Large Corporate Sector Stability and Economic Growth

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Large Corporate Sector Stability and Economic
Growth

• Kathy Fogel
• Randall Morck
• Bernard Yeung

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Starting Point
What is good for the country is good for General
Motors and vice versa.

• GM chairman Charles Wilson, at his 1953 Senate
  Confirmation Hearing as Defense Secretary

Was he right? What did he mean?
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Some intellectual tension Continuous dominance
of top firms is ...

• Associated with faster long run growth because
  great corporations serve as a growth engine
• Intrinsically great management that continuously
  creates wealth for all stakeholders
• Allows financing of costly innovations,
  Schumpeter (1942)?
• Provides security, increases managerial risk
  tolerance (e.g., good for career investment in
  human capital)?
• Associated with slower long run growth because
  continuous corporate dominance reflects
• Low level of creative destruction
• Schumpeter 1912
• Nelson and Winter 1982 (homogenous gene pool)?
• Government policy creating stagnation?
• Successful corporate entrenchment?

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Dominant Firms in 1975
Dominant Firms in 1996
Our question Is the size of the intersection
good or bad for growth from 1990 - 2000?
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• Our basic finding
• Cross country evidence shows that continuous
  dominance of large corporations is associated
  with slow economic growth
• Continuous dominance of large corporations is
  associated with
• - high government activism
• - high dependent on bank financing, weak
  property rights for outside shareholders
• - lack of openness

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• How to capture continuous dominance of big
  corporations?

Essence the size of the firms in the
intersection / the size of all the dominant firms
in 1976
Corporate stability index
e.g. measure size by employment d 1 if in both
the 1976 and 1996 circle
measure size by sheer number
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Hasten to add

• Same results whether we
• Use total revenues, or total assets, or
  employment as the base
• Use top 1975 or top 1996 total employment as the
  base

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Top 10 Corporate Survival Index
measure the extent to which top firms in 1975
that remain prominent/survival through 1996
Survive top firm in 1996, or
growth in revenue gt, per capita GDP growth
Tried survival non exit, has more than n of
old labor force SAME RESULT (important)
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Top 10 Corporate Survival Index

•  
• Li 1975 labor force of ith largest employer in
  the country
•  

Survive top firm in 1996, or growth in revenue
gt, per capita GDP growth
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Sample

• Sample of 27 to 55 countries
• Have data
• No wars
• Not ultra small (e.g., Vanuatu in South Pacific)
• countries whose 10th largest firms lt 500 L
• countries with less than 30 firms
• Firms used in each country exclude
• Government agencies, educational services, health
  Services
• Membership organizations
• Non-commercial Organizations
• List of samples
• I all firms
• II I minus financial companies
• III II minus foreign owned firms (20, largest
  shareholder)
• IV II minus state owned firms (20, largest
  shareholder)
• V II minus foreign owned and state owned firms

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Properties

• Developed countries have greater corporate
  stability and survival indexes
• For developed countries, the stability and
  survival indexes are similar
• across samples
• same value whether value or equal weighted
• For developing countries, the two indexes have
  more variations
• Differ across samples
• Value weight gt equal weighted

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• Dependent variable
• Data window 1990 2000
• Estimate long term growth
• Want 1995 2005, no data after 2000

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Decomposing Economic Growth
(Kindly provided by La Porta et al.)
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• Factor accumulation
• First, define K
• Ki, t1 Ki, t Ii, t ?Ki, t
• K1950 0, roll forward.
• Ii,t is aggregate real investment for country i
  in year t
• taken from Penn World Table 6.1,
• ? 7 depreciation
• Similar to that used by King and Levine (1994)
• k K/population
• Factor accumulation Dln(k)
• Productivity growth
• Dln(y) 0.3 Dln(k) check, the 0.3 should vary
  between high and low income countries

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Economic Growth Regressions
Coefficient of interest

• Used by Barro (1991), Mankiw (1995), Barro and
  Lee (1996), Morck, Yeung and Stangeland (2000),
  and many others
• And sometimes include initial country size (ln
  total GDP) as an additional control

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Pending issues

• Reverse causality
• Endogeneity

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Result

• More corporate stability the greater the extent
  to which top firms continue to dominate is
  associated with
• Less per capita GDP growth
• Less TFP growth
• Less capital accumulation (weaker result)

