Government-Led Restructuring of Firms' Excess Capacity and Its Limits: Korean “Big Deal” Case

Abstract

Based on the statistical analysis of a panel data composed of 26 Korean Big Deal-related firms' financial information over the sample period of 1988-98, this paper rigorously examines which factors determine the scale of excess capacity. The statistical analysis in this study demonstrates that a firm's strategic decision to maximize profits subject to the constraints existing in its business environment may be a rational behavior at the firm level even if it may bring about excess capacity at the industry level ex-post. Statistical results imply that government-led resource allocation, such as the "Big Deals," has limits in its function and effectiveness because government can not ex ante control firm's strategic behaviors.