VOLUME 12 ISSUE 2
Change Management An International Journal
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Changes in Economic Environment, Learning, and Dynamic Capabilities in Korean Firms HONG Y. PARK, GEON-CHEOL SHIN, SUNHO JUNG, AND YONG-SEUNG PARK
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Changes in Economic Environment, Learning, and Dynamic Capabilities in Korean Firms Hong Y. Park, Saginaw Valley State University, USA Geon-Cheol Shin, Kyung Hee University, South Korea Sunho Jung, Kyung Hee University, South Korea Yong-Seung Park, Kyung Hee University, South Korea Abstract: Korean firms (chaebols) faced increasing global competition as Korea became a member of the WTO and OECD, and the world economy continued to globalize. These changes in the economic environment led to a Korean economic crisis that caused Korean firms to transform. This paper investigates factors that contributed to the economic crisis and examines Korean firms’ learning and innovations based on knowledge learned from the economic crisis. Some Korean firms’ financial resource selection and deployment were ill-prepared for the changes in the economic environment (global competition); these firms were dissolved as the economic environment drastically changed. Other Korean firms learned the importance of multiple factors: managers’ awareness and adaptabilities to changes in market conditions, corporate core competency and capability, managers’ investment decisions, and principles of corporate management. Many Korean firms increased competitiveness by making changes in their competitive mindset and adopting new business practices after the economic crisis. Emphasis on competence-creation and globalization, the most prevalent changes, made Korean firms competitive. Keywords: Business Practice Innovation, Competence Creation, Corporate Cultures, Dynamic Capabilities, Knowledge, Learning, Novelty Creation, Changes in Selection Environment
1. Introduction
T
here are a number of studies on the Korean economic crisis at the macro-level (Adelman and Song, 1999; Baliño and Ubide, 1999; Joh, 2003: Krueger and Yoo, 2002); however, there is a paucity of empirical studies on the micro-level, particularly at the corporate level, in spite of the importance of corporate roles in economic performance. This study focuses on the corporate responses and transformation of management practices after the Korean economic crisis. Most studies report that the financial structure of Korean firms and government intervention in capital markets were main causes of the crisis. We take a different approach in understanding the nature of the crisis. This paper will examine economic, environmental and corporate level factors of the economic crisis and study corporate responses to the crisis from the dynamic capabilities perspective of the firm. The dynamic capabilities perspective of the firm focuses on the analysis of dynamic processes, change and innovation (Buenstorf, 2006; Nelson and Winter, 1982; Winter, 1984). Winter (1984) emphasizes the importance of economic change in our changing world. Teece, Pisano and Shuen (1997) appropriately capture the elements of their dynamic capabilities theory and emphasize the key role of strategic management in adapting, integrating and reconfiguring internal and external skills, resources and functional competencies to match the requirements of a changing environment (p. 515). Korean firms faced a drastically changing environment in the ‘90s, including becoming a member of the WTO and OECD. Some Korean firms adapted well to the changing environment, but a significant number of firms were dissolved, or changed ownership and management, in 1997 and 1998. The Korean firms’ experiences offer a unique opportunity to study the dynamic capabilities approach to the firm. Although extensive writings on dynamic capabilities of the firm have emerged in the last two decades, there is paucity in empirical
Change Management: An International Journal Volume 12, 2013, www.ontheorganization.com, ISSN: 2327-798X © Common Ground, Hong Y. Park, Geon-Cheol Shin, Sunho Jung, Yong-Seung Park, All Rights Reserved, Permissions:
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CHANGE MANAGEMENT: AN INTERNATIONAL JOURNAL
studies. The dynamic capabilities approach to the firm can be applied to understanding Korean corporate changes in a rapidly changing global economic environment. We will use the firms’ financial statements as well as primary data obtained in our earlier study (Park and Shin, 2004) for the empirical analysis. Primary data on the Korean economic crisis is scarce and we have obtained them by a survey which was conducted five years after the crisis. Section 2 reviews dynamic capabilities approaches to the firm to establish a theoretical framework for our analysis of changes in Korean firms. Section 3 discusses research method and section 4 considers the causes of the economic crisis and recovery, to grasp environmental changes in the Korean economy. Section 5 examines corporate learning and changes. Section 6 attempts to provide supporting evidence on survey results based on the Korean firms’ financial data. Section 7 discusses the survey results and evidence. Section 8 concludes the paper.
