Economic development and business groups in Asia: Japan's experience and implications

Economic development requires coordinated investment in many interdependent industries, and prescribes a flood of state-controlled investment across all sectors—a so-called big push (Paul Rosenstein-Rodan, 1943).  This state-dependent prescription did not materialize because widespread government failure defeated twentieth-century ‘big push’ schemes. But rapid economic development would still require coordinated growth across sectors, spillovers across firms and industries and from public goods; and hold-up problems and capital market limitations are real.  Can it be done without government failures?  Large, extensively diversified pyramidal business groups of listed firms dominate the histories of developed economies and the economies of developing economies.  While such groups (called zaibatsu) are thought to have provided this coordination successfully in pre-second-world-war Japan after a state-run big push failed, it is still being debated whether such coordination is being successfully provided by pyramidal business groups that are found in developing countries in Asia.  We hypothesize that pyramidal business groups can be private-sector mechanisms for coordinating big push growth, provided that (1) competition between rival groups induces efficiency unattainable with a state-run coordination mechanisms, and (2) additional conditions exist such as economic openness, basic public goods, rule of law, and separation of the state from business.  Finally, another condition that must be satisfied for a country to sustain economic growth after its big push phase is complete is a timely demise of business groups. Our case studies suggest that where these criteria are not met, growth stalls and the few pyramidal business groups become too powerful to dislodge.   In this paper we compare Japan’s pre-war experience with contemporary pyramidal business groups in China, South Korea and other countries in Asia. In particular we show that even though South Korea’s chaebols were created after Japan’s pre-war zaibatsu and China’s business groups were created after Japan’s pre-war zaibatsu as well as contemporary keiretsu business groups, their country-specific business and institutional circumstances imply different economic behavior for these business groups over time.