The Role of the State
in Asian Business Systems
_______________
Richard W. CARNEY
Michael A. WITT
2012/129/EPS
The Role of the State in Asian Business Systems
Richard W. Carney*
Michael A. Witt **
Richard Carney is the lead author of this chapter, having contributed about two-thirds of the total length.
Michael Witt contributed the remaining third.
This chapter is forthcoming in the Oxford Handbook of Asian Business Systems. Unless you quote directly,
please cite as: Carney, R.W., and M.A. Witt (forthcoming 2013). ‘The Role of the State in Asian Business
Systems’. In M.A. Witt & G. Redding (Eds.), The Oxford Handbook of Asian Business Systems. Oxford, Oxford
University Press. If you quote directly, please refer to the official published version or cite as an INSEAD
Working Paper, as copyediting may change some of the wordings slightly.
*
Fellow, Department of International Relations, School of International, Political & Strategic
Studies at Australia National University Canberra, Australian Capital Territory 2601,
Australia. Email: richard.carney@anu.edu.au
**
Affiliate Professor of Asian Business and Comparative Management at INSEAD, 1 Ayer
Rajah Avenue, Singapore 138676, Singapore. Email: michael.witt@insead.edu
A Working Paper is the author’s intellectual property. It is intended as a means to promote research to
interested readers. Its content should not be copied or hosted on any server without written permission
from publications.fb@insead.edu
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Abstract
This chapter of the Oxford Handbook of Asian Business Systems examines how states
influence the structure of national business systems in Asia. It begins with an overview of
literature on the state’s role with regard to the institutional arrangements of capitalist systems
in non-Asian as well as in Asia-specific contexts. It then turns to an examination of how well
existing social science and business systems theories of the role of the state map onto
contemporary Asian empirical realities. The evidence indicates that further refinement of the
state’s role with regard to business system structures is needed, and a novel framework is
proposed. We conclude with a discussion on future areas for research. This
chapter contributes to the business systems and varieties of capitalism literatures as well as to
the comparative political economy and sociology literature on state structures and
institutional embeddedness.
Keywords: Government; State; Asia; Business Systems; Varieties of Capitalism; Institutions;
Comparative Political Economy
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Introduction
The original formulation of the ‘varieties of capitalism’ argument (Hall and Soskice 2001)
attracted considerable criticism. Not all of this was altogether fair or on the mark (for a
review, and criticism of the criticism, see Hancké, Rhodes, and Thatcher 2007). However,
one point that has stood the test of time is that the theory underplayed the importance of
politics and the state. A large and growing range of theoretical and empirical contributions
have since emphasized that understanding the formation, maintenance, and evolution of
business systems requires accounting for the role of the state in the economy.
Taking its cue from this body of work, this chapter seeks to shed light on the role of
the state in Asian business systems. It begins by reviewing existing theory about the role of
the state in the political economy, both from the social-sciences literature more generally and
from the business-systems literature in particular. It then explores the utility of existing
frameworks for the Asian context. We conclude that existing business-systems theory needs
further refinement in accounting for the varying roles of the state, and we propose remedies.
Existing Theory
The first notable role of government with regard to its influence on the structure of business
systems emerges from its efforts to foster rapid economic growth. Gerschenkron’s (1962)
analysis of late development in Germany is a notable early articulation of the state-led
development thesis. A variant of this approach was utilized in analysing the modernization of
developed economies following World War II (Shonfield 1965). The principal challenge was
to shake out pre-war patterns and instil more modern business practices in order to secure
high rates of national growth. Critical to this endeavour, in the view of many, was the state’s
control over the allocation of credit, mirroring Gerschenkron’s emphasis on German banking
in the late nineteenth century (Cohen 1977; Zysman 1983). National governments were
categorized as either ‘strong’ or ‘weak’ (Katzenstein 1985; Skocpol and Amenta 1985), with
the strong states of France and Japan as models of success, while Britain’s weak state was
regarded as a laggard (Shonfield 1965; Johnson 1982).
The economic disruptions of the 1970s led to a stronger focus on how effectively
government could negotiate durable bargains between capital and labour. This
neocorporatism literature examines the capacity of the state to generate durable bargains with
employers and labour unions with regard to wages, employment conditions, and social or
economic policy (Schmitter and Lehmbruch 1979; Berger 1981; Goldthorpe 1984; Alvarez,
Garrett, and Lange 1991). A nation’s neo-corporatist model depended on whether its trade
unions were more encompassing and could more successfully internalize the economic
effects (such as inflation) of their wage settlements (Cameron 1984; Calmfors and Driffill
1988; Golden 1993). For many, such bargains were the result of a clear political exchange in
which the outcome was due to the government’s capacity to offer inducements, as well as the
disciplinary power unions held over their members (Pizzorno 1978; Przeworski and
Wallerstein 1982). In this literature, governments were categorized according to the
organizational strength of the national trade union movement, with the small, open
economies of northern Europe being models of success.
In the context of these advanced industrialized countries, there has also been
considerable interest in the welfare state and variations in its structures. The welfare state is
defined in the Oxford English Dictionary as a country with ‘a system whereby the state
undertakes to protect the health and well-being of its citizens, especially those in financial or
social need, by means of grants, pensions, and other benefits’. In the seminal work of this
literature, Esping-Andersen (1990) identified three types of welfare state: liberal, which
emphasizes private provision and usually provides only a rudimentary social safety net (e.g.
United States); Christian-democratic, which relies mostly on social insurance schemes to
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respond to needs (e.g., Germany); and social-democratic, which gives universal access to
benefits (e.g., Sweden). Japan was the only Asian country to be included by EspingAndersen, who classified it as ‘liberal’. Recent years have seen increased interest and
discussion in Asia in the welfare state, not least in the context of a rapidly ageing population
in many of the more advanced industrialized nations in the region, such as Singapore, South
Korea, and Taiwan (e.g., Witt 2013b).
