Government-Business Relations and Corporate Governance International Conference on Corporate Governance in Asia and China March 12, 2005 Shanghai Hasung Jang Korea University Business School Asian Institute of Corporate Governance www.aicg.org

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

Convergence of Asian Corporate Governance McKinsey Quarterly, 2004

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

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

Corporate Governance Ranking IMD 2004, 60 economies surveyed Average Rank Corporate Board Shareholder Value Insider Trading Right Singapore 7.5 5 13 3 9 Hong Kong 16.0 8 22 25 Malaysia 16.3 10 12 18 Sweden 18.8 38 14 17 6 UK 22.5 30 16 Germany 23.5 44 31 7 USA 35 29 Taiwan 23.8 21 34 28 India 37.0 49 Thailand 37.3 27 55 39 China 41.5 40 57 Japan 45.3 50 59 Philippines 45.8 37 42 54 Korea 50.5 53 41 Indonesia 55.3 56 52

Corporate Governance Index World 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 33 Korea 43 Philippines 3.89 44 China 3.80 46 Indonesia 3.62

Corporate Governance and Country Competitiveness Competitiveness by IMD, Corporate Governance by WEF, 45 countries China

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

Data: OECD STAN database, World Bank WDI, B. Shin & et al (KSRI) Target Growth Industries Selected by Korean Government and Financial System Annual Growth Rate of Real Value Added (%) (1991-2001) Industry ISIC Bank-based Market-based Dominance Digital TV/Broadcast 32+64 1.94 3.84 Display Device 26+30+32 -0.22 1.43 Intelligent Robotics 29+31+32 0.69 3.18 Future Automobile 30+34 -0.92 1.12 Next G Semi-conductor 30+32 -0.93 1.42 Next G Mobile Telecom 33+64 1.97 2.55 Digital Contents 64+72 6.47 7.85 Next G. Battery 31+32 0.53 3.45 Bio Pharmaceuticals 33+24 1.45 1.76 Average 1.22 2.96 Data: OECD STAN database, World Bank WDI, B. Shin & et al (KSRI)

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

External Trade/GDP External Trade = Export + Import 1990 2001 Singapore 361.2 325.4 Germany 53.2 69.2 Hong Kong 260.1 281.6 United Kingdom 50.9 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

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

Relative Under-development of Stock Market Stock Market Capitalization to Domestic Bank Credit (%) 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 China 32 43 Thailand 45 Indonesia 26 51 Japan 17

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)

Financial Market Development and Country Competitiveness

Stock Market Development and Country Competitiveness

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

Country Competitiveness Rank by IMD Country Competitiveness and Financial Market Development OECD Countries (n=27) Dependent Variable: Country Competitiveness Rank by IMD Stock market development -0.079 (0.021) -0.058 (0.028) -0.055 (0.037) Financial mkt. -0.074 (0.002) -0.026 (0.237) -0.021 (0.301) Per capita GDP -0.081 (<0.001) (<0.001) -0.071 (0.001) Adj. R-sq 0.477 0.702 0.655 0.703

Country Competitiveness Rank by IMD Country Competitiveness and Financial Market Development Non-OECD Countries (n=15) Dependent Variable: Country Competitiveness Rank by IMD Stock market development -0.015 (0.70) 0.017 (0.67) 0.037 (0.261) Financial mkt. -0.091 (0.004) -0.054 (0.020) -0.059 (0.014) Per capita GDP -0.153 (0.001) -0.094 (0.006) -0.112 (0.005) Adj. R-sq 0.567 0.640 0.771 0.779

Country Competitiveness Rank by IMD 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) residual of x3 Financial market dev. (x2) -0.090 (0.001) -0.029 (0.163) -0.018 (0.383) Financial market dev. Per capita GDP (x3) -0.075 -0.083 (<0.001) -0.084 Adj. R-sq 0.439 0.701

Country Competitiveness Rank by IMD 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) residual of x3 Financial market dev. (x2) -0.096 (0.001) -0.046 (0.047) -0.061 (0.016) Financial market dev. Per capita GDP (x3) -0.111 (0.004) -0.089 (0.010) -0.165 Adj. R-sq 0.559 0.778

Financial Market Development and Corruption

Stock Market Development and Corruption

Stock Market Development and Corporate Governance

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