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Diversification and efficiency of investment by East Asian corporations, Volume 1
 
Author:Claessens, Constantijn A.; Djankov, Simeon; Joseph P. H. Fan; Lang, Larry H. P.; Country:Taiwan, China; Japan; Hong Kong SAR, China; East Asia and Pacific; Korea, Republic of; Philippines; Malaysia; Singapore; Thailand; Indonesia;
Date Stored:1999/08/15Document Date:1998/12/31
Document Type:Policy Research Working PaperSubTopics:Small Scale Enterprise; Achieving Shared Growth; Economic Theory & Research; Microfinance; Small and Medium Size Enterprises; Fiscal & Monetary Policy; Private Participation in Infrastructure
Language:EnglishMajor Sector:Finance
Region:East Asia and Pacific; OTHReport Number:WPS2033
Sub Sectors:Financial AdjustmentCollection Title:Policy, Research working paper ; no. WPS 2033
Volume No:1  

Summary: The East Asian financial crisis has been attributed in part to the corporate diversification associated with the misallocation of capital investment toward less profitable and more risky business segments. Much anecdotal evidence to support this view has surfaced since the crisis but there was little discussion of it before the crisis. Quite the contrary: The rapid expansion of East Asian firms by entering new business segments was viewed as contributing to the East Asian miracle. The authors examine the efficiency of investment by diversified corporations in nine East Asian countries, using unique panel data from more than 10,000 corporations for the pre-crisis period, 1991-96. They: 1) Document the degree of diversification in the corporate sector in Hong Kong, Indonesia, Japan, the Republic of Korea, Malaysia, the Philippines, Singapore, Taiwan (China), and Thailand, countries that have achieved enviable rates of economic growth over the past three decades. 2) Distinguished between vertical and complementary diversification and study the differences across nine countries. 3) Investigate whether diversification in East Asian has hurt economic efficiency. Their study tests the learning-by-doing and misallocation-of-capital hypotheses related to the types and degrees of diversification in East Asian countries. Firms in Indonesia, Korea, Taiwan, and Thailand appear to have suffered significant negative effects of vertical integration on short-term performance; the same countries gained significant short-term benefits from complementary expansion. The results suggests that the misallocation-of-capital hypothesis is appropriate for Korea and Malaysia; the learning-by-doing hypothesis for Indonesia, Taiwan, and Thailand. Firms in more developed countries succeed in vertically integrating and improve both short-term profitability and market valuation. Firms in more developed countries are ultimately more likely to benefit from such diversification (learn faster, to improve their performance). And diversification by firms in less developed countries is subject to more misallocation of capital.

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