The expansion of globalization has led to the retreat of government in its involvement
with industry, and its role in economic governance has become more restricted. Increasingly
mobile capital has forced the state to attempt to create an attractive investment environment
for transnational capital via low taxes, easy labour laws, and a generally permissive
regulatory system. In this way, the global economy produced a ‘constraining effect’ on states’
macroeconomic policies by inducing increased budgetary pressure. This led to several
streams of literature examining how the state’s economic role was being restricted or
reconstituted by market forces.
Several of these have focused on how business and society organize systems of
production that are largely independent of government oversight, including sectoral
governance, national innovation systems, and flexible production regimes. These works are
influenced by the French regulation school and emphasize the movement of firms away from
mass production towards new production regimes as a result of technological change, and
depend on collective institutions at the regional, sectoral, or national level (Piore and Sabel
1986; Dore 1986; Streeck and Schmitter 1985; Boyer 1990; Herrigel 1996; Hollingsworth
and Boyer 1997; Whitley 1999). In comparison to the modernization, neocorporatism, and
welfare-state literatures, these works encompass a wider range of institutions and stress the
ways in which institutions generate trust or enhance learning within economic communities,
without an explicit role for the state. As a result, regional production networks are often
emphasized over national categories.
While this literature focused on phenomena associated with the withdrawal of the
state as a ‘direct’ producer of goods and services, or privatization, this decline in direct state
intervention was matched by an increase in the state’s indirect influence via a growth in the
regulatory apparatus. The nature of these regulatory changes nevertheless conformed to
existing institutional traditions that have tended to preserve power for the status quo. What
are these existing institutional traditions, and how have policy-makers implemented rules that
enhance, rather than hinder, competitiveness?
Hall and Soskice (2001) propose a framework that yields two contrasting outcomes.
For some countries, regulatory changes that enhance competitiveness do so by improving the
functioning of markets. For other countries, however, the regulatory apparatus achieves
improved outcomes by enhancing the sharing of information, improving actors’ ability to
make credible commitments, and altering actors’ expectations about what others will do. The
first type of system, in which coordination is secured primarily through market mechanisms,
is labelled a Liberal Market Economy (LME), while policies that reinforce the capacities of
actors for non-market coordination occur in Coordinated Market Economies (CMEs).
Because of the nature of non-market coordination, policy-making in CMEs
encounters higher levels of information asymmetries, transaction costs, and timeinconsistency problems. To resolve these issues, governments of these economies work
closely with business associations, trade unions, and other para-public organizations. Policies
get effectively implemented because these organizations are independent of the government
and accountable to their members. Hence, these members trust them with private information
to bargain for and administer the chosen policies. These associations can effectively work
with the government to implement these policies at lower transaction costs, because they
possess the authority to monitor and sanction members. At the same time, the capacity to
4
implement effective long-term coordination policies depends on the credibility of the
government to abide by its commitment. This credibility varies across political regimes.
Scholars observe a clustering of coordinated market economies with consensus
political systems, and liberal market economies with majoritarian political systems. In CMEs,
skills are viewed as co-specific assets that are invested in and utilized by multiple actors,
such as business, labour, and handwork organizations covering many different sectors of the
economy. These actors, however, will only be prepared to invest in such specialized skills if
they have political representation, both directly, via bureaucratic appointments (corporatism),
and indirectly, via political parties. To achieve this, proportional representation of different
parties in legislative institutions, especially parliamentary committees, is necessary.
Conversely, majoritarian institutions undermine the incentives of multiple actors to
commit to co-specific assets. In such systems, plurality electoral rules enable a large block of
opinion to be defeated by a narrow majority. As a result, these political systems have greater
policy variance than do consensus systems. Because long-term bargains among multiple
actors are difficult to sustain, firms seek flexibility, the ability to hire and fire, and the ability
to quickly change according to shifting market conditions. In essence, LMEs yield support
for policies that privilege non-specific assets.
The key mechanism is due to the capacity of consensus institutions to generate
credible commitments among multiple actors. ‘Credible commitment’ indicates the
probability that partners think the other side will hold to an agreement. Consensus institutions
increase the probability, because actors wield more power to veto a bargain they dislike
(Tsebelis 2002). Their consent to change is needed; thus, they can enter an agreement with
greater confidence that the bargain will hold. This process then becomes self-enforcing.
Participants make decisions based on the degree of stability of policy, and then seek to
preserve that system.
Critical to determining the strength of credible commitments is the electoral system.
PR permits the election of numerous political parties, thereby expanding the number of actors
and veto points. Plurality systems tend to yield fewer political parties, thereby reducing the
number of veto points. This view of government removes any purposeful activist role for it.
The government is seen as a complex of political institutions mediating strategic interactions
among economic and social actors, thereby sustaining particular institutional equilibria.
Many, however, argue that a more prominent role for the state is needed. Amable
(2003), in his analysis of the diversity of modern capitalism, introduces a grouping of
countries in which the state plays a determining role – the European-integration/public social
system of innovation and production (SSIP) – alongside three other European SSIPs (marketbased, meso-corporatist, and social-democratic) and goes on to propose five international
models of capitalism: market-based, social-democratic, Asian, continental European, and
south European. These categories mirror those analysed in the Regulation School more
broadly, except for the addition of the Asian model (Boyer 2005).
Schmidt (2002) creates her own typology of capitalist models, separating ‘state
capitalism’ (France) from ‘managed’ and ‘market capitalisms’ (Germany and Britain,
respectively). For her, ideas and national discourses matter for their capacity to generate and
legitimize changes in policies and practices (Schmidt 2009). Hancké, Rhodes, and Thatcher
(2007) propose a classical two-by-two matrix with the type of state-economy relations and
interest organization as dimensions. They distinguish étatisme (close relations, fragmented
interests, e.g., France), LMEs (arm’s-length relations, fragmented interests, e.g., UK),
compensating states (close relations, organized interests, e.g., Italy), and CMEs (arm’s-length
relations, organized interests, e.g., Germany). Both of these extensions allow for a wider
range of state responses and dynamics of neoliberal reform in national political economies.
