Infrastructure and Productivity in Asia: Political, Financial, Physical and Intellectual Underpinnings

Infrastructure and Productivity in Asia Political, Financial, Physical and Intellectual Underpinnings

John B. Kidd and Frank-Jürgen Richter

Infrastructure and Productivity in Asia

Also by John B. Kidd and Frank-Jürgen Richter TRUST AND ANTITRUST IN ASIAN BUSINESS ALLIANCES: Historical Roots and Current Practices (editors) FIGHTING CORRUPTION IN ASIA: Causes, Effects and Remedies (editors)

Infrastructure and Productivity in Asia Political, Financial, Physical and Intellectual Underpinnings John B. Kidd and

Frank-Jürgen Richter

Selection, editorial matter and Chapters 1 and 11 © John B. Kidd and Frank-Jürgen Richter 2005 Foreword © Emil Salim 2005 Individual chapters © contributors 2005 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2005 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N.Y. 10010 Companies and representatives throughout the world PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin’s Press, LLC and of Palgrave Macmillan Ltd. Macmillan® is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN 1–4039–4291–9 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Infrastructure and productivity in Asia : political, financial, physical and intellectual underpinnings / John B. Kidd and Frank-Jürgen Richter, [editors]. p. cm. Includes bibliographical references and index. ISBN 1–4039–4291–9 1. Infrastructure (Economics)—Asia. 2. Asia—Economic policy. I. Kidd, John. II. Richter, Frank-Jürgen. HC415.C3I52 2005 338.95—dc22 2004051231 10 14

9 13

8 12

7 6 5 4 3 2 1 11 10 09 08 07 06 05

Printed and bound in Great Britain by Antony Rowe Ltd, Chippenham and Eastbourne

Contents

List of Tables

vii

List of Figures

ix

Foreword by Emil Salim

x

Notes on the Contributors

Part I

xv

Infrastructure, Systems and Education

1 Infrastructure and Its ‘Sticky’ Interconnections: Perspectives from Asia

3

John B. Kidd and Frank-Jürgen Richter

2 The Role of Human Capital and Intelligence in the Economic Development of the Asian Economies

28

Richard Lynn and Tatu Vanhanen

3 Knowledge Resources in Korea: Understanding Korea’s Business System and Capitalism

51

Chong Ju Choi

Part II

Governance and the New Dynamics

4 Infrastructure and Productivity in Asia

71

Ranjit Ajit Singh, Eng Chye Phuah and Harveen Kaur

5 The Dynamics of Large Asian Corporate and Family Conglomerates

83

Ali Mirza

6 The Business Costs of Terrorism and Its Impact on Doing Business in Asia

104

Nara Srinivasan

7 Improving Road Administration in the Asia-Pacific Region: Some Lessons from Experience Clay Wescott v

123

vi Contents

Part III

Focused Examples of Infrastructure Changes

8 How to Attract Foreign Direct Investment: The Korean Approach

147

Terry Tuharsky and Joan Barron

9 Marketing and Communication Infrastructures Enable Proactivity and Responsiveness

166

Ralf Hirt

Part IV

A Future Scenario

10 The Leadership Dimension: Developing Human Capital in Asia

187

John Alexander and Michael Jenkins

11 Infrastructures: The Difficulty in Forecasting

208

John B. Kidd and Frank-Jürgen Richter Index

217

List of Tables

1.1 Partial details of the Copenhagen Consensus 24–28 May 2004 2.1 Data on educational attainment, national IQ, GDP per capita (PPP) in 1998, and economic growth in GNP per capita over the period 1976–98 in the group of 43 European and Asian countries 2.2 Intercorrelations of educational attainment, national IQ, GDP per capita (PPP) 1998, and economic growth in GNP per capita over the period 1976–98 in the group of 43 European and Asian countries 2.3 Intercorrelations of educational attainment, national IQ, GDP per capita (PPP) 1998, and economic growth in GNP per capita over the period 1976–98 in the group of 24 European countries 2.4 Intercorrelations of educational attainment, national IQ, GDP per capita (PPP) 1998, and economic growth in GNP per capita over the period 1976–98 in the group of 19 Asian countries 2.5 The results of multiple regression analysis in which educational attainment and national IQ are used to explain variation in GDP-PPP per capita 1998 in the group of 43 European and Asian countries 2.6 The results of multiple regression analysis in which educational attainment and national IQ are used to explain variation in economic growth in GNP per capita over the period 1976–98 in the group of 43 European and Asian countries 2.7 The results of the regression analysis of PPP-GNI-2001 on national IQ for single countries in the group of 51 countries 2.8 Prevalence of malnutrition in economically developing countries (percentages) 3.1 Business systems, stakeholders and strategic transparency vii

11

30

32

33

33

36

37 42 47 56

viii List of Tables

3.2 Knowledge resources: private, public, common pool and club 5.1 Comparative corporate structures 7.1 Exposure to graft of ADB-financed projects in the Philippines in civil works and procurement of goods

62 87 137

List of Figures 1.1 An illustration of the co-existence of trust and distrust 1.2 The relationships of capitals 2.1 The results of the regression analysis of PPP-GNI-2001 on national IQ in the group of 51 European, Asian and African countries 2.2 The results of the regression analysis of the 1999 Mathematics Achievement Scale scores (Math. 1999) on national IQ in the group of 23 European, Asian and African countries 3.1 The traditional global economic triad 3.2 Shareholder versus stakeholder capitalisms, business systems 3.3 Comparative business systems: Anglo-Saxon, Communitarian and Emerging 4.1 A Malaysian experience of a holistic approach to building a corporate governance framework 5.1 International comparison of family control of businesses 5.2 Distribution of corporate wealth 5.3 Debt to equity ratios 5.4 Ratios of internal to external funding in Korea 5.5 Korean funding sources 10.1 The leader development model of CCL

ix

14 17

41

45 53 55 56 77 86 87 93 95 95 197

Foreword Few months before the Asian economic crisis (1997), the Organisation for Economic Co-operation and Development (OECD) organized a seminar on ‘the world in 2020’.1 Its report on global development is upbeat – the influence of non-OECD economies in the global economy is rising, due to the adoption of free market principles that has spurred their economic growth into the global economy. This is in particular true for the Big Five economies: Russia, China, India, Indonesia and Brazil. These countries have both populations in excess of 100 million people and GDP above US$100 billion. They play also an important role in trade, investment, agriculture, energy and the global environment. Each of these countries also plays a leadership role in their respective regions and in international relations. From these Big Five economies, the economic crisis of 1997 has hit especially Indonesia, but has spared the others. While Indonesia is currently recovering slowly, the other four countries are moving rapidly ahead. With the rapid growth, especially of China and India, and followed by Japan and other East Asian economies, Asia may well lead global growth in the next decades to come. In terms of numbers of population alone, Asian development will affect more than half of the world’s population. It has also the largest number of poor people in the region. In terms of available natural resources, Asia has the largest potentials of the globe. This means that the kind of growth Asia executes will have a huge impact on global growth. Conventional development in the twentieth century has been able to raise gross world product almost sevenfold, from 7 trillion dollars (1950) to almost 45 trillion dollars (2000). But the number of poor has changed marginally from 1.18 billion (1987) to 1.19 billion (1998) for those people living on less than one dollar a day. And inequality has increased, since now 60 per cent of the people of the world earn 6 per cent of world’s income, while 17 per cent earn 78 per cent.2 Meanwhile the Asian state of environment also raised serious concern. Tropical forests area has been shrinking. Frequent forests fires and air pollution has created the ‘Asian Brown Cloud’, some of this is due to illegal logging and clearance that raises many concerns – especially as desertification has been rising. The sea level has shown some indication of rising, raising thereby the frequency of lowland floods, as in Bangladesh. x

Foreword xi

On the social front, the Asian population continues to increase. It is estimated that it will only be by 2050 passing that fertility forecasts for many developing countries will fall below the replacement level of 2.1 children per women.3 And migration studies suggest that more than half the population in Asia is expected to live in cities from about 2030. Under these circumstances, Asia cannot follow conventional development along the ‘business as usual’ tradition. All economic, social and environmental indicators show that this conventional model of development is not sustainable. Asia must change course and follow the path of sustainable development towards economic, social and environmental sustainability. Economic sustainability requires the ability of the economy to absorb increases of population growth with changing consumption patterns. It calls for a development pattern that optimizes man-made capital to produce more goods and services with less natural resources, minimum waste, minimum space, minimum energy use and minimum pollution. It is conducted in a stable macro economic setting with the capability to create meaningful employment for sustained livelihood. Social sustainability is reached by reducing poverty in its manydimensions, such as management and relief of: low income, lack of food, no accessibility to employment, education, health facilities, clean drinking water and sanitation facilities, electricity, adequate human settlements, and healthy environment. Social capital here plays a dominant role and is understood in terms of features of social organizations and networks of civil engagement. For Asia, with its diverse ethnic groups, race, religion, languages and cultures, there is the need for social capital formation through participatory and subsidiary approaches to development. Environmental sustainability requires the need to conserve the continued functioning of the life support eco-systems. Development must also avoid the creation of waste and pollution beyond the carrying and absorptive capacity of nature. An integrated economic, social and environmental impact analysis is hence required to ensure that development takes place on the path of their sustainability. Through the analysis of the ‘sustainability matrix’, with economic, social and environment in columns as well in rows, it is possible to trace the various impacts of one to the other. It then becomes clear that economic development is affecting social and environmental factors, and vice versa – social development affects economic and environment, and environment influence economic and social development.

xii Foreword

Much has been written already on the issues related to sustainable development. It is widely understood that sustainable development requires growth in economic capital stock, social capital as well as environmental capital. There is now the need to go deeper and explore what affects these capitals to grow. John B. Kidd and Frank-Jürgen Richter have assembled prominent experts to provide the political, financial, physical and intellectual capital underpinnings published in Infrastructure and Productivity in Asia. To enable these economic, social and environmental capitals to grow, the development of infrastructure is of crucial importance. The Asian crisis of 1997–8 clearly had its origin in the poor quality and deficiency of financial infrastructure. The leaders of the industrialized countries in the G-8 called for the need to change the financial architecture. The global banking and monetary infrastructure needs a review. The occurrences of financial crises in the USA, Japan, Latin America and Asia indicate that the financial infrastructure in the global economy needs a serious overhaul, notwithstanding the edicts of Basle-II. While this is necessary, it is not sufficient since such an overhaul cannot be done in isolation of other infrastructural improvements. One that looms high in priority is education infrastructure, covering the development of human capital as measured by educational attainment and the concept of ‘intelligence’ as a measure of human capital. If Asia is becoming the engine of global growth, John Alexander and Michael Jenkins argue that it becomes pertinent to develop Asian human capital in pace with demand, specifically as in terms of well-educated and skilled workers with effective management and leadership skills. Globalization requires different leadership skills. And recognizing that Asia is a continent with diverse and distinct cultures, it cannot apply the ‘one size fits all’ approach to leadership development. That is why Richard Lynn and Tatu Vanhanen put emphasis on developing human capital and intelligence in Asian development. There are differences in the contribution of human capital as measured by educational attainment, and by intelligence quotient (IQ) to per capita income and economic growth in the Asian economies. East Asian nations show a relatively higher educational attainment and national IQ compared with South Asian nations, which may explain why the former nations have higher economic growth in GNP per capita than the latter during 1976–98. The prevalence rates of moderate to severe malnutrition, anaemia among pregnant women and diseases that impair the absorption of nutrients have adverse effect on the intelligence development of the people.

Foreword xiii

The attainment of good governance requires sound infrastructure to support effective implementation of development. It requires sound financial and legal systems, the systematic protection of rights and supported by strong regulatory bodies to provide oversight and to monitor and enforce these rules. Ranjit Ajit Singh, Eng Chye Phuah and Harveen Kaur analyse the importance of good corporate governance, which is positively correlated with stock market premium, reflecting the value that is attached to trust and confidence. Asia is currently transforming the drivers for productivity and economic growth from public to the private sector. In this context, corporate governance reforms conducted in Asia are crucial for the growth of global economy. Asia is expected to evolve its own versions of models towards ensuring corporate responsibility and integrity. The Asian Development Bank defines four aspects of sound governance, namely accountability, participation, predictability and transparency. Within this broad framework Clay Wescott assess efforts of improving road administration in the Asia Pacific region. Road development as the strategic physical infrastructure in Asia is suffering poor management in operation and maintenance, and it is highly vulnerable to corruption, but it is very effective in poverty alleviation and in developing regional cooperation. While Asian infrastructure has been developing, consumer’s behaviour has been changing dramatically in receiving information. Ralf Hirt analysis the trend of development in the communication infrastructure. After the USA, China and Japan are the countries that are making effective use of the Internet as a marketing and communication system. Asia therefore has a tremendous opportunity through its building and leveraging of a communication infrastructure for macro- and microeconomic purposes. From the samples exposing the variety of issues in Asian infrastructure, it is clear that Asia needs to review its present trends and explore new venues and directions to develop its infrastructure in the future. Sustainable development requires interaction among economic, social and environmental sustainability. It needs the continued growth of economic, social and environmental capital. Various supporting infrastructures are required to support sustainable development, in finance, education, human development, good public and corporate governance, physical road infrastructure, communication infrastructure and others. The need for these various supporting infrastructures is interconnected, revealing a similar interconnection in economic, social and environmental factors in sustainable development.

xiv Foreword

When initially we discussed the ‘matrix of sustainability’ it clearly demonstrates that we need to expand this frame of analysis by also incorporating the ‘matrix of interconnection of infrastructure development’. The social and environmental dimensions of sustainable development suffer market failure, meaning that the social and environmental signals and scale of preferences are not captured and revealed in the market. This explains why ‘social and environmental costs as well as benefits’ are not internalized in economic calculations of costs and benefits. To cope with these market failures, intervention in the market is required to incorporate social and environmental signals and scale of preferences. The same applies to infrastructures, especially those related to social and environmental aspects, such as educational attainment, intelligence development, human development, governance, and others. In these cases the market fails to function and subtle intervention is required. The burden falls heavily on government to correct the market. And this puts the responsibility on the public at large to exert such influence that their governments fulfil their responsibility by creating the single most crucial infrastructure, namely good governance. EMIL SALIM Professor of Economy in the University of Indonesia, Jakarta former Minister of Population and Environment, Indonesia, and Chairperson for the World Bank Preparatory Committee of the World Summit on Sustainable Development (WSSD)

Notes 1. Organisation for Economic Co-operation and Development, The World in 2020: Towards a New Global Age, OECD 1997. 2. Linda Stark (ed.), Vital Sign 2002, Worldwatch Institute, USA, 2002, pp. 148–9. 3. Anil Markandya et al., Environmental Economics for Sustainable Growth, World Bank, 2002, p. 126.

Notes on the Contributors Note: Names are in Western format (family names last) John Alexander is President of the Center for Creative Leadership, an international, nonprofit educational institution devoted to research and teaching on leadership in the private and public sectors. A onetime Rhodes Scholar, Alexander received his BA in English from Princeton University and an MA in Politics, Philosophy and Economics from Magdalen College, Oxford. Alexander presents and writes on a wide variety of topics related to leadership and executive development and serves as a feedback coach in select open enrollment and custom programmes. His publications include book chapters such as ‘Leading Across Cultures: Five Vital Capabilities’ in The Organization of the Future (1996), ‘Process Advising: An Approach to Coaching for Development’ in Coaching for Leadership (2000). He also writes a regular column for Leadership in Action, a joint publication of CCL and Jossey-Bass. Joan Barron, President and CEO of Telsk, has worked in Asia since the early 1990s and is very involved in corporate and community affairs in Korea. Joan is the Chair of the Canadian Chamber of Commerce in Korea and a past President of the Foreign Investment Advisory Council to the Seoul Metropolitan Government. She has received several honours from the Korean Government including the Industrial Medal awarded by the President of Korea. Telsk is a joint venture of the Telus group in Canada and the SK group in Korea. Telus is a leading telecommunications company with over 8 million customers in Canada, while the SK group is third-largest in Korea with businesses ranging from energy to telecommunications. Telsk [Korea] employes about 424 people, and provides help desk and desktop support services across Korea. Chong Ju Choi, a Korean national, is presently Dean and Executive Director of the Australian National University’s National Graduate School of Management in Canberra, Australia. Until 2002, he was Dean of the MBA at Cambridge University, UK. Other former academic appointments include Professor of International Business at Duke University, US; xv

xvi Notes on the Contributors

Fellow in Economics at Oxford University’s Queen’s College; Professor of International Business at Waseda University, Japan. He received his Bachelors in Economics from Seoul National University, Korea; his Master of Public Administration from Harvard University’s Kennedy School of Government, US; his MBA from INSEAD, France; his MPhil and PhD in Economics from Oxford University, UK. Professor Choi has over 100 international journal publications in international refereed journals in economics, business, and management in such publications as: Journal of International Business Studies; Journal of Business Ethics; Management International Review; Economica; Human Relations; Organization Studies; British Journal of Management. He has lectured in over 50 countries and 60 universities in every continent of the world. Ralf Hirt is the Managing Director of DoubleClick’s Asia-Pacific business. DoubleClick Inc. is a New York City based, NASDAQ listed, provider of marketing technologies and data solutions. He joined DoubleClick in 1998 in London, UK, where he was involved with establishing DoubleClick’s TechSolutions business in Europe: and in June 2000, he moved to the Asia-Pacific region, and held management positions in Hong Kong and Sydney. Hirt sits on several Boards, including DoubleClick Japan and ADMA, Asian Digital Marketing Association and chairs its Standards and Practices Committee. He is a frequent speaker at industry events. He is a native of Germany, holds a business administration degree as Diplom Betriebsoekonom, a Master of General Management both from SGMI, St Gallen Management Institute, Switzerland, and a postgraduate diploma in philosophy of economics from Hagen University, Germany. Michael Jenkins is Managing Director of the Center for Creative Leadership’s CCL-Asia campus in Singapore, which serves the Center’s clients throughout Asia, including multinational organizations, regional companies and government agencies. Before that, Michael was Director of Executive Education in Asia for INSEAD, which he joined in 1999 as its regional director for Japan and Korea. Prior to that, he was Director of the Foreign Languages Centre at the University of Bath in the UK. He has written a number of books about Japan and has conducted numerous lectures and seminars on the economics and business environment of Asia. Born in Kuala Lumpur, Michael studied Chinese at the University of Durham in the UK and at the Beijing Languages Institute in China. He earned a post-graduate diploma in Japanese language,

Notes on the Contributors xvii

economics and politics at Nanzan University in Nagoya, Japan, and worked as a motor analyst for Toyota Motor Corporation. He has worked on consulting projects with a number of US, European, Chinese and Japanese companies and government organizations. Harveen Kaur is an accountant by training and is a Fellow member of the Association of Certified Chartered Accountants (ACCA, UK). She was previously attached to Ernst & Young Kuala Lumpur, as an auditor and later worked as a Finance Manager for a local manufacturing company. She is currently a manager at the Research and Strategy Department in the Securities Commission, Malaysia. John B. Kidd, a Research Fellow at Aston Business School, Birmingham, UK, studies the overlap of technological and human factors in information and communication systems, especially those that have a global reach. These factors interact in the strategic alliances of multinational firms, including in their supply chains, wherein there are many cultural influences at work. He has authored many papers for journals, and has written book chapters across several management disciplines. His recent books include two on Human Factors Management in Asia (edited with Frank-Jürgen Richter and Xue Li, 2001); further edited works (with Frank-Jürgen) include Corruption and Governance in Asia (2002), Fighting Corruption in Asia: Causes, Effects and Remedies (2003) and Trust and Antitrust in Asian Business Alliances (2004). Richard Lynn has been Professor of Psychology at the Economic and Social Research Institute, Dublin, and at the University of Ulster. His specialisms are intelligence and personality. He has published a number of papers on these in academic journals. His books include Personality and National Character (1972), Dimensions of Personality (1980), Educational Achievement in Japan (1988), Dysgenics: Genetic Deterioration in Modern Populations (1996), Eugenics: A Reassessment (2001) and (jointly with Tatu Vanhanen) IQ and the Wealth of Nations (2002). Ali Mirza holds a Bachelor’s Degree in Marketing from the University of New South Wales. He is the Executive Director and co-founder of MarketShare, implementing numerous successful sales campaigns and tailored approaches maximizing market growth, profitable market share, and return on investments for clients across the Middle East, the

xviii Notes on the Contributors

US, Europe and the Asia-Pacific region. He is also the co-founder of Strategic Intelligence Research, a Singapore-based Economic & Political research firm. Prior to this, Ali worked with Credit Suisse First Boston’s private banking arm, managing a regional client base from Singapore. He has broad regional experience having lived and worked in the Middle East, the Far East, North America, India and Australia. Ali is a sought after speaker at conferences around the region and appears as a regular guest on CNBC, giving his insights on topics covering marketing, technology and e-commerce. Ali also serves on the board of advisors to two Indian IT start-up companies strategizing their Pan-Asian market expansion. Ali is also an accredited member of ESOMAR, the World Association of Opinion and Market Research Professionals. Eng Chye Phuah graduated from the University of Manchester, UK, with a BA (hons) in Economics. He previously worked as a financial journalist, in investment management and as a licensed dealer representative. He was head of research with local stockbroking firms and was a regional bank analyst for Dresdner Kleinwort Benson as well as a director of its Malaysian equity research operations. He has been a member of Bursa Malaysia’s (previously known as the Kuala Lumpur Stock Exchange) Index Committee, a committee member of the Remisier’s Association of Malaysia (known as Persama) as well as an economist for the Association of the Stockbroking Companies, Malaysia (known as ASCM). Mr. Phuah is currently head of the Research and Strategy Department in the Securities Commission in Malaysia. Frank-Jürgen Richter is an independent consultant focusing on corporate globalization and Asian business. Prior to that he was Director of the World Economic Forum, in charge of Asian affairs. He lived, studied and worked in Asia for almost a decade, in Tokyo and in Beijing where he developed and managed European Multinationals’ China operations. As one of the leading analysts of Asian business and economies, he influences major business and governmental decisions with his public comments. An active scholar – he has authored and edited several books on Asian economies and international business. He has now formed his own company: HORASIS – The Global Visions Community, Geneva. Ranjit Ajit Singh is the Director of the Strategy and Risk Management Division of the Securities Commission of Malaysia. He is responsible for overseeing strategy, research, economic and policy analysis, risk management and international affairs. He is also a member of the Malaysian

Notes on the Contributors xix

Accounting Standards Board, the chairman of the International Organization of Securities Commission (IOSCO) working group on the regulation of secondary markets; the chairman of the Pacific Economic Council (PECC) Financial Markets Development Committee in Malaysia; and a member of numerous international task forces including the joint IOSCO-CPSS task force on securities settlement systems and was a member of the drafting group that prepared the standards being used for international securities regulation. Ranjit holds a Bachelor of Economics degree and a Master of Economics degree in Finance from Monash University-Clayton and is a professionally qualified accountant and member of the Australian Society of CPAs. Prior to joining the Commission, Ranjit was a member of the academic staff at the University of Melbourne and taught, researched and consulted in the area of international and corporate finance, securities analysis and investments. He has researched and published papers in the area of financial markets and spoken at numerous conferences and seminars. Nara Srinivasan is currently the Professor of Security and Risk at Edith Cowan University, Western Australia. Previously Dean of Murdoch Business School and Head of the School of Justice and Business Law at ECU, he is a member of various international and national organizations involved in corporate governance, anti-corruption and security related activities. Thus his current research interest includes the area of security and business and security management in the new post 911 environments. Professor Srinivasan has been responsible for forming a number of collaborative partnerships between Western Australian universities and international organizations, such as the International Civil Aviation Authority, USAID World Food Programme, Asian Development Bank, World Bank and Singapore Airport Terminal Services. He holds qualifications in criminology, management and sociology from Cambridge University, University of Malaya and Cornell University. Terry Tuharsky is a senior consultant of Telus International, a computer outsourcing company and subsidiary of Telus, the second-largest Telco in Canada. Terry is an Honorary Citizen of Seoul and a Vice Chairman of the Canadian Chamber of Commerce in Korea and has been living in Korea since 1996. Terry has a Bachelor of Science Degree from Northwest Missouri State University and an MBA from the University of Western Ontario in Canada. Terry worked extensively on input to a Hub report for the Presidential Committee and served on the Business Mecca Advisory Group for the Joong Ang Ilbo newspaper in Korea.

xx Notes on the Contributors

Tatu Vanhanen has a first degree in Journalism which was followed up with stints as a journalist in the Rural Youth Union, the Agrarian Party, and then the Centre Party. He then moved to study Social Science, receiving his Doctorate at Tampere University; and on returning to the Department of Political Science, University of Finland, Helsinki aligned himself to academe and to research. His major publications concern global comparisons – on democratization, on the politics of ethic conflicts, as well as comparative studies on educational achievement across the globe – as in IQ and the Wealth of Nations (co-authored with Richard Lynn). Clay Wescott is Principal Regional Cooperation Specialist for the Asian Development Bank. He is the focal point for design and implementation of the ADB-wide regional cooperation plans, and Chairperson of the Regional Cooperation Committee. He led the project team for Cambodia Commune Council Development Project, was a project team member for Vietnam Program Loan to support the PAR Master Program, including a major e-government initiative, and led ADB’s SAR’s response team. Clay Wescott has degrees in Government from Harvard College (AB, Magna cum Laude), and Boston University (PhD), and is a board member of the International Public Management Journal, the International Public Management Review, the International Journal of e-Governance and International PEACESAT, Incorporated. He is the author of many published articles and book chapters.

Part I Infrastructure, Systems and Education

This page intentionally left blank

1 Infrastructure and Its ‘Sticky’ Interconnections: Perspectives from Asia John B. Kidd and Frank-Jürgen Richter

Early history This book is about infrastructure in Asia. Even though Asia has become the growth engine of the world it still lacks a backbone similar to that of the US and the advanced nations of Europe when we review the physical, institutional and educational infrastructure. The Asian crisis of 1997–8 has clearly shown that Asia has still some way to go to catch up with its counterparts in the West. In this book we consider these deficiencies and the way forward. But first we explore the early history of building infrastructure in the universe before we dive into Asian waters. The universe began with a ‘singularity’ and then a ‘Big Bang’, or so we are informed, after years of wrangling, by philosophers, astronomers and cosmologists . . . Now they seem to agree on that point, and are actively searching for evidence of that instant long ago. They don’t know what existed before that singular event, only that almost instantly, in minute fractions of a second the universe became complex. Neither its early rules nor its current rules can be modelled with any degree of accuracy, or even with close agreement between the experts involved (Hawkin, 2001). Much later in cosmic history mankind was created and the early clans evolved into the 6 billion or so people who are now scattered across the face of our planet, living in compartmented regions – called countries. Their governments and institutions represent these people more or less consistently as they face up to their neighbours near and far. It has always been clear that members of a clan had to face local perils, such as 3

4 Infrastructure and Its ‘Sticky’ Interconnections

other clans, wild animals, fire, floods and drought, as well as internecine battles for power between local people. In modern times, as well as wars and other battles, there are other threats that derive from people across the globe engaging in digitally mediated trade offering goods once thought to be the sole preserve of one’s local country. This leads to one country setting up trade embargoes to prevent others selling their goods to that country. Of course the overuse of scarce resources is by ‘them’ over there, not by ‘us’ here – which led Hardin (1968) to characterize ‘the tragedy of the commons’ as locals, having joint ownership of grassland, overgrazing this grass because individually they looked to their own survival and not to the common good. Later we mention two grand proposals that aim to minimize threats to our global existence.

The early need for a financial infrastructure The early human groups were generally gregarious and learned skills that set each apart from the other – some were good hunters, or craft workers or healers, and others were respected leaders. Some clans slowly emigrated across the globe; other clan groups grew prosperous and became known over a large distance as they traded commodities. Tin, for instance, was traded from Cornish mines in the south-west of England, and these miners were chronicled as early as 320 BC by Pytheas, a Greek, who in fact travelled on to the Arctic circle before returning home. By the first century AD Cornish tin was traded as far as the eastern seaboard of the Mediterranean having travelled there by sea (across the Bay of Biscay) or, after crossing the English Channel, overland through France to its southern ports before resuming its sea voyages. After just a few years trade routes were recorded stretching from China and Mongolia through India to Ethiopia, Egypt and onwards to Britain (Cornwall noted again for its tin) and to Norway (for its amber). There were many goods traded along these routes – silk, horses, spices, gold and silver – and thus, by implication, many supporting infrastructures had to be set up to help the traders, such as horse suppliers, inn keepers and purveyors of foodstuffs; as well as message carriers: Marco [Polo] was impressed with the efficient communication system in the Mongol world. There were three main grades of dispatch, which may be rendered in modern terms as ‘second class’, ‘first class’ and ‘On His Imperial Majesty’s Service: Top Priority’. The ‘second class’ messages were carried by foot-runners, who had relay stations three miles apart. Each messenger wore a special belt hung with small bells to announce his approach and ensure that his relief was

John B. Kidd and Frank-Jürgen Richter 5

out on the road and ready for a smooth takeover. This system enabled a message to cover the distance of a normal ten-day journey in 24 hours. At each three miles station a log was kept on the flow of messages and inspectors patrolled all the routes. ‘First class’ business was conveyed on horseback, with relay-stages of 25 miles. But non-stop dispatch riders carrying a special tablet with the sign of the gerfalcon carried the really important business of Kublai Empire. At the approach to each post-house the messenger would sound his horn; the ostlers would bring out a ready-saddled fresh horse, the messenger would transfer to it and gallop straight off. Marco affirmed that those courier horsemen could travel 250 or 300 miles in a day. (http://www.silk-road.com/artl/marcopolo.shtml [accessed May 2004]) In the early days of global trade many traders and support staff were self-taught. But, to generate a more constant service – be this manufactured output, insurance indemnity and other guarantees referring to the passage of goods, or the building and maintenance of carriages, boats and ports – an educated populace was needed. Some of this need was satisfied by merchant and craft guilds, which sprang up across Europe in the eleventh century, and were widely recognized by the thirteenth century in most towns of any size. Herein masters, craftsmen and apprentices innovated and developed a consistency of form, so their outputs could be recognized as an artefact from London, Paris or Pisa. These people worked for wages, so traders needed to have a simple exchange mechanism to, as it were, be like the modern credit card so they could offer the artefact in, say, Paris for an agreed money exchange at some later date in a different town. Yet banking practices preceded the use of coinage. Banking originated in Ancient Mesopotamia (around 3000 BC) where the royal palaces and temples provided secure places for the safekeeping of grain and other commodities. Receipts came to be used for financial transfers not only to the original depositors, but also to third parties. At about this time, coinage became widely recognized in Egypt (from the time of the building of the pyramids – around 2575 BC onwards), and also in China (where cowry shells were used, rather than gold or silver, as a medium of financial exchange from around 1200 BC) (Davies, 1996). In all countries rules evolved to control cash flows – one English rule, for example, was used to punish those who failed to pay the danegeld land tax: first levied in AD 868 by King Alfred to keep the marauding Vikings at bay. Defaulters had their nostrils slit and so be seen to ‘pay

6 Infrastructure and Its ‘Sticky’ Interconnections

through the nose’. A somewhat draconian practice, yet clearly a visible deterrent! Banking re-emerged in Europe at about the time of the Crusades. In Italian city-states such as Rome, Venice and Genoa, and in the fairs of medieval France, the need to transfer sums of money for trading purposes led to the development of financial services including bills of exchange. Although it is possible that such bills had been used by the Arabs in the eighth century and the Jews in the tenth, the first definite evidence is in a contract issued in Genoa in 1156 to enable two brothers who had borrowed 115 Genoese pounds to reimburse the bank’s agents in Constantinople by paying them 460 bezants one month after their arrival. Partly to help trade, the Order of the Knights Templar was set up to protect pilgrims on their passage to the Holy Land, and also to aid traders in their personal quests by providing letters of credit: The Knights Templar were a monastic military order formed at the end of the First Crusade with the mandate of protecting Christian pilgrims on route to the Holy Land (about 1117 CE). In this sense they were the first of the Warrior Monks. Within two centuries they had become powerful enough to defy all but the Papal throne. Feared as warriors, respected for their charity and sought out for their wealth, there is no doubt that the Templar knights were the key players of the monastic fighting Orders. Due to their vast wealth and surplus of materials the Templars essentially reinvented banking, as we know it, although the church forbade the lending of money for interest, which they called usury. The Templars changed the manner in which loans were paid and were able to skirt the issue and finance even kings. The Order was destroyed, perhaps because of this wealth or fear of their seemingly limitless powers. In either case, the Order met with a rather untimely demise at the hands of the Pope and the King of France in 1307, and by 1314 was all but destroyed. (http://www.templarhistory.com [accessed May 2004]) We can recognize that the continuance of the early banking and monetary infrastructure has continued to the present day. But there is also an old informal infrastructure echoing the visible banking system, which, due to its lack of transparency, is much used for illegal trafficking and money laundering: In the hawala system, sums large and small are sent halfway around the world on a handshake and a code word. Records of transactions

John B. Kidd and Frank-Jürgen Richter 7

are kept, maybe in a small handbook, just until the deal is completed – then the relevant page is destroyed. No cash moves across a border or through an electronic transfer system, which are the places where authorities are most likely to spot or record the transaction. The sender does not have to provide his name or identify the recipient. Instead, he is given a code word, which is all the recipient needs to pick up the same amount of cash (or equivalent in a different currency) from an associate of the original trader. The transaction can occur in the time it takes to make a couple of phone calls or send a fax. These systems were in place long before modern Western banking. The ancient Chinese used a similar method called ‘flying money’ or fei qian [ 亳䪆 ]. (Franz, 2001) As Arab traders used the fei qian as a means of avoiding robbery along the Silk Road it is entirely plausible that the method inspired the banking methods of the Knights Templar and the Italian city-states. We noted above that there were well-known trading routes in place before this time, and sensible, though frightened, traders would have searched for cash-less transaction systems to protect themselves against robbers. We suggest that one of the earliest extensive infrastructures was that of the well-connected banking system, operating seamlessly from China through Europe to Britain, which enabled global trading based on cash-less instruments like bills of exchange and bills of lading to link supplier and client over long distances, possibly via several logistics providers: just like today. And just like today, all parties have to trust each other to an extent, since any ‘contract’ for delivery of goods – be these bits and pieces, or a cache of money – may not be 100 per cent watertight: we will write more on trust later in this chapter.

The early need for an education infrastructure During the Industrial Revolution, Lancashire, in the northeast of England, was known as ‘the workshop of the world’. At one point in the 1830s, the region quite literally possessed more machines than were in the rest of the planet combined. (Powell, 2002) The medieval craft guilds grew in importance up to the Industrial Revolution, and in some cases to the present day in a modified form. Even so, in the UK, there was a clear need for better formal education

8 Infrastructure and Its ‘Sticky’ Interconnections

through the 1800s and 1900s as the interconnections between manufacturers, service providers and clients became more complex, and more tightly controlled for quality, standardization and timeliness. But the UK failed to achieve a sufficient level of education, and over the years has underinvested in technical and vocational education (Sanderson, 1999). Part of the blame lies with inadequate government support since they lacked a coherent national policy to develop education, notwithstanding that the Reform Act of 1832 led the state to assume a small measure of responsibility for public instruction. But mere trifling could not satisfy the demand for education – it was found at that time that nearly as many children were believed to be without schools of any kind, as were in attendance at all types of school. However, one might argue that in regard to higher education, the UK has suffered from too much centralization of authority with a resultant stifling of entrepreneurial responses to emerging training opportunities. A more pluralistic institutional structure in UK higher education might have produced more responsiveness to economic demands; arguably this was the strength of US higher education (Sanderson, 1999). Naturally, for the Industrial Revolution to have developed in the UK there had to have been a caucus of educated, enquiring people. There were of course the old-established universities – set up in the UK at Oxford (1249), or Peterhouse College in Cambridge (1284); and elsewhere in continental Europe: in Italy at Padua (1222), and in modern Belgium at Leuven (1425). But these centres were not sufficient to provide the mass of educated people that industry demanded, especially when that technology was exported to the New World – as North America was once known. In its turn the US university system developed, first in New England with Harvard (1636), Yale (1701), and Brown (1764). In California higher education came later, with Santa Clara (1851) being its oldest state university. Sanderson suggested, the pluralistic US system allowed a variety of courses to develop to suit better their heterogeneous population. Universities prepare new professors to re-enter the university sector to research and to teach, but the mass of their output are graduates who simply wish to work in other places: Today, before our very eyes, another workshop of the world is being created. It stretches down the eastern coast of China, from Dalian, north east of Shanghai, to Fujian, then further south to Guangdong Province. (Powell, 2002)

John B. Kidd and Frank-Jürgen Richter 9

Education in China was linked to a very old system of examinations. It is argued that the ‘new’ Ming-Ch’ing civil examinations, in use from 1370 to 1904, represented a substantial break with the earlier T’angSung dynasty literary examinations that had existed from 650 to 1250. These were the Imperial Examinations (ke ju, ⾦ Г) that determined if scholars could be admitted into the government ranks. The new imperial examinations made ‘Tao Learning’ – or Neo-Confucian learning the orthodoxy in official life (Elman, 2000). Later the Cultural Revolution upset all tradition: schooling broke down, and briefly there was the cult of ‘Zero is Hero!’ (ⱒौ 㣆䲙 ) where a student gaining a zero per cent score was lauded as the best of the anti-intellectual brigade. Their system moved forward slightly when they proclaimed ‘Long-life 60’ – suggesting it was good enough to strive for a grade of 60 per cent (the pass mark) and not to tire oneself unduly on scholarship. Now parents ask their children to aspire for top grades, even to aim for 100 per cent – the parents recognize that quality education opens the door to employment within the extensive modern interconnected infrastructure systems. It may be argued, though Lynn and Vanhanen in Chapter 2 seem not fully convinced, that education offers the key to a nation’s success. A well-educated populace is able to discuss matters at a conceptual level, not just be emotive and hotheaded. Through discussions the populace may be able to help redirect the leaders, to offer new microsolutions more appropriate to their local region, and by contributing to the new solution be ‘paid-up members’ of the decision-making team, as it were, so dissent is diluted. Being a part of the process is democratic, and it makes the dissemination of the concepts, alternatives and solutions more effective. Thus it behoves a leader to enhance the state’s education provision – but we see later, the Copenhagen Consensus worries that in undeveloped regions the cash for education provision might just be siphoned away, and that the population will fail to benefit from this cash injection. This is similar to caveats presented by Wescott in Chapter 7, when he notes that the funds for road building have to be monitored well, otherwise ‘leakage occurs’: a fact already noted by Etienne (2003).

The ‘sticky’ infrastructure interconnections of modern times In looking back to history one often focuses on one aspect and effortlessly strips away irrelevance leaving the core to be discussed. We have noted the early infrastructures of banking and finance and briefly the need to support education. However, all people and all institutions are interconnected. The trade in medieval times led both the Pope

10 Infrastructure and Its ‘Sticky’ Interconnections

and the King of France to disband the Knights Templar; the increased opportunity in open liberal education systems led, at least, the white community of America to prosper through education and the application of this to their nation’s development. Now we see that globalization interconnects traders via digital systems in most countries of the globe, and goods can pass more or less freely (though sometimes bearing high tariffs) between all countries. It is incumbent on heads of state to enhance the infrastructure of their countries to attract more inwards investment. Not all heads agree on this process – some wish to be belligerent and be at war with neighbours. In their case investors will be few, and the cash needed to buy armaments will be taken from all parts of the state – often resulting in the mass of the population being left with inadequate provision for education, health and agriculture, as well as weakening other infrastructures such as water and power provision, the maintenance on roads and railways, and so on. The army is the beneficiary, in a sense – but it is robbing the state, and severely reducing its social capital. Even so, there is global pressure to cooperate and we create lists that highlight ‘issues’ that need alleviating. The United Nations has its ‘Millennium Development Goals’. By the year 2015 all 191 member states have pledged to meet the following goals:

• • • • • • • •

Eradicate extreme poverty and hunger. Achieve universal primary education. Promote gender equality and empower women. Reduce child mortality. Improve maternal health. Combat HIV/AIDS, malaria and other diseases. Ensure environmental sustainability. Develop a global partnership for development. (http://www.un.org/millenniumgoals)

The World Bank has estimated that between US$40 bn and US$70 bn needs to be spent each year to meet these goals. Under this rhetoric are hidden goals – we must provide the interconnecting infrastructures that will enable us to approach the UN goals in a coherent and effective global manner. It is futile to spend cash in, say, a rural African state if that state is disconnected from the rest of the world by its lack of roads, railways, digital highways and political will. Another major project is the Copenhagen Consensus. The basic idea in this forum was to improve the prioritization of the numerous problems

John B. Kidd and Frank-Jürgen Richter 11 Table 1.1

Partial details of the Copenhagen Consensus 24–28 May 2004

Project rating

Challenge sector

Opportunity

1 Very good 2 3 4 ... 14 Bad 15 16 17

Diseases Malnutrition Subsidies and trade Diseases

Control of HIV/AIDS Providing micro-nutrients Trade liberalization Malaria

Migration Climate Climate Climate

Lowering barriers against skilled workers ‘Optimal’ carbon tax The Kyoto protocol Value-at-risk carbon tax

Source: Based on The Economist, 2004

the world faces, by gathering several of the world’s greatest economists to a meeting where some of the biggest challenges in the world would be assessed. The forum ran from 22–28 May 2004. On most aspects, say The Economist reporters, this conference created consensus (both between the experts, and between a ‘youth’ group working in parallel). They offer formidably strong arguments in favour of goals that are not totally aligned to those of the UN (The Economist, 2004). Importantly the ranked programmes are achievable at a fraction of the estimated UN costs. Table 1.1 shows their top and bottom ranking projects. It may seem alarming that the ‘climate’ ranks bottom, but there was consensus and agreement that the social costs of climate management, modification and control far outweigh all benefits – at least at the moment. There is insufficient data, and the current proposals are too draconian and would achieve less beneficial results than the projects ranked higher up the list. For instance, on AIDS – the top ranked issue – The Economist (2004) notes: a package of preventive measures costing some $27 billion (in purchasing-power-adjusted dollars) over eight years that would prevent nearly 30m new infections (reducing expected infections from 45m over the period to 17m) . . . One study has calculated that part of this package, condom distribution combined with treatment for sex workers who are suffering from sexually-transmitted diseases, would entail a cost of just $4 for each disability-adjusted life-year saved. The implied ratio of benefits to costs is nearly 500.

12 Infrastructure and Its ‘Sticky’ Interconnections

However, all measures interconnect and have quite variable benefits, depending on the application scenario. The Economist continues: it was frequently emphasised by members of the panel during their discussions, that the likely effect of most if not all of the interventions under review depends on the local institutional context. For instance, spending more money on education may yield good results in countries where schools are already held accountable, in one way or another, for the quality of the service they provide. Where they are not held accountable, which is the position in most of the least developed economies, additional spending may simply be wasted . . . The effectiveness of many other forms of aid depends on civil order. In countries riven by conflict, little can be done to speed economic progress. Given peace and security, well-directed aid has a chance of working. In principle, the calculation of costs and benefits should take such linkages into account. In the case of civil conflicts, the implication is that the benefits that would flow from reducing their incidence are much larger than they might at first appear.

‘Social capital’ based on trust Notwithstanding the UN and Copenhagen lists we consider countries should aim to develop their capital stock of physical goods, their technological and intellectual capital and their social capital. When these come together in a more or less balanced form the country ought to prosper, but when imbalanced we find poor governance, greed, corruption and despotism abound – often leading to wars, some of which achieve global proportion. In these desperate times decisions by too many actors are often taken too hastily, leading to expensive and grizzly outcomes. This is not to say that peacetime decisions are perfect, but they may led to better solutions affecting a broader community. This raises considerable concerns: for instance, Joseph Stigltz (1998) strongly emphasized the importance of social capital and [social] institutions, and the need for capacity building as well as developing legal frameworks in developing nations. These concepts take us from the historical goal of value appropriation, which had transaction cost theories (for example, Williamson, 1975) at its centre, towards value creation (Moran and Ghosal, 1996). Fukuyama (1995) also asserts that firms exist because of high transaction costs, echoing the beliefs of Coase (1937); he goes on to say that lawyers and other service personnel exist in a firm because the firms rely on carefully scripted contracts to ensure the

John B. Kidd and Frank-Jürgen Richter 13

costs of dealing with sub-contractors are minimized, since there are great opportunities for selling poor quality, theft or other dishonesty. Once an owner had all these services in-house – for example, in a vertically integrated firm, which produced cars from basic raw materials, epitomized by Ford in its early days. This minimized the transaction costs while at the same time increased trust [in our ‘family’ team]. Economies of scale were achieved through vertical and horizontal integration that lower transaction costs. Networked organizations can also reduce transaction costs and run efficiently – always provided we trust our partners. Once we understand these principles our social capital increases. And trust also increases – which, being the lubricant of our relationships, allows our norms and behaviours to be accepted more widely. Many decision systems rely of trust between the partners – it is said to be perhaps the most fundamental relationship (Child, 2001). However, in the simplest of relationships we have to act autonomously – just as we don’t consciously monitor our heart rate, our breathing, nor the control of our muscles as they act in unison to keep us balanced, we cannot delve deeply into the reasoning and analysis of the data that leads our partners to their decisions. This is not to say that we must abrogate our existence to the whims of others. We must work in concert to question some of the data and some of the decisions, but the mass of data and decisions, for lack of time and competence on our part, have to be left to others – we must trust them; we must live our personal as well as public lives almost 100 per cent autonomously. There is an alternative construct that is also time consuming and costly – distrust. This is not a simple absence of trust, but a set of cognitive and affective factors that inhibit cooperation and coordination between different partners (McAllister, 1995a; 1995b). Lewicki et al. (1998) have also suggested that we need to consider the simultaneous acceptance of measures of trust and distrust with respect to our partner in our dyadic alliance relationships. One must work with a representative of the other firm. There may be no real reason for us to think ill of the other person – after all, in out daily interaction they have ‘delivered the goods as agreed’ – but conversations with third parties may give one cause for alarm . . . hence one might also carry a degree of distrust in the dyadic relationship. We note some of their ideas in Figure 1.1 in which ‘trust’ and ‘distrust’ may be the two most important dimensions of multidimensionality. Remember, organizations are composed of individuals, and it is the pairwise linking of these who exchange meaningful data; and later, it is their knowledge exchange that will nurture (or hinder) the alliance between the firms. In Figure 1.1 we note that the least interaction

14 Infrastructure and Its ‘Sticky’ Interconnections

HIGH TRUST Confidence Initiative

Interdependence promoted

Trust but verify

Opportunities chased

Follow-up opportunities but monitor down-side risks 2 4 1 3

Passivity Hesitancy

Limited interdependence

Assume harmful motives

Professional courtesy

Paranoia

LOW TRUST LOW DISTRUST

HIGH DISTRUST Low monitoring No vigilance

Scepticism Cynicism

Source: Based on Lewicki et al. (1998)

Figure 1.1

An illustration of the co-existence of trust and distrust

is in cell 1 where only professional courtesy is exchanged . . . ‘we do not trust the other, yet neither do we distrust, as there is no perceived need to distrust since there is no deep relationship.’ If the alliance depends on this form of dyadic relationship alone the alliance will eventually atrophy. Moving on to cell 3 it is obvious that the alliance will fail, as there is little to nurture the relationship since each assumes the worst of the other. In cell 2 there is euphoria as high trust is combined with low distrust: there is free rein to consider all initiatives and not doubt the other side. But the more realistic case is cell 4: here, high trust is tinged with the need to verify and monitor the other. Not so strongly to question motives and thus engender antitrust in the partnership, but enough to maintain a critical awareness of downside costs. These alternatives and dimensions of trust and antitrust link with an extension of the work of Larsson et al. (1999) wherein it is clear that opportunities exist for the alliance parties to fall as far as a state of anomie (Durkheim, 1933; Fukuyama, 1995, p. 6), or to think one side is milking the other (Inkpen, 1996; Kidd and Richter 2002). Kidd and

John B. Kidd and Frank-Jürgen Richter 15

Richter, when discussing the work of Larsson et al., suggested that when too little care is taken to absorb cultural complexity in the alliance then there is an unwillingness to collaborate and to volunteer data to the other side. Lewicki et al. would say that if there is distrust evident there will be a natural unwillingness to proffer data and thus individuals will not voluntarily engage in peer-wise organizational learning. This aspect is confounded with the natural inclination of some groups of people to be trusting or to be untrusting of others not ‘in the family’. Fukuyama (1995) and others have noted that the Chinese, Japanese, as well as some Italians and South Americans are naturally highly distrustful of ‘others’. This hinders voluntary data exchange and slows down organizational learning . . . one thinks the other is ‘milking one’ to take an early profit. Of course, we must recognize that an alliance is an arrangement between two parties for mutual gain and so these will not be charitable arrangements (Burton, 1995; Richter, 2000). In these circumstances we say that firms should strive for a ‘win-win’ situation where they would both become more successful in the long term – they must learn to play the ‘Prisoner’s Dilemma’ correctly – but there are sometimes asymmetrical gains taken where one party essentially milks the other dry (Inkpen, 1996; Khanna et al., 1998). Partnership should not be a one-way process, but a long-term relationship carried by mutual trust: it is important to note that Japanese kyosei means ‘symbiotic interaction with the surrounding companies’ (Teramoto, 1993; Murakami, 1992). There is self-interest in Japan, which lies in hateke zukuri (ploughing the field) against future eventualities – since you never know when you may have to become indebted to others (osewa ni naru). This is similar to guanxi in China (Luo, 2000). Growth of a system that is not linked to an environment with similar growth in the partner can, as Senge (1990) shows, stagnate or even turn into the opposite process. Since kyosei aims for the co-evolution of the cooperating companies we may envisage a learning model that focuses on ‘a profit’ for all participating companies: yet ‘profit’ is not the ultimate driver in all circumstances – since, as we noted above, we ought to strive to raise levels of social capital, which in turn will raise intellectual and knowledge capital.

Knowledge-based capital All forms of ‘capital’ acquisition depend on local infrastructure: was there abundant food for family growth? Did they have access to schooling? Are there roads, railways, water, and power supplies available at reasonable cost? And so on. These will all contribute to the development of

16 Infrastructure and Its ‘Sticky’ Interconnections

educated and well-rounded individuals who will be able to engage in discourse and able to evaluate alternatives. If these people also have access to the Internet their discourse could be better informed through absorption of cultural differences at the organizational level as well as across national boundaries – the former were noted by Zuboff (1988) in her studies of the early days of digitization of what had been a manual operation in wood pulp mills. A more recent example is given by Kripalani (2004) who describes the enabling of peasants in rural Karnataka [southwest India]. At a cost of US$3.7 mn the ‘Bhoomi’ programme (meaning ‘land’ in both Hindi and the Kannada local language) digitized some 20 million land-registry documents of the 6.7 million state’s population. Now, using one of the 200 government IT kiosks, a land owner may access instantly their documents for just a few rupees whereas it took maybe weeks and upwards of US$20 to get a record from a local official. The same local officials also conscribed to land fraud which once ran at US$20 mn per year. Now further infrastructure redevelopment plans may proceed much more rapidly as discourse may be better achieved between landowners and developers, even though most of the population are illiterate. At least some of the uncertainty is taken out of their discussion. Based on a tripartite structure – the staff, their structure and their technological base – we may perceive how knowledge capital may grow, and how their explicit knowledge may be better managed: Figure 1.2 illustrates this process. Much has been written on topics supporting the concepts implied in this figure – formulating the ‘correct’ organizational structure, implanting the ‘correct’ technical base (the computer networks and their programs), giving staff the ‘correct’ education and training programmes, and latterly creating the ‘correct’ open forum for Communities of Practice to develop (for example, Rao, 2003; Lehaney et al., 2004). Naturally the Internet figures strongly in these discussions, and indeed in Rao’s book we may discern that around 1998 many firms began to use the Internet more effectively for their global management of knowledge simply because the programs embedded in the Internet, and its use, became more mature and able to be used transparently by individuals inside and outside the firms. They could exchange knowledge and thus leverage their positions. In other words, the explicit data could, via explicit infrastructures, be used to enhance individuals’ knowledge – so their personal implicit database is boosted. In turn this drives them up the continuous knowledge spiral so be better able as informed discussants to develop their infrastructure further.

John B. Kidd and Frank-Jürgen Richter 17

Know-why

The implicit knowledge spiral Know-where

Know-how

Know-that Know-when

Staff Know-who

St

ru

ct ur es

Creation

Te

Acquisition

ch

no l

og

y

Identification Retention

Measurement

Sharing

Utilization

The explicit infrastructure

Figure 1.2

The relationships of capitals

Pressures for better governance and transparency Quite naturally all infrastructure developments demand careful embedding into existing systems of governance. Too often however we see that a weak government allows corrupt practices to develop, and from these many opaque illegal programmes are also developed to benefit, not the general public, but only a select few – who may be located in other parts of the globe (benefiting from their use of the transparent infrastructure, but not themselves being subject to local laws as these ‘do not see’ any law being infringed). Sometimes governments may promote illegal operations: Fake US $100 bills are alleged to have been printed by the North Korean government in a US$30 million operation over many years involving ex-agents of the KGB in Moscow, money launderers in the US, clandestine IRA members in Dublin, and couriers in Birmingham, UK. This operation clearly involved individuals high up the [real] governments and their security staff, yet has not been fully closed down. (BBC Panorama programme The Superdollar Plot, 22:15 BST, 20 June 2004)

18 Infrastructure and Its ‘Sticky’ Interconnections

Such large-scale corruption is not unusual; indeed Peter Lilley (2002) has argued that global corruption and money laundering, derived from many means, is upwards of US$ 3 trillion per year. Nor is this confined to developing regions where banking regulations are weak, or to countries whose members are naturally secretive and fearful of outsiders (such as China, as mentioned earlier) – large-scale corruption takes place in most countries. The problem is how to curb its excesses so that funds are used for their assigned purposes, and that full taxes are paid on the transfers and holdings. We are concerned in this book to illustrate, albeit briefly, that infrastructure matters, and size matters. But when large-scale projects suffer from the outset from leakage their planned benefits will not flow to the targeted recipients. Consider, for instance, the Three Gorges project – China needs more electrical power, and hydroelectric power from the Yangtze river looks plausible. But in this project calling on US$24 million (an estimate, the real cost will be much higher) displacing nearly 2 million persons it was believed that contractors won bids through bribery and then skimped on equipment and materials to siphon off construction funds. The head of the Three Gorges Economic Development Corporation allegedly sold jobs in his company, took out project-related loans and disappeared with the money in May 2000. Officials from the Three Gorges Resettlement Bureau were caught embezzling funds from resettlement programmes in January 2000: there are many other cases on file. Who, therefore, will compensate for these wide-spanning losses? Other examples exist round the globe. We, therefore, need exemplary guidance and support from governments who work with the Development Banks to provide governance regulations (and their policing), and to insist on transparency so that their national infrastructure projects fully benefit their population. Developing countries need their railways, roads, and airports. To keep these moving they need projects that supply power and water (both clean supply, and the subsequent management of foul water) and the means of communication – a postal service, telephones, the Internet and so on. And perhaps above all, to provide the structure that will educate its population. Further, developed nations also need new large-scale infrastructure projects that must comply with full disclosure and transparency and are in accord with international banking guidelines, such as Basle II (see the Bank for International Settlements at www.bis.org). Further, the developed nations need to re-invent infrastructures created in their early history – for instance, in the UK, the Victorian system for clean water supply and

John B. Kidd and Frank-Jürgen Richter 19

the subsequent foul water treatment is in urgent need of renovation: this will be a programme costing over US$1.5 billion on 22,000km of pipelines alone. Also, there are treatment plants to consider. There are other projects to alleviate inadequate electrical supply systems, roads, poorly located airports (given new urban developments), and so on. Somehow, therefore, we have to utilize our skills and knowledge better to accomplish these projects in a reasonable time frame, and as closely to budget as possible. The goals of the Kyoto protocol look reasonable; yet as we saw above, the Copenhagen Consensus indicate other goals that could yield better gains for mankind. These all demand an adequate infrastructure to be put in place – in both developing and developed nations, which in turn demand that, generally, we accept open rules about governance and transparency – notwithstanding the differences in perception and resulting actions predicated on our cultural heritage.

Structure of the book The book focuses on current Asian matters from the viewpoints of different authors. They discuss many aspects pertaining to ‘infrastructures’ and how these affect ‘productivity’. All however, are of the opinion that ‘infrastructures’ need to be strengthened, but the big question is how? And given that the infrastructures are interconnected, the second question is – which one first? Asia is still missing a cohesive joint development model. Even though there have been some attempts recently to build an ‘Asian block’, – a growing ASEAN, ASEAN + 3 (ASEAN countries + the three Northeast Asian powers China, South Korea, Japan) and APEC – Asia is still far away from the European model of the European Union (which was recently strengthened through the enlargement towards Eastern Europe), and even from NAFTA in North America (which is less a cultural and social union than a economic trading block). One might argue that Asia is too diverse to be united. There are the Northeast Asian powerhouses philosophically based on Confucianism, there are the predominantly Buddhist societies of Thailand and Bhutan, as well as the Muslim nations of Indonesia and Malaysia. Economically, Asia hosts some of the world’s richest countries (Japan, Singapore) as well as the world’s poorest country – East Timor. East Timor records a GDP per capita of US$500 p.a. How can politicians, businessmen and representatives of civil society lay out an infrastructure in such a vast conglomerate of economies, cultures and nations?

