Trust and Antitrust in Asian Business Alliances

Trust and Antitrust in Asian Business Alliances Historical Roots and Current Practices

Edited by

John Kidd and Frank-Jürgen Richter

Trust and Antitrust in Asian Business Alliances

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Trust and Antitrust in Asian Business Alliances Historical Roots and Current Practices Edited by

John Kidd Aston Business School, Birmingham, UK

and

Frank-Jürgen Richter World Economic Forum, Geneva, Switzerland

Selection, editorial matter and Chapter 1 © John Kidd and Frank-Jürgen Richter 2004 Foreword © Francis Fukuyama 2004 Individual chapters © the contributors 2004 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2004 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N.Y. 10010 Companies and representatives throughout the world PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin’s Press, LLC and of Palgrave Macmillan Ltd. Macmillan® is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN 1–4039–1619–5 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Kidd, John. Trust and antitrust in Asian business alliances: historical roots and current practices/ John Kidd, Frank-Jürgen Richter. p. cm. Includes bibliographical references and index. ISBN 1–4039–1619–5 1. Strategic alliances (Business) – East Asia – Psychological aspects. 2. International business enterprises – East Asia – Cross-cultural studies. 3. Globalization – East Asia – Moral and ethical aspects. 4. Business ethics. 5. Trust. I. Richter, Frank-Jürgen. II. Title. HD69.S8K525 2003 338.8⬘095—dc22 2003053688 10 13

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Printed and bound in Great Britain by Antony Rowe Ltd, Chippenham and Eastbourne

Contents List of Figures

vii

List of Tables

viii

Foreword by Francis Fukuyama

ix

Notes on the Contributors

xi

Part I The Nature of Trust

1

1

Building Trust in Asian Business John B. Kidd and Frank-Jürgen Richter

3

2

East Asian Economies: Westernization, Liberalization and New Regionalism Ivan Tselichtchev

32

Part II The Antecedents of Trust 3 Is Wealth Creation Sustainable? Trust, Need and Greed in the Development Process Hock-Beng Cheah

61

4

Sustainable Governance for Sustainable Development Gill-Chin Lim

84

5

The ‘Co-op–Comp’ Chinese Negotiation Strategy Tony Fang

6 Tao Zhugong’s Chinese Business Principles (770–221 A Convergence with Modern-day Construction and Real Estate Practices Sui Pheng Low

Part III 7

121

BC):

151

Trust in Asian Governance and Commerce

The Role of Trust in the Process of Alliance Evolution Anna Goussevskaia and John B. Kidd

v

181

vi Contents

8 Business Linkages and Resilience of SMEs during the East Asian Crisis: The Role of Networks and Trust between TNCs and Local Suppliers Philippe Régnier 9 How Sustainable are Benefits from Global Production Networks? Malaysia’s Upgrading Prospects in the Electronics Industry Deiter Ernst 10 Asian Values, Malaysian Style: Imperatives for Building Cross-cultural Partnerships in Malaysia David Wong and Michael Yeoh 11 Focus on China: New Challenges for Japanese– German Strategic Business Alliances in a Dynamic Environment: A Theoretical View of Third-market Business Collaboration René Haak

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209

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12 Trust and Antitrust in Cross-cultural Alliances: Cross-cultural Management Challenges in Japan Pawel Komender

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13

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Clusters as ‘ba’ for Knowledge Management Yoko Ishikura

14 A Cross-cultural Comparative Study of German and Singaporean Employees’ Trust Decisions Following a Takeover: Implications for Cross-border Mergers and Acquisitions Günter K. Stahl and Chei Hwee Chua 15 Creating Trust in the Korean Chaebol John Barry Kotch

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Part IV Personal and Public Roles 16 Developing Trust: Obstacles and Understanding Lionel Stapley

353

Name Index

375

Subject Index

383

List of Figures 1.1 A simplification of familiar research paradigms 1.2 The multi-dimensionality of relationships between dyads 1.3 An example of dimensionality 1.4 General considerations of ‘Learning’ in alliances 4.1 Matrix of relationships among units 4.2 Comparison of five schools 5.1 The Yin–Yang principle 5.2 The thirty-six Chinese stratagems 5.3 The ‘Co-op–comp’ Chinese negotiation strategy 6.1 Template for Tao Zhugong’s Chinese business principles 7.1 The relationships between inter-organizational learning processes and collaboration conditions 10.1 An audit of the Malaysian culture based on cultural dimensions 12.1 Japanese versus Western management styles 12.2 Direct investments to and from Japan 12.3 Future orientation of cross-cultural management in Japan 13.1 SECI model of knowledge conversion 13.2 Knowledge management and strategy conceptualization 13.3 Cluster 13.4 TAMA cluster 13.5 Kinki biotechnology cluster 13.6 Cluster and firm 13.7 Specific information required 13.8 Examples of ‘ba’ 14.1 Proposed determinants of target-firm members’ trust in the acquiring firm’s management

vii

7 10 11 15 90 105 129 139 143 153 190 235 277 280 285 292 294 296 297 301 303 303 304 319

List of Tables 2.1 2.2 2.3 2.4 2.5 4.1 4.2 7.1 14.1

Customs duties for IT-related goods in East Asian countries Composition of inward FDI to East Asian countries, by country or region Asia’s exports, by country or region Composition of East Asia’s imports, by country or region Composition of inward FDI into East Asia, by country or region Objective indicators of governance, for selected countries Subjective indicators of governance, for selected countries Approaches to the alliance evolution and inter-organizational learning processes Influence of decision criteria on respondents’ trust decisions in hypothetical takeover scenarios

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45 46 50 50 51 112 113 186 322

Foreword One would be hard-pressed, glancing through a modern economics textbook, and particularly one on international economics, to find much on the subject of trust. This is odd, because any one in business will tell you that trust is critical to success, both with regard to the internal workings of the firm, and to its relationship with customers, suppliers or contractors. And one of the hardest things to cultivate when doing business internationally is a sense of trust that transcends cultural boundaries: even so, businesspeople invest substantial quantities of time and resources in cultivating trust relationships, with the full expectation that it will yield economic payoffs just like any other investment. There is, of course, a substantial body of economic theory on issues like cooperation, bargaining, opportunism and asymmetric information. Economists understand that social cooperation is central to economic efficiency, and see it as a natural outcome of interactions between rational economic actors. But trust itself is much more than a correlate of social cooperation; it is a subjective state of mind that has important psychological and social dimensions. The economists’ game-theoretic models explain when individuals ought to trust one another based on maximization of their self-interest. But what makes economic life endlessly complicated is that people trust (or distrust) one another for reasons that are often not entirely rational. It is one of the major entry points of culture, values, and norms – the domain of sociologists and anthropologists – into economic life. Trust, understood in this broad, psycho-social sense, is critical to understanding the nature of economic life in Asia, both in the way that Asians relate to one another, and in the ways that they relate to outside investors and trading partners. Trust relationships, whether based on kinship, ethnicity, friendship, or common schooling, can be seen as informal mechanisms for correcting information asymmetries, providing credible commitments, and posting bonds for performance between economic actors. To this extent they serve as complements and sometimes substitutes that facilitate cooperation notwithstanding the prior existence of formal, rational-legal mechanisms ‘defining’ the extent of the cooperation. The existence of such informal relationships in place of rule-of-law mechanisms does not distinguish Asian societies from Western ones, as some have asserted. All modern economies rely, to a greater or lesser extent, on informal norms to reduce transaction costs and facilitate exchange. But types of trust relationships differ from one society to another, and understanding how they work is critical to one’s ability both to do business in them and to make sensible public policies. ix

x

Foreword

Even as the Asian economic crisis of 1997–98 has moved many Asian countries to structural reform of their economies along North American lines, the degree of convergence is remains incomplete. The ways in which economic actors establish relationships of trust, and the way that these relationships structure both organizations and patterns of trade and investment, remain complex and variable from one society to another. Nor is it evident that one set of formal institutions will ever completely drive out informal relationships, or prevail over other possible institutional specifications. One has only to look at the issue of corporate governance: during the Asian economic crisis, it was common for Western critics to attack Asian companies and governments for cronyism and corruption because of their lack of proper accounting standards and other institutional safeguards. After the scandals at WorldCom, Enron, Xerox and other major American, and indeed, European, corporations, the ‘obvious’ superiority of Western institutions is far from obvious. This book – Trust and Antitrust in Asian Business Alliances: Historical Roots and Current Practices – edited by John B. Kidd and Frank-Jürgen Richter, provides important insight into the role of trust and antitrust relationships in Asian business. The chapters deal with issues critical to business relationships across a wide variety of Asian countries, and serve as indispensable guides to the realities of economic life there. It is a significant contribution to a dimension of economic life whose relevance is often acknowledged but which tends to be neglected by systematic analysis. And it will assist not just those seeking to do business in Asia, but also students of Asian economics and society, to better understand the social complexities of the region. FRANCIS FUKUYAMA Professor of International Political Economy at the Johns Hopkins School of Advanced International Studies

Notes on the Contributors John Barry Kotch was educated at the University of Rochester (BA), the University of Colorado (MA) and Columbia University, where he received an MBA in International Business and a PhD in Political Science with additional stints at the Sorbonne and the American University in Paris, France. He has served as consultant to the State Department, Bureau of East Asian and Pacific Affairs, Special Assistant at the Agency for International Development and was Foreign Policy Coordinator for the Jimmy Carter Presidential Campaign. He has written numerous articles and commentaries on the political history and contemporary political, economic and security aspects of KoreanAmerican relations and US policy toward Korea and is a regular contributor to The Japan Times and associate editor of The Korea Observer. He is currently a Visiting Professor of Political Science at the Graduate School of International Studies, Hanyang University, Seoul, Korea, and will be a Visiting Fellow at the Centre for International Studies at Cambridge University during 2004. Hock-Beng Cheah researches and teaches at the School of Business, University College, University of New South Wales. Within his twin fields of economics and management his research lies in the areas of sustainable development, human resource management, and entrepreneurship and the political economy in the Asia-Pacific region. While a visiting Research Fellow at the Snider Entrepreneurial Center, University of Pennsylvania, he proposed a new perspective of the entrepreneurial process. His work has been published in a variety of monographs and journals including Creativity and Innovation Management, Journal of Business Venturing, Journal of Enterprising Culture and Labour and Industry. Deiter Ernst is a senior fellow and theme leader for economic studies at the East–West Center, Hawaii, and he is also a research professor at the Center for Technology and Innovation (TIK) at the University of Oslo. His previous affiliations are many, including working at the OECD, Paris, as a senior adviser. He has advisory roles both with the US National Science Foundation (for information technology and international cooperation), and is the Prime Minister’s Science Advisor upon setting up the Malaysian National Science Foundation. He has published numerous books and articles in leading journals on information technology, globalization and economic growth, and his recent books include International Production Networks in Asia. Rivalry or Riches? (2000) and Technological Capabilities and Export Success: Lessons from East Asia (1998).

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Notes on the Contributors

Tony Fang is Assistant Professor of International Business at the Stockholm University School of Business and is also Director of SABEC – Sweden Asia Business Education Center – based at Stockholm University, that specializes in Asia and China-oriented executive education. He read for his master’s degree in naval architecture in Jiao Tong University, Shanghai, then his doctoral studies in Linköping University, Sweden, followed by several visiting scholar positions including the Massachusetts Institute of Technology. His research interests include cross-cultural management, business negotiation, and industrial marketing and purchasing. He is the author of Chinese Business Negotiating Style (1999) and has published many academic papers. Francis Fukuyama is Dean of Faculty and Bernard L. Schwartz Professor of International Political Economy at the Paul H. Nitze School of Advanced International Studies of Johns Hopkins University. From 1996 to 2000 he was Omer L. and Nancy Hirst Professor of Public Policy at the School of Public Policy at George Mason University. Dr Fukuyama’s book, The End of History and the Last Man, was published in 1992 and has appeared in over twenty foreign editions. It made the best-seller lists in the United States, France, Japan and Chile, and has been awarded the Los Angeles Times’ Book Critics Award in the Current Interest category, as well as the Premio Capri for the Italian edition. He is the author of Trust: The Social Virtues and the Creation of Prosperity (1995), The Great Disruption: Human Nature and the Reconstitution of Social Order (1997), and, most recently, Our Posthuman Future: Consequences of the Biotechnology Revolution, was (2002). Dr Fukuyama has written widely on issues relating to questions concerning democratization and international political economy. He has focused on the role of culture and social capital in modern economic life, and on the social consequences of technological change. In the past, he has written extensively on Soviet foreign policy in the Third World. He received his BA from Cornell University in classics, and his PhD from Harvard in political science. He has been a member of many ‘think-tank’ groups and is an active member of Presidential and other US-based councils on ethics, democracy and global business. Anna Goussevskaia is a research fellow and a member of the Innovation Knowledge and Organization Networks research unit (IKON) at the University of Warwick, Warwick Business School, UK. Her current research interests focus on inter-organizational networks and collaboration, organizational knowledge and learning, and organizational change. René Haak is head of the Business and Economics Section and Deputy Director at the German Institute for Japanese Studies, Tokyo which he joined in 1999. Otherwise he is a senior lecturer at the Technical University of Brandenburg (Germany). His research experience includes positions at the Fraunhofer Institute for Production and Design Technology, and

Notes on the Contributors

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the Institute for Machine Tools and Manufacturing of the Technical University of Berlin. Haak’s research interest focus on strategic management, automotive industry, and human resource management. He has written numerous articles on production technology and strategic management in Japan and China. His last book, with H.G. Hilpert, was Japan and China: Cooperation, Competition and Conflict (2002) and forthcoming is Focus China: The New Challenge for Japanese Management (2003). Chei Hwee Chua is a research associate at INSEAD, Singapore. Her collaboration with various professors at INSEAD has led to the publication of best paper proceedings at several conferences, including the 2003 Academy of Management conference, as well as the development of teaching cases in areas such as leadership and HRM, strategic management, change management, international business and technology management. Her current research interests include trust within and between organizations, international careers and global, leadership development. Her first degree was from the National University of Singapore, which was followed by a master’s programme at Lund University, Sweden, and she is to take up a doctoral programme at the Moore School of Business, University of Southern Carolina. Yoko Ishikura was educated at Sophia University, Tokyo, the Darden School, University of Virginia, and the Harvard Business School, returning to Japan as a consultant as well as an academic. She has authored several books including Building Core Skills of the Organization (1992), Managing Diversity in the 21st Century (with Hirotaka Takeuchi, 1994) and Asian Advantage (with George S. Yip, 1998). In addition, she has written several case studies for Harvard Business School and Darden School, as well as numerous articles for the Hitotsubashi Business Review and to Journal of Health and Society. She was a member of the Regulatory Reform Committee for the Japanese government (1998–2001) and the International Competitiveness Commission for the METI (2001). Now she is a member of the Central Education Committee, Chairperson of Cluster Commission for METI, and Forum Fellow of the World Economic Forum. John Kidd’s research lies in the overlap of technological and human factors in information and communication systems, especially those which have a global reach. These factors are seen to interact in his studies of knowledge management and organizational learning in strategic alliances of multinational firms, including those firms in their supply chains, wherein there are many cultural influences at work. He has authored many papers for journals, and has written book chapters across several management disciplines. His recent books include two on Human Factors Management in Asia (edited with Frank-Jürgen Richter and Xue Li, 2001); further edited works include Corruption and Governance in Asia (2002) and Fighting Corruption in Asia: Causes, effects and remedies (2003).

xiv Notes on the Contributors

Pawel Komender is the Managing Director of Simon Kucher & Partners – the Japanese subsidiary of a Germany-based strategy and marketing consulting company. He specializes in management accounting and quantitative methods. He has worked as a consultant for companies such as BMW, Matsushita/Panasonic, Siemens, Daiichi Pharmaceutical, Novo Nordisk Pharma, and Yamanouchi. He is author of several professional articles in Toyo Keizai and President, as well as Japan-related publications in the Frankfurter Allgemeine Zeitung. Gill-Chin Lim is MSU Endowed Professor of Asian Studies in a Global Context and Professor of Geography and Planning at Michigan State University. He was educated at Seoul National University, Harvard University and Princeton University. He has published and lectured on topics in strategic planning, comparative development, and public policy analysis. He is on the editorial board for the Journal of Urban Arts and Sciences and an adviser for the Environmental Impact Assessment Review. He has worked as a consultant to a number of international organizations including the World Bank, Asian Development Bank, and the US Agency for International Development. Currently, he is the President of the Consortium on Development Studies, and Co-representative of Korea Federation for Environmental Movement. Sui Pheng Low is a Chartered Builder by profession as well as holding the position of Associate Professor and Vice-Dean (Academic) at the School of Design and Environment, National University. He has a special interest in how cross-cultural behaviour can influence international business and project management, especially in the context of China. He has conducted extensive studies on how international cultural differences can affect quality management systems as well as businesses in the construction industry. He is acknowledged internationally as an authority on the study of ancient Chinese philosophies and strategies for modern-day businesses. His works in this area have won the Citation of Excellence Award from Anbar Electronic Intelligence in 1997, as well as a Best Paper Award from the Institution of Surveyors, Malaysia, in 2000. He has published widely in academic journals and books. Philippe Régnier is professor at the Graduate Institute of Development Studies, Geneva, Switzerland. He is also director of the Modern Asia Research Center, a research unit co-sponsored by the GIDS and the Graduate Institute of International Studies in Geneva. Since 1989, his research and teaching activities have concentrated on the one hand on entrepreneurship and development of small firms in emerging economies, and on the other hand on the development economics of East Asia. Frank-Jürgen Richter is a Director of the World Economic Forum, Geneva, and is responsible for its Asian affairs. He has lived, studied and worked in

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Asia for almost a decade: first in Tokyo, and more recently in Beijing where he developed and managed a European multinational’s China operations. He is an active scholar, authoring several books and papers on Asian economies and international business – recent books are China: Enabling a New Era of Changes (with Pamela Mar, 2003) and Intangibles in Competition and Cooperation (with Parthaserathi Banerjee, 2001). Günter K. Stahl is Assistant Professor of Asian Business and Comparative Management at INSEAD and prior to this he was Assistant Professor of Leadership and Human Resource Management at the University of Bayreuth, Germany. He also held visiting positions at the Fuqua School of Business and the Wharton School of the University of Pennsylvania, and was a fellow of the German Institute for Japanese Studies in Japan and the German Academic Exchange Service in the United States. He is the recipient of a number of research awards, including the Carolyn Dexter Award of the Academy of Management 2000 and the Academy of Intercultural Studies and DaimlerChrysler Award 1999. He has (co-)authored several books, as well as numerous journal articles in the areas of leadership and leadership development, cross-cultural management, and international human resource management. His current research interests also include international careers, trust within and between organizations, and the management of mergers and acquisitions. He is a consultant for a number of multinational corporations. Lionel Stapley is the Director of OPUS (Organization for Promoting Understanding of Society) and an organizational consultant. He has worked as a staff member of several international Group Relations Conferences and his consultancy clients include a variety of organizations, in the public, voluntary and private sectors. He is the author of The Personality of the Organization: A Psychodynamic Explanation of Culture and Change (1996), It’s an Emotional Game (2002), and co-editor with Larry Gould and Mark Stein The Systems Psychodynamics of Organizations (2001). Ivan Tselichtchev was born in Moscow and graduated from the Moscow University joining the Russian think-tank the Institute of World Economy and International Relations. Since 1989 he has worked in Japan initially as the Institute’s representative and as a guest fellow of the Japan Center for Economic Research in Tokyo, then from 1994 as a Professor at the Niigata University of Management. His main research fields are Japanese and Asian economies and the comparative study of economic systems. He is the author of The Distribution System in Japan (1985), The Keiretsu State: Japan Will Strike Back (1993), What is Happening in Russian Economy? (1995) a well as numerous papers in academic journals – in English, Japanese or Russian languages. David Wong is the Director of the Centre for Knowledge and Business Leadership at the Asian Strategy and Leadership Institute. He was educated

xvi Notes on the Contributors

at the University of Malaysia then at the Judge Institute, Cambridge, UK. His research interests include cross-cultural management, organizational culture and control, branding and services marketing, and industrial policy in nurturing big business and national champions. Michael Yeoh is the Founder Executive Director and Chief Executive Officer of the Asian Strategy and Leadership Institute, a non-profit private-sector think-tank that focuses on international business relations, strategic thinking, leadership, knowledge and competitiveness. He specializes in corporate strategic planning, organizational development and political analysis. He also sits on the Board of Directors of Southern Bank’s Venture Capital Corporation, SBB Capital Markets Sdn Bhd and SBB Asset Management Sdn Bhd., and was a Director of Star Publications and the National Heart Institute. He is also a member of the National Economic Action Council’s Consultative Group on Globalization and the Ministry of International Trade and Industry’s Expert Group on WTO Issues, holds memberships of several Boards and Chambers of Commerce.

Part I The Nature of Trust

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1 Building Trust in Asian Business John B. Kidd and Frank-Jürgen Richter

The World Economic Forum unveiled a survey on perceptions of trust prior to its 2003 Annual Meeting in Davos, when its chosen theme was ‘Building Trust’. The survey results show clearly that the level of trust worldwide is fading: ‘We are more distrustful than ever of our leaders and our [elected] governments whether it be as a parliament or a congress. It follows generally that we do not think we are being “governed by the will of the people”. The highest levels of trust worldwide are enjoyed by the armed forces, non-government organisations, and the United Nations’ (World Economic Forum, 2003). This survey of 20,000 people, mainly in the ‘Group of 20’ countries, shows further disturbing evidence of a deterioration in trust levels. Here is a sample listing of some of the responses: ●

●

●

● ●

●

●

Leaders generally were given lower trust ratings than the institutions they lead – ‘not doing what the say’ is the most often quoted failure in a leader. Citizens have as much trust in the media and in trade unions as they have in their nationally (mostly elected) governments. Leaders of non-government organisations (NGOs) were trusted in most countries. Leaders in the UN and spiritual leaders are the next most trusted. Global companies as well as large domestic companies were not trusted to operate for the best interests of society. The World Trade Organization (WTO), World Bank and the International Monetary Fund (IMF) have almost as many people distrusting them as trusting in their probity to work in society’s best interests: the WTO is the best trusted of the three. Most people in the survey said ‘the world is not going in the right direction’.

These are the results of recent surveys of people round the world – they show that the modern world is one fraught with perceived dangers; and if these dangers are not explicit, then they are implied through a growing distrust 3

4 Building Trust in Asian Business

of leaders and major institutions. Oddly, notes the World Economic Forum, the armed forces are trusted, though perhaps this is more because of their role in security and anti-terrorist manoeuvres rather than in absolute terms. How this position has arisen, and how the many origins of distrust may be combated is the focus of this book. Although we mainly focus on Asia, and trust in Asian business the contributors to this book have world wide experience and can write with authority on the issues. First, however, we shall concern ourselves with a little history and move quickly on to modern trade and its need to engage in ‘trust’. Most seafaring nations have engaged in international trade for centuries, and their sailors and agents have had to develop trust-based methods to engage in trade with their distant partners since there were no fully ‘negotiable’ legal instruments that were recognized in foreign lands – and even at home these may have been missing during the early days of trade. But now the pace of change is such that new methods of trade support have again had to be developed – for example, consider Bills of Goods (signifying ownership of goods in transit), which have had to change into systems that can be promoted digitally simply because the goods may change hands in transit, or be redirected. Indeed, information technology and communications (ITC) play a great part in modern trade, reducing the need for face-to-face contact that was the norm at one time. Currently, regardless of monetary crises in various parts of the world, there is a huge volume of (foreign) direct investment which promotes trade in many forms, and which stretches human relations in maintaining harmonious relationships between trading partners. ITC is no substitute for face-to-face contact, but this is proving difficult to support when trade is global and fast-moving. This book addresses the need to develop trusting relationships between pairs of individuals, and in this chapter we shall consider supply chains that suffer dynamic realignments as markets change. We are not focusing specifically on the issue of logistics – it is simply that the supply chain example will allow us to review traditional descriptions of trust, and indeed antitrust, and note how these concepts were originally considered to be bipolar, but are accepted now as being more complex, and so carry multi-dimensional descriptions. The supply chain consists of multiple two-way communications between individuals (the dyads) with respect to data and goods. But in the modern global marketplace we note how more complex forms of behaviour must be viewed as commonplace, even as we extend our dyadic relationships beyond local ethnic borders to sustain our global reach. Thus each partner needs to learn, and to learn fast, about the other, to avoid a variety of conflicts. The main inter-trading regions are North America, Europe and Asia, with many managers, academics and politicians maintaining an energetic attentiveness on the developments in Asia. They look especially at China now it has become a member of the World Trade Organization (WTO), noting that it is poised to become the world’s manufacturing centre in the next few

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years, and probably then being the world’s largest inward-FDI (foreign direct investment) recipient, ahead even of the USA (Chandler, 2003). Thus we must question whether there are emergent traits that contradict our older learning about the way in which alliances develop or are maintained in China, and, more broadly, in Asia; or perhaps we can see only a continuation of our old ways, dressed in new clothes. Western production organizations, once stable for many years, have evolved to be complex systems that rely upon highly integrated global sourcing with multi-site assembly, and a variety of distribution systems (Chase, 1997; Stock et al., 1999; Hewitt, 2002). In the 1980s there was great pressure to operate systems in a ‘lean way’, to achieve continuous improvement – highlighted by Womack et al. (1980) in The Machine That Changed the World. Some firms – for example, in the automotive sector – have apparently become massive, yet they are not – they rely upon a myriad of suppliers. Their production has moved to a regime that has to be ‘agile’, in which alliances are made (and dissolved) rapidly, based on substitutable supply chains put in place to service a volatile market, and then reconstituted to serve another market. In these circumstances, everyone in the supply chain has to learn quickly and effectively (Miyashita and Russell, 1994; Peppard, 1996). There is a clear need to manage up-stream and down-stream knowledge creation throughout the (global) supply chain (Drew and Smith, 1998: Chaston et al., 1999; Phan and Perdis, 2000); and we might expect that culturally illiterate staff will hinder this process, therefore precise and delicate human resource management and training is needed (Merry, 2001). Furthermore, globally, there is now a pressing need to understand and manage the reverse supply chain to ensure proper disposal of in-process residues and end-of-life goods in an eco-friendly manner (Carter and Ellram, 1998; European Commission, 2000). We also note that many firms have begun to outsource large sectors of their business. This is not a new phenomenon, and many early difficulties have been noted (Lacity and Hirschheim, 1993). Yet the trend continues, even perhaps accelerating as noted in BusinessWeek (European edn, February 2003, pp. 36–48). Their ‘cover story’ (with many contributing authors) brings to the fore several problems associated with offshore outsourcing. We see chief executive officers (CEOs) have noticed that there is an abundance of well-trained, English-speaking people outside America who normally have much lower salary demands than native US citizens. Thus simple-to-define jobs have moved offshore: accounting is done in India, the Philippines, and China; chip design and software development in India and China; and even seemingly hard-to-transfer jobs such as research and development (R&D) are done in China. In general, however, what is being seen is a drift of lowintensity-knowledge jobs to these offshore sites (or they may be jobs that do not need high levels of integration with existing systems). BusinessWeek forecasts the number of ‘office jobs’ moving offshore by 2005 will be 300,000; by 2010, 700,000; and by 2015, 1,700,000. In contrast, ‘management’ will

6 Building Trust in Asian Business

only move 37,000, 118,000 and 288,000 people offshore over these periods. So, for the present, US personnel do not feel too threatened by the potential loss of their intellectual capital, while their CEOs are very happy to reduce the overall back-office costs. We noted above that some R&D is undertaken offshore – this is generally not dependent on high levels of integration within existing systems, but relies on breakthrough ideas being developed in high-quality laboratories (and US cash can provide these facilities). The Japanese have practised this offshore model of R&D for decades: once the ‘breakthrough’ is sufficiently advanced, they take the idea back to Japan to undertake the critical development needed to put it into practice. In this way, their vital ‘know-how’ remains in Japan, where the Japanese staff are willing to work together, and trust each other, so they exchange ideas freely, leading to a speedy implementation and thus a fast exploitation of the blue-sky research from offshore. Most countries, developed or developing, have over 95 per cent of their manufacturing firms categorized as SMEs (small- and medium-sized enterprises). In the USA, 77 per cent of firms have fewer than five workers (M. J. Mandel, BusinessWeek, 16 September 2002, p. 14); and typically, in the UK, we find that, from the entire business population of 3.7 million enterprises, only 24,000 (2 per cent) are medium-sized (50–249 employees) and fewer than 7,000 (0.2 per cent) are ‘large’ (250 or more employees). It is quite striking how small firms dominate in the UK, with over 60 per cent of all firms having zero employees (sole trader companies), yet these contribute almost 5 per cent to the wealth of the UK. This fact emphasizes our concerns that there are probably grave problems in these firms, where in the worst case they may be grappling with legacy systems (hardware and software) using legacy mental models (relating to the management of their businesses). They are not able to integrate easily in digitally mediated commerce (Hally and Guilhon, 1997; COST 330 Action, 1998; Chaston et al., 1999). Ghani (2000) supports this view, reporting on a meeting of the Malaysian Association of SMEs in which it was reported that that nation’s adoption of information and communications technology (ICT) was very low. The need to join a (perhaps global) supply chain is becoming imperative, especially when one considers the Just-in-Time systems needed to manufacture goods in an effective way (Inkpen, 1996; Stock et al., 1999). There are, however, many difficulties with this idea – since the supply chain contains many uncertainties, if not chaos, in its system’s complexity (Wilding, 1998). These chains, with their parallelism, and with their highly stochastic local effects amplified over the length of the chain, can lead to self-generated chaos. To offset this, Wilding suggests that a focus on the needs of customers, and the chain managers replicating those needs as far up the chain as possible, while still keeping the process as lean as possible. Thus managers have to pay attention to the timeliness of delivery (between the supply chain nodes) as well as cost, quality, innovation and flexibility. Often this amounts only to using new algorithms relating to the relatively restricted domains

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concerning local delivery systems (Hayuth and Fleming, 1994; Salhi and Nagy, 1999); or it may be satisfied by new forms of open intranets, allowing for the forecasting of the consolidation of unitary loads by a third-party logistics operator (Angeles, 2000). Ultimately, we note that information and communications technology (ICT), with its fast data flows, is neutral in attitude to gender and race but, having no sensitivity to the human condition, it is no substitute for the human touch, interpersonal cultural literacy, organizational learning or knowledge management based on a deep empowerment of peers in alliances. Above all, the exchange of all of their data is deeply dependant on the development and management of trust between individual dyad partners in the alliances both up and down the supply chain. Fundamentally, we accept that the management of trust is the fundamental activity supporting all negotiations (Child, 2001): perhaps, we might suggest, even supporting all ventures with others.

Traditional views of trust It is said that ‘trust’ is like ‘motherhood’ – understandable when experienced, but very difficult to explain to others. There are many streams of research about ‘trust’, spanning individual studies (psychological) through to behavioural studies of the sociology of organizations. Figure 1.1 attempts to bring some of these into focus.

Generally exclusive continuum end-points

‘GOOD’

Expectation of high trust

Co-operative relationships Win–Win

Stable relationships

Low risk Low complexity

E(Low trust) >> Distrust

Non co-op Mixed motive games

Unstable and transitory

High risk Confusing complexity

Personality research

Behavioural decision-making

‘BAD’

Social psychology

Sociology

Research paradigms Fundamentally trust is above context

Lack of real context in paradigm

Organizational pressure is assumed

Enforcing contexts within paradigms Figure 1.1 A simplification of familiar research paradigms

Institutional pressure is assumed

8 Building Trust in Asian Business

Psychologists have for some time studied how trust shapes individual behaviour and relationships with others (Read, 1962; Worchel, 1979). Read, in particular, argued that individuals would define trust ‘as their confidence in another’s intentions and motives’, and would base this confidence on their appraisal of the sincerity of the words of the intended partner. One might link this to the ‘gentlemen’s (word-of-mouth) agreements’ as they negotiated trade and exchange agreements – over time each member of the dyad would have come to some measure of the other and thus induced a feeling of trust. We note in Figure 1.1 that in this measure of trust/distrust the form and behaviour of each party is defined as being superior to the context, regardless of what is being negotiated, and oddly, regardless of the context in which the negotiators now find themselves. They may be totally out of their depth and dysfunctional in this new job … even though it may have been stated widely, ‘They are good chaps – trust them!’ Behaviourists, on the other hand, will stress the calculative nature of trust, and note how ‘one party will be more trusting, and thus be more vulnerable to the actions of another party … to perform a set of actions … irrespective of the ability to control or monitor that other party’ (Hogarth, 1980; Khaneman et al., 1982; Mayer et al., 1995). While Mayer stressed the behavioural aspects (as in the definition given above), Hogarth and Khaneman et al. note that human beings do not calculate the odds particularly well in uncertain and risky situations. This results in individuals being willing to be more trusting than the data would suggest a fair Bayesian should be. Unfortunately, much of this behavioural research took place using ‘games’, and/or with students, so it might not be appropriate to the ‘real world’ situation. However, Khaneman et al.’s research findings are very strong, stating that humans do not make good use of all the information presented to them: they even overstress the information that was received most recently. This points consistently to the fact we are often too trusting, often more than the situation (data) warrants. The school of social psychologists accepts more of ‘reality’ than do the individualists or behaviourists, stressing that the organization in which individuals find themselves will predispose these individuals to a level of trust which they as individuals may not support (Dawes et al., 1990; McAllister, 1995). Dawes suggests that group identification increases co-operation, even in the absence of any future expectation by the partner of their reciprocity, reward or punishment. This relates closely to the concepts of Agency Theory, which presupposes that individuals look for self-gain and must be managed by ‘contracts’. These ‘contracts’ contain rewards or potential punishments that control and modify the risk to the principal (Baier, 1986; Baiman, 1996; Williamson, 1993). In reality, this is a weak instrument of control – as trust is needed to cover aspects that cannot be pre-ordained in detail – and we know that over-control reduces the performance of the partnership. Finally, we come to the sociologists’ view, where the world is accepted as being very complex, and very risky to all parties. However, to be trusting

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reduces complexity and risk – but perhaps at a price if this trust is ill-founded (Lewis and Weigert, 1985). There is affinity again here with Agency Theory, given that to trust reduces the costs of entry while simultaneously raising the barriers against the entry of others, since for one party (the insider) complexity is reduced, and for the other (the outsider) complexity is increased. The sector studies highlighted above are informative, but they do not take into consideration the modern, fast-moving world. In the current dynamic situation we do not have (the luxury of) time to develop friendships as a precursor to developing trust with our trading partners, nor do we find our trading partners reside in the traditional trading countries known for generations – they may now be located in any country in the world. Further, we have other managerial versus staff issues that we must consider that are totally dependant on the maintenance of trust – the well-being of the firm, and the continuance of its intellectual capital (because without continued organizational learning it will ossify and die). Thus individual staff have to believe they are needed by their CEOs, and that they will continue to be employed, even in the face of heavy downsizing, restructuring, and the obvious violation of psychological contracts that link the individual with the organization (Rousseau, 1995). We must accept that we live in turbulent times, and that timeliness and quality – that is, customer service – is of supreme importance (Schneider and Bowen, 1995; Chase, 1997). But this is a counter-intuitive aspect if management are likely to dismiss us – why should we give away our secrets to others? We become taciturn and silent – the quality of organizational learning decreases, as do the subtle qualities within interpersonal relationships, and interpersonal trust. To enable firms to satisfy the demands made upon them by their customers it is imperative to develop strategic alliances among competitors (Hamel and Prahalad, 1994). The managers, and all involved, should develop multicultural and multilingual relations (Fukuyama, 1995; Cox and Tung, 1997) that should be focused on the development of cultural competence (Merry, 2001). But we cannot take for granted our expectations of ‘their’ behaviour, ethics and trustworthiness – just as we doubt the trustworthiness of our senior staff, and most surely we do not trust those people ‘out there’ who are deemed to be our new partners, since we suspect they will take over our jobs.

Emergent views of trust and antitrust The above studies have presumed that trust and antitrust (or distrust) are at the opposite poles of a continuum, and that trust is presumed to be ‘good’. It is clear now that these uni-dimensional models are lacking in reality – for example, by knowing a person for a long time we can gain a more rounded impression of them, and so are happier to trust their judgement in a given context, even though we might have learned not to trust this person in a different context where they have shown themselves to be weak. Figure 1.2

10 Building Trust in Asian Business MULTIPLEX

UNIPLEX

This is… A single dimensional view of a person... ‘to trust or to distrust’

A multi-dimensional view of the person which develops over time

Time

As time progresses Increase in bandwidth increases the potential to trust

Plus… A person ‘projects’ his or her abilities through their learning context… And this… includes their ‘trustworthiness’ now assessed in a rich manner

Figure 1.2 The multi-dimensionality of relationships between dyads

illustrates that, over time, we might move from a very limited view of a person to one that is quite rich and multi-dimensional. All the time, however, we shall be mindful of the need to be more or less trusting on a restricted set of dimensions that are focal to our business interests. As we mooted from the older view of the individualist’s paradigm, ‘… he is a good chap so we will trust him (in all respects)!’ In reality, this is not likely to be a good policy, especially in a fast moving world where this ‘good chap’ has not had time to mature and learn about new contexts. Lewicki et al. (1998) have suggested that we need to consider the simultaneous acceptance of a measure of trust and a measure of distrust with respect to our partner in a dyadic alliance relationship. We note some of their ideas in Figure 1.3 in which ‘trust’ and ‘distrust’ may be the two most important dimensions of the multi-dimensionality illustrated in Figure 1.2. Remember, organizations are composed of individuals, and it is the pairwise linking of these where exchange of meaningful data takes place, and, further, it is their knowledge exchange that maintains the alliance between the firms. In Figure 1.3 we note that the least interaction is in cell 1, where only professional courtesy is exchanged: ‘we do not trust the other, yet neither do we distrust, as there is no perceived need to distrust, since there is no deep relationship’. If the alliance depends on this form of dyadic relationship alone, it will fail. Moving on to cell 3, it is obvious that the alliance will fail – there is little to nurture the relationship, since each assumes the worst of the other.

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HIGH TRUST

Confidence Initiative

Passivity Hesitancy

Interdependence promoted

Trust but verify

Opportunities chased

Follow-up opportunities but monitor down-side risks

2

4

1

3

Limited interdependence

Assume harmful motives

Professional courtesy

Paranoia

LOW TRUST

LOW DISTRUST

Low monitoring No vigilance

HIGH DISTRUST

Scepticism Cynicism

Figure 1.3 An example of dimensionality Source: After Leweicki et al., 1998.

In cell 2 there is euphoria as high trust is combined with low distrust: there is free rein to consider all initiatives and not to doubt the other side – as in the more realistic case of cell 4. Here, high trust is tinged with the need to verify and monitor the other – not so strongly as to engender antitrust in the partnership, but enough to maintain a critical awareness of down-side costs. These alternatives and dimensions of trust and antitrust link with the extensions of the work of Larsson et al. (1999), where it is clear that opportunities exist for the alliance parties to fall as far as a state of anomie, or to think one side is milking the other (Inkpen, 1996; Kidd et al., 2002). Kidd et al., when discussing the work of Larsson et al., suggested that, when little care is taken to absorb cultural complexity in the alliance, there is an unwillingness to collaborate and to volunteer data to the other side. Lewicki et al. (1998) would say that if there is distrust evident, there will be an unwillingness to proffer data and thus individuals will not engage voluntarily in peer-wise organizational learning. We suggest that they will be unwilling to follow the edicts of their CEOs and be volunteers in any knowledge-management initiatives developed from the top down. ‘Knowledge’ exchange now becomes ‘sticky’, and data does not flow as it would under more normal circumstances (Szulanski, 1996; Fruin, 1997; Huber, 2000). Essentially, the peers are

12 Building Trust in Asian Business

saying to themselves, ‘we won’t give our secrets to the enemy, we don’t trust them, as they will steal our ideas and put us out of business’, or, more precisely, each person says ‘they will put me out of work and I will lose my livelihood’. Cox and Tung (1997) support this contention and broaden the argument – suggesting the cultural interaction in cross-border alliances is the one critical success factor that must be well managed. Similarly, ‘culturalists’ such as Hofstede (1980, 1991), Berry et al. (1992), Trompenaars (1993), Joynt and Warner (1996) and Tayeb (1996) all suggest we need to be sensitive to the other partner, as well as noting the degree(s) to which others from different cultures are more or less trusting than ourselves. We must acknowledge the contrast between the ‘Eastern’ and ‘Western’ concepts of trust at an individual level. For example, a Westerner in negotiation might fall back on a morality stemming originally from Judaeo-Christian beliefs (McClelland, 1961); whereas an Easterner (in particular, a Chinese person) may rely on the ethics of yi (justice) and other internalized ethics derived from the edicts of Confucius (Luo, 1997). Each may believe they are projecting ‘trustworthy images’. So the overt (even if unspoken) ‘trust me’ of the Westerner may be perceived as arrogant or immodest by the Easterner; and conversely, the Easterner, even if truly ‘expert’, may appear too humble or selfeffacing in the Westerner’s eyes.

Issues of ‘silence’ and rhetoric Western specificity An essential feature of Western culture is the high esteem given to the spoken and written word. Because of the diversity of peoples in the Western world, and their lack of homogeneity, it has always been necessary for them to explain their opinions and intentions explicitly and to strive for consistency in order to make themselves understood. In ancient Greece the word logos played a central role, even acquiring the additional meaning of ‘logic’. The Greek philosophers developed the art of speech, rhetoric, argumentation, dialectics, the art of logically consistent conversation, and discourse. These techniques in the use of language were taught in Western universities, and are now a living part of European culture. For example, ‘rhetoric’ is said to have four basic activities: (i) contextualization (talking around the subject); (ii) perspective (taking a variety of views); (iii) referencing (equating to other’s norms, reducing cognitive dissonance); and (iv) purposiveness (creating goals, such as mission statements understood by all). Naturally, to pass through these stages takes time and a certain willingness by the actors to participate, not only for themselves, but also for the collective. In the West, contracts and associated prices determine the transactions that are undertaken and there is an old, but strong, belief in the ‘rule of law’, so to some extent rhetoric does not apply – if we cannot understand the

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words of the contract, the ‘law’ will sort it out. This results in a low level of mutual dependency by business partners in the West. They use so-called ‘arm’s length transactions’, rather than the relationship-based systems that are commonplace between Asian partners (in China we would call these guanxi networks) (Luo, 2000). Institutional links matter less in the West, and the market becomes the most important medium for directing and governing the terms of transactions. For example, early maritime traders developed ways and means of ‘controlling’ their distant partners. The ‘Bills of Lading’ used by European merchants by the fourteenth century were only simple receipts, but by the sixteenth century they had become a ‘Proof of Entitlement’, and so evidenced a contract of carriage between shipper and ship-owner. Since 1855 this proof has transferred contractual rights and liabilities – and is now incorporated in the UK Carriage of Goods by Sea Act, 1992. Once, these documents were written on paper and travelled with the goods by sea – they took a long time to reach their destination, and were delivered by the shipper/merchant to the original customer. Now, partfinished goods are transported (often by fast air freight) by third-party logistics operators, who may be requested electronically to switch instantly their in-transit goods to a new destination, or to a new ‘owner’ who may even be creating a different finished product. Hence the need for electronic Bills of Goods (Livermore and Krailerk, 1998) that can be created, considered and modified by instant e-delivery before the goods arrive at their destination.

Eastern inscrutability, and trusting The Asiatic concern for ‘face saving’ will force Asian managers into silence rather than risk losing ‘face’ directly (Bond, 1994). They will also do this if they feel their action might cause a partner to lose ‘face’ because of their own words. Conversely, and grossly different, is the brash individualism of the Westerner, uttering grand statements in an apparently aggressive way. This may get things done in the West, but not in Asia. In Japan, society developed from small village communities undisturbed by foreign contacts for centuries (in stark contrast to the population migrations and many wars among the countries of Europe). Because of the homogeneous nature of the Japanese people, there was no necessity for an explicit and coherent expression in speech: therefore rules of rhetoric and logic did not develop. Instead, sasshi (empathy), ishindenshin (telepathy) and haragei (‘belly talk’) became accepted aspects of a gesture-free body language, becoming forms of communication considered characteristically Japanese. In their literature, it is not the precise term that is esteemed, but the oku fukai (deep and wide) and ganchiku no aru (suggestive) expression. This particularly Japanese way of conducting ‘silent discussion’ is disturbing to Western businessmen (Matsumoto, 1988).

14 Building Trust in Asian Business

The essence of trust in Asia revolves around the Confucian principle or ren – which refers to the way people relate to each other. One cannot exist alone and one must be able to interact with others. Ren can, therefore, be understood as being able to handle interpersonal or inter-organizational relationship personally: having renqing – human feelings. Trust as a corporate interaction mode is always based on a long-term commitment so it is not easy for managers in the supply chain to bridge cultures, especially when the chain alters quickly in form and allegiances. Supply chains are one form of network (technological, and related to physical goods) but in China there are also guanxi networks (interpersonal processes) that may involve much gift-giving, and some would say corrupt bribe exchange (Nojonen, 2003). But now, in the West, similar views are expressed against excessive stock options offered to European and US managers which are also said to be corrupt (‘This stuff is wrong’, Carol J. Loomis; Fortune magazine (European edition), 25 June 2001, pp. 37–42). Systems based on mutual trust ensure a return to the partner by granting power and influence over the individual representing his/her organization by the linking person in the other firm – globally, this is a generally accepted concept. It is important to note that mutual trust is not pursued for charitable reasons, nor is it altruistic in intent (Kao and Sek-Hong, 1993). However, the self-interest in Asia lies in hateke zukuri (Japanese: ploughing the field) for a future eventuality. A person never knows when he/she might have to become indebted to others (osewa ni naru), and long-term relationships survive in environments where laws are poorly drafted and contracts are not easily enforceable by law (Luo, 2000). Mutual trust and inter-organizational relationships manifest themselves in a variety of different forms. On the interpersonal level, Japanese nomunication and Chinese guanxi relationships are the best known. Nomunication (Japanese: nomu (to drink) plus English ‘communication’) are informal meetings that take place at the end of the work day with the aim of building up a mutual group identity – and thereby amplifying a spirit of uchi (in-group identity). Japanese ‘salarymen’ drink sake together in one of the many bars (izakaya) which cater specially for these groups of people. Thus staff members grow closer to each other and more trusting, by sharing experiences and worries. Nomunication may include business partners from suppliers, customers and members of the same keiretsu to which the companies belong. Similarly, when a Chinese entrepreneur seizes a business opportunity, he prefers to make a ‘deal’ based on previously established guanxi rather than seeking the anonymity of the market. Such a deal is based on opportunities arising through guanxi, engaging with privileged contacts and using non-publicly-available information. Finally, to conclude the deal, the value of the Chinese handshake is regarded as being high and invulnerable – this is based on trust (Fang, 1999) (see Chapter 3 of this book, where Tony Fang discusses the ‘Chinese gentleman versus the strategist’). We should note that an introduction of a new person to a (guanxi)

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group by a trusted insider gives this new person almost the same level of guanxi as the introducer. This means that the introducer has the responsibility of guaranteeing the debts of the new person if that person hints at defaulting: but it also means that the new person has great pressure brought on him by the group as a whole to behave honestly (I-Chuan Wu-Beyens, 2000).

The interaction of West/East in alliances Within the ‘strategic’ models developed by Western practitioners and academics, we note the need for knowledge management and organizational learning, since it is only through these processes that individuals can learn: (a) within their own firms as they deal with their peers and other staff relationships; and (b) between firms as they deal with their counterparts in the alliances to progress their joint development. Figure 1.4 indicates some of the complications arising within knowledge management and organizational learning in a multi-firm and multicultural environment – that is, a multinational enterprise. Here we note that early Western concepts of work and the worker, as developed by Max Weber (and

LEARNING

in

… own firm

SOCIOLOGY Max Weber on superiors & subordinates CEOs

… in same region

… cross-border

GLOBE studies on Leadership in 62 countries Organisation 1

Formally agree Strategic links

Organisation 2

Knowledge management strategy

Knowledge management strategy The task for CEOs

RATIONALIST Inkpen etc on alliances Build bridges Operational relationships Organisational learning

Organisational learning

WORKERS CULTURAL ANTHROPOLOGY Hofstede etc on social norms

The task for the HRM staff

… the cultural differences of individuals in context

Figure 1.4 General considerations of ‘Learning’ in alliances

16 Building Trust in Asian Business

many others, of course, who were active researchers in the early 1900s and who created an academic bedrock upon which subsequent theories were built) were quite ethno-centric. That Western bias is now well known and guarded against – for example, note the research on leadership that stems from a Western view that has been carefully crafted to capture the nuances of management around the world (the GLOBE studies: see House et al., 2002). Figure 1.4 emphasizes the role of human resources staff as a focal point in the organizations – to translate the board’s wishes to the workers, and to reflect the workers’ anxieties back to the board. Further, the human resources management (HRM) of the firms in alliances have a joint responsibility to engage in transfers of staff between partner firms, enabling peers to exchange their knowledge more easily for the betterment of the alliance (Richter, 1999; Kidd et al., 2001a, 2001b). However, we must bear in mind that Geert Hofstede would argue that deeply-held personal views do not change over decades, which is how we are able to discern ‘cultural differences’. Therefore, and notwithstanding studies such as GLOBE, we contend that East/West alliances are predicated on a fragile understanding between individuals, that at the base level rests at the ‘low Trust’/‘low Distrust’ seen in quadrant 1 in Figure 1.3, and that the Institutional form of Trust (as in Figure 1.1) may be the factor determining how peers interact with professional decorum. Perhaps they, as individuals, would be willing to trust each other, but their institutions may demand that they should treat one another as enemies.

The development and maintenance of trust Co-operation leading to co-opetition and later to compromise, foregoing some market opportunity for the greater good – Nalebuff and Brandenburger (1996) defined co-opetition as a blend of co-operation and competition. If Partners (the peers in the dyad) are too close (in the sense of Granovetter, 1973) there is an interaction in the trust/antitrust relationship that becomes difficult as dyad partners attempt to reduce their ambiguities through rhetoric; time is needed. Yet it would be best in the cross-culture situation for all concerned to involve themselves and their alliance partners in co-opetition: at second best, they could engage in compromise, forgoing some market opportunity for the greater good (Nalebuff and Brandenburger, 1996). If partners (the peers in the dyad) are too close (in the sense of Granovetter, 1973) there may be too many entrenched ideas creating barriers that do not allow co-operation. In this case, the firms will slide from potential co-operation towards lesser degrees of involvement – perhaps, as we have suggested earlier (in crosscultural alliances), resulting in anomie where all parties forget even their own firm’s needs. But if the parties are somewhat distant, the ‘strength of weak ties’ may prevail (Granovetter, 1973) where one party sees the benefit of these distant partners who have different circles of influence and other access to different information. We suggest, as does Granovetter, that we can

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absorb models, ideas – and thus knowledge – from both our distant and our close partners (the weak and strong ties, respectively). However, we think one can overstep a subtle boundary when involved in culture-crossing situations, and individuals can switch quickly into a pathological mode, such as anomie. It is certainly true that ‘more distant’ contacts proclaim such different ideas that these elevate our measure of distrust – which perhaps puts us into quadrant 4 in Figure 1.3, and perhaps move us easily to the paranoia displayed in quadrant 3. These issues will surface quickly as many firms and government agencies in China have become financially over-extended, especially in public-sector ventures (Lague, 2003). We suggest that agents in these ventures will for some time provide false information in the ‘traditional’ way for their own betterment, or to deceive clients and customers. This will be of concern to the government in Beijing as senior ministers espouse ‘honesty and transparency’ in all matters – especially given their entry into the World Trade Organization (WTO). This conflict between national mission statements and local reality will continue to confuse outsiders in the many alliances that are attracted to massive public sector construction projects. Unfortunately, it is the construction sector that carries the greatest propensity to cheat, be dishonest and be corrupt (Peter Eigen, CEO of Transparency International, introducing the company’s Annual Report on Corruption Davos, 28 January 2003). Therefore, while we might expect alliance partners to be professional in their trusting relationships in construction projects, they seem too often to be collusive partners in corrupt enterprises. Naturally, we may ask if managers in China will follow Western ways – after all, many young executives have been schooled in the West – in Europe or the USA – and on return to their homeland have put their new knowledge to work. However, Schlevogt (2002) has found that Chinese managers maintain a distinct ‘Chinese style’, especially in the emerging private enterprises: they continue to emphasize family-related values, which is in stark contrast to the Anglo-US model of managers working as distinct individuals within their firms (Hofstede, 1980, 1991). Thus our international perception of ‘us and them’ is stimulated and disturbed continuously by these differences as we enter and leave alliances. One factor that is disturbing to Westerners is the Chinese potential to be very suspicious of strangers, as we noted above – and it seems that such ‘traditions’ continue, with much distrust being maintained against the outsider. There is the contention, by some, that the Chinese nurture a deep hatred of foreigners, and they follow the ‘Thick Black Theory’ and its subsequent extension into the Thick Face, Black Heart doctrine espoused by Chu (1988, 1995) and discussed by Low (2003). If this is the case, it will be quite difficult for outsiders to contemplate long-term relationships with the Chinese. It would thus behove the outsider party of an alliance to raise their distrust level, and perhaps attempt to work (with cynicism) within

18 Building Trust in Asian Business

quadrant 4 of Lewicki’s thesis (Figure 1.3), and thus accept that the Chinese will probably ‘milk’ the partner. We have only to look at recent news items, for example: Tens of thousands of counterfeiters are at work in China today. They range from low-tech factories mixing shampoo and soap in back rooms to big state enterprises that have discovered the profits to be made selling knockoffs of soft drinks and beer. Higher up the technological ladder are factories that produce everything from car batteries to motorcycles. At the top end of sophistication are mobile CD factories with optical disk-mastering machines costing $1.2 million. One reason Chinese pirates now have global reach is through tie-ups with organized crime. In recent years, experts say that Asian gangs such as Wah Ching of Los Angeles and United Bamboo of Taiwan entered the counterfeiting business after Latin syndicates squeezed them out of narcotics. But the trade isn’t as organized as the Italian Mafia. Richard C. LaMagna, senior manager for worldwide investigations at Microsoft, describes the typical overseas Chinese counterfeiting ring as an ad hoc partnership. ‘It is a group of entrepreneurs with finance, manufacturing talent, connections, and access to distribution who come together for moneymaking enterprises.’ LaMagna was a former agent with the Federal Bureau of Investigation and the Drug Enforcement Agency. (An extract from the cover story – with many authors: ‘China’s Pirates’, BusinessWeek, International edn, 5 June 2000) This is further emphasized by Peter Lilley, CEO of Proximal – antilaundering consultants – when interviewed for BBC’s World Service: Evidence shows that organized crime moved out of the banking sector a long time ago and terrorist money has followed it … they are now using such mechanisms as the diamond market, gold, precious metals and the Internet to launder funds, so laundering has gone a long way beyond just the banking system. (Proximal Consulting Newsletter, 17 February 2003) If an alliance partner is indeed working with organized crime then there is no hope for the ‘innocent’ partner. The alliance will simply be a working ‘front’ for the more lucrative business of the underworld, which in East Asia is a big and dangerous business (Korchagin and Ivanov, 2003).

Conclusion Recently, Richter and Mar (2002) have suggested that there may be a new way emerging in Asia itself – with their contributing authors indicating an enthusiasm for the future. Yet, in contradiction, the various authors in

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Kidd and Richter (2003a, 2003b) show that corruption throughout Asia and the lack of appropriate governance mechanisms in government, nongovernment organizations and firms throughout Asia leads to a breakdown of alliances. The dilution of trust through the added ‘hidden’ costs of bribery and extortion may prevent outside firms approaching those in China to make alliances. Or, if it does not prevent an alliance from being formed, the 20–25 per cent on overheads because of bribery will inflict an onerous financial burden as the remaining 80 per cent of the investment struggles to meet the mission targets. Accusations of non-ethical activity lead to a further breakdown of trust, and an increase in distrust. As we said earlier – in these circumstances the alliance begins to slide rapidly into failure mode, with each side accusing the other of malfeasance of several kinds. Naturally we may call caveat emptor – and many outsiders do go into alliances knowing some of the grey issues, but do not (in their ‘special’ case) expect to get their fingers burnt. Their innocence is proclaimed later when the full extent of the dark side becomes evident, though we cannot be sure that we should offer sympathy in these cases. We do not see any quick or simple solution to this issue. The ‘clock’ in dynamic alliances militates against all forms of interpersonal learning: we need time to meet with peers to discuss alternatives, and to meet with partners to engage deeply in rhetoric to remove misunderstandings that arise through intercultural incomprehension. Such time is not available, as all partners must work flat-out to meet contracts, and it is quite possible that the alliance firms, who are most likely to be SMEs, do not have any organizational slack to ‘indulge’ in chat. Ultimately, what is difficult to alter is the deep antagonism of ‘other-worldliness’ as one’s partner behaves in ways that offend – by bribing, by being unethical, by being ‘holier than thou’ and loudly informing one of that fact; or simply by eating the wrong food with the wrong hand. We must learn to be culturally literate. This learning began in the UK with respect to the Japanese in their manufacturing subsidiaries from the mid-1980s onwards. There were increasing numbers of Japanese managers employed in tours of duty with their families, and as tourists also, so people in the UK had a greater exposure to these foreign individuals (and the Japanese, in turn, to UK residents). To aid assimilation, there was more accessible literature, both academic and popular, and so on. But, ‘when the chips are down’ none of that learning alters the ‘software of the mind’ (Hofstede, 1991), and we all respond using ‘iron-age’ aggressive constructs. We worry about this effect continuing unchecked in global alliances when far-distant SMEs have contracts terminated without consultation. Will they invoke their own form of ‘thick skin, black heart’ and retaliate? We hope not – but who can tell in these early days of complex, dynamic, global alliances which cross cultural boundaries, and have to rely on trust as the ultimate determining factor?

20 Building Trust in Asian Business

The structure of the book The book, comprising sixteen chapters, is divided into four sections. Part I considers Trust in general terms; Part II deals with Trust from two viewpoints: first, by considering the antecedents in Asia of its ‘religions’, and how these may have moulded behaviour; and second, a fundamentalist viewpoint – that we are all rather greedy and so may not readily trust one other, but we ought to in order to develop sustainable relationships; Part III offers summaries and attempts to suggest ‘ways forward’, as we all hold views different from those of our neighbours. And finally, in Part IV we attempt to suggest general policies for development which include the need to trust.

Part I In Chapter 1 John Kidd and Frank-Jürgen Richter have presented a message that trust is difficult to define, in part because it seems so simple – once it has been appreciated. It looks to be natural, and seems to flow from the giver when needed. Yet we see through Kidd and Richter’s words that trust has been defined in several ways – by some it is ‘calculative’, while others let it be ‘institutionally driven’, causing a newcomer to a system to behave (that is, trust) in ways that he or she does not really believe in. They noted that in crossing cultural boundaries we have other issues to consider, since the behaviour of each side in the potential alliance will mask their beliefs to some extent, and so time is needed for each side to become familiar with the other. Unfortunately, time is not a free commodity in today’s fast economy – alliances have to be made, and dissolved, faster than partners may like – they do not have time to appreciate each other more than the amount needed to satisfy a contract; but there is more to partnering than a ‘contract’ – trust on both sides has to be there to deliver the parts a contract cannot reach. Ivan Tselichtchev looks in Chapter 2 to the broad effects of Westernisation, liberalization and new regionalism across many countries of Asia. Initially, he paints a brief historical picture of the East Asian (business) model, which continued to be applauded even after the East Asian financial and structural crisis in the late decades of the 1900s – possibly because there was only the Anglo-American model that held any alternative promise. However, he notes that since the accession of China into the WTO, and its dominance as a global manufacturing centre, the rest of Asia has had to follow its lead in opening up its own structures towards the once-despised Anglo–US model. As a result, their business systems are gradually becoming more transparent, have better governance systems and are looking towards capitalist principles. With respect to ‘liberalization’, he notes the strong role of foreign direct investment (FDI) and how this has, in parallel to ‘Westernisation’ transformed the Asian economies – but not all equally – only those with governments that

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embraced reform. Finally in ‘new regionalism’ he notes that many indigenous firms are managed by Western-trained managers, with these and others actively looking to recruit more Westerners into managerial posts in Asia. This, naturally, while increasing the liberalization via Westernisation also increases regionalism through deeper differentiation – but not to the extent of ignoring the benefits of pan-regional economic accords.

Part II Hock-Beng Cheah analyses the dynamics of trust, self-interest and wealth creation in Chapter 3, and notes that some time ago Mahatma Gandhi allegedly said, ‘There is enough in the world for everyone’s need, but not enough for everyone’s greed’ – a statement that gives an initial focus for this chapter. Trust increases confidence and enables transactions to be undertaken at lower cost, with less risk, and leads to higher net gains. In this regard, trust offers the potential for significant positive synergistic effects that could enhance outcomes substantially. For this reason, trust can act as an essential lubricant that helps the economy and society to function more smoothly. In this context, wealth creation can be sustainable if it is directed towards satisfying the essential needs of at least a large majority of the population. It is in this context that trust and other positive synergies are generated in the development process. From this benign view of trust and sustainability, Cheah reflects on the writings of Adam Smith, Thomas Hobbes, and several contempory American writers who incline us towards the notion and act of individual greed as globalization exports their increasingly rapacious behaviour of profitseeking to other parts of the world; and some are also supported by governments seeking to advance their ‘national interests’. He notes there are many vivid examples of economic exploitation, and experiences of processes that lead to impoverishment – which include unfair trade practices stemming from duplicitous ‘free trade’ policies that benefit wealthy countries and penalize poorer ones. Finally, he concludes that we all have to work towards each other in searching for sustainability, and quotes from the American president, John F. Kennedy’s 1961 Inaugural Address, ‘All this will not be finished in the first 100 days … But let us begin.’ Stirring stuff! In Chapter 4, Gill-Chin Lim proposes a normative strategy for good governance in Asia which can be also applied to other countries. First, he presents a conceptual framework with which the subject of governance and trust in development processes can be studied. Next, he reviews the main features of Asian thoughts relevant to governance, and expands that discussion of Asian thought concerning governance beyond the Confucian school, which has been at the centre of the debate. Lim notes – as do the authors of following chapters, Fang and Low, that the Confucian school has dominated philosophical applications of

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governance in some states during certain times in history; even so, there are other schools of thought that have exerted substantial influences on the formulation of social values and governance structures such as the Taoist school, the Legalist school, the Warfare school, and Buddhism. These schools are drawn together in his analysis of the concept of governance and related values, such as trust. Finally, he reviews the performance of Korean presidential governance, since the country embarked on economic development in the early 1960s – suggesting that the Asian model of governance relying on Confucian values did not inspire the Korean presidents; rather, their governance seemed to be characterized by mistrust, inconsistency and anomie. Lim concludes with a set of normative – yet practical – strategies for sustainable governance. Chapter 5, by Tony Fang, begins with empirical illustrations of the Chinese business negotiating style provided by Western and Chinese negotiators, respectively. Then it discusses two components of Chinese culture and their influences on Chinese negotiating style – where the Chinese negotiator demonstrates a seemingly paradoxical negotiating behaviour – that is, simultaneously both sincere and deceptive. If negotiation strategy is defined as a means used to influence the behaviour of others at the negotiation table, then the Chinese negotiator can be understood as adopting co-operation on the one hand and competition on the other. This viewpoint can be derived from a traditional Chinese culture point of view, as the Chinese negotiator plays the role of both ‘Confucian gentleman’ and ‘Sun Tzulike strategist’ and adopts a ‘co-op–comp’ (that is, both co-operation and competition) negotiation strategy. Fang notes that guanxi – the wellresearched ‘networking’ of the Chinese – generates benefits but entails costs as well. While guanxi is important and certainly deserves further inquiry, he says we need to look more deeply at the concept of trust in the Chinese context to uncover the secrets of Chinese business style. The chapter concludes by suggesting a model of Chinese negotiation strategy, and discusses the roles that trust plays in predicting the paradoxical patterns of Chinese business behaviour. In Chapter 6, Sui Pheng Low notes the early origins of business practice in China, wherein Tao Zhugong (770–21 B.C.) is recognised as the founder of the Chinese business school of thought. He expounded his own business principles which cover human resources, product knowledge, customer service, efficiency and foresight, among others, as well as dealing with the pitfalls of poor business practices. It is from an analysis of early writings that Low engages us in modern issues – centrally that of ‘trust’. Tao Zhugong’s eighteen principles have been revised over time into twelve Golden Standards and twelve Golden Safeguards for business success. Low shows that these rules are still relevant and are being practised in the construction industry into the twenty-first century – hence we have to be sure we understand the old texts before engaging in business with the Chinese.

