Market watchers worldwide are all abuzz about the “globalization of the American economic model.” By that they mean the rising contribution of the information-technology sector to economic growth, the soaring valuations of Internet-related stocks and the use of those shares to finance highly leveraged buyouts. It is becoming increasingly clear that this “Americanization” is a mixed blessing: The growth is welcome, the accompanying bubbles are not. Local variants of the phenomenon may compound the dangers.
Business spending on information technologies in the industrialized economies of the United States, Europe and Japan is growing about 12 percent a year, considerably faster than those economies as a whole. It is estimated that growth in the sector added about half a percentage point to Japan’s overall GDP in 1999, and it is anticipated to reach over 1 percentage point soon. In Japan, the number of jobs in the IT sector grew about 2.4 percent a year from 1980 to 1997, while annual growth in the entire labor force was just 1.7 percent.
Bright prospects have spilled over into the markets. New York share prices have lured investors from around the world, but there is froth in other exchanges, too. By one estimate, the value of European Internet companies has jumped from $25 billion to $100 billion in the last six months. “New Japan” stocks are taking market indexes here to new heights, led by such companies as Softbank and Hikari Tsushin, which have marked triple-digit increases in value in the last few months alone.
This is worrisome on several counts. There are concerns that Net-related stocks are crowding out investments in older companies. Investors eager to score on the “next big thing” and fund managers trying to keep pace with the competition are pouring more money into these stocks and forsaking older, more reliable, but much less glamorous companies. It is an intensely polarized market: By one estimate, Japan’s TOPIX index has surpassed its post-bubble high (reached in June 1996), even though 85 percent of stocks are cheaper than they were then and 45 percent are even lower than their post-bubble low.
A market so narrowly based is delicately poised. If the new bubble bursts, the slide could quickly become an avalanche, especially since share prices have been the foundation of so much of the “wealth” created in the last few years.
While the Net boom is relatively new to Asia, the region has its own vulnerabilities. One trouble spot is the large networks of companies. Softbank, for example, has investments in 300 such businesses worldwide. Hikari Tsushin, another aggressive investor, has used its $300 million war chest to tie up with more than 70 companies. Their dynamism has been important in nurturing venture companies in Japan; it also creates disturbing interdependencies.
The rise of the “Net-zaibatsu,” as they are sometimes called, looks a lot like the old-style conglomerates that have dominated economies in the region. That, too, is troubling. Some see virtue in casting a wide net to encourage as many companies as possible; others say it shows a lack of focus. Softbank’s role in setting up the Nasdaq Japan exchange raises concerns about conflict of interest — it will be investing in these companies as well as running the market — that look all too familiar.
Hong Kong last week showed the world its own particular brand of cyber-capitalism — and it has blemishes of its own. The spectacular debut of tom.com, a portal run by companies affiliated with Mr. Li Ka-shing, was 700 times oversubscribed. That tom.com was given fast approval by the local authorities to go ahead with the listing does not seem to have deterred investors eager to share Mr. Li’s golden touch.
Then there is the successful bid by his son, Mr. Richard Li, to win control of Cable & Wireless HKT. Mr. Li’s company, Pacific Century CyberWorks, prevailed over SingTel in the competition, even though the former has no operating record and no strategy. It does, however, have the support of the local government — which aroused protests when it awarded PCCW the right to build a cyberport nearly two years ago without opening the bid to public tender — as well as of Beijing.
While doubts about the propriety of SingTel, a government-owned company, running Hong Kong’s phone system are only natural, Mr. Li’s win suggests that Hong Kong’s clubby capitalism is making inroads in cyberspace. The winning bid means that the two Li’s companies now account for nearly one-third of the capitalization of the Hong Kong stock exchange. That is a worrying concentration of wealth. The extension of American-style globalization is a problem, but the local versions seem no more reassuring.
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