East Asian Corporates: Growth, Financing and Risks over the Last Decade

Abstract

Using a database of 5,550 firms in nine countries over the period 1988-1996, we find large differences in performance and financial structures across East Asian countries. Profitability, as measured by real return on assets in local currency, was relatively low in Hong Kong, Japan, Korea, and Singapore throughout the period, while corporates in Indonesia, the Philippines, and Thailand had high returns, on average twice higher than those recorded in Germany and the US. Nominal returns in dollars were high too, but reflected in part the real appreciation of currencies. In 1994-1996, measured performance declined in several countries, especially Japan and Korea. This did not show up as much in sales growth as investment rates were high and continued to drive output growth rates in many countries. The combination of high investment and relatively low profitability in some countries meant that much external financing was needed. As outside equity was used sparingly, leverage was high in most East Asian countries, also relative to other countries, and increasing in Korea, Malaysia and Thailand. Short-term borrowing became increasingly important, especially in Malaysia, Taiwan, and Thailand. Some of the vulnerabilities in corporate financial structures that have now become a very apparent factor in triggering and aggravating East Asia’s financial crisis, were thus already in existence in the early 1990s.

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