By Robbie Shell
Professor Mauro Guillén analyzes the role of business groups in South Korea, Argentina and Spain. Within their histories lie clues to overall economic performance.
The Asian financial crisis has hit Korea hard. But Taiwan is thriving. In Latin America, Venezuela is in trouble, but Argentina looks like a winner. What’s going on?
To some people, the term “emerging economy” evokes a one-size-fits-all image of developing countries struggling, with mixed success, to share in the prosperity of the global marketplace. Mauro Guillén, however, doesn’t see it that way. By focusing a part of his research on the rise and fall of business groups within these countries, he has uncovered differences in how individual economies perform in both internal and external markets.
“One emerging economy out of 40 goes down and suddenly investors start panicking and getting out of all the others. We must begin differentiating among these countries in a more sophisticated way,” says Guillén, an assistant professor of management whose major areas of interest include multinational and comparative management.
“After the Mexican economy collapsed in 1994-95, the next country singled out for investors’ rage was Argentina,” he notes. “That doesn’t make any sense. Not only are these two countries very far from each other geographically, but the products they export are different, they don’t compete in the same global markets and they don’t trade with each other. Wall Street has just one category for emerging economies so their response to any economic news is the same, regardless of the individual circumstances.”
Guillén brings an unusual perspective to the issue of emerging economies, an area he has studied since 1992 when he joined MIT’s Sloan School of Management. A native of Leon, Spain, Guillén graduated from the Universidad de Oviedo with a BA and PhD in political economy and from Yale University with a master’s and PhD in sociology. He has been at Wharton since 1996.
Most recently he has focused on the rise and fall of business groups in emerging economies, including, for example, the Korean chaebol (e.g. Samsung, Hyundai), the Indian business houses (e.g. Tata, Birla) the conglomerates of Indonesia (e.g. Salim Group) and the Latin American and Spanish grupos (e.g. Perez Companc in Argentina and El Corte Ingles in Spain). While his research includes data from Brazil, Colombia, India, Indonesia, Mexico and Taiwan, he has concentrated primarily on the emerging economies of South Korea, Argentina and Spain.
Guillén defines business groups as a collection of firms that operate in a wide variety of industries under unified entrepreneurial guidance. These business groups grew, not because they were seeking financial diversification, he says, but “as a result of their ability to set up new business ventures across a variety of industries quickly and at low cost.”
“These conglomerates exist in emerging economies but they are not all the same,” Guillén says. “In Korea, for example, they are all powerful and very prominent. In other countries they are not as important. I have been trying to look at their histories, see how they have grown or shrunk over time and then figure out exactly what the conditions are that give rise to their success or failure.”
Guillén takes a “resource-based” approach in his analysis of business groups. He divides resources into three types – inputs (labor, capital and raw materials), process-related knowledge (technology and operations proficiency) and markets (distribution channels and contracts with foreign and domestic customers or with the state). However, having the necessary resources is not enough for a business group to sustain its competitive advantage over time, Guillén argues. Also necessary are “certain limits to competition,” especially in the areas of foreign trade and foreign direct investment. Guillén’s research shows that business groups thrive in countries following an “asymmetric development strategy” combining high levels of exports and outward investment with low levels of imports and inward investment (e.g. Korea). They decline in countries following a “symmetric development strategy” with high levels of trade and investment in both directions (e.g. Spain).
Looked at another way, host countries that restrict foreign multinationals provide “opportunities for local entrepreneurs to start diversifying across industries,” especially if it is feasible for them to simply buy technology from foreign multinationals and manufacture the goods – ranging from TV sets to cars to memory chips – themselves.
Conversely, to the extent that countries or governments dismantle this protectionism, business groups find it necessary to refocus. The result is that they become proficient in a few areas rather than “mediocre in 20.” This, in turn, has important implications for governments and managers alike, as well as the country’s overall success within the larger global environment, notes Guillén.
First, “when governments give advantages to certain entrepreneurs or firms and restrict access by foreigners they should expect the growth of powerful business groups that will most likely try to derail attempts at liberal economic reform.”
Second, if the government encourages local and foreign firms to focus on the domestic market alone, without engaging in exports or outward investment, it will be encouraging business groups to enter into coalitions with foreign multinationals to share this domestic market. “Such an ‘inward looking’ strategy is not a particularly healthy one for the country at large,” Guillén notes. Furthermore, since multinationals in this situation are not encouraged to export their products, they will try to maximize their profits by charging high prices for domestic goods and services. “Consumers are the losers,” Guillén adds.
Business groups emerge in part because of their connections to the government, Guillén says. “If you cut these ties, as the Koreans are trying to do, but don’t open up competition by letting foreign companies operate without restrictions, then you won’t see these business groups decline.” It’s one of the reasons that economic reforms in several Latin American countries – Argentina, Brazil, Colombia – have not eroded the position of the business groups: They are moving into industries not fully open to foreigners, such as telecommunications, electricity and natural resources.
