Stages of Corporate Governance in Transition Economies

By Le, Son A.; Kroll, Mark J. et al. | Journal of Business Strategies, Fall 2011 | Go to article overview

Stages of Corporate Governance in Transition Economies


Le, Son A., Kroll, Mark J., Walters, Bruce A., Journal of Business Strategies


Abstract

We develop a model of corporate governance stages in transition economies, including bureaucratic control-based; relational; and rule, market-based corporate governance. We demonstrate how institutions shape stakeholders' dominant sources of control power and firms' dominant origins of resources within and across these stages. We then theorize how these driving forces influence the effectiveness of these corporate governance stages, and how the shift from one stage of corporate governance to another comes about. Our paper therefore contributes to the understanding of the development and nature of corporate governance in transition economies.

Introduction

Transition economies are former socialist countries such as those that were part of the former Soviet Union, those in Eastern Europe, and East Asia, which are transforming from central planning to free market competition (World Bank, 2002). Numerous studies of corporate governance in transition economies have recently been undertaken (e.g., Andreff, 1999; Aoki, 1994; Berglof, 1995; Dharwadkar, George, & Brandes, 2000; Estrin & Angelucci, 2003; Wright, Filatotchev, Buck, & Bishop, 2003; Young, Peng, Ahlstrom, & Bruton, 2002). Notably, transition economies account for a significant portion of the world's population and economic activity, and corporate governance is central to the privatization of state-owned enterprises--a vital activity in their economic transformation (McCarthy & Puffer, 2003; Peng, 2004). These economies present a unique context for examining phenomena and theories well established in the setting of developed economies (Hoskisson, Eden, Lau, & Wright, 2000; Peng, 2003).

Most prior studies are static in nature. Given radical institutional changes and varying rates of progress occurring in different transition economies, research insights obtained from such static studies may be inconclusive and not reflective of temporal dimensions of corporate governance within and across transition economies. For example, Judge, Naoumova, and Koutzevol (2003) and Peng (2004) found inconsistent results concerning the role of outside board members in Russia and China. Similarly, Wright et al. (2003) and Estrin and Angelucci (2003) reported conflicting findings regarding the effectiveness of inside versus outside ownership. Such inconclusive findings may lead some scholars to conclude that transition economies are heterogeneous and thus it is not feasible to develop a general model of corporate governance for transition economies. However, according to a number of transition economy researchers (e.g., Boisot & Child, 1996; Le, Kroll, & Walters, 2010; McMillan & Woodruff, 2000; Peng, 2003), these findings offer evidence that transition economies go through similar stages during their market-oriented transformation, and at a given point in time their corporate governance is dissimilar because they are in different transition stages.

This paper is motivated by unresolved questions concerning corporate governance in transition economies: (1) Does transition to a market-oriented economy generally progress through similar stages? (2) Which modes of governance are likely effective in those stages? (3) How and when do privatized firms shift from one mode of corporate governance to another? We note that our focus is on corporate governance in privatized firms (firms that have their ownership transferred from a socialist state to private organizations and individuals), to which we refer as "firms" in the rest of the paper. Previous studies (e.g., King, 2001; Le et al., 2010; Peng, 2003) indicate that the market transformation in transition economies can be temporally divided into three stages: (1) the early or bureaucratic control stage, (2) the intermediate or relational stage, and (3) the late or market stage. We suggest that, correspondingly, the prevalent mode of corporate governance likely shifts from bureaucratic control-based to relational corporate governance, then from relational to market-based corporate governance. …

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