The state matters: management models of Singaporean Chinese and Korean business groups

Abstract

Both the proponents and critics of Asian economic organization have been preoccupied with the ideal-typical management models of family businesses, and have rarely identified their changing management structures. We, instead, identify the change and continuity in these management structures through an analysis of family-controlled business groups in Singapore and South Korea before and after the Asian currency crisis. In our view, these business groups professionalized their management, but retained family control and corporate rule before the crisis. The crisis, however, increased the pressure on such groups to relinquish family control and corporate rule. Singaporean Chinese business groups tended to loosen their tight grip on corporate rule by absorbing more professional managers into their upper echelons. The surviving Korean chaebol, however, intensified family control. Only a few chaebol, which were on the brink of bankruptcy, relinquished corporate rule to professional managers. We argue that other tha n the market, cultural, and institutional factors as suggested in the existing literature, state capacities and strategies do matter in shaping the changing management structures of business groups. Drawing on our analysis, researchers will be able to conduct comparative studies of family businesses across East Asian societies, of organizational imitation, and of the role of the state in influencing management models.

Keywords: Asian economic organization, institutional perspective, the state, organizational imitation, family business, overseas Chinese enterprise, chaebol

Introduction

The extraordinary economic growth of East Asian economies from the 1970s to the mid- 1990s has sparked much research into the management and organization of Japanese keiretsu, Korean chaebol, and overseas Chinese business enterprises (Chen 1995; Redding 1990; Tam 1990; Tan and Fock 2001). However, after the Asian economic crisis and the resultant slowdown, an increasing number of authors, consultants, IMF economists, and government policy-makers have been preoccupied with the dark side of family businesses (Backman 1999; Economic Intelligence Unit 2000; Straits Times 2000a, 2000b). They have prognosticated that family-controlled and managed businesses will have much difficulty in staying competitive in the new global economy. Devinney (1998: 58) posited that 'family governance will have to be ceded to professional management structures'. Both the proponents and critics of Asian economic organization have been preoccupied with the ideal-typical management models of Asian family businesses, and have rarely iden tified their changing management structures.

We argue that large Asian family businesses professionalized their management before the currency crisis of 1997 as they met the challenges of new technology, regional competition, and the deepening integration of national economies into the global economic system. However, the credit squeeze and reforms in national economic systems that resulted from the currency crisis increased the pressure on family-controlled businesses to relinquish family control and corporate rule. In this article, we identify changes in the management structures of large Asian family businesses and the underlying forces before and after the currency crisis. This provides us with a base on which to develop a more comprehensive explanation of changing management structures and to suggest future research directions.

Of all Asian family businesses, we focus on those in Singapore and South Korea for three reasons. First, in both societies, family businesses are predominant in terms of indigenously owned businesses. The ownership of the Korean chaebol appears to be dispersed, but in reality, it is highly concentrated within single families through cross-shareholdings among member companies within the groups. Second, both societies share the cultural heritage of Confucianism, and both governments have harnessed cultural values and institutional norms to hasten economic development. Third, the governments of both countries have played the role of investor in their economies more than in other East Asian economies, as measured by control of publicly listed companies (see Table 1).

Among the family businesses in Singapore and South Korea, we focus on family-controlled business groups. We avoid classifying single family firms and conglomerates or business groups into a single category. We find it important to compare the comparable, and hence we compare only Chinese business groups and the Korean chaebol. The chaebol are composed of numerous large, multidivisional, hierarchical, vertically integrated and legally independent firms. Their emergence can be traced back to the 1940s during Japanese colonization (Fukuyama 1995). The ascent of the chaebol as an engine of economic growth began with the national development policy that was implemented by Korea's military junta in the 1960s. Overseas Chinese business groups, according to Hamilton (1997), consist of independent firms that are loosely linked to a mother or core company, which often pursue conglomerate accumulation rather than vertical integration, and resemble a web structure rather than a unitary organization. These business groups usually emerge from small, private companies that were founded by Chinese who emigrated mostly from the maritime provinces of China (Guangdong and Fujian) or by descendants of these immigrants.