Diversification, Concentration and Economic Performance: Korean Business Groups *

Abstract

The purpose of this paper is to analyze empirically some of therelationships involving corporate diversification, concentration and economic performance for agroup of 25 of the largest Korean chaebols or business groups over the period 1985–1995. UsingHerfindahl–Hirschman indices of inter-industry diversification and intra-group member firm concentration,our results indicate that increased conglomerate diversification does not affect chaebol profitswhereas changes in internal member firm concentration do. Of particular interest with respect to bothdiversification and concentration are our findings that a quadratic relationship exists between groupprofits and the number of member firms, with both smaller and larger chaebols having higher profitsthan intermediate size chaebols. A similar relationship also exists with respect to group size measuredin terms of total assets. Since the number of member firms is included as an explanatory variable, ourresults imply that profitable chaebols expand primarily within their existing industries ratherthan by adding firms in new markets.