Working Paper: NBER ID: w28069
Authors: Luis Dau; Randall Morck; Bernard Yeung
Abstract: Every firm in a developed economy relies on the mere existence of countless other firms to keep prices competitive up and down all supply chains. Without this network externality, no firm forms; and without many firms, no network forms; locking in a low-income trap. Business group governance supersedes corporate governance in most developing economies and in the rapid catch-up development phases of most high-income economies by hierarchically coordinating firms in multiple industries, internalizing this network externality. High-income economies grow via creative destruction - creative firms imposing a negative externality upon firms they destroy or disrupt, but a larger positive innovation-related externality upon the whole economy. Business groups avoid creative self-destruction, innovation by one group firm that disrupts another. Corporate governance supersedes business group governance in high-income economies to facilitate productivity growth. If business group governance does not retreat, productivity growth is impaired and a middle-income trap can result.
Keywords: Corporate Governance; Business Group Governance; Economic Development; Network Externalities
JEL Codes: B26; G3; N20; O1; P12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| absence of a network of interdependent firms (L14) | economic viability issues (O22) |
| absence of a network of interdependent firms (L14) | low-income trap (I32) |
| business group governance (G38) | mitigates hold-up problems among firms (D86) |
| business group governance (G38) | emergence of a viable network (D85) |
| emergence of a viable network (D85) | economic development (O29) |
| transition to corporate governance (G38) | productivity growth (O49) |
| transition to corporate governance (G38) | innovation (O35) |