Acprof 9780198729167 Chapter 8

State Structures and Business System Changes in East Asia
Changing Asian Business Systems: Globalization,

Socio-Political Change, and Economic
Organization
Richard Whitley and Xiaoke Zhang
Print publication date: 2016

Print ISBN-13: 9780198729167
Published to Oxford Scholarship Online: April 2016
DOI: 10.1093/acprof:oso/9780198729167.001.0001
State Structures and Business System

Changes in East Asia
Richard W. Carney
DOI:10.1093/acprof:oso/9780198729167.003.0008
Abstract and Keywords

With regard to innovative activities, East Asian economies can be broken into
two groups—those which have displayed a sustained commitment to innovation
(e.g., Japan, South Korea, Taiwan, and Singapore) and those which have not
(e.g., Indonesia, Malaysia, Philippines, Thailand, Laos, Vietnam). The innovation
patterns found among these economies correspond to two comparably
dichotomous types of state structures—developmental and non-developmental
states. In this chapter, I focus on these two state types to develop a first attempt
at explaining variation in business system changes generally, and innovation
systems more specifically. I argue that East Asia’s business systems have
exhibited, and continue to manifest, two basic types of change—incremental and
structural. The former occurs within the confines of each state type. The latter
occurs when systemic factors that distinguish state types from one another
change, thereby enabling changes to state structures to occur, with attendant
implications for business system arrangements.
Keywords: business systems, institutions, institutional change, Asia, East Asia, state, government,
politics, innovation
Introduction
To understand the changing nature of business systems in East Asia, especially
in relation to national innovation systems, in this chapter I narrow the focus to
two dominant types of state structures with distinct pre-industrial arrangements
—developmental and non-developmental states. Without ignoring the numerous
differences that exist within each group, I contend that this division offers
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significant analytical insight into how state structures influence business system
arrangements generally, national innovation systems more specifically, and their
potential for change.1 Non-developmental states arise when resource
endowments yield unequal distributions of wealth and concentrate power in the
hands of elites. Developmental states not only lack such resource endowments,
but are also likely to emerge in response to persistent external threats. Political
leaders in states with few natural resources and persistent external threats must
upgrade and grow the economy via export-oriented industrialization in order to
generate sufficient revenue to protect the nation. This requires the creation and
maintenance of a broad coalition of groups who support the regime’s
development objectives. Sustaining this coalition requires the regular delivery of
side payments, which produces strong institutions over time, as well as a long-
term commitment to developing human capital via sustained funding towards
education. Together, these factors encourage a long-lasting commitment to
improving productivity and, in turn, innovation outcomes.
I restrict the focus to these two state types to develop a first attempt at
explaining variation in business system changes generally, and innovation
systems more specifically. This is not to deny that further refinements with
regard to state typologies may yield additional insights. But the key axis of
variation among East Asian economies regards those which have displayed a
sustained commitment to innovative activities (e.g., Japan, South Korea, Taiwan,
and Singapore) versus those which have not (e.g., Indonesia, Malaysia,
Philippines, Thailand, Laos, (p.188) Vietnam). To explain this clear dichotomy,
it is useful to begin with comparably dichotomous state structures.
The potential for change within these state structures is further conditioned by
three governance attributes that influence the capacity for state leaders to build
broad coalitions and influence business system changes: (a) the nature of
coordination through business networks; (b) the mobilizing strength of socio-
economic groups; and (c) whether the regime is democratic or authoritarian.
Business networks constitute vertical or horizontal modes of coordination among
firms which can vary in their formality, longevity, and scope of connectedness.
Examples of the former include production networks and vertically integrated
enterprises; examples of the latter include alliances and cartels. Where state
elites are integrated into these networks, they can have greater influence over
the speed and form of change that occurs. The mobilizing strength of socio-
economic groups refers to whether societal forces are effective at lobbying the
government and bargaining for their interests. Where their strength suddenly
changes, business systems will be more susceptible to change. Finally, whether
the regime is authoritarian or democratic indicates whether hierarchical
coordination will be strengthened, as with authoritarian rule, or weakened, as
with democracies. Business systems have the greatest potential for change in
the wake of regime change. Together, these governance attributes affect the
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extent and form of change that business systems undergo, but within broader
constraints determined by state structures.
The chapter proceeds by discussing next the pre-industrial origins of the two
major types of state structures in East Asia—developmental and non-
developmental. The third section discusses the governance attributes and
develops implications for business systems changes through an examination of
four cases. The final section concludes with a discussion of the types of business
systems changes that are occurring in the region.
State Structures: Developmental and Non-Developmental States

Following the framework of Doner, Ritchie, and Slater (2005), the pre-industrial
origins of non-developmental states include an abundance of resources and the
relative absence of external threats. Developmental states, in contrast, are more
likely to emerge when states lack abundant resource endowments and when
faced with persistent external threats. Late development has contributed to the
institutionalization of hierarchical control in both state contexts, preserving the
concentration of corporate ownership in the hands of either families or the state
(Gerschenkron, 1962).
Resource Endowments
Research suggests that a state’s ease of access to revenue influences
institutional development. Engerman and Sokoloff (2006) argue that initial
factor endowments (p.189) that correspond to cash crops and minerals versus
food crops may have contributed to substantial differences in the degree of
inequality in wealth, human capital, and political power that persisted over time
among states in the Western Hemisphere. In tropical climates and those with
abundant resources, most people were denied economic opportunities because
of institutions established by elites. The prevalence of cash crops and ownership
of mines in the hands of a small elite in conjunction with a large population of,
often, slave labour resulted in large disparities in income, wealth, and political
influence. These disparities led to restrictions on the establishment of
corporations, the granting of property rights, and the regulation of financial
institutions so that the elite could preserve their power. These restrictive
arrangements came at the cost of society realizing its full economic potential.
When looking at East Asia, scholars have also pointed to resource endowments
as an essential attribute distinguishing non-developmental from developmental
states. Examples of the former category include Indonesia and its abundance of
oil, Malaysia with rubber and tin, the Philippines with sugar, and Thailand with
rice (Booth, 2007).
External Threats
Where resource endowments are few, pressures for political elites to form broad
coalitions may be enhanced by persistent external threats. Scholars of state
formation in early modern Europe point to external threats as essential to the
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construction of institutions that foster growth and pay for war (Tilly, 1975).
Campos and Root (1996) and Woo-Cumings (1999) apply this argument to
explain the rapid development of Japan, South Korea, and Taiwan.
In contexts of few natural resources and persistent external threats, elites