20 Infrastructure and Its ‘Sticky’ Interconnections

Part I: Infrastructure, systems and education Herein we give an introduction to infrastructure in its broadest sense noting that society has become ever more complex – initially there were nomadic tribes that developed with their own specialities so developing trade (maybe over long distances). Their systems gradually made way for the interwoven modern systems that we seem to take for granted in which there is an interlinking of capital, revenue and material flows that enable our global society. Infrastructures all depend upon the well-educated and involved actors having a good cross-cultural understanding in order to give service. In turn, infrastructures depend on an evolving hierarchy of technical infrastructures developing trade and commerce. People, as leaders, determine and structure the physical infrastructure (of roads, railways, canals [or canalized rivers], airports and ports) through which the goods are shipped; and they create a utilities infrastructure (the electricity, water [both clean and foul] and telecommunications [landlines, mobiles, the Internet and satellite systems]) which all support a commercial system that keeps the global complex working in a fairly smooth way. At least that is the theory – but we will see that our authors have different stories to unfold – the reading of which helps us learn how to make our practice better fit the realities. Human capital means the skills and abilities of the population and is widely believed to play a part in determining economic development: human capital is normally measured by educational attainment or literacy. In Chapter 2 Lynn and Vanhanen review the significance of these measures for the East Asian economies and introduce the concept of ‘intelligence’ as a new measure of human capital. They assess what contribution the high intelligence of the populations has made to the economic development of the East Asian economies. The economic success of the East Asian economies in the second half of the twentieth century supports convergence theory, which states that the gap between rich and poor countries should converge over time. This has occurred for the East Asian economies that have enjoyed greater economic growth than the western European economies; and that have by the end of the twentieth century achieved about the same per capita income. However, the present human capital approach suggests that convergence theory only works for nations whose populations have well-developed human capital expressed in high standards of educational attainment and high intelligence. Following analyses Lynn and Vanhanen show there are clear differences between the regional groups of countries both in the values of

John B. Kidd and Frank-Jürgen Richter 21

their national IQ, of per capita income, and in the residuals. The level of per capita income is somewhat higher than expected on the basis of national IQs in nearly all European and European offshoot countries, although most residuals are relatively small. Of the East Asian countries, Hong Kong and Japan are near the regression line, whereas per capita income is much lower than expected in South Korea and even lower in China. Yet they suggest that because of its high national IQ, China has the potential human capital for continued rapid economic growth. It is characteristic for the South and Southeast Asian countries that all of them score between the European-East Asian and African groups, and they are below the regression line with significant negative residuals. This means that their human capital potential is not yet effectively utilized and that we can expect economic growth in all of them. The Asian Business System is a combination of shareholder capitalism as in the Anglo-Saxon countries such as the US and UK, and the stakeholder capitalism of continental Europe. Globalization, the Internet and worldwide communication have seen the emergence of a third business system: one based on knowledge and creativity. The challenge of this third system, and its compatibility with Asian business, cultures and institutions is a fundamental issue for Asia to address in the twenty-first century. In Chapter 3 Choi contributes to the debate on infrastructure and productivity in Asia in the following three ways. First, he defines globalization in the twenty-first century as the interplay among technology, knowledge and creativity resources. Then, he analyses the Asian business system, especially the mix between shareholder and stakeholder business systems. Finally, he analyses the economic, social and institutional impact of ‘creativity’ as a resource in the Asian business system, and also its link to the Asian education system.

Part II: Governance and the new dynamics The Asian financial crisis was ushered in six years ago and it severely affected several of Asia’s one-time vibrant economies. Although the regional economic crisis had significant implications on the Asian economies with rising costs, falling demand, financing problems and mounting debts, the financial markets in Asia have since rebounded with Asia emerging as the fastest growing region. There have, however, been significant economic and financial transformations taking place in the Asian economies. The initiatives that have been adopted by countries, including investor protection measures, mechanisms to enhance competitiveness and corporate and financial restructuring,

22 Infrastructure and Its ‘Sticky’ Interconnections

have resulted in stronger and more resilient economies, which have helped in expanding regional growth and greater wealth creation. Chapter 4 examines in greater detail the issue of governance, and the manner in which improved governance has enhanced productivity and shareholder value in Asia. Singh, Phuah and Kaur consider the development of the three pillars of corporate governance, namely regulatory discipline, market discipline and self-discipline. These will be assessed to determine how they interact contemporaneously with one another. As the investors’ sophistication and the speed of information dissemination increase, the quality of corporate governance will play an increasing role in the willingness of creditors to provide loans to companies and the willingness of investors to purchase shares in the companies concerned. The authors show that to ensure high standards of corporate governance the linkages between good governance and enhancements in shareholder value must be clearly identified and assessed. In the nineteenth and twentieth centuries, most Asian businesses were family run: indeed from earlier times most businesses world-wide were family run. However, the Asian businesses developed a symbiotic relationship with their host economies – providing employment and economic growth in return for government contracts and protectionist policies and several have grown into some of the world’s largest conglomerates. Presently, about half the listed companies in Asian countries are family owned. In his analysis of Asian-run and family-dominated conglomerates in Chapter 5 Mirza notes that two characteristics continuously surface. These characteristics differentiate Asian corporations from their counterparts in the US and the other developed economies worldwide. First, the ownership and control of Asian corporations is often concentrated among a few large families; and second, close affiliation within Asian corporate groups (and/or between these businesses and their governments) is the norm, in direct contradiction to practices common in the West, particularly in the US. Chapter 5 examines how family-run enterprises in Asia are evolving to adapt to the new world economic order. Have their relationships with host governments changed? How has the regional economic and geopolitical climate affected their fortunes? What structural changes have they undergone to deal with the challenge of globalization? And what are the factors that will affect their relevance and survival in the new millennium? The impact of the post-September 11 environment towards business operations is wide-ranging and it crosses international and national

John B. Kidd and Frank-Jürgen Richter 23

boundaries. New legislation, new business and political relationships, new financial restrictions on fund transfers are just some of the issues affecting multinational operators. This is especially true in the Asian region due to the perceived regrouping of terrorist cells in parts of the region, and the acknowledged financial requirements of these organizations. Multinational corporations that are operating in the region need to understand the implications that this has with regard to their operations and financial transactions. As the governance structures, anti-corruption methodologies and regulatory regimes in the region are constantly changing in light of these new requirements a hermeneutic study is being conducted in selected countries within the region to access their impact. The experiences of the multinational operators, government officers and in some instances human rights organizations and NGO’s are discussed in Chapter 6. It is recognized that the challenges of capitalism, its relationship to moral values and ‘public goods’ as outlined in previous studies have changed significantly in the region since 11 September 2001. Thus the study, and its results, offer a timely and better understanding of these changes. The Asia Development Bank (ADB) supports member countries in improving transport governance and regulation: they, and other donors, support transport ministries and regulatory bodies in improving operational effectiveness and efficiency, and in enhancing performance management and orientation. The focus of Chapter 7 is the ADB’s work on road improvements. The objectives of this support (noting the key result indicators) include improving accessibility (average road user cost, travel time and reliability), traffic safety (fatalities and injuries per vehicle-km), environment (pollution and noise), equity (benefits to all citizens, especially the poor), programme development (planning, budgeting and other management systems for construction, maintenance and operations), programme delivery (forecasted vs. actual costs, overhead expenses), and programme performance (value of road assets, roughness, bridge deck area, road surface condition, and user satisfaction). With this conceptual foundation in mind, the chapter draws from recent experience in the Asia-Pacific region to examine the extent to which road administrations are able to meet the above objectives, and the key institutional issues that need to be addressed. Although experience with the sector has improved our understanding of what works and what needs to improve: the successes and failures of reforms are better understood than in the past with the help of cross-border reform networks, international agencies, think tanks, consultants, the media,

24 Infrastructure and Its ‘Sticky’ Interconnections

and scholars – a genuine evaluation of reforms using rigorous social science techniques is rare. While the chapter notes that results have been achieved, it finally asks for more in-depth research on how to achieve high performance in road administration.

Part III: Focused examples of infrastructure changes Korea suffered a major financial crisis in November of 1997, yet two years later it was on its way to regaining the status of an ‘Asian Tiger’ country. FDI (Foreign Direct Investment) was seen as a key element in the descent and ascent of Korea’s economy. But by 2003 Korea was seen again by the business community as being at a crossroad, with major challenges ahead: the maintenance of inwards FDI was seen as the key to keeping Korea’s ‘Tiger’ status. The reasons for Korea’s decline in 1997 are up for debate but several theories are discussed in Chapter 8. From a business perspective however, Korea’s ascent could be placed in two categories. The first is traditional: ‘Economic policies’ with a mix of tax incentives, financial deregulation, and so on. Here FDI is seen as a catalyst to improving a countries economy. The second category, and perhaps more interesting, could be labelled as ‘Liveability’. By improving the ability to attract FDI, the resulting application of the FDI in the country should improve the quality of life for its citizens: to some extent this becomes a circular and beneficial pump. Thus we would expect that by improving aspects of both categories the Korean government would expect increased FDI in the future. Asia is, in many aspects, the region of extremes and has been developing with high speed and high volatility across all its complex and comprehensive diversities, cultures, religions, and economical divides. Chapter 9 considers the way in which the region has an outstanding opportunity to communicate precise messages in an adequate, appropriate, fast and reasonable way to global, regional, domestic and local audiences by making smart use of state-of-the-art technologies in order to take proactive approaches to promote products and services. As Asian infrastructures have been developing, so have consumer’s behaviours changed dramatically in the way they get and receive information, do research, and shop. New technologies and an increased range of interactive direct marketing methods enable countries and marketers to provide more relevant information to personal computers, to be able to analyse comprehensive reports, and instantly to remarket based on transactions, retrieved interests, noted behaviours or permission-based demographical information.

John B. Kidd and Frank-Jürgen Richter 25

The ‘pushers’ will be able to develop and close the marketing and communication loop and Asia as a whole can benefit from increased investment – first in IT-led programmes, followed by investment in other infrastructures supporting that which has been ‘sold’ on the Web.

Part IV: A future scenario At the start of this new century, Asian nations are poised to become the engines of global economic growth. The global marketplace offers great opportunity but requires that the supply of human capital keeps pace with demand – specifically we need well-educated and skilled workers with effective management and leadership skills. Leadership development in Asia must be approached with a consideration of two sets of factors. First, globalization is reshaping definitions of leadership and desired leadership skills, resulting in the adoption of various combinations of traditional and modern practices. Second, Asia is a vast continent with distinct cultures. The work of researchers and practitioners across Asia indicates that leadership preferences and needs vary from country to country and from organization to organization. While the changing environment and unique needs of individual organizations eliminate any ‘one size fits all’ approach to leadership development in Asia, the work of the Centre for Creative Leadership (CCL ®), discussed in Chapter 10, offers a clear framework that can help organizations develop leadership capacity in a deliberate way. Their model employs a process of ‘assessment, challenge, and support’ that helps leaders learn, grow and change over time. Utilizing these elements within a cohesive system of leader development enhances the efforts of Asian nations and organizations to develop more effectively their human capital. Kidd and Richter in Chapter 11 fully agree with Alexander: the building of infrastructure has very much to do with the excellence of leadership. Leaders have to articulate their visions to reinforce infrastructure across Asia. Asia can’t afford a second crisis. The signals are alarming. The Chinese economy as seen in 2004 shows signs of overheating. And while the Japanese economy is recovering it is very much dependant on the well-being of China. Likewise other nations in Southeast Asia who make bilateral trade agreements with China. Asia may need a ‘Beijing Consensus’ modelled after the Copenhagen model to tackle the current problems in Asia (also the geopolitics, India–Pakistan, Taiwan, North Korea) by building regional infrastructures better enabling trade, services, and human well-being.

26 Infrastructure and Its ‘Sticky’ Interconnections

References Burton, J. (1995) ‘Partnering with the Japanese: Threat or opportunity for European Businesses?’ European Management Journal, 13, 304–16. Child, J. (2001) ‘Trust – The Fundamental Bond in Global Collaboration’, Organizational Dynamics, 29(4), 274–88. Coase, R. H. (1937) ‘The Nature of the Firm’, Economica, 6, 386–405. Davies, G. (1996) A History of Money: From Ancient Times to the Present Day, Cardiff: University of Wales Press. Durkheim, E. (1933) The Division of Labour in Society, New York: Macmillan. Elman, B. A. (2000) A Cultural History of Civil Examinations in Late Imperial China, Berkley, CA: University of California Press. Etienne, G. (2003) ‘The Economy of Seepage and Leakage in Asia: The Most Dangerous Issue’, in J. B. Kidd and F.-J. Richter (eds) Fighting Corruption in Asia: Causes, effects and remedies, Singapore: World Scientific. Franz, D. (2001) ‘Ancient Secret Systems Moves Money Globally’, New York Times, 3 October, online at: http://www.globalpolicy.org (accessed May 2004). Fukuyama, F. (1995) Trust: The Social Virtues and the Creation of Prosperity, New York: Free Press. Hardin, G. (1968) ‘The Tragedy of the Commons’, Science, 162, 1243–8. Hawkin, S. (2001) The Universe in a Nutshell, London: Bantam Books. Inkpen, A. (1996) ‘Creating Knowledge through Collaboration’, California Management Review, 39(1), 123–41. Khanna, T., Gulati, R. and Nohria, N. (1998) ‘The Dynamics of Learning Alliances: Competition, Co-operation and Scope’, Strategic Management Journal, 19(3), 193–204. Kidd, J. B. and Richter, F.-J. (eds) (2002) Corruption in Asia: Causes, Effects and Remedies, Singapore: World Scientific Press. Kripalani, M. (2004) ‘The Digital Village’, Business Week, 28 June, 28–30. Larsson, R., Bengtsson, L., Henricksson, K. and Sparks, J. (1999) ‘The Interorganizational Learning Dilemma: Collective Knowledge Development in Strategic Alliances’, Organizational Science, 9(3), 285–306. Lehaney, B., Clarke, S., Coakes, E. and Jack, G. (2004) Beyond Knowledge Management, Hershey, London: Idea Group Publishing. Lewicki, R. J., McAllister, D. J. and Bies, R. J. (1998) ‘Trust and Distrust: New Relationships and Realities’, Academy of Management Review, 23(3), 438–58. Lilley, P. (2002) ‘The Asian Money Laundering Explosion’, in J. B. Kidd and F.-J. Richter (eds) Corruption in Asia: Causes, Effects and Remedies, Singapore: World Scientific Press. Luo, Y. (2000) Guanxi and Business, Singapore: World Scientific Press. McAllister, D. (1995a) ‘Affect- and Cognition-based Trust as Foundations for Interpersonal Cooperation in Organisations’, Academy of Management Journal, 38, 24–59. McAllister, D. J. (1995b) ‘Two faces of Interpersonal Trust’, in R. J. Lewicki, R. J. Bies and B. H. Sheppard (eds), Research on Negotiation in Organisations, 87–112, Greenwich, NJ: JAI Press. Moran, P. and Ghoshal, S. (1996) ‘Value Creation by Firms’, in J. B. Keys and L. N. Dosier (eds), Academy of Management Best Paper Proceedings, 41–5.

John B. Kidd and Frank-Jürgen Richter 27 Murakami, T. (1992) ‘Kyosei and the Next Generation of Japanese-style Management’, Nomura Research Institute Quarterly, Winter, 2–27. Powell, B. (2002) ‘Its All Made in China Now’, Fortune, 4 March, 59–62. Rao, M. (2003) Leading with Knowledge: Knowledge Management Practices in Global Infotech Companies, New Delhi: Tata McGraw-Hill. Richter, F.-J. (2000) Strategic Networks: The Art of Japanese Interfirm Co-operation, New York: Haworth Press. Sanderson, M. (1999) Education and Economic Decline in Britain, 1870 to the 1990s, New York: Cambridge University Press. Senge, P. (1990) The Fifth Dimension: The Art and Practice of the Learning Organisation, New York: Doubleday. Stiglitz, J. (1998) Towards a New Paradigm for Development Strategies, Policies and Processes, The Prebisch Lecture at UNCTAD, see Press release TAD/INF/PR/9834 on 21/10/98. Teramoto, Y. (1993) Gakushu suru soshiki (The Learning Organization), Tokyo: Shobunsha. The Economist (2004) ‘Special Report: Putting the world to rights – Copenhagen Consensus’. London: The Economist, 5 June 2004. Vol. 371, iss. 8378, p. 65. Weick, K. E. (1979) The Social Psychology of Organizing, Reading, MA: Addison-Wesley. Williamson, O. E. (1981) ‘The Economics of Organisations: The transaction cost approach’, American Journal of Sociology, 87, 548–77. Williamson, O. E. (1985) The Economic Institutions of Capitalism, New York: Free Press. Zuboff, S. (1988) In the Age of the Smart Machine: The Future of Work and Power, Oxford: Heinemann.

2 The Role of Human Capital and Intelligence in the Economic Development of the Asian Economies Richard Lynn and Tatu Vanhanen

The cognitive skills of a population are known as its human capital. It has been widely accepted that human capital is an important determinant of economic growth and development. Thus ‘human capital, particularly that attained through education, has been emphasised as a critical determinant of economic progress’ (Barro and Lee, 2001, p. 541); and ‘growth rates are affected by ideas and invention, which in turn are related to the stock of human capital either through research and development activities or though adoption behaviour. These formulations indicate not only why the level of output is higher when a country has more human capital but also why the growth rate is higher’ (Hanushek and Kimko, 2000, p. 1184). Human capital in different countries has been measured by the number of years of its educational programme, and by educational attainment. The second of these is more valid as an index of human capital (Engelbrecht, 2003). Hanushek and Kimko (2000) and a number of other economists have shown that educational attainment measured in the international studies of mathematics and science are positively associated with economic growth and per capita income. We have recently proposed a new measure of human capital based on the intelligence (IQ) of the population (Lynn and Vanhanen, 2002). Intelligence is a construct that determines the efficiency with which mental tasks are performed. Intelligence was usefully defined in a letter by 52 leading experts published in the Wall Street Journal in 1994 under the lead signature of Linda Gottfredson: Intelligence is a very general mental capacity which, among other things, involves the ability to reason, plan, solve problems, think abstractly, comprehend complex ideas, learn quickly and learn from 28

Richard Lynn and Tatu Vanhanen 29

experience. It is not merely book learning, a narrow academic skill, or test taking smarts. Rather, it reflects a broader and deeper capability for comprehending our surroundings – ‘catching on’, ‘making sense’ of things, or ‘figuring out’ what to do. (Gottfredson, 1997, p. 13) Intelligence is associated with earnings among individuals at a magnitude (quoting the Spearman rank correlation – a statistical measure of association between variables – eds) of around 0.35 to 0.37 (Jencks, 1972; Murray, 1998), and with job proficiency at a magnitude of 0.51 (Schmidt and Hunter, 1998). It therefore seems probable that if there are intelligence differences between nations, these will have an effect on aggregate earnings.

Intelligence differences and economic development Hitherto it has been generally assumed by economists that intelligence is the same in all populations. For instance, Hanushek and Kimko (2000, p. 1191) write ‘we assume that the international level of average ability of students does not vary across countries.’ However, we have shown that this is incorrect, and that, in a study of 81 nations, there are considerable intelligence differences between countries and that these are correlated with GDP-PPP per capita (1998) at a magnitude of 0.83, and with economic growth of GDP per capita (1983–96) at 0.66. We have also shown that IQ and educational attainment are quite highly associated across countries. National IQs are correlated at 0.77 with attainment in mathematics, and 0.70 with attainment in science in a sample of 27 countries based on the Third International Mathematics and Science Study. Thus national differences in educational attainment are to a considerable extent a function of national differences in IQ. This is not surprising, because there are quite strong associations of approximately 0.65 between IQ and educational attainment among individuals within countries (Yule et al., 1982; Lynn et al., 1984). In this chapter we consider the contribution of human capital as measured by educational attainment, and by IQ to per capita income and economic growth in the Asian economies. For comparative purposes we examine the same data for the market economies of Europe, North America and New Zealand: the data to be discussed are given in Table 2.1. The figures for educational attainment are taken from Hanushek and Kimko (2000) who have combined the results of the First and Second International Mathematics and Science Studies and calculated national

30 Table 2.1 Data on educational attainment, national IQ, GDP per capita (PPP) in 1998, and economic growth in GNP per capita over the period 1976–98 in the group of 43 European and Asian countries Educ Attain

Australia Austria Belgium Canada Cyprus Denmark Finland France Germany Greece Iceland Ireland Italy

48.13 – 53.25 47.57 42.24 53.48 48.76 54.15 59.03 49.11 48.13 47.59 44.59

National IQ

98 102 100 97 92 98 97 98 102 92 98 93 102

GDP–PPP Per cap income 1998

Economic Growth GNP per capita 1976–98

22,452 23,166 23,223 23,582 17,482 24,218 20,847 21,175 22,169 13,943 25,110 21,482 20,585

232.8 403.8 274.3 166.6 705.4 346.4 329.0 280.8 250.3 349.8 359.2 616.4 563.9

Educ Attain

National IQ

GDP–PPP Per cap income 1998

Economic Growth GNP per capita 1976–98

East Asia China Hong Kong Japan Singapore S. Korea Taiwan Median

59.28 56.93 60.65 56.51 56.21 56.28 56.73

100 107 105 103 106 104 104.5

3,105 20,763 23,257 24,210 13,478 13,000 17,119

82.9 1,021.8 559.5 1,013.3 1,089.6 1,136.7 1,017.5

South Asia India Indonesia Iran

21.63 37.98 20.79

81 89 84

2,077 2,651 5,121

186.7 183.3 −8.3

Luxemburg Malta Netherlands New Zealand Norway Portugal Spain Sweden Switzerland UK USA Median

39.45 53.16 56.84 52.44 49.60 50.28 49.40 47.41 57.17 53.98 43.43 49.44

101 95 102 100 98 95 97 101 101 100 98 98

33,505 16,448 22,176 17,288 26,342 14,701 16,212 20,659 25,512 20,336 29,605 21,825

574.5 430.3 299.4 245.9 362.7 532.5 382.2 195.5 351.4 432.3 271.9 350.6

Iraq Israel Jordan Kuwait Malaysia Philippines Sri Lanka Syria Thailand Turkey Median

29.34 51.29 39.38 28.3 47.89 34.35 41.54 31.6 39.83 41.52 37.98

87 94 87 83 92 86 81 87 91 90 87

3,197 17,301 3,347 25,314 8,137 2,555 2,979 2,896 5,456 6,422 3,555

7.9 306.6 149.2 30.5 318.6 156.1 305.0 30.8 478.9 219.2 183.3

31

32 Human Capital and Intelligence in Economic Development

scores on a mean of 50 for the total population of nations. The IQ data are taken from Lynn and Vanhanen (2002, pp. 73–80). The Real GDP per capita (PPP) income 1998 and economic growth data (GNP per capita over the period 1976 to 1998) are also taken from Lynn and Vanhanen (2002, Appendix 2). When these data are examined it is apparent that there is a considerable difference between the East Asian nations of the Pacific Rim (China, Japan, Hong Kong, South Korea, Singapore and Taiwan) and the South Asian nations from Turkey in the west through to Malaysia in the east and including Indonesia and the Philippines (we include Singapore among the East Asian Nations because its population is 76 per cent ethnic Chinese). To make this difference easily discernible, the data for these two groups of nations are presented separately. Examining the data in Table 2.1, we see that the nations’ results for educational attainment and IQ are broadly consistent. The East Asian countries score highest on both measures, the European market economy countries come next, while the South Asian countries score lowest. The same consistency is present for economic growth, which is highest in East Asia, intermediate in the European nations, and lowest in the South Asian nations. However, there is less consistency for per capita incomes, which are higher in the European countries than in the East Asia, while they are lowest in the South Asian countries. For the entire set of nations, the correlations between educational achievement, IQ, per capita income and economic growth are shown in Table 2.2. These correlations are also presented within European nations (Table 2.3) and the Asian nations (Table 2.4). Although the correlations in Tables 2.2 to 2.4 are all statistically significant and quite high in the total group of 43 nations, they are not perfect – so we now consider the explanations for anomalies. Among the European nations, the principal anomaly is the United States, which has one of the lowest scores for educational attainment, average IQ and low economic growth, but the second highest (after

Table 2.2 Intercorrelations of educational attainment, national IQ, GDP per capita (PPP) 1998, and economic growth in GNP per capita over the period 1976–98 in the group of 43 European and Asian countries

Educ IQ GDP

Educ

IQ

GDP

Econ Growth

1.0

.846 1.0

.493 .651 1.0

.493 .589 .294

Richard Lynn and Tatu Vanhanen 33 Table 2.3 Intercorrelations of educational attainment, national IQ, GDP per capita (PPP) 1998, and economic growth in GNP per capita over the period 1976–98 in the group of 24 European countries

Educ IQ GDP

Educ

IQ

1.0

.377 1.0

GDP −.150 .478 1.0

Econ Growth −.481 −.376 −.108

Table 2.4 Intercorrelations of educational attainment, national IQ, GDP per capita (PPP) 1998, and economic growth in GNP per capita over the period 1976–98 in the group of 19 Asian countries

Educ IQ GDP

Educ

IQ

1.0

.896 1.0

GDP .501 .579 1.0

Econ Growth .713 .818 .556

Luxembourg) per capita income. The anomaly is the high per capita income, which is largely attributable to the accumulation of capital during the twentieth century. Most of the European countries experienced large destructions of capital during the world wars, which the US largely escaped. Another anomaly is Norway, which has an average educational attainment, average IQ and average economic growth, but the second highest per capita income in Europe. The principal reason for its high per capita income is its possession of North Sea oil. Switzerland with the fourth highest per capita income is not an anomaly: it has high human capital measured by educational attainment and IQ. Ireland too may be considered something of an anomaly in so far as it has weak human capital measured by educational attainment and IQ, but average per capita income and high economic growth. These are largely attributable to financial transfers from the European Community, and tax incentives for international corporations to set up in the country. Because of these and other anomalies and because the values of variables vary relatively little in this group of countries, correlations in the European group of 24 nations are much weaker than in the total group, or in the Asian group of 19 nations (Table 2.3). The positive correlation between educational attainment and national IQ is only 0.377. The correlation between educational attainment and per capita income is slightly negative, whereas it is moderate (0.478) between national IQ and per capita income.

34 Human Capital and Intelligence in Economic Development

Both educational attainment and IQ are negatively correlated with economic growth in this group of 24 European nations. Looking now at the East Asian nations – it may be seen that their educational attainment and their IQs are both on average higher than in the European countries. There is little overlap between the two groups of nations. The median of educational attainment is 56.73 for East Asian nations and 49.44 for European nations. On intelligence, only China (IQ = 100) scores below the seven highest European nations with IQs of 101 to 102. Considered as a group, their IQs are quite homogeneous lying in the range between 100 and 107 and with a median of 104.5. Thus, the East Asian peoples have a higher average IQ than the Europeans. However, their per capita incomes are quite varied, ranging from very low in China, intermediate in South Korea and Taiwan, and high in Hong Kong, Japan and Singapore. The low per capita income and the low rate of economic growth in China is attributable to its communist economy approximately during 1950 to 1990. From around 1990 it began to introduce a market economy and its rate of economic growth increased dramatically. The transition from a command economy to a market economy takes time, in part because populations have to learn to become entrepreneurially minded: and this has only recently begun in China. In South Korea and Taiwan the per capita incomes are only moderate at $13,478 and $13,000 respectively. This is attributable to the historic backwardness of these economies. Even so, these two countries have experienced very fast economic growth during the period 1976 to 1998 essentially because they have highly intelligent populations working in market economies. Hong Kong, Japan and Singapore have high per capita incomes. The median per capita income ($ 23,257) of these three nations is slightly higher than that of the 24 European nations ($ 21,825), but their economic growth has been higher. This again is because they have highly intelligent populations working in market economies. Looking finally at the South Asian economies, we see that these populations have lower IQs (median 87) than those in Europe (98), or in East Asia (104.5). The South Asian economies also have much lower per capita incomes (median $ 3,555) – less than a sixth of those in the European market economies, and approximately a fifth of those in East Asian economies. The IQs in South Asia are reasonably homogeneous and there is no overlap with the IQs in Europe and East Asia, except for Israel with its IQ of 94. Israel is the greatest anomaly among the South Asian countries because of its higher educational attainment – which is about the same as the

Richard Lynn and Tatu Vanhanen 35

median of the European countries (51.29 compared with 49.25). It also has a high IQ (of 94) the highest among the South Asian nations and close to the European median of 98. These two measures of high human capital go some way to explain their high per capita income and economic growth, as compared with the rest of South Asia. The explanation for the anomalous position of Israel is that approximately 50 per cent of the population are European Jews, 33 per cent are eastern Jews and the remainder mainly Arabs. The population is therefore a European–South Asian mix, and hence the country falls intermediately between the European nations and South Asian nations. There is a somewhat similar ethnic mix in Turkey, where the IQ (90) is only fractionally below the lowest of the European nations (Greece and Cyprus, IQ = 92), and the per capita income and economic growths are above the average of South Asia. The explanation is that the Turkish population is a mix of European and South Asian peoples that has come about through their close geographical proximity and interbreeding over the course of many centuries. Kuwait creates another anomaly within the generally low per capita incomes in South Asia – it has a low IQ (83), but a much higher per capita income than the rest of South Asia. The explanation for its high per capita income is that it is oil rich, and has a small population of approximately 1.7 million. And finally, at the eastern extremity of South Asia, Malaysia and Thailand have higher IQs (92 and 91) than in the remainder of South Asia (apart from Israel), and their per capita income and economic growth are also above the average of South Asia (apart from Israel). The explanation is that both countries have significant Chinese populations (30 per cent in Malaysia and 12 per cent in Thailand), who have high IQs and make important contributions to the economies. Despite the anomalies, the broad picture is that the Asian countries cannot usefully be considered as a single homogeneous group. On the contrary, they fall into two quite disparate groups consisting of the East Asian countries with their high human capital expressed in high educational attainment and IQs, their high per capita income (except for China), and high rates of economic growth; and the South Asian countries with their low human capital expressed in low educational attainment and IQ, their low per capita income (except for Israel and Kuwait), and their low rates of economic growth. We believe that the main reason for the low per capita incomes and rates of economic growth in most of the South Asian countries is attributable to their low human capital. Because the values of the variables vary considerably in the group of Asian countries, nearly all correlations are somewhat higher in this

36 Human Capital and Intelligence in Economic Development

group of 19 Asian countries than in the total group of 43 countries (see Tables 2.2 and 2.4). The correlation between educational attainment and national IQ is high (0.896), and both educational attainment and IQ are also strongly correlated with economic growth (0.713 and 0.818 respectively).

Relative contributions of educational attainment and IQ to per capita income and economic growth We consider now the problem of the relative contributions of educational attainment and IQ to per capita income and economic growth. We adopt the position that IQ should be considered the primary determinant because IQs are present in early childhood and are determinants of educational attainment, as shown in Jencks’ (1972) classical path model. We have, therefore, carried out a multiple regression to ascertain what contribution educational attainment makes to per capita income and economic growth over and above that made by IQ. The results are shown in Tables 2.5 and 2.6. It will be seen that once IQ is taken into account educational attainment makes very little contribution to per capita income and economic growth. Table 2.5 shows that the multiple correlation in which educational attainment and IQ are taken together to explain variation in GDP-PPP per capita 1998 is only slightly higher (0.660) than the single correlation between national IQ and per capita income (0.651, Table 2.2). We see also from Table 2.5 (standardized coefficients) that the relative significance of educational attainment is small compared to the significance of IQ. Table 2.6 shows that, in the case of economic growth, educational attainment does not add anything to the explanation provided by national IQ.

Table 2.5 The results of multiple regression analysis in which educational attainment and national IQ are used to explain variation in GDP-PPP per capita 1998 in the group of 43 European and Asian countries Variable

Coefficient

Standardized coefficient

t-Value

P-value

Intercept Educ attain National IQ R = 0.660 R2 = 0.435

−7534.523 −17.994 104.754

7534.523 −0.202 0.822

−3.768 −0.908 3.688

0.0005 0.3691 0.0007

Richard Lynn and Tatu Vanhanen 37 Table 2.6 The results of multiple regression analysis in which educational attainment and national IQ are used to explain variation in economic growth in GNP per capita over the period 1976–98 in the group of 43 European and Asian countries Variable

Intercept Educ attain National IQ R = 0.589 R2 = 0.347

Coefficient −1916.836 −0.486 24.216

Standardized coefficient

t-Value

P-value

−1916.836 −0.017 0.604

−2.834 −0.073 2.521

0.0072 0.9425 0.0158

This conclusion differs from that frequently reached in the economic literature to the effect that educational attainment is causal to economic growth. For instance, Hanushek and Kimko (2000) write of the positive association between scores on tests of mathematics and science and economic growth ‘the concentration on mathematics and science corresponds to the theoretical emphasis on the importance of research and development activities as a source of growth; able students with a good understanding of mathematics and science form a pool of future engineers and scientists’. We do not dispute that talented mathematicians and scientists make some contribution to economic growth, but we believe the main reason for the positive association between scores on tests of these subjects and economic growth is that these scores are proxies for intelligence. High intelligence in a nation produces efficient work in all spheres of life and this translates into rapid economic growth and high per capita income. Thus, we believe that the correlation of high scores on tests of mathematics and science with per capita income and economic growth arise principally because they are all significantly determined by a single common cause: the intelligence of the population.

Why IQs affect economic development We propose that there are seven principal reasons why high national IQs are a major factor contributing to high per capita incomes and high rates of economic growth: 1. People with high IQs can produce high technology goods and services for which there is a demand and which those with low IQs are

38 Human Capital and Intelligence in Economic Development

2.

3.

4.

5.

6.

unable to provide. Goods and services for which there is a strong demand command a high value and those who are able to produce them or who can produce them most effectively secure the highest incomes. This principle is well established within nations: it also holds between nations because nations are aggregates of individuals. Intelligence is a major determinant of educational attainment, so nations with high IQs achieve high educational standards, shown in the correlation of 0.846 between national IQs and educational attainment (Table 2.2). The high educational attainments of populations with high IQs provide the skilled labour force and human capital that are required to maintain the high per capita incomes and strong economic growth of developed economies. Nations whose populations possess high IQs have a large elite who are able to produce high value new products such as automobiles, electronic products such as televisions, radios and video-recorders, industrial robots, aeroplanes, computers, mobile telephones and pharmaceuticals. These products are designed and made in the European nations, the US, or the East Asian nations, but not in South Asia. Nations whose populations have high IQs can provide other nonscientific but complex and cognitively demanding goods and services that command high prices in international markets. These include the financial services of banking, stock exchange dealing and insurance provided by the leading financial centres of London, New York, Frankfurt, Tokyo and Hong Kong; the fashion industry of Paris and Milan, the perfume industry of Paris; and the film industry of Hollywood. The economic advantage of nations with high IQs does not only lie in their possession of cognitive elites who can produce high value goods and services. These nations also have large numbers of individuals of high average intelligence who are able to carry out efficiently management functions and perform the skilled work on which a successful economy depends. Nations whose populations have low IQs typically have large agricultural and mining industries, which do not require a high level of intelligence and for which there is in general a world surplus and often a weak demand. These products command only low prices in international markets and therefore low incomes for the producers. The principal exceptions to this are the high value of oil and of a few relatively rare and valuable raw materials, such as diamonds and gold – although the incessant and high demand for iron and steel

Richard Lynn and Tatu Vanhanen 39

products in China has distorted the historical market values from 2001 onwards. 7. In general, nations whose populations have high IQs have intelligent political leaders who manage their economies effectively and achieve high rates of economic growth. Intelligent economic management is required to produce the right conditions for economic growth. The most important of these is the introduction and maintenance of a market economy, the promotion of competition and free trade, and the prevention of the growth of monopolies and of restrictive practices by trade unions. It is also important for political leaders to ensure that interest rates are kept at the level that produces full employment with minimum inflation and that it promotes education and vocational training to produce a skilled workforce. In general the political leaders of European and East Asian countries (except for China) have provided these conditions for strong economic growth but the leaders of the South Asian countries have been less successful in this respect. For instance, India achieved only a modest rate of economic growth in the second half of the twentieth century, averaging 2.5 per cent a year of GNP. This is partly because the economy was not well managed by Jawaharlal Nehru and his successors. Nehru became Prime Minister of India in 1947 and adopted the regulated British economy and the economic planning of the Soviet Union as models for India. The state attempted to control the economy through a series of five-year plans modelled on those of the Soviet Union and an extensive licence permit system that restricted and restrained private economic activities, distorted free competition, and created a favourable environment for corruption (Gardner, 1998, pp. 579–82). The Indian economist Nafziger (1997, pp. 544–5) has written of these policies: ‘once the licensing system was created, politicians, bureaucrats, and sheltered businesses and their workers used centralized planning logic to define their own interest and to oppose reform, and Indian economists also rationalized the system’. These policies were continued by Nehru’s successors and hampered private enterprise in many ways (Bhuleshkar, 1973; Datt and Sundharam, 1979; Ghosh, 1979; Singh 1998a, 1998b). Yergin and Stanislaw (1998, pp. 74, 218) write that, inspired ‘by idealism and ideologies, India initially embraced a program that held back development that could have alleviated its massive poverty’; and the leaders of the Congress Party ‘believed that central planning, strong state control, and government knowledge would do a better job of allocating investment

40 Human Capital and Intelligence in Economic Development

and determining output than would many millions of individual decision makers’. They describe the consequences of this set of policies as follows: India developed a thoroughly complex and enormously cumbersome system. It operated through a Byzantine maze of quantitative regulations, quotas and tariffs, endless permits, industrial licenses, and a host of other controls: a maze in which incentives and initiative and entrepreneurship either were lost or became hopelessly distorted. All of this made the economy increasingly inefficient and bureaucratic dispensation took over the functions of the marketplace . . . The restrictions brought economic stagnation. There is now widespread agreement among economists that India would today be a considerably richer country if her political leaders had adopted a market economy. Tavleen Singh (1999) has written of Nehru’s economic policies: ‘while Jawaharlal Nehru undoubtedly made good speeches about trysts with destiny and other such romantic things, he appears to have been singularly wrong in choosing the bus India needed to take’, and she continues, noting that India ‘missed the most important bus’ when Rajiv Gandhi became prime minister: ‘as the prime minister with the largest mandate in independent India’s history he could have done anything he wanted – liberalized the economy, invested heavily in infrastructure, insisted on compulsory primary education, changed healthcare methods, brought about massive judicial reforms – and today we could have been a rich country instead of languishing among the 50 poorest in the world’.

Asia compared with Africa Many researchers have wondered why economic development has taken place in East Asia, and in Europe before that, much more successfully than in Africa and especially in sub-Saharan Africa. As a consequence, the gap between rich and poor countries has grown enormous. After World War II, economic growth was greatest in East Asia and lowest in sub-Saharan Africa (see, for example, Clague, 1997; Nafziger, 1997; Ayittey, 1999; Allen and Thomas, 2000; Todaro, 2000; World Bank, 2000; Hayami, 2001, pp. 31–55; Maddison, 2003; Seligson, 2003; Passe-Smith, 2003). We argue that differences in national IQs provide the most powerful explanation for developmental differences, and this factor explains especially well the gap between East Asia and sub-Saharan Africa.

Richard Lynn and Tatu Vanhanen 41 Regression Plot 3500 United States Switzerland Austria

Norway Denmark Ireland

3000

Japan

2500

Hong Kong

PPP-GNI-2001

Israel

2000

Greece

1500

Singapore

Spain New Zealand Portugal South Korea

South Africa

1000

Malaysia Iran

500

0

Egypt

Guinea Ghana Ethiopia

Nepal India

Sierra Leone

Morocco

Thailand Turkey

China

Indonesia

Zambia

–500 60

65

70

75

80

85

90

95

100

105

110

National IQ Y = –4865,698 + 70,365 * X; R2 = ,691

Figure 2.1 The results of the regression analysis of PPP-GNI-2001 on national IQ in the group of 51 European, Asian and African countries

We test our argument by exploring the relationship between national IQ and per capita income (PPP gross national income in 2001) in a group of 55 countries comprising 18 Asian countries, 20 old European and European offshoot market economies, and 17 African countries. This group covers only the countries for which we have direct evidence of national IQs. In order to emphasize the contrast between extreme cases, 13 Latin American and Caribbean countries, 9 former European socialist countries, and 4 Pacific Ocean countries are excluded from the total group of 81 countries. Data on PPP gross national income (PPPGNI) in 2001 are from the World Bank’s World Development Indicators 2003 (World Bank, 2003, Table 1.1). These data are not available from four of the 55 countries (Equatorial Guinea, Iraq, Qatar and Taiwan). So the group consists of 51 countries. The correlation between national IQ and PPP-GNI-2001 is 0.831, which means that national IQ explains 69 per cent of the variation in PPP-GNI-2001 in this group of 51 countries. Figure 2.1 illustrates the results of the regression analysis of PPP-GNI-2001 on national IQ.

42 Human Capital and Intelligence in Economic Development

We can see from Figure 2.1 that there are three clearly separate groups of countries: Sub-Saharan African countries are near the lower left corner; two North African and South and Southeast Asian countries are at the middle below the regression line; and nearly all the old European market economies and East Asian countries are clustered to the upper right corner. China near the lower right corner is the most extremely deviating outlier. The results of the regression analysis for single countries are given in Table 2.7. Table 2.7 shows that there are clear differences between the regional groups of countries both in the values of their national IQ, of per capita income, and in the residuals. The level of per capita income is somewhat higher than expected on the basis of national IQs in nearly all European and European offshoot countries, although most residuals are relatively small. The United States, Ireland, Norway, Switzerland, and Denmark were in 2001 the most highly deviating cases with large positive residuals. Of the East Asian countries, Hong Kong and Japan are near the regression line, whereas per capita income is much lower than Table 2.7 The results of the regression analysis of PPP-GNI-2001 on national IQ for single countries in the group of 51 countries Country

IQ

PPP-GNI 2001

Residual PPP-GNI

Fitted PPP-GNI

24,630 26,380 26,150 26,530 28,490 24,030 24,080 25,240 17,520 27,170 24,530 27,390 18,250 29,340 17,710 19,860 23,800 30,970 24,340 34,280

4,329 3,264 4,442 6,933 8,189 4,433 3,779 2,124 1,441 10,387 1,414 4,274 −3,458 9,039 −480 263 1,388 8,558 2,632 13,979

20,301 23,116 21,708 19,597 20,301 19,597 20,301 23,116 16,079 16,783 23,116 23,116 21,708 20,301 18,190 19,597 22,412 22,412 21,708 20,301

Old European, and offshoot market economies Australia Austria Belgium Canada Denmark Finland France Germany Greece Ireland Italy Netherlands New Zealand Norway Portugal Spain Sweden Switzerland United Kingdom United States

98 102 100 97 98 97 98 102 92 93 102 102 100 98 95 97 101 101 100 98

Richard Lynn and Tatu Vanhanen 43 East Asian countries China Hong Kong Japan Korea, South Singapore

100 107 105 106 103

3,950 25,560 25,550 15,060 22,850

−17,758 −1,074 323 −10,870 −969

21,708 26,634 25,227 25,930 23,819

81 89 84 94 86 92 78 86 91 90

2,820 2,830 5,940 19,630 4,400 7,910 1,360 4,070 6,230 5,830

−5,519 −11,138 −4,510 2,144 −7,457 −8,169 −4,868 −7,787 −9,146 −8,842

8,339 13,968 10,450 17,486 11,857 16,079 6,228 11,857 15,376 14,672

73 65 83 63 71 66 72 85 67 64 72 72 72 73 77 66

680 630 3,560 800 2,170 1,900 970 3,500 790 460 10,910 1,750 520 1,460 750 2,220

−2,030 3,549 −6,186 5,127 868 4,116 −1,036 −7,654 2,302 4,083 8,904 −256 −1,486 −1,250 −4,774 4,436

2,710 −2,919 9,746 −4,327 1,302 −2,216 2,006 11,154 −1,512 −3,623 2,006 2,006 2,006 2,710 5,524 −2,216

South and Southeast Asian countries India Indonesia Iran Israel Lebanon Malaysia Nepal Philippines Thailand Turkey African countries Congo (Brazzaville) Congo (Zaire) Egypt Ethiopia Ghana Guinea Kenya Morocco Nigeria Sierra Leone South Africa Sudan Tanzania Uganda Zambia Zimbabwe

expected in South Korea and even lower in China. South Korea is approaching the regression line, but China is still far away from the expected level of PPP-GNI. We suggest that because of its high national IQ, China has the potential human capital for continued rapid economic growth. It is characteristic for the South and Southeast Asian countries that all of them, except Israel, score between the European–East Asian and African

44 Human Capital and Intelligence in Economic Development

groups, and they are below the regression line with significant negative residuals. This means that their human capital potential is not yet effectively utilized and that we can expect economic growth in all of them. Some of them may achieve or nearly achieve the expected level of per capita income (cf. Hossain et al., 1999; Kakwani, 2000). Thus Hossain et al. (1999, pp. 3–17) wonder why South Asian economies failed to generate strong economic growth, although they were endowed with the initial conditions that were better than those faced by some of the East Asian economies. They seek explanation from the failures of South Asian policy makers. This may be true, but our point is that there is a crucial difference in national IQs between South Asian and East Asian countries. In India, economic growth has escalated during the last few years (see The Economist, ‘India’s Shining Hopes. A Survey of India’, 21 February 2004), but the target indicated by the regression line is still far off. Just as in China, the high population density and extremely large population make it difficult to raise the level of per capita income dramatically. Because of their higher national IQs, Egypt and Morocco are in the cluster of South and Southeast Asian countries. All sub-Saharan African countries, except South Africa, are in a cluster near the regression line. For some of them, residuals are positive, and for some others negative, but the sign of residual is not important in this group of countries for the reason that, because of the form of the regression equation, the fitted (predicted) values of PPP-GNI are negative for the countries whose national IQ is below 69. It is significant to note that, because of their low national IQs, there does not seem to be much human capital potential for economic growth in sub-Saharan Africa, although the level of per capita income in those countries is the lowest in the world. The low level of national IQ separates sub-Saharan African countries from South and Southeast Asian countries and even more from East Asian countries and explains why economic development has been much more successful in East Asia than in sub-Saharan Africa (cf. Alemayehu, 2000; Kayizzi-Mugerwa, 2003). South Africa’s large positive residual is principally due to the impact of the country’s white minority that comprises 14 per cent of the population. Leftwich (2000) remarks that it is important to establish why, in Africa, politics have been so venal and often brutal: and why, in consequence, developmental performance has been so weak. He adds: ‘it has nowhere been more difficult than in Africa to find a coherent and plausible theory of the relationship between politics, society, the state and its developmental function or failure’ (p. 86). We consider that

Richard Lynn and Tatu Vanhanen 45

clear differences in national intelligence between sub-Saharan Africa and East Asia provide a coherent and plausible theoretical explanation for the developmental failures in Africa and the successes in East Asia. As noted previously, human capital has been measured by years of education and by educational attainment. Our argument is that national differences in educational attainment are to a considerable extent a function of national differences in IQ. This argument has already been tested by data on educational attainment and national IQs (Table 2.2). Now we test and illustrate this argument by the regression analysis of the 1999 Mathematics Achievement Scale Scores (Lynn and Vanhanen 2002, pp. 70–1) on national IQ in the group of 23 European, Asian and African countries. Data on Mathematics Achievement Scale Scores are available only for 23 countries of this comparison group. The correlation between national IQ and Math 1999 scores is 0.922. Figure 2.2 summarizes the results of the regression analysis.

Regression Plot 650 Singapore South Korea

600

Belgium 550

Canada Malaysia

500 Math. 1999

Hong Kong Netherlands New Zealand

USA

Thailand

Italy

Israel

450 Iran

Turkey

400 Indonesia 350

Philippines Morocco

300 South Africa 250 70

75

80

85

90

95

100

105

110

National IQ Y = –410,454 + 9,393 * X; R2 = ,85

Figure 2.2 The results of the regression analysis of the 1999 Mathematics Achievement Scale scores (Math. 1999) on national IQ in the group of 23 European, Asian and African countries

46 Human Capital and Intelligence in Economic Development

Figure 2.2 indicates that the relationship between national IQ and Mathematics 1999 is nearly complete. All countries are relatively close to the regression line. In this limited sample, sub-Saharan Africa is represented only by South Africa, but it is reasonable to assume that the Mathematics Scale Scores would not be higher for the other sub-Saharan African countries. Five East Asian countries (Hong Kong, Japan, South Korea, Taiwan and Singapore) are at the upper right corner of Figure 2.2 as expected on the basis of their high national IQs, and South Africa is at the lower left corner as expected on the basis of its low national IQ. For all North African as well as South and Southeast Asian countries, the Mathematics 1999 scores are lower than for East Asian countries as expected on the basis of their national IQs. European countries are in a cluster close to the regression line and below the group of East Asian countries. Figure 2.2 supports our argument that differences in educational attainment reflect national intelligence differences and that, consequently, a nation’s potential to raise its level of human capital depends crucially on national IQ.

Causes of national IQ differences The identification of IQ differences as an important determinant of national differences in economic growth and development raises the question of what measures could be taken to increase the intelligence of the populations of developing countries. There is no doubt that the intelligence of the peoples in the third world countries is to some degree impaired by poor nutrition. Inadequate nutrition impairs the growth of the body and brain and retards the development of intelligence: and there is no doubt that inadequate nutrition is widespread in many economically developing countries and that it has this adverse effect.. The principal kinds of inadequate nutrition whose adverse effects on intelligence have been studied are protein-energy malnutrition, iron deficiency and iodine deficiency. Protein-energy malnutrition retards growth and in extreme cases causes kwashiorkor and marasmus; iron deficiency produces anaemia, a lack of energy and it impairs intelligence; and iodine deficiency produces goitre, and in pregnant women impairs the neurological development of the brain resulting in cretinism and impaired intelligence. Malnutrition impairs physical growth and is measured by ‘stunting’, ‘wasting’ and ‘underweight’:

• Stunting is low height. Moderate to severe stunting is defined as less than two standard deviations below the median height in relation to

Richard Lynn and Tatu Vanhanen 47

age of the well-nourished population. Stunting is caused by chronic insufficiency of protein for bone growth. • Moderate to severe wasting consists of weighing less than two standard deviations below the median weight for height of the well-nourished population. • Moderate to severe underweight consists of weighing less than two standard deviations below the median weight for age of the wellnourished population. The prevalence rates of moderate to severe malnutrition in different regions of the economically developing world in the early 1990s estimated by UNICEF (1996) and of anaemia among pregnant women in the years 1960–82 estimated by the World Health Organization (De Maeyer and Adiels-Tegman, 1985) are shown in Table 2.8. Surveys in individual countries confirm these results. For instance, a survey in India carried out in the 1980s found about 60 per cent of children under 3 years, and 44 per cent of those between 3 and 5 years were anaemic (Seshadri and Gopaldas,1989). Diseases, particularly diarrhoea and measles, which impair the absorption of nutrients, exacerbate inadequate nutrition in many economically developing countries. The adverse effect of malnutrition on the intelligence of many of the peoples in developing countries world is shown by a number of studies that have compared the IQs of well-nourished and malnourished children. Simeon and Grantham-McGregor (1990) have reviewed 15 such studies and conclude that in 10 of them malnourished children obtained lower IQs than the adequately nourished. They have also summarized seven studies in economically developing countries in which giving nutritional supplements to malnourished children increased their intelligence. Even in the economically developed countries some children have inadequate nutrition and this impairs their intelligence. For instance, several studies have found that infants who are breast-fed Table 2.8 Prevalence of malnutrition in economically developing countries (percentages) Region Sub-Saharan Africa SW Asia and North Africa South Asia East Asia and Pacific Latin America

Underweight

Wasting

Stunting

Anaemia

31 12 64 23 11

7 5 13 4 3

41 24 62 33 21

40 – 40 25 30

48 Human Capital and Intelligence in Economic Development

have higher IQs than those that are fed on formula milk obtained from cows (Lucas et al., 1992; 1998). The explanation for this is that breast milk contains nutrients not present in formula milk, and the iron in breast milk is sufficient whereas the iron in cows’ milk is less absorbable by infants. It has also been shown that some adolescents are nutritionally deficient and that giving nutritional supplements improves their intelligence. For instance, a study of adolescents in a socially deprived city in Britain found that 17 per cent were iron deficient and daily iron supplements given to these children for three months increased their IQs by 5.8 IQ points (Lynn and Harland, 1998). Other studies showing positive effects of nutritional supplements on the intelligence of children in economically developed nations have been described by Benton and Roberts (1988), Benton and Cook (1991), and Eysenck and Schoenthaler (1997). A second environmental factor that has sometimes been proposed as responsible for the low IQs of peoples in economically developing countries is lack of education. There is no consensus on whether education has a long-term beneficial effect on intelligence. Mackintosh (1998) reviews several studies showing that schooling increases intelligence but these are short-term gains and it has not been demonstrated that they are permanent. Nevertheless, it would be desirable to increase educational provision in developing countries for a variety of reasons and this would be likely to improve economic performance by raising the levels of cognitive skills. We therefore believe that efforts to increase economic growth in South Asia and in other economically developing countries could usefully be directed at improving nutrition and education.

References Alemayehu, M. (2000) Industrializing Africa: Development Options and Challenges for the 21st Century, Asmara, Eritrea: Africa World Press. Allen, T. and Thomas, A. (2000) Poverty and Development into the 21st Century, Oxford: Oxford University Press. Ayittey, G. B. N. (1999) Africa in Chaos, New York: St Martin’s Griffin. Barro, R. J. and Lee, J.-W. (2001) ‘International Data on Educational Attainment: Updates and Implications’, Oxford Economic Papers, 3, 541–63. Benton, D. and Cook, R. (1991) ‘Vitamin and Mineral Supplements Improve Intelligence Scores and Concentration of Six Year Old Children’, Personality and Individual Differences, 12, 1151–8. Benton, D. and Roberts, G. (1988) ‘Effect of Vitamin and Mineral Supplementation on Intelligence in a Sample of School Children’, The Lancet, 1, 140–3. Bhuleshkar, A. K. (ed.) (1973) Towards Socialist Transformation of Indian Economy, New York, NY: Humanities Press. Chai, J. C. H. (1998) China. Transition to a Market Economy, Oxford: Clarendon Press.

Richard Lynn and Tatu Vanhanen 49 Clague, C. (ed.) (1997) Institutions and Economic Development, Baltimore and London: Johns Hopkins University Press. Datt, R. and Sundharam, K. P. M. (1979) Indian Economy (16th edn), Delhi: S. Chand. De Maeyer, E. and Adiels-Tegman, M. (1985) ‘The Prevalence of Anaemia in the World’, World Health Statistical Bulletin, 38, 302–16. Engelbrecht, H.-J. (2003) ‘Human Capital and Economic Growth: Cross Section Evidence for OECD Countries’, The Economic Record, 79, S40-S51. Eysenck, H. J. and Schoenthaler, S. J. (1997) ‘Raising IQ with vitamins and minerals’, in R. J. Sternberg and E. Grigorenko (eds), Intelligence, Heredity and Environment, Cambridge: Cambridge University Press. Gardner, H. S. (1998) Comparative Economic Systems (2nd edn), Philadelphia, PA: Dryden Press. Ghosh, A. (1979) ‘Reproducing the “Images of Man”: Sociology and the Indian Situation’, Teaching Politics (Delhi), V, 1–2, 16–24. Gottfredson, L. S. (1997) ‘Editorial: Mainstream Science on Intelligence’, Intelligence, 24, 13–24. Hanushek, E. H. and Kimko, D. D. (2000) ‘Schooling, Labor-force Quality and the Growth of Nations’, American Economic Review, 90, 1184–208. Hayami, Y. (2001) Development Economics: From Poverty to the Wealth of Nations, Oxford: Oxford University Press. Hossain, M., Islam, I. and Kibria, R. (1999) South Asian Economic Development: Transformation, Opportunities and Challenges, London and New York: Routledge. Jencks, C. (1972) Inequality. London: Penguin. Kakwani, N. (ed.) (2000) ‘Special Issue: Economic Growth, Poverty and Income Inequality in the Asia-Pacific region’, Journal of the Asia-Pacific Economy, 5(1–2). Kayizzi-Mugerwa, S. (ed.) (2003) Reforming Africa’s institutions: Ownership, Incentives and Capabilities, Tokyo: United Nations University Press. Leftwich, A. (2000) States of Development: On the Primacy of Politics in Development, Cambridge: Polity Press. Lucas, A., Morley, R. and Cole, T. J. (1998) ‘Randomised Trial of Early Diet in Preterm Babies and Later Intelligence Quotient’, British Medical Journal, 317, 1481–7. Lucas, A., Morley, R., Cole, T. J., Lister, G. and Leeson-Payne, C. (1992) ‘Breast Milk and Subsequent Intelligence Quotient in Children Born Pre-term’, Lancet, 339, 261–4. Lynn, R. and Harland, E. P. (1998) ‘A Positive Effect of Iron Supplementation on the IQs of Iron Deficient Children’, Personality and Individual Differences, 24, 883–7. Lynn, R. and Vanhanen, T. (2002) IQ and the Wealth of Nations. Westport, CT: Praeger. Lynn, R., Hampson, S. and Magee, M. (1984) ‘Home Background, Intelligence, Personality and Education as Predictors of Unemployment in Young People’, Personality and Individual Differences, 5, 549–58. Mackintosh, N. J. (1998) IQ and Human Intelligence, Oxford: Oxford University Press. Maddison, A. (2003) ‘The World Economy: A Millenium Perspective’, in M. A. Seligson and J. T. Passe-Smith (eds), Development and Underdevelopment: The Political Economy of Global Inequality, Boulder, CO: Lynne Rienner Publishers. Murray, C. (1998) Income Inequality and IQ, Washington, DC: AEI Press. Nafziger, E. W. (1997) The Economics of Developing Countries (3rd edn), Upper Saddle River, NJ: Prentice-Hall.

