Introduction:

The Asian financial crisis was a period of financial crisis that gripped much of East Asia
beginning in July 1997 and raised fears of a worldwide economic meltdown due to contagion.
The crisis started in Thailand with the financial collapse of the Thai baht after the Thai
government was forced to float the baht due to lack of foreign currency to support its fixed
exchange rate, cutting its peg to the US$, after exhaustive efforts to support it in the face of a
severe financial overextension that was in part real estate driven. At the time, Thailand had
acquired a burden of foreign debt that made the country effectively bankrupt even before the
collapse of its currency.
[1]
As the crisis spread, most of Southeast Asia and Japan saw slumping
currencies,
[2]
devalued stock markets and other asset prices, and a precipitous rise in private
debt.
[3]
Indonesia, South Korea and
Thailand were the countrys most affected by the crisis. Hong Kong,
Malaysia, Laos and the Philippines were also hurt by the slump. China, Taiwan, Singapore,
Brunei and Vietnam were less affected, although all suffered from a loss of demand and
confidence throughout the region.
Foreign debt-to-GDP ratios rose from 100% to 167% in the four large Association of Southeast
Asian Nations (ASEAN) economies in 199396, then shot up beyond 180% during the worst of
the crisis. In South Korea, the ratios rose from 13 to 21% and then as high as 40%, while the
other northern newly industrialized countries fared much better. Only in Thailand and South
Korea did debt service-to-exports ratios rise.
[4]
Although most of the governments of Asia had seemingly sound fiscal policies, the International
Monetary Fund (IMF) stepped in to initiate a $40 billion program to stabilize the currencies of
South Korea, Thailand, and Indonesia, economies particularly hard hit by the crisis. The efforts
to stem a global economic crisis did little to stabilize the domestic situation in Indonesia,
however. After 30 years in power, President Suharto was forced to step down on 21 May 1998 in
the wake of widespread rioting that followed sharp price increases caused by a drastic
devaluation of the rupiah. The effects of the crisis lingered through 1998. In 1998 the Philippines
growth dropped to virtually zero. Only Singapore and Taiwan proved relatively insulated from
the shock, but both suffered serious hits in passing, the former more so due to its size and
geographical location between Malaysia and Indonesia. By 1999, however, analysts saw signs
that the economies of Asia were beginning to recover.
[
After the 1997 Asian Financial Crisis, economies in the region are working toward financial
stability on financial supervision.
[6]

Until 1999, Asia attracted almost half of the total capital inflow into developing countries. The
economies of Southeast Asia in particular maintained high interest rates attractive to foreign
investors looking for a high rate of return. As a result the region's economies received a large
inflow of money and experienced a dramatic run-up in asset prices. At the same time, the
regional economies of Thailand, Malaysia, Indonesia, Singapore, and South Korea experienced
high growth rates, 812% GDP, in the late 1980s and early 1990s. This achievement was widely
acclaimed by financial institutions including IMF and World Bank, and was known as part of the
"Asian economic miracle."
Definition of Asian Currency Crisis: Also called the "Asian Contagion", this was a series of
currency devaluations and other events that spread through many Asian markets beginning in the
summer of 1997. The currency markets first failed in Thailand as the result of the government's
decision to no longer peg the local currency to the U.S. dollar. Currency declines spread rapidly
throughout South Asia, in turn causing stock market declines, reduced import revenues and even
government upheaval. The Asian Financial Crisis was stemmed somewhat by financial
intervention from the International Monetary Fund and the World Bank. However, market
declines were also felt in the United States, Europe and Russia as the Asian economies slumped.
Why a Crisis now?
