The largest ever initial public offering (IPO) did not come from the Harvard dropout working in California, nor the Stanford classmates who left Google; it came from Jack Ma, a former English teacher. The Chinese technology magnate bombarded front pages of media outlets in September when Alibaba, the company he founded, raised an astonishing US$25 billion with its IPO in the New York Stock Exchange (NYSE). The news brought to surface the already growing awareness for the need to depart from the traditional East-Asian methods of financing.
Before we jump into examining the next big thing in East-Asian financing, let’s examine what an IPO is. According to Bloomberg, it is when a company offers its stock to the public for the first time. The definition leaves something to be desired, so let’s try again: an IPO is when a private company goes “public” by listing their stocks on an official exchange. Through this process, the firm proposes to raise capital for planned future investments and increase liquidity for their shareholders. I know, this sounds like a mouthful, so here’s Leonardo DiCaprio’s take on IPO in the Oscar-worthy movie of The Wolf of Wall Street : “The i- Look, I-I know you’re not following what I’m saying anyway, right? That’s-that’s okay. That doesn’t matter.”
But it does matter because, through this form of financing, firms are able to raise significant capital. Furthermore, firms can achieve an unprecedented level prestige and recognition by making their shares globally available to traders. It makes investments in their, big and small, accessible all over the world. That’s like opening a seemingly endless treasure chest.
Of course, it isn’t a Disney fairytale; the SEC (Securities and Exchange Commission) requires firms pursuing an IPO to disclose all relevant financial information to the public, which may unintentionally be beneficial to the firm’s competitors. There are also significant costs that should be considered, including underwriting, advertising and legal costs. Despite the drawbacks, the IPO is still a common step for a firm to grow and enforce its market position.
In Asia, things are a bit different, for reasons more complex than just the time zone difference. In general, people with East-Asian backgrounds often employ collectivist behaviors and base their identity upon their family values. Independent behavior that may disrupt the harmony of the family is strongly discouraged. Such beliefs are often manifested within the mechanisms that run their businesses. As of 2007, more 70 percent of the enterprises in Asia were family owned and operated.
This statistic implies that management in Asian firms is almost entirely composed of the members or the close relatives of the family. Their offspring would be mentored and educated in the functions of the business from early on, in hopes of one day inheriting the throne. This practice successfully reduces risk as all managers are well aware of their roles, thereby fostering a deep sense of trust among staff that increases efficiency. The majority of firms take the “Zaibatsu” structure, or family-like run business. Their values align with the Japanese phrase “Genchi Genbutsu,” meaning “Go and see for yourself,” which encourages employees, regardless of their position, to value their company as a family.
With the Zaibatsu mindset, companies took great caution with financing decisions and private investors were mostly preferred. As the IPO requires a full disclosure of the financial statements of the entity, it puts the company under considerable pressure from the market. Such pressure may cause firms to focus more on short-term earnings rather than long-term growth. The East-Asian companies, whose long-term commitment values stem from the Zaibatsu principle, simply were not suited for this spotlight. The largest banks in China (which are also the biggest public companies in the world as of 2014) only became public in the latter years of 2000’s.
In light of the drastic shifts of political ideologies and economic reforms, the traditional East-Asian variants of business strategy have shown weaknesses. The global expansion of investment banks has led to an increased accessibility to public financing, and those businesses that were able to capitalize on this have had a greater chance of prosperity. Businesses that relied solely on private equity found their competitive advantage challenged. The IPO boom that characterized the American market deified classical tradition. The western-educated heirs to East-Asian companies took the throne bringing with them an increased trust and faith in public financing.
The stable political ground and economic prosperity recently enjoyed by the East-Asian businesses has also been a major contributor to the changing culture. Decreased risk with a fairly democratic setting, along with the reduction in information asymmetry achieved by the development of a reliable financial intermediary, has helped to establish a business atmosphere where public financing and external investment has become a legitimate option to financing businesses.
Evidence of these cultural changes are ever present and exemplified by the new found sense of entrepreneurship in the continent. IPO creates opportunities for small to midsized firms to exponentially develop their wealth and to expand and grow. When this process becomes fairly unregulated, firms with limited capital will be able to benefit from public financing and become recognized in the market. As the income disparity grows in Asia, the younger generations are considering an entrepreneurial alternative to developing wealth. Young innovative companies like Weibo, Kakaotalk and Line are already dominating in their respective markets and are looking to expand into the western hemisphere.
Yet, problems do exist. State-owned enterprises (SOEs) will remain under the protective wings of their respective governments. The biggest banks in China are still state-owned and operate under the government’s jurisdiction. The protection of domestic firms by many of the East-Asian countries may diminish opportunities for new startups and ultimately hinder innovation. IPOs are a means to satisfy the capital needs of both large and midsized firm hungry for capital in order to grow and expand domestically and globally. As a result, this protectionist mentality may lead to unfavorable regulations limiting growth for non SOEs. The extreme risk-averse behaviors displayed by the businesses is also an issue that is reflected in the fact that the total Asian IPO index remains at only 15 percent of the US IPO index.
With that said, the tides appear to be changing. In early 2014, Beijing’s Security Association of China passed a set of new regulations allowing new listings on their stock exchange. With President Park Geun Hye’s “Creative Economy Initiatives,” Asia’s fourth-biggest economy, South Korea, is set to record an all-time high IPO market of 4 trillion Won – which represents a two-fold increase from 2013. These creative initiatives include direct investment into startups, modern technology research, as well as the protection of internet intellectual property. Japan’s Abenomics (named after their Prime Minister Abe) has remained dominantly supportive of IPOs, with a number set to climb after a very successful year of 2013.
Indeed, there has been and will continue to be considerable doubts as to whether Alibaba will signal a new wave of successful Asian startups in US, or just a one-hit-wonder. However, as Jack Ma stated, “It doesn’t matter if I failed. At least I passed the concept on to others. Even if I don’t succeed, someone will succeed.” So look out for the descendants of the concept; the next Silicon Valley may be in the city of Hangzhou, Zhejiang Province in China.