This paper summarizes key aspects of the public enterprise sector in Korea and analyzes the effects of recent privatization efforts. Public enterprises still constitute a majority of the largest, commercially successful firms in Korea, and their importance has been increasing since the recent economic crisis when many private firms went bankrupt or fell into financial trouble. The paper also extensively analyses governance structures of key public enterprises, as well as related policy concerns; in particular, the effect of the Special Act on Privatization introduced in 1997.
Shares of most commercial public enterprises have been sold to domestic and foreign investors on a large scale since 1998. As a result, government ownership of all large public enterprises has been reduced substantially. However, most public enterprises are still viewed as instruments of policy objectives rather than profit-oriented firms. More specifically, in most cases, separation has not occurred among the commercial operation of a public enterprise, regulatory functions, and industrial policies of the relevant line ministry. Lack of separation amongst these three elements is believed to lead to inefficiency in management of public enterprises, and could also result in an outcome that is sub-optimal in terms of allocative efficiency.
This paper also reviews the fundamental problem in Korea concerning privatization of large SOEs: namely, ownership and control by chaebols. Finally, the paper concludes with the observation that Korea probably needs an alternative mode of governance structures for large firms and financial institutions to make the economic system more efficient.