Since weaknesses in Asian financial systems had existed for decades and were not unique to the
region, why did Asia not experience crises of this magnitude before? Two explanations are
likely. First, rapid growth disguised the extent of risky lending. For many years, such growth
allowed financial policies that shielded firms that incurred losses from the adverse effects of their
decisions. However, such policies would make economies highly vulnerable during periods of
uncertainty. Second, innovations in information and transactions technologies have linked these
countries more closely to world financial markets in the 1990s, thus increasing their vulnerability
to changes in market sentiment. Since weaknesses in East Asian financial systems had existed
for decades and were not unique to the region, why did Asia not experience crises of this
magnitude before? Two explanations are likely. First, rapid growth disguised the extent of risky
lending. For many years, such growth allowed financial policies that shielded firms that incurred
losses from the adverse effects of their decisions. However, such policies would make economies
highly vulnerable during periods of uncertainty. Second, innovations in information and
transactions technologies have linked these countries more closely to world financial markets in
the 1990s, thus increasing their vulnerability to changes in market sentiment. Financial sector
vulnerability was accentuated by a tendency not to hedge foreign currency borrowing in
countries with pegged exchange rates. Market participants may have interpreted currency pegs as
implicit government guarantees against the risk of currency volatility (Dooley 1997), backed by
foreign reserves that would be made available through central bank currency intervention. While
the absence of hedging significantly lowered the cost of funds (in the short run) for those firms
with access to foreign credit, the consequent mispricing of foreign credit contributed to excessive
capital inflows and the vulnerability of borrowers with heavy exposure to foreign currency loans.
The lack of hedging also added to the instability in Asian financial markets once the crisis hit.
The high cost of abandoning currency pegs induced policymakers to adopt harsh contractionary
measures (involving skyrocketing interest rates) to defend the exchange rate, even when the pegs
were unsustainable in the face of adverse market sentiment. The efforts of market participants to
cover previously unhedged foreign currency exposure after the onset of the crisis further
weakened Asian currencies. After the pegs collapsed, borrowers who had not hedged their
foreign currency borrowing had difficulty servicing their debts and, in some cases, went
bankrupt, thus worsening the crisis.

Causes of Asia Currency Crisis:
The collapse of the Thai baht in July 1997 was followed by an unprecedented financial crisis in
East Asia, from which these economies are still struggling to recover. A great deal of effort has
been devoted to trying to understand its causes. One view is that there was nothing inherently
wrong with East Asian economies, which have historically performed very well. These
economies experienced a surge in capital inflows to finance productive investments that made
them vulnerable to a financial panic. That panicand inadequate policy responsestriggered a
region-wide financial crisis and the economic disruption that followed (Sachs and Raveled
1998). An alternative view is that weaknesses in Asian financial systems were at the root of the
crisis. These weaknesses were caused largely by the lack of incentives for effective risk
management created by implicit or explicit government guarantees against failure (Moreno,
Pasadilla, and Remolona 1998 and others cited below). The weaknesses of the financial sector
were masked by rapid growth and accentuated by large capital inflows, which were partly
encouraged by pegged exchange rates. While the two views are not mutually exclusive, their
policy implications vary greatly. If a panic unrelated to fundamentals fully explains Asias
financial crisis, reforms in the economic structure or in financial sector policy are not essential in
planning Asias recovery. If, however, weaknesses in the financial sector were important
contributors to the crisis, reforms are indeed essential. To shed further light on this question, this
Economic Letter briefly reviews Asias recent financial crisis and the two alternative views of its
cause.
Boom and bust in Asia: Operating in an environment of fiscal and monetary restraint, most of
East Asia enjoyed high savings and investment rates, robust growth, and moderate inflation for
several decades. Starting in the second half of the 1980s, rapid growth was accompanied by
sharp increases in asset values, notably stock and land prices, and in some cases by rapid
increases in short-term borrowing from abroad. After the mid-1990s a series of external shocks
(the devaluation of the Chinese remnimbi and the Japanese yen and the sharp decline in
semiconductor prices) adversely affected export revenues and contributed to slowing economic
activity and declining asset prices in a number of Asian economies. In Thailand, these events
were accompanied by pressures in the foreign exchange market and the collapse of the Thai baht
in July 1997. The events in Thailand prompted investors to reassess and test the robustness of
currency pegs and financial systems in the region. The result was a wave of currency
depreciations and stock market declines, first affecting Southeast Asia, then spreading to the rest
of the region. In the year after collapse of the baht peg, the value of the most affected East Asian
currencies fell 35-83% against the U.S. dollar (measured in dollars per unit of the Asian
currency), and the most serious stock declines were as great as 40-60%.Disruptions in bank and
borrower balance sheets have led to widespread bankruptcies and an interruption in credit flows
in the most severely affected economies. As a result, short-term economic activity has slowed or
contracted severely in the most affected economies.