2. The Dynamic Capabilities Approach to the Firm In capabilities research the dynamic capabilities approach has emerged as a new paradigm of the modern business. The dynamic capabilities approach concerns change as evolutionary economics does. Helfat et al. (2007) argue that firms must develop the “dynamic capabilities” to survive and prosper under conditions of change. The initial definition of dynamic capabilities refers to “the firm’s ability to integrate, build, and reconfigure internal and external competencies to address rapidly changing environments.” (Teece, Pisano, and Shuen, 1997, 516). Eisenhardt and Martin (2000) argue that a firm’s dynamic capabilities are “the firm’s processes that use resources … to match and create market change (p. 1107).” Zollo and Winter (2002) define a dynamic capability as “a learned and stable pattern of collective activity through which the organization systematically generates and modifies its operating routines in pursuit of improved effectiveness (p. 340).” Helfat et al. (2007) define a dynamic capability as the capacity of an organization to purposefully create, extend, or modify its resource base (Helfat et al., 1). For Teece et al. (1997) the dynamic capability implies the firm’s capability to respond to changing environments such as technology (computers, telecommunications, and production methods), markets (competitors, customers, and suppliers) and regulation (taxes, antitrust and international) (Brickley et al. 2008). The dynamic capability for Helfat et al. (2007) and Zollo and Winter (2002) refers to a firm’s active capability to improve its effectiveness. Eisenhardt and Martin (2000) include both response to and creation of market change. Grewal and Tansuhaj (2001) emphasize that firm capabilities strengthen its ability to manage economic crisis. Fahy (2002) suggests the importance of identifying and developing value-creating resources in a global environment from a dynamic perspective. Change, learning, and adaptation have all been used to refer to the process by which organizations adjust to their environment (Fiol and Lyles, 1985). Organizational relationship and interaction to its environment lead to innovation in new products, processes and services. Daft and Weick (1984) propose a matrix of four different kinds of organization: undirected viewing, conditioned viewing, discovering and enacting. Brown and Duguid (1991) argue that innovation is not simply a response to empirical observations of the environment, but the interface between an organization and its environment help create innovation. For Brown and Duguid (1991) the enacting organization is proactive and highly interpretive. It responds to environment and also creates many conditions to which the enacting organization must respond. Eisenhadt and Martin’s (2000) response to and creation of market change capture the innovative perspective of the enacting organization. Korean firms faced rapidly changing environments and the financial crisis in 1997. They learned the nature of changes in economic environments and made changes in practices and creating new competences. Korean firms initially needed to respond to the rapidly changing environment and the crisis, but the dynamic capability has become a routine for continuous improvement. Korean firms’ experiences fit to the notion of the dynamic capability and the
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enacting organization. We, therefore, will apply dynamic capabilities framework to examine Korean firms’ learning and innovation after the economic crisis.
3. Research Method We conducted a survey of Korean business firms in 2003 to learn business leaders’ perceptions of the 1997 economic crisis and how they have changed in response to the economic crisis. In particular, the survey questionnaire included questions regarding policy and market factors of the economic crisis to help understand the environmental factors of the economic crisis. We created a website with the questionnaire for collecting data. We sent out our email and regular mail to 1300 firms asking them to fill out the online questionnaire. The sample was stratified based on the size to reflect the population. In total, 204 firms, which represent 50 large business groups (chaebols) and 154 small and medium-size firms, are useable, resulting in a response rate of 15%, which reflects the population of Korean firms fairly well. The questionnaire was designed for respondents to rank the top three items in order of importance among the listed factors in each question, so as to avoid confusion in priority ranking. In our analysis, each item’s rank was transformed into a score and a weighted total score was calculated by multiplying 1X3; 2X2; 3X1. For example, 32 respondents ranked the government exchange rate policy failure as the most important reason for the crisis; 44 respondents ranked it as the second important reason; and 37 respondents ranked it as the third important reason; thus the total score for government exchange policy failure is 221 (32 X 3 + 44 X 2 + 37 X 1 = 221).
