Rethinking Emerging Markets: Unwinding the Western Lens
While the last five years has been a difficult period for the emerging economies, there is no denying the seismic shift in the global economy of the 21st century, moving the center of growth from developed to emerging economies. Even a cursory overview of the statistics- home to 80% of the world’s population, over half of world GDP and commodity consumption – reveals the profound economic transformation that makes emerging economies dominant in the discourse on global growth. Yet even as the role of emerging economies become increasingly dominant, the academic theory describing this growth lags desperately behind. With obvious disparities between the theories of growth and the evolving realities, the economics, finance, and management communities studying emerging markets should therefore seriously reconsider our fundamental assumptions.
Perhaps the most insidious issue causing insufficient understanding of emerging market growth is the embeddedness of a Western perspective. As this perspective is ingrained, uncovering how these normative assumptions limit our approach is less obvious and requires a self-examination which is uncommon in the academic world. Yet, only by taking a step back and disentangling which ideas stem from a Western perspective on economics and how it affects theory building can theory begin to better match reality and we can begin to gain a more substantial understanding of emerging market growth.
Evidence of a Western perspective abound in the study of emerging markets. The economics, finance and management literature on business groups provides a clear example of this embeddedness. In recent work, I posit that several aspects of the study of business groups suggest that a normative view pointing towards a Western-style equilibrium exists in this literature. This literature has long sought to determine whether business groups – confederations of legally independent firms (Granovetter 1995) that are the dominant form of organizational structure of large enterprise in emerging economies- are “avatars or anachronisms” (Granovetter 2005), “paragons or parasites” (Khanna and Yafeh 2007) or “red barons or robber barons” (Perotti and Gelfer 2001), depending on their impact on social welfare. In a working paper, I discuss how the Western perspective is the lens through which many researchers have long viewed two of the “evil” activities attributed to business groups—expropriation and rent-seeking—as well as the “good” concept of institutional voids.
The expropriation view portrays business groups as vehicles used by controlling shareholders to divert, or expropriate, minority shareholders’ returns. This expropriation perspective belongs to the agency theory paradigm, which in turn centers on the model of the widely held American corporation put forth by Berle and Means (1931). While Berle and Means (1931) have also emphasized the drawbacks of separation of ownership and control, the chief implication of their work was that the widely held, professionally managed “modern corporation” is an inevitable consequence of large enterprise.
This type of corporate structure, however, is itself a purely American archetype largely created and reinforced by politically and sociologically motivated legislation and regulation introduced after the Great Depression (Davis and Thompson 1994). Specifically, the idealization of ownership dispersion grew out of populist sentiment seeking to prevent large financial institutions from owning significant stakes in corporations. As a result, the securities acts of 1933 and 1934 minimized economic concentration and financial institutions’ ability to purchase corporations. Additional regulation limited shareholder activism, albeit indirectly and perhaps even unintentionally. For example, regulations abolished in the early 1990s required that the Securities and Exchange Commission approve the dissemination of information among large shareholder groups. Although limiting activism may not have been the intention, this regulation increased the cost of collective shareholder action, in turn helping to concentrate managerial control within the corporation. Still more regulation required that sets of shareholders seeking to have a joint influence on management would be subject to elaborate filing requirements, further discouraging collective action. And while corporate managers were not instrumental in the establishment of these laws, later lobbying efforts by managers ensured their survival (Roe 1991). Thus the widely held American corporation is not a natural outgrowth or deliberately constructed organization of large enterprise to maximize efficiency; rather, its conceptualization and realization resulted as much if not more from sociological and political influences.
The idealization of the widely held corporation has also been weakened by empirical evidence that a majority of firms around the world are in fact not widely held (La Porta, Lopez-de-Silanes, and Shleifer 1999; Claessens et al. 2000; Faccio and Lang 2002). This statistic, too, would seem to suggest that using the Western notion of the widely held, professionally managed corporation as an international benchmark is not supported by reality.
The rent seeking view suggests that business groups are structures seeking to extract societal rents through political ties (Bhagwati, Brecher, and Srinivasan 1984). Close ties to a government may allow business groups to serve as a mechanism through which a handful of owners receive access to scarce social resources for private benefit (Khanna, 2001). Implicit in this theory, however, is the logic that political connections necessarily yield negative social consequences. This assumption, too, is a largely Western, developed-economy outlook. Existing research on business groups, for instance, does not establish whether political connections per se decrease social value, as only one paper directly measures the political connections of business groups (Fisman 2001). Furthermore, many existing business groups were initially formed in conjunction with the government—ostensibly, at least, because their formation supported industrial policy geared towards development. For instance, business groups in Japan, South Korea, Israel, and China all originated in governmental economic policies intended at least in part to support development through the provision of public goods (Khanna and Yafeh 2007; Keister and Lu 2004; Maman 2002; Chang 2003; Berglöf and Perotti 1994). Thus, while rent-seeking may have been an additional motive or outcome of this relationship, it would seem plausible that a business group’s political connections are more likely to be the result of inevitable dependence on this particular path—that is, one that intersects with the government—than the desire for a vehicle through which social rents may be extracted.
