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SOSC 300 K

Lecture Note 6

Business Networks

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• Gary G. Hamilton and Nicole Woolsey Biggart, 1988, “Market, Culture and Authority: A Comparative Analysis of Management and Organization in the Far East”

• How can this article help us to better understand Hong Kong’s post-war state/business relationship?

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Patterns of industrial organization in T, J, SK in the 1980s (comparison)

(1)• Similarities among the two economies from the 1980s:

• 1. Export-oriented economy;• 2. Rapid economic growth after recovering from

the destruction of the W. W. II.;• 3. U. S. economic aid and direction after the war; • 4. None of them has rich natural resources

(minerals, land)• 5. Similar cultural influences (Confucian and

Buddhist traditions)

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Patterns of industrial organization in T, J, SK in the 1980s

(comparison) (2)• An overview of major patterns of industrial

organizations in J, SK and T:

• Japan: 1) corporate groups; 2) vertical linkages between major manufacturing and their subsidiaries

• South Korea: Chaebol [ 재벌 ; 財閥 ]

• Taiwan: family firm and the business group

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The Japanese Pattern of Industrial Organization (1)

• Two interrelated networks of firms:• 1. Linkages among large firms (“relational contracting

between equals” in Dore’s terms): These networks are normally groups of firms in unrelated businesses that are joined together by central banks or by trading companies. Most of them were developed from the pre-war zaibatsu ( 財閥 ). – “Relational contracting”: the stability of contracting relationship.

Both sides recognize an obligation to try to maintain it. • Zaibatsu: any of the large capitalist enterprises of Japan

before World War II, usually organized around a single family. One zaibatsu might operate companies in nearly all important areas of economic activity. They transformed into Kigyo shudan (corporate groups) after the war. Notable zaibatus included present-day Misui ( 三井 ), Misubishi ( 三菱 ) corporate groups.

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The Japanese Pattern of Industrial Organization (2)

• 2. Connection among small- and medium-sized firms to large firm (“relational contracting between unequals”): vertical linkages between major manufacturers (kaisha [ 會社 ]) and their related subsidiaries.

• The linkages produce a dual structure in the Japanese economy.

• Major firms in Japan are directly connected to a series of small independent firms that perform important roles in the overall system of production.

• Relationship between large firms and small firms: subcontracting.

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The South Korean Pattern of Industrial Organization

• Chaebol: similar to the prewar zaibatsu in size and organizational structure. – In 1980-81: 26 chaebol controlled 456 firms– In 1985: 50 chaebol controlled 552 firms

• E. g. Samsung, Hyundai, Daewoo, Lucky-Goldstar• Member firms of chaebol are closely controlled by

central holding companies, which are owned by an individual or a family. The central holding companies of the chaebol do not have the independence of action (compared with the enterprise group possess in Japan).

• The central holding companies are managed by state.• Outside the chaebol networks, few large and

independent firms; no subcontracting between large and small firms.

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The Taiwanese Pattern of Industrial Organization

• The dominant organizational forms: family firm ( 家族企業 ) and the business group ( 集團企業 )

• Compared with J and SK, Taiwan has low level of vertical and horizontal integration and a relative absence of oligarchic concentration.

• Most family firms are small- and medium-size (in1976, 97.33% firms were fewer than 300 employees or less than $ 20 million U. S. assets; 60% labor force in Taiwan worked in these firms)

• Connections among firms: Some of the firms form production, assembly, or distribution networks among themselves. The networks are often linked through informal contracts. Some firms perform subcontracting work for larger firms.

