Oligarchic family control, social economic outcomes, and the quality of government
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Oligarchic family control, social economic outcomes, and the quality of government Kathy Fogel Department of Economics and Finance, Northern Kentucky University, Highland Heights, KY, USA Correspondence: Kathy Fogel, Department of Economics and Finance, College of Business, BEP 431, Northern Kentucky University, Highland Heights, KY 41099, USA. Tel: þ 1 859 572 7607; Fax: þ 1 859 572 6627; E-mail: [email protected]
Abstract Wealthy families, as opposed to small public shareholders, characterize ownership of the large corporate sectors of many countries around the world. This paper shows that greater oligarchic family control over large corporations is associated with worse social economic outcomes. It also correlates with more bureaucratic and more interventionist governments, and less developed financial markets. Further tests show that red tape, price controls, and the lack of shareholder rights protection are the paramount factors relating to the extent of family control of large firms. These results are broadly consistent with Olson and others who argue that economically entrenched wealthy insiders pursue rent-seeking activities to preserve the status quo, and that this increases corruption, and impedes growth. Journal of International Business Studies (2006) 37, 603–622. doi:10.1057/palgrave.jibs.8400213 Keywords: oligarchic family control; government; institutions
Received: 6 June 2005 Revised: 1 December 2005 Accepted: 17 January 2006 Online publication date: 27 July 2006
Introduction A handful of very wealthy families control a substantial part of the large corporate sectors in many countries and across all levels of economic development.1 Through control pyramids, cross-holding, dual-class shares, and other mechanisms, these families are able to control a vast amount of corporate assets many times their family fortune, sometimes a considerable share of the host countries’ economies. Such concentrated control of very large business groups is thus highly relevant for the economic and institutional development of those countries. The following three questions emerge. First, the wealth of nations is closely tied to the prosperity of large businesses, which tend to be the most capital intensive, the most technologically advanced, and utilize the largest economy of scale. Is there any identifiable relationship between these ownership patterns and the host countries’ economic performance and social development in general? Whereas La Porta et al. (1999) and Morck et al. (2000) addressed the relationship between concentrated ownership pattern and national income, this paper focuses on social economic development indicators such as the quality of healthcare, education, infrastructure, and income equality. Second, what determined wealthy families’ choice in the ownership patterns of their firms? The families behind the largest publicly traded corporations in the United States generally retain a small, non-controlling stake in t
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