Large Firms Can - and Should - Fail

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Large Firms Can - and Should - Fail

An early attempt at analyzing the success and failure of U.S. companies resulted in Gibrat''s Law, which posits that there is no correlation between the size of a company and its ability to grow in the future. A large successful company and a small successful company both have the same probability of survival.

Until recently, this rule did not seem to apply in Korea. The government stepped in to save large companies from failure, while strong affiliates become guarantors of the weaker. But we now can ask ourselves about the future of the top 30 firms. Who could predict that Hyundai Engineering and Construction would so easily collapse?

Accustomed to high growth, we sometimes think that Korean firms are exceptional in the world, but other developed countries have shown similar patterns. In the past 10 years, 213 companies entered the list of the top100 U.S. companies, but those companies stayed on the list only an average of 4.8 years. Uncertainty has deepened in the globalized economy, and the life span of a company is becoming shorter.

This shorter life cycle phenomenon is unrelated to the size of companies. It is a trend which is not in our power to reverse, and it is a potential risk which may cause the entire foundation of our economy to fall. As the world changes, our economy is more at risk.

Hyundai Construction, which once was a symbol of Korea, is not standing on the edge of a cliff, and Daewoo Group, which once was a symbol of global management, have cast a gloomy shadow on our economy. We do not even need to talk about the impact on small and medium companies. The people''s burden in public expenditure has increased tremendously, and no one can predict how long this crisis will continue. How can our economy survive these risks?

First, we should accept the fact that a company can succeed or fail at any time. If all economic actors accept change as normal, the survival power of our economy is strengthened. We should give up the idea of supporting ailing large companies just because of uneasiness about unemployment or for political considerations. Restruc-turing is a natural phenomenon which occurs constantly in our everyday lives. The correct way to minimize social expenses is to push failing companies out of the market. We understand those facts, and we should no longer pay for the lessons.

It is important to provide flexibility for companies to adapt themselves to the market environment. In addition to flexible employment, a good business environment which encourages new investments and the failure of unsuccessful firms should be encouraged so that companies adapt quickly. Strategies to maintain existing businesses without regard to profitability and confrontation between labor unions and employers refusing restructuring will only speed the failure of companies. In contrast, we should understand that it is only possible to create jobs for employees through timely restructuring. Restructuring is an unavoidable choice, but unemployment is an avoidable outcome.

We should also give up trying to reverse market trends. Companies are living organisms in the market; how can they survive after being deserted by the market? Daewoo Group collapsed and Hyundai Construction is at risk because they both lost the trust of the market, which has been observing government policies, corporate strategies and labor struggles. Those choices which try to reverse the trend of the market today will cause an enormous amount of social expense tomorrow.

Economic crises always come with elements that allow them to be resolved. It is natural for our economy to slow, or even go into recession for several years after decades of growth. The problem is not the stagnation we should expect to see, but how much more we should pay for already-learned lessons on how to overcome economic problems.
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