1 Government-Business Relations and Corporate Governance International Conference on Corporate Governance in Asia and China March 12, 2005 Shanghai Hasung.

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Government-Business Relations and Corporate

Governance

International Conference on Corporate Governance in Asia and China

March 12, 2005Shanghai

Hasung JangKorea University Business School

Asian Institute of Corporate Governance www.aicg.org

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Corporate Governance in Asia

• Poor Corporate Governance– New regulations are introduced after the crisis– But, weak enforcement of laws and regulations – Pervasive related party transactions– Poor investor protection

• Entrenched Management – Family owned and managed firms – State owned enterprises

• Convergence of Corporate Governance in Asia– After 1977 crisis, it is a new trend

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Convergence of Asian Corporate Governance

McKinsey Quarterly, 2004

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Why Poor Corporate Governance

in Asia• Establishments’ rent seeking behavior

– Controlling shareholders and management are unwilling to enhance corporate governance

• Concentrated ownership– Pyramidal or circular ownership

• Weak protection of shareholders• Expropriation of minority shareholders• Shareholders are inactive

– Institutional investors are not independent

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Pervasive Political Rent Seeking

• Rent-Seeking Players– Big Businesses (conglomerates, chaebols)– Politicians– Bureaucrats– Financiers– Labor (Large company’s unions)

• Impact of Political Rent Seeking Practices– Strengthens entrenchment of incumbent players– Limits new competitions and ‘creative destruction’– Discriminates against market based financing– Restricts building independent financial institutions– Corruptions

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Corporate Governance RankingIMD 2004, 60 economies surveyed

AverageRank

CorporateBoard

ShareholderValue

InsiderTrading

ShareholderRight

Singapore 7.5 5 13 3 9

Hong Kong 16.0 9 8 22 25

Malaysia 16.3 10 12 25 18

Sweden 18.8 38 14 17 6

UK 22.5 22 30 16 22

Germany 23.5 44 31 7 12

USA 23.5 35 17 29 13

Taiwan 23.8 12 21 34 28

India 37.0 29 35 49 35

Thailand 37.3 27 28 55 39

China 41.5 25 40 57 44

Japan 45.3 50 59 13 59

Philippines

45.8 37 42 54 50

Korea 50.5 53 53 41 55

Indonesia 55.3 56 52 59 54

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Corporate Governance IndexWorld Economic Forum 2003, 49 countries surveyed Rank Score

1 United Kingdom 6.34

6 Sweden 5.98

7 USA 5.94

8 Singapore 5.91

9 Germany 5.78

13 Hong Kong 5.59

21 Malaysia 5.27

23 Taiwan 4.96

28 Thailand 4.72

31 Japan 4.59

32 India 4.59

33 Korea 4.59

43 Philippines 3.89

44 China 3.80

46 Indonesia 3.62

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9

10

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Corporate Governance and Country Competitiveness

Competitiveness by IMD, Corporate Governance by WEF, 45 countries

Korea

05

1015

2025

3035

4045

50

0 10 20 30 40 50

Corporate Governance rank by WEF 2003

Cou

ntry

Com

pet

itiv

enes

s ra

nk b

yIM

D 2

004

China

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Corporate Governance andCorruption

Corruption Perception Index by TI, Corporate Governance by WEF, 49 countries

Korea

0

10

20

30

40

50

60

0 10 20 30 40 50

Corporate Governance rank by WEF 2003

Corr

upti

on P

erc

epti

on Index rank

by T

I 2003

China

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Target Growth Industries Selected by Korean Government and Financial

SystemIndustry ISIC Bank-based Market-based Dominance

Digital TV/Broadcast 32+64 1.94 3.84 Market-based

Display Device26+30+

32-0.22 1.43 Market-based

Intelligent Robotics29+31+

320.69 3.18 Market-based

Future Automobile 30+34 -0.92 1.12 Market-based

Next G Semi-conductor

30+32 -0.93 1.42 Market-based

Next G Mobile Telecom

33+64 1.97 2.55 Market-based

Digital Contents 64+72 6.47 7.85 Market-based

Next G. Battery 31+32 0.53 3.45 Market-based

Bio Pharmaceuticals 33+24 1.45 1.76 Market-based

Average 1.22 2.96 Market-based

Annual Growth Rate of Real Value Added (%) (1991-2001)

Data: OECD STAN database, World Bank WDI, B. Shin & et al (KSRI)

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Financial System in Asia

• The Asian financial markets are under-developed

• The capital market is under-developed relative to the banking sector in Asia

• Dependence on foreign trade is increasing

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External Trade/GDPExternal Trade = Export + Import

1990 2001 1990 2001

Singapore 361.2 325.4 Germany 53.2 69.2

Hong Kong 260.1 281.6 United

Kingdom50.9 56.5

Malaysia 146.4 214.3 France 46.8 55.2

Netherlands 104.3 129.9 Italy 39.8 53.6

Thailand 76.3 126.8 China 29.3 49.2

Philippines 57.3 95.2 Australia 33.2 43.0

Switzerland 84.6 94.3 India 17.2 29.1

Korea 59.2 83.4 Brazil 13.6 27.9

Canada 52.0 82.5 United States 20.0 23.4

Indonesia 49.6 78.1 Japan 20.3 21.0

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Under-development of Financial Markets

A=Stock Market Cap to GDP(%)B=Domestic Bank Credit to GDP(%)

