Review of Industrial Organization 21: 271–282, 2002.
© 2002 Kluwer Academic Publishers. Printed in the Netherlands.
Diversiﬁcation, Concentration and Economic
Performance: Korean Business Groups
and THOMAS G. COWING
Konkuk University, Seoul, Korea;
Binghamton University, Binghamton, NY 13902-6000, U.S.A.
Abstract. The purpose of this paper is to analyze empirically some of the relationships involving
corporate diversiﬁcation, concentration and economic performance for a group of 25 of the largest
Korean chaebols or business groups over the period 1985–1995. Using Herﬁndahl–Hirschman in-
dices of inter- industry diversiﬁcation and intra-group member ﬁrm concentration, our results indicate
that increased conglomerate diversiﬁcation does not affect chaebol proﬁts whereas changes in in-
ternal member ﬁrm concentration do. Of particular interest with respect to both diversiﬁcation and
concentration are our ﬁndings that a quadratic relationship exists between group proﬁts and the num-
ber of member ﬁrms, with both smaller and larger chaebols having higher proﬁts than intermediate
size chaebols. A similar relationship also exists with respect to group size measured in terms of total
assets. Since the number of member ﬁrms is included as an explanatory variable, our results imply
that proﬁtable chaebols expand primarily within their existing industries rather than by adding ﬁrms
in new markets.
Key words: Chaebols, concentration, diversiﬁcation, economic efﬁciency, Korean business groups.
Diversiﬁcation has long been a subject of interest to industrial organization
researchers and policymakers alike.
An important example of corporate diversiﬁc-
ation seen in many Asian and developing economies is that of industrial business
groups, consisting of separate ﬁrms controlled by a single management entity. A
unique case of large business groups, known as chaebols, is found in Korea and has
recently become the subject of an intense policy debate involving both efﬁciency
and equity concerns. In this paper, we attempt to analyze empirically some of
the relationships between corporate diversiﬁcation, concentration and economic
performance for a group of 25 of the largest Korean chaebols over the period
We begin this paper with a brief review of modern diversiﬁcation theory, in-
cluding a summary of several recent empirical studies of diversiﬁcation and ﬁrm
performance. Section II presents a discussion of the growth, diversiﬁcation and
The authors are Professor of Economics, Konkuk University, Seoul, Korea and Professor of
Economics, Binghamton University, Binghamton, New York, respectively. They would like to thank
Young Jin Ro for his able research assistance. Professor Choi would like to acknowledge ﬁnancial
support from the Konkuk University 2000 research fund.
Corresponding author: E-mail: firstname.lastname@example.org
For example, see Mueller (1987).