“Getting the institutions right”: Corporate governance and technological capability in East Asia and Latin America compared

Latin America and East Asia differ in the extent to which they have specialised in mechanical, electrical and electronic sectors. These sectors are critical for economic development but pose a challenge for corporate governance. By combining insights from studies of corporate governance and of development economics, this paper examines how certain developed countries have been able to establish institutions enabling a specialisation in these sectors. We show how East Asia has met some of the institutional conditions enabling specialisation in these sectors and the difficulties of Latin America in this respect. Introduction There is wide agreement that the prospects for economic growth are much more modest for Latin American than for East Asian countries. For example, the World Economic Forum ranks Taiwan fourth, Korea 22nd, Mexico 31st, Argentina 42nd and Brazil 51st out of the 59 countries surveyed using its competitiveness index (World Economic Forum, 1999). Much of this disparity is due to differences in what the authors call “technology” and “institutions”. “Technology” measures computer usage, the spread of new technologies, the ability of the economy to absorb new technologies and the level and quality of research and development. “Institutions” measures the extent of business competition, the quality of legal institutions and practices, the extent of corruption and vulnerability to organised crime. In identifying the role of “technology” and “institutions”, the report is representative of a shift in mainstream economic thinking away from a concern with strict “economic” variables such as macroeconomic stability and international openness. However, what this report does not explain is the dynamic relation between these factors, and how certain institutions can lead to the development of certain sectors that are important for economic development and long-term growth. A more fruitful approach involves bringing together insights from studies on corporate governance and a concern for the dynamic and strategic aspects of the development process. A focus on corporate governance can add significantly to our understanding of the great post-war success of certain East Asian countries and of the relative failure of Latin American countries. It is notable that the two sets of countries are very different in the extent to which they have specialised in the sectors covered by Pavitt’s mechanical and electrical and electronic ‘technology families’ (Pavitt, 1984). Among non-traditional development theorists there appears to be wide support for the view that these mechanical/electrical sectors are critical for economic development, because of the extent of interdependence and linkages across the production process (Hirschman, 1958; Fransman and King, 1984). We shall add to this the argument that they are potentially a relatively cheap vehicle for economic development, because they depend heavily on human and intellectual capital which can be acquired through learning by doing, incrementally and cumulatively. For related reasons, however, they present severe difficulties organisationally, which represent a challenge to the corporate governance system. This paper addresses these issues through a comparison of two East Asian countries –