typically focus on promoting growth by continuously upgrading local resources.
The need to fund the nation’s defences against external threats in conjunction
with the lack of resources from which to pay for them means that leaders face a
hard budget constraint. This constraint encourages leaders to grow the economy
by upgrading the domestic economy and improving productivity. This not only
involves the simple provision of public goods such as securing property rights
and building infrastructure, but also implementing programs that require
compromise among competing groups such as education and training programs
that meet the evolving needs of a developing economy, and redistributing assets
such as land. Reconciling divergent interests requires accommodation and
agreement among a broad coalition, which typically involves side payments
(Riker, 1962: 105). The effective and reliable delivery of these requires a well-
developed institutional capacity. It is the consistent delivery of these side
payments that acts as the causal mechanism through which broad coalitions
produce stronger institutions. This is critical to long-run development when it
occurs during the early stages of state formation and has been essential to the
emergence of East Asia’s developmental states.
(p.190) Hierarchical Forms of Control

Hierarchical control has been fostered and preserved in the developmental
states of East Asia through efforts to rapidly develop the economy. Gerschenkron
famously argued that: ‘The more backwards a country’s economy, the greater
was the part played by special institutional factors designed to increase supply
of capital to the nascent industries and, in addition, to provide them with less
decentralized and better informed entrepreneurial guidance; the more
backwards the country, the more pronounced was the coerciveness and
comprehensiveness of these factors’ (Gerschenkron, 1962: 354). The implication
is that the pressures of late development would therefore lead to the
concentration of control over the allocation of credit and the ownership of
corporate assets.
In East Asia, rapid development occurred because government officials could

direct lending to strategic industries via export-oriented industrialization
(Johnson, 1982; Amsden, 1989; Wade, 1990; Haggard, 1990). Large businesses
were aided by the state in their quest to gain market share, and elite power
grew in tandem. A key feature prevalent across all of the East Asian
developmental states is the concentration of corporate ownership in the hands of
either families or the state (Carney and Child, 2013).
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Business systems scholars commonly identify corporate ownership and

governance as a focal point for determining complementarities with other
institutions (e.g., Nolke and Vliegenthart, 2009); in the context of East Asia, the
focus on corporate control is even more well-deserved because it is a central
mechanism by which elites assert their power over the economy and society.
Ultimate owners of corporations can be classified into one of three basic
categories—the state, families, or widely held ownership (Claessens, Djankov,
and Lang, 2000). Hence, state and family ownership constitute the two types of
ultimate owners with the potential to wield concentrated control in a top-down,
or hierarchical, manner. These family or state-dominated forms of hierarchical
control shape the means by which actors coordinate with one another. In family-
oriented systems, coordination primarily occurs among firms within a family
business group. A common tool for maintaining family control of listed firms is
pyramidal share ownership. In this arrangement, the largest shareholder holds a
controlling share in one firm, which in turn holds a controlling stake in another.
In state-dominated systems, coordination among state elites is more prevalent.
Whether families or the state dominate corporate ownership, they each form the
basis for alternative types of hierarchical modes of coordination.
Summary: Business System Ideal-Types and the Potential for Structural Change
Integrating the main dimensions listed above yields two dominant types of
business systems that correspond to their state structures—developmental and
non-developmental—with two subtypes each—state-market economies (p.191)
(SMEs) and family market economies (FMEs). The developmental subtypes
constitute the ideal-types that yield superior economic performance over the
non-developmental subtypes. The institutional arrangements corresponding to
each subtype are presented in Table 7.1. In keeping with the main themes of the
volume, I focus on those dimensions with clear relevance to the structure of
national innovation systems.2
Four country cases are presented as examples of each ideal-type. They include
South Korea and the Philippines for the developmental and non-developmental
forms of FMEs, respectively; as well as Singapore and Malaysia as examples of
the developmental and non-developmental forms of SMEs, respectively.
Discussion of the dimensions comprising these ideal-types in the context of these
country cases is presented below.
The implication for changes to business systems is that they are unlikely to
deviate significantly from the underlying state structures that they emerge from
and are conditioned by; change will no doubt occur, but within the broader
constraints determined by state structures. The most likely type of change is due
to shifts in the identity of the dominant owner of the largest corporations,
families or the state. Once developmental states have achieved high-income
status, and future growth increasingly depends on innovation, continuing state
intervention risks undercutting private sector innovation incentives and efforts,
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as evidence from Singapore suggests (Carney and Loh, 2009). In this context,
family business owners become increasingly important. No longer are they mere
collaborators with the state; instead they become the main drivers of economic
growth. But in economies in which the state remains highly important as a
corporate owner even after high-income status has been achieved, innovation
may be difficult to advance so long as the state remains unwilling to divest its
control over the corporate sector.
Change will therefore be most dramatic when the systemic factors change. If
resources are exhausted or external threats emerge, non-developmental states
may move in the direction of developmental states as the pressures to rapidly
develop the economy via inclusive political bargains take hold. Such changes do
not seem far-fetched as resources are finite and as China’s projection of power
into the South China Sea has heightened threats to many countries.
While political preconditions may lead to more developmental countries, the

structure of developmental states still differs from the pre-industrial OECD
countries in numerous ways, suggesting that East Asian developmental
economies will persist in their different business structures from their OECD
counterparts. Notable differences exhibited in East Asia that differ from those in
the West include: (1) the lack of a strong crafts/guilds tradition; (2) stronger
pressures for rapid development; and (3) more fragmented and weaker socio-
economic groups such as labour unions. (p.192)
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Table 7.1. East Asian business system ideal-types
Developmental States Non-Developmental States
Institution FME SME FME SME
Corporate Family-owned and State-owned and controlled Family-owned and State-owned and
ownership and controlled controlled controlled
governance
Coordinating Informal Informal coordination via state elites and potentially with Informal Informal
mechanism coordination firms in a family group coordination coordination via
among firms in a among firms state elites
family business within a family
group group
Primary means of Bank lending, Bank lending, usually government affiliated Family group State bank
raising usually group- bank lending lending for
investment affiliated favoured groups
Employment Group-specific State-controlled Few effective State-controlled

