The Business Environment in Asia - Essay Example

The Business Environment in Asia Introduction Business groups in Asia project similar growth and ownership patterns although each of these nations has different economic conditions and also differ in their political-social backgrounds. National competitiveness is based on political, legal and social context but the microenvironment of the business as well as the sophistication in strategy devised by businesses influence the competitive position of the companies. Government support and interventions play a significant role in the growth and development of businesses in emerging economies. Business groups in developing economies can add value to the nation’s economy as they fill institutional gaps and take advantage of opportunities created by outdated policies. The emerging economies have weak financial markets, underdeveloped labor markets and weak infrastructure. This is the reason that they can prevail upon the state to acquire concessions and favorable policies. They also succeed in reducing risks of arms-length transactions. The business groups in the emerging economies deprive the minority shareholders of their rights, and they have political power to prevent entry of competitors. However, lack of competition can stifle innovation and creativity. Besides, economic power is concentrated with these businesses which prohibit the development of economic institutions. Concentration of economic power also implies concentration of political power. However, in Asian economies business-government relations are critical to the success of business. The government plays five major roles in the growth and development of the economy – protector, controller, distributor, promoter, and regulator (Liou, 2010). The government is responsible for formulating policies and protecting businesses, for monitoring and adjusting public policies, to prevent the unfair distribution of public resources among various classes. As promoters, the government has to invest in infrastructure to facilitate economic growth and as regulators, they are expected to focus on the business regulations and business operations. This paper evaluates the differences and similarities in business-government relations with particular reference to China, India, and Indonesia. Indonesia The top 30 companies in Indonesia belonged to the Salim Group and to Suharto's children. After the recession, new family conglomerates entered the scene but the structure of the private sector did not undergo substantial change. The economy continues to boom and the family businesses benefit. In Indonesia, the state plays the most vital role in the growth of the business groups. Lobbying and corruption are prevalent in conducting business and due to their continued influence, businessmen become politicians (Mahmood, 2011). Large-scale towns in Indonesia have their own police and their own government including private taxation collection. All public facilities such as health, water, sewerage, and sanitation are controlled by this self-styled government in individual townships. The business has so much of political clout and influence that they are able to sustain opaque ownership pyramid structure which originates in some other nation and develops monopoly as in the case of Instant Noodles that belongs to the Salim Group. Such a system has its own disadvantages and advantages. While it provides capital, infrastructure, and source of business talent and entrepreneurship, it creates moral hazard, ethnic tensions and state capture. Importance of building relationships is critical to the success of business in Indonesia. Relationships with the government officials help in expediting the bureaucratic process. It helps in streamlining the applications for obtaining licenses, permits, and information (Facing the Challenge, n.d.). The national officials or pegawai Negeri such as the notary in Indonesia are treated with respect. Such initiatives have facilitated the smooth functioning of businesses in Indonesia. The regulatory environment for foreign firms has been streamlined as the laws have been relaxed and the process simplified. To get the legal proceedings moving, business groups prefer to hire the services of a government registered legal officer and build the relationship with him. To succeed in Indonesia it is also important to understand the culture and apply it to business negotiations. It takes time to establish relationships and hence business groups should plan for longer horizons to derive benefits. China Before the reforms, China was a state-dominated society with the government having control over business and commercial activities due to which the society was homogenous. However, once the reforms started policies were reformed to promote business investment. Policy changes such as decentralization and deregulation were also expected to eliminate the bureaucratic inefficiency (Liou, 2010). These policy changes did make the local government activities and the approval system supported businesses. Development policies such as the reform of state-owned enterprises did improve the macroeconomic performance but the beneficiaries were only the state-owned enterprises. When the economy opened up to foreign investors the government officials were worried if the domestic business groups could withstand competition as the domestic firms were quite small in size. To protect its own industries and entrepreneurs, even though FDI was allowed, it was controlled and limited (Huang, 2003). Gradually China opened up its economy even for the energy sector to FDI. The idea was to gain technical knowledge and expertise which could improve the operating conditions of the domestic firms while also encouraging innovation and creativity. At all stages, however, the domestic firms were given preference suggesting that the Chinese government continued to have a protectionist attitude despite liberalization and reforms. The government preferred contract production where the foreign firm could supply and provide instructions which were in effect, a way of accessing technical-know how for its domestic entrepreneurs. However, most of the domestic companies in China were state-owned enterprises. China possessed