February 22, 2011
by Annelise Riles
1 Comment

When Companies are Households

The scandal pages coming out of Hong Kong this month are full of intrigue about disputes among family members and various other possible “significant others” over the estate of tycoon Stanley Ho.  The Financial Times’ story on all this basically suggested that mixing family and company was an Asian characteristic, and not a particularly good one at that.  The point was that Asian companies need to separate business from family matters, and to separate the economic interests of each family member from the other if they are to succeed.

You hear this conventional wisdom from European and American experts all the time. In order to succeed, Asian companies need to make their companies look and function just like Euro-American ones.

Really? Now that two out of the three largest economies in the world are in Asia, perhaps it is time to consider European conventional wisdom on what a good company looks like. First, it is not as though shareholder governance always works out so great, as the recent financial debacles in the West have taught us.

But more importantly, writing from Tokyo at the moment, I am repeatedly struck by how much energy, creativity and real economic productivity resides in family-owned companies in this country (what the government euphemistically refers to as small and medium sized enterprises, even though some are actually enormous–as if it were an embarrassment that these companies are also families).  The open secret is that more than 90% of Japanese companies have the majority of their stock held by relatives.  More than 70% of Japanese employees work for such a company, and this does not count the unpaid labor of family members–the spouse who keeps the books, the son who manages the factory floor and so on.

I personally think this is a good thing, not an embarrassment at all. When I get depressed about the lack of innovation in large Japanese institutions–universities, companies, government–I have only to turn to the local restaurant or convenience store or florist to see examples of truly awe-inspiring creativity, intelligence, and perseverence under very difficult economic conditions.  When I get furious at the lack of women and young people in leadership positions in this country, I only have to go around the corner to see how the mom and pop owners of my local stationery store work side by side with their daughter and son-in-law with dignity and mutual respect (and of course the occasional screaming match).

What worries me, rather, is the way all this talk about needing to turn your family business into a “real” company with fancy financial investments and complex ownership structures is having disastrous effects on those who listen. One of the saddest chapters in the recent financial crisis in Japan has been the bankruptcy of so many such family businesses due not at all to poor performance in their business but to their investment in complicated financial instruments that the large banks convinced them they needed.

These companies do have very different economic challenges–one of the principal ones being what to do about succession when the founder or chairperson dies or retires, leaving behind either too many possible heirs or no heirs interested in the family business at all.  But what about the problem that worries the Financial Times so much, about people’s interests being mixed up with each other? Well, this is a problem in Euro-American shareholder governance as well, of course.  And there is no denying that in life in general, and not just in economic life, Chinese and Japanese people sometimes complain about the burdens that come with being so intimately connected with other people.  But there are advantages as well as disadvantages.  The Financial Times does not seem to recognize that the same sense of mutual connection that makes dividing assets difficult at death makes funding a startup relatively easy.  And many of the problems that plague Western companies–problems about how to align managers’ interests with the interests of shareholders–are hardly problems at all when the manager is the daughter of the founder.

And we might query whether Euro-American capitalism is really all that different, or whether the difference is rather one of degree. Many very successful public and private companies in the US and Europe are also largely family owned–from major newspapers to leading automobile manufacturers.

There are real issues here for policy: these companies are largely neglected by government policies long aimed at supporting the big industrial players.  It may also be that too many bureaucrats, trained in the West, are enamored with the Western model and not all that interested in how things work in their own country.  The company laws on the books in Japan for example–borrowed largely from American and European corporate law–don’t fit these companies’ needs or challenges very well.  Thinking about the economy as basically a bunch of household enterprises, incorporated formally as corporations, should cause us to think differently about a whole range of regulatory problems, from labor rights to the promotion of innovation to access to capital and taxation policy.  It also suggests the need for lots more research–we know surprisingly little about how these families/companies work, what role gender, and marriage, and inheritance tax, and social class, and immigration play in their fortunes and strategies.  We know too little also about how they globalize–how they set up operations overseas, and what contributes to success or failure.  And this all suggests the need for a much broader range of methodologies and specialities–notably anthropology and sociology, which have long traditions of expertise in kinship and social organization.  But the first step may be simply to recognize the obvious: so much of markets is really about households and families.

February 14, 2011
by Annelise Riles

Can we talk?

I spend roughly half of each year in the United States and half in Asia.  Thinking about markets and their regulation from these two different vantage points makes you confront, every day, the almost comic level of misunderstanding, misconception, and general lack of sophistication that prevails on each side of the Pacific about what goes on on the other side.  Even what gets celebrated and imported is often twisted almost beyond recognition and therefore destined to do far more damage than good:  for the record, Chinese mothering is not a ruthless and abusive pursuit of a myopic definition of success, and the ideal of American capitalism is not about eliminating all obligations to employees or consumers and treating everyone around you as unworthy of dignity.

In my experience, the problem is sadly but equally widespread from street-level shop owners to the high echelons of national bureaucracies, and from journalism to the academy.  For the most part, and with very notable exceptions, the average academic or bureaucrat I know in Asia or the US frankly just isn’t that interested in what is happening on the other side of the Pacific. He or she has his or her own day to day concerns, political struggles, and ambitions, at home, and doesn’t really see how reaching out and taking an interest in foreign stuff, or putting in the time to build long term relations with people elsewhere, will pay off.

