Firm Failure and Financial Crisis: The Experience of South Korea

In this paper we try to analyze the link between some industrial policies in South Korea and the 1997 financial crisis. We argue that while the industrial policies have greatly promoted the development of many local industries, they also have encouraged local firms to become over-optimistic, to over-invest, and to over-produce. That increases the risks the firms are facing. When a bad time occurs, many of the firms will face difficulty. When a sufficiently large number of them have difficulty, their troubles become the troubles of the economy