50 Human Capital and Intelligence in Economic Development Passe-Smith, J. T. (2003) ‘The Persistence of the Gap Between Rich and Poor Countries’, in M. A. Seligson and J. T. Passe-Smith (eds), Development and Underdevelopment: The Political Economy of Global Inequality, Boulder, CO: Lynne Rienner Publishers. Schmidt, F. L. and Hunter, J. E. (1998) ‘The Validity and Utility of Selection Methods in Psychology: Practical and Theoretical Implications of 85 Years of Research Findings’, Psychological Bulletin, 124, 262–74. Seligson, M. A. (2003) ‘The Dual Gaps: An Overview of Theory and Research’, in M. A. Seligson and J. T. Passe-Smith (eds), Development and Underdevelopment: The Political Economy of Global Inequality, Boulder, CO: Lynne Rienner Publishers. Seshadri, S. and Gopaldas, T. (1989) ‘Impact of Iron Supplementation on Cognitive Functions in Preschool and School-aged Children: The Indian Experience’, American Journal of Clinical Nutrition, 50, 675–86. Simeon, D. T. and Grantham-McGregor, S. (1990) ‘Effects of Nutritional Deficiencies on Intelligence and Behavior’, Nutrition Research Reviews, 3, 1–24. Singh, T. (1998a) ‘Yesterday’s Men and Ideas: All Nehru’s Apolitical Italian Heir Offers is Lip Service’, India Today, 23(38), 13. Singh, T. (1998b) ‘Set to Stagnate: Beware the Swadeshi Brigade’s Economic Fossils’, India Today, 23(40): 17. Singh, T. (1999) ‘Don’t Get Left Behind: Prosperity Comes From Sound Policies, Not Political Cleverness’, India Today, 24(37), 11. Todaro, M. P. (2000) Economic Development (7th edn), Reading, MA: AddisonWesley. UNICEF (1996) The State of the World’s Children, Oxford: Oxford University Press. World Bank (2000) World Development Report 2000/2001: Attacking Poverty, Oxford: Oxford University Press. World Bank (2003) World Development Indicators 2003, Washington, DC: The World Bank. Yergin, D. and Stanislaw, J. (1999) The Commanding Heights: The Battle Between Government and the Marketplace that is Remaking the Modern World, New York: Touchtone. Yule, W., Gold, R. D. and Busch, C. (1982) ‘Long-term Predictive Validity of the WPPSI: An 11 Year Follow-up Study’, Personality and Individual Differences, 3, 65–71.

3 Knowledge Resources in Korea: Understanding Korea’s Business System and Capitalism Chong Ju Choi

Introduction After several decades of interdisciplinary research on developing economies by researchers in international business and social sciences, there is an increasing consensus that ‘knowledge’ is the crucial resource for development throughout the developing economies – much more important than land, tools and labour (Ostrom, 1990; World Bank, 1998). And, following North (1990) and Olson (1982, 1992), we believe that knowledge is crucial for economic development through the interaction between organizations and institutions. The nature of knowledge is such that it is widely dispersed throughout society, and it is accumulated and exchanged usually through networks, traditional groups, or professional associations (Hayek, 1945; Simon, 1991; World Bank, 1998). It is also coincidental, that just as knowledge is seen as crucial for the development of the poorest developing economies, knowledge is also seen as a resource crucial for the success of societies in developed economies (Coase, 1992; Nelson, 1994a, 1994b). This chapter analyses the nature of knowledge as a resource in Korea’s business system. However, in order to assess the role of knowledge in Korea, there is a need for a more fundamental understanding of Korea’s business system in the context of global capitalism. The Korean business system is a hybrid of the well known: the Anglo-Saxon system of capitalism practised in countries such as the US and UK, and the Communitarian system (Albert, 1991; Etzioni, 1988; Choi et al., 2004) prevalent in countries such as Germany, France and in continental Europe. 51

52 Knowledge Resources in Korea

The Korean economy emerged and became a mature, developed economy in the early 1990s, as Korea’s per capita income reached US$10,000, which is the normal definition of a mature, developed, OECD economy. This chapter advocates that in order to more fully include the emergence process into international business research, there is a need to move away from the traditional framework of the global triad of US, Western Europe and Japan advocated by various researchers such as Vernon (1966); Wells (1972); Ohmae (1985) and Thurow (1992). We introduce a new framework based on, ‘comparative business systems’: Anglo-Saxon, Communitarian and Emerging markets (Choi et al., 1999) which better incorporates the dynamic process of emergence and how developing and emerging economies become mature, developed, OECD economies. We also analyse the nature of knowledge resources and assets in the Korean economy and its business system context. Knowledge in the Korean context can only be fully analysed by taking into account the nature of Korea’s business system, and of global capitalism in the twenty-first century. We believe that by analysing the dynamic process of Korea’s past emergence process, researchers and policymakers can more fully understand the way knowledge resources are created, retained and transferred in the Korean business system in the early twenty-first century.

Including emerging, developing economies Recently, the ideological rhetoric that dominated the debate among policy makers, academics and the media during the Cold War, has been replaced by discussions of economic growth and the role played by ‘emerging markets’ (Choi, 1992; Garten, 1997). The Asian crisis of 1997 and the dramatic recovery of 1999, the collapse of the Russian economy, and the currency crisis in Brazil have dampened the earlier euphoric predictions and increased uncertainty towards emerging and developing economies. In spite of these developments, it is clear that these markets offer major growth opportunities for multinationals. Compared to the low annual growth rates for most products in mature markets, sales in emerging markets have the potential to grow at an exponential rate for the indefinite future. The nature of society, business exchange, legal systems, consumer demand and public policy in these emerging markets, which are often very different from the more mature economies, have provided difficult dilemmas for North American and Western European government and corporations (Olson 1991, 1992). Even within emerging markets, of course, there can be substantial differences in regions such

Chong Ju Choi 53

US Developing Europe Figure 3.1

Japan

The traditional global economic triad

as Central and Eastern Europe, who are in transition, and in other parts of the world. A major reason for why the developing economies have not been included in international business and economic research is because the traditional global ‘triad’ framework from the 1960s has focused primarily on the world’s wealthiest economies, the US, Western Europe and Japan. This well-known triad framework has set the tone, psychology and research agenda of international business for over three decades. This static, triad framework is based on international markets, income levels and geography (Vernon, 1966; Wells, 1972; Ohmae, 1985; Thurow, 1992; Dunning, 1996). However, this global framework does not include emerging or developing economies that leads to the following proposition: Proposition 1: The traditional, static global triad framework creates a psychological mindset within international business research that excludes emerging and developing economies. In the 1960s, when this global triad framework became popularized, countries such as Singapore, which today have per capita incomes of nearly US$35,000, would have been included in the ‘developing’ country category, and thus not part of the psychological analysis of international business. Thus, this framework does not provide a dynamic framework, which could potentially include new members, such as Korea which is a member of the OECD. This traditional static framework based on income levels and geography is shown in Figure 3.1.

Comparative business systems The revival of interest in comparative economics, political, social organization and institutions in academic research has centred around the issue

54 Knowledge Resources in Korea

of competing models of capitalism, or business systems, as the sustained success of the German and Japanese economies provided an alternative model of political economy often called ‘alliance’ or Communitarian capitalism (Bernstein, 1992; Choi et al., 1996; Dunning, 1996). There has also been an intense debate on the reform of corporate governance systems coupled with various initiatives of corporate restructuring in both Anglo-Saxon countries and Communitarian countries (Barzel, 1997). In addition, there is a compelling need for an applicable model of business systems for the former Eastern bloc countries as well as other emerging market countries. The traditional definition of the international business environment in research such as Ohmae (1985), Porter (1990), Thurow (1992), and Berkley and Casson (1996) argues that the increasing homogenization of demand, technology and income levels in the three triad-markets (US, Western Europe and Japan) tend to shape managerial mind sets and decision making in global competition. This view is often extended to the argument that globalization of markets and the convergence of demand under this triad framework allow firms to allocate their resources and activities freely across these three regions, thus leading to increased economies of scale and scope by standardization of products and services, minimization of costs, and the formation of flexible organizational structures. The Anglo-Saxon business system, or ‘capitalism’ (Albert, 1991) was economically dominant through the nineteenth and twentieth centuries. Although the term West is often used to describe both North America and Western Europe as a relatively homogeneous grouping of countries in terms of economic and political systems, there is a significant difference between Anglo-Saxon countries such as the US, Canada and the UK and those of continental Europe. The Communitarian business system includes the eastern and western European countries that are very different from the Anglo-Saxon countries in term of their domestic business systems that emphasize the role of the government in economic and social affairs, the close linkages between banking and industry, and the group orientation of the society and Communitarian values. In sum, their stakeholders system is fundamentally different. These two systems have also been compared as the ‘shareholder’ versus ‘stakeholder’ business systems (Albert, 1991). This is shown in Figure 3.2. The emerging market business system refers to a broad range of countries that are rapidly entering the world business system. They include most of the Asian countries, some of the Eastern European countries such as Russia, Hungary, Czech Republic, and some of the Latin American countries such as Mexico, Chile and Brazil. These countries in turn have

Chong Ju Choi 55

Financial markets

SHAREHOLDERS

Corporate performance

Banks, insurance firms

Financial markets STAKEHOLDERS

Corporate performance

Government

Employees

Figure 3.2

Shareholder versus stakeholder capitalisms, business systems

to be distinguished from the developing countries of the world: and due to their phenomenal economic growth, the emerging markets have become a key focus for personal and institutional investors as well as for international corporations. But, there is also a need to appreciate the differences even among the mature economies of the world, especially between the Anglo-Saxon business systems versus the Communitarian business system. Figure 3.2 shows the home market institutions and constraints in international business systems. The emerging market countries are of course ‘latecomers’ (Amsden, 1989) to the OECD group of mature, developed economies. It is only since the 1990s that researchers in social science and business began researching the differences between the two mature business systems: the Anglo-Saxon system prevalent in countries such as the US and UK and the Communitarian system prevalent in continental European countries such as France, Germany and Sweden (Albert, 1991). The emerging market system is a hybrid of both systems, since for latecomers, ideas and innovations have been borrowed and integrated into their systems. This applies to the five mature and developed economies of Asia: Japan, Korea, Taiwan, Singapore and Hong Kong. These distinctions are explained in more detail in Table 3.1. Figure 3.3 shows the ‘new’ linkages of business systems.

56 Knowledge Resources in Korea Table 3.1

Business systems, stakeholders and strategic transparency

Types of business systems

Stakeholder strategic transparency

Anglo-Saxon system

• Shareholders and the dynamics of financial markets • High degree of information disclosure • Stakeholders: employees, suppliers, government and the community • Limited information disclosure • Family owners, government ministries • Lack of disclosure, transparency • Mix of both shareholder and stakeholder systems

Communitarian system

Emerging system

Anglo-Saxon business system Developing

Communitarian business system Figure 3.3 Emerging

Emerging Market business system

Comparative business systems: Anglo-Saxon, Communitarian and

Knowledge I: Exchange Hayek (1945, p. 520) pointed out the intangible and randomness aspects of knowledge, which make it such a difficult and complex resource to analyze: ‘the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge . . . a problem of the utilization of knowledge not given to anyone in its totality’. In order for such dispersed knowledge to be combined and to be valuable, the actors must ‘exchange’ the various parts of knowledge in their possession into a viable, useable whole. Thus, various institutions throughout history have been developed to enhance the possibilities of exchange (North, 1990; Coleman, 1990; Kogut and Zander, 1992; Coase, 1992; Moran and Ghoshal, 1999). The past literature, although emphasizing the importance of exchange, generally

Chong Ju Choi 57

refers to exchange through efficient markets (Coase, 1992). However the past literature does not sufficiently analyse the various types, or spheres of exchange that exist for organizations, institutions, markets and society. We believe that the intangible aspects of knowledge (Polanyi, 1957) and its dispersed nature in society (Hayek, 1945) required an in-depth analysis of the spheres of exchange. Polanyi (1957), who is universally quoted in terms of the distinctions of implicit knowledge versus explicit information, and other social scientists such as Kolm (1984) have suggested the importance of reciprocity, defined as, ‘the giving and receiving according to need’ (Polanyi, 1966, p. 210). These early works by Polanyi (1957) and Kolm (1984), however do not provide a sketch of the institutions that could potentially work in such a reciprocity-based system. Nor do the ideas and frameworks provided by this earlier research distinguish between the nature of production, distribution and exchange in tangible assets such as manufactured products, or intangible assets, such as knowledge. In this chapter, we sketch out a preliminary framework for understanding such reciprocity-based systems, since they are traditionally seen as part of primate, or pre-modern societies (Mauss, 1955; Bourdieu, 1977; Gregory, 1982). However, one characteristic of pre-modern societies was that exchange was based on informal social exchange, overlapping with concepts of embeddedness within, and of, the social structure (Granovetter, 1985; Coleman, 1992; Burt, 1992). These systems of exchange combined various elements of markets, reciprocity, redistribution in exchange and are still readily used in the low-income countries designated by the World Bank as ‘developing’. We believe this can provide a framework for understanding knowledge-based exchange in developed economies and at a more general level of analysis. In terms of trust-based exchange, these pre-modern societies as well as many developing economies today are based on informality, and they have institutions for undertaking trust-based exchange in, ‘inalienable’ or intangible assets. The literature agrees that intangibility is a key component of knowledge as an asset (Kogut and Zander, 1992; Spender, 1996). Thus, a sophisticated model of the exchange of knowledge assets can learn from the nature of exchange in these pre-modern societies on inalienable assets (Mauss, 1955; Bourdieu, 1977).

Spheres of exchange In order to develop our frameworks for analysing the exchange of knowledge as a resource, we need to discuss the nature of markets, and market-based exchange. The key distinction is that tangible, physical

58 Knowledge Resources in Korea

assets such as equipment and capital have a ‘valuation’ and price determined in the market; this valuation serves as a universal, transparent mechanism to facilitate the exchange of such physical assets. Under market exchange of commodities, assets being exchanged are focalized, quantified and valued at a particular price (Gell, 1982). Tacit, informal assets such as knowledge are difficult to determine a valuation for, and thus, the value can be context- or situation-specific, or specific to particular organizations or actors (Polanyi, 1957; Spender, 1996; Choi and Lee, 1997). Money itself has different functions, for example, under capitalism, most income is spent on housing and transport with less on clothing and consumer necessities; in contrast under centrally planned socialism, housing and transport are subsidized and most income is spent on clothing and consumer necessities (Neale, 1976; Durkhein, 1974; Humphrey and Hugh-Jones, 1992). Prices thus reflect very different values, even for tangible commodities such as transport, clothing and consumer necessities. But, as mentioned earlier, intangible assets such as knowledge are difficult to label with a market valuation, because their value may be specific to organizations, actors, or even may be situation- or context-specific or spread throughout society (Hayek, 1945). Such assets may have a symbolic economic value (Bourdieu, 1977, 1990; Douglas and Isherwood, 1979). Research in social anthropology has shown that in various societies where money exists, there has been a tendency to categorize different ‘spheres’ of exchange: certain tangible items such as foodstuffs and raw materials were exchanged for money, but more intangible items such as cloth would only be given as gifts without the exchange of money (Sahlins, 1972; Neale, 1976; Simmel, 1978; Gregory, 1982; Appadurai, 1986; Adler and Graham, 1989). Although such spheres of exchange could be seen as the difference between market exchange and social embeddedness (Granovetter, 1985), we are referring to the fact that certain, intangible assets such as knowledge may be more reliant on spheres other than the spheres of exchange for tangible assets such as plant, equipment and capital. Such different spheres of exchange also exist in exchanges within families or households (Douglas and Isherwood, 1979; Bourdieu, 1990). We believe this is crucial in understanding the exchange of knowledge: it is difficult for knowledge assets to have a market valuation, or price determined by multipurpose money. In this chapter, we provide such a typology of exchange, in order to improve our understanding of the nature of exchange in invisible assets such as knowledge-based assets. To do so, we need to make the distinction between commodities, or alienable assets, which are freely exchanged in markets, and inalienable assets, which tend to have more

Chong Ju Choi 59

of a social exchange aspect. We use the term, ‘alienable’, a term more commonly used in social anthropology (Simmel, 1978; Bourdieu, 1990; Sahlins, 1972) to describe the exchange of such commodities under market exchange. We now define the difference between intangibility and inalienability: the market value of intangible assets can only be known through high measurement costs . . . inalienable assets may not have a market value, and may have value only in organization-specific and situationspecific contexts. Thus, according to our definition, intangible assets can be measured and be accorded a valuation in the market, however the measurement costs may be high. Inalienable assets however may not have a market valuation; their value may be dependent on organizations, individuals, situations and context. As analysed by North (1990) and Kranton (1996), information costs, such as measurement costs are one of the fundamental problems of interactions and exchange in the market. Such measurement costs are especially high for knowledge-based industries, where there is high intangibility of value and content. Thus, the identity of the firms and consumers in exchange becomes relatively more important as the value of what is being exchanged becomes more uncertain. The limitation of the pioneering works by North (1990) and others is an insufficient analysis of the systems of ‘exchange’. Market exchange, which leads to the exchange of alienable commodities has been seen to characterize modern societies – in contrast to primitive societies, which rely more on social, inalienable exchange. The concept of gifts has been used by social anthropological researchers to show the differences: gifts are inalienable and thus exchanged socially, commodities are alienable and thus exchanged in the market (Bourdieu, 1977; Douglas and Isherwood, 1979; Gregory, 1992). However as far back as Polanyi (1944), it has been known that most societies have elements of both alienability and inalienability. We argue that such identification in the market is relative and leads to status within the industry (Bourdieu, 1977). This is similar to the concept of gifts in social anthropology. Exchanges based on gifts are seen to create status, and are the symbolic relative rankings for the exchange partners (Mauss, 1955; Sahlins, 1972; Simmel, 1978; Nojonen, 2003). What is crucial is that such inalienable, intangible resources may be exchanged only through informal, social and community-based exchange systems. In truth, many developing economies still retain these

60 Knowledge Resources in Korea

characteristic exchange systems, and need to maintain them in order to benefit fully from knowledge as a resource: Proposition 2: Developing economies are characterized by informal, social and community-based exchange systems. Economic development policies should not change such systems, which in turn are crucial for utilizing knowledge as a resource.

Knowledge II: Property rights, public good If knowledge is a public good, it may be underprovided. In this case, the non-excludability (difficulty of appropriation) aspects of public goods (Love, 1995) leads to the fundamental problems of free riders and collective action (Olson, 1965; Hardin, 1982), where actors would prefer the benefits of the resource such as knowledge, but not the costs of creating and maintaining the resource, leading to an inefficient allocation of resources. Knowledge and gravity are often used as examples of global, public goods (Ostrom, 1990). For common pool resources, the use of appropriation of the resource occurs within a restricted facility, such as a fishing ground, and environmental regions (Ostrom, 1990), even if the assets such as fish or forests could be exchanged and have a value in the market. Common pool resources, which have certain characteristics that overlap with public goods, face the problem of, overuse and over exploitation. This problem has become known as the ‘tragedy of the commons’ (Hardin, 1968) and has developed a wide literature in environmental and natural resource disciplines as well as in the social sciences. If knowledge is a common pool resource, then it will be overused or potentially overvalued, since as a resource it has a market price and value outside the restricted grounds or commons. For example, it is possible that if a firm views knowledge as a common pool resource, it will overemphasize knowledge assets relative to non-knowledge assets; and because successful firms tend to be a combination of various assets and capabilities, firms may potentially overuse knowledge (Nelson & Winter, 1982). Thus, the present debates in international business on knowledge as a resource and the role of the multinational enterprise needs to take into account more fully the earlier works on the nature of knowledge as a public good (Johnson, 1970; Caves, 1971; Geertz, 1978; Buckley and Casson, 1976; Blau, 1975). Also, the implications for property rights (Lévi-Strauss, 1966; Barzel, 1997) interact with the analysis of any resource with public good characteristics. If knowledge is either a public good or a common pool resource, external actors such as the

Chong Ju Choi 61

state need to be considered in optimizing the creation, transfer and exchange of the resource. International business research then needs to take into account the related research from other disciplines such as international relations and political theory on the importance and difficulties of such collective action (Buchanan, 1965; Olson, 1965; Hardin, 1968, 1982; Ostrom, 1990).

Knowledge and property rights The creation and transfer of an intangible resource such as knowledge requires continuous exchange among actors (Polanyi, 1957). For such continuous exchange to occur, there is a need for the actors to understand the property rights of each other. In the social science literature, there are two major definitions of property: a traditional, more legal, definition of property rights, which is closely concerned with the rights given by the state; and the more recent economic and management-based definition of property rights, which is linked to the economic value of assets or resources (Hart and Moore, 1990). In this chapter, we are more concerned with the economic value and definition of property rights. Property rights over resources – including knowledge – require recognition as well as enforcement of the rights (Williamson, 1985; North, 1990; Jacobson, 1992). Economic property rights over knowledge pose an especially complex problem since the nature of knowledge can be tacit, and the value difficult to measure. Once measurement costs exist, then because of the intangibility of the assets being transferred, exchanged or protected, the value of such intangible assets are not always known to the current or potential owner of the asset (Barzel, 1997). The enforcement of agreements concerning property is thus crucial for the continued success of collective action towards public goods and common pool resources such as knowledge. The intangibility of knowledge assets makes the definition of property rights and the transfer, exchange and protection of such rights in social communities especially problematic (Spender, 1996; Inkpen and Beamish, 1997).

Knowledge and social communities If knowledge is based in social communities, it is well known that they tend to emphasize informal rules and norms, relative to formal and explicit rules (Olson, 1965, 1982; Choi, 1992). But past research on collective ownership and interests also shows that groups of communities driven by social bonds and reciprocity-based exchange will be limited in size (Hardin, 1982; Taylor, 1987). For a social community to be successful in the creation and transformation of knowledge, the community will require mechanisms to ‘exclude’ outside non-members from the benefits

62 Knowledge Resources in Korea

and knowledge within the social community (Hardin, 1982; Appadurai, 1989). This is similar to the concept of ‘club goods’ in law and economics, whereby members of a community pay a type of club fee for membership and share the collective benefits, but at the same time exclude non-members from free-riding on the resources and assets of the social community (Olson, 1965; Elster and Moene, 1989; Ostrom, 1990). Joint ventures, strategic alliances and other collaborative inter-organizational relationships in managing knowledge assets, have the potential to overcome some of these collective action issues (Inkpen and Beamish, 1997), although such relationships can also face collective action difficulties. The earlier works of Buckley and Casson (1976), Hennart (1982), Rugman (1980) and Caves (1971) broadly touched upon the public good nature of knowledge, although these works did not forge a clear link between multinational enterprises and social communities. Public goods suffer from underprovision, and common pool resources suffer from overuse and overexploitation (Olson, 1965; Hardin, 1982; Ostrom, 1990). Thus social communities need to abstain from overexploiting communal knowledge resources and to practise self-control against solely individual rent seeking behaviours (Schelling, 1984). Thus, the analysis of knowledge and its potentially collective and social nature is affected by its definition. First, whether it is like a private resource, which is both rivalrous and excludable. Second, whether it is like a pure public resource, nonrivalrous and nonexcludable. Third, whether it is like a common pool resource, rivalrous and nonexcludable. Fourth, whether it is like a club good, nonrivalous and excludable. Table 3.2 gives examples of these definitions. Table 3.2

Knowledge resources: private, public, common pool and club

Resource

Characteristics

Private

Rivalrous and excludable. One actor’s use value can preclude another actor’s use of the resource. For example, the use of a personal computer. Nonrivalrous and nonexcludable. No actors can be excluded, and one actor’s use does not preclude another actor’s use. For example, street lights. Rivalrous and nonexcludable. No actors can be excluded, but an actor’s use affects another actor’s potential use. For example, overfishing a lake. Nonrivalrous and excludable. Actors can be excluded through a membership system from using the resource. For example, membership in a private club.

Public

Common pool

Club

Chong Ju Choi 63

Korea’s business system in the twenty-first century Korea’s business system and capitalism is a mixture of the well-known Anglo-Saxon system prevalent in countries such as the US and UK, and the Communitarian business system of continental Europe (Etzioni, 1988; Albert, 1991). The importance of knowledge as a resource in economies has been recognized as being fundamental at least since the early 1990s (World Bank, 1998). Knowledge can be broadly defined as including science and technology, as well as the tacit and more socially complex nature of knowledge as an intangible asset. Korea in the twenty-first century needs to incorporate more fully the two aspects of global capitalism and knowledge resources. First, Korea needs to understand further, and analyse, the hybrid nature of its business system and capitalism, which, like most of the developed Asian economies such as Japan, Korea, Taiwan, Singapore and Hong Kong, have elements of both Anglo-Saxon and Communitarian business systems. Second, knowledge needs to be seen not only as science and technology, but also as a socially complex and sensitive resource. In this sense, the nature of knowledge exchange and property issues that were analysed earlier in this chapter need to be more fully incorporated into the future of business and economic strategy for Korea in the early twenty-first century.

Conclusions and further research At the start of the twenty-first century the majority of the world’s economies are still categorized as developing: given the definition level of per capita incomes below US$1,000 (World Bank, 1998). The World Bank has recently identified ‘knowledge’ as the fundamental resource driving growth and economic development. Korea is a country that emerged and reached mature, developed economy status by the early 1990s as a member of the OECD economies. International business research, which has recently begun to analyse the importance of knowledge, has not applied it in a developing economy context. Nearly all research has focused on how knowledge as a resource is being utilized by multinational enterprises from developed, high-income countries. The purpose of this chapter is as a preliminary attempt at combining the role of knowledge as a resource, and the role of developing economies in international business research. In the first part of this chapter, we discussed how the traditional definition of the global triad of the US, Western Europe and Japan based

64 Knowledge Resources in Korea

on incomes, trade flows and geography (Vernon, 1966) could provide a psychological barrier to including emerging and developing economies in international business research. The traditional triad framework is also a static one, which does not allow the possibility of new members (Ohmae, 1985; Thurow, 1992). We believe that this traditional framework creates an additional psychological barrier to researchers to incorporating more fully developing economies into international business research. Knowledge as resource is crucial for both developed and developing economies. We provided two frameworks for analysing the nature of knowledge exchange and property rights, which are both crucial for analysing knowledge as a resource. First, the nature of exchanging knowledge, which notes the importance of social anthropologic frameworks, such as barter, gifts and commodities, traditionally more commonly associated with pre-modern societies (Mauss, 1955; Sahlins, 1972; Simmel, 1978). Second, the importance of distinguishing whether knowledge is a public good or a common pool resource – which is an area that has been widely researched in the context of developing economies within international relations and political theory (Ostrom, 1990). The purpose of this chapter is to show that comparative analysis in international business, by including hints from developing and emerging economies environments, could create further understanding of the nature of knowledge as a resource. In this sense, it is highly unlikely that there is a ‘universal’ model of capitalism, or a universal model of international prosperity for countries, industries or corporations. However, the importance of knowledge for both developed and developing economies may allow international business researchers to incorporate both groupings of economies into their research.

References Adler, N. and J. Graham (1989) ‘Cross-cultural Interaction: The international comparism fallacy’, Journal of International Business Studies, 20(2): 515–37. Albert, M. (1991) Capitalism against Capitalism, Paris: Seuil. Amsden, A. (1989) Asia’s Next Giant, Oxford: Oxford University Press. Appadurai, A. (1986) The Social Life of Things: Commodities in Cultural Perspective, Cambridge: Cambridge University Press. Barzel, Y. (1997) Economic Analysis of Property Rights, Cambridge: Cambridge University Press. Bernstein, L. (1992) ‘Opting out of the Legal System: Extralegal contractual relations in the diamond industry’, Journal of Legal Studies, 21(3): 115–59. Blau, P. (1975) Approaches to the Study of Social Structure, New York: Free Press. Bourdieu, P. (1977) Outline of a Theory of Practice, Cambridge: Cambridge University Press.

Chong Ju Choi 65 Bourdieu, P. (1990) Outline of a Theory of Practice, Cambridge: Cambridge University Press. Buchanan, J. (1965) ‘An Economic Theory of Clubs’, Economica, 32, 1–14. Buckley, P. and Casson, M. (1976) The Future of Multinational Enterprise, London: Macmillan, now Palgrave. Burt, R. (1992) Structural Holes, Cambridge MA: Harvard University Press. Caves, R. (1971) ‘International Corporations: The Industrial Economics of Foreign Investment’, Economica, 38, 1–27. Choi, C. J. (1992) Asian Capitalism Versus Western Civilization, Oxford University, mimeo. Choi, C. J. and S. H. Lee (1997) ‘A Knowledge-based view of Co-operative Interorganizational Relationships’, in P. Beamish and P. Killing (eds), Co-operative Strategies: European Perspectives, Massachusetts: Josey-Bass. Choi, C. J., Kim, J. B. and S. H. Lee (1996) ‘Contract Enforcement in Emerging Markets’, paper presented at the Academy of International Business, annual conference, held in Banff, Canada. Choi, C. J., Lee, S. H. and Kim, J. B. (1999) ‘Countertrade: Contractual Uncertainty and Transaction Governance in Emerging Economies’, Journal of International Business Studies, 30, 189–202. Choi, C. J., Hilton, B. and S. Chen ‘Counterfeits and Moral Intensity’, Journal of Business Ethics, forthcoming. Coase, R. (1992) ‘The Institutional Structure of Production’, American Economic Review, 82, 713–19. Coleman, J. S. (1992) ‘The Rational Reconstruction of Society’, American Sociological Review, 58, 1–15. Douglas, M. and Isherwood, B. (1979) The World of Goods. Towards an Anthropology of Consumption, London: Allen Lane. Dunning, J. (1996) ‘Reappraising the Eclectic Paradigm in an Age of Alliance Capitalism’, Journal of International Business Studies, 26, 461–80. Durkheim, E. (1974) Sociology and Philosophy, New York: Free Press. Elster, J. and K. Moene (1989) Alternatives to Capitalism, Cambridge: Cambridge University Press. Etzioni, A. (1988) ‘The Responsive Community: A Communitarian Perspective’, American Sociological Review, 61(2): 1–11. Garten, J. (1997) Ten Big Emerging Markets, Cambridge, MA: Harvard Business School Press. Geertz, C. (1978) ‘The Bazaar Economy: Information and Search; Peasant Marketing’, American Economic Review, 68(1): 28–32. Gell, A. (1982) ‘The Market Wheel: Symbolic Aspects of an Indian Tribal Market’, Man, 17, 470–91. Granovetter, M. (1985) ‘Economic Action and Social Structure: The problem of embeddedness’, American Journal of Sociology, 78(2): 1360–80. Gregory, C. A. (1982) Gifts and Commodities, London: Academic Press. Hardin, R. (1968) Collective Action, Baltimore: Johns Hopkins University Press. Hart, O. and Moore, J. (1990) ‘Property Rights and the Nature of the Firm’, Journal of Political Economy, 48, 1119–58. Hayek, F. A. (1945) ‘The Use of Knowledge in Society’, American Economic Review, 35, 519–30.

66 Knowledge Resources in Korea Hennart, J.-F. (1982) A Theory of Multinational Enterprise, Ann Arbor, MN: University of Michigan Press. Humphrey, C. and Hugh-Jones, S. (1992) Barter, Exchange and Value, Cambridge, Cambridge University Press. Inkpen, A. and Beamish, P. (1997) ‘Knowledge, Bargaining Power and International Joint Venture Stability’, Academy of Management Review, 22, 177–202. Johnson, H. (1970) ‘The Efficiency and Welfare Implications of the Multinational Corporation’, in C. Kindleberger (ed.), The International Corporation, Cambridge, MA, MIT Press. Kogut, B. and Zander, U. (1992) ‘Knowledge of the Firm Combinative Capabilities and the Replication of Technology’, Organization Science, 3, 383–97. Kolm, S. C. (1984) La bonne economie, Paris: Presses Universitares de France. Kranton, R. E. (1996) ‘Reciprocal Exchange: A Self-Sustaining System’, American Economic Review, 86(4): 830–51. Lévi-Strauss, C. (1966) The Elementary Structure of Kinship, Boston: Beacon Press. Love, J. (1995) ‘Knowledge, Market Failure and the Multinational Enterprise: A Theoretical Note’, Journal of International Business Studies, 26, 399–407. Mauss, M. (1955) The Gift, London: Routledge. Moran, P. and Ghoshal, S. (1999) ‘Markets, Firms and the Process of Economic Development’, Academy of Management Review, 24, 390–412. Neale, W. (1976) Mories in Societies, San francisco CA: Chandler and Sharp. Nelson, R. (1994a) ‘An Agenda for Formal Growth Theory’, Working paper, International Institute for Applied Systems Analysis, Laxenburg, Austria. Nelson, R. (1994b) ‘The Co-evolution of Technology, Industrial Structure, and Supporting Institutions’, Industrial and Corporate Change, 3, 47–63. Nelson, R. and S. Winter (1982) An Evolutionary Theory of Economic Change, Cambridge MA: Harvard University Press. Nojonen, M. (2003) ‘The Competitive Advantage with Chinese Characteristics – The Sophisticated Choreography of Gift-giving’, in J. B. Kidd & F.-J. Richter (eds), Corruption and Governance in Asia, London, Palgrave, 107–31. North, D. (1990) Institutions, Institutional Change and Economic Performance, Cambridge: Cambridge University Press. Ohmae, K. (1985) Triad power, New York: Free Press. Olson, M. (1965) The Logic of Collective Action, Cambridge, MA: Harvard University Press. Olson, M. (1982) The Rise and Decline of Nations, New Haven, CT: Yale University Press. Olson, M. (1992) ‘The Hidden Path to a Successful Economy’, in C. Clague & G. Rausser (eds), The Emergence of Market Economies in Eastern Europe, Oxford: Blackwell. Ostrom, E. (1990) Governing the Common: The Evolution of Institutions for Collective Action, Cambridge: Cambridge University Press. Polanyi, M. (1957) The Tacit Dimension, New York: Anchor Day. Porter, M. E. (1990) Competitive Advantage of Nations, New York: Macmillan. Rugman, A. (2000) The End of Globalization, London: Random House Business Books. Sahlins, M. (1972) Stone Age Economics, Chicago: Aldine Atheston. Schelling, T. C. (1984) Choice and Consequence, Cambridge, MA: Harvard University Press. Simmel, G. (1978) The Philosophy of Money, London, Routledge.

Chong Ju Choi 67 Simon, H. (1991) ‘Organisations and Markets’, Journal of Economic Perspectives, 5, 25–44. Spender, J.-C. (1996) ‘Making Knowledge the Basis of a Dynamic Theory of the Firm’, Strategic Management Journal, Winter special issue, 17, 45–62. Taylor, M. (1987) The Possibility of Cupertino, Cambridge, Cambridge University Press. Thurow, L. (1992) Head to Head, London, Nicholas Brealey. Vernon, R. (1966) ‘The Product Life Cycle’, Quarterly Journal of Economics, 66, 121–40. Wells, L. (ed.) (1972) The Product Life Cycle and International Trade, Cambridge, MA: Harvard Business School Press. Williamson, O. (1985) Economic Institutions of Capitalism, New York: Free Press. World Bank (1998) World Development Report: Knowledge for Development, Oxford, Oxford University Press.

This page intentionally left blank

Part II Governance and the New Dynamics

This page intentionally left blank

4 Infrastructure and Productivity in Asia Ranjit Ajit Singh, Eng Chye Phuah and Harveen Kaur*

Introduction The Asian financial crisis in the late 1990s was triggered by a sudden sharp reversal in the direction of global portfolio flows. The massive outflows within a short period of time led to a severe liquidity squeeze, which resulted in severe balance sheet stress. The combination of this with a steep correction in Asian exchange rates saw aggregate demand fall and operating costs rise overnight, undermining the viability of many Asian corporations. Productivity suffered as a result of the implicit sharp jump in the cost of capital, adversely affecting investment and consequentially confidence in these economies. Asia met the challenge head-on by directly rectifying weaknesses through macroeconomic policy and undertaking broad-based reform of the financial sector and quickly engineering a restoration of financial stability and a recovery of its economic growth rates. Nonetheless, post-recovery, the debate rages on with various arguments postulated as to the causal factors that led to the crisis. One stark fact emerges, namely that one of the main factors underpinning the economic and financial crisis could be traced to the weaknesses in corporate governance inherent within the corporate and financial infrastructure of Asian economies as their economies and markets gained in complexity and sophistication. The traditional command and control structures, so useful in providing discipline for capital allocation and fund-raising in the past, were simply inadequate to support future development needs

* The views expressed in this chapter are those of the authors and do not necessarily represent those of the Securities Commission of Malaysia.

71

72 Infrastructure and Productivity in Asia

and in facilitating the rise in productivity that was now necessary to achieve sustainable growth. In any case, the Asian crisis has since been overshadowed as occurrence after occurrence of corporate misconduct and malfeasance unfolded in global centres. Public trust and confidence in their largest corporations and, by implication, markets’ confidence have been severely dented. In turn, this has propelled the issue of corporate governance into even greater prominence. International and regional organizations such as The International Organization of Securities Commissions (IOSCO), the World Bank, the Asian Development Bank and the Organization for Economic Cooperative and Development (OECD) have been at the forefront in promoting corporate governance reforms and advocating standards by which, eventually, countries and markets will be benchmarked. If recent trends are anything to go by, they indicate that corporate governance is no longer a luxury but a necessity. Corporate governance is now increasingly becoming a competitive tool that countries and companies alike will use to attract global liquidity with the objective of promoting economic and capital market development. The attainment of good governance requires a sound infrastructure to support effective implementation. This infrastructure can be broadly defined as requiring sound financial and legal systems, the systemic protection of rights and supported by strong regulatory bodies to provide oversight and to monitor and enforce these rules.1 Within Asia, there is already strong appreciation of the role of corporate governance as the vehicle towards enhancing productivity by increasing capital allocation efficiency, reducing leakages that occur due to the private capture of benefits that should accrue to rightful stakeholders and, in this manner, enhance long-term economic growth prospects. Within this context, this chapter provides a perspective on the corporate governance structures in Asia and puts forward some of the issues and challenges that need to be tackled in developing strategies for reform. The chapter advocates that a holistic approach is required to reform existing corporate governance structures, which should take into consideration Asia’s unique economic and business environment and circumstances.

Evolution of the corporate governance infrastructure The debate over corporate governance always requires consideration of context. Interpretation of issues should be considered in relation to individual environments and historical circumstances. In this regard, capital markets in Asia are still in relatively early stages of

Ranjit Ajit Singh, Eng Chye Phuah and Harveen Kaur 73

development – though the take-off of these markets has been quite dramatic particularly for the larger Asian economies. Since the crisis, there have been significant changes in Asia’s corporate governance environment, though it should be noted that the pace of reform has been uneven across Asia. Generally, reform has resulted in countries adopting explicit governance codes and best practices, strengthening securities laws and listing requirements, enhancing rules on disclosures, strengthening enforcement and supervision mechanisms and a general increase in public awareness of corporate governance. From a historical perspective, during the early 1980s the Asian corporate scene was largely dominated by subsidiaries of foreign multinationals and family owned companies. To a large extent, both the multinationals and family owned companies did not frequently tap the capital markets for funds and principally relied on the banking system as a major source of funding. The typical family owned Asian company preferred to keep company affairs very much as a private matter and outside attempts to glean insights into company affairs were usually rebuffed and regarded as unwelcome intrusions. The Asian corporate landscape began to change in the late 1980s. As opportunities and competitive pressures started to grow, the ownerdominated companies increasingly began to tap the capital markets to fund their expansion. Starting from the mid-1980s, Asian governments, led by Malaysia, increasingly decided to privatize their national agencies and to seek public listings for them. As an outcome from privatization programmes, governments increasingly began to float infrastructure entities such as their national telecommunications and electrical utilities. From the early 1990s onwards, Asian capital markets began to broaden on the back of strong economic growth and seemingly insatiable global demand for Asian assets. An increasingly large number of Asian companies sought to go public and list on exchanges. However, they retained their traditional family mindset even as they sought to raise funds from the market and even as ownership of these companies broadened. As a result, Asian corporate ownership largely remained concentrated. The large shareholders continued to exercise control rights and to run companies as if they were still private companies and often did not pay sufficient attention to the rights of minority shareholders. Perhaps the more serious issue was the widespread practice of pyramiding and cross holdings as a means of maintaining a tight grip over ownership of their public-listed companies while minimizing the amount of capital required to do so. Such structures were typified by the unlisted holding company owning controlling blocks of listed companies

74 Infrastructure and Productivity in Asia

at the apex of the pyramid; with control rippling downward to other listed subsidiaries and associates. This concentration of shareholding imposed a severe constraint on the ability of the market to operate its discipline. First, the owners or their families continued to run the businesses. Second, there was no market for corporate control and therefore there was little role for the threat of hostile takeovers to act as a check on management performance. In addition, the traditional structural bias towards bank credit not only reduced the incentives to develop the markets for long-term debt securities and equity, but it also aggravated the concentration of corporate ownership. In this respect, boards of directors were often dominated by controlling shareholders. The lack of board accountability was not only due to the absence of independent directors but also the lack of recourse to ensure such accountability. The practice of setting up audit, nomination and remuneration committees were also rare among companies in Asia. Generally, there were low levels of participation by minority shareholders while legal protection for shareholders could be considered as inadequate. Very few institutional investors, whether domestic or international, considered taking an active role and often chose the easy way out by ‘voting with their feet’. Arising from the above factors, which undermined the disciplinary mechanism of the market, the mechanisms for accountability and transparency were generally weak. These weaknesses had severe implications on the development of the corporate governance infrastructure – as reflected by the low levels of disclosures, the lack of independent oversight over management and the board of directors. Inadequate protection of minority shareholders’ rights coupled with shareholder passivity magnified opportunities for misuse of assets while large shareholders and management exploited opportunities to undertake activities that resulted in the private capture of benefits at the expense of other stakeholders. The general lack of awareness on corporate governance and weak mechanisms in Asia is the outcome of the absence of market traditions and regulations. Scale is another issue as compliance can be costly for a small company. Within this context, the costs of complying with corporate governance can be high for the small Asian companies. Within this context, many of the rules on corporate governance are new and relatively untested while the culture of corporate governance is yet to be established. The public, accustomed to traditional practices, are only providing lukewarm support. It should be recognized the necessary changes in attitude and behaviour takes considerable effort and time.

Ranjit Ajit Singh, Eng Chye Phuah and Harveen Kaur 75

From the perspective of history, Asia is making rapid progress – but the main initial achievements have been in relation to rules relating to transparency and disclosure. Over the past few years, disclosure practices, accounting standards and auditing practices and standards have been revised to be compatible with international standards. In tandem with this, considerable efforts have also been put into strengthening accounting and auditing practices, enforcing due diligence and fiduciary obligations of both financial intermediaries as well as of directors, managers, accountants and auditors. Such trends and developments are not surprising. The establishment of rules is the easiest and the quickest to implement. Critics may complain that the rules lack ‘bite’, but the reality is that the achievement of effective enforcement – in other words, building the surveillance and prosecution capabilities and ensuring sufficient penalties for breaches – to match the new rules is a long-term process requiring the full involvement and commitment of many parties. In truth, the development of effective and efficient mechanisms naturally lags behind the development of the frameworks. The laws may not have been amended to facilitate effective enforcement or the institutions charged with the responsibility of enforcing these rules may lack the necessary capacity. More critically, the necessary precedents and case laws for domestic cases for breaches of corporate governance rules do not exist and this may substantially reduce successful prosecution of such cases. Cases involving insider trading or breach of fiduciary duties are rare and difficult to win. While legal traditions may vary across countries, there is a broad consensus that the structure, vigilance and capacity of the regulatory and judicial framework forms an integral part of the corporate governance environment.

Corporate governance and productivity Most research studies indicate that there is a strong relationship between good governance and a stock market premium – reflecting the value that could be attached to trust and confidence. Good governance is a magnet for global capital flows.2 Good corporate governance complemented by a conducive business environment can work to strengthen private investment, corporate performance and economic growth. Good corporate governance then potentially triggers a virtuous chain.3 Increased market confidence inevitably attracts investments thereby lowering the country’s cost of capital.4 The enhanced transparency and reliability of information not only reduces monitoring costs but also

76 Infrastructure and Productivity in Asia

increases capital allocation efficiency – resulting in a highly efficient and productive economy. Asia’s rapid growth in the 1980s and 1990s was driven by reforms that promoted a sharp rise in exports. However, some studies have argued that much of this growth was output-driven and that productivity levels remained relatively stagnant during this period. While the degree to which extent this was true can be vigorously debated, there was clear evidence that much of the growth was driven by large inflows of foreign direct investments (FDIs) and mirrored by sharp jumps in output and nominal exports. But if, in the next phase of development, Asia needs to be able to harness portfolio flows to develop its intellectual capital and to invest in technology rather than its labour force, then it has to rely more on market mechanisms rather than government policy if it is to achieve the success that it so desires. Not only are there clear productivity benefits from good corporate governance, it should not be overlooked that the potential costs of poor corporate governance are enormous. Without trust, global portfolio investors – and probably even domestic investors – will either stay away from the market or demand high risk premiums for their capital. The high costs of capital can inhibit a country’s potential growth.

The challenge and ideas for reform for Asia The trend towards strengthening corporate governance frameworks is a global phenomenon but as outlined earlier there are sufficient variations in operating environments to rule out a standard approach towards achieving a common objective. For example, in Western jurisdictions, self-regulation preceded government regulation but, by comparison, in Asia, regulation tends be prescriptive and to be driven by governments. The private sector lacks the capacity, expertise and even incentive to regulate its own behaviour. In this context, countries with longer traditions in corporate governance can approach reform on a more piecemeal basis but, in Asia, where the infrastructure is weaker, a more holistic approach towards building a corporate governance framework is required. Drawing from the Malaysian experience (Figure 4.1), a holistic approach requires viewing reforms from the perspective of a broad framework of ensuring regulatory discipline, market discipline and self-discipline. A legal or prescriptive approach misses out the point made earlier that the Asian private sector has yet to develop an adequate compliance culture to ensure a high probability of success. It also overlooks the more important point that ethical conduct cannot be legislated and

Ranjit Ajit Singh, Eng Chye Phuah and Harveen Kaur 77 Regulatory discipline

R

Enforcement Rules and regulations Planning, standards and best practices

M

Professional and ethical management

Market discipline

S Self-discipline

Source: Securities Commission, Malaysia

Figure 4.1 A Malaysian experience of a holistic approach to building a corporate governance framework

that it needs to be reinforced by the establishment of norms and public pressure. In this respect, the traditional Asian values were more effective within the close-knit family type business structures but became increasingly ineffective as society became more complex, as business expanded beyond boundaries and became increasingly transacted with unknown parties through a marketplace. The starting line for achieving higher standards of corporate governance is regulatory discipline. Regulatory discipline is fundamental to ensuring obligations towards maintaining high levels of corporate transparency and accountabilities. Corporate governance related laws and codes could be important in setting the tone for change. Authorities do their part in formulating robust rules and regulations and by ensuring that they are effectively enforced and, at the same time, undertaking educational programmes to raise awareness on the importance of corporate governance.

Regulatory discipline Regulators must ensure that the rules and standards they are introducing do not unwittingly inhibit market discipline or work against businesses

78 Infrastructure and Productivity in Asia

operating efficiently. Typically, these rules and standards cover areas such as the level of investor awareness, the adequacy and reliability of financial and other information, the state of shareholder activities and the level of professionalism of advisers such as lawyers, valuers and accountants. Given the breadth required for an effective regulatory framework, a fine balance need to always be drawn between the controls needed to prevent fraud and unethical conduct and the freedom necessary to stimulate competition and growth. Regulators design the institutional framework and policies and drive reforms, where appropriate, to converge with international benchmarks. Regulators then invest in building capacity for enforcement to protect the interest of investors by ensuring the integrity of information and minimizing market misconduct. The objective of regulatory discipline is to ensure that customers of the capital market believe that markets are fair and that their interests are protected.

Market discipline A holistic approach is premised on the philosophy that regulatory discipline is only the starting line rather than the finishing line. Regulatory discipline must be accompanied by reforms to ensure the efficient functioning of market disciplinary functions. In other words, investors cannot just leave it to the regulators to ‘do-the-job’. Markets play an extremely important role in complementing the efforts of regulators. For example, if markets consistently reward ‘exciting’ management and companies that do not adhere to the spirit of corporate governance, that is, that do not understand their broader responsibilities nor subscribe to an ethical manner of conduct, then they risk undermining the efforts of regulators to curb such behaviour. In markets with a strong culture of shareholder activism for instance, investors typically exert pressure on companies to link the objectives of their key processes to long-term value. Without sufficient shareholder pressure on local companies to focus on wealth enhancing activities and to reward their efforts towards value creation for shareholders, companies will tend to waiver from this path. Market discipline is exercised most often through the valuation of companies. The resulting publicity is likely to have a heavy influence on the behaviour of owners and managers. Disclosure, good regulation and enforcement are only, therefore, one part of the equation towards achieving good governance. To paraphrase a well known regulatory saying: ‘Sunshine is the best disinfectant but you need to make sure the sun is up and about.’

Ranjit Ajit Singh, Eng Chye Phuah and Harveen Kaur 79

The role of the regulator in this respect, is to enable or facilitate the building of structures that shape behavioural norms and that would incentivize the market to take up its responsibility of ensuring good governance. The promotion of shareholder activism and private sector monitoring agencies coupled with the modification of regulatory frameworks to ensure that these market-based disciplinary mechanisms can work effectively is a sometimes overlooked but equally important task. Some of the largest global investors are leading the way and have become increasingly active and vocal. Corporate governance ranks high on their agenda and the menu of interests can also be quite varied – with considerations ranging from ethical investing to corporate social responsibilities to ensure that corporations are also aware of their broader social responsibilities. Institutional investors in Asia are only now beginning to become aware of their role in influencing corporate behaviour. However, they may lack the necessary capacity to perform this function effectively. Ultimately, it may be desirable that institutional investors increasingly behave like owners of business and operate with long time horizons. Other minority shareholders, or groups, can also play a role but their influence and resources to do so are relatively limited. Another group that is likely to play an increasingly important role are rating agencies. Here, it is expected that the international rating agencies, through joint ventures with domestic agencies, would play a key role. Other important commentators are the analysts and the media, due to their impact on the sphere of public expectations.

Self-discipline As discussed earlier, codes and best practices are an important part of the infrastructure that enables good governance but they do not in themselves cause good governance. To augment the laws, regulations and codes, good corporate governance must be effected by market participants. Self-discipline entails high levels of professionalism and integrity and more transparent and greater accountability in corporate behaviour. Regulatory discipline must be complemented by a culture that reinforces strong self-discipline. Though regulators and market participants can play an important role in influencing compliance with rules and norms, ultimately the onus for ethical behaviour must lie squarely where it belongs – with the owners and top management of publicly-listed companies. Corporate leaders must recognize their responsibilities, that their success derives from the community and that they are accountable to all stakeholders. Education is vital to raising the standards of corporate governance and

80 Infrastructure and Productivity in Asia

is equally applicable to both investors as well as company management and their board of directors. Directors of companies can be subjected to some form of academic or training requirements to ensure that directors are aware of regulatory requirements and have an appreciation of the changing environment and demands. A sound corporate governance framework would also ensure that there is a strong internal system of checks and balances. In this regard, professionals such as lawyers, corporate advisors, internal and external auditors must perform the duties that they are obliged to as professionals so that these checks and balance can work effectively. Self-regulatory mechanisms tend to promote self-discipline and good practices and target specific problems within industries, impose lower compliance costs on business, and offer quick, low-cost dispute resolution procedures. Effective self-regulation also promotes public trust and confidence and allows industry the flexibility to be more responsive to changing market dynamics and expectations. The development of a pool of competent professionals is therefore important in enhancing professionalism. The effectiveness of self-regulation and the extent of reliance that regulators can place on the self-discipline of market participants, however, will depend on the nature and extent of market sophistication and the effectiveness of a strong oversight regulatory function.

Conclusion Asia is becoming increasingly important to the global economy. Asia currently accounts for about 34 per cent of world GDP5 and represents a market of more than three billion people.6 Asia is also home to some of the most dynamic economies and companies and is in the midst of a transformation where the drivers for productivity and economic growth are increasingly being shifted from the public sector to the private sector. Against this backdrop, the corporate governance reforms being undertaken in Asia are of substantial importance to the rest of the global economy. The Asian crisis is only a blip in history but its effects have been a useful catalyst for wholesale reform of the corporate governance frameworks and markets. But, as outlined in this chapter, it should be recognized that the issues relating to corporate governance are complex due to the interdependencies and linkages with a whole host of issues such as labour laws, tax laws, the judicial system, bankruptcy legislation, financial infrastructures, the availability of human skill, corporate cultures and the sophistication of the marketplace.

Ranjit Ajit Singh, Eng Chye Phuah and Harveen Kaur 81

Replicating the approach used in non-Asian countries is not the answer though globalization may require some convergence or adherence to standards. As it stands, even the most advanced mechanism and frameworks for corporate governance have gaps and inefficiencies. In large part, there appears to be overemphasis on compliance rather than effect. In this regard, this chapter advocates that an effective approach must require a holistic framework, which places equal emphasis on the three cornerstones comprising regulatory discipline, market discipline and self-discipline. In introducing reforms, Asia, must have the confidence to evolve its own versions or models towards ensuring corporate responsibility and integrity. Regardless of the approach, the quest is ultimately simple – that is to build a market place where there are high levels of integrity, confidence and trust.

Notes 1. The Finance Committee on Corporate Governance: Report on Corporate Governance, Malaysia, 1999 defines corporate governance as ‘the process and structure used to direct and manage the business and affairs of the company towards enhancing business prosperity and corporate accountability with the ultimate objective of realizing long-term shareholder value, whilst taking into account the interests of other stakeholders’. 2. For instance, Governance Metrics International, GMI Governance and Performance Analysis, March 2004 reported that: ‘a substantive connection between good governance practices and performance as measured by average annual total returns to shareholders. In the short term (1 year), the link between the two is not considered significant, but looking at the long term (3,5 and 10 years), there appears to be a connection between good governance practices and performance. 3. Emerging Markets Committee (1999) ‘The crisis raised important issues concerning the interaction between financial markets in economic development, the management of international private capital flows and private and public debt management. In this regard, the strength of the financial system is seen to be a critical issue, with the crisis showing that what were thought to be “optimal” policies in the real sector of an economy could easily be undone by a weak and underdeveloped financial system.’ 4. Davies (2002) ‘US Academic researchers have found that in countries where the policing of insider trading is regarded as weak, or where the legal framework is poor, the cost of capital for firms is typically some three-percentage points higher than in countries where insider dealing is policed effectively.’ 5. IMF World Economic Outlook 2004. 6. World Development Indicators database, World Bank, April 2004.

References Asian Roundtable on Corporate Governance (2001) White Paper on Corporate Governance in Asia, Paris: Organisation for Economic Co-operation and Development Securities Commission. Berg, A. (2003) Corporate Governance Reform in Emerging Markets – Implications for Financial Sector Regulators, Private Sector Advisory Services, The World Bank.

82 Infrastructure and Productivity in Asia Business Environment Group, Responding to the Global Financial Crisis, The Business Environment and Corporate Governance, Strengthening Incentives for Private Sector Performance, Private Sector Development Department, The World Bank Group. Davies, H. (2002) ‘Financial Services Authority, Corporate Governance and the Developments of Global Capital Markets’, Balance Sheet, 10(3), 14–18. Emerging Markets Committee (1999) Causes, Effects and Regulatory Implications of Financial and Economic Turbulence in Emerging Markets, The International Organization of Securities Commission. Gill, A. (2002) ‘Corporate Governance and Performance’, Corporate Governance International, 5(3), 28–49. High Level Finance Committee on Corporate Governance February (1999) Finance Committee on Corporate Governance: Report on Corporate Governance, Malaysia. Kadir, A. A. (2000) ‘Can Corporate Governance Lead the Way to Global Competitiveness’, Closing address at the International Conference on Corporate Governance in Asia: Corporate Governance and Global Competitiveness, Securities Commission, Malaysia. Securities Commission (2001) Capital Market Masterplan, Malaysia. Zarinah, A. (2003) ‘Towards a World Class Regulatory Framework: Enhanced Transparency and Governance’, Keynote address at the First Meeting of CPA Australia’s International Board of Directors, Securities Commission, Malaysia.

5 The Dynamics of Large Asian Corporate and Family Conglomerates Ali Mirza

The complex governance of Asian-run and family controlled conglomerates has long been a subject of deep interest and discussion among economists, researchers and Western businesses. Asian culture and the political context of Asian economies have provided a fertile breeding ground for Asian multi-corporations for most of the twentieth century, and successfully transformed many of these firms into formidable players in the Asia-Pacific region. In this chapter, we shall examine the broad management overview of important issues for businesses dealing with Asian conglomerates. Case studies are provided to illustrate the points where relevant. By the end of World War II, Asian conglomerates had built and developed firm symbiotic relationships with their respective host economies. These large businesses, operated smoothly within their country by providing stable employment to the working class: they also simultaneously expanded into new markets while driving economic growth for their country. Given their fundamental role in the creation of the ‘Asian Tiger’ economies, namely Hong Kong, South Korea, Malaysia, Taiwan and Singapore, these Asian conglomerates became the darlings of governments, and champions of the working middle class population across Asia. As a result, their corporate governance and financial practices went largely unchecked as Asian economies boomed from the 1980s to mid-1990s. In 1997, the Asian financial crisis saw the collapse of many Asian conglomerates, while the operations of many others were severely affected. In several cases, their respective host governments provided multi-billion dollar bailout packages to cushion the impact on their economies. Not surprisingly, this prompted the attention of ‘regulators’ followed by investigations into how these guarded Asian conglomerates were 83

84 Dynamics of Asian Corporate and Family Conglomerates

operating. Aside from issues of poor corporate governance and lax financial practices, there were also issues of charges of corruption and nepotism in many of the cases. The following few years were filled with agendas of restructuring and reform within the Asian economies as well as internally in the individual Asian conglomerates. For those Asian multinationals that emerged from the financial crisis, new challenges surfaced as they geared up towards the new millennium. These included the challenge of China as the rising new economic centre for Asia and adaptation to the new challenges presented by the information economy. On a global basis, there remains the wider threat of a global recession in the face of the war following the September 11 terrorist attacks. In my analysis of Asian-run and family dominated conglomerates, two distinct and defining characteristics of the typical Asian conglomerate continuously surface and have been shown to differentiate themselves widely from their counterparts in the US and the other developed economies worldwide. First, the ownership and control of Asian corporations is often concentrated among a few large families; and second, close affiliation within Asian corporate groups (and/or between these businesses and their governments) is the norm, in direct contradiction to practices common in the West, particularly in the US. Building upon these two characteristics identified within the Asian conglomerate, a broader understanding is obtained based upon the following five key organizational issues: 1. Control and corporate governance: the prevalence of founding-families within Asian conglomerates and their impact on corporate control and governance. 2. Networking and government relations: networking in the Asian context and in particular the relationships between Asian conglomerates and their host governments. 3. The Asian financial crisis and financial practices: based on the financial crisis and the financial practice of Asian conglomerates in general, we derive lessons from those that survived the crisis. 4. Challenges in the changing economic landscape: the past key growth drivers for Asian conglomerates are reviewed, and an outline given of the challenges that the shifting market environment presents to them in the new millennium. 5. Partnerships with Asian conglomerates: an outline of some high-level strategies and best practices that Western firms adopt in dealing with Asian conglomerates.

