South Korea: economic growth and HRM - HR Management

South Korea (referred to hereafter as Korea) has an area of 99 313 square kilometers and an estimated population of 46.4 million people (Financial Times, 1999c). Its capital is Seoul, which has an estimated population of 10.5 million (Financial Times, 1999c). Korea is a relatively new industrialised country, which experienced rapid economic growth from the 1960s to the early 1990s (Anon, 1995). It was badly affected by the Asian crisis in 1997–98. The percentage GDP growth fell by 5.8 per cent in 1998 (Financial Times, 1999c). One of the biggest shocks to hit the economy after 1998 was the financial crisis within Daewoo.

Daewoo was one of the influential chaebols, which are large, family-owned conglomerates that dominate Korea’s economy. The five leading chaebols prior to the collapse of Daewoo were Hyundai, Samsung, Daewoo, Lucky Goldstar and the SK group. South Korea received a $58 billion bail-out from the International Monetary Fund in order to prevent economic collapse in 1997 (Ward, 2002a). However, the situation was quickly reversed, and Korea’s GDP rose by almost 11 per cent in 1999 (Anon, 2000b). Inflation rose by 7.5 percent in 1998 and then fell back to 1.3 per cent in 1999. Similarly, industrial production fell by 7.3 per cent in 1998 and then rose by 16 per cent in 1999. The unemployment rate rose to 8.4 per cent in 1999, but fell back to 3.7 per cent by 2000 (Rowley and Bae, 2002).

In the five-year period from 1998 to 2002, Korea went from the brink of economic disaster to one of the region’s best economic performers (Thornhill, 2002c). Gross domestic product was recorded at 6.1 per cent growth in the first half of 2002 (Ward, 2002a). Underpinning the turnaround has been the restructuring of activities in the financial and corporate sectors. Since 1998, 25 per cent of financial institutions and 16 of the largest conglomerates have been closed or broken up. Domestic demand has underpinned growth and the construction and service sectors have expanded rapidly (Ward, 2002a).

In respect of the chaebols, Samsung Electronics has performed particularly well. It was named as the fastest-growing brand in 2002 and has been successful in terms of developing and marketing advanced mobile phones, such as camera phones, that China was not able to imitate (Ward, 2002b). In addition to developing successful products, chaebols such as Samsung have been working to improve corporate governance and have had to move away from supporting non-viable companies by internal financing arrangements (Ward, 2002c). However, some commentators are concerned that despite the turnaround, some economic weaknesses remain (Ward, 2002a).

Firstly, more work is required to ensure that South Korea reaches global standards of corporate governance. Secondly, the government (via the banking system) continues to support manufacturing companies who are not generating enough income to pay their debts. Thirdly, the shift from a nation of ‘savers’ to credit-funded spenders has led to some problems. Some householders unaccustomed to managing credit have fallen into financial difficulties and this has been exacerbated by the lax approach to lending by banks and financial institutions. Fourthly, China’s entry into the WTO could potentially increase the competitive pressure on South Korea.

Burton (1999a) suggests that Korea risks being ‘squeezed economically’ as it occupies a middle ground between China’s low-wage economy and Japan’s high-technology economy. In addition, the threat of a US attack on Iraq in 2002/3 meant that oil prices could rise, thus pushing up operating costs and potentially sparking a decline in export demand (Ward, 2002a).

  • Some key historical issues

In order to understand some of the contemporary economic and HR issues that are impacting upon Korea, it is useful to give a brief review of its history. This allows an insight into the way in which the business context has developed and the legacy that this has created. In comparison with other Asian countries such as Japan, relatively little has been written about general business and HR issues in Korea. Whitley (1999) provides one of the most useful insights into the business context in Korea, giving an overview of Korea’s history that is summarised below. Whitley argues that the dominant institutions in Korea can be understood by reference to pre-industrial society, the period of Japanese colonial rule and the Korean War.

He argues that the present structures for governance and business reflect three key aspects from the past. First, there has always been a tendency towards a high degree of political centralisation. Second, there is a continuing Confucian influence in terms of the importance attached to superior authority and moral worth, and these are linked to examination success. Third, there has been a history of factional struggles among the aristocracy, and aristocratic status and ancestry have always been viewed as important (Whitley, 1999: 152). These will now be expanded upon.

Korea was ruled by the Yi or Chosun dynasty between 1392 and 1910. Confucianism was predominant during this period. In particular, political power was highly centralised, and success in examinations was prized. There was a sharp division between the aristocratic elite and others. Within the aristocracy, success in examinations tended to secure senior posts. Although the monarch was revered, the aristocratic bureaucracy that developed ensured that the monarch would never achieve despotic power. There was much competition between different factions, which was encouraged by the monarch, so that local power bases would not develop.