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Part III In the first chapter of Part III, Chapter 7, Anna Goussevskaia and John Kidd note how knowledge may be characterized. They find that in the interorganizational context many studies focus on only one dimension, namely the degree to which knowledge can be codified from its context. One of the difficulties in sharing tacit knowledge is the need for formalization, which in turn generates a community of practice that may be observed in the workplace, in apprenticeships and even in the structuring of academic papers. If the context and layout become unusual, knowledge exchange does not occur – which is one of our concerns in this book in looking to ‘trust’ in cross-cultural alliances – for example, between Euro–US and Asian firms. To ameliorate the problem it is necessary to deal with the rich and socially embedded learning dynamics among organizations. Otherwise, as suggested by Kidd and Richter (2003c), one partner’s perceptions of the other (it is a two-way process) are that they are being ‘milked’ – either for their technology or market reach. Although executives spend a significant amount of their time on developing collaborative partnerships plans and drafting legal documents, they spend much less on actually managing an alliance. They conclude that knowledge, if it is tacit rather than explicit, presents particular difficulties because of its interconnections with organizational processes and social context. It is difficult to extract knowledge from the norms and the rituals that have developed as the players exchange their tacit data over time, and to do this more effectively both sides must trust each other. In Chapter 8, Philippe Régnier concentrates on the upstream linkages of the small and medium-sized enterprises in Thailand during the East Asian financial crisis and immediately afterwards (1997–2000). Its analyses are based on several sample surveys conducted during this period, first for UNCTAD, and then during the author’s own time in Bangkok. Generally, he shows that that SMEs linked to transnational corporations (TNCs) (or their affiliates) have been more resilient throughout the crisis than all other categories of local SMEs, especially those firms that were exclusively domesticmarket-orientated. Further, he explains that strong networks of trust and cross-cultural alliances between foreign contractors and local SMEs can explain the observed resilience of ‘linked’ SMEs. This finding seems to confirm part of the positive aspects of alliances quoted by Anna Goussevskaia and John Kidd in Chapter 7 – that is, by moving away from confrontational behaviour and being more trusting, individuals in the alliances can, and do, exchange more data central to increased performance. In Chapter 9, Deiter Ernst, suggests that an upgrading of East Asia’s electronics industry is an essential prerequisite for sustaining and broadening the benefits of integration into global production networks (GPNs). This development would engender a shift to higher value-added products,

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services and production stages through increasing specializations, and through efficient domestic and international linkages. Such industrial upgrading necessitates a strong domestic knowledge base, and raises daunting challenges; chief among them being the requirements for substantial investments in long-term assets such as specialized skills, and innovative and research capabilities. In countries where the domestic industry structure provides only limited incentives for firms to invest in these long-term assets, upgrading prospects will remain limited, and Ernst’s chapter focuses on Malaysia as it already has a confirmed skills base that could perform better. Interwoven in this economic, or resource-based, argument lies the need to trust – which will allow the Malaysians to tap into international flows of human capital and knowledge through informal peer group networks of technically skilled immigrants with business experience and connections in the USA, Europe and Japan. However, his final remarks suggest that successful international knowledge-sourcing necessitates a much stronger basis for mutual trust than appears to exist in the current hostile international environment. Tough new visa policies, introduced in the USA since November 2001, as well as in Europe and Japan, as part of the ‘war on terrorism’, are beginning to stifle the mobility of knowledge: this will constrain the free movements of scientists, engineers, managers and students from countries such as Malaysia. David Wong and Michael Yeoh also consider Malaysia in Chapter 10, but painting a rosier picture than does Ernst – they suggest that having recovered impressively from the Asian economic crisis that struck towards the end of the 1990s, Malaysia is poised to see partnerships flourish even further in the near future as foreign companies jostle to take advantage of production costs that are relatively lower than in many Western economies, the abundant supply of skilled labour, political stability, investment security, an increasingly affluent market and state-of-the-art infrastructure. Although most cultural norms and values that are found across Asia are also found in the Malaysian culture, a thorough understanding of the unique underlying assumptions and specific characteristics of the Malaysian culture is essential if Western partners wish to avoid potential cultural flashpoints that may derail what would otherwise be successful partnerships. The authors lay out clearly the many cross-cultural issues affecting alliances in Malaysia; they note that it is imperative for prospective Western partners to build and develop cross-cultural competence when attempting to establish partnerships with Malaysian companies – these bridges enhance trust, and as a virtuous circle, enhance the partnerships. René Haak notes in Chapter 11 that the establishment of new dynamic businesses in fast-developing nations such as South Korea, Taiwan, Hong Kong and Singapore, together with the increasing presence of businesses operating on a global basis from Japan, Germany and other Western industrialized countries are examples of the rapid changes the business world has

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undergone in recent years. The collapse of the planned economies in Eastern Europe, the economic realignment of the Chinese Republic, and the evolution and consolidation of large unified economic entities such as the European Union (EU), the North American Free Trade Agreement (NAFTA) and the Association of South East Asian Nations (ASEAN) states have all drawn new features on the economic map of the world. Thus, with the liberalization of the global economic order and developments in information technology, businesses are increasingly forced to optimize all the stages of the value-added chain at a global level. In particular, China has offered promising opportunities for participation to both German and Japanese businesses since it ‘opened up’ at the end of the 1970s. However, the conditions created by the rapid development of the Chinese economy since the 1980s gives rise to questions regarding the most appropriate internationalization strategy in German and Japanese businesses, as both have been perceived as one-time powerhouses offering models to be emulated. Haak moves on to consider an interesting situation where German and Japanese firms collaborate to jointly enter the Chinese market following a timely reminder of issues that alliances (in their many forms) might encounter. In conclusion, he notes that the third-party alliance system is indeed fraught with problematic issues – which may be overcome with trust. Yet while it is often assumed that a relationship based on trust can develop into a stronger personal emotional–normative secure relationship, one should not lose sight of the fact that the person exhibiting the trust is always taking a certain risk. Trust always implies an advance ‘payment’ carrying a risk made in the expectation of later returns. The management in the Japanese–German third-country collaboration must be aware of this in order to establish a basis of trust for their regular, mutual exchange of resources and information that must ultimately be sufficiently resilient to take on the challenges of competition in China. Pawel Komender writes in Chapter 12 from his long experience as a businessperson in Japan. He notes many success factors, but also discusses the failure of alliances. With globalization progressing at such a fast pace, he notes companies in Japan must face two particular challenges. First, in light of the increasing mergers and acquisitions (M&A) activity, selecting the right partner as well as negotiating and implementing the co-operation are critical success factors. Naturally, in Japan, a manager has to be familiar with many particularities in order to carry out a merger or acquisition successfully, or develop an alliance. In merger negotiations, there are possibly other people outside the board of directors or other official decision-makers who have a decisive influence. Second, once co-operation has been established, a new corporate culture will need to be introduced. The new corporate culture will ensure the employees’ satisfaction and optimize their performance – thus leading to higher profits and growth. This will be a particular challenge when a Japanese and a Western company are

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involved, and Komender notes how Nissan has absorbed some good ideas from Renault, introduced by the ‘outsider’ boss – Carlos Ghosn. Ghosn was a good choice in so far as he had a good understanding of the nature of business systems, and was well versed in cross-cultural factors, so was able to merge international, French and Japanese ideas for the benefit of the Japanese firm. And he was able to generate a trusting environment, which many outsider managers cannot do inside Japan. The chapter concludes that ‘Japan Inc.’ will be attractive to outsider investment for some time but, in order to benefit, Japanese managers themselves have to unbend and be more flexible in order to absorb some good aspects of the business systems of Western firms. In Chapter 13, Yoko Ishikura moves towards trust from a consideration of the need to manage knowledge – especially knowledge derived from within clusters. The latter are the relatively closely (geographically) concentrated firms that amplify a local region’s skill base and in turn amplify the business processes and modes of working ‘as we do it round here’. In this way, individuals learn how to co-operate better, and thus learn to trust their neighbours in their common venture ‘in the cluster’. It is from a consideration of a shared space – ba – that we learn about the way in which learning is initiated, and so trust is also initiated. Ishikura supports the recent ideas of Nonaka in which he suggests that that viewing the firm in terms of knowledge enables us to see the knowledge spiral from individual to group, and from group to organization with the interface of the market. Following this approach, the ba becomes even more important, as it provides a place for conceptualization and dialogue. Ishikura goes on to illustrate these processes through case studies, and finally states that, through knowledge conversion more new knowledge will be generated. When more knowledge, particularly the tacit kind, is created and shared by people from different organizations and institutions, mutual trust will be further strengthened. Once the process of knowledge conversion based on mutual trust starts, the pace and quality of knowledge conversion accelerate, and may involve more diverse organizations and institutions. Without trust, this would be quite difficult. The authors of Chapter 14, Günter K. Stahl and Chei Hwee Chua, based in Singapore, review the nature of the merged firm in their contribution. They note that mergers and acquisitions (M&A) are still the fastest way to grow a firm, and this activity has gone on unabated through the recent Asian ‘crises’. The purpose of Chapter 14 is twofold. First, the authors examine the previously neglected, but potentially critical, role that trust plays in the M&A process, and they discuss a number of variables related to the characteristics of the initial takeover situation and post-acquisition integration process that may play a role in the process of trust development in the aftermath of a M&A. Second, since there is evidence that trust dynamics

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within and between organizations may vary depending on national culture, they examine whether an individual’s trust reactions to a takeover differ across cultures. They do this by using a policy-capturing approach to test the variables discussed as determinants of target firm members’ trust in the acquiring firm management. For this, they use a sample of German and Singaporean employees. The findings of their study indicate that, in some cases – for example, the acquisition of a German company by a foreign firm – national cultural differences have a detrimental effect on trust. Further, the acquiring firm’s management must not only pay attention to the target company’s culture, but also to its own culture. The ‘know thyself’ adage applies as well to companies as to people. Only after an executive team has reached a clear, sophisticated understanding of both its own culture and that of the target firm can cultural integration planning be conducted, and measures be taken that will help to (re)build a culture based on trust. As Lim did in Chapter 4, following his analyses of Asian cultural antecedents, John Barry Kotch focuses in Chapter 15 on the chaebol of Korea. Korea’s aspiration to sustain high levels of economic growth (in the neighbourhood of 5 per cent per annum) and to achieve globalization and regional hub status over the first decade of the twenty-first century depend on putting its economic house in order, including the completion of the corporate reform and financial restructuring agenda begun under the Kim Dae Jung Administration. That means targeting the chaebol, which, as the motor of Korea’s economics-driven economy, account for more than half of its growth according to the most recent statistics available at the time of writing. Thus the issue of whether public trust and confidence in the chaebol – never very high to begin with – can be restored is a critical one. According to the World Economic Forum’s Corporate Social Responsibility Initiative, corporations ideally have obligations and responsibilities to their employees, shareholders, stakeholders and society at large in a concentric circle from innermost to outermost, and should be held accountable as to how well they discharge these obligations. Implicit in all of these relationships is the element of trust. Corporations – particularly large corporations such as the chaebol – can manufacture products, but they cannot manufacture trust: that must be earned. In contrast to Lim – who concluded that Confucian ideas do not have much validity – governance as practised in Korea is a scene of inconsistency and anomie. Kotch suggests that in a family-centred, Confucian-based society, it should come as no great surprise that family-owned enterprises continue to hold sway as the natural business model with the best fit. The issue is not their continued relevance (in the absence of an alternative corporate structure) but how to make them more responsive and responsible to the demands of a globalizing Korea. In that effort, trust is a key ingredient.

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Part IV Lionel Stapley takes a rather different view in Chapter 16, basing it in the psychoanalytic approach. Here he states the premise that we develop from infancy onwards: we never completely forget the ways of functioning we learnt earlier and, in particular, the ways that we learnt first of all as infants. Thus, while we may not be aware of it as mature adults, we carry with us ways of functioning and relating to people that are essentially infantile. To understand these ways we must return to the world of the infant. The nature of this fit between what the infant is reaching out for and what the mother can provide is not a static phenomenon; it is intrinsically dynamic, providing the basis for subtle reciprocal interactions that contains the potential for increasingly complex exchanges in which it seems clear that ‘trust’ is a vital and important element. A difficulty is that each party symbolizes his or her world in different ways. In developing a relationship, the ambiguity that exists at the boundary of the different parties is a source of anxiety, and it is the boundaries that matter. If all parties are to express themselves in a creative, spontaneous way; if they are not to be overwhelmed by anxiety; and if they are to have the confidence to overcome setbacks and still pursue their desires, they need to accept the responsibility for ensuring and developing a facilitating environment. However, people do not have to love each other, or even to like each other, to work together effectively. But they do have to be able to trust each other in order to do so.

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Merry, P. (2001) ‘Cultural Literacy – Its Link to Business Success in Asia–Pacific’, in J. B. Kidd, X. Li and F.-J. Richter (eds), Maximizing Human Intelligence Deployment in Asian Business: The Sixth Generation Project (London/New York, Palgrave). Miyashita, K. and Russell, D. W. (1994) Keiretsu: Inside the Hidden Japanese Conglomerates (New York, McGraw-Hill). Nalebuff, B. J. and Brandenburger, A. M. (1996) Co-opetition (London: HarperCollins Business). Nojonen, M. (2003) ‘The Competitive Advantage with Chinese Characteristics – the Sophisticated Choreography of Gift Giving’, in J. B. Kidd and F.-J. Richter (eds), Corruption and Governance in Asia (London, Palgrave), pp. 107–30. Peppard, J. (1996) ‘Broadening Visions of Business Process Re-engineering’, Omega, 24(3), pp. 255–70. Phan, P. H. and Perdis, T. (2000) ‘Knowledge Creation in Strategic Alliances: Another Look at Organisational Learning’, Asia Pacific Journal of Management, 17, pp. 201–22. Read, W. H. (1962) ‘Upward Communication in Industrial Hierarchies’, Human Relations, 15(3), pp. 3–15. Richter, F.-J. (1999) Business Networks in Asia: Promises, Doubts, and Perspectives (Westport, Conn., Quorum Books). Richter, F.-J. and Mar, P. C. M. (eds) (2002) Recreating Asia: Visions for a New Century (Singapore, John Wiley). Rousseau, D. M. (1995) Psychological Contracts in Organisations: Understanding Written and Unwritten Agreements (Thousand Oaks, Calif., Sage). Salhi, S. and Nagy, G. (1999) ‘A Cluster Insertion Routine for Single and Multiple Depot Vehicle Routing Problems with Backhauling’, Journal of the Operational Research Society, 50, pp. 1034–42. Schlevogt, K.-A. (2002) Inside Chinese Organisations: An Empirical Study of Business Practices in China. Oxford, Dissertation.com. Schneider, B. and Bowen, D. E. (1995) Winning the Service Game (Boston, Mass., Harvard Business School Press). Stock, G. N., Greis, N. P., Kasunda, J. D. (1999) ‘Logistics, Strategy and Structure: A Conceptual Framework’, International Journal of Physical Distribution and Logistics, 29(4), pp. 224–39. Szulanski, G. (1996) ‘Exploring Internal Stickiness: Impediments to the Transfer of Best Practice within the Firm’, Strategic Management Journal, 17(Winter Special Issue), pp. 27–43. Tayeb, M. H. (1996) The Management of a Multicultural Workforce (Chichester, John Wiley). Trompenaars, F. (1993) Riding the Waves of Culture: Understanding Cultural Diversity in Business (London, The Economist Books). Wilding, R. (1998) ‘The Supply Chain Complexity Triangle: Uncertainty Generation in the Supply Chain’, International Journal of Physical Distribution and Logistics Management, 28(8), pp. 599–616. Williamson, O. (1993) Calculativeness, Trust and Economic Organisation, Journal of Law and Economics, 36, pp. 453–86. Womack, J. P., Roos, D. and Jones, D. (1980) The Machine That Changed the World, based on the Massachusetts Institute of Technology’s 5-Million-Dollar 5-Year Study on ‘The Future of the Automobile’ (Boston, Mass., MIT Press). Worchel, P. (1979) ‘Trust and Distrust’, in W. G. Austin and P. Worchel (eds), The Social Psychology of Intergroup Relations (Belmont, Calif., Wadsworth), pp. 174–87. World Economic Forum (2003) – Results of the ‘Survey on Trust’ can be found at http://www.weforum.org/site/homepublic.nsf/Content/Annual⫹Meeting⫹2003% 5CResults⫹of⫹the⫹Survey⫹on⫹Trust.

2 East Asian Economies: Westernization, Liberalization and New Regionalism Ivan Tselichtchev

Westernization The outstanding economic success of Japan in the 1960s–1980s, followed by the remarkable growth of the four ‘Asian tigers’ (the economies of Taiwan, Hongkong, South Korea and Singapore) – and later the ASEAN countries, together with China – built a solid foundation for a school of thought emphasizing the advantages of the East Asian model as an alternative to Western-style capitalism. The latter may be also defined as ‘all-American’ or ‘Anglo-Saxon’. Even the critics of the East Asian model had to admit that the success of this region succeeded in making it one of the three major centres of the world economy within a very short time-span. However, after the Asian crisis of 1997–8 a new reality is emerging. The region suffered a deep financial and currency crisis caused by the chaotic movement of speculative capital, and there was also a deep structural crisis, which was reflected in the model itself. The unprecedented structural failure of the Japanese economy in the 1990s strengthens this assumption even further. It is not surprising that, under these circumstances, hymns to the East Asian model can be heard no longer. To recover from the crisis, practically all the major East Asian countries have started (or are visibly speeding up) structural reforms that drive their economic systems much closer to the Anglo-Saxon style of capitalism. China, which was not hit by the Asian crisis, is also moving also in the same direction. The major paradigm is changing. Presumably the ‘East Asian model’ ceased to be an alternative to Anglo-Saxon capitalism. East Asian countries have started their transition to a new model, which has already led to the demolition of some core elements of the conventional systems, and to their reconsideration of basic economic policies. As far as the evolution vector is concerned, practically all the major East Asian economies now tend to (or to have no viable alternative but to) accommodate substantially more elements of Anglo-Saxon capitalism, and competition between the two 32

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models is fading. Competition between nations, however, as well as between businesses of different national origin, is mounting. However, these businesses are functioning within environments and systems that are becoming increasingly homogeneous. Basically, the conventional East Asian model had three major features: (i) A leading role was played by the state, which pursued an active development policy, exercising tight control over private businesses and largely influencing resource allocation – namely, directing resources to the industries generating growth and structural modernization. (ii) With a few exceptions, such as Taiwan, most countries had large companies (or groups, mostly conglomerates, belonging to or controlled by individual owners, families or clans) in predominant positions. In short, they belonged to the oligarchy. In Japan, these were financial – industrial groups without strong individual owners, put together by cross-shareholding and other kinds of mutual corporate control. (iii) There was a significant role for inward foreign direct investment (FDI) as the driving force of growth and development for the majority of the East Asian countries, but not for Japan or, until recently, Korea (this issue will be examined in detail below). To understand the way the East Asian model, with its pros and cons, works, it is important to view the first two features listed not as separate items, but as a set. Tight government control coupled with the dominance of conglomerates facilitated concentration of resources in sectors and industries with the greatest potential for growth and structural upgrading. First, the speedy development of heavy industry was encouraged. It is highly characteristic of the East Asian model that conglomerates and other private companies that were supported and protected by the state sought to increase production, and to maintain and expand the size of their organizations much more than to maximize profitability and company value. The government support, as well as special intra-group relationships (cross-shareholding, mutual loan guarantees, preferential loans and so on) largely protected them from market pressures, while they rapidly increased the volume of production and modernized its structure. At times of trouble they were generally bailed out. Probably the most precise definition of the essence of the economic policies and government–business relations shaping the conventional East Asian model would be ‘Protection and promotion of major national producers’ (including those firms involving the participation of foreign capital). For about three decades this paradigm provided for rapid economic growth and successful industrialization. The negative side of the model was cronyism. As a rule, conglomerates established close links with the state in general, and influential political figures in particular (or, to put it a different way, political organizations or

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politicians themselves had a big stake in particular conglomerates), and thus enjoyed various kinds of preferential treatment. These special relations resulted in corruption and inefficient resource allocation – a major factor of the systemic crisis of the late 1990s. It is this very combination of state-led economic development and the dominance of the oligarchy-controlled conglomerates that is now undergoing a major transformation. It is significant that the pattern of such a transformation turns out to be largely similar in most countries of the region in spite of their specific differences. The main directions of the change are as follows. In practically all countries of East Asia the state is reconsidering (or, because of the unprecedented crisis in the conventional system and mounting outside pressures, cannot help reconsidering) the old-fashioned policies of supporting national producers. Collaborative government–business relationships are replaced by visible tensions between the two as the former moves to press the latter to restructure so as to enhance the efficiency of management and profitability, and become competitive without relying on state support. This paradigm shift results in the far-reaching transformation of the conglomerates and other statesupported businesses: their ownership and control structures, capital-raising schemes and management practices. As preferential financing under government supervision is cut or reduced, more funds are mobilized on the capital markets. Consequently, ‘outside’ shareholders, including foreign investors, are growing more influential compared to traditional owners – the oligarchs. Furthermore, it is no longer unusual if the latter are ousted altogether. The result is the emergence of more Western-style systems of corporate governance. These in turn have many important implications, such as greater transparency, the introduction of internationally recognized accounting standards and so on. In the companies undergoing this kind of transformation, the managerial power, naturally, tends to be concentrated in the hands of technocrats, or professional managers, of whom many were educated in America or Europe. As a rule, they have not only Western university diplomas, but also, to a large extent, Western-style ways of thinking. Furthermore, the growing number of East Asian companies invites further American and European managers to be local sojourners (long-term expatriate managers located in Asian cities working for Asian firms). Under these new conditions, the managerial paradigm shifts from the increase of production volumes and market shares, and the size of the organization in general, towards issues concerning efficiency and profitability. The state is drifting from protecting national producers to playing the role of watchdog, pushing conglomerates to undertake a real, rather than a cosmetic transformation, and intervening directly (nationalization included) when such a transformation is considered not to be genuine or not speedy enough, or when it meets tough resistance. In this respect, in practically all the countries of the region the ‘bad loans disposal policy’, with all its implications

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for the restructuring of companies and financial institutions, is especially important. In a growing number of cases such restructuring opens the door for strong foreign, mostly European or American, investors, placing a conglomerate or a company under its control. Thus the state, which used to be a core player in the conventional East Asian model, now tends to be largely (because of ‘the force of circumstance’ and pressures from outside, namely the International Monetary Fund (IMF)) the major promoter of ‘Westernization’. Probably the most far-reaching structural reform, bringing about a major systemic change, is being undertaken in Korea. Breaking the resistance of the influential business elite, the government enforced the restructuring of the major financial–industrial groups (‘chaebol’). As a result of this adjustment, such major chaebol as Samsung, Daewoo, Kia, Sammi and Jinro collapsed, and the Hyundai group has been dissolved and split into independent companies. In 1998, the government banned cross-debt guarantees among affiliates – the instrument widely used by chaebol to raise funds easily. It also forced the chaebol to resolve existing cross-guarantees; at the time of writing, the top five chaebol have already done it. It means a step forward towards more transparency and sound management. Cross-shareholding was also limited. Chaebol subsidiary investment limits were introduced and rules were imposed banning oligarchs from exerting their influence over subsidiaries beyond their legal shareholding limit. Old-fashioned preferential bank loans to the conglomerates have also been practically stopped – on the contrary, the main creditor banks were pressed by the government to push the chaebol-restructuring plan. In a number of cases, banks have come to the rescue of troubled chaebol companies, but their support is usually linked to restructuring. For example, in 2000, the Korean Exchange Bank, the main creditor bank for the Hyundai group, extended a 50 billion won (45 million US dollars) emergency loan to Hyundai Engineering and Construction Co., on condition that Hyundai speed up the reforms to unload subsidiaries and focus on the automobile, shipbuilding and computer chip sectors, where it has a competitive edge. Basically, troubled chaebol companies are no longer bailed out as they used to be; almost unconditionally, by the banks under the guidance of the state. In fact, some of the biggest companies are sold out to outside investors, including leading Western firms (Samsung Motors was acquired almost completely by Renault, and Daewoo Motors by GM), and the government now actively supports such deals. Speaking to the local American Chamber of Commerce in 1999, the Minister of Commerce, Industry and Energy, Chung Duck-Koo, articulated the essence of the reform in the following way: ‘in the past companies reaped profits at times when there was a business upturn but the losses they incurred when business was poor were compensated for by bailouts from creditor banks or with taxpayers’ money. The latter practice will no longer be tolerated’ (Robbins, 2002).

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Since 1998, when the mobile telephone operator, SK Telecom, became the first Korean company to let minority shareholders appoint directors, major changes have occurred in the field of corporate governance. Minimum requirements for shareholders to exercise a voice at shareholders’ meetings were reduced, the appointment of standing auditors became mandatory, and the procedure for the appointment of outside directors was simplified. As a result, in place of a corporate system totally controlled by powerful individual owners and families, closely linked with the state, a new system is emerging where ‘outside’ shareholders are more powerful and decisionmaking is delegated to professional managers. In other words, this became a corporate system much closer to the Western pattern. The Korean government is also keen on implementing the so-called ‘Big Deal’ – an exchange of business units between major companies and groups. The idea is to encourage every company and group to focus its activities on the areas where it has a competitive advantage, and thus to enhance international competitiveness. Along with restructuring the chaebol, the Government has launched a large-scale privatization programme, involving Korea Gas, Korea Telecom, KEPCO and so on. In March 2001 it was announced that twenty-nine state companies were to be privatized. Despite strong resistance from the banking community, the government took resolute steps to deal with the bad loans problem, having chosen (or largely being forced to choose) a hard-landing approach. From the end of 1997 up to the beginning of 2000, as many as 347 financial institutions (16.5 per cent of their total number), with a heavy burden of being non-performing were liquidated. Since late 2000, the government has started to inject public funds into a number of leading banks to boost their capitalization and meet the Bank for International Settlements (BIS) standards for capital adequacy ratio, while the shares of those banks were devalued 100 per cent (in other words, stockholders were forced to take responsibility for the failures). In January 2002, the privatization programme for the nationalized banks was announced: the government pledged to sell-out its shares within three or four years. Under strong pressure from the government, the banks made important steps towards restructuring, including the streamlining of operations, personnel cuts and other cost reduction measures. Malaysia’s version of this government-enforced restructuring was basically similar in its content, though reforms were somewhat less radical. One of the representative examples is the transformation of the Renong Group (see the Renong website), a leading national conglomerate with an investment holding company at the top, comprising more than a hundred companies engaged in property development, telecommunications and multimedia, transportation, construction and engineering, and so on. The group is known to have had close ties with UMNO (the politically dominant United Malays National Organization). Halim Saad, its former

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chairman and de facto owner, is close to the powerful finance minister, Daim Zainuddin, the number-two person in the Mahathir Administration until his resignation in the summer of 2001. In the late 1990s Renong faced serious financial troubles, but its attempt to restructure ended in failure. Among other things, it tried to register some of its most attractive group companies, first of all the telecommunications firm, Time dotCom, on the Kuala Lumpur Stock Exchange, but was unsuccessful, as the demand did not meet initial expectations. Time dotCom’s stock was acquired by several investors, including the state-owned pension fund for civil servants, which became a political issue. It turned out to be one of the government-funded bail-outs of a company that was linked to Z. Daim and his associates. A series of such bail-outs was already undermining the image of the administration in general, and led to the rift between Daim and Mahathir. In this context, Daim’s resignation can be viewed as being the result of an offensive on cronyism, and the manifestation of an important change in the Government’s relations with major conglomerates. Renong’s problems were further complicated by Halim’s huge (around 3.2 billion ringit) personal debt (under the put option contract) to UEM (United Engineers (Malaysia) – the core company of the conglomerate) – with Renong’s share in the UEM being about 38 per cent, while UEM had a 31 per cent stock holding in Renong. Halim tried to find a way out by arranging a deal obliging UEM to purchase 5.3 billion ringits-worth of Renong’s assets and liabilities, but the plan did not work. In August, 2001, Syarikat Danasaham, a wholly-owned subsidiary of the state-owned investment company, Khazanah Nasional, made a conditional voluntary offer to purchase the entire shares and warrants of UEM, including Renong’s stake. Having put UEM under its control, Khazanah also became the owner of Renong (through UEM’s 31 per cent stake). After the takeover, Khazanah’s executives made it clear that there was no role for Halim in the restructuring of UEM and the Renong Group as a whole. The latter was removed from his position as Renong’s chairman. All the board members were changed, and, at the time of writing, a team of technocrats with professional experience in accounting, banking and finance, legal services and so on, runs Renong. The majority of the board members have diplomas from American or British universities. The new chairman, Sheriff Mohd Kassin, a former Kazanah executive, has a Degree in Economics from Oxford University in the UK, and a master’s degree in Economics from Vanderbilt University, USA (Renong website). The case of Renong became the focus of public attention as it was expected to set a pattern for the government’s approach to the restructuring of troubled conglomerates in general. It showed that the state was capable of intervening actively, and that it was resolute enough to oust the oligarch altogether, put the group under its direct control, appoint professionals to top managerial posts, and start the restructuring. Among other things, it intends to speed up the listing of the key Renong companies, with the aim of attracting foreign

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investors. On the other hand, having removed Halim, it stopped short of making him bear the responsibility and, ironically, his put option contract with UEM was terminated, which in practice meant removing his debt. The same pattern was followed in the case of the two companies operating the Kuala Lumpur city railway (one of them from the Renong Group). Syarikat Prasarana Negara, a wholly-owned subsidiary of the Finance Ministry’s holding, took over the debts of the two companies conditional on their nationalization. Since 2000, in particular, managerial power in nationalized companies is visibly shifting in favour of the new generation of managers: mainly technocrats, educated in the West. Basically, they are committed to restructuring companies by enhancing managerial efficiency. For example, the post of the managing director and CEO of UEM went to Abdul Wahid Omar, aged 37, while 32-year-old Abdul Rahman Ahamad and 30-year-old Shahril Ridza Ridzuan became, respectively, managing director and executive director the of the Malaysia Resources Corporation, Berhad, which was previously linked closely to UMNO. These managers studied at the London School of Economics or Cambridge University, and started their careers in the financial sector. The new developments terminate, or at least weaken, the special relationship between conglomerates and the political elite, and undermine the power base of oligarchy. Management, separated from ownership, is becoming more ‘professional’ and profit-orientated. Potentially, this strengthens the position of outside (especially foreign) investors. The key question remaining is the ability of the government and companies to take the next step that is supposed to follow ‘restructuring through nationalization’ – the privatization of nationalized companies, and the provision of sound corporate governance. In Thailand, the impetus for a systemic shift came from reforms in the financial sector. Until recently, Thai financial institutions were under the protection of the Financial Institutions Development Fund (FIDF), established under the central bank. Though the aim of this scheme was said to be the stability of the financial system, eventually it served to bail out poorlymanaged banks and other institutions that extended loans, often violating basic commercial principles. Many of these loans were ‘politically motivated’, or, in other words, businesses with links to influential politicians received preferential treatment. After the crisis, the government reconsidered this scheme, introducing new harsh criteria of bank solvency and enforcing tougher monitoring procedures. In 1998, four leading commercial banks were nationalized temporarily, their managers replaced and their capital reduced – at the same time FIDF provided for loans – and the legal framework was changed radically. The minimum return arrears period for a loan to qualify as non-performing was reduced from one year to three months. Retrospectively, the central bank introduced stricter reserve requirements.

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The government also worked to promote banks’ M&As, and to weed out inefficient institutions, first of all the financial companies (FCs). The majority of the FCs, though controlled by banks, carried out the transactions, yet were closed to the banks themselves by existing regulations. In the 1990s these companies accumulated a huge number of non-performing loans and became the shakiest element of the financial system. In the summer of 1997, the government made clear its intention to close fifty-eight of the FCs, but met with stiff resistance from influential business and political groups. The chairman of the government committee on the FC reorganization was even forced to resign under strong political pressure. However, in October of the same year, a new and more powerful body, the Financial Sector Restructuring Authority, was established. Based on the results of its audit (with the participation of internationally recognized accounting firms recommended by the World Bank and the IMF), fifty-six of the FCs were shut down (Wong et al., 2000). In other developments, important amendments to the outdated Bankruptcy Law of 1940 were adopted in March 1999. Under the old law, the process of filing bankruptcy proceedings was complicated and very timeconsuming for creditors. Courts often dismissed the proposed deadlines and granted extensions to debtors. It also lacked a framework for the rehabilitation and reorganization of struggling businesses, as only creditors, not debtors, had the right to file for bankruptcy. The amendments both sped up and simplified bankruptcy procedures, which means progress towards improving corporate governance, and provides for the rehabilitation mechanism. A Bankruptcy Court has been established and, under the new Foreclosure Law, foreclosure cases have to be completed within a short timespan (12–18 months). Courts have been given discretionary power to deny appeals based on case-delaying tactics. Previously it often took up to ten years to go through all the bankruptcy procedures, which slowed down the structural adjustment through the ‘weeding out’ of inefficient companies. Under the new legislation, creditors putting fresh funds into a cashstrapped company have the right of repayment under the reorganization plan by sending a letter to the planner, or by a repayment request to the receiver. Under the old legislation, an investor injecting funds into an ailing company had to do it entirely at his/her own risk, which impeded the revival of viable companies (Tselichtchev, 2001). The new legislation was opposed strongly by the members representing the business community in the appointed Upper House of the Thai Parliament. They argued that, resulting in more bankruptcies, it will cause big social problems, and lead to ‘selling out’ Thailand to foreigners. They criticized the government for what they called ‘retreating under pressure’ from the IMF. The government responded that the work on the new legislation had started before the IMF published its requirements, and were necessary to address the bad loans problem efficiently. The government

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eventually succeeded in overcoming the resistance and passed a very important amendments package. To some extent, similar trends are seen in Indonesia, though political turmoil and strong pressures from various interest groups remains a major obstacle. All national banks were required to meet an 8 per cent target for capital adequacy ratio, and to reduce the share of bad loans in the total amount of outstanding loans to below 5 per cent by 2001. Business operations for banks unable to meet the requirements were to be suspended. To restructure the banking sector, the government used such methods as nationalization, inflow of public funds, and mergers. An important breakthrough was the nationalization of the BCA Bank – a key financial institution of one of the most powerful conglomerates, the Salim Group. Also, the Indonesian Bank Restructuring Agency (IBRA) put under its control Bank Universal and three other major banks incapable of reaching the 8 per cent target, and in November 2001 they were merged with the nationalized Bali Bank. As a result, the target was met. On the other hand, business operations of the troubled Uni Bank were suspended. In total, the government nationalized or injected public funds into eleven banks. For Indonesia, where the state-owned banks had previously numbered only four, this was really a far-reaching step. (As a result, the share of the fifteen state-owned or state-controlled banks in the total amount of assets held by commercial banks exceeded 75 per cent.) However, only three out of the fifteen state-owned banks succeeded in reducing the bad loans ratio to less than 5 per cent (Wong et al., 2000). The policy adopted under the guidance of the IMF includes the sell-out of assets acquired by the IBRA, and the privatization of some key state-owned banks and companies. However, progress in this field is very limited. The privatization bid for BCA in 2001 was cancelled unexpectedly, on the pretext that the initial bidding price was too low (there were only two bidders: one domestic and one American investment company). The real reason is said to be close personal ties between the domestic investment company and the former owner (Salim Group), as well as opposition in Parliament to the takeover by a foreign company. The second major privatization deal – for the state-owned cement producer, Semen Gresik – was also unsuccessful, as the government failed to reach an agreement with the preferred bidder, Mexican CME, about the terms of the transaction. The major reason was fierce opposition in Parliament, as well as from trade unions and local authorities, to selling the company with its subsidiaries, while its acquisition without subsidiaries was unacceptable to CME. This Indonesian experience shows that, in practice, to privatize often turns out to be much more difficult than to nationalize – not only because of the differences in the terms of the deal, but also for political reasons. Reforms in Japan, East Asia’s economic powerhouse, were not affected directly by the Asian crisis, were facing big structural problems and fighting the longest recession in its post-war history; they also fit the common framework.

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They underscore a significant paradigm shift of the 1990s: Japan’s economic system and economic policy pattern, at least in a conventional understanding of them, ceased to be a model for other East Asian countries. Japan’s economic system itself, though retaining some conventional features, is becoming more Western in style. The strategy of the structural reforms, put forward by the Koizumi cabinet, includes a variety of policies, such as the disposal of bad loans and revitalization of banks, invigoration of the capital market and strengthening of its role as the source of companies’ financing (versus bank loans), promotion of venture businesses, activation of the competition policy, deregulation, privatization of public companies and, in the medium term, the reorganization (through downsizing, mergers, privatization and so on) of the state-owned financial institutions, as well as the reduction of their share in loans to the private sector. Contrary to conventional practices, the government and financial institutions did not bail out a substantial number of big companies, banks and so on that became bankrupt in the 1990s and beyond, including such giants as Yamaichi Securities, Sogo Department Stores and the LongTerm Credit Bank of Japan. LCB (now Shinsei Bank) and Toho Life Insurance, as well as a number of smaller financial institutions, have been taken over by Western companies. The leading automobile maker, Nissan, has been rescued and taken over by Renault (now its major stockholder), and Mazda, another major automobile maker, taken over by Ford. The government has articulated its policies regarding the bad loans disposal and revival of industries. It has introduced stricter, American-style rules for the evaluation of borrowers’ credibility, forcing banks to increase reserves. For commercial banks, it means the growing threat of capital shortage. The government has made it clear that, if shortages occur, it is prepared to inject public funds (as it did in 1998) and go ahead with a de facto nationalization. A newly-established Agency for the Revival of Industries will purchase bad loans from the banks (apart from main creditor banks) if the revival of an indebted company is considered possible. Thus, having become, together with the main creditor bank, a major stakeholder of a company, the Agency is supposed to promote its restructuring aggressively. In the context of the systemic change, the reform of the government Investment and Loans Programme is especially significant. For decades, this programme, often called ‘the second budget’, played a key role in the financing of particular industries, businesses and regions. Through the special account (called the Trust Fund Bureau), managed by the Ministry of Finance, it channelled funds from such sources as postal savings, the national pension fund, the postal insurance fund, government-guaranteed loans and so on, to both public companies and to state-owned financial institutions, while the latter extended preferential loans to particular industries and sectors of the economy. In the years of high economic growth and industrialization (1950s–early 1970s) practically all major industries received some support

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through this programme. Later it became more focused on supporting small businesses: agriculture, forestry and fisheries; economically less developed regions; and the development of infrastructure and housing. In the 1990s the scheme suffered sharp criticism for its inefficiency, lack of the relevant criteria for performance evaluation, and the taking away of business opportunities from private banks. The reform has been implemented step-by-step since 2001. The Trust Fund Bureau has gone into liquidation. The mandatory use of postal savings, the pension fund and postal insurance fund surpluses for the purposes of the programme has been abolished, and these funds can now be managed freely. State-owned financial institutions are required to raise funds on the capital market directly, though the government will provide the guarantees. At the time of writing the reforms still look largely cosmetic, as, instead of the Trust Fund Bureau, the new special account has been opened temporarily to raise funds for the programme. However, the Government has presumably set the stage for a more far-reaching change, encouraging the state-owned financial institutions to stick to market principles instead of relying on the ‘second budget’ funds. Among other things, it means a much tougher selection of loan recipients. In the medium term, with the reorganization of the state-owned financial institutions, the Investment and Loans Programme, a cornerstone of the conventional Japanese economic system, is likely to be cut drastically, or even eliminated (Tselichtchev, 2002). At the corporate level, a number of other cornerstones are also undergoing major changes. The scale of cross-shareholding is decreasing, especially between companies and banks. The Japanese version of conglomerates (though without strong individual or family owners) – six major financial– industrial groupings (shudan) – held together by a web of cross-shareholding, with a co-ordinating role by the main bank and personal ties between leading managers, were reorganized into four more Western–style financial groups with holding companies on the top (before 1997, holding companies were banned in Japan by the Anti-monopoly Law). Long-term business ties between big manufacturing companies and their small and medium-sized sub-contractors within the vertical groups (keiretsu) are also growing looser, and in many cases are terminated altogether, as the former transfer production abroad or find more competitive suppliers. On the other hand, small companies tend to rely less on the transactions within their keiretsu, and are developing new products, expanding markets and establishing new and more flexible partnerships (METI, 2001). Japanese corporations, interconnected through mutual stock ownership, were known for their neglect of ‘outside’ stockholders, seeking the maximization of profits and company value. Instead, they attached primary importance to long-term growth and stability of the organization, and valued a special relationship with regular employees based on ‘lifetime’ employment and seniority. At the start of the twenty-first century, however, increasing

Ivan Tselichtchev 43

numbers of firms are putting an emphasis on profitability and company value, moving to establish co-operative relationships with stockholders and introducing more flexible employment patterns, first by increasing the percentage of non-regular contract employees, part-time and temporary workers. Deep structural changes taking place in China continuing its long-term shift from centralized planning to the market economy, though not in themselves related directly to the Asian crisis, also led to the emergence of a system where the state’s involvement in the economy is strictly limited, businesses are expected to be self-reliant, and companies losing out to competition and becoming insolvent are not bailed out, but are either liquidated or restructured and sold to new owners. The start of the privatization of large, stateowned companies (in China it is called ‘corporatization’) was a crucial turning point towards the creation of a modern market system, coming closer to the Western pattern, rather than the conventional East Asian style. As time goes by, the government in China is putting more emphasis not on supporting industries or companies directly, but rather on such areas as establishing and strengthening the labour exchange system, upgrading infrastructure, or facilitating research and development (R&D). Not only companies, but also state agencies are eliminating lifetime employment guarantees, and are switching to fixed-term employment contracts. The current changes in policy options are so important that, even in North Korea, some visible signs of the intention to introduce market mechanisms exist. In September 2002, a sensational announcement was made regarding the establishment of a special administrative unit in the border area with north-eastern China, and to turn it into an ‘island of market economy with a very liberal regime for businesses’. A Chinese-born businessman (Yang Bin, a 39-year-old orchid and property magnate who had befriended North Korea’s leaders) was officially appointed as head of the Administration Authority. He was one of China’s richest men, but was not above the law, and was formally charged with bribery, fraud and other ‘commercial’ crimes in November 2002. Later, the controversy over North Korea’s nuclear programme made the implementation of that market experiment practically impossible at the present time. Still, forces pushing North Korea towards market-orientated reforms are still at work at the time of writing. To summarize, despite all the differences between the East Asian countries, and their economic, social and political environments, an important common trend is gradually gaining strength. In the 1970s/1980s, and particularly in the early 1990s after the collapse of the socialist system, economists and political scientists often stressed the importance of the competition between different models of capitalism as a major worldwide development. First, attention was focused on the competition between the East Asian and the American, or Anglo-Saxon, models. At the time of writing it is reasonable to say that, in this competition, at least for the time being, the Anglo-Saxon model seems to be a winner, and rivalry between the two

44 East Asian Economies

models has ceased to be a major world trend. This major trend occured after the 1997–8 crisis, when the East Asian model evolved, eliminating many of its core elements and integrating increasingly elements of the Anglo-Saxon system. Interestingly, the governments involved, or the states, largely initiated this evolution, though initially they were core players in the conventional East Asian economic system. To facilitate such a shift, the state has to overcome resistance from interest groups within the business community, and in the domestic political arena, which have a stake in the old system. Sometimes this resistance makes reforms incomplete and slows down their pace. Yet the social basis for such a shift is obviously growing wider. For example, the new generation of managers (and generally technocrats, many of them educated in the West and feeling more positive about Western values) as well as new, venture-style entrepreneurs and so on are likely to become an important driving force for change.

Liberalization Another major trend, closely interrelated with ‘Westernization’, is the accelerating liberalization of imports and inward foreign direct investment (FDI). All East Asian nations are making important steps in this direction. In the 1990s the trend became visibly stronger after the adoption of Individual Action Plans – voluntary liberalization programmes within the APEC framework, set by the Bogor Declaration (1994). One other strong impetus was provided by China’s entry into the World Trade Organization (WTO) in 2001. The Asian crisis set the stage, first of all, for far more vigorous liberalization and promotion of inward FDI, though some countries (the most typical example is Malaysia) chose to impose additional restrictions on portfolio investment. The importance of FDI increased dramatically as East Asian economies had to fight capital shortages and to speed up technological and structural modernization. Trade liberalization has proceeded at a remarkably fast pace in most countries of the region. In Thailand the average import tariff went down from more than 30 per cent in 1988 to about 17 per cent in 1998. The Philippines reduced tariffs, respectively, from 28 per cent to 9 per cent and then to about 8 per cent in 2000. In Indonesia, the average tariff fell from 18 per cent in 1988 to 12 per cent in 1998–2000; in Malaysia, respectively from 13 per cent to 9 per cent; in Korea, from 19 per cent to 8 per cent; and in Singapore, from 28 per cent in 1988 to 9 per cent in 1998, and 7 per cent in 2000. China’s average import tariff went down from nearly 40 per cent in 1988 to about 16 per cent in 2000 (METI, 2001, p. 20). Especially important were the resolute steps taken by East Asian countries to liberalize imports of IT-related items. Though the Information Technology Agreement (ITA) – a product of the WTO Ministerial Meeting of 1996 – stipulated the elimination of tariffs for around 200 IT-related goods by the

Ivan Tselichtchev 45 Table 2.1 Customs duties for IT-related goods in East Asian countries (%) Semiconductor parts

China Hong Kong Indonesia Korea Malaysia Philippines Singapore Thailand Taiwan

Computers

1995

2000

1995

2000

20 0 0 16 5 25 0 35 1

5 0 0 0 0 0 0 0 0

9 0 20 18.6 30 50 0 40 4.2

9 0 0 0 0 0 0 0 0

Source: METI, 2001, p. 21.

year 2000, and for developing countries it allowed a five-year postponement. Even so, all the major countries and territories of East Asia, except China, had zero tariffs by the year 2000 (see Table 2.1). Significant progress has also been made regarding the reduction or elimination of non-tariff barriers. China, Malaysia, the Philippines and Taiwan cancelled their systems of import licensing for particular products, Thailand eliminated import quotas for fuels and some other important items, Korea abolished the so-called import diversification scheme, which imposed quantity restrictions on imports from particular countries, and Indonesia eased regulations on automobile imports. All the East Asian countries and territories are also improving the environment for FDI. Korea, known for its more than cautious approach to attracting foreign investment, is changing its stance rapidly. The Foreign Investment Promotion Law, adopted in 1998, opened the way for a complete liberalization of FDI to most industries, removal of the restrictions on land ownership by foreigners, and a drastic simplification of formalities. The introduction of a ‘one window’ registration system spared investors many tiresome bureaucratic procedures. Malaysia eliminated all the import tariffs for raw materials and intermediate products used in the manufacturing industries, irrespective of whether the final product was to be exported or sold on the domestic market. The Philippines opened up its retailing sector. Singapore lifted all restrictions on foreign capital in banking and telecommunications. Thailand simplified procedures for getting entry visas in one set with work permissions. China authorized transactions with the national currency for a number of foreign banks affiliates in the Shanghai area. A number of countries eliminated local

46 East Asian Economies

content regulations. Also, steps have been made to improve legislation regarding corporate governance and the introduction of internationally accepted accounting standards. While, in 1999, the total outstanding balance of the world FDI was three times more than it had been in 1990 in the nine East Asian countries and territories (Korea, Taiwan, Hong Kong, Singapore, Thailand, Malaysia, the Philippines, Indonesia, China – hereafter the data on East Asia’s trade and investment will refer to these countries and territories only) it increased four times: their share in the total world FDI stock reached 15 per cent, and, in the developing countries, total stock was about 50 per cent. As shown in Table 2.2, the share of FDI from the EU and USA is steadily increasing, while the share from Japan goes down. In 1999, the FDI from the EU and USA combined accounted for 36 per cent of the total FDI, while in 1990 it was only 24 per cent. The number of companies with foreign capital in East Asian countries and territories over the period 1994–9 (years with statistical data available vary from country to country) was four times more than in 1986–93; and in the second half of the 1990s about 45 per cent of the total number of the companies with foreign capital in the world were located in East Asia (METI, 2001). One more remarkable trend in East Asian economies of the post-crisis period is the visible growth of M&As, especially acquisitions of local companies by European and American firms (cross-border M&As are now emerging as the main type of FDI). It looks only natural that M&As in East Asia surged after (and even during) the Asian crisis; as for the Western investors, a big fall in local currencies reduced acquisition costs dramatically. The cross-border M&A (the total value of local companies merged or acquired) in the five most crisis-affected countries (Indonesia, Malaysia, the Philippines, Thailand and Korea) in 1999 reached US$24 billion – three times more than in 1996, precrisis. American, and in particular European, companies were definitely the key players.

Table 2.2 Composition of inward FDI to East Asian countries, by country or region (%)

Total Inward FDI (billions US dollars) USA EU Japan NIEs Others Source: METI, 2001, p. 23.

1990

1999

36.1 14 10 26 33 17

102.5 18 18 8 25 31

Ivan Tselichtchev 47

During 1995–6 the M&As by EU companies slightly exceeded US$2 billion, but in 1998–9 the figure was almost US$12 billions. For American companies, the increase was even more dramatic: from US$ 200 million to almost US$6 billion, respectively. ‘Euro-American’ M&As accounted for almost 80 per cent of the total value of M&As in these countries (METI, 2001). According to the FDI Confidence Index – a ranking by the American consulting firm A. T. Kearney – in 2002, for the first time ever, China was placed at the top, surpassing the USA as the most attractive place to invest. This FDI Confidence Index is constructed on the basis of surveys conducted among the managers of the top 1,000 global companies, of which some 85 per cent are American and European firms. Their views reflect the investment environment in almost every country. On the other hand, recent surveys also show vividly the growing differentiation among the countries and territories of the region in terms of their ability to attract FDI. For Singapore, Korea, Hong Kong and Thailand, the situation looks more or less satisfactory (though far less favourable than for China), but the rankings for Indonesia, the Philippines and Malaysia are going down dramatically. This differentiation reflects the harsh reality of East Asia at the start of the twenty-first century. Prior to the Asian crisis, FDI was growing steadily throughout the region (and the whole of East Asia, in fact), though there were some reservations about Korea with its ‘flying geese’-style growth. This was looked upon as a region of substantial investment opportunities. Investors, as well as Western governments had a strong incentive to push for further liberalization and improvement of the investment environment in the area. However, in the late 1990s and beyond, a new phenomenon emerged, which can be called the ‘twofold differentiation’. The first, and probably the most important, dimension is the differentiation (or a new gap) between China and all other countries and territories of the area. The reason for this is China’s emergence as the global factory, capable of producing a uniquely wide spectrum of items – from the most simple and labour-intensive products to high-tech goods. A combination of steady economic growth, commitment to attracting foreign capital, and liberalizing and improving the investment environment has made this ‘new economic giant’ an absolute and unchallenged regional leader in attracting foreign investment. This new development brought about enormous investment constraints for practically all other countries of the region, destroying the ‘flying geese’ growth pattern. From the viewpoint of all other countries and territories of the area, capital started ‘running away’ to China (sometimes in the direct meaning of the words, as foreign companies shifted their headquarters and production facilities to China). This resulted in unprecedented fluctuations and destabilization in the FDI inflow. For example, in the first half of 2002, looked at on an annual basis, the amount of inward FDI fell by 80 per cent in Malaysia, almost 70 per cent in Indonesia and the Philippines, 56 per cent

48 East Asian Economies

in Vietnam, 35 per cent in Thailand, while FDI to China was growing at 25 per cent per annum. The second dimension is the differentiation between countries and territories continuing to attract FDI more or less successfully and those experiencing a sharp downturn in the direct investment inflow. At present the latter group comprises Malaysia, the Philippines and Indonesia. Problems faced by these countries can be explained as follows. First, they have liberalized and improved their investment environment less than their neighbours have. Second, some of their policy actions and domestic developments, undermined the trust of the world business community – for example, in Indonesia, the investment environment was destabilized because of a controversy over the regulation (by the Instruction of the Minister of Labour) obliging employers to pay retirement benefits to employees who were dismissed under penalty on the same basis as those who were voluntary retirees. After the Minister cancelled the regulation in June 2001, more than 10,000 protestors went into the streets of Bandung, Western Java and attacked the Provincial Assembly building. Concerned about the unrest, the Megawati cabinet arranged a trilateral meeting with the leaders of the trade unions and the business community after which it was decided to reinstate the regulation, which meant a deviation both from the initial stance and the internationally accepted de facto standards for labour relations. Naturally, such deviation undermined the trust of investors. To make things worse, since 2001, the provincial governors were given the right to set minimum wage levels, which, from the investors’ viewpoint, resulted in an unpredictability of costs. In October of the same year, the governor of Jakarta Special Capital District raised the minimum wage by 37.8 per cent. Despite protests by the Managers Association of Indonesia (Apindo), which took the matter to court in 2002, the governor’s decision came into effect. Next, the Provinces of South Sumatra and South Kalimantan followed suit and raised minimum wages by 30 per cent (Wong et al., 2000). In addition, the financial decentralization policy resulted in a growing number of local taxes, which not only increased the overall tax burden, but also made the tax system itself far more complicated and less transparent. In total, the Provinces issued more than a thousand tax-related instructions and ordinances, and even the results of the survey conducted by the Interior Ministry showed that 105 of them were controversial. In November 2001, the Ministry recommended the cancellation of seventy-one ordinances (the latter included such exotic taxes as, for example, payments for the use of public facilities, payments for loading and transporting goods and cash, mandatory donations to local private companies and so on) (Wong et al., 2000). Third, and finally, these countries definitely lagged behind the others in providing political stability. There was political turmoil in Indonesia, the fiasco of the Estrada regime in the Philippines, conflicts surfacing between Prime Minister Mahathir and his Western investors, as well as outbreaks of

Ivan Tselichtchev 49

ethnic violence in Malaysia: all were a big deterrent for investors. For these countries, it was a very unhappy coincidence that such kinds of problems erupted at a time when competition to attract foreign capital became visibly stronger, and competitors with much greater potential began to play ‘at full strength’. It is notable that the group facing the biggest problems comprises two predominantly Muslim states (Malaysia and Indonesia), and a country facing a very serious problem of radical Muslim insurgence (the Philippines). In October 2002 Indonesia experienced an unprecedented (attack when 202 people were killed in a Bali nightclub by a terrorist bomb), and the Philippines saw a number of terrorist acts and a long hostage saga. Malaysia, which up till quite recently had a good reputation for safety, is now a little more risky, largely because of the announcement by the police authorities about the emergence of the first ‘suicide bomber’ squad. All this notably worsens the image of this part of East Asia as a recipient of investment. As the worldwide threat of terrorism coming from radical Islam with all its implications for security, stability and inter-state relations becomes a matter of major concern in every part of the globe, chances for these countries to improve their ratings as investment recipients may become significantly smaller. Basically, in the 1990s and beyond, East Asia made very significant progress in liberalizing its trade and inward FDI, and improving its investment environment. The trend grew visibly stronger after the Asian crisis, opening the door for the unprecedented ‘penetration’ of the Western capital. However, liberalization goes hand-in-hand with the growing differentiation between the countries of the region themselves regarding their ability to attract FDI, which may lead to the emergence of winners and losers, and new development gaps.

New regionalism One more new trend, which emerged in the late 1990s and is drastically changing the economic face of East Asia, can be defined as new regionalism. For the first time, practically all the major regional players are becoming involved in the creation of bilateral and multilateral free trade areas (FTAs) and the possibility of the formation of a regional economic community is becoming more accessible. At the time of writing, practically no East Asian country can work out sound economic strategies outside the context of accelerating regional integration. For many years, the prospects for regional integration looked very dim. The main reasons were economic, cultural and political diversity; differences in the level of economic development largely exceeding that in Europe and America; and numerous territorial disputes and other bilateral political problems existing between the countries of the region. Though most of these

50 East Asian Economies Table 2.3 Asia’s exports, by country or region (%) 1980

1997

19.8 20.3 15.8 22.1 22.0

11.7 19.9 13.8 38.7 23.6

100.0

100.0

Japan USA EU (15 countries) East Asia Others Total

Source: Urata (1999a) Azia Keizai – no Fukkatsu to Nihon – no Yakuwari, Japan Centre for Economic Research, JCER Paper, 57, p. 18.

Table 2.4 Composition of East Asia’s imports, by country or region (%)

Japan USA EU (15 countries) East Asia Others Total

1980

1997

23.3 16.8 12.2 22.2 15.5

18.5 13.4 13.3 40.2 14.6

100.0

100.0

Source: Urata (1999a); 57 p. 64.

impediments are still there, over recent years the pro-integration trend, undoubtedly, has gained a new, strong impetus. First, such an impetus comes from rapidly growing economic interdependence. Tables 2.3 and 2.4 show vividly that, for the nine major emerging market economies of East Asia, the share of trade with one another increased dramatically through the 1980s and 1990s, up to the years of the Asian crisis, while the share of all the ‘outsiders’ went sharply downwards. In recent years there have been only minor changes in the composition of East Asia’s trade: in 2001, the share of intra-regional trade was 37.3 per cent for exports and 43.7 per cent for imports, while the shares of export to and imports from Japan were 11.9 per cent and 19.0 per cent, respectively; for the USA – 21.9 per cent and 12.6 per cent, respectively; and for the EU – 14.5 per cent and 10.6 per cent ( JETRO, 2002). Up to the mid-1990s the intra-regional FDI also increased significantly, exceeding by far the inflow of capital from the USA, the EU or Japan (Table 2.5). As for Japan itself, though its share in the nine East Asian countries’ trade and inward FDI fell, their share in Japan’s exports increased from

Ivan Tselichtchev 51 Table 2.5 Composition of inward FDI into East Asia, by country or region (%) share of the world FDI

Japan USA EU (15 countries) East Asia Others Totals

1980

1994

24.5 20.1 19.7 19.7 16.0

19.4 13.3 12.5 38.3 16.5

100.0

100.0

Source: Urata (1999a); 57 p. 26.

25.2 per cent in 1980 to 42.8 per cent in 2001; and in imports, from 22.6 per cent to 43.1 per cent respectively. Second, there is a growing concern that lagging behind Europe and North America in the pace and depth of regional integration may become detrimental to the economic development of all the East Asian nations. After the emergence of NAFTA, America is moving steadily towards the creation of a Free Trade Association of the Americas (FTAA), and the EU has made a decision about accepting ten new members from Central and Eastern Europe. East Asia’s achievements in the field of integration leading to the ASEAN Free Trade Area (AFTA), and the bilateral FTA between Japan and Singapore do not look very impressive. Third, the integration process is facilitated by the rapidly-growing economic (and political) strength of China, especially as it develops into a diversified ‘global factory’, attracting a visibly growing share of the world FDI. For all other countries of the region, China poses a big challenge as a competitor in the export markets and in attracting capital. However, China’s growth is not only posing a challenge, it is also opening new opportunities. At the time of writing, the future of any East Asian economy (including Japan) depends decisively on its ability to strengthen economic links with China – namely, to capitalize on the rapidly-expanding Chinese market, to transfer a certain proportion of production facilities, and to develop and deepen the bilateral division of labour, which would enhance efficiency and competitiveness. The creation of some sort of regional economic community with the participation of China would be more than helpful in solving those tasks. On the other hand, accommodating China within a regional community could be the best answer to the ‘Chinese challenge’. These driving forces of integration are becoming more significant than the above-mentioned impediments. Yet, once the pro-integration trend has begun to gain momentum, other impediments have surfaced – namely, the absence of a core country capable of exercising leadership in integrating the region, and apprehension on the part of the USA.

52 East Asian Economies

In Europe and America the leading role in the promotion of regional integration is played, naturally, by the major economic powers. However, the major economic power in East Asia – Japan – is not ready to play such a role, either politically, or psychologically, or, in many respects, even economically (the latter, because a substantial part of domestic companies and industries are inefficient and unprepared for genuine competition within the common regional market). Consequently, it has to be substituted by someone else, and this someone, among other things, has got to persuade Japan to participate actively in the process. At the time of writing, this part is played by the ASEAN countries, but their capacity to exercise leadership in the long run is questionable. As for the USA, until recently they were more than wary about the emergence of any economic grouping in East Asia. As some regional leaders (especially Prime Minister Mahathir of Malaysia) were keen on making statements about the unacceptability of the American model and way of life for East Asian societies, and the necessity for Asians to strengthen their solidarity and co-operation without any interference by non-Asian powers, the USA tended to see regional integration as a threat to its own interests, and were concerned that East Asian integration could weaken the role of APEC. When, in the late 1980s–early 1990s, Mahathir suggested the East Asian Economic Caucus initiative, the idea was finally killed, at first because of the opposition from Washington, which prevented Japan and some other East Asian states from supporting the proposal. However, in the late 1990s there emerged a workable formula which eventually was the new edition of the Economic Caucus plan: the APT (‘ASEAN Plus Three’; the three are Japan, China and Korea). This time there was no explicit opposition from the USA, as, first, the rethoric irritating Washington practically vanished and, second, the grouping itself was set up after the establishment of the ASEAN Regional Forum, which included the USA and other major world powers. The APT leaders’ informal meetings are held annually and, within this framework, trilateral meetings between the leaders of Japan, China and Korea are also arranged. Outside this ASEAN-initiated forum such meetings would be hardly possible because of the political problems complicating SinoJapanese and Korean–Japanese relations. It means that ASEAN is playing the key co-ordinating role in promoting multilateral co-operation in the whole of East Asia. In November 2000, at the APT leaders’ meeting in Singapore, an important decision was made to set up a joint working group to study the feasibility of the creation of the East Asian FTA. However, from the start it was keeping a low profile. At the next summit, in Negara Brunei Darussalam in 2001, it was only confirmed that the group would continue its work. In addition, ASEAN proposed to formalize the leaders’ meetings as the East Asian Summit. The issue of large-scale joint regional projects, such as the construction of the

Ivan Tselichtchev 53

railway from Singapore to Kunming (southern China), was also put on the agenda. However, Japan took a very cautious position regarding the creation of the East Asian economic grouping, and stopped short of supporting the idea of a formalized regional summit. In November 2002, in Phnom Penh, the leaders approved the report of the working group, calling for the creation of the East Asian FTA in the medium or long term. The report comprised mostly general assumptions and did not contain any specifics regarding the timetable and mechanisms. It became obvious that the regional integration goal can be reached only through a number of intermediate stages. The most important intermediate step expected is the establishment by ASEAN of a separate FTA with China, Japan and Korea. The starting point was a bold move on the part of ASEAN and China. At the end of 2001 both sides made clear their intention to sign the FTA agreement within ten years. Full-scale negotiations are due to start in 2003. They also signed the framework agreement on lifting tariffs between China and the six most-developed ASEAN countries by 2010, and four less-developed – by 2015 (with few exceptions for specific items). To speed up the integration process, both sides intend to liberalize exports and imports of the eight agricultural products completely in 2004 (Nihon Keizai Shimbun, 11 May 2002). Such speedy progress, and especially a very active Chinese stance, turned out to be a surprise for Japan. Not to miss the boat, the Koizumi cabinet produced a comprehensive Japan–ASEAN partnership initiative, presented by the prime minister in his speech in Singapore in January 2002. Three key areas of co-operation were proposed: Japan’s assistance in the implementation of structural reforms; addressing global problems, especially poverty and conflict prevention; ‘co-operation for the future’ (in such areas as culture, contact between young people and so on). As for the creation of the FTA, Japan initially stopped short of articulating this goal clearly, in contrast to the Chinese approach. Both sides simply stated that experts would discuss the content of economic co-operation. In Phnom Penh, however, Japan and ASEAN agreed to start negotiations in 2003 with the aim of signing an agreement on economic co-operation before 2010, and that the agreement would include the FTA. Yet, in Japan itself, the government is often criticized for a lack of initiative and the absence of a clear-cut vision of co-operation. There is a good reason to believe that, first and foremost, it was motivated by a desire not to be left behind by China. Japan’s position on regional integration, far less proactive than that of the USA or the major European countries regarding integration in their regions, can be explained with the following three reasons. First, political will is definitely not there: the government is preoccupied with domestic problems, mainly the prolonged recession, and public opinion remains largely indifferent. Second, the liberalization of imports of agricultural and

54 East Asian Economies

marine products remains an extremely sensitive issue, as domestic producers are not competitive internationally, but very active in the field of political lobbying. Yet, recently, the Ministry of Agriculture, Forestry and Fisheries clearly stated that it would not seek any exceptions when concluding the FTA agreements. Third, as nowadays FTA agreements are not limited to trade only, but comprise a wide spectrum of co-operative arrangements at the inter-state level, the Japanese side is wary that the FTA creation will escalate demands for the increase of Overseas Development Assistance (ODA), especially on the part of poor ASEAN countries. At the time of writing, because of the condition of the national economy in general, and public finance in particular, it is considered unacceptable. Thus Japan is also considering the option of signing, bilateral FTA agreements with some major ASEAN countries – initially Thailand and the Philippines (a bilateral FTA agreement with Singapore was signed in January 2002). In general, Japan, though remaining rather a passive player in the regional integration field, is inevitably becoming increasingly involved in the process. In the first half of 2002, the Foreign Ministry announced for the first time that it is taking into the consideration the possibility of the formation of an East Asian FTA. A further major APT member – Korea – has also shown an interest in establishing a FTA with ASEAN. As a result of these developments, an outline and sequence of regional integration, East Asian style, are becoming somewhat more distinct, with the key role being played by ASEAN. In the medium term (probably by around 2010), the ASEAN–China FTA will have been created, followed by, or in parallel with, the ASEAN–Japan and ASEAN–Korea FTAs. Before that, Japan will have established bilateral FTA with some ASEAN countries– probably Thailand and the Philippines. Other FTAs, outside the ASEANcentred framework, are also quite plausible. First, a Japan–Korea FTA is likely to appear in the foreseeable future (consultations between the two sides and work by experts were begun several years ago). During the Phnom Penh APT meeting, China took another bold initiative in proposing a trilateral FTA with Japan and Korea. The Japanese and Korean sides responded cautiously, stressing the need for a thorough study of the proposal by experts. From 2003, think tanks from the three countries are to begin a joint study of the issue. As the first experience of the trilateral co-operation of this kind, it will be a significant development in itself, regardless of the outcome. Up to now, in the field of regional integration, East Asia was lagging behind Europe and North America in terms of both pace and depth, but now the process is accelerating visibly. The integration pattern, however, appears to be different. While in Europe and America the formation of a single institutionalized grouping and its further expansion were the core of the integration process, in East Asia the main route is likely to be the formation and expansion of a network of complementary FTAs with overlapping

Ivan Tselichtchev 55

membership, which, in the medium or long term (presumably within 10–15 years – that is, by 2015) can merge naturally into a single regional economic territory. At this point, the creation of a single regional FTA with its own institutions (in other words, some kind of regional economic community) may become quite a plausible and realistic option. However, whether a single FTA such as this will appear or not, the expansion of the network of complementary and overlapping FTAs, combined with continuing co-operation under the existing APT framework, will be very important as such, because it will allow East Asian companies to capitalize increasingly on regional integration as a factor of global competitiveness. (Up to now they have not had this opportunity.) Additionally, while in East Asia it is hardly possible to expect the emergence of an economic union comparable to the EU, integration, growing interdependence and intensifying contacts at the inter-state level will eventually induce the countries of the region to seek and pursue common approaches in increasing numbers of areas, and to exercise a common voice in dialogue with other regional economic groupings on a growing number of issues.