Ali Mirza 85

Before further examination of the areas above, the following definitions for the scope of this discussion are:

• For this study, the term ‘Asia’ covers the key North and Southeast Asian economies in general. The specific markets covered are: China (PRC), Hong Kong, Indonesia, Japan, Malaysia, Philippines, South Korea, Singapore, Taiwan and Thailand. • The term ‘conglomerates’ denotes sizable corporations that have a number of businesses and subsidiaries, typically across multiple industries and markets. While there is no specific requirement in terms of annual revenue or market capitalization to qualify as a conglomerate in this instance, the examples used are all well-known listed entities.

Control and corporate governance Compared to the conglomerate structures observed in the US, UK and other developed countries (with the exception of some less-developed European countries), a relatively high proportion of Asian companies were controlled by families (in most of these cases, usually the controlling stake was with the founder). The widespread practice of family run businesses was so rampant that special terms for these family conglomerates were developed within these markets, for instance chaebol in South Korea and zaibatsu in Japan, being the local translation for ‘family owned conglomerates’. In today’s world, it is common knowledge that control of Asian conglomerates is still largely in the hands of a few wealthy families, even as ownership is being diluted. Although there is positive progress and upwards movement towards global standards of corporate governance (increased transparency, management and board accountability, and shareholders’ rights), the established practice of hiring family appointed executives still remains intact, and probably the role of these families in Asian business will stay for another generation at the very least (Chen, 2002). To illustrate this, Figure 5.1 indicates that outside of Japan (excluding mainland China), the family owned conglomerate is the dominant model in Asia, accounting for at least 50 per cent of listed companies in many countries. The ‘visibility’ of the family controlled listed companies in Asia is comparable to that in some European countries, such as France and Italy. This enables the companies to draw in external funds while allowing the families to retain control over the use of the capital.

86 Dynamics of Asian Corporate and Family Conglomerates 100% 90% 80% 70% 60%

Widely held

50%

State-owned

40%

Family-owned

30% 20% 10% UK

Indonesia

Singapore

Malaysia

Thailand

Philippines

Taiwan

Hong Kong

Japan

South Korea

0%

Source: World Bank (1998b) cited in Kurniawan and Indiatoro (2000).

Figure 5.1

International comparison of family control of businesses

In addition, much of the market (and thus control, both visible and invisible) in the Asian economies is owned by a handful of very wealthy Asian families. This is particularly true in the Philippines, Indonesia and Thailand, where the 15 richest families own more than half their countries’ wealth in terms of market capitalization (see Figure 5.2). Ownership and control of Asian conglomerates, which lies in the hands of a selected few, has large implications towards organizational structures; effectiveness of the companies; executive committee’s responsiveness; and speed towards market interactions. But, unless there is clear transparency in the management hierarchy and departmental interrelationships, familial appointments within the Asian conglomerate will only serve to impede the company’s global competitiveness, since outsiders are becoming more wary of family based management opacity. How does this affect corporate governance in Asian businesses? Family based conglomerates are characterized by tight control, with key family members (in some cases only one person) and top cadres responsible for important corporate decisions. Therefore, a secured position on the board of directors of an Asian conglomerate does not necessarily guarantee significant corporate influence within the organization. The family members and trusted associates typically could act as one voice in the decision-making process therefore combining stakes as though the majority. Table 5.1 compares the three corporate governance systems.

87 70 60 50 Top 15 Top 10 Top 5 Top 1

40 30 20 10 Indonesia

Singapore

Malaysia

Thailand

Philippines

Taiwan

Hong Kong

Japan

South Korea

0

Source: World Bank (1998a) cited in Forbes Magazine (2002).

Figure 5.2

Distribution of corporate wealth

Table 5.1

Comparative corporate structures Type of corporate governance system

Management’s share of control-oriented finance Share of firm listed on exchange Ownership of debt and equity Investor orientation Shareholder rights Creditor rights Dominant conflict Role of board of directors

Equity marketbased system

Bank-led system

Family based system

Low

High

Large Dispersed

Not necessarily small Concentrated

Initially high, but may be reduced by external financing Usually small

Profit-oriented Strong Strong

Mixed Weak Strong

Shareholders vs. management Important

Bank vs. management Varies

Source: Strategic Intelligence, ADB Institute.

Concentrated Control-oriented Weak for outsiders Depends on relationship Controlling vs. minority investors Limited

88 Dynamics of Asian Corporate and Family Conglomerates

In a family based governance system within an Asian company, one question constantly resurfaces, namely, how is an Asian conglomerate managed? A family based system typically adopts a more informal management style tending towards a more intuitive rather than bureaucratic style. Many of these founders of Asian conglomerates were not highly educated. Schooled in the busy street markets of Asia instead of Harvard or Stanford, these businessmen are driven more by practicality than theory, and are promoted to become market leaders through a combination of foresight, strategic decision-making ability and good fortune. In Asian tradition, the sons in the family have been (and very much still are) expected to take over the reins of the family business. In the event where the founder does not have a son, a common practice is to extend the family by marriage. For instance, Hong Kong shipping magnate Y. K. Pao (of Star Ferry, World-Wide Shipping, and Hong Kong & Kowloon Wharf & Godown) groomed his three sons-in-law to take over his business empire. In Japan, wealthy families with no sons often ‘adopt’ mukoyoshi – men who marry their daughters and sometimes take on a new surname – in order to take over the family business. As in King Solomon’s days, marriage is a means of extending one’s alliances and influence in Asia. South Korea’s Samsung and Hyundai for example, are linked by marriage alliances. Current trends suggest that the traditional model of father-to-son succession is gradually changing. Globalization has increased the range and complexity of business issues, and businessmen need much more than a good pedigree and list of contacts to survive. Ability aside, the spirit of individualism found in the West has found its way into the collectivist Asian culture. As such, the scions of Asia’s elite, often having been trained in top universities in the US or elsewhere, sometimes shun the family business in favour of charting their own course. Furthermore, the old Chinese adage ‘the first generation builds, the second preserves, the third destroys’ actually advises against the traditional succession model. In the early 1990s, a family feud spilt renowned Singapore food and beverage company Yeo Hiap Seng, leading to the appointment of the first non-family CEO since the company was set up at the turn of the century. Taiwan’s Stan Shih (CEO of computer giant Acer) has banned his children from working in the company. Contrary to the traditional practice, he invited external directors and managers to join, offering company shares as an incentive.

Ali Mirza 89

The increasing use of professional managers is a move to attract global investors by demonstrating that Asian conglomerates play by the global rules of corporate governance. Shin Corp., Chaoren Pokphand, Lotus Group and Big C are some of the big family controlled companies in Thailand that have injected professional management into their organizations, reflecting the changing face of future family run firms. However, the key issue for global investors is not management per se, but transparency. Transparency refers to the accuracy, substance and timeliness of company-related information available to the investor. From a macroeconomic perspective, it is a key requirement for the market to function well since it enables investors to act rationally. It is also a general indicator of good corporate governance as it promotes the accountability of management. Unfortunately, transparency (or the lack thereof) is still a major issue given the complex and opaque ‘pyramid’ organizational structures that exist across Asian conglomerates. This often enables family conglomerates to place loyal managers in key positions, even as their holdings are diluted: The law in Korea doesn’t allow a holding structure, so each company is independent. But through a sophisticated arrangement, Chairman Lee [Kun Hee] controls all 45 companies, despite the fact that they all have independent boards. Dennis Chiang, EVP and COO, eSamsung China [Note: The Lee family owns only around 8 per cent of the wider Samsung conglomerate.] These family vassals, known as kasin in South Korea, would make business decisions that favour the founding family’s interests over other shareholders, in return for a pathway to the management ranks. Through them, families that only control 5–10 per cent of stock can still run their conglomerates like empires. In the wake of the Asian financial crisis, the finger of responsibility has been pointed at this behindthe-scenes group of executives. In the case of Hyundai, creditor banks called for the resignation of three kasin over allegations of blocking mandated reform. Aside from pyramid structures, other mechanisms that family run Asian conglomerates employ to enhance control of their businesses are crossholdings and voting caps (by implementing multiple classes of voting

90 Dynamics of Asian Corporate and Family Conglomerates

rights). These truly reflect the Asian culture of preservation of the tradition of the company through its founding fathers, generational alliances and relationships for the retention of power and control of their vast interests. Where instances of global corporate systems are in place, the issue of transparency and how the company is run is still much left to debate.

Networking and government relations Due to the close relationships within Asian corporate groups, business groups and their governments, it is unsurprising that issues of cronyism and corruption arise. Generally however, good efforts are being made across Asia to wipe out cronyism and corruption in government, but the problem will not go away overnight. The fact also remains that Asian conglomerates are built upon a web of political and business networks. The reaction of many Asian governments to the financial crisis has demonstrated the existence of these two-way relationships. In addition, the complexity of the economics of networking increases with globalization, and this will require Asian conglomerates to adopt the rules-based approach vis-à-vis foreign companies in the global arena. Traditional networks, however, will thrive in the new economy. In the e-business space, the Keiretsu strategy – a loose association of noncompeting companies who share a common interest or marketplace – will enable small businesses to offer a range and depth of services similar to large conglomerates. With politics and corporations closely intertwined, business networking and dealings in Asia are traditionally viewed as flexible arrangements, as opposed to the rule-based West where contract is law. By extension, the Asian business community is more ‘connections-based’, with relationships, rather than price or quality, being the key factor that seals the deal. An interesting case in point is the Chinese ‘bamboo network’ (Tanzer, 1994). Through loyal citizens of whatever country they reside in, overseas Chinese constitute an invisible economic network held together by ties of kinship and family. The global network helps establish trust and minimizes administration and red tape through the use of informal agreements. This allows Chinese companies to diversify businesses and expand into new markets with minimal investments and within very short periods. The bamboo networks also fit in with the model of the typical Asian family business, which is a network of enterprises, compared to the unitary family companies (e.g. Ford and Wal-Mart) found in the United States.

Ali Mirza 91

One example is a Bangkok-based company that manufactures parts for major makers of personal computers all over the world. It is owned and managed by a Thai citizen of Chinese ancestry. It now has 11 plants around the world: three in mainland China, four in the US, three in Malaysia and one in Indonesia. It is planning to build two to three additional plants in Europe, probably in the UK. Every one of these plants is managed by a citizen of the country in which it operates. However, every one of these managers is of Chinese extraction and related by blood to the owner or the owner’s wife. (http://www.vgconsultant.com/comp4.html. [accessed July 2004]) This similarity can also be found in the Japanese keiretsu system. Like the ‘bamboo network’, kiretsu rarely takes the form of a formal joint venture or partnership, but are instead built upon family ties and historical alliances. They can manifest themselves in a number of ways, including preferential transfer rates, cross referrals, and exchange of market intelligence. Politics and economics are closely intertwined in Asia, possibly as a result of having a small elite in each country, so it is interesting to examine the relations between the business and political establishments. In almost every country, close relations of political figures (and often the politicians themselves!) are linked to some major business entities. This has created fertile ground for corruption. Almost every Asian country has had corruption scandals involving top politicians in the past five years. In 2000, three ASEAN heads of government – former Indonesian president Abdurrahman Wahid (popularly known as Gus Dur), Thai Prime Minister Thaksin Shinawatra and former Philippines’ president Joseph Estrada – were simultaneously investigated for alleged corruption. In Malaysia, Finance Minister Daim Zainuddin resigned after being linked to questionable government bailouts of businesses during the financial crisis. And there is still a long-running saga linking chaebol to the corruption managed for, or on behalf of, the Korean government (Kotch, 2004). The tacit relationship between family controlled corporations and governments and how strong the alliance is was shaken in a recent attempt by Temasek Holdings to wrest control of United Overseas Bank from the Wee family through United Overseas Land in what is widely believed to be a bid to caution on the use of significant cross shareholdings to retain family ownership of several companies under his entertainment, banking and hotel empire.

92 Dynamics of Asian Corporate and Family Conglomerates

But in other parts of Asia, the practice of close association between Asian conglomerates and governments are prevalent especially in Indonesia where the acronym KKN (korupsi, kolusi, nepotisme – bahasa Indonesia for corruption, collusion and nepotism) has found its way into the vocabulary of everyone. Just how such alliances breed is due to the win–win situation for Asian conglomerates and their host governments. Despite the obvious negative connotations, some have argued that it is the close relations between businessmen and politicians that have helped to promote stability and economic development in Asian countries. For example, the relationship is often symbiotic – the Asian conglomerate provides significant employment and tax revenues in good times; in turn, governments help businesses develop with tax incentives, subsidies, low-interest loans and (in some cases) protectionist policies. During economic downturns, the governments may even intervene to bailout those in distress. During the Asian financial crisis, the South Korean government set up a Restructuring Committee that rescued (through bailout funding and other ‘work-outs’) 102 corporations, which included chaebol like Daewoo and Hyundai. Hence, it can be said that close relationships with the government (both official and personal) and ethnic networks have helped these companies to entrench positions in their respective markets. Even so, typical Asian management practices often do not meet Western standards of corporate governance.

The Asian financial crisis and current state of financial practices The Asian financial crisis was seen as a vital though unfortunate event to shake the comfort zone, management practices and growth strategies of Asian conglomerates. Some of the net effects of the Asian financial crisis for Asian conglomerates have been a dilution of holdings (including state and foreign ownership) and broader wealth distribution. Restructuring and management reform efforts have brought about a movement towards global standards of corporate governance. Families are ceding control to outsiders (often even foreigners) in the wider interests of the companies, employees and country. Now, with China’s entry into the World Trade Organization (WTO) and increasing regional free trade agreements, it is clear that government intervention in Asia still will not disappear. Instead, it will shift towards enhancing efficiency, protecting property rights and promoting competition. ASEAN governments in particular will have to make their economies increasingly attractive to investors or risk being completely marginalized by China.

Ali Mirza 93

To understand the true effects of the Asian financial crisis on Asian conglomerates, it is important to know what caused the crisis in the first place. You will see that the cause of the crisis was also partly the result of the characteristics of Asian conglomerates. Several factors were responsible for bringing the ‘Asian miracle’ to a sudden halt in 1997. Briefly, these included:

• High debt-to-equity ratios: Prompted by the high returns on investment in the 1980s, many Asian conglomerates rapidly expanded in the early 1990s. These investments were increasingly funded by external sources like long-term loans, putting many Asian conglomerates in a high debt-to-equity ratio. In 1996 (just prior to the financial crisis), firms in South Korea, Japan and Thailand were amongst the most leveraged (defined as total debt over equity) in Asia, with average debt-to-equity ratios over 2.0 (see Figure 5.3). • Inadequate financial regulatory frameworks: At the same time, fiscal policies in several Asian economies were liberalized to further boost growth, allowing companies to borrow even more. The financial industry regulators in many Asian countries had not kept pace with the growing complexity that had come with economic progress. The lack of financial regulation and supervision produced practices such

4

3 1988 1996

2

1

Source: World Bank (2000).

Figure 5.3

Debt to equity ratios

Indonesia

Singapore

Malaysia

Thailand

Philippines

Taiwan

Hong Kong

Japan

South Korea

0

94 Dynamics of Asian Corporate and Family Conglomerates

as cross borrowing (where conglomerates borrow from banks that they own). Close insider links between business leaders and politicians (corruption and cronyism) also suggest that rules and policies may be enforced only selectively in some cases. • Reliance on foreign capital: Attracted by the potential returns offered by the Asian miracle, foreign investments poured in as capital, as well as loans. As exchange rates for Asian currencies fell in 1997, many foreign companies withdrew their investments to cut their losses, aggravating the situation for the Asian economies. In 1997, the then Malaysian prime minister (and also the Finance minister) Mahathir Mohamad blamed currency speculator George Soros for the fall of the Malaysian ringgit. To curb further speculation (and a further decline of the ringgit), Mahathir imposed capital control measures and pegged the ringgit to the US dollar. Although initially viewed as draconian, these measures have later been credited with having helped stabilize the Malaysian economy. In some cases, even the International Monetary Fund (IMF) rescue packages, which were meant to speed economic recovery, were criticized for prolonging the recession. After the Asian financial crisis, one net effect and which inadvertently changed was the dominant modes of financing in Asian conglomerates. In the 1980s, Asian conglomerates would raise around 50 per cent of their financing needs through internal funding. With the rapid expansion in the late 1980s and early 1990s, Asian companies in general increasingly relied on external sources of funding. In South Korea for example, average external financing for listed non-financial corporations increased from 56 per cent to 77 per cent between 1988 and 1996 (see Figure 5.4). External financing can come in the form of liabilities (such as bank and government loans, bonds and trade credit) which are easily obtained given the close relationship between government and Asian conglomerates, as well as investment (equities and direct investments). Liabilities made up over 70 per cent of South Korean companies’ external financing in 1997, and as many of them could not service their loans when the crisis hit, many creditors were left with a pile of bad debts. Figure 5.5 shows the sources of external finance of Korea’s non-financial corporations in 1997. The fallout from the Asian financial crisis saw the Indonesian, South Korean, Malaysian and Thailand economies as the most severely affected.

Ali Mirza 95 100

Source of funding (%)

80

60 Internal financing External financing 40

20

1996

1995

1994

1993

1992

1991

1990

1989

1988

0

Source: Bank of Korea (1996).

Figure 5.4

Ratios of internal to external funding in Korea

13%

19% 1%

23%

9% 9%

1% 4%

Bank borrowings Non-bank borrowings National/public bonds Commercial paper Corporate bonds Equity Foreign loans/bonds Government loans Others

21%

Source: World Bank in Claessans and Klepper (1997).

Figure 5.5

Korean funding sources

Ownership of many Asian conglomerates in these countries was diluted in the wake of the crisis. Banks in particular felt the pinch of increases in the occurrence of non-performing loans (NPLs). In Thailand, some 95,000 cases of NPLs valued at US$43 billion were investigated. Of 15 formerly family owned

96 Dynamics of Asian Corporate and Family Conglomerates

banks, four have been nationalized (at an almost complete loss of family holdings), and two have been taken over by foreign institutions, with more likely to follow. Huge recapitalization reduced family holdings in the big two – Bangkok Bank, and Thai Farmers Bank – to just over 50 per cent. In South Korea, many companies, including several chaebol, faced the threat of bankruptcy. Daewoo, then the second-largest Korean corporation, collapsed under a US$78 billion debt, which was $20 billion more than the IMF’s entire 1998 bailout package for South Korea. This prompted the government to push the other chaebol to undertake major restructuring and reform efforts, which included selling off unproductive units and putting international investors in management positions in order to improve corporate governance. These were initially met with resistance. However, following government pressure and Daewoo’s collapse, the founder of Korea’s largest chaebol Hyundai, Chung Ju-yung, announced in May 2000 that his family would completely withdraw from the day-to-day management of the company, a move welcomed by both the South Korean government and the investing community. Over 30 of Hyundai’s 52 affiliates liquidated or were put up for sale. The remaining companies were directed to bring foreign managers on board and seek strategic alliances with foreign firms. Other chaebol have followed suit and, for the first time, Samsung and SK have appointed outsiders to sit on their boards. The governmental support and bailout packages to some economically important Asian conglomerates had irreversibly produced what I call the Asian crisis survivor. These corporations adapted and changed to meet the needs of the new economy after the crisis but their defining characteristics still exist in a large way. In the 1970s and 1980s, some of the fundamental drivers of growth for Asian conglomerates were adaptability, strategic foreign alliances, government protection, and expansion and internationalization. In many ways, these are also the factors that have helped many of them to survive the crisis. Emerging from the Asian crisis, it is important to understand the updated profile of the Asian conglomerate and see the extent of its effects on management issues. As most Asian conglomerates have vast interests across industries, those that survived had the ability to quickly adapt to changing circumstances. This group of survivors mainly comprise Asian conglomerates that recognized the need for reform and quickly took action. Charoen Pokphand Industry, owned by Thailand’s Chearavanont family, replaced family members with professional managers who, in turn, restructured its company to focus on its core

Ali Mirza 97

agriculture, retail and telecommunications businesses, enabling the company to survive the crisis. Others survived by forging strategic alliances with foreign companies. But the Asian financial crisis resulted in some Asian conglomerates toppling in a domino effect as local partners, suppliers, customers and creditors folded their businesses in the wake of the crisis. Thai telecom player Shin Corp Industry forged a strategic alliance with SingTel by ceding some management control. Thus, aside from the usual synergies accrued from foreign alliances (such as expanded access to resources, distribution network, licensing agreements), strategic foreign alliances that were less affected by the Asian crisis provided an anchor for Asian conglomerates. The Asian crisis survivor if they had no one to turn to, relied on Government assistance and intervention, in terms of trade protectionism, low-interest loans and bailouts, which enabled them to survive. In 2001, the Korean government set up a special committee, backed by a US$4.2 billion bailout, to restructure and rescue Hynix, then the world’s third largest chip-maker. Malaysia’s capital controls, introduced to stabilize the economy following the financial crisis, possibly helped to save many Malaysian businesses. The American Malaysian Chamber of Commerce, however, criticized the Malaysian government for playing ‘too large a role’ and being highly unpredictable, and said that this would repel international investors. Last but not least, the Asian conglomerate survivor that had expanded, geographically as well across sectors, was better positioned to ride out the crisis, since the recession was generally localized in Asia. In fact, other Asian conglomerates that were less affected even took advantage of the situation to go bargain hunting. Several Singapore conglomerates (like Singapore Airlines, SingTel and the Development Bank of Singapore) made acquisitions in the months following the crisis. Hence, the aim to internationalize either regionally or globally is now one goal of most Asian conglomerates and for this strategy to be envisioned, they are less prejudiced against foreign and professional managers as opposed to family appointed members.

Challenges in the changing economic landscape The Asian conglomerate survivor has now a newly updated profile despite the continued presence of family ownership and close governmental affiliation. However, are the changes enough to survive in the changing economic environment? First, we take a look at some of the current trends that will affect the Asian conglomerate. Later, we will explore how they are gearing up to these challenges.

98 Dynamics of Asian Corporate and Family Conglomerates

One of the key drivers of success in business, both within and outside Asia, is the ability to recognize and adapt to changing circumstances. The Asian conglomerate survivor should already be implementing this strategy, but whether the latter is sufficient for rapid changes is another important factor to understand when working with them. The challenges facing the Asian conglomerate are:

• Globalization: Cross-border business dealings become increasingly common, and the Asian conglomerate will have to gravitate towards global (Western) standards of rule-based corporate governance. On another level, globalization also induces a shift towards liberalism and individualism. As such, certain collectivist Asian practices like lifetime employment and family succession will gradually decline. • China as Asia’s next economic powerhouse: Asian observers predict that China will take over Japan’s position as the economic and industrial centre of Asia. Other developing Asian economies, especially in Southeast Asia, will be marginalized. To survive, businesses in these countries will have to find ways to remain competitive or better yet, engage China and leverage on its growth. • Growing Asian middle class: Many Asian societies traditionally comprised a small elite leading a large proletariat. Rapid economic growth over the past three decades has created a growing middle class. Asian conglomerates will no longer have an unlimited supply of unquestioningly loyal workers as they become better able to demand worker’s rights, fair wages, transparency in management and a clean government. • The information economy: In recent months, businesses have recognized that the Internet is not so much a source of new business models as it is a tool for cost cutting. Given that Asia is a global manufacturing hub, supply chain management (SCM) will be a key area for many Asian conglomerates vis-à-vis IT spending. Supply chains account for some 60–70 per cent of overall manufacturing costs, and Asian conglomerates will leverage upon SCM tools to maximize their competitive advantage. Hence, the Asian business environment is becoming increasingly complex, an established brand (family) name and historical partnerships alone will not be enough to survive. Asian conglomerates will require visionary leaders with keen management skills in order to be successful. Having defined the challenges, the Asian conglomerate has to develop new strategies of growth and success, but how they apply their strategies

Ali Mirza 99

and the extent to which the latter blends with their defining characteristics is an interesting subject to research. Samsung, in trying to shake off bureaucratic practices associated with the chaebol label, decided to start its own incubator, eSamsung, to manage and fund start-ups (some 400 of them). Instead of watching its staff leave to set up new economy ventures elsewhere, these eSamsung ventures leverage on each other for demand and supply as per chaebol tradition, and also provide technology solutions for traditional Samsung businesses. Kunio Takeda of Takeda Chemical industries, Japan’s top drug manufacturer, has consistently managed to provide investors with a double-digit return on equity while still retaining his family owned corporation. This was achieved in part by setting aside some traditional Japanese practices in favour of global standards of corporate governance. He sold off the company’s unprofitable businesses, shifted its focus to overseas markets, and replaced the seniority-driven promotion system with a merit-based one. Siam Cement, which is partly owned by the Thai royal family, took steps to restructure following the 1997 crisis. McKinsey was called in to perform a ‘cold evaluation’ of its businesses to determine its strategic direction. Following the study, Siam Cement made its core business more autonomous, encouraging managers to focus on profitability rather than market share. Meanwhile, stakes in other ventures were reduced but not eliminated so as to reserve a stake in any economic upturn. Like other dotcoms, Li Ka-Shing’s Tom.com was not spared from the bursting of the Internet bubble. However, unlike its new-economy counterparts, it may turn out to be a survivor. Tom.com has been reinventing itself as a Chinese-language media corporation with plans to dominate China’s advertising market: it has already acquired several new and old-media assets. Given Li’s clout and formidable resources, observers have labelled him as the Rupert Murdoch of China. Hence, albeit family run and controlled, but to a certain extent it is adaptive in new management ways to combat the changing market economy. Nevertheless it is still of interest to know if such Asian conglomerate characteristics are the boon or bane of independent managers hoping to implement strategic growth decisions.

Partnering with Asian conglomerates The Asian conglomerate, viewed as wary or not understood by most Western corporations has not deterred the latter from exploring new and emerging markets and partnerships in the Asia-Pacific region.

100 Dynamics of Asian Corporate and Family Conglomerates

In fact, the growing presence of Western companies in traditionally xenophobic Asian business communities – as partners, investors or as managers – is due to the dual contribution of globalization and the Asian crisis. For foreigners, Asia represents not only new markets and opportunities, but also a source of products, raw materials and low-cost labour. Post-crisis exchange rates and its growth potential have made Asia even more attractive to the West, when compared to other emerging markets like Eastern Europe and Latin America. Therefore, forming alliances with Asian conglomerates, which may enable a Western company to leverage off the government protection and guanxi (a Chinese term meaning business relations, trust and ‘human capital’) that its partner enjoys, is viewed as a strategic move. Asian conglomerates could also provide local market knowledge to access an economical yet good-quality workforce. For their part, Western companies may offer capital inflows, management expertise, high technology, and global resource and distribution networks. Just as valuable perhaps is the capacity to work outside the constraints of Asian business traditions. Partnerships can enable both sides to extend their geographical reach, and range of products and services. In status-conscious Asia, Asian conglomerates can also reap significant benefits from their associations with Western brand names. In 1988, Ford Motor formed a partnership with Kia to introduce the Ford Sable into Korea. Ford needed Kia’s distribution and after-salesservice network while Kia wanted a premium model to complement its product line without incurring significant technology transfer costs if licensing, or even the time and the R&D development costs if they were to go-it-alone. In a 1994 agreement, Digital Equipment Corporation (DEC) designated Taiwan’s family owned Tatung as the main distributor of its products, leveraging on the regional conglomerate’s distribution network and expertise. For its part, Tatung benefited from its association with DEC’s technologically advanced line-up. Having discussed the characteristics in Asian conglomerates and their adaptive measures taken around the new economy, we still must ask: ‘what will be the impact and influence of foreign partnerships in Asia?’ And how will these Western–Asian alliances affect the Asian corporation with their sometimes-substantial family stakes? In 1998, French car marker Renault bought a controlling stake in Japan’s ailing Nissan. The company dispatched Carlos Ghosn to overhaul the company. Ghosn was a skilled international corporate manager – by design he broke several Japanese taboos – selling off stakes in all but

Ali Mirza 101

a handful of its 1,400 affiliates, halving suppliers, closing five domestic plants, and shedding some 21,000 jobs – but he became a star among Japanese executives when he managed to rebuild Nissan into a profitable company. Renault now hopes to repeat this feat in Korea, having bought over 70 per cent of bankrupt Samsung Motors in September 2000. But not all East–West partnerships have had happy endings. In 1995, Indonesia’s state-run PT Telkom (PTT) took in AT&T-affiliated Ariawest as a strategic partner. Described as a ‘forced marriage’ to begin with, the relationship soured in July 2000, with PTT terminating its agreement with Ariawest, and the latter filing a US$1.3 billion arbitration claim against the PTT. Alliances can also be smothered by unfortunate external circumstances. In 1999, Hong Kong’s PCCW signed a 10-year accord for UK-based Trans World International (TWI) to provide content for their Network of the World, PCCW’s interactive TV channel. The contract was cancelled early in 2002, and is expected to result in significant TWI job losses, for which PCCW will have to pay compensation. Hence, a partnership between an Asian conglomerate, which is sometimes seen to be an advantage in a diverse Asian market, and a Western corporation, has to tread carefully given the intricate characteristics of an Asian family and public controlled company and their norms, given their historical experience with the more transparent and open communicative nature of the Western firm. But understanding how an Asian conglomerate has grown and changed over the years, as well as before and after the Asian financial crisis, its close associations with political parties and management styles will help a long way in developing a sound business relationship where profit is important. Having found that many family owned corporations still make up a majority of listed companies in most Asian countries, with the exception of Japan and Taiwan, forging a business relationship with them and acknowledging the management issues when dealing with them will be useful. Through loyal family appointed executives, pyramid-shape organization structures, cross-holdings and voting caps, these powerful families extend their control. In many cases, a significant share of the economy belongs to a small number of wealthy families. This is especially true in the Philippines, Indonesia and Thailand. Thus, foreign multinationals have to work within these boundaries and also within the close relationships between the Asian conglomerate with the government (both official and personal) and ethnic networks that have helped these companies to entrench positions in their respective markets. In this case, if an alliance is not forged with an Asian conglomerate,

102 Dynamics of Asian Corporate and Family Conglomerates

the Western company has also to expect some form of economic barrier to foreign market entry due to these governmental associations. In addition, typical Asian management practices often do not meet Western standards of corporate governance, and complications may arise. On the other hand, the Asian financial crisis has forced Asian businesses and governments alike to reconsider their practices. Despite their traditional xenophobia, many Asian companies have opened up and invited foreigners to join, both as investors and managers. These, and other restructuring efforts, have helped to improve transparency and accountability. Governments, too, have taken steps to reform their constituencies, particularly in the financial sectors. ASEAN leaders in particular realize that they risk being marginalized by China, and are taking steps to make their economies attractive to global investors. This view of the five key management issues of Asian conglomerates based on their characteristics can only be a broad overview, but it serves as a general perspective of the Asian conglomerate and stepping board for further studies and research that can assist the foreign company in penetrating the Asia-Pacific market.

Note This study is based on an analysis of secondary data taken from across a broad base of sources, including media publications, international organizations (such as the World Bank, and ADB) and academic research. Effort has been made to capture and include data and viewpoints from sources both within and outside Asia.

References Bank of Korea (1996) The Economic Statistics Year Book: 208. Chen, M. (2002) ‘Post-crisis Trends in Asian Management’, Asian Business & Management, 1(1), 39–58. Claessans, S. and L. Klepper (1997) Resolution of Corporate Distress: Evidence from East Asia’s financial crisis. See http.//econ.worldbank.org/files/1001_wps2133.pdf. Forbes Magazine (2002) February: 23–5. Kotch, J. B. (2004) ‘Creating Trust in the Korean Chaebol’, in J. B. Kidd & F.-J. Richter (eds), Trust and Antitrust in Asian Business Alliances, London: Palgrave Press. Kurniawan, D. M. and N. Indiatoro (2000) Corporate Governance in Indonesia, prepared for the Second OECD/World Bank Asian Corporate Governance Roundtable, Hong Kong, 31 May–2 June. Strategic Intelligence (2002) Comparison of Governance Systems, ADB Institute. Tanzer, A. (1994) ‘The Bamboo Network’, Forbes, 18 July, 138–45. Virachai Vannukul The Bamboo Network Organizational Model used in Southeast Asia: http://www.vgconsultant.com/comp4.html. Accessed July 2004. World Bank (2000) Research observer, Chart: Ratio of debt-to-equity in selected economies 15(1): 15–23.

Ali Mirza 103

Case studies and notes EIU (27 March 1997) And Never the Twain Shall Meet . . . EIU (27 April 2000) The End of Tycoons. EIU (13 June 2002) Corporate Restructuring in South East Asia: Timid Tigers. EIU (19 February 2004) Corruption in South East Asia: Who will watch the watchdogs? EIU, Surveys on South East Asia (10 February 2000) The Tigers that Changed their Stripes. EIU, Survey on Asian Business (10 February 2000) From Bamboo to Bits and Bytes. EIU, Survey on Asian Business (5 April 2001) Empires without Umpires. EIU, Survey on Asian Business (5 April 2001) In Praise of Rules. EIU, Survey on Asian Business (5 April 2001) The Greatest Leap Forward. EIU, Survey on Asian Business (5 April 2001) The Best and the Rest. EIU, Survey on Asian Business (5 April 2001) The Giant Stirs. EIU, Survey on South East Asia (10 February 2000) A Prickly Pair. EIU, Survey on Malaysia (3 April 2003) The Big Clean-up. EIU, Survey on South Korea (17 April 2003) Unfinished Business. EIU, Survey on Asian Finance (6 February 2003) Rocky Shores.

6 The Business Costs of Terrorism and Its Impact on Doing Business in Asia Nara Srinivasan

The reactions of the US and allied nations to the terrorist attacks of 11 September 2001 have impacted business in Asia through increased costs and compliance. The common costs that have been highlighted are the costs of increased insurance, freight and security costs (Raby, 2003). However, costs that are often hidden and unquantified by businessmen and women in the region include those relating to the transfer of money, compliance with new laws that are being introduced by the US, such as the Homeland Security Act 20011 and the USA PATRIOT Act 2001,2 and the growing immigration hassles3 caused by new and perceived threats to the US and allied nations. This chapter will analyse these issues and suggest some improvements that could ease the process for doing business post-September 11 and the compliance regime. The chapter starts with an introduction to the issues and problems.

What is the problem? The ‘globalization’ of terrorist groups such as Al Qaeda and their expansion plans in the Asia-Pacific region had been neglected by many analysts and the US until September 2001. The groups such as Jemiah Islamiah (JI), Abu Sayyaf and the Moro Islamic Liberation Front (MILF) have been in existence since the early 1970s and have been active in the Asia-Pacific region since the early 1980s. Their aims are to disrupt trade, overthrow moderate governments, and try to form a triangle of Islamic states in the Asian region. While the US and associated states knew of their existence they did not see them as a serious threat to their countries. Prior to 11 September 2001, there were various veterans of the Afghanistan conflict present in the Asia-Pacific region, actively recruiting 104

Nara Srinivasan 105

trainees to fight for their causes, including the mujahideen, volunteers who fought the Soviet Union in that conflict. Bin Laden himself was said to have turned his attention to this region to build up his network of fighters who were picked and sent to Afghanistan for training (Gunaratna, 2002). All of these activities were seen to be domestic in the context of global terrorism and had been ignored by international law enforcement organizations until September 2001. Yet one of the major outcomes of this was that the funds, which were flowing freely for the financing of these groups, did not attract the attention of any relevant authority such as the Financial Action Task Force (FATF) or even the United Nations money laundering initiatives. In fact, it has been argued by US Senators in the recent Joint Hearings on Terrorism before the subcommittee on Asia (October 2003) that much of the funds that were used to finance (and even today continue to finance) these activities were received from charities, sympathetic governments and business organizations that are engaged in business activities in the Asia-Pacific region. Thus, one of the greatest challenges facing the global community in its fight against terrorism is the development of effective strategies that can be used to stop funds from reaching the terrorists, especially in the Asian region. Many governments in this region are gaining from the terrorist activities and as such do not have a genuine interest in cutting the free flow of funds to these groups. Moreover, even countries such as Malaysia, Singapore, Indonesia and the Philippines that do have a genuine interest in cutting the free flow of funds to the terrorists, need the support of the entire region and this is not forthcoming (Vatikiotis, 2002). In January 2002, the Singapore government arrested 32 members of the JI group in Singapore who were alleged to be planning attacks on US interests in Malaysia, Singapore, Indonesia and the Philippines. Their arrests brought to light the fact that more than 135 JI militants had been travelling through Southeast Asia while planning these activities, raising questions regarding the ease with which these militants had been travelling through the region both before and after 11 September 2001. The October 2002 terrorist attacks in Bali, Indonesia, and those of August 2003 in Jakarta (Marriott Hotel) gave further proof that these activities were being actively funded by various organizations. Recent articles explain in detail how funds from Al Qaeda were channelled to radical groups in the Asian region (Zachary, 2003). The articles assert that not only were Saudi-based charities used to channel these funds to Indonesia, but that many front companies and corporate entities have been set up by Al Qaeda in the region. These entities generate revenue, raise capital,

106 Terrorism’s Costs and Impact on Business in Asia

and fund radical groups to operate in Indonesia, Thailand and the Philippines. Links to ‘mainstream’ corporate entities have not been suggested in any of these articles, but the US original list of banned individuals, companies and charities had many names of individuals and ‘mainstream’ corporate entities on it. In addition, the very nature of doing business in some countries in the region requires companies to make contributions to charitable and political organizations. The risk of funds earmarked for major infrastructure projects reaching these organizations or groups cannot be underestimated. Even a very small portion of infrastructure-related funds reaching these organizations would be enough to launch Marriott or Bali type terrorist activity (Euroweek, 2002). One recent documented example of what goes on when major infrastructure projects are being negotiated is provided by a major US-based power consortium. This consortium is said to have spent US$18–25 billion in payments to consultants and community based organizations including charities in the Asian region when developing relationships with the respective countries (Winer, 2003). Some of these funds could easily have been channelled to charities and organizations supporting terrorism and in the current environment, such behaviour would have been heavily scrutinized with the new disclosure-related laws and regulations in place to prevent the financing of terrorism. What is odd, however, is that since 1967 the US has had a law strictly forbidding the use of bribes and so on in foreign regions by US citizens, or being condoned by US citizens: yet little has been done to prevent cash flows such as that mentioned above. The existence of hawala (unregulated banking systems) related financing of terrorism has been highlighted but recent estimates put the amount being funded through these systems at less than 5 per cent of funds passing through the entire hawala system (Gupta, 2004). As an example from South Asia alone, about U$15billion dollars is said to be operating in the hawala system. What is important though is to realize that these banking systems almost always seem to serve the terrorist on the ground and their families, and this is one reason why the US and the United Nations are keen to disrupt the hawala-based banking systems The question then is how is all, or any, of this relevant to infrastructure development and productivity? In simplistic terms, all companies operating in the Asia-Pacific region now have to comply with the new stringent requirements imposed on them if they want to do business with any of their major trading partners including the US and many countries of the European Union. The reality of the above situation has

Nara Srinivasan 107

resulted in the US, United Nations and European Union acting fast to try to stop terrorist financing in the region. While the perceived ‘overreaction’ by the US mainly in creating rigorous disclosure requirements particularly for companies operating in the Asian region may appear harsh, they are understandable, and it is important to recognize the reality of the situation and why these steps could play a crucial role in reducing funding to the radical terrorist organizations in the region.

The context of this study This chapter is based on a study that was looking into the level of understanding that people in Indonesia, Malaysia, China and Vietnam had in relation to trade liberalization initiatives in the region. The original study started in early 2001 and was to have been completed in December 2002. The part of the study that concentrated on issues to do with understanding the new requirements for doing business post-September 11 began in November 2002 and was completed in March 2003. During the course of the original study, it became obvious to the researchers that a major issue facing businessmen and women in the region was the effect of new legislation that was being implemented to curb terrorism, and in particular, legislation and rules introduced by the US. The issue was not in relation to the legislation itself but mainly a lack of understanding of what may be required on the part of local businesses to prevent themselves from being ‘blacklisted’ by the major trading partners and multilateral agencies. The government of each respective country and financial institution had been publicizing the new legislation in relation to financial transactions and rules of scrutiny mainly regarding the need for extreme care in knowing with whom and what businesses were dealing. The danger was in being ‘involved’ with any of the then 300 blacklisted charities, business organizations and individuals on the US list who were operating in their region (Zachary, 2003) Participants indicated their keen interest to understand how the new rules and regulations would work and what the impact of these new rules would have in their business and day-to-day activities. About 60 per cent of the participants indicated that they were already having problems dealing with their trading partners, especially when they were engaged in major infrastructurerelated projects that were being funded by firms and agencies overseas. The participants did not know what they would have to do in future and how they could prevent doing business with blacklisted firms and individuals.

108 Terrorism’s Costs and Impact on Business in Asia

Methodology The study was based on a methodology known as critical hermeneutics, which uses focus groups to ensure that people from different backgrounds participate in the learning process leading to ownership of the issues in question (Warnke, 1987; Rundell, 1991; Crofty, 1998). This methodology also ensures that effects of cultural differences of the different focus groups are minimized (Zemke, 1998). Two groups from each country participated in the study and each group ranged from six to eight participants. The participants came from various backgrounds including senior government officers, multinational companies and local businesses. Unfortunately there was no gender balance in the ratio of males to females, and each group had only two female participants. Throughout the process, all participants were assured that their identities would be kept confidential, as numerous concerns were expressed with regards to their identities being made public. This assurance had to be provided at every meeting, and also when private interviews were conducted by the researchers. The groups met twice during the course of the study and had access to the chief researcher at all times during the four months. Private interviews were conducted with the participants after the two meetings to identify any further problems and issues that the participants faced, and wanted to raise. Before the first meeting, a document was circulated to all participants outlining the current status of legislation and rules concerning money laundering, financing of terrorists, rules governing companies that are dealing with defence-related tenders in the US and the new related laws enacted by the US. This was to refresh their memory so that they could more easily identify the regulations and laws with which they had faced problems in recent times. The focus groups each had a leader who facilitated the discussion and the main aim was to identify and discuss the obstacles or perceived obstacles faced by the participants in carrying out their business after 11 September 2001. Each group identified the issues and drew up a list that was written up and discussed at the second meeting. It must be pointed out that only the chief researcher was present at all eight focus group meetings. The groups also discussed how they could improve the way the organizations were operating, based on their experiences relating to the new laws and regulations introduced following 11 September 2001. The group leaders drew up a list of ideas on what could be done to assist the com-

Nara Srinivasan 109

panies and individuals to operate in this new environment, and the issues raised in this list were discussed and further refined. The above project was given the codename Business 911.

Doing business in a post 9/11 environment Issues that were identified by the groups ranged from perceived discrimination through country profiling, religious profiling and name profiling. The participants felt that having Muslim sounding names for individuals, and Muslim names for businesses had become inappropriate when conducting business in a post 9/11 environment. Other issues are increased insurance, freight- and security-related costs, through to the effect of doing business under new laws enacted or in some cases the enforcement of old laws following 11 September 2001. The ease with which many of the participants and their business associates travelled through the US, Europe and even Asia had changed considerably. Many countries had introduced visa requirements, furthermore the US especially was taking no chances and had enforced very tight visa requirements and travel document scrutiny (US Department of Commerce, 2003).

Increased costs Of particular interest, participants explained, was that in all the cases they did not mind the increased costs in insurance and security; however they did not relish the increases in costs of travel, especially in relation to obtaining the necessary travel documents. The cost of getting a US business visa had increased by up to 147 per cent in one instance, due to the extra documentation that was required, and this was not an isolated example. The increase in costs involved extra certification (in some countries in Asia, lawyers charge up to U$35 to certify the authenticity of one page of a document), while the delayed processing times and the high number of rejections after going through these processes meant cancelled trips. Furthermore, in many instances when the business visas were rejected, no reasons were given and this too irked the participants and their business associates. Part of the problem is that there are no clear, concise and well-written instructions for visa applications, and the current set of instructions seems to be controlled by the visa officers located in respective countries. When the participants from the same groups (that is, from the same country sample) compared the reasons and problems that they had faced in obtaining US business visas, it became clear that the US

110 Terrorism’s Costs and Impact on Business in Asia

officers who were rejecting the applications did not have to provide any reasons and there seemed to be no fixed pattern about the rejected applications. The issue also involved companies that had officers working offshore in the US as the renewal process for these staff had changed considerably since 11 September 2001. The results from a recent study, released in June 2004, show that many US-based businesses that were engaged in exporting goods to Asia have suffered considerable losses due to the delays experienced by their staff in obtaining business visas to the US and other Western countries (Santangelo Group, 2004). Many of the companies surveyed in this study were multinational companies engaged in infrastructure projects throughout Asia. The study states that the average revenue loss per company was US$1,507,560 and the indirect costs averaged US$163,383, with medium sized companies suffering the largest revenue loses at US$5,075,000 (Santangelo Group, 2004, p. 6). Companies, as well as the governments of the countries involved, must start taking notice of these figures because if it continues unchecked, it will have an impact on their entire economies. The Santangelo study concluded that these delays resulted in postponement of projects, inability to bring consultants and prospective clients to the US, inability to bring prospective business partners to the US and unquantifiable damage to the reputation of the companies in the eyes of their business partners (Santangelo Group, 2004). Participants in the Business 911 study indicated that they had made representations through their respective country immigration diplomats to review the business visa application processes as in their opinion, these processes especially for US business visas had become worse in the past year. Indonesian and Malaysian businesses seemed to be especially affected, since before 11 September 2001, it was not problematic for business visa applicants to get their visas through a very systematic process. The Chinese and Vietnamese participants in the study commented that it had become just a little more difficult to gain business visas but that the processes were getting better especially for US business visas. In their opinion, the level of difficulty in getting US business visas had become greater immediately after September 2001 but had since improved and become streamlined. These participants also felt that they had better communication with the foreign embassies in their countries since September 2001. This was due to the interest the Chinese and Vietnamese governments were taking to increase the globalization processes, and to integrate with the World Trade Organization (WTO) processes since September 2001.

Nara Srinivasan 111

Question of insurance Immediately after 11 September 2001, insurance companies started debating on how, where and when to increase insurance premiums. The debate also extended to how the insurance industry had defined risks resulting from terrorism prior to 11 September 2001. Governments responded by redefining the government roles in providing insurance for commercial companies from the risks of terrorism. All of this was quick and reactive to a situation that had happened so suddenly that no one agency had had the time to consider these issues prior to the September 2001 terrorist attacks. In October 2002, members of Al Qaeda committed two terrorist attacks one in Bali and the other in Yemen. Insurance companies that were dealing in marine, cargo and hospitality cover increased their premiums by up to three times in some instances (Gunaratna, 2003). Indonesia was one of the countries affected by raised insurance premiums, and in some cases insurers were refusing to even consider insuring premises and cargo in Indonesia. The Straits of Malacca, through which an estimated two thirds of all world marine cargo is transported – some 600 ships daily – became categorized as ‘extremely high risk’ due to piracy and terrorism (Rand, 2003). This has resulted in increased costs and difficulty in obtaining insurance intended for the ‘terrorist, piracy and unforseen risks’ category. In the case of aviation insurance, many of the governments in the Asia-Pacific region provided insurance cover for commercial aviation companies that operated from their countries. Airports were also covered by the arrangements that the airport authorities made with the governments of the respective countries in the region. In the case of marine, cargo, hospitality and infrastructure projects, there are no state guarantees when it comes to insurance. This has resulted in businesses having to work through several agents in some instances to obtain the proper insurance since lenders such as banks and financial institutions were not willing to lend to companies that did not have proper insurances for all risks – including terrorism (Lenain et al., 2002). The US and other western governments also keep issuing travel warnings and alerts based on their intelligence, and this too has an impact on insurance – usually travel insurance. In these instances, many executives who work in companies that are active in Indonesia and Malaysia have had to cancel their travel plans due to insurance difficulties. Recent studies also indicate that terrorists in the Asian region are most interested in targeting businesses (Gunaratna, 2003). In 2000 and

112 Terrorism’s Costs and Impact on Business in Asia

2001, terrorists targeted 383 and 397 commercial buildings respectively. Of these, 45 per cent were in the Asian region (US State Department, 2003). As such, it is not surprising that insurance companies are hesitant to underwrite companies either operating directly in this region or having associated operations in the region. The participants in the Business 911 study reflected on what they had to go through as a result of the difficulty of obtaining quality insurance since September 2001. It appeared that in all cases, after gaining expensive guidance from business consultants, the companies were able to obtain insurance for all associated risks. The cost of the insurance had risen due to the multiple agents that these companies had to go through to obtain reasonable quotes. Some of the companies had stuck to their former insurers but at higher premiums. In addition to these problems, all of the companies had to undergo some ‘uninsured’ periods due to the transformation that the insurance companies were undergoing in terms of deciding what they could and could not insure after September 2001. The direct and indirect costs associated with the above issues have been quantified to range from US$2billion to US$12 billion (Zhang, 2003). Recent studies argue that these costs are not accurate and cannot be relied upon (Guihong, 2003). However, what is clear from the Business 911 study is that no one seems to know what the costs are and how to estimate future increases. This is verified by some recent studies on business costs of terrorism in the Asia-Pacific region (Raby, 2003). Insurance companies, governments and commercial entities are all grappling with this problem with no obvious solution to hand. Infrastructure project managers are also involved in approximating the rising cost of insurance as more terrorist-related activities take place in their area.

Effect of new and renewed legal impediments What many see as new legal impediments such as new Acts, executive orders and regulations to doing business following the 11 September attacks is in most instances reinforcement of earlier laws and regulations. The important change is that all countries are being proactive, acting within these rules as the threat of sanctions and other trading embargos are very real since 11 September 2001. The following section analyses some of these matters and provides some responses from the participants of the Business 911 study.

United States executive orders signed since 11 September 2001 As discussed previously, participants of the Business 911 study expressed concern at the lack of understanding that they had with the new

Nara Srinivasan 113

rules and regulations that were introduced after September 2001 especially by the US. Every participant had heard of the ‘blacklist’ that had been drawn up by the US that consisted of companies and individuals that had connections with terrorist organizations and activities. No one knew how to get hold of this list and many had used expensive services of business consultants to assist them in keeping away from this ‘blacklist’. The above ‘blacklist’, a compilation of all those ‘associated with’ designated terrorist groups, was created through the United States Executive Order 13224 signed on 24 September 2001 (US State Department, 2003). What this executive order did was to expand on previous executive orders to include all terrorist groups not just ones operating out of the Middle East. Under this executive order, the US can freeze all the US assets of people who are on this list, but more importantly, it provides powers for the US to prevent anyone dealing with these organizations, and not to have any trade relations with companies that trade in the US. The US Treasury Department has the power to prevent access of any company or individual dealing with the ‘blacklisted’ companies to US markets and assets. In broad terms, it may be unlikely that companies other than banks and financial institutions in Asia would be affected by this Order. Unfortunately, due to all the publicity that was created, especially immediately after September 2001, organizations operating in countries like Indonesia and Malaysia that had similar names to some of the individuals and organizations on the ‘blacklist’ had to seek costly professional assistance to trade and operate freely. The ‘blacklist’ is also constantly being updated, and in some instances names that appeared on the original list that had been removed after complaints by the respective governments and trade organizations returned again to the list. The confusion caused by this constant change had an impact on the post-911-business environment especially in countries that had a predominantly Muslim population. The main cause was the similarity in the names of the people on the US ‘blacklist’ with organizations and individuals in these countries.

USA PATRIOT Act and its implications The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Act 2001 (USA PATRIOT Act of 2001) requires all banks that propose to have or already have accounts with any banking institution in the US to be certified (USA PATRIOT Act 2001). What this means is that these banks have to provide certification that all the customers with whom they are dealing do not have

114 Terrorism’s Costs and Impact on Business in Asia

any links with terrorist financing or terrorist organizations. The original intention of this certification was just to get certification confirming that the banks do not do any business with shell banks. Unfortunately, the panic that set in immediately after 11 September 2001 resulted in some countries and banking sectors taking a tougher stand in translating this part of the Act. When this Act was introduced, many banks in Indonesia and Malaysia requested their corporate customers, especially those who had dealings with the US to complete many forms and administrative procedures before they could operate their accounts in the respective banks. The USA PATRIOT Act is based on a series of assumptions. The first of these is that offshore banking provides clients with anonymity and this has the potential to be used by individuals and organizations that fund terrorism. Private banking services that have been set up to service illegal gains are also targeted by this Act. Laundering of money and the transfer of funds through the legal and underground banking systems become the main object of this Act. In Asia, these banking systems flourish [and, as mentioned in Chapter 1, the underground banking systems are very old institutions (eds)] and as such both the private and governmental sectors are being requested by the authorities to assist in implementing tighter controls over such activity. The end result of all these stipulations is additional costs to businesses. These costs are being passed on to the customers and to the funding agencies that provide the funds for infrastructure projects. The USA PATRIOT Act also has clauses in it that make reference to specific industries such as mining, dealers of precious metals, stones and jewels, and technology and scientific research organizations. Several countries in the Asian region are listed as being ‘uncooperative’ towards preventing money laundering (examples include Indonesia and Philippines) and in not assisting the US in tackling money laundering problems. Participants in the Business 911 study indicated that those of them involved or working with companies dealing in mining, precious stones and metals and imports of any type of chemicals (including cement) had to understand what these rules meant to their business operations. The USA PATRIOT Act does not make it clear what the rules are for companies that trade in these materials that have close associations with their counterpart companies in the US. The companies that are in the US are unsure if they are allowed to do business as usual with the companies in the listed countries and this is causing much confusion, and interrupting business to and from the US. What the USA PATRIOT Act does make clear is that dealers in any of the materials discussed

Nara Srinivasan 115

above such as precious metals and chemicals must have a set of policies, procedures and controls to prevent money laundering. This includes the employment of a compliance officer and an independent audit function to test these functions. The larger companies in Indonesia, Malaysia and China are working in close cooperation with the respective governments to try to implement these measures but this is not happening in the small and medium enterprise sector (Gardner, 2003). As a direct result of the USA PATRIOT Act, the US Treasury has frozen over US$550 million around the world and has the cooperation of over 166 countries (Mitchell, 2003). The fines for non-compliance are up to US$ one million and criminal charges for bank officers. These fines and officers can be based anywhere in the world and the US is working towards enhancing the cooperation of the banks and governments where the non-compliers reside. In addition there is always the threat of economic sanctions against countries that do not cooperate or comply. In addition to this, the USA PATRIOT Act has the capacity to cripple economies through the threat of being ‘blacklisted’ as a sponsor of ‘state terrorism’ or a ‘non–cooperating’ country. This fear is very real in countries like Indonesia, Malaysia, China and the Philippines (Zachary, 2003). What is clear from all of the examples and a review of recent literature is that there are many trade associations, business consultants and government departments in and out of the US that are providing workshops, creating compliance kits and training programmes for various industries on the USA PATRIOT Act. All of these activities are expensive and in the case of some industries like the banking industry it has become compulsory for senior members of the industry to participate in these activities. Working with countries and organizations on the ‘lists’ can be extremely dangerous as companies that do so could be prevented from trading with the US and other Western countries that may be their major trading partners. It is clear from the Business 911 study that the USA PATRIOT Act has certainly created fear of making such mistakes among company executives and investors in Indonesia, Malaysia, Vietnam and China.

The United States Customs Trade Partnership Against Terrorism (C-TPAT) C-TPAT is a good example of the partnership between government and private enterprise. Companies in the US that comply with C-TPAT (which is a significant undertaking) will be assured of faster and more efficient service when it comes to US Customs clearing. In simple terms,

116 Terrorism’s Costs and Impact on Business in Asia

C-TPAT compliance means that the company involved is giving an undertaking to the US Customs that it knows all of the people with whom the company is doing business, including the importers, manufacturers, brokers, suppliers. That is everyone in the supply chain up to the time the product reaches the US Customs. The steps required to provide this assurance are very rigorous, and in return the US Customs Service will reduce the number of customs inspections (Gunaratna, 2003). The United States Customs and Border Protection (CBP) also has plans to use C-TPAT to prevent terrorists and terrorist weapons from being smuggled into the US. The plan includes incorporating foreign manufacturers to comply with C-TPAT and physically to examine containers that depart and arrive from high-risk countries. A separate category of ‘high risk cargo’ will also be identified and subject to extra checks (Bonner, 2003). Teams of US CBP officers will be located in ports around the world in a ‘Container Security Initiative’4 targeting and inspecting what the US could term as ‘high risk cargo’. Participants in the Business 911 study raised many issues to do with C-TPAT because many of the companies with which they are trading had requested that they provide the information that was required for C-TPAT compliance. The issue of what the participants saw as unnecessary delays in the inspection process that resulted in extra storage and loss prevention measures was also raised by these participants. In all instances, the participants had to hire business consultants to assist their staff to provide the information required for compliance with C-TPAT. The details essential for C-TPAT compliance required many hours of work and research in the first instance: but the participants felt that after this first exercise, all that they are required to do is to supply the same information. It is unclear if this was the intention of C-TPAT when the venture was introduced. The companies that are taking part in C-TPAT cannot be expected to provide all of this information without working in partnership with their business associates in the respective countries from which they import goods and services. The stringent requirements of C-TPAT to prevent acts of terrorism and to understand the business partners of companies sending goods and services to the US may be compromised if the necessary checking mechanisms are not done in complete partnership with the foreign manufacturers. The US Customs needs to work with the companies in the US as well as educate their counterparts in foreign countries especially in the case of companies that are C-TPAT compliant. The point here is that the partnership between business and government in preventing

Nara Srinivasan 117

terrorism and terrorist financing will only work if the business community is serious in its undertakings. Someone has to bear the cost of these strict compliance measures and sharing the costs may provide the best solution to an expensive problem.