4. Changes in Korean Firms after the 1997 Economic Crisis 4.1 The Nature of the Rapidly Changing Economic Environment South Korea was the world’s 10th largest economy in 1997, but faced economic crisis in that year. The Korean Stock Price Index (KOSPI) fell from 981 in April 1996 to 471 at the end of October, 1997; the unemployment rate rose from 2% in October, 1997, to 6.5% in June of 1998; and Korean currency, the “won,” depreciated from 800 won for a dollar to 1800 won. Many large companies went bankrupt and large chaebols lost money during the crisis. Korean foreign reserves were depleted and the Korean government received an IMF loan package of $58.35 billion in bailout, along with the IMF regime for crisis management. The crisis was caused by a number of economic factors: financial liberalization and high interest rates (Krueger and Yoo, 2001), an incorrect mix of government-intervention with market forces (Adelman and Song, 1999), deteriorated profits (Joh, 2003), structural problems in financial and corporate sectors (Baliño and Ubide, 1999), and asymmetric information (Hahm and Mishkin, 2000). We have investigated some of these factors and added our own. We examine them from two perspectives: (1) policy and market factors; and (2) business side factors. The policy and market factors are external factors and include inefficient allocation of financial resources due to government intervention; failing of government exchange rate policy; loss of market competitiveness earlier in the ‘90s; the sudden exit of foreign capital; high wages due to the strengthened labor unions; outflows of business funds to politicians; and opening the domestic market to comply with the WTO and OECD. The internal business side factors include heavy debt-driven business expansion; pursuit of business growth without considering changes in external market conditions; a business group not exiting an unprofitable business unit; a decline in business profits due to the lack of effective responses to market changes; and high foreign debt dependency. The survey question regarding policy and market factors of the economic crisis was designed to learn the environmental factors of the economic crisis.
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Table 1: Policy and Market Factors of the Crisis Factors Inefficient allocation of financial resources due to government/business connection Failure of government exchange rate policy Loss of market competitiveness in the 90s Sudden exit of short-term foreign capital High wages due to the rigid labor market Outflow of business funds to politicians Opening domestic market to comply with the WTO and OECD Others
1
2
Responses 3 Total
96
38
33
397
1
32 28 16 8 3
44 23 30 16 24
3 39 28 23 14
221 169 136 79 71
2 3 4 5 6
3
16
14
65
7
5
1
1
18
8
1 96
2 44
Responses 3 Total 27 403
35
69
43
286
2
15
34
55
168
3
28
19
45
167
4
17 1
25 0
18 2
119 5
5 6
Rank
Table 2: Business Side Factors of the Crisis Factors Heavy debt-driven business expansion Pursuing business growth without considering changes in external market conditions Not exiting an unprofitable business unit from a business group A decline in business profits due to the lack of effective response to market changes High foreign debt dependency Others
Rank 1
The top three factors indicated by survey respondents were (1) the inefficient allocation of financial resources by government-directed loans, (2) failure of the government exchange rate policy, and (3) the Korean economy losing market competitiveness. The top three crisis factors caused by businesses were (1) the heavy debt-driven business expansion, (2) business’ pursuit of growth without considering changes in external market conditions, and (3) business groups not exiting unprofitable business units.
