[25 Years of Turmoil in the Business World] 36 Years Since the Introduction of the Large Business Group System... "What Was Right Then Is Wrong Now"

[Asia Economy Reporter Park Sun-mi]The 'Large Business Group Designation System,' introduced to limit the concentration of economic power among domestic conglomerates and prevent abuse of market dominance, has reached its 36th year this year. As of the 1st of this month, 76 business groups were designated as 'Disclosure Target Business Groups,' among which 47 were classified as 'Mutual Investment Restriction Business Groups,' subject to additional regulations. It is estimated that the number of regulations applied to companies could reach up to 217 and 275, respectively. This is also the background behind the growing calls to ease excessive regulations through further revisions to the Large Business Group System.

◆This Year, 71 Disclosure Target Business Groups, 47 Mutual Investment Restriction Business Groups=According to the Fair Trade Commission on the 11th, a 'Large Business Group Policy Briefing' will be held over two days on the 12th and 13th of this month for employees belonging to disclosure target business groups. This event will include explanations of large business group policies and disclosure training. Being designated as a large business group entails many and complex regulations such as prohibitions on internal transactions and private profit appropriation, total investment limits, and mutual investment prohibitions, requiring careful attention to avoid penalties.

The Fair Trade Commission annually designates disclosure target business groups and mutual investment restriction business groups to determine the scope of large-scale business group policies aimed at curbing economic power concentration. The criteria for designating large business groups have been steadily changing to reflect economic conditions. When the system was introduced in December 1986 and first designated in 1987, the criterion was companies with total assets exceeding 400 billion KRW. However, from 1993 to 2001, it changed to the top 30 companies by asset ranking; from 2002 to 2008, companies with total assets over 2 trillion KRW; and from 2009 to 2016, companies with total assets over 5 trillion KRW. Since 2017, companies with total assets over 5 trillion KRW are classified as disclosure target business groups, and those with assets over 10 trillion KRW as mutual investment restriction business groups.

Although the asset threshold for designation has increased, the number of companies subject to regulation has steadily risen. The number of disclosure groups and mutual investment restriction groups increased from 60 and 32 in 2018 to 64 and 34 in 2020, and jumped to 71 and 41 this year.

From 2024, even if assets do not exceed 10 trillion KRW, if a company accounts for more than 0.5% of the domestic gross production, it will be classified as a mutual investment restriction business group. This means the number of companies subject to regulation could increase further.

◆"It was right then but wrong now"…How has the environment changed? The business community points out that the large business group designation system, introduced in 1987 to curb economic power concentration domestically, is an outdated regulatory framework. It is said to be unsuitable for the current open economy where many companies operate globally.

In the 1980s, Korea's economic openness was about 65%, allowing some companies to monopolize the domestic market and pursue monopolistic profits. However, the current market openness exceeds 90%, raising concerns that excessive regulation could even harm corporate competitiveness.

In fact, according to a survey by the Federation of Korean Industries referencing corporate business reports, last year the top 10 companies by sales earned 66% of their total revenue overseas. This indicates that under an open economy, Korean conglomerates operate beyond the relatively small domestic market and target overseas markets. When the large business group designation system was introduced in the 1980s, Korea had no free trade agreements (FTAs) with other countries, but now it has 57 countries (as of March 2021). This means foreign companies can enter the Korean market at any time, making it very difficult for some domestic companies to monopolize the market.

A Federation of Korean Industries official pointed out, "Currently, large business groups are subject to excessive regulations and penalties," adding, "Disclosure target business groups (with assets over 5 trillion KRW) can be subject to up to 217 regulations, and mutual investment restriction business groups (with assets over 10 trillion KRW) up to 275 regulations."

There is also growing expectation that the newly launched Yoon Suk-yeol administration, aiming to create a better environment for corporate management, may move to ease regulations concentrated on large conglomerates. Previously, the Presidential Transition Committee proposed narrowing the scope of relatives of the 'same person' (head of the group) subject to large business group regulations from six degrees of kinship to four degrees. This aims to reduce corporate burdens through rational regulation and enhance market self-monitoring functions.

A business community official said, "While it may be challenging for the Yoon Suk-yeol administration, which has expressed a pro-business stance, to drastically revise the large-scale business group system that has been in place since 1987, regulatory easing is necessary as various regulations in the era of globalization are undermining the competitiveness of Korean companies."