relations labour protections with concessions
to favoured
groups
Education and General General skills and knowledge Poor Better for
training systems education; group- favoured (ethnic)
specific training groups
offered
Page 7 of 30
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Developmental States Non-Developmental States
Institution FME SME FME SME
Comparative Quickly respond Quickly mobilize vast resources; public goods; use of Resource Resource
advantage/ to new market political leverage extraction and extraction and
Performance opportunities diversity of state backing for
based on businesses in one favoured firms
incremental family group
innovation
Change Incremental Incremental change to preserve state power Stasis Incrementally

retreat of state increasing power
of the state
Example South Korea Singapore Philippines Malaysia
Page 8 of 30
(p.193)
Governance Arrangements and the Scope for Incremental Change
Governance arrangements constitute an important means by which changes to
business systems occur within the broader constraints of state structures. Three
governance arrangements are of particular importance because they directly
influence the capacity for state leaders to build broad coalitions and thereby
affect the scope for business system changes. These governance arrangements
include the structure of business networks, the mobilizing strength of socio-
economic groups, and whether political regimes are democratic or authoritarian.
The importance of business networks as an institutional medium by which Asian

economies are socially organized is well documented (Dacin and Delios, 2005;
Witt and Redding, 2014). Indeed, some scholars regard business networks as
‘more significant—that is, stronger—than the individual firms that make up the
networks’ (Hamilton, 1996). But even for those who regard firms as more
important than the networks of which they are a part, few would deny that
networks play a central role in the organization of Asian business. The strength
and resilience of these networks contrasts with their relative unimportance to
business in the United States, where they are relatively weak and commonly
occur only for situational and opportunistic reasons, and therefore tend to be
short-lived. For this reason, the institutional logic of Asian economies can be
characterized as relatively more network-based, in contrast to the United States
economy which is more firm-based (Hamilton, 1999).
The structure of these networks varies across the region. For example, the
formality, longevity, degree and scope of connectedness among firms in
alliances, cartels, and other networked groups will depend on the form of
authoritative coordination exercised by the dominant firm/owner (e.g. Lindberg
et al., 1991; Boyer and Hollingsworth, 1997; Di Maggio, 2011). The most
common form of authoritative coordination occurs via kinship ties, as in Chinese
societies (Redding, 1996). This form tends to enhance family-oriented control,
although it can be exploited by the state. Southeast Asian networks tend to be
kinship-based or organized around patron-client relationships (Scott, 1972).
Japanese business networks are predominantly inter-corporate ties that cement
together a vast community of firms (Orru, 1996; Lincoln and Shimotani, 2008).
South Korean business networks are dominated by elite business families that
prospered through privileges granted by a strong state (Kim, 1997).
The second governance arrangement is the mobilizing strength of socio-

economic groups. This refers to whether societal forces are effective at lobbying
the government and bargaining for their interests. I assume there are two key
societal groups, employees and employers. Where these groups are strong,
hierarchical state coordination is likely to be weaker. With some reservations,
union membership can serve as a proxy for the organizational strength of labour.
A concern here is that high or low levels of membership do not necessarily
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translate into low or high levels of influence, because existing institutions may
amplify or attenuate strength in numbers—German unions, for instance, are
more powerful than their membership numbers suggest, because they can
leverage entrenched legal rights. Unfortunately, comparative statistics of union
rights are not available for most of East Asia.
(p.194) Likewise, there are no comparative statistics for Asia that measure
employer organization. However, qualitatively viewed, organization levels of
employers seem to be consistent with those of employees.3 That does not mean
that employers and employees are equally influential. Employers in most Asian
countries wield considerable influence on government through a range of
measures, such as personal connections and bribery (Faccio, 2006). However,
that form of influence is usually not organized collectively and thus unrelated to
societal organization as a dimension, except in Japan (Schaede, 2000).
I therefore focus on union densities as a proxy for social organization levels. As a

point of reference, Japanese density levels are low by CME standards (though
the same as for Germany), but can be considered to be an indicator of high
societal organization in the East Asian context. The results suggest that by this
measure, only Korea and Taiwan exhibit comparable levels of societal
organization to those of Japan (Carney and Witt, 2014). When we consider that
Japan’s level is low by OECD standards, the rest of the region exhibits quite
weak societal organization indeed, though this does not deny the possibility for
change over time.
The third governance attribute is whether the regime is authoritarian or

democratic. In the former, hierarchical coordination will be strengthened; in the
latter, weakened. Hence, business system changes are most likely to occur in the
wake of regime change. In democracies, the potential for change will further
vary with regard to whether the regime is consensus-oriented, as in states with
proportional representation electoral systems, or polarizing, as in states with
majoritarian electoral systems. In the consensus-oriented system, change will be
tempered as bargaining and compromise are necessary for passing legislation.
In majoritarian systems, change is more likely but there are no East Asian
democracies with this type of electoral system. Hence, the more consensus-
oriented form of democracy found in East Asia will be expected to contribute to
more incremental business system changes.
These governance arrangements will affect how business systems evolve within
the broader constraints of state structures. Three business system dimensions
with particular relevance to national innovation systems are examined, including
the manner by which investment is raised, employment flexibility and
commitment, as well as education and training. I examine how state structures
and governance arrangements have influenced the manifestation and evolution
of these business system dimensions before turning to an examination of how
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they jointly affect nations’ comparative advantage and performance. Figure 7.1
offers a schematic presentation of the argument.
Raising Investment
How investment is raised matters a great deal to innovation outcomes (Tylecote
and Visintin, 2008). Where it is relationship-based, as usually with banking, a
long-term corporate focus is privileged which tends to enhance incremental
forms of innovation. Where capital markets are more important, a shorter-term
focus is (p.195)
emphasized and venture capital is

