Pyramid Business Structures In China Essay Example | Topics and Well Written Essays - 4000 words

Pyramid Business Structures In China - Essay Example This essay explores the basics of the pyramid business structure and checks how far the business model has deep rooted in the Chinese environment. It also analyses whether the pyramidal structure is beneficial or harmful to the Chinese economy through a case study on CITIC. Introduction A pyramid business structure has one person who is a sole controller and owner of one or more organizations. The person and his firms control a chain of other business structures in various industries. Thus the person at the top of the pyramid is the indirect controller of several small firms owned by a handful of his companies. This structure is widely prevalent in all the developing countries especially China. The owner at the top of the pyramid is capable of controlling the actions of every other company under their firms with little investment through this method. Such type of business structure is important for the massive growth of huge corporate in the developing economies. But, developed count ries like the USA efficiently controlled this model as early as the 1930's as it curbed the growth of small entrepreneurs and entrusted too much profit into sectored groups. The US government used various strategies like double taxation to control pyramidal business sector (Marck et al, 2005). ... Claessens, Djankov and Lang (2000) confirm nearly 38.7% huge public firms in East Asia are managed through pyramid ownership. The pyramid business structure enables the ultimate owner to invest less and control massive cash flow. Another main advantage in this system is the firms controlled and the controller firms can share their resources in terms of capital, labour as well as revenue similar to business groups. But, the owner will be free from paying heavy taxes to the government for the small firms as only a handful of major firms are under his direct control. These controlled firms are used for the benefit of the owner in various ways. They can be discouraged from showing profits as the owner might need them to show losses to evade tax. These firms are run by the money invested by the common public or the shareholder who lack any control over these structures. This gap between control and cash investment paves way for tunnelling or which reduces the firm's total value. â€Å"Tu nneling† generally defined as the passing of assets or profits from the smaller country to the bigger companies for the ultimate benefit of the huge group’s owner. Research done by various scholars in the western countries as well as the growing eastern market suggests the same. Research done by La Porta, Lopez-de-Silanes, Shliefer and Vishny (2002) confirmed pyramid business structures paved way for tunnelling more than the other business structures after studying the top 27 economies in the western world. Claessens et al (2002) research in East Asian economies confirms the same. Classens et at (1998) claims there are three main problems in pyramid business structure. They are