Security requirements to protect major projects One of the new necessities since the terrorist attacks in Bali and New York is the protection of staff and major critical infrastructure projects in the Asian region. As there are frequent terrorism alerts that affect the countries in the region, companies that are willing to be involved in major infrastructure projects must also be prepared to provide the necessary protection for their staff and projects. Recent estimates put this cost of security provision between US$12 billion and US$18 billion a year for major infrastructure projects worldwide (Hall, 2003). This includes the cost of securing schools, churches, multinational offices and the personal security of expatriates, which were not needed before the September 2001 terrorist attacks (Murray, 2003). The amount of specialized training that staffs that protect critical infrastructures require is unavailable in many countries in Asia unless provided by specialized firms or the government. The participants in the Business 911 study indicated that they had been approached (through intermediaries) by many aid-related organizations such as USAID to work in partnership with local security-related firms to train local staff to be able to provide skilled critical infrastructure protection. In some cases, this was a primary requirement of securing aid-related funding for infrastructure projects – as the funding bodies are concerned that the expatriate staff involved in these projects will not otherwise be safe. This is seen as an additional burden as it requires an additional skill set when tendering for these projects. Again there are numerous local and foreign consultants who are willing to provide these services but these consultants have questionable skills in the area of critical infrastructure protection (including protecting of staff) (Murray, 2003). A recent British Broadcasting Corporation report raised the concern of insurance underwriters in providing quotes for companies operating in countries that are high terrorist risk such as Indonesia (Hennock, 2004). The added complication that most of these underwriters are located in London or Frankfurt and have to rely on risk reports that are outdated makes this job very difficult. This is especially true when quoting for infrastructure projects as the knowledge of the project and the exact site of all staff and facilities needs to be correctly input. Add to this the

118 Terrorism’s Costs and Impact on Business in Asia

nature and style of security protection offered to the facilities and staff. These issues are fast becoming mandated by both the foreign companies and the insurers, thus causing great problems for companies operating in not only in high risk areas such as Iraq but also in countries that are seen to be at high risk by the US and their associates.

Maritime and aviation security requirements The increased costs of aviation and maritime security since 11 September 2001 and the Bali attack of 2002 is another major issue faced by business organizations in the Asian region. Unlike some countries such as the United Arab Emirates and Israel where these costs are being borne by the governments, countries such as China, Indonesia, Malaysia and Vietnam are passing on these costs to the customers or the business organizations that use these services (Jinks, 2004). Of greater importance are the stringent requirements that are being imposed by international organizations such as the International Civil Aviation Organization and the US government on how the airports and seaports in these countries must be security compliant to be able to send cargo to any port in the US (Saywell, 2002). As discussed above, the US Customs and Border Protection and the International Maritime Organization (IMO) are working together with governments across the world to implement the International Ship and Port Facility Security (ISPS) code. The deadline of 1 July 2004 to be code compliant was unachievable for many countries in the region and again the issue of what is the role of the private sector in implementing this code is unclear (Jinks, 2004). The shipping companies and the port authorities are all involved as the compliance requirements include the port facilities and the registered fleet of vessels. Security assessments and plans have to be approved by the respective governments and many governments in the Asian region are depending on the privatized port authorities and shipping lines to assist with these processes. There are questions as to how effectively these plans can and will be implemented and who will bear the costs (Reddy, 2002). In India, for instance, there are considerable concerns about the extra costs as well as the time for compliance (Raja, 2004). He goes on to say that 200 Indian ships will be covered by the code, and that 70 per cent of the ships will have their security plans ready on time. In addition, the 13 major Indian ports, 36 minor ports and 10 shipyards will have to comply. But the biggest difficulty in ISPS Code compliance has been the lack of availability of the necessary security equipment – such as ship alerts – and its software.

Nara Srinivasan 119

The good news, therefore, is that all companies operating in countries such as Indonesia, Malaysia, China and Korea that deal in exports and imports to the US are working energetically with their governments to implement these regulations. What is complicating this more is that the US Customs and Border Protection (CBP) and the IMO are now insisting that officers from the IMO and CBP may inspect some of these countries before being approved as code compliant. Initially this function had been left to the discretion of respective governments and port authorities but recent reports suggest that the CBP and IMO might be visiting these ports to approve them (IMO, 2004).

What next? Infrastructure projects in Asia face renewed pressures ranging from competitive disadvantages through to the question of their lack of basic critical infrastructure and personnel protection due to the new rules and regulations being introduced since 11 September 2001. Countries in the developing world have to balance the new security priorities with increased costs and trade objectives. Aid agencies have to rework their funding for infrastructure projects to get a fair estimate of these renewed costs and pressures. And following on, the business and government community in Asia must take steps to comply with the new measures as otherwise they risk losing their competitive advantage and funding for critical infrastructure projects. What is clear from the Business 911 and some of the other recent studies on this issue is that the rules are changing fast, and therefore they need to be clearly explained to the business community on a continuous basis (Santangelo, 2004). Governments and funding bodies must be clear about this, and do whatever is necessary to increase the pace at which the new measures and rules are being explained to the business community. The US government realizes this and is making some efforts towards better training for staff working in their embassies throughout the world (US State Department, 2003). The Internet plays its role also – see the notes at the end of the chapter. Companies and governments engaged in infrastructure projects have no choice but to embrace these changes positively. The costs have to estimated and calculated, and have to be included in the projects’ capitalization. The new requirements for money transfers and accountability of all financial transactions, especially for major infrastructure projects, may provide the additional benefit of reducing corruption as all monies have to be accounted for more meticulously in this new

120 Terrorism’s Costs and Impact on Business in Asia

system. This should result in major cost savings: yet on the other hand, these requirements may create more opportunities for corrupt and creative officers. One positive example is seen from the ports in the region: the old ‘tea money’ for fast clearances has to be done away with, as the new rules make it more stringent for cargo shippers to engage in this practice. Capacity building and inter-development assistance remain absolutely necessary if the new systems are to be implemented effectively especially in the case of infrastructure projects. Someone has to bear the costs, and the question of who this is has to be decided sooner rather than later. In the meantime, the competitive advantage of doing business is being fast eroded through the new rules and regulations. To maintain competitive advantage with the major trading partners, countries have to implement regulations and codes, and be compliant with the new financial rules – while at the same time keeping their overall costs low. The balancing act between the new security regulations and trade is becoming difficult, especially for developing countries. But if these difficulties are not addressed the danger is that these countries, or operators using these counties as a shield, will use whatever means available to them to take shortcuts that could make the whole point of the compliance exercise invalid.

Notes 1. 2. 3. 4.

See http://www.whitehouse.gov/deptofhomeland/analysis/ See http://www.epic.org/privacy/terrorism/hr3162.html See http://www.immigration-usa.com/resource.html See for instance, that the European Union has agreed to the ‘imposition’ of extra security on its container traffic from April, 2004. http://europa.eu.int/comm/ taxation_customs/customs/information_notes/containers_en.htm#Transport

References Address to Joint Session of Congress and the American People, 21 November 2001, online at http://www.whitehouse.gov/news/releases/2001/09/200109208.htm. (accessed 25 March 2004). Bonner, R. (2003) Address to the Senate Commerce, Science and Transportation Committee, 9 September (available at: http://japan.usembassy.gov/e/p/tp20030917a3. html. accessed 20 March 2004). Crofty, M. (1998) The Foundations of Social Research: Meaning and Perspective in Research Process, Australia: Allen & Unwin. Euroweek (2002) Bali Blast Fractures Southeast Asia Economic Hopes, London, Euromoney Institutional Investor PLC, 18 October. Gardner, C. (2003) ‘Diamond Report’, Rapaport Diamond Report, 26 (13), online at www.jvclegal.org Gunaratna, R. (2002) Inside Al Qaeda: Global Network of Terror, New York: Columbia University Press.

Nara Srinivasan 121 Gunaratna, R. (2003) Terrorism in the Asia Pacific: Threat and Response, Singapore: Times Media Private Limited. Gupta, S., Clements, B., Bhattacharya, R. and Chakravarti, S. (2004) ‘Fiscal Consequences of Armed Conflict and Terrorism in Low- and Middle-Income countries’, Washington, DC, IMF Working Paper, WP/04/142, International Monetary Fund, August. Hall, M. (2003) ‘Private Security Guards are Homeland’s Weak Link’, USA Today, 22 September, 11. Hennock, M. (2004) ‘Counting the Rising Cost of Fear’, BBC Business News, 16 April, transcript available at http://news.bbc.co.uk/go/pr/fr/2/hl/business/ 3627011.stm International Maritime Organization (2004) IMO Adopts Comprehensive Maritime Security Measures, online at: www.imo.org (accessed 7 February 2004). Jinks, B. (2004) ‘Tightening Security, Singapore’, The Business Times, 24 March. Lenain, P., Bonturi, M. and Koen, V. (2002) The Economic Consequences of Terrorism, Economics Department Working papers no. 334, Paris, Organization for Economic Cooperation and Development, 17 July. Mitchell, L. (2003) The Implications of the USA PATRIOT ACT on Foreign Banking Institutions, paper presented at the National Anti Money Laundering Training Seminar, Kingstown, St Vincent, 24 May. Murray, T. (2003) ‘Increasing Security, At a Price’, International Herald Tribune, 22 March. Raby, G. (2003) The Costs of Terrorism and Benefits of Cooperating to Combat Terrorism, Australia: Department of Foreign Affairs and Trade, online at: www. dfat.org Raja, M. (2004) ‘Terrorist Threat Stirs Asian Shipping’, Asia Times Online, 14 Jan, online at: www.atimes.com (accessed May 2004). Rand (2003) “Seacurity”: Improving the Security of the Global Sea Container Shipping System, Rand Office of External Communications, online at: www.rand.org/ hot/press Reddy, R. (2002) ‘Friction Over Security Gaps’, Intelligence Enterprise, 8 October, online at: www.intelligenceenterprise.com/0210081516/infosc1–1shtml Rundell, J. (1991) Social Theory: A Guide to central Thinkers, Australia: Allen & Unwin. Santangelo Group Inc USA (2004) Do Visa Delays Hurt US Business?, June, online at: www.santangeloGroup.com Saywell, T. (2002) ‘Shipping News’, Far Eastern Economic Review, 17 October. Second Report of the Monitoring Group Established Pursuant to Security Council Resolution 1363 (2001); and extended by resolution 1390 (2002), United Nations, Sept. 30, 2002, online at: www.un.org/s3245/e/et/html (accessed 18 February 2004). Senate Republicans Warn That Patriot Act Will Not be Renewed Unless Changes are Made, San Francisco Chronicle, 14 October 2003. Taylor, F. (2002) Impact of Global Terrorism, remarks to Executives Club of Chicago, March, online at: www.state.gov/s/ct/rls/rm/8839.htm (accessed 4 April 2004.). The Economist (2002) ‘Counting the Cost’, The Economist, 16 October, online at www.Economics.com The USA PATRIOT Act: A Legal Analysis, CRS Report for Congress RL31377, 15 April 2002.

122 Terrorism’s Costs and Impact on Business in Asia US Department of Commerce (2003) Services Exports and the US Economy, Office of Service Industries, March, online at: www.ita.doc.gov US State Department (2003) Patterns of Global Terrorism 2002, April, online at: http://www.state.gov/s/ct/rls/pgtrpt/2004 (accessed 8 February 2004). US State Department (2004) Patterns of Global Terrorism 2003, April, online at: http://www.state.gov/s/ct/rls/pgtrpt/ (accessed 8 February 2004). Vatikiotis, M. (2002) ‘A Tale of two Madrasas’, Far Eastern Economic Review, 27 June, 60. Warke, G. (1987) Gadamer: Hermeneutics, Tradition and Reason, Cambridge: Polity Press. Winer, J. M. & Roule, T. J. (2003) ‘Fighting Terrorist Finance’, Survival, 44 (3), 87–104. Zachary, A. (2003) Tentacles of Terror: Al Qaeda’s Southeast Asian Network, in APCSS Biennial Conference proceedings Enhancing Regional Security Cooperation, Honolulu, Hawaii, 16–18 February, 1–7. Zemky, R. (1998) In Search of self Directed Learners, Training (May): 60–8. Zhang, G. (2003) US Security Policy toward South Asia After September 11th and Its Implications for China: A Chinese Perspective, The Henry L. Stimson Center, USA January, online at: www.stimson.org

7 Improving Road Administration in the Asia-Pacific Region: Some Lessons from Experience Clay Wescott*

Background Asia-Pacific countries are increasingly working to improve the management of their social and economic resources for development. Although the ADB (1995, pp. 1–7) recognizes a diversity of political systems and institutional cultures in the region, the ADB defines four aspects of sound governance relevant for all countries: 1. accountability (officials answerable to the entity from which they derive their authority, that work has been conducted according to agreed rules and standards, and reported fairly and accurately); 2. participation (allowing public employees a role in decision making; empowering citizens, and especially the poor, by promoting their rights to access and secure control over basic entitlements that allow them to earn a living); 3. predictability (fair and consistent application of laws, regulations and policies); and 4. transparency (low cost, understandable, and relevant information made available to citizens to promote effective accountability, and clarity about laws, regulations and policies). Within this broad framework, Asia-Pacific countries are making headway in improving transport governance and regulation. Transport ministries

* This is a personal view, and not necessarily the view of the Asian Development Bank.

123

124 Improving Road Administration in the Asia-Pacific Region

and regulatory bodies are improving their operational effectiveness and efficiency, and in enhancing performance management and orientation. Within the transport sector, countries are improving their road administration, which is the focus of this chapter. The objectives of these improvements (and indicative result indicators used, as adapted from OECD, 1997, pp. 120–4) include improving accessibility (average road user cost, travel time and reliability), traffic safety (fatalities and injuries per vehicle-km), environment (pollution and noise), equity (benefits to all citizens, especially the poor), programme development (planning, budgeting and other management systems for construction, maintenance and operations), programme delivery (forecasted vs. actual costs, overhead expenses), and programme performance (value of road assets, roughness, bridge deck area, road surface condition, and user satisfaction). With this conceptual foundation in mind, the following will draw from recent experience in the Asia-Pacific region to give a brief overview of the extent to which road administrations are able to meet the above objectives, and some institutional issues that need to be addressed. The aim is neither to produce a comprehensive survey of the sector, nor to provide a blueprint for reform, but rather to highlight some of the challenges faced in the region, and approaches being taken to address them. Although our understanding is better now than in the past of what works and what needs to improve, more in-depth research is needed on how to achieve high performance in road administration.

Characteristics of effective road administration Before assessing how roads are administered in the Asia-Pacific region, it is important to understand the scale of the challenge. As in other parts of the world – in developed countries as well as developing – road transport has become the most important form of transport. In Bangladesh, for example, the demand for road transport grew at over 8 per cent per year during the 1990s, a rate nearly double the rate of GDP growth. In Thailand, traffic grew at 14 per cent per year. In response, countries have increased the size of their road networks, ranging from 1.4 per cent per year in India, to 6 per cent per year in Bangladesh. The PRC alone built 230,000 km over the period, with its network size growing at nearly 4 per cent per year.1 For some countries, roads are their largest assets, with replacement costs over $500 billion (Heggie and Vickers 1998, pp. 1, 9; UNESCAP, 2001, pp. 49–50; ADB, 2003e, p. 1). The ability to manage such an asset base, with such high growth rates, is a credit to the hard work and improved practice of regional governments in the sector.

Clay Wescott 125

There are at least three characteristics of effective road administration: robust planning and execution of critical functions, sufficient resources for O&M and sound operation of road facilities. We will discuss these in turn.

Robust planning and execution of critical functions Road administrations need to adopt sound, practical planning criteria, while maintaining appropriate flexibility to cope with the unexpected. It is particularly important to monitor construction delays, since they can lead to cost overruns, which in turn reduce the scope of civil works, reduce design standards, reduce funds available for operations and maintenance (O&M), while increasing future maintenance costs and increasing the maintenance backlog. Also important are systems for proper planning of the road network, ensuring equitable allocation of road investment and adequate technical standards. Over the last decade, some road administrations have initiated reforms to modernize their planning and administrative processes, with resulting improvements in service delivery. The setting up of the semi-autonomous, National Highway Authority of India (NHAI) in 1995, for example, has led to faster decision making than in traditional Indian road agencies. It has a system for consulting with road users, and has achieved impressive progress in successfully planning and executing major, new projects (see below). At the same time, public works departments (PWDs) in about one third of India’s states are undertaking reforms such as divesting rural roads to local governments, divesting construction plant and equipment, hiving off roads from other functions such as irrigation, consulting with road users, and setting up autonomous road development corporations (World Bank, 2002a, pp. 8–9). Despite the considerable progress throughout the region, many challenges remain. For example, in some road authorities, the lack of planning criteria based on a sound pavement management system, may lead to rejection of budget requests. Agencies in Nepal often fail to submit proper justification for budgets for priority activities, leading to diversion of budgeted funds to less efficient uses favoured by politicians. In Lao PDR, budget requests are denied because estimates aren’t backed up with reliable unit costs. Furthermore, maintenance budgets are based on ceilings set by the ministry, rather than on surveys of road conditions (ADB, 1998, p. 6). Sound planning also requires coordination and clear assignment of responsibilities among different agencies, including those involved in

126 Improving Road Administration in the Asia-Pacific Region

different aspects of road administration, and those administering other transport modes. In Bangladesh, each transport mode is administered in isolation from the others, leading to poor connections among inland waterways, bridges, ferries and highways, and problems such as the construction of bridges not meeting design guidelines and blocking large river vessels. The Cabinet is presently considering a comprehensive National Land Transport Policy (NLTP), which will set out an allinclusive approach for modernizing road administration, financing, and network planning. A related ministerial committee is working on an Integrated Multi-Modal Transport Policy, which would provide formal coordination mechanisms among the relevant ministries dealing with road, river, sea and air transportation, and improved clarity in roles and responsibilities (ADB, 2003e, Appendix 2; ADB, 2004, pp. 212–13; BSS, 2004).

Sufficient resources for operations and maintenance (O&M) Throughout the Asia-Pacific region, a major challenge faced by road administrations is providing sufficient resources for O&M, particularly for preventative maintenance for roads. The most cost-effective use of road funds is for routine maintenance, followed by periodic resurfacing, followed by much more costly rehabilitation and reconstruction. Yet a survey of 19 recent ADB-supported highway projects from 15 countries found that 14 had rehabilitation or reconstruction components, indicating that respective national highways hadn’t been adequately maintained. Although lack of funds is often cited as the reason for inadequate routine and periodic maintenance, the fact is that the cost of rehabilitation or reconstruction supported by ADB in these cases was greater than would have been the cost for routine and periodic maintenance (Harral, 2001, pp. 9–12). Governments and development partners are working on a range of strategies to address this challenge. In Bangladesh, national road spending grew 12 per cent per year from FY1997 to FY2000, while maintenance spending grew at 4 per cent per year. Local government road spending (and maintenance) increased at 19 and 7 percent respectively over the same period. Overall, road maintenance spending is estimated to be less than half of what is required. There are many reasons for this, including weak coordination between the two different authorities responsible for capital and recurrent budgeting, and the unwillingness of most donors to finance recurrent expenses (World Bank and ADB, 2003, pp. 93–4). A promising step forward is the annual road maintenance plan prepared by the Roads and Highways Department starting in the period

Clay Wescott 127

1999–2000. The process uses a highway design and maintenance standards model to set priorities for roads to be maintained, and the level of maintenance (ADB, 2002d, pp. 1–2). The NLTP recognizes that normal budget allocations aren’t sufficient, and is considering setting aside part of the fuel tax levy, or an additional road fuel levy. In the Philippines, road budgets are approved annually by Congress, and allocated to regions according to a formula not linked to engineering needs. Partly for this reason, and partly due to weak capacity, the Department of Public Works and Highways (DPWH) hasn’t adequately set priorities, nor is it able to maintain proper standards for design and execution due to corruption and weak business practices (Harral, 2001, p. 82). The ADB and other donors are partly to blame, for their willingness to finance road rehabilitation or reconstruction which reduces the pressure on DPWH to adequately maintain roads. In Lao PDR, maintenance work based on agreed priorities is frequently disrupted by the need for emergency repairs caused by landslides; for reasons discussed above, budgets are inadequate to cope, and planning systems insufficient to provide the slope protection that could prevent landslides in the first place. In Thailand, the pavement management system based on generous funding, can’t accommodate more stringent, post-1997 budgets calling for less-costly repair methods: thus work is left undone (ADB, 1998, p. 6). In Nepal, the ADB, World Bank and other donors helped finance periodic maintenance of roads identified by the Department of Roads (DOR). Yet despite technical assistance provided by ADB (1998b, p. 11) and other donors to set up a comprehensive and objective pavement management system, the system isn’t fully functional, so it isn’t possible to tell whether the donor financed maintenance met the priority needs of the country (ADB, 2000, pp. 16–18). Like many countries in the region, Nepal is setting up donor support with a road fund financed by fuel taxes and registration fees for road maintenance to be managed by an independent Roads Board. Although this model appears to be more promising than government managed funds set up in the 1970s and 1980s in Africa and Latin America, the actual success won’t be known until these funds have operated for many more years.2

Sound operation of road facilities Effective law enforcement, regular vehicle inspections with up-to-date equipment, and responsible driving are key to the effective use of road facilities. Road safety is typically the joint responsibility of many agencies

128 Improving Road Administration in the Asia-Pacific Region

and departments; thus a coordinated approach is generally more effective than individual agency efforts (ADB, 2001, p. 3). For example, an interministerial meeting in Lao PDR in 1998 found that police and regulators were unaware of key issues, were undermined by special exceptions granted by transport authorities, and were faced by ambiguous and conflicting regulations and lack of coordination among concerned departments. A survey in Vientiane found that 85 per cent of all trucks were overloaded. In a pilot enforcement project in Vientiane, local authorities were allowed to keep part of the fine revenue collected to pay for weighing scales, vehicles, training and overtime costs. By training and working together, the better equipped regulators and police could enforce regulations more effectively. The pilot team went on to train other provinces and districts (Changan et al., 2002, pp. 40, 58). Enforcement is also a challenge in Bangladesh, where the rate of injuries from road accidents (73 per 10,000 vehicles a year) is the highest in South Asia. Despite a law requiring annual inspections of vehicles more than five years old, an estimated 80 per cent of vehicles are unfit. Although ADB (2004, pp. 215–16) and others have helped set up modern inspection centres, they aren’t fully utilized due to the lack of staff expertise, and the need to recalibrate the equipment to Bangladesh conditions. Efforts to lease the equipment to private operators also haven’t worked because of weak institutional capacity and corruption. Many vehicle owners pay a bribe for a vehicle fitness certificate; others don’t bother, since they may be stopped randomly by police and forced to pay a bribe, even if they have a certificate! Police also reportedly take bribes and fail to enforce other laws, allowing trucks to load or unload on main roads while blocking traffic. An example from the People’s Republic of China (PRC) shows that when coordinated, multidisciplinary actions are taken road safety can improve. A 5 year plan adopted in Hailongjiang Province has four components: awareness education in schools and villages, using radio, television and print media; addressing key bottlenecks including enforcement of safety belt rules, installing signs, speed traps, and computers for traffic police; strengthening preventative measures, including new directives and instructions for traffic authorities, increased patrol frequency, and clearer accountability; and improving regulation, including job training and better supervision. The result in the first three years was a 22 per cent drop in expressway accidents, and a reduction in fatalities of one-third (ADB, 2001, pp. 38–9). Coordination among road safety agencies works better in some countries (for example, Fiji and Singapore) than others (for example Bangladesh

Clay Wescott 129

and Philippines). Road safety and other regulatory bodies should give special consideration to the needs of non-motorized transport since these are used extensively by the poor (AITD, 1996, pp. 47–76)

Broad lessons from experience Improving road administration is a difficult challenge facing governments and their development partners, because of the complexity of the processes, and the wide variation in context. Still, there are three broad lessons to consider: (i) ensure critical capacities are in place; (ii) provide incentives for policy reform; and (iii) recognize that reform takes time.

Ensure critical capacities are in place To perform the tasks required for effective road administration, a ‘task network’ of organizations needs to work effectively together, with clearly defined roles. Each organization needs systems for hiring and retaining staff of the highest levels of competence and integrity, and systems that safeguard accountability through effective legal frameworks, management practices and auditing procedures. Also needed are clear management objectives, and an accountable management structure, commercial costing systems, and sound management information systems. (Hilderbrand and Grindle, 1995, pp. 441–64; Heggie and Vickers, 1998, pp. 103–25). Based on these criteria, the capacity of road administrations varies widely throughout the region, as does the ability of donors like ADB to improve capacity. One of the more capable in the region is the Department of Highways (DOH) in Thailand. With high-level political commitment, adequate budgets, and support from the ADB and other donors since the mid-1970s, the capacity of DOH has reportedly kept pace with the fast-growing needs of the road network. DOH uses a highway design and maintenance system to prioritize investment decisions. To develop and maintain its institutional strength, DOH held 19 courses and seminars attended by over 2,400 trainees in 1997. Much of the training was carried out by DOH highway engineers, helping to disseminate new ideas, procedures and systems as needs emerge. DOH training courses also benefit counterparts from the Mekong region that attend the courses, in turn helping to promote regional goals such as greater cooperation among Mekong countries (see below). DOH, which falls under the Thai Ministry of Transport and Communication, functions with considerable autonomy, while being well integrated into national economic and social development plans. But

130 Improving Road Administration in the Asia-Pacific Region

there are still capacity challenges that need to be addressed. The Evaluation Section in the DOH Planning Division hasn’t been given enough attention, and mainly focuses on annual budgeting and physical implementation monitoring. In addition, after the 1997 economic crisis, budget constraints have reduced the training programme. These challenges need to be addressed if DOH is to maintain its high standards (ADB, 1998, pp. 40–1). While Thailand’s DOH and PRC’s Expressway Bureaux are examples of agencies with well-motivated staff accountable for good performance, many other road administrations in the region fall short in these areas. Problems include poor morale and untrained staff, lack of performance monitoring, policies limiting investment in O&M, lack or inadequate use of a road design and maintenance system and insufficient maintenance equipment (ADB, 1998, pp. 11–12). For example, road departments were restructured and strengthened with ADB support over the period 1997 to 2000 in Mongolia, Kyrgyz Republic and Kazakhstan, making the departments the client to maintenance and construction contractors, in turn separated through corporatization or privatization. An ADB evaluation (2002b, pp. 6–10) didn’t try to measure the results of these organizational changes in terms of increased efficiency or effectiveness, but did point out that capacity in road agencies may still be weak, and in some cases weaker than before due to systemic problems such as low salaries, frequent changes in ministers and staff, budget cuts and downsizing. In particular, funds available for road maintenance are inadequate. For example, in Kyrgyz Republic maintenance needs were estimated at Som 1.0 billion for 2002, but allocations were only 8 to 20 per cent of that amount in each of the previous four years. Privatization in the Lao PDR road sector has also been carried out with ADB support with some success, although the impact on improved operations in unclear (ADB, 2002c, pp. 5–6). In Papua New Guinea, a road asset management system is being implemented by international consultants, but it isn’t considered likely that it will be sustainable once the consultants leave. In any case, even with such a system, there are severe funding constraints; 2002 road allocations, for example, were only 4 per cent of the estimated required amount. An increasingly capable organization is the semi-autonomous NHAI discussed above, responsible for implementing India’s National Highway Development Programme, including the Golden Quadrilateral, linking the cities of Delhi, Mumbai, Chennai and Kolkata, along with the North–South and the East–West Corridors linking other important cities across the face of India, but attempting not to mimic the routes of

Clay Wescott 131

the Quadrilateral. The latter is India’s biggest road project since the sixteenth century, and the completion of the project over the period 1998–2007 at a planned cost of US$12–15 billion would achieve significant savings in vehicle operating costs, while helping to improve links between fast-growing and slower-growing states. The NHAI has issued, as of late 2003, an average of 35 contracts per year, covering about 1,400 km annually. Although this is a major achievement, NHAI would still have to double the pace of delivery to meet the ambitious completion target. The NHAI is working hard to improve its ability to monitor consultants and contractors, and to simplify project preparation and processing. Yet it is hampered by the fact that half of their professional staff is seconded from other government agencies for 2–5 year periods, causing problems of staff retention and organizational capacity (ADB, 2003d, pp. 1–3; Shukla, 2003). A typical response by the ADB when carrying out a road project is to set up a project implementation unit (PIU), staffed by skilled, well-paid staff. The PIU manages project activities, including selecting and appointing consultants, tendering and awarding contracts for civil works, supervising construction, and coordinating among the relevant agencies (for example, ADB, 1998a, pp. 11–12). While PIUs serve short-term needs of project execution, they may work against building up sustainable capacity in the longer term. Some of the problems relating to the PIUs are: (i) they are relatively expensive to set up and operate; (ii) they may draw scarce professionals away from road agencies, leaving critical organizational functions unattended, (iii) the expertise gained during the project implementation may be lost to the public sector the end of the project; (iv) for large projects PIUs may make decisions that overshadow the concerned agencies, and run counter to policy reforms; and (v) PIU staff have a vested interest in prolonging their contracts, and may for this reason effectively lobby for new donor-funded investments that would otherwise have a low priority.

Provide incentives for policy reform International development agencies increasingly provide technical assistance to help countries make transport policy changes, and may require such actions by borrowing countries as conditions for loan effectiveness or tranche releases. For example, ADB helped prepare a Highway Law, highway design standards, and detailed procedures for build-operate-transfer (BOT) arrangements in PRC. In Nepal, ADB (1998, Appendix 3) helped in drafting the Vehicle and Transportation Management Act in 1994 that led to standardization of traffic signs and

132 Improving Road Administration in the Asia-Pacific Region

other improvements, and the Public Road Maintenance Act approved in 1996 that provides for toll collection to help finance road maintenance. Reforms supported by ADB in India have already been discussed above. Policy changes may also be addressed on a regional basis. For example, ADB has financed road corridors in the Greater Mekong Subregion (GMS), and used the cross-border aspect to encourage countries to address regulatory issues to facilitate border crossings. Constraints include: (i) restrictions on the entry of motor vehicles; (ii) different standards pertaining to vehicle size, weight and safety requirements and driver qualifications; (iii) inconsistent and difficult formalities related to customs procedures, inspections, clearances and assessment of duties; and (iv) restrictive visa requirements. The GMS countries have agreed to sign an agreement harmonizing these and other regulations by 2005, as discussed in more detail below (ADB, 2003, pp. 1–2). Despite the increasing frequency of policy conditions attached to road projects, O&M conditions are frequently not adhered to, and yet countries that don’t adhere to conditions may still receive donor financing. To address this, conditions shouldn’t be overly ambitious, and need to be calibrated to the ability of a country to achieve them (ADB, 2003g, pp. 5, 8–9).

Recognize that reform takes time As regional road administrations struggle to cope with traffic levels exceeding the design capacity of many roads, despite the ambitious pace of network expansion, countries are finding that comprehensive, sector-wide institutional reforms are needed to produce sustainable improvements. Any fundamental reform takes time to take hold, and needs to be sustained across changes in governments and changes in donor funding. Because of the range of administrative problems, and the economic and political urgency of solving them, governments need a comprehensive vision and timetable for reform. However, because of the enormity and political sensitivity of the task, and the severe limitations on capacity to manage reform, such a framework may take 10 to 20 years to achieve significant impact. Take the case of Sri Lanka, where there has been no working road management system, and suitable information, while collected, isn’t appropriately used. Road works suggested by field engineers, politicians, majors, and other influential people are ranked subjectively, and then funded depending on amounts released by the Government. When an ADB project added new roads, maintenance funds continued at the previous level, and cracks and other defects went unrepaired. Planned

Clay Wescott 133

ADB support to provide equipment and training to small contractors for road maintenance failed to achieve its purpose because after the project agreement had been approved, the Government changed course and placed all maintenance under the government-owned, Road Construction and Development Corporation (RCDC) (ADB, 2000, pp. 9–10). To address these and other shortcomings, Sri Lanka’s road sector reform framework aims for core competencies of engineering, strategic planning and management within the Roads Development Authority, a competitive domestic private sector that can carry out most needed road works, capacity improvements in provincial authorities, systems in place for annual prioritizing of road maintenance among other elements. The Government has demonstrated its commitment in many ways, including setting up a task force for regular dialogue with private contractors and a road implementation unit in the RDA, closing down the RCDC, creating a road fund, and setting up dedicated roads units in selected provinces. ADB is supporting this process through a loan and technical assistance grant, and is prepared to provide future support to this comprehensive, lengthy reform agenda (ADB, 2002e, pp. 7–8). As these reforms proceed, it will be important to calibrate carefully the pace and sequencing. One analyst suggests focusing on ‘where the shoe pinches’, or what aspects of weak administration most offend road users and other key stakeholders, how durable is the support for change, how much division is there among stakeholders, and what are the lessons of similar attempts to change in the past (Montgomery, 1996, p. 959). Reforms need to move ‘as fast as possible when circumstances permit, and as slow as necessary when accountability needs to catch up, upon the absorptive capacity to grow, or the need for public tolerance to be rebuilt . . .’ (Schiavo-Campo & Sundaram, 2001, p. 733). Implementation may need to proceed in many small stages. Some of these can be planned, and scheduled based on priorities and complementarities. Others will proceed based on targets of opportunity (Esman, 1991, pp. 138–9). To manage reforms in this manner, effective structures for managing reforms need to be put in place. The correct balance needs to be struck between self-managed reforms by road agencies themselves, and reform management by external reform units in central agencies such as a Prime Minister’s Office or Ministry of Finance.

Key reform priorities With these characteristics and lessons in mind, one can now review some key road administration reform priorities that have emerged in

134 Improving Road Administration in the Asia-Pacific Region

the region, and have a better basis for analysing how to tackle them in a given country. This list is not complete, but gives an indication of some leading reform challenges in Asia–Pacific countries.

Improving performance While improving the performance of public services is a goal widely supported across many different stakeholders in the region, determining how to achieve it is not easy. There are many ways to improve performance, including the use of quantitative and qualitative indicators, dialogue, report cards, peer pressure, incentives and sanctions. Performance measures should be simple, and normally brought in without disrupting normal administrative and budgetary systems. Take, for example, the road sector in Cambodia. Since the end of hostilities in the early 1990s, Cambodia and its development partners have improved about one-third of primary and secondary roads to a point where they can be maintained, and about two-fifths of tertiary roads. Yet survey results indicate that while 40.7 per cent of primary roads were in good or better condition in 2001, only 7.7 per cent of secondary national roads were at this standard, and only 6.5 per cent of provincial and urban roads, because of poor maintenance. To improve this performance, development partners have recommended a unified planning and budgeting process, the use of analytical tools in making inputs to the planning and budgeting process, and search for greater transparency in investment and procurement decisions. While these recommendations make sense in principle, the reality on the ground is that many transport planning and strategy documents are prepared only in the local Khmer language, and thus not fully understood by donors. Before donors push Cambodia toward new administrative systems, they themselves need a better understanding of the local systems already in place, and their strengths and weaknesses (Tolentino, 2004). Balochistan Province, Pakistan has the lowest density of roads among the four provinces, with 90 per cent of the network in poor to very poor condition, and only half the required maintenance funds. Improving performance in the sector requires systemic changes such as adequate funding, and changes in structures and processes for road administration. The Communication and Works Department (CWD) is a typical government agency with too high a proportion of its budget needed to pay for its large staff, and not enough to finance modern systems and capacity for planning and maintenance. Boosting performance would entail considering alternative structures and business processes, with

Clay Wescott 135

fewer, more capable staff, and more discretion and accountability for managers. Any performance-enhancing reforms would also need to be consistent with the devolution programme that shifts many responsibilities to the district level (ADB, 2003f, pp. 1, Appendix 3, 29). ADB (2003d, p. 5), like other donors, is working to streamline its procedures to enhance performance. For example, to address delays in road project implementation in India, ADB now allows advance procurement and consultant selection, permits larger size contract packages to attract more experienced contractors, and has raised levels of authority of the supervising engineer. An approach to productivity improvement being adopted in some regional countries is results-based management (RBM), which typically includes the following elements: i) a focus on desired results; (ii) indicators to measure progress made toward those results; (iii) the ability to use information on results to manage operations and resources to improve future performance; (iv) holding relevant staff accountable for results; (v) recruitment and promotion of staff based on merit; and (vi) staff awareness and ownership (ADB, 2003a, p. 2). For example, since 1999, 49 agencies in Thailand have adopted RBM to improve performance (World Bank, 2003, p. 40.) Notions of improving performance by measuring results originated in the private sector. Yet both private and public organizations have found it difficult to adopt this approach (Ittner and Larcker, 2003). But such measures need to be used carefully. In the quest to achieve measurable results, there is a risk of quick fixes that aren’t sustainable, attaining measurable targets of questionable benefit (for example, downsizing staff and rehiring the same staff as consultants), and setting up unreasonable expectations for change that can’t be met. There is also the risk that perception will diverge from reality. Laws and regulations enacted may not be enforced. Anti-corruption units may focus on eliminating political opponents. Policymakers may ventriloquize commitment to donor-supported policy changes, giving the impression of local ownership of reforms; yet their actual views may be directly opposite. Expatriate advisors may be used not to train counterparts, but to carry out policy formulation and coordination roles, thus sidelining counterparts, who are seen by insecure rulers as potential threats if they know too much. Staff given specialized training may be transferred to assignments where the training is irrelevant for the same reason, thus perpetuating problems of low government effectiveness. Thus, one needs to be careful what results one measures, and what inferences are drawn (Wescott, 2001, p. 299).

136 Improving Road Administration in the Asia-Pacific Region

Combating corruption Corruption is reportedly widespread in road construction and maintenance, and arguably greater than in other sectors. Measuring the quality of road works is more difficult than in other sectors because the consequences are not immediately apparent to most observers. By contrast, when sub-standard work is done on a power project, the fact becomes more readily apparent through service outages. If a road contractor reduces the average pavement depth from a contracted 15 cm to 12 cm, road users won’t notice the difference initially. Internal inspectors could uncover the discrepancy through careful measurement, but they may receive bribes to overlook it. There are some instances of NGOs that measure pavement depth, notice discrepancies, and push for action; 3 but NGOs aren’t generally active in monitoring road works. The result is that contractors can readily recover the costs of bribes and low-ball estimates through sub-standard work, leading to greatly shortened road life and high maintenance requirements. There are other factors in road projects that can facilitate corrupt payments. For example, the unit costs for ADB financed (2000, p. 5) roadworks in Sri Lanka increased 156 per cent between appraisal and award of contract, and another 38 per cent during construction, compared to a 30–40 per cent increase in civil works in Sri Lanka over the period. The difference was explained as a risk premium to compensate for possible civil unrest that had previously occurred in the project area. Yet practices often observed of collusion between bidders and public officials might also explain some of the difference. This project was approved in 1987. Yet a recent study documents that even today, after the ADB is required by its Anticorruption Policy to document the risks of corruption for its country programmes and projects, adequate corruption risk assessments are not being done (Herz, 2004, pp. 6–11). A study (ADB, 2002) of procurement practices in the Philippines shows how ADB projects are at risk to corruption. The prequalification stage is the most subjective, and therefore an area at great risk to corruption. Payments are made by bidders to be prequalified. Bidders also agree at this stage who will win the bid, with others stepping aside in return for payment. Bidders may also collude with public officials to have competitors disqualified on false grounds. In the civil works area, foreign consultants reportedly pay 5–10 per cent of the contract value to ‘buy’ a contract. This increases the cost of the contract, and reduces quality by discouraging many qualified bidders. Contractors may also have to pay to expedite permits, licences and approvals, certification for

Clay Wescott 137

payment, contract revisions or variations, quarry royalties over and above those officially negotiated, to the consultants’ site staff for approval of work done, to expedite progress and escalation payments, to help agreement on the final measurement and to approve the final handover. Although specific payments can rarely be proven, the consensus that they do exist helps explain the low quality of work frequently observed. Table 7.1 provides estimates of exposure for ADB civil works projects and goods procurement. Three kinds of actions can be considered for combating corruption in road administration. The first is to develop effective capacities and transparent systems within road agencies. The examples cited above of NHAI and other autonomous roads boards are moving in this direction, but more work is needed. The second step is to strengthen anti-bribery actions and and integrity in business operations. This includes measures for effective prevention, investigation and prosecution of corrupt acts, and promotion of corporate responsibility and accountability on the basis of existing relevant international standards. The third step is to support active public involvement including public awareness campaigns, education programmes aimed at creating an anti-corruption culture, and low cost, understandable, and relevant information made available to concerned parties (ADB and OECD, 2002). Examples of emerging road user’s consultative mechanisms are promising developments to build upon. It would also be useful to encourage independent

Table 7.1 Exposure to graft of ADB-financed projects in the Philippines in civil works and procurement of goods Area

Percentage of project cost Civil works

Project selection Bidding stage Prequalification Evaluation, negotiation, and award Conduct of works and delivery of goods Permits, licenses, approvals Contract administration Financial management Total Source: ADB (2002).

Supply of goods

0

0

5 5

5 0

10 10 0

5 5 0

30

15

138 Improving Road Administration in the Asia-Pacific Region

NGOs to develop capacity for better oversight of the road sector, as in the Philippine case cited above. Reforms of this nature require efforts not only to improve road agencies, but also to raise core governance standards. As stated above, such reforms will take a long time, and need to proceed carefully and opportunistically. More detailed analysis is needed of road sector reforms discussed above in Sri Lanka, Bangladesh, and other countries to examine whether complementary reforms are proceeding to improve the overall governance framework. Without such complementary actions, improvements in road administration will be less successful in combating corrupt practices.

Promoting private sector investment Toll roads are in principle attractive to private investors such as pension funds seeking a steady income stream. In Asia, such projects are normally set up on a build-operate-transfer (BOT) basis. In PRC, such roads have produced good returns for investors because capital costs are low, there is a lack of alternative roads, relatively high tolls are acceptable and affordable, there is high traffic growth driven by rapid economic growth, and a working institutional framework. However, in other countries in the region, projects have had higher than expected costs and lower than expected revenue, and thus usually required substantial, unexpected government financing, leading in turn to high, proportionate government spending in capital regions and along major corridors, contrary to government policies. Such toll roads have had much less impact on overall problems of the road sector than expected. Analysts offer many suggestions for gaining more benefit from BOT projects and other types of private sector participation, but successful cases are rare outside of PRC (ADB, 2000a, pp. 45–7 and Appendix 2: 3; Estache et al., 2000).

Benefiting the poor Rural roads are a critical enabling condition for improving living conditions in rural areas, including those of the poor. Roads reduce travel time, facilitate marketing crops, small businesses, and migration, act as a safety net by enabling diverse livelihood opportunities, and improve access to public services. These benefits may disproportionately benefit women and girls (Matin et al., 2002, pp. 128–50), as well as operators of rickshaws and similar vehicles used by the poor (Lebo and Schelling, 2001, p. 30). A study of selected ADB (2002a, pp. 16–37) financed rural roads in Philippines, Sri Lanka and Indonesia found many ways governments can strengthen the poverty reduction impact of roads, including use of labour-intensive construction methods, broadening access

Clay Wescott 139

(for example, tracks, paths, culverts and crossings), devolving responsibility for road maintenance to local communities, strengthening the regulatory environment to ensure affordable transport, adding poverty as criteria for selection of road investments, integrating road investments with complementary efforts to benefit the poor (for example, credit and marketing), and participatory design and planning. For example, rural roads projects funded by the World Bank (2002, vol. 2, pp. 614–17) and other donors in Bangladesh and India reportedly benefited from a participatory approach in setting investment priorities and in developing policy frameworks. But mainstreaming the recommendations beyond a few donor-supported projects would require major improvements in planning and budgeting road investments and maintenance, and in enforcing proper road operations, which is missing in many countries in the region.

Regional cooperation Through collective actions, individual countries can improve their development performance and reduce poverty in ways that may not occur through individual efforts alone. Asia-Pacific countries are increasing their cooperation in road administration, addressing expedited border crossings, harmonized customs procedures, and common standards for road design, commercial vehicles, and fuel requirements. For example, countries in the Greater Mekong Sub-region (GMS) will complete the first major components of the East–West Corridor in 2004–5. As an example of the cooperative spirit of ongoing work, the Northern Corridor road through Lao PDR is financed jointly by the Government, with support from an ADB loan, and by loans from the Governments of Thailand and PRC (ADB, 2002f). To ensure the freer movement of goods and services across GMS borders, the GMS Cross-Border Transport Agreement was signed by all GMS members in Dali, People’s Republic of China (PRC) in 2003. To ensure the agreement can be successfully implemented, steps are underway to set up single-stop/single-window customs and transit traffic regimes, with common standards for eligibility of vehicles, commercial traffic rights, and cross-border infrastructure (ADB, 2003b). ADB’s (2004, p. 49) experience in regional cooperation highlights a number of lessons. Asia-Pacific countries are finding that opportunities for regional cooperation are wide-ranging, and there is no one-size-fits-all. Successful cooperation mechanisms in transport and other areas are flexible, country-led, and appropriate for the sub-regional context. Forms of cooperation can range from regular meetings of senior officials and

140 Improving Road Administration in the Asia-Pacific Region

ministers, supported by a small secretariat at ADB (for example in the GMS sub-region), to cooperation anchored in established regional institutions such as Association of South-East Asian Nations (ASEAN), APEC, and the Pacific Islands’ Forum. Cooperation takes time, and needs to be sustained across changes in governments and changes in donor funding. Because of the range of regional issues, and the economic and political urgency of solving them, countries need a comprehensive vision and timetable for expanding cooperation. However, because of the enormity and political sensitivity of the task, and the severe limitations on capacity to manage the process, such a framework may take 10 to 20 years to achieve significant impact. To ensure sustainability, countries should be engaged in many different types of cooperation, together benefiting a broad group of stakeholders in each country. The different stakeholders in the full range of cooperative efforts thus help to ensure that their counterparts all live up to their respective agreements.

Conclusion Drawing from ADB’s experience since 1995 in the Asia-Pacific region, we have examined some characteristics of effective road administration, three broad lessons to consider, and some examples of reform priorities in the region. Recent experience in the Asia-Pacific region has improved our understanding of what works and what doesn’t, what practices are transferable, and under what conditions. The successes and failures of reforms are better understood than in the past with the help of crossborder reform networks, international agencies, think tanks, consultants, the media, and scholars. But genuine evaluation of reforms using rigorous social science techniques is rare. Reasons include the difficulties of proving cause-and-effect relationships because of problems of multiple attribution, lack of baseline data, lack of robust, experimental designs, lack of agreed conceptual frameworks and language for reform, methodological difficulties of comparing reform outcomes with counterfactuals, and the tradition of public management research focusing on prescription rather than explanation and analysis (Kelman et al., 2003, pp. 3–5; Jones and Kettl, 2003, pp. 12–14). Fully cognizant of the methodological challenges, greater investment is needed in more rigorous research on how to achieve high performance in road administration in the Asia-Pacific region. Such research would lead to better prescriptions, and a better return on the considerable investment in reform by governments and international agencies.

Clay Wescott 141

Notes 1. Percentages based on the period 1986–95 (Thailand), 1994–9 (Bangladesh), 1993–5 (India) and 1994–9 (PRC). 2. Road funds are operating or under design in 10 Asia-Pacific countries in addition to Nepal. ADB, 2003, pp. 30, 45–60. 3. For example, The Concerned Citizens of Abra, in Northern Luzon, Philippines gathered data on discrepancies between actual and contracted amounts, leading to disciplinary actions against some concerned roads officials.

References* ADB (1995) Governance: Sound Development Management, (R151-95) Manila: ADB. ADB (1998) Special Evaluation Study on the Operation and Maintenance of Road Facilities and their Impact on Project Sustainability, Manila: ADB. ADB (1998a) Project Performance Audit Report on the Farm-To-Market Roads Project (Loan No. 758-Pak[Sf]) in Pakistan, Manila: ADB. ADB (1998b) Project Performance Audit Report on the Roads Improvement Project (Loan No. 806-Nep[Sf]) in Nepal, Manila: ADB. ADB (2000) Impact Evaluation Study of the Asian Development Bank Assistance to the Roads Sector in Nepal, Manila: ADB. ADB (2000a) Developing Best Practice for Promoting Private Sector Investment in Infrastructure: Roads, Manila: ADB. ADB (2000b) Project Performance Audit Report on the Second Road Improvement Project (Loan 864-Sri[Sf]) in Sri Lanka, Manila: ADB. ADB (2001) Performance Audit Report on Selected Technical Assistance in Road Safety, Manila: ADB. ADB (2002) Philippine Project Implementation Report, ADB: Manila. ADB (2002a) Impact of Rural Roads on Poverty Reduction: A Case Study-based Analysis, Manila: ADB. ADB (2002b) Technical Assistance Performance Audit Report on Institutional Strengthening and Policy Support to the Road Sector in Kazakhstan, Kyrgyz Republic, and Mongolia, Manila: ADB. ADB (2002c) Technical Assistance Performance Audit Report on Road Sector Management in Lao People’s Democratic Republic, Papua New Guinea, and Philippines, Manila: ADB. ADB (2002d) Road Network Improvement and Maintenance Project (Bangladesh), Manila: ADB. ADB (2002e) Road Sector Development Project (Sri Lanka), Manila: ADB. ADB (2002f) GMS Northern Economic Corridor Project, Manila: ADB. ADB (2003) Road Funds and Road Maintenance: An Asian Perspective, Manila: ADB. ADB (2003a) ‘Enhancing Effectiveness: Managing for Development Results’, Discussion paper, Manila: ADB. ADB (2003b) Technical Assistance for Implementing the Agreement for Facilitation of the Cross-Border Transport of Goods and People in the Greater Mekong Subregion – Phase 1, Manila: ADB. * Most ADB, World Bank, and other references available online. Websites accessed May 2004.

142 Improving Road Administration in the Asia-Pacific Region ADB (2003c) Program Performance Audit Report on the Public Sector Reform Program (Loan 1520-FSM[SF]) in the Federated States Of Micronesia, Manila: ADB (Online). ADB (2003d) National Highway Corridor (Sector) I Project, Manila: ADB, RRP: IND 34420. ADB (2003e) Road Network Improvement and Maintenance Project II (Bangladesh), Manila: ADB. ADB (2003f) Balochistan Road Development Sector Project (Pakistan), Manila: ADB. ADB (2003g) Dushanbe-Kyrgyz Border Road Rehabilitation Project (Phase I – Tajikistan), Manila: ADB. ADB (2004) ‘Bangladesh Country Governance Assessment’, draft report, Manilla: ADB. ADB & OECD (2002) Anti-Corruption Action Plan for Asia and the Pacific, Manila: ADB & OECD. Asia Institute of Transport Development (AITD) (1996) Non-Motorized Transport in India: Current Status and Policy Issues, New Delhi: AITD. Bangladesh Sangbad Sangstha (BSS) (2004) ‘Government to announce Integrated Multi-Modal Transport Policy soon’, March 20, online at: http://www.bssnews. net/index.php?genID = BSS-04-2004-03-21&id = 7 Chagnan, J., Gansberghe, D. V., Vongphasouk, B., and Rumpf, R. (2002) Looking Back to See Forward – Consultations about Good Governance and Participatory Development in the Lao PDR, Vientiane: Swedish International Development Cooperation Agency. Esman, M. J. (1991) Management Dimensions of Development – Perspectives and Strategies, West Hartford, CT: Kumarian Press, Inc. Estache, A. et al., (2000) ‘Toll Roads’, in A. Estache and G. de Rus, Privatization and Regulation of Transport Infrastructure, Washington: World Bank Institute, pp. 235–92. Harral, C. (2001) ‘Asian Highways and the role of the ADB’, Manila: ADB, draft report. Heggie, I. G. and Vickers, P. (1998) Commercial Management and Financing of Roads, Washington: World Bank. Herz, S. (2004) Zero Tolerance? Assessing the Asian Development Bank’s Efforts to Limit Corruption in its Lending Operation, Washington, DC: Bank Information Center. Hilderbrand, M. E. and Grindle, M. S. (1995) ‘Building Sustainable Capacity in the Public Sector: What Can Be Done?’, Public Administration and Development, 15(5), pp. 441–63. Ittner, C. D. and Larcker, D. F. (2003) ‘Coming up Short on Non-financial Performance Measurement’, Harvard Business Review, November. Jones, L. R. and Kettl, D. F. (2003) ‘Assessing Public Management Reform in an International Context’, International Public Management Review, 4(1), online at: www.ipmr.net Kelman, S., Thompson, F., Jones, L. R. and Schedler, K. (2003) ‘Dialogue on Definition and Evolution of the Field of Public Management’, International Public Management Review, 4(2), online at: www.ipmr.net Lebo, J. and Schelling, D. (2001) Design and Appraisal of Rural Transport Infrastructure: Ensuring Basic Access for Rural Communities, Washington: World Bank, Technical Paper No. 496. Matin, N. et al. (2002) ‘Women’s Empowerment and Physical Mobility: Implications for Developing Rural Transport, Bangladesh’, in P. Fernando and G. Porter Balancing the Load, London: Zed Books.

Clay Wescott 143 Montgomery, J. (1996) ‘Bureaucrat, Heal Thyself! Lessons from Three Administrative Reforms’, World Development, 24(5), pp. 953–60. Organisation for Economic Co-operation and Development (OECD) (1997) Performance Indicators for the Road Sector, Paris: OECD. Schiavo-Campo, S. and Sundaram, P. (2001) To Serve and to Preserve: Improving Public Administration in the Competitive World. Manila: ADB, online at: http:// www.adb.org/documents/manuals/serve_and_preserve/default.asp Shukla, D. (2003) Governance – Building India’s National Pride: The Golden Quadrilateral, New Delhi: Government of India, Press Information Bureau, online at: http:// pib.nic.in Tolentino, B. (2004) ‘The Assessment of Implementation of Policy Initiatives and Reforms in Cambodia’, Phnom Penh: ADB, draft report. UNESCAP (2001) Review of Developments in Transport and Communications in the ESCAP Region 1996–2001 – Asia and the Pacific, Bangkok: UNESCAP. Wescott, C. (2001) ‘Measuring Governance in Developing Asia’, in L. Jones, J. Guthrie and P. Steane (eds), Learning from International Public Management Reform, Oxford, JAI – Elsevier Science. World Bank (2002) A Sourcebook for Poverty Reduction Strategies, Washington: World Bank. World Bank (2002a) India’s Transport Sector: The Challenges Ahead, Volume II: Background Papers, Washington: World Bank. World Bank (2003) Thailand Economic Monitor, Bangkok: World Bank. World Bank and ADB (2003) Enhanced Service Delivery through Improved Resource Allocation and Institutional Reform, Washington and Manila: World Bank and ADB.

This page intentionally left blank

Part III Focused Examples of Infrastructure Changes

This page intentionally left blank

8 How to Attract Foreign Direct Investment: The Korean Approach Terry Tuharsky and Joan Barron

In this new millennium, attracting Foreign Direct Investment (FDI) is more important then ever before. Enormous sums are available for FDI (US$1.4 trillion outflows were recorded globally in 2000 (UNCTAD, 2003). These huge sums represent opportunities for governments to attract investment and develop their economies. Governments who want modern economies recognize the importance of FDI, and take action to attract it. This chapter discusses some of the how’s and why’s of attracting FDI, using examples from various time periods in Korea and Asia. The specific topics are:

• • • •

Why do countries want FDI? A history of attracting FDI in Korea, through 1998–2002 and 2003–4. Effectiveness of Korea in attracting FDI. The necessity of addressing issues such as transparency, corruption, tax, etc. in order to attract FDI. • Livability, and its cause and effect relationship to attracting FDI.

