The Nature of Chaebol Restructuring: Two Lessons from Professor Coase

Abstract

In this article, the firm theory, originally suggested by Coase (1937), is extended to build up a theory of business groups in which a diversified network of closely linked subsidiaries are internalizing their transactions across a wide range. In particular, we pay attention to the major changes in the transaction costs of running the chaebol form of organization, which is internalizing necessary transactions in a group. At the same time, some core changes in markets and institutions are identified that collectively act to make market transactions cheaper to use. Focusing on the changes in the relative costs of using the chaebol vs. markets, we can make some inferences about how the chaebol will reshape in strategy, and capital structure, and other features in the aftermath of the IMF crisis. Another Coase (1960) insight shows us the proper role of the state in correcting the external costs caused by the chaebol: to set up an efficient structure of property rights. Applying this idea to the policy of corporate restructuring, we suggest a market-driven solution to the chaebol problems: to reduce the costs of using the market through institutional reform. Instead of directly intervening in the market as in big deals (or large-scale business swaps), the government needs to remove regulatory hurdles and uncertainty that prevent Coasian bargaining from striking in the market.