Diversification and Efficiency of Investment of East Asian Corporations

31 Pages Posted: 26 Feb 1999

See all articles by Stijn Claessens

Stijn Claessens

Bank for International Settlements (BIS)

Joseph P. H. Fan

The Chinese University of Hong Kong (CUHK) - School of Accountancy

Simeon Djankov

London School of Economics & Political Science (LSE); Peter G. Peterson Institute for International Economics

Larry H.P. Lang

The Chinese University of Hong Kong (CUHK) - Department of Finance

Date Written: October 1998

Abstract

We examine the efficiency of investment by diversified firms in nine East Asian countries, using a unique data of more than 10,000 firms over the 1991-96 period. We document the degree of diversification in the corporate sector, distinguish between vertical and complementary diversification, and study the differences across the nine East Asian countries. Based on the differential effect of vertical and complementary diversification on corporate performance, we test the misallocation-of-capital and learning-by-doing hypotheses. We find that the misallocation of capital is more pronounced in South Korea and possibly Malaysia than in Indonesia, Taiwan and Thailand, while the learning hypothesis is more pronounced for these three countries. Our East Asian sample provides diversity of development across countries, and enables us to further test these two hypotheses. We find evidence consistent with the learning-by-doing hypothesis that firms in more developed countries are successful in vertical diversification since they already make use of sophisticated technologies and may have peer firms to learn from. Furthermore, firms in more developed countries learn faster and improve their performance. We also find evidence consistent with the misallocation-of-capital hypothesis, as diversification by firms in less developed countries is subject to more misallocation of capital.

JEL Classification: G31, G32

Suggested Citation

Claessens, Stijn and Fan, Po Hung Joseph P. H. and Djankov, Simeon and Lang, Hsien Ping Larry, Diversification and Efficiency of Investment of East Asian Corporations (October 1998). Available at SSRN: https://ssrn.com/abstract=147467 or http://dx.doi.org/10.2139/ssrn.147467

Stijn Claessens (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Po Hung Joseph P. H. Fan

The Chinese University of Hong Kong (CUHK) - School of Accountancy ( email )

Shatin, N.T.
Hong Kong
(852) 26097839 (Phone)
(852) 26035114 (Fax)

Simeon Djankov

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

Hsien Ping Larry Lang

The Chinese University of Hong Kong (CUHK) - Department of Finance ( email )

Shatin, N.T.
Hong Kong
+85 2 2609 7761 (Phone)
+85 2 2603 6586 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
1,016
rank
20,653
Abstract Views
3,200
PlumX Metrics