Why Are East Asian Business Groups so Common?

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Why Are Business Groups More Common In East Asia?

It is thought that since the early 1960’s business groups have been a vital asset to the industrialization and economic growth of East Asian Countries. A ‘business group’ is a group of legally independent firms bound together in a formal or informal way. They have shown extreme rapid growth throughout East Asia, and have become a very controversial topic when relating to East Asia’s financial development, often being referred to as “paragons or parasites”. There are many proposed features of business groups, both positive and negative, that have resulted in their rapid formation and substantial growth in Asia.

During East Asia’s early economic development, the main capital markets were undeveloped containing a range of structural weaknesses such as the absence of legal and bank regulations, financial supervision and market supporting institutions. These ‘institutional voids,’ and lack of market infrastructure meant there was high transaction costs and little external investments thus creating high barriers for market entry. There was also a scarce source of advanced technology and little product distribution; as a result, it was difficult for the success and long term survival of independent entrepreneurship in these imperfect markets, often resulting in market failure. The poor market conditions in East Asia led the controlling nature of the Asian government to play an important role in the formation of business groups. For example, there was a large amount of government intervention in Asia where the weak corporate government established a range of restrictive regulations and high taxations and possessed large control over resource allocation. These bad economic fundamentals, in addition to the government’s neglect of corporate disclosure and poor investment protection, meant capital investment within emerging markets contained a high level of risk and was viewed as unreliable. Business groups were identified as solution to the risk factors associated with market failure and institutional voids, whereby the internalisation of human capital, technology and insurance was seen to enhance a firm’s performance in imperfect markets where the legal and regulatory institutions were of poor quality. There are many “bright sides” related to business groups that have led to their growing popularity in Asia, this growth is represented in Figure.1.,and they have been considered, by growing businesses, as a method to create easier entry into external markets. Figure 1. Table to show the substancial size and economic growth of East Asian Economies from 1980 to 2000.

Business groups posses a range of political and government contacts, and as a result they can be used as a method of solving information and technology imperfections. By joining a business group member firms remain legally independent, but economic and social ties typically unites each group, meaning credible and reliable information about other businesses can be obtained through information transfers and substantial technology can be acquired, which can facilitate a company’s performance and profits, helping support product licensing. This, in addition to their sophisticated capital markets and mature economies, means they can provide soft market infrastructure, being economically important to affiliating firms, by reducing transaction costs and providing access to scarce resources in labour markets, helping to close the productivity- technology gap and restructure declining industries. The growth of Gross domestic products thought to be from business groups is represented in Figure.2.

Figure 2. Table to show growth of Gross domestic products in developing countries from 1960 to 2004, including East Asia.

Within the cross ownership structure of business groups there is efficient business regulations provided by a pool of skilled managers, with significant managerial talent and training. The high degree...
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