From Chaebols to Start-ups (1/2)
Conglomerates have driven South Korea’s growth for decades. It’s time for them to pass the torch.
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Gangnam neighborhood in South Korea
Earlier last month, South Korea’s president Yoon Suk Yeol shocked the world when, out of the blue, he declared martial law for the first time in the country in almost 50 years.
Coincidentally, I was in Seoul as all of this unfolded. I was attending the Fosterbridge conference, a privately sponsored event that invited 50 global venture capital investors from 20 countries to showcase the Korean domestic start-up market and its investment opportunities.
Global investor delegation at FosterBridge 2024
This post isn’t about the martial law drama. It’s about South Korea’s economy and how the country rose from post-war poverty to become a global success.
As I was trying to understand the country’s dynamics, I realized one needs to take a few steps back and examine the past few decades of history to fully understand things.
I’ll keep the historical dive short.
In the early 20th century, Korea was annexed by Japan in 1910 and remained under Japanese colonial rule until the end of World War II in 1945. Once the war ended, Korea was liberated from Japanese control, but the peninsula was split in two. The Soviet Union influenced the North, establishing a communist regime, while the United States supported a capitalist government in the South. This division set the stage for tensions between the two regions, which led to the Korean War in 1950.
The war lasted until 1953 when an armistice was signed between the US, North Korea, and China. South Korea did not sign the armistice, and a peace treaty was never signed. Technically, the Korean War is still on hold, as it never officially ended. Tensions remain high to this day, with the two Koreas divided by the Demilitarized Zone (DMZ) that marks the border.
If you have friends who’ve been to South Korea and shared the photo below on Instagram, they were at the DMZ!
Views of North Korea from the Dora Observatory in Paju, South Korea
Anyways, back to the point.
In the aftermath of the Korean War, South Korea was one of the poorest countries in the world and its economy was devastated. The government's main priorities were rapid reconstruction and industrialization. So they decided to turn the country into an export powerhouse. To do this, they identified key sectors — such as manufacturing, shipbuilding, and electronics — and assigned a few family-run businesses to dominate these industries. These family businesses became known as chaebols.
The government supported these families and provided chaebols with low-interest loans, subsidies, and preferential access to foreign capital. All of this enabled chaebols to expand quickly and to move from industry to industry until they morphed into huge conglomerates. Some chaebols have become household names: for instance, motor vehicles were assigned to Hyundai, and electronics to Samsung and LG.
You probably think you know well what these brands sell. However, these chaebols consist of numerous affiliated companies and operate far beyond the few products we know them for.
Source: Daxue Consulting
This excerpt from a 2014 New York Times opinion piece is an accurate reflection:
A person could live here (in Korea) using only Samsung products. You could wake up in your Samsung C&T-built apartment, turn on your Samsung TV, and check the weather on a channel run by Lee Kun-hee’s brother-in-law. On the subway, you could watch how the Samsung Lions lost their baseball game the night before on your Samsung Galaxy smartphone. On the weekend, you could spend time with your family at Samsung’s Everland amusement park just outside of Seoul. And you could pay for everything using your Samsung credit card.
Blessing a few businesses with preferential treatment might not have been the fairest approach. However, it’s undeniable that the government-led chaebol-centric model was very successful and lifted millions out of poverty. The rise of these conglomerates increased wages, improved living standards, and fueled the country’s export growth. This period of rapid economic growth after the Korean War, known as the Miracle of the Han River, propelled South Korea to become Asia’s fourth-largest economy in the late 1980s — a position it still holds today.
South Korea’s GDP per capita has grown impressively since 1960, rising from $158 to $33,121 in 2023 — a 209-fold increase. The global average GDP per capita grew 29x over the same period, from $450 to $13,138. For further comparison, during those same years, GDP per capita grew 82 times in Spain, while in the US it grew 27 times.
South Korea's vs. World average GDP per capita evolution over the years (Source: World Bank)
So there’s some pride that many Koreans feel over the chaebol-model success — and for good reason!
But chaebols have also been a source of public anger, as they earned a reputation for corruption and increasing inequalities. They’ve long been seen as untouchable, despite being implicated in many scandals related to their business practices and the personal behavior of family owners. Chaebol leaders have traditionally played a role in politics and economics. This continues to this day, with many joining President Yoon Suk Yeol on his official overseas visits. As of 2022, the five largest chaebols accounted for 61% of South Korea’s GDP, so the influence and power that they hold comes as no surprise.
So, how does this relate to South Korea’s start-up scene?
Many people are now blaming chaebols for slowing down innovation in the country. Chaebols have grown into a dominant force, and the economy still depends heavily on them. Critics claim their dominance is holding back the growth of SMEs and startups, which in turn is slowing future economic development.
The entrenched relationships between the South Korean government and these conglomerates have led to an unhealthy collusion, creating an uneven playing field for other businesses. For instance, the regulatory environment often favors chaebols at the expense of start-ups and SMEs.
Chaebols capture most top talent and monopolize tech resources, which leaves fewer opportunities for start-ups and SMEs. The system also increases income inequality: Employees at large corporations, which make up just 10% of all companies, take home the lion’s share in terms of income, while those at SMEs and startups, which account for 90%, earn significantly less.
However, a contrarian view is that the presence of these chaebols could provide a competitive advantage to the country’s start-up ecosystem. These companies have also become active stakeholders in the entrepreneurial world, providing investment, support, and most importantly, exit opportunities. Additionally, their R&D capabilities are key to the country’s tech ecosystem and they can act as a training ground for many young Korean graduates. Usually, the best entrepreneurs are those who have several years of experience working in the private sector before launching their own ventures, and these conglomerates provide them a platform to do this through a globally relevant lens.
I think there’s some truth to this last perspective. But I still believe that Korea truly needs entrepreneurship to build a more diversified economy. For Korea to stay competitive, start-ups need to take on a bigger role in driving innovation and economic growth.
And what does the South Korean start-up scene look like today?
Well… I’ll save that for the next post!
That’s all for this week 👋
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MP.