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The Emergence of Business Organizations: A Comparison of Israel and South Korea

The Emergence of Business Organizations:

A Comparison of Israel and South Korea

   How could it be possible that, in very diverse institutional contexts, similar and comparable economic groups have emerged in Israel and South Korea. Unlike certain political, cultural, social and market points-of-view, one must note that one aspect alone cannot explain the emergence in both countries of similar business groups.1

   Business organizations came into being in Israel and South Korea in the 60s and 70s, which is attributable to three main factors:

(1)  the state and its component intersocial relationships;

(2)  the beliefs and roles played by the elites; and

(3)  the conditioned absence of multinational industries in each countries’ economy.2

   The chaebol, which is a South Korean conglomerate – usually owned by a single family – is characterized by an authoritarian management and centralized authority. The chaebol is more or less a result of the intentional creation of the South Korean state. On the other hand, Israeli business organizations are the result of state policies in the field of economy.3

   In both Israel and South Korea, the state’s elite maintained a developmental ideology, was not dependent on market influences for economic

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furtherance, and aimed for economic and military self-reliance. In addition to this,

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South Korea and Israel are recipients of considerable loans and grants from other nations. Thus, the emerging business groups were protected from intensive competition of multinational companies.4

   Incidentally, business organizations, a central factor of capitalism in developing and developed countries, play major roles in the political and economic sectors of widely diverse societies.5

The Role of Business Organizations

in Capitalist Economics

   South Korea and Israel seem to be very different countries with regards to history, culture and politics. However, both countries became independent from colonial regimes after WWII. Nevertheless, while Israel may be considered a new society comprised by an ancient people, Korea is best known for its longevity and stable civilization.6 With regards to political regimes, during the period of the ‘60s and ‘70s, while Israel was – and still is – a democratic country, South Korea has always been an authoritarian state. In Israel, its labor union (Histadrut) was one of the major characters in politics and economics.7 In South Korea, on the other hand, labor was extremely repressed. 8 Another major difference between the two countries is that Israel belongs to Western civilization, while South Korea belongs to a

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Confucian culture. Nevertheless, there are important similarities:

(a)  despite both countries’ late start an scarce natural resources, Israel and South Korea have had extended periods of outstanding economic performance;

(b)  each countries’ state had a critical role in their economic development;

(c)  both countries have been involved in constant military and political conflict, making security matters a major concern in both; and

(d)  minimal or no interaction with multinational companies.

   As a result, local entrepreneurs began to play important roles in economic development, gaining dominance and the opportunity to build their own conglomerates without having to compete with multinational companies.9

Business organizations are typified as a federation of legally independent firms, consolidate by both informal and formal mechanisms. 10

   South Korea and Israel “borrowed” their business groups’ concepts from other countries. South Korea from the Japanese Zaibatsu, and Israel, from the German Konzerne.

   A starting point for Israel’s economic growth performance is 1952, to be exact. 11 The year marked Israel’s coming of age, and was highlighted by the War of Independence, the re-drawing of borders, the

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establishment of institutions and the heavy ingress of immigrants. 12

Differences in South Korean and Israeli Business Groups:

there are more business organizations in South Korea than Israel;
South Korea’s economy is larger than Israel’s;
Each countries’ business organizations differ with regard to the number of it affiliated firms; and
The chaebol are owned by families while the Israeli groups are not. 13
Similarities include:

both countries’ business groups are diversified;
similarity in the structure of vertical authority (hierarchical); and
retired civil servants are recruited to fill senior posts.
Because of the differences in their ownership structure, there were accompanying differences in the statuses of their professional managers. Most Israeli business organizations are run by professional managers, South Korean top management belongs to family. In cases when the Korean recruit from outside the family, the new employees usually came from the same region.14

To sum up, the Israeli and South Korean business organizations have both similar structural characteristics, as well as differences.

Theories on the Formation of Business Groups

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A. Market Imperfections

   Usually, the emergence of business organizations occurs in a situation wherein they can provide some sort of economic advantage.

