Apart from Japan, the remarkable long-term economic growth in East Asia has produced surprisingly few companies with truly global presence. Japan's 130-year history of industrialization distinguishes it from the newcomers in the region, except for South Korea and a few in Taiwan which also have companies active on a world scale.
It is illuminating to note that East Asia's modern growth phase is comparable to the recent "information revolution" in terms of time span and growth levels.
However, in the US and Europe, publicly-held corporations compete globally with well-known, dominant brand names that are universally recognized. By contrast, East Asia's typical industrial structure is based on closely-held and often family-owned companies. Even the most developed among these have governance and ownership structures linked to family relations. An advantage is that this solves the principal-agent problem in that management acts in the interest of the owners. Unfortunately, family control may interfere with resolution of problems of expanding market share arising out of limited access to capital for product development based on industrial research or growth in size of the business.
Size, growth, and market expansion are generally connected to a set of modernization processes. An important part of that process relates to political institutions. These include as minimum requirements the establishment of contract and corporate law, a competent and politically-independent judiciary along with modern capital and labor markets.
Such institutional arrangements allow for a rational separation of ownership and management functions of a firm that is attuned to shareholder value. Specialized managers can then run a family-owned firm so that advanced management skills can be used to develop the company into a "brand name" company.
This business growth path is well worn in Western countries but has not been very visible in East Asia's long growth cycle. One reason is that the institutional prerequisites for a complete modernization are underdeveloped in the Asian context. But it is probable that a deeper motive is found in a special political economy of business growth in the East Asian environment.
The philosophical core of these arrangements is that power should be concentrated on a dominant single party supported by a politicized bureaucracy. Few power centers outside these circles are tolerated. The practice of law is organized to fulfill and reinforce these basic criteria. Recently, waves of democracy in Asia have begun to infringe upon this despotic tradition. Nonetheless, Asians face the cumbersome task of breaking with a political culture and the longstanding customs that supported it.
Traditional structures in much of East Asia provide incentives wherein family-organized enterprises can thrive. These firms are able to organize small groups of people quite well while operating in local or regional markets without coming into conflict with political authorities by making demands for extensive changes in laws.
Larger corporations have wider ranging interests. They are more likely to come into conflict with established political centers by acting as an alternative power source that can exert considerable influence. More mature democratic societies recognize the existence of a large number of different political forces with equal footing under the law. In such settings, the emergence a new political center is not problematic and lobbying activities are regarded as a non-controversial part of democratic decision-making.
Clearly, the difference in political conditions can influence the nature of business decisions. It is instructive to note that Japan and South Korea produced most of the significant East Asian "brand name" companies. In both instances, a curious symbiosis developed between government, the bureaucracy and the new corporations that effectively transferred important parts of business decision-making to their governments' bureaucracies.
The enormous keiretsu (Japan) and chaebol (South Korea) corporations were transformed into an integral part of trade and employment policy. To expand them further, "dual" interest rate markets were created where these corporations were offered special access and low-interest or interest-free loans.
The result was mammoth conglomerates that ceded some indirect control to government technocrats. With low capital costs, there were fewer restrictions on growth so they have diversified into each and every branch of the economy, focusing upon growth in market share rather than in profits.
Japanese government long-term debt is partly a result of an ambitious industrial policy that supported this symbiotic process.
Unsurprisingly, the financial sector in most of these economies has suffered. When the conglomerates stopped growing, the volume of non-performing loans started to swell in Japanese and South Korean banks. This initial problem acted like a malign cancer cell in the economy. Both business and political actors were trapped, bearing equal responsibility yet without viable alternatives to reverse the sinking trend.
The general perspective offered here is that the East Asian economies are at a preliminary stage of modern capitalism. At the same time, those that have become market economies are preparing their political structures to move into a higher stage. This is evident in the democratization process in East Asia from the late 1980s.
Meanwhile, broad segments of Asia's population are increasingly aware that pervasive institutional reform is necessary for continued growth.
Forces released by market processes give direction and momentum to the process of modernizing political institutions. If the present downturn in East Asia speeds up that process, that might be the most important beneficial outcome from the economic misfortunes experienced there.
Christopher Lingle is global strategist for eConoLytics.com.
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