5
But even these models that grant a larger role for the state fail to adequately account
for its varying roles in the East Asian context. In the developmental states of East Asia,
government officials direct lending to industries considered of strategic importance to lifting
the nation up the rungs of the development ladder via export-oriented industrialization
(Johnson 1982; Johnson 1987; Amsden 1989; Wade 1990; Evans 1995). However, given the
prevailing theoretical assumptions about government failure coming from neoclassical
economists, accompanied by the lack of success for industrial policies in other parts of the
world, debates have occurred on why such policies seem to work in these particular
countries.
One set of arguments focused on the state’s use of the financial system. Wade (1990)
argued that government intervention increased the capital available for spurring industrial
development by heightened savings rates and by holding savings within the country for use
by domestic investors. Amsden (1989) showed that subsidies directed toward bolstering the
supply of capital not only spurred investment, but also helped to overcome two key costs
associated with export-oriented industrialization: currency devaluation in an importdependent economy and the high degree of uncertainty associated with entering foreign
markets.
A second set of arguments in response to the neoclassical position attempted to show
how the broader institutional and political environment contributed to relatively efficient
outcomes. Johnson (1982) pointed to the autonomy of technocrats from political interference,
and their interactive relationship with business in targeting and implementing marketconforming development policies. Haggard (1990) emphasized the role of the state in solving
collective-action problems associated with economic policy reform, including through the
exercise of authoritarian power. Along these lines, Wade (1990) argued that the one-party
state was crucial for Taiwan’s development, and Amsden’s (1989) study of Korea referred to
the power of the state to ‘discipline’ the private sector.
In further refinements, the developmental state was seen as effective because of
bureaucrats’ autonomy from political pressure, while also retrieving information from the
private sector via trade associations to make decisions. This ‘embedded autonomy’ (Evans
1995) kept it from capture on the one hand and predation on the other. In other words, to be
effective, the developmental state needs not just an independent sense of purpose; it also
needs access to and information from the economic actors it seeks to influence. These dual
needs become increasingly important as development becomes less certain and more
complex. In other words, the increasingly sophisticated and complicated nature of industrial
production and greater reliance on innovation as a nation’s income status rises reinforces the
need for autonomy and reliable information (Amsden and Chu 2003; Wade 1990). As a
result, the developmental state’s ability to ‘impose’ its decisions is of diminishing relevance
to its capacity to institute a continuing conversation with economic actors about the
opportunities for innovation and the obstacles to be overcome in the context of a
performance-based incentives structure that disciplines its beneficiaries.
The developmental state as an ideal type needs to be juxtaposed to its opposite, the
predatory state. Much of Southeast Asia, with the exceptions of Singapore and India, has
historically fallen at least partially into this category (Evans 1995; Doner, Ritchie, and Slater
2005). Predatory states "extract such large amounts of otherwise investable surplus while
providing so little in the way of ‘collective goods’ in return that they impede economic
transformation" (Evans 1995:44). Typical of this form of state is a high concentration of
economic benefits in a relatively small group whose members are usually intimately
connected to top political leaders on the basis of family or kinship ties. With politics
representing predominantly a tool for self-enrichment, corruption is common, with attendant
results for the rule of law and government effectiveness. Compared with developmental
6
states, economic performance is usually poor (Evans 1995). At the same time, growth rates
may, at least for some time, exceed those in advanced industrialized countries, for reasons
that include population growth (higher population growth usually means faster GDP growth)
and low base effect (a small economy needs to grow much less in absolute terms to produce a
high growth rate than a large one).
But what political prerequisites led to the adoption of developmental or predatory
strategies in Asia? Doner, Ritchie, and Slater (2005) point to three key variables that,
together, offer necessary and sufficient conditions for the existence of a developmental state.
First, a lack of resources tends to push states toward developing a modern economy based on
manufacturing and services. By contrast, resource-abundant economies such as those of
Southeast Asia — Indonesia having an abundance of oil, Malaysia rubber and tin, the
Philippines sugar, and Thailand rice — lend themselves to more predatory orientations.
Second, the severity of an external threat to a nation's survival tends to be associated
with developmental strategies, though as the case of Pakistan illustrates, it is certainly not a
sufficient condition. Such threats were and are clear and real in Northeast Asia, first during
the Cold War and presently given the state of affairs between the two Koreas, between China
and Taiwan, and between China and Japan. It was also acutely felt in Singapore, with both
Malaysia and Indonesia initially attempting to absorb it. Threat levels in Southeast Asia have
arguably been lower in recent decades. The Vietnam War proved the major exception to the
rule and helped spur economic reforms in the region at the time.
Third, political leaders’ reliance on an encompassing coalition is associated with
developmental policies. While leaders’ political survival depends on the maintenance of a
minimum winning coalition, pressure to enlarge it can arise due to the threat of domestic elite
conflict or disruptive mass mobilization. To retain power, side-payments are often made to
popular sectors, but these can be difficult to sustain in the presence of severe security threats,
which siphon revenues to the defence sector. Revenue may be further constrained by resource
limitations, thereby leading to the reconciliation of coalitional, geopolitical, and fiscal
constraints via the widening of the coalition. Building and holding it together, however, can
only occur by continuously expanding the national pie through sustained growth and
jettisoning a cheap-labour strategy that could alienate coalition members. The presence of
these three variables therefore leads to the pursuit of a higher-skill, quality-based export
trajectory, rather than a low-wage-based export-growth model. Sustaining such a broad
coalition over the long run requires the ability to export high value-added goods by
continuous upgrading. Only strong states have the capacity to implement these policies; states
with weak institutions lack the capacity to overcome these political-economic challenges.
While this development strategy may foster certain institutional patterns, important
differences often remain. For example, Singapore’s institutional arrangements differ in
important ways from those of Japan and both of these differ from China, as case studies
clearly demonstrate. Hence, a nation’s particular business-system arrangements cannot be
explained solely by its development strategy.
