Why Are Business Networks So Important in the Chinese Economy - Case Study Example

Why are business networks so important in the Chinese economy? Introduction Why are business networks so important in the Chinese Economy? Definition of business networks Compare and contrast the benefits and the costs of having business networks Derivation of a conclusion I. Introduction A network is a configuration of points which are linked and more often than not are related to each other (Dimara, et. al., 2003). These points and the means of the connection, which are abundant in terms of resources, contribute to the complexity and the continuity of transactions between business units, whereas, business networks are configuration of different firms or business entities (Dimara, et. al., 2003). Particularly, business networks are “integrated and coordinated set of ongoing economic and non-economic relations embedded within, among and outside business firms” (Yeung, 1994). Business networks primarily exist only if an individual comprehends and utilizes the network. However, a business network can also be the establishment of relationship between different businesses. Some highly recommend the utilization of business networks because it touches the social aspect of creating a business. Instead of only assessing the financial aspect of the business, involving the firm into the society can also be beneficial especially in new businesses where penetration of the market is being conducted and competing with the already established businesses in terms of finances is very difficult. Also, networks are very helpful in disseminating information and resources to different firms. (Dimara, et. al., 2003) The development of such an entity in China may be attributed to the familial ties of Chinese which are very close in nature and establishing connections is nothing new amongst blood relatives (Krug, 2003). An example would be an informal business network exists when a certain Chinese family handles different kinds of businesses, which is the usual case, and is able to gain access to the different businesses. Since close monitoring will definitely be done in this arrangement, information about the different market aspects such as the profitability and the preferences of the people will be known to the informal network. Also, the culture of the Chinese promotes personal connection, even to those who are non-relatives but usually trusted individuals, also called guanxi, wherein two individuals are compelled by a psychological agreement that results into a long-term connection, common dedication and loyalty (Chen and Chen, 2004). In general, Chinese people have a leaning towards creating connections and relations with other people. However, the necessity of establishing associations with other business entities does not only exist because of the existing Chinese culture. After all, businesses are very much concerned with the profit and the flow of money. What then is the importance of business networks in the Chinese economy? II. Main Text As said in the introduction, establishing ties is encouraged in the Chinese culture. However, business networks do not just exist because of the belief, but also in the benefits (in particular the financial benefits of being involved in a business network) that it gives the businesses that are members of a certain business network. The selection of the business partners to work with in a business network in the nature of Chinese people is not that simple. Chinese people do not just engage in business networks haphazardly or make impulsive decisions when it comes to businesses. Chinese scrutinize very much the people whom they will work with. Specifically, Chinese often prefer blood relatives to be business partners and if not possible, select the ones which entered the same school, joined the organization as they had or have similar characteristics as them. The probability of being involved with an unrelated business entity may even be close to zero. Different things may be shared in the event of being involved in a business network (Dimara, et. al., 2003). Primarily, sharing is the benefit of being involved in a business network. This is because equity is being encouraged in this sharing of different things, coming from different business entities. Also, sharing of things may be able to create a stronger link from one business to another. Firstly, products or services may be shared between businesses. The sharing of these may be input or output-oriented, upstream or downstream sharing of products or services. This is important when the existing business networks’ members are specializing in different kinds of products. In product or services sharing, supplying the product to those linked to the business network may be of great help in terms of sales on the side of the producer and a trustee supplier on the side of the firm which consumes the product or service. Also, having different products may be beneficial because of the absence of competition of same products within a business entity. Secondly, capital can also be shared in a business network. Specifically, some of the businesses are not that financially stable and can stand alone in its finances. With the presence of capital sharing in a business network, the lack in the finances may be complemented by the finances of the other business entities. The payment to the liabilities may be done after the business has recovered from its opening and when it is stable. Thirdly, information and knowledge dissemination is rampant in business networks. This especially is very useful in rural and lagged areas. Because of the information and knowledge sharing among the businesses linked in the business networks, no one will be left out of the information in the market and also, rural and lagged areas may be able to cope up with the existing technologies and the changes in preferences of the consumers. Moreover, the competitiveness of each business entity involved in the business network may be balanced out because of implementing equity in information and knowledge. Lastly, employment may be shared in a business network and will be beneficial because of the concentration of the source of laborers in the different businesses. In