Institutions, the state and performance : evidence from South Korea

The purpose of this thesis is to investigate whether State intervention in the market
can be a catalyst for economic growth by examining the cases of South Korea. Since Stale
intervention in the market typically takes two form; namely, implementing industrial policy
and controlling State-owned enterprises (SOEs). I investigate industrial policy as an overall
strategy of state intervention. and performance contract and board of directors as governance
mechanisms of SOEs. In doing so the thesis contributes to the existing knowledge in the
following ways.
First, this thesis extends the existing literature on industrial policy by shedding new
light on the dynamic nature of industrial policy. That is, industrial policy necessarily
changes the market conditions where it ha: been shaped and, therefore, it becomes outdated.
which necessitate new policies. Given this, I propose a dynamic framework for successful
industrial policy over time and find that South Korean industrial policy over the period
1960-1996 an be explained within the framework. confirming that successful industrial
policy. hould be a dynamic and evolutionary process which is responsive to changes in
institutional environment.
Second. the thesis extends the existing literature on performance contracts (PCs) by
examining whether PCs an actually improve the performance or SOEs. From relevant
theories, the thesis draws out conditions that 'sensible' PCs measures should meet so as to
effectively motivate SOEs to perform better and the use of Total Quality Management
(TQM) as a basis for generating specific PC measures. The arguments are then empirically
tested using data from the South Korean PC which are built on TQM. The results show that
the South Korean PC meets the condition. for 'sensible' measure, and actually improve the
performance of the South Korean SOEs. indicating that PC: can improve the performance of
OE: where PCs incorporate sensible measures.
Finally, this thesis. extends the existing literature on corporate governance by
empirically investigating how corporate boards add value to firms in the context of SOEs.
and how SOE boards interact with PCs. sing a novel framework that incorporate board
process, the thesis. derives empirical evidence that PCs act as substitute for board monitoring.
The results indicate that SOEs do adjust their internal governance in response to internal
imperatives (the reduced need for monitoring due to the presence of PCs) rather than
institutional pressure of PCs for effective monitoring. This implies that regulators should
consider this subtitutive effect when they design the governance structure of SOEs.