This dissertation examines a sample of firms from the 70 largest Korean conglomerates, or chaebols, in order to determine the motivation behind their diversification strategies and to identify the effects of diversification on economic performance. The first essay, “Government Revenue Maximization, External Capital and Corporate Diversification,” examines the argument that firms that have easy access to external capital, which is directly related to government subsidies in Korea, become over-diversified. The empirical analysis shows that firms with a high debt level are the most likely to pursue diversified expansion. Furthermore, this study shows that these firms have a tendency to decrease their diversification level when the government reduces business subsidies. The analysis conducted here is consistent with the argument that extensive and skewed subsidies lead industrial firms to accumulate considerable resources that are a springboard for excessive diversification.; The second essay, entitled, “Chaebol Structure and Industry Productivity Growth in Korea,” focuses on the effects of corporate diversification on performance rather than any particular aim that lies behind diversification strategies. According to prevailing studies, the over-diversification of Korea's large business conglomerates was an important source of inefficiency, which resulted in an industrial structure that was particularly susceptible to the financial shocks of the 1990s. My empirical tests are consistent with this argument, as they show that industries with higher levels of chaebol diversification have lower levels of productivity and productivity growth. These findings are consistent with previous studies in other countries, which have found that diversification is negatively related to economic performance.
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