In the context of Northeast Asia, Whitley (2005) argues that the state plays a critical
role in determining the characteristics of the business system and how employers behave
associationally. He also argues that where the state adopts an active role in economic
development (the developmental state) by directly intervening in certain sectors of the
economy, the result is greater diversity in employment policies, bargaining procedures,
corporate governance, systems of skills formation, etc., between firms of different size within
the same sector. In this analysis of potential business system outcomes, Whitley identifies
four types of state: arm’s-length, dominant developmental (Korea: paternalistic), businesscorporatist (Japan after WWII: state agencies, banking system, and large companies), and
inclusive-corporatist (Germany).
7
In contrast to Whitley’s focus on developmental states, Tipton (2009) argues that the
‘strong’ states of Southeast Asia owe their features to their heritage of colonialism and
reactive nationalism. Of critical importance is the political dominance of a narrow elite,
which gets reflected in the top-down management style of business. Yet often these strong
states are ineffective in generating high levels of growth compared to their developmental
counterparts, for reasons pointed to by Doner, Ritchie, and Slater (2005).
While elite political influence is predominant among these states, it is nevertheless
tempered by the structure of national political institutions, as shown by their responses to the
Asian Financial Crisis. MacIntyre (2001) explains that the distribution of veto authority can
account for differences in investment reversals. Countries with many veto points exhibit more
rigid policy responses, while those with very few display greater policy volatility. Both
extremes are bad for investors; a balance between the two is preferable. Thus, there is a ushaped relationship between the number of veto players and policy risk for investors. While
MacIntyre’s analysis is directed toward explaining foreign investment, the mapping of veto
points onto political regimes that extend beyond the advanced democracies traditionally
examined in the varieties of capitalism literature offers a potentially useful way to apply the
relationship between electoral systems and the varieties of capitalism framework to the East
Asia setting.
Seeking to develop a general explanation for business systems that can span North
and Southeast Asia, Tipton (2009) points to state capacity and state direction as indicators for
whether governments fit the liberal or coordinated approach to business systems. Together,
these attributes refer to the state’s ability to make and implement policies that effectively
achieve the government’s goals, as well as the extent of state involvement and resources used
to do so. Countries with high levels of state direction and state capacity are CMEs; countries
that are low on both dimensions are LMEs.
In the most recent contribution to the topic, Walter and Zhang (2012) apply a
framework resembling that of Hancké, Rhodes, and Thatcher (2007) (summarized earlier) to
the Asian context. They present a four-fold typology in which the organization of social
groups is characterized as strong or weak (Hancké et al.: organized or fragmented) and state
organization of the economy is extensive or modest (Hancké et al.: close or arm’s-length).
Capitalist institutions reflect the interaction of these two dimensions, yielding co-governed
(ROK, Taiwan), state-led (China, Malaysia), networked (Japan), and personalized (Indonesia,
Philippines, Thailand) state systems. Hong Kong and Singapore, two important cases with
economies larger than Malaysia or the Philippines, are not classified.
As with the framework proposed by Hancké, Rhodes, and Thatcher (2007), the
benefit of this approach lies in its applicability to varying regime types and degrees of social
coordination. However, Walter and Zhang (2012) argue that the combination of weak or
modest state organization of the economy, paired with weak coordination of economic action,
produces personal capitalism (i.e., predatory states) in Asia, while Hancké, Rhodes, and
Thatcher (2007) see essentially the same combination as leading to liberal market economies
in the West. The presence of different outcomes despite similar characteristics suggests that
there are missing variables that need to be accounted for and that further theoretical
development concerning the state’s role in the context of Asia is required.
Mapping State Theories on to Business System Outcomes
To make sense of how the government influences contemporary business systems, we
consider two different approaches. The first examines how conventional political-economy
categorizations of the state influence the various dimensions of a business system. These
categories include the regulatory, welfare, developmental, and predatory state. Britain and
several of its former colonies, such as the United States, Canada, Australia, New Zealand,
8
and Hong Kong are generally regarded as regulatory states; most of the West European states
fit into the welfare-state category; the East Asian Tigers – Japan, South Korea, Taiwan, and
Singapore – fall into the developmental category; and most Southeast Asian, Sub-Saharan
African, and Latin American states fall into the predatory-state group. Japan is often
categorized as either a developmental or a welfare state.
There are a couple of drawbacks to this approach. First, it was never intended to
explain the institutional arrangements of business systems, although inferences can be drawn
with regard to them. Second, states that were once seen as falling into a particular category
may no longer clearly belong there, such as the developmental states. Moreover, and as with
any typology, some states, such as Japan, could be placed into more than one category. But
bearing in mind these potential drawbacks, the benefit of this approach is that these politicaleconomy typologies of the state are widely accepted and understood. Hence the exercise of
drawing implications for business-system structures could offer generally acceptable insights
about the government’s influence on them.
Regulatory State
A regulatory state governs the economy mainly through regulatory agencies that are
empowered to enforce a variety of standards of behaviour to protect the public against market
failures of various sorts, including monopolistic pricing, predation, and other abuses of
market power, and by providing collective goods (such as national defence or public
education) that otherwise would be under-supplied by the market (Levi-Faur 2012).
Although the idea of the regulatory state was not intended to explain business
systems, by virtue of its emphasis on the United States, several of the features of a Liberal
Market Economy have come to be associated with it (Majone 1997). Hence, modern
regulatory states, which have given rise to regulatory capitalism (Levi-Faur 2005), tend to be
equated with strong financial markets and corporate ownership, and governance
arrangements that offer strong protections to shareholders. By virtue of this, managers tend to
have more power, although this is an implication that derives from stronger regulatory power
and not from theories of the regulatory state. Such states tend to have relatively basic
protections for workers, especially when compared to the welfare state. As a result, employee
turnover tends to be higher, and by implication, general educational skills and training are
favoured. With regard to inter-firm relations, theories of the regulatory state are mute.
