Academic journal article International Advances in Economic Research

Economic Development and Business Groups in Asia: Japan's Experience and Implications

Academic journal article International Advances in Economic Research

Economic Development and Business Groups in Asia: Japan's Experience and Implications

Article excerpt

Abstract Large, extensively diversified pyramidal business groups of listed firms dominate the histories of developed economies and the economies of developing economies. While such groups (called zaibatsu in Japan) are thought to have provided coordination for big push growth successfully in pre-second-world-war Japan after a state-run big push failed, it is still being debated whether such a pyramidal business group driven big push coordination exists in developing countries elsewhere in Asia. We hypothesize that pyramidal business groups can be private-sector mechanisms for coordinating big push growth, provided that first, competition between rival groups induces a sufficiently high level of coordination efficiency, and second, conditions exist for maintaining economic openness and basic infrastructure and legal institutions. Another condition that must be satisfied for a country to sustain economic growth after its big push phase is complete is a timely demise of business groups. Where these criteria are not met, growth stalls and the few pyramidal business groups become too powerful to dislodge.

Keywords Economic development * Economic history * Japan * Privatization * Business groups * Asia

JEL codes O1 * O5 * L33

Introduction

Economic development requires coordinated investment in many interdependent industries, and prescribes a flood of state-controlled investment across all sectors--a so called big push (Rosenstein-Rodan and Paul 1943). This state-dependent prescription did not materialize because widespread government failure defeated twentieth-century 'big push' schemes. However, rapid economic development would still require coordinated growth across sectors, spillovers across firms and industries and from public goods; and hold-up problems and capital market limitations are real. Can it be done without government failures?

Large, extensively diversified pyramidal business groups of listed firms dominate the histories of developed economies and the economies of developing economies. While such groups (called zaibatsu in Japan) are thought to have provided this coordination successfully in pre-second-world-war Japan after a state-run big push failed, it is still being debated whether such coordination is being successfully provided by pyramidal business groups that are found in developing countries in Asia.

We hypothesize that pyramidal business groups can be private-sector mechanisms for coordinating big push growth, provided that (1) competition between rival groups induces efficiency unattainable in a state-run coordination mechanisms, and (2) additional conditions exist such as economic openness, basic public goods, rule of law, and separation of the state from business. Finally, another condition that must be satisfied for a country to sustain economic growth after its big push phase is complete is a timely demise of business groups. Our case studies suggest that where these criteria are not met, growth stalls and the few pyramidal business groups become too powerful to dislodge.

In this paper we compare Japan's pre-war experience with contemporary pyramidal business groups in China, South Korea and other countries in Asia. In particular we show that even though South Korea's chaebols were modeled after Japan's pre-war zaibatsu and China's business groups were modeled after Japan's pre-war zaibatsu as well as contemporary keiretsu business groups, their country-specific business and institutional circumstances imply different economic behavior for these business groups over time and hence different paths of economic development in these countries.

Big Push, Pyramidal Business Groups and Economic Development

Rosenstein-Rodan and Paul (1943) and others state that rapid development requires a big push, the coordinated rapid growth of diverse complementary industries. They suggest a role for government in providing such coordination. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.