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Explanations of the three patterns of industrial

organizations • 1. Market Explanation

• 2. Culture Explanation

• 3. Authority Structure and Organizational Practice

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Market Explanation (1)• All three economies fit the situation of technological

advance as proposed by Chandler. • 1. internal and external transportation and

communication systems are well developed;• 2. substantial and growing internal mass markets have

risen and all have vast external markets;• 3. the most advanced technologies in the various

industrial sectors are available.• But the economies developed into three different forms

of industrial organizations.• Neither can the market explanation fully explain why the

organizational structures of business enterprises in the three economies are so different

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Market Explanation (2)

• The Japanese case: growing technology, expanding communication, and the increased volume of manufacturing transactions are not the causes of the development of Japanese zaibatsu. They developed simultaneously, if not earlier, than Japan’s industrialization in the Meiji era.

• The SK case: intervention of state into business organization can be traced back to pre-modern political practices.

• The Taiwan case: Only a few large organizations or concentrated industries. Even when a family business becomes successful, the pattern of investment is not to attempt to vertical integration in order to control the marketplace, but rather is to diversify by starting a series of unrelated firms that share neither account books or nor management.

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Culture Explanation (1)

• Japan: the emphasis of wa (harmony)• One important organizational consequence is the

subordination of the individual to the group and the practices to which that leads: the necessity to check with colleagues during contract negotiations; the routine and calculated movement of personal among functional areas to promote wider understanding at the expense of specialization; the promotion of cohorts, not individuals, up the organization ladder; the development of lifetime employment, internal labor markets, and senior systems to maintain the integrity of the group.

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Culture Explanation (2)

• Taiwan: Confucianism• Its expression in enterprise: promote individual self-

control and dutiful conduct to one’s superiors and particularly to one’s family.

• Compared with the Japanese model, modern Chinese organization emphasizes competitive relations among subordinates.

• Compared with the Japanese, Chinese loyalty is not firm specific. Chinese loyalty extends to a network of family enterprises. Therefore, business is conducted with members of one’s kinship network.

• Confucianism promotes strong bonds at the local level when face-to-face relations are paramount but is a weak form of social control.

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Culture Explanation (3)

• Critiques of culture explanation: • Taiwan, South Korea and Japan belong to the same

cultural complex: Confucianism, Buddhism, influences of Chinese civilization, etc.

• The culture explanation can explain the common patterns that attributed to the rapid economic growth in the three societies: high rates of literacy, the desire to achieve, and the willingness to work hard.

• However, the culture explanation cannot distinguish the many differences that exist among these societies, including the organizational structure of business enterprises.

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Authority Structure and Organizational Practice

• Max Weber: organizational structure should be explained by many factors. Key factors in explaining economic organization may not be economic. These factors should be understood in particular historical contexts.

• Cf. Chandler’s explanation of the making of large-scale business enterprises and unfettered transportation and communications in the late 19th century U. S.

• In Weberian approach, Chandler’s analysis should be put in the context of the weak state vs. powerful private institutions.

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South Korean Industrial Pattern in Authority Explanation (1)

• Centralized state: the state is the leading actor that actively participates in the public and private spheres of economy—centralized economic planning and aggressive implementation procedures. These procedures aim at controlling the entire economy.

• The state controls the private sector through the control of the banking system, credit rationing, and other financial controls.

• A Korean firm should know how to follow along the state’s commands otherwise the firm would be subject to the following penalties, e.g. its tax returns might be subject to careful examination, or it application for bank credit would be ignored, or that its outstanding bank loans would not be renewed.

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South Korean Industrial Pattern in Authority Explanation (2)

• Medium and large firms, particularly the chaebol, are favored by such planning and implementation procedures, because state policies support business concentration.

• However, these firms are also constrained by government-controlled credit, by government regulation of the purchase of raw materials and energy, and by government price-setting policies for selected commodities.

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Japanese Industrial Pattern in Authority Explanation (1)

• State policy: creating and promoting strong intermediate powers, each having considerable autonomy, with the state acting as coordinator of activity and mediator of conflicting interests.

• The most important of these strong intermediate powers are the intermarket groups of large firms (the resumption of pre-war zaibatsu after the American occupation era).

• These business networks and member firms are independent of direct state control, but they may comply with the state’s “administrative guidance” such as the guidance proposed by the MITI (Ministry of International Trade and Industry).