Finally, because of the emphasis on providing institutions that protect the integrity of a
market economy, there is a tendency towards strong institutionalized trust.
[Table 1 about here]
Table 1 displays the ranking of states according to proxy measures for each of the
four state types. The measures used do not precisely capture the characteristics of each state
category, but offer a reasonable and objective method of comparing and ranking them.
Among the economies of Asia examined in this volume, Hong Kong most clearly fits the
regulatory state model, though not quite perfectly. First, the regulatory state is normally
associated with fully-functioning democracies, which Hong Kong is not. Second, strong
protections for minority shareholders, and therefore a tendency for the dilution of
concentrated ownership, is expected, yet Hong Kong’s enterprises are dominated by family
ownership. Finally, and partially due to the importance of these family groups, interpersonal
trust plays a more important role in Hong Kong than in the ideal-typical regulatory state.
Also of note is Singapore’s high placement in this category, though it is often regarded as
belonging to the developmental state category.
9
Welfare State
As discussed earlier, a welfare state is a concept of government in which the state plays a key
role in the protection and promotion of the economic and social well-being of its citizens,
primarily through the redistribution of funds by the state.
With regard to implications for the business system, financial systems tend to be more
reliant on banking than stock markets (Van Kersbergen 1995). This is partly due to the
greater social protections granted to employees, which disfavour the use of hostile mergers
and acquisitions that could lead to layoffs. Correspondingly, concentrated corporate
ownership prevails. The representation of numerous interests in government likewise
translates into a number of actors having influence on a key management decisions such as
hiring and firing, as well as wages (Esping-Andersen 1990). This tendency towards greater
employment stability likewise facilitates more specialized education and training (Hall and
Soskice 2001). In addition to the generally more cooperative relationships between owners,
managers, and employees, these firms also coordinate their behaviour with each other.
Together, these more coordinated forms of market interaction support more enduring forms
of interpersonal trust.
In the context of Asia, Japan most clearly fits the welfare-state model, though its
classification in the liberal sub-type, alongside the United States and Canada, indicates that it
does not display key features associated with this category. For example, employee welfare is
conducted more heavily at firm level rather than by the state, and mainly among large firms.
Moreover, the form of blockholding prevalent in Japan is due to cross-shareholdings among
member firms of the business group or long-term shareholdings by friendly firms rather than
by a single family owner. Japan also uses a proportional representation electoral system for
less than half of its legislative seats, the system commonly used in Continental Europe, which
some would regard as partially responsible for observed deviations from the ideal-typical
welfare state. Table 1 shows that South Korea would be next, and if data were available,
Taiwan would probably also be in the mix.
Developmental State
In this model, the state has more independent, or autonomous, political power, as well as
more control over the economy. The argument from this perspective is that a government
ministry can have the freedom to plan the economy and look to long-term national interests
without having its economic policies disrupted by either corporate-class or working-class
short-term or narrow interests (Doner, Ritchie, and Slater 2005). This autonomy from the
political process is easier to accomplish in a non-democratic state, and Taiwan, South Korea,
and Singapore all went through the majority of their developmental phases with such political
regimes. However, Japan illustrates that such developmental states may also exist in
democracies. Moreover, although Taiwan and South Korea have democratized, important
features of the developmental state persist.
As for implications for the business system, there is an expectation that the financial
system will be heavily reliant on banking, since over-borrowing and over-lending tend to be a
crucial mechanism by which strategic industries are rapidly developed (Wade 1990; Hoshi
and Kashyap 2004). As a consequence of the underdevelopment of the stock market as a
source of external financing, corporate ownership will tend to remain concentrated, although
this may be in the hands of families, the state, or through cross-shareholdings that form part
of a business group, as with Japan’s keiretsu. There are no hard-and-fast rules about the
internal decision-making structure of firms: Japanese firms have engaged in consensual
decision-making, while Korean, Taiwanese, and PRC firms have displayed more top-down
processes (Whitley 1992). These internal decision-making dynamics are reflected in the
structure of industrial relations, which exhibited stronger informal protections for workers in
10
the case of Japan, as compared to their Taiwanese, PRC, and Korean counterparts. The more
inclusive political arrangements in Japan likewise corresponded to relatively strong education
and training (both public and private) programmes, more tepid support in Korea and Taiwan,
and relatively little in PRC. The prevailing importance of business groups to organizing
economic activity contributes to a greater likelihood for inter-firm relations to occur
exclusively among these firms, and social capital is likely to have stronger interpersonal trust
attributes.
One of the drawbacks of this model is that there are several different kinds of political
regime that fall within its remit. Moreover, two of the countries, Korea and Taiwan, switched
regimes near the end of their developmental phases, leading to stronger protections for
workers. Hence, it is a little difficult to draw clear implications for the business system from
this model. For many, the PRC would also fall into this category with regard to its large
SOEs, but much of the rest of the Chinese economy would not. Additionally, the PRC has a
high level of income inequality, which differs from the other developmental states.
Many countries categorized as developmental do not fully belong in this category any
longer, as they have largely completed their development phase, although institutional inertia
means that many of the institutional arrangements persist. Generally, these countries rely on
strong interpersonal trust to enable rapid development, but Singapore exhibits strong
institutionalized-trust characteristics. Overall, there are many inconsistencies in business
systems among the variety of countries placed into this category.
Table 1 uses government effectiveness as a measure for the developmental state, since
this is regarded as a crucial feature. Asian economies line up in a way that is broadly
consistent with the developmental-state typology (though Hong Kong is placed highly, but is
more generally regarded as a regulatory state, as the government did not play an active role in
guiding the development of the economy). As the high scores of the European nations
indicate, this measure loses its discriminant power as GDP per capita levels increase. It is,
however, a useful measure for distinguishing developmental from predatory states at lower
levels of economic development. Detailed country analyses show that the state in China,
Malaysia, and Thailand has played a developmental role, though perhaps less clearly so than
in the other Northeast Asian states (Carney and Andriesse 2013; Suehiro and Wailderdsak
2013; Witt and Redding 2013a). The same cannot be said about the lower-ranking Asian
economies.