Epilogue Previously, researchers, experts, businessmen and politicians tended to stress the importance of the peculiarities of the East Asian economic model, differentiating it from Western patterns, but this way of thinking now needs a thorough overhaul. As far as the economy is concerned, East Asia is changing, and this change is bringing the area much closer to the Western, especially AngloSaxon, pattern of capitalism. Not the growing differences, but rather the visible increase in the number of similar features, deserves special attention as the major trend at the start of the twenty-first century. The evolution of economic systems, accommodating more and more Anglo-Saxon-style elements; significant steps towards the liberalization of trade and inward FDI opening the door for Western goods, services and capital; and, finally, moves towards regional integration, constitute three closely inter-related developments, showing that East Asia is becoming ‘more like the West’. These developments will have various implications for East–West economic relations. On the one hand, it will become easier to do business together, including such advanced forms of co-operation as inter-corporate alliances and joint ventures. But on the other hand, a growing number of East Asian companies (including, of course, companies backed by Western capital) will emerge as mighty competitors on the global arena, thus posing new challenges for European and American businesses. In other words, East Asia will become more genuinely involved in the globalscale co-operation–competition game. In this respect, it is notable that Japan’s business community, namely the Federation of Economic Organizations

56 East Asian Economies

(formerly Keidanren), when articulating its demand for the government to reduce the rate of corporate tax, first referred to the growing competition from East Asian companies, arguing that East Asia’s, and not Europe’s or America’s, tax rates have to be used as a criterion. Western economies will also have to face increasing competition pressure of this kind. One more major implication of the evolution described is the emergence of, and the growing gap between, winners and losers in East Asia itself. The period when growth in more advanced countries of the region facilitated growth in the countries of ‘the next row’ within the ‘flying geese’ framework, has presumably come to an end. The ‘Plus Sum’ game, beneficial to all regional players, is over, at least in its conventional form. In particular, the emergence of China as the fastest-growing economy in the region goes in parallel with the loss of dynamism by the ASEAN economies, often accompanied by political destabilization. The situation is further complicated by the fact that, especially in the wake of the events of 11 September 2001 (9/11) and beyond, some of the major ASEAN states ‘fell’ into the high-risk zone in the eyes of the international business community. One issue of major importance, which largely remains outside the framework of this chapter, is the correlation between the described economic change and the transformation of East Asian countries’ political systems. Logically, the type of economic transformation now being experienced by the East Asian states also paves the way for political change: namely, increasing democracy, the rule of law, pluralism and a respect for human rights, a greater role for the opposition, greater freedom of speech and so on. However, in reality, in the field of politics East Asia retains many more specific features than simply those in the field of economics, thus differentiating it from the West. In the vast majority of East Asian states, the ruling elite and existing political institutions fight to survive under the change, and in order to survive, take the lead in implementing economic reforms. As a result, ironically, the political establishment (in the main, authoritarian-style developmental states) which, until recently, was promoting various versions of the East Asian model, is now enforcing (or has no alternative but to enforce) ‘Westernization’ and liberalization of the economic systems. This is the paradox and the reality of East Asia at the start of the new millennium. In the vast majority of East Asian countries, this survival strategy is working. The only country where the Asian crisis itself led to domestic turmoil and a change in the regime was Indonesia, which is lagging behind the others regarding both the pace of its economic transformation and its depth. All other regimes appear to be adapting: ●

In Japan, which, in spite of being a democracy, until now has no really strong opposition capable of presenting a viable alternative to the Liberal Democratic Party (LDP)-led government, the Koizumi cabinet produced the most radical structural reform programme since at least the late 1940s, in spite of resistance from powerful groups within the Party.

Ivan Tselichtchev 57 ●

●

●

●

● ●

In Korea, the emergence of the Kim Dae-Jung Administration and the victory of Rho in the presidential election in February 2003 reflected the growing strength of the reformist forces in the political establishment, favouring a more radical economic transformation, especially with regard to the dissolution or reorganization of the chaebol. In Malaysia, Prime Minister Mahathir consolidated his own power, putting together a team that seeks to accelerate reforms. The forces blocking this transformation process have suffered a major setback. In Singapore, the authoritarian-style government is continuing its promarket economic policies, facilitating ‘Westernization’ and liberalization. In China, the Communist regime is enforcing the market-orientated reforms, coming step-by-step closer to the Western-style economic system. At the same time it is opening the door for businessmen to join the Party in order to widen its power base. Vietnam is likely to move in the same direction as China. Even the North Korean regime has clearly shown its intention to set up the enclaves of the market economy on its territory.

Two major conclusions can be drawn about the correlation between economy and politics in East Asia: first, existing political institutions, sometimes significantly different from those in the West, at least for the present, are ready to promote the ‘Westernization’ of economic systems. Second, stronger and more stable regimes (irrespective of their ideological background) are capable of facilitating more genuine economic reforms. However, it is worth noting that, to keep up the momentum of the reforms, in the near future, the state – now a key player in promoting the ‘Westernization’ reforms – will have to curtail its activities in the economy and pass the baton to the private sector, first of all through the privatization of companies and banks. It is reasonable to expect that, at least in some countries in the region, there may be a turning point, and beyond that point the drive for genuine democratization will become significantly stronger. Thus the best choice for Western democracies is to concentrate more on assisting East Asian countries in promoting the ‘Westernization’ and liberalization of the economic field, and to abstain from exerting too strong a pressure regarding issues related to the countries’ political systems and domestic policies: East Asia will find its own mechanisms and tools for political transformation.

References Associated Press (2000) ‘South Korean Banks Provide Emergency Funds for Hyundai’, Yomiuri Daily, 28 May, p. 5. Drysdale, P. and Ishigaki, K. (eds) (2002) East Asian Trade and Financial Integration New Issues, Australia–Japan Research Center, Asia-Pacific Press. Fukushima, M. (ed.) (2002) Azia Do: ko: Nempo (Tokyo, Institute of Developing Economics JETRO), pp. 45–7, 342, 398, 401–2.

58 East Asian Economies JETRO (2002) Boeki Toshi Hakusho (Tokyo, JETRO). Keizai Kikakucho Chyo:sakyoko (2000) Azia Keizai (Tokyo, Keizai Kikakucho), p. 215. METI (2001) Tsusho Hakusho (Tokyo, METI). Renong website (http://www.renong.com). Robbins, F. (2002) ‘The “Asian Crisis” and “Asian Capitalism” ’, Management International Review, 42 (Special Issue: ‘Economy and Business in Asia: Post-crisis perspectives’), pp. 7–20. Terry, E. (2002) How Asia Got Rich (Armonk, NY, M.E. Sharpe). Tselichtchev, I. (2001) ‘Yaponskaya Model Rosta: Sberejeniya, Kreditovanie, Investirovanie’, Mirovaya Ekonomika i Mezdunarodnie Otnosheniya, 6, pp. 87–96. Tselichtchev, I. (2002) ‘Japan: East Economic Relationship: the Evolving Pattern’, Management International Review, Special issue: ‘Economy and Business in Asia: Postcrisis perspectives’, 42, pp. 61–76. Urata, Y. (1999a) Azia Keizai – no Fukkatsu to Nihon – no Yakuwari, JCER Paper, Japan Centre for Economic Research, Tokyo, 57, pp. 1–27. Urata, Y. (1999b) Azia Keizai – no Fukkatsu to Nihon – no Yakuwari, JCER Paper, Japan Centre for Economic Research, Tokyo, pp. 17–18, 24. Wong, K., Phunsunthorm, Ch. and Sucharitkul, T. (2000) ‘Problems and Promises: The Reform of Thai Bankruptcy Law in the Wake of the Asian Financial Crisis’, Harvard Asia Quarterly, Winter, 4(1), pp. 17–23. Yamazaki, J. (2002) (Tai To: nan A To: shi 6 Wari Gen). Nihon Keizai Shimbun, 17 September, p. 7. Yusuf, Sh. and Evenett, S.J. (2002) Can East Asia Compete? (Washington, DC, Oxford University Press).

Part II The Antecedents of Trust

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3 Is Wealth Creation Sustainable? Trust, Need and Greed in the Development Process Hock-Beng Cheah

Today, American business faces a crisis of trust. Consumers have been barraged with news accounts of egregious corporate misconduct. Allegations of dishonesty, subterfuge, and executive greed have triggered government investigations, indictments, and company bankruptcies. Public trust of business has collapsed to levels not seen since the early 1900s. (Haas, 1995)1

Introduction ‘There is enough in the world for everyone’s need, but not enough for everyone’s greed’:2 this statement, attributed to Mahatma Gandhi, serves as a useful starting point for this analysis of the dynamics of trust, self-interest and wealth creation. Trust may be defined as the belief held by one party in a relationship that another party will not act intentionally in an opportunistic manner to disadvantage the first party. This belief, in a relationship between two or more parties, may be reciprocal (shared or mutual) or non-reciprocal.3 Trust may be examined at the individual dimension and at the social dimension in a relationship among major groups, and at the system dimension with regard to core institutions. There may not be perfect congruence between these three dimensions, but while trust may vary or fluctuate on the individual and social (group) dimensions without serious threat to the whole system, significant undermining of trust on the system dimension will threaten a collapse of the overall structure. This leads to the notion of variations in the level of trust, which may vary from a total absence of trust on a low (insufficient or inadequate) level, through a high (sufficient or adequate) level to a level that is ‘too high’ (excessive or inappropriate).4 61

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Trust increases confidence and enables transactions to be undertaken at lower cost, with less risk, and leads to higher net gains.5 In this regard, trust offers the potential for significant positive synergistic effects that could enhance outcomes substantially. For this reason, trust can act in the capacity of an essential lubricant that helps the economy and society to function more smoothly. In this context, wealth creation can be sustainable if it is directed towards satisfying the essential needs of at least a large majority of the population. Because it is in this context that trust and other positive synergies are generated in the development process. These positive synergies promote a positive-sum game situation. In contrast, when wealth creation is directed principally towards the pursuit of greed, mistrust and a host of associated negative synergies are generated, and these erode the long-term viability of the development process. From this perspective, practitioners of the ‘greed is good’ principle, when they are successful in amassing substantial wealth, also generate a zero-sum or negative-sum game situation. Because, beyond a certain point, the quest for private gain impinges adversely on the needs of other individuals, and on the collective well-being. This has significant deleterious effects on social relationships and on the sustainability of the wealth-creation process itself. Consequently, the ends towards which wealth-generating activities are directed matters a great deal. In drawing on the writings of Adam Smith to support private-sector wealth creation activities, many pro-market advocates have not appreciated this point adequately. That is, they have over-estimated the capacity of market processes, based on the pursuit of self-interest, to satisfy needs, and ignored their capacity (or propensity) to generate greed. At the extreme, they too become supporters of the ‘greed is good’ principle, and in this regard they fail to appreciate the danger that Adam Smith’s vision of the benign market, where self-interest is guided by an invisible hand to produce positive outcomes for all with minimal government involvement, may degenerate into Thomas Hobbes’ vision, where the pursuit of self-interest leads to a ‘war of everyone against everyone’ (Hobbes, 1660), and where chaos and anarchy elicit a range of tough controls imposed by a Leviathan state. Indeed, it may be argued that there are cycles of trust and mistrust in the development process, and that a combination of domestic and international forces have generated noticeable tendencies since the 1980s for a shift away from the Smithian benign market economy and towards the Hobbesian rapacious market economy. This chapter considers the empirical evidence of such developments in the USA, and examines the implications for other countries. It argues that successful development depends on sustainable wealth creation. This may depend on the ability to promote a shift away from a mass-production system based on market processes that focus largely on the pursuit of greed and the power to control resources and to generate scarcity, to a sustainable production system focused on the satisfaction of essential needs and the generation of trust.

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From Smith to Hobbes: trust, self-interest, markets and states Adam Smith and Thomas Hobbes offer analytical concepts and insights that are significant for the following analysis. This analysis seeks to build on those insights, in a manner that promotes understanding of contemporary experiences.

Adam Smith: self-interest, perfect competition, the benign market and the minimalist state In The Theory of Moral Sentiments, Adam Smith wrote about the ‘sense of propriety’ and the significance of ‘mutual sympathy’. Indeed, for Smith it is inherent in human nature that ‘How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it’ (Smith, 1759, pt. I, ch. 1, para. 1). If such assumptions are widely held, they form the basis for trust to emerge and to exert its influence on social relationships and transactions. However, in his later work, The Wealth of Nations, Smith was perceived to be a leading advocate of the capacity of a benign free market to create wealth, operating on the basis of self-interest. Specifically, he proclaimed that: It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. (Smith, 1776, bk I, ch. 2, para. 3) and [The individual] generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it … he intends only his own security; and … he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. (Smith, 1776, bk IV, ch. 2, para. 9) These views are very significant in at least three respects: they provide a basis for those who have chosen to argue that (a) ‘greed is good’; (b) there should be no limits to the pursuit of self-interest; and (c) the consequences of these processes are completely benign, individually and collectively. This positive portrayal of the dynamics of free-market processes is based on the positive unintended consequences that result from individuals pursuing

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their self(ish) interests. It places significantly less emphasis on the impact of the negative intended consequences (for example, anti-competitive collusion), and little attention to the negative unintended consequences of such behaviour (for example, adverse market externalities). Consequently, it becomes axiomatic that, after appropriate measures (for example, various anti-trust laws) are introduced to restrain anti-competitive behaviour, the market can be left to its own devices, so that the ‘invisible hand’ can perform its magic. These ideas helped to secure the foundations of utilitarian, conventional liberal, and libertarian philosophies. At the macro level, these ideas form the basis for the policies of those groups that advocate free trade, privatization, economic liberalization, unrestricted capital flows, self-regulation of the private sector, and contraction of the role of the public sector, to create a minimalist state.6 However, there are many possibilities that might cause this situation to break down. One possibility is that one or more parties (competitors) may succeed in acquiring substantial leverage through the competitive process, and thus violate the assumptions of the ‘perfect competition’ model. In a situation of disparate and diverging competitive power, the stronger competitors could set off a dynamic process that leads towards increasing polarization, with the strong growing stronger in their gains and in their assertion of their self-interest, and the weaker competitors growing increasingly distrustful that their interests would be served, or even considered, in this situation. The stronger competitors could also, individually or in concert, subvert or simply ignore the rules and the institutions (set up by a weak minimalist state) to curb anti-competitive behaviour. Through this and other possibilities, the benign market described by Smith could turn into a very rapacious market, with the strong competitors devouring the weaker ones and growing even stronger, and with the ideal of ‘perfect competition’ dissolving into a reality of oligopolistic and monopolistic competition, far surpassing the capacity of the minimalist state to remedy. More fundamentally, Kuttner (1998, pp. 6–7) noted that ‘a reading of economic and political history … suggests that pure laissez-faire is socially and economically unsustainable … there is significant evidence that, quite apart from questions of distributive justice, the very stability of the system requires departures from laissez-faire.’

Thomas Hobbes’ rapacious state of nature: self-preservation, power, war and Leviathan In contrast to Smith’s theories, Thomas Hobbes provided a very different portrayal of the processes and consequences of the pursuit of self-interest. He suggested that the desire for self-preservation and other interests lead to reactive as well as anticipatory actions that result in general conflict. According to Hobbes, ‘Nature hath made men so equal in the faculties of body and mind … [that] the weakest has strength enough to kill the strongest, either by secret machination or by confederacy with others that

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are in the same danger with himself’ (Hobbes, 1651, ch. 13). In this situation, they are in that condition which is called war; and such a war as is of every man against every man … the nature of war consisteth not in actual fighting, but in the known disposition thereto during all the time there is no assurance to the contrary … where every man is enemy to every man, the same consequent to the time wherein men live without other security than what their own strength and their own invention shall furnish them withal. In such condition there is no place for industry, because the fruit thereof is uncertain: and consequently no culture of the earth; no navigation, nor use of the commodities that may be imported by sea; no commodious building; no instruments of moving and removing such things as require much force; no knowledge of the face of the earth; no account of time; no arts; no letters; no society; and which is worst of all, continual fear, and danger of violent death; and the life of man, solitary, poor, nasty, brutish, and short. (Hobbes, 1651, ch. 13) Hobbes suggested that the solution to this depressing and unproductive situation would be found through the emergence of a social contract sanctioned by a sovereign state which would set the rules for, and limits of, acceptable conduct, and this would secure the interests of self-preservation and other concerns of the individual parties to the contract (Hobbes, 1651, ch. 13). According to Hobbes (1651, ch. 17): The only way to erect such a common power, as may be able to defend them from the invasion of foreigners, and the injuries of one another, and thereby to secure them in such sort as that by their own industry and by the fruits of the earth they may nourish themselves and live contentedly, is to confer all their power and strength upon one man, or upon one assembly of men, that may reduce all their wills, by plurality of voices, unto one will: which is as much as to say, to appoint one man, or assembly of men, to bear their person; and every one to own and acknowledge himself to be author of whatsoever he that so beareth their person shall act, or cause to be acted, in those things which concern the common peace and safety; and therein to submit their wills, every one to his will, and their judgements to his judgement. Clearly, Hobbes did not conceive of a minimalist state. On the contrary, the Leviathan would need to acquire as much power and coercive force as necessary to secure the interests of the Commonwealth.7 By such means, the condition of war between all parties can be avoided, and common interests secured. However, there are also many possibilities that might make this situation break down. One possibility could arise from resentment and rebellion over the harsh or repressive measures wielded by the sovereign power. Another possibility is that, in reality, the Leviathan could be swayed and

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subverted by one or more interested parties, acting separately or in concert, to direct greater benefits to those parties, and to direct more of the costs towards non-affiliated parties. This violation of the social contract could lead to distrust on the part of the non-affiliated parties and, if resistance is mounted, to a return to general discord. Yet another possibility may arise in reality from a party gaining disproportionate power through various means, and then asserting the pre-eminence of its interests over all others, regardless of the commands of the ruling state. The dominant party could also, in de jure or de facto fashion, abolish the authority of the ruling state and assert its own authority, and rule in the absence of a social contract on the basis of superior force exerted over all other parties. In this situation, it could achieve substantial acquiescence to its rule, even through other parties distrust the willingness of the dominant power to look after their interests. This imperial situation could be also be achieved by a coalition of parties of varying strengths, who are bonded by strategic alliances.

From Smith to Hobbes: the process of market transformation It may be suggested that the different scenarios portrayed Adam Smith and Thomas Hobbes do not represent fixed and enduring states. Heuristically, we may view them as ideal types representing possibilities that constitute polar opposites on a loop. This is not necessarily a closed loop and, over time, could be portrayed better as a spiral. It may be suggested further that, over time, a society’s position on that spiral will shift towards greater harmony or greater discord, depending on the particular combination of forces and circumstances operating at the time. Thus it is arguable that, periodically, the pursuit of self-interest (‘greed is good’) leads to the transformation of Smithian benign markets into Hobbesian rapacious markets. This process is described briefly below. Under certain initial conditions, where there are relatively few competitors (that is, competitive pressures are low), production capacity is scarce, demand for goods and services high, and purchasing power is plentiful, the possibility exists for Smith’s benign market to operate. Trust is based on predominantly transparent (immediate, direct, open) market transactions. Over time, competitive pressures increase as the number of private producers grows, all seeking only their own advantage; overall productive capacity expands substantially; and a tendency towards market saturation emerges (first in particular markets and industries, and eventually at the aggregate level). Aggregate debt rises to a very high level, and normal market processes become increasingly constrained. The increasing polarization of wealth and poverty leads to a situation where purchasing power is increasingly concentrated among the extremely wealthy, and scarcity is generated artificially for a growing majority, in the midst of substantial excess productive capacity on the one hand, and many unmet essential needs in the society (the

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world) on the other. Trust is subverted by increasingly non-transparent (complicated, lengthy, indirect, delayed, distant and corrupt) market transactions. Then rapacious behaviour becomes increasingly prominent, and tensions and conflicts increase as the ‘rat race’ turns into a ‘dog fight’, and leading to full-scale open warfare (both figuratively and literally). Realist policies and practices (Machiavellian practices in pursuit of self-interest or national interest) are replaced by Hobbesian practices that lead towards greater conflict, conquest, and ‘total war’. In this situation, ethical considerations are suspended, trust has evaporated, and ‘normal’ market processes are severely circumscribed or cease completely, to be replaced by command, conscription, confiscation, rationing and other forms of non-market allocation or control. Eventually, the elimination of many competitors, the destruction of substantial amounts of productive capacity, the redistribution of resources among the major (domestic and international) participants, the cancellation of previous accumulations of extremely large (unrepayable) aggregate debts, the injection or recovery of substantial new purchasing power into the economy, and the requirements of the reconstruction process, foster a return to the initial conditions. The renewed (fresh) scope for the pursuit of selfinterest, in the midst of a loosening of market controls, generates the ‘positive unintended’ consequences of the Smithian benign market, trust is revived, and collectively these feed the revival of free market ideology.8 This brief and stylized description of market transformation serves at least five important purposes. First, it allows us to suggest that, conceptually, Smith’s benign market and Hobbes’ rapacious market do not necessarily refer to static and enduring, or self-perpetuating, phenomena. Instead, it may be argued that they are dynamic and evolving. Second, and more significantly, it may further be suggested that they evolve in an interrelated, cyclic or alternating fashion. Third, from this perspective, it is possible to argue that it is not simply the problems caused by government intervention and other nonmarket processes that restrict or distort the free functioning of the market, leading to market failure, as the neoclassical economists and the Austrian School contend. An unregulated (‘free’) market system based on unlimited (unrestrained) pursuit of greed is capable of evolving to undermine itself, with appalling human and environmental consequences.9 Fourth, we are thus led to confront not simply market or non-market (government) failures but, rather, various possible combinations of market and non-market failures that may even be linked in multiple ways, both directly and indirectly. Fifth, we are guided to seek solutions that incorporate various possible synergistic combinations of market and non-market processes – processes that do not depend on unrestrained greed, processes that enhance rather than destroy trust, processes that are economically, ecologically, socially and ethically sustainable for the world, and for future generations.

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The case of the USA: self-interest, the free market and systemic corruption The ideas presented above provide a framework for examining developments in the USA. The renowned American economic historian, Alfred Chandler (1978), examined the evolution of the corporate form of organization and noted that the situation that approximated most closely the concept of ‘perfect competition’ underpinning the notion of the free market occurred during the earliest phase of that evolution process.10 Since then, in various industries and sectors, large firms have dominated the scene in a manner that is not at all characteristic of both ‘perfect competition’ and the ‘free market’. Nevertheless, the USA is arguably the strongest bastion of the ideology of the free market, and the champion of its proclaimed superiority over other alternative forms of economy. The foundations of this ideology span a range from neo-classical economics, to the monetarist economics of Milton Friedman and the associated works of the Chicago School, to Austrian economics, to the writings of Ayn Rand. However, among the developed countries, the USA also provides the best example of the myth of the free market, and the rapacious nature of that market (see Levinson, 1988; Batra, 1996; Kuttner, 1998; Frank, 2000). One of the major myths is that of ‘equal rights’ in a democratic free market economy. Hartmann (2002) has described how, because of a mistaken interpretation of a Supreme Court reporter’s notes in an 1886 railroad tax case, in the USA, corporations are legally considered ‘persons’, equal to human beings and entitled to many of the same protections guaranteed only to human beings by the Bill of Rights. The results of this ‘corporate personhood’ have been to confer significantly greater rights, benefits and protection on corporations, relative to ordinary citizens. This has provided corporations with superior advantages that aid them in their search for profits. Indeed, Soros (1995) has argued that laissez-faire ideas and practices can pose a threat to the democratic open society. The evidence for corporate malfeasance is extensive (see Graham et al., 2002). For example, there must now be serious doubts that the reportedly outstanding performance of US firms in the 1990s was genuine. Indeed, many high-profile American firms have crashed, among alarming corporate scandals and gross failings by auditors and regulatory agencies. Most worrying is the evidence that Enron is not an isolated case (see Partnoy, 1997 and 2003; Prashad, 2002). Paul Krugman (2002), a leading American economist, wrote: capitalism as we know it depends on a set of institutions – many of them provided by the government – that limit the potential for insider abuse. These institutions include modern accounting rules, independent auditors, securities and financial market regulation, and prohibitions against insider trading.

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The Enron affair shows that these institutions have been corrupted. None of the checks and balances that were supposed to prevent insider abuses worked; the supposedly independent players were compromised. Enron’s byzantine network of 3,000 subsidiaries and partnerships – one for every seven employees – made a mockery both of accounting rules and of rules against insider trading. Not incidentally, the network also allowed the company to evade taxes in four of the last five years. And Enron executives knew what they were doing. A letter last August from an Enron vice president to the chairman, Kenneth Lay, described how shell companies with names like Condor and Raptor were used to create fictitious profits, and quoted one manager as saying, ‘We are such a crooked company’. The accounting firm of Arthur Andersen was told of these concerns. Yet it gave Enron a free pass, and shredded documents when questions arose. The regulators were nowhere to be seen, partly because politicians with personal ties to Enron … took care to exempt Enron from regulation. Thus Enron illustrates the wider corruption, not just of individual firms such as Enron and WorldCom, but also a systemic failing among leading auditors and government regulators.11 In this regard, another revealing observation noted that, The pivotal lessons from the Enron debacle do not stem from any criminal wrongdoing. Most of the manoeuvres leading to Enron’s meltdown are not only legal, they are also widely practiced. Many of the problems dramatically revealed by the Enron scandal are woven tightly into the fabric of American business. Outside the spotlight on Enron’s rise and fall, government policies and accounting practices continue to reward and shelter many firms with harmful habits just like those of Enron. (Klinger and Sklar, 2002; see also Greider, 2002) There are many other examples of executive profiteering at the expense of employees, shareholders and the public,12 and other questionable corporate activities. These include the manipulations by tobacco companies,13 and corporate tax minimization efforts that lead to low or no tax being paid by corporations, while they receive substantial financial and other forms of support from government (see Bovard, 1995; Moore and Stansel, 1996; McIntyre and Nguyen, 2000; Slivinski, 2001; Klinger and Sklar, 2002).14 Indeed, rather than performing well based on their own independent capabilities and excellence, the reality is that many seemingly successful firms are relying significantly on government support and largesse, in a manner that support the arguments of those who denounce the myth of the free market (see Shields, 1999). It is significant to note also that serious questions have been raised about the Bush Administration that began in 2001,15 and this too may not

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be secondary or peripheral but instead central and integral to the broader issues. In particular, the direct and indirect links between Enron and other questionable corporations and various members of the Bush Administration (Palast, 2003) have been submerged by other distractions (the ‘9/11’ attack on the World Trade Centre in New York, the release of anthrax bacteria in the USA, and the war against ‘terrorism’ in Afghanistan, Iraq and other locations). But these do not remove the greater social insecurities, the growing vulnerabilities of the US economy, and the likely forthcoming slide into recession or worse, with direct adverse implications for the global economy. Moreover, the strong push in the later decades of the twentieth century for increasing privatization, flowing principally from the USA and rationalized by ‘free-market’ economics, holds up the private sector as the quintessential model of efficiency and good performance. It also suggests that, since private firms set the standards for performance, they should be left largely to regulate themselves and to decide what is ‘best practice’, and not be restricted by bureaucratic agencies that do not have ‘hands on’ responsibilities. These arguments contribute to an open invitation to unscrupulous and rapacious executives to rob, pillage and plunder. The argument that ‘only a minority’ engage in such practices also fails to address the massive scale of the aggregate (multi-billion dollar, short- and long-term) impact of this ‘minority’ on others (such as suppliers, customers and investors), and on society overall. In short, the private sector’s extreme preoccupation with the economic imperative leads to neglect of other important imperatives, especially the ethical imperative. This is a fundamental (not an incidental or accidental) consequence. Indeed, as it becomes more difficult to ‘make an honest buck’ from productive activities, more and more resources are diverted to speculative and essentially criminal activities. This shift puts pressure (from corporate interest-groups, and their political supporters) onto the regulators to ‘look the other way’, and to dilute the regulations. From this perspective, simply setting up ‘codes of conduct’ or ‘ethics committees’ fails to address the systemic roots of the problem. One major consequence of a rapacious market economy is the serious erosion of trust in society. In this regard, Robert Reich, then US Secretary of Labour, offered the following comment: I have picked up as I travel around the country more distrust even over the last three and a half years, a greater degree of distrust. More and more employees, workers, average working people I talk to around the country say to me, I’m on my own. I have to look out for number one. Look out for me. The company’s not going to look out for me. I’m not going to do one extra thing for this company that I don’t have to do. Why should I be loyal to this company? Why should I go the extra mile when this company is treating me and other employees like we are disposable pieces of machinery, where there’s no loyalty on the other side. (Reich, 1996)

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This may be related to the undermining of the previous social contract between employers and employees that has heightened employee vulnerability and insecurity (Mills, 1996). According to Reich (1996): There used to be, thirty years ago, forty years ago, an implicit social contract, and although it was never written down, it was understood. It was enforced partly by unions, when thirty-five percent of the wage force was unionized, that was not an insignificant enforcer, but also by public norms. And that social compact was, if the company was doing better and better, workers could be reasonably assured that they would have their jobs, and also that they would see better wages and better benefits. Now that old social compact has come apart. Now we have the specter of companies doing better and better and better, and yet some companies, not all by any means, but some companies pushing wages down, pushing benefits down, abandoning communities, breaking all of those implicit contractual terms. This has led to increasingly opportunistic behaviour by both employers and employees, with compounding effects on each other. In the search by employers for greater organizational ‘flexibility’, practices such as corporate downsizing increased employee fears, cynicism and distrust (Mishra and Spreitzer, 1998), and produced strong feelings of betrayal (Elangovan and Shapiro, 1998). This has led to situations of low trust and high distrust (see Lewicki et al., 1998, p. 445). Moreover, when there are no effective institutional sanctions to curb such corporate practices (see Hagen and Choe, 1998), workplace relationships deteriorate significantly.16 Beyond the workplace, evidence from various sources suggests that there has been a significant reduction in the general level of trust within the USA (see Lazonick and O’Sullivan, 1997; Palley, 1998; Mackenzie et al., 2002), and from external quarters. The Pew Research Center (2002, p. 2) also reported ‘Souring attitudes toward America are more than matched by the discontent that people of the planet feel concerning the world at large. As 2002 draws to a close, the world is not a happy place. At a time when trade and technology have linked the world more closely together than ever before, almost all national publics view the fortunes of the world as drifting downward. A smaller world, our surveys indicate, is not a happier one.’ One likely explanation for this may be attributed to the inability to confine this rapacious system within the USA: its explosive forces also drive it abroad. As one supporter of this system argued, ‘The driving idea behind globalization is free-market capitalism. The more you let market forces rule and the more you open your economy to free trade and competition, the more efficient and flourishing your economy will be. Globalization means the spread of free market capitalism to virtually every country in the world’ (Friedman, 1999a).17 Nevertheless, Friedman was aware that the gains are not distributed equally, when he noted that ‘Globalization-is-U.S. Because we are the biggest beneficiaries and drivers of globalization, we are unwittingly putting enormous pressure on the rest of the world.’

72 Is Wealth Creation Sustainable?

However, where Friedman emphasized the positive aspects of global free-market capitalism, Rankin (1998b) observed that, In today’s era of economically advanced welfare states … Hobbes’ insights are most applicable to the global economic behaviour of corporates and nations. Sovereignties that ‘beggar their neighbours’ can be called Hobbesian nations, and corporates that behave without reference to some implicit or explicit code of social responsibility can be called Hobbesian firms.

Implications for other regions in the world As globalization exports the increasingly rapacious behaviour of profitseeking companies to other parts of the world, supported by governments seeking to advance their ‘national interests’, there are many vivid examples of economic exploitation,18 and experiences of processes that lead to impoverishment (Chossudovsky, 1997; Shiva, 2000). These include unfair trade practices stemming from duplicitous ‘free trade’ policies that benefit wealthy countries and penalize poorer ones.19 As Rankin (1999) noted: Rival nations often claim to support global free trade. But, when their actual policies are based on gaining a competitive advantage at the expense of their trade rivals, they are looking for win–lose and not win–win outcomes. Deceptive strategies are all a part of the game of making other nations lose … Deception often means appealing to others on matters of principle, but not abiding by that principle. One of the most frequently exhorted principles for this purpose is that of multilateral free trade. The United States is in the business of selling free trade. They have been using the free trade principle to demand that the European Union buy all its bananas from Central America, and not buy some at higher prices from Caribbean countries such as St. Lucia and Jamaica … This bullying – which includes threatening to destroy the Scottish cashmere sweater industry! – is not really about free trade but about assisting transnational companies like Chiquita to destroy their small non-corporate rivals. In the same week, the United States International Trade Commission was seeking to protect American sheep farmers from cheap New Zealand imports of lamb. Getting everyone else to practice free trade while you protect yourself is a perfect example of the deceptive prisoner’s dilemma strategy. At the extreme, these processes are leading to ‘a race to the bottom’ (see Douthwaite, 1999; Greider, 2001), and to increased social tensions and conflict (Chua, 2003).

Hock-Beng Cheah 73

After free trade: from miracles to crises From Japan and China in the east to Argentina and the USA in the west, and many countries in between, the situation is deteriorating as former examples of economic miracles experience significant downturns (see Dieter, 1998; Cheah, 2000; Galbraith, 2002). In the USA itself, more than US$7 trillion in value has evaporated from US stock markets, and the Dow Jones Industrial Average has slumped from its peak on 14 January 2000. Retirement funds and other investments have been set back significantly, and the country is experiencing growing budget and trade deficits. Twelve consecutive interest rate cuts, beginning on 3 January 2000 and reaching a record low of 1.25 per cent on 6 November 2002, has failed to turn the US economy around (see Godley, 2003). From this perspective, the increasing resort by many organizations to ‘cooking the books’ and to recent innovations such as financial ‘derivatives’20 may be viewed as part of the desperate measures to keep afloat a sinking ship. Nevertheless, the US dollar is depreciating relative to other currencies such as the euro and gold. Foreign investors are beginning to seek alternative locations to place their funds and other assets (see Pesek, 2003). Indeed, Friedman (1999a) suggested that Global financial crises will be the norm in the coming era … Fasten your seat belts and put your seat backs and tray tables into a fixed and upright position. Because of the booms and the busts the recoveries will all be coming faster. So get used to it, and just try to make sure that the leverage in the system doesn’t become so great in any one area that it can make the whole system go boom or bust … In fact, as you are reading these words, the next global financial crisis is already germinating somewhere. In such times of increased uncertainty, heightened tensions, growing distrust, and spreading conflicts, the role of the military becomes even more prominent.

The role of the military and constant war Friedman (1999a) emphasized quite frankly that ‘The hidden hand of the market will never work without a hidden fist – McDonald’s cannot flourish without McDonnell Douglas, the designer of the F-15. And the hidden fist that keeps the world safe for Silicon Valley’s technologies is called the United States Army, Air Force, Navy and Marine Corps.’ Within the US military, there has also been an expectation of continuing conflict. One member of the military warned explicitly, There will be no peace. At any given moment for the rest of our lifetimes, there will be multiple conflicts in mutating forms around the globe.

74 Is Wealth Creation Sustainable?

Violent conflict will dominate the headlines, but cultural and economic struggles will be steadier and ultimately more decisive. The de facto role of the US armed forces will be to keep the world safe for our economy and open to our cultural assault. To those ends, we will do a fair amount of killing. (Peters, 1997) This is a situation that the US military intends to ‘win’, by achieving ‘full spectrum dominance’.21 For these purposes, in the USA, the so-called defence budget has been by far the largest in the world, and it is anticipated that it will continue to rise significantly in the future.22 Moreover, various corporate and private interests stand to gain significantly from these developments in the US military (Hartung, 1999), because military campaigns help to create access to new territory, and new situations that offer substantial profitable opportunities for private companies.23

Towards sustainable wealth creation: beyond the ‘free market’ and constant war Increasingly, evidence has accumulated to indicate that the dominant strategies are producing serious adverse consequences, and leading towards dead ends (see, among others, Cobb et al., 1995; Cobb et al., 1999; Douthwaite, 1999). Consequently, various alternatives have been suggested. Among these are:24 ●

Gordon (1986) proposed a ‘front yard strategy’, arguing that Strategies that pursue international primacy not only are economically unreliable but also pose a political threat to democracy at home and peace abroad. We should begin instead to work toward greater independence from the world economy, seeking self-sufficiency not so much for its own sake but, as Keynes concluded, in order to provide wider domestic room for political manoeuvre – opening the space for efforts to forge greater security, democracy, and equality at home.

●

●

Douthwaite (1996) advised the strengthening of local economies and communities to create ‘parallel financial micro-climates’, within which local resources can be used to meet local needs to a much greater extent than would be possible if only world-market prices and interest rates ruled. This would help to protect them from the instabilities of the world system. Anderson (1999) described the transformation of a company, named Interface, that is the world’s largest producer of commercial floor coverings and other interior products. In recent years, Interface has embarked on a mission to make the company a sustainable corporation by leading a worldwide war on waste, and pioneering the processes of sustainable

Hock-Beng Cheah 75

●

●

●

●

development. This involved turning the near-US$1 billion company around to become zero-waste, energy efficient (and then energy selfsufficient), and to improve the working conditions for its 7,000 employees in forty cities worldwide. Hawkins et al. (1999) provided examples of at least quadrupled resource productivity to explain how, across whole economies, people could live twice as well but use half as much material and energy. Such striking gains in resource efficiency could be profitable, and obstacles to their implementation could be overcome by combining innovations in business practice and public policy. Korten (1999) described the need to create living economies or ‘mindful market economies’ that combine ethical cultures with self-organizing economic relationships. These resemble the Smithian benign market economy, comprising small, locally-owned enterprises that function within a community-supported ethical culture to engage people in producing for the needs of the community and its members. Palley (2002) advocated a new development paradigm based on domestic demand-led growth, to replace the dominant model based on exportorientated development that is heavily reliant on foreign demand. To achieve this outcome will require a new constellation of policies based on four pillars: (i) improved income distribution; (ii) good governance; (iii) financial stability and space for counter-cyclical stabilization policy; and (iv) an adequate, fairly-priced supply of development finance. The policies needed to put these pillars in place include labour and democratic rights, appropriate reform and regulation of the financial architecture, and a combination of debt relief, increased foreign aid, and increased development assistance provided through expanded Special Drawing Rights. Cheah and Cheah (2002, 2003) have argued that economies based on the mass-production system are increasingly obsolete, because that system is focused too narrowly on the economic imperative. It largely ignores ecological, social and ethical imperatives. For these and other reasons it is failing, not only in terms of the broader measures of performance, but even on its traditional (economic imperative) performance criteria. They explore the processes that may lead to a shift from the mass-production system based on the single bottom line to a sustainable production system guided by the quadruple bottom line. These processes offer the possibility of transforming situations characterized by ‘unsustainable scarcity’ into ‘sustainable abundance’.

These and other works are helping to prepare the foundations for a shift to a very different conceptual framework, and to a different development paradigm in the decades ahead, as the world struggles to find viable alternatives to the rule of rapacious markets and to the associated dominant ethos that ‘might is right’.

76 Is Wealth Creation Sustainable?

Conclusion ‘We cannot have some eating five times a day while others go five days without eating’, proclaimed Brazil’s newly-installed president, Luiz Inácio ‘Lula’ da Silva (quoted in Cooper and Frasca, 2003). Such situations fan the flames of distrust and conflict. They also call into question the viability of domestic and global systems premised on the primacy of unenlightened self-interest that generate and perpetuate these situations. Indeed, Schlefer (1998) argued that, instead of Adam Smith’s supposed support for the virtues of self-interest guided by the invisible hand, on the contrary, ‘He saw the interests of large capitalists as conflicting with those of the public: capitalists seek high profits, which corrupt and impoverish society. In another example the famous division of labour increases factory output but erodes the intelligence, enterprise, and character of workers.’ This perspective calls for a rethinking of the strongly entrenched economic development orthodoxy, similar to the revised views reported of Keynes: John Maynard Keynes recalled in 1933 that, like most Englishmen, he had been brought up ‘to respect free trade not only as an economic doctrine … but almost as a part of the moral law. I regarded ordinary departures from it as being at the same time an imbecility and an outrage.’ And yet, Keynes went on, he was now firmly of another opinion on the matter. He had come to sympathize ‘with those who would minimize, rather than with those who would maximize, economic entanglement among nations.’ Britain should aim to be its own master. A policy of increased national self-sufficiency, he wrote, ‘is to be considered, not as an ideal in itself, but as directed to the creation of an environment in which other ideals can be safely and conveniently pursued’. (Gordon, 1986) Such a revision would bring Keynes closer to the views of Adam Smith, cited by Gordon (1986), Schlefer (1998), Korten (2001) and others, and it would also provide a very different historical perspective of ‘free market’ and ‘free trade’ (in fact, mercantilist) policies and practices. In this regard, the notable philosopher had suggested that those who do not learn from history will be doomed to fulfil it (Santayana, 1924). This insight may be especially pertinent in helping to explain the recurring cycles of benign and rapacious markets, and their political and military corollaries, each time ending in widespread distrust, conflict and violence. Thus Thucydides (c. 460 BC–395 BC), writing some 2,400 years ago on the causes of the Peloponnesian War, noted that, ‘The real cause I consider to be the one which was formally most kept out of sight. The growth of the power of Athens, and the alarm which this inspired in Lacedaemon, made war

Hock-Beng Cheah 77

inevitable’ (Thucydides (431

BCE),

ch. 1). Furthermore, he reported,

The politicians on each side were armed with high sounding slogans. Both boasted that they were servants of the community and both made the community the prize of the war. The only purpose of their policy was the extermination of their opponents, and to achieve this they stopped at nothing. Where no contract or obligation was binding, nothing could heal the conflict, and since security was only to be found in the assumption that nothing was secure, everyone took steps to preserve himself and no one could afford to trust his neighbour. Many years later Thomas Hobbes revisited such a scenario, and depicted a state of nature in which everyone is at war with each other, and propounded the need for a social contract to resolve the conflicts. And many more years later, at the start of the twenty-first century, various social contracts have been subverted or discarded, and the world again confronts, not peace at the end of the ‘Cold War’, but the prospect of endless war in a conflict against a nebulous enemy called ‘terrorism’ (see Hartmann, 2003). The prospects for winning this war are illusory, when wars commenced earlier against drugs, poverty, hunger, homelessness and injustice have stalled a very long way from success. Nevertheless, it does serve to open the door to rapacious organizations that are seeking opportunities for predatory profits. It may be argued that wealth creation will only be viable, and trust will only prevail in an enduring form in a future, more sustainable, world, where self-interest is moderated by or combined with mutual interests. Then the truth of Mahatma Gandhi’s belief could be demonstrated successfully – that ‘There is enough in the world for everyone’s need.’ In this regard, enlightened self-interest must not be focused merely on short-term personal gains (greed), but on short- and long-term individual and collective interest in a sustainable future, in which the needs of one and all are addressed directly as a principal concern of both the market and the state. Indeed, it is in such a future that we may find the possibility for sustainable abundance – a possibility that there will be more than enough for everyone’s needs. In this regard, the concluding words here may be cited from an inspiring American president, John F. Kennedy, who said in his 1961 Inaugural Address, ‘All this will not be finished in the first 100 days. Nor will it be finished in the first 1,000 days, nor in the life of this Administration, nor even perhaps in our lifetime on this planet. But let us begin.’

Notes 1 See also http://www.newsday.com/news/printedition/ny-bzgreed022770095jul02, 0,3309101.story. 2 For this analysis, greed may be defined as the quest for private gains or benefits greatly in excess of personal needs. Need may be defined as the conditions that ensure personal and collective survival and well-being.

78 Is Wealth Creation Sustainable? 3 Sako (1998) made the useful distinctions between ‘contractual trust’, ‘competence trust’ and ‘goodwill trust’. 4 Moingeon and Edmondson (1998) indicate that there are situations where trust may be(come) an obstacle. 5 Dore (1983) noted the importance of ‘goodwill’ for market capitalism, and Leibenstein (1987) examined the role of trust in offering optimum solutions to various ‘Prisoner’s Dilemma’ situations. 6 Rankin (1998a), Schlefer (1998) and Korten (2001) have argued convincingly that there has been a serious distortion of Adam Smith’s ideas. Nevertheless, the misinterpreted idea has been widely accepted, and now this misconception has acquired its own conceptual and empirical significance. As Kuttner (1998, p. 3) observed, ‘The ideal of a free, self-regulating market is newly triumphant. The historical lessons of market excess, from the Gilded Age to the Great Depression, have all but dropped from the collective memory. Government stands impeached and impoverished, along with the essence of human liberty, and the most expedient route to prosperity.’ 7 Higgs (1987) suggested that a government’s responses to national ‘crises’ (real or imagined) tends to lead to ever-increasing government power that endures long after each crisis has passed. Over time, this impinges increasingly on both civil and economic liberties, and fosters extensive corporate welfare and favours. As government power grows, it achieves a form of autonomy, making it ever more difficult to decrease its size and scope, and to resist its further efforts to increase its reach. 8 For more extended analyses of these dynamics, see Polanyi (1944) and Hirschman (1977, 1982). 9 As Kuttner (1998, p. 5) noted, ‘Beyond a certain point, excessive marketisation may not be efficient even for economic life.’ 10 This was during the 1790s–1840s, the period of increasing specialization of traditional enterprise. During this period, American business enterprises were generally small (atomistic) units, managed by owners and/or partners. Work was done largely by the owner-managers and a few employees. Such firms began with a low level of specialization but, over time, work activities gradually became more specialized. Chandler identified the subsequent periods as follows: 1840s–1920s: period of the rise of the modern American enterprise; 1920s–1960s: period of increasing dominance of the modern American corporation; after 1960s: period of relative decline of the American business corporation. 11 http://www.pbs.org/wgbh/pages/frontline/shows/regulation/. [Accessed August 2003.] 12 See http://www.pbs.org/wgbh/pages/frontline/shows/blackout/ and http://www. fguide.org/Bulletin/enron.htm. [Accessed August 2003.] 13 See Committee of Experts on Tobacco Industry Documents (2000), Bitton et al. (2002), and Schapiro (2002). 14 See also http://www.ctj.org/html/enron.htm and http://www.ctj.org/html/ camptax.htm. [Accessed August 2003.] 15 See Scheer (2001) and Palast (2003, ch. 2). 16 One consequence has been a flood of publications proclaiming the virtues of trust in organizations and society, and prolific advice on how this might be promoted. See, for example, Fukuyama (1995), Ryan and Oestreich (1998), Reina and Reina (1999), Lewis (1999), Zak and Knack (2001). 17 See also Friedman (1999b), and the critique by Korten (1999).

Hock-Beng Cheah 79 18 See Bowden (1996), Harrison (1997) and http://news.bbc.co.uk/1/hi/programmes/ panorama/archive/970385.stm. [Accessed August 2003.] 19 See Oxfam (2002), Jordan and Sullivan (2003), Rossett, et al. (2000), and http://news.bbc.co.uk/nol/shared/spl/hi/programmes/panorama/transcripts/read ysteadytrade.txt. [Accessed August 2003.] 20 See comments by Warren Buffett, the well-known American investor, on these devices, http://www.fortune.com/fortune/print/0,15935,427751,00.html. 21 See http://www.defenselink.mil/news/Jun2000/n06022000_20006025.html and http://www.dodccrp.org/1999CCRTS/pdf_files/track_6/109phist.pdf. 22 http://www.defenselink.mil/news/Feb2003/b02032003_bt044-03.html. 23 See Reilly (2002), Greider (2003), Jackson (2003) and Klein (2003). 24 See also Weisskopf et al. (1983), Hawken (1993), Henderson (1999), Theobald (1999) and Hayden (2003).

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80 Is Wealth Creation Sustainable? Committee of Experts on Tobacco Industry Documents (2000) Tobacco Company Strategies to Undermine Tobacco Control Activities at the World Health Organisation (http://www5.who.int/tobacco/repository/stp58/who_inquiry.pdf). Cooper, M. and Frasca T. (2003) ‘Lula’s Moment’, The Nation, 10 March. Dieter, H. (1998) ‘Crises in Asia or Crisis of Globalisation?’, Centre for the Study of Globalisation and Regionalisation, Working Paper No. 15/98 (Coventry, CSGR). Dore, R. (1983) ‘Goodwill and the Spirit of Market Capitalism’, British Journal of Sociology, 34, pp. 459–81. Douthwaite, R. (1996) Short Circuit: Strengthening Local Economies for Security in an Unstable World (Totnes, Green Books). Douthwaite, R. (1999) The Growth Illusion: How Economic Growth has Enriched the few, Impoverished the Many and Endangered the Planet (Gabriola Island, New Society Publishers). Elangovan, A. and Shapiro, D. (1998), ‘Betrayal of Trust in Organisations’, Academy of Management Review, 23(3), pp. 547–66. Frank, T. (2000) One Market Under God: Extreme Capitalism, Market Populism, and the End of Economic Democracy (New York, Doubleday). Frank, T. (2002) ‘Shocked, Shocked! Enronian Myths Exposed’, The Nation, 8 April. Friedman, T. (1999a) ‘A Manifesto for the Fast World’, New York Times, editorial, 28 March. Friedman, T. (1999b) The Lexus and the Olive Tree (London, HarperCollins). Fukuyama, F. (1995) Trust: The Social Virtues and the Creation of Prosperity (New York, Free Press). Galbraith, J. K. (2002) ‘The Brazilian Swindle and the Larger International Monetary Problem’, Levy Economics Institute Policy Note 2002/2. Godley, W. (2003) ‘The US Economy: A Changing Strategic Predicament’, Strategic Analysis, Levy Economics Institute, March. Gordon, D. (1986) ‘Do We Need to Be No. 1?’, The Atlantic Monthly, April. http:// www.theatlantic.com/politics/foreign/gordon.htm. [Accessed August 2003.] Graham, C., Litan, R. E. and Sukhtankar, S. (2002) ‘Cooking the Books: The Cost to the Economy’, The Brookings Institution, Policy Brief No.106. Greider, W. (2001) ‘A New Giant Sucking Sound’, The Nation, 31 December. Greider, W. (2002) ‘Crime in the Suites’, The Nation, 4 February. Greider, W. (2003) ‘Military Globalism’, The Nation, 31 March. Haas, R. D. (1995) ‘Profits Through Principles’, In BayArea Council Hall of Fame Profiles. http://www.bayareaCouncil.org/newsunts/and/Selectedprofiles.pdf. [Accessed August 2003.] Hagen, J. and Choe, S. (1998) ‘Trust in Japanese Interfirm Relations: Institutional Sanctions Matter’, Academy of Management Review, 23(3), pp. 589–600. Harrison, D. (1997) ‘Greed Fuels Disaster of World-wide Proportions’, Observer, 7 October. Hartmann, T. (2002) Unequal Protection: The Rise of Corporate Dominance and Theft of Human Rights (Emmaus, Pa Rodale). Hartmann, T. (2003) ‘When Democracy Failed: The Warnings of History’, Common Dreams, 16 March. Hartung, W. (1999) ‘Military-Industrial Complex Revisited: How Weapons Makers Are Shaping U.S. Foreign and Military Policies’, Foreign Policy in Focus, Special Report (Washington, DC, Institute for Policy Studies). Hawken, P. (1993), The Ecology of Commerce: A Declaration of Sustainability (New York, HarperCollins).

Hock-Beng Cheah 81 Hawkins, P., Lovins, A. B. and Lovins, L. H. (1999) Natural Capitalism: Creating the Next Industrial Revolution (New York, Little, Brown). Hayden, T. (2003) ‘Landless, Jobless, But Not Hopeless’, The Nation, 9 February. Henderson, H. (1999), Beyond Globalization: Shaping a Sustainable Global Economy (Bloomfield, Conn., Kumarian Press). Higgs, R. (1987) Crisis and Leviathan: Critical Episodes in the Growth of American Government (Oxford University Press). Hirschman, A. (1977) The Passion and the Interests: Political Arguments for Capitalism before Its Triumph (Princeton, NJ, Princeton University Press). Hirschman, A. (1982) Shifting Involvements: Private Interest and Public Action (Princeton, NJ, Princeton University Press). Hobbes, T. (1651) Leviathan (1996 revd student edn) (Cambridge University Press). Jackson, J. (2003) ‘Iraq: From Gunboat Diplomacy to Gunpoint Democracy’, Common Dreams, 28 March. Jordan, M. and Sullivan, K. (2003) ‘Trade Brings Riches, But Not To Mexico’s Poor’, The Washington Post, 23 March. Klein, N. (2003) ‘Privatization in Disguise’, The Nation, 28 April. Klinger, S. and Sklar, H. (2002) Titans of the Enron Economy: The Ten Habits of Highly Defective Corporations (Boston, Mass., United for a Fair Economy). Korten, D. (1999) The Post-Corporate World: Life After Capitalism (Bloomfield, Conn., Kumarian Press). Korten, D. (2001) When Corporations Rule the World, 2nd edn (Bloomfield, Conn., Kumarian Press). Krugman, P. (2002) ‘A System Corrupted’, New York Times, 18 January. Kuttner, R. (1998) Everything for Sale: The Virtues and Limits of Markets (New York, Alfred Knoff). Lazonick, W. and O’Sullivan, M. (1997) ‘Corporate Governance and Corporate Employment: Is Prosperity Sustainable in the United States?’, Levy Economics Institute Working Paper No. 183 (Annandale-on-Hudson, NY, The Levy Economics Institute of Bard College). Leibenstein, H. (1987) Inside the Firm (Cambridge, Mass., Harvard University Press). Levinson, M. (1988) Beyond Free Markets: The Revival of Activist Economics (Lexington, Mass., Lexington Books). Lewicki, R., McAllister, D. and Bies, R. (1998) ‘Trust and Distrust: New Relationships and Realities’, Academy of Management Review, 23(3), pp. 438–58. Lewis, J. (1999) Trusted Partners: How Companies Build Mutual Trust and Win Together (New York, Free Press). Mackenzie, G. et al. (2002) Opportunity Lost: The Rise and Fall of Trust and Confidence in Government After September 11 (Washington, DC, Center for Public Service, The Brookings Institution). McIntyre, R. and Nguyen, T. D. (2000) Corporate Income Taxes in the 1990s, (Washington, DC, Institute on Taxation and Economic Policy). Mills, D. Q. (1996) ‘The Changing Social Contract in American Business’, European Management Journal, 14(5), pp. 451–6. Mishra, A. and Spreitzer, G. (1998) ‘Explaining How Survivors Respond to Downsizing: The Roles of Trust, Empowerment, Justice and Work Design’, Academy of Management Review, 23(3), pp. 567–88.

82 Is Wealth Creation Sustainable? Moingeon, B. and Edmondson, A. (1998) ‘Trust and Organisational Learning’, in N. Lazaric and E. Lorenz (eds), Trust and Economic Learning (Cheltenham, Edward Elgar), pp. 247–65. Moore, S. and Stansel, D. (1996) ‘How Corporate Welfare Won: Clinton and Congress Retreat from Cutting Business Subsidies’, Cato Policy Analysis, 254, 15 May. Oxfam (2002), Rigged Rules and Double Standards: Trade, Globalisation and the Fight Against Poverty (London, Oxfam). Palast, G. (2003) The Best Democracy Money Can Buy: The Truth About Corporate Cons, Globalization and High-Finance Fraudsters, 2nd edn (New York: Plume). Palley, T. (1998) Plenty of Nothing: The Downsizing of the American Dream and the Case for Structural Keynesianism (Princeton, NJ, Princeton University Press). Palley, T. (2002) Domestic Demand-Led Growth: ‘A New Development Paradigm’, Discussion Paper Foreign Policy in Focus (Washington, DC, Institute for Policy Studies). http://www.Ppif.org/papers/development.html. [Accessed August 2003.] Partnoy, F. (1997) F.I.A.S.C.O. Blood in the Water on Wall Street (New York, W. W. Norton). Partnoy, F. (2003) Infectious Greed: How Deceit and Risk Corrupted the Financial Markets (New York, Times Books). Pesek, W. (2003) ‘Indonesia May Dump Dollar; Rest of Asia Too?’, Bloomberg News, 17 April. Peters, R. (1997) ‘Constant Conflict’, Parameters, XXVII(2). Pew Research Center (2002) What the World Thinks in 2002: How Global Publics View Their Lives, Their Countries, the World, America (Washington, DC, Pew Research Center for the People and the Press). Polanyi, K. (1944), The Great Transformation: The Political and Economic Origins of our Time (Boston, Mass., Beacon Press). Prashad, V. (2002) Fat Cats and Running Dogs: The Enron Stage of Capitalism (Monroe, Me., Common Courage Press). Rankin, K. (1998a) ‘What Adam Smith Really Said About the “Invisible Hand” ’ (http://www.ak.planet.gen.nz/~keithr/rf98_ InvisibleHandQuote.html). Rankin, K. (1998b) ‘Self Interest and the “War of All Against All” ’, New Zealand Political Review, 7(1): pp 6–10. Rankin, K. (1999) ‘The “Prisoner’s Dilemma”: Competition, Cooperation or Deception?’, New Zealand Political Review, 8(2): pp 16–21. Reich, R. (1996) Interviewed for PBS Frontline Programme ‘Does America Still Work?’, broadcast 21 May (http://www.pbs.org/wgbh/pages/frontline/america/interviews/ reich.html) [Accessed August 2003]. Reilly, J. (2002) ‘The U.S. “War on Terror” and East Asia’, Foreign Policy in Focus Policy Report (Washington, DC, Institute for Policy Studies). Reina, D. and Reina, M. (1999) Trust and Betrayal in the Workplace: Building Effective Relationships in Your Organization (San Francisco: Berrett-Koehler). Rosset, P., Collins, J. and Lappe, F. (2000) ‘Lessons from the Green Revolution: Do We Need New Technology to End Hunger?’, Tikkun, March/April. Ryan, K. and Oestreich, D. (1998) Driving Fear Out of the Workplace: Creating the HighTrust, High-Performance Organization (San Francisco: Jossey-Bass). Sako, M. (1998) ‘The Information Requirements of Trust in Supplier Relations: Evidence from Japan, Europe and the United States’, in N. Lazaric and E. Lorenz (eds), Trust and Economic Learning (Cheltenham: Edward Elgar), pp. 23–47. Santayana, G. (1924) The Life of Reason or The Phases of Human Progress: Reason in Common Sense (2nd edn) (New York: Charles Scribner’s Sons. Originally published 1905: Charles Scribner’s Sons.)

Hock-Beng Cheah 83 Schapiro, M. (2002) ‘Big Tobacco’, The Nation, 6 May. Scheer, R. (2001) ‘Connect the Enron Dots to Bush’, The Nation, 11 December. Schlefer, J. (1998) ‘Today’s Most Mischievous Misquotation: Adam Smith Did Not Mean What He Is Often Made To Say’, The Atlantic Monthly, March. Shields, J. (1999) ‘Corporate Welfare and Foreign Policy’, Foreign Policy in Focus Special Report (Washington, DC, Institute for Policy Studies). Shiva, V. (2000) ‘Globalisation and Poverty’, Resurgence, 202, September/October. Slivinski, S. (2001) ‘The Corporate Welfare Budget: Bigger Than Ever’, Cato Policy Analysis, 415, October 10. Smith, A. (1759) The Theory of Moral Sentiments (1982 edn) (Indianapolis: Liberty Classics). Smith, A. (1776) The Wealth of Nations (1937 edn) (New York: Modern Library). Soros, G. (1995) ‘The Capitalist Threat’, The Atlantic Monthly, May. Theobald, R. (1999) We Do Have Future Choices: Strategies for Fundamentally Changing the 21st Century (Lismore New South Wales, Southern Cross University Press). Thucydides (431 BCE), History of the Peloponnesian War, trans. by Richard Crawley (http://classics.mit.edu/Thucydides/pelopwar.html). [Accessed August 2003.] Weisskopf, Thomas E., Bowles, S. and Gordon, D. M. (1983) Beyond the Waste Land: A Democratic Alternative to Economic Decline (New York: Doubleday). Zak, P. and Knack, S. (2001) ‘Trust and Growth’, The Economic Journal, 111, pp. 295–321.

4 Sustainable Governance for Sustainable Development Gill-Chin Lim

Introduction After the end of the Second World War, the wide gap between rich and poor countries continued for decades. Both capitalist and Marxist scholars observed the phenomenon with pessimistic opinions about the possibility of significant development in the lagging nations. Capitalist economists argued that the Third-World countries lacked the basic requirements for successful economic growth – such as capital, productive human resources, natural endowment, technology and competent government. Some Marxists attributed the backwardness of the poor nations to their dependency on more developed, advanced industrial countries. However, beginning in the 1960s, the so-called Four Tigers of Asia – Hong Kong, Taiwan, Singapore and South Korea – recorded remarkably high rates of growth, surpassing that of advanced countries. The myth of underdevelopment was challenged. Scholars and policy-makers wondered how the Asian Miracle came about, and began a debate about how these economies had been able to attain their exceptional growth. One of the main themes of the debate was the role of Asian values – particularly the Confucian values emphasizing Confucian authoritarianism, loyalty and frugality – in economic development. An optimistic extension of Asian values presumed an Asian model of governance based on Asian values. While the debate was going on, several economies in the Asian region – including Korea – suddenly faced serious financial crises. These incidents sparked questions about the basic premises of the Asian Miracle and the Asian development model based on dominant Confucian values. A search for alternative explanations also began. A parallel trend relevant to this debate was the erosion of public trust in public and private institutions. The Asian financial crises raised serious doubts about the accountability of governments and businesses. There exists an abundance of empirical evidence on the lack of trust in government in advanced countries (Nye, Jr. et al., 1998).1 A broader study of the role of 84

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moral capital2 – such as trust – in social and economic development appeared (Fukuyama, 1995). Under these circumstances, scholars examined the causes of, and remedies for, corruption (Kidd and Richter, 2002). The ultimate objective of this chapter is to propose a normative strategy for good governance in Asia, which can also be applied to other countries. First, I present a conceptual framework with which the subject of governance and trust in development processes can be studied. Next, I review the main features of Asian thought relevant to governance. I expand my discussion of Asian thought concerning governance beyond the Confucian School, which has been at the centre of the debate. Although the Confucian School dominated philosophical application of governance in some states during certain times in history, there are other schools of thought that have exerted substantial influence on the formulation of social values and governance structures. I include the Taoist School, the Legalist School, the Warfare School, and Buddhism. I pay special attention to how the concept of governance and related values such as trust are viewed by these schools of thought in Asia. With these conceptual and philosophical analyses as a background, I look at Korea in more detail. I evaluate the performance of presidential governance since Korea embarked on economic development in the early 1960s. Evidence suggests that Korean presidents were not directed by the Asian model of governance that relied on Confucian values. A probe into the individual characteristics and behaviour of Korean presidents in relation to their performance shows that Korean governance was characterized by mistrust, inconsistency and anomie. It was a case of unsustainable governance. After this examination, in an effort to recommend an appropriate role for the international community in dealing with the global challenge of good governance for sustainable development, I review what the United Nations attempts to do through the policy mechanisms framed by the World Summit on Sustainable Development (WSSD). The last section of the chapter presents a set of general recommendations regarding a normative – yet practical – strategy for sustainable governance.

Analytical framework Governance: definition and measurement Definition The World Bank, which has been a leading international institution in conducting research on governance, published a report in 1992 entitled Governance and Development. It defined governance as follows: the manner in which power is exercised in the management of a country’s economic and social resources for development. (World Bank, 1992, p. vii)

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The World Bank is interested in governance because it is concerned with sustainable development, for which good governance is one of the necessary conditions. The World Bank identified three distinct aspects of governance: (i) the form of political regime; (ii) the process by which authority is exercised in the management of a country’s economic and social resources for development; and (iii) the capacity of governments to design, formulate and implement policies, and discharge functions. The Bank’s Articles of Agreement explicitly prohibits its involvement in political issues, and thus it focuses on the second and third aspects. For the World Bank, governance is intended for a country as a whole, but it can be applied to ‘ “corporate governance” – the framework of laws, regulatory institutions and reporting requirements that condition the way the corporate sector is governed’ (World Bank, 1994, p. xiv). At the inception of the Bank’s work on governance, it was limited to the public sector. However, since the performance of government and business are interdependent, the Bank later expanded its work on governance to the private sector. The Bank’s work in corporate governance focuses on shareholder rights; stakeholder treatment; disclosure and transparency; and board duties. It assesses member countries’ corporate governance following the OECD Principles of Corporate Governance (OECD, 1998). The paragraph below explains what the OECD means by corporate governance: One key element in improving economic efficiency is corporate governance which involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and shareholders and should facilitate effective monitoring, thereby encouraging firms to use resources more efficiently. The OECD principles are designed mainly for publicly-traded companies. However, they can be applied to corporate governance in non-traded companies, such as privately held and state-owned enterprises. In the private sector, corporate governance refers to a set of relationships among four groups of actors that share certain goals of the corporation: (i) shareholders; (ii) board of directors; (iii) management; and (iv) other stakeholders. In general, governance can be defined as ‘a set of actions, rules and relationships among a group of actors who share certain organizational goals’. In a system of governance there are actors, goals, and means of achieving the goals. Actors have their respective goals, which may not be identical to the overall goals of the

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organization. Means are the tools of implementation, such as (i) moral persuasion; (ii) rules and regulations; and (iii) incentives and rewards to achieve goals.

