Most of Indonesia's largest domestic firms come in the form of widely diversified conglomerates, often under the control of families. Headed by powerful tycoons, these family firms arouse controversy in Indonesia.
The widely diversified firm is a business structure that went out of fashion in the West in the 1980s. Why does diversification continue in Indonesia? Is Indonesia simply lagging behind in its business models or is there more to it? Should the government do something about the concentration of wealth in the hands of a few families?
Indonesia is not alone when it comes to the presence of large diversified corporate groups. Most Asian countries display this pattern in their business landscape, and indeed many other emerging markets too. In Latin America they are known as the grupos, in Korea as chaebols, but despite the local names, there is something surprisingly universal about diversified business groups.
Moreover, many of these diversified groups are run by families, from the Lee family controlling Samsung in Korea to the Birla family in India. Even some developed countries house such groups in their markets.
Just like in Indonesia, these groups are usually a cluster of separate companies, controlled and informally coordinated by one or more families. The different companies are not necessarily a single legal entity. Scholars tend to call this format a family business group.
In some Asian countries, these business groups tend to be very powerful and control a significant portion of wealth. One researcher linked to the World Bank has estimated that Indonesia scores very high when it comes to concentration of wealth in the hands of family groups.
In Indonesia, the top 10 groups control 57.7 percent of the total market capitalization in the country, the highest of all Southeast Asian nations. The figures were from 1996, but it is reasonable to assume that Indonesia still scores high on the influence of family-controlled groups on the private sector.
Why does Indonesia harbor these groups in its economy? Research suggests that family business groups are more predominant in developing markets. One theory focuses on transaction costs. In business, one needs to engage in deals with other business players. If it is cheap to find and contract another partner; if one can be confident the other party can be trusted; and if something goes wrong there is always the protection of the law, then transactions costs are low.
However, in Indonesia such conditions may not always exist. Protection from courts may not be counted upon, law enforcement may be erratic, trust in unknown others is low, and it can be quite a challenge to find trustworthy partners.
Under such conditions, academics would say transactions costs are high. Faced with an environment with high transaction costs, it becomes much more interesting to develop in house what may normally be outsourced. So perhaps business people in high-transaction cost environments may consider setting up their own bank, buying the supplier or setting up wholly owned distribution networks and retail chains rather than contracting other parties. In short: High transaction costs stimulate building a group of companies.
A second theory focuses on trust. In situations where others cannot be easily trusted, you see that the business elite create strong personal networks. A useful concept in this context is social capital, which refers to advantages derived from connections with others.
In countries where there is feeble law enforcement, and people get away with cheating others in business, it is essential to develop social capital.
The third and most influential theory concerns the role of institutions. Institutions refer to rules and regulations ensuring a healthy private sector, such as property rights, a functioning and liquid capital market and banking sector, a well trained labor market, norms and values on how to do business. . The theory is that if institutions in a country are weak, then companies try to replace them.
For example, if the stock market is not functioning well as a source of funding, companies may create an internal capital market. If you own a group of companies, some of which generate cash, and others need new investments, it may be attractive to re-allocate revenues within the group rather than resort to outside financing options.
Therefore, academics now think that sprawling business groups are a way to compensate for weak institutions, in other words: business groups fill institutional voids.
Stronger institutions will transform family businesses slowly
If family business groups are associated with weak institutions, they may fade away as institutions become stronger. Is this really the case? There are some indications that this is happening. If one looks at Indonesia, the 1997 economic crisis was instrumental in streamlining many groups and selling off all the small bits and pieces that were remnants of past diversification.
There are a few factors that may slow the disappearance of family business groups. The first is that Indonesia's environment changes only slowly, and therefore there is no need to anticipate a new business climate if it is not happening yet.
Second, business groups may be slow to adapt. All organizations develop inertia over time, and family businesses are no different. In fact, due to the limited family talent and patriarchal (in some cases matriarchal) styles of management, certain visions and practices may become entrenched in the firm and change becomes difficult.
In the long run however, Indonesia would benefit from strong groups that can play a role in the world economy. Chinese and Indian businesses such as Lenovo and Mittal Steel are already investing abroad. But none of the Indonesian groups even made it into the UNCTAD list of the 100 largest transnational firms from developing countries.
On the other hand, historical evidence tells us that it is not impossible to take the leading business families along in efforts to create a fairer and more transparent market place. In the U.S. of the 19th century, the so-called robber barons were rich individuals accused of monopolizing industries and unfairly manipulating public policy for private economic gain.
The challenge for Indonesia is to enlarge the group of competent business people who can contribute to economic growth and job creation. Rather than fighting the tycoons and attempting to break up their empires, the government may consider opting for the robber baron-route: To strengthen national institutions, and at the same time stimulate the family tycoons in their transformation to great capitalist families.
The writer, holding a PhD degree from Leiden University in the Netherlands and is currently a visiting fellow at NUS Business School in Singapore. She studies family business groups in Southeast Asia, and has recently published an independent corporate biography of the Salim Group. This is a personal view. She can be contacted at marleendieleman@hotmail.com.
Find Article by Date