Corporate Governance, Competetion, The new International Financial Architecture and Large Corporations in Emerging Markets

This paper examines from the developing countries perspective important analytical and policy issues arising from: a) the current international discussions about corporate governance in relation to the New International Financial Architecture; b) changes in the international competitive environment being caused by the enormous international merger movement in advanced countries. The background to a) above is the emergence of corporate governance as a key issue in the current G7 proposals for the New International Financial Architecture. The G7 emphasis on corporate governance can be traced back to the thesis that the ‘deeper’ reasons for the Asian crisis lay in the microeconomic behaviour of corporations and businesses in the affected countries. The failings of the corporate governance mechanisms and distortions in the competitive process have received special scrutiny in such analyses. With respect to b) above, the context is that the largest corporations in advanced countries are currently in the process of potentially cartelising the world market place through a spate of cross-border mergers and take-overs. This huge merger movement raises serious policy concerns for developing countries. The paper's main conclusions are: 1. The thesis that the deeper causes of the Asian crisis were the flawed systems of corporate governance and a poor competitive environment in the affected countries is not supported by evidence. 2. The Anglo-Saxon model of widely held corporations with dispersed share ownership is by far the exception in developing countries and in much of continental Europe. Empirical evidence suggests that emerging markets, as well as European countries such as Italy, Sweden or Germany have successful records of fast long-term growth with different governance systems, indeed superior to those of Anglo-Saxon countries. 3. Empirical evidence does not support the view that the Asian crisis 1997 to 1999 was caused by crony capitalism. 4. Corporate financing patterns in emerging markets in the 1990s were broadly similar to those observed in the 1980s. Unlike their counterparts in advanced countries, large developing countries firms continued to rely overwhelmingly on external sources to finance their growth of total assets. 5. The analysis of this paper does not support the claim that developing country conglomerates are inefficient, financially precarious and necessarily create moral hazard. It also indicates that contrary to widely held beliefs, product market competition in emerging countries is no less intense than in advanced economies. Acknowledgements Please do not quote without permission from the authors. Comments are most welcome