Economic Groups Be Decided by the Market

All business entities share the ambition of acquiring other entities, because all think that it must be bigger to be more powerful, to be more proactive, and to have more power, higher position and greater strength. This is a common thought because of easy persuasion. This also satisfies the sense of ‘superiority’ in human psyches. But the correlation between stature and strength is not always on the one side: The strong must be the big but the big is not necessarily the strong. Being big but weak usually results in stroke. Thus, the issue here is how to grow strong, not how to grow big.

 

Economic groups, mainly State-owned, are popular in China and Vietnam. Despite a lot of efforts to reform governance system and necessary legal frameworks (Law on Enterprises 2000, 2003 and 2009), economic groups still face numerous difficulties in pursuing effective operations. State-owned corporations still have certain limitations. And, as the representative owner of public capital, the State ineffectively manages such capital.

 

“State-owned corporations hold leading roles and dominate the national economy" is a major policy of the State but the issue is who is responsible for managing the capital and whether they can manage it? Currently, no laws force State-owned corporations to make their business reports public. They only report their performances to the Government but it remains unclear that who will read, supervise and hold responsible for treating them when problems are found. Thus, wrongdoings will be hardly discovered in time to make necessary corrections. The Law on Audit 2011 stipulates that State-owned enterprises (SOEs) are subject to audit. However, this law does not completely remove the "bottleneck" in supervision responsibility, quality and performance of SOEs. The deployment and publicity of audit results of the State Audit Office of Vietnam is quite late, sometimes up to several years from the current year. This shows the lax management and supervision over economic “iron fists” of the State.

 

The State of course has certain limitations and cannot impose comprehensive monitoring. The State is responsible for introducing development policies and orientations and even deciding deployment methods.

But, because capital is owned by the whole people, the State only represents the people to use that capital. So, the people should be provided all necessary conditions, rights and responsibilities to monitor the capital used by State economic groups. This is the most basic conditions in business: Capital owners must know who is using their capital, what their capital is used for, and whether their capital is effectively used?

 

Regarding the State role in building economic groups, economic groups in Japan and South Korea raise (most of) capital directly from the public and are run the private sector which is responsible for reporting to shareholders and the State. These economic groups have made extraordinary achievements in the past few decades.

 

However, because of the close relationship with the State (complying with development principles and guidelines, receiving preferential treatment in terms of market information and State credit), this model has brought about enormous risks, monopolies, factionalism, corruption.

 

In the past two decades, Japanese economic groups have encountered numerous hardships due to unfocused business, inflexibility and low margin ratio (usually less than 1 per cent on revenue). They thus have to struggle to survive in the tough situation. The biggest risk in these two countries is the power and benefit fall into a few companies, resulting huge difficulties in bad situations like dissolution. Developments relating gigantic economic groups will cause huge effects on the society like layoffs and bad debts. The financial system may face overloading and fail to make changes to adapt to new situation. And, if this is the case, it will cause a domino effect.

 

Meanwhile, Taiwan, with the same starting point after World War II as Japan and South Korea, became an Asian dragon only after two or three decades. However, its development strategy is based on two factors: The activeness of the private sector, especially small and medium-sized companies, with very little support from the government; and limitation of fields required State investment. In the 1950s, government-run companies contributed 75 percent to its GDP but the private sector accounted for 70 percent of its GDP in the 1980s. By now, it is clear that Taiwan is more successful with a well-developed, more sustainable and more equitable economy than both Japan and South Korea.

 

With the experience from other economies and on the basis of current realities, perhaps, the concept of economic groups should be seen in a more open and flexible angle:

 

First, an economic group is not necessarily an institution with a certain stature but it must be useful to the economy. So, let the market decide who should be big and strong and who is beneficial.

 

Second, a logical, voluntary and mutual supporting connection of different enterprises - both the State-run and the private-run - is necessary to promote their strengths and utilise others’ strengths to be stronger. They are not necessarily bound to a bigger entity that we call “parent company” because independence will make stakeholders set up more effective connection.

 

Third, economic groups should be seen as natural development phenomenon as a result of market demand and the development capacity of such groups. Specific treatments and preferences are unessential, except for some legal conditions to preclude monopoly and cornering.

 

However, an economic model only develops well when it is in a transparent, fair and healthy business environment. Vietnamese entrepreneurs have the opportunity to be trained in the domestic market with international standards to enhance their competitiveness and global economic integration. Vietnam can achieve a 10 percent growth if energetic, dynamic and inspirational Vietnamese people join hands together for a better business environment.