more likely to thrive, enabling
radical innovations to obtain
funding. Entrepreneurs without a
proven track record will have
difficulty obtaining financing from Fig. 7.1. Schematic Flow of the
banks, and instead must search Argument
for venture capitalists willing to
fund their idea. But for venture
capitalists to invest, they must have confidence that they can exit their ownership
stake at a profit which requires that other investors be willing to purchase it from
them. With a sufficiently large and liquid stock market, venture capitalists are more
likely to find risk acceptant investors who will buy the stake. But this process of selling
shares on a stock exchange dilutes ownership and in the long-run could threaten the
owner’s dominant control. Hence, bank lending tends to dominate firm financing
across the region.4
But how closely banks are tied to firms tends to vary across state structures.
Non-developmental states are more likely to have banks that are tightly
controlled either by the family to which the loan is made, or by the state in a
state-dominated system. The tight control over credit in these systems
diminishes the possibility for new firms to gain access to financing, thereby
reducing the chances for innovations to emerge. These arrangements reflect the
concentration of power in a narrow elite that does not need to establish a broad
governing coalition to maintain political control (due to abundant resources and
the lack of external security threats to force rapid development). In
developmental states, banks are less likely to be closely allied to the borrowing
firm in family-oriented systems, and may not be state-owned in state systems.
This reflects the need for the ruling elite to maintain a broad coalition in order
to develop the economy rapidly (due to the lack of resources and a persistent
external threat), which leads to better access to credit for a wider slice of the
private sector. This is not to say that developmental states will not have close
bank-firm relationships; such examples have been clearly witnessed in Korea
and Japan. However, total access to credit (and by extension the institutions
providing that credit) tends to be more widely available in developmental states
due to the political necessity of maintaining a broad coalition. Hence,
entrepreneurs may have somewhat better access to lending, but the nature of
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the lending still caters to large companies with proven track records. Radical
innovations are therefore unlikely and incremental innovation will be more likely
to occur.
In Korea, for example, the Bank for International Settlements (2010) estimates
that the ratio of bank credit to the private sector over GDP stood at 1.1 in 2009.
Japan, a bank-led system, had a similar ratio in 2009 at 1.05. This reliance on
bank (p.196) financing has not changed since the mid-1990s (Krueger and Yoo,
2002). But the elite-oriented business network that permits chaebols special
prerogatives has led to the expansion of connected non-bank financial
institutions that they own since the Asian Financial Crisis. Because these
institutions are connected, loans are unlikely to be recalled. In 2005, loans
originating from these institutions accounted for about 30 per cent of loans in
the entire economy (Hahm, 2008). In this way, the elite-oriented structure of
Korea’s business network has led to changes in the form of Korea’s banking-
oriented financing arrangements.
In the Philippines, the high concentration of corporate ownership is also

matched by a strong reliance on conglomerate-owned banks for raising
investment. In 2009, seven of the ten largest banks belonged to the
conglomerates owned by elite families, and these seven owned about 60 per cent
of national bank assets (IMF, 2010). Easy access to bank financing allows owner
families to reduce their reliance on the capital market. As a result, the Philippine
Stock Exchange has remained small relative to other Asian countries (IMF,
2010). This reliance on bank financing is a continuation of historical trends
(Zhuang et al., 2000) and reflects the continuing importance of kinship-based
business networks to how financing is raised.
Although Singapore’s stock market is well developed, its relatively large size is
due to the heavy representation of foreign companies. In 2009, they constituted
nearly half of the total stock market capitalization (Carney, 2014). By
comparison, deposit bank assets as an indicator of bank lending is comparable
to that found in other bank-oriented economies such as Germany or South
Korea. As a result, indirect lending has continued to play a dominant role in
raising investment and is very much influenced by the state’s ‘paternalistic’
guidance of the local business sector and especially through its ownership
stakes in so many of the largest companies (Deyo, 1981: 107). As in the
Philippines, business networks and the political regime have remained
unchanged, and socio-economic groups are weak. Hence, financing patterns
continue to reflect the power of the state and have changed little. But
Singapore’s developmental state structure (due to a lack of abundant resources
and persistent external threats that have contributed to a broad governing
coalition which is sustained via side payments) has permitted access to financing
Page 12 of 30
to a wide segment of the business community in comparison to its non-

developmental SME counterpart, Malaysia.
Malaysia’s sizeable stock market also masks the importance of bank lending as
the primary source of investment, a continuation of historical trends. The major
beneficiaries of government credit are large state-owned enterprises (SOEs),
government agencies, and firms typically connected to senior politicians of the
ruling UMNO (United Malays National Organization) party (Gomez, 2006). The
stock market has primarily served as a mechanism for politically connected
business owners to capitalize on the value of their connections by means of
financial manipulation and speculation (Gomez, 2009; Zhang, 2009). Changes in
the state’s control over the allocation of credit have occurred since the Asian
Financial Crisis; specifically, credit has become more heavily controlled by the
government, reflecting the increasing centralization of political control. The
patron-client nature of business networks has allowed for increasingly
hierarchical control to arise without serious opposition or competition from
other non-state financing sources. The weakness of socio-economic groups and
the (p.197) authoritarian structure of the political regime further deny
opportunities to alter existing financing arrangements.
Increasingly hierarchical state control is motivated by the Malaysian regime’s

recognition of the risks it faces from political opponents in the wake of the Asian
Financial Crisis. The key threat is the capacity for political opponents to gain
access to funds via allied business owners. Exerting tighter control over finance
is a way for the state to deny resources to these opponents, and rising control
can be seen as a defensive response to the growing popularity of political
opponents such as Anwar Ibrahim.
Employment Flexibility and Commitment

Employment patterns have also been shown to be consequential to innovation
outcomes. Where labour is mobile, it can more easily move between firms
allowing workers to take new ideas that can contribute to successful start-ups
and innovations, as in Silicon Valley. Where employment is longer term, workers
have incentives to focus on improving their knowledge and skills tied to the
firm’s specific products/services, as in Japan. But the capacity for labour
mobility to affect innovation outcomes also depends on the configuration of
other business system dimensions such as education and training, which will be
discussed below.
Because the modus operandi of firms in non-developmental FMEs is oriented

towards generating rents for the family elites via sectors that are shielded from
international competition, few concessions are granted to workers in order to
maintain low labour costs. Among developmental FME firms, the upgrading of
the economy requires that workers attain increasingly higher levels education
and knowledge-intensive skill sets. This in turn allows for accommodation of
Page 13 of 30
improved employment relations for more highly skilled workers. As a result,

selective family group-based agreements are likely to emerge due to the
business system’s family-oriented hierarchical coordination. In state-oriented
developmental states, politics frequently trumps market priorities, so although
these states will seek to encourage the development of highly skilled workers,
opportunities for collective bargaining are likely to remain weak. The state, after
all, seeks to deny political influence to potential competitors such as organized
labour. In non-developmental states, highly skilled labour is not in demand as
rent extraction is prioritized and made possible due to the abundance of
resources; hence there will be few concessions granted even to highly skilled
workers.
Turning to Korea’s employment patterns, there is clear variation by firm size. In

