Reforms are urgently needed to prevent Asian business dynasties from jeopardizing continental growth


This article was authored by Simon Commander, Visiting Professor of Economics at IE Business School and Managing Partner at Altura Partners, and Saul Estrin, Emeritus Professor of Managerial Economics and Strategy at the London School of Economics and Political Science.

The mutually beneficial linkages between Asian business dynasties and their political elites are an important driving force behind Asia’s extraordinary renaissance. But these close ties are now threatening the continent’s future economic growth, as we argue in our new book, Connecting the World: The Future of Capitalism in Asia, just published by Cambridge University Press.

This is because the ubiquitous Asian corporate-structured business conglomerates systematically collaborate with Asian politicians to create excessive monopoly power and market concentration.

Facts have proved that Dynasty Business Group is very good at strengthening its position. However, by concentrating resources in relatively few hands, they limit competition and stymie innovation, which threatens future progress.

The ubiquitous and highly resilient web of connections between business and politicians provides a common backbone for Asia’s development and cuts across political systems.

The “connected world” in our title is a world made up of networks of interactions between businesses and politicians or political parties. These interactions are highly transactional and often involve a significant degree of reciprocity. For example, politicians expect companies to donate to campaigns or individuals; to pay bribes; to provide jobs for their family members or colleagues, and to create jobs at politically favorable times. In return, businesses look to politicians to protect them from domestic and foreign competition; provide subsidies, loans and/or public sector contracts. All parties benefit from these interactions, creating a stable political-economic balance.

The foundations for future growth are far from stable

Connections World has served Asia well over the past half century – the continent’s share of the world economy has risen from 9% in the 1970s to almost 40% in 2021. However, it will provide less support for future growth. Fundamental innovation must be the main driver. This connected world means that neither politicians nor the business community has enough interest in stimulating competition and innovation, whether through the entry of domestic or foreign multinationals as competitors.

Asian business groups are also often highly diversified, with oligarchic or dynastic control reinforced through cross-holdings and ownership pyramids. To understand their importance, it’s best to look at the overall concentration. Our analysis shows that in the US, the five largest companies’ revenues account for no more than 3% of the country’s GDP, while in China and India they account for 11%. High concentrations are common throughout Asia. This finding is even stronger when we calculate the revenues of the top 10 largest companies. In the U.S., it’s only around 4 percent, but in South Korea it’s over 40 percent, and in India and China it’s over 15 percent.

If access to low-cost labor and capital becomes more difficult, future economic growth in Asia will have to rely increasingly on innovation. Elsewhere in the world, innovation thrives in open ecosystems where people are willing to take risks and fail.

In Asia, the connected world crowds out new entrants and draws in capital, skilled workers and managers. Furthermore, it undermines the competitive environment that is central to the trial-and-error process at the heart of many successful innovations. Even if conglomerates themselves are innovative, they do relatively little in the wider economy.

urgent need for reform

What policies and other measures should be taken to address the shortcomings of a connected world?

At the heart of the policy menu to loosen the grip of entrenched business groups must be measures to transform them into more transparent and better governed businesses, while fundamentally weakening the link between politicians and business.

This will not happen naturally, as the mutual benefits of market consolidation and political linkages outweigh any gains for existing players from reform. The required policies will need to include changes to corporate governance to weaken pyramidal ownership structures, mergers and cross-shareholdings. Additional taxes on established business groups will be required, as well as the introduction of estate taxes and a shift to new types of competition policies and targets.

Some of these policies were successfully introduced into the United States under Roosevelt. More recently, Israel has adopted overall and market-specific concentration standards in competition policy, while South Korea has used high inheritance taxes to weaken the sideline controls of its sprawling business conglomerates. Measures are also needed to limit the scope and incentives for politicians to use their connections for personal or family gain. Although difficult to achieve, incremental improvements, such as through audited interest registers, can begin to influence behavior.

Many critics declared 21Yingshi Century wants Asia. This is far from predetermined. Unless the kinds of policies we propose are introduced to roll back the tentacles of the connected world, many Asian economies will find themselves unable to reach their potential for decades to come.

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