Interpreting the Crisis:The economic shocks affecting East Asia were not followed by a normal
cyclical downturn, but what some describe as runs on financial systems and currencies. Some
argue that these runs reflected a classic financial panic that did not reflect poor economic policies
or institutional arrangements. As is well known, even well-managed banks or financial
intermediaries are vulnerable to panics, because they traditionally engage in maturity
transformation. That is, banks accept deposits with short maturities (say, three months) to
finance loans with longer maturities (say, a year or longer). Maturity transformation is beneficial
because it can make more funds available to productive long-term investors than they would
otherwise receive. Under normal conditions, banks have no problem managing their portfolios to
meet expected withdrawals. However, if all depositors decided to withdraw their funds from a
given bank at the same time, as in the case of a panic, the bank would not have enough liquid
assets to meet its obligations, threatening the viability of an otherwise solvent financial
institution. As pointed out by Radelet and Sachs (1998), East Asian financial institutions had
incurred a significant amount of external liquid liabilities that were not entirely backed by liquid
assets, making them vulnerable to panics. As a result of this maturity transformation, some
otherwise solvent financial institutions may indeed have been rendered insolvent because they
were unable to deal with the sudden interruption in the international flow of funds. However, it is
apparent that this is not the entire story, as the impact of the crisis varied significantly across
economies. In particular, as investors tested currency pegs and financial systems in the region,
those economies with the most vulnerable financial sectors (Indonesia, South Korea, and
Thailand) have experienced the most severe crises. In contrast, economies with more robust and
well-capitalized financial institutions (such as Singapore) have not experienced similar
disruptions, in spite of slowing economic activity and declining asset values. Indeed the collapse
of the Thai baht in July 1997 and of the Korean won in the last quarter of 1997 were preceded by
signs of significant weaknesses in the domestic financial sector, notably an inability by domestic
borrowers to service their debts. In Indonesia, it became apparent after the crisis that domestic
lenders could not monitor adequately the financial condition of their borrowers, a situation that
worsened the severity of the crisis. This suggests that understanding what factors contributed to
weaknesses in the financial sectors of the most affected economies may help make them less
vulnerable to financial crises in the future.
Lack of incentives for risk management: Two characteristics common in countries that have
experienced financial crises were present in a number of East Asian economies. First, financial
intermediaries were not always free to use business criteria in allocating credit. In some cases,
well-connected borrowers could not be refused credit; in others, poorly managed firms could
obtain loans to meet some government policy objective. Hindsight reveals that the cumulative
effect of this type of credit allocation can produce massive losses. Second, financial
intermediaries or their owners were not expected to bear the full costs of failure, reducing the
incentive to manage risk effectively. In particular, financial intermediaries were protected by
implicit or explicit government guarantees against losses, because governments could not bear
the costs of large shocks to the payments system (McKinnon and Pill 1997) or because the
intermediaries were owned by Ministers nephews (Krugman 1998). Krugman points out that
such guarantees can trigger asset price inflation, reduce economic welfare, and ultimately make
the financial system vulnerable to collapse. The importance of implicit government guarantees in
the most affected economies is highlighted by the generous support given to financial institutions
experiencing difficulties. For example, in South Korea, the very high overall debt ratios of
corporate conglomerates (400% or higher) suggest that these borrowers were ultimately counting
on government support in case of adverse outcomes. This was confirmed by events in 1997,
when the government encouraged banks to extend emergency loans to some troubled
conglomerates which were having difficulties servicing their debts and supplied special loans to
weak banks. These responses further weakened the financial position of lenders and contributed
to the uncertainty that triggered the financial crisis towards the end of 1997.