2010, smaller firms had tenures of about half that of large firms (4.5 years
versus 9 years, respectively; Witt, 2014). This is consistent with expectations
that employment relations are more group-specific rather than economy-wide, as
in CMEs. In Japan, for example, national employment tenures are over 10 years
on average, compared to 6.2 years in Korea, and there is far less variation across
firms of different sizes (Witt, 2014). The favouritism accorded to employees of
chaebol firms also reflects the greater organizational power of labour unions and
socio-economic groups more generally. The mobilizing strength of labour
increased considerably as a result of the regime change that occurred in 1987
when Korea transitioned from a military dictatorship to a democracy.
(p.198) In the Philippines, conglomerate employees are favoured even more

than their Korean counterparts. Strong employment protections are accorded
only to the regularized workers primarily located in the upper tiers of family
conglomerates, a persistent feature since the 1990s. Matching this is the fact
that only 1.7 million of the 38.9 million employed belonged to unions in 2008
(Kondo, 2014). At the same time, the country’s high unemployment rate and lack
of a social safety net have caused millions to leave the country to work abroad
since the 1970s. This dual structure is reflective of the non-developmental
structure of the state, which denies opportunities and influence to non-elite
members. It is also upheld by the organizational weakness of socio-economic
groups (labour unions, specifically), as well as the kinship-based business
networks in which family members disproportionately benefit and are those
most likely to occupy the upper tier of the corporate ladder.
In Singapore, employment relations have remained one of the most flexible in

the world despite concentrated ownership (by the state and families) alongside
the prevalence of indirect lending. For example, there is no law prohibiting the
firing of workers and no minimum wage (Lopez-Claros et al., 2006: 485). These
conditions are hailed as critical for attracting foreign direct investment.
According to Schwab (2012), out of 144 countries only Hong Kong has more
flexible employment conditions. The weak organizational strength of unions,
Page 14 of 30
which are co-opted by the state via the NTEU (the National Trade Enterprises
Union) and the nondemocratic political regime stymie efforts at improving
employment security.
Finally, Malaysian employment relations are determined by two objectives: (1)

affirmative action towards indigenous Malays; and (2) the need to offer flexible
labour practices to attract foreign multinationals (Frenkel and Kuruvilla, 2002).
The country’s pursuit of export-led development alongside a political
commitment to local Malays has contributed to a ratio of one foreign worker to
every five local workers; one of the highest in the world (Ramasamy and Rowley,
2011). Tight legislative restrictions on labour’s freedom to engage in collective
bargaining have kept down the real wage levels of unskilled, largely foreign,
workers (Bhopal and Todd, 2000). At the same time, employment protection
measures such as quotas and affirmative action programs assure constant
employment for local Malays. These employment relations reflect the emphasis
of bumiputera favouritism since the NEP was initiated in 1971. These
arrangements have changed little over the last two decades as the UMNO has
sought to protect its political power through continuing favouritism to
bumiputeras. The authoritarian regime alongside severe restrictions on the
mobilizing capacity of socio-economic groups prevents workers (especially non-
Malay workers) from pressing for improvements to employment conditions.
Education and Training

Education and training is the final dimension examined here with clear
importance to national innovation systems. Developmental states, both family
and state-oriented, seek to improve the education and skills of the workforce as
a necessary part of rapidly developing the economy (due to external threats and
few (p.199) resources). In developmental family systems, family groups will
encourage more specific knowledge and training that are compatible with the
products and services that the group offers. The need for such highly trained
workers encourages support for high quality education systems but with an
emphasis on general knowledge. Acquisition of more specific knowledge and
skills will occur once workers enter the employment of the group. Similar
support for education is expected among developmental state economies,
however there is likely to be greater emphasis on general skills and knowledge.
Those who rise to executive positions tend to be transferred between different
firms by the political establishment which helps to ensure political loyalty above
ties to a specific firm or industry, as would occur in the context of a family-
oriented developmental state. Moreover, the lack of collective bargaining
corresponds to weak job protections and higher mobility of workers which
further contributes to a preference for general skills and knowledge. Non-
developmental family and state systems have few incentives to invest heavily in
public education since resource extraction tends to dominate the policy
objectives of the elite.
Page 15 of 30
In Korea, the variation in employment stability between chaebols and

non-chaebol firms matches the opportunities for education and training. While
schooling is nearly universal through high school, and nearly three-quarters of
high school graduates go on to tertiary education, there is a lack of vocational
training schemes. As a result, retraining programs are common among large
companies, but often last nearly two years. Because these programs are
primarily found in large firms, only 12.8 per cent of Korean workers participated
in training schemes in 2005 in comparison to an OECD average of 37.1 per cent
(Witt and Redding, 2013).
The Philippines’s historically poor employment conditions have corresponded to

a low level of education and training. For example, education spending in the
Philippines was only 2.4 per cent of GDP in 2005, compared to 8.1 per cent in
Malaysia and 9.2 per cent in Thailand (Son and Jose, 2011). To compensate for
this, Philippine corporations have provided on-the-job training to regularized
employees, mostly in the supervisory and managerial levels (Ofreneo, 2003). But
those who do receive training often emigrate, contributing to high turnover and
skills shortages (Gropello, 2010). Access to quality on-the-job training reflects
the privileges associated with membership to a powerful kinship network.
At the same time, Singapore’s educational system is consistently ranked as

among the best in the world. Recently, it was ranked third, behind Switzerland
and Finland (Schwab, 2013). It was ranked first for science and math. While the
workforce is highly educated, the nature of the local economy, with a heavy
reliance on multinational corporations who can easily hire and fire employees,
means that there is little incentive to acquire specialized skills. This is reflected
in a survey which found that local companies did not rate the level of importance
of their human resources as highly as did the multi-national corporations
(MNCs) (Huang et al., 2002). Moreover, the managers, engineers, and scientists
working in Singapore’s high growth sectors—those with highly specialized
knowledge and skills—are commonly expatriates. These features reflect the
mechanisms by which the authoritarian regime maintains control; specifically, by
moving elite members between companies and ministries thus deemphasizing
the value of specific knowledge and skills.
(p.200) Mirroring the dual structure of its employment relations, Malaysia’s

education and training exhibits similar divisions. Public expenditure on
education is consistently high for the local population, with a well-developed
system of primary and secondary education, and a well-developed physical
infrastructure of technical colleges and universities that favours Malays.
However, Malaysia’s export sector, which relies on foreign workers on short-
term (mostly two-year) contracts, contributes to the under-development of a
knowledge economy, including adequately skilled people, supportive education
and training systems, and R&D capabilities. Training is therefore limited to on-
the-job task-related familiarization. At the same time, ethnic Malays engage in
Page 16 of 30
frequent job hopping as quotas and affirmative action programs assure constant
employment. Consequently, employers have little incentive to invest in their
workers, a continuation of historical practices. The political logic of the
authoritarian regime which discriminates in favour of Malays has led to the
perpetuation of these arrangements over time.
Comparative Advantage and Performance

