ASIA PACIFIC BUSINESS AND SOCIETY

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ASIA PACIFIC BUSINESS AND SOCIETY (BSP2005)
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Class Admin

• No class next week
• Office hours today cancelled

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A Note about the Project

• To quote carefully the sources and references
• To have a proper well-defined structure
• executive summary
• methodology
• conclusions
• exhibits
• To indicate group names

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On the style of teaching so far

• Brief background
• Discussion
• External studies/surveys

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In the news

• Hyundai CEO
• convicted of embezzlement, 3 year jail term
• Hyundai and Kia gt70 of countrys vehicle
  exports
• Worlds 6th largest automaker
• similarity to CEO of top oil refiner SK Corp

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Business Groups

• Collection of firms
• Linked by commonality in ownership
• Usually engaged in wide range of activities

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Advantages of Business Groups

• Cross-subsidization
• Access to internally generated resources
• Reciprocal buying selling
• Access to complementary resources,
• distribution outlets

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Some examples from lecture

• Pre-war Japan
• Mitsubishi, Mitsui, Sumitomo, etc. (Zaibatsu
  ending with single family in control)
• Post-war Japan
• The same old ones (Horizontal keiretsu) Sony,
  Hitachi, Toshiba, etc. (vertical Keiretsu
  meaning subsidiary)
• Mitsubishi Banking, Motors, Atomic Energy,
  Chemical, Nikon, Electric
• Korea
• Samsung, Hyundai, Lotte, LG, Hanjin, etc.
  (Chaebols)
• Taiwan
• Tatung, Formosa (Jituanqiye)
• India
• Tata, Aditya Birla, Reliance, etc. (Trading
  houses)
• Southeast Asia and HK
• Hutchison Whampoa (HK) Hong Leong (Malaysia)
• CP (Thailand) Lippo (Indonesia) (Bamboo
  networks)

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Quick check

• Asahi Breweries
• Fuji Photo Film
• Mitsubishi
• Toshiba
• Toyota
• Mazda
• NEC
• Canon
• Nissan
• Fujitsu
• Takashimaya
• Konica Minolta

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Japans Keiretsu
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Korean Chaebol

• Family controlled, more centralized than Keiretsu
• Assisted by government financing and policy
• foreign loans
• local banks
• Involvement in government, e.g. Hyundai N.Korea
• As of 1998, had 37-63 subsidiaries
• each
• Samsung, Hyundai, LG,
• Daewood (collapsed)

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Korean Chaebol

• Willingness to develop new product lines
• textiles
• defense and chemical
• high-tech electronics

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Discussion

• Reasons for ineffectiveness of business groups,
  e.g. chaebols, keiretsu

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Ineffectiveness of Keiretsu..

• 1990 Japanese Recession
• Sony

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Failure of chaebols

• Asian financial crisis
• 11 of 30 collapsed between 1997-1999
• also linked to forex (refusal to devalue the
  Korean Won)
• Heavily invested in export-oriented markets,
  increasing vulnerability to overseas economic
  effects
• Severely indebted to banks
• Daewood US80 billion debt
• Bought 70 of one mid-sized firms output
• Corruption and fraudulent accounting

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Diversification and Growth
Performance
Focused Firm
Related Diversified Firm
Unrelated Diversified Firm
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Discussion

• Why diversification?
• Does diversification really hinder performance?
• Diversification and Performance
• Does size of business group matter?

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Why Diversification?

• Performance-based
• Empirical research says otherwise
• Transaction costs
• Management Choice-based
• Growth instead of profitability
• Strategy in declining profit markets

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Why Diversification?

• Greater flexibility in capital performance
• More access to internally generated resources
• Synergies in production, distribution, marketing,
  research
• To reduce risk

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Why not Diversification?

• Firms with unused borrowing power tend to
  undertake value-decreasing investments
• Stages in firm contemplating diversification
• Next most profitable investment
• Lose competitive advantage
• Cross-subsidization of failing segments
• True that diversification lowers firm
• performance, subject to structure

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Business group size and performance

• Across all firms, diversification lowers firm
  performance
• Within business groups, diversification improves
  performance in a larger business group compared
  to a smaller entity

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Other random points

• Group-affiliated firms are more diversified than
  non-group firms
• What does Samsung produce?
• Mazda and Ford