Predatory State
Predatory states are characterized as being governed by elites who monopolize power
through the use of opaque decision-making procedures, weak institutions, and a lack of
market competition, so as to generate profits that benefit them rather than society at large
(Robinson 2001). With regard to expectations about the structure of the business system, the
financial system is expected to be heavily banking-oriented, because the legal system is too
weak to allow for a well-performing stock market to develop (Evans 1989). Corporate
ownership is concentrated in the hands of families or the state, which is used for the benefit
of a clientelist group. With few checks in place to prevent abuse, state ownership provides
state officials with ample opportunities for rent-seeking. Mirroring the broader hierarchical
structure of society, the internal structure of the firm is top-down, with no protections for
employees. Likewise, there are few education-and-skills training opportunities. Inter-firm
relations are likely to occur only between firms from the same family group, and social
capital is strongly oriented towards interpersonal trust.
There is considerable variation in how closely these states conform to type, as seen by
their rankings in the control of corruption and government effectiveness in Table 1. India,
Indonesia, the Philippines, Laos, and Vietnam generally exhibit business-system
11
characteristics indicative of predatory states, while China, Malaysia, and Thailand combine
predatory elements with developmental aspects. Variation also occurs with regard to the
control of each country’s largest corporations. For example, Vietnam, Laos, and Malaysia
exhibit high levels of state ownership, while Indonesia, the Philippines, and Thailand have
more family ownership; Thailand has seen an increase in widely-held ownership since the
1997 Asian Financial Crisis. There are also important differences in political regimes.
Vietnam and Laos retain strict state control due to the continuing political dominance of the
Communist Party. The Malaysian state exhibits slightly weaker, but still strong, centralized
control, but with more market-oriented economic policies. Thailand, Indonesia, and the
Philippines have more democratic governance, but are not yet mature and well-functioning,
and patronage politics continues to play a vital role in economic policy-making. In summary,
predatory states display considerable variation, which makes it problematic to ascribe
uniform business-system characteristics to countries in this category.
Assessing Business Systems Theories
The second approach to evaluating how the state influences business systems is to examine
the utility of existing business-systems theories. We focus on the framework of Hancké,
Rhodes, and Thatcher (2007), which is mirrored in Walter and Zhang (2012). While other
frameworks exist, as reviewed above, this framework is the most elaborate model aiming for
universal applicability.
The key dimension for understanding the state in this model is the extent of state
intervention. Conceptually, such state intervention can occur in several ways: through the
regulatory framework, through direct state activity, and informally through processes such as
‘administrative guidance’ in Japan (cf. Witt 2013a).
While informal processes are difficult to measure, reasonable proxies of the other two
dimensions are available. The Index of Economic Freedom (Heritage Foundation 2012)
measures predominantly the extent of economic regulations, but also accounts for the level of
direct state activity in the economy as evident in government spending and associated taxes.
In addition, states may be directly involved in the economy through ownership of productive
assets. As a proxy measure, we use the percentage of state-controlled enterprises among the
top 200 listed firms in each economy. This is an imperfect measure, as it reports ownership
only for firms that are at least partially listed. However, it is the best available, as no
comparative statistics on total state ownership are available. Carney and Child (2012) report
state ownership among the top-200 listed firms for nine Asian economies. For the remaining
four – China, India, Laos, and Vietnam – we know from empirical analyses (Andriesse 2013;
Saez 2013; Truong and Rowley 2013; Witt and Redding 2013a) that state ownership levels
among major firms are high. To enable a meaningful comparison, we further report the
respective values of these variables for five Western advanced industrialized economies:
France, Germany, Sweden, the United Kingdom, and the United States (Christiansen 2011).
Table 2 shows the results for each measure in rank order. To reconcile the different
rankings, we calculate a weighted average rank order, giving twice the weight to the
Economic Freedom Index, as it is more encompassing than the ownership measure. Building
on prior classifications (Schmidt 2002; Hancké, Rhodes, and Thatcher 2007), we use the
weighted average rank order of France as the threshold for high levels of state intervention.
Five Asian economies thus have relatively low levels of state intervention: Hong Kong,
Singapore, Taiwan, Japan, and South Korea. The remaining eight nations have high levels.
[Table 2 about here]
12
The second dimension of the framework relates to societal organization with respect
to the economy. While this dimension is, strictly speaking, not related to the state as such, it
is still worth exploring so as to gain a fuller sense of the validity of the framework.
Measuring societal organization is difficult. We assume that there are two key societal
forces, employees and employers. With some reservations, union membership can serve as a
proxy for the organizational strength of the former. A concern here is that high or low levels
of membership do not necessarily translate into low or high levels of influence, because
existing institutions may amplify or attenuate strength in numbers – German unions, for
instance, are more powerful than their membership numbers suggest, because they can
leverage entrenched legal rights. Unfortunately, comparative statistics of union rights are not
available for most of Asia.
To our knowledge, there are no comparative statistics for Asia that measure employer
organization. However, qualitatively viewed, organization levels of employers seem to be
consistent with those of employees (cf. country chapters in Witt and Redding 2013b). That
does not mean that employers and employees are equally influential. Employers in most
Asian countries wield considerable influence on government through a range of measures,
such as personal connections or bribery (Faccio 2006). However, that form of influence is
usually not organized and thus unrelated to societal organization as a dimension.