As trade and foreign investment become more symmetric, Guillén says, “competitive pressures from both foreign multinationals and non-diversified local firms will intensify, probably inducing business groups to divest from certain industries and concentrate on those that promise the highest growth and returns.” That is what happened in Spain over the last 15 years, accompanied by the decline of the business groups. To a certain degree, it is happening in Mexico as well, influenced in part by the North American Free Trade Agreement (NAFTA), Guillén says.
What happens to these theories when real world events – such as global economic crises – intervene? While it’s difficult to predict outcomes, Guillén says, certain facts are indisputable. For example, the chaebol in Korea have grown too large to be allowed to go bankrupt. “It’s very difficult to lay off 35,000 workers … We are seeing this with Kia which sells autos in the U.S. The company is technically bankrupt. The government took it over one year ago and is now trying to privatize it. The problem, of course, is that nobody wants to assume all the debt.
“Meanwhile, while the business groups continue to operate, the small firms suffer tremendously. One of Korea’s biggest problems is that the small business sector is in terrible shape. Many companies are going bankrupt, but we don’t hear much about them.”
Whatever the outcome, it’s clear that conglomerates in Latin America have responded to the economic downturn very differently than those in Asia. “In Latin America, they have actively sought to adapt to the new situation,” says Guillén. “They haven’t resisted the need for change. In Asia, they have resisted fiercely. In Latin America they have sought foreign investors, organized trips to New York and London to lure foreign capital and so forth. The Koreans, Malaysians, Indonesians and Indians don’t seem to want that.
“The Koreans are extremely nationalistic. They will always flatly oppose direct foreign involvement in any industry they consider important. They don’t trust foreigners, partly because of the hardships they suffered at the hands of outsiders during their colonial past.”
Another difference between the two continents is the size of the business groups. “The Asian groups are much bigger – in some cases 10 times bigger – than the groups in Latin America,” Guillén says. “It is much easier to adapt when you are one tenth the size of a Hyundai or Samsung.”
Guillén recently completed a book entitled Developing Difference: Organizations, Globalization, and Development in Argentina, South Korea, and Spain, in which he urges the business community to work harder at understanding and supporting differences among the economic systems of individual countries.
This theme of difference applies not just to emerging economies but to globalization in general, says Guillén. “I differ from many other academics and journalists in that I don’t think globalization produces convergence, in the sense of only one best practice, or only one market theory. Nor should it. Countries should not try to adopt the same economic model because how could everyone possibly succeed if they imitate each other? The name of the game is to decide what your strengths are and play to those strengths in the global economy. Globalization should be an opportunity for countries and firms to differentiate themselves from others, to promote diversity, to enhance their own performance.”
Look at Germany and Japan, says Guillén. The Germans have focused on producing high quality manufactured goods rather than inexpensive, standardized goods. “Germany has three luxury automobiles on the market. Even VW, which is their ‘mass producer,’ manufactures very high quality cars. The same is true for machine tools and specialty chemicals. On the other hand, Germans are not known for their high-tech or service industries.
“Japan is absolutely outstanding at manufacturing relatively high quality (but not top quality) standardized goods, such as VCRs, TV sets and autos.”
Taiwan is another example. “Taiwan is next door to Korea and Indonesia, but unlike them, it doesn’t harbor huge conglomerates that have made unwise investments in manufacturing. The Taiwanese economy is made up of small and medium-sized firms, which can easily adapt to economic changes. Taiwanese companies don’t have excess capacity right now, while the auto industry in Korea is running at 40 percent capacity.
“Several decades ago, Germany, Japan and Taiwan chose to emphasize different approaches. For the most part they have been successful in this strategy.”
In his study of Korea, Spain and Argentina, Guillén interviewed approximately 250 business group leaders, government officials, labor organizers and top managers. He conducted surveys analyzing how companies access foreign markets and how they view foreign investment.
What does he see as the future of these business groups that play such a prominent role in so many emerging economies?
In Korea, he says, the chaebol have been in trouble twice before but have essentially been bailed out by the government. “This third time, it is much more serious because the conglomerates have gotten too big and invested too much. Everyone says investing is good and saving is good, but those high savings rates are actually a curse because when you have so much money you start making unwise decisions about how to spend it.
“This is precisely what is wrong with some of the emerging economies. Korea thought it could be the number one semiconductor manufacturer in the world, the number one auto producer, number one in steel, number one in electronics. They came close. But Korea is a tiny country after all, and a lot of other countries are trying to compete against them. The average debt/equity ratio among the largest chaebol in Korea is probably 500 or 600 percent. In the U.S. it’s about 200 percent.
“Korea will be helped if there is no recession, if the U.S. and European economies keep on growing fast and if China doesn’t collapse. Otherwise, the country will experience a glut in a number of industries, including cars, memory chips and steel – commodities where manufacturers compete on the basis of price.