particular, a business network may combine all of the laborers into one source and should there be a need for a certain skill and characteristic, a business may just obtain the laborer from that source. Also, should there be a vacancy in the connected business entities, the other businesses may be able to share the information to other people and thus, creating employment. These characteristics may also serve as an encouragement to those who are not yet part of business entities to engage in one. However, not all business networks share the enumerated characteristics but more often than not do. In addition, some of the Chinese entrepreneurs use business networks as a means to “acquire political protection, access to different resources (both owned by other members of the business networks or even the resources of the state), government contracts, subsidies and advertising the guanxi relationships with government officials in state media channels” (Batjargal, 2002). Establishing connections with government officials is a usual move of Chinese entrepreneurs because of the extensive properties of these officials. Also, other than the benefits, being involved in a business network can also be a strategy of the businesses. This is because engaging in a connection reduces the risk of competing with firms, reduces the transactions cost of a firm, be an invaluable resource for the firm and the utilization of the network capital to expand the horizon of the firm (Wu and Choi, 2004). However, business networks do not only give benefits to businesses, it can also be a cause of its downfall. Like any other program or activity that may contribute to the economy or to the firm itself, there are pros and consequences in creating a business network. In particular, social obligation and expectations may exist because of the close relationship between businesses (Batjargal, 2002). The closeness of the business entities creates a negative vibe in the network. Thus, being free to venture into new and different opportunities may not be that easy to do. Moreover, any individualistic move of an entity may be viewed as misbehavior by the other members of the network. Likewise, moral hazard can be a problem between business entities in a business network because moral hazard is the uncertainty of what the other would do given that the business networks’ bounds are not all specified and rules can also be played about (Carney, 2005). More so, moral hazard should be a very important concern if the business entities at hand are very competitive before joining the business network. The opportunistic minds and the possible abuse of the network may be put into work. III. Conclusion Business networks are very important in the Chinese economy because it is beneficial for both individual firms which are members of the business network and the entirety of the business network. Also, there may be a chain-reaction of events if a business will not be able to utilize its potential. In the case of the individual business entity, the benefits that the businesses experience in a business network may be a motivation for those who are not yet part of business networks or even be the reason of the long-term and stable connections within a business network. If not for the benefits of the businesses, operation would be immediately halted because of lack of funds, or even support from other businesses. As a reaction to the failure of an individual business, particularly, businesses may opt to stop operation and close. Without the businesses, the progress of the economy would not be that fast and even be detrimental to the entire economy. In the case of the welfare of the whole business network, the firms are being leveled-off in the business network because of the promotion for equity by sharing some of some things among business network members. In this way, status in the business network can be disregarded because of the possible mixture of rural and lagged entities to the elite ones. Also, the fairness is present because of the leveling-off. Also, being involved in a business network lessens the existing competition in the market of China. Instead of the competition, specifically, in the prices of goods, most of the time decrease in price which hurts both the producer and the income of the country, being involved in a business network decrease the probability of competing in the prices of goods. Also, because of the synergy that is required from the members of a certain business network, the businesses that are involved are compelled to help each other out and the information sharing among can also be helpful in determining how to be a better business entity. However, the success of business networks in China does not mean the applicability of the program to other countries. This is because of the culture of familial and establishing connection with other people. Also, the strategies and problems with regards to competition of business in different countries may differ and the establishing of business networks may also be beneficial to the country, may not be able to change anything at all or even be detrimental. Generally, the success of the economy of China cannot be all attributed to the existence of business networks. After all, there are different factors affecting the economy of a country. Nevertheless, should the success be attributed to business networks, “a secure long-term relationship, an enduring and trusting one, is one of the factors to entrepreneurial success” (Batjargal, 2002). References: Batjargal, B. (2002) Entrepreneurial Networking in China and Russia: Comparative Analysis and Implications for Western Executives Carney, M. (2005) Globalization and the Renewal of Asian Business Networks Chen, X-P. and Chen, C. C. (2004) On the Intricacies of the Chinese Guanxi: A Process Model of Guanxi Development Dimara, E., Goudis, A., Skuras, D. and Tsegenidi, K. (2003) Business Networks and Performance: A Spatial Approach. Krug, B. (2003) Networks In Cultural, Economic and Evolutionary Perspective. Wu, W-P. and Choi, W.L. (2004) Transaction Cost, Social Capital and Firms’ Synergy Creation in Chinese Business Networks: An Integrative Approach Yeung, H. W. (1994) Progress in Human Geography. Read More