Another related aspect was that the This meant that there was a relatively small merchant class, and they were regarded with suspicion. While there were factional struggles, the society did not disintegrate owing to the ‘finely tuned mechanisms of checks and balances’. Collectivism was never a central feature of Korean society, and there was always a great distance between rulers and the ruled.

Japanese colonial rule spanned from 1910 to 1945. While the Japanese made some changes, Whitley argues that many of the aspects of Korea’s pre-industrial past were sustained. This included the ‘capricious and unpredictable behaviour of the executive’ (1999: 155). Korea was awarded its independence again in 1948. Power was centralised among the elite once more. The entrepreneurs of the 1947–57 period were men who were favoured by the president.

The president virtually gave away businesses that had been owned by the Japanese. These firms form the basis of the chaebols that are central to the Korean economy today. The state continued to play a key role in terms of the development of the chaebols. It offered cheap credit to them via the banking system, and as the president controlled access to the credit, he maintained a strong position. The family members that owned the chaebols continued to operate on a factional basis. The Korean War raised the power of the military elite. Korean management style is often described as authoritarian, and this reflects the influence of the military after the Korean War.

Whitley argues that the growth and diversification of the chaebols was influenced by the requirements of the state. The state offered subsidised credit, and in return the chaebols developed in accordance with state priorities. These included a desire to expand rapidly and to ‘catch up’ with Japan, and as a result the chaebols grew and diversified rapidly. Second, the chaebols developed heavy engineering and chemical production in the 1970s because of the military threat from North Korea.

Education and qualifications continued to be prized, to the extent that there was a dearth of workers with manufacturing skills in the 1990s. The authoritarian management style was, as we have said, influenced by the military, and subordination was reinforced by Confucian traditions. While trade unions exist in Korea, the state has acted to limit their power – for example, by intervening in disputes. A considerable distance between the business-owning elite and the masses persists, and chaebol owners have had little need to harness the support of trade unions or workers. All these themes reflect Korea’s historical development, and they continue to impinge upon business relationships in Korea today.

  • The contemporary business and human resource context

This historical overview has offered an insight into some of the contemporary business and HR issues that face Korea as it enters the twenty-first century. The economy continues to be dominated by the chaebols. They operate in heavy engineering, car production, electronics, construction, transport, insurance and finance. There is an argument that the economic environment has not supported the development of small, entrepreneurial businesses, but an explanation for this can be found in the historical overview above. The South Korean president Kim Dae-jung (appointed in 1998) began a programme of reform that was spurred by the Asian crisis of 1997–98.

The economic crisis in Korea was at least partly related to the actions of the chaebols. The government has recently attempted to put measures into place to stem those practices of the chaebols that have had negative consequences for the economy. The chaebols had over-invested in production facilities, which had created huge debts (Burton, 1999a). Another related problem has been that stronger businesses within chaebol empires have supported weaker ones.

When the government eased restrictions on crossshareholding for the chaebols in an attempt to encourage consolidation, many chaebols used this as an opportunity to rescue weaker businesses, by using money from the stronger businesses to purchase shares in them (Burton, 1999b). This meant that internal shareholdings often represented as much as 34 per cent in 1998 (Burton, 1999b). The government has moved to counter the power of the chaebols and has encouraged outside investors and is considering strengthening shareholder rights (Thornhill, 2002d). The proportion of independent outside directors has risen and this has diluted the power of the founding families (Ward, 2002c).

The economic crisis was closely linked to the debt-ridden banking sector. The government injected Won 64 trillion into the banking sector during the economic crisis. This was equivalent to approximately 16 per cent of the GDP (Montagnon, 1999b). In 1999, of 33 commercial banks, five were closed and four were merged. This led to a wave of redundancies, which many argued was necessary given the fact that the banks were overstaffed.

However, the evidence suggested that many employees were rehired on short-term contracts (Montagnon, 1999b). The government encouraged foreign investment after the economic crisis, partly to try to bring more discipline into the banking sector in particular. The economy has recovered in the short term, but many commentators argue that continued reforms are necessary in order to secure its long-term prosperity.

  • Human resource issues

This section will give a short overview of some of the HR issues that are affecting contemporary Korea. One such issue has been highlighted in the historical review above. Some commentators have argued that the predominantly authoritarian, militaryinfluenced management style is likely to prove unsuitable for the long term (Burton, 1999a). The preferred style tends to be reminiscent of a scientific anagement approach, within which subordinates are closely controlled by supervisors.

