business networks in east asia: past, present and future

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Business networks in East Asia: past, present andfutureWei-Hwa Pan a , Jeng-Min Wong b & Cherng-Ying Chiou ba Department of Business Administration , National Yunlin University of Science andTechnology , Yunlin Taiwan , Republic of Chinab Department of International Trade , Overseas Chinese University , Taichung Taiwan ,Republic of China E-mail:Published online: 14 Jun 2013.

To cite this article: Wei-Hwa Pan , Jeng-Min Wong & Cherng-Ying Chiou (2010) Business networks in East Asia: past,present and future, Journal of Statistics and Management Systems, 13:2, 375-387, DOI: 10.1080/09720510.2010.10701474

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Business networks in East Asia: past, present and future

Wei-Hwa Pan2

Department of Business AdministrationNational Yunlin University of Science and Technology4

Yunlin, TaiwanRepublic of China6

Jeng-Min Wong ∗

Cherng-Ying Chiou8

Department of International TradeOverseas Chinese University10

Taichung, TaiwanRepublic of China12

Abstract

Business network is an especial phenomenon that has a long history in East Asian14

economies. Recently, the rapid economic growth of East Asia has attracted much attentionfrom academics and practitioners in exploration of the managerial implications of East Asian16

business networks.However, differing in institutional context and industrial structure, business network18

in each East Asian country has its distinctive characters. The purpose of this study isto explore the business network organizations in Japan (i.e. Keiretsu), South Korea (i.e.20

Chaebol), and the East Asian Chinese societies, including Taiwan, Hong Kong and China,for their historic backgrounds, current situations, and prospects of future developments.22

Keywords : East Asia, business network, Keiretsu, Chaebol.

1. Introduction24

In the late 20th Century, the economic growth of East Asia has beenso noticeable worldwide. During the 1970s, Japan became one of the pow-26

erful nations of ”Triad” in the world. Then, serial “miracles” of economic

∗E-mail: [email protected]

——————————–Journal of Statistics & Management SystemsVol. 13 (2010), No. 2, pp. 375–387c© Taru Publications

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376 W. H. PAN, J. M. WONG AND C. Y. CHIOU

developments were made by the Newly Industrializing Economies (NIEs)comprising Taiwan, South Korea, Singapore and Hong Kong, and next2

comes China, who has had economic reforms and opening-up since 1980s,which has transformed China rapidly into the “World Factory,” having the4

most greatest foreign reserves in the world (Shenkar, 2005; Gilpin, 2001).

Since the 1980s, the amount of foreign direct investment (FDI) in the6

emerging economies has increased gradually and amounted to a recordhigh of USD 585.60 billions in 2007, 32% of the global capital inflow.8

Among them, East Asia is in the foreground, especially Hong Kong,Singapore, South Korea, Taiwan and China (UNCTAD, 2008). The trend10

that the proportion of FDI inflow has been increasing steadily reflects afact– the importance of East Asia in the world economy.12

The following section presents the background and development ofbusiness networks in Japan, South Korea and Chinese Societies as well as14

their efforts in the era of globalization. The paper concludes with a brightprospect for business networks in East Asia.16

2. Emerging of East Asian business model

The rapid rise of East Asian economy has aroused European and18

American scholars’ interest in East Asian enterprises’ business models.For decades, the controversies over East Asian enterprises’ business20

models have reflected the contextual evolvement of East Asian economyas well as East Asian enterprises’ management characteristics (Singh and22

Delios, 2005). The emerging of East Asian business model has progressedthrough three periods of controversies:24

(1) From the 1970s to the mid 1980s: “Japan as Number One”After Japan was awarded the praise “Japan as Number One” in the26

1970s, other countries’ enterprises began to pay attention to the oper-ational advantages of “Japanese model” (Vogel, 1979; Hamilton and28

Biggart, 1988), including Japanese Keiretsu network organizations,lifelong employment, high quality yet low cost, and pursuit of growth30

at the cost of profits, etc., which are all deemed the important elementsof successful Japanese enterprises. Besides, collective capitalism, net-32

work capitalism and so on are often used for describing Japan’seconomic traits (Singh and Delios, 2005; Gilpin, 2001).34

(2) From the mid 1980s to the 1990s: “The East Asian Edge”The Newly Industrializing Economies (NIEs) – Hong Kong, Singa-36

pore, South Korea, Taiwan – have made great economic achieve-

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BUSINESS NETWORKS IN EAST ASIA 377

ments, recognized as “Asian Values” by the world. Their storiesof successful developments are also praised to be “Asian Miracle”2

and “The East Asian Edge” (Hofheinz and Calder, 1982). Analystsinterpret the success of Asian enterprises as the network links among4

enterprises, guanxi network, family business, Confucian traditions,diligent working, discipline, loyalty, high savings rate, and developing6

country capitalism (the government is the leading role in economicdevelopments), etc. (Singh and Delios, 2005; Li, 2001).8