We consequently use union densities as a proxy for social organization levels. Table 3
shows union densities for our sample in rank order. We take Japanese density levels, which
are low by CME standards (though the same as for Germany), to be the threshold for high
levels of organization. The results suggest that by this measure, there are four economies with
high levels of societal organization: Hong Kong, Japan, Taiwan, and Vietnam. However, we
know that in Vietnam, as in all Asian economies with governing Communist Parties, unions
are a branch of the party and thus not a means of labour organization, but part of the state
apparatus (Truong and Rowley 2013; Witt and Redding 2013a). The same logic applies to
Laos, for which unionization rates are not available (Andriesse 2013). Furthermore, we know
that unions in Hong Kong exist mostly in the context of a few public enterprises and are
virtually absent from the private sector (Redding, Wong, and Leung 2013). On the other
hand, while unionization rates in Korea in general are low, about half of the employees of the
most important companies — those belonging to the chaebol — are unionized (Witt 2013b).
Singapore, while close to Japanese levels, has effectively made unions part of the government
(Carney 2013). Taking these points into account, three economies remain with a high level of
societal organization on the labour side: Japan, Korea, and Taiwan.
[Table 3 about here]
The overall result is summarized in Figure One. It is reasonably consistent with the
labels proposed by Hancké, Rhodes, and Thatcher (2007). Hong Kong and Singapore are
arguably LMEs, and it is well accepted that Japan is a CME. Most observers would probably
also agree with the placement of the states identified as generally étatist. Problematic are
Korea and Taiwan, which the framework suggests to be CMEs, a classification not borne out
by detailed business-systems analysis (Hsiao and Lee 2013; Witt 2013b).
[Figure 1 about here]
The result is much less consistent with the empirical results and proposed labelling by
Walter and Zhang (2012). In terms of empirics, they classify South Korea and Taiwan as
having high levels of state intervention. While one can argue about the South Korean case —
perhaps Korea rather than France should be the threshold — Taiwan is clearly in the low-
13
intervention camp, having a higher rank than Japan, which Walter and Zhang accept as
having low intervention. It is also inconsistent with respect to Indonesia, the Philippines, and
Thailand, which Walter and Zhang classify as having low state intervention. In terms of
labelling, Hong Kong and Singapore in their scheme would be classified as having
‘personalized’ forms of business systems — read, predatory. This is clearly not the case
according to the indicators.
In terms of the overall utility of the 2x2 matrix, two points stand out. First, one of the
quadrants remains empty. The data suggest that co-governed or compensating states do not
exist in Asia unless one reclassifies Korea as a case of high government intervention, as
discussed earlier. Second, one might question whether it is sensible to lump together
relatively well-performing economies such as China or Malaysia with problem cases such as
Laos or the Philippines. As the weighted-average rank order shows, the level of state
intervention is not a useful discriminant for this question.
Implications for Theory and Conclusion
Our analysis suggests that existing business-systems theories that address the role of the state
are in need of further development. Given the presence of considerable empirical challenges
to the Walter and Zhang (2012) model, we propose to build on the model by Hancké, Rhodes,
and Thatcher (2007). If we accept that compensating states do not (yet) exist in Asia, two key
challenges to this model remain. First, Korea and Taiwan were classified as CMEs, even
though detailed analysis suggest otherwise. This could suggest a fundamental flaw in the
system. However, it might also be the result of institutional inertia. Both Korea and Taiwan
have undergone relatively recent transformations to democracy, allowing for a stronger role
of organized societal interests. While the current political configuration may thus have newly
come to resemble that associated with CMEs, the institutional structure of their business
systems may not reflect these new realities yet. If the framework is correct, one would
consequently predict these business systems to become more Northern European in
institutional structure over time.
Second, the étatist category mixes, to borrow terminology from the more general
models, predatory and developmental states; that is, polities with very different business and
political dynamics. In our view, it may be possible to address this issue by adducing a third
dimension for cases with high levels of state intervention: state capacity, as expressed by
government effectiveness and its control of corruption. This is in line with prior work that has
argued that state capacity, in the sense of state ability to get things done, may distinguish
developmental from predatory states (Evans 1995). Given that developmental and predatory
states tend to be relatively poor countries in terms of per capita GDP, we expect this
dimension to have discriminatory power only for lower-income economies. We remain
agnostic about the question of whether states combining low state capacity with high per
capita GDP represent a meaningful analytical category. Some oil-rich countries, such as
Equatorial Guinea, may fit these criteria. We leave this question for future research to
explore.
The resultant refinement to the étatist/state-led quadrant is presented in Figure 2. We
present the Asian étatist economies from most developmental (left) to most predatory (right),
using the average of the World Bank’s government effectiveness and control of corruption
measures, discussed earlier, as a proxy. Four rough clusters emerge, indicated by the
columns. Within each column, states cited higher are relatively more developmental than
those below them. Although this proposed model adds some complexity to the existing
framework, we think it is a necessary step in order to distinguish among different types of
étatist states, consistent with empirical facts for Asia and Europe.
14
[Figure 2 about here ]
Identifying systematic differences among these étatist states provokes questions about
their origins and the long-term effects they have on business systems as well as other
dimensions of the political economy. For example, Iversen and Soskice (2009) find that
electoral systems not only exhibit strong correspondence to capitalist arrangements among
OECD countries (particularly those related to industrial relations), but also to income
inequality and the extent of redistribution. Systematic differences among étatist states in Asia
may lead to similarly clear institutional and related economic outcomes. For instance,
developmental and predatory states may develop distinct sectoral patterns of comparative
advantage that resemble those proposed by Hall and Soskice (2001), i.e. of CMEs being more
competitive in areas with incremental innovation, and LMEs with radical innovation.
Developmental states would present an interesting object of exploration with regard to how
such advantages develop over time. For most predatory states, on the other hand, sectoral
advantages are likely to be heavily skewed toward resources and related low-technology
industries.
A further challenge to theory is the lack of democracy among many Asian countries.
Current theories about the political origins of OECD business systems point to a persistent
relationship with the electoral system. How might the political institutions of non-democratic
states be differentiated, and does their non-democratic apparatus impede the possibility to
predict future trajectories? Moreover, to what extent, and in what ways, do informal
institutions generate and preserve business-systems arrangements? Whitley (1992) has
pioneered work in this area, primarily among Northeast Asia’s developmental states, and
found considerable variation among them. It would be useful to see this work extended to
cover predatory states.