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Taiwanese Industrial Pattern in Authority Explanation (1)

• The strong state and the “virtually free trade conditions”, particularly in export business sector.

• 1. The state owns and manages a range of public enterprises that provide important substituting commodities (e. g. petroleum, steel, and power) and services (e. g., railways and road and harbor construction), but unlike those in South Korea, public enterprises in Taiwan have steadily decrease in importance;

• 2. The state imposes import controls on selected products and promotes industrial development in export products through special tax incentive programs and the establishment of export processing zones. These incentives do not favor industrial concentration;

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Taiwanese Industrial Pattern in Authority Explanation (2)

• 3. As in Japan and South Korea, the state in Taiwan exerts strong controls over the financial system, including banking, insurance, and saving systems. This financial system however favored the development of a curb market—that is, an unregulated, semi-legal credit market in which loan suppliers and demanders can transact freely at uncontrolled interest rates. [informal and unregulated transaction]

• Why does the curb market favor the development of small- and medium-sized firms?

• Because small- and medium-sized firms require only moderate to little investment capital and because such firms have difficulty obtaining bank loans, the curb market has played an extremely important role in financing Taiwan’s industrial development.

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What determined the choice of state-business relationship? (J)

• The historical selection after the Second World War that each regime has to establish a rationale to legitimize its existence.

• Japan: the presence of the emperor, but the emperor was a weak center. Therefore, successive decisions allowed for the creation of a modern version of the decentralized structure of power—the center coordinates strong and loyal independent powers. In turn, the independent powers have normative responsibility for the people and groups who are subordinate to them.

• The economic consequences of this type of legitimation strategy: to create large, autonomous enterprises. Therefore, Japanese intermarket groups are not creations of market forces. “They…. institutionalized a managerial structure that, from the outside, looks like a corporation but, on the inside, acts like a fiefdom” (p. 465)

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What determined the choice of state-business relationship? (SK)

• The crisis after the World War II: Syngman Rhee’s ( 李承晚 ) rule (1948-60) and the Korean War (1950-3)

• The legitimizing strategy for the South Korean government centered on the imagery of the strong Confucian state: a central ruler, bureaucratic administration, weak intermediate powers, and a direct relationship between ruler and subjects to the state.

• South Korean firms draw their managerial culture from the same source, the state, and from state-prompted management policies. These firms developed an ideology of administration, an updated counterpart to the traditional Confucian ideology of the scholar-official.

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What determined the choice of state-business relationship? (T)

• The basis legitimation strategy of the Chiang Kai-shek government in Taiwan:

• The problem: to rule over the linguistically distinct southern Chinese in Taiwan (Hokkien, Hakka, and Teochew) and the aboriginal people by predominant northern Chinese.

• The strategies: 1) 1940s-1950s: take Taiwan as a base to return to the mainland; 2) 1960s: a long-term government based on the model of the late imperial China—the state should be an exemplary institution and its leader a benevolent ruler. No corruption and unfair wealth were not allowed. The emergence of favorite groups was discouraged. A clear separation between public and private spheres.

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What determined the choice of state-business relationship? (T)

• The consequences of the state policy: to allow society to respond to the economic opportunities that existed in the world economy and for which the state offered incentives.

• The Taiwanese pattern is similar to the pattern of Chinese business practices in 19th. Century China, pre-war Southeast Asia, Hong Kong and Singapore—Chinese enterprises in the above space and time were operated at the dearth of direct political control, coupled with the basis of small family-run firms and personalistic networks that linked firms backward to sources of supply and forward to consumers.

• The nature of Chinese family system: patrilineage--equal inheritance among all sons (cf. the primogeniture of the Japanese system)

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Different Niches for the three economies

• Each possess different economic capabilities, and each seems to fill a different niche in the world economy

• Niche: the most appropriate place for an economy to survive, such as the most appropriate position of a species or population in an ecosystem

• Taiwan’s small family firms, which can flexibly shift from producing one commodity to another, has become a dominant producer of an extensive range of medium- to high-quality consumer goods (e. g., clothes, small household items). Production of these goods requires little research and development (R & D).