B. Cultural Influences

   Scholars have previously tried to connect the family, a culture’s inheritance system, values and also beliefs to the emergence of business organizations. This is largely seen in the South Korean society and business groups.15

C. Society’s Political Economics

   Apparently, there is a connection between the emergence and domination of business organizations and the interrelationship between society and state. In South Korea, the state is an active presence in the public and private sectors of the economy. 16 In Israel, the state’s post 1967-war strategy created a growing self-reliance in weaponry. 17 This eventually led to the immigration of very skilled and highly trained technical people, including talented Russian engineers. This contributed to the economic boom in Israel in the 1990’s. 18

Developmental Stage and

the Emergence of Business Organizations

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In both South Korea and Israel, during the time when business groups were

emerging, both countries’ were developmental yet had outstanding capacities

and also a large amount of autonomy from society in general. In both South Korea and Israel, state organizations had great involvement in the promotion of economic change and development/growth, becoming instruments of modernization. 19

   In 1961, South Korea’s developmental state was set by General Park. His governance implemented certain economic developmental plans using an authoritarian manner. 20 The South Korean economic boom is best described by a focus on export and the evolution of an industrial “infrastructure”. 21 In the 1070’s, the state made available low interest loans for heavy and chemical industrialization. 22 The state’s autonomy was heightened by the demolition of Korea’s landlord class through the state’s land reform, the influence of the military in guaranteeing executive dominance, and the aggressive steps taken by the state to suppress labor.23 The Park dictatorship all the more strengthened the power of the state by using policing strategies against General Park’s political opponents.24 Ever since the coup in 1961, Korea’s state, by itself, influenced the domestic and foreign capital. Commercial banks were nationalized, and financial intermediaries were controlled by the Ministry of Finance. South Korea received substantial

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economic and military aid from the U.S:

Total foreign aid to Korea was:25

   Year                   Amount of Aid             Host Country

   —-                   ————-             ————

   1946 to 1976           $12 billion               United States

                            1 billion               Japan

                            2 billion               International Financial

                                                    Institutions

   This foreign aid became the source of financing for South Korean industrialization.26

   Israel’s developmental state, in contrast to South Korea’s, is democratic. The state was responsible for Israel’s industrialization in the 1950’s onwards. In the 1960’s the state implemented the foundation pf a military0industrial complex. The state apparatus had the clout to decide which industries would be cultivated, where it will be located, and what subsidies and financing were to be given to entrepreneurs. 27

   Israel’s autonomy was heightened due to a lack in social groups like landlords or aristocracy possessing vested interests. As a result, the state was able to implement economic policies with little or no resistance. In contrast with South Korea, however, Israel’s Histradut formed a coalition

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with state organizations. In South Korea, the state repressed labor. Israel’s state organizations greatly influenced the economy and had absolute control over the allocation of business capital.

Total foreign aid to Israel was:28

   Year                   Amount of Aid             Host Country

   —-                   ————-             ————

   1953 to 1964           $800 million              Germany

   1948 to 1990           $ 7 billion               World Jewry

1949 to 1985           $33 billion               United States

   Like South Korea, foreign aid became Israel’s source of capitalization for industrialization. As a result of both countries’ economic boom, the biggest firms expanded and accrued vast amounts of capital, allowing them to enter into new fields, to establish new firms and to buy other enterprises.29

   1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 13, 14, 15, 16, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29. Maman, Daniel. (September to October 2002). The emergence of business groups: Israel and South Korea compared. Retrieved on May 30, 2008 from <http://findarticles.com/p/articles/mi_m4339/is_5_23/ai_97822730/pg_11

   11, 12. Razin, Assaf and Efraim Sadka, “From Rapid Growth to Standstill, Accelerating Inflation, and Debt Crisis” in the Economy of Modern Israel. Ch.1

   17, 18. Popper, Steven. (April 25, 2008). Science and Technology Policy in Korea and Israel. Rand Infrastructure, Safety and Environment.

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Bibliography

     Maman, Daniel. (September to October 2002). The emergence of business groups: Israel and South Korea compared. Retrieved on May 30, 2008 from <http://findarticles.com/p/articles/mi_m4339/is_5_23/ai_97822730/pg_11

     Razin, Assaf and Efraim Sadka, “From Rapid Growth to Standstill, Accelerating Inflation, and Debt Crisis” in the Economy of Modern Israel. Ch.1

     Popper, Steven. (April 25, 2008). Science and Technology Policy in Korea and Israel. Rand Infrastructure, Safety and Environment.

 

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