The varying institutional features of these systems yield differences in their
innovation capabilities and, by extension, their comparative advantage and
performance.5 For the reasons mentioned above, innovation is likely to be
relatively stunted among non-developmental economies. For developmental
states, family systems (FMEs) will encourage more incremental innovation than
state-oriented system (SMEs) because of greater attention paid to on-the-job
training for employees of business groups that emphasizes skills and knowledge
specific to the group’s product line. By bringing together diverse businesses
within the control of a single family group, East Asian family groups can act
quickly to fill market opportunities in comparison to large family-owned firms in
continental Europe that must consult other stakeholders. Innovation in
developmental SMEs is likely to occur in state-funded R&D centres and be
transferred to firms. Private firms in SMEs face considerable challenges in
sustaining innovative capabilities because: (1) state-owned corporations often
have privileged access to finance and state-funded research centres; and (2)
actors’ incentives conflict in that ownership concentration promotes a long-term
focus consistent with incremental innovation but even highly skilled employees
lack employment protections (to prevent the emergence of organized labour who
might challenge the incumbent political regime) and thus have few incentives to
invest in specific knowledge and skills.
Although developmental states yield superior performance, FMEs and SMEs

have different comparative advantages. The comparative advantage of FMEs is
the speed with which its firms can fill market opportunities in areas that build on
incremental innovations. Numerous firms and product lines under the
centralized control of a single family allows these groups to act quickly in
responding to (p.201) new market opportunities, and this advantage is further
enhanced when they have privileged access to financing such as a group-
affiliated bank. The comparative advantage of FMEs differs from coordinated
market economies which have incremental innovation and slow decision-making;
it also differs from liberal market economies which have radical innovation and
fast decision-making (Hall and Soskice, 2001).6 Taken together, the following
institutional arrangements support FME firms’ comparative advantage:
concentrated ownership, banks within or closely allied to the group, high levels
of general education followed by more group-specific knowledge and training as
well as flexible industrial relations specific to the business group’s needs.
Page 17 of 30
Korea exemplifies the comparative advantage of a developmental FME. During

the main phase of its developmental period, the Korean state played a strong
role in guiding and collaborating with the private sector. But since the early to
mid-1990s, the Korean government has retreated from its dirigiste industrial
policy except for some selected high-tech R&D projects (Chang, 2001: 72). The
withdrawal of the state has enabled Korea’s conglomerates to more effectively
pursue their comparative advantage—speed in filling market opportunities with
goods that draw on incremental innovations. Speed in decision-making is
commonly attributed to family-owned conglomerates because of the
concentration of power in the owner-manager (Kim at al., 2004). Samsung
Electronics is indicative of how this has manifested itself. Its success over the
last decade has come from spotting areas that are small but growing fast,
especially in capital-intensive projects. Samsung first develops some familiarity
with the technology and then waits for the market to present an opening which
it can quickly capitalize on. For example, Samsung turned liquid-crystal displays
into televisions only once they grew to 40 inches in size in 2001. In flash
memory, Samsung quickly entered when new technology made it possible to put
a whole gigabyte on a chip. Many companies saw the potential of these
technologies but few could or would invest billions in a single shot. That
Samsung could is in large part due to the power vested in the hands of the
chairman who could quickly mobilize and flood the sector with cash by drawing
on its group-affiliated financial institutions. In its 2006 annual report, Samsung
Electronics identified ‘the speed of innovation and product development’ as a
key factor contributing to its success.
The comparative advantage of SMEs is due to the concentration of political

power in a single party which allows SOEs to deploy vast resources. This leads
to a comparative advantage that comes from funding public goods such as
infrastructure, uniform business-friendly rules and institutions, and state-funded
research and development centres. The public goods that an SME provides are
contingent on state-specific circumstances, but in a developmental state they are
likely to yield goods that enhance, rather than hinder, the economy’s overall
performance.
In contrast to Korea, where the government has moved in a liberalizing direction

with regard to its relationship with the country’s largest firms (notwithstanding
certain exceptions such as the promotion of biotechnology; Wong, (p.202)
2012), the Singapore government has stepped up its involvement. Singapore’s
comparative advantage derives from the centralization of state control which
allows state-owned firms to quickly deploy vast resources. To this end, the state
has made substantial long-term investments in public goods designed to
enhance private sector productivity and efficiency, including infrastructure,
uniform business-friendly rules and institutions, and state-funded research and
development centres. Besides having the best sea-port and airport facilities in
the world, Singapore has among the most efficient telecommunications
Page 18 of 30
infrastructure, power systems and water utilities. The public transport services
and road infrastructure are also excellent and automobile ownership quotas and
peak hour charges effectively limit traffic congestion. As a result, Singapore has
been consistently ranked as having the best infrastructure in the world for
business by the World Competitiveness Report (IMD, various years).
The city-state also provides business-friendly rules and institutions which have
consistently placed it at the top of various business competitiveness indexes
(e.g., IMD’s World Competitiveness Report; World Bank’s Ease of Doing Business
Rankings; World Economic Forum’s Global Competitiveness Report). Some of its
highest ranked areas include protections for investors, dealing with construction
permits, and trading across borders (World Bank, 2013).
Finally, large sums have been invested into ramping up research and
development facilities. Until the late 1980s, government policies towards science
and technology focused primarily on promoting effective technology absorption
from MNCs rather than technology development (Wong, 2001). Only since the
late 1980s has public R&D funding become significant (Wong, 1995). The
development of R&D capabilities first focused on manufacturing with the
establishment of the Institute of Microelectronics, the Data Storage Institute and
the expansion of the Institute for Manufacturing Technology. Since the
mid-1990s, billions of dollars have been spent on high-tech research with
projects such as the Science Park, the Technopreneuship 21 initiative, and
Biopolis (Wong, 2001). As a result of the government’s focus on building R&D
capabilities, Table 7.2 shows that Singapore’s R&D spending relative to GDP is
approaching that of Japan and Korea and the number of researchers in R&D per
million exceeds them.
But in contrast to these other countries, the dramatic increase in R&D resources
primarily comes from the government’s heavy investment rather than from the
private sector. An important challenge is for publicly funded R&D to yield
private sector success (Carney and Loh, 2009).
In the Philippines, the high concentration of family ownership, strong bank-

