Implication for the Network Relations of SMEs in International Business - Literature review Example

A review of Trust and Contracts, and their implication for the Network Relations of SMEs in international business Introduction Among the variablesthat increased International presence by Small and Medium Enterprises (SME), the most common are small domestic market and the unique knowledge or technology possessed by them and the attraction of variety of alliances and relationships available in the host country (Freeman et al 2006). Buckley (1989) has argued that owner-managers of such small companies may very well undertake greater risk than other types of decision makers. In such situations the smaller firms can fill the role of a niche player in the market and this becomes a major advantage. This competitive advantage offers the opportunity to go International. Networking However SME’s have limited resources and this leads them to look for international alliances (Coviello & Munro, 1992) and in turn this offers them growth opportunities (Brush 1992). There is no doubt that as compared to MNC’s, the SME lacks resources to expand. One reason of seeking Internationalization is the search of resources. Dunning (1993) has stated several categories of motives for entry into international business. These are market seeking, resource seeking, efficiency seeking and strategic resource seeking motives. To this a fifth category, network seeking motives (Dimitratos & Plakoyiannaki, 2003) has been added for recognizing networks as a significant part of internationalization corresponding to recent research. It is in this connection that the network seeking motive becomes exceptionally important. This can be useful under any kind of entry mode. A new term social capital explains this as it is a form of bridging the divides rather than bonding the divides. This can be of great value as it has the potential to add new information, ideas and opportunities. Networks can be described as social capital that is intangible but that drives the international growth of entrepreneurial firms, particularly those in High Technology. The network is based on reciprocal responses, individual relationships, mutual respect, and trust. Confidence in each other to deliver is the basic and core element of a successful network and it is developed through repeated interactions. Trust determines the solidity and reliability of the network link. But can Trust alone be the backbone of Networking? Development of a Network may also rest upon factors like Transaction Costs, Psychic Distances and Technological Implications. Transaction Costs It can be argued that Networking does not really contribute to lowering of Transaction Cost (TC) as TC is dependant more on the structure of the firm involved. TC will be high in a hierarchical type of firm which is heavy with beurocracy; low in a professional type where individual is more relevant and average in all others that will face normal market environment (Williamson 1985). International Business means having contractual relationships with other firms, institutions and individuals. Contracts are the means to transactions which always face the risk of non-performance or under performance. It is in conditions of moderate risks, that networking based or relationship based model of transaction or contract is useful (Williamson 1985) Psychic Distances Factors such as differences in language, culture, political system etc., are called psychic distances as they disturb the flow of information between the firm and the market (Johanson & Associates 1994). When the host country differs widely due to cultural and language barriers, these psychic distances will not always be covered up by networking alone although they may contribute to reduce the barriers but not remove them; the greater the difference, the less effective will be the network experience. It has been affirmed that firms first enter markets which they are familiar with. (Johanson & Associates, 1994) Technological Implications The firm that rises due its technological prowess according to Oviatt & McDougall (1994, p. 49) is ‘A business organization that, from inception, seeks to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries’. These are also refereed to as a born-global company. Such firms would benefit from Networking; but by nature of its unique product or service it will benefit more from its inherent capability rather than the Network. Trusts and Contracts This brings back the importance of Trust and Contracts as the central relationship in an enduring Network. This is most suitable to a resource starved firm that may or may not have an exclusive product or service, but a definite hunger to get a foothold in a foreign land with intention to succeed. The entrepreneurial spirit is the decision maker and such decision makers take high risks. They attempt to mitigate this risk through networking. The typically financially constrained firm obtains a critical leveraging opportunity through networking during which resources can be gained without requiring capital investments. The entrepreneurial firm is offered a way to maximize its adaptability to its environment (Larson, 1992). Trust is a mental state that is distinguished by the positive feelings about qualities possessed by the partner and the self-belief that the partner will carry out certain actions. It also includes the confidence in the partner’s capability and reliability, and assurance of the partner’s benign intentions. Trust is a vast and multi-dimensional concept. It begins with the belief that at the individual level trust is considered to be related to trust at the firm level (Zaheer et al., 1998; Jefferies & Reed, 2000). When we talk about what we can trust, it has been universally accepted that partners can trust in each other’s capabilities and benevolent intentions (Mayer et al., 1995). The why of the trust has been identified as calculation-based, knowledge-based, and emotion-based trust (Williamson, 1993; Lewicki & Bunker, 1995; Shapiro, 1987; Ring & Van de Ven, 1992). Trust can also be seen as playing multiple causal roles, as outcome, antecedent, and mediator (Rousseau et al., 1998). When two partners have collaborated in the past the out come is trust. With a history of collaborations between them the antecedent role of trust will come into play. In a new collaboration trust plays the role of mediator for concluding contract. It has been observed that Trust is a critical ingredient for inter-firm cooperation (Wicks et al., 1998; Vangen & Huxham, 2003). Trust between partners generates constructive attitudes and behaviors, and decidedly helps to augment the effectiveness of the relationships (Morgan&Hunt, 1994; Mayer et al., 1995; Ghoshal & Moran, 1996; Zaheer et al., 1998). But there are some critics too, who have argued that the positive impact of trust on performance is conditional. Wick, Berman, and Jones (1999) hypothesize that only if there is a match