4.2 Factors Contributing to the Recovery from the Crisis To overcome the economic crisis, policy makers, managers and entrepreneurs made reforms. The survey included questions designed to investigate the effectiveness of these market changes and government policy and business reforms. As Table 3 indicates, survey respondents ranked government-driven reforms as the most important recovery factor; an increase in export competitiveness due to the depreciation of the Korean “won” and the government’s public funds were rated as the second and third most important factors in overcoming the crisis. The government demand expansion was an interesting factor. The Korean government encouraged bank credit cards usage as a measure of demand expansion; people began to use them on a large scale, which increased the demand for goods and services. This helped solve the problem of the lack of demand during the crisis. However, people spent money before they earned it and credit card debt consumption spending has since become a huge problem for banks. The top three business reform factors were (1) focusing on the business core, (2) raising labor productivity by introducing rational human resource management, and (3) reduction in
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interest payment by lowering the corporate debt. Tables 3 and 4 provide the detailed responses of the survey respondents. Table 3: Market and Government Policy Changes Factors Government driven reforms Depreciation in exchange rate lowered export prices and helped exports Government public funds Successful inducement of foreign capital A fall in interest rates Government’s demand expansion policy Others
1 55
2 37
Responses 3 Total 25 264
48
32
26
234
2
28 27 14 12 4
26 25 36 27 2
32 32 36 29 4
168 163 150 119 20
3 4 5 6 7
Rank 1
Table 4: Business Reforms Reform Measures Reductions in diversified business areas and focus on core business Raising productivity by introducing rational human resource management Reductions in interest payments by cutting the amount of debt Reduction in production costs by increasing outsourcing Use of temporary labor contracts Improvements in work incentives by introducing pay for performance Raising global competitiveness by developing new technologies and products Raising the entrepreneurial and sense of ownership employees Reductions in debt/equity ratio by increasing the equity capital Others
Responses 3 Total
1
2
Rank
52
28
35
247
1
26
31
32
172
2
30
29
23
171
3
25 18
27 22
30 15
159 113
4 5
11
17
15
82
6
9
11
10
64
7
6
6
15
45
8
4
13
6
44
9
5
1
1
18
10
5. Learning from the Crisis and Changes Responding to the Economic Crisis 5.1 Learning and Changes Korean firms made many changes in response to the crisis. Foss (1993b) points out that “the competence perspective is a story about economic organization under circumstances where inputs, outputs and technology are significantly changing” (p. 141). Teece et al. (1997) emphasize rapidly changing environments in their definition of dynamic capabilities. Zollo and Winter (2002) define a dynamic capability as “a learned and stable pattern of collective activity through which the organization systematically generates and modifies its operating routines in
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pursuit of improved effectiveness” (p. 340). Some common threads of these definitions include rapidly changing environment, learning and making innovations. We were interested in what Korean firms have learned from their experiences and what they did with the knowledge. To manage future economic shocks, it was important for business firms to learn to deal with the 1997 economic crisis. An accumulation of such knowledge can help all business groups. Cook and Brown (1999) state that “the generative dance between knowledge and knowing is a powerful source of organizational innovation” (p. 381). A concept about knowledge and knowing can be applicable here: knowledge is acquired through learning and knowing is a use of this knowledge or practice of knowledge (Brown and Duguid, 1991; Orlikowski, 2002; Zollo and Winter, 2002). Schendel (1996) points out that what really matters is “what the organization can do with the learning” (p. 3). Cohen (1991) makes a similar point in his review essay on individual learning and organizational routine: Building and modifying the repertoire are fundamental activities because they embody learning in routines, thus constituting a major form of organizational memory. The steady refinement of that repertoire generates much of the performance improvement we see in learning curve research (p. 135). In the Korean economic crisis, knowledge learned from the crisis and experiences of the crisis could become very important resources for corporate change, innovation and sustainable firm growth (e.g., Lee and MacMillan, 2008). Table 5 and Table 6 reflect managers’ learning and changes during the economic crisis. Table 5: Learning through the Crisis Learning Importance of managers’ awareness and adaptabilities to changes in global market conditions Importance of corporate core competency and capability Importance of managers’ investment decisions Importance of principles in corporate management Importance of R & D for technology innovation Others
Responses 3 Total
1
2
Rank
59
58
47
340
1
54 37 29 8 1
45 44 26 13 1
48 42 29 71 0
300 241 168 121 5
2 3 4 5 6