Measurements In terms of measuring governance, the World Bank developed six dimensions of governance (Kaufmann et al., 1999, 2002): ● ● ● ● ● ●

Voice and accountability; Political stability; Government effectiveness; Regulatory quality; Rule of law; and Control of corruption.

In the meantime, the UNDP, which has been engaged in research on governance since the mid-1990s (UNDP, 1997a, 1997b) constructed two groups of indicators for governance (UNDP, 2002).3 The first group – Objective Indicators of Governance – consists of three sub-groups with six indicators: ●

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Participation: ● Voter turnout in latest election for lower or single house; ● Year women received right to vote; ● Seats in parliament held by women. Civil society: ● Trade union membership; ● Non-governmental organizations. Ratification of rights instruments: ● International Convention on Civil and Political Rights; and ● Freedom of Association and Collective Bargaining Convention 1987.

The second group – Subjective Indicators of Governance – has three subgroups with eleven indicators: ●

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Democracy: ● Polity score; ● Civil liberties; ● Political rights; ● Press freedom; ● Voice and accountability. Rule of law and government effectiveness: ● Political stability and lack of violence; ● Law and order; ● Rule of law; ● Government effectiveness.

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Corruption: ● Corruption Perceptions Index; and ● Graft (corruption).

The World Bank study covers 175 countries and the UNDP reports on 173. These measurements can be used to understand the past and current status of governance in different countries, and to design and evaluate policies designed to improve governance. Empirical estimates of these indicators for selected countries appear in Table 4.1 of this chapter.

Defining trust: universal and selective trust, mistrust and complicity Love all, trust a few. Do wrong to none. William Shakespeare (1564–1616) Do not trust all men, but trust men of worth; the former course is silly, the latter a mark of prudence. Democritus (460–370 BC) My wishes are to comfort the old, trust my peer, and embrace the young. Confucius (c. 551–479 BC) Trust men and they will be true to you; treat them greatly, and they will show themselves great. Ralph Waldo Emerson ((1803–82) Those unworthy of trust are met with distrust. Lao-Tzu (c. 604–531

BC)

After all, what is trust? In a phrase, I think trust means being counted on to do the right thing when nobody is watching. It means doing what you say you are going to do. It means that your word is your bond – something British industries have taught the world a great deal about. Carly Fiorina (2002) The word ‘trust’ can have many different meanings. Quite often in journalistic, as well as scholarly writings, it is used without a clear definition. In different cultures, its meaning can also vary. As we can see in the quotations above, each has his or her own view, albeit there are some similarities. ‘Trust’ can be used as both a noun and a verb. A typical dictionary definition of ‘trust’ used as a noun is ‘confidence, dependence, faith, reliance or credence’. It refers to ‘complete assurance and certitude regarding the character, ability, strength, or truth of someone or something’ (Merriam Webster Thesaurus). As a verb it means ‘place confidence in, confide in, depend upon, have no doubt, be sure about, rely on, or swear by’.4 There are two different relationships of ‘confidence, dependence, faith, reliance or credence’. On the one hand, a group of individuals have

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confidence in one another, and their actions are legitimate and transparent. Their organizational goals do not violate the ethical standards and laws of their society. This is a case of a legitimate trust relationship. A person may trust all those whom he or she is associated. In this case, the person offers universal trust. In contrast, a person may trust only a certain fraction of people he or she deals with, in this case offering selective trust. On the other hand, there are groups of individuals who rely on one another with confidence, but their organizational purpose is to engage in unethical or illegal actions, such as drug trafficking or financial fraud. Trust is not quite suitable a word to use in this case; the term ‘complicity’ better describes it. The dictionary defines ‘complicity’ as ‘association with an improper or unlawful activity’. Its synonyms are ‘collusion’ and ‘connivance’ (Merriam Webster Thesaurus).

Units of analysis and factors affecting the level of trust Units of analysis and their relationships The level of trust, mistrust or complicity can be examined within a unit, between two units, or among three or more units. These units range from a small group of individuals to the entire world. Key units for which trust relationships can be analysed include the following: ●

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Private group: ● Family; ● Friends; ● School and alumni; ● Cultural group; ● Workplace. Government: ● Local government; ● National government. Business: ● Local business; ● National business. Civic organization: ● Local civic organization; ● National civic organization. International organization: ● International public organization; ● International business; and ● International civic organization.

Figure 4.1 shows a matrix of trust relationships. Along the diagonal axis of the table, IT (internal trust relationship) can be analysed. For example, one can examine the level of trust within a family, a local government or an

Workplace

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Figure 4.1

Matrix of relationships among units

Note: IT ⫽internal trust relationship; ET ⫽external trust relationship.

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international agency. For all other areas in the table, ET (external trust relationship) can be investigated. For example, the trust relationship between an individual and local government, a family and national government, or a national government and an international organization can be examined. Some of the relationships are of critical importance to public well-being – for example, the trust relationship between an individual and the various units of government, while others are presented in the table as part of an overall conceptual scheme but are of less relative significance – for example, the trust relationship between a group of a person’s friends and the IMF, an international organization. The value of the matrix is that it can serve as a comprehensive framework to conduct theoretical and empirical studies on trust relationships among different groups in society. Despite the growing volume of studies on trust, many of them are still anecdotal. Many boxes in the table have not been filled following concrete analysis.

Factors affecting the level of trust There are several factors that affect the level of trust within a unit, or among units. First, the dominant social, political, cultural and religious thoughts that evolve through history influence significantly the level of trust in a relationship. Second, the behaviour and policies of government affects the level of trust. The actual and perceived level of accountability of government, its economic performance and public relations strategies – information dissemination or propaganda – are often assumed to be important determinants of how much people trust governments. Third, the mass media and mass communication among the populace can affect the level of trust. Rapid advances in communication and information technology enabled modern mass media to gain a profuse amount of information and reach a large number of people in a speedy manner. We should also note that, increasingly, in addition to conventional mass media such as radio and TV, a large proportion of the population has access to new devices such as wireless telephones and the Internet. People can gain information faster and at less cost, demanding disclosure of information from public and private organizations and formulating watchdog activities relatively easily.

Conditions for sustainable governance The ultimate goal of good governance is to improve people’s quality of life. An international organization such as the United Nations (UN) is devoted to the advancement of the well-being of people around the world. Its member nations are presumed to endeavour to pursue what is declared as its common goals.5 An assumption behind the study of trust and governance is that sustainable governance is desirable because it eventually contributes to an improvement in human living conditions. People will be enabled to live in

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peace, enjoy basic human rights, remove oppression, be more productive, have better housing and be free from hunger. Good governance adds to positive social, political and economic benefits. Therefore investment in the means of enhancing governance is justified. The first condition for sustainable governance is that the actors in the governance system must have three categories of competence: technical competence, inter-subjective competence and ethical competence. Technical competence is the ability to carry out duties with technical knowledge, such as analytical and scientific skills. Without technical competence, there will be mistakes, negligence, and frequent human error. Inter-subjective competence is the ability to communicate and negotiate with other actors in a governance system to minimize conflict and reach a mutually acceptable consensus. Without inter-subjective competence, individuals and units cannot communicate effectively, and may run into mistrust because of unintended miscommunication and misunderstanding. Ethical competence refers to the ability to make sound moral judgements, and to be accountable and transparent. Without ethical competence, the technical and inter-subjective competences are useless. People with sophisticated technical expertise and refined communication skills can lie, manufacture results and engage in corruption for illegitimate private gain. This is a case of complicity. We have seen abundant examples of complicity in government and business. We have observed corruption in the governments of Brazil, Mexico, Indonesia, Korea, and so on, demonstrating poor governance in the public sector. Enron and WorldCom are prime examples of how the lack of ethical competence leads to untrustworthy relationships and unsustainable corporate governance. The relationships among the actors in the units of analysis can be legitimate or illegitimate, efficient or inefficient, truthful or deceptive. An actor who is technically, inter-subjectively and ethically competent is in a state of sustainable governance, and able to achieve its goals. In an ideal world, all actors should have technical, inter-subjective and ethical competence, and their relationships should be legitimate, efficient and truthful. When the majority of individual units in a governance system do not possess these three competencies, the world will exist in an ongoing state of mistrust and complicity, facing crisis after crisis.

Governance and trust in Asian thought The teachings of Confucius are widely known, not just in Asia, but also in the West. We even see jokes and playful games beginning, ‘Confucius said …’. However, there are several other social thoughts that have influenced scholarship, political behaviour, religion, culture and secular behaviour (Mote, 1989). In addition to the Confucian School, there are four other major schools of thoughts from Asia that are worth reviewing to study

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governance: the Taoist School, the Legalist School, the Warfare School, and Buddhism. In reviewing these five schools, I will first describe the personal background of each school’s main thinker, and then identify the key ideas for governance – particularly, those relevant to trust – in their writings.6 I think it is both important and necessary to understand a thinker’s personal background and consider it in the examination of his philosophical discourse.

The Confucian School Confucius [L]ove the people. Confucius, The Analects, 12.22 (Confucius, 2000) The two main thinkers of Confucianism are Confucius (c. 551–479 BC) and Mencius (c. 390–305 BC). The best-known Chinese moral and political philosopher, Confucius’ most important thoughts are recorded in The Analects, a posthumous collection of his statements and dialogues with his disciples. Mencius and Hsun Tzu (c. 298–238 BC) are compared for their diverging positions on human nature. Typically, Mencius is known as a believer in ‘the theory that human nature is innately good’, while Hsun Tzu is treated as a believer in ‘the theory that human nature is evil’. Hsun Tzu believed that human beings have desires to satisfy and, if not properly tamed, the evil side of human nature can be exposed as a dominant human characteristic. His thoughts resembled those of Confucius because he believed in rational thinking for the governance of human affairs. However, he was critical of the Confucian idea that Heaven is the supreme source of power, morality and social relations. Instead, Hsun Tzu advocated the use of Li (ritual) as means of social control, and maintained that learning, moral education and the rules of the society could nurture human ability to conduct a good life and good governance. His unique position is taken by legalists (discussed later in the chapter). Confucian teaching is not unitary over a long period of time. Its history reveals differences in various incarnations of Confucianism. Classical Confucianism led to Han Confucianism and then Neo-Confucianism. A notable scholar in the Neo-Confucian School is Chu Hsi (1130–1200), during the Sung Dynasty (AD 960–1279), whose reinterpretation and synthesis has had a significant impact in the ensuing period Confucius lived in the second half of the Chou Dynasty (1044?–256 BC), when China was divided by feudalistic states and suffered from disorder and corruption. He wanted to employ moral principles to guide the behaviour of people and the governance of governments. The story of Confucius’s life shows an interesting realization of the gap between philosophy and real life. While he wanted to practice his political philosophy in government, it was only when he was 52 years old that he

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served in government, and only for a short period of time. He continued to seek opportunities to work for a ruler who would let him put his political philosophy into practice, but ultimately failed to do so. He spent the rest of his life devoted to teaching in China.

People’s well-being, education, love, loyalty, honesty and universal trust Confucius showed substantial concern and interest in people’s well-being and education, which can be regarded as his main goals of governance. Material well-being and education still occupy the top of the agenda for public policy in contemporary societies. When he was travelling to Wei, Confucius commented, ‘There are so many people.’ His disciple, Jan Yu, asked him what should be done with such large clusters of population. The Master replied, ‘Make them rich.’ Jan Yu asked, ‘Once they are made rich, what is next?’ The Master said, ‘Educate them’ (The Analects, 13.9). The means to achieve this goal lies in virtuous conduct of life – the essence of Confucius’s philosophy. He emphasized Jen, which means ‘love, charity, benevolence, humanity and kindness’. He tells us to ‘love the people’ (The Analects, 12, 22). As a moral philosophy, loyalty and honesty are important concepts in the Confucian doctrine. First, he proclaimed his own life to be transparent: Confucius said to his disciples: ‘My disciples, do you think I hide anything from you? There is nothing I hide from you. There is nothing I do that I do not share with you. That is how I am.’ (The Analects, 7, 24) He taught four things: culture, conduct, loyalty and trust (7, 24) and emphasized, ‘Put loyalty and trust above all’ (9, 25). Then he spoke of the honest relationships with friends: ‘Advise your friends with loyalty; guide them with goodness’ (12, 23). Learning is an additional dimension of importance for Confucian doctrine. He said, ‘The love of honesty without the love of learning degenerates into brutality’ (17, 8). He demanded virtue from rulers on order to have well governed states. In this context, trust is a critical guiding principle of the Confucian philosophy. Confucius emphasized trust repeatedly in The Analects. He asked for trust between colleagues: ‘My wishes are to comfort the old, trust my peer, and embrace the young’ (5, 26). And he asked that rulers governed people with trust: ‘If the ruler loves trust, the people dare not to be mendacious’ (13, 4). Confucius believed in universal trust.

Influence Confucius was in search of principles of good public governance, educated disciples, and tried to work in the government to bring about reform in an effort to improve the well-being of the people.

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After his death, Confucianism as the exclusive guiding principle for the empire was practised during the reign of Emperor Wu (140–87 BC) of the Han Dynasty. A version of Confucian philosophy – Neo-Confucianism – provided a foundation upon which developed rules of governance and ethical principles in China, Korea and Japan. However, later, what became known as Confucian principles in the daily lives of people and the government deviated from the original doctrine as taught by Confucius. Although similar, in the daily conduct of life, male supremacy, paternalistic governance, the three-year mourning period, seven rules for sending a daughterin-law back to her family, unequal inheritance and so on were practised as Confucian rules of conduct. In the area of governance, the emphasis on loyalty was often used as a conceptual mechanism to enforce the orders of superiors on to subordinates – sometimes illegitimately – to justify the actions of the rulers. This aspect of secular application of Confucian principles explains why authoritarian governance prevailed in Asian countries, traditionally and even under constitutional democracy. Japanese bureaucracy organized around strict seniority and blind loyalty to the shogun and the emperor under the supreme spiritual authority of the Heavenly Emperor; Singapore’s notorious Confucian elitism of Lee Kuan Yew; and Deng Xiaping’s Chinese authoritarianism mixed with socialist state control are examples of how some practices might have taken a different trajectory from the initial teachings of Confucius. There are numerous versions of The Analects with translators’ interpretations attempting to provide advice to how a person can live their life with Confucian wisdom.

The Taoist School Stop thinking, and end your problems. Lao Tzu

Lao Tzu The central thinker in the Taoist School is Lao Tzu (c. 604–531 BC) – ‘Lao Tzu’ meaning ‘Old Master’. Some conjecture that he was a contemporary of Confucius and had dialogues with him. Legend says that he refused to write books, but while travelling in the west of China he encountered a gatekeeper who asked him to write, and he did. The Tao Te Ching is thought to be either his book, or written by others in the later period and attributed to him. It contains rules and governing principles regarding the universe, nature, government and people. It is a normative description of how the universe, nature and the secular world should work. A cryptic document, the text can be translated and interpreted in many different ways. Lao Tzu was unhappy with the disorder and corruption around him, but unlike Confucius did not seek to work for the government. Rather, he spoke

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of detachment, non-aggression and giving up desires. He served as a custodian in a low-level government position, keeping books and documents, and for that reason some believe that he read more than other scholars of his time. Legends tell that, disappointed by the state of the world, he wandered around on a water buffalo without any definite purpose. Also according to legend, when he met Confucius, he criticized the fact that Confucius was arrogant and greedy. But Confucius, after he parted from Lao Tzu, said that Lao Tzu was like a dragon that could not be captured.

Holistic harmony, simplicity, non-aggression, non-desire, governing without artificiality, and unbounded trust Lao Tzu’s Taoism presents several key concepts relevant to governance: a holistic (universally integrated) view, harmony, simplicity, spontaneity (effortlessness), instinct, non-desire, governing without artificiality and unbounded trust. It may be a contradiction, but Lao Tzu’s philosophy of governance is governing without governing. One may well equate his idea to Henry David Thoreau’s thinking that the least government is the best government. One of the most widely cited paragraphs form the Tao Te Ching describes the holistic view of Taoism: Tao is great Heaven is great; Earth is great; The king, too, is great. They are the four greats in the universe, And the king is among them. Man follows earth. Earth follows heaven. Heaven follows the Tao. Tao follows nature. (Ch. 25) This statement has often been quoted by modern-day environmental thinkers and activists when they explain the philosophical reasons behind living in harmony with nature. Its emphasis on simplicity and spontaneity (effortlessness) are evident: Whenever you advise a ruler by the way of Tao, Advise him not to use force to conquer the universe. For this would only provoke resistance. Force will result in a loss of strength. This is not the way of Tao. What goes against the Tao ends in early demise. (Ch. 30)

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Taoists are pacifists. Lao Tzu denounced the use of weaponry: Fine weapons are instruments of fear; all living things hate them. Therefore, believers in Tao never use them. (Ch. 31) The Taoists’ belief in simplicity, spontaneity (effortlessness), modesty, instinct, and governing without artificiality naturally leads to underscoring the virtuous side of human nature. The concept of trust is a key element in the Tao Te Ching. In Chapters 17 and 23, the following sentence is repeated: ‘Those unworthy of trust are met with mistrust.’ Chapter 13 reads: ‘He who values himself above all under Heaven can be entrusted with all under Heaven; He who loves himself above all under Heaven can be confided with all under Heaven.’ He warned against making promises too easily. He said, ‘Easy promises are seldom trustworthy’ (Ch. 63). In Chapter 49, he recommended universal unbounded trust, applied even to those who are not trustworthy: ‘I trust the trustworthy, and I also trust those who are not trustworthy. That obligates their trust.’ This last sentence can be rendered, ‘Trust is thereby obtained.’

Influence For kings and emperors in search of power and material gain, Taoist philosophy was not an immediately practical apparatus of governance. However, mixed with the Buddhist belief in giving up desire, through which ordinary people attempt to gain peace in life, Taoism became a secular religion for a large proportion of the population in Asia. Statistics on religion in Asia show that a substantial proportion of the Asian population identify themselves as Taoists. As a secular religion, Taoists worship a variety of gods of the earth, heaven, four seasons, ancestors and fictional animals such as dragons. They believe that these god symbols dispel evil and bring good fortune and happiness, and there is a sizeable market for secular Taoist products. The cultural influence of the Tao Te Ching in contemporary society cannot be underestimated. It is said to be the second largest translated classic after the Bible in the world. It has had an effect on many of the younger generation during the 1960s and beyond, not only in Asia but also in Western societies, and it has been translated with interpretations aimed at attracting a larger audience. For example, a version of the Tao Te Ching carries the title The Tao of Power: Lao Tzu’s Classic Guide to Leadership, Influence, and Excellence (Wing, 1986).

The Legalist School To impose death or torture upon offenders is called punishment; to grant encouragements or rewards on men of good deed is called reward. Han Fei Tzu

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Han Fei Tzu Historically, legalism – another important Chinese philosophy relevant to governance – has a long tradition. Han Fei Tzu, the most renowned thinker in this tenet, succeeded the antecedents of the legalist school and absorbed the thoughts of Hsun Tzu (c. 298–238 BC) (introduced in the section on Confucius). Han Fei Tzu and Li Su were Hsun Tzu’s disciples during the Ch’in Dynasty (c. 221–207 BC). The former became the most prominent scholar in the Legalist School, and the latter became the premier of the Ch’in Dynasty. However, at the beginning of the Han Dynasty, Hsun Tzu’s thought was declared to be unorthodox, and since then has stayed outside the mainstream Confucian tradition. Han Fei Tzu (c. 280–233 BC) was born a prince of Han and became a leading architect of the Legalist School. Legends tell that he was a stutterer, and therefore he wrote diligently, delving into a gamut of topics relevant to governance of the state. He offered an uncompromising critique of Mo Tzu and Confucius, and advocated a virtuous way of governance. Deeply impressed by Han Fei Tzu’s book, the king of Ch’in invited him to work in the Ch’in government. Li Su, jealous of Han Fei Tzu, conspired to send poison to him and caused him to commit suicide.

A strong nation, law, punishment and reward, and selective trust The Legalists criticized Confucian philosophy harshly, because it concentrated on the good side of human nature, trust between the ruler and the ruled, and the virtuous conduct of rulers, to achieve good governance. Legalists also rejected the Taoists’ idea of holistic balance, spontaneous harmony, and the Heaven-backed power of kings. At the heart of the Legalist School was the strength of a nation. The goal of governance was to make a nation powerful. To attain this goal, Legalists wanted to govern by means of the law, the use of harsh punishment and reward, and selective use of trust to gain support and remove what was undesirable. Han Fei Tzu claimed that the military and agriculture are the only useful sectors that make a nation strong. In Legalism, establishing and enforcing the law was the most important principle of governance for a strong nation. In ‘Having Regulations’, Han Fei Tzu says, ‘The countries conforming to law are strong and those who do not are weak.’ He promoted an equal application to all people, regardless of social status, as far as the rules of punishment and reward are concerned: Ministers should be punished if they make mistakes and common people should be rewarded if they do good things (‘Having Regulations’). As a means of implementation, Han Fei Tzu proposed that the ruler should use the ‘two handles’ of reward and punishment. To ensure good conduct, the ruler must use the system of punishment and reward enforced

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by law without exception: There are only two handles with which the wise ruler controls his ministers. The two handles are punishments and rewards. What are punishments and rewards? To impose death or torture upon offenders is called punishment; to grant encouragements or rewards on men of good deeds is called reward. Han Fei Tzu argued that love is not an effective means of governance – but rather the law. People engage in good behaviour not because of good will but because of the law (‘The Five Vermins’). The Legalists were anti-intellectual, but they themselves were intelligent intellectuals. In defiance of morality and Confucian scholarship, Han Fei Tzu said Confucius had only seventy disciples who admired his moral principles, and only one of them became humane and moral. So he argued that the ruler should not give public positions to accomplished scholars – one of the five vermins – because they will bring confusion to the law (‘The Five Vermins’). Contrary to the popular belief that the Han Fei Tzu type of Legalists do not believe in the use of trust, legalists were highly perceptive of human nature regarding trust and knew the importance of it in preparing to put law into practice. The story of Shang Yang (Lord Shang) recorded in Ssu-ma Ch’ien’s Shih-chi (Ch. 68) includes an anecdote famous for the phrase ‘i mu chih hsin’. It may be translated as ‘trust about moving a wooden pole’. When Shang Yang’s reform measures were ready to be promulgated, he was worried that people might not deem the government to be trustworthy. He was right in being apprehensive, because it was really a time that lacked trust of any kind. So he placed a long wooden pole by the south gate with an announcement that anyone who moved it to the north gate would be rewarded with ten pieces of gold. People laughed at that. Then he raised the award to fifty pieces of gold, and one man agreed to move it. He was given the fifty pieces of gold, and that incident marked the beginning of the process of rebuilding trust between the government and the people. Internally, Han Fei Tzu promoted the idea of selective and highly limited – guarded – trust to enable the ruler to gain the loyal support of his subordinates. But no others could be trusted. Rulers should always be on the alert and never expose their decisions until the last moment. Trust was only a tool to manage a situation, not a fundamental guiding principle for good governance. Therefore, when Legalists refer to trust, it could be taken as a kind of complicity by the ruler to serve his own selfish purpose rather than to promote the well-being of the people.

Influence Ch’in’s unification of China owed a great deal to Legalist teachings. It helped Ch’in Shih Huang, ‘The August Founding Emperor of Ch’in’, to unify

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China. But the adoption of Confucianism in the later period of Han as official doctrine, and Confucianism’s harsh critique of Legalism throughout ensuing generations made their ideas less visible in the formal arena of politics and governance. But, in reality, the Legalists’ pragmatic and stern principles of governance, similar to those of Niccolò Machiavelli, were more extensively and frequently employed by the rulers and elites of the states. Despite the official adoption of Confucianism, the elites in Asia continued in real life to attempt to use rules – often cruelly oppressive, brutal and undemocratic – in governing the state. This raises the question of hypocrisy, legitimacy and accountability of those who governed in Asia and other national entities throughout history. In contemporary public policy-making, two types of incentive are commonly recommended for policy implementation: carrots and sticks. Is there a similarity between Han Fei Tzu’s ‘two handles of rewards and punishment’ and the modern-day ‘carrots and sticks’? The difference comes from the fact that the decisions to use reward and punishment were made arbitrarily by the ruler. There was no legitimate due process in making decisions the Legalist state. The process by which rewards and punishments were given in Ch’in was far from the way that measures of carrots and sticks are used in modern societies. Their failure to have sustainable governance – Ch’in lasted only fifteen years after it unified China – is historical proof that rules without legitimate due process cannot achieve the goal of good governance.

The Warfare School War is a way of deception. Sun Tzu

Sun Tzu The warlords, kings and emperors in China, Korea and Japan had to fight constantly against their enemies to protect or expand their territories. The art of war was an essential feature of knowledge for survival for the rulers in Asia. To win a war, they needed a special set of doctrines governing a nation, and these were not provided by Confucius, LaoTzu or Han Fei Tzu. The life of Sun Tzu (541–482 BC), the originator of the Warfare School, is not clearly recorded. He was born in Ch’i and later became a general in the state of Wu. Much of the military successes of Wu were credited to Sun Tzu. The Art of War, known to be written by Sun Tzu, is the oldest book on military strategy.

War, moral law, disciplines and tactics, secrecy, spies, and selective trust Perhaps war is the most difficult matter of governance for a nation. The overall goal of waging war is clear – it is victory, but the selection and implementation of the means by which one can gain a victory require

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careful thinking and decisive action. It also requires mobilization of a large number of people and material resources. The crucial importance of war is stated by Sun Tzu in his first chapter, entitled ‘Launching Plans’: ‘War is a vital matter for the state, a matter of life or death, and a road to existence or extinction. Therefore, we must not neglect to study it (1.1). He said that war is governed by five principal factors: (i) The moral law; (ii) Heaven; (iii) Earth; (iv) The generals; and (v) Disciplines and tactics (1.1). Here, we detect a mixture of abstract concepts and practical apparatuses. This type of philosophical and pragmatic thinking demonstrates how insightful the Warfare School is in understanding human nature and behaviour. The following widely-quoted sentence reflects the Warfare School’s keen awareness of the importance of psychology and information when a nation has to go to war: If you know the enemy and know yourself, you will always win. If you do not know the enemy, but know yourself, you will win once and lose once. If you know neither yourself nor the enemy, you will always lose. (3.6) However, it should also be noted that Sun Tzu asserted that the best victory is a victory without a war (3.3). Sun Tzu had two visions of governing principles: one for the soldiers under a general’s command, and another for the enemy. He wanted to enforce the five principal guidelines, in particular the moral law, for a ruler to gain internal trust and thus internal strength. Within the ruler’s camp, maintaining morality was deemed crucial to gaining a victory and trust (Ch. 4: ‘Tactical Dispositions’): The victorious ruler cultivates the moral law, and implements disciplines and tactics. So he is able to carry out a mode of governing which brings a victory to him and a defeat to the enemy. (4.4) Meanwhile, against the enemies, the Warfare School chose a doctrine based on secrecy and deception for winning a war. Using spies was an important implementation mechanism of Sun Tzu’s overall strategy for winning a war. He devoted a whole chapter to describing how to use five kinds of spies: (i) Local spies; (ii) Moles; (iii) Double agents; (iv) Doomed spies; and (iv) Surviving spies. Sun Tzu, in sum, recommended a selective use of trust to different groups. Strong trust internally, and the instrument of secrecy, deception and spying to deal with the enemy.

Influence It is said that many rulers in Asia and other nations were fond of reading Sun Tzu’s Art of War, including Napoleon. It has thus become a book

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not only for military experts but also for those who are interested in strategy and management in government and business. A wide variety of books have appeared using Sun Tzu’s military tactics as guidelines to indicate how people in the modern world can play a winning game. Many translated texts of The Art of War have interpretations and comments that provide the wisdom and strategy of governance in government and business. In the USA, The Asian Mind Game, with its subtitle, Unlocking The Hidden Agenda of the Asian Business Culture – a Westerner’s Survival Manual summarized Sun Tzu as a basic source of ideas for business application (Chu, 1991).

Buddhism Do not engage in sinful act; practice goodness. Buddhist Scriptures

Buddha Buddha (c. 563–483 BC) was born Gotama Siddhartha, a prince to King Suddhodana, head of the Sakhyas tribe and member of the caste of the Kshatriya (noble), and the queen Maya. He was educated in all fields of knowledge to succeed his father. However, at the age of 29, when he witnessed the agonies and suffering of life in the city, he decided to leave his kingdom and started a search for a way to transcend the realities of human suffering. He started a life of solitary wandering, begging and learning the techniques and philosophies of the time. It is said that at the age of 35 he reached the ultimate state of awakening – enlightenment – after forty-nine days of meditation. Buddha’s doctrine is based on the description of the inter-relationship of all human behaviour, and on training in practices aimed at the suspension of the cycle of causalities. Buddha achieved a synthesis of the philosophical knowledge of his time – it is philosophical, but at the same time practical. In essence, he taught that every man and woman could attain the highest status of enlightenment. For forty-five years after his awakening, the Buddha travelled around the country, preaching his doctrines to all classes of people. It is said that he died at the age of 80.

Enlightenment, four truths about life, eight right ways, and trust There are several variations of Buddhist Schools. I will present only the key thoughts of the early Buddhist School, which is shared by others that developed and spread over different parts of Asia, with varying levels of influence. Buddhist Scriptures tells the Buddha’s life story with dialogues that convey his teaching. The essence of Buddhist teaching lies in the four truths

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about life: Ourselves are an amalgamation of body and mind which experience suffering. The causes of this suffering are desire and thirst for existence, such as material and power. The suffering ends when our desire and thirst are exhausted. There are right ways to be relieved from desire and thirst. As a religion which believes in transcending mundane desire, Buddhism underscores basic elements of virtuous conduct. It is expressed by the method of removing desire, known as the ‘Eight Right Ways’: right vision, right thinking, right speech, right action, right mission, right effort, right concentration and right comfort. Other schools reviewed above deal with human relationships and therefore make explicit statements about how the state, the world, and the universe is, or should be, governed. However, Buddhism, as a religion, is concerned with obtaining enlightenment. Buddha left his palace, from where he was supposed to govern. In Buddha’s world, governance of the world is meaningless and does not exist. In Buddhism, a person takes a journey into his or her own inner world and asks self-reflective questions about the relationship between self and the universe. The Buddhist scriptures are filled with messages of devotion and self-sacrifice. Living with the eight right ways of life to obtain enlightenment, people are compelled to avoid ethically wrong behaviour. Thus Buddhism encourages universal trustworthy relationships as an unquestionable property in human relations.

Influence Considering the fact that a large proportion of Asians believe in Buddhism, it is rather curious to note that Buddhism is rarely discussed in the debate over the role religion plays in Asian development. There are various forms of Buddhism in Asia. As we can see in Japan, Korea and China, Buddhism takes a unique form in each, being adapted to local culture and political context. In Korea, Buddhists account for 47 per cent of the population. In Japan, those who observe both Shinto and Buddhism total some 84 per cent. In Hong Kong, an eclectic mixture of local religions gives 90 per cent. In Taiwan, a mixture of Buddhist, Confucian and Taoist thinking account for 93 per cent. In Thailand, Buddhism represents 95 per cent (data as at 1991) (CIA Factbook). Despite its noble aspect of teaching, in reality Buddhism has become a secular religion, mixed with shamanism, because many who pray do so to satisfy their thirsts and desires. In contemporary Korea, many Buddhists pray for personal material gain, good luck in college entrance examinations, entering paradise after death and so on.

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One aspect of Buddhism – seeking freedom from material constraints – has affected the psychology of ordinary people in their need for achievement. During the pre-economic development era, which began in the 1960s, a low level of need achievement prevailed. Secular Buddhism might have imbued nihilistic behaviour among common people. This observation makes us wonder how Thailand, a Buddhist and not a Confucian country, was able to be a latecomer to NICs (newly industrialized countries). Socialist China seemed to discourage Buddhist expansion for fear that the Buddhist nihilism might hinder people’s desire for hard work.

Comparison As a summary of the above theoretical and historical analyses, Figure 4.2 presents a comparison of the five schools in light of the analytical framework described in the section above entitled ‘Analytical framework’. Several observations are made. First, we see clear differences among them in terms of overall governance systems. Three of them – Confucius, Han Fei Tzu and Sun Tzu, constructed distinctive systems of governance characterized by respective goals of governance, means of implementation, and key values. The Taoist school is distinguishable from these three in that Lao Tzu presented an ideal of a harmonious universe, but without forcing artificiality. And Buddha went one step further: there is no governance in the Buddhist’s world. Second, each of them had different sets of goals. Confucius wanted the well-being of the people and education; Lao Tzu was in search of a harmonious universe; Han Fei Tzu desired a strong state; and Sun Tzu aimed at a victory – or a victory without war, if possible. Third, in terms of means, Confucius, Lao Tzu and Buddha focused on moral persuasion; Han Fei Tzu on punishment (rules and regulations) and reward (incentives); and Sun Tzu on moral persuasion and disciplines and tactics (rules). Fourth, while Confucius, Lao Tzu and Buddha embraced positive values such as love, loyalty, trust and devotion; Han Fei Tzu and Sun Tzu possessed a more complex set of values, including enforcement and deception. Fifth, the five schools are divided by types of trust. Confucian and Buddhist Schools believed in universal trust; Lao Tzu embraced universal unbounded trust; and Han Fei Tzu and Sun Tzu used selective trust. Complicity was observed in the Legalist School. While the five schools portray different views about governance, together they covered a wide range of goals and means. The goals of governance were (i) enhancement of people’s well-being; (ii) education; (iii) a strong nation; and (iv) a victory, with or without war. Means of implementation encompassed (i) moral persuasion; (ii) rules and regulations; (iii) rewards (incentives); and (iv) the equal application of law.

Main scholars

Text analysed

Goals of governance

Means of implementation

Dominant values

Type of trust

Confucian School

Confucius; Mencius

The Analects

Well-being of people; Education

Virtuous conduct

Love; Loyalty; Honesty; Trust; Learning

Universal trust

Taoist School

Lao Tzu

The Tao Te Ching

Harmonious universe without forcing artificiality

Detachment; Non-aggression

Holistic view; Harmony; Simplicity; Spontaneity; Instinct; Non-desire; Trust

Universal unbounded trust

Legalist School

Han Fei Tzu

The Han Fei Tzu

Strong nation

Equal application of law; Punishment; Reward

Enforcement

Selective internal trust; Complicity

Warfare School

Sun Tzu

The Art of War

Victory; Victory without war

The moral law; Heaven; Earth; The generals; Disciplines and tactics

Honest understanding of self and others; Deception; Secrecy

Selective internal trust

Buddhist School

Buddha

Buddhist Scriptures

Nongovernance; Enlightenment

Non-governance; Eight right ways

Devotion; Self-sacrifice; Non-desire

Universal trust

105

Figure 4.2 Comparison of five schools

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South Korea Religion in Korea In Korea, Buddhism was adopted as early as 535 during the Silla Kingdom (57 BC–AD 924) and became an official religion under the Koryo Kingdom (AD 924–1392). Towards the end of Koryo, however, corruption in Buddhism was rampant. The succeeding Chosun Kingdom (1392–1910) adopted Confucianism as the official doctrine and, as a result, the influence of Buddhism on the public scene diminished substantially. Nevertheless, Buddhism continued to be a popular religion in Korean history, surviving the Chosun Kingdom and Japanese colonial rule (1910–45). In South Korea, Buddhists account for 47 per cent of the total population; Christians 49 per cent; Confucianists 3 per cent; and Shamanists, Chondogyo followers (Religion of the Heavenly Way), and others 1 per cent (CIA Factbook). These facts about the composition of religious groups imply that the social trend in Korea has been formulated by multiple factors including Confucianism, Christianity, Buddhism, Taoism and others. It is not appropriate to conclude that there was a single social doctrine which guided or controlled social phenomena in Korea.

Rapid economic growth, the 1997 crisis, and the question of sustainable governance From the 1960s until the 1997 financial crisis, South Korea expanded continuously. Korea’s real per capita gross domestic product (GDP) grew from US$80 in the early 1960s to US$1,648 in 1980, and US$9,620 in 1997. The ten-year average of annual percentage change in real GDP was 9.4 per cent for 1980–90, and 7.2 per cent for 1990–7. Exports, having been an important factor of growth, expanded rapidly. They represented a meagre US$0.2 billion in 1965, but by 1980, they reached US$29.8 billion, and in 1997, US$164.9 billion. Korea was also able to maintain a relatively low rate of inflation compared to other developing nations. The government deficit was 2.9 per cent in 1980, and 4.9 per cent in 1994. Its balance of payments on current-account deficit as a percentage of GDP was ⫺2.2 per cent in 1980 and ⫺1.8 per cent in 1997. The unemployment rate was low. The international reserve was US$2.9 billion in 1980, and US$20.4 billion in 1997. During this period, the economic structure transformed from agricultural to industrial. This structural change meant that the country could be given the name NIC (newly industrialized country), and later ANIE (advanced newly industrialized economy). The agricultural share of GDP was 58.5 per cent in 1965, 15.0 per cent in 1980, and 6.0 per cent in 1997. Industry’s share of GDP was 40 per cent in 1980, and 43 per cent in 1997. The share of service industries was 45 per cent in 1980, and 51 per cent 1997. During

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this process, the country became urbanized and labour became larger. And the nation was becoming increasingly diverse. There was an overall improvement in the quality of life, as evidenced by a sharp increase in life expectancy: from 60 in 1970 to 67 in 1980, and 75.2 in 2001. Korea’s Human Development Index (HDI) was 0.879 and it ranked 30th among 175 countries studied in 2001 (UNDP, 2003). The HDI in 1995 was 0.894, ranking 30th out of 174 countries. But in 1997, Korea encountered a financial crisis which surfaced symptomatically as an acute shortage of foreign reserve, and forced the country to seek help from the IMF. On 3 December 1997, Korea signed a stand-by arrangement with the IMF to obtain US$57 billion. In the face of this sudden financial collapse, questions were asked: ‘Is the Korean economy sustainable?’ and ‘Is Korea able to have a sustainable governance system for sustainable development?’

Presidential governance, guiding values and trust In order to examine the nature and performance of governance in Korea, I shall look at the presidential style of governance and describe the personal background of each president since the rapid economic growth began in the 1960s. In general, public figures (including presidents) make decisions not only through rational analysis and official rules and procedures, but also by using personal values and emotions. The Korean political system is highly centralized, with a concentration of power in the president. Therefore, examining the background and the style of governance of each president is an effective means of measuring to what extent the existing Asian model affected governance, and to uncover what kind of guiding values played a role in governing the nation.

Chung Hee Park General Chung Hee Park took power via a military coup in 1961. He was educated in the Japanese military academy during the colonial period and became a general in the Republic of Korea. He never associated himself officially with any religion. He was a moralist for his political purpose. An example of his moralist action is his establishment of the National Charter of Education as a supreme moral declaration for the country. Every citizen was required to memorize the Charter, which starts with, ‘We are born in this land with the historical mission to revitalize the Korean people.’ After the coup, he announced that he would return to his military duties as soon as he had finished cleaning up the political system. But he broke his promise and ran for the presidency, winning the election against Dae-Jung Kim. When he took the helm, many were sceptical about Korea’s capability to develop its economy. Under his authoritarian regime, Park carried out a series of five-year economic development plans. He was a dictatorial, undemocratic ruler, but there is little doubt that his regime achieved remarkable

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economic progress, which came to be called a miracle. He seemed determined to achieve the national goal of improving the well-being of the people. He was an authoritarian, but benevolent, ruler (Kleiner, 2001). Park had the constitution revised several times, to enable him to remain in power. He ruled the nation for eighteen years until he was assassinated by presumably his most trusted staff member – his CIA (Central Intelligence Agency) director – in 1979. The incident would not have happened if Park had been successful in maintaining Confucian authoritarianism with loyalty and trust from his subordinates. The politics of the Park regime were testimony to unsustainable governance.

Doo-Whan Chun When Park was assassinated, General Doo-Whan Chun – a protégée of Park’s – orchestrated a coup, and the prime minister, Kyu-Ha Choi, briefly served as president. Taking advantage of the indirect electoral system, Chun obtained almost unanimous support to become president in 1980 and 1982. Chun was a Buddhist and was a graduate of the regular Korean Military Academy, modelled after West Point, USA. At the Korean Military Academy, cadets are not taught Confucianism. The core of their curriculum consists of military science and training, modern social science, humanities and natural science. Chun was known to have a strong personality, to be decisive, and to be a person who was as good as his word. His authoritarian style of governing might have been his own translation of strong military leadership into a rigid command and control system in public office. Chun claimed that he delegated most economic decision-making to technocrats – people with doctorates from Western universities (Harvard, Stanford, UCLA, for example), who were trained in modern free-market economics. He had a strong grip on political decisions, such as making key appointments to public offices. He had the power to appoint all the governors of provinces, and the mayors. His governing motto was ‘Realization of a Just Society’. He cracked down on hoodlums, sending them to a special training camp in large numbers. At the same time, he called up many students and citizens who demanded democracy into armed service without strictly following the due process of law. In the arena of social control, he practiced the harsh principles of Han Fei Tzu. He collected a large sum in bribes – an estimated 220.5 billion won secretly from the chaebols – large business conglomerates.7 Despite the rumours that he planned to have the constitution revised so that he could serve two terms, he finished just one term, as he had promised.

Tae-Woo Roh General Tae-Woo Roh, a classmate of Chun at the Korean Military Academy, succeeded Chun in 1988. The popular perception of Roh, a Buddhist, is that he was not as decisive as Chun. Political oppression under Park and Chun

Gill-Chin Lim 109

nurtured strong anti-government sentiments. Therefore presidential candidate Roh promised the freedom to organize and to bargain collectively in his Declaration of Democracy in June 1987, and the presidential election system changed from indirect to direct voting. In an election held in November 1987, 89.2 per cent of eligible voters went to the polls and Roh, with 36.6 per cent of the vote, was elected by a narrow margin over Young Sam Kim.8 After 1988, when labour unions were allowed to bargain collectively, labour union activism drove up wages and added to labour market rigidity. Labour gradually became more confrontational, and engaged in illegal strikes. The Confucian control and work ethic disappeared almost completely. During his period of tenure, Korea suffered an ongoing turmoil of labour disputes, but he was not able to handle the situation to calm down the labour unions and give stability to the economy. Roh also secretly amassed bribery money of an estimated 268.2 billion won from the chaebols. Towards the end of his term, his party (the Democratic Justice Party) judged that it could no longer stay in power, and the party leaders were afraid of possible political revenge by opposition parties. On the other hand, the leading opposition party (the Unification Democratic Party) of Young Sam Kim was not sure whether it could gain enough popular votes to win among competition from other parties. The solution was the creation of a new party – the Democratic Liberal Party – by merging three parties, with Kim being the presidential candidate. The third party to join the merger was the New Democratic Republican Party of Jong Pil Kim.

Young Sam Kim In 1992, Young Sam Kim was elected by popular vote as the first civilian politician. He received 41.4 per cent of the vote, with a voting rate of 81.9 per cent. Kim was a Protestant and a graduate of Seoul National University – the premier university in Korea. A life-long politician, he served in the National Assembly and was a party leader. An outspoken personality, who dared to say almost anything in public, he had long declared that his goal in life was to become president. Reportedly, he often said, ‘I can borrow other people’s brains, but not their health.’ During his term, his motto was ‘civilian government’, and he promised to undertake major reforms in government, business and labour. Perhaps the most significant incident during his time in office is that both Chun and Roh were convicted of treason and corruption. He did not provide protection for Chun or Roh, as it was assumed that he would do in return for Chun and Roh’s support. For Chun and Roh, it was a betrayal, an untrustworthy act following political complicity by the party merger. Young Sam Kim governed until 1997, when financial disaster hit the nation. When he was questioned about why he had not been able to prevent the crisis, he responded that he was not given reports from the responsible officers in charge of

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financial affairs in advance. However, key financial officers in his regime, including the head of the Bank of Korea, maintained that they sent reports to the president. A detailed analysis of the 1997 financial crisis shows that Kim and his staff lacked the competence to govern effectively (Lim, 2002a). In an effort to clean up corruption, Young Sam Kim sent the chairmen of business conglomerates, including those who bribed Chun and Roh, to jail. However, sadly for him, towards the end of his term, his own son was also sentenced to serve a prison term for corruption.

Dae-Jung Kim Young Sam Kim was followed by Dae-Jung Kim of the National Congress for New Politics (NCNP). A 73-year-old Catholic, Kim had faced death several times since Park’s time, including a death sentence under Chun. He won the presidential election against Hoi-Chang Lee of the governing Grand National Party (GNP) and In-je Rhee in December 1997. The victory, with a slim margin – 40.3 per cent from 80.7 per cent of the 33 million eligible voters – was won by a coalition with the United Liberal Democrats (ULD), the leader of which was Jong Pil Kim, the former CIA director and prime minister under Park. Kim named his governance style ‘people’s government’. On balance, he was successful in recovering from the financial meltdown, in that the country accumulated sufficient foreign reserves. He also attempted to remove corruption in both government and business, establishing the Commission on Anti-Corruption. However, in the last year of his presidency, his son was found guilty of corruption. He said that he had not been aware of his son’s illegal activities, but nevertheless made a public apology. On 15 June 2001, Dae-Jung Kim made a historic visit to North Korea to have the first summit meeting with Jong Il Kim, the head of North Korea, where he, and his father before him, Il Sung Kim, had reigned since 1945. For Dae-Jung Kim’s efforts to set up the ground-breaking meeting to return peace to the Korean peninsula, he was honoured to receive the Nobel Peace Prize in 2001. Towards the end of his term, however, the news broke that there had been a secret transfer of 224 billion won (US$200 million) from the South to the North just before the summit meeting. The opposition party (GNP) immediately criticized ‘the cash for summit scandal’ and demanded a full investigation by a special prosecutor.

Moo Hyun Rho The news of the scandal broke in late 2002, around the time when the National Assemblyman, Moo Hyun Rho, was elected as the new president. Rho, a Catholic and a self-made human rights lawyer who never went to college, is likened to Abraham Lincoln. The motto of the Rho regime is ‘participatory government’. The national voting rate was very low – only 70.8 per cent, and Rho received 48.91 per cent of the vote. The low voter

Gill-Chin Lim 111

turnout was considered to be further evidence of decreasing confidence in government and politics, and increasing political apathy. Facing the ‘cash for summit’ scandal, Rho first stated that it should be investigated fully according to the law. At first, Kim denied the allegation. Then later, he and his staff argued that, in the interests of the nation and the people, he should be excluded from legal investigations, arguing that presidential privilege permitted him to send money to the North in secret. As soon as Kim’s defensive tactics were announced, Rho softened his position. The news media commented that it was an act of betrayal to his own credo asserted during his campaign for presidency. Whether Rho can abide by his promises and build a sustainable governance system during his term remains to be seen at the time of writing.

Summary The presidential elections between 1972 and 1981 were indirect. In 1987, the amended constitution resumed direct voting. The overall voter turnout has been declining steadily and significantly – from 89.2 per cent in 1987 to 70.8 per cent in 2002 – indicating a serious erosion of people’s confidence in the government. In the above observations on presidential governance, we see little evidence to illustrate that Korean governance has been influenced significantly by the Confucian model. We detect an abusive form of modern military authoritarianism, a hint of Han Fei Tzu, opportunism, incompetence, complicity, lying, mistrust, breaking promises and betrayal. Presidential governance in Korea since the 1960s, during which time the country has journeyed through three dramatic stages of remarkable development, sudden collapse, and a struggle to resurrect, is better characterized by inconsistency and anomie. Korea was a case of unsustainable governance.

Evaluation of Korean governance by the UNDP study As mentioned in the earlier part of this chapter, the UNDP developed a system of measuring governance using objective and subjective indicators of governance (UNDP, 2002). Table 4.1 presents objective indicators for selected countries, and Table 4.2 subjective indicators. I selected several advanced countries at the top, some in the middle and some at the bottom, to show Korea’s relative position. I chose Hong Kong and Singapore to compare the performance of the Asian Tigers. Taiwan is not included because the UNDP does not report on Taiwan. Japan and China are countries of useful comparison because, historically, they were strongly influenced by Confucianism. Thailand is a medium-ranking human development nation, where Buddhism is the most popular religion. Korea’s Human Development Index (HDI) ranked it at 27 out of 173 in 2000, placing it in the high human development group. In terms of objective indicators, Korea shows a weakness in participation and civil society.

Human Development Index rank

Participation

Largest election for lower or single house

Year

Year women received right to vote restricted; unrestricted

Voter turnout (%)

Civil society

Seats in parliament held by women (as % of total)

Trade union membership (as % of nonagricultural labour force) 1995

112

Table 4.1 Objective indicators of governance, for selected countries Ratification of rights instruments

Nongovernmental organizations, 2000

International Convention on Civil and Political Rights

Freedom of association and collective bargaining convention, 1987

1 Norway

2001

74

1907; 1913

36.4

52

2,571

❍

●

3 Canada

2000

61

1917; 1950

23.6

31

2,329

❍

●

6 United

2000

51

1920; 1960

13.8

13

2,685

❍

9 Japan

2000

62

1945; 1947

10.0

19

2,122

❍

●

13 United

2001

59

1918; 1928

17.1

26

3,388

❍

●

1998

82

1918

31.0

30

3,505

❍

●

–

–

–

–

8

1,130

–

–

25 Singapore

2001

95

1947

11.8

14

1,039

–

–

27 Korea,

2000

57

1948

5.9

9

1,315

❍

28 Portugal

1999

62

1931; 1976

18.7

19

2,289

❍

70 Thailand

2001

70

1932

9.6

3

1,028

❍

96 China

1998

–

1949

21.8

55

1,275

❍

173 Sierra Leone

1996

50

1961

8.8

–

328

❍

States

Kingdom 17 Germany 23 Hong Kong

Republic of

Notes:

●

Ratification, accession or succession;

Source: UNDP, 2002.

❍

Signature not yet followed by ratification. – No rights instrument.

●

●

Table 4.2

Subjective indicators of governance, for selected countries

Human Development Index rank

Rule of law and government effectiveness

Democracy

Polity score

Civil liberties

Political rights

Press freedom

Voice and accountability

Political stability and lack of violence

Law and order

Rule of law

2000 2000 (⫺10 to (7 to 1) 10) 1 Norway 10 1 3 Canada 10 1 6 United States 10 1 9 Japan 10 2 13 United Kingdom 10 2 17 Germany 10 2 23 Hong Kong N/A 3 25 Singapore 22 5 27 Korea, 8 2 Republic of 28 Portugal 10 1 70 Thailand 9 3 96 China ⫺7 6 173 Sierra Leone N/A 5

2000 (7 to 1)

2000 (100 to 0)

2000.01 (⫺2.50 to 2.50)

1 1 1 1 1 1 5 5 2

5 15 15 23 17 13 – 68 27

2000.01 (⫺2.50 to 2.50) 1.58 1.33 1.24 1.03 1.46 1.42 ⫺0.33 0.11 0.98

1.32 1.24 1.18 1.20 1.10 1.21 1.13 1.44 0.50

6.0 6.0 6.0 5.0 6.0 5.0 4.0 6.0 4.0

1.70 1.70 1.58 1.59 1.61 1.57 1.37 1.85 0.55

1 2 7 4

17 29 80 75

1.42 0.37 ⫺1.11 ⫺1.35

1.41 0.21 0.39 ⫺1.26

5.0 5.0 4.0 3.0

0.94 0.44 ⫺0.19 ⫺0.38

2001 2000.0 (0 to 6) (⫺2.50 to 2.50)

Corruption

Government effectiveness

Corruption Perceptions Index

Graft (corruption)

2000.01 (⫺2.50 to 2.50) 1.35 1.71 1.58 0.93 1.77 1.67 1.10 2.16 0.44

2001 (0 to 10)

2000.01 (⫺2.50 to 2.50)

0.91 0.10 0.14 ⫺1.60

8.6 8.9 7.6 7.1 8.3 7.4 7.9 9.2 4.2

1.76 2.05 1.45 1.20 1.86 1.38 1.16 2.13 0.37

6.3 3.2 3.5 –

1.21 ⫺0.46 ⫺0.30 ⫺0.45

Source: UNDP, 2002.

113

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Its voter turnout for lower or single house is among the lowest. It is lower than that of Japan, Singapore or Thailand. This fact, in addition to the declining voter turnout for the presidential election, supports the hypothesis that Korean citizens do not trust the government and politicians. The trade union membership of Korea is also very low, similar to that in Hong Kong and Thailand. Considering the size of population, Korea seems to have a strong Non-Governmental Organization (NGO) sector. Comparison of subjective indicators discloses both positive and negative sides of governance in Korea. In democracy, Korea is better-governed than Hong Kong or Singapore. The poor scores of Hong Kong, Singapore, Thailand and China imply that their democratic institutions are not as well developed as Korea’s. Government effectiveness in Korea is the lowest among the nations with a similar level of human development. It is significantly less effective than that of Japan, Hong Kong or Singapore, and is much less effective than Portugal, whose HDI rank is 28. Korea is politically unstable, as the political stability and lack of violence indicator, and the rule of law value show. The Korean government is far behind Japan, Hong Kong and Singapore, let alone Western democracies such as Norway, the United States and the United Kingdom. The advanced nations at the top, such as Norway, Canada, the United States, Japan, the United Kingdom and Germany, show a high correlation between democracy and government effectiveness. The Korean case of unusual pairing of relatively good democracy and poor government performance indicates that there exist problems of incompetence within the governance system in Korea. Korea has a much higher level of corruption than advanced Western countries, Japan, and the other Asian Tigers. Overall, the governance measurement study by the UNDP corroborates the observations on Korean presidential governance.

Use of WSSD for good governance [G]ood governance is indispensable for building peaceful, prosperous and democratic societies. (UN Secretary-General Kofi Annan) In the international community, good governance for sustainable development has become an important action to be implemented through the activities of the UN. In contrast to the World Bank, which is prohibited by its Articles of Agreement from stepping into political affairs, the UN’s main function is to achieve its goals in the arena of global politics. The most recent UN action concerned with governance took place at the 2002 World Summit on Sustainable Development (WSSD) in Johannesburg,

Gill-Chin Lim 115

South Africa. The WSSD meeting in Johannesburg emphasized ‘good governance’ and ‘corporate responsibility and accountability’ as key factors affecting the achievement of its goals.9

2002 Johannesburg Summit The 2002 Johannesburg WSSD was one of the largest gatherings on earth to discuss the issue of development and environment. It was attended by heads of state and heads of government, national delegates, NGO leaders, businesses and other major groups.10 According to Kofi Annan: Johannesburg Summit 2002 is an opportunity to rejuvenate the quest to build a more sustainable future. The Summit must bring the world together and forge more cohesive global partnerships for the implementation of Agenda 21. It must send out a message that sustainable development is not only a necessity, but also an exceptional opportunity to place our economies and societies on more durable footing. (Annan, 2002) The Johannesburg Summit resulted in two documents: The Johannesburg Declaration on Sustainable Development and the Plan of Implementation. The UN press release summarized the WSSD’s outcomes as follows: The World Summit on Sustainable Development concluded in Johannesburg on 4 September, with world leaders declaring that the ‘deep fault line’ between rich and poor posed a major threat to global prosperity and stability, and then adopted a broad plan to address it, containing specific global targets in poverty reduction, clean water and sanitation, and infant mortality. (UN Newsletter, 2002)

Good governance outlined by the WSSD In Johannesburg, Declaration 19 of the Declaration on Sustainable Development lists corruption as one of the unfavourable conditions which need high priority attention: 19. We reaffirm our pledge to place particular focus on, and give priority attention to, the fight against the worldwide conditions that pose severe threats to the sustainable development of our people. Among these conditions are: chronic hunger; malnutrition; foreign occupation; armed conflicts; illicit drug problems; organized crime; corruption; natural disasters; illicit arms trafficking; trafficking in persons; terrorism; intolerance and incitement to racial, ethnic, religious and other hatreds; xenophobia; and endemic, communicable and chronic diseases, in particular HIV/ AIDS, malaria and tuberculosis.

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This is followed by the Introduction to the Plan of Implementation, in which anti-corruption measures are suggested in the context of good governance: 4. Good governance within each country and at the international level is essential for sustainable development. At the domestic level, sound environmental, social and economic policies, democratic institutions responsive to the needs of the people, the rule of law, anti-corruption measures, gender equality and an enabling environment for investment are the basis for sustainable development. With this general statement, Section V of the Implementation Plan recommends enhancing corporate responsibility and accountability. However, it does not point explicitly to government responsibility and accountability, which is essential to achieve sustainable development. This omission is a critical weakness of the WSSD approach to good governance. Corruption in governments and businesses in developing countries is a major barrier to sustainable development.11 Developing nations have both government and market failures. We do not know precisely whether governments are more corrupt than businesses, or vice versa. It is clear though, that corruption goes hand-in-hand between government and business everywhere in developing, as well as developed, countries. The Plan of Implementation sets concrete goals for education, health and many other sectors. However, it does not plan any direct actions to prevent corruption and support good governance. Without strong anti-corruption measures it will be difficult to have good governance, and many countries, particularly developing countries and nations in transition, will waste much of their financial investment in various sectors. Pressure from the international community, such as the UN, is potentially effective for promoting good governance among governments and businesses that suffer from corruption and inefficiency. However, the actions as formulated by the 2002 WSSD are not strong enough to tackle the problems. The UN needs to undertake some major remedies to realign its action plans for good governance.

Towards sustainable governance The theoretical and historical part of this chapter indicates that the discussion in the past of Asian values in relation to development has been overly simplistic: Asia has been influenced and governed by diverse values, religions and philosophies. The empirical observations made for Korea suggest that the existing model of development guided by Confucian ideas does not have much validity. Governance as practised in Korea is a scene of inconsistency and anomie. It is also a result of diverse cultural and historical influences. For Korea and other nations in the UN community, the WSSD action

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plans have the potential to foster good governance, but its current action plans are too weak to be effective. Policies involving investment in sustainable moral infrastructure are needed, to achieve the goal of sustainable development. To move towards sustainable governance, a normative – yet practical – strategy is needed. Concrete actions should be designed and implemented to enhance the level of trust and establish good governance. First, invest in education, which enhances the three types of competency. In particular, we need to reform the area of inter-subjective and ethical competency in our formal education. We teach techniques, but do not teach how to communicate effectively or pursue our goals ethically. It is also important to integrate formal education with social and family education. A life-long education system can be an important educational vehicle for making a connection among the three spheres of education, which are currently highly fragmented. Second, the public policy arena must be reformed substantially. The re-education of public officers – especially in the area of ethical competence – is a prerequisite to all public reform. There should then be a firm establishment of rules governing the conduct of public servants. Each governmental unit can set up a ‘participatory ethics committee’ and craft a ‘code of ethics’. Third, the business sector must engage in the ongoing re-education of its human resources and the restructuring of its governance system. It should also have an ethics committee and code. Fourth, on the technical side, a technical code system of a high standard should be established and enforced. This applies to construction, manufacturing, transportation, agriculture, mining and natural resource management. Technical codes can save money and protect human lives by preventing negligence and accidents. Fifth, civic organizations should expand and improve their capacity to collect information on governance, alert public agencies and businesses, and inform the general public. Internally, too, they need to re-educate their staff and reform its governance system. Sixth, the mass media needs to pay more attention to the importance of trust relationships in social, political and economic progress. The mass media in Asia are often accused of inaccurate reporting and corrupt behaviour, which destroys trust among the people, governments, businesses and civic entities. Seventh, it is the individual whose trustworthiness determines the aggregate level of trust in a society. A nationwide ‘Campaign for Trustworthy Individuals and Society’ could be launched via a concerted effort by civic organizations, business firms, educational institutions, government and the mass media. Finally, an international community such as the United Nations could play an important role in enhancing the level of trust and improving the governance of businesses and government. I suggest that the UN

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strengthens the ideas adopted in the Johannesburg WSSD: sustainable governance is a prerequisite to sustainable development.

Acknowledgement I am indebted to Professor Hyong Gyu Rhew who read an earlier version of this chapter and made many valuable comments. Most of his suggestions have been incorporated into the present chapter. I also want to thank Chris Carter and Susan Dechant, who provided excellent editorial suggestions.

Notes 1 Nye, Jr. et al. (1998) covers mainly people’s mistrust of government in the USA, but includes a study on Japan and some comparative information on European countries. 2 I use ‘moral capital’ rather than ‘social capital’, because the expression ‘social capital’ was used by Karl Marx as early as 1885 in his book, Capital (bk 2, pt III: The Reproduction and the Aggregate Social Capital). 3 The UNDP study is a part of its Human Development Report (2002). It draws data from four different sources, one of which is Kaufmann et al. (2002). 4 In the literature dealing with trust – the subject matter of this book – it is mainly used as a noun. Its synonyms are ‘confidence, dependence, faith, hope, reliance, stock’. Related words are ‘assurance, certainty, certitude, conviction; belief, credence, credit; positiveness, sureness; entrustment; overconfidence, oversureness’. Contrasted words are ‘doubt, dubiety, scepticism, suspicion, uncertainty’. The most widely used antonym is ‘mistrust’ (Merriam Webster Thesaurus). 5 The Charter of the UN declares in its ‘Preamble’: ‘We the peoples of the United Nations determined to save succeeding generations from the scourge of war, which twice in our lifetime has brought untold sorrow to mankind, and to reaffirm faith in fundamental human rights, in the dignity and worth of the human person, in the equal rights of men and women and of nations large and small, and to establish conditions under which justice and respect for the obligations arising from treaties and other sources of international law can be maintained, and to promote social progress and better standards of life in larger freedom.’ 6 There are many translations of the writings for these five schools. I have used Chinese texts published in Korea. Translations of parts of the text quoted in this article are mine. 7 The exchange rate floats around 1,200 Korean won per US dollar. Information on the presidents has been gathered from daily newspapers – Joong Ang Daily, Chosun Ilbo and Dong-a Ilbo – and other, unpublished, sources. 8 Election data are provided by the National Election Commission, Korea. 9 For a more detailed description of the WSSD, see Lim (2002b). 10 The United Nations reported that it issued 21,340 accreditation passes, including more than 9,000 to delegations, over 8,000 to major groups, and more than 4,000 to the media. 11 Corruption prevails in the public and private sectors of many, especially less developed, nations. A study by Transparency International (2001), which ranked 91 countries in terms of the Corruption Perceptions Index (CPI) for 2002, found that almost two-thirds of the countries had an index score of less than 5 out of a maximum score of 10 (the least corrupt). Developed, rich countries such as

Gill-Chin Lim 119 Finland, Denmark, New Zealand, Iceland, Singapore and Sweden scored 9 or higher. But 55 countries, among the world’s poorest, received a CPI score of less than 5, indicating high levels of perceived corruption in governments; In particular Azerbaijan, Angola, Madagascar, Uruguay, Kenya, Indonesia, Nigeria and Bangladesh scored 2 or less. Countries in transition, in particular the former Soviet Union, seem to have high levels of corruption. Scores of 3 or less were recorded in Russia, Romania, Kazakhstan, Georgia and Ukraine.

References Annan, K. A. (2002) Taking Action for our Earth’s Future. An address to the Johannesburg Summit on Sustainable Development, September 2002. http://www.johannesburg summit.org/html/brochure/final_brochure.pdf [Accessed August 2003]. Chu, Chin-ning (1991) The Asian Mind Game: Unlocking the Hidden Agenda of the Asian Business Culture – a Westerner’s Survival Manual (New York, NY, Macmillan/Rawson Associates). CIA. The World Fact Book [http://www.cia.gov/cia/publications/factbook. [Accessed August 2003]. Confucius (trans. by Hoo-Soo Chung) (2000) The Analects, Jang-Rahk’s Classic Series 7 (Seoul, Jang-Rahk). Fiorina, C. (2002) Good Corporate Governance, an address by Carly Fiorina to the Confederation of British Industries, Manchester, UK on 26 November 2002. Fukuyama, F. (1995) Trust: The Social Virtues and the Creation of Prosperity (New York: Free Press). Han Fei Tzu (Han-Bi-Za) (2002) Great Books Series–054 (Seoul, Korea, Hangil Publishing Co.). Institute for Publication of the Holy Buddhist Scriptures (1982) Buddhist Scriptures. Newly Translated (Seoul, Korea, Honsin Moon Wha Sa). Kaufmann, Danny, Kraay, Aart and Zoido-Lobaton, Pablo (1999/2002) ‘Governance Matters’, Policy Research Working Paper No. 2196 (Washington, DC, World Bank) (1999); http://www.worldbank.org/wbi/governance/pdf/govmatrs.pdf (April 2002). Kaufmann, Danny, Kraay, Aart and Zoido-Lobaton, Pablo (2002) ‘Governance Matters II: Updated Indicators for 2000/01’, Policy Research Working Paper No. 2772 (Washington, DC, World Bank) http://www.worldbank.org/wbi/governance/pdf/ govmatters2.pdf (April). Kidd, John and Richter, Frank-Jürgen (eds) (2002) Corruption in Asia: Causes, Effects and Remedies (Singapore, World Scientific Publishing Co.). Kleiner, Juergen (2001) Korea: A Century of Change, Vol. 6: Economic Ideas Leading to the 21st Century (London, World Scientific). Lim, Gill-Chin (2002a) ‘Korean Financial Crisis in Global Political-Economic System’, in Zusun Rhee and Eunmi Chang (eds), Korean Business and Management: The Reality and the Vision (Elizabeth, NJ/Seoul, Hollym), pp. 23–48. Lim, Gill-Chin (2002b) ‘Critical Issues in Sustainable Development: From Rio to Johannesburg to Where?’, Environmental Impact Assessment for Sustainable Society: Proceedings of the International Symposium for the 10th Anniversary of the Korean Society of Environmental Impact Assessment, 14–15 November 2002, Seoul, pp. 157–206. Mote, Frederick W. (1989) Intellectual Foundations of China, 2nd edn (New York, McGraw-Hill Inc.). Nye, J. S., Jr., Zelikow, Philip D. and King, David C. (eds) (1998) Why People Don’t Trust Government (Cambridge, Mass., Harvard University Press).

