National Models of Corporate Economic Sector

The business environment which has settled down in today’s Russia is prohibitive for the creation of a full-size corporate sector on a private basis. However, the necessity for powerful corporations still remains. Therefore the free niche is being taken by the state which is building up its own corporate sector. Why government is taking the full control in its hands? What did private companies miss?

Currently, we are witnessing a formation of a powerful retrograde wave in Russia, which is due to a transit from the large-scale privatization to hectic nationalization. At the same time, the nationalization is conducted in a light way, by constructing a strong corporate state sector. This process by no means can be classified as normal: many countries which have instituted a big corporate sector did so within the framework of private rather than state sector. It’s logic to ask, why Russia pursues the way of governmentalisation of the corporate sector.

The issue becomes the more acute due to the fact that up till quite late the Russian economy had been organized on the basis of private corporate sector. Why does it so happen that the state once again takes upon itself the economic functions?

At first glance the answer is quite obvious: private corporations of the newly-born Russian business have turned out ineffective, so that the state has to take the real economy in hand. This is quite so. But then there another, more subtle question: why Russian private companies failed to fulfill public expectations?

A reply to this question is in some way contained in Francis Fukuyama’s book Trust. And, ironically enough, the reply touches upon such things which at first glance have no relation to corporations. It’s about family traditions kept in various countries and by various nations. But how is family institute related to the corporate sector of economy and what has it all to do with the state’s actions?

Fukuyama’s logic is like this. A strong, loyal and large family is a basis for small business. Successful business begins with a family corporation with maximal mutual trust among its members. If there is no support from family, it’s hard to start even the smallest business, let alone succeed. That’s why countries and nations with strong family traditions succeed in small and primitive business. Precisely due to this China has filled the world with its primitive kid toys which can be produced in makeshift way with violations of all ecological regulations. Numerous Chinese families and clans with huge inside support are capable of occupying entire economic branches which do not require effect of scale. For the same reason Caucasian families and diasporas make up a vanguard of retail trade in Moscow and other Russian cities.

But family can have only limited powers. At some stage a successful and expanding business becomes so overgrown that no family, however big, nor clan, however mighty can satisfy the HR and managerial demands. Then the family has to let other people in, and such a step involves some degree of confidence in “foreigners”. If the family cannot overcome its mistrust to aliens and employed managers, it rejects their service and in such a way puts a limit to the expansion of its own business. This is where family traditions and values clash with economic needs and business demands. So it happens that a really big corporate can only begin beyond this mistrust and family limitations. And, as Fukuyama justly remarks, it is based on mutual trust of foreign people. Otherwise, any business will break apart because of excessive expenses of checking and rechecking of each other by members of the same business.

Without any doubt trust by itself requires legal mindedness of the society members, let alone their high moral and ethical level. If people are targeted at theft and con art alone, no business can be done with them. In part that is the reason why no serious corporate private sector can be created in today’s Russia. Most of the dealers, civil servants, and ordinary employees think only about gain, real work steps down to the periphery of their interests.

Accordingly, all the countries which have built up a modern developed economy with all accompanying private corporations possess in their social basis a phenomenon of high trust among people and moral principle of behavior. In reality we witness a variety of models of corporate sector in various countries. To understand their basic differences, it’s logical to analyze three parameters: family, private corporate sector and state. While examining the three phenomena their force of manifestation should be considered. If we take a geometrical interpretation, all of the three elements of economy can be looked upon as circles of some area: the stronger the phenomenon, the large is the circle. As for their mutual position, at the bottom will be family as vital basis of any society, then goes private corporate sector as economic basis of society, at top is state as organizing and unifying force. So that we can see a figure, which characterizes the structure of society, in which corporate private sector is realized. Then four national models of corporate sector will be quite clear.