Effect of Asian Currency Crisis:
Corporate Social Responsibility
Corporate Social Responsibility (CSR) is a companys obligations to be accountable to all of its
stakeholders in all its operations and activities. There are four parts of CSR, categorized in terms
of economic, legal, ethical, and philanthropic responsibility (Carroll, 1991). CSR has increased
significantly during the last decade. Many firms started reporting about their ethical, social and
environmental conduct. And in marketing, being green and social is positioned as a relevant
product and firm characteristic. In academic research, CSR has become a topic of interest too
(Scholtens, 2008). The importing of CSR in Asian countries has led to various structural changes
in the business community.CSR of Japanese Corporation is regarded as the professionalization
whereas China companies would view as the importing of dominant Western views. In Malaysia
and Thailand, there is direct engagement with CSR debates and practices (Fukukawa,
2010).Moreover CSR issues in Asia encapsulate problems such as the lack of or disparities in
education, poverty, labor rates and standards, human rights, health care, corporate governance
and vulnerability to natural disasters (Chapple&Moon,2007).In Thailand, CSR policy integration
should ensure that companies are not selective in their CSR contribution and disclosure of their
policies and achievement should be used to enhance transparency and accountability in the
practice of corporate social responsibility. CSR in Thailand still needs to be more effectively
implemented and regulated with regard to the environmentally friendly nature of the corporate
production process and in ensuring that internal stakeholders, such as workers and employees,
are suitably treated in terms of pay, adequate facilities, equal male-female opportunities,
childcare provision and safe working conditions. CSR activities as implemented by companies in
Thailand still at best only partially respond to or reflect the social and environmental needs of
Thai society (Kuasirikun, 2010). CSR is similar to and different from other traditional corporate
market activities if they are to pursue value creation through CSR. An understanding of the
conditions under which CSR may create value is crucial to developing a theory of strategic CSR.
All firm activities may add value in the moment that they reduce costs, create product
differentiation, or move customers to buy from one firm rather than another. CSR is an
opportunity to re-configure the competitive landscape as well as to develop distinctive and
dynamic resources and capabilities (Husted &Allen, 2007).The linked between CSR-business
strategy and business benefits. It was apparent that including CSR as an integral part of business
strategy is highly beneficial in terms of CSR evaluation and measurement, and determining its
impact on profit(TW&MV, 2001).Related study finding the business awareness of the
relationship between socially responsible investment and reputation, linked to their desire to
have a positive impact on the societies in which they operate, indicates that business strategies
play an important role in CSR; also, that such an approach to CSR may result in higher financial
flexibility in terms of increased social investment (CL, &RL, 2005).Thus, CSR can increase
sales growths, reduce costs to increase operating profitability, and reduce investment risk and
lots of confidence among stakeholders. The underlying assumption is that Corporate Social
Responsibility brings about value creation. The importance of this construct and related
assumption for effective value creation is stated in the following proposition.