Why do countries want FDI? As most politicians recognize, the three most important issues to getting reelected are ‘jobs, jobs, jobs’. Equally compelling is a quote from former US President Clinton’s campaign ‘It’s the economy, stupid’.1 If the importance of jobs and the economy are on the voter’s mind, then it does not take a great leap of imagination to see that FDI should also be important. 147

148 The Korean Approach to Attracting FDI

The most obvious benefit of FDI is the ability for investments to be translated into assets, which could then improve the infrastructure and productivity in the country. Looking at FDI attractiveness, increased productivity follows from providing workers with the proper tools, business processes and training in using these. The tools are assets, and a major driver behind creating jobs. If a country only wanted jobs then it could just ask people to dig ditches. However a country also needs increased productivity deriving from jobs that are in demand locally, nationally and if possible, globally. Voters do not just want a job, they also want to be modern; they desire international products and brands, they want to improve their standard of living, and have better roads, better water/sewage systems, reliable lighting systems and so on. In a wealthy country such as the US, a Fortune 500 worker might command as much as $100,000 dollars in assets to support their job. Comparing this figure with a poorer region such as Africa we might find a worker there has only $1,000 dollars in assets to support their job. So having greater asset backing for the workers should enhance productivity in a modern economy. A related reason for a country to seek FDI is technology transfer. Technology transfer includes the knowledge, education, and even business opportunities that come from interacting with expert foreigners. This yields invisible benefits, for example, in almost every country where we see large amounts of FDI, we also see more modern restaurants – including ethnic restaurants – more fashion styles, more kinds of entertainment, more schools and educational facilities, and more scientific, academic and corporate/technical information transfer. It can be argued that these are the desirable results of FDI that are wanted by citizens universally, and they contribute to and largely define a modern society. A person may argue that trade as opposed to FDI could bring many of the modern aspects mentioned above without the negative aspects of FDI, such as national companies going out of business due to enhanced competition. So why not try to limit FDI so that jobs can be protected and stability achieved? In the past too many governments have tried to do just that. However, one only has to compare North and South Korea to see the result of limiting or discouraging FDI. North Korea has a severe nationalistic focus and an annual per capita GDP of only $1,000 dollars (CIA Database 2003 estimate). South Korea had an anti-FDI attitude until 1997, but even in 1997 there were many Fortune 500 companies investing in South Korea: its economy was regarded as advanced, there was a large

Terry Tuharsky and Joan Barron 149

domestic market in South Korea, and nearby in Japan and China, and moreover its labour cost was low. Therefore an examination of South Korea can provide insight to why attracting FDI, and not just trade, can provide economic growth.

A History of Attracting FDI in Korea, 1998–2002 and 2003–4 South Korea, prior to 1997, was regarded as fairly successful, however, by November 1997, a financial crisis hit the country and was widespread over the region. In Korea it was referred to as the IMF crisis (International Monetary Fund) and in other parts of Asia simply as the ‘Asian crisis’. The Korean currency dropped from 900 to near 2000 won to the US dollar. Unemployment rose from 3 per cent to near 6.8 per cent (Anon, 2004). The streets of Seoul’s centre became quiet with less traffic and its restaurants were empty. Foreigners working for the IMF bank were brought in to help implement financial reforms. It was a difficult time for Korea. And for foreigners living in South Korea it was difficult anticipate whether the Korean economy would recover. South Korea could have shunned FDI and instead focused on trade and domestic issues. Korea could have simply kept, or even strengthened, regulations to impede foreigners from investing in Korea. By protecting domestic companies from FDI, South Korea could have promoted jobs over productivity. However this is not what South Korea did: the next section discusses the tremendous successes that South Korea enjoyed through opening up their economy and attracting FDI. Most foreigners who lived in Korea during the crisis thought that Korea’s newly elected President, Kim Dae-Jung, provided strong leadership and support for change and increased FDI. In addition, Korea also needed loans from the worldwide community to help stabilize the currency and its economy. These loans were largely provided by the IMF Bank, but along with these loans came conditions. The IMF focused on three areas: 1. improving financial institutions; 2. improving corporate governance; and 3. increasing labour flexibility. (Cited by Kim and Choo, 2002) The government, to its credit, did not limit improvements to only these areas. It also looked at corruption, taxation, deregulation, opening up of the Korean markets to more foreign goods, legal reforms, and a host of

150 The Korean Approach to Attracting FDI

other areas. The changes in these areas created a better climate for FDI and helped the economy. The government recognized that it needed good news about Korea, in order to attract FDI. So in 1998 the government introduced legislation called the Foreign Investment Promotion Act (FIPA) and the Special Tax Treatment Control Act. In addition, the government also created Foreign Investment Zones (FIZ), eligible for drastic tax reductions. With these changes the government now had an excellent message for foreign investors. Much of the news about coming to Korea centred around tax exemptions of 100 per cent for 7 years and an additional 3 years with tax reductions of 50 per cent. In the author’s view it was this news that really gave FDI marketing efforts a boost. The new tax regulations were presented in most government marketing brochures and literature. Since investors look at risk and reward, the idea of zero tax for 7 years, certainly added to the reward picture. Korea’s FDI in 1998, 1999, and 2000 suddenly boomed with record levels of FDI coming to a country where little FDI had been attracted before (US$ millions 5,412, 9,333 and 9,283 respectively, but falling to US$1,992m in 2002: UNCTAD, 2004) In the areas of transparency and corruption, Korea needed great improvement – Transparency International Inc, a group that monitors these issues worldwide, has rated Korea quite low. Although progress has been made since the index was first issued in 2000, today Korea is still ranked only fiftieth out of 133 countries (TI Corruption Perceptions Index, 2003) with a score of 4.3 out of a maximum of 10, with the latter representing totally clean behaviour. Its score has risen only slightly from 2000 when it held a rank of forty-eighth of 90, and a score of 4.0. At the start of its economic recovery, Korea still had corruption problems. The underlying climate of corruption continued from the mid-1990s. Several scandals have been noted, including the collapse of a department store and bridge (these scandals resulted in many deaths and were thought to be caused by bribery related to faulty inspections and faulty construction techniques). Newspaper articles on corruption continued apace, and even former President Kim Young-Sam’s son was involved in multiple scandals (Healy and Nakarmi, 1997). The Daewoo scandal, where it was claimed US$80 billion was lost or missing, did not enhance Korea’s image on corporate governance (Moon, 2001). Korea improved their image by setting up Internet sites to capture ‘wrongdoing’ and the City of Seoul took the impressive step of creating an online system to monitor processes with the city. This system has won worldwide recognition: for instance, by Transparency International,

Terry Tuharsky and Joan Barron 151

who gave the Malaysia 2001 Global Integrity Award to Mayor Goh (TI Newsletter, 26 April 2001). Transparency is a broad term and can cover many issues – financial reporting is one of them. As a condition of the IMF loans, Korea had to make improvements in financial reporting. Over the years the IMF has noted on their website that Korea is improving their transparency. In 1998 labour issues were prevalent. Strikers with red bandana’s waving their fists and beating on drums were regularly seen and heard on the streets and in the news. The Korean government worked on a ‘Tripartite Agreement’ to improve the situation. The Ombudsman of Korea noted that downsizing of a company or laying off workers was still an onerous task which required a near bankrupt financial condition and permission from the unions (Kim and Choo, 2002). In hindsight perhaps the Tripartite Agreement may be viewed as a success, because Korea did attract FDI, although many hundreds of thousands of Korean employees lost their jobs in restructuring and bankruptcies. In 1997 Korea’s won was close to 900 won per US$. When the crisis hit, Korea might have moved to a fixed exchange rate as Malaysia did. Instead Korea stayed with the floating exchange rate system and let the won drop in a band of 15 per cent per day. In November and December of 1997 the Korean won dropped daily by its maximum until its low rate of about 2,000 won per US$. However, with hindsight, the move to continue the floating currency paid off. Shortly, the currency returned to around 1,300 won to the US$ and by 2003 it was often in the 1,100–1,200 won per US$. This policy probably contributed to the growth in FDI. From late 1997 to 2002, the Korean Government worked diligently at fixing the Korean economy. The GDP returned to about US$10,000 per person, the won stabilized, Korea’s foreign exchange reserves rose to over US$100 billion, FDI increased dramatically. This was accomplished via a combination of tax incentives, financial reforms, deregulation, labour, legal/corruption reforms and a floating currency.

The effectiveness of Korea in attracting FDI However looking at the period of early 2003 and 2004 the successes seemed small and the Korean economy looked as though it was receding. One must ask if the changes introduced in 1998–2002 were the correct ones? Did these reforms attract FDI and did they help Korea in the long run? To answer the above questions, we looked at comments and discussion from foreign chambers of commerce in Korea, and foreign presidents

152 The Korean Approach to Attracting FDI

and CEOs who live and work in Korea. (This also includes this chapter’s authors who are on the Board of Directors of the Canadian Chamber of Commerce in Korea.) In 2002, there was a considerable drop in FDI and the Korean economy slowed. With this backdrop, Chamber leaders met, and their comments on what Korea had to do to continue its forward momentum were revealing and thought provoking. Tami Overby (Executive Director of the American Chamber of Commerce in Korea) allegedly said something like ‘As good as – is not enough!’ when discussing China and Japan. Korea is a smaller country with only 48 million people and it is centred right between Japan (127 million people) and China (1.2 billion people). Looking at this situation it is apparent that many investors were choosing China and/ or Japan as places to invest capital. That comment made the strong point, that emulating China and Japan was not a winning strategy for Korea if it wished to attract FDI. Another comment was that Korea needed to ‘delight the customer’ similar to the relevant actions in Ireland, Singapore and Hong Kong who introduced ‘fewer hassles’ for the business community, and were rewarded with increased FDI. Their lower taxes and less onerous regulations certainly contributed to the delight of the business community In 2003, Korea’s newly elected President, Roh Moo-Hyun had only been in office a short time and was experiencing many labour difficulties. Although Korea’s labour force is less than 15 per cent unionized, the business community was calling labour difficulties the biggest threat to Korea’s progress: indeed this was a point also noted by SRAMA (Kidd, 1993). The press became involved by showing detailed pictures of a strike at the Doosan plant in Changwon. These showed a group of union members surrounding a union official in what looked like a ritual, however it became apparent when the photo was explained to readers, that the official was immolating himself. There were rumours that this was done intentionally as part of a group action. Unfortunately, suicides similar to this were common in Korea but this particular suicide seemed quite gruesome (http://www.amrc.org.hk/4907.htm). Another incident cited by the American Chamber of Commerce involved the slogan ‘Death to the Company’ posted on company premises during a dispute. Although the union felt this was a normal course of action, management interpreted it as overly hostile. The effect on FDI is hard to quantify, but labour issues in Korea are not seen as helpful for attracting FDI.

Terry Tuharsky and Joan Barron 153

Another issue involved the ‘rule of law’. In many situations the business community believed that unions were breaking the law and then being rewarded for their actions. A common scenario was for the union members to hold a strike, and occupy and damage company premises. (Sometimes the union would bring in family members and other union members not employed by the company.) These actions exacerbated the situation, especially as after the strike companies often hired back all union members, including any lawbreakers, and provided back pay for wages lost during the strike. Korea’s labour image was clearly not setting a good backdrop for FDI in 2003, even though the government quoted statistics showing a reduction in days lost to strikes in 2003 – which did little to appease overseas investors. As Kim Hyuck-kyu, the governor of South Gyeongsang province asks, ‘Who’s going to invest in Korea when on CNN there are striking Korean workers in the streets seen wielding iron pipes and throwing rocks?’ (Miyazaki, 2003). Labour flexibility remains a challenge for FDI. In South Korea, regulations require the payment of 1-month severance pay per year per worker in the event of downsizing. Although the regulation seems costly, the main concern for investors is to assure flexibility to layoff employees; even so, such action could necessitate court approval, and union approval, and might even result in strikes. For corporations using unionized workers, the need for flexibility in determining the size of staff is a continuing concern, which detracts further from the attractiveness of Korea as an FDI location.

The necessity of addressing issues such as transparency and corruption in order to attract FDI Transparency and corruption in 2003 did not seem to be serious issues but by 2004 several scandals caused significant damage to the Korean economy. Certainly in 2003 there were scandals with one large conglomerate having billions ‘seemingly’ disappear and their accounting seemed to be totally inaccurate. As a result the conglomerate leader was jailed for a short period. But even these scandals, although depressing, did not lead to much action. Perhaps the fact that the Korean government was in turmoil over illegal funds for North Korea and illegal political campaign contributions was enough for people to believe that corruption was acceptable (Kotch, 2004). It should be noted that Korea was trying to improve its grade with respect to transparency and corruption. By 2002 Korea set up a commission called ‘The Korean Independent Commission Against

154 The Korean Approach to Attracting FDI

Corruption’ (KICAC). This commission has been trying to focus on eliminating corruption in the Korean Government at all levels. KICAC has set up connections with organizations such as OECD, APEC, EU-OLAF, and Transparency International, as well as other Asian country commissions. The commission has about 160 employees and has started a Corruption Zero campaign. Although the commission does not have authority over the private sector they are planning some proactive campaigns to help the cause in the private sector. It is to be noted that having mixed jurisdiction presents difficulties (Kim, 2003). In 2001, IBM Korea and LG IBM colluded with other firms to help Winsol win a 2.6 billion won open contract in 2001 for the supply of computers and servers to the Ministry of Information and Communication. Those arrested included IBM Korea’s executive director, who allegedly took 340 million won for helping Winsol win contracts from public offices through pre-arranged bidding between 2001 and 2003: he, and two other IBM directors were jailed for 18 months and 12 month respectively – and this triggered an anti-corruption sweep in the computer-related industries of Korea (Staff Writer, 2004). Not only are there the interactions with Sarbanes Oxley (tax declarations and governance implications) that affect many worldwide investors, Korea also has other treaty agreements against corruption such as the OECD anti-bribery convention of which Korea became a signatory by 17 December 1997 (ratifying this with the OECD by 4 January 1999). However, one major concern with the Korean legislation is that currently neither domestic nor foreign bribery is a predicate offence to Korean money laundering legislation. However, the OECD understands that Korea will enact new legislation so that bribery will be a predicate offence. So – if one of the best companies in the world (IBM) is allegedly involved in bribery in Korea then what must the foreign community think? Clearly foreign investors must be concerned about local Korean business practices? In light of this scandal, it seems apparent that fighting corruption is germane to attracting FDI, but to what extent it impedes FDI is difficult to quantify. Although physical infrastructure in Korea is impressive many foreigners say that the virtual infrastructure is not adequate. In Korea the focus has been on ‘Hardware not software’. Looking at the many improvements the Korean government has made, physical infrastructure is often always involved: the new airport at Seoul, and the high-speed train are examples. Concentration on these physical infrastructure projects, while welcome, results in a lack of focus on ‘software’ issues such as legal reform, minority shareholder rights, intellectual property rights and so on.

Terry Tuharsky and Joan Barron 155

Minority shareholder issues remain an outstanding problem, even though class action lawsuits have been implemented. The verdict is still out on whether minority shareholders of publicly traded companies in Korea are afforded a fair set of rights. The biggest concern is that it is possible for a person to control a corporation with very few shares, perhaps as little as 3 per cent. Finding a person could control a large corporation with very few shares is probably not what people meant when requesting ‘minority shareholder rights’. Another area of concern is legal reform. Investors must consider the security of their assets: thus the legal framework for the contracts that an investor signs are very important. In Korea the court system for clearing business disputes remains too slow. Six months is thought to be a normal timeframe for a court to hear a complaint. Since Korean arbitration is not highly regarded, this alternative to the lengthy court procedures is not seen as viable. Other areas such as bankruptcy laws also seem to be cumbersome and slow to arrive at logical conclusions. Another important ‘software issue’ is Intellectual Property Rights (IPR). IPR between 1998 and 2002 was poor – improvements were needed. In one case for instance, website names were taken and then ransomed to the foreign companies who had not yet registered these names or domains in Korea. This caused quite a stir in one of the foreign chambers, and meetings were held to determine if anything could be done. Fortunately the government sided with the foreign community on this issue and the website domains were eventually returned to their rightful owners. Although this may have been a small issue, it indicates that piracy issues or IPR is a concern for foreign investors. Even today, most professionals will warn potential investors that software and other types of IP will not find safe havens in Korea. In fact it is known that the Korean software market has a difficult time with piracy of software and that it hurts the Korean software makers by making sales vacuous, and reducing revenue to the Koreans. These aspects were well known by the Business Software Alliance (a US Trade Group) who were concerned that even with a relatively low [dollar] loss rate in Korea there was a piracy rate of 75 per cent when they conducted their first survey in 1994. They noted a growth in computer use would rapidly increase monetary losses. They quoted in their 1998 survey: China accounted for a loss of $1,449 million due to software piracy, and led the world with its 96-percent piracy rate; followed by South Korea, $600 million with a 67-percent piracy rate; and Brazil, $400 million with a 62-percent piracy rate. The United States, by comparison,

156 The Korean Approach to Attracting FDI

accounted for $2,800 million lost to piracy, though it had only a 27-percent piracy rate. (Software Piracy, BSA, 27 October 1998) By 2002 the Korean piracy rate had fallen to 50 per cent (www.bsa.org report 2003: accessed May 2004), and the long-term annual average loss is around US$500 million: too much, but being controlled, it seems. Foreign investors must interact with Government departments and often find the process frustrating. In 1998 the Korean government set up a department under Korea Trade-Investment Promotion Agency called Korean Investment Services Center (KISC) – now called Invest Korea (Kim & Choo, 2002). This department was set up to be a ‘one stop centre’ for the foreign business community, thus making it easier to invest in Korea. In general terms the objectives were:

• to raise the ratio of FDI in national GDP to the OECD average of 12 per cent by 2012;

• to advance Korea as a Northeast Asian business hub; • to generate employment; and • to help raise per capita income to US$20,000. (Timblick: Head of Invest Korea, 2004) The outsider consensus on this department seems to be unanimous – the department is very helpful and also a benefit to the Korean economy. The department has a pro-business outlook and has helped many foreign business companies work through their initial problems in Korea. In addition, the Government appointed an Ombudsman to give foreigners an advocate and champion to solve problems: and again the foreign business community highly appreciates this effort. Since the introduction of KISC and the ombudsman, Korea has seen FDI grow by US$40 billion. Although similar types of positions and departments exist in other countries, they do not seem to be as well known, or as effective: though the Scottish Office with its own ‘Invest in Scotland’ might contest that statement. Invest Korea’s model of improving the environment for FDI seems to be an example that every country could copy. First impressions are always important, and in most countries the immigration department often makes that first impression. In 1997 Korea appeared to have a reasonable immigration department: certainly, line-ups upon entering the country moved reasonably fast and were efficient. However when interacting with the department for work visas, it seemed to be rather officious. Fingerprinting all 10 fingers of a foreign employee, requiring the employee to exit the country for routine visa

Terry Tuharsky and Joan Barron 157

renewals, and taking 3 weeks or more to process a request seemed, while logical, to be unhelpful and prevalent. Another ‘software’ issue is marketing. After 1998 it appeared that the government stepped up its marketing of Korea. Advertisements using celebrities like President Kim Dae-Jung and Korea’s great golfer, Seri Park, were seen on CNN. Members of KOTRA, the trade division of the Korean government, accompanied by prominent expatriates living in Korea made several marketing trips abroad to encourage investment. But even with this stepped-up marketing campaign, Korea still seemed to be missing a marketing opportunity. Korea had long been known as the Hermit Kingdom and this label proved difficult to shake. For example, as of January 2004, there appears to be no major government website that acts as a central source for information on Korea. Advertising, and pointing and ‘clicking’ towards one single website would help officials focus on the quality of their information. It would be a central point for factual data management and maintenance, and would make access simpler for foreigners. Many people continually claim that they do not have good information on Korea and events in Korea, and this complaint has been well known for many years. Korea also needs a central marketing division. Currently each department or ministry does its own marketing with little coordination. As an example, government departments and agencies produce numerous brochures that seem to cover similar items of information, but each lacks similar information: note we said ‘brochures’ and not websites! Certainly the information in these brochures and their distribution along with other marketing documents and advertising needs better coordination. Developing and protecting the brand of ‘Korea Inc.’ is an area that Korea can continue to improve. To be fair, Korea has built a solid organization called KOIS (Korean Overseas Information Service). This government department is trying to setup www.korea.net as the central website for Korea. In June 2002 this website was rated as a top central portal by a UN Survey and today offers a broad spectrum of news and factual information in several languages. So Korea is trying to improve its marketing and KOIS will be one department that will help in this area.

Livability and its cause and effect relationship to attracting FDI Reviewing the comments from the heads of the foreign Chambers of Trade in 2003, it looked like all the old issues from 1998 were returning – corruption, transparency, tax, labour, and so on. But the Chamber

158 The Korean Approach to Attracting FDI

heads were also seeing a different set of issues emerging. This was later to be named as ‘Livability’. From the authors’ perspective ‘Livability’ gained credibility because corporations require a certain number of foreign employees (expatriates) to live oversees to manage their investments. One can assume that difficult living conditions for expatriates means less FDI, especially if the funds invested perform poorly due to poor local conditions. Typing ‘livability’ into Google results in over 100,000 hits. To the authors this is not surprising, as ‘Quality of Life or Livability’ issues are seen regularly in the media. In 1999 the Seoul Metropolitan Government (SMG) created a Foreign Investment Advisory Council (FIAC): they met quarterly and planned to use expatriates as a sounding board for advice. Although one might expect that the topics would be related to issues such as Tax, Banking and other financial issues, this certainly did not seem to be the case at the first meeting or even thereafter as ‘people issues’ dominated the discussions. From FIAC’s inception Seoul’s Mayor Kun Goh (head of FIAC) began to hear from FIAC council members ‘Quality of Life issues’ or ‘Livability’. Complaints regarding air pollution, transportation woes, driving habits, refuse collection, English usage, education, street signs and addresses, and so on seemed to come from every participant – and little referred to FDI directly. Now, with some years of hindsight, it can be seen that ‘livability’ has a definite part to play in attracting FDI. Although FIAC made many suggestions to SMG during 1999–2003, it was not these suggestions that epitomized the committee and its work. What appears to stand out is that ‘livability issues’ are very important to most executives and their families who arrive in Seoul, and almost every investor or business executive has a strong opinion on ‘livability’ – so FIAC has to address these points.

Education One aspect of livability that commands a lot of attention is education. In 1998 educational issues were not prominent, but by 2003 it became a hot topic in the expatriate community in Seoul. In particular it was rumored that executives were not coming to Seoul because their children could not get adequate education in Seoul. Since Seoul was the capital of Korea and a major FDI location, the complaints of the foreign business community received attention. At first it was thought to be a lack of foreign schools or places therein: but government officials

Terry Tuharsky and Joan Barron 159

were able to state that there were many foreign schools in the Seoul area. Soon it became apparent that the issue was the quality and nature of education a student would receive. Only the top foreign school had no vacancies, and it became the focus of study. Especially noteworthy was the fear of favouritism – was the government to spend Korean taxpayers won on just this issue so that expatriate children could receive a better education than local kids? Although the education problem did not appear serious at first, it was pointed out by one expatriate that if a parent could not get their children into the top high school then the child would be disadvantaged when trying to get into elite universities abroad. Another sensitive area was the thought that parents may want a more ‘English or Home country’ environment for their children at school. At the time of writing this book, Seoul and the Korean government had established a working committee to build a second school to meet the needs of the children of expatriates. Although there seemed to be some division among the interests of the various expatriate groups such as EUCCK (European Chamber of Commerce in Korea) and Amcham, the government is seen to be committed to trying to find a solution; and as of April 2004 seemed to be reaching consensus on the form and function of the new school. So, although education does not seem to be directly related to attracting FDI, it indirectly influences FDI; and has a place in any discussion on attracting FDI.

Air pollution One subject that continually gets media attention in Korea is air pollution. Air pollution is often cited as a top problem if not ‘the top problem’ of living in Seoul. The government is well aware of the problem and it is known that millions of tons of toxic waste are spilled into the air every year. But because vehicles are largely responsible for this waste little has been done, so far, in this area. There seems to be a reactive ‘solution’ to this problem – when a high profile international event that would benefit from clean air and lower traffic is scheduled, Korea generally opts for regulating the vehicles via the last digit in the licence plate number. A car with an even licence plate number can travel on one day, and the cars with an odd licence plate can travel the next. This kind of regulation was used for events such as the APEC summit, or the world cup soccer event to great effect: it is also used in Athens, Greece in most summers, but many Greeks, it is said, simply swap number plates if they wish to travel by car each day!

160 The Korean Approach to Attracting FDI

Air pollution in Korea gets much worse in the spring: being caused by the sands of the Gobi Desert blowing across the country. Although this desert is located in China and Mongolia, the problem is so serious that Korea and China have reached an agreement to try and plant more trees around the Gobi dessert. But this increases infrastructure issues such as provision and payment of the necessary staff, the training thereof, the maintenance of the trees, and other ancillary aspects such as water access. ‘Solutions’, therefore, have wide-ranging interlinkages. One factor that may press the government into taking action to eliminate pollution comes from Hong Kong. Around 2000 Hong Kong suffered drastic air pollution and had to take action. The Hong Kong government received a lot of negative press on this issue, and knew if they failed to act they would have problems with their children’s health in addition to problems of attracting FDI. For these reasons and others, maybe Korea too will try to tackle the issue of air pollution. However, because vehicles are so popular and their manufacture and utilization creates many jobs, it is hard to see a simple mechanism to eliminating this major contributor to air pollution. Since FDI may not be affected by air pollution until it becomes a health hazard, there is probably little political will to act. However noting the setbacks that Hong Kong has faced, one can only hope that dangerous levels of air pollution do not have to be attained in order that the Korean government is forced to act. As in all scenarios – it would be better to be proactive, rather than reactive.

Transportation Closely related to air pollution concerns are transportation issues. Many expatriates label transportation as a serious problem in Seoul. It may seem a stretch of the imagination that transportation issues could impede FDI, but if business executives spend hours in traffic jams, the direct and indirect costs to business will increase and make business rewards more difficult to attain. An associated issue relates to the justin-time regime practised within most manufacturing systems. Simply by refusing to hold adequate inventory the downstream firm obliges the upstream firm to deliver just a few boxes of goods ‘on time’ across Seoul, or in other major cities. This was observed ten years ago as a major source of traffic jams, as little alleyways were used as shortcuts [rat runs] by small delivery vans (which were carrying little, even nothing at all on their return routes) as they attempted to beat the jams, causing more jams, and backing these jams onto the minor roads

Terry Tuharsky and Joan Barron 161

where too-large delivery lorries attempted to effect their deliveries to firms using roads designed for bullock carts (Kidd, 1993). Some of the transportation issues that were noted in Seoul were:

• drivers are rude and aggressive; • the subway needs more escalators for people access; • the use of English-language signs on the roads and at subway stations should be increased;

• the authorities should enforce traffic laws (against speeding, tail-gating, traffic light jumping, etc.);

• reduction of the number of cars being driven in Seoul (via some method like odd/even licence plates);

• legislate in favour of fuel efficient cars; • encourage substitute fuel usage (i.e. use propane or hydrogen instead of petrol);

• encourage car-pooling; and • create direct non-stop bus routes between the three downtown areas. Despite many suggestions, traffic circulation in Seoul remains difficult, and progress is slow. In searching for solutions, perhaps a study of Manila’s new subway system may provide insights upon whether transportation affects FDI. Certainly expatriates feel that spending excess time in traffic is not ‘money well spent’; for instance, in Tokyo, Japan, UK officials are not recompensed for their taxi use as they are seen as too slow, too costly.

Entertainment in the language of choice A feeling of isolation is something many expatriates experience when living abroad. In Korea the problem may be exacerbated, as its language and culture are not well known in the EU or North America. This feeling could be lessened with increased access to communications in a language of choice. Complaints in Korea about the selection of TV programmes and Internet access did exist, although Internet access since 1997 has now improved to outstanding levels (broadband access is available in most urban and many rural areas). But in the area of television, Korea could still improve. For example Korea has no private foreign owned TV station that plays world wide popular programmes (although there is a US armed forces TV station); and of course, there are also no stations dedicated to languages such as French, German, etc. At one time the Korean government started an English channel programme, but the

162 The Korean Approach to Attracting FDI

nature of Korean propaganda makes it at best a cultural icon. Most shows are about living in Korea, with a high school English quiz programme being quite popular. American movies are very popular with as many as five movie channels available in Seoul, but the Korean government seems hesitant to improve even in this area – especially as it has been highlighted that in the more remote areas of Korea where FDI is badly needed, international TV as well as other amenities are very limited. It is easy to see how expatriates being forced to rely on Korean TV programmes find this annoying, and in some small way it can create difficulties in attracting investors and foreign employees to Korea. Because of the (relatively) small number of expatriates, and the TV industry lobby, it is not surprising that the government finds it hard to make changes in this area. It is sometimes frustrating to see a better selection of TV programmes in countries such as the Philippines and Malaysia (which have lower GDPs). But it is known that TV moderates culture, and culture is certainly a politically sensitive area in Korea. Elsewhere there seems to be greater freedom – in Canada there is a new channel (in Vancouver) that is largely dedicated to multicultural languages including an extensive Korean language section (http://vancouver. shawtv.ca). Ability to speak English is a tangential issue that affects FDI. Many Koreans do not speak English well: like many for whom English is a second language they are reluctant to practise speech. This is a serious difficulty since many senior managers in Korea and employees regularly take English tests as part of getting promoted or participating in Human Resource programmes. In addition perhaps as many as 50,000 students are studying abroad with English as the background teaching language, and some students will be studying English directly as a subject in its own right. Even so, the ‘language’ complaints have been so numerous that that the government has set up a special website relating to the economy and investment where people will ‘speak’ only English (see english.koreaneconomy.go.kr). One might note wryly that access to this ‘English language’ site automatically suggests one downloads Microsoft’s Korean language scripting program – perhaps an error, but understandable in a domain developed in Korea. At least this indicates the government’s sensitivity to the issue of language, and how it may relate to FDI. In speaking about the breadth of attracting FDI one incident that happened in Seoul may be illuminating. At the first ‘Town Hall Meeting’ in Seoul expatriates were invited to come and talk about improving Seoul: this meeting was sponsored by FIAC and the SMG. The meeting

Terry Tuharsky and Joan Barron 163

had all the ‘livability issues’ aired as one might expect at a meeting of this kind. However near the end of the meeting one person mentioned how they would like to have easier access to cheese. This comment was seen as one of the most controversial comments made at the meeting and resulted in a lively discussion in the local newspapers. Foreigners looked like simple-minded complainers and people who were unable to adapt. Although this at times could be true, it also points to the breadth of the problem when trying to attract FDI. Certainly people like their ‘comfort foods’ and food is a major ingredient for life (in all its varieties). The concept of comfort food indicates that livability as a component of FDI has many facets, which interact directly with the Food Standards regulation of Korea: which states that imported cheese must contain no bacteria (Zsasky, 2001).

Conclusions In trying to make conclusions about attracting FDI and how it can be accomplished one must look at many areas. In this chapter we have chosen areas that have attracted attention, not only by the business community, but from government and the media as well. Our first conclusion is that there is no silver bullet. Lowering taxes seems to be a front runner to attracting FDI, but business, government and academia, all point to other areas such as transparency, corruption, regulations, legal reform, and ‘livability’. Based on a review of these factors in Korea, one can conclude that a multipronged approach is needed to attract FDI. Second, within the multipronged approach, on one line, taxes seem to make a significant difference to attracting FDI. It should be noted that besides ‘FDI successful’ countries like Singapore, Ireland and Hong Kong, other countries are also setting up ‘tax friendly’ jurisdictions (often zero tax for a number of years with a slow ramp-up thereafter). Along with Korea and its many economic zones, the Philippines, Malaysia and India have all set up tax friendly zones. But when countries like China and Japan still attract much FDI and have high tax rates, it is hard to see tax as the sole leverage issue for attracting FDI in Korea. A third conclusion would be that the risk–reward equation is a significant factor in FDI. For example, FDI comes to places where there is great reward and favourable risk: so a favourable business proposition, and lower taxes should increase the reward, while improving finance, legal transparency and livability reduces the risk. The concept of reducing the risk and increasing the reward to attract FDI fits well with the

164 The Korean Approach to Attracting FDI

business objective of maximizing shareholder return. This ought to be noted by government as well as inward investors. Transparency issues and corruption seem to be accepted as risks in business. Certainly Korea, China, and Japan are all notorious for needing greater transparency and most call for reduced levels and breadth of corruption. Perhaps we can point to countries in Africa that have little FDI and also huge problems in corruption as evidence that transparency and corruption do matter. But these facts do not give promoters of transparency much satisfaction. Increased transparency and corruption eventually reduce the volume of inwards FDI, so it appears to be an issue that should be given greater attention in Korea.2 ‘Livability issues’ generate voluble discussion but do not directly affect FDI. However government policy makers would be careless if they set up policies to attract FDI that ignored ‘livability’. Eventually the ‘livability issues’ will be heard, and something will be done about them: and at the very least, lazy government bureaucrats who are responsible for these areas will be replaced. Is attracting FDI a continuous process? It ought to be recognized as such, and Korea has made great improvements since the IMF crisis, but 6 years later the business community still seems unsatisfied with the progress. The rate of attracting FDI has declined, and the threat of China and Japan collecting all the regional FDI and the Korean economy dwindling seems to be enormous. The Korean media, the new government, and the business community are all wondering what can be done. Korea’s economy is about the twelfth largest in the world. So one must wonder why so much attention continues to be focused on attracting FDI. Surely the infrastructure in South Korea is vast enough, and it is productive, and will not deteriorate seriously any time soon? The authors contend that attracting FDI is a continuous self-reinforcing process. Once a country starts on a path of attracting FDI it will continually seek more FDI to further improve the economy. We have looked inside Korea to provide answers on how to attract FDI and we have seen that Korea still desires and needs improvement in their economic performance. But Korea Inc. is doing a reasonable job of attracting FDI. With an estimated US$63 billion in the period 1998–2003, (notification basis) it is difficult to state otherwise. Korea’s overall FDI from 1962 to 1997 was US$24.6 billion and so it is easy to say that Korea has excelled at attracting FDI. Attracting FDI is seen as an important goal by many governments and the best plan for attracting FDI has not been discovered. In this chapter, Korea’s plan and its many initiatives have been reviewed

Terry Tuharsky and Joan Barron 165

briefly, and one can see that a consistent approach for attracting FDI is rewarded. As with all countries wanting to improve their FDI performance, Korea could enhance their multifaceted approach to attract more FDI – tax/financial, transparency/corruption, legal/judicial reform, communication reform and ‘livability’. We think that Korea’s quest for enhanced FDI provides useful insights into the successful elements of a good programme which could be employed by many countries continuously to attract FDI.

Notes 1. www.americanpresident.org/history/billclinton/biography/campaignsandelections.common.shtmlo 2. Chapter 2 in this book discusses the wealth of developing countries, including Africa, and links this to their educational achievement (eds).

References Anon (2004) ‘Better Business Climate Imperative for Higher GDP’, The Korean Herald, 19 March. Healy, T. and Nakarmi, L. (1997) ‘The Fallout from Sammi’, AsiaWeek, 4 April. Kidd, J. B. (1993) Spring Manufacturing in Japan and Korea. SRAMA (The Spring Research and Manufacturers’ Association, Sheffield, UK: Final report, September. Kim, T. (2003) ‘Comparative Study of Anti-corruption Systems – Efforts and Strategies in Asian Countries: Focusing on Hong Kong, Singapore, Malaysia and Korea’, in J. B. Kidd and F.-J. Richter (eds), Fighting Corruption in Asia: Causes, Effects and remedies, Singapore, World Scientific. Kim, W.-S. & Choo, M. J. (2002) Managing the Road to Globalization: The Korean Experience, Korean Information Service Center (KISC, now called Invest Korea), Korea Trade-Investment Promotion (KOTRA). Kotch, J. B. (2004) ‘Creating Trust in the Korean Chaebol’, in J. B. Kidd and F.-J. Richter (eds), Trust and Antitrust in Asian Business Alliances: Historical Roots and Cultural Practices, London, Palgrave Press, pp. 330–53. Miyazaki, J. (2003) ‘Korea’s Summer of Discontent’, Asia Times On-line, 22 August. Moon, I. (2001) ‘Kim’s Fall from Grace at Daewoo’, BusinessWeek, 19 February. Staff Writer (2004) ‘48 Indicted in IBM Korea Probe’, Sydney Morning Herald, 5 January. Timblick, A. (2004) ‘[Investment] Korea Becomes Asia’s Profit Center’, Korean Times, 16 May. UNCTAD (2003) FDI Reaches a New Peak, UNCTAD Press release 2003/85, 4/09/ 2003. UNCTAD (2004) World Investment Report: Country Fact Sheet – Republic of Korea, Geneva, UNCTAD. Zsasky, A. (2001) ‘Say Cheese! Import Controversy May Be Over’, Korea Herald, 16 March.

9 Marketing and Communication Infrastructures Enable Proactivity and Responsiveness Ralf Hirt

Introduction Asia is, in many aspects, the continent of the extremes and has been developing with high speed and high volatility across all its complex and comprehensive diversities, cultures, beliefs and religions, economical and digital divides as well as promoting tremendous richness in various fields. This region now has an outstanding opportunity to communicate relevant messages in an adequate, appropriate, fast and reasonable way to both global, regional, domestic and local audiences by making smart use of state-of-the-art and best-of-breed technologies in order to take proactive approaches to promote products and services. In so doing it would establish a communication infrastructure for pan-Asian, outbound Asian and inbound Asian purposes. This will help Asia to continue reliably delivering on the expectation of being the centre of growth in the twenty-first century. As Asian infrastructures have been developing, so have consumer’s behaviours been changing dramatically in the way they get and receive information, do research and shop. Consumers gather information from various sources, which then from a country’s or marketer’s point of view will need to be coordinated not only in terms of message consistency but more importantly in order to leverage the enhanced opportunities multichannel browsers offer by sticking to a brand across several contact points (we could say ‘touch’ points as marketing notes the tactile aspects of its trade). Nearly every direct marketing or advertising piece contains or will contain a URL and at the same time the website typically contains a service phone number and information on shop address or other point of sale. Consumers will decide what meets their 166

Ralf Hirt

167

needs best and when, but new technologies and an increased usage of related interactive direct marketing methods enable countries and marketers to provide more relevant information to consumers, analyse comprehensive and detailed campaign reports, remarket products or services based on transactions, interests, behaviours, or permission-based demographical information and overall dynamically develop and close the marketing and communication loop. Moreover, widely accessible communication and information platforms based on the Internet will enable governments, not-for-profit organizations or any other association to alert and distribute relevant messages within their people-reach networks and to make information available to hundreds of millions of people as needed, as immediate action is required in times of disasters and crises such as wars, civil wars, emergencies, SARS, bird flu, flooding, earthquakes, typhoons, terrorist attacks or any other unforeseen incident or catastrophe. Furthermore, such an information backbone as the Internet will make education available, accessible and affordable to many, who have not had a solid opportunity to experience education, education at a sufficient level, or advanced and international education. On the latter point, an early research programme in Europe demonstrated the potential for satellite-based education linking many educational establishments to their customer base scattered over the European footprint of the transmitting satellite (Longworth, 1988). This education mode continues for some – see the ‘EDUspace’ portal [http://www.esa.int/ esaED/index.html] run by the European Space Agency. All the reasons mentioned above grant Asia the tremendous opportunity of leveraging these drivers in order to continue and foster its significant economical growth and related improvements of safety, security, prevention, prosperity, standard of living and quality of life in the years to come.

The Internet and related technologies in Asia In Asia the Internet has picked up significantly although adoption varies from country to country. While places like Japan, Korea, Singapore, Hong Kong and Taiwan are among the most sophisticated Internet adopters and innovators globally, in South-East Asia, South Asia and Central Asia the progress is slower though, primarily due to limited broadband availability, or access in general. At the same time this does not mean that these countries are not able to benefit right away since global audiences still use the Internet to gather information about this region. China has been emerging at a high pace and leading Chinese

168

Marketing and Communication Infrastructures

websites such as sina.com, 163.com (Netease), sohu.com and tom.com are among sites with the highest traffic in the world. The worldwide web has made Asia ‘smaller’ as it has the world, but it also has made Asia accessible by everyone from everywhere and brought it closer to all other parts of the world. At the same time Asia and in particular the emerging countries of Asia, have the chance to market to additional markets by capturing a larger portion of the value chain. This is an excellent opportunity and tremendous chance for Asia in the twenty-first century to establish itself alongside the mature Western countries and regions simply by leveraging its scale, histories, cultures and richness to perform even better. Due to Asia’s diversity, economical divides and different political systems it is difficult to speak in general for Asia; however, technical and marketing frameworks are similar if not the same, while the local flavours and dynamics vary. In the example of Greater China the general idea of the opportunities of marketing and communication infrastructure is described together with the direct impact or implication, which then will be looked into for some other Asian countries or regions as well.

Greater China Greater China is a collective description. For the purposes of this chapter it is the awakened giant of the People’s Republic of China, the Hong Kong Special Administrative Region, and Taiwan. It has become the second largest global Internet population following the US. Within this decade, mainland China alone is very likely to become number one in terms of online population. The fact of such an enormous change in communication and marketing infrastructure in basically a period of only 10 years has had a major impact on the society, on communication, on information availability and distribution, on media, on business: as well as for international integration and the open accessibility of China (including the global Chinese community). Furthermore, the roles of Hong Kong and Taiwan become crucial in the fast changing and developing dynamics of information flow, investment focus and manufacturing location decisions. Easy communication between people, within companies, between companies and between sellers and buyers impact traditional value chain patterns, and will open minds for new considerations and strategies regarding which values are generated where, and who retains these values; followed by the question of how and where will financial gains be reinvested.

Ralf Hirt

169

In the second half of this 1990s China’s Internet population was between 10 and 20 per cent of its population, however, the demographics of the population suggest that the online population is young, well educated, and open to technology adoption. It has a purchasing power higher than average, and it is most likely that it will have an even better purchasing power in the future as they develop their careers further and faster, become more knowledgeable, get more job experience – while, at the same time, China continues to grow at a fast pace. Marketers realize that their potential clients are using the Internet and therefore will pay attention to this medium. As more people use the Internet as an information and communication resource, it changes the landscape of media consumption. It is not that there is an entire replacement or substitution scenario; but there are shifts towards the Internet. This trend has various reasons and actually has happened all over the world. The Internet is the medium that is easily accessible at the most hours of the day. Many have access to the Internet the entire day at work, at University, at home, in Internet cafes and increasingly often access the Internet via wireless devices such as mobile phones or PDAs (Personal Digital Assistants). During the past decade the number of mobile phone users in China grew more than half-a-billion. From a media consumption point of view the Internet will be the number one medium in China, accessible by the greatest population in the world, in many easy ways, and for the longest time per day compared to any other media. This medium is the by far most interactive and richest (we include here email, voice and chat), as well as being the most informative with nearly unlimited information from search engines, due to the sheer number of websites and therefore to the volume of content. Last but not least the Internet has been emerging as a business platform in the field of e-commerce. Online marketing, branding and shopping is taking off, and business-to-business trading platforms and auction sites are booming. The Internet is the place where sellers meet buyers, consumers search for information, people communicate privately. It is an incredible, huge, place of personal and bundled activities. A place nobody can ignore, a place where things are happening – and a place where countries attempt to filter content to protect their fragile heritage. China as an emerging country has a market which is potentially the largest in the world: it has fewer old infrastructures for doing business compared to more mature economies and, therefore, is able to embrace the new media and the online business platforms with higher pace. The advantages of economy of extreme scale together with the ramp up

170

Marketing and Communication Infrastructures

support from Hong Kong and Taiwan as well as global investors have made China a hot-spot in the global Internet and digital marketing landscape. Although the Internet does not substitute all other media it consistently will become more important and in fact will eventually be the leading medium. It currently seems to be the most leveraged from a user’s point of view, and furthermore it is at the same time the central information source, pool and destination used by marketers and publishers to capture potential customers and retain existing clients. Different media are appropriate for different needs on different occasions. People like listening to the radio, watching TV, browsing the Web, reading newspapers and magazines. Everything is up to the choice of the individual, the occasion and the availability or accessibility. The same parameters apply to consumers’ buying behaviour. Consumers use and appreciate different channels and media for different purposes on different occasions. One day a consumer may want to buy a book online, because it is quick and easy, next time the shopping experience, inspiration and personal assistance and advice in a specialized bookstore is appreciated. At the next occasion a gift is needed for a friend abroad and the domestic website of the country of destination is chosen, followed by another purchase of a book after a book presentation at an exhibition, followed by a purchase based on promotion by a permission-based email newsletter subscription and next time taking advantage of a discount offered in a traditional direct mailshot . . . and so on. Furthermore, depending on the consideration of time, concrete need and availability of a particular channel, consumers browse and look for information in one channel but then buy in another one later. One information and sales channel drives the other and therefore all channels need to work together in an integrated way based on a holistic view of the consumer and relevant strategic and operational marketing actions. This small example shows that marketers need to communicate with their targeted audiences, or prospects, across multiple media and across multiple channels. Technologies allow marketers to do this in an integrated way and, therefore, use the Internet itself as the backbone for an important part of their marketing infrastructure combined with purchased marketing automation software and web-based solutions or own marketing execution and communication tools. Technologies allow them to measure the results, effectiveness and efficiency of their online advertising and marketing campaigns, their email marketing activities, learn about user behaviours on their websites and to analyse and understand the results their e-business applications generate. They

Ralf Hirt

171

therefore can continually improve and optimize their services in line with their marketing goals and client’s behaviours, wishes, needs, demographics, patterns and feedbacks. Such useful information together with the information from other channels such as shops, direct marketing and telesales have been enabling marketers to respond to changes quickly, and to proactively communicate relevant information to suppliers. This allows them to build and develop quality relationships and overall to win more new clients quicker, and cheaper, while developing their client base, brand and market. In China we currently see many symbolic activities leading to the growth of the economy and, therefore, the opportunity for the adoption of leveraging new marketing and information infrastructures. These activities include:

• China is no longer simply the factory of the world, it increasingly • • • • • • • •

gets involved and participates in the chain of the creation of added value. Chinese companies are staring to build own brands. Chinese companies go global with their brands. Chinese companies acquire companies and brands abroad. Chinese companies go public domestically and in the US. More multinational companies launch in China. Internet usage is increasing. Broadband availability is increasing. The Internet population is growing.

One important aspect of marketing and communication in China is language. Although the younger generation speak English more and more frequently, the main language on the Internet in China is and will remain Chinese. This is a very critical factor. It enables China to retain its unique identity, and to protect itself from global competition to some extent. The percentage of non-Chinese speaking Chinese is and will remain comparably low. As a result of this, China may have a competitive advantage compared to its communication and business partners from countries other than China. Within China the Internet facilitates regional and local progress as it does elsewhere. For all these reasons China might be the country in which the Internet has the most impact on the economy and society – not only in Asia, in fact, globally. It facilitates business domestically and internationally, it grants a global audience insight into China and vice versa. In any case the most populous country in the world will be much closer and much

172

Marketing and Communication Infrastructures

more integrated with every single day, with every new user, with every impression and every click inside and outside of China. Everyone who believes that education enables innovation, that scale drives down cost, and that labour will remain fairly cheap for quite some decades in China should be very excited about watching how the Internet and China co-develop.

India We may think the development of China and India could go hand in hand as far as the marketing infrastructure and the Internet is concerned. However, there are significant differences in various aspects so that a closer look is warranted. First of all, the availability of Internet access in India is much less than in China. The online population in India is less than 20 per cent of the Chinese rate, and there are no signs that this ratio will change much in the foreseeable future unless Internet usage via mobile phones skyrockets in India. On this point alone we know there are several technical limitations constraining an explosive demand for a service similar to the fast access provided by terrestrial broadband, nevertheless there is a pent-up demand that will have to be addressed – in India and globally. Due to the fact that a large percentage of Indians, who are online, speak English, international websites are visited and international Internet services are used: but in the background we note 30 per cent speak the national Hindi language and there are 14 other official languages, while only 60 per cent of the population is literate (CIA World Factbook). Additionally, the historical background and links of India to countries such as the UK enhance openness towards non-Indian content providers. As Indians may surf partly abroad, Indians can provide services to the world. At the current time, marketing infrastructure enables India to export services online. This is a tremendous opportunity for India. It is known and has been proven for years that high quality information technology services can be sourced to or out of India. Due to the advancement of Indian software engineers together with the factor of their low wage cost it will be a continuing important driver for the Indian economy. The Internet, intranets and extranets applications allow companies to include literally every location and every potential partner in the world in their sourcing considerations. Development of systems, operating call centres, creating support organizations and a wide variety of IT-tasks are independent of locations, if skill, language, reliability and integrity are at or above a satisfactory level. Such services

Ralf Hirt

173

are basically mutable around the world, while countries are not. In these days this works in favour of India, though they themselves are carefully evaluating the Philippines as a centre to which to outsource their own work. The Internet as a communication backbone to transfer information back and forth has enabled India to hug up with the world. It not only generates jobs in the information technology and services industry, it has moved India onto the global landscape of countries that are of economic interest for two reasons. One is sourcing out of; the other one is selling into. With the steadily increasing success of its economy together with its huge population of more than one billion inhabitants, which is still growing, it is the second largest emerging global market, which means global brands want to be in there. In order to create brand awareness, the Internet again serves as a central information and communication platform for relationships between seller and buyer, brand and consumer. These days there are few brands that do not have a web location, but client communication does not exclude other conventional communication touch points such as TV, newspapers, magazines, phones or radio. In fact the right mixture of those marketing tactics enhances the brand experience.

Japan and South Korea On a relative basis South Korea is the country with the highest number of broadband users. In fact nearly everyone has broadband access. Usage of the Internet is high, content is rich and services are sophisticated. South Korea has all the parameters in place that has made the country one of the most advanced Internet countries in the world. On a domestic level the Internet and digital services are everywhere, and marketers are utilizing it to communicate with their customers within their relevant communities. It does not matter if it is music, search, auctions, wireless services, online gaming or whatever is the next big, cool thing. In this space South Korea has been positioned at the forefront, and so has Japan. Japan has the third largest Internet population after China and the US. It will remain with this rank until India takes over at some stage in the second decade of the twenty-first century. However, Japan is, and will remain for a long time, the second largest online population when it comes to the purchasing power of its Internet users. As marketing budgets follow targeted audiences and meet them on the media this allows sellers to generate the best returns: so marketing technologies will play an important role in business in Japan.

174

Marketing and Communication Infrastructures

On the other hand both Japan and South Korea could still leverage the Internet much more by utilizing it to establish their countries at the next level of ‘more globally integrated nations’, rather than remaining fairly locally focused, despite the massive exports of Japanese and South Korean manufactured goods that are used all over the world. One of the reasons why Japan and South Korea have not embraced this new and easy marketing and communication media together with its tools for international purposes is the nature of their language barriers, together with the potential issue of an ageing generation in many of the senior executive and government positions. Generally their domestic success has been driven by innovative, ambitious and entrepreneurial people as well as the young, technology-keen adopting domestic consumers: not by octogenarian enterprise leaders. When both countries start leveraging marketing infrastructure for pan-Asian and international purposes the way they do it for domestic sales, Japan and South Korea will be able to develop more direct global relationships with people – not only to export more goods and services, but also to get more attention for their cultures and increase tourism; which in turn builds relationships when people discover the beauty of these countries.

ASEAN The city-state of Singapore has been likened to South Korea and Japan, domestically embracing the Internet as a marketing and communication platform. Although for domestic e-business activities the lack of local critical mass has not allowed Singapore to scale the way to compete domestically with the same domestic momentum as in South Korea or Japan. On the other hand many multinational companies market pan-Asia out of Singapore, which leads to additional sophistication and scale. Singapore has been an appropriate hub for such activities as technology expertise and people with various Asian language skills are available. Another reason why Singapore is able to benefit from the advanced and increased Asian-wide usage of the Internet is that the global expatriate community finds Singapore an attractive place to live and stay. Singapore might well be the most multicultural and internationally influencing city in Asia. This mixture is a valuable asset, especially when it comes to communication and marketing. Inventing, strategizing, creating, designing, executing and distributing relevant messages to targeted audiences means that the marketing and communication experts have to understand the people’s needs, sensitivities, cultures, likes and dislikes,

Ralf Hirt

175

religions, society rules and response patterns. They have to understand the wider social capital issues, not just those of Singapore. As a result of this, the multicultural melting pot of Singapore together with its bestof-breed education and infrastructure will benefit from the economical growth of Asia by basically facilitating it. This is a huge opportunity for a small state to participate in the growth of the largest continent. The ASEAN countries other than Singapore and to some extent Malaysia (which also has many smart adopters both for domestic and international purposes) have great opportunities to make the most of the availability of the Internet in order to communicate in an easy and reasonable way. That is, fast and direct, and with the ability to react and respond immediately to any demand. Some of the challenges that emerging countries always face are in building trust among foreign investors, so as to compete for investments with their neighbours, to attract tourists, to rebuild global confidence after crises: in other words, to get out their messages to the right people at the right time with an acceptable financial effort. The Internet as the communication backbone for country marketing and promotion allows each country to start building relationships with specific audiences based on complex demographics and interests, and even across multiple countries. In order to build relationships there must be consistency, relevance, timing and actuality which are the cornerstones and critical success factors. Countries like Thailand, Vietnam, Cambodia, Philippines or Indonesia or companies from these countries understand some of these factors and are now enabled to start leveraging. The tourism industry is an example that encompasses managed aspects for both opportunities and challenges.

Vertical leverage factor – tourism and travel as an example Predictions assume the tourism and travel industry will grow faster than the economies on average. Tourism and travel is important for Asia and in fact for every country. The rich countries like Japan and South Korea for instance want to decrease their tourism deficits, since many more Japanese and Koreans travel abroad than foreigners visit their countries. The emerging countries either have traditionally had a tourism focus or are now opening up for tourism as we see from China, Mongolia, Vietnam or Cambodia. Increased domestic travel particularly in China and India, as well as Asian travellers from Asia and from outside Asia, will be contributing to the economic growth and all these people and client groups offer the potential to develop not only their travel desire but also design solutions that allow the travel industry to maximize the yield and value

176

Marketing and Communication Infrastructures

chain. Innovative solutions could cover multicountry approaches, regional branding, and vertical pan-Asian activities, just to name a few. Technology infrastructure such as the Internet, email and wireless (WIFI) will enable the industry to execute appropriate strategies to educate and communicate relevant information in a cost-efficient and effective way. Furthermore, it will allow the industry to respond to crises quickly and rebuild trust and consumer confidence whenever such activities are required. Since these technologies are interactive, the interactivity allows surveys on trends, intentions and likelihood to be carried out quickly, so that risk and opportunity management and forecasting will be much easier, more flexible and reliable. From the very early stage of the Internet the travel industry has adopted this medium and has taken full advantage of the opportunities. Driven by a low margin and cost pressure, business environment travel websites became one of the pioneers of e-business. Obviously, many people all over the world are interested in and keen on travelling and getting ‘a good deal’. To some extent it seems that the consumer enjoys the hunt for a good deal, rather than simply the good deal itself. However, the Internet has brought more price transparency to consumers looking for flights, packages and to certain extent, individual trips. In fact, in many cases, consumers could compare more fares and scenarios online than could their local travel agency, which is based on their in-house or group’s or chain’s booking system, and as such limited in reach, and self-limiting in customer satisfaction. Apart from this, the permanent availability of the Internet has further encouraged its usage independent of the day of the week or the time or the holidays – as they say, its has a 24/7 availability. Recently the established players in the travel industry have established their Web presence, thus it is possible to book a flight at any time, anywhere, and to everywhere, as long as the consumer has Internet access and a credit card. Unless crises of any nature endanger the lust to travel, travel will increase: after the September 11 affair in the US or the SARS scare in Asia tourism has recovered to its former levels. People are interested in exploring the world, travelling is easier, safe and travellers have less hassle with currencies, payments, transport and languages given the scope of credit cards. Generally, the world has become a safer place with less travel restrictions. Travel can be domestic, pan-Asian, inbound or outbound. Travel can be for different purposes such as holidays, education, business, incentives or any combination of these. It also can be at entirely different levels – from first-class trans-oceanic flights to a 100 mile economy-class coach journey. It could include as a package, hotels, resorts, lodges, training, tours, car

Ralf Hirt

177

rentals, sailing, yachting, cruise tours, adventure excursions, diving courses, sport activities and all this in nearly all countries and in basically an unlimited number of regions, cities and villages. The challenge for countries and companies of the tourism and travel industry is to deal with this complexity, to maximize success, and to manage their marketing expenditure wisely and effectively. While choice is great for consumers, it makes marketers focus on niches, creating specialization, differentiation and scaling. Some or even all can work together as long as prospects, customers, needs and opportunity segmentation are managed smartly and the communication executed in a highly automated way. This would be by leveraging the latest state-of-the-art for email-marketing, SMS (Short Messaging Service), MMS (Multimedia Messaging Service), targeted outbound online advertising for promotions, and remarketing based on permission-based consumer demographics, permission-based transactional data, or as part of loyalty programmes. Marketing and advertising in particular is no longer an art as some experts may argue, it has emerged and evolved to a science as technology enables marketing to get to a higher level in terms of sophistication, efficiency, effectiveness as well as timely and relevant accuracy of messages. The marketing and communication infrastructure of the Internet enables Asia, united at a government or tourism commission level, in country alliances or regional initiatives, or in vertical industry-like resort holidays or incentive trips, to build one brand or to build several brands for specific purposes. In order to communicate the messages and build a meaningful relationship with the consumer, marketing databases of consumers, who have expressed interest in receiving information on the subjects they have opted-in for and who have provided their email-address and/or mobile phone number, together with marketing execution technologies and outbound tools, enable the distribution of relevant information according to the consumer profiles. These systems are proactive and responsive at any time once the information demands are triggered. By having such an automated although personalized communication, dynamically generated content based on provided templates in line with demographics of the consumers and news or marketing content will be extremely beneficial for everyone – consumer, country, region, marketer or vertical industry.