Rank Country A B A+B

1 Hong Kong 312.6 142.5 455.1

3 Japan 54.4 317.5 371.9

4 US 137.2 163.9 301.1

5 UK 155.7 140.5 296.2

6 Malaysia 135.1 155.3 290.5

11 Singapore 137.0 102.0 239.0

12 Sweden 78.7 143.3 222.0

16 Germany 58.1 147.5 205.5

21 China 45.2 140.6 185.8

24 Korea 55.0 110.4 165.4

30 Thailand 31.7 112.0 143.7

39 Philippines 29.9 63.1 93.0

43 India 23.1 54.7 77.8

44 Indonesia 15.8 60.6 76.4

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Relative Under-development of Stock Market

Rank Country %

2 Hong Kong 219

5 Singapore 134

9 UK 111

14 Malaysia 87

15 US 84

27 Sweden 55

28 Korea 50

30 Philippines 47

35 Germany 39

39 China 32

43 Thailand 28

45 Indonesia 26

51 Japan 17

Stock Market Capitalization to Domestic Bank Credit (%)

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Socio-Economic Implication of Financial Market Development • Financial Market Development and Country

Competitiveness• Stock Market Development and Country

Competitiveness• Financial Market Development and Corruption• Stock Market Development and Corruption• Stock Market Development and Corporate

Governance

• Variables– Country competitiveness rank by IMD (2000, 2001)– Financial market development = (Stock market capitalization +

Domestic Credit Provided by Banks)/GDP (2001)– Stock market capitalization to Domestic Credit Provided by Banks (2001)

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Financial Market Development and Country Competitiveness

-10

0

10

20

30

40

50

60

0.00 100.00 200.00 300.00 400.00 500.00

Financial Market to GDP

Cou

ntry

Com

pet

itiv

enes

s R

ank

by IM

D

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Stock Market Development and Country Competitiveness

0

5

10

15

20

25

30

35

40

45

50

0.00 0.50 1.00 1.50 2.00 2.50 3.00

Stock Market Capitalization to Domestic Credit by Banks

Cou

ntry

Com

pet

itiv

enes

s R

ank

by IM

D

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Financial Market Development and Country Competitiveness

• Income level (per capita GDP) affects the country competitiveness significantly

• For Developed Countries– OECD member countries– Stock market development significantly affect country

competitiveness– Financial market development is not significant

• For Under-developed Countries– Non-OECD member countries– Financial market development significantly affect

country competitiveness– Stock market development is not significant

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Country Competitiveness and Financial Market Development

OECD Countries (n=27)

Dependent Variable:Country Competitiveness Rank by IMD

Stock marketdevelopment

-0.079 (0.021)

-0.058 (0.028)

-0.055 (0.037)

Financial mkt.development

-0.074 (0.002)

-0.026(0.237)

-0.021 (0.301)

Per capita GDP -0.081 (<0.001)

-0.079(<0.001)

-0.071(0.001)

Adj. R-sq 0.477 0.702 0.655 0.703

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Country Competitiveness and Financial Market Development

Non-OECD Countries (n=15)

Dependent Variable:Country Competitiveness Rank by IMD

Stock marketdevelopment

-0.015(0.70)

0.017(0.67)

0.037(0.261)

Financial mkt.development

-0.091(0.004)

-0.054(0.020)

-0.059(0.014)

Per capitaGDP

-0.153(0.001)

-0.094(0.006)

-0.112(0.005)

Adj. R-sq 0.567 0.640 0.771 0.779

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Country Competitiveness and Financial Market Development

OECD Countries (n=27)

Dependent Variable:Country Competitiveness Rank by IMD

Stock market dev. (x1)-0.060(0.045)

Stock market dev.residual of x2

-0.079(0.050)

-0.060(0.045)

Stock market dev.residual of x3

-0.060(0.045)

Financial market dev. (x2)-0.090(0.001)

-0.029(0.163)

-0.018(0.383)

Financial market dev.residual of x3

-0.018(0.383)

Per capita GDP (x3)-0.075(0.001)

-0.083(<0.001)

-0.084(<0.001)

Adj. R-sq 0.439 0.701 0.701 0.701

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Country Competitiveness and Financial Market Development

Non-OECD Countries (n=15)

Dependent Variable:Country Competitiveness Rank by IMD

Stock market dev. (x1)0.043

(0.298)

Stock market dev.residual of x2

-0.015(0.767)

0.043(0.298)

Stock market dev.residual of x3

0.043(0.298)

Financial market dev. (x2)-0.096(0.001)

-0.046(0.047)

-0.061(0.016)

Financial market dev.residual of x3

-0.061(0.016)

Per capita GDP (x3)-0.111(0.004)

-0.089(0.010)

-0.165(0.001)

Adj. R-sq 0.559 0.778 0.778 0.778

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Financial Market Development and Corruption

0

2

4

6

8

10

12

0 100 200 300 400 500

Financial Market to GDP

Cor

ruption

Per

ception

Index

by

Tra

nspar

ency

Inte

rnat

iona

l

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Stock Market Development and Corruption

0

2

4

6

8

10

12

0.00 0.50 1.00 1.50 2.00 2.50 3.00

Stock Market Capitalization to Domestic Credit

Provided by Banks

Corr

uption P

erce

ption Index

by

Tra

nsp

are

ncy

Inte

rnational

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Stock Market Development andCorporate Governance

3.00

3.50

4.00

4.50

5.00

5.50

6.00

6.50

7.00

0.00 0.50 1.00 1.50 2.00 2.50 3.00

Stock Market Capitalization to Domestic Credit by Banks

Cor

por

ate

Gov

ernan

ce S

core

by W

EF

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Thank you