Corporate Governance, Business Group Governance and Economic Development Traps

Luis Dau, Randall Morck and Bernard Yeung

No 28069, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: B26 G3 N20 O1 P12 (search for similar items in EconPapers)
Date: 2020-11
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-ent, nep-sbm and nep-tid
Note: CF
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