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• Turn to survival
• The extent to which dominant firms in 1975 remain
  prominent in 1996
• Remain as dominant firms in 1996, or
• Grow as much as per capita GDP, or
• Result the same as survival the extent to which
  dominant firms in 1975 avoid being
  marginalized/failure

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• Continuous prominence (survival) of old dominant
  firms is associated with slower per capital GDP
  growth, TFP, and capital accumulation
• Meaning
• The more the old dominant firms exit or become
  marginal, the faster the per capital GDP
  growth, productivity growth, and capital
  accumulation

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• Break the sample into high and low income
• Different institutional environment
• Greater survival and stability are associated
  with lower capital accumulation only in lists II
  and III where SCEs are included
• SCEs are more important in developing countries
• High income countries
• The negative effect of corporate
  stability/survival on growth
• builds on reducing TFP growth
• linked to the continuous prominence and dominance
  of non-financial private sector
• Low income countries
• The negative effect of corporate
  stability/survival on growth
• builds on both reducing TFP and capital
  accumulation
• linked to the continuous dominance/survival of
  SCEs

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Emerging Result

• Countries with greater corporate sectors
  stability and survival have
• less per capital GDP growth
• less productivity growth
• less capital accumulation
• Rich countries Main effect involves private
  sector stability/survival and via productivity
  growth
• Poor countries Main effect involves state owned
  enterprises stability and via productivity growth
  and capital accumulation

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Robustness Checks

• Outliers checked
• Natural resource dependency?
• Control for country size?
• Population, real GDP, real GNP
• Include total employment of top firms in 1975
  scaled by population or total GDP?
• Alternative measures of human capital (e.g.,
  average number of years of education for male
  older than 25) to calculate productivity growth?
• ? All of these generate qualitatively similar
  results

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Institutional underpinning?

• Why some countries have greater corporate
  stability and survival?
• Focus on differences in economic institutions
• Government
• Financial markets
• Openness

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Consider the government

• Benevolent government policies biased towards
  large corporations?
• Governments do not like abrupt and massive
  changes
• Negative social costs
• Erode supports, raise demand for changes
• abrupt and massive job losses and income losses
  take place when big corporations fortunes fall
  sharply

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Politicians Seem to Like Stability

• The Japanese government defended a 200B bail-out
  of Sogo Department Stores on the grounds that
  this would minimize confusion

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Égalité?
Bail out Holzmann The government has a
responsibility to step in if a major German
company is about to collapse and cost thousands
of people their jobs.

• German Federal Finance Minister Hans Eichel

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No Detectable Relationship

• between corporate sector stability and general
  economic volatility as measured by
• variance of unemployment rate
• Inflation rate
• Macro stability
• Dummy for exchange rate crisis
• Dummy for general economic crisis
• Dummy for banking crisis
• Fraction of bank assets affected by crisis
• Dummy for political crisis
• Frequency of coups détat

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No Detectable Relationship

• Between corporate sector stability and equality
• Equality (Income Gini)
• Change in equality (growth in Income Gini)
• Unemployment rate

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Big government ? corporate sector stability

• Government activism directly favor big
  corporations?
• Convenient channels for social engineering (e.g.
  industrial policies)
• Preserve politicians power
• Government activism is costly for upstarts
• Government activism bids up factor (physical,
  human, financial capital) costs that hurts
  upstarts more
• Government activism creates bureaucracy and
  political risks that large established firms are
  more able to handle
• Government activism collusion between
  politicians and big business
• Large, established firms are better at political
  lobbying?
• Credible implicit collusion between big firms and
  government?
• Credible commitment between the government and
  top dominant firms with multiple business units
  to scratch one anothers back
• (Morck Yeung 2003)

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Fraternité?
We view Malaysia as a corporation, and the
shareholders in the government are companies.

• Mustapha Mohamed, Malaysian Entrepreneurship
  Minister

Mustapha Mohamed presents award to government
selected entrepreneur
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Results

• Crowd out effect
• Greater private sector corporate sector stability
  and survival is associated with
• Greater government spending
• Regulatory effect
• Greater corporate sector stability and survival
  (with SCEs) is associated with
• Civil Code legal systems
• High regulatory burdens to new entries

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Rich vs poor countries

• Effects mostly stem from rich countries
• Moreover, the regulatory effects exist in all
  lists of indexes
• Crowd out effect in the private sector
• Effects not significant among poor countries, but
  retain the negative signs