So what? The stability and growth of the three largest economies in the world–the US, Japan and China–depends on our collective ability to find solutions to some serious disagreements and ways of working together on some real challenges, from labor and trade relations to government debt to foreign exchange policy, border disputes, environmental standards and much more.  We are at an exciting, but also a potentially dangerous time in world affairs and market development.  Where are we going to find the resources–the ideas, the people, the institutions–to make real progress on these conflicts and build solutions that will last?

The language barrier is much more of a problem here than we often acknowledge.  It only takes a couple of years of language classes for a smart French bureaucrat or union leader to be competent enough in Italian to make sense of a position paper written by an Italian colleague.  As a result, the ability to communicate is much more widespread throughout the society.  In contrast, it takes many years of very hard work for Asians and Americans to master one another’s languages.  And this creates its own distortions and absurdities: the Americans who specialize in Japan and the Japanese who specialize in America each are their own odd breed, to say the least. At the same time, I have met too many Americans whose solution to this problem is to convince themselves that it doesn’t exist–that everyone in Asia speaks English anyway–and who are therefore blithely unaware of the depth and richness of what they are missing.

And yet living between the US and Asia I am also constantly reminded of how much each side stands to learn from the other.  The Japanese experience with health care, and its technical, social and political innovations for adapting to the so-called Aging Society is surely a model for the US.  At the same time, Japanese society and markets surely would benefit from studying some of the deep conditions of American innovation–not the surface level stuff of importing a foreign CEO or two, or cutting employees’ employment security, but the stuff Americans largely take for granted: relatively open immigration, the availability of credit, and the availability of equal opportunities for people under the age of–say–fifty.  The Chinese government is ahead of both the United States and Japan in appreciating the long-term benefits that come with training a generation of experts who are truly culturally, linguistically and technically fluent and can move freely across the Pacific region.

In the same way that we need to invest in light rail and internet infrastructure, we need to invest now in building the human resources–the individuals, the institutions, the ways of talking to one another– for a vastly more sophisticated cross-Pacific conversation.  This needs to happen at all levels–from elementary school on up. In the specific area of market regulation and reform, the Clarke Program in East Asian Law and Culture which I direct at the Cornell Law School is launching a multilingual (Japanese, Chinese, English) online community of lawyers, policy makers, academics and graduate students across the Pacific.  We hope that by investing in a detailed and intensive conversation about market issues, broadly conceived, over the long term, we can have the kind of frank and imaginative conversation that will produce the new ideas we all need.  More about this initiative soon on this site!

February 9, 2011
by Annelise Riles

The Gift Economy

It’s the Chinese New Year, and the financial press has been full of stories of massive Chinese purchases of gold (for instance here and here), as gold (molded into rabbits to signify that it was given in the year of the rabbit) has emerged as this year’s gift of choice. Chinese buyers are purchasing gold in quantities the market has never seen before not as an investment in the traditional economic sense, but for purposes of satisfying their obligations in the gift economy.

The gift economy is something that economists don’t talk much about. It is for the most part treated as an evolutionary precursor to the market economy.  The simple story most economic historians tell is a tale of progression from status to contract–from old fashioned relationships built on gifts to modern markets made up of arms-length transactions among strangers.  Where the reality of the significance of gifts to modern markets just can’t be avoided, as here (because the price of gold is skyrocketing), the gift economy is usually treated as a cultural oddity, just a little aberration to the general rules of economic action.  But anthropologists have amassed generations of data on how gift economies and market economies interact in many societies around the world–how economic tokens like money can become the stuff of gifts, and how gifts (from whales’ teeth in Fiji to sexual relations in New York) can become marketable commodities.  It turns out that gift economies are extremely complex and variable phenomena that require as much data and as much theory to understand as market economies.  (It would be impossible to even begin to summarize that literature here, but it begins with Marcel Mauss’ classic, The Gift, written a century ago, and after that just about every serious anthropologist has wrestled with the subject in every part of the world.  For a great literature review, see Hiro Miyazaki’s chapter in The Oxford Handbook of Material Culture Studies, Oxford University Press, 2010).

Now that the Chinese economy is number two though, it is probably time for the world to start paying attention to what economic anthropologists know about gift-giving: any serious China expert knows that markets don’t work in China without gifts, and that it is through gifts (as well as markets) that every kind of relationship that is significant to markets, from a company’s relations with regulators, to relations among investors to obligations between employers and employees gets built and maintained. Moreover, as the legal scholar and former dean of Peking University Law School Zhu Suli is currently finding, in research to be presented as the 2011 Clarke Lecture at the Cornell Law School, much of the astounding profits of Chinese enterprises are now being funneled into fulfilling stakeholders’ gift obligations–such as the massive resources a young man’s family must hand over to the family of their son’s prospective spouse in exchange for the “gift” of a wife.  And it turns out that there is astronomical  inflation in the price of brides these days in China, as people become richer, and the supply of daughters becomes ever more limited as a result of the one child policy and families’ preference for sons.  You simply can’t understand the logic of Chinese markets, or for that matter of Chinese actors’ investment strategies and economic activities globally, without understanding the theory and practice of gift-giving.

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