great economic potential at the time of its accession to WTO but structural problems persisted in the economy. However, in China business groups believe in “guanxi” which is somewhat similar to “lobbying” in the Western world. Based on this principle the foreign SMEs could build up the strong position in several business sectors in China. Because of the structural problems the state-owned enterprises (SOEs) were losing money while the private firms were making profits (Huang, 2003). This was despite the fact that SOEs received preferential treatment as the rules and regulations discriminate against the nonstate companies (Jinglian, 2006). Administrative power is very strong in China which has given rise to crony capitalism among the private business owners. Different economic sectors are also treated differently while the nonstate companies in sectors are discriminated with regard to pricing, taxation, financing and legal and social status. Because of preferential treatment competition is not fair in the market. India In India, the government has always protected the business groups since independence. The license raj in the capital created monopolies because the government officials were pampered as businessmen used them to cater to their needs (Misquitta, 2011). The lobby created by certain business groups could prohibit fresh entrepreneurs from entering the foray as they could not afford heavy bribes to obtain permits and licenses. The license raj killed talent as they lacked capital. License Raj controlled production and increased corruption. However, after the license raj was abolished the government continued to have faith in the private sector. This perhaps is the reason that in India family-controlled businesses are predominant even today. The average shareholding of promoters in Indian companies was as high as 48.1 percent (Chakrabarti, 2003). This suggests ineffectiveness of the legal system in protecting property rights. Where legal protection of property rights is weak family-controlled business is important. In fact, family-controlled businesses are prevalent where property rights are weak. Family-owned organizational forms reduce transaction costs. Such organizational forms exist because of poor development of external financial markets. In general, the firm value is high if the owners' stake is high and the value declines when the largest owner's equity reduces. In Taiwan however, the situation differs. In Taiwan family businesses with lower control by the family perform better than those with high family control. Reserve Bank of India regulates the financial system and individual banks while also devising the monetary policy. However, the banking system is less advanced black money flows easily throughout the economy (Png, 2010). Black money originates in India due to evasion of tax and customs duties, from smuggling and from proceeds from criminal activities. This shadows the financial system and is also responsible for the rising inflation in India. This implies that there is the inefficient allocation of resources. Besides since the enforcement is illegal court system cannot be applied. If the seller accepts ‘white money' he has to pay very high taxes as profits are high and hence to avoid taxes he gets into activities to generate black money. This weakens the monetary policy of the nation. India now has two-tier economy – the organized and the informal sector (Png, 2010). The organized sector comprises of heavily regulated sectors such as steel and coal, while the new economy is less regulated and comprises of sectors such as outsourcing, mobile telecommunications. The informal sector keeps itself out of the tax net and includes the self-employed, the SMEs and the entrepreneurs. The financial market also has two tiers – the formal system that includes banks and the stock exchanges while the informal system includes the moneylenders and black money. In India ‘tunneling’ of funds is quite common within the business groups, which deprives the minority shareholders at the lower levels of the pyramid of their rightful gains (Chakrabarti, 2003). India inherited one of the world’s poorest economies at independence but it had four functioning stock markets, well-developed equity culture and a banking system with well-developed lending norms and recovery procedures. Enforcement of laws and regulations in India is weak. There is too much of insider trading and violations of the Companies Act. Financial disclosure norms in India have been superior to most Asian countries but nondisclosure with the norms did not attract punitive action. India has high government regulation but also the high level of corruption including the high level of violation of regulations. This is because of weak monitoring by bureaucrats and limited enforcement of liability laws. Besides, consumers are not active in fighting for their rights in India (Mahmood, 2011a.). Comparison and discussion The Asian countries differ in their economic conditions and the politico-legal backgrounds but all of these nations have controlled stock-ownership and family-controlled businesses (Chakrabarti, 2003). The state-controlled businesses also form an important segment of the corporate sector in these nations. The business groups in the emerging economies are legally independent firms operating in multiple and often unrelated industries, bound together by formal and informal ties (Khanna & Yafeh, 2007). The business groups in these economies enjoy close ties to the governments and such business groups are often viewed as rent-seeking "parasites". Most often these are family-owned businesses and they are formed with the government support. In China, the government actively supported the business groups and protected them from foreign competition (Khanna & Yafeh, 2007). The Salim Group of Indonesia had family ties with the government and could expand due to the assistance it received from the government-granted monopolies and licenses. However, as the businesses evolve, the relations between the business group and the government becomes complex. In Indonesia particularly, the business groups enjoyed and derived value through political connections (Khanna & Yafeh, 2007). In India, many business groups