120 Sustainable Governance OECD (1998) OECD Principles of Corporate Governance (Paris, OECD). Ssu-ma Ch’ien (Sa-Ma-Chun) (2000) Shih-chi (Sa-Gi). Oriental Classic Series 23, 24, 25 & 26 (Seoul, Yuk-Moon-Sa). Sun Tzu (Son-Za) (2000) The Art of War (Son-Za-Byung-Beob), Oriental Classic Series 7 (Seoul, Yuk-Moon-Sa). Transparency International (2001) The Corruption Perception Index (Berlin, Transparency International). UN (2002) World Declares that ‘Fault Line’ between Rich and Poor Threatens Prosperity; Adopts Broad Measures to Alleviate Poverty, Protect Environment (New Delhi, United Nations Information Centre, 7 September). UNDP (1997a) ‘Corruption and Good Governance’, Discussion Paper No. 3, Management Development and Governance Division, Bureau for Policy and Programme Support, New York. UNDP (1997b) ‘Governance for Sustainable Human Development: A UNDP Policy Document’, Management Development and Governance Division, Bureau for Development Policy and Programme Support, New York. UNDP (2002) Human Development Report 2002: Deepening Democracy in a Fragmented World. Published for the United Nations Development Programme (UNDP) (Oxford/New York, Oxford University Press). UNDP (2003) Human Development Report 2003: Millennium Development Goals—A Compact among Nations to End Human Poverty. Published for the United Nations Development Programme (UNDP) (Oxford/New York, Oxford University Press). Wing, R. L. (1986) The Tao of Power: Lao Tzu’s Classic Guide to Leadership, Influence, and Excellence (Garden City, NY, Doubleday). World Bank (1992) Governance and Development (Washington, DC, World Bank). World Bank (1994) Governance: The World Bank Experience, Development in Practice Series (Washington, DC, World Bank).

5 The ‘Co-op–Comp’ Chinese Negotiation Strategy Tony Fang

Introduction One of the most formidable challenges in creating and managing business in China is cross-cultural negotiation with Chinese businesspeople (Ghauri and Fang, 2001; Stone, 2001). The Chinese are described as the world’s toughest negotiators (Mann, 1989). In the words of Lucian W. Pye (1986, p. 74), ‘for centuries they [the Chinese] have known few peers in the subtle art of negotiating. When measured against the effort and skill the Chinese bring to the bargaining table, American executives fall short.’ A survey in the late 1990s among 127 Western companies doing business with China shows that Western business executives considered knowledge and skills about negotiation in China to be the most important factor for success in trading relationships with the People’s Republic of China (PRC) (Martin and Larsen, 1999). Much thoughtful writing has been published on Chinese business culture and its negotiating style (Pye, 1982, 1986, 1992; Tung, 1982a, 1982b, 1989; Chen, 1995; Chen and Faure, 1995; Blackman, 1997; Buttery and Leung, 1998; Faure, 1998, 2000; Fang, 1999; Chen, 2001; Ghauri and Fang, 2001). Nevertheless, an important issue that has been less researched is how to understand the complexity of Chinese business negotiation strategy. What seems to be most perplexing to Western businesspeople, many of whom have been working on in China for a long time, is not face, guanxi, or other indigenous Chinese concepts, but rather a complex mixture of them in often paradoxical patterns of Chinese business behaviour. If Geert Hofstede’s (1980) definition of culture is used, the Chinese seem be ‘mentally programmed’ by a complex and paradoxical value system, which allows them to be culturally capable of coping with various negotiation situations. The purpose of this chapter is to explore the cultural roots of Chinese negotiation strategy in a business context. The empirical base of the chapter is the author’s personal interviews on cross-cultural business negotiation in China conducted with both Chinese and Nordic businesspeople during 1995–2003. The interviewees were top or middle-level officials and managers from a 121

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number of industries including telecommunications, power generation, automobiles, steel, mining, trade, food, and pulp and paper. Here, the focus is placed on analysing Chinese negotiation strategy from the vantage point of traditional Chinese culture. The chapter begins with nine empirical examples illustrating the Chinese business negotiating style provided by Western and Chinese negotiators, respectively. It goes onto discuss two paradoxical components of Chinese culture, and their influences on Chinese negotiating style. The concluding section suggests a model of Chinese negotiation strategy and discusses the role that trust plays in predicting the paradoxical patterns of Chinese business behaviour.

Nine examples (1) Chinese negotiator: ‘I have met Chinese lawyers only once.’ In 1983, that’s when I started negotiating in China. During the early 1980s, we negotiated six licensing agreements. At that time there was not even a Chinese law regulating licensing. That law came in the spring of 1985. Prior to that, when a legal framework didn’t exist, we had already entered into six licensing agreements … One thing which is extremely positive and has helped us a lot – both the Chinese party and ourselves – is the fact that throughout these years in negotiating with the Chinese I have met Chinese lawyers only once. And that was in Changchun … during a joint-venture negotiation. One day, two Chinese lawyers from a law firm in Changchun were brought in. But the following day, they didn’t come. So I asked the Chinese party: ‘Where are the lawyers?’ Then they said, ‘We trust you. Because you know the Chinese rules much better than they.’ … Honesty is very important … Throughout the years, we have never had any real conflicts with any of our Chinese partners … The only serious problem I have had in China is the language problem. Many times it has happened that the demands from the Chinese party have sounded very tough. We have talked about prices and other terms and conditions. But if you penetrate the issue and really ask them why they argue and think the way you find tough, usually you find that it’s just a question of communication. It is the translation that has made things sound worse than they really are.

(2) Western negotiator: ‘How could we plan for divorce when we were just talking about marriage?’ Foreigners just loved to work on the contract text. This was like calculating family property in preparation for future divorce at a time when we were just beginning to fall in love. How could we plan for divorce when we were just talking about marriage? I respect the foreign party’s intention to seek legal protection. They are accustomed to placing emphasis on it.

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But, we really cannot agree to this practice … In my opinion, when negotiating a joint-venture contract, we must first grasp the core issues – for example, equity share, composition of the board of directors, distribution of power, payment of various key charges, pricing, financing. We must look at the foreign party’s technology, market and economic strength. These are the points which we should by no means forget. Once we have got the OK on these points, the contract is basically workable. After we have signed the contract, we mainly rely on the spirit of co-operation to do things. What is most important is not to do things according to the contract but on the basis of mutual co-operation, of the spirit of co-operation … For example, let us say the contract is now signed. How could we turn over the pages to check what is restricted by the contract? It’s absolutely impossible. Most probably, the contract file would be locked into the drawer and nobody would read it any more. After the opening of the joint venture, people would be doing what is actually required by reality, which will not necessarily be the same as specified by the provisions of the contract. As long as the parties have a spirit of co-operation, the project can be operated well.

(3) Western negotiator: ‘The Chinese want to get acquainted with you first.’ Social contact is important in Asia. We are, generally speaking, poor at making social contact. While we would rather do business straight ahead at once, the Chinese want to get acquainted with you first. And most probably, you may not achieve anything in the first meeting, which is more of a social gathering. But then, when you have met them at least twice, you become a friend. Afterwards, the atmosphere becomes better and you can begin negotiating with them in real terms.

(4) Western negotiator: ‘Business is done not in a conference room or in an official negotiation, but rather over the mah-jong table at home or in a hotel room.’ Business in China is very much personal-chemistry steered and relationship-driven. I think that people here always do business with relationships. It is always the persons in the companies who have relations who develop business processes with each other. In China, this is more prominent than in West. You may be an expert in other Asian markets and able to tackle problems in one country after another, but China is by no means the same … There are two kinds of relationships in China. One is the relationship in which people feel empathy – that is, people know each other as persons. This type of relationship is probably not so common actually. A common relationship which I have perceived is when people feel mutual benefit. People build relationships upon the fact that they need and depend on each other and also have reciprocal joy from each other … Another important point which I believe is that we

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Westerners – that is, we who do not speak Chinese, will always remain ‘visitors’ and ‘second-hand people’. We will not be on-site when business is done. Business is done not in a conference room or in an official negotiation, but rather over the mah-jong table at home or in a hotel room. It is very much a question of language, and also a question of culture … I don’t know if you met P [local Chinese person]. He is in a totally different situation [from me]. Although we have the same position, he can go out and do business with customers, but I can’t. I can start up and define the project and so on, but do business, no.

(5) Western negotiator: ‘Chinese do business with you, not with your company.’ I did not come to live in China until February last year [1994]. But I had lived in Hong Kong since 1983 and in Singapore since 1979. I have worked with Chinese [people] all the time and I like to work with the Chinese. If you have got a Chinese [person] as your friend, he is your friend for life. Business in China is not about doing business between organizations, but about doing business between people. If people are business partners, they get to know each other and become personal friends who visit each other frequently. So, you have business when you have established an interpersonal relationship. This is what Western companies find difficult to comprehend. Therefore, you cannot change your people frequently. Your successor does not automatically inherit your friends and relationships. As I perceive [it], Chinese do business with you, not with your company. You have a certain influence over how your company functions. The company does what you promise, for example, deliver on time … You can’t be blueeyed (and innocent) and believe that you have made friends through one or two deals. It takes a little more time.

(6) Western negotiator: ‘The Chinese said, “Before the negotiation, we had divided our work internally.” ’ That was in Beijing in 1986. We were negotiating with zhongcan [Headquarters of the General Staff of People’s Liberation Army] about selling our products. The contract was not large, valued at under US$100,000. In the midst of one face-to-face negotiation, one Chinese team member, whom I did not know at all, suddenly stood up, shouting angrily at me, ‘YY [full Chinese name of the interviewee]! You cannot cheat me! I am from Guangdong, I know your price there.’ I had totally lost myself. I didn’t know this person at all. How could he be so rude to me? … It was exactly two years after this encounter that we met each other again at a dinner party. We had become acquainted with each other during the years because of the business we did. We were there chatting, quite friendly. When we recalled that past unpleasant encounter, the Chinese [man] said: ‘I am sorry. It was not my intention to attack you personally, you who I

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did not know. Before the negotiation, we had fen gong [‘divided our work’] internally. If you came up with a price above our line, I would stand up and shout. If not, my colleagues would play the game differently’.

(7) Chinese negotiator: ‘What was important was to let them feel they were being put in a comparison situation.’ At that time, we had arranged, rather ingeniously, the timing of the meetings with these two companies, so that they would not clash with each other. That is, the timing allowed us to negotiate with both companies comfortably at different times … After we signed the feasibility study report with F [foreign company], our factory’s Deputy Director came personally to the negotiation table, giving the news to the S [Western company] people. He said we were prepared to sign a similar report with S … Our method was neither too implicit nor too explicit. What was important was to let them feel they were being put in a comparison situation. The same rule was applied to both S and F, making both of them feel uneasy and uncertain in their hearts, while keeping alive their hopes … From my point of view, we should not hide what did not need to be hidden. Open and frank talking would yield greater profit.

(8) Chinese negotiator: ‘Lao Han often appeared absent-minded, not listening to his counterpart, or just keeping silent, as if he didn’t understand anything.’ Both Lao Han and I are able to understand English quite well. There is no big problem for us to understand and read English. Yet it’s true that we are no good at spoken English … Laowai [‘foreigners’] often judge us at face value and believe that we do not understand English. In the meeting, they explained again and again to us, even with pictures … As a matter of fact, we knew at quite an early stage what the counterpart meant. We merely did not want to state our opinions in a rush. This is a celue [‘stratagem’]. For instance, Lao Han often appeared absent-minded, not listening to his counterpart, or just keeping silent, as if he didn’t understand anything. Sometimes he went so long that I became bewildered and couldn’t help interrupting him. That’s why Lao Han lost his temper with me. Afterwards, I had listened to Lao Han’s explanation and realized that my interruption was childish indeed.

(9) Western negotiator: ‘He utilized face, I would say.’ I can give an example of how face influences our business environment. We have a director [Chinese] as our customer. His demands are often high and he has ideas about doing things his way. I understand that one should never say ‘No’ to a Chinese. It’s just impossible and it won’t work. This [‘No’] is a word that one does not use here. It happened that Director C [Chinese negotiator] took advantage of our silence. He treated it as a

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confirmation, a ‘Yes’. He interpreted more than what we actually promised. Then he went out, talking to all the sub-bureau and local operators under his control that A [Western company] would be doing this and that. Afterwards, when we presented our plans, which turned out not to be the ones he had demanded, he ‘lost face’, because he had promised everyone and everywhere. Therefore, he put very much pressure on us to live up to his demands. Furthermore, he had to make sure that everyone knew that it was the fault of A, that did not live up to its promise … He had not misinterpreted anything. On the contrary, he interpreted it as he liked and it was clear that he did this on purpose. He utilized face, I would say. This influenced our business situation. He had had a major influence on our working and business environment … To deal with the Chinese, you need patience, patience, and patience.

The paradox of Chinese negotiation behaviour The above examples together suggest a paradoxical personality among Chinese negotiators. On the one hand, they do business based on trust, and even do not involve lawyers in face-to-face negotiations. They value the human base (relationship) more than the legal base (contract) of contracting (Example 1). They see a contract not as a one-off legal package, but rather as an ongoing relationship with which to solve problems that they believe are bound to occur during the project’s life. They negotiate sincerely based on the ‘spirit of co-operation’ (Example 2). They prefer to start the business process by building up trust (Example 3). Informal social settings create mutual bonds which help to secure and facilitate transactions (see Example 4). The Chinese view business relationships a highly personalized process (Example 5). Chinese negotiators seem to be sincere negotiators who are co-operationorientated, and take a ‘problem-solving’ or ‘win–win’ approach to negotiation. On the other hand, the Chinese negotiate deceptively and attempt to knock the other party off balance. They attach importance to intelligence and plan the negotiation tactically (Example 6). They drive parallel negotiations to play the competitors off against each other (Example 7). They can pretend to be ‘absent-minded’ negotiators to confuse the other party and to obtain the maximum profit (Example 8). They can go so far as to take deliberate advantage of the foreigners’ stereotypical ideas about Chinese culture and behaviour (Example 9). The Chinese seem to be deceptive negotiators who are keen on mind games and obsessed with employing various tricks to gain psychological and material advantage over the other party. They are competition-orientated, and their approach to negotiation is ‘win–lose’. This paradoxical picture of Chinese negotiating behaviour can also be discerned from some of the existing literature on Chinese negotiation behaviour. For example, Chinese negotiators are described as co-operative on the one hand (Deverge, 1986), but competitive on the other (Blackman, 1997);

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very honest at one moment, but not at all honest at another (March, 1994). The Chinese view a co-signatory to an agreement as establishing a relationship with friends, and adopt a positive, problem-solving attitude towards conflicts; however, they also do not hesitate to employ a daunting array of ‘win–lose’ ploys and tricks with their ‘friends’ (Seligman, 1990). The Chinese ‘apply the carrot and stick at the same time’ (Fang, 2001a). Now the question is: How can we understand the paradox of Chinese negotiation behaviour?

Co-operation and competition as negotiation strategies Co-operation and competition as general business strategies have been an important component in business-to-business relationship literature (see, for example, Håkansson, 1982, 1989; Axelsson, 1992; Johanson and Mattsson, 1992; Araujo and Mouzas, 1996). Co-operation and competition are also identified as two generic negotiation strategies in the negotiation literature (Walton and McKersie, 1965; Fisher and Ury, 1981; Lewicki and Litterer, 1985; Graham, 1986; Pruitt and Rubin, 1986; Putnam, 1990; Pruitt, 1991; Hall, 1993; Brett, 2001). Competition strategy (also known as contending, distributive bargaining and so on) is a strategy used by a negotiator to pursue his/her goals by persuading his/her opponent to concede. Based on game theory, competition strategy entails ‘efforts to maximize gains and minimize losses within a “win–lose” or self gain orientation’ (Putnam, 1990, p. 3). This ‘win–lose’ approach emphasizes the negotiating tactics and tricks to be employed to overpower the other party and secure victory. Co-operation strategy (also referred to as problem-solving, collaboration, integrative bargaining and so on) ‘aims to reconcile the interests of both parties, reach joint benefits, or attain “win–win” goals’ (Putnam, 1990, p. 3). The parties work together to find solutions that satisfy their common interests. Nalebuff and Brandenburger (1996) suggest that one may combine co-operation with competition in business that is characterized by both peace and war. Given the illustrations and discussions so far, and the definition of negotiation strategy as a ‘means’ used to ‘influence the behaviour of others’ at the negotiation table (March, 1988, p. 127), we can arrive at an initial understanding of the fact that Chinese negotiators use both ‘co-operation’ and ‘competition’ strategies in business negotiations. The conventional wisdom on negotiation, however, tends to produce a stereotype that negotiation and negotiation strategies are just universal concepts and skills regardless of specific cultural values. This approach to negotiation, however, does not cope well with the richness of business reality that indigenous cultural values, norms and habits contribute greatly to the shaping of patterns of co-operative and competitive behaviour of people from that culture. In order to understand Chinese negotiation strategy more deeply we need to examine the idiosyncratic components of traditional Chinese culture that have a fundamental bearing on the propensities of Chinese negotiators at the international business negotiation table.

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Traditional Chinese culture There is an international consensus that the Chinese are skilful negotiators with a unique negotiating style. But what characterizes ‘the Chinese style’ is a question that has been under-researched in the literature. Pye’s (1986, p. 74) observation that ‘for centuries they [the Chinese] have known few peers in the subtle art of negotiating’ suggests that the Chinese negotiating style is not a recent invention, but rather comes from traditional Chinese culture. Culture is a system of transmitted and created content and patterns of values, norms and customs rooted in philosophies and/or religions that shape human behaviour and artefacts (Kroeber and Parsons, 1958). A cultural explanation of management behaviour has been developed by a number of scholars (Weinshall, 1977; Kahn, 1979; Hofstede and Bond, 1988; Adler, 1991; Franke et al., 1991; Fukuyama, 1995; Naisbitt, 1996). China is the world’s ‘longest continuous civilization with the longest tradition of record-keeping and collection’ (Ropp, 1990, p. x). Chinese traditions provide a solid foundation for decoding the ‘black box’ of Chinese negotiation strategy. Traditional Chinese culture has been moulded by three philosophical traditions: Confucianism, Taoism and Buddhism. Briefly, Confucianism deals with human relationships; Taoism deals with life in harmony with nature; and Buddhism deals with people’s spiritual world. The Chinese are the world’s largest group of atheists. For them, Confucianism, Taoism and Buddhism are more philosophies than religions. ‘Chinese people have been less concerned with religion than other peoples are’ (Fung, 1966, p. 3). Lee (1995, p. 12) argues that the lack of religious sentiment is an important ‘foundation of Chinese culture’ that makes the Chinese ‘intensely practical’: This is a wonderful way of life which some Westerners cannot understand – how can a person follow the teachings of three teachers who have always been regarded by many Western and even Chinese writers as the founders of the three religions of China – Confucianism, Taoism and Buddhism? The fact is they are not religions, and that is why the Chinese can follow all three teachings, each for one aspect of his life. This foundation of Chinese culture has made the Chinese intensely practical … and given them great power for absorbing all things that are good and beneficial, irrespective of their origin. Chinese culture has survived and has been enriched by this power. The Chinese capacity to follow different teachings at the same time to enrich different aspects of their life helps us to understand complex and multi-faceted Chinese behaviour. The essence of traditional Chinese culture resides in the philosophical traditions of Confucianism and Taoism (Weber, 1951; de Bary et al., 1960; Chan, 1963; Fung, 1966; Ren, 1986; Kirkbride et al., 1991; Tang, 1991).

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Figure 5.1 The Yin–Yang principle

Chen (2001) explores the meaning of Yin and Yang to explain the holistic nature of the Chinese business mind. The Yin–Yang symbol (see Figure 5.1) suggests the significance of coexistence of both Yin (female, moon, water, weakness, darkness, mystery, softness, passivity and so on) and Yang (male, sun, fire, strength, brightness, clearness, hardness, activity and so on) inherent in all universal phenomena. The Chinese have the capacity to see opposites as containing the seed of the other, and together forming a dynamic totality. The Yin–Yang principle embodies the Chinese world view and lifestyle to embrace and transcend paradoxes. The Chinese mind is, therefore, paradoxical in nature. In the next two sections of this chapter, we shall look in detail at the two paradoxical constructs of Chinese culture: the co-operation-orientated Confucianism, and the competition-orientated Chinese stratagems, and discuss their implications for understanding the nature of Chinese negotiation strategy.

Confucianism: a co-operative construct of Chinese culture Confucianism has shaped Chinese culture for 2,500 years. Six Confucian values can be identified for our understanding of Chinese negotiation strategy based on the existing literature: (i) Moral cultivation; (ii) Importance of interpersonal relationships; (iii) Family and group orientation; (iv) Respect for age and hierarchy; (v) Avoidance of conflict and a need for harmony; and (vi) The concept of face (Tu, 1984, 1990; Bond and Hwang, 1986; Shenkar and Ronen, 1987; Hofstede and Bond, 1988; Lockett, 1988, 1990; Redding, 1990; Tan, 1990; Child and Markoczy, 1993).

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Moral cultivation Confucianism can be understood as a form of moral ethic (Tu, 1984). The term junzi (‘gentleman’, ‘profound man’, ‘superior man’, ‘cultivated man’, ‘princely man’, or ‘noble man’) appeared 107 times in The Analects of Confucius. Confucianism has Five Constant Virtues (wuchang): ren (human-heartedness, benevolence); yi (righteousness, justice); li (propriety, rituals, rules of conduct); zhi (wisdom); and xin (trust) (Fung, 1966). Above all, it emphasizes sincerity and trust. Sincerity is the Way of Heaven. To think how to be sincere is the way of man … Sincerity means the completion of the self, and the Way is selfdirecting. Sincerity is the beginning and end of things. Without sincerity there would be nothing. Therefore the superior man values sincerity. Sincerity is not only the completion of one’s own self, it is that by which all things are completed (‘Doctrine of the Mean’, in Chan, 1963, pp. 107–8): Legal power does not feature at all in Confucianism. The Confucian ideal is to rule by morals and li (rituals, proprieties, etiquettes) through instilling ‘a sense of shame’ into the human mind: A ruler who governs his state by virtue is like the north polar star, which remains in its place while all the other stars revolve around it … Lead the people with governmental measures and regulate them by law and punishment, and they will avoid wrong-doing but will have no sense of honor and shame. Lead them with virtue and regulate them by the rules of propriety (li), and they will have a sense of shame and, moreover, set themselves right (The Analects, in Chan, 1963, p. 22) Chinese negotiators believe that ‘all successful negotiations call for a high level of mutual trust and respect’ (Pye, 1992, p. 37). They place a high value on reputation, credibility, personal character and quality on the part of both Western firms and their negotiators (for example, Frankenstein, 1986; Kindel, 1990). ‘Honesty is probably the most important factor in negotiating in China because it builds trust, a major consideration in the Chinese decision’ (Yuann, 1987, p. 52). When negotiating with foreign businesspeople, the Chinese intend to know: ‘Are you and your company sincere?’ (Hoose, 1974, p. 464). In China, ‘one can negotiate a deal most effectively when there is enough trust between the parties that a verbal agreement is as good as a written contract’ (Roehrig, 1994).

Importance of interpersonal relationships, guanxi Confucianism can also be viewed as ‘a practical philosophy of human relationships and conduct’ (Lee, 1995, p. 7) or a ‘philosophy of daily life’ (Fung, 1966, p. 22). The Confucian notion of self is conceptualized in a relational context: ‘Confucianism conceives of the self neither as an isolated atom nor

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as a single, separate individuality, but as a being in relationship’ (Tu, 1984, p. 5). The Confucianists see the world through the lens of ‘Five Cardinal Relationships’ known as wulun in Chinese (‘Doctrine of the Mean’, in Chan, 1963, p. 105): There are five universal ways [in human relations] … The five are those governing the relationship between ruler and minister, between father and son, between husband and wife, between elder and younger brothers, and those in the intercourse between friends. These five are universal paths in the world. Three prominent features characterize all these five relationships: hierarchical, reciprocal and interpersonal. The superior (older) senior is righteous and charismatic, while the inferior (younger) is obedient and respectful. If the ruler is not righteous and loving, the subject can revolt and choose a better one. Confucian relationships are interpersonal rather than inter-organizational in nature. Despite China’s long history of political upheaval, natural disasters, waves of emigration, and, above all, economic scarcity, the well-defined Confucian relationships have often helped to keep social chaos at bay (Kao, 1993). Guanxi, the mandarin word for personal relationships or connections, is a Chinese cultural trait. Guanxi is a ‘special relationship individuals have with each other in which each can make unlimited demands on the other’ (Pye, 1992, p. 101), ‘friendship with implications of a continual exchange of favours’ (Chen, 1996, p. 224), ‘the establishment of a connection between two independent individuals to enable a bilateral flow of personal or social transactions’ (Yeung and Tung, 1996, p. 55). The benefits of guanxi, such as providing a source of information and a substitute for formal institutional support, have been emphasized in the literature (Davies et al., 1995; Xin and Pearce, 1996; Luo, 2000). One issue that has been less studied is that guanxi does not necessarily mean ‘trust’; guanxi does not lead automatically to a trusting relationship; and guanxi entails cost and risks. In business, Chinese negotiators look more for a sincere commitment to working together than for a neatly decorated legal package; it is the ‘strong personal relationships that provide some assurance that an agreement can come to fruition’ (Seligman, 1990, p. 113). Inter-firm negotiations are essentially interpersonal negotiations (Fang, 2001a). Chinese negotiators seem to expect and desire a level of personal relationship with their counterpart that would be viewed as unnecessary in the West (Kirkbride et al., 1991).

Family and group orientation Of the five cardinal human relationships defined by Confucius, three (that is, father–son, husband–wife and elder brother–younger brother) are direct family relationships, and the remaining two (that is, ruler (sovereign)–minister

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(subject), and friend–friend) can also be perceived as kinds of family relationships (Lin, 1939; Fung, 1966). Confucianism sees a direct transition from jia (family) to guo (state). It considers xiushen (moral cultivation of personality), qijia (orderly regulation of family), and zhiguo (governing of state) as inter-related processes. One important feature of the Chinese family system is that those with wealth and power have obligations to less fortunate relatives (Hsu, 1963): the strong must help the weak to overcome difficulties. The family system has shaped Chinese social characteristics (Lin, 1939). For example, the Chinese are well-known for their noble virtue of patience and subtle art of handling interpersonal relationships. Lin (1939, p. 45) points out that the ‘training school’ is the extended Chinese family, ‘where a large number of daughters-in-law, brothers-in-law, fathers and sons daily learn this virtue by trying to endure one another’. Lin (1939) observes that the relationship towards ‘strangers’ or ‘others’ is not among the five cardinal relationships. The Chinese family is a ‘walled castle’, where trust is high inside and low outside the family border. Fukuyama (1995) also regards China as a ‘familistic’ and ‘low-trust’ society where there has been a strong distrust of outsiders (non-family members). Given Confucian family values, the Chinese negotiating team is a ‘consensus-reaching group’ (Deverge, 1986), and the Chinese show a strong preference for meeting in groups rather than in one-to-one settings (Shenkar and Ronen, 1987; Kindel, 1990). The Chinese family awareness that ‘the strong must help the weak’ explains, in part, why they often feel that investors from ‘rich’ industrialized countries should make concessions to help ‘poor’ developing countries.

Respect for age and hierarchy One important hallmark of Confucianism is its teaching regarding respect for age and authority (Lin, 1939). Confucius says (The Analects, in Chan, 1963, p. 22): At fifteen my mind was set on learning. At thirty my character had been formed. At forty I had no more perplexities. At fifty I knew the Mandate of Heaven. At sixty I was at ease with whatever I heard. At seventy I could follow my heart’s desire without transgressing moral principles. By this succinct aphorism, Confucius is believed to highlight the characterbuilding of a great personality through a life-long process of self-cultivation. At the same time, the words also convey an important Confucian message, that age means wisdom. Eberhard (1971) states that the five Confucian relationships involve three principles of ranking: (i) age (older ranks above

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younger); (ii) social status (ruler above subject); and (iii) sex (male above female). These three principles can usually be reduced to one – namely, age. Instead of social equality, Confucianism stresses social hierarchy and differentiation. Everyone has their position in the social hierarchy. This can be seen from Confucius’ aphorism jun jun, chen chen, fu fu, zi zi, translated as follows: ‘Duke Ching of Chi asked about government. Confucius replied, “Let the ruler be a ruler, the minister be minister, the father be a father, and the son be a son” ’ (The Analects, in Chan, 1963, p. 39). Social harmony and stability is realized by people fulfilling the requirements of their roles in the social hierarchy. The Confucian value of respect for age and hierarchy has implications for foreign negotiators. The age and rank of foreign negotiators will determine the attitude of the Chinese host organization towards your company. For example, if your rank is low, the Chinese may feel ‘insulted’ and doubt your ‘sincerity’ to do business (Seligman, 1990, p. 117).

Avoidance of conflict and need for harmony One basic tenet of Confucian philosophy is the principle of harmony, which reflects an aspiration toward a conflict-free, group-based system of social relations (Shenkar and Ronen, 1987). Confucianism urges individuals to adapt to collectivity, to control their own emotions, to avoid confusion, competition and conflict and to maintain harmony (Hsu, 1963). ‘Social harmony was achieved when the “Five Relations” were fulfilled’ (Deverge, 1983). The Chinese avoidance of conflict and the need for harmony is a product of the Confucian concept of zhong yong (literally, ‘moderation’, ‘compromise’, ‘harmonization’ and ‘Mean’ – the Confucian classic Zhong Yong translates as ‘The Doctrine of the Mean’). Wu (1990) maintains that ren (humanity, benevolence), li (propriety, ceremony, rites, rules of proper conduct), and zhong yong form the foundation of Confucian philosophy. The ‘cultivated person’ strives to maintain self-control regardless of the situation (Shenkar and Ronen, 1987). The Chinese avoid passing harsh critical judgements, and find it difficult to have frank dialogues except among trusted friends (Tan, 1990). Direct and open conflict upsets interpersonal relationships and causes the people involved to lose face. Therefore, conflict is frequently resolved by bringing in a third-party mediator who is respected and accepted by both parties. Pye (1992, p. 91) observes that, in business negotiation, the Chinese never show ‘emotions’. As a ‘cultivated man’, the Chinese negotiator masters prudently the opportunities available through self-control. He considers negotiation as a simultaneous discussion of issues that leads him to integrative solutions; to adopt a slow but steady approach through ‘collaborative measures’; and to win his opponent’s heart (Withane, 1992, pp. 71–2).

Concept of face Face is a universal aspect of human nature and a ubiquitous concept that occurs in all cultures (Goffmann, 1955). However, face is particularly salient

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for the Chinese culture (Lin, 1939; Hu, 1944; Stover, 1962, 1974; Redding and Ng, 1982). In fact, the concept of face is Chinese in origin – the term is a literal translation of the Chinese lien (or lian). In The Shorter Oxford English Dictionary on Historical Principles (1975, p. 716), ‘to lose face’ is rendered directly from the Chinese phrase tiu lien (or diu lian): ‘to lose one’s credit, good name or reputation’. Face is one of the most important elements in Chinese social psychology, and the most delicate standard by which Chinese social intercourse is regulated (Lin, 1939; Stover, 1974). Hu (1944) explains that face involves the respect of the group for a person with a good moral reputation as well as his or her prestige. What makes ‘Chinese face’ special is that it is not only a person’s private affair but also, more importantly, the business of the person’s whole family, social networks and community at large. The Chinese concept of face is embedded in the Confucian notions of shame and social harmony. ‘Harmony’ is found in the maintenance of an individual’s face (Hofstede and Bond, 1988, p. 8). As noted earlier, Confucius did not advocate ruling by law; rather, he advocated instilling ‘a sense of shame’ into people’s minds as a self-regulating mechanism for people’s social behaviour. The Chinese face may not only be saved or lost, but can also be ‘traded’: to give and be given. Chinese commonly use the term ‘giving face to someone’ to mean doing a favour for someone. The person who has been giving face is expected to give face in return – a face trading thus begins. Therefore, the Chinese concept of face is linked inextricably to the Chinese concept of guanxi, and reciprocity is inherent in Chinese face behaviour (Ho, 1976; Hwang, 1987; Brunner and Wang, 1988). The self in Chinese culture is bounded by mutual role obligations and duties, and structured by a patterned process of give-and-take reciprocal facework negotiations. Face is perceived as the main reason for the Chinese preference for doing business with large companies with worldwide reputations (Chu, 1991). Chinese negotiators try to avoid saying ‘No’ in order to maintain the face of all the parties involved (Dunung, 1995). The Chinese often say ‘I know, I know’; however, in some cases they in fact do not understand (March 1994). This may be interpreted as a typical Chinese behaviour to protect face. It would be difficult for a Chinese negotiator to make concessions because of his face-consciousness (Warrington and McCall, 1983). Moreover, the Chinese propensity for re-negotiation has much to do with face (Schnepp et al., 1990). To sum up, Confucianism is the co-operative component in Chinese culture. It offers Chinese negotiators a set of rules for their own behaviour, and to influence others in business negotiations. In an ideal Confucian working environment, Chinese negotiators will negotiate sincerely to find ‘win–win’ solutions for all the members of the ‘family’ to satisfy notions of guanxi, face, harmony and so on. In this Confucian environment, negotiations ‘are not seen as a win/lose battle but as a dignified process of compromise’ (Deverge, 1986, p. 365). The boxed text contains a picture of the Confucian

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The Confucian gentleman The superior man has nine wishes. In seeing, he wishes to see clearly. In hearing, he wishes to hear distinctly. In his expressions, he wishes to be warm. In his appearance, he wishes to be respectful. In his speech, he wishes to be sincere. In handling affairs, he wishes to be serious. When in doubt, he wishes to ask. When he is angry, he wishes to think of the resultant difficulties. And when he sees an opportunity for a gain, he wishes to think of righteousness. Source: Adapted from The Analects (in Chan, 1963, p. 45).

‘gentleman’ or ‘superior man’ depicted by Confucius himself (The Analects, in Chan, 1963, p. 45).

Chinese stratagems: a competitive construct of Chinese culture Travelling in Greater China, one can hardly fail to notice a shared phenomenon: local books and articles on business strategies often mention the name of a Chinese person other than Confucius and illustrate how to use his Art of War to do business; this person’s name is Sun Tzu. Military terminologies are extensively used in Chinese business and economic life. Zhu Rongji, ‘China’s economic tzar’, provided an example. In the Great Hall of the People on 19 March 1998, at his first press conference as China’s fifth premier, Zhu declared his ambition to speed up the reform of China: ‘No matter what is ahead of me, whether landmines or an abyss, I will brace myself for it. I have no hesitation and no misgivings, and I will do my very best and devote myself to the people and country until the last day of my life’ (China Daily, 1998). Zhu sounded like a general commander on a battlefield rather than a chief economic architect in a marketplace. A Chinese proverb says: ‘The marketplace is a battlefield.’ The Chinese believe that the wisdom that guides the general commander in the battlefield also guides all of us in our daily life, including our business and economic life (Mun, 1990; Chu, 1991; Chen, 1995). Over the 1990s, there has been a range of managerial and academic works published on the relationships between strategic Chinese thinking, and Chinese and East Asian business strategies (see, for example, Mun, 1990; Chu, 1991; Tung, 1994; Chen, 1995; Low, 1995). It is argued that Chinese and East Asian business strategies have been shaped, at least in part, by ji (‘Chinese stratagems’) (Fang, 1995).

The concept of ji Ji (Chinese stratagems) can be understood as (i) a tactic or ruse used in war; (ii) an artifice in political and/or private life (von Senger, 1991, p. 2); and (iii) a socially allowed, through not necessarily encouraged, scheme with

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which an individual, or a group of individuals, tries to acquire certain benefits or to avoid disasters (Chiao, 1981, p. 429). At the heart of ji lies Sun Tzu’s strategic thinking – ‘victory without fighting’ (that is, a skilful strategist subdues the enemy without engaging it; takes the enemy’s cities without laying siege to them; and overthrows the enemy’s states without bloodying swords). Ji asserts the superiority of using human wisdom rather than engaging in a pitched battle to conquer the enemy, to cope with various situations and to gain advantage over the opponent – the foundation of Chinese competition strategy. Two classics works on Chinese stratagems – Art of War and The Thirty-Six Stratagems – are the best introductions to the Chinese concept of ji. Sun Tzu’s Art of War, a 14-chapter treatise, forms ‘the earliest of known treatises on the subject, but has never been surpassed in comprehensiveness and depth of understanding’ (Hart, 1982, p. v). The Thirty-Six Stratagems (or ‘The Thirty-Six Jis’ in Chinese) was written by an anonymous Chinese writer in the late Ming Dynasty (1368–1644) or in the early Qing Dynasty (1644–1911). It is a condensed compendium containing thirty-six items relating to Chinese stratagems. Through consisting entirely of a mere 138 Chinese characters, it has crystallized ‘the Chinese nation’s wisdom and personality’ systematically (Liu and Zhu, 1991, p. 434), and provided ‘a means for comprehending other people’s behavior, including both deliberate and inadvertent actions’ (Gao, 1991, p. 16). ‘For Westerners, knowledge of the 36 stratagems can provide a key to much of Chinese thinking’ (von Senger, 1991, p. 12). A number of Chinese stratagems are described in The Art of War: (1) comparison; (2) leadership; (3) a shared vision; (4) delegation of power; (5) conquer by stratagem; (6) create a situation; (7) prudence; (8) initiative; (9) quick fighting; (10) deception; (11) extraordinary troops; (12) flanking; (13) flexibility; (14) focus; and (15) espionage (Mun, 1990). The quintessence of ji is best summarized in Sun Tzu’s (1982, p. 77) admonition ‘To subdue the enemy without fighting’: To win one hundred victories in one hundred battles is not the acme of skill. To subdue the enemy without fighting is the acme of skill. Thus, what is of supreme importance in war is to attack the enemy’s strategy; Next best is to disrupt his alliances; The next best is to attack his army; The worst policy is to attack cities. Attack cities only when there is no alternative. Figure 5.2 lists all the legendary thirty-six ancient Chinese stratagems. Stratagems contained in The Thirty-Six Stratagems and Art of War can, in many cases, be coupled directly with one another. For example, the essence of Stratagems 1, 2, 3, 4, 8, 29, 33 and 36 in The Thirty-Six Stratagems can also be found in Principles 10, 14, 5, 8, 11, 6, 15 and 13, respectively, in Art of War.

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Ji 1 Cross the sea without Heaven’s knowledge (Man Tian Guo Hai) Deceive the Emperor (‘Heaven’) into sailing across the sea by inviting him into a seaside city which is in reality a huge camouflaged ship. Hide the deepest secrets in the most obvious situations. Ji 2 Besiege Wei to rescue Zhao (Wei Wei Jiu Zhao) Save the state of Zhao by besieging the state of Wei, whose troops are out attacking Zhao. Avoid the strong to attack the weak. Ji 3

Kill with a borrowed knife (Jie Dao Sha Ren) Make use of outside resources for one’s own gain.

Ji 4

Await leisurely the exhausted enemy (Yi Yi Dai Lao) Relax and preserve your strength while watching the enemy exhaust himself.

Ji 5

Loot a burning house (Chen Huo Da Jie) Take advantage of the opponent’s trouble or crisis.

Ji 6

Clamour in the east but attack in the west (Sheng Dong Ji Xi) Devise a feint eastward but launch an attack westward.

Ji 7

Create something out of nothing (Wu Zhong Sheng You) Make the unreal seem real. Gain advantage by conjuring illusion.

Ji 8 Openly repair the walkway but secretly march to Chen Cang (An Du Chen Cang) Play overt, predictable and public maneuvres (the walkway) against covert, surprising and secretive ones (Chen Cang). Ji 9 Watch the fire burning from across the river (Ge An Guan Huo) Master the art of delay. Wait for favourable conditions to emerge.

While still little-known in the West, ‘recipes’ for Chinese stratagems are jia yu hu xian (‘known to every household’) in China. Ji is a cultural phenomenon that permeates the socialization process of the Chinese people. The great popularity of Chinese stratagems is due perhaps to Chinese folk literature as well as the form in which they are preserved. Through TV, radio, theatre and even grandfather’s bedtime stories, Chinese children have learned automatically various kinds of Chinese stratagem. In China, the folk novel Three Kingdoms (Luo, 1994) is commonly called the ‘textbook of ji’, in which various ancient Chinese stratagems can be found in real historical contexts. Chiao’s (1981) research on social and political strategies in Chinese culture shows that Chinese stratagem is an everlasting Chinese tradition that prevails in all Chinese societies, irrespective of whether they are Communist or not. Chinese stratagems are preserved in the simple and condensed form of Chinese idioms, most of which consist of no more than four Chinese characters arranged so that, when recited, they produce a rhythmic effect, making it easier even for children to remember them.

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Ji 10 Hide a knife in a smile (Xiao Li Cang Dao) Hide a strong will under a compliant appearance, win the opponent’s trust and act only after his guard is down. Ji 11 Let the plum tree wither in place of the peach tree (Li Dai Tao Jiang) Make a small sacrifice in order to gain a major profit. Ji 12 Lead away a goat in passing (Shun Shou Qian Yang) Take advantage of opportunities when they appear. Ji 13 Beat the grass to startle the snake (Da Cao Jing She) Use direct or indirect warning and agitation. Ji 14 Borrow a corpse to return the soul (Jie Shi Huan Hun) According to popular Chinese myth, the spirit of a deceased person may find reincarnation. Revive something ‘dead’ by decorating or expressing it in a new way. Ji 15 Lure the tiger to leave the mountains (Diao Hu Li Shan) Draw the opponent out of his natural environment, from which his source of power comes, to make him more vulnerable to attack. Ji 16 In order to capture, first let it go (Yu Qin Gu Zong) The enemy should be given room to retreat so that he is not forced to act out of desperation. Ji 17

Toss out a brick to attract a piece of jade (Pao Zhuan Yin Yu) Trade something of minor value in exchange for something of major value.

Ji 18 To capture bandits, first capture the ringleader (Qin Zei Qin Wang) Deal with the most important issues first. Ji 19 Remove the firewood from under the cooking pot (Fu Di Chou Xin) Avoid confronting your opponent’s strong points and remove the source of his strength. Ji 20 Muddy the water to catch the fish (Hun Shui Mo Yu) Take advantage of the opponent’s inability to resist when they are put in a difficult and complicated situation. Ji 21

The golden cicada sheds its shell (Jin Chan Tuo Qiao) Create an illusion by appearing to present the original ‘shape’ to the opponent while secretly withdrawing the real ‘body’ from danger.

Ji 22 Shut the door to catch the thief (Guan Men Zhuo Zei) Create a favourable enveloping environment to encircle the opponent and close off all his escape routes. Ji 23 Befriend the distant states while attacking the nearby ones (Yuan Jiao Jin Gong) Deal with ‘enemies’ one by one. After the neighboring state is conquered, the distant state can then be attacked. Ji 24 Borrow the road to conquer Guo (Jia Dao Fa Guo) Deal with enemies one by one. Use the nearby state as a springboard to reach the distant state. Then remove the nearby state.

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Ji 25 Steal the beams and change the pillars (Tou Liang Huan Zhu) In a broader sense, the stratagem refers to the use of various replacement tactics to achieve one’s masked purposes. Ji 26 Point at the mulberry tree but curse the locust tree (Zhi Sang Ma Huai ) Convey one’s intention or opinions in an indirect way. Ji 27 Play a sober-minded fool (Jia Chi Bu Dian) Hide one’s ambition in order to win by total surprise. Ji 28 Lure the enemy on to the roof, then take away the ladder (Shang Wu Chou Ti ) Lure the enemy into a trap and then cut off his escape route. Ji 29 Flowers bloom in the tree (Shu Shang Kai Hua) One can decorate a flowerless tree with lifelike yet artificial flowers, so that it looks like a tree capable of bearing flowers. One who lacks internal strength may resort to external forces to achieve his goal. Ji 30 The guest becomes the host (Fan Ke Wei Zhu) Turn one’s defensive and passive position into an offensive and active one. Ji 31 The beautiful woman stratagem (Mei Ren Ji ) Use women, temptation and espionage to overpower the enemy; attach importance to espionage, intelligence and information-collecting. Ji 32 The empty city stratagem (Kong Cheng Ji ) If you have absolutely no means of defence for your city and you openly display this vulnerable situation to your suspicious enemy by opening the city gate, he is likely to assume the opposite. A deliberate display of weakness can conceal the true vulnerability and thus confuse the enemy. The stratagem can also be used to mean something with a grand exterior but a void interior. Ji 33 The counter-espionage stratagem (Fan Jian Ji ) When the enemy’s spy is detected, do not ‘beat the grass to startle the snake’, but furnish him with false information to sow discord in his camp. Maintain high intelligence and alertness. Ji 34

The self-torture stratagem (Ku Rou Ji ) Display one’s own suffering in order to win sympathy from others.

Ji 35 The stratagem of interrelated stratagems (Lian Huan Ji ) A stratagem combining various stratagems into one interconnected arrangement. Deliberately planning a series of stratagems. Ji 36 Running away is the best stratagem (Zou Wei Shang Ji ) When all else fails, run away. Put up with temporary disgrace and losses to win ultimate victory. Running away to gain bargaining power. Figure 5.2 The thirty-six Chinese stratagems ( Jis) Source: Fang, 2000: 519–20, Fang, 1999: 289–304.

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Ji and Chinese negotiating tactics The Chinese believe that business competition and military warfare share many common traits, and strategies can thus be used interchangeably (Mun, 1990; Chu, 1991; Chen, 1995). First, both enterprises and armies strive for a favourable position to protect themselves and to defeat their enemies/competitors. Second, enterprise competitions and wars are confrontational activities. Third, both organizations must be well organized and managed. Fourth, both require strategies and tactics. Fifth, the leadership of both an army and an enterprise plays a decisive role in achieving success. Sixth, both rely on high quality and committed people. Seventh, both require a supply of resources and logistics. Finally, both attach importance to intelligent gathering of information. The chief negotiator of a Western multinational corporation gave his impression of Chinese negotiating style based on an ongoing negotiation with the Chinese in telecom industry, as follows: ‘The most significant Chinese negotiating style is that they merely put the competitor’s proposals on the table before your eyes.’ Looking beneath the various Chinese negotiating tactics described in this study, we can identify a linkage between the patterns of Chinese negotiating tactics and the inner logic of ji. We find that the Chinese tend to use deception, a ‘borrowed knife’, an external force, a created situation and so on, to induce the other party into doing business the Chinese way. A Chinese negotiator typically does not force a company representative into accepting the Chinese terms, but rather signals that his/her competitors are waiting next door, prepared to present a better offer! This is a typical ‘Kill with a borrowed knife’ (Ji 3) trick as shown in Example 7 on page 137. Another case in point is Example 9 (page 137) in which a Western chief negotiator who, taking into consideration the complications of the Chinese concept of face, remained silent and did not say ‘No’ to the ‘ridiculous demand’ from the Chinese side. It turned out that the Chinese strategist was intentionally interpreting the Western silence as ‘Yes’. This episode resulted in a tremendous problem for the Western company in launching its products in China. This ‘Your silence means “Yes” ’ tactic is an example of ‘The empty city stratagem’ (Ji 32). Similarly, we can explain other illustrations from the Chinese stratagems point of view: for example, Example 6 to Ji 11 and Ji 33 and Example 8 to Ji 27 (pages 138–9).1

Taoist influence Ji is permeated with Taoist philosophy (Chu, 1991; Gao, 1991; von Senger, 1991; Chen, 1995): ‘The ancient Chinese embraced the essence of Tao and I-Ching and discovered the natural rhythm of military strategy’ (Chu, 1991, p. 14). The Taoist Yin–Yang principle states that the interaction of Yin and Yang determines the harmonious development of universal phenomena, and can be found in the myriad of relationships explored in the Chinese stratagems. Chinese stratagems, often planned and implemented in secrecy,

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may be understood as belonging to Yin (Gao, 1991). However, Taoism is also about the strength of weakness. ‘The yin power of passivity is more enduring than the yang force of direct action’ (Cooper, 1990, p. 40). Given appropriate circumstances, Yin can conquer Yang, weak can defeat strong, small can overpower big. The strategic Chinese thinking of ‘victory without fighting’ also reflects the Taoist Wu Wei principle. Wu wei literally means ‘inaction’, ‘non-action’ or simply, ‘doing nothing’. However, looking only superficially at Wu Wei can misinterpret the philosophical profundity that the term embraces. For ‘the Taoist is not indifferent’ but rather ‘totally committed to life’ (Cooper, 1990; p. 77). In Chinese philosophical parlance, Wu Wei may be better rendered as ‘to act without acting’, ‘actionless activity’, ‘non-interference’, ‘letting-go’ (see, for example, Cooper, 1990). Wu Wei is the supreme moral integrity of Taoism (Tang, 1991). Lao Tzu, the founder of Taoism says: ‘To march without formation; to stretch one’s arm without showing it; to confront enemies without seeming to have them’ (Tao-Te Ching, in Chan, 1963, pp. 167–72). All the Chinese negotiating tactics share one identical theme: ‘To subdue the enemy without fighting is the acme of skill’. The subtlety of Chinese negotiating tactics lies in the Chinese capacity to bargain without bargaining. The Taoist Wu Wei principle holds together all the Chinese negotiating ‘tricks’, ‘ploys’ and ‘tactics’. As the Yin–Yang image suggests, Yin and Yang exist in everything, and everything embraces Yin and Yang. Nothing is absolute in the Chinese culture. The existence and popularity of ji in Chinese societies implies linkages between Confucianism and Chinese stratagems. The Confucian familycentredness is often singled out as an unintentional contributory factor for Chinese stratagems. Tung (1994, p. 60) explains the moral base upon which Chinese and East Asians adopt deceptive tactics from the Confucian values of family: Because of the Judeo-Christian influence, Westerners consider such deception immoral. On the other hand, East Asians, who have no indigenous religion akin to Judaism and Christianity, consider deception a neutral term – it is amoral and acceptable if it results in a greater good. From the East Asian perspective, ‘the greater good’ embraces the wellbeing of the nation-state, the clan (the geographic region from which a person’s ancestors came), the extended family, the nuclear family, the corporation (employer), and the self. Their order of importance, however, varies among East Asian countries … In China, Hong Kong, and Taiwan, the family is usually considered paramount. Earlier, we discussed the fact that Chinese morality is reciprocal: if one party is not righteous and loving, the other party may revolt and choose a better partner. Therefore, the use of deception and other Chinese stratagems

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The Sun Tzu-like strategist He waits patiently for the right opportunity with full alert, constant observation and investigation on the situation. When he moves, his actions tend to be deceitful and indirect, and often he tries to achieve his goal by making use of a third party. He may exaggerate or fabricate occasionally, but always feigns. He does his best to stop his opponent’s advance. He may allure, prod and warn his opponent, but unless it is absolutely necessary, he will not have a real direct confrontation with him. If he has to, he will move fast and try to quickly put his opponent under control. He is always ready to abandon or withdraw, that is only a step for coming back. Source: Adapted from Chiao, 1981, p. 436.

as a ‘tit-for-tat’ strategy against insincere and unrighteous counterparts may be morally justified from the Confucian family point of view. Before a trusting ‘family’-type relationship is established, the use by Chinese people of Chinese stratagems to gain an advantage over the ‘non-family’ negotiating counterpart seems to be inevitable. Chen and Ying (1994, p. 27) have also observed that: If a Chinese negotiator does not establish a personal relationship with a potential investor, he does not feel obligated to be fair to the investor. Following this line of reasoning, the Chinese party would not view fishing [unethical deception of foreign investors] as an immoral act, but rather as a part of the negotiation process. A picture of the deceptive Chinese strategist, which is diametrically different from that of the Confucian gentleman discussed above, is presented in the boxed text.

Trust and Chinese negotiation strategy The coexistence of two paradoxical orientations in the Chinese culture – that is, Confucianism versus Chinese stratagems, has contributed to making Chinese business behaviour dynamic and paradoxical. As discussed earlier, the Chinese are intensely practical and follow different teachings to enrich different aspects of their life, and they play various roles in a range of social and functional settings. In a business negotiation context, the Chinese choice of roles and strategies can be illustrated as a continuum ranging from being a pure ‘Confucian gentleman’ without any stratagems in mind to being a pure ‘Sun Tzu-like strategist’ full of tactics and mind games. Figure 5.3

Tony Fang 143 Trust

Low

‘The Sun Tzu domain’

Chinese negotiation strategy

High

‘The Confucian domain’

‘Sun Tzu-like strategist’

‘Confucian gentleman’

Competition strategy

Co-operation strategy

Win–lose (Yin) approach

Win–win (Yang) approach

Short-term profit

Long-term interest

Figure 5.3 The ‘co-op–comp’ Chinese negotiation strategy

presents a metaphor of a ball swinging between the two opposite oblique planes to illustrate the paradoxical orientations of Chinese negotiation strategy. When trust is high, the Chinese will negotiate as a ‘Confucian gentleman’, adopt co-operation strategy, take a ‘win–win’ (Yang) approach to negotiations, and long-term interest is sought. When trust is low, the Chinese will bargain like a ‘Sun-Tzu-like strategist’, use competition strategy, take the ‘win–lose’ (Yin) approach, and short-term profit is emphasized. As such, the Chinese are culturally comfortable playing two diametrically different roles in two diametrically different work domains: ‘The Confucian domain’ versus ‘The Sun Tzu domain’. The state of trust (high versus low) between the negotiating parties serves as the magic force driving the Chinese negotiation strategy swinging between the two paradoxical orientations: co-operation versus competition. The nature of Chinese negotiation strategy is essentially both co-operative and competitive; I call it a ‘co-op–comp’ Chinese negotiation strategy. Take face as an example. Face as a Chinese value has been explored in numerous studies. However, the opposite of face – that is, the ‘thick face and black heart’ (Chu, 1992; see also Kidd and Richter, in Chapter 1 of this book) as a Chinese value, has been far less researched. Chinese culture is a paradox. In the Confucian domain, face is valued and the Confucian norms and etiquettes are followed meticulously. In the Sun Tzu domain, however, face is a word that has little meaning, illustrated also in Example 9, in which the rules of the ‘Thick Face’, the Art of War, and the Thirty-Six Stratagems apply. That the Chinese value face as well as thick face is baffling to many Western businesspeople. The Chinese tend to examine and evaluate the level of trust between the parties at the outset of negotiation, and then to calibrate their

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negotiation strategy in response to the behaviour of other party. Initial meetings and pre-negotiation sessions with the Chinese are critical and must be planned prudently, because the negotiator’s attitude and behaviour are to be repaid by the Chinese counterpart in light of the principle of reciprocity. The pre-negotiation sessions set the tone and atmosphere for further negotiation sessions and interactions. The Chinese negotiating style is therefore situation-related and reciprocal, as highlighted in a Chinese saying: ‘If you honour me a foot I will honour you ten feet in return’ (Fang, 2001a). The foreign party can influence Chinese choices of strategic orientations and do business with the Chinese in a win–win work environment through building, cementing and retaining trust with the Chinese party during the entire business process (that is, the pre-negotiation, face-to-face negotiation and post-negotiation phases). Trust is the ultimate indicator of complex Chinese negotiating behaviour. Using both co-operation and competition strategies in negotiation is not a monopoly of the Chinese but rather a strategy adopted by many experienced negotiators in all cultures. However, what this chapter intends to explore is the linkage between the traditional Chinese culture and the nature of Chinese negotiation strategy as suggested in the empirical cases. The Chinese negotiating style comes naturally from the Chinese culture. The ease with which Chinese people apply such a distinctive combination of co-operation and competition strategies in negotiation is rooted in the Chinese tradition.

Conclusion The Chinese negotiator tends to demonstrate seemingly paradoxical negotiating behaviour – that is, both sincere and deceptive. If negotiation strategy is defined as a means used to influence the behaviour of others at the negotiation table, then the Chinese negotiator can be understood to be adopting two diametrically different negotiation strategies – co-operation on the one hand, and competition on the other. Chinese negotiation strategy is a product of Chinese culture, which embraces both co-operative and competitive components: Confucianism versus Chinese stratagems (ji). The capacity of the Chinese culture to follow different teachings at the same time enables the Chinese to use both co-operation and competition strategies simultaneously at the international business negotiation table. From a traditional Chinese culture point of view, the Chinese negotiator plays the role of both ‘Confucian gentleman’ and ‘Sun Tzu-like strategist’, and adopts a ‘co-op–comp’ (both co-operation and competition) negotiation strategy. The level of trust between the negotiating parties serves as the ultimate indicator for the Chinese choice of strategy. When trust is high, the Chinese will negotiate as a ‘Confucian gentleman’, adopt co-operation strategy, take a ‘win–win’ (Yang) approach to negotiations, and long-term interest is sought. When trust is low, the Chinese will bargain as a ‘Sun-Tzu-like strategist’, use

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competition strategy, take the ‘win–lose’ (Yin) approach to negotiation, and short-term profit is emphasized. Child’s (2001, p. 278) study of Hong Kong companies with units operating in mainland China finds that ‘the trust their managers could place in their mainland managers and staff was the single strongest predictor of how successful those units were’. This chapter supports this finding. Trust serves as the ultimate indicator for the paradoxical orientations of Chinese negotiation strategy. Guanxi and its benefits have been emphasized in the literature (see, for example, Davies et al., 1995; Xin and Pearce, 1996; Luo, 2000). However, guanxi does not necessarily equate with trust. Guanxi, in effect, has its inherent instrumental and tactical dimension and implications (Yang, 1994; Fang, 2001b). Guanxi generates benefits but entails costs as well. While guanxi is important and certainly deserves further inquiry, we ought to look more deeply at the concept of trust in the Chinese context to uncover the secrets of Chinese business style.

Note 1. Interested readers are recommended to Fang (1999) for a complete account of Chinese negotiating tactics studied from the traditional thirty-six Chinese stratgems perspective.

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6 Tao Zhugong’s Chinese Business Principles (770–221 BC): A Convergence with Modern-day Construction and Real Estate Practices Sui Pheng Low

Introduction A comparison by Low and Sirpal (1995) of modern-day Western business and corporate strategies with ancient Chinese classical strategies of war suggests that there is considerable overlap in concepts between the two (Thomas, 1995). This suggests that the Chinese people faced and dealt with similar problems of modern-day living more than 2,000 years ago. Ancient Chinese treatises in the areas of philosophy, administration, management and strategy continue to provide much wisdom for business applications in the twenty-first century. It is just unfortunate that all these treatises were written in the Chinese language, which is not accessible to the majority of the English-speaking world (Low, S. P., 1996, 2003). Studies have, however, shown that these ancient Chinese treatises have many similarities to modern-day management practices (Low and Yeo, 1993; Low, 1995; Low and Tan, 1995; Low and Lee, 1997). The Chinese people have not neglected business principles throughout the long history of China. In fact, the Chinese business school of thought was known to exist as far back as the Eastern Zhou Dynasty (770–221 BC), when a military strategist by the name of Tao Zhugong went into business. Recognized as the founder of the Chinese business school of thought, he expounded his own business principles, which cover human resources, product knowledge, customer service, efficiency and foresight, among others, as well as dealing with the pitfalls of poor business practices (Xu, 1999). Soon (1999) argued that Tao Zhugong’s principles are a pillar of support for many Chinese businessmen overseas, and that a study of the business techniques advocated by Tao Zhugong would reveal that they contain practical advice relating to trust, honesty, integrity and organizational best practice that is still applicable in modern-day business organizations. 151

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From the anecdotal case studies drawn from construction and real estate, this chapter will show that these business rules are still practised today, at three levels: individual, firm and country. Each business rule will be elaborated in this chapter with two management case studies – one each from the construction and real estate industries. The aims of this chapter are: (i) to provide a historical account of the life and work of Tao Zhugong; (ii) to explain the standards and safeguards for business practice advocated by Tao Zhugong; and (iii) to provide anecdotal evidence of the relevance of Tao Zhugong’s school of thought in modern-day construction and real estate management practices.

History of Tao Zhugong Tao Zhugong, who served as an official of the Lord of Yue, lived during the Spring and Autumn Period (770–476 BC) and was a native of Wan (presentday Henan Province). This period, which preceded the Period of the Warring States (475–221 BC), was a tumultuous one in the history of China (Meyer, 1994; Roberts, 1996). When the state of Yue lost the war to the state of Wu, the Lord of Yue was banished to slavery in Wu. As loyal subjects, Tao Zhugong and Wen Zhong (another official) left with the Lord of Yue for the state of Wu. With brilliant planning, Tao Zhugong, together with Wen Zhong, was able to assist the Lord of Yue to defeat the state of Wu after ten years in exile. Following this victory, and understanding only too well that the victory is ephemeral, Tao Zhugong suggested to Wen Zhong that they should both retire to live a quiet life now that the Lord of Yue has been returned to power. While Wen Zhong found it difficult to retire prematurely amid his new found glory, Tao Zhugong packed his valuables, took his family and quietly left the state of Yue by boat. They arrived in the state of Qi and settled there. While there, Tao Zhugong reflected that his teacher had offered the Lord of Yue seven strategies to defeat the state of Wu. The Lord of Yue was, however, able to defeat the state of Wu by using only five of the strategies. This discovery prompted Tao Zhugong to examine whether his teacher’s strategies could be applied to business management. At that time, agriculture and commerce were flourishing in the state of Qi. Tao Zhugong and his sons ventured into farming and the salt trade, and after only a few years of hard work were able to amass a huge fortune. Tao Zhugong became so well-known that the Lord of Qi invited him to be his prime minister. While considering this invitation, Tao Zhugong received news that the Lord of Yue had killed Wen Zhong, who had stayed behind in the state of Yue. Not wanting to rejoin politics, that same night, Tao Zhugong and his family left quietly and went to a place known as Dingtao (in present-day Shandong

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Province). Having observed that Dingtao was a prosperous commercial centre where merchants and traders met for business, Tao Zhugong bought a piece of land there to build some warehouses. Once this had been done, he instructed his sons to go to the marketplace and buy anything that was being sold cheaply. He explained to his sons that, when the market lacked these goods in future, they would sell them and make a profit. Tao Zhugong soon became a rich man and was well-known throughout the country (Xu, 1999). A visitor came one day to ask Tao Zhugong how he managed to make so much money three times within the short span of ten years. Tao Zhugong replied that he owed his success to his teacher who taught him some strategies that he had applied to managing his business. He offered the eighteen guiding principles of business management to his visitor and urged him to exercise flexibility when applying them. Tao Zhugong’s eighteen principles of business and financial management were thus handed down from one generation to the next. These eighteen principles were eventually revised over time into twelve Golden Standards and twelve Golden Safeguards for business success (Xu, 1999), as shown in Figure 6.1. From the anecdotal evidence given below, it can be seen that these rules are still relevant and are being practised in the construction industry even now.

12 GOLDEN STANDARDS

12 GOLDEN SAFEGUARDS

Be a good judge of character Be customer-orientated Be single-minded Be captivating in your sales promotion Be quick to respond Be vigilant in credit control Be selective to recruit only the best Be bold in marketing your product Be smart in product acquisition Be adept in analysing marketing opportunities Be a corporate model Be farsighted in developing a total business plan

Don’t be penny-pinching Don’t be wishy-washy Don’t be ostentatious Don’t be dishonest Don’t be slow in debt collection Don’t slash prices arbitrarily Don’t give in to the herd instinct Don’t work against the business cycle Don’t be a stick-in-the-mud Don’t overbuy on credit Don’t under-save – keep reserve funds strong Don’t blindly endorse a product

Figure 6.1 Template for Tao Zhugong’s Chinese business principles

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The twelve golden standards The twelve ‘dos’ for business success and their respective anecdotal evidence for construction and real estate practices are discussed below.

1 Be a good judge of character This requires one to know who can be trusted in order to avoid losses (Xu, 1999). Nick Raynsford, at one time the UK’s Minister for Construction, set up a task force to help outlaw ‘cowboy’ builders in Britain. The task force, headed by Stent Foundation’s chairman Tony Merricks, called for the introduction of a Quality Mark to differentiate between reputable builders and ‘cowboys’. A raft of anti-‘cowboy’ measures was introduced in the summer of 2000. A six-month pilot scheme for the Quality Mark was set up in Birmingham (Glackin, 1999a). This anti-‘cowboy’ episode suggests that one should only deal with a party who can be trusted, based on the principle of a ‘personal guarantee’. Queensland in Australia was looked upon at once stage to be the right place for property investment. However, Argent (1996) cautioned that one needs to be armed with a wealth of information before making any financial commitment, no matter how good a deal sounds. The marketing of Queensland properties in Asia was then of particular concern to the industry in Australia. Over-enthusiastic claims of capital appreciation and the use of statistics out of context created unreal expectations. Built-in rental guarantees, free trips, special offers and so on all caused inflated purchasing prices. The non-refundable booking fee was for the benefit of the agent, not the purchaser. In the cold, hard light of day, a buyer might regret booking at an exhibition should it be discovered that not all the facts have been revealed; the choice he or she was left with was to write off the booking fee as a loss, or stay in the deal under sufferance and possibly lose more (Argent, 1996). It is necessary to judge who can be trusted based on their words, demeanour and actions. This helps to minimize loss and damage caused by people who are not trustworthy.