oriented financing, poor employment protections and education and training
systems combine to yield an underinvestment in innovative capabilities.
Innovations are primarily introduced via linkages with foreign companies
(Saldana, 2001). In 2007, the number of full-time researchers in the Philippines
was 78 for every one million people, which is substantially fewer than in
Singapore (5955), Korea (4672), and Malaysia in 2006 (365) (World Bank, 2012).
Moreover, in the same year, the Philippines spent only 0.11 per cent of GDP on
R&D, while Singapore spent 2.39 per cent, Korea spent 3.2 per cent, and
Malaysia in 2006 spent 0.63 per cent (World Bank, 2012). Table 7.2 reflects the
Page 19 of 30
persistent underperformance of the Philippine economy across the 1996–2008

time period.
(p.203)
Page 20 of 30
Table 7.2. Research and development indicators7
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Researc
hers in
R&D
per
million
Japan 4946 5000 5209 5249 5151 5187 4943 5170 5176 5385 5416 5409 5189
S. Korea 2212 2270 2034 2190 2357 2950 3057 3244 3336 3822 4231 4672 4947
Malaysi 89 153 274 292 495 365

a
Philippi 71 81 78
nes
Singapo 2547 2644 3030 3277 4244 4205 4494 4901 5134 5576 5677 5955 5834
re
R&D as
percent
age of
GDP
Japan 2.80 2.87 3.00 3.02 3.04 3.12 3.17 3.20 3.17 3.32 3.40 3.44 3.45
S. Korea 2.42 2.48 2.34 2.25 2.30 2.47 2.40 2.49 2.68 2.79 3.01 3.21 3.36
Page 21 of 30
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Malaysi 0.22 0.40 0.47 0.65 0.60 0.63

a
Philippi 0.14 0.13 0.11 0.11

nes
Singapo 1.34 1.43 1.75 1.85 1.85 2.06 2.10 2.05 2.13 2.19 2.17 2.37 2.66
re
Page 22 of 30
(p.204) The state of Malaysia obtains rents from its abundant resources which it
deploys towards the creation of public goods. However, Malaysia’s political system
yields stark distributionally unequal outcomes that favour ethnic Malays at the
expense of ethnically Chinese and Indian groups. These dynamics contribute to three
performance-related outcomes. First, corporate performance is heavily determined by
political connections. For example, the government regularly engages in large
infrastructure projects (e.g., Petronas Twin Towers, the Putrajaya planned city, Bakun
Dam, and the Stormwater Management and Road Tunnel) but, in contrast to
Singapore, they are often thinly disguised mechanisms by which to reward the
politically connected (Gomez, 2009). Additionally, corporate growth is often not driven
by the pursuit of strategies to enhance competitiveness, but by perceived opportunities
for fast profits due to speculation and inside information via the imperfectly regulated
equities market or because of the ready availability of state credit due to political
connections. Finally, ethnic Malay firms usually focus on sectors such as finance and
telecommunications which are protected from international competition; no major
ethnic Malay firms have appeared in manufacturing sectors that are exposed to
international competition (Carney and Andriesse, 2014). As a result, business groups
often do not survive the loss of political patronage.
The second performance-related feature of the Malaysia corporate sector is
corruption. Malaysia’s Corruption Perceptions Index ranking (54) is much worse
than Singapore’s (5), which is indicative of the extractive nature of its
governance institutions. Schwab (2013) regards corruption as the second most
important impediment to doing business in Malaysia after an inefficient
government bureaucracy.
Finally, the preferential treatment of Malays leads to the import of foreign

labour on temporary contracts which undermines the cultivation of scientists
and engineers, thereby stunting innovation. For example, Table 7.2 shows that
the number of researchers in R&D as well as the R&D as a percentage of GDP is
much lower than in Singapore.
In contrast to Korea where state power has declined since the early 1990s, the
power of the state in Malaysia has increased. This change in state power is a
reflection of its rising vulnerability in the face of growing threats from political
challengers (Carney, 2014). To preserve the political regime’s control, state
ownership of publicly listed firms increased. Dominant state control has allowed
the state to deny resources to political challengers as well as enhance stability in
the face of unexpected financial shocks. But the competitiveness of Malay firms
remains underwhelming as indicated by the lack of R&D investment.
Conclusions
East Asia’s business systems have exhibited, and continue to manifest, two basic
types of change. The first type is structural. This occurs when systemic factors
that distinguish developmental from non-developmental states evolve, including
resource abundance and external security threats. Although structural change
does not occur easily, there is increasing potential for non-developmental (p.
205) states to undergo structural change that moves them in the direction of
Page 23 of 30
developmental states. For example, resource abundance is declining as finite

resources are exhausted. Additionally, external security threats are rising as a
result of China’s rise and its increasingly assertive claims to key parts of the
South China Sea.
The second type of change is incremental. These more modest changes, which
occur within the boundaries of broader state structures, are conditioned by the
three governance features of: coordination through business networks, the
mobilizing strength of socio-economic groups, and whether political regimes are
democratic or authoritarian. Of the business system dimensions examined here,
business networks have the greatest influence on changes to how firms raise
investment. In Korea, for example, elite networks yielded the creation of chaebol
connected non-bank financial institutions as a result of stricter lending rules for
conventional banks following the Asian Financial Crisis. The mobilizing strength
of socio-economic groups and regime transitions matter most for employment
relations and education and training. For example, working conditions improved
significantly following Korea’s democratic transition coupled with the rising
power of chaebol workers.
Malaysia, by comparison, has witnessed changes associated with increasingly

centralized state power. As pressures due to financial globalization have
threatened the power of the ruling party (the UMNO), the state’s control over
the corporate sector has grown as a defensive reaction. Control over the
corporate sector offers a mechanism by which to reward loyal supporters of the
regime and to deny resources to political challengers via redistributive policies
that benefit bumiputeras. A consequence of this is that firm financing has
become even more strongly controlled by the state while various policies that
bolster the loyalty of Malays to the UMNO, such as employment relations as well
as education and training, remain strongly discriminatory.
Governance arrangements have changed modestly in the case of the Philippines.