between level of trust and level of interdependence between firms only then trust will positively influences performance, or else there will be no-trust. In the same vein, Jeffries and Reed (2000) disagree and state that only a right combination of interpersonal and inter-organizational trust will be problem solving. It has also been emphasized that relying too much on trust will limit the partners’ choices and affect behaviors (Jefferies & Reeds, 2000; Zucker, 1986; Wick et al., 1999). However generally there appears to be a consensus that trust certainly facilitates inter-firm collaborations. Trust between firms is certainly more evident in transition or emerging economies where property rights are as yet ill-defined and private sector legality has yet to be developed (Boisot & Child 1996, Nee 1992, Smallbone &Welter 2001). It is for this reason that trust is often viewed as suitable substitute for developed market institutions (Redding, 1990; Peng&Heath, 1996). Building Trust The exercise of trust building rests on existence of both formal and informal institutions. Contracts are the basis of relationships and performance and execution are the criteria that are to be evaluated. The presence of legal framework and courts as formal institutions encourages trust between partners who know they can rely on them in case of breakage of contracts. Existence of institutions indicates the cost of breaking contracts and underlines calculation based trust. (Shapiro 1987, Zucker 1986). The informal institutions are the rituals, customs and moral values practiced in a particular societal environment. These ensure that the reputation of individuals and firms depends on adherence, hence their existence acts a trust building force. (Granovetter 1985, Coleman 1988). They also act as an incentive for display of cooperation and prevent opposite negative attitude and behaviour (Gulati 1995, Gargiulo & Benassi 2000; Hagen & Choe 1998). Repetition of transactions and deals between parties also builds trust. (Ring & Van de Ven 1992, Zucker 1986).Over a period of time, confidences build up, reliability becomes apparent and as a consequence trust develops. Eventually it paves the way for developing trust based transactions. But it must be remembered that trust is fragile and one wrong result can break it. In the social network the past plays an important part, hence the legacy or historical relationship comes to fore whenever managers look for trustworthiness. Old relationships and old collaborations are always preferred and trusted (Granovetter 1985, Coleman 1988, Redding 1990). The above conditions of trust building relate to developed economies where the institutions, both formal and informal have existed for a long period and they contribute towards trust building and also act as deterrents against defaults. In the current era there are a large number of transitional and emerging economies where the formal institutions and free markets are either non-existent or are in their nascent stage (Thornton & Flynn, 2003). Free markets are still developing therefore it is difficult to base transactions on trust alone. In such environment the trust building and deterrent factors are missing. However in such countries the informal institutions like culture, custom and rituals are usually much stronger and more respected. Strangely, it is these informal conditions that provide a rich and reliable base for trust building and trust. This is true of most emerging economies and the case of China is illustrated here as explanation. China has been chosen for reason that it is the most powerful emerging economy in the world; its GDP, in terms of purchasing power parity, is already second only to USA; its share in international trade is already 10% of the total world trade; and it is attracting the second highest investments from foreign companies, both big and small. Networking as mode of entry is an established fact in China and its formal institutions are still a long distance from trust inspiring status. Trust in Chinese Context It is impossible to be impersonal in China. Over centuries they have developed a form of relationship called Quanxi. According to Luo (1997) ‘The Chinese word Guanxi refers to the concept of drawing on connections in order to secure favors in personal relations. It is an intimate and pervasive relational network in which Chinese culture energetically, subtly, and imaginatively engage’. The Chinese concept of Guanxi is a form of social structure that provides security, trust and an approved role. It will help to refer to the Social Network Theory (SNT) as a comparison to Guanxi. Both have many overlaps. Under both the essential feature for sustaining social systems is the flow of information. Where the Guanxi talks of the insider and outsider relationships, the SNT speaks of strong and weak ties. They are both working for a change that is ethical and sustainable and where order is created by and through trust that is a local experience. Guanxi favors certainty along with trust and SNT believes in creation of trust out of chaos. (Hammond and Glenn) Guanxi personalizes interpersonal relationships even in formal business organizations. It plays a vital role in the internalization process of SME’s. Government in China controls the rare resources and the access to huge markets, which are available through permissions and licenses that are the personal fiefdoms of the governors at different levels who hold the monopoly of their control over them. It is from these assets that they exact rents and a personal networking with them is necessary. A profitable growth is the result of successfully managing uncertainty. The Guanxi is the method to deal with this uncertainty that needs to be managed in China for any measurable success by an SME. The equation has to be manipulated with deep understanding of human behavior. Conclusions Much has been explained above about trust being the central issue of networking. It can also be now stated that as far as transactions costs are concerned, they too can be brought down in a networked environment provided the relationship is based on trust. Yet the concept of trust has been treated in a rather restricted way in the West as compared to the East. Despite the attempt to equate Quanxi with SNT, gaps still remain as to the exact roles played by each. It may be safe to say that the dissimilarity is more striking than the similarities counted elsewhere in this short article. Quanxi is a way of life while SNT is a short term practice. One is the means to an end while the other is the justification for an end. Indeed this is the paradox of all thinking between the East and the West. The subject therefore merits further study and research. Bibliography Brush, C.G. (1992). Factors Motivating Small Companies to Internationalize: The Effect of Firm Age. Unpublished doctoral dissertation. Boston University. Boisot, M., & Child, J. 1996. 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