Emerging Market Global Players: Institutions, Governance and Strategy

(The Korean Case)

Hwy-Chang MoonDean and Professor of International Business Strategy

Graduate School of International StudiesSeoul National University

cmoon@snu.ac.kr

AIB 2014 Annual MeetingJune 25, 2014

Summary• The Dynamic Patterns of Institutions of Korea on Major MNEs

The patterns are conflicting. The institutions encourage the big enterprises such as chaebols to contribute to the economy. At the same time, they discourage the firms from growing too big because the government has to protect small and medium sized enterprises (SMEs) in the name of “economic democracy.” For internationalization, the institutions encourage firms to go multinational, but also discourage them from increasing foreign employment, in order to protect domestic workers.

• The Effects of Institutions on Corporate Governance

The institutions put stricter regulations on large firms, for example, prohibition of cross-shareholding and expanding to the areas suitable for SMEs. In response, large firms have to reduce cross-shareholding and withdraw from the business areas that were traditionally led by the SMEs. In response to the institutions of protecting domestic employment, Korean MNEs have to show their plans for domestic investment and employment.

• MNE Responses and Strategies

The institutional demands are very harsh but the solution for Korean MNEs can be surprisingly very simple; they can build an efficient “global ecosystem” by utilizing the global value chain. In the global ecosystem, for example, Samsung’s competitor is not a SME in Korea and other countries, but it is Apple’s ecosystem on a global scale. In reality, Samsung has made huge investments in Vietnam, which are more complementary than substituting Samsung’s operations in Korea.

• Conclusion

There is a fundamental difference between politicians and businessmen. Politicians are concerned about re-election, so national workers and SMEs are more important than their foreign counterparts. However, by building an efficient global ecosystem, MNEs can increase their performances as well as meet the needs of national institutions. National institutions and MNEs can go together.

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The Dynamic Patterns of Institutions of Korea on MNEs

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Large FirmsLarge Firms

Multinational FirmsMultinational Firms

• Encouraging them to contribute to the economy• Discouraging them from growing too big

- for domestic SMEs (i.e., economic democracy)

• Encouraging them to go multinational• Discouraging them from increasing foreign employment

- for domestic workers (i.e., hollowing-out effect)

Conflicting Directions

The Effects of Institutions on Corporate Governance

Increasing regulations on-cross-shareholding -expanding to the areas reserved for SMEse.g., Regulations on hypermarkets and food businesses

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Samsung Insurance

Samsung Card

19.3% 7.6%

37.5%5%

Source: Woori Investment Research Center (2014)

Samsung Everland

Samsung Electronics

Increasing pressure on-showing plans for domestic investment and employment-hiring domestic employment despite low profitse.g., Domestic employment increase between 2012-2013: Samsung Electronics (5.6%), Hyundai Motors (5.5.%), Daewoo Construction (22.9%)

Large FirmsLarge Firms

Multinational FirmsMultinational Firms

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Implications•Global firm’s competitiveness: Individual firm vs. Global ecosystem•The relationship between LEs and SMEs: Competition vs. Cooperation

Samsung

Suppliers & Assemblers

Samsung Ecosystem

MNE Responses and Strategies

Simultaneous Solutions for Domestic and Global Issues through Global Ecosystem

Apple

Suppliers & Assemblers

Apple Ecosystem

Conclusion

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• Conflicts between Politicians and Businessmen- Goal: Re-election vs. Profit maximization- Scope: Domestic vs. Global

• Simultaneous Solutions- Domestic and foreign businesses are more

complementary than substituting- MNEs should build an efficient global ecosystem