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Family businesses play a big role in development of Asian emerging markets

Family businesses in many of Asia's emerging markets (EMs) have long spearheaded economic development by being better providers of public goods than local governments.

It's a system that has benefited both businesses and the local population, but certain inherent dangers means it's not always the optimum solution for turning EMs into developed markets.

A history of public assistance

Asian EMs have traditionally lacked elements vital to a well-functioning economy; infrastructure, power, access to finance, business customer protection, transparency and good governance are just a few.

When these elements are missing, it creates "institutional voids," a term coined by Harvard University professors Tarun Khanna and Krishna Palepu in 1997 that refers to a country's undeveloped market ecosystem.

Institutions responsible for creating and maintaining the ecosystem, namely governments, don't always function as expected, so private-sector players frequently step in, according to Khanna's and Palepu's theory. By providing solutions that local institutions cannot, these private players create profitable business empires.

"These entrepreneurs are public spirited because they must fill the institutional voids, that is, compensate for the inadequacies in their environment...Virtually all well-run large entities in Asia do this," Khanna told CNBC.

Family-run businesses, in particular, are at the forefront of this phenomenon, Khanna added, pointing to the Philippines' Ayala Corporation as a prime example.

Ayalas step in with infrastructure

The Zóbel de Ayala family has controlled Ayala, the country's largest conglomerate, since its creation in 1834. The firm is credited with developing the Philippines' premier business district in Makati, Manila, as well as championing education across the country.

The Makati central business district of Manila where Ayala Land is building new residential developments, office buildings and hotels.
SeongJoon Cho | Bloomberg | Getty Images
The Makati central business district of Manila where Ayala Land is building new residential developments, office buildings and hotels.

Following the end of World War II, Ayala Land—the company's property development arm—converted the area that hosted Manila's first commercial airport into the country's first master-planned, mixed-use development with modern infrastructure.

The infrastructure included underground electricity and telephone lines, integrated sewage and a well-planned road layout, all public goods that the government couldn't provide at the time, explained Jamil Paolo Francisco, associate professor of economics at the Asian Institute of Management (AIM).

Several of Ayala's companies also invest in "skilling" their middle managers in order to address the country's weak human capital development. A 2015 World Economic Forum index showed the Philippines ranked 46th of 124 countries when it came to nurturing talent through education and skills development.

'Ciputra does the government's job'

Indonesia's Ciputra Group, meanwhile, is hailed for establishing a higher standard of living in Jakarta. The company's vast property portfolio comes with a range of public goods, including the provision of security guards and the upkeep of greenery.

"The government has always possessed little capacity to provide public grids, which makes living in Jakarta hard with the lack of parking and cleanliness. Ciputra was the pioneer among property developers to organize these things themselves," Marleen Dieleman, associate professor at National University of Singapore and a specialist in Asian family business groups, said.

In a broad sense, companies like Ciputra were doing the government's job, she noted. "Legally speaking, it's a grey area. City infrastructure, such as roads or water treatment plants, mostly belongs to government but private companies like Ciputra maintain them since local governments don't possess the capacity to do so."

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Power from the people

The fact that citizens typically have little faith in national institutions empowers these companies, allowing them to wield substantial power, the AIM's Francisco said.

But there are weighty consequences of such intense private sector participation in public life.

If just one or two private firms control most of the public goods, there is more room for market abuses, such as higher prices, inefficient service, or poor quality products, noted Francisco. "This is where competent competition policy must come in," he added.

Moreover, inequality can spike, Dieleman said, explaining that some public goods, such as infrastructure provided by property developers, were only available to wealthy gated communities within cities, rather than the general public.

But on the bright side, this should allow the government to focus on the poor while corporates take care of the rich, she said.

Public spirit or pure profit?

The motivation behind these public-minded companies is typically a blend of a sincere interest in social responsibility and corporate self-interest, according to experts.

"If poor infrastructure prevents them [companies] from developing high-quality, globally competitive commercial or residential districts, then they have no choice but to build the infrastructure themselves and integrate them with [often less well-developed] infrastructure provided by government as seamlessly as possible," Francisco said.

It should also be noted that the phenomenon isn't Asia-wide; Countries with heavy state influence, such as China, tended to take control of public goods, Dieleman said.