Competition, Corporate Governance and Selection in Emerging Markets

1. Introduction: The Domestic and International Policy Context

Ajit Singh in his article ,, Competition, Corporate Governance and Selection in Emerging Markets" published in The Economic Journal, discusses on the basis of three articles concerning the topics enumerated in the title. The selections in this article were introduced because in the last few years

These issues have acquired urgent international significance.

The three papers reveal aspects that have been subject of intense debate for many economist and examine themfrom an analytical, empirical and methodological point of view. They have acquired international policy significance especially after the emergence of the Asian crisis. It was a period of sharp downturn and proved devastating for many emerging economies in east Asia. The financial crisis that gripped the aerea at the beginning of july 1997 and raised fears of a worldwide economic mealtdown.

The crisis started in Thailand due to poor assessment and management of financial risk; large amounts of international capital was borrowed on short term and used to finance poorer- quality investments. The result was sharp declines in the currencies, stock markets, other assets and in the meantime some banks went bankrupt.

Soon after the asian crisis began, the subject of an international crisis was on everyone's mind and specialists started to analise in depth it's causes and the day to day interaction of corporations, banks and the governments in these countries.

The answer they reached was that the crisis was inevitable and the roots layed in the asian way of doing business.

The crisis was caused mainly because of the poorly regulated financial sector, over-investment and deficiencies in the corporate governance. Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. An important theme of corporate governance is to ensure the accountability of certain individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent problem It is a multi-faceted subject and most importantly the positive effect of corporate governance on different stakeholders ultimately is a strengthened economy, and hence good corporate governance is a tool for socio-economic development

Another problem was the tendency of these countries to have a close relationship and interdependence between the government the business and financial sectors.

In my opinion businessmen and corporations alike were mislead by the recent boom in the economy and lacked market discipline. They invested excessively, borrowed too much and took no notice of the corporate sector wich was by then vulnerable due to it's high leverage.

The important thing was that some learned their lesson and undertook during the 80's and 90's many market oriented economic reforms, wich changed the shape of the business sector. They opened their markets towards foreign investment, reduced trade barriers and expanded the stock market. All these measures led to a significant growth of the private sector.

The events in Asia, the growing significance of the emerging markets, called attention to some needed reforms to forestall future economic crises worldwide and led to the emergence in the late 90's of a New International Financial Architecture.

Nowadays corporate governance competition regulation constitute salient policy concerns and are subject to intensive research. Such research was done in the paper by Glen, Lee and Singh ,, Intensity of Competition in Emerging Markets and in Advanced Economies" on the issues of the dynamics of the competiton process and in addition, provided time-series analysis of corporate profitability at a firm level for seven leading developing countries. This is among the first comparative international studies on the theme and, unlike previous research, focuses on the dynamics of the competition process. Secondly, the paper compares systematically the results for emerging markets with those reported for advanced economies. It contributes by its surprising main conclusion that the persistence of profitability is not greater, and hence intensity of competition is no less, in emerging markets (including the crisis-affected Asiancountries) than in advanced economies.

The second paper by Gugler, Dennis Mueller and Yurtoglu ,, Corporate Governance and the Returns on Investment "studied corporate governance in developed and deloping countries. They investigated the efficiency of corporate investments in terms of Tobin's q and sought to explain the inferences in economic performance between firms in developing and developed countries.

The last paper by Aw, Chung and Bee Roberts ,, Productivity and Turnover in the Export Market: Micro-level Evidence from the Republic of Korea and Taiwan", examines competition and selection in two leading emerging markets: South Korea and Taiwan. They conclude that because of higher sunk costs of entry in Korea, Taiwan has a more dynamic industrial structure.

The similarity in all three papers is that they take a comparative stance and provide comparable information for AC's and DC's but using different methodologie to accomplish that.

2. Competition, Corporate Governance and Selection: Analytical and Empirical Links

Studies that demonstrated a close relationship between competition, selection and corporate governance were done as far as the 1950's and suggested that regardless of separation between ownership and control, the competitive selection in markets would oblige managers to maximize profits. As a result only some corporate governance structures would survive this natural selection mechanism that is the global market.

Most developing countries do not yet have an active market for corporate control in the anglo-Saxon sense, for example India, Brazil and thus will suffer from information deficits. Moreover, because of the many imperfections in the markets for corporate control