The Power of Political Connections: Evidence from Korean Chaebols and Government Procurement

ABSTRACT

This paper investigates the impact of political connections on the performance of Korean chaebol companies. We use two indicators to measure the ability and diversity of political connections and find that chaebol companies are more likely to establish political connections compared to non-chaebol firms, which gives them an advantageous position in government procurement bidding. Significantly, our findings indicate that political connections correlate positively with the monetary value of government contracts secured by chaebols, underscoring the direct economic benefits of these connections. Overall, our study sheds light on the motivation for the political networks of chaebol firms and contributes to a better understanding of the direct benefits of political connections.

KEYWORDS:

• Political connections
• government procurement
• chaebols
• firm performance
• emerging economy

JEL:

• G30
• G34

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. Top managers include CEO, president, vice president, and the managers of subdivisions, such as the chief of risk officer, the chief operating officer, chief financial officers, and chief credit officer. We also include outside directors.

2. A chaebol is defined as a conglomerate in which the largest shareholder and their family hold more than 20% of the company’s shares and participate in management.

3. Since Korean men are required to serve 21 months in the military by law, we do not consider having served in military as having military connection. A manager with military connection has worked as an officer in our study.

4. Farag and Dickinson (2020)‘s work emphasizes the importance of examining a wide range of connections beyond traditional political ties, suggesting that these diverse connections can offer different strategic benefits and risks to companies.

5. Political parties in Korea have undergone a number of new name changes in recent years. Currently, the main political parties are the Saenuri Party and the New politics Alliance for Democracy, the United Progressive party, and a conservative party. We track the change of names of these main parties, and consider the parties are the same despite the changes in names when a majority of party members are the same.

6. Thanks to the anonymous reviewer for the helpful comments.