PUBLICATIONS & REPORTS

Contents Introduction

This paper examines whether there has been overinvestment by Korean firms in the 1990s, particularly during the few years leading up to the crisis in Korea. Overinvestment is defined as the statistically significant discrepancy between the forecasted value from an econometric model of investment and the actual investment. Our analysis shows that overinvestment was found most frequently for chaebol firms. Moreover, it was most evident in a few industries showing viable exports in the 1990s, such as electronic and communication equipments, basic metals and transport equipments other than motor vehicles. However, capital account liberalization was not found critical in inducing overinvestment. Overinvestment by chaebols during 19941996 period indicates that loosening strict restrictions on lending in the financial sector to chaebols backfired. In this sense, the Korean crisis was caused by structural weaknesses in corporate and financial sectors.