Why Are East Asian Business Groups so Common?
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
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
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