ABSTRACT
OECD Principles certainly made a great effort to improve access to the international capital market. However, there is no solid foundation in theory and practice for its claim of “improving economic efficiency and growth.” In fact, their real motive was “enhancing investor confidence,” especially for foreign investors. There are some issues related to questions of efficiency and growth in economic theory. First, financial economics so far has no objective measurement of market efficiency. According to the efficient market hypothesis (EMH) in finance theory, market efficiency could be judged by its unpredictability if stock markets are dominated by Brownian motion (Fama 1970, 1991). However, EMH was challenged by our discovery of color chaos, which accounts for about 70 percent of market fluctuations (Chen 1996a). It is also found that there are weak microfoundations for business cycles. The major source of market fluctuations is neither from consumers nor producers, but from financial intermediates (Chen 2002). There were a series of financial crises, such as the stock market crash in 1987, the Asian financial crisis in 1997, and the Internet Bubble in 2002. Some
economists emphasize an internal mechanism caused by a positive feedback trading strategy and corruption (De Long et al. 1990), while others are concerned with external shocks such as an international speculative flow. Clearly, the financial market is the most complex and regulated market with huge transaction costs and uncertainty, a counter case to the Coase world of zero-transaction costs. Second, there is no consensus on which model of market institution is optimal and whether there is a historical trend in institutional convergence (Hall and Soskice 2001). It is known that American firms are often overpriced while German and Japanese firms are underpriced in the financial market. At the macro level, the United States has persistent trade and budget deficits while Germany and Japan have persistent trade surpluses. Over-consumption and under-saving in the US can be partially contributed to financial innovation in credit expansion and American power in the global financial market. The Anglo-Saxon model of liberal economics emphasized the shareholder’s value while Germany, Japan and Scandinavian models put more weight on shared interests of stakeholders. Third, there is no optimal choice of economic efficiency even at the firm level. Beauty is in the eyes of the beholder. Maximizing profit or minimizing costs is more complicated in practice than in theory. For a visionary corporate founder, seeking the status of an industry leader in innovations and products would be his long-term goal, while small shareholders would like higher dividends or returns in medium or even short terms. Managers may manipulate the financial outlook to increase their stock options or social status, but workers may care more about job security and social welfare. The property rights theory implicitly favors single or large shareholders for corporate control. The contrary policy of protecting minority shareholders is also relevant for increasing confidence in the financial market (Shleifer and Vishny 1997). Fourth, the appeal of a transparent market ignores fundamental issues of information ambiguity and economic complexity. Market transparency is meaningful only for cooperative games with symmetric information without economic complexity. A non-cooperative game will stimulate motivation for creating false information or protecting strategic information in market competition. Under constant business-cycle movements, both information diffusion and information distortion may amplify market sentiment and market instability. The recent collapse of Enron and the sub-prime credit market are good examples of information game and information ambiguity under an ill-regulated financial market. Therefore, the benefits and costs of the so-called transparent market depend on the selective rule (transparent to whom and for whose benefit) of the market institution, which is not equal to all players. Fifth, the relation between growth and globalization of the financial market is poorly understood. People are puzzled about the real cause of the Asian financial crisis. Some Western observers blamed Asian cronyism and nepotism, which is an issue in corporate governance. However, more economists realized the danger of excess speculation and foreign power enhanced by the IMF policy on financial liberalization. Korea opened its financial market under IMF pressure during the crisis. Foreign stock ownership rose dramatically, including foreign shares of
top Korean companies. Clearly, the issue here is not only about economic efficiency, but also a fair international order. Sixth, corporate governance may have a negative impact on corporate culture and strong leadership. Excess monitoring may destroy mutual trusts within the firm. Short-term efforts of reducing agency costs may end up with long-term effects of increasing coordination costs and weakening leadership. From the above discussion, we can see corporate governance is an important issue in increasing investor confidence under financial globalization, but less clear to its relation with efficiency and growth. To improve our understanding, we need to examine further theoretical foundations in firm theory and organizational development, notably, the transaction costs approach and the property rights theory. Both property rights theory and theory of agency costs are strongly influenced by the concept of transaction costs (Alchian and Demsetz 1973; Fama and Jensen 1983). Their minor difference is mainly the level and forms of transaction costs inside the firm (Jensen and Meckling 1976). Coase believes that transaction costs are insignificant in the real world (Coase 2004), so that the roles of regulation and governments should be minimized, while property rights school concerns impacts of large transaction costs and the important role of legal institution. However, their common ground is the same one-sided view of transaction costs based on cost competition without innovation competition in a closed economy. We will address their fundamental flaws in evolutionary dynamics in open economy.
