Business groups in China compared with Korean chaebols

This paper examines and compares the characteristics of business groups and non-group firms in China and Korea, focusing on relative size, ownership structure, debt structure, profitability and growth propensity. It uses data from 1994 and 1995 on firms listed in the stock markets and applies statistical tests to assess whether differences between the different types of firm, and between the two countries, were significant.

Its findings include that:

• big business groups in China tend to have more state shares, be more heavily indebted, less profitable, and accumulate capital more slowly than non-group firms in China
• similarly, big business groups in Korea (known as chaebols) tend to be more heavily indebted and to pursue faster growth at the expense of profitability, compared to non-chaebol firms in Korea
• Chinese business groups have fewer assets than Korean chaebols, and are less diversified, more likely to have a simple hierarchical ownership structure, less heavily indebted, and less growth-oriented
• this finding suggests that Chinese business groups have emerged by the original firms either “spinning off” into new businesses, acquiring existing firms in the same business area, or by joint ventures with other independent firms
• fierce competition within China prevents firms from diversifying, and consequently Chinese business groups may be more vulnerable to firm-specific or sector-specific risk than firms affiliated to Korean chaebols
• the fact that big business groups are less diversified and less dynamic compared to small groups and non-group firms may also mean that the big groups will not be such major players in the Chinese economy in the future.

The paper concludes by noting that the characteristics of Chinese firms and the Chinese economy mean that the firms experience more “ups and downs” and have a shorter average life span than Korean firms. Despite this, China as a nation is less affected by the ups and downs of its big business groups than Korea, because none of the Chinese groups controls as large a share of industry as the Korean chaebols.