Table 6: Corporate Changes after the 1997 Economic Crisis Changes Increased awareness of the importance of corporate competitiveness at all levels of employees Greater capability for crisis management Better preparation to deal with future crisis through crisis management strategy Routinization of crisis management Introduction of new management techniques Increased corporate competitiveness Increased capability of new product development Others
24
Responses 3 Total
1
2
Rank
52
37
36
266
1
28
32
32
180
2
20
42
33
177
3
34 15 19 19 1
19 25 20 12 0
19 25 22 1 2
159 120 119 92 5
4 5 6 7 8
PARK ET AL.: CHANGES IN ECONOMIC ENVIRONMENT, LEARNING, AND DYNAMIC CAPABILITIES
Respondents to the survey ranked the importance of managers’ awareness and adaptabilities to changes in market conditions at the top. They also learned the importance of corporate core competency and capability, as well as the importance of managers’ investment decisions, understanding of corporate management principles and R&D for technology innovation, as Tables 5 and 6 illustrate. Although the total score for the importance of R&D for technology innovation is only 121, ranking it fifth, 71 respondents ranked it as their third most important category, showing that many respondents learned the importance of the new competence-creation (Cantwell and Mudumbi, 2003). The results in Table 6 also indicate that the learning of Korean entrepreneurs and managers did increase from the crisis and they used the acquired knowledge in their organizational changes. Naturally, there may be an inquiry with respect to the structural relationship between learning from Korea’s financial crisis and the organizational changes. Nonsymmetric correspondence analysis (D’Ambra and Lauro, 1992) was chosen as a statistical technique for determining how managers' learning affects corporate changes. This technique is an exploratory tool to produce a graphical representation of the dependence between two categorical variables. Figure 1 displays the directional relationship between learning and corporate changes in twodimensional space. The predictive power of a specific lesson from the crisis on a particular change in a firm is evaluated by the magnitude of the inner product between two vectors representing these entities on the plot (i.e., the closer two vectors, the stronger their relationship). Clearly, learning the importance of R&D for technology innovation enhanced new product development and crisis management capabilities. A lesson from the managers' adaptability to changes in turbulent environments forced Korean firms to emphasize the importance of achieving sustainable corporate competitiveness to all levels of employees, to better prepare for future crisis, and to improve corporate competitiveness (see Figure 1).
Figure 1: Joint plot of learning from the crisis and organizational changes. Arrowheads indicate predictor categories (the former) and circles indicate criterion categories (the latter).
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5.2 Adoption of New Business Practices We were interested in knowing what business practices Korean business firms adopted after they experienced and learned from the economic crisis. We asked them to select three items that the company put into practice, in order of importance. Results of this survey question are shown in Table 7. Most Korean firms are diversified business groups that realize the importance of core capabilities and core competency. Respondents rated emphasis on development and improvement in core capabilities and core competency as the most important business practice. Establishment and implementation of business strategy and structural reform in human resources management was the second, followed by important business practices adopted. Increasing brand reputation by improvement in product quality and development of new products has also become very important, along with globalization, for large chaebols such as Samsung, Hyundai, LG, SK and POSCO. Introduction of new products and advertising campaigns by these groups have made their companies highly visible and their brand names are recognized worldwide. New business practices improve firm performances. Table 7: Adoption of Business Practices Practices Emphasis on development and improvement in core capability and competency Establishment, implementation and routinization of business strategy Structural reform in human resources management Adoption of debt reduction strategy Emphasis on acquisition and development of human resources Establishing strategies to raise brand reputation by improvement in product quality and development of new products Increased globalization Others
Responses 3 Total
1
2
Rank
65
38
28
299
1
37
32
38
213
2
28 24
34 24
33 16
185 136
3 4
15
26
27
124
5
13
23
33
118
6
4 1
7 1
8 1
34 6
7 8
Nonsymmetric correspondence analysis was conducted to visualize how a specific lesson from the financial crisis is related to the type of new business practices adopted by Korean firms. Figure 2 shows that learning the importance of R&D was associated with the adoption of strategies to enhance brand reputation through higher product quality and new product development. While realizing the importance of corporate core competency, the managers considered the development of core capability and competency as very important. Moreover, firms that attach more importance to principles in corporate management adopted debt reduction strategy (see Figure 2).
