In recent years, many Asian countries have received attention for their burgeoning economic development and innovation. Much of this development and innovation is driven by business groups, large and highly diversified networks of firms with common ownership (such as Samsung). Simon Commander and Saul Estrin argue in their new book that the role of business groups as catalysts for innovation is much more nuanced than the hype suggests. 

In our recent book, The Connections World: The Future of Asian Capitalism, we chart Asia’s remarkable economic achievements of the past 50 years but also sound some warning signals. We argue that Asian development has been built on business arrangements very different from the West, notably the active intervention of the state and the central role of business groups (BGs), large and highly diversified networks of firms connected by common ownership, usually a family.  

As a consequence of these two factors, politicians often play a pervasive—and not always benign—role in guiding economic development in Asian economies. The BG organizational structure facilitates undesirably close relationships with politicians, but also opaque corporate governance and weak minority shareholder rights. In what we term the Connections World, at the apex sit politicians and political parties along with these  often dynastic BGs. BGs look to politicians to protect them from competitors as well as to provide them with cheap loans, subsidies, and public sector contracts. Politicians look to these groups to support state-led initiatives and provide jobs, especially in politically sensitive regions and for themselves and their families. The relationship between politics and business is thus highly transactional.

How does the ubiquitous presence of the Connections World affect innovation?  The answers are nuanced. The affiliates of BGs tend to be more innovative than non-affiliates; an unsurprising result given their access to additional resources. However, when we look at national levels of innovation, we find that the wider impact of BGs on innovation is mostly negative, largely as a consequence of their market power. This suggests Asian economies will need to rein in the entrenched market power of BGs and their political links in the next stage of their growth.

The Connections World and Innovation

The impact of the Connections World on innovation is of more than passing significance because, as Asian economies move from extensive growth (applications of more capital and labor)to intensive growth (fueled by higher productivity), innovation will play an increasingly important role in their economic development. Yet, the Connections World has been associated with the accretion of significant market power by incumbent business groups. Because these groups operate across many sectors and activities—often more than 50 or even 100 sectors can be contained in a single group—their organizational structure also supports high levels of overall concentration. By overall concentration, we refer to the share of the largest firms in the economy as a whole. Such concentration reinforces the BGs’ ability to enter mutually beneficial arrangements with governments, for example implementing policy goals in return for protection from foreign competition.  

Looking at the revenues of the largest companies relative to GDP, the extent of concentration for the top five firms (CR5) exceeds 30% in South Korea and Vietnam and even in the two very large economies—India and China—it exceeds 10%. For the ten largest firms (CR10), those shares rise to over 40% in South Korea and Vietnam and not far off that in Thailand. In India and China, the CR10 tops 15%. Indeed, overall concentration ratios are high throughout Asia. This is in contrast, for instance, to the United States, where the CR5 and CR10 are only 3% and 4%, respectively.  

High levels of concentration tend to imply high degrees of market power. This in turn appears to bode ill for innovation, as most economic thinking has emphasized the role of competition in spurring companies to innovate. In a classical framework, lack of competition will translate into rent taking and a failure to invest in innovation. However, Joseph Schumpeter also argued that competition can itself suppress the incentive to innovate if it erodes the returns to innovation too quickly. Further, market power in itself may not always be an impediment to innovation. In models of monopolistic competition with neck-and-neck rivalry, companies have strong incentives to innovate so as to disrupt their rivals. 

In Asia, there are some obvious differences that may affect innovation. For a start, the largest companies are usually highly diversified BGs which are very different in organization and focus from most European and North American companies. One possible implication is that BGs may have far greater market power than stand-alone businesses (non-affiliates), and the negative effect of this market power may be exacerbated by BGs’ political connections, which will increase their ability to extract rents and further decrease their appetite for innovation. However, BGs are also well placed to attract and leverage resources, including from the government, and they may use these resources for innovation. So, there is inevitably some ambiguity about whether BGs are good or bad for innovation.

Our research—based on a sample of more than 9000 firms in seven Asian countries— supports taking a nuanced picture of the impact of BGs on innovation. For sure, the BGs do innovate, perhaps driven by neck-and-neck rivalry. BG affiliates are more innovative than non-affiliates, though this is largely a consequence of the fact that BG affiliates have access to additional resources, notably capital provided internally within the group. However, there are also indications of a negative effect of BG market power on innovation. And the evidence suggests that as BGs become larger or more prevalent in the economy, the benefits of BG affiliation on innovation declines. 

Perhaps most telling is that when we look at innovation at the country level, the wider consequences of BGs on innovation appear to be negative. This is probably because the high market concentration and the role played by powerful business groups also stands in the way of creative destruction. Resources are tied up allowing inefficient firms to survive, while also restricting new entrants. Indeed, most countries in Asia have research and development expenditures below advanced economies (as might be expected) but also sit at about, or below, the level that exists elsewhere in the world for their level of development (as measured by GDP). Some economies—such as Indonesia, Philippines and Thailand—clearly undertake less R&D than could be expected. Indeed, only South Korea outperforms, although China is also slightly above the line. Similar results emerge if the focus is on patents.

In short— and contrary to some of the hype—Asia is not a particularly innovative region. This is not because the BGs fail to innovate themselves. They are often quite dynamic. But because of their vice-like grip on markets and the economy, innovation is held back in the rest of the economy. This is primarily because the BGs and their political connections make entry by potential competitors very hard. Further, few other companies are able to innovate due to lack of access to finance, skills and other key resources. This—rather than business groups acting as lotus eaters or rent takers—is the main channel by which innovation is restrained.


The power and resilience of the Connections World in Asia means that market power is deeply entrenched. This will require sustained and original policies in order to change. Yet, such changes will always be difficult given that the main players in the Connections World have few incentives to modify their behavior. However, there are indications on how to proceed from experience in the 1930s in the U.S., more recently in Israel, and also in South Korea. The key areas for policy reform include taking measures to break down BGs and force them to adopt a different and more transparent format. They also include formulating the design of competition policy capable of tackling the problems they cause along with the use of inheritance taxes to weaken dynastic control. 

President Franklin Delano Roosevelt in effect outlawed BGs in the U.S. by prohibiting the use of pyramidical ownership structures and restricting cross-holdings. This is unlikely to be feasible in Asia at the present time, but elements of this policy may have a chance. In addition, requirements that minority shareholders have a say over related party transactions could be a feasible option. In terms of competition policy, authorities should supplement standard competition rules with requirements concerning the impact of mergers and acquisitions on overall concentration, as has been done in Israel. This needs to be accompanied by enhancing the independence and technical capacities of the competition authorities. Finally, inheritance taxes can also help break down the BG format, most of which are family owned. Some evidence for this is emerging in South Korea, which recently adopted a 50% top rate for inheritance tax. There, the family-owned Samsung has already announced that the next generation will not take over control.

Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.