The success of Pohang Iron and Steel Co. Ltd. (POSCO): perfecting internal and external incentive

Abstract

We examine POSCO's success based on the internal and external managerial incentive structure. By internal incentive, we mean institutional foundation under which the interaction between the principal (the government) and the agents (the managers) takes place. This involves examining the political economy of state intervention and how the state employed credible policies intended to end 'politicized' relationship with state-owned enterprises (SOEs). Extrnal incentive structure relates to various exogenous market forces that discipline managers and owners in terms of corporate performance. Combined, they determine the extent to which SOEs face 'hardened budget constraints' and in the case of POSCO, the state was able to enforce credible policies that hardened the budget constraint.