rafmacalaba/datause-encoder-data huggingface dataset:
# **Diversification and Efficiency of Investment By East Asian Corporations**

Stijn Claessens, Simeon Djankov, Joseph P.H. Fan, and Larry H.P. Lang

## **1. Introduction**

The East Asian financial crisis has at least in part been attributed to the extensive diversification of corporates, which is associated with misallocation of capital investment towards less profitable and more risky business segments. While a plethora of anecdotal evidence to support this argument has surfaced in the aftermath of the crisis, there was little discussion preceding the crisis. Quite the opposite, the rapid expansion of East Asian corporations through entry into new business segments was seen as an important contributing factor to the East Asian Miracle (World Bank (1994)). In this paper, we examine the efficiency of investment by diversified corporations in nine East Asian countries, using unique panel data of more than 10,000 firns over the 1991-96 pre-crisis period. We offer three contributions to the literature. First, we document the degree of diversification on the corporate sector in Hong Kong, Indonesia, Japan, Korea, Malaysia, the Philippines, Singapore, Taiwan, and Thailand, countries which have achieved enviable rates of economic growth over the last three decades. Second, we distinguish between vertical and complementary diversification and study the differences across the nine countries. Finally, we investigate whether diversification in East Asia has hurt economic efficiency.

To accomplish the first two contributions, we use the inter-industry commodity flow data in the US input-output table as a common benchmark to construct vertical relatedness and complementarity indices between the primary and the secondary businesses of all sample firms in the nine countries (see Fan, Lang and Stulz (1998)). These measures allow us to describe, for any pairs of businesses, the possibility of vertical integration, joint procurement, and/or sharing marketing and distribution in each firm. We document the degree of diversification in the corporate sector, distinguish between vertical and complementary diversification, and study the differences across the nine countries.
19 from voucher investors might be a profitable business for a fund in the medium24 term since a fund (or its sponsor) is buying a share with an underlying net asset value two to four times higher. This explains why funds (or sponsors) that provide cash for their fund shares would rather hold them under the current situation than sell them on the secondary market. Therefore the first interpretation of an upper ceiling seems to offer the most convincing explanation: the buy back guarantee was perceived 'the fair market price' which resulted in high discounts to net asset value for shares of funds making promises to their investors.

The biggest divergence between the market value of an invested voucher book and the buy back promise of the sponsor is for the fund established by Ceska Pojistovna, the Czech Insurance Company. The fund's share is quoted at only half the price at the stock exchange in comparison to the guaranteed buy back price. This was the reason why half of the investors in Ceska Pojistovna's fund have used their option to redeem their fund shares for cash, far more than investors of other funds.

# **8. Funds and corporate governance**

Spending many points on one single enterprise does not necessarily mean that a fund has got a high stake in a given enterprise. It could also mean that the fund invested in the big companies (that issued more shares than small companies). In order to assess a fund's ability to control portfolio enterprises, one would have to analyze the number of companies in the portfolio, in which the fund owns a _significant_ or _controlling_ stake. In this study, a _significant_ stake is defined as more than 10% of outstanding share, which is the proportion funds are generally given a seat on the governing boards of the company. Many funds,

> **24** The validity of this statement is of course dependent on a higher liquidity of the stock market for the fund being able to liquidate its portfolio.
<!-- Start of picture text --> Outlet<br>discharge<br>Authorized<br>Branch canal<br>Actual<br>De-silted<br>0 Distance from head<br>Minor canal<br>Head<br>Head outlets Tail outlets<br>Watercourse<br>Tail = PMIU discharge gauge<br>Distributary<br><!-- End of picture text --> Figure 1: Channel schematic with discharge gauges of gates regulating flow into the off-taking distributaries according to a rotational schedule. However, since _moghas_ are ungated, discharge into tertiary units, the watercourses, is determined by the width of the outlet; the greater the watercourse CCA, the greater the authorized outlet width and thus the greater the water in-take each week. Over the course of a week, proceeding from the head to the tail of the watercourse, each farmer takes his preassigned turn at using the entire flow to irrigate his field, with the length of turn proportional to the size of the Although design discharge at any point along a channel accounts for seepage and conveyance losses and is therefore a declining function of distance to the head (see Figure 1 inset), tail outlets should, by virtue of their greater width, receive their full water entitlement.<sup>7</sup> In practice, however, this elaborately constructed allocation system does not guarantee equity. If discharge at the distributary head is intermittent during the filling cycle (as is often the

> 7Since there is no adjustment for seepage within a watercourse, farmers at the tail-end of a _watercourse_ are at a disadvantage relative to those at the head even on paper (more on this below).