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PARK ET AL.: CHANGES IN ECONOMIC ENVIRONMENT, LEARNING, AND DYNAMIC CAPABILITIES
Figure 2: Joint plot of learning from the crisis and adoption of new business practices. Arrowheads indicate predictor categories (the former) and circles indicate criterion categories (the latter).
6. Evidence Supporting Survey Results Questions are often raised regarding the validity of survey based research results. Do we have other evidence supporting survey results? Though it is difficult to provide concrete empirical evidence supporting survey results, we will attempt to provide several selected pieces of such evidence, with a risk of selection bias. We developed four hypotheses based on the survey results. The first hypothesis can be stated that Korean firms improved capital structure by reducing debt. Heavy debt driven business expansion was reported as the top rated business side factor of the crisis, while cutting the amount of debt ranked high among business reform measures in survey responses. The second hypothesis is on development in new product and process which require a significant increase in R&D. The third hypothesis is on the performance of assets and the fourth hypothesis tested is performance of return on assets. To improve performance of assets, businesses made reforms in human resource management, parts outsourcing, labor contracts, work incentives, brand equity, technologies, and the entrepreneurial mindset of employees. Financial data imported from KISLINE (i.e., a database maintained by Korea Investors Service Inc.) provide supporting evidence of four important changes that occurred in capital structure and in asset performance. These changes included debt equity ratio, R&D expenditures, sales-to-asset ratio, and return on assets. For the changes that we considered, paired sample t-test1 was performed to find whether any significant difference existed between before and after the economic crisis. Though there are many business firms in Korea, the Fair Trade Commission (FTC) in Korea closely monitors government designated chaebols. Among others, 27
CHANGE MANAGEMENT: AN INTERNATIONAL JOURNAL
we included 22 chaebols for our analysis as these business groups had more financial data available. First, we examined financial data on capital structure. Korean firms had financed their business expansions using mainly debt financing. This high debt/equity structure contrasts with the U.S. capital structure, known for its low debt/equity ratio, due to professional managers with small ownership stake (Jensen, 1986). The average debt/equity ratio of the top 35 U.S. manufacturing firms in 2001 was 0.9107 (source: authors’ estimation based on 2001 corporate balance sheets); the overall U.S. debt/equity ratio during the ‘90s was 1.50 (Balaño and Ubide, 1999). The Korean firms, in contrast, tended to utilize debt financing for two main reasons: (1) firms were managed by owner-managers with a strong incentive to protect their ownership and control by maintaining high equity shares (Park et al. 2012a); and (2) during the government-led economic development, the Korean government had supported large firms with loans below the market interest rate. The debt/equity ratio of most chaebols (business groups) exceeded 400 percent during the ‘90s (Balaño and Ubide, 1999); when the 1997 Korean economic crisis caused negative profits for Korean firms, this heavy debt led to bankruptcies for many large chaebols. Consequently they recognized that they needed to make adjustments in capital structure, and the survey results reflect these adjustments. The actual debt/equity ratio has declined annually since 2000; from 2.187 in 2000, to 1.077 in 2004 (see Table 8). A paired sample t-test was conducted to find whether any significant difference existed between the 1992 and 2002 debt equity ratios. The result of this test showed that the debt equity ratio in 1992 was significantly greater than that in 2002 (t = 2.08, p < .05). Table 8: The Average Debt/Equity Ratio of Large Korean Chaebols since 2000 Year Net Profit (billion won) Debt/Equity Ratio
1996
2000
2001
2002
2003
2004
6315
-16,148
2,115
11,572
28,018
32,686
2.509
2.187
1.712
1.312
1.164
1.077
Source: Calculated by authors based on Korean Fair Trade Commission’s financial data on Korean Chaebols published on the FTC website.