2 Be customer-orientated This requires one to remember that customer satisfaction both retains and attracts clients (Xu, 1999). Davis Langdon and Everest (DL&E), the world’s largest quantity surveying consultancy, joined forces with specialist mechanical and electrical (M&E) quantity surveyor, Mott Green & Wall, to strengthen its service. Most larger quantity surveyors offered M&E service as part of an overall package, but Mott was often taken on separately to provide cost advice on M&E installation. DL&E’s senior partner, Paul Morrell, said: ‘There is a shortage of M&E quantity surveyors, and we recognized the need to strengthen what we offered, so I went to talk to Ken Cheshire, Mott Green & Wall’s joint managing director.’ Morrell added: ‘From a cost consultancy

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point of view, you can only advise on how to do it better if you understand how the technology works.’ Cheshire said: ‘We are doing this to open doors. We had been successful on our own, but with DL&E, we can hit a new market’ (Barrie, 1999f). The merger between DL&E and Mott Green & Wall is an example demonstrating that one should strive towards customer-orientation in all dealings. While Malaysia’s booming economy in 1996 may have brought smiles to the faces of the country’s planners, it brought frowns to property developers. This was because competition to attract buyers, especially in the industrial and commercial sectors, has increased. One marketing tool used increasingly was ‘specialization’, with the aim of finding niche buyers. Mohamed Eusoff, Senior Manager for Arosa Development Sdn Bhd described it as ‘giving something unique’. The aim was replace the modern shop house, with its bare façade and minimal infrastructure. These were usually not well maintained, because no one wanted to take responsibility for the general upkeep of the area in which the shop houses were located. Parking space was minimal, and security was non-existent after closing time. Hence, the FACB Business Centre Ampang was conceived. Based on the infrastructure of shopping complexes, one of its strong points was 24-hour security. Others included a façade reminiscent of a MNC’s head office, ample parking space and the option of buying adjacent units for variable office needs. There was one lift for every two offices and broad walkways for easy pedestrian flow. To make sure there was no downtime in maintenance, centre owner Arosa Development employ a team promoting and managing the property (Khor and Rathir, 1996). One should therefore provide good services that achieve customer satisfaction. These include good product knowledge, after-sales service and prompt delivery. The right attitude towards providing good service is also crucial to business development.

3 Be single-minded This requires one to focus on the chosen product and to avoid arbitrary switches (Xu, 1999). Amec was a hot favourite to build Manchester’s £90-million stadium for the 2002 Commonwealth Games. It was recommended in an evaluation report sent to Manchester City Council’s chief executive, Howard Bernstein, and was set to be named as the preferred bidder for the project. Industry sources said Amec had put in the lowest bid and scored highest in several other key categories, including technical ability and capacity to build the landmark project. Amec edged ahead of Bovis in the last stages of the evaluation process partly because it had little other major work on site in Manchester city centre. Howard Bernstein was known to have fears about overheating in Manchester during the millennium period, and viewed the completion of the project on time as being crucial to the city’s image. In this context, Bovis was disadvantaged, because it was

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still busy with work to rebuild Manchester after the 1996 IRA bomb attack (Barrie, 1999a). Amec was therefore put in a strong position because the stadium would be its single major project in Manchester. The business maxim ‘small is beautiful’ was evident in Shenzhen, one of China’s five special economic zones established in the 1980s as a window on the outside world and an economic showcase. Murray (1996c) observed that tiny apartments with a floor space of 30–50 sq.m. proved to be the best sellers on the local property market. Developers originally built these units for single people, but another major purchasing group was the large migrant worker population that was attracted by a booming economy: they flooded in from all over the country. The Teli Building, located to the east of the downtown area, sold its 50 units rapidly during a promotion in December 1995. In the Shenzhen Real Estate Fair a month later, ‘mini flats’ saw the briskest sales. Each of the units has a bedroom, a sitting room or a dining room, a kitchen and a toilet (Murray, 1996c). The success of these ‘mini-flats’ in Shenzhen suggests that one must be sincere in a business venture and must be prepared to work and study in order to be knowledgeable about market demands. This is the only way to secure a beachhead in the market and to succeed.

4 Be captivating in sales promotion This requires one to have an interesting and varied showcase for one’s products, especially at the point of sale (Xu, 1999). In the UK curtain-walling market, the more expensive pre-assembly method was preferred because panels assembled in a factory were thought to be less likely to leak between joints. However, hundreds of British firms were unable to bid for high-profile curtain-walling contracts because the companies were too small to underwrite the necessary warranties. They usually tackled jobs that were worth under £5 million. Baco Contracts, with an annual turnover of £15–20 million, overcame this hurdle because it was owned by British Aluminium, which has a £500 million turnover. British Aluminium signed and underwrote each contract, while Baco Contracts carried them out with its US partner, IAC Kawneer (Cavill, 1999). By underwriting each contract, British Aluminium was able to help Baco Contracts add value to sales. ERA Realty Network, the largest real estate agency in Singapore, launched its latest high-tech service – ERA Mobile Access Network (MAN) – to enable its more than 1,000 ERA agents to provide the most comprehensive and instantaneous real estate service to its customers. The launch of ERA MAN made ERA the first company in Singapore to benefit from the services of DataRoam Access, a new mobile wireless communication access that made the concept of the mobile office a reality. Harry Chua, Chairman and CEO of ERA Realty Network, explained: ‘Our customers will be able to get instantaneous real estate information through ERA MAN. For instance, a customer who wishes to know how much his property is worth can have the

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information right there in his living room or wherever he is. ERA MAN allows our agents to access the head office computer system using the services of DataRoam Access’ (Beh, 1996b). The ERA experience suggests that one should constantly reorganize, revamp or restructure all aspects of an organization (including company image, human resources, work attitude and so on) to enable the business to keep up with the times.

5 Be quick to respond This requires one to be quick in decision-making. Business opportunities may be lost if one hesitates (Xu, 1999). Sims (1999), while suggesting that the construction industry does not know enough of what its customers want, proposed three golden rules of marketing. First, there must be a faceto-face meeting with the client; second, the client must have a suitable project; and, third, the client must be in a position to say ‘yes’. Sims (1999) posited that if any one of these ingredients is missing, it would be difficult to respond quickly to the client’s needs. In another context, Baco Contracts was set to challenge the five European curtain-walling manufacturers and installers who dominated the UK’s £100 m–£200 m-a-year market. This was because Baco Contracts, who specialized in aluminium cladding design and installation, set up a partnering deal with US curtain-walling manufacturer, IAC Kawneer. This partnership enabled it to provide large, pre-assembled panels of curtain walling. These panels, used on high-value contracts, have not previously been available from UK firms. Baco Contracts’ managing director, Peter Edwards, said: ‘The vast majority of UK curtain-walling companies are so small they are unable to tackle big jobs. They don’t have the manufacturing capacity or the financial muscle. By teaming up with IAC Kawneer, Baco Contracts will be able to offer pre-assembled curtain walls without having to invest in the expensive equipment necessary to manufacture them’ (Cavill, 1999). This partnering arrangement also enabled Baco Contracts to respond quickly to market demands in the UK. In the United States, the National Association of Realtors’ subsidiary, Realtors Information Network (RIN) and a computer software company, ESRI of Redlands, California, teamed up to develop a new software to make the home buyer’s life much simpler (Low, C. G., 1996). Geodata, a speciallydesigned software system, enables a potential buyer to go to his/her local estate agent’s office and request the agent to search for the kind of home in the kind of neighbourhood the buyer desires, with any other characteristics he/she has in mind. Geodata eliminated the need to spend valuable time travelling and house searching. This can now all be done via the local estate agent’s office. The data provided includes streets, demographics, school information, crime statistics, parcel-level data, environmental data, and other relevant home buying criteria/data. The specific data about most of the properties was provided by more than 320 multiple listing services (MLS)

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that have joined this service. Their business represented more than 80 per cent of real estate transactions in the USA (Low, C. G., 1996). In relation to the benefits offered by Geodata, one should therefore seize an opportunity when it appears, and to be able to provide the goods and services needed by customers as and when required.

6 Be vigilant in credit control This requires a person to be meticulous, unabashed and speedy in debt collection (Xu, 1999). The Royal Opera House in Covent Garden, London, hit the headlines after refitting work started on site in 1996: defective design, vandalism, strikes and claims plagued the project. After the work started in April 1996, the site was hit by a series of calamities. Sagging steelwork on the 50-metre-high fly-tower needed to be straightened with reinforcements; workers walked off site because of canteen facilities; a crane toppled over; workers clashed over bonuses; and a delicate plaster ceiling had to be reworked after it was vandalized. When the 1 December 1999 opening night was seven months away, services contractor, Balfour Kilpatrick, said its electricians could not finish the job until the end of January 2000. Construction manager, Schal, battled to keep the project on course to enable Placido Domingo’s opening night performance to go ahead. But that was not the only worry. Keeping to the £140-million construction budget was tough. Schal’s project director, Paul Reeder, said there was £28 million left to spend, but project sources said that unsettled claims could be as high as £15 million. After three years on site, the contingency fund that would usually pay for such claims was said to be running low, which meant that cash would have to come from the construction budget (Spring, 1999). Innovation in home sales was most apparent on Hainan Island, China. Some developers there were promoting forward buying with a ‘value guarantee repurchase’ agreement. The idea was that the customer pays for the property in full while it is being built, enabling the developer to maintain cash flow at a crucial time. At the time of handover of the completed house, if its value has not increased, the developer agrees to repurchase the property immediately at a 15–20 per cent premium (Murray, 1996a). The lesson to be learned is that, while pressing clients for debt settlement is a difficult and thankless task, one should remember that claiming debts – even though often only a little at a time – helps to provide a healthy cash flow for an organization. Bad debts must be minimized at all times to maintain a healthy balance in receipts and expenditure.

7 Be selective to recruit only the best This requires work to be assigned according to ability, as well as to capitalize on the best possible opportunities to maximize productivity (Xu, 1999). A leading clients’ representative in the UK, the British Property Federation (BPF), called for a league table to rank major contractors according to cost,

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speed and reliability. BPF’s director-general, Will McKee, said it would give clients a clearer idea of the performance of the top fifty firms, and added that the system of performance indicators released by another agency did not go far enough. These measured performance in terms of time, cost, defects, safety, profitability and client satisfaction. However, clients would not be able to judge firms, because contractors did not have to make their figures public (Barrie, 1999b). A league table for ranking contractors would allow developers to select only the best companies for their projects. As of August 1996, Singapore-based CDL Hotels New Zealand owned 23 hotels and 3,086 rooms, with further investment in rooms planned for the future. Since moving into the market in 1993, the company had increased its investment rapidly. CDL’s annual report for 1996 said that the company was showing an unrealized gain on buildings and land in New Zealand, with a market valuation of between NZ$350 million and NZ$400 million. Vincent Yeo, CDL’s managing director, said the change in the company’s hotel values reflected the growth in New Zealand tourism and the recovery since 1993, when CDL bought most of its hotels. Commenting on the investment, Vincent Yeo said: ‘Decisions on getting into the New Zealand market were based on the very good purchase opportunities at that time and the longterm confidence in tourism in New Zealand which commands a special niche in the tourism market. We were also very confident in the New Zealand economy which was in the recovery phase based on the restructuring during the 1980s’ (McManus, 1996). To deploy staff effectively, one should therefore know their aptitudes and talents, give them room for growth and not interfere too much with their work. The same attitude should also prevail for asset acquisition and accumulation. One should remember that the success of an enterprise depends on the quality of its staff and assets.

8 Be bold in marketing the product This requires the exploration of new and unconventional methods for creating awareness of the product, and to promote its unique selling point (Xu, 1999). Overseas expansion was a priority for the architectural practice formed out of the merger between Abbey Hanson Rowe and Holford Associates. Abbey Hanson Rowe’s chairman, James Handley, said the main aim of the deal was to give the firms the critical mass they needed to expand. He said: ‘At the moment, we are concentrating on getting the new firm up and running. Our main priorities will be to further strengthen our London office and move overseas in the medium term. That is where we believe the markets are.’ Holford already has an office in Dubai. Handley said the new firm will be looking towards expanding into underdeveloped markets including Kazakhstan, Poland, Bahrain, Saudi Arabia and possibly South Africa (King, 1999b). The merger took the bold step of marketing its services overseas.

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In the medium term, Ho Chi Minh City officials in Vietnam believed the city could generate sufficient economic activity to mop up the torrent of new hotel rooms and even support a future double-digit annual percentage growth in supply. A study prepared by the city’s tourist department and National Institute of Tourism in 1995 showed that while the number of international standard hotel rooms available or under construction amounted to 5,424, the current market required 7,000. The projected requirement was for 21,000 rooms by the start of the twenty-first century, when the number of visitors to the city was expected to double from the one million to two million a year in the mid-1990s. This optimistic attitude assumed that a strong tourism industry would spring up quickly in Vietnam. But some hotel operators and airlines were disillusioned by the country’s failure to develop the infrastructure and a marketing strategy that would support tourism growth. After an initial flurry of visitors as the country opened its doors, hotel operators complained of declining occupancy rates, and some airlines said passenger numbers had fallen (Murray, 1996a). The slowdown in the Vietnamese tourism industry suggests that one should not forget to market and sell even when the product is good. Don’t be tongue-tied. One should earn the trust of customers and help them to appreciate the value of the product in order to close a sale.

9

Be smart in product acquisition

This requires one to be thorough and meticulous when buying stock, to ensure a high turnover (Xu, 1999). Kvaerner negotiated for £150-million-worth of construction work on a west London site that it was in talks to sell. The contractor was in exclusive negotiations with developer Stanhope over the 13-hectare site. Although both parties declined to comment ahead of the sale, it was understood that Stanhope was planning a 150,000-sq.m. business park, which Kvaerner hoped to construct. As a condition of the sale, Kvaerner was understood to be asking for guarantees that it would be given the opportunity to construct at least some of these buildings (Barrie, 1999d). In another development, Davis Langdon & Everest (DL&E) took over leading Manchester-based quantity surveyor, Poole Stokes Wood on 1 May 1999. The attraction of the deal to DL&E was that this helped to boost its expertise in sports stadiums and housing. Stadiums can be marketed abroad, and housing provided a counterbalance to the business cycle in the commercial sector. This enabled DL&E to broaden the range of services it offered (Barrie, 1999j). In a similar vein, contractor Thomas Vale, based in the Midlands, UK, and Kent-based facilities management and contracting business, Industrial Contract Services, merged to form a £85-million-turnover company. Thomas Vale’s chairman, Mike Wallis, said the aim of the merger was to build the business into a major national facilities management and contracting force, adding that: ‘Having FM skills on board is enormously helpful for PFI work’ (King, 1999a). The Kvaerner, DL&E and Thomas Vale cases suggest that these companies were smart in their mergers/acquisitions to achieve the added advantage.

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Following the start of en bloc property sales in Singapore, Long See Hong, Richard Ellis’s associate director for development consultancy and research, noted that: ‘With the increase in the plot ratios, housing sites will boast great potential for luxury condominium developments. This means owners of some of the affected estates will be allowed to redevelop their properties, doubling the number of units there. Cashing in on the rise in land values, existing owners have, in fact banded together to put up their properties for collective sale. Owners who have been able to sell their entire estate collectively have reaped a windfall.’ Residents of Miramar Mansion sold their sixteen units to Euro-Asia Realty for S$45.89 million in July 1995. This was followed by the sale of twenty-eight units in Newton Mansion in October 1995 to City Development Ltd, for S$38.2 million. Another en bloc sale that occurred at about the same time was Moulmein Lodge. Occupants of its eight units sold their properties to RDC Land for S$14.35 million (Pang, 1996). The beginning of collective sales allowed people to gain a windfall if they were smart enough to acquire the right property before enhanced changes were made to existing plot ratios. On the other hand, one should also remember that cheap products are frequently not quality goods, and that those who are eager to sell may not always offer genuine items. In selecting and taking delivery of goods, one should be meticulous in inspecting them to discover any defects. Orders therefore should not be placed casually.

10

Be adept in analysing marketing opportunities

This requires the carrying out of market research in order to buy and sell at the opportune time (Xu, 1999). At the request of the Chinese government, the UK Chartered Institute of Building (CIOB) was asked to assess the state of the construction industry in China. Tony Bingham, a member of the CIOB team, observed: I have just taken a taxi across Shanghai and have seen all the scaffolding ever made anywhere in the world. It is all here. Shanghai is building its own Manhattan. Roads, bridges, railways, and skyscrapers are being built and rebuilt. China must rank as the biggest building site ever, employing a staggering 35 million people. On a practical level, their worries are about engineering errors. I was asked several times who checked the architect’s or engineer’s designs in the UK? They weren’t just talking about building inspection; they were talking about looking over the shoulder of the bloke who decides what the specification will be. Puzzled, I asked why. Apparently, the engineering decisions on some roads, bridges and dams have led to poor-quality structures. In January 1999 a bridge collapsed and 40 were killed. Two died on another expressway bridge mess up. There are opportunities here for UK engineers and architects to do some business. (Bingham, 1999a, 1999b)

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In an interview on possible regional expansion, David Lawrence, Marco Polo Developments’ managing director in Singapore, explained that, as a group: We do not intend to expand into South East Asia. We are a Hong Kong group. We have been successful with regional investments and perhaps, in the future, we will duplicate this in other countries. At the moment, Marco Polo Developments Singapore is focused on Singapore. That may or may not change, depending on whether we can find suitable investment flows in Singapore in the future. But as a group, we are likely to end up in 10 to 20 years time with similar vehicles in the major countries such as Indonesia and Malaysia. I think it is about time to start looking at Japan again. Tokyo and Osaka are very large property markets. It has been difficult for foreign investors because it has been a fairly closed market. But that’s changing now. It is a mature market. Land prices are relatively cheap now. In Tokyo, there has been an oversupply of office space for a long time, but since the Kobe earthquake, companies are more focused on earthquake-proof buildings. And there is now a shortage of earthquakeproof modern buildings with a large floor space in Tokyo. So that does offer some opportunities. (Dizon, 1997) Undoubtedly, David Lawrence’s comments reflect the importance of market research in analysing regional opportunities for property investment. In market research, one should remember that natural factors may affect the quantity of goods produced, and that market forces may also affect supply and demand. All these will collectively influence high/low price, demand and supply.

11 Be a corporate model This requires a person personally to abide by company rules and regulations in order to instil harmony and trust (Xu, 1999). In the context of building, sustainable construction deals with matters such as waste management, energyconscious design and safety, whereas sustainable development includes social planning issues such as creating workspaces and homes close together, so that transport problems are reduced. Sustainable construction includes economic sustainability – all players must be able to profit. Consultants and contractors need to collaborate to find economically sustainable measures to minimize environmental impact (Cook, 1999a). Construction firms can be good corporate models if they adopt concepts and processes that support sustainable construction. These include recycling waste materials (for example, using waste wood to make chipboard), and the design of flexible buildings that can be adapted for re-use. Increasingly, businesses in Singapore are beginning to explore ways in which they can help more people to appreciate the value of art. By sponsoring exhibitions or commissioning works for their own corporations, they can

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simultaneously enhance the environment, while linking their name with a particular image or noble cause. The large, bronze, bird sculpture on Boat Quay in Singapore, for example, was sponsored by the United Overseas Bank (UOB) to symbolize its corporate philosophy. Completed by South American artist, Fernando Botero, in 1990, this sculpture was chosen because traditionally birds are associated with peace and security. In line with UOB’s commitment to help make Singapore a more gracious and cultured society, the bird was seen as an ideal image to reflect the joys of living in the city and the sense of optimism for future success. UOB’s belief that, so long as there is peace and optimism among its people, Singapore will continue to grow and prosper, has been captured in a lighthearted and appealing way (Vincent, 1996). Similarly, at the organizational level, one should therefore take the lead to embrace the enterprise’s corporate culture or business principles. These help to promote trust and unity between superiors and subordinates as well as to help in enhancing staff relationships.

12 Be farsighted in developing a total business plan This requires a person or company to consider the risks and returns before investing (Xu, 1999). Cook (1999b) reported that the University of East London’s (UEL) new campus was the Egan demonstration project everyone was watching to prove that its innovations work [Sir John Egan had set the Construction Industry a task to become better integrated (Egan, 1998)]. Edward Cullinan Architects played a part in keeping the project on track. Its director, Robin Nicholson, said: ‘We took the design to RIBA Stage E before handing over to the develop-and-construct team.’ This advanced stage of design meant greater cost certainty for the contractor, Tarmac. By the time that revised designs were complete, the campus project was cheaper than had originally been proposed, but had to be built in 85 per cent of the original time allowed. Consequently, Tarmac needed to introduce innovative measures to improve profitability. These mainly involved the disposal of waste. All the on-site spoil was re-used, which eliminated the cost of removal. Tarmac treated 20,000 cubic metres of sub-soil with lime cement and used it as fill. Tarmac also saved on mortar. Instead of bringing in readymixed concrete, Tarmac set up two dry-mix silos. When mortar was needed, the dry mix was simply ‘run off’ and water added. Although the capital costs were higher, there was an overall saving for Tarmac because there was less waste. Additionally, waste concrete was crushed and used as aggregates for the window lintels (Cook, 1999b). Sime UEP Properties, long identified with the Klang Valley township of Subang Jaya and its inseparable extension, UEP Subang Jaya in Malaysia, was on the verge of a major corporate transformation. It was no longer a oneproject developer but instead had different types of properties to sell in up to four townships, all at the same time. It also went beyond marketing just one major product line – terraced houses and other landed properties. Its product

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range expanded to include condominiums, factory sites, built-up factory space, office space for lease, and even service apartments and hotels. In addition, a few highway developments that took place in the Klang Valley area enhanced the marketability of whatever plans Sime UEP had in mind for its new sites. The new highways were the Shah Alam–Kuala Lumpur Highway and the North–South Link. The latter linked Klang Valley to the new international airport in Sepang, and the new Putrajaya administrative centre (Lim, 1996b). The Sime UEP Properties’ business plans suggest that foresight is essential when making future investment plans. It is therefore necessary to recognize market trends and to implement policies/plans that are sensitive to market changes.

The twelve golden safeguards The twelve safeguards for business success and respective anecdotal evidence for construction and real estate practices are discussed below.

1

Don’t be penny-pinching

This requires businesses to invest in public relations and social concerns (Xu, 1999). Civil workers working in the Jubilee Line Extension (JLE) project in London were offered a ‘golden handshake’ which guaranteed them up to £1,600 when they left the project. The deals, agreed between joint-venture contractor Balfour Beatty/Amec and the construction union UCATT, guaranteed workers with three years’ service on the JLE a £1,200 payment when the project ended, plus a week’s pay if they were made redundant before that time. The deal was in line with a similar package offered to electricians on the troubled project. It was agreed after Balfour Beatty/Amec workers threatened to take industrial action over the issue. UCATT official, Jerry Swain, said: ‘This agreement sets the standard for future agreements as it not only rewards those who are made redundant, but also those who are transferred to other projects’ (Barrie, 1999g). Balfour Beatty/Amec would not have been able to avert industrial action if they had been penny-pinching at the outset. When the Malaysian government announced a RM100,000 levy to be imposed on every purchase of real estate by foreigners in October 1995, the property market was thrown into a state of shock and confusion. Consequently, foreign purchasers have become more selective, and marketing exhibitions of Malaysian developments have met a subdued response. Developers were also motivated to offer foreigners top-end projects where the impact of the RM100,000 levy was less significant compared to lower-priced properties. As the margin also tended to be higher for higher-priced properties, developers were also more willing to be less penny-pinching by absorbing part of the levy in order to close a sale (Wong, 1996). In addition to a willingness to accept a lower price, developers should also remember that donating to disaster funds and charities, as well as sharing the

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costs of public projects, are ways to serve society. The status of an enterprise can be enhanced through these activities, which in turn can help to create opportunities for widening the scope of the business.

2

Don’t be wishy-washy

This requires the recognition that a lack of resolve can lead to stagnation in a business (Xu, 1999). Former Wimpey and Shepherd’s construction chief, David Anderson, was reported to be taking control of commercial affairs at Jarvis. Anderson suddenly left privately-owned Shepherd to join Jarvis, where his specialization will be in private finance initiative (PFI) projects, of which Jarvis has built up a portfolio worth several billion pounds, mainly in education. Jarvis’s chief executive, Paris Moayedi, said: ‘Unlike many other people in the PFI business, we seldom joint venture. We do all the construction, the design and the facilities management on our projects. This means the risk can be greater, and we need someone like David to provide overarching experience’ (Barrie, 1999e). With Anderson on board, this shows that Jarvis’s venture into PFI is far from wishy-washy. The rush to cash in on the boom in property prices in China has seen the opening up of many companies that do not have a track record or expertise in property development. Because of the risks involved, investors must exercise caution and have an understanding of market conditions, prices and rental trends, to avoid pitfalls. Ruyee How, Group Executive Director of Marlin Land, stressed that potential investors should not be wishy-washy but should instead take note of the following precautions in order to avoid pitfalls: (a) ensure all key documentations are in place; (b) ensure technical features of buildings are built and delivered according to original specifications; (c) check out the track record and background of the developer and construction company; and (d) check the availability of external infrastructure (WNIB, 1996). Similarly, one should also remember that failure to act at the opportune moment can result in lost opportunities for business expansion. When efforts put in are not followed up, time is wasted and the business stagnates.

3

Don’t be ostentatious

This involves spending only when costs are justified (Xu, 1999). Costain’s quest for less risky and higher-margin work resulted in the company returning to profit for the first time in four years. Costain posted a pre-tax profit of £500,000 for the year to 31 December 1998, against a £7.4 million loss for 1997. The return to the black came on a reduced turnover of £392 million, compared with £576 million for the previous year. Costain’s chief executive, John Armitt, commented: ‘I’d much rather be a profitable medium-sized

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contractor than a less profitable big boy. You’ve got to achieve a certain level of turnover, but the key thing is profit; that must be the most important factor’ (Glackin, 1999c). While the construction of hotels, offices and serviced apartments flourished, the real estate industry, like all businesses in Vietnam, was not without its problems. The PDD Building, a virtually complete, 11-storey office block in Ho Chi Minh City, reportedly had received legal approval and was being built according to specifications when Prime Minister Vo Van Kiet stepped in and ordered the top five floors be demolished. The reason cited was that it overshadowed a significant landmark – the beautiful French architecture of the old City Hall that was the People’s Committee headquarters (Murray, 1996a). This saga suggests that one should therefore value thrift and avoid extravagance. It is therefore wrong to overspend and to borrow heavily to satisfy one’s vanity. Otherwise, irreparable damage and huge losses incurred cannot be recouped.

4

Don’t be dishonest

This requires the recognition that cheating and profiteering may court disaster (Xu, 1999). Police raided the offices of Drake & Scull as part of an investigation into the possibility that fraud was involved in London in the awarding of £125-million-worth of the Jubilee Line Extension (JLE) work to this M&E contractor in 1993. Officers from the British Transport Police executed search warrants at the company’s West London headquarters and Docklands office, and removed more than twenty bags of documents. They took complete sets of tender documents, project drawings and correspondence with London Underground from the tender period for JLE contracts 205 and 206. The documents related solely to the tendering period. A former Drake & Scull director, believed to have been engaged in the preparation of the tender, was arrested and released on police bail. One other suspect was also arrested. The Drake & Scull probe was the latest development in a wideranging enquiry into possible fraud and corruption in the awarding of contracts on the JLE project. There have also been allegations of bribery of a former JLE staff member (Glackin and Barrie, 1999). A panel appointed by Thailand’s Land Department submitted draft amendments to the country’s House of Representatives to tighten real-estate law to protect buyers and bring order back to the industry. The 30-member panel, which took nearly a year to complete the amendments, was said to be alarmed by an oversupply of houses and property in Bangkok, and the rampant cheating of buyers by some builders. This was because current loopholes in Thailand’s real-estate law had made it possible for some builders to swindle buyers out of down-payments even if their future homes were not completed on schedule. Panel member, Chainid Sirimanee, who was also managing director of Property Perfect PLC, explained that: ‘Once it is

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enforced, buyers will be able to get their downpayments plus interest back from financial institutions.’ The draft also required developers to honour details of all infrastructure and public amenities promised in their advertisements and contracts with buyers (Beh, 1996a). The development in Thailand clearly points out that there are rules for competing in the market. Fairness must be subscribed to at all times, and the law will not tolerate the infringing of copyrights or stealing trade secrets.

5 Don’t be slow in debt collection This requires the recognition that failure to collect debts results in bad debts (Xu, 1999). A building contractor, Try, threatened to wind up Portsmouth Football Club’s parent company because of an unpaid bill. Try gave Blue Star Garages, which owned most of the shares in the struggling first-division club, two weeks to come up with the £435,000 it claimed it was owed for building the 4,500-seat north stand at the Fratton Park ground in 1997. The stand was the subject of 18 months of wrangling between the club and the contractor. Try had built the main part of the stand by October 1997, but withdrew after the club ran into financial difficulties at the end of that year. Try’s company secretary, Richard Barraclough, said his company agreed to a rescheduled payment plan in January 1998, with Blue Star Garages acting as the guarantor. However, payments had stopped by mid-1998, and Try won a High Court order for the outstanding sum in November. Barraclough said the winding-up order was the last resort, and added: ‘We regret having to take this sort of action against any company. We are not interested in taking legal action – all we are interested in is getting paid what we are owed’ (King, 1999c). Midway through October 1997, the Hong Kong dollar became the target of currency speculators as Thailand, Malaysia and Indonesia effectively allowed their currencies to devalue. The Hong Kong Government’s commitment to a US-dollar peg saw interest rates rise, with the prime rate moving to 9.5 per cent. This sent the stock market tumbling as investors feared for the effect of higher rates on the economy. Property prices began to crumble, along with stock prices. By mid-November 1997, the residential property market had declined by 10–15 per cent, with many predicting a further fall to around a 20 per cent decline before prices levelled off. Mortgage rates rose to about 11.25 per cent, increasing the burden on home-owners. Falling prices and higher loan costs exposed the lending banks to the risk of increased loan defaults. In an attempt to reduce the pool of new mortgages, the banks have tightened lending criteria, and some institutions have even pulled out of the mortgage business completely (Walters, 1998). The Hong Kong experience suggests that banks have not been slow in collecting debts/cutting losses once they have perceived that the market is not going to get any better. One should also remember that a sale is completed only when payment is made. Although debt collection is the last stage of a

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sale process, one should stay positive and not give up even if there is a battle between the creditor and the debtor.

6

Don’t slash prices arbitrarily

This requires the design of pricing strategies to meet sales margins (Xu, 1999). Laing lost at least £20 million on the Cardiff Millennium Stadium contract. Hemsley (1999) reported that this was one design-and-build contract where a price had been tendered for a scheme that, in the end, turned out to be not quite feasible. Negotiations were held with Laing, the lowest tenderer, to achieve a price for a revised scheme. Time was short. The price was agreed at £99 million on the basis of sketchy information, and the job went ahead. Then disaster struck: for whatever reason, Laing had underpriced. Claims came in from at least one sub-contractor. Under the contract, Laing carried the risk and was left with the bill. The consequence was the departure of a number of staff and a new central management team to stop ‘local barons running the show’. In some way, Laing had failed to price the job correctly, either because of errors, or because of a lack of understanding of the complexities of the project (Hemsley, 1999). In Laing’s case, although there may have been a genuine mistake, price was nevertheless ‘slashed’. In a move that created ripples across the residential property market, Singapore’s Pidemco Land offered the lowest-priced executive condominium ever, at S$378 per square foot on average. Pidemco Land swallowed an estimated S$30 million loss to do so. Its Woodsvale project in Woodlands, a district in northern Singapore, threw down the gauntlet to its competitor, the Hong Leong Group’s neighbouring North Oaks executive condominium, being 8.3 per cent cheaper than its S$412 per square foot. Pidemco Land’s sub-S$400 per square foot pricing was expected to trigger cuts at North Oaks and at other executive condominium projects (Rashiwala, 1998). One should remember that violent price fluctuations will occur when competitors try to outdo one another by raising and lowering prices frequently. The business will ultimately suffer, however, and be unable to gain a foothold in the market to maximize profits.

7 Don’t give in to the herd instinct This requires one to avoid investing where everyone else does (Xu, 1999). It appears that the so-called ‘creeping euro’ has not crept very much in construction’s direction. Lowndes (1999) reported that three weeks after the launch of the single currency, a survey of pan-European clients and suppliers revealed that none had early plans to switch UK payments and invoicing from sterling to euros. Fit-out contractor, Overbury, which issued a press release in 1998 on its euro-readiness, admitted that none of its clients has asked about trading in euros. Overbury’s managing director, Steve Elliott, believed that the ability to price and be paid in euros will prove to be a plus point for its city clients, but felt that people do not want to be the first and to get their fingers

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burnt (Lowndes, 1999). In this case, it seems that the herd instinct is absent in so far as trading in euro currency is concerned. Chan (1996) noted that, not surprisingly, the luxury holiday home industry, although barely in its adolescent stage in Asia, was taking off fast. But while more resort developers have rushed to cash in on this investment bandwagon, many property pundits have urged investors not to give in to the herd instinct but instead to look more carefully before they plunge in. This was because the prices of some luxury holiday homes may even dip, especially if the properties are not well maintained, or when the economy of the host country experiences a prolonged economic downturn (Chan, 1996). Investors should not spend hundreds of thousands of dollars of their hardearned money on an overseas home simply because of the herd instinct. One should remember that, when market forces are at work, prices will fall when they reach the ceiling and rise when they bottom out. By following the trend and selling what others are selling, there is little flexibility for a business to respond profitably to changing demands.

8

Don’t work against the business cycle

This requires sensitivity to the rise and fall in a product life cycle (Xu, 1999). UK Home Office officials were reported to have stunned teams bidding for the department’s £60-million headquarters by asking them to rebid almost three years after the scheme was first advertised. Jarvis, Bovis and a consortium led by developer Godfrey Bradman were understood to be outraged after the decision to rebid on the private finance initiative project was announced. Officials have asked the three teams to bid again under different terms from those advertised in August 1996. There was immediate speculation that each of the bidders, having already spent millions on the project, would press for compensation. One bidder said: ‘I would hope they will at least get new bid documents out before the millennium. We are all totally annoyed.’ Another bidder added: ‘How could they do this after all this time? Why didn’t they make any decisions about the decanting issue in the first place? [note: Decanting is a term used in the construction industry to describe a project which requires the staff occupying a building to be moved out into another while the original building is refurbished – eds.] It’s a very funny way of dealing with matters’ (Barrie, 1999h). Developments in this project therefore seemed to be working against the business cycle. CDL Hotels International, the international hotel investment arm of Singapore’s premier condominium developer, City Developments, owned or controlled 55 hotels and about 14,000 rooms located in eleven countries. The company’s track record provided analysts with reasons for optimism. It has been buying prized assets at distressed prices, often ahead of recoveries in the respective hotel markets – for example, in New Zealand, the UK and New York. It also upgraded assets upon acquisition, a strategy that often produced the happy results of increasing occupancies, rising room rates and improving

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returns on investments (Lim, 1996a). City Developments’ strategy underlined the significant point that timeliness is an important element in business. One must therefore possess the ability to forecast accurately not only on the supply side, but also to predict changes in market demand and price changes.

9

Don’t be a stick-in-the-mud

This requires the recognition that refusing to acknowledge new ideas and environmental changes can stifle business growth (Xu, 1999). A report commissioned by the Construction Industry Training Board (CITB) in the UK suggested alarmingly that the construction industry showed little sign of shaking off its image of being racist. Many black people felt it would be difficult to get a job in what they considered to be a white-dominated industry. There was also a fear of racism among black workers. The report indicated that it was important to look beyond the construction industry, and added that there was an issue of wider institutional racism. For example, a black person may be unsuccessful in getting a bank loan to expand his/her business, proving that it was not just the construction industry that was prejudiced. The report also said that black workers were given the worst jobs on site and had to work harder than white workers to prove themselves. Black managers in construction also felt that they had to do the best part of their selling work on the telephone or by post, to establish a relationship before customers saw the colour of their skin (Barrie, 1999c). The CITB report recognizes that racism can in fact stifle business growth. Better known in Singapore for providing the main form of public transport, the Singapore Bus Service (SBS) Group moved into property development under its property subsidiary formed in 1993. Incorporated as Singbus Land Pte Ltd, the company was called Waterbank Properties (S) Pte Ltd to signify its regional and international outlook. In the three years after its establishment, the company built up a portfolio of residential, industrial and commercial developments. The company has four property developments, two residential and two industrial, in Singapore, while in London, it has launched its (100 per cent owned) Waterdale Manor. The company intended to build up its land bank in Singapore and elsewhere either by tendering for land put up for sale by the government, and smaller parcels put up by private individuals and companies, or through joint ventures with suitable partners (Tan, F., 1996). The diversification into property development made by the SBS Group suggests that it recognized that being conservative and stubborn can stifle business growth. If good ideas and new methods are rejected frequently, a business will lose its viability and cannot prosper.

10

Don’t overbuy on credit

This requires one to recognize that over-reliance on credit terms may cause cash flow problems (Xu, 1999). Manchester Airport has a reputation for

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being one of Britain’s toughest construction clients – a fact borne out by the disputes that have accompanied its two most recent major terminal projects. The latest controversy blew up when Niwel, a contractor based in the Manchester suburb of Levenshulme, went into liquidation as a result of payment problems on its blockwork contract for the £100-million Terminal 1 British Airways project. Niwel blamed the construction manager, Bovis, for its demise, as this company was responsible for certifying payments on the project. However, Bovis itself is understood to have suffered financially from the terminal scheme (Barrie, 1999k). When China’s property market showed little sign of emerging from a prolonged slump, developers had to find new ways to get properties off their books and start generating some cash flow. In Zhuhai, a southern special economic zone on the border with Macau, developers experimented with China’s first ‘timeshare’ scheme. At the Zhuhai Gong Bei Dihuan luxurious holiday resort, 20,000 yuan (US$2,410) will buy the right to use a 100 sq.m. apartment, the basic unit, for 30 days a year over a 50-year period. Five hundred apartments put on the market in 1996 were quickly snapped up. Some private individuals bought a large number of units in a single transaction, in the hope of renting them out to make a large profit. But as Murray (1996b) pointed out, these were mere gimmicks adopted at a time when developers had billions of yuan tied up uselessly in empty properties and were desperate to unlock some of the funds. Drawing from the lessons of these developers’ plights, one should therefore remember that, although it may be easy to obtain credit for the business, the risk of overspending what one can ill afford is constantly present.

11 Don’t under-save – keep reserve funds strong This points up that high reserves enable a business to stock up on goods when prices are low (Xu, 1999). Balfour Beatty was reported to be on the prowl for another construction company following the decision of its parent company, BICC, to sell its Energy Cable business for £275 million. BICC announced that it had decided to leave the cable market and focus its activities on the construction sector. BICC’s chief executive, Alan Jones, said the sale would enable BICC to focus on growth areas within Balfour Beatty, such as rail engineering and asset management. The sale placed Balfour Beatty in a very strong position. With no real debt, it is in a position to borrow readily. Everyone was talking about consolidation in the industry, and with these funds Balfour Beatty had the firepower to do something. It could also look to join the European super league by buying into a European operation (Glackin, 1999b). In the light of the Asian financial crisis which snowballed in mid-1997, Singapore was not in any imminent danger of property-sector loans turning bad. Tay Chin Seng, an analyst with Peregrine Securities, believed that Singapore banks’ loan exposure of 34 per cent to the property sector, including construction concerns, in 1996 must be put into perspective. It may be

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one of the region’s highest exposures, but borrowers were not likely to default on payment. Tay Chin Seng noted that exposure to housing loans was only 16 per cent, and home-owners usually serviced their loans adequately unless a recession caused people to lose their jobs. Although most Singaporeans did not perceive any threat to their job security, they were expecting smaller (or no) pay increases, and tiny bonuses – against impending rises in mortgage rates. Many home-owners were already highly geared, with home loan repayments accounting for an average 40–50 per cent of their income, excluding payments channelled from their Central Provident Fund savings. Assuming that mortgage rates could go as high as 7 per cent in the future, and pay increase would be minimal, mortgage repayments would claim an even larger stake of a home-owner’s income (Tan, F., 1998). This scenario suggests that it is all the more important for home-owners to keep their reserve funds strong in times of economic uncertainty. One should therefore remember that when prices have bottomed out, they can only move up. The big winners in business are those who have ready cash at hand to make purchases at the right time.

12

Don’t blindly endorse a product

This requires one to judge the product on its own merits and not be biased (Xu, 1999). Norwegian group Kvaerner was to sell its Cleveland Bridge steel fabrication business as part of a radical restructuring. The group also put its Govan shipyard up for sale. Kvaerner Construction’s chief executive, Keith Clarke, said that although he was sad to lose the Cleveland brand name, the firm has been carrying out too few commissions for up to ten years. The strong pound and lack of infrastructure projects had exacerbated this lack of construction work. The changes within Kvaerner Construction came against a backdrop of heavy losses across the group dating from a diversification that included the acquisition of Trafalgar House in 1996 (Barrie, 1999i). It is clear that Kvaerner Construction does not blindly endorse products that do not turn in a profit. Comfort and convenience are the key to modern living, which these days, is achieved through intelligent technology. Cynthia Dimney, a Director with Techno Lifestyle Pte Ltd, explained: There is a growing trend in intelligent housing. Those who have seen our product have told us that they had thought it would remain a dream. Now we are receiving a surge of interest from the home-owners of the younger generation who are especially house-proud, as well as developers who are eager to package this into their upcoming projects as they feel it is a basic need for the home-owner. However, as with all manufactured devices, minor drawbacks were inherent in artificial intelligence for the home. Apart from the substantial costs, there

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may be a risk of fire and other hazards. Cynthia Dimney added: There are always some constraints to dummy intelligence. Take the example of calling home to activate an electric kettle while you are away. If you had unwittingly moved the receiver from one socket to another, there may be danger involved. What if you activated the clothes iron instead and the people at home are unaware that it’s been heated up? And if the kettle is left to boil until there is no more water left, a fire may start. Similarly, Patrick Koh, of the Ban Hin Leong Group, added that artificial intelligence in the home may be somewhat overrated in the sense that some electrical appliances already possess built-in ‘intelligent’ mechanisms. Examples of such appliances include the water-heater which automatically switches itself off when it becomes over-heated, and the Daikin variable refrigerant which not only maintains a constant temperature throughout the day, but also saves on electricity (Tan, K. K., 1996). These comments suggest that developers did not endorse ‘intelligent’ buildings blindly. Drawing an analogy from ‘intelligent’ houses, while one may pay more for a product that presumably is of a higher quality, this may not necessarily be so at all times. Consequently, when the quality of a brand does not meet with expectations, one would be forced to sell it at below cost price. One should also exercise caution even when these concerned branded/labelled goods.

Conclusion It is clear from the anecdotal evidence given above that the guiding business principles set out by Tao Zhugong more than 2,000 years ago are no less relevant at the start of the twenty-first century. The match between Tao Zhugong’s business principles and modern-day construction and real estate practices, as highlighted in the anecdotal cases above, suggests that there is already a wealth of deeply-rooted wisdom in ancient China which has endured right up to the present time. In addition, these tried-and-tested principles seem to cut across nationalities and cultures in the modern-day construction and real estate business setting. Although some of these principles overlap in their concepts, they remain applicable for modern-day construction and real estate practice. Their application and relevance also depend on how the concepts were interpreted differently by people coming from different backgrounds and with different life experiences. In addition, while the anecdotal evidence presented was drawn primarily from construction and real estate practices, this is not to suggest that the principles involved are not relevant for business practices outside construction and real estate. Leung Yun Chee, for example, an immigrant to Singapore from the Guangdang province in China, put the principle of ‘be adept in analysing marketing opportunities’ into practice in the 1920s. Buoyed by the

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then entrepreneurial spirit sweeping through Singapore, Leung Yun Chee started his own medical oil company. He chose the brand name ‘Axe’ because at that time, every household had an axe for chopping wood to be used in cooking. As an enterprising businessman, Leung Yun Chee took bold steps to market his product. He invested in an impressive car, a chauffeur and a Western-style suit to carry out sales visits. He advertised in the local newspaper and even started his own Chinese newspaper which ran gossipy snippets and short stories on the reverse of Axe medicated oil advertisements. His efforts paid off as the Axe brand chalked up sales in Malaysia and Singapore. After his death in 1971, his eldest son, Leung Heng Keng, took the brand further afield with manufacturing plants set up in Malaysia and Indonesia. Attempts were also made to penetrate the Middle Eastern market. Observing that Muslim pilgrims often suffered discomfort during their long sea journeys to Mecca for the haj, Leung Heng Keng distributed free samples of Axe medicated oil to them. Before long, the oil was sought after among Muslims living in countries such as Indonesia, Pakistan and Kenya (Wee, 2002). Similarly, the principle of ‘Don’t slash prices arbitrarily’ was evident during the economic recession following the aftermath of the 11 September 2001 incident involving the World Trade Center in New York. In Singapore, bad times have prompted some bar operators to make their happy hours truly merry. For example, a banner outside a Mohamed Sultan club listed its housewines and beers at S$13.80 a jug and S$3.80 a glass from 6 pm to 10 pm on most nights of the week. This was about half the normal price. But veterans frowned on price-slashing, saying this eats into their already thin profit margins and may spell doom for the outlets eventually. Kenny Skeoch, director of the Emerald Hill Group, said: ‘It comes back to the basics of service, quality and the product. We don’t do super-cheap promotions for the sake of being super-cheap. The bar is the star’ (Tee, 2002). Similarly, Chua Piang Sze, analyst for DBS Vickers, noted that: ‘Singapore has always been a difficult, saturated market for fast-food operators, but this is something different. Household spending on dining out among the middle- to lower-income groups is dropping as the rising number of jobless people takes its toll on family coffers. You can see that times are tough for Singapore’s fast-food industry from the aggressive cost-cutting campaigns this festive season. Price cuts are always the move of last resort for these companies, but here you have the likes of Kentucky Fried Chicken (KFC) slashing prices’ (Wilcox, 2002). It can therefore be observed that the application of Tao Zhugong’s business principles can be relevant not only at the level of the individual (for example, construction workers on strike; the discerning home-buyer and so on) and organizations (for example, the merger between Davis, Langdon & Everest and Mott Green & Wall; City Developments’ venture into New Zealand and so on) but also at the country level (for example, property developments in China and Vietnam and so on) where governance is concerned. The interpretation of these principles in the anecdotal cases has been flexible enough

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to accommodate different needs and circumstances. Modern-day businesses may therefore adopt Tao Zhugong’s template as shown in Figure 6.1 (see page 153) for planning/strategizing their operations as well as in setting markers to achieve ethical and professional practice. There is also another important reason for international businesses to familiarize themselves with Chinese business practices. Following China’s entry into the World Trade Organization (WTO) in 2001 and the country’s successful bid for the 2008 Olympic Games, international businesses into and out of China are expected to increase further over the next few decades. The need to better understand how Chinese businesses operate, through Tao Zhugong’s business principles, cannot be more pressing.

References Argent, R. (1996) ‘Catching the Turf’, Property Review, May, pp. 40–2. Barrie, G. (1999a) ‘Amec to Land £90 m Manchester Stadium’, Building, 30 April, p. 7. Barrie, G. (1999b) ‘Client Group Calls for Contractors’ League Tables’, Building, 30 April, p. 10. Barrie, G. (1999c) ‘CITB: Industry Is Rife with Racism’, Building, 30 April, p. 10. Barrie, G. (1999d) ‘Kvaerner Negotiates £150 m Site-for-work Deal’, Building, 30 April, p. 12. Barrie, G. (1999e) ‘Anderson Takes PFI Expertise to Jarvis’, Building, 30 April, p. 18. Barrie, G. (1999f) ‘DL&E Joins Forces with Specialist Services QS’, Building, 23 April, p. 10. Barrie, G. (1999g) ‘New Jubilee Line Extension Payout’, Building, 23 April, p. 10. Barrie, G. (1999h) ‘PFI Teams Shocked as Home Office Rebids 1996 Project’, Building, 16 April, p. 11. Barrie, G. (1999i) ‘Steel Firm for Sale in Kvaerner Shake-up’, Building, 16 April, p. 19. Barrie, G. (1999j) ‘DL&E to Take Over Manchester QS’, Building, 9 April, p. 16. Barrie, G. (1999k) ‘Growing Turbulence at Manchester Airport’, Building, 8 January, pp. 20–1. Beh, P. (1996a) ‘Bangkok to Tighten Real Estate Law’, Property Review, April, p. 9. Beh, P. (1996b) ‘ERA Launches Instant Information Services’, Property Review, April, p. 10. Bingham, T. (1999a) ‘International Angle’, Construction Manager, Chartered Institute of Building, 5(4), p. 15. Bingham, T. (1999b) ‘China and Its Supporters’, Building, 9 April, p. 61. Cavill, N. (1999) ‘British Challenge to Euro Cladders’, Building, 30 April, p. 11. Chan, L. (1996) ‘Leisure Properties – at Home Here and Abroad’, Property Review, March, pp. 56–8. Cook, A. (1999a) What Is Sustainable Construction Exactly?’, Building, 22 January, pp. 45–6. Cook, A. (1999b) ‘On Site: University of East London’, Building, 16 April, pp. 40–5. Dizon, A. R. (1997) ‘Shrewd or Scared?’, Property Review, January, pp. 37–40. Egan, J. (1998) Rethinking Construction. (London, Department of the Environment, Transport and the Regions). Glackin, M. (1999a) ‘Interim Cowboy Report Released’, Building, 9 April, p. 10. Glackin, M. (1999b) ‘Balfour Beatty to Expand as BICC Quits Cables’, Building, 9 April, p. 10.

176 Tao Zhugong’s Chinese Business Principles Glackin, M. (1999c) ‘Costain is Back in the Black After Four Years’, Building, 9 April, p. 17. Glackin, M. and Barrie, B. (1999) ‘Police Probe £125 million Drake & Scull JLE Bid’, Building, 16 April, p. 9. Hemsley, A. (1999) ‘Cooking With Mace’, Building, 15 January, p. 31. Khor, H. E. and Rathir, R. (1996) ‘New Age Industry’, Property Review, December, pp. 38–42. King, D. (1999a) ‘Midlands Contractor Merges with Kent Firm’, Building, 22 January, p. 10. King, D. (1999b) ‘Merged Architects Aim for Overseas Markets’, Building, 15 January, p. 16. King, D. (1999c) ‘Try Threatens to Wind Up 116-year old Portsmouth Football Club’, Building, 8 January, p. 12. Lim, E. H. (1996a) ‘Hotel Group on Growth Curve’, Property Review, August, pp. 48–50. Lim, E. H. (1996b) ‘Building on the Success of Subang Jaya’, Property Review, June, pp. 48–50. Low, C. G. (1996) ‘Home Buying by Computer’, Property Review, December, pp. 54–5. Low, S. P. (1995) ‘Lao Tzu’s Tao Te Ching and Its Relevance for Project Leadership in Construction’, International Journal of Project Management, 13(5), pp. 295–302. Low, S. P. (1996) ‘The Influence of Chinese Philosophies on Mediation and Conciliation in the Far East’, Arbitration, 61(1), pp. 16–20. Low, S. P. (2003) ‘Understanding the Mind of the Chinese: A Historical Perspective’, in J. B. Kidd and F. Richter (eds), Corruption and Governance in Asia (Palgrave Macmillan), pp. 86–106. Low, S. P. and Lee, S. K. (1997) ‘Managerial Grid and Zhuge Liang’s Art of Management: Integration for Effective Project Management’, Management Decision, 35(5), pp. 382–91. Low, S. P. and Sirpal, R. (1995) ‘Western Generic Business and Corporate Strategies: Lessons from the Thirty-six Chinese Classical Strategies of War, Marketing Intelligence and Planning, 13(6), pp. 34–40. Low, S. P. and Tan, C. S. (1995) ‘A Convergence of Western Marketing Mix Concepts and Oriental Strategic Thinking’, Marketing Intelligence and Planning, 13(2), pp. 36–46. Low, S. P. and Yeo, K. K. (1993) ‘Sun Tzu’s Art of War and Its Strategic Relevance for Construction Project Management’, RICS Research Paper Series, Paper No. 20, Royal Institution of Chartered Surveyors, London. Lowndes, N. (1999) ‘What the Euro Means for Construction’, Building, 22 January, pp. 24–5. McManus, G. (1996) ‘The Rise and Rise of Hotel Investment in Kiwiland’, Property Review, August, pp. 36–8. Meyer, M. W. (1994) China. A Concise History (Lanham, MD, Littlefield Adams). Murray, G. (1996a) ‘Building Booms in Vietnam – but at What Price?’, Property Review, September, pp. 37–40. Murray, G. (1996b) ‘China – the Mortgage Solution to Over-supply’, Property Review, July, pp. 38–40. Murray, G. (1996c) ‘What’s Hot and What’s Not in Shenzhen’, Property Review, June, pp. 44–6. Pang, D. (1996) ‘Keeping Faith with Market Forces’, Property Review, April, pp. 26–8. Rashiwala, K. (1998) ‘It’s only $378 psf for Woodsvale’, The Straits Times, 6 August, p. 60. Roberts, J. A. G. (1996) A History of China. Vol. 1: Prehistory to c. 1800 (Stroud, Alan Sutton). Sims, A. (1999) ‘Getting to Know You’, Building, 8 January, p. 39.

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Soon, P. Y. (1999) ‘Foreword’, in H. Xu, Golden Rules for Business Success, (Singapore, Asiapac Books). Spring, M. (1999) ‘What a Performance’, Building, 9 April, pp. 40–51. Tan, F. (1996) ‘From Buses to Buildings’, Property Review, September, p. 9. Tan, F. (1998) ‘No Place Like Home’, Property Review, January, p. 1. Tan, K. K. (1996) ‘The Age of Intelligence’, Property Review, March, pp. 52–4. Tee, H. C. (2002) ‘Where’s the Party?’, The Straits Times, 12 December, pp. 5–6. Thomas, M. (1995) ‘Editorial’, Marketing Intelligence and Planning, 13(6), p. 3. Vincent, S. (1996) ‘Pleasing the Public’, Property Review, June, pp. 38–41. Walters, T. (1998) ‘Hong Kong – A Market Tamed’, Property Review, January, pp. 57–9. Wee, L. (2002) ‘Axe Medicated Oil. Potent Medicine’, The Straits Times, 10 December, p. 20. Wilcox, S. (2002) ‘Consumers Cut Spending. Tough Times for Fast-food Outlets as Sales Drop 5%’, The Straits Times, 23 December, p. 18. WNIB (1996) ‘Avoiding Pitfalls in Real Estate Investment’, What’s New in Building, November, p. 8. Wong, E. T. K. (1996) ‘Interest in the RM100,000 Levy in Malaysia’, Property Review, May, pp. 56–7. Xu, H. (1999) Golden Rules for Business Success (Singapore, Asiapac Books).

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Part III Trust in Asian Governance and Commerce

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7 The Role of Trust in the Process of Alliance Evolution Anna Goussevskaia and John B. Kidd

Introduction This chapter examines the role of trust in the development of cross-cultural alliances. We argue that trust building constitutes an inseparable part of interorganizational learning processes, and is crucial for alliance evolution. We present a framework to support our argument and illustrate its application, with respect to the trust that needs to be developed between individuals and their organizations, be they from the same or from quite different countries. If the countries are different – for example, in alliances between European and Asian firms, we might expect individuals to espouse rather different ethical stances that may interfere with the strict terms of the alliance, and ultimately bring about its downfall. The chapter is structured as follows. First, we present an overview of learning and knowledge-sharing in alliances. In this overview, we emphasize the social and cognitive processes involved in inter-firm collaboration. Second, we explore the relationship between learning and alliance evolution by examining the studies of the alliance development that addressed learning processes explicitly. Through this review, we identify four major dimensions of alliance evolution, which we call ‘collaboration conditions’, and three distinct learning processes. Next, we build our framework by exploring the interaction between collaboration conditions and inter-organizational learning processes. Third, we demonstrate an application of the proposed framework for the analysis of trust-building in the context of cross-cultural alliances. Finally, we address the theoretical and managerial implications of our approach.

Inter-organizational learning Given the importance that firms place on forming collaborative arrangements to exploit opportunities,1 researchers have begun to examine the learning processes undergone by the partners, and the factors that might have an 181

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impact the outcomes of joint learning. One part of the study concerns a particular process through which learning can take place – knowledge sharing. This process depends on the characteristics of the knowledge involved, and the organizational properties of participating parties (Inkpen and Beamish, 1997). Much of a firm’s expertise is context-specific and tacit in nature – therefore posing significant challenges to it being shared across organizations (Zander and Kogut, 1995; Szulanski, 1996). In an inter-organizational context, the literature also provides some evidence linking the properties of knowledge to the possibilities of it being shared across organizational boundaries (Collinson, 1999; Lynskey, 1999; Simonin, 1999). These studies focus on a particular dimension along which knowledge can be characterized – namely, the degree to which it can be isolated from its context and then codified. The conclusion produced is that, the more tacit the knowledge, the greater the difficulties it presents because of its interconnections with organizational processes and its social context: it is difficult to extract knowledge from the norms and rituals that have developed as players have exchanged their tacit data over time. One of the difficulties in sharing tacit knowledge is the need for formalization, the generation of a community of practice that may be seen in the work place, in apprenticeships, and even in the structuring of academic papers. If the context and layout change, then knowledge exchange does not occur (Wertsch, 1985). Scribner et al. (1991) have suggested that much of the expertise in the workplace lies in being able to formulate problems in ways that are embedded in understandable contexts – therefore, tacit knowledge may become formalized and articulated. Thus, capabilities built on tacit knowledge, which are costly to imitate, constitute the basis of superior performance (Spender, 1996). Therefore, the outcome of inter-organizational learning is heavily dependent on how learning parties succeed in integrating such tacit resources – and further, we must question the (local/national) frameworks for codification, since differing perceptions will yield differing codes. Note, for example, the Japan-centred research of Nonaka and Takeuchi (1995) which, being dependent on the tradition of life-time employment in Japan, is based on the luxury (as it were) of low staff turnover, with staff who find it normal to extend their working day long into the night to discuss, over (many) rounds of sake, the options facing the firm. Inkpen and Dinur (1998) examined different organizational processes associated with sharing of different types of knowledge. The processes characterized by the most intensive social interaction were associated with the sharing of tacit knowledge, while formal processes – such as primary technology transfer – involved more objectified and explicit knowledge. Makhija and Ganesh (1997) provided a similar argument, postulating that partners’ learning was affected by the appropriateness of the mechanisms for sharing different types of knowledge. Despite taking a rather simplistic view of knowledge and the process of its sharing, these insights are useful as they permit the development

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of propositions about the relationship between knowledge characteristics, categorizations, and the recognition of the processes involved at different levels of the organization. The above studies pointed out the important role of interpersonal interactions as an effective mechanism in knowledge sharing. Therefore, the complexity of this process has to be properly addressed. Information flows among social actors are heavily dependent on both their social structure and their motivation to engage in knowledge exchange (Brown and Duguid, 1991). From this perspective, collaboration can be seen as a knowledgeconstruction process. Therefore, the evolution of mutual awareness and trust through social interaction is central to the creation of joint learning outcomes. However, the link between individual behaviour and the organizational processes in this context is underdeveloped because of the lack of conceptual integration of these elements, though a route has been proposed by Cummings and Bromiley (1996). Another part of the research on inter-organizational learning concerns the barriers that inter-firm settings pose for knowledge sharing. These barriers originate from the competitive element that is present in a relationship. The dilemma consists of the necessity to protect a firm’s proprietary resources while sharing knowledge with its partners. Khanna et al. (1998) and Kale et al. (2000) approached this dilemma by exploring the dynamics of learning behaviour in collaboration. They postulated that collaborative behaviour is influenced by the degree to which the partners’ learning objectives are complementary or competitive, and by each firm’s opportunity set to apply learning outcomes outside an alliance. In this way, alliances balanced differently along these two dimensions are likely to exhibit different patterns of learning behaviour. Thus, when a competitive element prevails in a relationship, we can expect ‘learning races’ to occur (Hamel, 1991). Also, the uncertainty about a partner’s incentives can provoke sub-optimal learning behaviour, so jeopardizing joint results (Khanna et al., 1998). However, this approach does not explain how partners can manage network processes to avoid these ‘learning races’ and benefit from the collective learning outcomes. Larsson et al. (1998) expanded the analysis of inter-firm co-operation, and proposed a framework that considered both the integrative dimension of how joint outcomes were produced, and the distributive dimension of how these outcomes were divided between the partners. Based on these dimensions, they developed a typology of possible learning strategies. In this way, collaborative dynamics are captured through the interaction patterns of individual learning strategies that are path-dependent, and that go beyond competitive versus collaborative behaviour choices. Their studies indicate that information asymmetry arising between partners, and uncertainty about others’ goals and behaviour produces a complexity that can generate high costs within inter-organizational co-ordination. To ameliorate the problem it is necessary to deal with the rich and socially-embedded learning dynamics

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among organizations. Otherwise, as suggested by Kidd and Richter (2003), one partner’s perceptions of the other (and it is a two-way process) are that they are being ‘milked’ – either for their technology or their market reach. The understanding of the origins of learning behaviour and the mechanisms of how firms balance competitive goals and joint learning requires attention to be paid to the factors that influence learning in inter-organizational settings. A significant part of the literature on inter-organizational learning shares this concern. For example, a widely-accepted view is that learning is conditioned by the organization’s ability to identify, assimilate and utilize knowledge. Cohen and Levinthal (1990) defined the ability ‘to recognize the value of new, external knowledge, assimilate it, and apply it to commercial ends’ as absorptive capacity (1990, p. 128). If we assume that a small firm has few staff: these work ‘flat-out’ and have no time to acquire, understand and implement new knowledge. They may not regularly chat between themselves about their current situation. This too is the broad message of Welsch et al. (2001), as they noted the environmental impact on the reactivity, in terms of absorptive capacity, of small US firms. Parkhe (1991) used a similar line of analysis to develop a framework that attempts to put together various dimensions of inter-firm diversity and their relationship with organizational learning. Inter-firm diversity is conceptualized as inter-organizational differences that influence the pattern of interaction between collaborating firms. Parkhe distinguished between two types of inter-organizational diversity. The first deals with the purpose of collaboration, noting the complementary resources provided by the firms to enable joint learning among the partners. Such resources are presented by Lane and Lubatkin (1998) in terms of knowledge domains – though they could be cash flows, labour or know-how in various forms (such as how to gain access to local markets). The second type of diversity refers to the differences in the partners’ organizational characteristics. The framework identifies several dimensions of diversity that include societal culture, in which organizations are embedded, their national context, organizational culture and, finally, organizational practices on strategic and operational levels. Each dimension can influence ongoing reciprocal learning within the relationship, thus complementing the findings of Lane and Lubatkin (1998) of how the diversity at the organizational level might affect the learning processes. We can also consider the influence of the broader social context on inter-organizational processes as it moulds epistemological structures of perceiving and thinking, and thus determines the general attitudes of organizational members towards outsiders and the recognition of the meanings and messages of others. Furthermore, Parkhe suggested that the degree of diversity could also determine the extent of learning. Therefore, similar firms would require relatively small adjustments, while highly diverse organizations would have to undergo double-loop learning (Argyris, 1993) in order to adapt to the diversity. The framework proposed by these studies is useful as it permits the analysis

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of the interplay and relative importance of learning determinants and, moreover, how inter-firm diversity may shift through different phases of collaboration development in response to the learning process. Also, it helps to understand the antecedents of ‘transparency’ and ‘receptivity’, concepts that are central to the analysis of learning dynamics (Hamel, 1991; Larsson et al., 1998). Indeed, we might suggest these also influence the degree of trust and its development over time, and how the development (or not) of trust supports learning between partners.

Inter-organizational learning and alliance evolution In this section, we examine the studies of inter-firm collaboration that have addressed learning processes explicitly. Our purpose is to explore the relationship between learning and the changes that occur during collaboration. The developmental process of collaboration involves a wide range of changes, such as the renegotiation of agreements, the reconfiguration of management structures, and other possible alterations in the relationship between the partners. All these may have a significant effect on the venture’s performance (Yan and Zeng, 1999). Therefore, to capture these changes we define collaboration conditions as the characteristics of an inter-firm relationship at any given moment of its existence. In this way, the review centres on collaboration conditions and learning processes addressed by the authors (see Table 7.1). Through this review, we identify four major dimensions of collaboration conditions and three distinct learning processes.

Collaboration conditions Having considered a variety of collaboration conditions as depicted in the studies, we group them along the following four dimensions: knowledge type; inter-organizational diversity; governance; and relational quality. We argue that these dimensions capture systematically the key aspects of collaboration conditions addresses in the literature.

Knowledge The type of knowledge refers to the degree to which it is tacit or objectified (Szulanski, 1996). This is a fundamental characteristic of collaboration, as it determines to a great extent the challenges faced in governing the relationship (Grandori, 1997; Gulati and Singh, 1998). Makhija and Ganesh (1997) and Lubatkin et al. (2001) examined the impact of the knowledge type involved in the way that learning takes place. Based on this particular dimension along which knowledge can be characterized, the argument produced is that more tacit knowledge presents greater challenges to be shared across organizations, and that appropriate governance mechanisms

186 The Role of Trust in the Process of Alliance Evolution Table 7.1 Approaches to the alliance evolution and inter-organizational learning processes Authors

Collaboration conditions

Learning processes

Arino and de la Torre (1998) Boddy et al. (2000)

Resource interdependence; Governance; Relational quality Differences in organizational cultures; Governance; Relational quality Differences in belief structures, experiences and interpretations; Relational quality Expectations; Governance; Organizational context of the partners Learning intent; Transparency; Receptivity Resource interdependence; Learning ability of the partners; Relational quality Common versus private benefits

Learning to trust; Ability to adjust Learning to collaborate; Ability to adjust Learning to collaborate; Development of joint organizational actions Content learning; Learning to trust; Behavioural learning Asymmetrical learning

Absorptive capacity; Governance; Learning strategy

Learning to collaborate; Differential learning; Ability to adjust Collective learning; Asymmetrical learning Reciprocal learning; Asymmetrical learning; Learning to collaborate; Learning to trust Differential learning

Buchel (2000)

Doz (1996)

Hamel (1991) Inkpen and Beamish (1997) Khanna et al. (1998) Kumar and Nti (1998) Larsson et al. (1998) Lubatkin et al. (2001)

Makhija and Ganesh (1997)

Parkhe (1991)

Receptivity; Transparency; Relational quality Knowledge type; Absorptive capacity; Differences in belief structures; Governance; Relational quality Knowledge type; Resource complementarities and interdependence; Governance; Learning ability of the partners Inter-organizational diversity

Differential learning

Asymmetrical learning

Amount of adaptation

are crucial in this process. We have to note that the codification of knowledge (essentially what is objectified or explicit) was thought to be ‘easy’, but Szulanski (1996) suggests that this process might be ‘sticky’, as does Fruin (1997). We note that Huber moved from ‘easy’ codification to ‘sticky’ over a decade of study (Huber, 1991 and 2000). Later in this chapter we postulate that, if there is perceived ‘distrust’ between partners, ‘we will not exchange knowledge with those cheats’!