Corporate Governance:
Corporate Governance (CG) is the process of supervision and control intended to ensure that the
companys management acts in accordance with the interests of shareholders (Parkinson,
1994).At its core, corporate governance is concerned with identifying ways to ensure that
strategic decisions are made effectively. Governance can also be thought of as a means to
establish harmony between parties (the firms owners and its top-level managers) whose interests
may conflict (Hittet al2011).Agency theory suggests that governance matters more among firms
with greater potential agency costs. Rational investors are unlikely to value safeguards against
unlikely events. Yet, few studies of the relation between governance and firm value control for
investor perceptions of the likelihood of agency conflicts. Firm value is an increasing function of
improved governance quality among firms with high free cash flow. In contrast, governance
benefits are lower or insignificant among firms with low free cash flow. Chi andLee (2010)
showed that un-controlling for this conditional relation between governance and firm value could
lead to erroneous conclusions that governance and firm value are unrelated. Corporate
governance structures used in Germany, Japan, and China differ from each other and from the
structure used in the United States. The U.S. governance structure focused on maximizing
shareholder value. In Germany, employees, as a stakeholder group, take a more prominent role in
governance. By contrast, Japanese shareholders played virtually no role in the monitoring and
control of top-level managers. However, now Japanese firms are being challenged by activist
shareholders(Hittet al., 2011).Related studies suggest that good corporate governance serves as
an effective mechanism to alleviate the opportunistic behaviors of management, to improve a
company's reporting quality, and to increase firm value (Chen et al., 2009; Bhagat& Bolton,
2008; Denis &McConnell, 2003). The Asian crisis has effected corporate governance and
accounting system on the valuation of book value and earnings. Results indicated that the value
relevance of earnings in Indonesia and Thailand was significantly reduced during the Asian
financial crisis while the value relevance of book value increased. In Malaysia, the value
relevance of both earnings and book value decreased during the crisis. In Korea, neither book
value nor earnings was significantly impacted by the crisis. It indicates that the level of
corporate-governance mechanisms has an impact on the extent of changes in the value relevance
of book values, but not earnings. Specifically, the value relevance of book value declines when
corporate governance is weak(Fridayet al., 2006).Wruck and Wu (2009)made three conclusions
from their study First, new relationships drive the positive stock price response at announcement;
placements lacking new relationships are non-events. Second, investors with relationship ties to
the issuer are more likely to gain directorships as part of the placement. Third, new relationships
are associated with stronger post-placement profitability and stock price performance. Overall,
their findings are consistent with private placements creating value when they are associated
with increased monitoring and strong governance. The underlying assumption is that Corporate
Governance brings about value creation. The importance of this construct and related assumption
for effective value creation is stated in the following proposition.
Innovative Organization:
Innovative Organization is the implementation of a new or significantly improved product
(goods or service), or process, a new marketing method, or a new organizational method in
business practices, workplace organization or external relations (OECD, 2005).Firms can derive
four basic benefits for Innovative Organization: (1) increased market size; (2) greater returns on
major capital investment or on investments in new products and process; (3) greater economies
of scale, scope, or learning; and (4) a competitive advantage through location (e.g., access to
low-cost labor, critical resources, or customers) (Hitt et al.,2011). The innovative capacity of a
country is the basic driving force behind its economic performance; it provides a measure of the
institutional structures and support systems that sustain innovative activity. Furman, Porter and
Stern presented frames concept of national innovation capacity measured by patenting rates, and
estimates its institutional sources for a group of 17 OECD countries (Moe, 2003). Innovation is
widely regarded as the central process driving economic growth and the competitiveness of
nations. But it takes a long time for a country to reach the technological frontier where
innovation becomes a principle driver. In the case of the outstanding latecomer economies of the
19th century, Germany and the US, it took from 50 to 100 years for these countries to catch-up
with and over take the leader, the UK. In the 20th century, Japan has caught up with the leaders,
and in the postwar period, the outstanding cases have been those of the East Asian Tiger
economies, Korea, Taiwan, Hong Kong and Singapore, described by the World Bank as the
East Asian Miracle (World Bank, 1993).Taiwan is equipped with an innovation system that is
much more flexible and suited to dealing with change than those of Japan and South Korea.
Thus, it is also conspicuous how much better Taiwan fared through the crisis than Japan and
South Korea (Moe, 2003). Most previous publications agree that organizational innovation
influences performance positively such as Oriental (1998).They used a resource-based view to
show the positive relationship between technological innovations and organizational
performance. Hurley and Hult(1998)demonstrated positive relationships between organizational
innovation, a market orientation, and organizational learning, showing that all of these elements
together influenced the potential for good performance. Senge (1990)also indicates that leaders
positive view of innovation is an essential factor for its implementation and development within
the firm and improvements in organizational performance. The underlying assumption is that
Innovative Organization brings about value creation. The importance of this construct and
related assumption for effective value creation is stated in the following proposition.