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Can family businesses get too powerful?

Family businesses are to be encouraged at all levels, big as well as small. But they should never be allowed to become too dominant, whereby they are stifling competition and entrepreneurship.

Family businesses are crucial to the smooth running of western economies. Indeed, as argued many times by CampdenFB and its supporters, they are crucial to the recovery of the European and US economies,  and the continuing success of fast-growing emerging markets.

But that doesn’t mean they are beyond reproach and can’t become too powerful, stifling entrepreneurship and creativity. And there are probably few better examples of where their power as a collective is boarding on excessive than in South Korea. A recent report by a number of the country’s economic think-tanks found that the top 10 family-controlled conglomerates, or chaebols as they are known locally, have a market capitalisation of more than 50% of the country’s main stock market index, the Korea Exchange.

Moreover, this concentration is growing. According to the think-tanks, the latest figure shows that the top 10 control 51.9% of market capitalisation (that’s worth 1,227 trillion won or €837.6 billion), compared with 44.8% in 2008. By way of comparison, family businesses in Italy – where they play a big part in the economy – have a market capitalisation of around 32%. In the UK, family businesses have just 6% of market capitalisation of the FTSE 100.

In South Korea, a number of these family-controlled businesses are well known, like Hyundai and Samsung. In the last four years – indeed since the onset of the financial crisis – these two and their likes have been gobbling up global market share from their domestic and international rivals. Most impressively, they are particularly beating their Japanese rivals in areas like electronics and car making. That’s all to be admired.

But there are wider questions for these family businesses over, for example, their adherence to sound corporate governance principles, their links to policy makers and how they encourage oligopolistic practices to prosper to the detriment of competition.

South Korea’s chaebols may prosper today, but they should be wary of the lessons from Japan when similar, often family-controlled businesses, relied too much on similar oligopolistic dominance in the 1970s/1980s and ultimately became unstuck.

Family businesses are to be encouraged at all levels, big as well as small. But they should never be allowed to become too dominant, whereby they are stifling competition and entrepreneurship. South Korea’s family businesses need to take note.

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