SOSC 300 K
Lecture Note 6
Business Networks
1
• 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?
2
Patterns of industrial organization in
T, J, SK in the 1980s (comparison)
(1)
• Similarities among the two economies from the
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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)
3
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
4
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 prewar 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.
5
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.
6
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.
7
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.
8
Explanations of
the three patterns of industrial
organizations
• 1. Market Explanation
• 2. Culture Explanation
• 3. Authority Structure and Organizational
Practice
9
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
10
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.
11
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.
12
Culture Explanation (2)
• Taiwan: Confucianism
• Its expression in enterprise: promote individual selfcontrol 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.
13
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.
14
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.
15
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.
16
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.
17
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).
18
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;
19
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.
20
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. 21
465)
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.
22
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.
23
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, prewar 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)
24
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.
25
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.
26
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?
27
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,
10.8 %
insurance, real
estate, and
business
services
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.
28
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.
29
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]
30
Foreign direct investment in Hong
Kong’s Non-manufacturing Sectors
Net value
Percentage
(in 100,000,000 HKD)
Great Britain
2,031
30
China
1,298
19
Japan
1,364
20
759
11
Others
1,411
20
Total
6,843
100
U. S.
Cited from Fung Bangyen, Xianggang yingzi caituan (Hong Kong: Sanlian shuju, 31
1996), p. 162.
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?
32