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Consider Financing

• Bank centered systems
• Banks worry about the stability of big creditor
  firms
• High domestic credit (banking)/GDP ? discriminate
  against upstarts
• Market centered systems
• Having a market centered system more
  competition in financing channels,
• Plus, diversified shareholders dont really care
  if a few firms go under now and then
• High stock market capitalization/GDP ? more
  corporate turnovers?
• Variables
• Bank lending/GDP, Stock market capitalization/GDP
  - 1975
• Creditors rights, anti-director rights 80s

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Detectable Relations

• Financial development and corporate sector
  stability
• the size of the banking system (all lists of
  indexes)
• 0 creditor property rights
• 0 the size and growth of the stock market
• shareholder property rights (when SECs are
  included)

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Rich vs poor

• The positive relationship between banking
  systems size and corporate stability and
  survival stem from rich countries
• The negative relationship between shareholders
  rights and corporate sector stability and
  survival (when SECs are included) is found among
  both rich and poor country subsamples

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Openness

• Trade openness
• More competition, changes ? less stability
• More foreign capital flow (Morck et al. 2000,
  Rajan Zingales 2003)
• By itself reduces stability
• Compete for capital and investment opportunities
• Reduce resistance to liberalize domestic capital
• Reduce corporate stability?
• Lack of openness a result of economic
  entrenchment?

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Results

• Less trade and direct investment openness
  correspond to greater stability and survival of
  private large corporations
• Results stem from the low income countries

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Summary

• Countries with more stable corporate sectors
• Bigger more interventionist government
• Regulatory effects among richer countries for all
  lists
• Crowd out among private sector
• Bigger banking systems
• True for all lists in rich countries only
• Worse shareholder rights
• True for both rich and poor countries when SECs
  are included
• Less open
• Applies only in poor countries
• We detect no correlation between stability and
• Inequality, growth in inequality
• Economic, financial or political crises

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Causality
The regressions of growth on corporate sector
stability and survival suffer from endogeneity
and reversal causality problems
Use two stage least squares
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Instruments

• Mid 1970 institutional characteristics
• Government spending/GDP
• GINI coefficient
• Common Law legal origin
• Banking system size / GDP
• Stock market size/GDP
• Inward FDI flow
• Trade openness
• Keep only those with p-value lt 15

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Results

• Like the old results
• Greater corporate sector stability and survival
  is associated with slow growth and tfp growth
• Rich countries
• Results are stronger than before
• Greater corporate sector stability and survival
  is now also associated with slower capital
  accumulation
• Results now exist even within list where SECs are
  included
• Poor countries
• Results are still confined within lists where
  SECs are included

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More on reverse causality

• Reversal causality may still exist in Tables 3
  and 4
• The unpredicted components of the indexes still
  predict growth
• Should use a panel and run Granger causality
• Have to be low frequency data to capture long run
  growth
• Data constraint
• Suggestions

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Conclusion

• Corporate sector stability and survival is
  associated with slower growth, including slower
  productivity growth
• The effects are more prominent among developed
  countries
• Corporate sector stability and survival is
  related to institutional factors
• High government spending
• Civil Codes legal system
• High regulatory burdens on new entries
• High reliance on bank financing
• Weak outside shareholders rights
• Lack of openness
• Institutional environment affects creative
  destruction and thus growth

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Two tracks of thoughts

• Schumpeter creative destruction?
• Sociological attitude

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Schumpeterian take on Corporate Sector Stability

• Schumpeter (1912)
• Theorie der Wirtschaftlichen Entwichlung
• Creative destruction
• Young innovative firms grow up rapidly and
  replace old, stagnant firms
• Motivation turn of the century high tech boom
• Bottom line Growth assoc. with turnover of top
  firms

Young, upstart Schumpeter
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Schumpeterian take on Corporate Sector Stability

• More qualified and nuanced picture of creative
  destruction
• Only large quasi-monopolistic firms afford big
  RD budgets
• Innovation routinized within big firms
• Bottom line Growth assoc. with stable list of
  leading firms

• Schumpeter (1942) Capitalism, Socialism and
  Democracy

Old, established Schumpeter
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Sociological take on Corporate Sector Stability

• The underlying mechanism is about .
  Entrenchment?
• Rent-seeking, connected with the government
• Big government hurts upstarts
• Tolerate poor property right for investors?
• Reliance on relational lending, i.e., banking
• Collateral a conservative bias in financing?
• Preserve market power in capital markets
• ? slow growth?
• Close door policies?
• Benevolent big government ? bad results?

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Fin