Bankruptcy, corporate governance and competition: some important links

Abstract

The three elements in the title of this paper refer to the institutional framework for economic development, described by Joseph Schumpeter as a process of "creative destruction." Development has good news stories of colorful entrepreneurs, newly created companies, investment in research and development and the introduction of new goods, services and methods of organization such as the Malaysian Multimedia Super Corridor (MSC). The more painful part of the process is associated with the destruction that occurs as firms adapt to the changes and are either reshaped, taken over or forced into liquidation and bankruptcy. In economies characterized by private ownership of property, the mechanism for creative destruction is the interaction of supply and demand which signals changes in markets. The names of Rockefeller, Ford, Beaverbrook and Gates are associated with the introduction of new products and forms of organization. Corporate reorganizations have seen tobacco firms diversify into grocery retailing, automotive companies into financial services, and book retailers substitute on-line selling for store-based operations. In the public sector, postal services have adapted to the Internet and state owned universities responded to privately provided distance education services. Mergers and bankruptcy are measures used to reorganize and reallocate resources in the private sector. Bankruptcy receives less favorable attention because, as in the case of gold mining in Indonesia, it is at times associated not just with commercial failure but with fraudulent acts. A proposed 16th century English bankruptcy statute was entitled "Merchants that run away with other men's goods."