While prior studies focus on business portfolios, financial structure, and ownership structure of business groups in Korea, control systems have been largely ignored in the literature. The purpose of this study is to measure control systems of business groups before and after the 1997 financial crisis and to document how control systems have changed over time. The survey instruments which measured decentralization, evaluation, coordination, social control, communications between group headquarters and subsidiaries, executive compensation, and group influence were sent to both group headquarters and subsidiaries.

Key findings are as follows. First, control systems of business groups have generally been strengthened since the financial crisis. The decision-making authority has been increasingly delegated to subsidiaries. However, coordination, evaluation, performance-based executive compensation, social control, and communications by group headquarters were found to increase since the financial crisis. These findings suggest that business groups have sought to build up control systems to manage their subsidiaries. How such changes affect strategy and performance of business groups and their subsidiaries is worthy of future research.

Second, there exists heterogeneity in control systems among business groups. Some groups demonstrated low levels of coordination, evaluation, social control, and communications by group headquarters while delegating much of decision-making authority to subsidiaries. These groups largely treat their subsidiaries like independent firms. By contrast, other groups were more active in managing their subsidiaries. Antecedents and consequences of such differences in control systems warrant further conceptualization and empirical analysis.

Third control systems were found to affect R&D intensity (ratios of R&D investment to total sales) of subsidiaries. More specifically, evaluation by objective criteria was negatively related to R&D intensity, but evaluation by subjective criteria and evaluation by group criteria were found to increase R&D intensity. These findings suggest that excessive evaluation by short-term financial criteria may lead to short-term orientation among executives, and that evaluation by non-financial criteria may complement evaluation by financial criteria. More research is necessary to enhance our understanding about how control systems affect resource allocation and strategy of subsidiaries.