(3) After the mid 1990s: Asian financial crisis/ World FactoryThe Asian financial crisis in 1997 aroused criticism for “Asian values”10

from many Western scholars, who argued that the crony capitalism,tight relationships among or between firms and government, had12

systemic deficiencies which led to the serious Asian economic crisis(Singh and Delios, 2005). On the other hand, China is the analogue14

of “World Factory” in labor-intensive industry, and its enormousdomestic demand market is attracting foreign investments inflow from16

worldwide. One of the key factors in China’s rapid economic devel-opment is that China is located in the center of the Greater Chinese18

Economic Commonwealth, surrounded with a group of complemen-tary economies and business networks. Especially, Taiwanese and20

Hong Kong enterprises’ experience in managing business networksalso provides China’s enterprises with the models of learning (Castells,22

2000; Shenkar, 2005).

The foregoing controversies over East Asian business models show24

the unique backgrounds of development among East Asian enterprisessince the 1970s. Most of the discussions focused on networking among26

enterprises.

3. The development of business networks in East Asia28

Business network is commonly seen and has a long history in EastAsian enterprises and Chinese business communities worldwide (Kao,30

1993; Wang, 2007). Historically and culturally, Japan, Korea, Taiwan, HongKong and China are intertwined. Characteristics are that they are deeply32

influenced by Confucian and Buddhist traditions, and their economic de-velopments are mostly supported by exports. Such similarities (including34

business network) have been deemed as the features of East Asian Areaby other regions.36

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However, owing to different institutional contexts of these countries,business network in each East Asian country has its distinctive characters.2

(Biggart and Hamilton, 1997; Fukuyama,1995). We discuss the develop-ment of business networks in Japan, South Korea, and Chinese Societies4

respectively as follows:

3.1 Business network in Japan6

Since Meiji Reform in 1868, Japan’s industrialized society had longbeen controlled by a small set of “zaibatsu”, the enormous network groups8

owned by prominent families, such as Mitsui, Mitsubishi, Sumitomo, etc.The prewar structure of the zaibatsu, organized around key families and10

the group holding company, is shown in Figure 1 (Gerlach,1992).

12

Figure 1Prewar zaibatsu control patterns (Sources: Gerlach (1992), Figure 1a)

During the US occupational period of postwar, these zaibatsu were14

dismissed. Later, new business network groups have developed in Japan,including the so-called “keiretsu” such as Toyota, Nissan, Matsushita,16

Toshiba, and Hitach, and the big banks “network groups” such as Fujo,Dai-ichi Kango and Sanwa (shown as Figure 2). Most of them have18

professional management, public offering, and separate ownership frommanagerial authority. Besides, Japan also has numerous small enterprises20

which are connected with big companies in the network as suppliers orsubcontractors to big companies (Fukuyama, 1995; Gerlach, 1992).22

Historically, large enterprise groups dominated the industrial land-scape of Japan. Theses groups enable many enterprises that originally scat-24

ter in industrial, commercial, and financial industries to form a network.

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Figure 2Postwar keiretsu control patterns (Sources: Adapted from Gerlach(1992), Figure 1b and Figure 2a)2

Japan’s business groups represent in two types (Gerlach, 1992; Hamiltonand Biggart, 1988).4

(1) Horizontal network: Some large firms are loosely coupled large firms onequal bases. These networks are spreaded among different industrial6

sectors. Among them, some are descendents of pre-war zaibatsu, likeMitsui, Mitsubishi; while some are major banks founded during the8

post-war period (Daiichi Kango, Sanwa).(2) Vertical network: It connects small- and medium-sized firms to large10

firms under a dual structure. The “system of subcontracting” enableslarge firms to agilely utilize small firms’ production capacity to con-12

front market volatility elastically, while small firms depend on orders,technical guidance, and financial support from large firms.14

At present, the core objects of the horizontal Keiretsu include: onedominant bank (financing group members), one large trading company16

(exploring markets), and one or two main manufacturers which integratesmall subcontractors (shown as the upper half part of Figure 2). As18

for vertical Keiretsu, it includes large manufacturing groups related toautomobile or electronic industries, such as Toyota, Nissan, Matsushita,20

Toshiba, and Hitachi. Usually, a vertical Keiretsu comprises firms in thesame industry but at different stages of value chain (Singh and Delios,22

2005).