Family-owned groups have dominated both the structure of the business system
and the country’s political apparatus and very little has changed in this regard in
recent times. Kinship networks continue to prevail in the coordination of
business as they have in the past, and socio-economic groups remain weak.
In Singapore, the one-party regime seeks to retain power by controlling the

state’s resources, as in Malaysia. However, the party’s legitimacy depends on
more broad-based support; hence, there is a greater need for improving the
aggregate welfare of the country in contrast to redistributive welfare
mechanisms as in Malaysia. But this poses a difficult balancing act as the state’s
dominant political control faces challenges from a rising number of different
groups that want a voice in the policy making apparatus. Because the city-state
has reached high-income status, sustaining high levels of economic growth
becomes increasingly difficult thereby opening opportunities for other groups to
Page 24 of 30
demand political representation in how the country is governed. But until

dramatic political change occurs, the business system is unlikely to undergo
radical change because the PAP’s hold on power depends on its control over the
corporate sector. Modest adjustments are likely to occur in a way that preserves
the power of the ruling party, such as the types of public goods (e.g., R&D
projects) that the government funds.
(p.206) Acknowledgments
I would like to thank Richard Whitley, Xiaoke Zhang, Dennis McNamara, and the
participants of the Changing Asian Business Systems workshop at the
Manchester Business School in June 2014 for helpful comments on earlier
versions of this chapter.
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Notes:
(1) See Whitley’s Chapter 1 in this volume as well as Zhang and Whitley (2013)
for alternative perspectives on changes to business systems.
(2) Because developmental states are distinguished by the regime’s broad

coalitional commitments which yield strong institutions over time via the
provision of side-payments (such as education and training among other public
goods) in order to grow the national economy, the innovation implications tend
Page 29 of 30
to be national in scope. To the extent that institutions exhibit subnational

variation, innovation outcomes will likewise vary subnationally.
(3) See, for example, the country chapters in Witt and Redding (2014).
(4) See Young’s Chapter 8 of this volume for an analysis of Asian financial
reforms.
(5) See the chapters by Casper and Storz, Liu and Tylecote, as well as
McNamara for analysis of innovation patterns and strategies in Korea, Japan,
and China.
(6) Hall and Soskice’s argument (2001) is not that institutional structures solely
determine innovation outcomes, but rather that institutional arrangements yield
incentives for firms to engage in different types of innovation.
(7) Source: World Development Indicators (2012).
Page 30 of 30

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State Structures and Business System Changes in East Asia

Changing Asian Business Systems: Globalization,

Print publication date: 2016

State Structures and Business System

Abstract and Keywords

State Structures: Developmental and Non-Developmental States

In contexts of few natural resources and persistent external threats, elites

(p.190) Hierarchical Forms of Control

In East Asia, rapid development occurred because government officials could

Business systems scholars commonly identify corporate ownership and

While political preconditions may lead to more developmental countries, the

Table 7.1. East Asian business system ideal-types

Developmental States Non-Developmental States

Institution FME SME FME SME

Employment Group-specific State-controlled Few effective State-controlled

Developmental States Non-Developmental States

Institution FME SME FME SME

Change Incremental Incremental change to preserve state power Stasis Incrementally

Example South Korea Singapore Philippines Malaysia

The importance of business networks as an institutional medium by which Asian

The second governance arrangement is the mobilizing strength of socio-

I therefore focus on union densities as a proxy for social organization levels. As a

The third governance attribute is whether the regime is authoritarian or

emphasized and venture capital is

In the Philippines, the high concentration of corporate ownership is also

to a wide segment of the business community in comparison to its non-

Increasingly hierarchical state control is motivated by the Malaysian regime’s

Employment Flexibility and Commitment

Because the modus operandi of firms in non-developmental FMEs is oriented

improved employment relations for more highly skilled workers. As a result,

Turning to Korea’s employment patterns, there is clear variation by firm size. In

(p.198) In the Philippines, conglomerate employees are favoured even more

In Singapore, employment relations have remained one of the most flexible in

Finally, Malaysian employment relations are determined by two objectives: (1)

Education and Training

In Korea, the variation in employment stability between chaebols and

The Philippines’s historically poor employment conditions have corresponded to

At the same time, Singapore’s educational system is consistently ranked as

(p.200) Mirroring the dual structure of its employment relations, Malaysia’s

Comparative Advantage and Performance

Although developmental states yield superior performance, FMEs and SMEs

Korea exemplifies the comparative advantage of a developmental FME. During

The comparative advantage of SMEs is due to the concentration of political

In contrast to Korea, where the government has moved in a liberalizing direction

In the Philippines, the high concentration of family ownership, strong bank-

persistent underperformance of the Philippine economy across the 1996–2008

Table 7.2. Research and development indicators7

Malaysi 89 153 274 292 495 365

Malaysi 0.22 0.40 0.47 0.65 0.60 0.63

Philippi 0.14 0.13 0.11 0.11

Finally, the preferential treatment of Malays leads to the import of foreign

developmental states. For example, resource abundance is declining as finite

Malaysia, by comparison, has witnessed changes associated with increasingly

Governance arrangements have changed modestly in the case of the Philippines.

In Singapore, the one-party regime seeks to retain power by controlling the

demand political representation in how the country is governed. But until

Bank for International Settlements 2010. Long-Term Issues in International

Bhopal, M. and Todd, P. 2000. Multinational corporations and trade union

Booth, A. 2007. Colonial Legacies. Honolulu: University of Hawai’i Press.

Boyer, R. and Hollingsworth, R. J. (eds) 1997. Contemporary Capitalism: The

Carney, M. and Andriesse, E. 2014. Malaysia. In Witt, M. and Redding, G. (eds.),

Carney, R. 2014. Singapore. In Witt, M. and Redding, G. (eds.), Oxford Handbook

Carney, R. and Loh, Y-Z. 2009. Institutional (dis)incentives to innovate: an