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Inter-organizational diversity Inter-organizational diversity is conceptualized as inter-firm differences that influence the patterns of interaction between collaborating partners. Here, we follow Parkhe (1991) and distinguish between two types of inter-firm diversity. The first implies the existence of complementary resources and interdependencies that enable joint learning among the partners. Arino and de la Torre (1998), Khanna et al. (1998), Inkpen and Beamish (1997) and Makhija and Ganesh (1997) address this particular type of inter-firm diversity. The second type of diversity refers to the differences in the partners’ organizational characteristics. Thus partners may differ along several dimensions, such as societal culture (which moulds epistemological structures of perceiving and thinking), national context, organizational culture and, finally, organizational practices at both strategic and operational levels. Boddy et al. (2000), Buchel (2000) and Doz (1996) emphasize the significance of such organizational differences for the collaboration process. Other authors addressed inter-organizational diversity along both dimensions. For example, a widely accepted view is that learning is conditioned by the organization’s ability to identify, assimilate and utilize knowledge. Earlier we mentioned absorptive capacity. Lane and Lubatkin (1998) developed a concept of relative absorptive capacity to embrace the particular situation of inter-organizational context. According to their findings, relative absorptive capacity was determined by two sets of factors. The first indicates the relationship between the partners’ knowledge domains in terms of their similarity and relevance to each other. The second concerns the differences in firms’ organizational structure and management practices. The latter factors were recognized as important learning determinants, because the degree of formalization and centralization in task allocation and decision-making influenced the interaction patterns between the participants.

Governance Governance refers to formal or informal negotiated control and measurement mechanisms as well as the interface structure and managerial mechanisms adopted for inter-firm co-ordination. Often, the term is focused strongly on the financial management and probity of senior executives, but in fact it could be a concept that is devolved throughout an organization.

Relational quality Relational quality is an elusive but important concept. It reflects the interplay between trust and opportunism present in a relationship, as well as the balance of competitive and co-operative elements of collaboration. The authors addressed the issue of governance and relational quality widely. They emphasize in particular the role of social interaction dynamics as an important source of regulative mechanisms for inter-firm co-ordination. They recognize

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that trust based on interpersonal relationships acts as a powerful regulative mechanism when dealing with uncertainties. This implies that firms do not evaluate collaboration solely on economic criteria but also on the criterion of ‘fair dealing’. Therefore, the assessment based on the perception of justice by partners is equally necessary for the continuation of a venture. Therefore, the way in which firms evaluate collaboration, is conditioned by the quality of the relationship developing between them. This is particularly important in multicultural alliances, as one partner may consider as irrelevant those elements another considers to be vital. Some of these aspects refer to perceptions of ethics, corruption, nepotism and so on – thus as soon as a partner is questioned for any reason, doubts set in and learning become restricted.

Learning processes Learning processes are stimulated by the presence of the partners. They influence and are influenced, at the same time, by the patterns of interaction between firms that could provide, or fail to provide, the synergy needed for learning to occur. Hence inter-organizational learning can be conceptualized as the collective acquisition and development of knowledge through the construction and modification of inter-organizational environments and working rules (Larsson et al., 1998).

Content learning The selected studies emphasize a number of learning processes. The most frequently addressed process is content learning. The typical assumption is that a firm’s goal is to absorb or acquire its partner’s knowledge. Consequently, the main theme is the presence of asymmetrical or differential content learning that potentially benefits one of the partners (Hamel, 1991; Inkpen and Beamish, 1997; Makhija and Ganesh, 1997; Khanna et al., 1998; Kumar and Nti, 1998). The issue of collective or reciprocal learning (Larsson et al., 1998; Lubatkin et al., 2001), however, is rarely addressed in the literature.

Process learning Process learning means that, through inter-firm interactions, the partners learn to collaborate with and to trust each other. A number of studies have examined process learning (Doz, 1996; Arino and de la Torre, 1998; Kumar and Nti, 1998; Boddy et al., 2000; Lubatkin et al., 2001). These studies suggest that the uncertainty produced by the complexity of behavioural dynamics in collaboration can be better managed by the controls based on social norms and reciprocity. This emphasis placed on informal means of coordination implemented through personal interactions indicates the importance of the processes occurring at the operational level of interorganizational networks. Therefore, the view shared by the authors is that collaboration emerges and develops along with people’s engagement through collective sense-making and the establishment of psychological contracts.

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Behavioural learning The third distinct learning process we identify in the review is behavioural learning. This refers to the action or behaviour needed to enable changes to occur (Doz, 1996). It is an important component of collaboration, because relationship dynamics are influenced strongly by the amount of learning and adaptation occurring between partners (Parkhe, 1991; Arino and de la Torre, 1998; Kumar and Nti, 1998; Boddy et al., 2000). Behavioural and process learning are clearly interdependent. However, we consider it important to distinguish between them, as process learning can occur without behavioural learning following. The partners may develop trust and common understanding of issues involved in collaboration, but still not act in order to continue the partnership. Process and behavioural learning are different from content learning as they depend on sustaining a number of behavioural and attitudinal changes (Mintzberg and Westley, 1992; Weick and Quinn, 1999). Process and behavioural learning are responsible for the adjustment of collaboration conditions, and the initiation of the next cycle of relationship development. Some of the conditions can be changed deliberately by organizations. For example, governance mechanisms can be renegotiated, thus establishing new terms for a partnership. Others can only be changed as a part, or a result, of learning. For example, if firms do not engage in joint sense-making and learning about how to interact successfully, they may find working together increasingly frustrating. These dynamics can be self-reinforcing, leading to sustained commitment over time, or they can fail, resulting in dissolution, depending on the organizational ability of partners to adjust.

Framework and its application Having considered collaboration conditions and learning processes addressed by the studies, we suggest that inter-firm learning is an important source of change in alliances. At the same time, the collaboration conditions are the key to understanding how different types of learning (that is, content, process and behavioural learning) are going to unfold. Based on the three learning processes and four dimensions of collaboration conditions identified in the review, we propose here a matrix of two-way relationships between conditions and inter-organizational learning, which is illustrated in Figure 7.1. The proposed matrix allows a better understanding of, first, how learning processes mediate changes in the development of collaboration; and, second, how learning processes interact and evolve. Figure 7.1 describes the relationships between learning processes and changes in collaboration conditions. Upward arrows indicate which collaboration conditions can enable or inhibit certain learning processes, and downward arrows indicate how the outcomes of different types of learning can lead to changes in collaboration conditions, or block them. We illustrate the application of the framework with the following example.

190 The Role of Trust in the Process of Alliance Evolution

Content learning

Process learning

Behavioural learning

Knowledge type

Inter-organizational diversity

Governance

Relational quality

Figure 7.1 The relationships between inter-organizational learning processes and collaboration conditions

Doz (1996) studied the evolution of the AT&T–Olivetti alliance in the field of mini- and microcomputers. AT&T was a US company originally operating in the telephone market and wishing to enter the computer industry. Olivetti was an Italian leading supplier of computer and office electronics. Organizational diversity between AT&T and Olivetti consisted of high resource complementarities, which was promising for a productive partnership. However, this characteristic was combined with deep differences in national and organizational cultures. Olivetti was an aggressive, fast-moving, entrepreneurial organization, while AT&T could be characterized as having a professional, technocratic management culture. At the beginning of the collaboration, governance comprised rigid contractual agreements with no specific organizational interaction process and little exchange of personnel. The incompatibility of organizational processes

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did not allow the partners to establish a dialogue in order to resolve conflicts arising. The lack of appropriate governance structures combined with high inter-organizational diversity resulted in low content learning as the partners were too different in their emphases, with no co-ordination mechanisms in place at that time to support co-operation. Also, this combination of collaboration conditions resulted in low process learning, as there was little interaction among employees. Low content and process learning led to the partners being increasingly disappointed with each other. For example, Olivetti’s top management became worried about AT&T ability to manage the business successfully, which damaged competence trust (Sako, 1992). In this way, the relational quality deteriorated further as suspicions about competencies grew. Olivetti, for example, was concerned with the possibility of AT&T terminating the partnership, or even trying a takeover. The partners recognized the difficulty in inter-partner co-ordination, but because of low relational quality no action was taken, which meant low behavioural learning. As a result, partners were not able to adjust their behaviour and governance structures to overcome the unfortunate combination of collaboration conditions. Similar reasoning was found by Kidd (1998) when reviewing Japanese manufacturing alliances in Italy. Here, in the weaker alliances, the relevant Japanese managers suggested, ‘if the Italian [managers] were not involved in our alliance we would be better able to run the alliance’. Inevitably (within months for one firm) these alliances broke. Yet in others, where the Japanese did not operate a ‘heavy-handed approach’ but collaborated, often ‘at arm’s length’, the alliances thrived and knowledge was exchanged based on the joint development of trust in the partnership. We mentioned earlier the concept of ‘distrust’ and how this may coincide with ‘trust’ in a person or group of persons, as with partner firms and the employees with whom individuals have contact (Kidd and Richter, Chapter 1 this volume). Essentially this multi-dimensional approach stems from the work of Lewicki et al. (1998) and has been further elaborated by Ford (2003). Recapitulating, we note that one may more or less trust a person, but if any (reasonable) degree of distrust is present there will be no knowledge exchange, no joint organizational learning – since ‘I distrust the other person – he or she will steal my intellectual property’. Imagine, therefore, the feelings engendered when reviewing data reported by David Hsieh in The Straits Times on 16 April 2002: A survey of 4695 entrepreneurs in China by the China Entrepreneurs Survey System (CESS) [a research unit under the State Council] reported that: ●

●

Over 90% of Chinese managers in the survey had been engaged in at least one contract dispute over the last year, Some 76% of managers said that ‘credibility was lacking’ in terms of loan repayments,

192 The Role of Trust in the Process of Alliance Evolution ●

●

63% said ‘breach of contract’ was a major factor undermining trust in Chinese companies, and 42% said that the production of ‘counterfeit goods and sub-standard goods’ was rife.

This was because there was [and is] a lack of law enforcement and consequently over 60% of the managers urged caution in doing business in China. In summary, the managers in the survey said the main activities that reduced trust were worries about: Repayment of loans Arrears in payment for products and services Breach of contract Production and selling of fake and sub-standard goods Providing false information Cheating on prices Trademark and patent infringement Arrears in paying or cutting workers’ wages Cutting corners on work and materials Deceiving clients and customers. We would suggest that, according to our matrix displayed in Figure 7.1, all aspects of the ‘relational quality’ would be minimized, and our feelings about ‘governance’ would be confused, since we would have negative feelings towards the Chinese partner, and would be boosting our own sensitivity with respect to the measures used by our own staff who have to review ‘governance’ and probity. Thus, with too great a diversity between ‘us and the Chinese partner’ [as noted the above extract] we would close down our exchange of knowledge totally. Of course, this is a rational view; our senior executives may still wish to form an alliance for other reasons, such as a political need to venture – so be it: caveat emptor! If we take the work of Lewicki a little further, noting that they suggest that ‘if we trust little, yet have no distrust in the partner’ we may relate ‘professionally’ with the partner. This indeed may be one recipe for a successful (basic) alliance relationship when the relational distance, or more specifically the cultural difference, is great. We do not exchange knowledge with our partner, or they with us – yet we can collaborate and maintain a business-like relationship in which we should not be able to be accused of ‘milking the other’.

Conclusion The proposed framework contributes to the study of inter-firm collaboration by helping to unpack the ‘black box’ of the collaboration process. We conceptualize change in collaboration development as a modification in the

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set of collaboration conditions that characterize an inter-firm relationship at any given time. Four main dimensions of collaboration conditions have been developed from the review of process studies of inter-firm collaboration: knowledge type, inter-organizational diversity, governance and relational quality. We link these conditions to the distinct learning processes (content, process and behavioural learning) in a recursive process framework. This recursive interaction can explain how collaboration conditions and learning processes shape, and in turn, are shaped by one another. Our approach, through the notion of process learning, addresses the role of trust in the development of collaborative alliances. It also contributes to an understanding of how the trust-building process inter-relates with other organizational processes. While we have emphasized the implications of the proposed framework for theory, we also take the position that it is useful to managers. While executives spend a significant amount of their time on developing collaborative partnerships plans and drafting legal documents, they spend much less on the actual management of an alliance. The emphasis on processes given in our framework contributes to the better appreciation of the key issues involved in collaboration management. Namely, we asked what enables partners to adjust the relationship to changing conditions and benefit from collaborative efforts? Thus we understand the dynamic nature of collaboration, and the role of learning, which provides insights into the processes involved in the day-to-day running of collaborative projects.

Note 1 See, for example, the annual data presented by UNCTAD, which suggests (as at 2002) that the global total of foreign direct investment is well over US$1 trillion (UNCTAD, 2002). See http://www.unctad.org.

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Anna Goussevskaia and John B. Kidd 195 Lane, P. and Lubatkin, M. (1998) ‘Relative Absorptive Capacity and Interorganizational Learning’, Strategic Management Journal, 19, pp. 461–77. Larsson, R., Bengtsson, L., Henriksson, K. and Sparks, J. (1998) ‘The Interorganizational Learning Dilemma: Collective Knowledge Development in Strategic Alliances’, Organization Science, 9(3), pp. 285–305. Lewicki, R. J., McAllister, D. J. and Bies, R. J. (1998) ‘Trust and Distrust: New Relationships and Realities’, Academy of Management Review, 23(3), pp. 438–58. Lubatkin, M., Florin, J. and Lane, P. (2001) ‘Learning Together and Apart: A Model of Reciprocal Interfirm Learning’, Human Relations, 54(10), pp. 1353–82. Lynskey, M. J. (1999) ‘The Transfer of Resources and Competencies for Developing Technological Capabilities – the case of Fujitsu–ICL’, Technology Analysis and Strategic Management, 11(3), pp. 317–36. Madhoc, A. and Tallman, S. B. (1998) ‘Resources, Transactions and Rents: Managing Value through Interfirm Collaborative Relationships’, Organization Science, 9(3), pp. 326–39. Makhija, M. V. and Ganesh, U. (1997) ‘The Relationship between Control and Partner Learning in Learning-related Joint Ventures’, Organization Science, 8(5), pp. 508–27. Mintzberg, H. and Westley, F. (1992) ‘Cycles of Organizational Change’, Strategic Management Journal, 13, pp. 39–59. Nonaka, I. and Takeuchi, H. (1995) The Knowledge-creating Company (Oxford University Press). Parkhe, A. (1991) ‘Interfirm Diversity, Organizational Learning, and Longevity in Global Strategic Alliances’, Journal of International Business Studies, 4, pp. 579–601. Sako, M. (1992) Prices, Quality, and Trust: Inter-firm Relations in Britain and Japan (Cambridge University Press). Scribner, S., Di Bello, L., Kindred, J. and Zazanis, E. (1991) ‘Co-ordinating Two Knowledge Systems: A Case Study’, Technical Paper: Laboratory for Cognitive Studies of Work (New York, City University Graduate School). Simonin, B. L. (1999) ‘Ambiguity and the Process of Knowledge Transfer in Strategic Alliances’, Strategic Management Journal, 20, pp. 595–623. Spender, J. C. (1996) ‘Organizational Knowledge, Learning and Memory: Three Concepts in Search of a Theory’, Journal of Organizational Change Management, 9(1), pp. 63–78. Szulanski, G. (1996) ‘Exploring Internal Stickiness: Impediments to the Transfer of Best Practice within the Firm’, Strategic Management Journal, 17 (Winter Special Issue), pp. 27–43. Weick, K. E. and Quinn, R. E. (1999) ‘Organizational Change and Development’, Annual Review of Psychology, 50, pp. 361–86. Welsch, H., Liao, J. and Stoica, M. (2001) ‘Absorptive Capacity and the Firm’s Responsiveness’, Presentation to the 2nd USASBE/SBIDA conference, Orlando, Florida, 7–10 February. Wertsch, J. V. (1985) Vygotsky and the Social Formation of Mind (Cambridge, Mass., Harvard University Press). Yan, A. and Zeng, M. (1999) ‘International Joint Venture Instability: A Critique of Previous Research, a Reconceptualization, and Directions for Future Research’, Journal of International Business Studies, 30(2), pp. 397–414. Zander, U. and Kogut, B. (1995) ‘Knowledge and the Speed of the Transfer and Imitation of Organizational Capabilities: An Empirical Test’, Organization Science, 6(1), pp. 76–92.

8 Business Linkages and Resilience of SMEs during the East Asian Crisis: The Role of Networks and Trust between TNCs and Local Suppliers Philippe Régnier

Introduction The World Investment Report 2001 published by the United Nations Conference on Trade and Development under the title ‘Promoting Linkages’ was devoted entirely to the study of business linkages (UNCTAD, 2001). Since the 1990s, the international community seems to have become more aware of the importance of such linkages, especially, but not exclusively, between transnational corporations (TNCs) and local suppliers. Linkages can be strategic within the development of global chains of production supported by foreign direct investment (FDI), and other types of financial and technological arrangements, either among OECD nations or between them, and/or large or smaller suppliers (SMEs). The main focus of the international discussion tends to concentrate on backward linkages (outsourcing to local suppliers and sub-contractors) and to a lesser extent on forward linkages (business links with various intermediaries and final customers). The overall argument can also be tested in the case of TNCs outsourcing in emerging economies and other developing countries. There, FDI-linked SMEs can be defined as those SMEs having linkages with foreign affiliates, and the linkages can have various forms such as contracting or subcontracting (for components, parts, intermediary products and so on). For a narrow segment of local SMEs it can go as far as including local enterprises receiving foreign equity in one form or another. One issue focuses on how, and how far, such linkages can stimulate local entrepreneurship. A second issue is related to the solidity and sustainability of these linkages, and whether they are compatible with global competition, in particular market fluctuations or market failures such as the recent East Asian crisis (1997–8). One hypothesis could be that the more integrated (or linked) local SMEs are vis-à-vis TNCs and their affiliates, the more resilient 196

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they can be during market cycles and possible crises such as the East Asian one in the late 1990s, or, more recently, that in Argentina in 2002. If such a hypothesis could be demonstrated, then both the private and public sectors could further promote various forms of foreign investment and partnership locally, in order to promote linkages between local SMEs and foreign firms. This chapter concentrates on backward linkages in Thailand during the East Asian financial crisis and the period immediately afterwards (1997–2000). It is based on several sample surveys conducted during this period, first for UNCTAD, and later during the author’s own scientific leave and research sojourn at Chulalongkorn University (SASIN Graduate Institute of Business Administration, Bangkok). There are two objectives for this chapter: (i) to show that SMEs linked to TNCs (or their affiliates) have been more resilient throughout the crisis than all other categories of local SMEs, especially those exclusively domestic market-orientated; and (ii) to show that the observed resilience of ‘linked’ SMEs can mainly be explained by strong networks of trust and cross-cultural alliances between foreign contractors and local SMEs.

The East Asian crisis and the distress of local SMEs The internationalization of Thailand and other East Asian emerging economies The 1993 World Bank report on the so-called ‘East Asian Economic Miracle’ indicated that the internationalization of the East Asian emerging economies had progressed in rather spectacular terms during 1980–93. However, the degree of global inter-dependence between such rapid growth and inflows/outflows of foreign investment has become a very controversial issue since the outbreak of the East Asian financial crisis (see UNCTAD, 1998). In order to remedy some of the main causes of the crisis, structural corporate and financial reforms have been introduced in the most affected economies of East Asia. They have targeted the necessary restructuring of local conglomerates and other large-scale enterprises. Whether already more or less open to FDI before the crisis, these economies have been required to review the role of FDI as a potentially important contributor to their ongoing restructuring process. Through this approach, FDI and other forms of investment have been seen as key instruments in the globalization of local firms, both large companies and SMEs, leading to the possible diminution of corporate and financial vulnerability vis-à-vis domestic and regional market fluctuations. The scale and degree of internationalization of the East Asian conglomerates and other large companies had been studied widely before the crisis, particularly in the four Asian ‘dragons’ and other neighbouring emerging economies (for example, Indonesia, Malaysia and Thailand). The restructuring

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contribution of FDI has been accepted for a number of core firms in countries such as Korea and Thailand, which were hit particularly hard by the East Asian financial crisis. Yet, in contradiction, in-depth knowledge of the East Asian SME sector remained extremely scarce (except in Japan and Taiwan) before the crisis. This is a paradox when one considers that this sector has been responsible for the vast majority of existing firms, for the bulk of employment, and for a modest but rising contribution to GDP and external trade (already substantial in the case of Japan, Taiwan and Korea).

The impact of the crisis on local SMEs The East Asian crisis was most probably the first crisis of a pure financial nature linked directly to the globalization process. The international community had never previously met head-on such a private debt crisis, though it was quite used to public debt and insolvency. In brief, those foreign investors and creditors who had pressed local emerging financial markets to deregulate very rapidly during the first half of the 1990s, withdrew abruptly during the summer of 1997. In retrospect, they became aware at a very late stage of the too-rapid growth and high vulnerability of most East Asian conglomerates and other large firms. National currency markets and stock exchanges were affected by the devastating economic storm. Local firms, and SMEs in particular, were hit at three levels: by the sharp fall in the national currency (⫺40 per cent to ⫺60 per cent on average within a couple of weeks); (ii) by the drastic collapse of domestic demand (⫺80 per cent to ⫺100 per cent in some sectors or sub-sectors during the first six months); and (iii) by a total credit crunch.

ii(i)

The second factor affected the vast majority of SMEs, and some of them had to face a total freeze of orders for months. The currency devaluation hit local SMEs, both those importing and exporting directly, and those working through intermediaries. The credit crunch involved a minority of SMEs because commercial banks and other financial institutions did not lend much to this category of firm, as it is traditionally considered to be too risky. On the other hand, most Asian SMEs tend to rely on family and friendship networks and informal arrangements to raise capital. But the dimensions of the crisis deepened further as most of the affected emerging economies, apart from Malaysia, called for financial assistance from the International Monetary Fund (IMF). During its first series of interventions (autumn–winter 1997), the IMF made fundamental mistakes with the prescription of rigorous budget and fiscal policies that were not adapted to the private (rather than public) nature of the debt crisis. On the top of this, the IMF was not equipped to give any appropriate answer to the core

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question of ‘the lender of last resort’. In other words, were the IMF and East Asian governments entitled to use the public funds created by IMF memberstate taxpayers in order to save local and foreign private investors? The international community provided no real answer until the repeated and devastating crisis in Argentina in 2002. Therefore, the first medication prescribed by the IMF – well discussed by Joseph Stiglitz (2001), former Chief Economist of the World Bank – aggravated the depression of the real economy. Local SMEs have been affected even though they carried no responsibility in the crisis, unlike the bad loans and overall debt of local conglomerates and other large firms. Partly because of the crisis, and partly because of the first IMF intervention mistakes, it is estimated that at least 10 per cent to 15 per cent of SMEs disappeared from Korea and Thailand between September 1997 and May 1998. (Recently in Argentina – over 2002–03 – a quarter of its local SMEs have disappeared, or will fail soon). Because of the crisis, unemployment in Asia rose dramatically after nearly two decades of full employment (apart from Indonesia) and even imports of foreign unskilled labour into Korea, Malaysia and Singapore fell. In the absence of any social safety net, job-seekers and marginalized workers joined the informal and petty job sector: this too was affected by the initial IMF policy because of sharp increases in the price of most basic commodities and fuels.

Policy neglect of SMEs in the treatment of the crisis The two successive interventions of the IMF, in autumn 1997 and spring 1998, have completely neglected the micro dimensions of the crisis, and its various impacts on local SMEs, despite their substantial economic and social contributions. The IMF and East Asian governments (mainly Ministries of Finance and central banks) have focused on: (i) the stabilization of macroeconomic fundamentals; and (ii) the restructuring of private corporate debt and the bad loans of commercial banks. Thailand is an exception, but to a limited extent. In December 1997, the newly-elected democratic government announced its intention to design an SME promotion policy, which was partially absent before the crisis. However, their real intentions were primarily political, because of a rising anti-crisis anger and the risk of social unrest among middle-class urban Thais which included micro-enterprises and SME owners. In this context, neopopulist movements emerged with the creation, for example, of the Thai Rak Thai party, which won the general election two years later. On the external front, an SME master plan was envisaged as early as November 1997, with the hard currency support of Japan. It was then developed further by Japanese senior consultants close to the Thai Ministry of Finance, primarily

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to protect sub-contracting SME-related heavy direct investments made by Japanese automotive and electronic TNCs. But, on the purely SME domestic front, nothing concrete materialized for all the other categories of SMEs, despite repeated declarations by the government. A first-ever SME Bill took about two years to be proposed, being heard only in February 2000. Therefore it played no part in the hard times of the crisis, between mid-1997 and the end of 1998. The international community has not learnt much from the distress of local SMEs during the East Asian crisis. Small entrepreneurs were not organized into strong, lobbying pressure groups. It follows that, in the more-orless similar financial crises that hit Russia, Turkey and, more recently, Argentina, no emergency safety net was conceived as a transitory attempt to safeguard SMEs, employment and local know-how.

Looking into the resilience of local SMEs linked to foreign firms The absence of governmental or inter-governmental microeconomic interventions during major market failures such as the East Asian crisis explains why our empirical research focused on buisness-to-buisness (B2B) linkages. The main objective was to explore whether, and how, they might have played a positive role, not only during periods of growth, but also during periods of sharp recession.

Results of the first SME survey in Korea, Malaysia and Thailand (1998–9) Results are derived from a brief SME sample survey conducted on behalf of UNCTAD during January–April 1999 in Korea, Malaysia and Thailand. There was no previous data on this subject, and because of limited resources and time at our disposal, the survey concentrated on three main questions.

Question 1: Have local SMEs with a relatively strong export orientation experienced a weaker decrease of production and sales than SMEs with an exclusively domestic orientation? The answer was positive and showed that: (a) the strong depreciation of national currencies initially improved the competitiveness of some, but not all, SME products; and (b) the expansion of exports, combined or not with preferential credit facilities (if and when put in place in the documentary credit sector), had a positive impact on the sales of some, but not all, exporting SMEs, and this compensated for the decline of local demand – at least to some extent. In the Korean sample, for example, the stronger the export-orientation of the SME initially, the more positive was the sales development experienced

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in 1998. In a number of cases, it cushioned fully (or even over-compensated for) the downturn in domestic demand, and so local exporting SMEs were thus relatively more efficient than big firms in adapting to drastically new and harsh market conditions. In the Thai sample, most SMEs, whether affiliated or not to foreign firms in the electric and electronic industries, were export-orientated, and both categories experienced positive effects derived from the devaluation of the baht. But in the textile and garment sector, all non-foreign affiliated SMEs surveyed were found to be less resilient than the affiliated firms. It seems that a majority of exporting SMEs continued to rely primarily on direct orders from foreign buyers, but a significant minority also used the export channels of foreign TNCs or trading houses.

Question 2: Have local SMEs, linked to foreign firms with various mechanisms – such as assistance and sub-contracting linkages (apart from direct investment and ownership linkages), been more resilient to the crisis than the vast majority of local SMEs not linked to foreign firms? There seems to be a rather positive but indirect impact, which is not well documented either quantitative or qualitative terms. The Korean sample shows that foreign affiliation did not figure much in the resilience of local SMEs, even though it may have provided at least a certain degree of security, but not to all firms. A similar proportion of foreign-affiliated SMEs and non-foreign-affiliated companies experienced an increase in sales. In the Thai sample, 12.9 per cent of the interviewed SMEs conducted sub-contracting activities with TNCs or other foreign affiliates. The most frequent type of support was a guaranteed and continuing access to export orders, but there were some devastating exceptions.

Question 3: Have local SMEs linked to FDI or foreign equity participation been particularly resilient to the crisis? Even in the most open economies, such as Malaysia or Thailand, FDI has been concentrated in certain sectors and primarily in majority/whollyowned foreign corporations. The number of local SMEs linked to FDI is still very limited and no SME data was available on this subject before the crisis. Most surveyed SMEs declared that they would welcome foreign capital to overcome the crisis. But, in reality, because of the small size of their paid-in capital, most family-owned SMEs were reluctant to allow the intrusion of any foreign investors. At best, they might tolerate foreign ownership if it was limited to a minimum, but this formula is unattractive to most foreign investors. During and beyond the crisis, the so-called danger of ‘selling out’ local enterprises to foreign interests was high in the common, and rather nationalistic, perception of local entrepreneurs.

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In the Malaysian sample, there was no clear correlation between SME export resilience and foreign-firm affiliation: some SMEs fully affiliated to Japanese investors improved their export performance because of the weak currency, but they had to face more costly imports of raw materials and components. Some other SMEs, fully-owned by US foreign investors but working primarily for the domestic market, faced such drastic import cost rises and drops in such sales that they closed some of their units and tried to restructure or disinvest. Yet, in contrast, 100 per cent of the Malaysianowned exporting SMEs (less than 4 per cent of all existing SMEs) experienced positive impacts, thanks to the weakened Malaysian dollar. In the Thai sample survey, the foreign affiliated SMEs (5.5 per cent of all existing SMEs in manufacturing) survived the crisis better than those without such an affiliation. The more foreign equity participated in a local SME, the more likely it was that assistance was provided or envisaged by foreign partners: ●

●

●

SMEs surveyed in the textile and garment category were almost 100 per cent foreign owned, and totally export-orientated; in the electrical and electronic sector, only one SME having a rather high foreign equity participation (19 per cent) was particularly resilient, thanks not only to the continuity of orders, but also to temporary financial assistance at the peak of the crisis. The other foreign-affiliated SMEs all experienced both positive and negative effects from the crisis, even though the modalities of their foreign affiliations differed from one case to another; and in the automotive sector, only one SME, producing wiring looms for both export and domestic markets, had over 51 per cent of foreign equity. It reduced output and staff because of its sharp decrease in sales and profits – but the foreign partner provided export orders and access to cheap loans. The non-foreign-affiliated SMEs suffered tremendously, even those active in both domestic and export markets.

Tentative interpretations of survey results First, the survey tends to indicate that (a) the export orientation of local SMEs in particular; and (b) the lower the foreign affiliation of local SMEs played a significant role in the resilience of local SMEs during the crisis. The more strongly linked the SMEs were to export markets before the crisis, the more resilient they have been since August 1997. SMEs relying on both export and domestic markets generally performed less well, but still did better than those working only for the domestic market. Considering the various types and degrees of foreign affiliation, SMEs having a high ratio of direct foreign equity participation (49 per cent and over) were on average the most resilient because of various forms of assistance from trustee foreign

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partners, including additional capital injection and/or financial facilities in some cases. However, this was not true for all SMEs of this category, not even for those that were wholly foreign-owned. Second, local SMEs with no foreign participation declared they would welcome some FDI as soon as possible, but they wanted to limit it to a minimum. SMEs with some foreign equity participation did not want – despite the crisis – any higher ‘foreign intrusion’ into their firms. In both situations, the fear of losing management control was a central focus for both tangible financial and intangible reasons. The latter refers to the psychological and sociological profiles of the vast majority of family-based SMEs, who generally lack a proper long-term industrial, marketing and management strategy. In addition, despite the short-term negative effects of the crisis, the financial situation of most SMEs did not reach a desperate bottom line. Most of them struggled with various downsizing constraints, but not to a point of closing down (apart from the 10–15 per cent already mentioned). The number of bankruptcies in 1998 more than doubled in comparison with 1996, but the sharp recession primarily hit the most vulnerable domesticmarket-orientated SMEs. Third, the small segment of FDI inflows attracted by the local SME sector has developed gradually since the 1980s. Though no precise data was available, this FDI originated more from the Asian region (especially in terms of manufacturing outsourcing from Japan, Korea, Hong Kong, Singapore and Taiwan) rather than from Western Europe or Northern America. New, wholly-foreign-owned SMEs were created locally in a majority of FDI cases. In other cases, FDI inflows did not target the most vulnerable SMEs, but rather the most promising ones – if they were ready to welcome foreign participation. Does it mean that any sound anti-crisis policy should target either the most affected domestic-market-orientated SMEs or pick up the winners and the most resilient ones? Should only SMEs of the second category be promoted in their endeavours to share ventures with foreign partners, or are they able to proceed just by themselves? How far should a venture strategy be left entirely to private-sector forces, which may be in a better position to assess mutual benefits of forging sustainable and trustworthy B2B linkages?

Results of the second survey in Thailand (1999–2000) and the importance of SME–TNC resilient and trustworthy linkages The author conducted the second survey during his 8-month research visit to the SASIN Graduate Institute of Business Administration (Chulalongkorn University, Bangkok) between July 1999 and March 2000. It focused on a few dozen of the Thai SMEs in various sectors, which were linked to foreign buyers through various modalities before and during the crisis. As already tested with the Thai sample in the first survey (discussed above), the second sample

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permitted – within the limits of its size and the arbitrary choice of SMEs – a demonstration that SME–TNC linkages were quite effective and resilient during the crisis if close links, reliability and trust had been established and gradually intensified during the years before the crisis occurred. A first conclusion, documented with detailed SME case studies from the sample, was that pre-crisis linkages played a significant role in resisting the sudden and sharp recession of 1997–8. A number of SME entrepreneurs were inspired during the 1980s or early 1990s by TNC production and management standards. In some cases, they were able to obtain technological ‘roadmaps’ and transfers of know-how directly from TNCs in order to supply high quality, and later they supplied increasing numbers of sophisticated components and parts. After years of perseverance, those SMEs that had proved their rapid learning capacity, and their determination to invest in machinery and human skills (most were Sino-Thai SMEs), were not dropped by TNCs just because of the economic downturn of 1997–8. In other cases, local SMEs obtained through their TNCs access to business schools or vocational training centres sponsored or co-sponsored by TNCs. And some SME entrepreneurs had formerly been trained on TNC sites or developed their own skills through qualified jobs in large domestic firms supplying TNCs. In a significant number of cases (in the automotive sector), SME entrepreneurs just happened to be former TNC employees. They had decided at the age of 35–45 (on average) to establish their own businesses sometimes with the blessing and direct assistance of their previous TNC employer. Frequently, they would receive their initial orders from the in former TNC employer. These forms of ‘intrapreneurship’ need to be studied more carefully in the future. One striking example was the story of SME O.E.I. Parts Co. Ltd, where 80 per cent of its automotive parts went to the Japanese giant Isuzu before the crisis. The Thai entrepreneur had been trained in Japan and was associated with Isuzu during 1974–89 before setting up his own business. But Isuzu (Thailand) was badly hit by the 1997 crisis and decided to drop, at least temporarily, its sub-contractors. In November, orders to O.E.I. were cut by 100 per cent and were only resumed slowly in February 1998. O.E.I. put two-thirds of its workforce on leave, offering a little cash to help them to survive until new orders could be secured. Within six months, because of his fluency in Japanese and his fantastic network among local Japanese expatriates, the company owner was able to link up with several other giants such as Honda, Mazda and Mitsubishi. He also secured direct export orders to Japan and the USA. By the end of 1999, the company was back to full capacity, and even beyond, and had rehired most of its former staff, plus, of course, additional workers. A second conclusion was that some local SMEs were resilient during the crisis as they were sustained by various forms of financial support provided

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by TNCs and local affiliates. Despite the collapse of local demand, some TNCs maintained sustainable levels of orders, thus preventing the bankruptcy of their most reliable SME sub-contractors. They also delayed terms of payment for various deliveries, components and inputs needed by local SMEs to supply themselves or other firms with intermediate or final goods. They have facilitated SME access to credit by providing some SMEs with appropriate introductions and guarantees vis-à-vis local and foreign bankers. In a few cases, they have even provided fresh money in the form of temporary, or a more sustainable, minority investment ventures. TNC best practice can be illustrated by the case of Toyota (Thailand). Its senior management, both in Thailand and Japan, decided to study carefully its production and stocks of cars worldwide, especially in North America (where demand was sustained in 1997–8). Therefore, it was able to maintain the same levels of orders during the crisis, with the strategic objective of reinforcing trust, linkages, technical co-operation, quality control, and just-in-time (JIT) deliveries with its privileged SME sub-contractors. In some cases, Toyota went as far as to offer loans with attractive interest rates to its closest sub-contractors. In mid-1999, the CEO of Toyota even declared that Thailand would become its major production hub in Asia outside Japan. Third, some TNCs contributed, both during and after the crisis, to SME production and management through various forms of up-grading. Some TNCs, such as Hitachi or Mitsubishi, have not hesitated to send their own consultants, engineers and technicians to local SME sites in the electrical sector. In other cases, TNCs have provided on the SME’s site (or within their own premises) brief, intensive skill training for both SME white-collar and blue-collar staff. In the agro-food sector, for example, local SMEs exporting to Japan did not only obtain financial facilities from Japanese importers (when banks refused any documentary credit vis-à-vis Thailand in late 1997), but they also received valuable advice concerning market expansion, product differentiation and financial management at the most crucial point of the East Asian financial crisis. The main objective has always been to expose local SMEs to better standards of production, quality control and effective management. In recent years, TNCs have also provided increased SME assistance in the field of testing and International Standards Organisation (ISO) certification. As mentioned above, Toyota is definitely ‘best of class’. Fourth, most TNCs have stated clearly that they do not want close and reliable SME suppliers to become over-dependent vis-à-vis a single major TNC contractor. Sound SME–TNC linkages are also supposed to contribute to the rising autonomy – if not independence – of each SME vis-à-vis its initial mentor. Some TNCs tend to develop multi-level sub-contracting linkages with a wide number of local SMEs in any case, and not with just one or a few. In addition, some TNCs help local SMEs with the development of their own commercial and marketing intelligence. An ultimate medium-term

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objective for a TNC may be to encourage and support their SME subcontractors to diversify their clients, and to become more sustainable enterprises. One good example is a Sino-Thai SME jewellery producer established in Bangkok that has become the best supplier of Wal-Mart in the USA. Trust was first established between the two firms thanks to the intermediation of diamond brokers in New York. Then, some of the second-generation owners of the Thai SME were sent to study engineering and management in the best US schools, where they were able to network further with Wal-Mart. Down the road, the Thai SME has expanded rapidly, but avoided becoming too large. One option they took was to continue the ‘chain of trust’ upstream first: some of its most skilled workers were encouraged and then supported in setting up their own jewellery workshops, to supply the core jewellery SME to match to its own standards, which in turn are fully recognized and praised by Wal-Mart (by 2000, more than 300 independent workshops of this kind had been established). Downstream, the core SME also started to explore ways and means of internationalizing further, in order to become a kind of global SME. In 2000–01 it began to invest in production and marketing facilities in India and Hong Kong. In conclusion, it can be said that there is much to be learnt from the relative density of business linkages between TNCs and some local SMEs in the East Asian emerging economies. Most of these linkages have been built up gradually over the decades of rapid industrialization and export growth in the late twentieth century, but some other links have been revealed or were only established during the times of sharp market fluctuations – such as the financial crisis of the late 1990s and its aftermath.

Further evidence from Malaysia (2001–02) and importance of public–private partnerships In 2001–02, the enterprise branch of UNCTAD made further explorations on the global compact, and in particular business linkages in Malaysia. Thanks to introductions by the Intel Corporation and the local government, a detailed study was conducted in Penang. The survey revealed that the Malaysian federal and local states were able to design an industrialization strategy for Penang. This island was already attractive to TNCs by the early 1970s. First, they assessed the local situation and infrastructure of past colonial Penang and pushed them up to world-class standards of communication and transportation facilities. Second, they put in place combined fiscal and training conditions attractive to foreign investors. Third, they developed public–private partnerships locally, together with foreign affiliates, in order to boost the sprit of entrepreneurship and the talents of the local Chinese and Sino-Malay small business community. During the 1980s and 1990s, most first-class TNCs in the electronics and electrical machinery sectors not only settled in Penang but also contributed

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in several ways to the creation and development of over 3,000 SMEs established either on the island or elsewhere on the Western coast of the Malaysian peninsula. On the one hand, some TNCs, such as Bosch or Intel, designed long-term in-house strategies to identify, select and coach their sourcing SMEs through various stages of product sophistication, on the other hand, some TNCs teamed up with local authorities to establish and adapt training centres and business service provision more closely to the needs of the local SMEs, which would be linked increasingly intimately to foreign affiliates settled in Penang, or even elsewhere in East Asia. Some of these SMEs even became so-called ‘total solution manufacturers’ wellknown all over East Asia and beyond. Similar to that of Malacca or Singapore, the historical destiny and economic governance of Penang before and after the independence of Malaysia are probably unique in many ways, and therefore not necessarily replicable. However, the local inter-relationships and inter-connections between the public and private sectors during more than three decades deserve attention. In particular, the ‘virtuous’ triangulation built up consciously over the years between foreign affiliates, local SMEs and local authorities for the benefit of the whole community of Penang seems to be sustainable, mainly because it is based strongly on individual proximity and collective trust between the different stakeholders. The story of Penang suggests that SMEs, or at least some SME segments, should not be considered bad risks, as commonly perceived, especially by bankers and state officials. On the contrary, long-term investment in corporate and community values such as the status and contribution of SMEs, trust in their entrepreneurial and flexible innovation capacities, and recognition of their gradual achievements, should prevail. In that respect, TNCs, other large firms and local public authorities have major roles to play in selecting, incubating, coaching and supporting at least the most promising ones, with various trickle-down effects upstream and downstream in the long run.

References Abdullah, M. A. (1998) SMEs in Malaysia: Policy Issues and Challenges (Aldershot, Ashgate). Asia-Pacific Economic Cooperation (APEC) (1994) The APEC Survey on SMEs 1994, (Singapore, APEC Secretariat). Buckley, Peter J., Campos, J., Mirja, H. and White, E. (eds) (1997) International Technology Transfer by Small and Medium-Sized Enterprises (London, Macmillan). Fujita, Masataka (1998) The Transnational Activities of Small and Medium-Sized Enterprises (New York Dordrecht, Kluwer Academic Publishers). Glancey, K. S. and McQuaid, R. W. (2000) Entrepreneurial Economics (New York, Palgrave). OECD (1997) Globalisation and Small and Medium Enterprises, Vol I: Synthesis Report (Paris, OECD).

208 The Role of Networks and Trust Régnier, Philippe (1994) ‘Guidance Policies for SMEs in the Asian Newly Industrialised Economies’, in OECD, New Economic Partners: Dynamic Asian Economies and Central and Eastern European Countries’ (Paris, OECD), pp. 107–30. Régnier, Philippe (1996) ‘The Dynamic Asian Economies: Local Systems of SMEs and Internationalisation’, in OECD, Networks of Enterprises and Local Development (Paris, OECD), ch. 15, pp. 225–32. Régnier, Philippe (1998) ‘Dynamics of Small Enterprise Development: State versus Market in the Asian Newly Industrializing Economies’, in Paul Cook, Colin Kirkpatrick and Frederick Nixson (eds), Privatization, Enterprise Development and Economic Reform: Experiences of Developing and Transitional Economies (Cheltenham, Edward Elgar), pp. 206–28. Régnier, Philippe (2000) SMEs in Distress: Thailand, the East Asian Crisis and Beyond, (Aldershot, Gower). Stiglitz, J. (2001) What I learned about the World Economic Crisis. http://www. whirledbank.org/ourwords/stiglitz.html [Accessed August 2003]. UNCTAD (1993) Small and Medium-sized Transnational Corporations: Role, Impact, and Policy Implications (Geneva, UNCTAD). UNCTAD (1998a) Handbook on Foreign Direct Investment by SMEs (Geneva, UNCTAD). UNCTAD (1998b) The Financial Crisis in Asia and Foreign Direct Investment: An Assessment (Geneva, UNCTAD). UNCTAD (1998c) World Investment Report (annually) (Geneva, UNCTAD). UNCTAD (1998d) Trade and Development Report (annually) (Geneva, UNCTAD). UNCTAD (1999–2000) Transnational Corporations, a refereed journal published 3 times a year, Reports 8 and 9 (Geneva, UNCTAD). UNCTAD (2000) TNC–SME Linkages for Development: Issues, Experiences, Best Practices, (Bangkok, UNCTAD X), 15 February. UNCTAD (2001) World Investment Report: Promoting Linkages (Geneva, UNCTAD).

9 How Sustainable are Benefits from Global Production Networks? Malaysia’s Upgrading Prospects in the Electronics Industry Dieter Ernst

One of the most striking features of the 21st century is that everything has become tradable. (Pender, 2003) The world is more US-centric now than it has ever been. (Roach, 2003) One of the important issues to be examined is whether and to what extent intra-regional trade and investment linkages will work as a major factor of growth in the future. (Ivan Tselichtchev, Chapter 2 in this volume)

Introduction A progressive integration of East Asia’s electronics industries into global production networks (GPNs) provides a fascinating example of the benefits that Asian firms can reap from linkages with foreign firms (see, for example, Borrus et al., 1997, 2000). Network participation has provided Asian producers with access to the industry’s main growth markets, helping to compensate for the initially small size of their domestic markets. It has also provided new employment opportunities, and induced Asian network suppliers to develop primarily operational technological and management capabilities (Ernst and Kim, 2002). As a result, East Asia has emerged as the dominant global manufacturing base of the electronics industry, especially for assembly and component manufacturing. However, the 1997 financial crisis, followed by the downturn in the global electronics industry since late 2000, have brutally exposed the downside of export-led industrialization: a country is more vulnerable the more it is 209

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focused on assembly-intensive mass production of commodity-type products, and the higher the share of these electronics products in its exports. This has given rise to an important debate that should inform the study of trust and antitrust in cross-border corporate networks, especially those networks that include companies from Asian countries. Three questions are addressed in this debate: (i) Can earlier benefits from integration in GPNs be sustained? (ii) Can these benefits be broadened to include improvements in learning, innovative capabilities and value-added? (iii) What adjustments does this require in firm strategies and organization, and in related government policies? This chapter argues that an upgrading of East Asia’s electronics industry is an essential prerequisite for sustaining and broadening the benefits of integration into GPNs. Defined as a shift to higher value-added products, services and production stages through increasing specialization and efficient domestic and international linkages, industrial upgrading (IU) necessitates a strong domestic knowledge base. Successful upgrading raises daunting challenges, chief among them being substantial investments in long-term assets, such as specialized skills, and innovative and research capabilities. In countries where the domestic industrial structure provides only limited incentives for firms to invest in these long-term assets, upgrading prospects will remain limited. This, of course, implies that ‘winners and losers will emerge and differentiation will increase’ (Tselichtchev, Chapter 2 in this volume). Yet globalization based on increasing inequality is hardly a realistic proposition, as it gives rise to anti-trust, if not to violence and wars. Conscious efforts are thus required to counter rising inequality. Business can contribute to these efforts. The keys to success are organizational innovations that help develop and disperse skills and capabilities ahead of what the market would provide. International knowledge sourcing through participation in GPNs, as well as through complementary linkages with foreign universities, consulting firms and informal global peer group networks, can play an important catalytic role. These diverse international linkages can help Asian firms to bridge existing gaps in specialized skills and innovative capabilities; and they can facilitate the necessary changes in organization and procedures to develop these capabilities locally. It is difficult in a single chapter to consider the entire range of upgrading prospects via network participation that face the countries of East Asia. We focus on Malaysia,1 a mid-sized country confronted with a particularly demanding challenge, because of three peculiar characteristics of its electronics industry. First, Malaysia exceeds most other Asian electronics producers (with the exception of Singapore) in terms of its exposure to GPNs. Electronics constitutes around 60 per cent of Malaysia’s exports. The electronics industry has been the major recipient of FDI, absorbing more than a third of total

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manufacturing FDI in 1996–8 (MIDA, 1999).2 And the US market absorbs 25 per cent of Malaysia’s total exports (an estimated 40 per cent for electronics exports). Second, with the Penang Development Centre, with its two industrial master plans, and with the Bill of Guarantees (developed for its Multimedia Super Corridor) Malaysia has produced one of the most aggressive sets of upgrading incentives for private companies (both foreign and domestic). And yet … Third, despite such policies, we find a mixed balance of benefits from network integration. On the positive side, Malaysia experienced, within a relatively short period, a substantial capacity and international market share expansion for electronics products. And until the mid-1990s, employment generation was significant, accompanied by considerable growth in productivity. Since then, however, productivity growth has slowed down, while lay-offs have increased considerably. Low-end assembly operations continue to dominate. Most importantly, Malaysia has failed to develop a sufficiently diversified and deep industrial structure to induce a critical mass of corporate investment in specialized skills and innovative capabilities. In short, Malaysia’s experience in the electronics industry indicates that nothing is automatic about benefits from participating in GPNs. The first section in this chapter introduces an operational definition of industrial upgrading (IU). The second section sketches key characteristics of GPNs and documents the emergence of complex, multi-tier ‘networks of networks’ which provide new opportunities for IU, but which also raise threshold requirements for participating in these networks. In the third section, we highlight structural weaknesses in the Malaysian electronics industry that constrain its upgrading prospects, assess current policies that try to link cluster development and global network integration, and ask to what degree linkages with contract manufacturers (CMs) can broaden network benefits. The fourth section, concludes the chapter by exploring new opportunities for international knowledge sourcing that could complement Malaysia’s linkages with GPNs.

Industrial upgrading An appropriate long-term development strategy for Asian electronics industries must focus on improvements in specialization, productivity and linkages (as defined by Hirschman, 1958, ch. 6), all of which necessitate a broad base of skills and innovative capabilities. All four elements are essential prerequisites for improving a country’s capacity to raise long-term capital that is necessary for facility investment, research and development (R&D), and human resource development. The concept of industrial upgrading (IU) ties these four elements together (Ernst, 2003c). Our definition emphasizes the importance of international linkages. We do not assume that IU ends at the national border, and that it occurs only if improved specialization generates pressures to create dense forward and backward linkages within the district or the national economy. A ‘closed

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economy’ assumption is unrealistic. First, as globalization and information technology (IT) have drastically increased the international mobility of trade, investment, and even knowledge (Ernst, 2003a, 2003b), this increases the scope for cross-border forward and backward linkages (Ernst, 2002a, 2003c). Second, most countries are constrained by a narrow domestic knowledge base and limited linkages. Both constraints are particularly important for Asian developing economies (see, for example, Lall, 1997; Ernst et al., 1998). With few exceptions, highly heterogeneous economic structures constrain agglomeration economies; weak and unstable economic institutions obstruct learning efficiency; and a high vulnerability to volatile global currency and financial markets constrain capital for patents that is necessary for the development of a broad domestic knowledge base. As a result of this ‘vicious circle’, very limited sharing and pooling of resources and knowledge occurs within the country, and often even within the export-orientated cluster. To compensate for their narrow domestic knowledge base and limited linkages, Asian developing economies thus have to rely on foreign sources of knowledge to catalyse domestic capability formation. International linkages need to prepare the way for an upgrading of East Asia’s electronics industries. Integration into GPNs is one possible approach.

Global production networks Characteristics Trade economists have recently discovered the importance of changes in the organization of international production as a determinant of trade patterns (see, for example, Feenstra, 1998; Jones and Kierzskowski, 2000; Navaretti et al., 2002). Their work demonstrates that: (i) production is increasingly ‘fragmented’, with parts of the production process being scattered across a number of countries, hence the increasing share of trade in parts and components; and (ii) countries and regions that have been able to become a part of the global production network are the ones that have industrialized the fastest. This chapter builds on this work, but uses a broader concept of GPNs that emphasizes four characteristics:3 (i) scope: GPNs encompass all stages of the value chain, not just production; (ii) asymmetry: flagships dominate control over network resources and decision-making; (iii) knowledge diffusion: the sharing of knowledge is the necessary glue that keeps these networks growing; and (iv) information systems: the increasing use of digital information systems to manage these networks enhances not only information exchange, but also provide new opportunities for the sharing and joint creation of knowledge.

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Vertical specialization has been a powerful driver of these networks (Ernst, 2002b). A GPN covers both intra-firm and inter-firm transactions and forms of co-ordination: it links together the flagship’s own subsidiaries, affiliates and joint ventures with its sub-contractors, suppliers and service providers, as well as partners in strategic alliances. A network flagship such as IBM or Intel breaks down the value chain into a variety of discrete functions and locates them wherever they can be carried out most effectively, where they improve the firm’s access to resources and capabilities, and where they are needed to facilitate the penetration of important growth markets. The main purpose of these networks is to provide the flagship with quick, low-cost access to the resources, capabilities and knowledge that are complementary to its core competencies. As the flagship integrates geographically-dispersed production, customer and knowledge bases into GPNs, this may produce transaction cost savings. Yet the real benefits result from the dissemination, exchange and outsourcing of knowledge and complementary capabilities. Knowledge sharing is the glue that keeps these networks growing. Flagships need to transfer technical and managerial knowledge to local suppliers. This is necessary to upgrade the suppliers’ technical and managerial skills, so that they can meet the technical specifications of the flagships. Originally, this involved primarily operational skills and routine procedures required for sales and distribution, manufacturing and logistics. Over time, knowledge sharing also incorporates higher-level, mostly tacit forms of ‘organizational knowledge’ required for control, co-ordination, planning and decision-making, as well as for learning and innovation.

Flagships While equity ownership is not essential, network governance is distinctively asymmetrical. There is thus an inherent trend towards inequality that may constrain the building of trust. A GPN typically consists of various hierarchical layers, ranging from network flagships that dominate such networks through their capacity for system integration (Pavitt, 2002), down to a variety of usually smaller, local specialized network suppliers. The flagship is at the heart of a network: it provides strategic and organizational leadership beyond the resources that, from an accounting perspective, lie directly under its management control (Rugman and D’Cruz, 2000). The strategy of the flagship company thus directly affects the growth, strategic direction and network position of lower-end participants, such as specialized suppliers and sub-contractors. The latter, in turn, have no reciprocal influence over the flagship strategy. The flagship derives its strength from its control over critical resources and capabilities that facilitate innovation, and from its capacity to co-ordinate transactions and knowledge exchange between the different network nodes. Flagships retain in-house activities in which they have a particular strategic advantage; they outsource those in which they do not. It is important to

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emphasize the diversity of such outsourcing patterns. Some flagships focus on design, product development and marketing, outsourcing volume manufacturing and related support services; other flagships even outsource a variety of high-end, knowledge-intensive support services.

Asian suppliers To understand how sustainable benefits are from integration into GPNs, it is necessary to open the black box of ‘Asian suppliers’ (Ernst, 2003d). First, some of these suppliers have been around for quite a while. Since the 1960s, various groups of Asian suppliers have emerged, first in consumer electronics, then as contract chip assemblers (Korea’s Anam being the most prominent example) and, more recently, in contract wafer fabrication (‘silicon foundries’): or as ODM suppliers of computers and related equipment, IC design houses, and suppliers of PDA and wireless devices. Second, Asian suppliers obviously differ considerably in their capabilities, network position and market power. Substantial differences also exist with regard to their capacity for component sourcing, design and development, and engineering, their capacity to provide global support services, and their use of digital information systems. Greatly simplifying, we distinguish two types of Asian suppliers: highertier and lower-tier suppliers. ‘Higher-tier’ suppliers – for example, Taiwan’s Acer group – play an intermediary role between global flagships and local suppliers. They deal directly with global flagships (both ‘brand leaders’ and global, US-based ‘contract manufacturers’); they possess valuable proprietary assets (including technology), which enables them to contract-out the manufacturing of parts or final products based on their own design; they also provide knowledge support services to foreign firms; and they have developed their own mini-GPNs (see, for example, Chen, 2002). These higher-tier suppliers are now under pressure to develop complementary skills and capabilities in new product introduction (NPI) and process re-engineering, as well as in ‘embedded’ software, SOC (system-on-chip) design, system integration, and become involved in the management of network resources, supply chains and customer relations. With the exception of hard-core R&D and strategic marketing, which remain under the control of the global brand leader, Asian higher-tier suppliers must be able to handle all the steps in the value chain. They must even take on the co-ordination functions necessary for global supply chain management. ‘Lower-tier’ Asian suppliers are the weakest link in the GPNs. Their main competitive advantages are low cost, speed and flexibility of delivery. Typically, they use dedicated parts supplied by a foreign firm, or contract manufacture parts or final products to the specifications of a foreign firm. These lower-tier suppliers are often used as ‘price breakers’ and ‘capacity buffers’, and can be dropped at short notice. This second group of local suppliers rarely deals directly with the global flagships; they interact primarily

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with local higher-tier suppliers. Lower-tier suppliers normally lack proprietary assets, their financial resources are inadequate to invest in training and R&D, and they are highly vulnerable to abrupt changes in markets and technology, and to financial crises.

Networks of networks: outsourcing based on contract manufacturing4 To move this model a bit closer to reality, we distinguish two types of global flagship: (i) ‘Original equipment manufacturers’ (OEMs), who derive their market power from selling global brands, regardless of whether design and production is done in-house or outsourced; and (ii) US-based global ‘contract manufacturers’ (CMs) who, in recent years, have developed their own GPNs aggressively to provide integrated manufacturing and global supply chain services to the OEMs. This gave rise to an extremely rapid growth of the CM industry. From 1996 to 2000, capital expenditure grew 11-fold (50 per cent compound annual growth rate, CAGR), and revenues increased by almost 400 per cent (81 per cent CAGR). The industry’s rapid growth was driven primarily by M&A. Outsourcing based on contract manufacturing has created increasingly complex, multi-tier ‘networks of networks’ that juxtapose global ties among the two large groups of global players (the OEMs and CMs), as well as intense regional ties with (mostly smaller) Asian firms.5 Sturgeon and Lester (2003) emphasize that the rise of US contract manufacturers with a global reach may pose a serious competitive threat to Asian suppliers in four areas: (i) component sourcing; (ii) design, development and engineering (DD&E); (iii) ‘global reach’ which is the provision of support services across multiple locations in all major macro-regions; and (iv) ‘network co-ordination’, giving improved network efficiencies through the use of sophisticated digital information systems. Our analysis leads us to a more-or-less optimistic perspective. It is important to emphasize the still-limited share of US contract manufacturers in hardware production for worldwide electronics. In 2001, this share was estimated to be around 13.7 per cent (up from 13.0 per cent in 2000). For 2002, this share was projected to increase to 16.3 per cent (communication from Eric Miscoll, CEO, Technology Forecasters, Inc., 15 April 2002). Clearly, the US model of contract manufacturing is just one possible approach, and Asian electronics firms will continue to play an important role, based on their accumulated experience, in this form of contract manufacturing (Ernst, 1997). However, the downturn in the global economy over 2001–02 caused a fall of about 20 per cent in the sales of semiconductors in Malaysia, and [globalized] firms looked to China to lower their labour costs (against those prevalent in Malaysia). They also looked to the potential growth of the Chinese market. It is expected that US investment in Malaysia will reduce between 13 per cent and 35 per cent in 2003 as firms shift manufacturing to China (IT Matters, 2002).

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This learning process goes back to the early 1980s: well-documented milestones are Samsung’s contract with GE to act as its global contract manufacturer for microwave ovens (Magaziner and Patinkin, 1989); the spread of OEM (original equipment manufacturing) contracts from Korea’s consumer electronics industry to Taiwan’s computer industry and their gradual transformation into ODM (original design manufacturing) contracts (see, for example, Ernst and O’Connor, 1992, ch. 4; Hobday, 1995; Ernst, 2000); and the market leadership by Asian (primarily Taiwanese) silicon foundries in contract wafer fabrication (Chen, 2002). Given this long history of contract manufacturing in Asia, there are ample opportunities to groom a variety of new specialized Asian suppliers, provided the necessary changes are put in place in policies and support institutions. Let us now look at these efforts in Malaysia.

Implications for Malaysia’s upgrading perspectives in the electronics industry A progressive integration into global production networks (GPNs) has been a primary driver of Malaysia’s success in the electronics industry. This integration started in the early 1970s with offshore chip assembly, primarily by US semiconductor firms. The next stage, since the early 1980s, was centred on Japanese electronics makers that moved their export platform production for consumer electronics to Malaysia and other South East Asian locations. Since the late 1980s, Malaysia has been integrated into the production networks of American producers of computer-related equipment, as well as those established by their Taiwanese sub-contractors. The most recent stage has involved the production of communication and networking equipment, and the acquisition of existing affiliates of global brand leaders (the so-called OEMs) by global contract manufacturers (CMs). The results have been impressive, in terms of production, exports, employment and investment. Between 1990 and 2000, Malaysia’s electronics industry registered a CAGR of 23.5 per cent. During the same period, exports grew at an annual average of 25.2 per cent, while employment grew almost 11 per cent annually until 1995 (figures courtesy of Ministry of International Trade and Industry, Kuala Lumpur).

Structural weaknesses Yet, despite these achievements, a shift in strategy is now overdue. Seven structural weaknesses of Malaysia’s electronics industry constrain its upgrading prospects (Ernst, 2003d). First, Malaysia’s integration into GPNs gave rise to the development of an asymmetric industry structure, in which multiple layers of electronics firms are distinguished by unequal control over resources and decision-making. While Malaysian firms dominate numerically, Malaysia’s electronics industry

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continues to be shaped by strategic decisions made by the global flagships (both OEMs and major American CMs). In hierarchical order, four types of firm can be distinguished: (i) at the top of the industry pyramid are global OEMs and CMs; (ii) next suppliers and contract manufacturers from Taiwan, Japan, Singapore and Korea; (iii) higher-tier local suppliers; and (iv) lower-tier local suppliers. Second, there is a heavy reliance on technological capabilities developed within affiliates of global flagships, and their eventual spill-overs into local firms. This traditional pattern of network integration apparently produces decreasing benefits. A good proxy is the disturbing slow-down in productivity growth since 1995. In Penang, for example, total factor productivity (TFP) of manufacturing declined by 0.5 per cent between 1995 and 1997, compared to an increase of 8.9 per cent between 1990 and 1995 (State Government of Penang, 2001). In the electronics industry, TFP growth fell to 2 per cent (from 14.1 per cent during the earlier period) – hardly sufficient for an industry that is supposed to be the engine of upgrading.6 Third, in contrast to countries such as Taiwan, South Korea and Singapore, Malaysia has failed to develop a broad and multi-tiered base of support industries. The majority of local suppliers possess few proprietary advantages and clearly qualify as ‘lower-tier’ suppliers.7 The result is a lack of efficient domestic linkages and an inverted production pyramid – a huge and rapidly-growing final product sector that rests on a weak and much smaller domestic base of support industries. Fourth, a further consequence of Malaysia’s truncated industry structure is a persistently high import dependence stemming from rapid growth in the final products sector, necessitating considerable imports of intermediates and production equipment. By the late 1980s, the Malaysian electronics industry was having to import almost 43 per cent of the intermediate goods required for the production of a single unit of final output, far more than Korea (37 per cent) and Japan (8.2 per cent) (Takeuchi, 1997, p. 7). Malaysia’s dependence on imports of electronics components, in particular semiconductors, continued to increase during the 1990s, both as a share of electronics imports and a share of total merchandise imports.8 Fifth, a focus on low-end assembly operations for a handful of products further adds to the country’s vulnerability, as these operations can easily be replicated in countries with low labour costs. Sixth, of particular concern is a declining capacity for employment generation. Following earlier downturns, a substantial proportion of laid-off workers were re-hired, but this no longer seems to be the case.9 This shows that export-led electronics manufacturing is unlikely to act again as an engine of employment growth. Finally, an increasingly important weakness in Malaysia’s electronics industry is a serious mismatch between the demand for and supply of skills. Despite the recession, job vacancies have continued to increase, with the

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greatest number of job openings being in the ‘managerial and professional’ categories in the electronics industry. This human resource bottleneck also has an important qualitative dimension. There is a widespread perception among electronics firms that local university graduates have book knowledge but are ill-equipped to deal with real-world problems on the shop floor, and that they lack basic skills in communication, negotiation and presentation. This has led to the emergence of a bifurcated labour market, where the best employees can choose their jobs – resulting in intense competition for those engineers and managers who either graduated from overseas universities or who have worked for a foreign firm.