Finally, another leading theory in the business group literature is known as “institutional voids,” which portrays business groups as a social “good” that compensates for weak external market-supporting institutions. This view can be traced back to Leff (1978)’s “group principle,” which holds that business groups allocate critical resources—primarily financial capital, but also intermediate goods and managerial talent—when markets for these resources function poorly. Khanna and Palepu (1997) broadened and popularized this argument, contending that business groups compensate for the absence of multiple types of intermediaries and observers to facilitate the acquisition of financial capital, technology, and management talent. Many related papers followed, asserting that business groups are organizations whose structure supplies key resources otherwise unavailable. Though the institutional voids perspective portrays business groups in a more socially beneficial and therefore favorable light, it also more insidiously reflects the market-based model. Namely, by advancing the functionalist argument that business groups’ raison d’etre is primarily to compensate for a lack of American-style, market-supporting institutions in emerging economies, this view relegates business groups to transitory phenomena on the evolutionary path to market-based capitalism (e.g., Khanna and Palepu, 1999; Chang and Choi, 1988; see also Granovetter, 1995: 106-108; 2005: 444-447).
The explicit idealization of this model (and its implication that business groups and other “emerging-market phenomena” are transitory) is primarily responsible for the negative normative orientation of both the expropriation and institutional void theories. In order to understand why business groups survive and even thrive when economies expand, it is imperative to ask whether the underlying West-centric assumptions linking economic development with other organizational forms are in fact valid. Broader trends in the scholarly understanding of capitalism over the past two decades—including a growing acceptance of the idea that alternative economic systems and structures may succeed in different institutional settings (Musacchio, Lazzarini, and Aguilera 2014; Orru 1997)—cast even greater suspicion on these West-centric theories’ global purchase.
All in all, the embeddedness described here in the business group literature represents only one small part of the economics literature that is rooted in, and therefore held back by, an implicit Western perspective. As this crossroads in the nexus of economic growth in the global economy from developed to emergings, application of critical theory is therefore warranted. Both academics and practitioners alike should begin to challenge existing theory, and present new models and tests that may better help to describe the primary role of emerging markets in the global economy absent a Western view.
References
Berle, A. A., and G. G. C. Means. 1931. The modern corporation and private property. Transaction Publishers, New York.
Berglöf, E., and E. Perotti. (1994). The governance structure of the Japanese financial keiretsu. Journal of Financial Economics, 36: 259-284.
Bhagwati, J. N., R. A. Brecher, and T. Srinivasan. (1984). DUP activities and economic theory. European Economic Review, 24: 291-307.
Chang, S. J., and U. Choi. (1988). Strategy, structure and performance of Korean business groups: A transactions cost approach. The Journal of Industrial Economics, 37: 141-158.
Claessens, S., S. Djankov, and L. H. P. Lang. (2000). The separation of ownership and control in East Asian corporations. Journal of Financial Economics, 58: 81-112.
Davis, G. F., and T. A. Thompson. (1994). A social movement perspective on corporate control. Administrative Science Quarterly, 39: 141-173.
Faccio, M., and L. H. Lang. (2002). The ultimate ownership of Western European corporations. Journal of Financial Economics, 65: 365-395.
Fisman, R., and Y. Wang. (2010). Trading favors within Chinese business groups. The American Economic Review: 429-433.
Granovetter, M. (1995). Coase revisited: Business groups in the modern economy. Industrial and Corporate Change, 4: 93-130.
Granovetter, M. (2005). The impact of social structure on economic outcomes. Journal of Economic Perspectives: 33-50.
Keister, L. A., and J. Lu. (2004). Financial resources and product market development: Strategic choice and institutional processes during China’s transition. Paper read at Sociological Forum.
Khanna, Tarun, and Krishna G. Palepu. (1997).Why focused strategies may be wrong for emerging markets.
Khanna, T., and Y. Yafeh. (2007). Business groups in emerging markets: Paragons or parasites? Journal of Economic Literature, 45: 331-372
Khanna, T., and J. W. Rivkin. (2001). Estimating the performance effects of business groups in emerging markets. Strategic Management Journal, 22: 45-74.
La Porta, R., F. Lopez-de-Silanes, and A. Shleifer. (1999). Corporate ownership around the world. The Journal of Finance, 54: 471-517.
Leff, N. H. (1978). Industrial organization and entrepreneurship in the developing countries: The economic groups. Economic Development and Cultural Change, 26: 661-675.
Maman, D. (2002). The emergence of business groups: Israel and South Korea compared. Organization Studies, 23: 737-758.
Musacchio, A., S. Lazzarini, and R. Aguilera. (2014). New varieties of state capitalism: Strategic and governance implications. The Academy of Management Perspectives, 29: 115-131
Perotti, E. C., and S. Gelfer. (2001). Red barons or robber barons? Governance and investment in Russian financial–industrial groups. European Economic Review, 45: 1601-1617.
Roe, M. J. (1991). A political theory of American corporate finance. Columbia Law Review, 91: 10-67.