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Table 1. State Type Rankings.
Regulatory
State
Indicator
Economic
Freedom
index 2012c
Welfare State Indicator
Social
Protection
Index 2011a
OECD Public
Social Expenditure
as % of GDP, 2007
Developmental
State
Indicator
Government
Effectivenes
s 2011b
Predatory
State
Indicator
Control of
Corruption
2011b
Hong Kong
89.9
Japan
0.54
18.7
Singapore
2.16
Laos
-1.06
Singapore
87.5
South Korea
0.28
7.6
Sweden
1.96
Philippines
-0.78
US
76.3
Malaysia
0.15
Hong Kong
1.7
Indonesia
-0.68
UK
74.1
China
0.14
UK
1.55
China
-0.67
Taiwan
71.9
India
0.11
Germany
1.53
Vietnam
-0.63
Sweden
71.7
Vietnam
0.09
US
1.41
India
-0.56
Japan
71.6
Indonesia
0.06
France
1.36
Thailand
-0.37
Germany
71
Philippines
0.06
Japan
1.35
Malaysia
0
South
South
69.9
Laos
0.02
1.23
South Korea
0.45
Korea
Korea
Malaysia
66.4
Hong Kong
Taiwan
1.17
Taiwan
0.9
Thailand
64.9
Singapore
Malaysia
1
US
1.25
France
63.2
Taiwan
China
0.12
Japan
1.5
Philippines
57.1
Thailand
Thailand
0.1
France
1.51
Indonesia
56.4
France
28.4
Philippines
0
UK
1.54
India
54.6
Sweden
27.3
India
-0.03
Germany
1.69
Vietnam
51.3
Germany
25.2
Indonesia
-0.24
Hong Kong
1.84
China
51.2
UK
20.5
Vietnam
-0.28
Singapore
2.12
Laos
50
US
16.2
Laos
-0.91
Sweden
2.22
a
Asian Development Bank 2011
b
Worldwide Governance Indicators, World Bank 2011
c
Heritage Foundation 2012
Note: Higher values on the Economic Freedom Index denote higher economic freedom. For government effectiveness and control of corruption,
higher values indicate greater effectiveness or better control.
19
Table 2. Measures of State Intervention in Rank Orders.
Economic Freedom Index 2012
Economy
Index
Hong Kong
89.9
Singapore
87.5
US
76.3
UK
74.1
Taiwan
71.9
Sweden
71.7
Japan
71.6
Germany
71.0
S. Korea
69.9
Malaysia
66.4
Thailand
64.9
France
63.2
Philippines
57.1
Indonesia
56.4
India
54.6
Vietnam
51.3
China
51.2
Laos
50.0
a
State Ownership among Top 200
Weighted Average
b,
Companies *
Ranking
Economy
Ownership, % Economy
Ranking
US
1.0
US
2.3
UK
1.0
UK
3.3
Germany
1.5
Sweden
5.0
Sweden
1.5
Hong Kong
5.0
Philippines
5.2
Singapore
5.3
France
5.5
Germany
6.3
Japan
6.3
Taiwan
6.3
S. Korea
6.9
Japan
7.0
Taiwan
9.2
S. Korea
8.7
Thailand
12.8
France
10.0
Indonesia
14.1
Philippines
10.3
Singapore
20.5
Thailand
10.7
Hong Kong
28.0
Malaysia
11.3
Malaysia
39.7
Indonesia
13.0
India
(high)
India
15.0
China
(high)
Vietnam
16.3
Vietnam
(high)
China
16.7
Laos
(high)
Laos
18.0
a
Heritage Foundation 2012
Christiansen 2011; Carney and Child 2012; Andriesse 2013; Saez 2013; Truong and Rowley 2013; Witt and Redding 2013a.
*
The high score for Hong Kong reflects the large number of mainland-Chinese SOEs listed on the exchange, rather than HK state-owned firms.
b
20
Table 3. Union Densities in Rank Order.
Economy
Sweden
Vietnam
Taiwan
UK
HK
Japan
Germany
Singapore
China
US
Philippines
Malaysia
S. Korea
Thailand
France
India
Indonesia
Laos
Union Density, %
68.4
67.0 (2005)
37.3
26.5
23.2
18.5
18.5
17.7 (2009)
16.1 (2007)
11.4
11.2 (2007)
10.2 (2007)
10.0 (2009)
10.0
7.6 (2008)
6.9 (2008)
5.0 (2007)
n/a
Notes
union branch of the Communist Party
unions focused on few large public enterprises
union effectively part of government
union branch of the Communist Party
close to 50% unionization in chaebol
union branch of the Communist Party
Sources: OECD 2012; Witt and Redding 2012
Note: Numbers are 2010 or latest available.
21
Figure 1. Placement of Asian Economies Using Existing Frameworks.
State Intervention
low
‘CME’/’networked’
high
Social
Organization
high
‘compensating’/’cogoverned’
Japan
Korea
Taiwan
-
‘LME’/’personalized’
‘étatist’/’state-led’
Hong Kong
Singapore
China
India
Indonesia
Laos
Malaysia
Philippines
Thailand
Vietnam
low
Note: Terms in quotation marks are labels proposed by Hancké, Rhodes, and Thatcher (2007) and Walter and Zhang (2012) respectively.
22
Figure 2. Placement of Asian and Major European Economies Using Proposed Framework.
State Intervention
high
low
CME
high
compensating
Japan
Korea
Taiwan
Italy
Spain
Germany
Sweden
Social
Organization
LME
étatist, advanced
Hong Kong
Singapore
France
étatist, developmental
low
UK
US
high
income
Malaysia
Thailand
China
India
high state capacity
23
étatist, predatory
Philippines
Vietnam
Indonesia
Laos
low state capacity
low or
medium
income
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