From father to son.                                                                                                Photographer: Yonhap News via Bloomberg
From father to son.                                                                                                Photographer: Yonhap News via Bloomberg

The oft-smiling Lee Jae Yong is both South Korea's biggest hope and its biggest problem.

The 46-year-old heir apparent to lead Samsung Electronics Co. has been the object of media obsession since his 72-year-old father disappeared into a hospital. Lee Kun-hee, Samsung’s chairman and Korea’s richest man, had emergency surgery in May after suffering a heart attack. The nation is already moving on to Lee the younger, with analysts and investors praying he'll steer the family business well.

Republic of Samsung

What's unfortunate is that the future of 50 million people hangs in the balance as this family drama plays out. One company doesn't make an entire economy, of course. But Samsung's outsized role in Korea makes the old axiom about General Motors -- as GM goes, so goes America -- seem quaint. Samsung remains the core of Korea's system of family-run conglomerates, or chaebol. The five biggest ones generate about two-thirds of gross domestic product, and none is more dominant than Samsung, which counts more than 70 companies under its name. If the conglomerate closed shop tomorrow, the equivalent of 25 percent of South Korea's GDP would vanish. Is it any wonder Koreans joke that they hail from the Republic of Samsung?

Handing off such an economically vital, publicly traded company from father to son to grandson doesn't reflect well on Korea's global brand -- a brand that Samsung's flashy Galaxy phones and tablets have done much to create. Why don't shareholders speak out about against the blatant nepotism exercised by most chaebol, not just Samsung? What about President President Park Geun Hye, who rarely misses a chance to talk about the need for the country to evolve into a more creative economy?

The transition from Lee to Lee illustrates exactly why South Korea risks losing ground. The Organization for Economic Cooperation and Development issued a report last week on the structural weaknesses that threaten to undermine Korea's effort to match Japan's living standards. None looms larger than the country's domineering chaebol.

Making the rounds in South Korea last week, I heard over and over how small and mid-size enterprises are the heart of the economy. It's true that they account for about 87 percent of all employment. But their track record of productivity and innovation is appalling. Despite generous public support -- with more than 1,300 government programs, by the OECD's count -- they've failed to restructure, improve corporate governance or develop disruptive products. Korea's small companies tend to remain small, limiting wealth creation.

Park has pledged support for startups, tax breaks for angel investors, loans for "incubators" and limits on bureaucracy in order to spur sectors like finance, education, health care and tourism. But I worry she's putting the cart before the proverbial horse. The real problem is the chaebol. With tentacles deep into any industry a young would-be innovator might want to crack, chaebol leaders can easily destroy any competitive threat.

The sheer scale of the chaebol leaves virtually no room for a South Korean Google or Uber to disrupt the economy. Yet so far, Park seems reluctant to challenge the old guard. For one thing, she would be dismantling the economic model built by her father, dictator Park Chung Hee, and long championed by her own party. She also knows voters have a complicated love/hate relationship with corporate giants. They're proud of what Samsung and groups like Daewoo, Hyundai and LG have achieved globally, even while they're increasingly aware of how the chaebols' dominance holds the country back.

Park's own policies are a bit schizophrenic. While she's clamped down on the cross-holding of shares, and on deals where chaebol steer business to friends or relatives, Park is relying on the big companies to boost economic growth. Last August, Park even met with Lee Kun-hee and the heads of nine other chaebol to implore them to increase investment. The implicit quid pro quo: new regulations would not hurt their interests.

Chaebol bigwigs aren't used to losing. In 2008, Lee was convicted of evading taxes on about $5 billion, only to be pardoned a year later by Park's predecessor and fellow Saenuri Party member Lee Myung Bak (a former chaebol executive). The pardon was emblematic of the cronyism and revolving-door dynamics that have been so heavily criticized during South Korea's recent ferry crisis. The Sewol, which sank April 16 killing more than 300 people, was operated by Chonghaejin Marine Co., one of Korea's moderately sized chaebol.

Who knows, Lee Jae Yong might be an inspired leader, the vanguard of a younger breed of Western-educated executives. As she works to drive Korea forward, though, Park needs to get tougher with the sprawling conglomerates that are holding the economy back.

To contact the writer of this article: William Pesek at wpesek@bloomberg.net

To contact the editor responsible for this article: Nisid Hajari at nhajari@bloomberg.net