As Table 8 shows, Korean firms began paying off their debts as they began to realize net profits, providing supporting evidence for survey results regarding debt reduction. This trend can be interpreted as Korean firms’ optimizing capital structure, or as overly cautious investment behavior due to their experiences in the crisis. Overly cautious investments may result in losing a competitive edge in the future. However, when debt-financed investment in R&D is successful in new product and process development, it makes companies competitive. Since firm’s R&D creates novelty and variation for selection, both GE in the U.S. and Samsung in Korea maintain relatively high debt/equity ratios compared to other firms because of their large R&D investments. Second, R&D spending for new product and process innovation by leading chaebols such as Samsung, LG, Hyundai, SK and POSCO provides evidence of competence-creation (Cantwell and Mudambi, 2003). Korean firms learned the importance of core competence from the crisis and have focused on increasing competence-creation. Samsung spent $5.428 billion on R&D in 2005, ranking 11th among global R&D spenders (Jaruzelski et al., 2006). Samsung, very successful with new technology development in television and memory chips, has become an industry leader. POSCO (iron refinery business) spent $220 million in 2005 (Jaruzelski et al., 2006) and is known as a well-managed innovating firm. POSCO reportedly succeeded in the FINEX refinery process as the first among iron refinery companies in the world (Financial Times, May 31, 2007). This new FINEX refinery process will cut production costs by 15 percent and reduce environmental contamination more than 90 percent. POSCO invested over 1.6 billion
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dollars in the FINEX project and plans to use this new competence for its refinery construction expansion in Vietnam and India. LG’s home appliances have increased global market shares. Hyundai automobile’s aggressive globalization was noticed by world automobile producers and consumers as the company improved quality and built factories in the U.S., India, China and Europe. SK, a dominant oil refinery in Korea, is expanding to other countries. These examples illustrate the competence-creation and globalization of Korean firms. The degree of the competence-creation was measured in terms of a Korean firm’s 1996 and 2001 R&D expenditures divided by its total sales. The results of the t-test for these paired samples indicated a significant change in the ratio between 1996 and 2001 (t = 1.85, p < .05), which confirmed greater R&D expenses after the 1997 economic crisis. A third reform measure taken by Korean firms was managers’ entrepreneurial actions. Managers adopted new business practices in core competency, business strategy, structural reform, acquisition and development of human resources, quality improvement and new product development. These measures should contribute to improvement in return on assets and can be analyzed from the dynamic capabilities perspective, which offers an analytical framework to capture changing environment and corporate adaptation to a changing environment. A firm which was dissolved or exited can be classified into the following two groups according to the period of dissolvent or exit: 1) firms dissolved or exited in 1997 and 1998 and 2) firms in 2000, 2001, and 2002. For each group, a paired sample t-test was performed to compare the difference between one and two years prior to firms’ dissolvent or exit in terms of the salesto-asset ratio. We found that the business groups dissolved or exited in 1997 and 1998 had actually improved sales/assets ratio one year prior to their exits (t = 2.52, p < .05), but both Sammie and Hanbo (steel companies) had extremely high debt/equity ratios of 8.77 and 5.86, respectively. Kia automobile group had a relatively low debt/equity ratio of 1.48; Kia’s problem was labor costs; it had losses in 1996 and 1997 and could not pay high interest. However, the sales/asset ratios of business groups dissolved or exited in 2000, 2001 and 2002 had significantly deteriorated one year prior to their exits (t = -3.45, p