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|Republika Srpska|||D+|A||D+|
|---|---|---|---|---|---|---|
|Kosovo|..|..|C|B|C+|A|
|North Macedonia|37|6|D|B|D+|C+|
|Montenegro|..|5|C|B|C+|D+|
|<br>Serbia|43|21|C|B|D+||

Sources: International Budget Partnership; Wang, Irwin, and Murara (2015); latest PEFAs.

# **These problems frustrate the effective implementation of fiscal rules:**

- The incomplete coverage of general government makes the rules less effective. It may also make future compliance with the EU’s fiscal rules more difficult than it may it first appear, since Eurostat will examine the coverage and may conclude that it should be broader than it currently is. Similarly, the absence of accrual accounts will make compliance with the EU’s accrual-based deficit more difficult—though there are procedures for estimating accrual deficits on the basis of cash data.

- There is too little information to show whether the letter of the fiscal rules has been followed only by violating their spirit. For example, have the rules been complied with only by allowing arrears and other accounts payable to accumulate? Or have they have been complied with only by moving public spending and borrowing to state-owned enterprises and other entities not included in the scope of the rules?

- Problems in forecasting and medium-term fiscal planning also make it harder for governments to comply with the rules and, if compliance is nevertheless achieved, may encourage abrupt rather than smooth adjustments.

# **V. PRINCIPLES TO GUIDE POLICY TOWARD FISCAL RULES**

**What principles should guide policy toward fiscal rules in the Western Balkans?** Although the evidence about the effectiveness of fiscal rules is not robust enough to support confident recommendations, the following five principles can help guide policy in the period ahead.

**First, the fiscal rules should enjoy strong domestic support** . That in turn means they should be simple and introduced only after considerable public debate. Because self-imposed national fiscal rules work partly by changing political pressures, they work best if they are clearly understood by politicians and the population at large and enjoy support across party lines (e.g., Schick 2004). This suggests that the rules should be simple and few in number; introduced after careful public debate; enacted in a legal norm that requires a supermajority to pass or amend; and changed only occasionally. Governments can, and should, have more fiscal goals than compliance with fiscal rules; these additional goals, which can vary with the state of the economy, should be set out as targets in budget documents or medium-term plans—not in a law intended to be permanent. Although the press can be expected to report on whether the government has complied with fiscal rules so long as the rules are announced with enough

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if they were interested in doing so. The micro‐savings account is geared towards micro‐entrepreneurs as an entry savings and transaction account, requiring no initiation fees (although a minimum balance of 500 naira is needed ‐ one‐third of average daily profits from our sample of entrepreneurs). Interest on this savings account is then a function of the amount of savings held. If entrepreneurs expressed interest in opening an account but did not have the opening balance on hand, they could sign up their names and contact details and follow up with _Accion_ at a later date to confirm the account opening. In this case, the combined intervention aimed at simultaneously encouraging people to save through the movie’s message while reducing access barriers almost to zero with the presence of the MFB at the screening events. The hypothesis was that the movie would serve to inform, but also motivate business owners to act, and open a new savings account. The motivational effect of the movie was expected to wear off soon after the screening, and giving business owners the opportunity to act in the moment may increase the potential for this short‐term motivation to translate into action. By overcoming these barriers to formal financial participation, the study could then explore whether this engagement resulted in longer‐term interactions, leading to improved use of financial products over time.

While Credit Awareness planned to roll out the screening events across the country, the evaluation focused on a series of early pilot screenings to test the modality and learn before scaling up. The pilot screenings were conducted at local community halls in the Ikotun region of Lagos – home to a sprawling street market. The typical screening event would be held in a hall, with local traders invited to attend. The event lasted approximately 3 hours, starting with a brief introduction, the screening of the movie and an open discussion after the event to reflect on the story’s core messages. This would be followed by the engagement with the MFB. For the purpose of the evaluation, two extra elements were included to the standard Credit Awareness model: (i) to ensure compliance with the assignment strategy each participant received a personalized invitation with a photograph to confirm their identity; and (ii) to improve participation rates, a lottery was held at the end of the event where participants could win spot prizes.

# **3. Sampling and Identification Strategy**

Two community halls large enough to hold 200 people were identified in the Ikotun area of Lagos. A radius of 2km was used to set the boundaries to ensure that all participants could easily access the halls without needing to use public transport. A census of the area was then taken in July 2012, together with a short baseline listing questionnaire used to stratify the sample on whether they had a savings account, whether they kept financial records and if their store was in the main (official) market area, or in the surrounding 7
treatment level, i.e. by household. Note that we have at most 10 observations per individual. To minimize potential selection bias associated with differences in interview completion rates across individuals, all observations are attrition weighted, with weights corresponding to the inverse of the number of complete weeks for which an individual was observed.