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Both horizontal and vertical Keiretsu are institutionalized networkconstructed by a group of companies with close transaction relationships.2

Usually, these relations include cross-ownership, common trademark,intra-network transaction, and preferential loans among firms. Through4

these arrangements in a Keiretsu, transaction costs can be reduced andcompetitive advantages can be achieved (Gerlach, 1992; McGuire and6

Dow, 2003).

After the Plaza Accord in 1985, Japanese Yen (JPY) appreciated sub-8

stantially hence, Japanese enterprises are forced to speed up undertakingforeign direct investment in other Asian countries in order to maintain10

their competitiveness. The overseas expansion of Keiretsu has constructedan widespread international networks in Asia (Peng, Lee, and Tan, 2001).12

3.2 Business network in Korea

Korea’s business network organizations are known as “Chaebol”,14

such as Hyundai, Samsung, Daewoo, and Goldstar, etc. The organizationalstructure of a Korean Chaebol is similar to that of Japan’s prewar za-16

ibatsu. Basically, Chaebol are a self-sufficient entity, with little outsourcingbusiness. The finance of its core holding company is supported by a18

trading companies controlled by the national bank and the government(Castells, 2000; Wu, 2005). Since the 1960s, South Korea Government20

has encouraged the enterprises to establish large business groups asstrategic instruments for national economic development (Fukuyama,22

1995). Because Chaebol are prompted by the government imposingly, themotivation for company to expand a new department usually derives24

from the government. Therefore, South Korean Chaebol are more author-itative, centralized and hierarchical than a Japanese business group (Kim,26

Hoskisson, and Hong, 2004).

Before the eruption of Asian financial crisis in 1997, Korea’s top 3028

Chaebol accounted for about 40% of all the South Korea’s total output.The main Chaebol such as Hyundai, Samsung, and Daewoo all had several30

tens of their own subsidiaries, covering various industries such as semi-conductor, consumer electronics, architecture, shipbuilding, automobile,32

trade, and financial services and so on (Chang and Hong, 2000; Kim et al.,2004). Figure 3 shows the ownership structure of the Samsung Group.34

After the eruption of Asian financial crisis, Chaebol were criticizedfor weak competitiveness due to their excessive diversification. There-36

fore, South Korea Government asked Chaebol to readjust their business

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portfolios. Among the top 30 Chaebol in Korea, approximately a halfof them undertook company restructuring, downsizing, or dissolution.2

For example, Daewoo Group dissolved due to bankruptcy during Asianfinancial crisis. As for other groups, such as Hyundai, Samsung and4

LG, the number of their affiliated companies had been downsized toapproximately one half. In addition to paying much more attention to core6

business and reducing the scope of diversification, Korean Chaebol alsostrive to improve their financial structures to reduce their liability ratio8

(Kim et al., 2004; Wu, 2005).

10

Figure 3Major affiliated companies of the Samsung Group (Sources:Adapted from Chang and Hong (2004))

3.3 Chinese business network12

East Asian Chinese enterprises are mainly distributed over China,Hong Kong, and Taiwan. As members of Asian NIEs, Hong Kong and14

Taiwan have near experiences in their formation and development of busi-ness networks. In the process of rapid export-oriented industrialization,16

coastal regions of China also present a similar business network despiteits substantial difference in system and level of development compared to18

Asian NIEs (Castells, 2000). Especially, Hong Kong and Taiwan businessmodels operated in China have had a direct impact on its local firms20

(Shenkar, 2005).

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The organization patterns of Chinese enterprises are mainly basedon family firm and business groups controlled by family (Hamilton2

and Biggart, 1988). Family is the key element in Chinese enterprisesorganizations. In Chinese societies, due to the inheritance system of “Sons4

share the family property”, every son is allowed to obtain the familyproperty to initiate his own business. Moreover, the distrust to outsiders6

due to strong “familism” enables the small and medium enterprises,host by family members, to dominate the economic activities in Chinese8

societies (Fukuyama, 1995).

3.3.1 Business network in Taiwan10

Business networks in Taiwan are usually formed by a group ofsmall and medium sized enterprises through mutual alliance. The core12

of Taiwan business network is not so obvious as Japan or South Korea.Because of firms outsourcing mutually, the core company may also be14

others’ subcontractor, while the small firm (others’ subcontractor) mayalso get a big order from a foreign customer and then outsource it levelly.16

Therefore, the business network contains both vertical and horizontalintegration. Small and medium enterprises in Taiwan combine “foreign18

trade network” with domestic “production network” to construct a flexi-ble collaborative business network, shown as Figure 4 (Chen, 1994; Luo,20

2001).