A pan-Asian view Usually countries, as well as most companies, think mostly either in a local, or company-specific mode. Multicountry and pan-Asian or

178

Marketing and Communication Infrastructures

industry-specific purposes could create additional opportunities and encourage a more pan-Asian way of thinking. Asia does not only need to see itself in competition with the other major economic forces primarily in Europe or the Americas to increase its business performance, it will also increasingly need to focus on building a healthier pan-Asian economy. Although Asia is diverse, mentalities from country to country are still closer to each other than to most countries outside of Asia. Generally, it is easier to do business within a region or continent due to fewer challenges of distance, time zone or cultural ignorance or misunderstandings. The Internet is there, it is everywhere, but currently the pan-Asian idea has not taken advantage of it in a way it could and should do. In the majority of cases companies, which have pioneered the online space or adopted such infrastructures cleverly and early, think of expanding their activities to Europe or the US soon after they had become the market leader or a strong player in their country of origin in Asia. As every major company in the world these days focuses in one way or the other on China, most large Asian companies have a foot in the door in China, too, but, for example, creating Chinese subsections of corporate websites or even have an entirely Chinese content and look and feel is still only at the very beginning of their marketing push. Countries within Asia compete for investments outside of Asia, but this does not mean that investment automatically will be made in Asia. The world is global and so is competition. Low-cost environments in Eastern Europe, Central or Latin America as well as Africa or Middle East are competitors if it comes to low cost. The European Union and NAFTA countries would be the investment focus for more mature services. And a joint pan-Asian or regional promotion would be a first step in helping to ensure investment will flow into the region, then as the second step Asian countries have to compete with each other to be the most attractive and compelling platform for investors and investments. The marketing and communications infrastructures are already in place.

Asia outbound From a global point of view Asia has been known for its relatively, to extremely, low cost wage rates. Depending on the country, this is still the key driver of success and has been the initiator and catalyst lifting the economies. In contrast, it theoretically also could have been innovation, creativity, culture, quality or sophistication. With respect to business, countries become less important while companies become more important. Know-how and labour is available globally, information

Ralf Hirt

179

exchange is not an issue due to telecommunication and the Internet. Quality assurance and total quality management is a task of company’s independent from the location in which they are manufacturing. The brand stands for the quality level and no longer the location of production. The brand is what consumers associate and compare with their expectation. Marketers have to deliver according to consumers expectations, which to a large extent the marketers set themselves. At the current stage of the evolution of globalization Asian countries have primarily two directions and opportunities to create frameworks to offer to companies from their own geographical origin. Either they facilitate a low cost environment with quality levels just good enough so that their productivity level is enough to get the investment. In this scenario the value is only in the provision of low cost and therefore associated scale. The second scenario is similar to the first scenario as basis of getting investments, but more importantly it is that the Asian enterprise participates more fully in the value chain by adding more value. This is to change from simple production or manufacturing to establish a label or brand recognizable outside Asia. If a country is able to provide frameworks and infrastructure enabling foreign investors to produce and source cheaply, the country’s companies should aim to achieve the same on their own. Know-how and support can be purchased or created, but what is really important is to focus on innovation, branding and marketing. The good news is that since the late 1990s a global marketing and communication infrastructure has been established and, therefore, it is easier to sell products globally without having tremendous cost of entering new geographical markets, finding and recruiting dozens of channel partners, spending fortunes on hardly controllable promotions and advertising campaigns. The answer to all this is that the Internet and its players, who either provide access to global or local audiences or who provide business, auction and trading platforms or who simply provide Internet-marketing enabling technologies, allow for building brands on a global scale, reaching potential global clients and enhancing relationships with existing customers. It is easier, less time consuming and incredibly cheaper and faster than ever before. The race is on.

Asia inbound For those, who believe that every product or service imported into Asia has its reason and, therefore, delivers directly or indirectly to satisfy a consumer need or desire, marketing and communication

180

Marketing and Communication Infrastructures

infrastructure works this way as well. There is hardware and software or better physical products: there is also know-how or perceptionbased consumer experiences, which most likely could be a combination of both. Know-how can be made available globally easily and therefore imported in order to fulfil a demand of an individual or a market in general. This is perfect to leverage the best from the West and make it even better by appropriately adding the best of the East. There are two focuses. Obviously, the non-Asian companies and countries target demands and consumers in Asia, while Asians look for goods, services, know-how and expertise from the West. As consumers should have the choice and practically do have the choice, the Internet information platform enables both parties to figure out the most suitable balance of the transition or conversion of offer to demand. Therefore, sourcing from outside Asia adds value to Asia. The countries and markets will sort out for what there is demand and for what there is not. An easy way of gathering information and useful updates from all over the world is not only to surf global content on the Web, it also allows users and consumers to subscribe for content delivered-for-free or for reasonable fees to their Internet account accessible via global Web hot spots or to their mobile device. Marketing and communication infrastructure is not only a tool for markets and countries; it is in fact a fantastic opportunity for people to import information and knowledge from everywhere to anywhere.

The Internet – facilitator for SMEs The Internet allows large companies to manage effectively an increasingly substantial part of their domestic and global sales and marketing efforts, processes and distribution via e-commerce applications, it also enables SMEs (small and medium enterprises) to reach consumers all over the world. So far so good – on paper. Although every simple website already has content, and is accessible by all Netizens, in order to achieve traction a marketer either has to have a strong brand or large budgets to promote its Web presence. It is in the nature of SMEs that this is exactly what they are missing. Were it not for the incredible opportunity to leverage online trading platforms and online market places, SMEs would benefit little from their global Web presence, as hardly anybody would know about them. Online trading platforms and market places either for specific vertical industries or regions categorize potential vendors. They obviously attract only specific buyers, which makes SMEs visible for potential customers outside their offline and

Ralf Hirt

181

conventional marketing reach. SMEs now have a much larger potential market to sell to more competitors, and as competition is good for the market, SMEs will grow faster. One of the great success stories of the Internet has been the tremendous growth of online auctions, which originally won momentum thorough consumer-to-consumer transactions. However, auction sites like eBay have enabled SMEs to use it as a sales channel – and there are SMEs using it even as their exclusive sales channel. In such online auctions, or markets, buyers meet sellers independent of their size, their budgets, their products or their location. Buyers are allowed to source globally, sellers are enabled to serve the globe. The Internet is an engine for small businesses. Any product to the people – to anyone, anywhere.

The marketing and communication backbone It sounds like a marketer’s dream, and yes in a sense countries can be seen as marketers, too, such that that huge audiences, potential clients or stakeholders in general are to a significant number accessible by using communication technologies in addition to conventional marketing methods. The clientele that is reachable through the Internet, email, wireless has, to a large extent, solid purchasing power, is younger rather than older, and more likely to be well educated. As pretty much every marketer and country is or will be connected to the web in order to promote themselves or their offerings, it is now about how easily the marketing and communication engines could be started. One of the beauties of technology usage and leverage in the twenty-first century is that in fact Web-based systems are easier to adopt now than ever before. The nature of the Internet is that its information and communication functionalities attract people, which therefore could be considered as the gravity of the Internet. But what makes this even more powerful is that there are marketing and communication infrastructure providers that offer smart marketing tools and services, software and ASP (application service provider) solutions, as well as companies providing full service solutions. As such the technologies and knowledge for global reach to targeted audiences is already available. What really matters is that based on these technologies and services, ongoing communication for whatever purpose, could be established, which allows marketers, countries and regions to build lifetime relationships with individuals around the globe. These relationships should flourish and contribute to the economy and improve social issues.

182

Marketing and Communication Infrastructures

People reach networks If countries, companies, institutions and communities are from the same joint background, interest, religion, using ideas, humour or whatever people may have in common within and outside of physical borders, then administrative permission-based databases of these people together with database-integrated direct marketing execution tools such as email or SMS/MMS, can be considered as a reach network of people. These, thanks to the communication backbone of the Internet and telecommunication gateways, enable data to be reached in a fast, nearly immediate, efficient and reasonable way. Relevant information for any purpose can be delivered around the globe, which is something that had been an absolute impossibility prior to the emergence of these technologies and the roll out of these infrastructures. Once more we see ‘Information to the people – any time, anywhere’.

Crises, risk and opportunity management Typically whenever there are speedy growths higher risks come with it. There is little doubt that there are further crises to come in Asia, whether such crises are political, environmental, religious, health related, terrorism or natural catastrophes. On the other hand the Asian economies always have been bouncing back at a high pace after a crash. A steady communication with stakeholders, based on surveys, interest intensity, inquiries and behaviour analysis, allows economic risks, trends and opportunities to be predicted easier and therefore responded to earlier and faster. After any crisis, which in fact could have been already softened due to better education on the subject, and partly by prevention, consumer trust and regional re-bounce will happen in an accelerated way. The pool of data, email addresses, and mobile phone numbers will allow marketers and countries, regions and vertical markets, to trigger relevant information quickly to their stakeholders around the world; hence marketers and countries are enabled to be immediately proactive and responsive. The accessibility of all individuals together with an ongoing systematic dialogue within a peoplereach network is the foundation for risk minimization, downtrend and crash smoothening, as well as opportunity maximization.

Education in a knowledge-based economy The Internet is the source for practically unlimited information. As a result of this, information can be made available online for education

Ralf Hirt

183

and learning purposes independent from the country or location. Due to the fact that schools and universities are already or will be equipped with Internet access, it changes the landscape of educational division between those who have the opportunity to learn and those who have not. In fact, over time, this issue will be reduced sharply or disappear entirely. This has got to have a tremendous impact on the world as everyone will be able to benefit from know-how and learning materials available online. Especially in the less-developed countries of Asia it will have positive effects. Education and access to knowledge is one of the key drivers of innovation and economic growth. Apart from the fact that people in emerging countries will have the chance to step up on the knowledge scale, everyone, independent from their educational background, has the opportunity to extend and enhance their own knowledge by participating and leveraging additional education programmes, studying new subjects, learning more languages or participating in many kinds of knowledge gathering depending on the individual’s desire, need or intention. It also brings Asia closer together since Internet education and knowledge distribution does not acknowledge borders. For the same reason it links Asia closer to Europe and the US, where education is widely available and has become a global business and this not at least due to the Internet (we earlier mentioned the European Share Agency programmes). Moving people forward will demand more education and more knowhow, which is good for business and countries. If more people have a better educational background and more know-how, people will compete on higher levels, and due to enhanced and easier availability of know-how, will need to further deepen and widen their knowledge. Asian countries want to avoid being in a commodity market position, and the Internet allows every state to either foster or to ramp up the knowledge platforms or human capital they utilize, and use this to compete with others for domestic productivity and to attract international investments.

The opportunity is a must Asia, independently from each country’s state of the union, has a tremendous opportunity through its building and leveraging a communication infrastructure for both macro- and micro-economic purposes. This can be achieved by utilizing the Web. As the name suggests it is a Web, a local, a regional, a world-wide Web, which means everyone and everything is able to be linked based on the initiatives of each single or

184

Marketing and Communication Infrastructures

corporate contributor, of companies, governments, associations, clubs, organizations, parties and institutions. An Asian-wide vision and mission created by Asia’s political and economical leaders, enabling the strategy and its execution, communicated throughout the business community and society could serve as a platform for greater prosperity, growth and stability. A market and information and technology-led mechanism for the marketing and communication infrastructure, and its accessibility, will drive growth in those geographical areas where its execution is handled at a state-of-the-art level and business benefits are generated. However, in order to profoundly foster and encourage the pan-Asian development progress as well as Asia’s integration with the world, the approach should be one of combining commercial, economical and social aspects, because only then will the perspective of growth be considered as sustainable and long-term. On the other hand, if countries and in particular small and tiny countries are left out, are abandoned or their governments do not take advantage of connecting their country, via direct high-bandwidth submarine cable access to the world stage, this could lead to the marginalization of those countries and inhabitants, which without doubt would become a potential risk and danger. Therefore a responsible, professional and quality task for governments is to encourage public and private partnership. This is essential to ensure that the Internet and digital technologies, seen here as a marketing and communication infrastructure, is a mutual catalyst for the second wave of globalization. In this form it will significantly help to improve the state of every single country, the whole of Asia, and the entire world.

Reference Longworth, N. (1988) ‘PACE in Europe – Delivering for Advanced Continuing Education’, Australian Journal of Educational Technology, 4(1), pp. 20–30, online at: http://www.ascilite.org.au/ajet/ajet4/longworth.html (accessed May 2004).

Part IV A Future Scenario

This page intentionally left blank

10 The Leadership Dimension: Developing Human Capital in Asia John Alexander and Michael Jenkins

Introduction At the outset of this new century, Asian nations are poised to become the engine of global economic growth. IMD’s 2004 World Competitiveness Yearbook, for example, lists Singapore as the world’s second most competitive country and announces that seven of the ten fastest rising regions in the World Competitiveness rankings are in Asia: A new breed of local competitors emerges, mainly from Asia, and soon from Russia and Central Europe. They don’t only provide manufacturing or services to western companies; they compete in their own right with their own brands. They will assail western markets, just as Japan before, but on a much wider scale. Such nations are quickly absorbing world standards in management and technology, which are spread by offshoring activities. (World Competitiveness Yearbook, 2004) For many Asian companies, the frame of reference has changed from local and regional markets to a global marketplace. The global marketplace offers greater opportunity but demands greater change within organizations to elevate their systems and processes for developing human capital. Mukesh Ambani, CEO of Reliance Group, India’s largest private conglomerate and the organization that has held the number two spot for the past five years in the Far Eastern Economic Review’s Leadership rankings for India, echoes the desire of many in India and across Asia when he says 187

188 Developing Human Capital in Asia

India today has a once-in-a lifetime opportunity to forge a new destiny of global leadership and transform the lives of over a billion of her people. With an eye on education, innovation, competition and market access and a vision that goes beyond business process outsourcing, contract manufacturing and contract research to building brands, technology and owning the global customer, India can make the grade. (Ambani, 2003) Along with this enhanced presence on the world stage comes a particular challenge for Asian nations: ensuring that the supply of human capital – specifically well-educated and skilled workers with effective management and leadership skills – keeps pace with demand. This challenge was front and centre in the minds of many business and government officials who gathered in Singapore in October 2003 for the World Economic Forum’s East Asia Economic Summit. A number of presenters asserted that developing and retaining a talented and motivated work force is essential for nations in the region seeking to cultivate knowledge-based or industrial-driven economies. Several powerful forces in Asia are helping to transform definitions of leadership and the development of leadership skills. One force driving the need for leadership training in the region is the reality that new ideas and expectations are being introduced and traditional leadership styles are rapidly changing throughout the region. Global influence – from Western management practices and schooling to increased blending of ethnicities and cultures in organizations – has taken root throughout Asia. Global influence and global competition are compelling leaders in Asia to decipher the right blend of traditional and new, East and West, individual and collective, authoritarian and empowering leadership. They need to shed behaviours that no longer serve them well, modify others, and adopt new ones – all the while ‘taking care of business’ – and being true to their unique, personal and local values. This increase in global interaction suggests that managers in various countries can learn from each other. Hiroshi Watanabe, a Japanese management consultant, trained American managers in the 1980s who visited Japan to marvel at the wonders of Japanese production management, quality control and Kaizen. He noted the growing sophistication of leadership development in the US in the 1990s as the nation gained momentum over Japan. He observed, on a visit to the Center for Creative Learning®:

John Alexander and Michael Jenkins 189

I noticed that new concepts of American leadership such as coaching, team building, team problem solving, performance development, decision-making by consensus, empowerment, and transformation may have had their origin in the Japanese operational management. But I became aware that while we had not been able to translate this operational knowledge into theory, the Americans had used this practical knowledge to build methods of application on a wider scale – from team to organization, from production to whole company. In addition, they had designed excellent training programs using assessment and feedback, integrating these new concepts and skills. (Lucenti, 2003) Another significant factor creating a need for leadership training is the growing number of Asian managers in multinational corporations. These managers need to understand how to work effectively with others from different nations who see leadership through a different cultural lens. In The End of Corporate Imperialism Prahalad and Lieberthal (2003) estimate that by 2010, many multinationals may have as many as 40 per cent of their top team coming from countries such as China, India and Brazil. They ask ‘How will that cultural mix influence decision making, risk taking, and team building? Diversity will put an enormous burden on top-level managers to articulate the values and behaviors expected of senior managers, and it will demand large investments in training and socialization.’ Yet, within the shared belief in the significance of human capital lies the understanding that leadership, management, and talent development will look different depending upon country, culture and organizational perspectives. There is no single ‘pan-Asian’ approach to people development. As Florence Plessier, an executive coach with extensive experience in Asia-Pacific, explains: ‘Asian countries are so different from one another that the notion of “leadership development” deserves a different answer for each of the Asian countries.’ At the Center for Creative Leadership (CCL), an international educational institution that has dedicated more than 30 years to leadership research and training, we approach leadership development in a way that transcends national, cultural and organizational differences. Our model of developing individual leaders and broad organizational leadership capacity is more process than prescription. This model also distinguishes between leader development – the expansion of an individual’s capacity to be effective in leadership roles and processes – and

190 Developing Human Capital in Asia

leadership development – the expansion of the organization’s capacity to enact the basic leadership tasks needed for collective work. This chapter focuses primarily on leader development and building organizational infrastructure for leadership. Rather than offering an overly simplistic ‘ten steps to leader development’, we offer a framework that can be tailored – and in fact, requires customization – according to cultural and organizational needs. In other words, we have distilled what we have learned over the years into a model of leader development. We believe this model offers the scaffolding on which to build creative, effective leadership development initiatives throughout Asia, and in countries around the world. Just as the US learned from Japan in the 1980s, we believe that emerging organizations in Asia can learn from the missteps and the experience of the West in developing human capital. Indeed, organizations in Asia have the ability to skip over the experimentation done elsewhere and incorporate the best learning and ideas available from four decades of learning about leadership development.

Approaching leadership development As in any discipline, the field of leadership development advances its understanding and practice by examining and reexamining fundamental questions. In leadership development, these central questions include the following:

• What does it take to be an effective leader? • What aspects of a leader’s talents are hard-wired, and what aspects are developable?

• How do people learn important leadership skills and perspectives? • Do some people learn more than others from their leadership experiences?

• What are the necessary ingredients for stimulating development in leaders?

• What are the best strategies for enhancing leadership development? Exploring these types of questions with our clients and colleagues has been the basis of CCL’s efforts to advance the understanding, practice and development of leadership. Over the years, we have conducted research, developed and refined leadership programmes, created more sophisticated tools and methods, and studied the impact of our efforts on participants. We have also tried to understand how managers learn,

John Alexander and Michael Jenkins 191

grow, and change throughout their careers – not just from formal programmes but also from the challenges in their working and nonworking lives, the relationships they cultivate, and the hardships they encounter. For most of CCL’s history, the essential question that has provided direction for both our research and educational activities has been ‘how can people develop the skills and perspectives necessary to be effective in leadership roles?’ More recently, we have broadened our research and practice beyond developing individuals to developing organizational capacity for leadership. In fact, we now distinguish between leader development – that concerning the individual; and leadership development – which is about the collective capabilities for leading. We gauge leadership effectiveness primarily by looking at the leadership tasks of setting direction, gaining commitment, and creating alignment. Many of the skills and behaviours required to accomplish these core leadership tasks can be learned and developed. By creating and enhancing developmental experiences through an intentional combination of assessment, challenge and support, managers and organizations can improve their capacity for leading. And by working with and talking to managers from across Asia, we’re finding that this perspective of, and approach to, leadership development is relevant and adaptable to the challenges they face (McCauley and Van Velsor, 2004). A thorough discussion of our philosophy and methods is presented in their The Center for Creative Leadership Handbook of Leadership Development. Before we proceed with an examination of CCL’s leadership model, we’ll first highlight several points about leadership in Asia that serve as the background for thinking about leadership and the platform for applying this framework of assessment, challenge and support.

Leadership in Asia: expectation, variance, and change Understanding the roles, characteristics and values of a leader are the underpinnings of any initiative to develop individual leaders and sustained human capital in organizations. When describing the values, characteristics and behaviours of good Asian leaders, the cultural and management literature associated with leadership typically refers to the characteristics of individual senior leaders being – loyal, humble and respectful, having integrity, and valuing relationships. Asian leaders themselves often give similar descriptions. Hong Kong business consultant Kim Fun Choy describes effective Asian leaders as demonstrating ‘Loyalty, sacrifice for the common

192 Developing Human Capital in Asia

good, personal aura and expertise’. Leadership is about ‘trustworthiness, achievement of results, perseverance and loyalty’, says Malaysia’s Seng Bee Keek. Jacqueline Wong, providing a Singaporean view, says good leadership is characterized by ‘integrity, followed almost always by an emphasis on valuing and honouring people as assets, and teamwork and collaborative behaviours’. Cherished leadership values in Asia include ‘humility, sense of power, respect for elders and the most senior’, says Florence Plessier. Trust and maintenance of strong personal relationships are particularly cherished values in Asia according to P. Y. Lai, founder and chairman of Global EduTech Management Group based in Singapore. In the US, he explains, business transactions first occur at a legal level, then at a logical level and finally, and least importantly, at a relationship level. In China, it is the exact opposite – relationships count the most in business transactions, followed by logic and then legality.

Difference is the norm Within the array of definitions of leadership and assumptions about leaders lies a key challenge for managers and organizations (in Asia and elsewhere) seeking to build leadership capacity: how to discover and develop leadership behaviours that are understood and valued throughout the organization. As anyone native to it would quickly point out, Asia is anything but homogenous in its preferences and approaches to leadership. The understanding and practice of leadership – and view of how leadership is developed – varies widely by region, country and organization, even among individuals with similar cultural backgrounds. ‘Each country has its own political environment and cultural characteristics’, says Kim Fun Choy. ‘There are as many leadership styles as personalities.’ For example, in Japan good listening, social and mediation skills are highly prized leadership traits, according to Kayoko Shiomi, a professor of business administration at Ritsumeikan University in Japan. Discipline and a willingness to take orders and suppress individual goals in favour of the broader team or organization goals are also very important, as is the ability to take a strategic view. ‘You have to see what’s going on in the whole organization and then what’s going on in the departments’, she says. Seniority is another part of the definition of a leader in Japan notes Shiomi: ‘Age really matters. To get the bigger jobs, you need to be in your 40s or 50s.’ In India, the leadership dynamic is centred on an expectation of ‘benevolent paternalism’, says CCL’s Meena Surie Wilson. Indian leaders ‘tend to be authoritarian. They are directive and structured. Subordinates

John Alexander and Michael Jenkins 193

do not typically expect to question the directives they are given.’ In exchange for this employee quiescence, ‘leaders are expected to be benevolent and family-minded . . . the organization takes care of their employees and often, family too – such as by offering them educational and job opportunities’. External factors are also significant in India, Wilson adds. ‘Credentials matter. This includes belonging to a respected family that is known in the community, and also being educated in an elite school.’ The latter is a factor not unknown in Japan too. While cultural and leadership diversity have long been acknowledged, a recent study has shed new light on both obvious and subtle differences. Project GLOBE – the largest study undertaken to examine how leadership practices and preferences are shaped by culture – identified differences in leadership styles and preferences across Asia, based on thousands of years of history and deep-rooted cultural practices. This decade-long study, in which CCL was a core investigator, was conducted by a team of 150 researchers who gathered data on cultural values and practices and leadership attributes from some 18,000 managers in 62 countries. The researchers studied nine core cultural attributes – such as assertiveness, gender role differences, and uncertainty avoidance – that distinguish managerial practices in one society from another. The work indicates that Asian nations are far from universal in their preferences, and sometimes are at different poles of the spectrum of preferences. For instance, Malaysia, Indonesia and the Philippines are among the highest scoring countries globally in terms of ‘humane orientation’; or in exhibiting fair, altruistic, generous and mutually supportive behaviours. Managers surveyed in these countries demonstrate conflict avoidance in favour of being caring. Singapore, on the other hand, joins Western nations such as France and Spain carrying the lowest score in this regard, favouring power and assertive styles of conflict resolution (see Javidan and House (2004) for a résumé of GLOBE, and for details of some highlights of the research). A point that further challenges the ‘one-size-fits-all’ approach to leadership style or leader development is the variance in leadership as a result of market forces. The preferred style of leadership varies on a company-bycompany basis and is influenced greatly by the industry and competitive environment in which companies operate. Organizations in Asia, from large corporations and family businesses to government agencies and NGOs, have unique challenges that require unique answers. ‘Leadership effectiveness definitions depend on the type of organization’, says Keek Seng Bee about Malaysia. ‘The government-linked

194 Developing Human Capital in Asia

companies’ success is really about following through on policies. The large local companies tend to see effectiveness in terms of being able to help grow the business as well as build new business ventures. The smaller companies see leadership effectiveness as being able to get the job done.’

Leadership preferences are changing Certainly, the way leadership is changing varies among countries as well. In Culture and Leadership in Singapore: Combination of the East and West, Li et al. (forthcoming) write that: traditional Singapore managers or leaders typically made decisions promptly, ordered their subordinates to take certain actions (without sufficiently explaining the rationale behind those actions), and expected their subordinates to comply regardless of the correctness of those actions. Although these traditional Singapore leaders showed little respect for the opinions of their subordinates, they tried hard to make their employees feel like they were members of a large extended family. Following the influx of direct foreign investment into Singapore in the 1970s, more advanced management practices were gradually introduced. With American, Japanese, German, French and British MNCs being the major investors in Singapore, new cultural values and leadership styles were introduced to Singaporeans. These new styles and practices subsequently influenced the behaviors of local managers or leaders. The authors note that several studies reflect the changes in leadership style in Singapore over recent years; for instance, a 1995 research study that found that managers ‘generally emphasize the total welfare of their staff by understanding as well as explaining to and cultivating their staff’ (Li et al., forthcoming). Furthermore, organizational change following global trade has come but recently to mainland China, with significant transitions occurring in society and in the type of leadership practices that are preferred. The collectivistic values nurtured by Communism are now being challenged as a result of exposure to foreign business and social influences. In turn, individual contributions are now being more actively acknowledged and rewarded as more Chinese workers strive for greater equality in the workplace and pursue jobs that offer better opportunities (Fu et al., 2000).

John Alexander and Michael Jenkins 195

Furthermore, to retain talented workers in China, companies will increasingly have to adopt more inclusive practices in the workplace. But change in China does not mean adopting Western methods wholesale. Rather there appears to be a desire to find harmonious connections between respected old traditions and desired new practices. This phenomenon is reflected in a study of leadership attributes expressed within major Chinese newspapers over two decades. Researchers Ping Ping Fu and Anne Tsui found modern management values, such as being charismatic, entrepreneurial and change-oriented to be much in favour. They note, however, that many modern management practices nest comfortably with age-old Confucian values that cherish hard work and individual resourcefulness as well as benevolence and kindness (Fu & Tsui, 2003). Arun Maira of Boston Consulting Group notes that there is a need to balance and harmonize modern management practices and core cultural values: Many organizations come to a situation when people in them feel the balance has gone awry. Often the cut-and-dry attention to performance feels too burdensome. There is a call to restore the balance with other values. There are two ways to restore the balance. One is to reduce the weight of the side that feels too heavy. . . . The other way is to increase the weight on the other side, which is to add the emphasis on values, without easing off on performance. (Maira, 2002) Sharma and Talwar (2004) have aptly described the leadership imperative for a changing Asia, one that may well hold true for years to come: In the new millennium, it will be essential for business leaders to devise and adopt a unified theory focused to attain excellence comprising principles, methods, tools, and systems appropriate to their companies. Organizational excellence can be attained by developing proactive, self-responsible people concerned about achieving the ultimate goals of the organization and inculcating values for appreciating the purpose of achieving goals. Success depends greatly on the involvement of people in the organizations, willing to bring a change in tune with the global environment. Clearly, the forces of global influence and competition are challenging Asian organizations and individual leaders to rethink their definitions of leadership and their approaches to developing leadership skills.

196 Developing Human Capital in Asia

Doing so successfully will require striking a balance between the traditional notions of leadership in the region and the new ideas being introduced from other regions.

CCL’s assumptions and model of leader development So what is the place of CCL’s leadership perspectives and development processes in the push for Asian nations and organizations to expand their leadership capacity? At CCL, we begin by defining leader development as the expansion of a person’s capacity to be effective in leadership roles and processes. Those roles and processes, we maintain, are those that facilitate setting direction, creating alignment and maintaining commitment in groups of people who share common work. We’ve found that this starting point is broad enough to encompass a wide range of leadership views and styles, while serving as a way to find the focus and commonality needed for creating leader development programmes and systems. In addition, rather than classifying people as ‘leaders’ or ‘nonleaders’, we believe that all people can learn and grow in ways that make them more effective in the various leadership roles or activities they assume. This process of personal development that improves leader effectiveness is what we understand leader development to be. The core question, of course, is how to go about this work. How do people acquire or improve their capacity for leadership? How do organizations help them in this process? A two-part model, illustrated in Figure 10.1, summarizes what we have learned thus far about the ingredients that comprise leader development. The three factors in part (a) of the figure – assessment, challenge and support – are the elements that combine to make developmental experiences more powerful. That is, whatever the experience, it has more impact if it contains these three elements. Situations that stretch an individual and provide both feedback and a sense of support are more likely to stimulate leader development than situations that leave out any of these elements. Part (b) of the figure shows that leader development is a process that requires both a variety of developmental experiences and the ability to learn from experience: the latter is an element that the individual brings to the development process and includes a complex combination of motivational factors, personality factors and learning tactics. The model also shows that developmental experiences and the ability to learn have a direct impact on one another. Being engaged in a developmental experience can enhance a person’s ability to learn, and being more

John Alexander and Michael Jenkins 197

Challenge

Assessment

Support

Developmental experiences (a) Developmental experiences

Variety of developmental experiences Organizational context

Leader development

Ability to learn

(b) The development process Figure 10.1

The leader development model of CCL

readily able to learn can lead one to draw more development from any set of experiences. Finally, part (b) indicates that any leader development process is embedded in a particular organizational context: the organization’s business strategy, its culture, and the various systems and processes within the organization. This context shapes the leader development process – how it is focused, how well integrated and systemic it is, and who is responsible for it.

Assessment, challenge, support Through CCL’s research and educational programmes, in which more than 400,000 professionals from around the globe have participated, we have begun to gain a better understanding of the elements that are key factors in leader development – assessment, challenge, and support. This framework is detailed in The Center for Creative Leadership Handbook of Leadership Development (McCauley and Van Velsor, 2004). When we look at any type of developmental experience, from training programmes to job assignments, we find that they are most effective when all three elements are present. To enhance the development of leaders, then, we need to help them find, create and shape a wide range of learning experiences, each of which provides assessment, challenge and support.

198 Developing Human Capital in Asia

These elements serve dual purposes in the development process: they motivate people to focus their attention and efforts on learning, growth and change; and they provide the raw material for learning – the information, observations, and reactions that lead to a more complex and sometimes quite different understanding of the world. Leader development in Asian organizations emphasizes challenge much more frequently, and more systematically, than assessment and support. Assessment, however, is beginning to gain more interest and use. Support is often provided through mentoring relationships that pair junior managers with senior ones, as characterized by the sempai–kohai (senior–junior) mentoring relationships in Japan. As is often the case in Europe and North America, elements of the ‘assessment, challenge and support’ model exist in various Asian organizations and countries, but they are not often utilized together within a comprehensive system of leader development. CCL’s research shows that leadership development occurs most effectively when all three aspects of this model are given due importance and attention within organizations. We believe these core principles are those that organizations in Asia, as well as those throughout the world, can apply to develop their human capital.

Assessment The best developmental experiences – whether as one-time training programmes, ongoing development initiatives, or on-the-job learning – are rich in assessment data: data, which can come from oneself or from other people. The sources are almost limitless – peers in the workplace, bosses, employees, spouses, children, parents, friends, customers, counsellors and organizational consultants. The processes for collecting and interpreting the data can be either formal or informal, with many shades of variation in between. Assessment comes in many forms:

• Formal assessment: includes performance appraisals, customer evaluations, 360-degree feedback, organizational surveys that measure employee satisfaction with managers, and evaluations and recommendations from consultants. • Informal assessment: includes asking a colleague for feedback, observing others’ reactions to one’s ideas or actions, being repeatedly sought out to help with certain kinds of problems, or receiving unsolicited feedback from a boss. • Self-assessment: can be formal and structured, as with psychological inventories or journaling, or informal and in-the-moment, such as

John Alexander and Michael Jenkins 199

monitoring of internal states, reflecting on decision processes, or analysing mistakes. Effective assessment is valuable for a number of reasons:

• Creates benchmarks for future development. Assessment gives people an

•

•

•

•

understanding of where they are now: their current strengths, the level of their current performance or leader effectiveness, and what are seen as their primary development needs. Stimulates people to evaluate themselves. What am I doing well? Where do I need to improve? How do others see me? In what ways do my behaviours affect others? How am I doing relative to my goals? What’s important to me? Provides information about effectiveness. People may not be aware of the degree to which their usual behaviours or actions are effective; they may not know what to continue doing and what to change. But when an experience provides feedback on how one is doing and how one might improve, the result can be an ‘unfreezing’ of one’s current understanding of oneself, which may, in turn, facilitate change. Points out gaps. Assessment can highlight the distance between a person’s current capacities and performance and some desired or ideal state. The desired level might be based on what the job requires, what someone’s career goals demand, what other people expect, or what people expect of themselves. This gap is one of the keys to why developmental experiences motivate learning, growth and change – people may work to close the gap by improving their current capacities. Clarifies what might be learned, improved or changed. Having data not only motivates a person to close the gaps but also provides clues as to how they might go about it. For example, if a leader learns that part of the reason for low morale in his work group is his pattern of not delegating important work to others, then improving morale involves learning how to let go of work and avoid micro-managing. If a person’s frustration at work is diagnosed as being partially caused by low tolerance for ambiguity, she can focus on ways to increase her tolerance, or may learn how to shape situations so that they are less ambiguous.

In Cultural Acumen for the Global Manager: Lessons from Project GLOBE, Javidan and House (2004) write that in countries with high power distance – i.e. how power is spread throughout society – two-way feedback is not culturally acceptable. They write: ‘input or feedback from subordinates is seldom solicited and in fact may be seen as

200 Developing Human Capital in Asia

impolite and disloyal.’ They recount a meeting with the senior management of a large Thai corporation on the subject of 360-degree feedback. ‘The conclusion of the senior executive was that such a feedback process is dysfunctional in that country, because the managers who were to be evaluated would feel insulted, and subordinates who were supposed to do the evaluation would feel out of place and very uncomfortable doing it.’ Indeed, this assessment model has to be applied carefully – Ellie Weldon, a professor of management who has taught in three higher education institutions in China, sees the same reticence to give feedback in that country. She notes that 360-degree assessments have not caught on strongly in China, particularly because there is a strong reluctance to have subordinates evaluating bosses. Even when companies are interested in formal assessment, the experience may not be effective. ‘Many companies [in Malaysia] did not have a good experience with the 360 assessment approach since many of them tried doing it without proper due process. . . . Those who had good experiences with 360 instruments are usually those who did it for development rather than for performance appraisals and selection/ promotion’, says Keek Seng Bee. On the other hand, formal tools like 360-degree instruments may create a mechanism for assessment that gets around cultural discomfort attributable to direct feedback. Florence Plessier (2004) says, ‘I am hearing more and more about 360 being used or requested by the organizations for development. It is a good way for them to get the feedback that is difficult to get face-to-face. . . . It could be sufficient to highlight a not-so-good-perception or a real asset in that person’s behavior as seen by the people.’ Asian organizations may benefit from taking a broad view of assessment that recognizes both formal and informal means of individual assessment. The key, then, to use the 360 or any other assessment process, is to determine effective, culturally compatible ways to provide credible assessment for the purpose of learning and development. In other words, at CCL we believe good assessment is essential for good leader development – but how that assessment takes place can and should be tailored and adapted. Effectively used, the relative anonymity of extensive 360-feedback may, for example, satisfy the harmony imperative of cultures such as those in Japan, Korea and Thailand.

Challenge Developmentally, the experiences that can be most potent are the ones that stretch or challenge. People tend to go about their work using comfortable and habitual ways of thinking and acting. As long as

John Alexander and Michael Jenkins 201

conditions do not change, they usually feel no need to move beyond their comfort zone to develop new ways of thinking and acting. In a comfortable assignment or relationship, people base their actions on well-worn assumptions and existing strengths, but they may not learn much from these opportunities. Challenging experiences, on the other hand, force people out of their comfort zone. Throwing them off balance, causing them to question the adequacy of their skills, frameworks and approaches: partly that was the core argument expressed by Pascale (1990) when discussing ‘managed conflict’ in US companies. These difficult experiences require that people develop new capacities or evolve their ways of understanding if they are going to be successful. So what are the elements of situations that can stretch people and motivate development? What creates challenge?:

• Novelty. Experiences that require new skills and new ways of understanding oneself in relation to others can be the most challenging. These situations are often quite ambiguous, necessitating much discovery and effort. • Difficult goals. Whether set by oneself or by others, goals are another source of challenge. People often respond to difficult goals by working harder, but major learning comes from finding ways to work differently. • Conflict. Situations filled with conflict, either with someone else or within oneself, can also be a source of challenge. Effectively dealing with conflict with a person or group requires people to develop an understanding of other perspectives, to become better able to differentiate others’ points of view from their own, and perhaps to reshape their own points of view. People face similar challenges when they experience incompatible demands that cause conflict within themselves. • Dealing with losses, failures, and disappointments. Job loss, business mistakes, damaging relationships, and similar events can cause a great deal of confusion, often stimulating a search for new meaning and understanding. These kinds of experiences, which we call hardships, startle people into facing themselves and coming to terms with their own fallibilities. Hardships also teach people how to persevere and cope with difficult situations. Challenging assignments are commonly accepted in many Asian countries and organizations as a means of learning and growth. ‘Grooming typically means letting the high potential people handle difficult,

202 Developing Human Capital in Asia

challenging and insurmountable tasks. Unless there are obvious failures, mistakes are overlooked as the high potentials’ rite of passage to greater wisdom’, says Mirimba Giam. ‘Compared to assessment and support, challenge is a well used way to develop leaders in Asia – usually businessrelated challenges’, that is, developing strategies to keep ahead, coming up with new policies, products or services for customers. Similarly, Keek Seng Bee notes ‘challenges are usually very stretching for people in senior positions since they are given very high targets of performance. The majority of those who make it are handsomely rewarded by way of promotions to the next level.’ Explicit forms of punishment – for example, public shaming – is used to challenge and motivate workers in some organizations in China, according to Ellie Weldon. Workers who acquire a certain number of demerits based on their performance need to stand before their co-workers and explain their failings. The philosophy behind this type of shaming, Weldon indicates, is to challenge individuals to improve their moral character and, ultimately, their overall performance. While this use of public shaming is radically different from motivational strategies in other countries, it seems to be a culturally driven form of challenge. Variety of challenge is also crucial for developing the capacities and versatility that today’s leaders need. At CCL, we have found that people learn different, equally valuable, lessons from different kinds of experiences. For example:

• From a ‘fix-it’ job, leaders can learn toughness, the ability to stand on their own two feet, and decisiveness.

• From leaving a line job for a staff position, leaders have the opportunity to learn how to influence individuals over whom they have no direct control. • From a formal leadership programme, participants learn how to step back from the day-to-day routine and develop a deeper understanding of their preferences, strengths and blind spots. • From an effective boss, leaders learn important values such as fairness and sensitivity to the concerns of others. • From a hardship situation, people can recognize their limits and learn how to deal with stress.

Support Developmental experiences are most powerful when they also include some form of support. Support sends the message that people will find

John Alexander and Michael Jenkins 203

safety and a new equilibrium on the other side of change. It helps them bear the weight of the experience and maintain a positive view of themselves as capable, worthy, valuable people who can learn and grow. If people do not receive support for development – that is, if their environments, coworkers, bosses, friends and family do not allow and encourage them to change – the challenge inherent in a developmental experience may overwhelm them rather than foster learning. Support is a key factor in maintaining a leader’s motivation to learn and grow. It helps engender a sense of self-efficacy about learning, a belief that one can learn, grow and change. Support also serves as a social cue that puts a positive value on where people are currently and on the direction in which they are moving. Support mechanisms also provide learning resources. By talking to others about current struggles, openly examining mistakes, and seeing to it that the organization reacts positively to the changes they make, people have the opportunity to confirm and clarify the lessons they are learning. They get the sense that they are on the right track, that the feedback they are receiving is legitimate, and that the new ways in which they are making sense of their situations are shared by others or will work toward making them more effective. Perhaps the largest source of support is other people: bosses, coworkers, family, friends, professional colleagues, coaches and mentors – people who can listen to stories of struggle, identify with challenges, suggest strategies for coping, provide needed resources, reassure in times of doubt, inspire renewed effort, celebrate even the smallest accomplishments, and cheer from the sidelines. Support can also come from organizational cultures and systems, taking the form of norms and procedures. Organizations that are more supportive of development have a closely held belief that continuous learning and development of the staff are key factors in maintaining organizational success, and they tend to have systems in place that support and reinforce learning. They have systems for helping people identify development needs and work out plans for addressing them. They use a variety of development strategies, make resources available for learning, and recognize and reward efforts to learn and grow. Feedback, cross-group sharing of knowledge and information, and learning from mistakes are part of their organizational culture. For managers in Asia, support is likely to be an informal element of personal relationships – being friends, family and coworkers – rather than a more structured component of their leadership or management development. In India, for example, ‘associates, or coworkers who have

204 Developing Human Capital in Asia

become friends or trusted family members, are more commonly used for support – rather than bosses or paid coaches’, says Meena Wilson. Support mechanisms are similar in Japan, says Kayoko Shiomi, who notes that ‘support most often comes from coworkers, with whom workers in the same age group will frequently socialize by going out for dinner and drinks after work.’ Within organizational systems, bosses may serve a support or ‘grooming’ role. Experienced leaders, too, may be considered as mentors to junior managers, ‘with a senior leader shadowing a younger one, more as a source of wisdom and advice versus coaching’, says Singapore’s Jacqueline Wong. Thus, executive coaching, while established in the US, is comparatively rare in Asian countries. Support encourages risk-taking and engenders empowerment. Florence Plessier says ‘There is a strong fear of failure and fear of being wrong. It is difficult to air fears or disapprovals.’ As a result, initiative and risk-taking can be limited and ‘as empowerment is not part of the culture; there is a general tendency to micromanage and tell people what to do, as that is what, in direct reporting systems, we expect leaders to do.’ In our view, organizations striving to develop leaders will want to upgrade the structures that provide support for learning – particularly when leaders are being given difficult assignments. By adding the element of support, lasting and broad learning is more likely to occur, rather than simply rising to the occasion or meeting the immediate goal. For instance, an initiative launched by the government of Singapore in 2001 offers an example of the ‘assessment, challenge and support’ model at work in Asia. This initiative – known as the FIREfly programme – is a collaboration among the seven agencies that comprise Singapore’s Ministry of Trade and Industry, the nation’s main driver of economic growth. The stated aim of FIREfly is ‘to recruit and develop officers with broad-based knowledge and leadership skills to face the economic and technological challenges in the knowledgebased economy’. The seven agencies pool their resources to address such key areas as talent attraction and retention, training, leadership and career development, succession planning and interagency effectiveness. In doing so, the agencies create comprehensive developmental experiences for promising officers that generously incorporate aspects of assessment, challenge and support. As might be expected in Singapore, the assessment of FIREfly officers involves the use of 360-degree feedback instruments to provide a portrait of individuals’ strengths and weaknesses – and to serve as a basis for creating developmental plans

John Alexander and Michael Jenkins 205

that take those traits into account. Challenges come in the form of demanding assignments overseas (and in Singapore) that allow officers to test and enhance their skills. Though officers join one of the seven agencies, their career development is not confined to just that single agency. They have the opportunity to transfer to other Trade and Industry agencies as well – this too is an experience that challenges them to leave their professional comfort zone and to broaden the depth and scope of their overall knowledge about economic development processes and to take a holistic view of the management of Singapore. Support is offered to FIREfly officers in a number of ways. The seven Trade and Industry agencies share their training calendars, allowing officers to access learning opportunities beyond the scope of their immediate agency (CCL, for example, provides leadership development training for the FIREfly programme that is grounded in the model of ‘assessment, challenge and support’). This programme includes coaching for officers and a networking component that allows them to share experiences with their peers and to build personal and professional bonds across agencies. In the few years since its creation, FIREfly has emerged as one of the programmes most sought after by top students in Singapore. ‘The willingness of the government agencies to step out and do this kind of thing is important, and the response to the programme has been very encouraging. Each year, it [knowledge of, and demand for] has been growing by word of mouth’, said CCL’s Victoria Guthrie, who designed the leadership development training component of the FIREfly programme. One source of support is not enough for maximum, ongoing learning. Different people play different roles and offer different kinds of support. Among them:

• peers serve as a resource for emotional support, release of pent-up frustrations, and sense of camaraderie;

• former bosses may offer perspective, guidance with difficult questions; and

• the current boss can reinforce the value of change and provide resources for learning.

Creating systems for building human capital The ability of Asian organizations to compete on the global stage hinges on nurturing their human capital and the ability of their people to

206 Developing Human Capital in Asia

exercise effective leadership. As we have indicated in this chapter, different leadership approaches will make sense for different organizations in different Asian countries. What is needed, however, is a deliberate process for leadership development – such as the Center for Creative Leadership’s model of ‘assessment, challenge and support’ – that addresses and enhances the learning, growth and change processes of individuals, and which embeds leadership into the organizational infrastructure. It is our hope that this chapter encourages Asian companies and governments to prioritize leadership development: and we hope it illustrates a road to build leadership capacity as an era of great challenge and opportunity dawns in the East.

Acknowledgements Lyndon Rego, group manager of institutional relations at the Center for Creative Leadership, and Stephen Martin, public relations manager at the Center for Creative Leadership, provided research assistance for this chapter.

References Ambani, M. (2003) ‘An Indian Renaissance’, in The Year Ahead: CEO Speak, online at: http://www.business-standard.com/special/bs1000/2003/bs8.htm (accessed May 2004). Fu, P. and Tsui, A. (2003) ‘Utilizing Printed Media to Understand Desired Leadership Attributes in the People’s Republic of China’, Asia Pacific Journal of Management, 20(4), 423–46. Fu, P. P., Wu, R., Yang, Y. and Ye, J. (2000) Chinese Culture and Leadership in China: Project GLOBE Monograph, Thousand Oaks, CA: Sage. Javidan, M. and House, R. J. (2004) ‘Cultural Acumen for the Global Manager: Lessons from Project GLOBE’, Organizational Dynamics, 29(4), 289–305. Li, J., Ngin, P. M. and Teo, A. C. (forthcoming) ‘National and Organizational Cultures in Singapore and their Effects on Leadership Behaviour in Local Firms’, in R. House (ed.), Global Studies of Managerial Cultures of the World, London: Sage. Lucenti, D. (2003) ‘A Global Exchange’, On Center, Fall Issue, 7–9. Maira, A. (2002) Shaping the Future: Aspirational Leadership in India and Beyond, Singapore, Wiley. McCauley, C. D. and Van Velsor, E. (eds) (2004) The Center for Creative Leadership Handbook of Leadership Development, New Jersey: Wiley. Pascale, R. (1990) Managing on the Edge: How Successful Companies Use Conflict to Stay Ahead, London, Penguin Books. Plessier, F. (2004) Appraisal Systems to Measure Develop and Motivate Talent, presentation to the Successful Retention and Recruitment Strategies conference, Sheraton Hotel, Singapore, 19–20 July.

John Alexander and Michael Jenkins 207 Prahalad, C. K. and Lieberthal, K. (2003) ‘The End of Corporate Imperialism’, Harvard Business Review, 81(8), B, 117–27. Sharma, A. K. and Talwar, B. (2004) ‘Business Excellence Enshrined in Vedic (Hindu) Philosophy’, Singapore Management Review, 26(1): 1–14. World Competitiveness Yearbook (2004) online at http://imd.ch/wcy.

11 Infrastructures: The Difficulty in Forecasting John B. Kidd and Frank-Jürgen Richter

In this brief chapter we wish to offer concluding remarks, and draw together some of the themes presented by our authors. First of all we think it ought to be simple to forecast . . . and thus create an adequately supportive infrastructure: but examples abound showing that large-scale forecasting is complex.

The complications of forecasting Take for instance the provision of school places in the UK – a developed nation. The country has good records of birth-rates (and death-rates too) so ought in the five initial years of a child’s life be able to estimate the numbers of children coming to each primary school . . . passing on to secondary schools (both of which are local to the child’s home) . . . and in aggregate terms, onwards to tertiary education in universities and colleges, or moving out to the workplace. But ‘they’ make a mess of the forecasting process, as every year we hear cries for help from head teachers who proclaim that there are too many (rarely, too few) pupils looking for places in their schools; and also they frequently announce there are too few teachers. Of course we know some of the population migrates to different regions of the country (see national census data), housing development programmes pull in new populations to a region, and there is immigration to assess (the numbers recently have fluctuated strongly as East Europeans and others from states at war flock to the UK for ‘asylum’). But, given the impact of some of these changes are only felt 5 years or more after a child’s birth, how can planners get their forecasts so wrong? For example, a birth will need a primary school place in 5 years’ time, and new-born children will need a teacher who takes 208

John B. Kidd and Frank-Jürgen Richter

209

maybe 4 or fewer years to train). Of course some aspects of the decision making are political and relate to ‘adjustments’ to current financial budgets which, for pragmatic reasons, conveniently forget implied impacts in the future . . . no cash to invest in the future fabric of a primary school for the child born today; or, if no cash now, therefore, no decisions in later years to offer inducements to future teachers to enter training; and so on. These messy time-based errors aggregate into a real mess sooner or later. In Asia, if we look to China with its current huge demand for electrical power, we see similar ‘errors’ in decision-making. The current problems are not surprising, as China has an insatiable demand for power since its productive capacity and manufacturing achievement have increased over many years. Indeed, a British Petroleum (Asian) Presentation on Global Power Demand made in Shanghai in 1996 indicated that China was substituting other fuels for coal, and that there was a steady growth in its overall power demand. What is astounding is that their annual increase in electricity demand (2002–3) was 69 per cent (Roberts, 2004). Roberts discusses why this might be so – obviously there is a lack of generating capacity to satisfy users in factories (for machines and industrial processes of all kinds), in offices (elevators, air conditioning and PCs), in the city (street lighting, as well as many hidden aspects such as pumps for sewage, or fans for air movement in tunnels), and in the home (as the more affluent urban citizens use air conditioners, pumps, motors, PCs and TVs) – which the rural citizens do not access. Gross infrastructure perturbations are following the years of high growth in China (a 9.8 per cent increase was observed in Q1 of 2004) which has resulted in higher demands by energy-hungry sectors like steel, aluminium, cement and chemicals, while generation and transmission capacity has not kept pace with this demand. Sadly, Chinese manufacturing still uses inefficient processing equipment; and its people are notoriously naïve in energy conservation, ‘we must keep the windows open to have fresh air’ while at the same time they wind-up the heating systems to keep warm. Perhaps this reflects the years of muddled thinking while working in their state-owned enterprises – ‘someone else will pay’ was an alluring attitude when no one knew, or bothered to calculate, transfer costs. Finally there are the political effects which has seen top Chinese government decision makers react, one against the other, simply to denigrate the others’ progress without due attention being put to the state of the nation they were supposed to be managing. Too often in

210

Infrastructures: The Difficulty in Forecasting

nations with weak governance principles there are few rules to provide the ‘checks and balances’ against which leaders may be judged. After all, in China, the people cannot vote out the government and its cronies as they have recently done in India: so officials are fairly safe in their indulgence of personal power games. In this case, says Roberts, the former National People’s Congress Chairman Li Peng spent long years at loggerheads with former Premier Zhu Rongji – each nullifying the other’s development plans, not just in electrical energy generation projects, but in all associated aspects such as the road and rail infrastructures needed for the delivery of sufficient coal to power stations (one of the present failure points, as these systems can’t now deliver the tonnage of coal needed); the nurturing of river developments to support hydro-electric generation (though nature and rainfall rates have a role to play here); and the creation of a truly national grid for the distribution of electrical power. Finally, deprivations such as these, lead inevitably to future excesses as both government officials and entrepreneurs see a short-term future wherein large profits may be made. Once the plans for new power generation come on-line (and much is partly constructed at present) there will be a glut of supply, followed by uncontrolled oscillations for several years. This is not to say we advocate central planning, nor free-reign capitalism – but a well conceived middle path is needed. Especially as there must be cognizance given by the government officials to the protocols following the Kyoto Accord and the Copenhagen Consensus (which we mentioned in Chapter 1). But if we are cynical, we may have to accept there will be no improvement in these matters in nations without clear governance systems: as there can be no effective accounting of senior officials such that they may be instructed to resign following their malfeasance.

Front-end and back-end issues As we have seen above, the integration of many infrastructures is an inevitable necessity of the modern situation: few people can honestly say they can live their lives in independent harmony – perhaps there may be some rather isolated tribes – but the forces of tourism will beat a trail to their door bringing modern-day problems to even them. How can we derive a solution to our infrastructure problems? We have seen in this book, chapter by chapter, illustrations of interactions that were the results of past decisions, and our authors have suggested solutions or routes to betterment. Take, for instance the

John B. Kidd and Frank-Jürgen Richter

211

writings of Lynn and Vanhanen in Chapter 2: they look at education achievement round the world. They note that nations are not equal in their abilities or their achievement (in standardized tests). But they stress that more could have been done for those children currently under-achieving – they may need to be better nourished, they may need to have better and more extensive facilities for their taught environments, and so on. Once a nation’s children are better educated there is acceleration in that nation’s ability to enter discourse – discourse within a family, between neighbours, between individuals and officials, and between individuals and the ‘shakers and movers’ who at one time might have held total control over the nation’s fate, and especially its incoming grants. Education, through discourse, enables better governance through the individuals being better able to use argumentation and its modes of enquiry to judge situations – both for and against the prime argument. We will see that India, in the next few years, will have some difficulty in making progress . . . The long-term Bharatiya Janata Party (BJP) was overthrown by popular vote (in the mid-2004 elections) but of India’s huge population, only about 66 per cent are literate – well able to vote, but limited in many other ways, especially when entrepreneurs and officials demand they give up their land for developments that may make sense to us, but not to the peasant farmer. India desperately needs to build its basic infrastructure – the roads and rail systems must link better to its ports. Although its national container flows amount to some 2 million TEU/yr . . . a bit larger than the annual capacity of the port of Le Havre in France there are huge traffic jams as inadequate roads carry an insupportable mix of rural traffic (on foot and hoof) as well as large container lorries travelling too slowly to promote trade. As India develops its basic infrastructures they will find they need to account better and have more transparent systems – Wescott (Chapter 7) notes that the Asian Development Bank now insists that benefactors must be clearer about the deployment of grants. Indeed the ADB itself is being asked to be more transparent (Spotlight on ADB Lending, FEER, 1 July 2004, p. 8) by a concerned US senator. Wescott notes that large-scale projects are complex and require good administrators who can put in place effective milestone markers and who can also account for progress or lack of it – we also suggest that the developing nations in receipt of ADB aid need to be guided by government officials who are both well educated and willing to set up good governance procedures. Major development programmes impact on a variety of sectors, and Srinivasan (Chapter 6) comments upon new laws put in place after

212

Infrastructures: The Difficulty in Forecasting

11 September 2001 when the US and the rest of the world were shaken by an escalation in terrorist violence. Many of these new laws are concerned with the passage and exchange of money that may once not have been noted as having passed from A to B and onwards along a chain. We mentioned the ancient hawala system in Chapter 1, but it still works and is under scrutiny by the US who hope to close it down or make its transactions transparent. There will be a massive resistance to such restrictions since hawala offers peasants the means to trade small amounts of money, even to barter in some cases: yet, as Srinivasan notes, the same system can be used quite easily to buy bombs or pay insurgents without any check or hindrance from the authorities. Connected to these issues are infrastructures higher up the chain wherein ports must adhere to new, stringent security systems that can guarantee problem-free containers being shipped to the US and by implication to other ports round the world. These systems are not cheap nor can they be installed and operated by illiterate persons – so again we see a connection between education and other infrastructures – which once in place will raise the wealth of local regions. Ultimately we see that the interplay between history and the future is a play between the leaders and the workers who together make goods or offer services that are in demand by others – locally, in the greater regions, or at the other side of the globe. The leaders have to ease away from despotism (and in some parts of the world they are still in power) to offer hope of a better future for their citizens by providing better education, sanitation and other well-being facilities, and in turn offer incentives to outsiders to invest in their country for mutual benefit. Korea has figured twice in this book – in Chapter 3 where Choi reflects on the emergence of ‘knowledge’ a force in Korea, which has been developed over the years and though a modification of its once corrupt and despotic system. It is still corrupt, as scandals indicate and resignations of senior government officials show, but say Tuharsky and Barron (in Chapter 8), Korea is a place where leaders are striving to create a place that is ‘liveable’ and has qualities of life that will attract outsiders which in turn will benefit the insiders since the expatriates will bring, not only inwards FDI, but also know-how to the local people. As a part of ‘liveability’ Hirt (Chapter 9) notes how the Internet and the telephone systems have transformed the one-time simple rural lifestyle into the current-day dynamic bustling big-city style right across Asia. Of course, this is one more aspect of ‘infrastructure’ that supports productivity – it had to be designed and put in place following the national leaders’ decisions, and the latter, while allowing entrepreneurs

John B. Kidd and Frank-Jürgen Richter

213

to promote their systems, also maintained checks on the use of the new technology. To some, these checks, especially on the free access to the information of the Internet, represent an unjustified suppression of freedom of access, and of freedom of speech . . . But for those who have not lived in a democracy, such Rights are unimaginable! ‘Speakers’ Corner’ in Hyde Park in London is a revelation as one may hear speeches extolling everything possible, and speakers next to each other proclaiming [freely] the exact opposite of the other’s speech. Of course, secretly, there are listeners – it behoves a government to listen out for sedition and other incitement: but this form of freedom could not take place in Cambodia, the Sudan, and many other countries of the world. The Internet allows such freedom – but as Srinivasan notes, the recent PATRIOT Act of the US allows their citizens, and other agents, to listen to all global conversations and to note all transactions to check if they may impinge upon the security of the US. Naturally this is un-freedom, and could only be promoted by a nation obsessed by a technological infrastructure: digital systems will, more so than human systems, ensure global peace they think. Perhaps this is one reason they oppose the hawala system as it is human based, and relies on trusted agents who do not keep records beyond the life-span of the transaction. Finally, we agree with Alexander and Jenkins (Chapter 10) that we must educate leaders. To an extent some people are born as leaders, but to many, this activity is thrust upon them and they have to learn how to command the respect of those whom they lead. Importantly their natural abilities have to be challenged by the trainers, so each leader grows in stature – and also to learn humility. The leaders have to learn that their decisions have long-term effects, and they will be judged: maybe voted out of office, or shot by aggrieved citizens. We would hope that the democratic process prevails, since by broadening democracies greater transparencies in all aspects of infrastructure development and their maintenance will be achieved, and in turn major infrastructures will become better interlinked. There are reservations to make on this aspect of democracy. We write this as President Bush, at the NATO conference in Turkey (June, 2004), pleads that the countries of the Middle East become ‘democratic’ as he, and many of us living in the relative security of a middle class society, accept that we have universal suffrage, and regularly vote for our seniors and our government members. There are nations with widely divergent population characteristics – often characterized by the concentration of wealth in only a few people and with a concentration of power resting in the hands of these few. The process of democratization is one that

214

Infrastructures: The Difficulty in Forecasting

destabilises despotic nations, since the have-nots wish to wrest power and riches from the haves: and the democratic process makes this very easy as we vote away the power from the former ‘masters’ and give it to the proletariat (Chua, 2003). We mentioned earlier that the long-term ruling party in India, the BJP was voted out in their mid-2004 elections in favour of the popularist party, which eventually had to rely on an alliance to make-up a government. That vote depended on the rural masses as they wished to have some say in the nation’s development and in particular wished to have some of its recent growth trickle down to their pockets; but only 66 per cent of so of the population are literate, and we might guess that the literacy rate of the rural mass is very low – yet they voted out the ruling party. Russia and China are two powerful nations that do not hold open democratic elections. In the case of China, if it became unstable through a rural vote as in India where would its development route take it? And what effect would this have on the fate of most nations in Asia and indeed, in the rest of the globe, that depend on the expectancy of continued growth in China? We have stressed the need for better educational programmes – but these can only take place if the leaders are willing to invest in teachers, and in the capital structures that support education: schools, books, roads and transport for access to education. In turn we find that schools need water and electricity and access nowadays to the Internet – so do homes and industry. Given these, we will find more inward investment follows, especially if the ‘liveability’ index rises. Democracy has promoted these processes in some countries, but there are many different forms of ‘capitalism’ so the Anglo/US models should not be allowed to swamp local initiatives; but whatever model prevails, transparency needs to be observed so that citizens can see that their scarce local resources are being managed to their general advantage, not diverted to the secret bank accounts of officials, or milked by external entrepreneurs. As all systems are inextricably linked in global trade and services better education of the children and for the leaders is needed to develop substantial infrastructures which will aid productivity: which in turn will create more than just local wealth – they help develop well-being for the community. There are caveats to be made on our stress ‘on the need for transparency’ in Asian firms. Of course in international alliances the outsider firm needs to see if the insider firm (in China, or other Asian country) is operating with probity and managing its resources effectively. It needs to have a base upon which to make international comparisons, and often these are driven by enterprise-wide software packages. But we

John B. Kidd and Frank-Jürgen Richter

215

have to ask, as does Backman (2004, p. 13) ‘what are Asian family businesses for?’ He suggests that the highly convoluted Asian family business with its labyrinthine relationships between people, equity and governance process is like this because they wish to be a family. They don’t want any one party to be too dominant and to break away; though they do, for historic reasons accept patriarchal control. In such a family business an outsider demanding transparency and open governance procedures will not be heard – so it behoves the outsider to look to new ways of managing divergent capitalisms (Whitley, 1999). The signals in Asia are now quite alarming. The Chinese economy as seen in 2004 shows signs of overheating. Their government has to control continuing booms in productivity set against increases in world commodity prices, and to control inflation caused by property booms in most parts of the nation. The Japanese economy, on the other hand, is very dependant on the well-being of China, since it is very much built on exports to China. Likewise throughout Southeast Asia. We may need a ‘Beijing Consensus’ to be drawn up following the style of the Copenhagen model. This is because we see national leaders looking to ASEAN or some other pan-Asia bloc to be a counterweight to the US and to the new enlarged Europe. Some of their problems relate to the highly skewed indices of China, Japan, and Korea (and other developed nations of the region) describing productivity, FDI, wealth and so on versus the underdeveloped nations in the region. And also they wish to have a view upon SE Asia incorporating Australia and New Zealand who are on their southern rim? Or indeed, the west coast of North America. Clearly leaders have to tackle the current problems in Asia (also the geopolitics of India–Pakistan, Taiwan, North Korea) by building regional infrastructures: we hope this book shows the way forward.