The coefficient βP provides an estimate of the impact of the survey modality on reported labor market behavior (recall that weekly in-person interviews are the omitted category and thus serve as the “control” group in this specification).

To assess whether modality effects vary between the wage workers and self-employed, we also estimate: i = β W +β + β W + τw i (2) WW ii SS ii SSWW ii ii YY PPho oo WWo WW SSooWWSS SSooWWSS ∗PPho oo WWo WW + εε where is a dummy variable that takes the value 1 respondents were self-employed at baseline and 0 otherwise. Labor market status was very stable over the course of the survey as is shown in ii SSooWWSS Table 3 which presents a matrix of transitions between employment status at baseline and endline. Only 9 workers who were self-employed at baseline (2% of all self-employed workers at baseline) had switched to wage employment at the time of the endline and only 14 workers who were wage employed at baseline (5% of all wage employed at baseline) had switched to self-employment. Baseline employment status is thus a good measure of a person’s employment type during the course of the survey and avoids potential concerns about the endogeneity of employment status to treatment. The coefficient β estimates the differential sensitivity of the self-employed to survey modality. SSWW Using a similar strategy, we examine heterogeneity among the self-employed. We divide the self-employed into two groups: those who work in a fixed structure that is outside their home, and those who do not (i.e. those who either work at home and those who work outside their homes but have a mobile workplace). The former group is likely to comprise a more established set of entrepreneurs, whose labor market attachment is less volatile, and whose labor market reporting may, as a result, be less sensitive to the particular way labor statistics are collected. Specifically, focusing on the sample of those who are self-employed at baseline we estimate: 12
- <mark>Frandsen, B.R. (2016). The Effects of Collective Bargaining Rights on Public Employee Compensation: Evidence from Teachers, Firefighters, and Police.</mark> _<mark>ILR Review</mark>_ <mark>, 69(1), 84-112.</mark>

- <mark>Gilligan, D.O., Karachiwalla, N., Kasirye, I., Lucas, A.M., & Neal, D. (2019). Educator Incentives and Educational Triage in Rural Primary Schools.</mark> _<mark>Journal of Human Resources</mark>_ <mark>. In Press.</mark>

- <mark>Goux, D., Maurin, E., & Petrongolo, B. (2014). Worktime regulations and spousal labor supply.</mark>

<mark>American Economic Review, 104(1), 252-76.</mark> <mark>Gregory, R. G., & Borland, J. (1999). Recent developments in public sector labor markets.</mark> _<mark>Handbook of labor economics</mark>_ <mark>,</mark> _<mark>3</mark>_ <mark>, 3573-3630.</mark>

- <mark>Hanushek, E. A., Piopiunik, M., & Wiederhold, S. (2019). The Value of Smarter Teachers International Evidence on Teacher Cognitive Skills and Student Performance.</mark> _<mark>Journal of Human Resources</mark>_ <mark>,</mark> _<mark>54</mark>_ <mark>(4), 857-899.</mark>

- Hanushek, E. A., & Rivkin, S. G. (2006). Teacher quality. Handbook of the Economics of Education, 2, 1051-1078.

- Hanushek, E. A., & Rivkin, S. G. (2010). Generalizations about using value-added measures of teacher quality. _American Economic Review, 100_ (2), 267-271.

- International Labour Organization. (2012). _International Standard Classification of Occupations: ISCO08_ . Geneva: ILO. Retrieved from

<u>https://www.ilo.org/public/english/bureau/stat/isco/docs/publication08.pdf</u> International Labour Organization. (2020). ILOSTAT: The leading source of labour statistics. Retrieved from. <u>https://ilostat.ilo.org/data/</u> Iwu, C.G., Ezeuduji, I.O., Iwu, I.C., Ikebuaku, K., Tengeh, R.K., 2018. Achieving quality education by understanding teacher job satisfaction determinants. Social Sciences 7.

https://doi.org/10.3390/socsci7020025 Jackson, C. K. (2012). Recruiting, retaining, and creating quality teachers. _Nordic Economic Policy Review, 3_ (1), 61-104.

Kontagora, H. L., Watts, M., & Allsop, T. (2018). The management of Nigerian primary school teachers. International Journal of Educational Development, 59, 128-135.

Kumar, S., and Kumar, N. (2019, January 25). Striking Tamil Nadu teachers denounce state and central governments _. The World Socialist Web Site._ Retrieved from

- <u>https://www.wsws.org/en/articles/2019/01/25/tnin j25.html</u>

Leaver, C., Ozier, O., Serneels, P., and Zeitlin, A. (forthcoming). “Recruitment, effort, and retention effects of performance contracts for civil servants: Experimental evidence from Rwandan primary schools _.” American Economic Review._ 26
from the population- or subgroup-level joint probability estimates.

