Breaking Up Business Groups Would Create More Problems

Policies to break down the business group format are far more likely to be effective, argues Simon Commander.

The turmoil around the Adani Group has opened up discussion about the role of connections between businesses and politicians and the consequences, notably the accumulation of market power by preferred businesses.

One striking indicator has been the extent of concentration.

In India, the top 10 companies’ revenues account for over 15 per cent of GDP and the percentage appears to be higher in terms of assets.

These concentration ratios have also been rising sharply in recent decades.

And it is not just in India.

Throughout Asia, big, highly diversified business groups — mostly family-owned — occupy substantial bits of economic territory.

In South Korea, for example, Samsung’s 22 per cent share of the economy has similarly tolled warning bells of excessive concentration.

To address the matter, there have been calls for breaking up businesses with market power — such as the Adani Group — with a view to stimulating competition and holding down inflation.

Radical measures to restrict market power have, of course, been tried before.

For break-ups, the classic example is Standard Oil in the US.

But, in general such steps have only been taken with egregious cases of monopoly or in times of crisis.

In much of Asia, not only is there no crisis — even if there is some underlying discontent — but also local business groups are often held up as national champions in the vanguard of economic progress.

Most fundamentally, key players — business owners or politicians — have few reasons to want change. The incentives to maintain the status quo are powerful.

In this light, three questions arise. The first is whether breaking up business groups is desirable; the second is whether it is feasible; and the third concerns alternative approaches.

With respect to the former, the available evidence on pricing, profits, and anti-competitive behaviour is both spotty and often inconclusive.

Not least because of the opacity of business groups’ accounting practices.

Certainly, in some economies — such as the Philippines — a few families and their business vehicles really dominate much of the formal economy.

Elsewhere — including in India — there is far more competition between business groups, albeit with variation across sectors.

Yet, even if a policy of breaking up business groups is accepted, it is not obvious what the criteria for inclusion/exclusion would be.

Simply picking the top five or 10 as measured by size would still leave a significant number of major players who could be expected to pick up any slack.

Perhaps more significantly, it is not obvious what would stop mandated break-ups being followed by a subsequent recombining under a different guise.

The usual riposte — that it will take political resolve –is similarly unconvincing.

The incentives for the politicians to act are depressingly small.

In addition, break-ups risk undermining broader business confidence.

In short, break-ups fail both desirability and feasibility tests.

What about alternatives? A better starting point is to focus on the most compelling reason for policy action: The reduction or elimination of the business group format.

Aside from their common failings in corporate governance, it is this format that not only facilitates the accumulation of market power but also its entrenchment, not least by being such effective vehicles for leveraging connections to power and politicians.

When looked at in this way, the route to a more competitive landscape becomes easier to discern.

In this regard, there are some precedents. In the early 1930s, US President Franklin Roosevelt’s administration put in place measures that scuppered business groups as an institutional format.

And after Japan’s defeat in World War II in 1945, Douglas MacArthur followed much the same approach to dispose of the Japanese business groups, seen as integral to that country’s militaristic regime.

So, why not revert to Roosevelt’s playbook? The answer is straightforward: The absence — as yet — of any contemporary political consensus or trigger.

If such policies are also of doubtful feasibility, what of other recent attempts at reining in business groups? These have commonly focused on company structures — for example, banning cross-holdings and limiting the number of tiers and/or subsidiaries.

Yet, most of these have also singularly failed.

Business groups have proven highly skilled at circumvention.

In short, measures carved from antitrust policy, as well as changes to corporate governance rules, have proven unequal to the joint tasks of unravelling the business group format and limiting market power.

But there are still some measures that have a far higher chance of success.

For a start, introducing an inheritance or a successor tax can drastically lower the incentive for family control — a key consideration, given that most Asian business groups are family-owned or dynastically owned.

Cases in point: Japan’s adoption of a top 55 per cent inheritance tax rate after 1945 and South Korea’s recent introduction of a top 50 per cent rate.

Moreover, there is additional scope for introducing supplementary corporate taxes that can be explicitly levied on businesses that persist in operating as affiliates of business groups.

This has the advantage of not penalising businesses in general and can also be calibrated over time to achieve the highest effect.

However, it will inevitably require adopting parallel measures to limit family business groups from taking their holdings abroad, and resorting to trusts and other vehicles for avoidance.

As to competition policy, the regulator’s usual focus is on market share in specific industries.

That, of course, is still a relevant object of focus.

Here, the main constraints tend to be the combination of a lack of technical capacity and a lack of political clout.

The first is, of course, more susceptible to treatment.

But aside from the conventional focus of competition policy, there is an additional component that Asian authorities have so far avoided handling — namely, concentration at the level of the economy as a whole.

And, as noted, concentration is not only generally high (in Vietnam, Thailand and South Korea, the revenues of the top 10 companies account for 30-40 per cent of GDP) but often rising.

There are some precedents for targeting overall concentration, principally from Israel.

Starting in 2012, the authorities applied a multiplicity of policies aimed at squeezing business groups.

These included limits on the number of levels as well as banning financial and non-financial companies being in the same group.

In addition, changes in regulatory and privatisation policy meant that economy-wide concentration was explicitly considered.

This multi-pronged approach led to a sharp decline in pyramidal business groups.

In sum, most Asian economies are now dominated by powerful business groups often closely allied to politicians.

They have built economic power and account for large chunks of the economy.

The resulting market power needs to be addressed.

But breaking up large business groups would create more problems than it solves.

Rather, policies to break down the business group format using a set of incremental measures are far more likely to be effective.

That is because they target the bedrock of these systems — the family-owned business groups — and cut away a key foundation of what Saul Estrin and I have called in our recent book (The Connections World: The Future of Asian Capitalism, Cambridge University Press).

Once these policy changes have played out, there would be far greater scope for classic competition and antitrust policies to begin to function more effectively.

Simon Commander is managing partner at Altura Partners and visiting professor at IE Business School, Madrid

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