• Large Japanese corporations specialize in a product area. Through R&D and marketing strategies, these enterprises can create new commodities and consumers for those commodities. Japanese business therefore operate on the frontiers of product development. South Korean businesses are attempting to become important producers of commodities that require extensive capital investment but for which markets already exist (e. g., steel, major construction materials, automobiles). Such ventures require large amounts of capital and coordination but relatively little R & D.

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Hamilton and Biggart’s Conclusion

• The firm is “embedded” in networks of institutionalized relationships and that these networks.

• These networks are different in each society. • The networks have a direct effect on the types of

firms that develop, on the management of firms, and on organizational strategies more generally.

• The particular forms of economic embeddedness in each society, particularly in relation to political institutions, allow for the activation of different organizational designs to achieve industrialization.

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Question and Discussion 1

• Please base on the following information (see the following pages) to compare the structure of business organization in Hong Kong with those in Taiwan, Japan, and South Korea. Hamilton and Biggart argue that Hong Kong’s industrialization could be associated with the Taiwanese model. Do you agree with this perspective? Why?

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Percentage of Hong Kong’s Gross Domestic Product by Selected Items, 1961-1991

Industry 1961 1971 1981 1986 1991

Manufacturing 23.6 % 28.2 % 22.8 % 22.3 % 15.2 %

Wholesale and retail trade, restaurants and hotels

19.5 % 19.5 % 19.5 % 21.3 % 25.4 %

Financing, insurance, real estate, and business services

10.8 % 17.5 % 23.8 % 17.3 % 22.7 %

Source: cited from Benjiamin K. P. Leung, Perspectives on Hong Kong Society (Hong Kong: Oxford University Press, 1996), p. 7.

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Table: Distribution of Hong Kong’s Manufacturing Establishments (as

percentage of total manufacturing establishments)Establishment distribution

Size of establishment (persons employed) 1961 1971 1981 1991

1-9 persons 38.9 51.9 65.4 72.3

10-19 28.6 19.1 15.6 13.6

20-49 18.2 15.5 11.1 9.6

50-99 6.7 6.6 4.7 3.3

100-199 4 3.9 2 1.4

200-499 2.5 2.1 0.9 0.7

500 and over 0.9 0.7 0.3 0.2

Source: cited from Benjiamin K. P. Leung, Perspectives on Hong Kong Society (Hong Kong: Oxford University Press, 1996), p. 8.

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Fact sheet on Hong Kong’s Economic Structure

• In the end of 1994, the top 12 business groups (such as the HSBC, the Jardines, the Swire Group, the Henderson Land Development, the Sun Hung Kai Properties Ltd., the New World Development, the Cheung Kong Ltd.) in Hong Kong constituted 69.95% value in the stock market.

• --Cited from Gao Chengshu and Chen Jiexun [eds.], Xianggang: wenming de yanxu yu duanlie? (Taipei: Lianjing chubanshe, 1997) [ 高承恕 , 陳介玄 [ 編 ] 香港文明的延續與斷裂 ? 台北 : 聯經出版社 , 1997]

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Foreign direct investment in Hong Kong’s Non-manufacturing Sectors

Net value (in 100,000,000 HKD)

Percentage

Great Britain 2,031 30

China 1,298 19

Japan 1,364 20

U. S. 759 11

Others 1,411 20

Total 6,843 100

Cited from Fung Bangyen, Xianggang yingzi caituan (Hong Kong: Sanlian shuju, 1996), p. 162.

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Question and Discussion 2

• Hamilton and Biggart argue that authority approach can best explain the different organizational structures among Taiwan, South Korea and Japan. Do you think the approach can also explain Hong Kong’s industrialization best?