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2 November, 2012  ▪  Oles Oleksiyenko

Big Business in Service of the Public

In countries the size of Ukraine, there is a correlation between economic breakthroughs and the extent to which big business potential has been adjusted to serve national interests

It is important to eliminate oligarchy, yet the struggle against it should not become a war on big business. The priority should be to put big business in a framework that will make it useful for the benefit of the nation, while not damaging small and medium business (SMEs) as the foundation of Ukraine’s stability and democratic development.

This is possible only under a number of conditions, a crucial one being the segregation of industries. Thus, SMEs should dominate in domestic market-oriented branches that do not require a significant concentration of production facilities and capital investment, while big business is vital to a slew of industries that are the cornerstone of economic growth.

These include sectors dominated by transnational corporations where big companies are mostly an important prerequisite for the promotion of Ukrainian goods in new markets. Without this, a compact economy like Ukraine’s that depends heavily on foreign trade can hardly develop successfully.

A NECESSARY LINK

The experience of most countries that are comparable to Ukraine in size and have managed economic breakthroughs over the past 50 years proves that the effective involvement of big business in the process has been a crucial component of success. The governments of countries that had no big business “grew” it intentionally.

They realized that only large companies have the necessary resource potential and, consequently, the ability to generate expensive hi-tech innovations such as new airplanes and cars, space shuttles, cruise ships, and modern communications devices. It is easier for such companies to survive the initial pressure when implementing long-term innovation projects and cover their costs with accumulated reserves and revenues from other branches of their operations, while small businesses – despite their flexibility - are forced to reject projects that take too much time and money, and have limited capacities in competing for foreign markets.  

Another important factor is that large companies fall under various ownership models—from fully government-owned, to partly government-owned or fully privately owned. Therefore, the methods by which the government influences and channels their operations in line with national interests must be varied as well.  

Under normal circumstances, the bigger the share of private capital, the more efficient the business. Therefore, most big corporations prefer this form of ownership to any other, while the government retains its impact through legislation and a range of “carrot and stick” economic instruments.

CARROTS AND STICKS

A government that has sufficient political will and is truly independent of individual oligarchs in decision making can create an effective system of restraints and counterarguments to get the most use out of big companies while minimizing risk.  

Governments have a range of incentives to encourage big businesses to develop in innovative sectors and industries that fit national interests the most, such as government loans, tax cuts, accelerated depreciation, targeted subsidies and subventions, profitable public contracts, and other instruments. The list of restraints includes harsher tax burdens, special regulations, forced splits or even nationalization. These can deter big companies from acting in a way that damages the national interest, blocks competition or leads to stagnation.

In European countries such as the UK and France, whose economies historically are not highly monopolized or concentrated in the hands of big businesses, the fairly influential and powerful medium-sized businesses have been handling the task of matching business groups to national priorities quite well.

In countries where industrialization took place later and massive businesses gained dominating positions in the economy, such as the USA, Germany and Japan, the government solved the problem of adjusting them to national interests through active interference. In Germany and Japan, that was one of the crucial prerequisites for the economic leaps that brought them the most rapid economic and welfare growth in the world.

Giant companies, such as Volkswagen, Audi, Grundig, Siemens, and others played a crucial role in the rise of the post-war German Federal Republic, making it the second largest exporter of industrial products for quite a long time, and facilitating the concentration and increase of its technological potential. At the same time, the government’s economic policy kept them from abusing their dominant positions in the domestic market.

AWAY WITH CLANS

In pre-WWII Japan, big zaibatsu family-run conglomerates – the Great Four including Sumitomo, Mitsui, Mitsubishi and Yasuda – controlled the economy, as well as the domestic and foreign policy of Japan through their own political parties. 

After Japan’s defeat in the war, the US occupational administration implemented a series of reforms. One was the elimination of 16 zaibatsu clans and the forced rearrangement of another 26. As a result, the tycoon families that owned them lost control over the nation’s economy and politics. 

In the 1950s, the zaibatsu tycoons were replaced by keiretsu, a new type of powerful business entity based on cross-ownership of companies by a group through shares, rather than family domination. Such companies relied on this sort of cooperation (the need partly lingering from their earlier operation as part of one structure) for stability and efficiency in their struggle to survive and win over the world market.

The keiretsu system laid the ground for long-term planning and investment into innovative projects. These corporations used their resources much more efficiently compared to the pre-war zaibatsu. Moreover, widespread horizontal and vertical ties within keiretsu structures played an important role in the protection of the Japanese economy – still weak at that point – from being swallowed up by foreign capital.  

Meanwhile, the Japanese government regulated the economic activity of these business entities by determining the priorities for economic development and encouraging them to invest into specific industries. This role was delegated to the Bank of Japan and the Economic Planning Agency, but the Ministry of Foreign Trade played the most important role, facilitating the import of new technologies in industries determined to be priorities, and ensuring that businesses could get affordable loans for growth. 


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