1. Japanesecylinder. In Japan we see a rather strong family with solid family traditions (large circle at the basis). At the same time confidence among the members of Japanese society is not limited to the narrow framework of family, which allows building up a powerful corporate private sector (large circle in the middle). Simultaneously due to historical traditions the role of Japanese state is also great (large circle at the top). Therefore, Japan possesses a strong corporate sector on private basis which functions against a strong family and a strong state.

2. American cone. In the US a weak family (small circle at the bottom): even the nuclear model of family is undergoing an ordeal which can be seen in frequent divorces, civil partnerships, same-sex couples etc. But US has been able to build up a very powerful private sector of corporate type (large circle in the middle). And it was made within Protestant ethical norms, inherited by the Americans from their pilgrim fathers of the Old World. Also US as economic leader possess a strong state (large circle at the top). As a result, the current American model of corporate sector is based on week family traditions, which makes it not very stable. Rather, Japanese society in that respect possesses more stability and is more preferable in long-term sense.

3. Chinese hyperboloid. In China the institute of family is evidently exaggerated (large circle at the bottom). According to Fukuyama’s logic that’s exactly why the Chinese so far cannot create a viable private corporate sector (small circle in the middle). The too strong Chinese family cements small entrepreneurship but keeps it from growing up into big corporate business. In part this deficiency of Chinese economy is compensated by a strong state (large circle above). As a result the final geometrical structure possesses greater stability, but loses to the previous models in economic efficiency.

4. Russian cone. Russia in the long course of social and economic reform has largely destroyed its family institute (small circle at the bottom). Alcoholism proceeds in destroying family values; economic experiments which lead to pauperization of mass of people make family a burden and lessen its attractiveness in the eyes of many. An atmosphere of total mistrust, embezzlement, theft in all possible forms nearly completely blocks the formation of effective corporate sector on private basis (small circle in the middle). Moreover, the absence of private sector in the country for many decades, and its absence in viable form even before 1917 fail to give positive practice of constructing business relationship. As in China, a compensation for such weak elements of national economy is coming from a strong if not excessively strong state (large circle at the top). The resulting Russian model of economy looks ineffective and unstable at the same time. In that respect this model loses simultaneously to Chinese hyperboloid, which is more stable, to American cone, which is more effective. Typically, it loses to Japanese cylinder in both ways simultaneously.

After examining the four models of corporate private sector, we can go back to the initial question: why is it that Russia returns governmentalization of big business?

The answer can be easy: the necessity for big business has been ripening for long time, while private sector cannot satisfy this need. That’s why the state finally takes upon itself the function of building up the country’s corporate sector. In fact, the Russian state is being pushed to fill in a vacant niche. Something similar is taking place in China, which once again confirms the inevitability of the state’s presence in the corporate sector of the two countries. Today in many countries of the world we see active operation of giant corporations from Russia and China, but all of these giants are state structures.

We can right off block some counter-arguments. For example, one may remark that in Russia the process of the state’s building up of its own corporate sector is rather artificial. For example, there was once Yukos, and operated quite effectively. Why shouldn’t it go on operate in the same way? But it was liquidated by the state, which took up its place. It’s not so simple. Yukos was alone, there were no more companies like that. Consequently, it was an exclusion from the rule, but not the rule. And when it was attacked, the country had no other powerful private corporations, which could rally around it with their capitals and authority. Or at least, buy out its assets.

The mission of building up innovation economy, which has been being formulated by the state for several years, is really urgent enough. But it could not and cannot be completed by private Russian corporations. Why? Because our private corporations can only pump up our natural resources and sell them abroad. But to create something principally new has been impossible for the Russian corporate sector. Oil and gas had been pumped up even before the advent of current oligarchs, so it will be done in the same way without them. It’s not for sure that state corporations will be able this same innovation economy, but as for private companies, they have proved absolutely inadequate to the task. So the molding of the state corporate sector is not a subjective, but rather an objective process. As for whether it’s good or bad, or whether one likes it or not is quite another story.

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