derived benefit during the "License Raj" period. However, not always the government and the business groups work symbiotically. For instance, in China, this was witnessed when the Chinese Communist party took over in 1949 and in India for a few years following independence, during India's socialist government (Khanna & Yafeh, 2007). The turnover in India in the past 60 years is too high to be consistent with close business-government ties. Even when the governments are not hostile the relationship between them changes over time as groups get established, become stronger and independent. It has been assumed that government support for businesses is socially harmful. These are negative implications of government favors but it may also happen that business groups have helped the government to push in several sectors. The indigenous private sector was suppressed in China which suggests that the government favors business groups formed by the state and discriminates against the business groups formed by private parties. Business groups often use their political clout to shape the business environment (Khanna & Yafeh, 2007). For instance in India industries with high-presence of group-affiliated firms rather than the state-owned firms were more likely to be associated with the foreign firms that entered India as a result of liberalization in the 1990s. Overall business groups are generally able to wield considerable market power. They may even be able to drive their rivals out of the market or prevent their entry due to their close ties with the government. A survey conducted by Mckinsey revealed that two-thirds of the executives believe that they should engage with the governments and the regulators regularly and proactively even if there is no immediate need, but in practice less than half actually do so (Heil & Julie-Parekh, 2011). This is necessary because the governments and regulators are the greatest stakeholders and they make the biggest economic impact. This study was conducted in the energy, healthcare and financial sectors in the developed and emerging economies. The study found that government and the regulators have the largest impact on company's values in these sectors – even more than the customer influence. The business executives' attitude towards the government was also evaluated – whether companies benefit from being transparent and whether greater government identified bad for business. Based on the degree of involvement, the businesses can be classified as partners, opportunists, avoiders, reluctant engagers, and adversaries. The study found that businesses in emerging economies like India, China and others are likely to be opportunists while those in the developed countries are likely to be reluctant engagers. In the emerging economies, the business is successful in influencing the government policies and regulatory decisions to suit their convenience, to mitigate risks and to create value. In China, the business not only influence the regulatory policies but they are also successful in managing corporate reputation and their reputation becomes a source of competitive advantage. This can be particularly found in the energy and financial service sectors. Businesses do not receive the trust and confidence of the customers in the emerging economy unless they establish relations with the government. Companies such as Reliance in India and Salim Group in Indonesia gained the competitive advantage because of their ability to manage business-government ties (Mahmood, 2011a). However, the source of competitive advantage changes over time. Often the business groups have informal political connections. This was found in the case of Chiang Kai-shek in China whose wife was a close friend of the granddaughter of the 1st President of Peking University. However formal ties provide more benefits and sustained competitive advantage over informal ties. There is greater accountability informal ties if the politician does not deliver but formal ties can also attract greater public attention as such ties are conspicuous. Conclusion It can thus be seen that Asian economies not only differ in their economic conditions and politico-legal backgrounds, the business-government relationship also differ. Indonesia and China are state-controlled nations and state-owned businesses or business owned by close family members receive preferential treatment. In Indonesia however, the top companies either belong to the family members or close associates of the President or are owned by one or two small business groups. The businesses capture the state in fact. Barriers to entry prohibit new enterprises from entering the market as the sectors are under the control of the state. In China too while guanxi is much talked about and building and managing relationships are important, SOEs receive preferential treatment leading to unfair competition. Private enterprises are not allowed to grow which implies that creativity and innovation in both Indonesia and China are stifled. In India the situation is different. The state-owned enterprises perform badly because of poor control mechanisms. The private business groups flourish again because of poor monitoring and control by the state. The government is unable to fulfill its responsibility as the protector and regulator in India as the prominent business groups influence the policies and regulations. They maintain personal relations with the government officials to get their work done or to procure permits and licenses. In China, the government does not fulfill its role of a distributor because of unfair distribution of resources. In India much can be attained by managing relations with the government but in China, more formal ties exist. The situation in India demonstrates weak financial markets due to which the businesses can influence the policies and even violate the regulations. Overall, in all three nations, political connections are critical to the success of business groups. References Chakrabarti, R. (2003). Corporate Governance in India – Evolution and Challenges. Retrieved from http://unpan1.un.org/intradoc/groups/public/documents/APCITY/UNPAN023826.pdf Facing the Challenge. (n.d.). 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