# 3.2. Vulnerability

Our analysis of vulnerability and income mobility is based on the definition of a vulnerability line as introduced by Dang and Lanjouw (2017). Below, we summarize this approach and explain how it ties in with the synthetic panel method. Our goal is to estimate 3x3 transition matrices for the income categories poor, vulnerable and economically secure.<sup>14</sup> This study focuses on the lower part of the income distribution, which is reflected in our choice of income categories. We note that once an individual reaches the secure category, there is no further scope for mobility in our setup. That also implies we are not analyzing the likelihood of social mobility in a broader sense, or intergenerational mobility – two relevant topics in the Malaysian context.

We start by defining the category ‘vulnerable’ as those non-poor in period 1 who face a certain probability or higher of falling into poverty in period 2. This conditional probability can be denoted as: PP<sup>VV</sup> 2 1 1 ) =<sup>PP (yyii2≤ zz2</sup> 1<sup>a</sup> 1 ) ,<sup>aa zz1< yyii1≤ vv1 )</sup> ii2 ii1 PP (yy ≤ zz | zz < yy ≤ vv ii1 PP ( zz < yy ≤ vv where 1 stands for the vulnerability line. The latter is derived empirically after setting the vulnerability index , the maximum probability to fall into poverty that we are willing to accept for a household to be vv considered economically secure. For example, we might set the index at a value of 20 percent. This PP<sup>VV</sup> approach contrasts with other approaches in the sense that the vulnerability line is not set arbitrarily, for example at 1.5 times the poverty line, but derived empirically from the vulnerability index. In practice, this requires a recursive algorithm that goes over the synthetic panel data to arrive at the vulnerability line that yields the desired vulnerability index.<sup>15</sup> We acknowledge that setting the vulnerability index is still an arbitrary decision, but it is based on a transparent weighing of risks. We argue that anchoring the definition of vulnerability in this way evokes the insecurity that is inherent to vulnerability.

We mostly present results for poverty and vulnerability dynamics in figures that do not indicate the level of precision of estimates. The main reason for this is that the results already consist of bounds

> 14 There are no generally agreed upon names for these categories. In some applications, the non-poor who are not considered vulnerable have been labeled ‘middle class’. We opt for the more neutral ‘economically secure’. One reason is that some of these households will be quite rich, so that middle class would be a misnomer for them. 15 See Rongen (2021) for a manual that describes the procedure in detail.

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also have an identical reference period and are able to illustrate a more precise worsening of the food security situation in Figure 3.

And third, it is possible that only a subset of women who experience IPV accurately describe those experiences to enumerators, and that the underreporting is worse than for men who are asked about the acceptability of a hypothetical man committing acts of IPV. Not admitting to abuse suffered in the pre-disaster period would result in no change for underreporting households even if there was a reduction in IPV. This could result in an estimate downward biased to zero and in an estimate that is less precisely estimated.

Figure 9b investigates this hypothesis and estimates the baseline empirical specification separately for women that are potentially more and less likely to report IPV experiences. Specifically, one of the many reasons that women might not report IPV experiences is the fear of additional abuse if other household members suspected that they might have admitted to the abuse that was occurring. It has been shown that women who have more resources and productive capacity can result in a more credible recourse of being able to leave an abusive household, and thus might fear this repercussion less than women who are less able to leave the household (e.g., Agarwal 1997; Hesse 2011; etc.). And reporting patterns in PNG are consistent with the least educated women underreporting IPV incidents. Women who never attended school report fewer instances of IPV despite the fact that the least educated women and men are _more_ likely to view instances of IPV being acceptable.<sup>35</sup> Thus, using a school attainment indicator to proxy for productive capacity, which was fixed long before the earthquake happened for women eligible for the women’s survey, we estimate the baseline empirical specification separately for women that never attended school and women that attended at least some primary school or above.<sup>36</sup> The results illustrate a substantial difference in the experiences of the 921 women who had never any school and the 3,024 women who had at least attended some school. There was a 47-percentage point larger decrease in the share of women who experienced any IPV in the past year for women who had attended at least some school than in the rest of the country. The estimate is precise and is nearly three times the baseline estimate for the entire sample in Figure 8a. However, there was no change in the share for women who never attended any school relative to the rest of the country (difference-in-differences estimate of 0.1 percentage points). And all of these patterns extend to both categories of IPV captured by the survey- emotional and

> 35Estimates of the difference are available from the authors upon request. And this is similar to the lower instances of IPV reported in rural areas despite IPV being more acceptable in those regions, as reported in Section 4.

> 36This is not to say that all women who never attended school underreport IPV or that all educated women accurately report IPV.

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