The approach encompasses low levels of trust between managers and subordinates. Work is often organized such that surveillance of subordinates is made possible. In common with the principles of scientific management, jobs tend to be broken down into narrowly defined tasks. Workers in manual grades are not promoted, and tend to stay in initial jobs (Whitley, 1999). This is especially the case within smaller chaebols.

The situation is different for white-collar workers. They tend to be moved around, and are often transferred across subsidiaries either within Korea or abroad. This is reflective of the historical development of Korea, in which educated employees were regarded as superior and those with technical and manual skills as inferior. Finally, roles and responsibilities were often defined more in terms of authority relations than in terms of formally documented job descriptions (Whitley, 1999). Therefore the traditional approach to management tended to be informed more by scientific management than by ‘modern management techniques’.

Modern management techniques such as quality management and human resource management emphasise worker involvement as a route to quality enhancement and increased performance. Burton (1999a) has argued that the authoritarian management style of the Korean chaebols could limit their development as global players in the future. There is also evidence that levels of employee participation dropped sharply between 1996 and 1998 as the economic crisis hit and that this partly reflected their fragility within the Korean business system (Park and Yu, 2000).Kim and Briscoe (1997) provide an overview of some of the traditional human resource practices used by the chaebols.

They recruit and select college graduates twice a year. Graduates from the top universities are preferred. The graduate trainees undergo four weeks of training, in order to turn them into ‘warrior workers’ for the chaebols . During this period the graduates are socialised into the history, norms and behaviours required by the chaebols. Interestingly, there was less emphasis upon technical skills, which again reflects the historical development of Korea. Rewards were traditionally based upon seniority.

Posts tended to have a minimum tenure before an employee could be promoted to the next level. Chaebols would normally offer a bonus that was linked to the overall performance of the company. Performance appraisals were not widely used, partly because managers preferred not to give critical feedback. Most employees would retire by the age of 55. Kim and Briscoe (1997) go on to provide some evidence of the modernisation of some of the HR practices.

They use the example of Samsung, which is generally regarded as a chaebol that has attempted t restructure after the Asian crisis. Kim and Briscoe argue that Samsung had to respond to a new paradigm of domestic and international competition. They outline three key areas of modernisation in terms of HR policy and practice: job hierarchy and promotion, compensation, and performance appraisals. The key differences are summarised in Table.

Rowley and Bae (2002) confirm that there is continuing evidence of shifts in these areas. They also highlight evidence that suggests increased uses of numerical and functional flexibility. Park and Yu (2000 suggest that there is also a trend towards flattening organisational hierarchies and movement towards team-based structures. Therefore, there is some evidence that chaebols are beginning to modernise their human resource practices.

Interestingly, Park and Yu (2000) observe that whilst traditionally HRM practices in Korean companies were almost identical, there is now more evidence of divergence, as companies adjust to a changing economic and environmental context. This is interesting in respect of the extent to which HRM may be seen as a source of competitive advantage in the future and in the way in which this may shape managerial choices and employee experiences as time progresses.

Korean trade unions have been weak in the past. Strikes and stoppages do occur, but the state often intervenes to dissipate them. There was a significant increase in strike activity during 1996–97. Morden and Bowles (1998) suggest that this was related to four key factors. First, the government had passed new labour laws, which were aimed at increasing the flexibility of the labour market. This included removing the provisions for lifetime employment and as a result, making workers redundant.

Second, the International Labour Organization (ILO) and the OECD had called for a reduction in statutory curbs on trade union activities. Third, the state had recognised the Korean Confederation of Trade Unions (KCTU), which was more vocal than its predecessor, the Federation of Korean Trade Unions (FKTU). Strikes were sparked by the Daewoo crisis. Workers in both Daewoo and Hyundai walked out in April 2000 to protest against plans to sell Daewoo in an international auction. The police arrested 20 trade unionists during the dispute, and this sparked a further strike within Daewoo (Burton, 1999c).

In addition to conventional strike activity, workers at Daewoo Motors blocked attempts by Hyundai officials to carry out due diligence in respect of a possible takeover of the car division. This is an example of continuing factionalism between the rival chaebols (Burton, 1999c). More recently, strikes have been reported in Hyandai, Kia Motors and Ssangyong Motors in protest at government plans to shorten the working week and reduce the number of public holidays and in the public sector (including gas and railway workers) as a response to threatened privatization and in the airline and chemicals industries (Ward, 2002e, 2000f).

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