References Backman, M. (2004) The Asian Insider: Unconventional Wisdom for Asian Business, London: Palgrave Macmillan. Chua, A. (2003) World on Fire: How Exporting Free Market Democracy Breeds Ethnic Hatred and Global Instability, London: Doubleday. Roberts, D. (2004) ‘Power Shortages are Zapping China’, BusinessWeek, 5 July, 22–3. Whitley, R. (1999) Divergent Capitalisms: The Social Structuring and Change of Business systems, Oxford, Oxford University Press.

This page intentionally left blank

Index Notes: f = figure; n = note; t = table; bold = extended discussion or heading emphasized in main text

Abdurrahman Wahid (Gus Dur) 91 Abu Sayyaf 104 accessibility 23, 124 accountability xiii, 12, 74, 77, 79, 85, 102, 119, 123, 128, 129, 133, 135, 137, 153 accounting standards 75 Acer (computer corporation) 88 ADB see Asian Development Bank Afghanistan 104–5 added value 171, 179, 180 advertisements/advertising 99, 157, 170, 177, 179 Africa 10, 21, 127, 148, 164, 165(n2), 178 Asia comparison (IQ and economic development) 40–6 agencies/agents 119, 127–8, 131, 193, 205, 213 agriculture 10, 38 air pollution 158, 159–60 airports 18, 19, 111, 118 Al Qaeda 104, 105–6, 111 Alemayehu, M. 44 Alexander, J. xii, xv, 25, 213 Alfred, King 5 Allen, T. 40 Ambani, M. 187 American Chamber of Commerce in Korea (Amcham) 152, 159 American Malaysian Chamber of Commerce 97 anaemia 46, 47 Anglo-Saxon business system 54 anomie 14 APEC (Asia-Pacific Economic Cooperation) 19, 140, 154, 159 application service provider (ASP) 181 Arabs 6, 7, 35 Arctic Circle 4 Ariawest 101 ASEAN (Association of South-East Asian Nations) 91, 102, 140, 215

internet 174–5 risk of marginalization by PRC 92 ASEAN Plus Three 19 Asia xi, xiii, 54, 55, 63, 138, 209, 212, 214, 215 Africa comparison (IQ and economic development) 40–6 business costs of terrorism 104–22 conglomerates (dynamics) 83–103 diversity 19, 24, 166, 168, 178 economic bounce-back 182 GDP 80 human capital 187–207 human capital and intelligence 28–50 infrastructure and productivity 71–82 infrastructure and its ‘sticky’ interconnections 3–27 internet 166–84 marketing and communication infrastructures 166–84 population 80 working definition 85 world competitiveness rankings 187 Asia-Pacific region xiii, 23, 83, 99, 102, 104, 105, 106, 112, 189 road administration 123–43 ‘Asian Brown Cloud’ x Asian Business System 21 ‘Asian crisis survivors’ (Mirza) 96–7, 98, 99 Asian Development Bank (ADB) xiii, xx, 23–4, 72, 102n, 123, 123n, 126–33, 135–40, 211 author 127, 128, 130, 131, 135, 136, 139, 141(n2) Asian Development Bank: Anti-Corruption Policy 136 Asian Development Bank Institute: Strategic Intelligence 87t

217

218 Index Asian financial crisis (1997–8) x, 3, 21, 52, 83, 84, 89, 91, 99–102, 164 bargain-hunting 97 causes/causal factors 71–2, 93 and financial practices 84, 92–7 Korea 24, 149 ‘only a blip in history’ 80 Thailand 130 ‘Asian miracle’ 93, 94 ‘Asian Tiger’ economies 83 Asian values 77 assessment, challenge, support (CCL model) 196, 197f, 197–205, 206 assessment 197, 198–200, 205 challenge 197, 198, 200–2, 205 support 197, 198, 202–5 assets alienable versus inalienable 58–9 intangible 57, 58, 59, 61, 63 knowledge versus non-knowledge 60 tangible 57–8 valuation 58, 59 AT&T 101 Athens 159 auditing/auditors 74, 75, 80, 115 Australia 30t, 42t, 215 Austria 30t, 41f, 42t aviation security 118–19 Ayittey, G. B. N. 40 Backman, M. 215 bailouts (rescue packages) 92, 94, 96, 97 Bali bombing (October 2002) 105, 106, 111, 117, 118 Balochistan Province (Pakistan) 134 ‘bamboo network’ 90–1 Bangkok 91, 96 Bangladesh x, 124, 126, 128, 138, 139, 141(n1) banking/banks 5–7, 9, 38, 73, 87t, 89, 94–6, 111, 113–15, 158 offshore 114 private 114 underground 114 see also Basel II, hawala system bankruptcy 96, 151, 155 Barron, J. xv, 152, 158, 164, 212 barter 64, 212 Basel II 18 ‘Beijing Consensus’, possible need for 215 Belgium 8, 30t, 42t, 45f

‘benevolent paternalism’ (India) 192–3 Bengtsson, L. 26 Benton, D. 48 best practice 73, 77f, 79, 84 ‘Bhoomi’ programme 16 Bhutan 19 ‘Big Bang’ 3 Big C (Thailand) 89 Big Five economies x bills of exchange 6, 7 bills of lading 7 Bies, R. J. 26 Bin Laden, O. 105 bird flu 167 Birmingham 17 birth-rates 208 ‘blacklisting’ 107, 113, 115 boards of directors 74, 80, 85, 86, 87t bonds 94, 95f bosses 202, 204, 205 Boston Consulting Group 195 brands/branding 148, 166, 171, 173, 176, 177, 179, 180, 187 Brazil x, 52, 54, 155, 189 breast-feeding 47–8 bridges 126 British Broadcasting Corporation 117 British Petroleum 209 Buckley, P. 62 Buddhism 19 build-operate-transfer (BOT) system 131, 138 buildings, commercial 112 bureaucrats 164 Bush, G. W. (b 1946) 213 business community 152, 153, 156, 164, 184 business consultants 115, 116, 117 business costs 160 business costs of terrorism 104–22 context of study 107 Customs Trade Partnership Against Terrorism (USA) 115–17 executive orders (USA, post-2001) 112–13 increased costs 109–10 insurance 111–12 legal impediments 112–20 maritime and aviation security 118–19 methodology 108–9 nature of problem 104–7

Index 219 post-Eleventh of September environment 109–20 prospects 119–20 security requirements to protect major projects 117–18 business environment 75, 98 business leaders 94 ‘Business 911’ study 109, 110, 112, 114–17 business opportunities 148 business organizations 107 Business Software Alliance (a US Trade Group) 155 business systems Communitarian 54 ‘comparative’ 52, 53–6 further research 63–4 ‘global triad’ 52, 53f, 53, 54, 64 Korea (twenty-first century) 63 ‘new framework’ 52, 64 ‘proposition 1’ 53 stakeholder strategic transparency 56f see also capitalism businesses 111, 114 call centres 172 Cambodia 134, 175, 213 Canada 30t, 42t, 45f, 54, 162 Canadian Chamber of Commerce in Korea xv, 152 capital 33, 58, 85, 100, 105–6, 152 costs 75, 76, 81(n4), 138 economic, social, environmental xiii foreign 94 knowledge-based 15–17 capital allocation 72, 76 capital controls 97 capital flows 71, 75, 81(n3) capital markets 72–3 capitalism 58, 210, 214 ‘alliance’ 54 Anglo-American, Anglo-Saxon 51, 52, 54, 55, 56t, 56f, 63, 214 challenges, 23 Communitarian 51, 52, 54, 55, 56t, 56f, 63 competing/divergent models 54, 214–15 emerging markets 52–3, 54–5, 56t, 56f global 51, 52, 63

Korean 51–67 shareholder versus stakeholder systems 21, 55f universal model ‘highly unlikely’ 64 see also business systems career development 205 Caribbean 41 Casson, M. 54, 62 Caves, R. 62 cement 114, 209 census data 208 Center for Creative Leadership (CCL ®) xv, xvi, 25, 188–93, 206 development process 197f developmental experiences 197f model of leader development 196–205 Center for Creative Leadership Handbook of Leadership Development (McCauley and Van Velsor, 2004) 191, 197 Central America 178 Central Asia 167 central planning 39, 58, 210 chaebol (South Korean conglomerates) 85, 91, 92, 99 restructuring 96 chambers of commerce/trade 151, 157 Changwon: Doosan plant 152 charities 105, 107 Charoen Pokphand Industry 89, 96–7 cheap labour 172, 178 Chearavanont family 96–7 cheese 163 chemicals 114, 115, 209 Chennai 130 Chiang, D. 89 chief executive officers (CEOs) 88, 152, 187 child mortality 10 children 160, 211, 214 Chile 54 China (pre-1949) 4, 5, 8, 9 China (People’s Republic, 1949–) x, xiii, 15, 18, 19, 21, 25, 30t, 32, 34, 39, 41f, 42–4, 84, 85, 91, 99, 102, 107, 110, 115, 118, 119, 124, 128, 138, 139, 141(n1), 149, 152, 155, 160, 163, 164, 167–8, 168–72, 173, 175, 178, 189, 192, 194, 209, 210, 214 ‘Asia’s next powerhouse’ 98

220 Index China – continued economic overheating 215 Expressway Bureaux 130 incentives for highway policy reform 131 ‘strong reluctance to having subordinates evaluating bosses’ 200 Chinese ‘bamboo network’ 90–1 Malaysia and Thailand 35 Choi Chong-Ju xv–xvi, 21, 212 choice 176, 177, 180 Choo, M. J. 149 Choy Fun Kim/Choy Kim Fun 191–2 Chung Ju-yung 96 cities 212 citizens 123, 213 civil conflict/unrest 12, 136 civil service examinations 9 civil works 136–7, 137t Clague, C. 40 Clarke, S. 26 climate 11t Clinton, W. J. 147, 165(n1) clothing 58 ‘club goods’ 62 CNN (Cable News Network) 153, 157 Coakes, E. 26 coal 209, 210 Coase, R. H. 12 coinage 5 Cold War 52 collective action 60, 61, 62 collectivism 88, 98, 194 comfort zone 201, 205 commodities 58, 64, 215 common pool resources 60, 61, 62, 64 Communication and Works Department (CWD, Pakistan) 134 communications xiii, 4–5, 18, 24–5, 165 Communism 34, 194 Communities of Practice 16 companies 59, 60, 80, 113, 116, 117, 119, 178–82, 184, 193 affiliated 101 Asian 22, 71, 187, 206, 214 Asian multinational 83, 84 Asian–Western partnerships 84, 99–102 Chinese 90–1, 171 corporations 22, 55, 71, 193, 200

family control (international comparison) 85, 86f, 86 foreign 96, 97, 101, 118, 156 ‘Fortune 500’ 148 international alliances 214 large 115 medium-sized 110 multinational corporations/ enterprises (MNCs) 23, 52, 60, 62, 63, 73, 101, 110, 171, 174, 189, 194 national (threatened by inward FDI) 148 private 73 small 74 SMEs (small and medium-sized enterprises) 115, 180–1 South Korean 94 stock-market listed 79, 85, 87t, 101, 155, 171 subsidiary 73–4 Thai 200 US 22, 201 valuation 78 western 187 competition 39, 92, 148, 178, 193 competitive/comparative advantage 98, 119, 120, 171 competitiveness 86, 187 compliance 76, 79, 81, 115–20 computers 154 Concerned Citizens of Abra (Philippines) 141(n3) conflict 201 conflict avoidance 193 Confucianism 19 conglomerates 22, 153 characteristics 93–4 cross-holding and voting caps 89–90, 101 founding fathers 90 mechanisms that enhance family control 89 ‘pyramid’ structures 89, 101 conglomerates, Asian corporate and family Asian financial crisis and financial practices 84, 92–7 challenges in the changing economic landscape 84, 97–9 characteristics 84 control and corporate governance 84, 85–90 definition of terms 85

Index 221 dynamics 83–103 further research 102 networking and government relations 84, 90–2 organizational issues 84, 102 partnerships with Western firms 84, 99–102 rules-based approach 90 succession issues 88 updated profile 96 Congo (Brazzaville) 43t Congo (ex-Zaire) 43t Congress (Philippines) 127 Congress Party (India) 39 Constantinople 6 consultants 131, 198 consumer information 166, 167 consumer necessities 58 consumer profiles 177 consumers 59, 170, 173, 174, 176, 177, 179, 180 Container Security Initiative 116, 120(n4) containers 211 context 72 contractors 18, 131, 133, 136 contracts 7, 90, 131, 136–7, 154 convergence theory 20 Cook, R. 48 cooperation 13, 140 coordination 13, 128, 157 Copenhagen Consensus (2004) 9, 10–11, 19, 210, 215 Cornwall 4 corporate governance 22, 54, 71–82, 83–4, 102, 149, 150 Asian conglomerates 84, 85–90 definition 81(n1) education 79–80 global standards 92, 96, 99 holistic approach 72, 76, 77f, 78, 81 ideas for reform 76–80 infrastructure evolution 72–5 market discipline 77f, 78–9, 81 and productivity 75–6, 81(n2–4) reforms xiii regulatory discipline 77f, 77–8, 81 related issues 80 rules-based 98 self-discipline 77f, 79–80, 81 types 87t corporate (social) responsibility 79, 137

corporate structures 86, 87t corporate wealth: distribution 87f corruption/bribery xiii, 12, 17, 18, 23, 39, 84, 90–2, 94, 106, 119–20, 127, 128, 135, 149, 150, 157, 163, 164, 165, 212 road administration 136–8, 141(n3) Corruption Zero campaign 154 cost-cutting 98, 119 court system 155 cowry shells 5 credit 74, 94, 139 crises 182 critical capacities (road administration) 129–31 critical hermeneutics 108 cronyism 90, 94 cross-borrowing 94 cross-shareholding 91 Crusades 6 Cultural Acumen for the Global Manager: Lessons from Project GLOBE (Javidan & House, 2004) 199 Cultural Revolution (PRC) 9 cultural values 194, 195 culture 25, 108, 161, 162, 189 blending 188 business 197 leadership practices and preferences 193 organizational 203 Culture and Leadership in Singapore: Combination of East and West (Li et al.) 194 currency 94, 149, 151, 176 customers 114, 198 customs procedures 132, 139 Customs Trade Partnership Against Terrorism (C-TPAT, USA) 115–17 Cyprus 30t, 35 Czech Republic 54 Daewoo 92, 96, 150 Daim Zainuddin, Tun 91 Dali (PRC) 139 Dalian 8 danegeld 5 data problems 140 databases 177, 182 Davies, H. 81(n4) debt management, private and public 81(n3) debt-to-equity ratios 93, 93f

222 Index decision-making 9, 86, 131, 189, 194, 209 Delhi 130 ‘delight the customer’ (Korea) 152 democracy/democratization 213–14 Denmark 30t, 41f, 42, 42t Department of Public Works and Highways (DPWH, Philippines) 127 deregulation 149, 151 design 127, 139 despotism 12, 212, 214 developed countries 84, 85, 57 developing countries 18, 47, 47t, 48, 51, 57, 59–60, 63–4, 119, 120, 165(n2) ‘proposition 2’ 60 development 10, 46 Development Bank of Singapore 97 development plans 129 Digital Equipment Corporation (DEC), 100 digital systems/services 10, 173, 213 disclosure 74, 75, 78, 107 disease 11t, 47 donors 127, 129, 131, 132, 134, 135, 140 Doosan plant (Changwon) 152 driving habits 158, 161 drugs 99 Dublin 17 due diligence 75 East Asia x, 21, 30t, 34, 35, 38–40, 42–6, 47t East Timor 19 economic development 20, 51, 60, 81(n3), 92 intelligence differences 29–36 economic downturns 92 economic growth xiii, 25, 28–37, 44, 46, 48, 52, 75, 80, 83, 98, 138, 149, 183, 184, 204, 214 economic sustainability xi, xiii economics 62, 91 economies of scale 13, 54 Economist 11–12, 44 economy, the 147, 149 education 7–9, 10, 12, 15, 21, 39, 48, 148, 158–9, 167, 172, 175, 193, 211, 212, 214 higher 8 knowledge-based economy 182–3 technical and vocational 8

educational attainment xiv, 20, 28–37, 38, 45, 46, 165(n2) national differences 29 effectiveness 124, 130, 135, 194, 199, 202, 206 efficiency 92, 124, 130 efficient markets 57 Egypt 4, 5, 41f, 43t, 44 elections 213 Eleventh September (2001) 22–3, 84, 176, 212 business costs of terrorism 104–22 elites 88, 91, 98, 159, 193 embeddedness 57 embezzlement 18 emerging markets 52–3, 56t, 56f, 64, 99, 183 business system 54–5 Emerging Markets Committee 81(n3) employee satisfaction 198 employees 193, 194 employment 9, 83, 92, 156 job losses 101, 151, 201 jobs 147, 148, 149, 160, 173 lifetime employment 98 unemployment 149 empowerment 204 End of Corporate Imperialism (Prahalad and Lieberthal, 2003) 189 enforcement 61, 72, 75, 77f, 77, 78, 109, 135 engineering 127 engineers 37, 129 English Channel 4 entertainment 148, 161–3 environment x, xi, xiii, 10, 23, 60, 124 Equatorial Guinea 41 equipment 133 Estrada, J. 91 Ethiopia 4, 41f, 43t ethnicities, blending 188 Etienne, G. 9 Europe 3, 5, 6, 7, 21, 29–34, 36t, 37t, 38–43, 45f, 46, 51–5, 85, 109, 167, 183, 198, 215 Central 53, 187 Eastern 19, 53, 54, 100, 178, 208 Western 20, 52, 53, 54, 63 European Space Agency (ESA) 167, 183 European Union 19, 33, 106–7, 120(n4), 161, 178

Index 223 exchange 56–60 market-based 57, 59 ‘proposition 2’ 60 social 59, 59 typology 58 exchange rates 71, 94, 100, 151 executive coaching 204 Executive Order 13224 (USA, 2001) 113 expatriates 117, 157, 158, 159, 161, 162 expectations, public 79 experience 201, 202–3 ability to learn from 196, 197f road administration (broad lessons) 129–34 expertise 131 exports 76, 119, 172, 174, 215 Eysenck, H. J. 48 family 58, 74, 84–6, 89, 106, 193, 194, 204, 215 family businesses 22, 73, 77, 193, 215 family feuds 88 Far Eastern Economic Review 187 fashion 38, 148 FDI see foreign direct investment feedback 199–200, 203 360-degree 198, 200, 204 fei qian (Chinese ‘flying money’) 7 ferries 126 fertility (human) xi fiduciary obligation 75 Fiji 128 Finance Committee on Corporate Governance (Malaysia) 81(n1) Financial Action Task Force (FATF) 105 financial institutions 107, 111, 113, 149 markets 81(n3) practices 84, 92–7 sector 71, 102 services 38 transactions 107, 119 Finland 30t, 42t FIREfly 204, 205 fishing grounds 60 five-year plans 39 ‘fix-it’ jobs 202 food 15, 58, 163 Forbes Magazine 87f Ford/Ford Motor Company 13, 90, 100

forecasting 208–10 foreign direct investment (FDI) 24, 76, 194, 212, 215 continuous attraction 164–5 importance to recipient countries 147–9 Korean approach 147–65 livability 157–63, 164, 165 transparency and corruption issues 153–7 foreign exchange reserves 151 Foreign Investment Advisory Council (FIAC), Seoul xv, 158, 162 Foreign Investment Promotion Act (FIPA, South Korea, 1998) 150 Foreign Investment Zones (FIZ) 150 France 4, 6, 10, 30t, 42t, 51, 55, 85, 193, 211 Frankfurt 38, 117 Franz, D. 7 fraud 78 free market x free riders/free riding 60, 62 free trade 39 freight 109 frustration 199 Fu Ping Ping 195 fuel tax 127 fuel usage 161 Fujian 8 Fukuyama, F. 12, 15 full employment 39 funding 94, 95f, 126, 141(n2) Gandhi, R. 40 gender 108 Genoa 6 Germany 30t, 42t, 51, 54, 55 Ghana 41f, 43t Ghosn, C. 100 Giam, M. 202 gifts 58, 59, 64 girls 138 global development x Global EduTech Management Group (Singapore) 192 globalization 10, 21, 22, 25, 54, 81, 88, 90, 98, 100, 104, 110, 179, 184 goals 192 difficult 201 Gobi Desert 160 Goh, K. (Mayor of Seoul) 151, 158 goitre 46 gold 38

224 Index Golden Quadrilateral (India) 130–1 goods procurement 137, 137t goods and services 116, 174 Google 158 Gottfredson, L. S. 28–9 governance xiv, 12, 17–19, 22, 210, 211, 215 four aspects 123 Governance Metrics International 81(n2) governance and new dynamics 21–4, 69–143 business costs of terrorism 104–22 conglomerates (dynamics) 83–103 infrastructure and productivity in Asia 71–82 road administration 123–43 government-linked companies (Malaysia) 193–4 governments xiv, 22, 54, 76, 83, 94, 96, 97, 101, 105, 107, 110–12, 115, 118–19, 126, 133, 138, 139, 147–51, 153–4, 156, 157, 159, 161, 164, 167, 184, 193, 205, 206, 209, 210, 213, 215 changes 132, 140 relations with conglomerates 84, 90–2, 102 Grantham-McGregor, S. 47 Great Mekong Subregion (GMS) 132, 139–40 Cross-Border Transport Agreement 139 ‘Mekong countries’ 129 Greater China 168–72 Greece 30t, 35, 41f, 42t gross domestic product (GDP) x, 29, 30–1t, 32, 32t, 33t, 36t, 156 ‘income per capita’ 33, 34, 35 world 80 gross national product (GNP) 30–1t, 32 Guangdong 8 guanxi (PRC) 15, 100 guilds 5 Guinea 41f, 43t Guthrie, V. 205 Hailongjiang Province (PRC) 128 Hanushek, E. H. 28, 29, 37 Hardin, G. 4 hardships 201, 202 hardware 180

hateke zukuri (‘ploughing the field’) 15 hawala system 6–7, 106, 212, 213 Hayami, Y. 40 Hayek, F. A. von 56 head teachers 208 health 10 Hennart, J-F. 62 Henricksson, K. 26 Hermit Kingdom (Korea) 157 high technology 100 high-speed train 154 Highway Law (PRC) 131 Hirt, R. xiii, xvi, 212 HIV/AIDS 10, 11t, 11 holding companies 73–4 Hollywood 38 Homeland Security Act (USA, 2001) 104 Hong Kong/HKSAR 21, 30t, 32, 34, 41f, 42, 43t, 45f, 46, 63, 83, 85, 86f, 87f, 88, 93f, 101, 152, 160, 163, 167, 168, 170, 191 Hong Kong & Kowloon Wharf & Godown 88 Hossain, M., et al. (1999) 44, 49 Islam, I. 49 Kibria, R. 49 House, R. J. 193, 199 housing 58, 208 human capital 20, 21, 25, 28–50, 100, 183, 187–207 creating systems for building 205–6 human resources 162 human rights organizations 23 ‘humane orientation’ 193 Hungary 54 hydro-electric power 18, 210 Hynix 97 Hyundai 88, 89, 92, 96 IBM Korea 154 Iceland 30t IMD (International Institute for Management Development) 187 Imperial Examinations (ke ju) 9 inalienability 59 India x, 4, 16, 25, 30t, 39–40, 41f, 43t, 44, 47, 118, 124, 130–1, 132, 135, 139, 141(n1), 163, 175, 189, 192–3, 203–4, 210, 215 elections (2004) 211, 214 internet 172–3 leadership 187–8

Index 225 Indiatoro, N. 86f individualism 88 individuals 107, 189, 191, 196, 204 Indonesia x, 19, 30t, 32, 41f, 43t, 45f, 85, 86f, 86, 87f, 91, 93f, 94, 101, 105–6, 107, 110, 111, 113–15, 117–19, 138, 175, 193 Industrial Revolution 7–8 inflation 39, 215 influence 202 informality 57 information xiii, 22, 24, 57, 75, 78, 89, 116, 123, 168–70, 173, 177–82, 213 costs 59 information economy 84, 98 information technology 25, 98, 172, 173 IT kiosks 16 infrastructure xiii, 3–27, 148 ‘big question’ 19 difficulty in forecasting 208–15 early history 3–4 educational 7–9 financial 4–7 front-end and back-end issues 210–15 monetary 6 ‘most crucial’ (good governance) xiv organizational 190, 191, 206 physical 154 regional 215 ‘sticky’ interconnections’ 9–12 virtual 154 infrastructure changes (focused examples) 24–5, 145–84 foreign direct investment (Korean approach) 147–65 marketing and communication 166–84 infrastructure and productivity in Asia x–xiv, 71–82 future scenario 25, 185–215 ideas for reform 76–80 structure of book 19–25 infrastructure projects 106–7, 110–12, 119–20 security requirements 117–18 infrastructure, systems and education 1–67 human capital and intelligence (role in economic development) 28–50

knowledge resources in Korea 51–67 ‘sticky’ interconnections’ (perspectives from Asia) 3–27 innovation 172, 179, 183 insider trading 75, 81(n4) institutional capacity 128 institutional investors 74 institutions 56, 57 interaction with organizations 51 insurance 38, 104, 109, 111–12, 117, 118 intangibility 59 integrated Multi-Modal Transport Policy (Bangladesh) 126 integration (horizontal/vertical) 13 intellectual capital 12, 76 intellectual property rights (IPR) 154, 155 intelligence (information) 111 intelligence (intellect) xiv, 20, 28–50 definition 28–9 economic development 29–36 see also IQ interactivity 176 international business research 53, 61, 63–4 International Civil Aviation Organization 118 International Maritime Organization (IMO) 118, 119 International Mathematics and Science Study 29 International Monetary Fund 94, 96, 164 loan conditionality 149, 151 International Organization of Securities Commissions (IOSCO) xviii–xix, 72 international relations 61 International Ship and Port Facility Security (ISPS) code 118 internationalization 96 internet/worldwide web xiii, 16, 18, 21, 25, 98, 99, 119, 150, 167–8, 212, 213, 214 ASEAN 174–5 broadband 161, 171, 172, 173 e-business, e-commerce 90, 169, 170, 174, 176 e-mail 169, 170, 175, 177, 181, 182 facilitator for SMEs 180–1 Greater China 168–72 India 172–3

226 Index internet – continued intranets and extranets 172 Japan and South Korea 173–4 marketing 177 online auctions 181 online population 168–9, 171, 172, 173 purchasing power of users 173 search engines 169 tourism and travel 175–7 virtual leverage factor 175–7 websites 172, 176, 178 Invest Korea 156 Invest in Scotland 156 investment 10, 39, 75, 90, 131, 139, 168, 178, 179, 214 investors 22, 55, 76, 78–80, 87t, 89, 100, 153, 154 foreign 94, 175, 179 global 102 international 96, 97 iodine deficiency 46 IQ (intelligence quotient) 21, 28–37 Asia–Africa comparison 40–6 effect on economic development (reasons) 37–46 ‘measure of human capital’ 28 national differences (causes) 46–8 IRA (Irish Republican Army) 17 Iran 30t, 41f, 43t, 45f Iraq 31t, 41, 118 Ireland 30t, 41f, 42, 42t, 152, 163 iron 38, 48 iron deficiency (malnutrition) 46 Islam 19 Islam, I. 49 Israel 31t, 34, 35, 41f, 43t, 43, 45f, 118 Italy 6–8, 15, 30t, 42t, 45f, 85 Jack, G. 26 Jakarta: Marriott Hotel bombing (August 2003) 105, 106 Japan x, xiii, 15, 19, 21, 25, 32, 34, 41f, 42, 43t, 46, 52–5, 63, 85–8, 93, 93f, 98, 99, 101, 149, 152, 163–4, 167, 175, 187–90, 192, 193, 198, 200, 215 internet 173–4 operational management 189 Javidan, M. 193, 199 Jemaah Islamiah (JI) 104, 105 Jencks, C. 36

Jenkins, M. xii, xvi–xvii, 213 Jews 6, 35 JNP party 211, 214 Joint Hearings on Terrorism 105 joint ventures 62, 79, 91 Jordan 31t just-in-time production 160 Kaizen 188 Karnataka (India) 16 kasin (‘family vassals’) 89 Kaur, H. xiii, xvii, 22 Kayizzi-Mugerwa, S. 44 Kazakhstan 130 ke ju (Imperial Examinations) 9 Keek, K. B. 192, 193–4, 200, 202 keiretsu 90, 91 Kenya 43t KGB (State Security Committee, USSR) 17 Kia 100 Kibria, R. 49 Kidd, J. B. xii, xvii, 14, 25 Kim, W-S. 149 Kim Dae-Jung 149, 157 Kim Hyuck-kyu 153 Kim Young-Sam 150 Kimko, D. D. 28, 29, 37 kinship 90 Knights Templar 6, 7, 10 know-how 178, 179, 180, 183, 212 knowledge 15–17, 21, 51, 52, 148, 212 characteristics 62t definitions 62, 62t, 63 ‘dispersed nature in society’ 57 exchange 56–60 implicit 17f, 57 intangible aspects 57 measurement costs 57 property rights, public good 60–2 spheres of exchange 57–60 tacit 61, 63 valuation 61 knowledge exchange 64 knowledge resources 63 Korea 51–67 private, public, common pool, club 62, 62t knowledge-based economy 182–3, 188 Kolkata 130 Kolm, S. C. 57

Index 227 Korea, North (People’s Democratic Republic of Korea) 17, 25, 148, 153, 215 Korea, South (Republic of Korea) 19, 21, 24, 30t, 32, 34, 41f, 43t, 43, 45f, 46, 83, 85–9, 91–7, 101, 119, 167, 175, 200, 212, 215 business hub 156 business system 51–67 capitalism 51–67 effectiveness in attracting FDI 151–3 foreign direct investment 147–65 funding sources 95f ‘hardware not software’ 154 history of attracting FDI 149–51 income per capita 52 internet 173–4 knowledge resources in Korea 51–67 ‘software’ issues 155, 157 transparency and corruption issues 153–7 ‘twelfth largest economy’ 164 Korea, South: Ministry of Information and Communication 154 ‘Korea Inc.’ 157, 164 Korean Independent Commission Against Corruption (KICAC) 154 Korean Investment Services Center (KISC) 156 Korean Overseas Information Service (KOIS) 157 korupsi, kolusi, nepotisme (KKN) 92 KOTRA (‘trade division of Korean government’) 157 Kranton 59 Kripalani, M. 16 Kurniawan, D. M. 86f Kuwait 31t, 35 kyosei (‘symbiotic interaction’) 15 Kyoto Accord 11t, 19, 210 Kyrgyz Republic 130 labour/workers 76, 138, 151, 157, 188, 202 low-cost 100 PRC 194–5 skilled 25, 38, 39 labour costs 149 labour flexibility 149, 153 Lai, P. Y. 192 Lancashire 7 land 16, 211

landslides 127 language xvi, 99, 134, 158, 161–3, 171, 172, 174, 176, 183 Lao PDR 125, 127, 128, 130, 139 Larsson, R., et al. (1999) 14, 15, 26 Bengtsson, L. 26 Henricksson, K. 26 Sparks, J. 26 ‘latecomers’ 55 Latin America 41, 47t, 54, 100, 127, 178 law 17, 62, 75, 77, 79, 80, 81(n4), 89, 90, 106, 108, 123, 135, 211–12 law enforcement 105, 127–8 lawsuits 155 lawyers’ fees 109 Le Havre 211 leader development 191 assessment, challenge, support 196, 197f, 197–205 CCL two-part model 196–205 definition 196 distinguished from ‘leadership development’ 189–90 leaders 39, 40, 212, 213, 214 leadership 25, 187–207 ‘difference is the norm’ 192–4 effective 206 expectation, variance, change (Asia) 191–2 ‘key challenge’ 192 preferences (changing) 194–6 ‘leadership development’ CCL model 190 central questions 190–1 distinguished from ‘leader development’ 189–90 leadership programmes, formal 202 learning 198, 201, 203 Lebanon 43t Lee Kun-Hee 89 Leftwich, A. 44 legal/judicial reform 155, 163, 165 legal systems 72 legislation 107, 108, 154 Lehaney, B., et al. (2004) 16, 26 Clarke, S. 26 Coakes, E. 26 Jack, G. 26 letters of credit 6 Lewicki, R. J., et al. (1998) 13, 26 Bies, R. J. 26 McAllister, D. J. 26 LG IBM 154

228 Index Li, J., et al. (forthcoming) 194, 206 Ngin, P. M. 206 Teo, A. C. 206 Li Ka-Shing 99 Li Peng 210 licence plates 159, 161 Lieberthal, K. 189 Lilley, P. 18 line jobs 202 literacy 20, 172, 211, 214 livability/liveability 24, 157–63, 164, 165, 212, 214 living conditions 138 living standards 148 loans 93, 94, 133, 149 low-interest 92, 97 local government Bangladesh 126 India 125 London 5, 38, 117 ‘Long life 60’ 9 Lotus Group 89 Luxembourg 31t, 33 Luzon (Philippines) 141(n3) Lynn, R. xii, xvii, xx, 9, 20–1, 32, 211 McAllister, D. J. 26 McCauley, C. D. 191 machines 7 McKinsey 99 Maddison, A. 40 Mahathir Mohamad, Datuk Seri (later Tun) Dr 94 Maira, A. 195 Malaysia xvii, xviii–xix, 19, 31t, 32, 35, 41f, 43t, 45f, 73, 83, 85, 86f, 87f, 91, 93f, 94, 97, 105, 107, 110–11, 113–15, 118, 119, 162, 163, 192–4, 200 corporate governance (holistic approach) 76, 77f internet 175 Malaysia 2001 Global Integrity Award 151 malnutrition 11t kwashiorkor 46 marasmus 46 stunting 46–7, 47t underweight 46, 47, 47t wasting 46, 47, 47t Malta 31t management 38, 74, 78, 79, 80, 85–8, 100 Asian practices 102

cultural mix 189 professional and ethical 77f senior 200 management performance 74 management practices 188, 194, 195 management skills 98 management systems 23 management values 195 managers 89, 97, 99, 100, 102, 188, 190, 192, 193, 194, 198, 203 Manila 161 mankind 3 manufacturing 98, 168, 174, 179, 187, 209 Marco Polo 4–5 marine cargo 111 maritime security 118–19 market, the 58, 60 market capitalization 86, 87f market discipline 22, 74, 77f, 78–9 market economy 29, 32, 34, 39, 40, 42 market failures xiv market forces xiv, 193 marketing xiii, 24–5, 139, 157 central division 157 interactive direct methods 24, 166–84 marketing and communication infrastructures Asia inbound 179–80 Asia outbound 178–9 backbone 181 Greater China 168–72 internet and related technologies 167–8 ‘opportunity is a must’ 183–4 pan-Asian view 177–8 proactivity and responsiveness 166–84 tourism and travel 175–7 two directions 179 virtual leverage factor 175–7 market knowledge 100 market mechanism 76 market share 99 markets 57, 102, 149 marriage 88 Martin, S. 206 mathematics 28, 29, 37 Mathematics Achievement Scale Scores (1999) 45, 45f, 46

Index 229 ‘matrix of interconnection of infrastructure development’ xiv media 23, 79, 102n, 164, 168, 169, 174 magazines 170 newspapers/press 160, 163, 170, 173, 195 radio 170, 173 television 101, 161, 162, 170, 173 Mediterranean 4 mentoring 198 mentors 204 merit 135 Mesopotamia 5 methodology 108–9, 140 Mexico 54 Microsoft 162 middle class 83, 98, 213 Middle East 113, 178, 213 Milan 38 ‘Millennium Development Goals’ (UN) 10 Ming-Ch’ing civil examinations 9 mining 38, 114 minority shareholders 73, 74, 79, 154–5 Mirza, A. xvii–xviii, 22–3 mobile telephones 169, 172, 182 money 58 money laundering 6, 18, 105, 108, 114, 115, 154 money transfers 104, 119 Mongolia 4, 130, 160, 175 monitoring 72, 75, 79, 125, 130, 131 Moro Islamic Liberation Front (MILF) 104 Morocco 41f, 43t, 44, 45f Moscow 17 motivation 202, 203 mujahideen 105 mukoyoshi (adoption) 88 Multimedia Messaging Service (MMS) 177, 182 Mumbai 130 Murdoch, R. 99 Muslims 109, 113 NAFTA (North American Free Trade Agreement) 19, 178 Nafziger, E. W. 39, 40 names 109, 113

National Highway Authority of India (NHAI, 1995–) 125, 130–1, 137 National Highway Development Programme (India) 130–1 National Land Transport Policy (NLTP, Bangladesh) 126–7 National People’s Congress 210 NATO (North Atlantic Treaty Organization) 213 Nehru, J. 39, 40 Neo-Confucian learning 9 Nepal 41f, 43t, 125, 127, 131, 141(n2) Nepal: Department of Roads (DOR) 127 nepotism 84 Netherlands 31t, 42t, 45f Netizens 180 Network of the World 101 networking 84, 90–2, 205 networks 101, 182 New York 38, 117 New Zealand 29, 31t, 41f, 42t, 45f, 215 Ngin, P. M. 206 Nigeria 43t Nissan 100–1 noise 23, 124 ‘non-cooperating’ countries 115 non-governmental organizations (NGOs) 23, 136, 138, 193 non-performing loans (NPLs) 95 ‘bad debts’ 94 North, D. 51, 59 North Africa 42, 47t North America 29, 52, 54, 161, 198, 215 North Sea oil 33 Norway 4, 31t, 33, 41f, 42, 42t not-for-profit organizations 167 novelty 201 nutrition 46–8, 211 OECD see Organisation for Economic Co-operation and Development Ohmae, K. 52, 54 oil 35, 38 Olson, M. 51 Ombudsman of Korea 151, 156 operations and maintenance (O&M) 125, 126–7, 130, 132 maintenance 134, 136, 139 opportunity management 182

230 Index Organisation for Economic Co-operation and Development (OECD) 52, 53, 55, 63, 72, 124, 156 anti-bribery convention 154 seminar on ‘the world in 2020’ (1997) x organizations 192–3, 197f, 197, 204, 205–6 human capital 191 interaction with institutions 51 osewa ni naru (‘indebtedness to others’) 15 output 40, 76 outsourcing 180 Overby, T. 152 Pacific Islands’ Forum 140 Pacific Ocean countries 41 Pakistan 25, 215 Pao Y. K. 88 Papacy 6, 9–10 Papua New Guinea 130 Paris 5, 38 Park, S. (golfer) 157 participation xiii, 123 Pascale, R. 201 Passe-Smith, J. T. 40 patriarchy 215 PATRIOT Act: Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (USA, 2001) 104, 113–15, 213 pavement depths 136, 141(n3) ‘paying through the nose’ 5–6 PCCW 101 peasants 211, 212 peers (equals) 205 pension funds 138 performance 23, 74, 75, 81(n2), 124, 195, 198, 202 corporate 55f road administration 134–5 personal computers 24 Personal Digital Assistants (PDAs) 169 personal relationships 192, 203–4 Philippines 31t, 32, 43t, 45f, 85, 86f, 86, 87f, 91, 93f, 101, 105–6, 115, 127, 129, 136–7, 137t, 138, 162, 163, 173, 175, 193 Phuah Eng Chye xiii, xviii, 22 piracy 111, 155–6 Pisa 5

planning 23, 77f, 127, 139 planning and budgeting, unified 134 Plessier, F. 189, 192, 200, 204 points of view 201 Polanyi, M. 57, 59 police 128 political campaign contributions 153 political sensitivity 132, 140 political theory 61 political will 10 politicians 91, 94, 125 politics 44, 90, 91, 135 pollution x, xi, 23, 124 poor people x, 123, 129, 138–9 population/demographics xi, 24, 44, 80, 211 port authorities 118, 119 Porter, M. E. 54 ports 118, 120, 211, 212 Portugal 31t, 41f, 42t poverty xiii, 10, 39, 138–9 Powell, B. 7, 8 power (energy) xi, 10, 15, 18, 106, 136, 210 electricity 19, 214 energy conservation 209 power (managerial/political) 193, 199, 213 PPP (purchasing power parity) 29, 30–1t, 32, 36t GNI (Gross National Income) 41–4 Prahalad, C. K. 189 precious metals 114, 115 predictability xiii, 123 price 58, 90, 215 Prisoner’s Dilemma 15 private sector xiii, 39, 76, 79, 118, 133, 135, 154 road administration 138 privatization 73, 130 productivity xiii, 19, 21, 22, 135, 148, 149, 179, 183, 212, 214, 215 infrastructure (Asia) and 71–82 products 100, 180 high value 38 professionalism 78, 79, 80 profit 15, 87t profitability 99 Project GLOBE 193 project improvement unit (PIU) 131 proletariat 98, 214 promotion 99 property booms 215

Index 231 property rights 60–2, 64, 92 definitions 61 protectionism 92, 97 Providing Appropriate Tools Required to Intercept and Obstruct (PATRIOT) Act (USA, 2001) 104, 113–15, 213 assumptions 114 implications 113–15 PT Telkom (PTT, Indonesia) 101 public, the 74 public goods 23, 60–2, 64 public involvement 137 Public Road Maintenance Act (Nepal, 1996) 132 public sector xiii, 80, 131, 135 public shaming 202 public works departments (PWDs) 125 pupils 208 Pytheas 4 Qatar 41 quality 8, 90, 159, 179 quality control 188 quality of life 24, 212 railways 10, 15, 18, 210, 211 Rao, M. 16 rating agencies 79 raw materials 13, 38, 58, 100 recession 97 reciprocity 57 redistribution 57 reform institutional 132 local ownership 135 road administration 133–40 Reform Act (UK, 1832) 8 regional (cross-border) cooperation 139–40 regional free trade agreements 92 Rego, L. 206 regulation/s 76, 77f, 108, 120, 123, 135 ‘inadequate’ 93–4 less onerous 152 regulators/regulatory bodies 72, 79, 83, 124, 128 regulatory discipline 22, 77f, 77–8 Reliance Group (India) 187 religion 19 Renault 100–1 rent-seeking 62

Report on Corporate Governance (Malaysia, 1999) 81(n1) research and development 37, 100 resource allocation 60 restaurants 148, 149 restrictive practices 39 restructuring 84, 92, 96–7, 102, 151 Restructuring Committee (South Korea) 92 results-based management (RBM) 135 Richter, F-J. xii, xvii, xviii, 15, 25 rickshaws 138 ringgit (Malaysian dollar) 94 risk 136, 182, 189, 204 road administration xiii, 23, 123–43 benefiting the poor 138–9 characteristics 124–9 constraints 132 corruption 136–8 critical capacities 129–31 experience (broad lessons) 129–34 further research required 124, 140 improving performance 134–5 incentives for policy reform 129, 131–2 lessons 129–34, 140 operations and maintenance (O&M) 125, 126–7, 130 planning and execution 125–6 private sector investment 138 ‘recognize that reform takes time’ 129, 132–3 reform priorities 133–40 regional (cross-border) cooperation 139–40 sound operation of road facilities 125, 127–9 road agencies 137, 138 road budgets 126–7, 129, 141(n2) Road Construction and Development Corporation (RCDC, Sri Lanka) 133 road design 130 road safety/traffic safety 23, 124, 127, 128–9 road users 125, 133, 137 roads 15, 18, 19, 160–1, 210, 211 rural 10, 125, 138 Roads Development Authority (Sri Lanka) 133 Roads and Highways Department (Bangladesh) 126–7

232 Index Roberts, D. 209, 210 Roberts, G. 48 Roh Moo-Hyun 152 Rome 6 royalties 137 Rugman, A. 62 rule of law 153 rules 77–8, 108, 120, 123 formal versus informal 61 rural areas 10, 125, 138, 161, 209, 211, 212, 214 Russia x, 52, 54, 187, 214 salaries 130 Salim, E. xiv Samsung 88, 96, 99, 101 eSamsung 99 Sanderson, M. 8 Santangelo Group Inc. USA 110 Sarbanes Oxley 154 SARS (Severe Acute Respiratory Syndrome) 167, 176 Saudi Arabia 105 scandals 150, 153, 154, 212 Schoenthaler, S. J. 48 schools/schooling 188, 208, 214 science 28, 29, 37, 63, 114 Scottish Office 156 Securities Commission of Malaysia xvii, xviii, 71n security equipment 118 security provision 117–18 security systems 212 self-assessment 198 self-discipline 22, 77f, 79–80 self-regulation 76 Seligson, M. A. 40 sempai–kohai (senior–junior) mentoring 198 Senators (USA) 105 Senge, P. 15 seniority 192 Seoul xix, 149, 150, 154, 158–62 Seoul Metropolitan Government (SMG) xv, 158, 162 Foreign Investment Advisory Council (FIAC) xv, 158, 162 service delivery 125 services 100, 187, 214 Shanghai 8, 209 shareholder rights 85, 87t shareholder value 22, 54, 55f, 81(n1) shareholders 73–4, 78, 79 cross-holdings 89

passivity 74 ‘pyramiding’ and ‘cross-holdings’ 73 returns to 81(n2), 93, 99, 164 shares/equity 22, 89, 94, 95f Sharma, A. K. 195 Shih, S. 88 Shin Corporation 89, 97 Shiomi, K. 192, 204 shipping 111, 118 Short Messaging Service (SMS) 177, 182 Siam Cement 99 Sierra Leone 41f, 43t Silk Road 7 Simeon, D. T. 47 Singapore xvi, xviii, 19, 32, 34, 41f, 43t, 45f, 46, 53, 55, 63, 83, 85–8, 93f, 105, 128, 152, 163, 167, 188, 192–4 competitiveness 187 internet 174–5 Singapore: Ministry of Trade and Industry 204, 205 Singapore Airlines 97 Singh, R. A. xiii, xviii–xix, 22 Singh, T. 40 SingTel 97 SK (chaebol) 96 skills 201, 205 social anthropology 58–9, 64 social capital xi, 10, 12–17, 175 social communities 61–2 social embeddedness 58 social sustainability xi, xiii socialism 58 socialist countries 41 socialization 189 societies, pre-modern/primitive 57, 59, 64 software 180, 181, 214 software engineers 172 Solomon, King 88 Soros, G. 94 South Africa 41f, 43t, 44, 45f, 46 South America 15 South Asia 21, 30–1t, 34, 35, 38, 39, 42–4, 46, 106, 167 malnutrition 47t South Gyeongsang province (South Korea) 153 Southeast Asia 21, 25, 42, 44, 46, 98, 105, 167, 215 Southwest Asia 47t Soviet bloc 54

Index 233 Spain 31t, 41f, 42t, 193 Sparks, J. 26 Speakers’ Corner (Hyde Park, London) 213 Spearman rank correlation 29 SRAMA (Spring Research and Manufacturers’ Association, Sheffield) 152 Sri Lanka 31t, 132–3, 136, 138 Srinivasan, N. xix, 211–12, 213 staff 129, 135 stakeholders 54, 55f, 79, 81(n1), 133, 134, 140 standards 77–8, 81, 123, 139 international 137 Stanislaw, J. 39 Star Ferry 88 state, the 60–1 state terrorism 115 state-owned enterprises 209 status 59, 100 steel 38, 209 Stiglitz, J. 12 stock markets/exchanges 38, 73, 75 Straits of Malacca 111 strategic alliances 62, 96, 97 street signs 158, 161 strikes 151, 152, 153 students 162 Sub-Saharan Africa 40, 42, 44, 45, 46, 47t Subcommittee on Asia (USA) 105 subsidies 92 subway systems 161 Sudan 43t, 213 suffrage 213 suicide 152 suppliers 101 supply chain 116 supply-chain management (SCM) 98 sustainability matrix xi, xiv sustainable development xi–xii, xiii, xiv environmental xiv social xiv Sweden 31t, 42t, 55 Switzerland 31t, 33, 41f, 42, 42t Syria 31t T’ang-Sung dynasty literary examinations 9 Taiwan 25, 30t, 32, 34, 41, 46, 55, 63, 85–8, 93f, 100, 101, 168, 170, 215

Takeda, K. 99 Takeda Chemical Industries 99 takeovers 74 Talwar, B. 195 Tanzania 43t ‘Tao Learning’ 9 task forces 133 ‘task network’ 129 Tatung 100 tax incentives 24, 33, 92, 151 tax reductions 150 tax revenues 92 taxation 80, 149, 152, 154, 157, 158, 163, 165 taxpayers 159 teachers 208–9, 214 team-building 189 technical assistance 131, 133 technology 21, 24, 63, 76, 114, 166, 167, 170, 174, 176, 181, 213 technology transfer 100, 148 telecommunications 179, 182 telephones 212 Temasek Holdings 91 Teo, A. C. 206 terrorism 23, 212 business costs 104–22 Thai Farmers Bank 96 Thailand 19, 31t, 35, 41f, 43t, 45f, 85, 86f, 86, 87f, 89, 93–7, 101, 106, 124, 127, 135, 139, 141(n1), 175, 200 royal family 99 Thailand: Department of Highways (DOH) 129–30 Planning Division, Evaluation Section 130 Thailand: Ministry of Transport and Communications 129 Thaksin Shinawatra 91 Thomas, A. 40 Three Gorges Project 18 Thurow, L. 52, 54 time 13, 20, 23, 79, 109, 118, 124, 129, 132–3, 140, 179, 208–9 tin 4 Todaro, M. P. 40 Tokyo 38 tolerance 199 toll roads 138 Tom.com 99 tourism 174, 175–7, 210 trade 4, 5, 7, 9–10, 11t, 20, 25, 104, 120, 148, 149, 194, 211, 212, 214

234 Index trade associations 115 trade liberalization 107 trade unions 39, 151, 152, 153 traffic 23, 124, 160, 161, 211 trafficking, illegal 6 ‘tragedy of the commons’ (Hardin) 60 training 117, 119, 129, 133, 135, 189, 197, 198, 209 leadership development 205 Trans World International (TWI), 101 transaction costs 12–13 transparency xiii, 6, 17–19, 75, 77, 79, 85, 86, 89, 90, 98, 101, 102, 123, 134, 137, 150–1, 157, 163, 164, 165, 176, 211, 213, 214, 215 Transparency International Inc. 150–1, 154 transport 58, 124, 129 see also road administration transport ministries 123 transportation 158, 160–1 travel costs 109 virtual leverage factor 175–7 warnings 111 tree-planting 160 Tripartite Agreement (South Korea) 151 trust 7, 12–17, 57, 72, 75, 76, 80, 81, 175, 176, 192, 204, 213 distrust 13, 14f, 15 Tsui, A. 195 Tuharsky, T. xix, 212 Turkey 31t, 32, 35, 41f, 43t, 45f, 213 Uganda 43t United Arab Emirates 118 United Kingdom 7–8, 11, 18, 21, 31t, 42t, 48, 51, 54, 55, 63, 85, 86f, 91, 101, 172, 208 United Nations 105, 106–7, 157 United Nations Children’s Fund (UNICEF) 47 United Nations: ‘Millennium Development Goals’ 10 United Overseas Bank 91 United Overseas Land 91 United States of America xiii, 3, 8, 10, 17, 21, 22, 31t, 32, 38, 41f, 42, 42t, 45f, 51–5, 63, 81(n4), 84, 85, 88, 90, 91, 148, 155–6, 168, 171,

173, 176, 178, 183, 188, 190, 192, 204, 212, 213, 215 business costs of terrorism 104–22 executive orders (USA, post-2001) 112–13 immigration 104 universities xv–xx, 8, 88, 159, 169, 183, 192, 208 urban areas 161 URL (Uniform Resource Locator) 166 US Armed Forces 161 US Customs and Border Protection (CBP) 116, 118, 119 US Customs Service 115–16 US dollar 94 US Treasury Department 113, 115 USAID (US Agency for International Development) 117 value chain 168, 179 Van Velsor, E. 191 Vancouver 162 Vanhanen, T. xii, xvii, xx, 9, 20–1, 32, 211 Vehicle and Transportation Management Act (Nepal, 1994) 131–2 vehicles 159, 160 Venice 6 Vernon, R. 52 Vientiane 128 Vietnam 107, 110, 115, 118, 175 visas 109–10, 132, 156 vision 132, 140 vocational training 39 voters 147, 148 wages 5, 98, 153, 178 Wal-Mart 90 Watanabe, H. 188 water 10, 15, 18–19, 160, 214 wealth 165(n2), 213, 215 websites 18, 120(n1–4), 151, 155, 157, 162, 165(n1), 166, 168, 170 Wee family 91 Weldon, E. 200, 202 Wells, L. 52 Wescott, C. xiii, xx, 9, 211 WIFI 176 Williamson, O. E. 12 Wilson, M. S. 192–3, 204 Winsol 154 women 10, 46, 47, 138 won (South Korean currency) 151

Index 235 Wong, J. 192, 204 worker’s rights 98 working class 83 World-Wide Shipping 88 World Bank 10, 57, 63, 72, 102n, 127 author 40, 86f, 87f, 139 World Bank: World Development Indicators 41 World Competitive Yearbook 2004 (IMD) 187 World Economic Forum: East Asia Economic Summit (Singapore, 2003) 188 World Health Organization 47 World Trade Organization 92, 110 world wars 33

xenophobia 100, 102 Xue Li xvii Yangtze River 18 Yemen 111 Yeo Hiap Seng (Singapore company) 88 Yergin, D. 39 youth 169, 171, 174, 181 zaibatsu (Japanese conglomerates) 85 Zambia 41f, 43t ‘Zero is Hero’ 9 Zhu Rongji 210 Zimbabwe 43t Zuboff, S. 16