Chronic excess capacity or over-investment has been a key issue whenever Korea goes through an economic crisis. The Korean government has repeatedly interfered with market mechanisms to dissolve structural excess capacity since it started full scale restructuring in the early 1980s. The purpose of this policy was to cure the adverse effects of excessively redundant investment in heavy and chemical industries after the second oil shock in 1979. Then, with the enactment of the Industry Development Law in the mid 1980s, the government initiated the restructuring of facilities in declining industries such as textile, dyeing/processing, and fertilizer in which chronic excess capacity had existed for a long time. The Korean government continued to indirectly engage in resource allocation through its "Core Business Specialization" program in the 1990s because it believed that excessive business diversification and over-investment on the part of the chaebol might weaken the country's international competitive edge in major industries. The government came up with the "Big Deal" policy, in which the 5 largest chaebol were asked to swap 8 businesses in key industries among themselves to alleviate chronic excess capacity in these businesses, which was pointed out as one of the key factors in bringing about the financial crisis of 1997. The eight major industries targeted by the big deals were semiconductors, petrochemicals, automobiles, aerospace, railway vehicles, power-generators/ship-engines, oil refining, and electronics. Looking back on past industrial policies vis- -vis excess capacity since the 1980s, the latter has been continuously mentioned at the center of industrial policy and without exception the government has taken an active part in resource reallocation to solve that problem. Based on the statistical analysis of a panel data composed of 26 firms' financial information over the sample period of 1988-1998, this paper rigorously examines whether chronic excess capacity has existed or not and which factors determine the scale of excess capacity.

The yearly average growth rate of sales in industries in which "Big Deals" were called for over the sample period is almost double the yearly average growth rate of sales for the whole manufacturing industry. Despite such a good situation on the demand side, the number of years in which capacity operating rates fell short of the 75% benchmark, defined as the capacity operating rate in economic downturn, is shown to be high for the auto, aerospace, railway vehicle, and power-generator/ship- engine industries. This statistical evidence indicates that structurally excessive capacity due to continual over-investment far in excess of growing aggregate demand over the sample period has existed in these industries. The level of excess capacity turns out to closely reflect demand shocks, after controlling for the effects of other explanatory variables. Nevertheless, reckless facility investment due to overly optimistic demand forecasting in the second half of the sample period (1994-1998), including the business bubble period of 1994-1996, is observed.

From the statistical analysis in this study, we can conclude that it is not feasible to attain the policy goal of successfully restructuring industries using government intervention as a tool for resource allocation since the government can not ex-ante control a variety of strategic behavioral patterns on the part of competing firms in an oligopolistic industry. For example, firms and industries with relatively high capital intensity or long-term chronic excess capacity usually have high fixed costs. Thus, they have a strategic incentive to spread high fixed costs over more units of output. In this case, the government can not forcefully control firms' strategic behavior in response to changes in the business environment, and its ex-post intervention in line with industrial policy may inevitably distort efficient resource allocation.

A firm's strategic decision to maximize profits subject to the constraints existing in its business environment must be a rational behavior at the firm level even if it may bring about excess capacity at the industry level ex-post. The statistical results in this study verify the theoretical inference that an excess capacity strategy may enable incumbents to threaten to expand output and cut prices following a competitor's entry, thereby making entry unprofitable. It is also worth noting that this statistical result is partially attributable to incumbents' exploitation of entry regulation policies. Incumbents benefit from the government's entry regulations by intentionally keeping a certain level of excess capacity whenever a potential competitor tries to enter the market. If this inference holds true, entry deregulation will significantly reduce incumbents' incentives to take advantage of entry regulations and engage in socially wasteful expansions of facilities.

A variety of positive analyses on the competitive consequences of the "Big Deals" confirm that the resulting mergers may significantly be detrimental to effective competition and, furthermore, be adverse to social welfare. The "Big Deal" policy to clear up chronic excess capacity is going too far in the sense that these business swaps, mergers and acquisitions, and consortiums may considerably deepen market concentration in relevant markets, and thus significantly impair fair competition. The Korea Fair Trade Commission (KFTC) has not played its fundamental role of fairly and transparently analyzing the competitive effects of mergers very well. While advocating industrial restructuring, the KFTC neglected its duty of screening out risky mergers in terms of competition restraint and social welfare loss. I examine whether mergers and acquisitions in the 8 "Big Deal" industries may restrain competition in relevant markets, based on the fair trade laws and guideline of the U.S., Japan, and Korea. When the related clauses of fair trade laws in Korea and Japan are applied to mergers and acquisitions in 16 lines of business related to the "Big Deals," most cases turn out to be major targets under intense screen of KFTC. In particular, mergers in the product markets of passenger cars, trucks, buses, railway vehicles, and power-generators fall under all clauses pertaining to competition restraint, and are assumed to harm fair competition in their respective market. If American merger guidelines are strictly applied to the "Big Deals," all cases fall into a category likely to have adverse competitive consequences and would ordinarily require further detailed analysis. Mergers in the product markets of passenger cars, trucks, buses, railway vehicles, and power-generators produce an increase in the HHI of more than 2000 points, even in highly concentrated markets post-merger, and are expected to face a strong challenge from the KFTC.

Merger screening in the auto industry had some problems with regards to the application of the "Failing Firm Doctrine." Kia, an allegedly failing firm, was unable to meet its short-term financial obligations. It was unable to reorganize successfully under the rehabilitation programs of financial institutions. Thus, a merger was one good alternative solution. But the KFTC did not make any good-faith efforts to elicit reasonable alternative offers for the acquisition of KIA's assets that would both have kept its tangible and intangible assets in the relevant markets and posed a less severe danger to competition than did the proposed merger. The commission has tended to overestimate the efficiency of merging firms compared with the negative effects of competition restraint. It might be more desirable to allow a temporary cartel to be formed, for example in the form of autonomous output and investment coordination among competing firms, rather than mergers until the markets get back on the right track.

The "Big Deals" are now almost over. In turn, there has been and will be considerable changes in market structure. The pending competition policy agenda is an exploration of market- compatible and feasible alternatives to maintain and promote workable competition in highly concentrated markets post-merger. First of all, the government needs to declare that "Big Deals" are the last interventions in market resource allocation and all industrial restructuring henceforth will be carried out in line with market principles. on the other hand, all economic regulations, including entry regulations and administration guidance, should be abolished to enhance market competition.