1. 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

2. 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

3. Convergence of Asian Corporate Governance McKinsey Quarterly, 2004

4. 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

5. 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

6. 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

7. 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

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

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

14. 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 (%) ( )
Industry
ISIC
Bank-based
Market-based
Dominance
Digital TV/Broadcast
32+64
1.94
3.84
Display Device
-0.22
1.43
Intelligent Robotics
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)

15. 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

16. 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

17. 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

18. 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

19. 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)

20. Financial Market Development and Country Competitiveness

21. Stock Market Development and Country Competitiveness

22. 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

23. 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
(<0.001)
(<0.001)
-0.071
(0.001)
Adj. R-sq
0.477
0.702
0.655
0.703

24. 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

25. 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

26. 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

27. Financial Market Development and Corruption

28. Stock Market Development and Corruption

29. Stock Market Development and Corporate Governance

30. Thank you