“What would help countries like Korea is less protectionism in the world and continued growth in the major economies. They need to find markets for what they are making.
“In the ‘70s and ‘80s, the Koreans started out with the benefit of low wages and low costs. But now there are other countries coming up behind them with even lower costs. This is the problem. It’s a constant race. You move up and you don’t realize other people are moving towards you from below. You end up getting caught in the middle.”
Excerpts from Three Case Studies
I. The Rise to Dominance of the South Korean Chaebol
Establishing and nurturing ties to the government has been essential to the chaebols’ growth . . .
The state policy-making apparatus created by General Park in the 1960s preferred to deal only with a handful of entrepreneurs, for obvious control reasons, and persuaded the favored ones to enter risky undertakings by expanding their license in already established and profitable industries, protecting them from foreign imports and lending them money at subsidized rates.
In addition to favoring a few entrepreneurs, the Korean state exhibited an early bias against foreign-owned enterprises, making it possible for the privileged domestic entrepreneurs to increase their exports and outward foreign investment without having to face significant imports and inward foreign investment.
These Korean entrepreneurs learned how to produce, at low cost, massive amounts of different types of goods. They neither designed nor marketed the products because rapid economic development could not wait for research or marketing capabilities to be created from scratch. Rather, they focused on manufacturing – often-times merely assembling – products to specification for Japanese, American and European multinationals and retailers. This pattern of original equipment manufacturing (OEM) was first used in textiles, shoes, toys and electrical appliances, and later extended to more technologically advanced industries.
Until the early 1990s, more than 80 percent of Korea’s exports were accounted for by OEM contracts.
Thus the chaebol established ties to the state to secure critical resources inside the country and to foreign MNEs in order to access technology and export markets. Increasingly the chaebols are manufacturing products with their own brands, but they still rely heavily on foreign technology.
The chaebol have opposed attempts by the state to reduce asymmetries in foreign trade and investment, knowing that their pattern of diversification and growth owes much to them. In the early 1980s an attempt to increase imports and inward foreign investment represented a shift from nationalist to pragmatic policies. The chaebol responded by mobilizing politically to water down reforms.
II. The Vicissitudes of the Argentine Grupos
The rise of business groups under erratic populist conditions is exemplified by the case of Argentina.
The [establishment] of the Argentine grupos economicos begins in the early 1950s. The groups diversified into new industries … by gaining concessions and permits from the state and borrowing technology from foreign multi-nationals.
The Argentine grupos have always been ideal local partners for many of the manufacturing and service multinationals venturing into the country in spite of the frequent zigzags in policies regarding foreign investment.
Under the Menem presidency beginning in the late 1980s, the business groups have been exposed to increased competition due to tariff cuts, but they have benefited from the crackdown on the unions’ power, renewed technical, licensing and marketing ties with foreign multinationals, and Latin America’s most ambitious privatization program, affecting more than 60 state-owned manufacturing and services firms valued at $26 billion. Of the 54 companies privatized by February 1993, one or more of the top ten Argentine business groups participated in 32 of them, and in 25 of those 32 instances they were joined by at least one foreign MNE, which typically provided capital and process-related knowledge.
While the Argentine grupos have not accumulated group-level capabilities to the same extent as the Korean chaebol, they too developed the ability to set up new ventures or to take over privatized companies quickly and in a cost-effective manner.
Cabinet ministers and other top political appointees have frequently been recruited among the managerial ranks of the largest groups, especially when an asymmetric economic strategy, as opposed to a symmetric one, was to be pursued. The Argentine business grupos, though, have not always succeeded at influencing policy-making in their favor.
III. The Rise and Fall of the Groups in Spain
The country initially pursued an asymmetric development strategy until the late 1970s, combining relatively low imports and inward investment with increasing exports. As a result, several diversified business groups formed around banks, large chemical or steel companies and in instances where entrepreneurs diversified out of traditional light industries like food and beverages. These groups generally grew on the basis of connections to the state and foreign partners.
While the industrial crisis of the 1970s hit Spanish industry hard, it was the subsequent process of market liberalization and integration with Europe that caused the definitive decline of many of the groups. Protectionist trade barriers and restrictions against foreign multi-nationals were lifted during the 1980s. As a result of the reduction in trade and investment asymmetries, some of the business groups collapsed under international competitive pressure, while others succeeded in refocusing on one core activity or were acquired by foreign multinationals.
By the mid 1990s, only the industrial groups organized around such banks as BCH and BBV or large retailers had survived.
Moreover, foreign companies and investors were allowed to take over many privatized public services and state-owned manufacturing companies without the collaboration of a local partner.
Although some of the groups and the banks resisted liberal economic policies, especially in their core industries, they were unable to derail the considerable political and social momentum created in favor of membership in the European Union, which required the abandonment of nationalist policies towards imports and inward foreign investment.