Since the 1990s, Taiwan’s small and medium enterprises (SMEs)22

have engaged in direct investment abroad through strategic ties in thebusiness network. They overcome their organizational weaknesses by24

network linkages to access external resources, including obtaining marketopportunities, natural resources, labor, capital, technique, economy of26

scale, economy of scope, synergy, etc. (Chen and Chen, 1988).

As Taiwan’s high-tech industries develop prosperously, collaborative28

business network emerges in such industries. However, compared withtraditional industries network which are interpersonal-relationship ori-30

ented, high-tech industries network put much more emphasis on systemictrust. Besides, high-tech companies have more open outsourcing systems32

covering many more non-exclusive subcontractors, and their businessnetwork relations are more dynamic (Luo, 2001).34

3.3.2 Business network in Hong Kong

In Hong Kong, before the 1970s, the English-invested consortiums,36

led by big foreign firms (ex. Jardine Matheson and Co, Swire Group, and

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Figure 4Flexible collaborative business network (Sources: Adapted from Chen (1994))2

HSBC Group), monopolized industries such as traffic, finance, trade andso on, while most of the small and medium enterprises invested by4

Chinese engaged in manufacturing. After the 1970s, Chinese businessgroup began to the monopoly in shipping and real estate.6

Most of the Chinese business groups in Hong Kong are familyfirm, which are known for their flexibility. After China’s reforms and8

opening-up since 1979, Hong Kong has become an important windowfor China to communicate with the world economy, which benefits Hong10

Kong enterprises by connecting with the global overseas Chinese businessnetworks (Liu, 1997). For example, Hong Kong’s Li and Fung Group12

operates a highly-efficient business network through strict supply chainmanagement, so as to maintain its competitive advantages of low costs,14

high flexibility, and rapid delivery. In view of the gradually increasingcost of production in Hong Kong in the 1980s, Li and Fung Group has16

transferred the labor-intensive part of production to Mainland China,while arranging the business of higher value to Hong Kong, such as18

key components, procurement or design and quality control. Then, itdistributes and markets the products worldwide by utilizing Hong Kong’s20

superior banking and transportation facilities. Figure 5 shows Li and FungGroup’s supply chain management (Li and Fung Research Centre, 2003).22

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Figure 5Li & Fung Group’s “shop in front and factory at back” (Sources:Li & Fung Research Centre (2003))2

3.3.3 Business network in China

Since economic reforms and opening-up in the 1980s, China’s state-4

owned firms have released parts of their assets to make joint venture orcooperate with non-state-owned firms and initiated the development of6

its business network. Besides, direct investment from abroad also promptsthe formation of its business networks. For example, Pearl River Delta is8

the business networks that centered on Hong Kong, invested by Chineseabroad, mainly from Hong Kong and Taiwan. Yangtze River Delta is10

the business networks that centered on Shanghai, formed by investmentfrom large multinational corporations (Li, 2006). As China continues its12

economic reform, the business networks in China will have more maturedevelopments.14

4. Business network in era of globalization

Although Japan, South Korea, Taiwan, Hong and China have distinc-16

tively different business networks, they are all expected to confront theera of globalization with enormous market demand and rapidly-changing18

market competition, which will enable East Asian enterprises to rely onthe external resources provided by business networks even more (Hagel20

III and Brown, 2005).No matter Japanese Keiretsu, South Korean Chaebol, or the family22

business in a Chinese business network, they all adjust their business

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strategies carefully, for fear of being drowned in the competitive wavesof globalization. Catching the opportunities of market opening-up in East2

Asian countries, Japan’s Keiretsu integrate information technology toexpand their international business networks actively (Peng et al., 2001). In4

the reforms and efforts after Asian financial crisis, South Korean Chaebolreinforce their cooperation with small and medium enterprises (Wu, 2005).6

Small and medium enterprises of Taiwan and Hong Kong even copy theirexperiences of business network to China (Shenkar, 2005).8

5. Conclusion: A bright future for business network

Business networks are a dominant economic force in East Asia. This10

paper explores the business network organizations in Japan, South Korea,and the East Asian Chinese societies (Taiwan, Hong Kong and China) on12

their histories, current characters of configuration and prospects of futuredevelopment. The present study contributes in understanding of the role14

of business networks in different settings of East Asian economies.For aggressive small and medium enterprises in East Asia, busi-16

ness networks not only make up for their inadequacy in organizationalresources, but also meet the strategic requirement for competing in18

the globalization. Although globalization brings tremendous pressureon business management, globalization indeed reduces the adjustment20

cost for international networking and enables small and medium firmsto expand their business networks more easily. Therefore, the trend of22

globalization has exploited an extensive and bright future for businessnetworks in East Asia.24

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business networks in east asia: past, present and future

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