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South Korea in the Fast LaneEconomic Development and Capital Formation$

Young-Iob Chung

Print publication date: 2007

Print ISBN-13: 9780195325454

Published to Oxford Scholarship Online: September 2007

DOI: 10.1093/acprof:oso/9780195325454.001.0001

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(p.375) Appendix 5.1: Indebtedness and the Scale of Business

(p.375) Appendix 5.1: Indebtedness and the Scale of Business

South Korea in the Fast Lane
Oxford University Press

There was a direct relationship between the debt‐to‐asset ratio and the size of the firm. The ratio of preferential loans allocated to the large enterprises was much higher than that of the medium‐ and small‐scale firms. According to a survey conducted in 1969, a total of 732 large firms were financed with loans equaling 76.53 percent of total assets, and nearly all of them were affiliates of the country's largest jaebeol (Y. B. Kang 1971). The owners' equity in most large businesses was less than one‐fifth of assets (i.e., 17.53 percent, some reaching as low as 3.6 percent). The indebtedness in most large businesses was more than four‐fifths of assets (82.47 percent), and some as high as 96.4 percent. The average debt‐to‐asset ratio of large businesses in 1970 was 80.5 percent.

It was also reported that the large corporations relied on nonequity financing at the rate of 79.5 percent of assets, while the small and medium‐sized firms relied on 67 percent (Hankuk Ilbo, August 17, 1972). In other words, the loan ratio of large companies was about one‐third higher than that of the medium‐sized and small companies. A survey conducted by the Economic Federation in 1975 shows that 61 percent of 365 large businesses borrowed more than 100 percent of the value of their assets, in contrast to the indebtedness ratio of the medium‐sized and small manufacturers, which was 75 percent in 1973 and 66 percent in 1974 (Dong‐A Ilbo, March 2, 1976). Large companies with more than 1 billion won of assets in 1978 financed nearly two‐thirds (66.4 percent) of their assets in loans, whereas the average small companies with 5 million won of assets were able to finance only 17.4 percent of their assets. One jaebeol that had 2.86 trillion won of assets had a sum of loans amounting to 2.61 trillion won, which represented 91 percent of the value of the firm's assets. More astonishing, perhaps, was that its short‐term loans amounted to 1.1 trillion won, or 38.5 percent of the value of its assets (Dong‐A Ilbo, October 6, 1978).

(p.376) In terms of bank loans, the average ratio of large corporations equaled 47.6 percent of assets, in contrast to only 38 percent for the medium‐sized and small businesses (Dong‐A Ilbo, August 5, 1975). The average net borrowing of unincorporated businesses (which were typically small) was only 23.1 percent of assets (calculated in L. P. Jones 1975: 82). The Bank of Korea's study reported that the small and medium‐sized businesses' borrowings were equal to 22.3 percent of the value of their assets (the Bank of Korea's analysis of business management for 1977 was cited in Dong‐A Ilbo and Kyonghyang Shinmun, August 11, 1978). The above survey reveals that the ratio became successively larger as the amount of assets grew.

The granting of bank loans to favored large businesses is also clearly shown in terms of the debt‐to‐equity ratio. The ratio of large corporations was higher than that of small and medium‐sized businesses. The ratios of most large businesses were reported to have been close to 6 in 1959, while typically they had been in the 3 to 4 range in manufacturing. The ratio decreased somewhat over time, but indebtedness of the largest corporations, the jaebeol, was equal to 487.9 percent of the owners' equity in the mid‐1970s, while that of the small and medium‐sized businesses was equal to 347.5 percent (according to the Bank of Korea's “Analysis of Business Management for 1977,” cited in Dong‐A Ilbo and Kyeong Hyang Shinmun, August 11, 1978). The indebtedness ratio of business in general was 313.4 percent in 1972 and 366.8 percent in 1978.

A similar situation prevailed in the 1980s. The ratio of the large firms was higher than that of the small and medium‐sized firms. The average ratio of indebtedness to capital shares of 50 jaebeol was 714.3 percent, which was twice as much as the average liability ratio of 360 percent for the manufacturing sector as a whole, which included firms of all sizes. The ratio of the 30 companies with the greatest debt in 1987 ranged from 612 to 6,396 percent. Many of these companies were owned by jaebeol (Newreview, August 22, 1987, 11). The ratio of debt to net worth of Lucky‐Goldstar in 1987 was 408 percent. That is nothing compared with the Dong‐Ah Group, a construction‐oriented jaebeol, which had a ratio of 2,930 percent. Even as recently as 1999, the two of the largest jaebeol in the country, Hyundai and Daewoo, were reported to have debt‐to‐equity ratios of 340 percent and 590 percent, respectively (Associated Press, quoted in the Ann Arbor News, September 26, 1999).

The ratio of bank loans to equity was directly related. In 1978, for instance, businesses with more than 1 billion won in assets had debt‐to‐equity ratios of 200 percent in contrast to 21 percent for the firms with less than 5 million won in assets. Similarly, the ratio of bank loans to net worth was directly related. It was reported that 59 corporations in 1978 had bank debt equal to 300 percent of owners' equity. In 1983, a total of 874 businesses had outstanding bank loans of more than 200 percent of their capital. In 1987, the average ratio of bank loans to net worth of the 82 businesses that had bank loans of 50 billion won or more was 174 percent (Newreview, May 30, 1987, 10). The nation's 30 largest business groups had to repay their bank loans first with funds derived from the sale of nonbusiness real estate or stocks (Newsreview, February 8, 1992, 16), and the ratio was supposed to have decreased to 137 percent in 1988 (Newreview, May 30, 1987, 10).

Likewise, according to a Bank of Korea analysis in 1976, the indebtedness (bank loans, domestic and foreign) of large corporations in 1975 was 130 percent of the (p.377) value of their collateral, which was twice that of medium‐sized and small businesses (that is, 66 percent). When curb loans and other indebtedness were added, the debt ratio of the former would have reached 2.1 times collateral assets. Other surveys and reports indicate a somewhat less strained relationship. Long‐term loans and other forms of liability in most large businesses constituted over four‐fifths of their total assets.