An Analysis of Exogenous Patterns and Endogenous Determinants of the Post-Crisis Performance of South Korean Firms

Abstract

This study examined the endogenous and exogenous dimensions of the post-crisis performance of South Korean firms and attempts to identify patterns and determinants significantly helped the rapid recovery. This study was motivated by the fact that firm level recoveries external and internal aspects were comparatively faster than other Asian countries similarly affected by the 1997~1998 economic crisis. In particular South Korean outward direct investment (ODI) remained at approximately the same level as it had been at before the crisis. In addition, overall internal performance of South Korean firms recovered sooner than expectations. This study therefore asks the research questions related to the rapid recovery and performance of South Korean firms. Firstly, questions related to exogenous aspects includes; what were the reasons behind the continued outward flows of Korean FDI after the crisis? What were the motivations of outward FDI at the period of time? Are these motivations differentiated by the size of firms? Secondly, questions related to endogenous aspects include particular issues if marketing expenditure or R&D investment changed during the crisis, and if marketing expenditure or R&D investment is responsible for the growing firm value after the crisis. Theses questions are based on the following arguments. One may suggest that a firm might be benefited by increasing financial stability as it avoids investments at the time of crisis in order to reduce further risks. Controversy, the other may claim that aggressive investment might result in differentiation when other firms or competitors hesitate the expansion of their capacity and this will create unique competitiveness. This study employs two different methodologies for the examination of both ODI strategies and firm level performance. Firstly, in order to test the hypothesis regarding differential ODI strategies by South Korean firms in the wake of the crisis, we undertook the difficult task of examining FDI flows at the firm level. UNCTAD’s data on FDI is obtained through the manipulation of IMF balance-of-payments statistics. The OECD uses data taken from national central banks. These measures, however, provide only national-level data and are difficult to use for inference about national economic sectors or specific firms. Instead of looking at export figures, we compare actual business dealings in the period before the crisis and the period following the crisis. This firm-level data provides the type of information necessary for discerning the differing reactions of various types of firms in the face of crisis. Using the SDC Platinum databases of joint ventures and mergers and acquisitions, we look at foreign investment behavior in the period 1991~1996 and in the period 1998-2003. The year 1997 is excluded, since it is the year of the outbreak of the crisis and therefore is likely to be a period of transition for South Korean firms from one ODI strategy to another. To get a sense of the differences in behavior, we compare the ODI strategies of the 5 largest chaebols; Daewoo, Hyundai, LG, Samsung and SK, with other firm behavior recorded in the database. Secondly, firm level performance is examined to assess endogenous dimension by utilizing data including KOSDAQ listed firms with 3 years time span between 1998 and 2000. At this time of the crisis, firms were unable to fully recover from the impact of the crisis. A part of variables are derived from the financial statements and samples are limited to 99 manufacturing firms listed during the period of the crisis. As the exogenous aspect of corporate performance, this article, firstly, posits a specific explanation, which is contingent on the size of the firm involved in ODI. The findings of this study implies that outward foreign direct investment was found out to be a way of opening markets to compensate for declining sales at home, whereas small and medium-sized firms used foreign investment to take advantage of production efficiencies made available by the crisis. This study, secondly, distinguishes R&D and marketing expenditures as responsible determinants that generated a comparative advantage allowing firms to accumulate potential capabilities and to improve performance during the economic crisis. Using OLS regression analysis, the results suggest neither R&D nor marketing expenditures are identified as significant determinants affecting the firms’comparative advantage measured by value and performance except for a specific period. Nevertheless, the analytical framework suggested in this study may provide effective facilities for finding potential variables explaining expedited recovery of South Korean firms from the crisis.