The Second Industrial Master Plan: clusters and global network integration An important attempt to overcome the weaknesses discussed above is the Second Industrial Master Plan (IMP2) (Ministry of International Trade and Industry, 1996). This document signals a fundamental change in Malaysia’s industrialization strategy, away from assembly-based ‘outward industrialization’ to value chain-based manufacturing, from sector-based to cluster-based development, and from performance targets to productivity-driven growth. The strategy is defined by two key concepts: ‘manufacturing ⫹⫹’, and ‘clusterbased development’. In line with Porter (1990), ‘manufacturing ⫹⫹’ highlights activities at both ends of the value chain – that is, ‘R&D and engineering and in-bound logistics’ on the one hand, and ‘outboundlogistics, and sales and marketing’ on the other. It is argued that a move into knowledge-intensive support services such as product development, process engineering, supply chain management and some select areas of R&D will enhance local value-added and productivity. ‘Cluster-based development’ implies that, based on existing strengths, especially in components and semiconductors, developing a dense web of domestic linkages will enhance value-added and deepen domestic capabilities (see also Chapter 13). The IMP2 highlights four specific objectives: (i) foster the growth of ‘leading local companies’ (Malaysian brands); (ii) reduce dependence on input imports; (iii) strengthen agglomeration economies by developing ‘integrated manufacturing centres’ (IMCs) for global network flagships; and (iv) develop cross-border clusters. Of these, the first two objectives are problematic, while the last two indicate a move in the right direction.10 Take recent developments in the Penang cluster, where an attempt has been made to combine the third and the fourth objectives of the IMP2. Rather than just giving in to requests for improved incentives by foreign companies, the state government is pursuing a more selective approach: incentives are linked explicitly to the promotion of ‘integrated manufacturing

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centres’ (IMCs). The goal is to induce global flagships to move to Penang an ‘entire chain of operations for a particular product’. It is expected that this would enable the Penang cluster to upgrade from mere assembly and testing to knowledge support services, such as sales and marketing, adaptive process engineering and tooling, financial planning, and, eventually, parts of R&D such as design and development (D&D).

Linkages with OEMs: fragile upgrading prospects The outcome of policies to upgrade linkages with OEMs, however, depends on sector-specific developments that are beyond the control of a mid-sized country such as Malaysia. The decisions, for example, by Komag and Quantum, to relocate their entire US manufacturing operation to Penang, reflects primarily the relentless pressure within the hard-disk-drive industry to move volume manufacturing and support services to locations having close proximity to Singapore, which is the dominant global cluster centre for these activities (Ernst, 1997). A major constraint to the building of trust is that much of Malaysia’s inward FDI remains highly ‘footloose’ and liable to sudden relocation decisions to lower-cost locations. Equally important is that global flagships that are forced to downsize to retain shareholder value in a recession are inclined first to cut employment in export platform locations, which reflects their flexible labour market regulations. These developments are hardly conducive to fostering trust between Malaysian and foreign firms. Take two prominent examples. For example, Quantum’s decision in 2001 to move to Penang its entire manufacturing line for digital linear tape storage devices was short-lived. One year later, in the summer of 2002, Jabil, the global contract manufacturer, was about to acquire Quantum’s tape drive manufacturing activities as well as two low-end products of the tape automation product division (author’s interviews, Malaysia, July 2002). Or take the recent decision by Dell to relocate its desktop production for the Japanese market from Penang to Xiamen, China, and to assign Xiamen to be the exclusive supply base for Dell’s complete Chinese product line – while Dell’s two plants in Penang remain the BTO shipment hub for the rest of its Asia-Pacific market (with the exception of desktop PCs). This constitutes a major blow for Malaysia. While immediate job losses were of only 60 workers (out of a total of 2,000), this move to China indicates that more such redeployments may be likely. Dell gives three reasons for its decision to redeploy to China: good and low-cost Chinese engineers; cheap land; and the too-limited number of flight connections between Malaysia and Japan. This further indicates the unpredictability and fragility of Malaysia’s GPN-induced upgrading prospects. Even so, linkages to OEMs also provide important new upgrading opportunities. Take the attempts to promote the adoption of RosettaNet e-business standards11 to improve the network integration of Malaysian

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suppliers. The idea is to involve major global network flagships that are already on the RosettaNet, such as Cisco, Dell, Quantum, Siemens, Solectron, Intel, AMD, Hitachi, Agilent and Motorola. These flagships could then be used to pressure and cajole local suppliers to upgrade their IT infrastructure, so that these local suppliers become eligible for the above grants. It is, however, an open question as to how to overcome the substantial constraints that prevent smaller lower-tier suppliers adopting the RosettaNet standards.12 (These forms of constraints were mentioned in Chapter 7 (of this book) where Goussevskaia and Kidd noted that small firms suffered from a lack of absorptive capacity.)

Developing multiple linkages with contract manufacturers To what degree can linkages with contract manufacturers (CM) broaden Malaysia’s upgrading prospects? Three developments are important: the arrival of major US CMs; the mutation of component suppliers from Japan and Taiwan into contract manufacturers; and the upgrading efforts of Malaysian higher-tier suppliers.

Arrival of major US CMs All the main US CMs are now present in the Northern Penang/Kulim Hi Tech cluster, or in the southern Johor/Singapore cluster.13 So far, this has created only limited upgrading opportunities, insufficient for a major push into more knowledge-intensive activities (Ernst, 2003d). The main benefits are an increasing sophistication in assembly technologies and the provision of support services related to manufacturing, with the exception of asset and logistics management.14 The purpose of these services is to provide manufacturing solutions that enable a quick expansion of volume manufacturing. Overwhelmingly, global CM players keep design (and in particular, circuit, advanced optical and systems design) concentrated in the USA and Europe. One would, of course, expect such a disparity in design and product development, because of their high knowledge-intensity. This, however, is now beginning to change, as Taiwanese contract manufacturers are expanding their design-based ODM services aggressively.15

Component suppliers from Japan and Taiwan A second important development in fact pre-dates the arrival of American contract manufacturers that has attracted the most public attention. Both the parts suppliers and component suppliers from Japan and Taiwan, whose arrival in Malaysia goes back to the second half of the 1980s, have acted as catalysts for the development of Malaysia’s local support industries (see, for example, Takeuchi, 1993; Ernst, 1997). Generally, Japanese component manufacturers concentrated primarily in the consumer electronics sector, although some of them have also branched out into the computer sector.

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Taiwanese firms have played an important role in Malaysia’s computer industry since the late 1980s. Over time, their Malaysian affiliates have upgraded from simple volume manufacturing, to designs owned by the global flagships, and to more sophisticated contract-manufacturing services for leading computer network flagships. Large Taiwanese contract manufacturers have pioneered the use of original design for manufacturing (known as ODM) capabilities in Asia. This may provide upgrading opportunities for Malaysian firms that interact with affiliates of these Taiwanese contract manufacturers.

Upgrading efforts of Malaysian higher-tier suppliers Leading higher-tier local suppliers understand that they need move up within the hierarchy of contract manufacturing arrangements, from low-end box build and consignment arrangements, to ODM provision, and then on to total solutions provider (author’s interviews, Malaysia, July 2002). They are, however, facing major problems in sustaining and expanding their upgrading efforts. They all face the demanding challenge of pursuing simultaneously the following upgrading strategies, each of which requires major investment: ●

● ● ● ●

to establish themselves with a credible position as low-cost niche contract manufacturers (CMs); to develop global presence through overseas FDI; to develop diversification and market segmentation; to develop knowledge-intensive support services; and to invest in design and R&D.

The implementation of these upgrading options requires the development of a broad and diverse set of capabilities. It is important to emphasize the systemic nature of the required capabilities.16 Take manufacturing services, for example. The move from box build to test necessitates the development not only of testing capabilities (which are scarce), but also of system engineering and maintenance capabilities. Furthermore, developing design and engineering capabilities requires substantial funds for R&D. Or take after-ship services, as another example. A seemingly mundane activity, such as repairs, requires the training of technicians in failure analysis, while end-life programme management requires capable supply chain managers. As for the upgrading of procurement and outbound logistics, substantial funds are required for the gradual upgrading of the necessary information systems. The successful upgrading of Malaysian higher-tier suppliers requires fundamental changes in industry organization – that is, a transition towards flexible domestic supplier networks that can complement the capabilities of individual Malaysian suppliers. Second, the quality of human resources needs to be improved, through a constant process of re-skilling and re-learning. And, third, international knowledge sourcing is required to

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bridge existing gaps in specialized skills and innovative capabilities, and to facilitate the changes in organization and procedures that are necessary to develop these capabilities locally.

New opportunities: international knowledge sourcing The MSC concept A widely-known attempt to address this issue is the government’s initiative to establish a US$40 billion Multimedia Super Corridor (MSC), planned to leapfrog the country into ‘fully developed nation’ status by the year 2020 (Multimedia Development Corporation, 2002). In 1996, the government had hired McKinsey, the global consulting firm, to draft a blueprint for a 15 km ⫻ 50 km strip intended to be Malaysia’s answer to Silicon Valley. An unprecedented set of incentives, enshrined in the Bill of Guarantees, were offered to companies involved in the creation, distribution, integration or application of multimedia products and services within the MSC17 So far, US$3.7 billion have been spent, but results are disappointing. A leaked confidential report by the company that designed the project (McKinsey) concluded in February 2001 that the MSC had not attracted much interest from global investors, nor made an impact on the domestic economy’ (Prystay, 2001). There is a growing recognition that lavish tax incentives and massive investment in infrastructure are not enough to bring about the development of dynamic clusters. Recent strategic documents emphasize that the key to success are incessant efforts on a massive scale to upgrade existing skills and capabilities continuously, and to extend them into new areas such as photonics, embedded software and chip design (National Information Technology Council, 2002). The following major priority areas for reducing the skills mismatch in the Malaysian electronics industry were identified during interviews with government agencies and leading companies (June/July 2002): (i) a massive re-skilling and re-training of production workers; (ii) an increase in the number of graduates, especially for EEE (Electronic and Electrical Engineering), IT and circuit design, who are able to combine hardware, software and application knowledge; (iii) find experienced managers, especially for strategic marketing, and upgrade management in general, and the management of international linkages; (iv) find entrepreneurs who combine street-wise commercial and financial instincts with analytical capacity for strategic decision-making; (v) find experienced and industry-aware administrators who are willing to stick their necks out and do more than just follow the rules (this, of course, requires some incentive alignment);

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(vi) create incentive alignments for university professors and academics that encourage close interaction with the private sector (for example, company internships and sabbaticals); (vii) support intense interactions with expatriate nationals who are based in the USA, Australia and Europe, or elsewhere in Asia; and (viii) create the capacity to bring in at short notice specialized experts from overseas who can help to bridge existing knowledge gaps, and can catalyse the necessary changes in organization and procedures.

Diversifying international linkages Malaysia should also exploit new opportunities for diversifying international linkages to complement its integration into GPNs. First, the country needs to strengthen linkages with overseas universities that can help to upgrade research, development and design capabilities in Malaysian universities and public laboratories. The focus so far has been on a handful of global elite institutions that bring in their standard, routine IT and business courses at a very high cost. Instead, collaboration should focus on specific niche areas, in line with Malaysia’s needs (for example, chip design, embedded software and photonics). The search should move beyond the exclusive ranks of the ‘Ivy League’ universities: there is a wide choice of smaller, less well-known universities and research institutes that are more than willing to develop innovative courses customized to the specific needs and capabilities of Malaysia’s electronics clusters. Second, Malaysia should also reconsider its linkages with consulting firms. For IT, the market is dominated overwhelmingly by a handful of giant corporations such as IBM, and consulting firms such as Accenture, that grew out of global accounting firms. These firms thrive on the economies of scale of knowledge sharing (called ‘network economies’ by information economists). However, as flagships of global information service networks, these firms provide only a standard product wherever they go, and customization is possible only within certain limits within the standard solution package. This approach to customization is extremely costly: customers are charged for the time required to adjust a standard IT package, and for its effective implementation. And these costs are also inflated by massive delays. The result is that new systems often come in late, over budget and unable to solve the problems they were meant to address. This has created a demand for smaller, specialized niche players from Asia who do not start from standard solution packages and who offer clients fixed-price projects. Third, Malaysia also needs to tap into an increasingly important carrier of international knowledge diffusion: the ‘transnational technical communities’ (Saxenian, 2002) of technically-skilled immigrants with business experience and connections in the USA, Europe and Japan, who play an important and complementary role to network flagships in global

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production networks. By linking their home countries with the world’s centres of information and communication technology (Silicon Valley, as well as other centres of excellence in less well-known places such as Helsinki, Kista/Stockholm, Grenoble, Munich, Tsukuba, Tel Aviv and so on) these informal social networks transform what used to be a one-way ‘brain drain’ into a two-way process of ‘brain circulation’. These networks could channel invaluable knowledge on global markets and technology trends to Malaysian electronics firms, complementing their linkages with global flagships. They also provide entrepreneurs and venture capitalists who can function well in both worlds. In Malaysia, the Penang cluster has obviously benefited from students who have studied engineering and management overseas, whether in Singapore, Australia, Japan, the UK or the USA, and who have returned with business experience and connections. In the main, these connections have been with global flagships such as Intel and Motorola in semiconductors, or Matsushita and other Japanese flagships in consumer electronics. Overwhelmingly, the technology, skills and knowledge generated by these immigrant engineers has focused on manufacturing-related activities. It is time now for Malaysia to adjust this ‘brain circulation’ to encompass new areas such as knowledge-intensive support services, software, circuit design and chip packaging. In short, international knowledge sourcing holds great promise as a necessary complement to integration into GPNs.

Conclusion Based on operational definitions of industrial upgrading (IU) and global production networks (GPNs), this chapter has explored how Asian firms can benefit from inter-relationships within these networks, and through other forms of international knowledge exchange. Inherent in the hierarchical structure of flagship-dominated GPNs is a trend towards increasing inequality that may foster anti-trust, and hence erode any possible benefits from globalization. Focusing on Malaysia’s electronics industry, we address three questions that are central to the study of trust and antitrust in cross-border corporate networks: (i) Under what conditions can benefits from integration in GPNs be sustained? (ii) Can these benefits be broadened to include improvements in learning, innovative capabilities and value-added? (iii) What adjustments does this require in firm strategies and organization, and in related government policies? We have documented that linkages with foreign firms through integration into GPNs provides new opportunities to upgrade Malaysia’s electronics industry, but realizing this potential has also become more difficult for

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mid-sized countries such as Malaysia. The best choice arguably is to move forward in incremental steps, and to build on existing strengths in assembly and volume manufacturing, by adding knowledge-intensive support services. Of critical importance is the absorptive capacity of the local suppliers – that is, their resources, capabilities and motivation. To stay within the GPNs, local suppliers must constantly upgrade their absorptive capacity by investing in their skills and knowledge base. Adequate incentives are required to generate sufficient investments in the development of skills and capabilities (as illustrated, for example, by the Nordic countries, and by Taiwan and Singapore). Successful IU within GPNs requires support policies for local firms through local supplier development, (co-funded) skill development, standard-setting, and the provision of investment and innovation finance through a variety of sources and mechanisms, including venture capital, and IPOs. Equally important are attempts to strengthen the country’s innovative capabilities through selective international knowledge sourcing. As an immediate policy instrument, it is advisable to import missing critical skills from overseas. This could help to catalyse necessary reforms in the domestic innovation system. Of critical importance for Malaysia’s upgrading prospects in the electronics industry are new opportunities to tap into international flows of human capital and knowledge through informal peer group networks of technically skilled immigrants with business experience and connections in the USA, Europe and Japan. These international social networks can play an important and complementary role as carriers of knowledge and capital to Malaysian firms that help to sustain and expand benefits from integration into GPNs. However, successful international knowledge sourcing necessitates a much stronger basis for mutual trust than appears to exist in the hostile international environment current at the time of writing. Tough new visa policies introduced in the USA, and in Europe and Japan, as part of the ‘war on terrorism’, are beginning to stifle the mobility of knowledge, by constraining the movements of scientists, engineers, managers and students from countries such as Malaysia. The damage caused to building trust in cross-border alliances is summarized aptly by Bill Reinsch, a former under-secretary of commerce in the Clinton Administration: ‘One of our secret weapons has always been bringing people here to see what America is like. The ones that stay enrich our society and the ones that go back enrich their societies because they take our values with them. We’re throwing all that away. The long-term consequences of this are horrible’ (Financial Times, 29 January 2003, p. 11).

Notes 1

For related studies on upgrading perspectives in Korea’s and Taiwan’s electronics industry, see Ernst, 1994, 2000, and 2001.

226 Malaysia’s Prospects in the Electronics Industry 2 Around 100 large foreign affiliates effectively dominate this industry. Their share in manufactured exports (most of it electronics), increased sharply from 39.8 per cent in 1985 to 68.3 per cent in 1992 (Takeuchi, 1997, p. 9). 3 For details, see Ernst, 1997, 2002a, 2003a, 2003b, 2003c. 4 Based on Ernst, 2003d. 5 A focus on complex, multi-tier ‘networks of networks’ distinguishes our analysis from Sturgeon’s (2002) modular production network model. 6 As for TFP growth for the whole of Malaysia, most estimates put it at around 1 per cent to 2 per cent p.a. (upto 2000). This is far below the minimum TFP growth of 3.2 per cent projected by the government (for the period 2001 to 2010), which will be necessary if Malaysia is to achieve a projected growth rate of 7.5 per cent. Compared with historical growth patterns of productivity in industrialized countries, such a massive slow-down in TFP growth is certainly premature, in light of the thus far still limited progress in Malaysia’s specialization by-product and production stage. 7 There are, of course, a few widely quoted success cases, almost all of them located in Penang, such as BCM, Globetronics, Unico, LKT and Eng Teknologi, that have positioned themselves successfully as higher-tier local suppliers for leading OEMs (see, for example, Rasiah, 1995; Best, 2001). 8 This suggests a fundamental mismatch of the country’s electronics exports and imports, with negative terms-of-trade implications; while imports involve high value-added core components, especially microprocessors, etc., Malaysia’s component exports consist overwhelmingly of low-value-added final assemblies. 9 In Penang, almost two-thirds of the retrenched workers in the electronics industry (c. 16,000, primarily low-skilled, female production workers), have left the labour market, indicating a massive return of Malay females (in the 25–29 age range) to their villages (Too and Leng, 2002). 10 The first objective represents an outdated concept of IU that assumes a fixed sequencing pattern from low-end, assembly-type sub-contracting to ‘original brand name’ (OBM) manufacturing (for a typical example, see Hobday, 1995). We now know that the transition to OBM is extremely difficult – even Taiwan’s Acer group has had only limited success (Ernst, 2000). The limited achievements of the ‘Proton City cluster’ in automobiles also indicate that this objective may be unrealistic. As for the second objective, much depends on whether the country succeeds in finding the right balance between reaping the benefits of foreign input imports (as described in Rodrik, 1999) and the development of local backward and forward linkages. 11 RosettaNet is a global consortium of over 400 of the world’s leading OEMs and CMs for electronic components, semiconductors, computers and telecommunications equipment, working to create, implement and promote open e-business process standards. Malaysia is the fifth country in Asia to join RosettaNet, after Japan, Korea, Singapore and Taiwan. 12 Participation in the definition of the RosettaNet standards is probably the most immediate benefit. Six Malaysian electronics engineers, on loan to RosettaNet for two years, will work for six months at the California-based RosettaNet headquarters alongside American engineers to define XML-based specifications for the global electronics industry. The companies that provide these Malaysian engineers include global flagships (Intel and Microsoft), leading local suppliers (BCM Electronics, Globetronics Multimedia Technology), and two employees of MIMOS (the Malaysian Institute of Microelectronics Systems), a web developer and a

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13

14

15

16

17

public key infrastructure developer. Obviously, on their return from their US mission, these six Malaysian engineers will play an important role as multipliers and upgrading catalysts. They will also act as gatekeepers for these more knowledgeintensive linkages with global flagships. Solectron is present in Penang, Johor and Singapore; Flextronics in Singapore and Johor; Sanmina/SCI in Penang and Singapore; Celestica in Kedah’s Kulin Hi-tech Park; and Jabil Circuit in Penang. There are also a few important investments elsewhere in the region, such as Malaysia’s Kuching/Sarawak (Sanmina/SCI), Thailand (Flextronics, Sanmina/SCI and Celestica) and Indonesia (Celestica). Typically, this also includes electrical and mechanical design services, global test services, printed circuit board layout services and detailed process engineering (‘advanced manufacturing technology research’ in CM industry parlance). Increasingly, certain types of electronic design, including SOC (system-on-chip) design, have been relocated to some of the leading IT clusters in the Asia-Pacific region that provide a skilled and retrainable workforce as well as easy access to foundry, assembly and testing services. Design first moved into Taiwan and Korea, but is now also moving into China and India, as well as to Singapore and Malaysia (Ernst, 2003e). LC1, one of the most successful local companies, attempts to build on existing strengths in contract manufacturing and the provision of ODM services, to become a lower-cost ‘total solution provider’ for carefully-chosen niche markets. To do this with low overheads requires strong capabilities in six highly interdependent functions: manufacturing, quality, materials, procurement, engineering and human resources. According to the Multimedia Development Corporation (2002), these incentives include commitments ‘to provide a world-class physical and information infrastructure; to allow unrestricted employment of local and foreign knowledge workers; to ensure freedom of ownership by exempting companies with MSC Status from local ownership requirements; to give the freedom to source capital globally for MSC infrastructure, and the right to borrow funds globally; to provide competitive financial incentives, including Pioneer Status (100 per cent tax exemption) for up to ten years, or an investment tax allowance for up to five years, and no duties on the importation of multimedia equipment; to become a regional leader in Intellectual Property Protection and Cyberlaws; to ensure no censorship on the Internet; to provide globally competitive telecommunications tariffs; to tender key infrastructure contracts to leading companies willing to use the MSC as their regional hub; and to provide a high-powered implementation agency to act as an effective one-stop super shop.’

References Best, M. (2001) The New Competitive Advantage (Oxford University Press). Borrus, M., Ernst, D. and Haggard, S. (eds) (2000) International Production Networks in Asia. Rivalry or Riches? (London, Routledge). Chen, Shin-Horng (2002) ‘Global Production Networks and Information Technology: The Case of Taiwan’, Industry and Innovation, 9(3) Special issue on ‘Global Production Networks’, with guest editors D. Ernst and Linsu Kim. Ernst, D. (1994) ‘What Are the Limits to the Korean Model? The Korean Electronics Industry Under Pressure’, A BRIE Research Monograph, The Berkeley Roundtable on the International Economy, University of California at Berkeley.

228 Malaysia’s Prospects in the Electronics Industry Ernst, D. (1997) ‘From Partial to Systemic Globalization. International Production Networks in the Electronics Industry’, Report prepared for the Sloan Foundation and jointly published as The Data Storage Industry Globalization Project Report 97–02, Graduate School of International Relations and Pacific Studies, University of California at San Diego. Ernst, D. (2000) ‘Inter-Organizational Knowledge Outsourcing. What Permits Small Taiwanese Firms to Compete in the Computer Industry?’, Asia Pacific Journal of Management, 17(2), Special issue on ‘Knowledge Management in Asia’, pp. 223–55. Ernst, D. (2001) ‘Catching-Up and Post-Crisis Industrial Upgrading. Searching for New Sources of Growth in Korea’s Electronics Industry’, in F. Deyo, R. Doner and E. Hershberg (eds), Economic Governance and the Challenge of Flexibility in East Asia (Lanham MD, Rowman and Littlefield), pp. 137–64. Ernst, D. (2002a) ‘Global Production Networks and the Changing Geography of Innovation Systems. Implications for Developing Countries’, Journal of the Economics of Innovation and New Technologies, XI(6), pp. 497–523. Ernst, D. (2002b) ‘The Economics of the Electronics Industry: Competitive Dynamics and Industrial Organization’, in W. Lazonick (ed.), The International Encyclopedia of Business and Management (IEBM), Handbook of Economics (London: International Thomson Business Press), pp. 319–39. Ernst, D. (2003a) ‘Digital Information Systems and Global Flagship Networks: How Mobile Is Knowledge in the Global Network Economy?’, in J. F. Christensen and P. Maskell (eds), The Industrial Dynamics of the New Digital Economy (Cheltenham, Edward Elgar). Ernst, D. (2003b) ‘The New Mobility of Knowledge: Digital Information Systems and Global Flagship Networks’, in R. Latham and S. Sassen (eds), Digital Formations in a Connected World, published for the U.S. Social Science Research Council (Princeton University Press). Ernst, D. (2003c) ‘Global Production Networks and Industrial Upgrading – A Knowledge-Centered Approach’, in G. Gereffi (ed.), Who Gets Ahead in the Global Economy? Industrial Upgrading, Theory and Practice (Baltimore, Md., Johns Hopkins University Press). Ernst, D. (2003d) ‘Global Production Networks in East Asia’s Electronics Industry and Upgrading Perspectives in Malaysia’, in S. Yusuf (ed.), Upgrading East Asia’s Industries, Vol. 2 (Oxford University Press). Ernst, D. (2003e) ‘The Economics of Global Electronics Design Networks’, East-West Center Economic Working Paper Series, 56. Ernst, D., Ganiatsos, T. and Mytelka, L. (eds) (1998) Technological Capabilities and Export Success – Lessons from East Asia (London, Routledge). Ernst, D. and Kim, L. (2002) ‘Global Production Networks, Knowledge Diffusion and Local Capability Formation’, Research Policy, Special issue in honour of Richard Nelson and Sydney Winter, 31(8/9). Ernst, D. and O’Connor, D. (1992) Competing in the Electronics Industry. The Experience of Newly Industrialising Economies, Development Centre Studies (Paris, OECD). Feenstra, R. (1998) ‘Integration of Trade and Disintegration of Production in the Global Economy’, The Journal of Economic Perspectives, 12(4), pp. 31–50. Hirschman, A. O. (1958) Strategy of Economic Development (New Haven, Conn., Yale University Press). Hobday, M. (1995) Innovation in East Asia: The Challenge to Japan (Aldershot, Edward Elgar).

Dieter Ernst 229 IT Matters (2002) US Electronics Investment in Malaysia to dip 13%–35% News story, 19–20 July http://www.itmatters.com.ph/news/news_07192002g.html [Accessed August 2003]. Jones, R. and Kierzskowski, H. (2000) ‘A Framework for Fragmentation’, in S. Arndt and H. Kierzkowski (eds), Fragmentation and International Trade (Oxford University Press). Lall, S. (1997) ‘Technological Change and Industrialization in the Asian NIEs: Achievements and Challenges’, Paper presented at international symposium on ‘Innovation and Competitiveness in Newly Industrializing Economies’, Science and Technology Policy Institute, Seoul, Korea, 26–27 May. Magaziner, I. and Patinkin, M. (1989) ‘Fast Heat: How Korea Won the Microwave War’, Harvard Business Review, January–February, pp. 267–308. MIDA (Malaysian Industrial Development Authority) (1999) Malaysia’s Manufacturing Sector – into an Era of High Technology (Kuala Lumpur, MIDA). Ministry of International Trade and Industry (1996) Second Industrial Master Plan (Kuala Lumpur, MITI). Multimedia Development Corporation (2002) Unlocking the Full Potential of the Information Age, available at http://www.mdc.com.my/package/. National Information Technology Council (NITC) (2002) Proceedings of NITC K-Strategy Policy Roundtable Dialogue, Kuala Lumpur, NITC, 23 November. Navaretti, G. B., Haaland, J. I. and Venables, A. (2002) Multinational Corporations and Global Production Networks: The Implications for Trade Policy (Brussels, Directorate General for Trade, European Commission), March. Pavitt, K. (2002) ‘Are Systems Designers and Integrators “Post-Industrial” Firms?’ in A. Prencipe, A. Davies and M. Hobday (eds), Systems Integration and Firm Capabilities, Oxford University Press. Pender, J. (2003) Going off the Rails: Global Capital and the Crisis of Legitimacy (Chichester, Wiley). Porter, M. (1990) The Competitive Advantage of Nations (London, Macmillan). Prystay, C. (2001) ‘Malaysia Seeks to Lift Super Corridor’, Asian Wall Street Journal, 24 August. Rasiah, R. (1995) Foreign Capital and Industrialization in Malaysia (London, St. Martin’s Press). Roach, S. (2003) The world is more US-centric now than it has ever been, A presentation to the world Economic forum 2003, Davos, Switzerland: March http://www. weforum.org [Accessed August 2003]. Rodrik, D. (1999) ‘The New Global Economy and Developing Countries: Making Openness Work’, Overseas Development Council Policy Essay, 24 (Baltimore, Md., Johns Hopkins University Press). Rugman, A. M. and J. R. D’Cruz (2000) Multinationals as Flagship Firms. Regional Business Networks (Oxford University Press). Saxenian, A. (2002) ‘The Silicon Valley Connection: Transnational Networks and Regional Development in Taiwan, China and India’, Special issue on ‘Global Production’, guest editors, D. Ernst and Linsu Kim, Industry and Innovation, 9(2), pp. 183–202. State Government of Penang (2001) The Second Penang Strategic Development Plan, 2001–2010 (Penang, Malaysia, Government of Penang). Sturgeon, T. J. (2002) Modular production networks: a new American Model of Industrial organisation. Industrial and Corporate Change, 11, pp. 451–96.

230 Malaysia’s Prospects in the Electronics Industry Sturgeon, T. and Lester, R. K. (2003) ‘Upgrading East Asian Industries: New Challenges for Local Suppliers’, in S. Yusuf (ed.), Upgrading East Asia’s Industries, Vol. 2 (Oxford University Press). Takeuchi, J. (1993) ‘Foreign Direct Investment in ASEAN by Small- and Medium-Sized Japanese Companies and its Effects on Local Supporting Industries’, RIM Pacific Business and Industries, Centre for Pacific Business Studies, Tokyo, Sakura Institute of Research, IV(22). Takeuchi, J. (1997) ‘The New Industrialization Strategy of Malaysia as Envisioned in the Second Industrial Master Plan’, RIM Pacific Business and Industries, Center for Pacific Business Studies. Tokyo, Sakura Institute of Research, III(37). Too, T. and Leng, T. P. (2002) ‘Unemployment Situation in Penang’, Economic Briefing to the Penang State Government, 4(4) (Penang, Malaysia Socio-Economic & Environmental Research Institute (SERI)).

10 Asian Values, Malaysian Style: Imperatives for Building Cross-cultural Partnerships in Malaysia David Wong and Michael Yeoh

A key issue in the business and economic landscape of the early twenty-first century, coloured by globalization, is the gradual increase in partnerships between Asian businesses and their Western counterparts. The level, breadth and depth of Asian–Western1 business partnerships in the form of strategic alliances at the time of writing are, arguably, unprecedented. Fuelled by the rapid liberalization of markets – China’s entry into the World Trade Organisation (WTO) and the imminent establishment of the ASEAN Free Trade Area (AFTA), to name but two examples – it is evident that an everincreasing number of North American and European companies are jostling to establish alliances with Asian companies as a means of penetrating the lucrative markets of developing Asia. The dynamism and complexity of partnerships present immense opportunities for value-creation that are simply not available to companies that decide to go it alone. Being a close, long-term and mutually beneficial agreement between two or more partners in which resources, knowledge and capabilities are shared (Parkhe, 1993; Spekman et al., 1994), a partnership, more commonly known as an alliance, may take many legal and structural forms – for example, joint ventures, ad hoc organizations, consortiums, outsourcing agreements, co-branding and project-based collaborative agreements – and is established for the purpose of enhancing partners’ positions in the marketplace (for example, Borys and Jemison, 1989; Lorange et al., 1992; Pekar and Allio, 1994). However, the journey to a mutually profitable partnership can be an arduous and tortuous one, particularly in cross-cultural partnerships. The disparate cultures the partners bring into the partnership may breed conflict and distrust, particularly where the partners come from distinctly different cultural backgrounds such as Asian versus Western. Malaysia, with a business- and investor-friendly government, always opens its doors invitingly to foreign companies that aspire to set up 231

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partnerships with local firms. Since the Malaysian economy took off convincingly after the mid-1980s recession, and galvanized by the government’s privatization policy that began officially in 1983, corporate Malaysia has witnessed increasing participation of foreign companies in the local economy, in the form of partnerships or alliances with local firms. Among the more significant ones have included the partnerships Proton had with Mitsubishi and Citroën in the automotive industry, the partnerships between local private colleges with foreign universities in offering ‘twinned’ degree programmes, and the code-sharing agreements Malaysia Airlines holds at the time of writing with a number of foreign airlines. There have also been less significant and less conspicuous partnerships in industries such as manufacturing, finance and retail, where foreign multinationals have entered into partnerships with their local counterparts in one form or another, ranging from the most concrete and formally structured, such as joint ventures, to loose partnerships in the form of ad hoc distribution or marketing arrangements. Having recovered impressively from the Asian economic crisis that struck towards the end of the 1990s, Malaysia is poised to see such partnerships flourish even more in the near future as foreign companies jostle to take advantage of production costs that are relatively lower than in many Western economies, the abundant supply of skilled labour, political stability, investment security, an increasingly affluent market, and state-of-the-art infrastructure. Such promising propositions will undoubtedly create a unique set of problems, dilemmas and issues pertaining to the effective management of partnerships when cultures collide. It is therefore essential for Western executives and managers to be ‘culturally competent’ when intending to build partnerships with Malaysian counterparts so as to avoid conflicts resulting from cultural clashes that might spell the demise of otherwise potentially fruitful and rewarding ventures.

Asian values – myth or reality? One of the most intriguing questions that has often either been swept under the carpet for fear of its complexity, or dismissed altogether on grounds of irrelevance, is whether there exists such a thing as a uniform set of Asian values. Just what are Asian values? Are they Confucian values, or Islamic values? Are Asian values not also universal values? Many of the world’s great religions have Asian roots if one extends the definition of Asia to include the Middle East. In that case, Asia has not only given rise to Buddhism, Confucianism and Hinduism, but also to Christianity and Islam. And if religious values underpin societal values, then it is not unusual for many to deem some common religious values to be Asian values. Translated into the corporate world and management circles, Asian values manifest in such general traits as diligence, discipline, reciprocity, frugality and respect for

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authority, and such philosophies as the primacy of long-term growth, ownership control, sustainability, maintaining harmony and stability, fostering relationships, and helping one other to prosper (Yeoh, 1998a). The truth is, however, that, given the diversity of Asia, there is no single conclusive framework of values that can be described as being exclusively ‘Asian’. While there are strands of values, norms and beliefs that the majority of Asians adopt as their way of life, there is a profound lack of a systematic pattern or set of values that can be accurately ascribed to and generalized across nations in the entire continent. The evidence revealed in various works on the systematic differences in national cultures (see, for example, Hofstede, 1980; Trompenaars and Hampden-Turner, 1997; Tu, 1998; Backman and Butler, 2003) may provide a rough guide to cultural dimensions in Asia in general, but they are not broad enough to provide a more profound understanding of a particular Asian nation’s culture. In general, Hofstede’s (1980) pioneering research describes the majority of Asian nations as collectivists, feminine, and exhibiting high power distance and high uncertainty avoidance. But, on closer examination, cultural traits of individual countries within Asia may not concur with the general evidence found in the region as a whole. High uncertainty avoidance, for example, may not hold true in the commercial and secular-minded society of Hong Kong, where substantial risk-taking forms the bedrock of its fame as one of the premier financial hubs in East Asia. Similarly, Trompenaars and Hampden-Turner (1997) describe most Asian countries as having a neutral and diffuse culture. Again, on closer inspection of the data, it can be pinpointed that, along the cultural dimensions of the affective versus neutral and the specific versus diffuse alone, there are substantial differences among Asian countries. While the majority of employees in Hong Kong, China, Indonesia and India would not show emotions openly, and are thereby described as neutral, the majority of employees in Kuwait, Oman and Thailand would. And while the majority of people in Hong Kong and the Philippines, whose cultures are described as specific, disagree that staff accommodation is a company’s responsibility, the majority in China, Indonesia, South Korea and the United Arab Emirates (UAE) think otherwise. Backman and Butler’s (2003) comparison of the Asian employee and the Western expatriate similarly provides a useful guide to understanding the Asian culture in general, but one would require more detailed investigation into the cultures of individual Asian nations in order to ascertain the degree to which their respective cultures conform to, or diverge from, the cultural values generally ascribed to Asia. For example, while in general the Asian employee is seen as preferring little or no travel for business, changing demographics in the workplace and the infusion of Western influence in such rapidly-developing countries as South Korea, China and Malaysia have seen an increasing number of professionals begin to regard travelling on business as a norm. By the same token, Asia is simply too diverse to be

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described adequately as possessing any particular culture based on religion or religious influences. Just as Confucian values are regarded as an integral factor in the development of a less adversarial, less individualistic and less self-interested modern civilization in East Asia (Tu, 1998), the development of a similar kind of society in South East Asia – arguably a melting pot of diverse religions – is attributed to various factors, both religious and secular. As such, though it is widely accepted that there are broad similarities in the values to which many Asian countries subscribe, it may not be entirely accurate to call them ‘Asian’ values. Each nation within Asia possesses a culture that is generally ‘Asian’, and yet is distinct in the sense that each is a product of the interaction and integration, or to some extent assimilation, of unique sub-cultures within the nation.

Asian values, Malaysian style – Malaysian culture in management One of the major prerequisites for forming partnerships with Malaysian companies is to understand the Malaysian culture and how it manifests in corporate Malaysia. This is essential because, while the Malaysian culture possesses an array of norms and values that are largely similar to those in many other East Asian countries, there are certain distinct differences which, if overlooked by foreign partners, may result in misunderstandings that potentially will derail the partnership or alliance. Yeoh (1998b) suggests eight common Asian values in Malaysian society: ● ● ● ● ● ● ● ●

the importance of ‘face’ or maruah (dignity); orientation towards the community; loyalty to the community and to the family; social cohesion and harmony; emphasis on the middle way or the path of moderation; a strong work ethic and capacity for hard work; filial piety and respect for elders; and an emphasis on the importance of education.

The culture that is inherent in corporate Malaysia today corroborates most of the evidence found in the analyses of Hofstede (1980) and Trompenaars and Hampden-Turner (1997). Drawing on their frameworks of analysis, enriched and augmented with the authors’ first-hand experience in, and knowledge of, corporate Malaysia, the Malaysian culture can be mapped out as shown in Figure 10.1. Malaysians are largely particularists, as much greater attention is paid to the obligations of relationships and unique circumstances than in universalist cultures, where the focus is more on rules, and where there is always an absolute truth that applies to all. Similar to doing business in China, the emphasis on first establishing a relationship based on trust and confidence

David Wong and Michael Yeoh 235 Universalism

0 0 0 0 0 0

Individualism

0 0 0 0 0 0 0

0 0 0 0 0

Communitarianism/collectivism

Neutral

0 0 0 0

Specific

0 0 0 0 0 0

0 0 0

Diffuse

Achievement

0 0 0 0 0 0

0 0 0

Ascription

Internal control Emphasis on the past

0 0 0 0 0

Particularism

0 0 0 0 0 0 0 0 0 0 0 0

0 0 0 0 0 0

Low power distance

0 0 0 0 0 0 0 0

0

Low uncertainty avoidance

0 0 0 0 0 0 0

0 0

Masculine

0 0 0 0 0

0 0 0 0

Emotional

External control Emphasis on the future High power distance High uncertainty avoidance Feminine

Figure 10.1 An audit of the Malaysian culture based on cultural dimensions Source: Developed by Hofstede (1980); and Trompenaars and Hampden-Turner (1997).

is of paramount importance before pen is put to paper in any cross-cultural partnerships. The closing of deals will have to be built on the foundations of trust laid through the establishment of understanding and rapport-building. However, building relationships to excess is not necessary, as this may at best yield indifferent results or at worst create an impression that the prospective foreign partner is suggesting a bribe. Malaysians also do not fully subscribe to the belief that there is a universal truth in every situation, yet deviation from the apparent ‘truth’ is frowned upon. For Malaysians there are always different perspectives on reality, depending on one’s environment and epistemological viewpoint, resulting in the possibility of doing things differently. One notable example is the unorthodox manner in which Malaysia has ridden out the Asian economic crisis. Selective capital controls and the imposition of a fixed exchange rate were certainly not the universalist approach preached by many Western economists at that time. While it has often been argued that individualism characterizes a modernizing society, Malaysia’s rapid development has hitherto defied this popular belief. Compared to a society where the individual comes before the community, Malaysians are, by and large, community-orientated and regard themselves primarily as part of a group, thus concurring with the findings in many studies (for example, Hofstede, 1980; Hui and Triandis, 1986; Markus and Kitayama, 1991; Trompenaars and Hampden-Turner, 1997). For Malaysians, the concept of ‘face’ or dignity is of paramount importance, and public reproach brings utter shame and humiliation. As such, there is a strong sense of social sensitivity which makes Malaysians, in general, want to incorporate the views and opinions of the larger community before making crucial decisions. This translates into the more frequent use of ‘we’ instead of ‘I’ even in corporate circles, and often decisions are not made alone but rather after consultation among the members of top management. Achieving consensus is regarded as a highly important virtue in Malaysian

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management, from the highest echelons in Government down to the small and medium-scale enterprises. Malaysians are generally moderate in showing emotion in public, particularly in the workplace. While the most conspicuous display of emotions may manifest in peaceful union pickets or street demonstrations, most Malaysian individuals are discreet in revealing their true feelings and deepest thoughts – including grievances, offences and jubilation – with each other in the workplace, apart from with the closest confidantes. Bringing this into a cross-cultural partnership scenario, it is likely that a Malaysian partner who is offended by an insensitive foreign counterpart will not openly express his or her displeasure, apart from voicing a gentle and, at times subtle, rebuke. While in many specific-orientated cultures a manager or leader clearly demarcates the relationship he or she has with a subordinate, and insulates this from other interactions or dealings, such relationship has a blurred demarcation in the Malaysian context. A Malaysian manager who happens to meet one of his office clerks at a private function would, more often than not, expect to be greeted and dealt with no differently than he would in the office. The superior–subordinate relationship permeates all other areas of life. Western businesspeople who try to relate to a very prominent Malaysian corporate figure in a restaurant as they would to a home-country counterpart in a pub may be deemed disrespectful. How status is accorded in Malaysia is perhaps one of the defining characteristics of an ascription culture. Although justice will not be done without underscoring the fact that what a person achieves through his or her own ability is crucial in determining the climb up the corporate and societal ladder, there is a substantial extent to which people are ascribed a status based on several factors, including race, social connections, education and age. As a result of the affirmative action implemented by the Government since 1970 by means of some form of social contract, Bumiputera or ‘sons of the soil’ are given certain special privileges, including the ownership of equity stakes, contracts for government projects, and important positions in both the government and corporate Malaysia.2 It is also alleged that social connections and political patronage have a role to play in determining a person’s status in corporate circles (Gomez and Jomo, 1999). While self-made business people with little or no higher education could hit the jackpot purely through hard work and personal ability during the infant years of the Malaysian economy, changing demographics at the time of writing dictate that, to ‘make it big’, a person almost certainly needs to possess a university degree. By and large, both in the private and public sectors, members of top management and the leadership in Malaysia are made up of people who are middle-aged and above, unlike those in the savvy new-economy firms. In the typical Malaysian family businesses, people are employed not primarily because they are the most competent or best qualified for the job but merely because of blood a relationship or by virtue of locality (Lee, 2001).

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The Malaysian culture is one that is externally-orientated in that the majority believes it is pivotal to live in harmony with nature and to go along with its laws, directions and forces. Asma (1996) describes this orientation as one that tends to promote a healthy co-existence with people around, and a willingness to accept things as they are. While cultures with an internal locus of control always strive to take control of their own fate and make what they aspire to happen, most Malaysians adopt a flexible attitude, are willing to compromise and keep the peace, and would focus on helping to make their neighbours prosperous – very much in tandem with the traits of a collectivist society. The Malaysian culture is also one that is moderate with regard to timeorientation. While taking pride in the rich history of the nation and its many achievements since securing independence from British rule, Malaysians are seldom preoccupied with past glories, but are focused on working in the present to attain the aspired-to future. This can be attributed primarily to the national vision, namely Vision 2020, that permeates the activities of the entire nation and is indeed the goal that Malaysians strive to attain. As such, it is unlikely that foreign businesspeople will find their Malaysian counterparts harping on about past glories or day-dreaming of future aspirations that are beyond reach. At the same time, Malaysian companies also place great emphasis on the long term, and particularly so after learning the lessons of the Asian crisis. However, this does not preclude them from planning for the short term, albeit it is likely to be done with the longer-term goals in mind. It should not be a surprise, therefore, for Western partners to find their Malaysian counterparts willing to forgo quick profits in the short term for more sustainable and rewarding results in the long term. Malaysian society is one where power distance arguably is high. While it may raise a few eyebrows, given that Malaysia is seen as a fast-developing nation embracing capitalist and market-orientated principles, the unequal distribution of power is seen as a natural situation, and not improper. Hierarchical relationships are very much the order of the day, and long and multi-layered hierarchies are largely accepted as the norm, the only exception being seen in Western multinational corporations. Not incompatible with the collectivist and externally-oriented culture that exists in Malaysia, the acceptance of unequal and at times authoritarian relationships between manager and the subordinate, and between the old and the young is a defining hallmark of Malaysians, for whom keeping the peace for the greater good of the masses, and respect for authority and ones elders are ingrained in their everyday lives. Very often, in typical Malaysian-owned companies staffed mainly or completely by Malaysians, viewpoints or ideas that are contradictory to those held by the boss or senior members of the management are withheld, and, as Asma (1996) points out, if expressed at all this will be done cautiously or indirectly. This often leads to situations where ‘groupthink’ occurs in meetings and discussions. Confrontational behaviour

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goes against societal norms, and rather than suffer the indignity of being labelled a black sheep a person would concur with the majority even if the opinion or decision belied his or her own convictions. Malaysians are generally a risk-averse society, where prudence and caution are always exercised in decision-making. In the workplace, the majority of Malaysian employees would prefer a job with clear task descriptions and unambiguous instructions. In other words, most Malaysians would prefer to avoid uncertainty under any reasonable circumstances. This, however, does not mean that they do not have a proactive attitude or lack the initiative to work independently. But, when faced with a reasonably huge task or project where much is at stake, most Malaysians would prefer to ‘play it safe’ for fear of possible negative repercussions from their decisions or initiatives. To a certain extent, this has manifested itself in a relative lack of world-class innovation emerging from Malaysia, very few Malaysian companies venturing abroad extensively, and the relatively slower growth of capital markets and the investment banking industry as compared to those in such Asian economies as Japan, Hong Kong, South Korea and Singapore. When it comes to the dimension of masculinity versus femininity in Malaysian culture, most Malaysians can be described as moderate. While displaying a healthy amount of aggression in achieving results and objectives, they are equally adept at the softer aspects of work such as human relations, interpersonal relationships, welfare and quality of life.

A hypothetical example of Malaysian culture in management The following hypothetical example brings the pieces together and provides a reader’s digest of the dimensions of Malaysian culture as explored above, with the manifestation of those cultural traits given in parentheses. A Malaysian telco has entered into negotiations with an American telco with the view of forming a strategic alliance to capture a niche in the Malaysian market. The American partner, with the belief that capitalist principles and market mechanisms are the ideals of the global telecommunications industry, discovers that the Malaysian telecommunications industry is still very much regulated by the government, which believes that a gradual liberalization of the industry is more suited to the local market and the Malaysian economy (particularism). When negotiations are under way, the team of American senior managers discovers that it is extremely difficult to get their Malaysian counterparts to commit to several concrete agreements in the first few meetings. The Malaysian senior managers are keen first to get to know their American counterparts better, often inviting them to tea and asking questions that appear irrelevant to the deal (particularism). Almost none of the proposals discussed receive any concrete feedback from the Malaysians, who will each time promise to report back to their American counterparts once they have

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brought the matter up for discussion in their bi-weekly top management committee meeting (collectivism). In further high-level meetings, where the chairmen of the two parties are present, the Americans are subtly surprised to discover that the Malaysian chairman, a Bumiputera honoured with the title Tan Sri by the King, has been appointed to his position by the board in order to fulfil certain requirements under government policies (ascription). Later, in an up-market restaurant, a mid-level manager from the American telco is enjoying a private dinner with several Malaysian friends. He then happens to see the chairman of the Malaysian partner company arriving with his wife, and naturally greets him with a slap on the back as he would when meeting his own chairman on private occasions. However, unlike his own chairman, the Tan Sri immediately gives him a grim and stern look signalling disapproval at such a cordial and informal manner of greeting (diffuseness), but stops short of making a verbal rebuke (neutral). Back at the negotiation table, the American partners often hear from their Malaysian counterparts about the need, in whatever strategic decisions they take, for the company to champion the advancement of the telecommunications industry in line with the nation’s Vision 2020, and focus on longterm profits even if it means sacrifice in the short term (time-orientation). At one juncture, a Malaysian manager voices his concerns and reservations about a particular marketing strategy suggested by the Americans, but in subsequent discussions agrees to the idea as a result of his chairman and CEO backing the idea (high power distance and external-orientation). As the two parties enter the final stages of negotiations, the Malaysians decide to drop one of the proposed market segments because of the high risks involved in venturing into such an untried and untested niche, and further insist on a clear delineation of duties and roles (high uncertainty avoidance). When the deal is finally sealed and operation of the alliance begins, the American partner discovers that the gung-ho attitude and hunger for results the Americans expected of the employees of the Malaysian partners are not up to the desired level. Instead, what they see is an equal emphasis on human resource development, employee welfare and building strong and peaceful human relations being placed alongside the need for achieving results (moderate masculinity–femininity).

The challenge of managing cross-cultural partnerships – potential cultural flashpoints A partnership between typical Malaysian and Western companies will undoubtedly be a journey of discovery. The cultural differences between the two are stark, and if not mitigated by building cross-cultural competence, the chances of the partnership floundering will be just as high as it flourishing. In partnership negotiations, Western businesspeople often find their Asian counterparts guided by assumptions and priorities that are very

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different from those inherent in negotiations with their compatriots (Paik and Tung, 1999). The same occurs when prospective Western partners fail to understand the embedded traits of the Malaysian culture and therefore struggle in an intricate web of confusion when dealing with Malaysians. Again, by adopting the framework of analysis discussed above, an audit of Western cultures in general reveals that they are: ● ● ● ● ● ● ● ● ● ●

universalist; individualistic; moderately neutral; specific; achievement-orientated; internally-controlled; mixed and intertwined in time-orientation; masculine; low in power distance; and low in uncertainty avoidance.

It must be qualified, however, by saying that the above traits are merely a generalization of Western cultures for the purpose of comparing Malaysian and Western cultures. Inasmuch as ‘Asian values’ is a fuzzy term to which no concrete framework of values can be ascribed as being truly Asian, there are tremendous variations among Western nations too, on any given cultural dimension (see Hofstede, 1980; Trompenaars and Hampden-Turner, 1997). For example, while the Americans and the British are risk-takers, the French, Belgians and Greeks are rather conservative. While the Americans and the British are moderately neutral, as half of them would not show emotions openly at work, the majority of Russians, French, Irish and Swiss would. And in contrast to the Americans and the British, who are highly individualistic and masculine, the Germans and the Scandinavians score closer to the other end of the continuum. However, apart from certain variations among individual countries or regions, most Western cultures approximately match the cultural dimensions described above. Based on the audit of the Malaysian culture and the assessment of Western cultures in general, a partnership between the companies from the two cultures may encounter some possible flashpoints when the following assumptions come into play.

Rules and relationships Many Western companies assume that there is only one universal way of doing things, and only one truth, and, as such, the partnership ought to abide by these tried-and-tested rules of the game. In contrast, Malaysian companies may have their own interpretations of ‘rules’ based on unique local conditions, circumstances, racial composition and the need for sustainable development, thus giving rise to what is known as the ‘Malaysian

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way’. For Western companies, legal contracts are readily drawn up to facilitate speedy and swift negotiations, and most Western executives will go straight to the point. Failure to understand that Malaysians appreciate the building up of confidence and trust by getting to know each other better may consign a partnership potentially to a bad start. Good, healthy and constructive relationships are just as important as contracts in the Malaysian context.

The individual and the group While Western companies tend to focus on individual efforts, reward individual contributions and take pride in individual accomplishments, Malaysians, being a collectivist society, often assume joint responsibility and achieve in groups. However, Western companies will do well to remember that an interesting change in the Malaysian workforce has seen increasing numbers of younger people appreciating being recognized for individual accomplishments. Nevertheless, on the whole, Malaysians often make decisions based on consensus, and major decisions are usually referred to senior management for consultation. This may irk certain Western executives, who are used to being empowered with individual authority to make quick and informed decisions, and are also thereby individually responsible for the consequences of their decisions.

Involvement and roles In most Western cultures, the superior–subordinate relationship is only as valid is in the work place. Should the boss and his/her subordinate meet in the local pub, both usually behave as though they are equals. There is, in other words, a clear demarcation of roles, and of the places where these roles are relevant. In Malaysia, however, most subordinates would still regard the boss as their superior, whether they are in the office or at a social occasion. Though they may be business partners, a mid-level Western executive may incur the displeasure of a prominent Malaysian chief executive should the former treat the latter as an equal, even on private occasions.

Status While most Western cultures subscribe to the belief that who and where you are are the result of your own efforts and achievement, because of the need for social re-engineering the context of meritocracy in Malaysia may not be what is expected by the West. Failure to understand that Bumiputera are accorded special privileges in certain aspects of the economy and the corporate sector may result in disenchantment. It is also not unusual for the best, brightest and most able people, regardless of their age, to assume top managerial positions in many Western companies, but to put a young person at the helm of a prominent Malaysian company may upset many of the old guard, who would invariably feel threatened.

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Planning, implementation and control Proactive optimism is one of the hallmarks of many Western companies, believing ‘if there’s a will, there’s a way’. Proper planning, organization and control are complemented by strong leadership to effect the desired results. Management by objectives is a norm, and at times the ends justify the means. Like a well-oiled machine, orientation is towards tasks, efficiency and effectiveness. Great importance is accorded to the setting of priorities and adherence to tight agendas. Emphasis is also placed on breaking a mammoth task into smaller components for analysis and completion. Although many Malaysian companies are increasingly adopting such meticulous and well thought out planning, implementation and control systems, two attributes stand out as being typically Malaysian, namely flexibility and the willingness to compromise. A detour in the implementation of a plan may be deemed necessary, even though half the journey has already been travelled. Certain Malaysian companies are also flexible in implementing late changes to be responsive to the environment. Given that Malaysians are generally peaceful people and place importance on keeping the peace, compromises along the way should not come as a surprise if this means generating a greater good for the masses.

Focus on results and time horizons Many Western companies are results-driven, thereby creating a strong emphasis on financial results – be it turnover targets, profit targets, share price, shareholder value, or return on investment – and the aggressive removal of obstacles that stand in the way of achieving the desired targets. Most Western companies also place a great deal of emphasis on quick returns in the short term. While results are just as important to Malaysian companies, substantial emphasis is also accorded to building relationships, achieving non-pecuniary targets such as goodwill, and holistic development. Most Malaysian companies prefer to achieve sustainable long-term growth while at the same time balancing short-term requirements.

Hierarchies and protocol Hierarchies are flatter in many Western companies than in Malaysian companies, and the emphasis on team-based structures appears to be more popular in the West, whereas functional structures are still very evident in Malaysia. Western companies are also less formal, and protocols are few and far between. Informal forms of address on a first-name basis transcend hierarchical levels, and this tends to promote equality across all sections of employees, and facilitating unbridled communication. Given that power distance in Malaysia is substantially high, any perceived inequality in power distribution and in these norms of protocols are viewed as normal. Individuals and politicians who have been awarded titles by Royalty expect

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to be addressed by the titles, failing which some of them – particularly politicians and those holding important government positions – may be profoundly displeased. Given the variations in the many titles conferred in Malaysia, it is deemed important, in written communication, to get the spelling of the titles impeccably precise. Respect for and loyalty to elders, superiors and those in authority is considered a virtue in Malaysian society.

Opinion voicing Individuals in Western companies are expected to be vocal, and to freely express their ideas verbally in order to demonstrate competence in thinking and reasoning. It is not unusual to speak out assertively with superiors, and to challenge the existing norms and work methods with a view to improving them. Were this to happen in the Malaysian context, it would almost certainly be regarded as rude and disrespectful to those in senior positions. Malaysians tend to be more accommodative and compromising when voicing opinions. To a certain extent, many are shy to challenge the status quo, thus reinforcing the power distance that already exists. Western executives in business partnership with Malaysians will almost certainly find this hard to swallow, as many regard it as tantamount to mediocrity and incompetence. Conflicts may occur when Western executives fail to tolerate the Malaysian ‘groupthink’ mentality. Furthermore, when disagreeing, Malaysians often prefer a non-confrontational approach, purportedly to save face and to keep the peace.

Concision and brevity While Western executives would prefer to go straight to the point in bringing something to light, their Malaysian counterparts may sometimes take much longer to arrive at the same point. By and large, such ‘spinning’ is regarded as a diplomatic way of conveying a message, particularly when the message may not be to the listener’s liking. At times, in cross-cultural partnerships, this may cause impatience on the part of Westerners.

Improving the odds of success Cultural mismatch as a result of cross-cultural incompetence has long been acknowledged as a major factor in the failure of cross-cultural partnerships and alliances. One study reveals that five of the most frequently cited reasons for alliance failure are each a direct consequence of cultural mismatch (Spekman, 2000). There have been too many horror stories told of cross-cultural incompetence contributing to the collapse of major cross-border ventures. Within Western cultures themselves, Unidata, a high-profile alliance of Dutch, German and French computer producers involving many multi-cultural businesses and technical teams, is a dramatic example. After several years of

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acrimonious in-fighting, the entire venture was dissolved without launching a single product. Another such failure was the aborted joint venture of Siemens and Westinghouse, which did not survived its protracted initial negotiations because of some cross-cultural misunderstanding and friction. A memorable case in the automobile industry was the collapse of the proposed merger of Renault and Volvo, apparently because of ‘overwhelming cultural differences’. And in the problematic General Motors–Daewoo alliance in the 1980s, the clash of Western–Asian cultures was one of the many reasons for its failure. Negative images of American businesspeople in eleven countries are welldocumented in an article carried in the 10 March 1997 issue of Forbes. A Colombian executive remarked, ‘What drives me crazy is the American need for information – right now! Americans are too straightforward, too direct.’ The senior vice-president of a Japanese company adds, ‘We would do more business with Americans if there was more consistency, more trust.’ Taking cognisance of this in the context of a Malaysian–Western business partnership, this is not to suggest that cultural differences will certainly doom a prospective partnership. The chances of partnership success will be greater when leaders on both sides manage the partnership in the context of each other’s cultural differences, seeking ways to create value from complementary differences and reduce the impact of differences that impede the venture. In attempting to build cross-cultural competence, and thereby improve the odds of success, when forming partnerships with Malaysian companies it is suggested that Western executives attempt to do so from both macro and micro perspectives.

Macro perspectives Building trust by first building relationships Building trust is pivotal to successful partnerships, particularly in a crosscultural setting. One needs to remember that, not too long ago, Malaysian Chinese entrepreneurs used to do business and formalize business arrangements with just a handshake, without reams of contracts or legal documentation, such was the element of trust in those days in building relationships. Significantly, in forging international or cross-cultural partnerships or joint ventures, by identifying whether trust is strong or weak in the relationship one can obtain an indication of the possible future outcomes of that venture. There are several areas where trust needs to be established. One is in the sharing of information and the communication channels to be adopted. In the past, some Malaysian Chinese businesses adopted two sets of books. Trust is vital in gaining the right financial information as well as other relevant management information. Second, trust is also essential in determining the amount of management co-ordination, monitoring and

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surveillance of the venture. Third, trust is also essential in any informal arrangements the partners may agree upon without formal contracts being signed. Studies have discovered that the lack of trust is one of the biggest impediments to cross-cultural partnerships and communication (see, for example, Huemer, 1998; Grosse, 2000). The building of trust and a common understanding will therefore be at the heart of effective cross-cultural ventures, and most Western partners strive very hard to build that trust when establishing business ventures in Asia. In Malaysia, as in most Asian cultures, trust often comes through the building of strong and constructive relationships, which foster richer social interactions and help to dissolve crosscultural barriers. Rushing into contractual formalities as a basis of cementing trust rarely works where the Malaysian context is concerned. To understand the underlying assumptions of the Malaysian culture and how its dimensions have an impact on the way things are done require the building of rapport and informal networks with the Malaysian partners, particularly so when Malaysians have their own means of achieving the same ends. This calls for the Western partners to avoid blindly imposing their own methods on their Malaysian counterparts lest problems arise, and frustration and resentment occur in much the same way as described by Kras (1995) in her account of Americans imposing their methods on Mexicans. Spending time on building relationships before getting down to the serious details of business is essential. So Western partners should not regard seemingly irrelevant casual conversations as small talk, or various invitations to tea as a waste of time. They should also bear in mind that there are multiple ways of looking at a problem and getting it solved.

Cross-cultural research and training It is essential for prospective Western partners to first conduct a detailed and meticulous audit of the Malaysian culture before attempting to begin any negotiations. It is insufficient merely to research the various dimensions inherent in the Malaysian culture as a whole; it is also imperative to audit the specific attributes of Malaysian culture in a given industry. The demography of Malaysian employees and management may vary across industries. A Malaysian consulting firm with global operations, for example, may adopt a culture that is remarkably different from a local-based fast-moving consumer goods (FMCG) retailer, albeit the larger Malaysian culture is inherent in both. Defining the cultural differences upon discovery is another crucial imperative if Western partners are to address potential flashpoints with pinpoint accuracy before they surface. Western partners should seriously consider providing their executives with appropriate training in inter-cultural business knowledge and skills, with a focus on the Malaysian context in particular. The shaping of appropriate attitudes regarding the Malaysian context through training can help

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them to avoid the kind of pitfalls that have previously ensnared culturally incompetent Western executives. Studies have shown that cross-cultural training for Western business people will have beneficial consequences for the company, individuals, and the members of the host country who will come into contact with the executive and his or her family (Bhagat and Prien, 1996), and that the level of inter-cultural sensitivity is seen as a function of biographical factors and cross-cultural training (Kaye and Taylor, 1997).

Adaptation An adaptive approach assumes that the more similar Westerners’ behaviour is to that of the Malaysians, the more acceptable Westerners will be. Adaptation is therefore expected to lower the risk of inappropriate behaviour and misunderstandings. Pornpitakpan (2003) contends that the more Americans adapt to Malaysians, the more favourable will the responses be from the latter. High adaptation may be viewed by the collectivist Malaysians as showing respect, readiness and eagerness to fit in with the local culture. As such, Western partners are encouraged to adopt Malaysian cultural norms and values when doing business on Malaysian soil. Taking a cue from the proverb ‘When in Rome do as the Romans do’, blending into the Malaysian way of life may not only endear Westerners to their Malaysian partners but will also impress the locals. However, it must be emphasized that the attempt to adapt to the Malaysian culture essentially involves first an audit of that culture – without which one would not know what the norms and values to adapt to are – and it is part and parcel of the building of relationships and trust.

Building a third or alternative culture The building of a third or alternative culture complements the three approaches above and is indeed a useful approach to managing cross-cultural partnerships, particularly when the cultural gap between the Western and Malaysian partners is simply too large. To avoid possible conflicts arising from one partner attempting to impose its own cultural values on the other, a third or alternative culture provides a platform for leveraging on common grounds and complementarities. An alternative culture involves the bridging and transcending of the two distinct cultures (Graen and Wakabayashi, 1994). In cross-cultural partnerships, it is important that one culture does not dominate the other, and a third culture is not a set of compromises but a fundamentally new way of thinking and getting things done that is not incompatible with each of the original cultures, but at the same time transcends the dogmas of the original cultures that may well weigh the partnership down. However, building a third culture has its own drawbacks, as it is not entirely feasible to build one where partnership entails a very loose alliance, such as co-branding or marketing arrangements. It is most useful when a partnership appears in more concrete and structured forms, such as joint

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ventures and spin-off consortiums, as such forms would allow for the creation of substantially autonomous entities each with its own workforce and business strategy. In building a third culture in Western–Malaysian partnerships, partners should find ways to emerge with organizational practices and management techniques that are amenable to both cultures. Western partners may consider building some collectivist components into the work structure and superior–subordinate relationships, making instructions clear as to how to avoid uncertainty and ambiguity, and structuring remuneration to include both performance-based and conventional rewards. At the same time, where appropriate and acceptable, Western partners may introduce approved practices and time-tested Western management principles, including the substantial empowerment of employees, freedom to voice opinions and challenge ideas, determination to achieve results, and increased individual responsibilities. While keeping in mind that Malaysians hate to lose face, the third culture can begin to introduce a system of honest appraisal based on a mentor–mentee approach. Corporate reward systems that promote group and team achievements as well as individual accomplishments can be established through a third-culture platform. Only in a transcending third culture, which is essentially a synthesized culture harmonizing elements from the original Western and Malaysian cultures, will there be ample room for the simultaneous introduction of Western good practice and the incorporation of local values that will work in synergy to effect performance improvement.

Micro perspectives Micro perspectives that Western partners should take heed of when attempting to build inter-cultural competence in Malaysia are many and varied. Below are some example micro perspectives that may be useful for prospective Western partners doing business with Malaysians in Malaysia.

Rivalry among individuals Hofstede (1993) notes that the characteristics of most Western cultures are supportive of the market philosophy where the ideal principle of control in organizations is competition among individuals. Although this may be successful in bringing out the best from individuals in the West, it is important to remember that, in a collectivist culture such as Malaysia’s, rivalry among individuals is not very popular, and Malaysians tend to favour achieving in groups rather than outwitting their neighbours.

Heaping praise Singling out employees for special praise in recognition of their individual accomplishments may backfire. In a rather conservative and collectivist

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society, this may be interpreted wrongly as a subtle attack on the other ‘nonperforming’ staff. Congratulations and acknowledgements may be better directed to the team as a whole, while subsequently admonishing the nonperforming in the team in private.

Losing face Chastising a Malaysian in public is a definite risk area for Westerners. Given that face or dignity is extremely pivotal to Malaysians, it is important for Western partners to realize that admonishments or reprimands should always be done in private.

Body language As Malaysians are rather neutral and shy in expressing emotions at the workplace, Western partners may not be able to read their Malaysian counterparts’ reactions or perceptions with any accuracy. Body language may therefore be instrumental in providing clues for the Western executives where verbal signals are of no help. Malaysians’ body language is rather clear; if they smile it simply means they are happy, and if they shake your hand firmly you can be sure they hold you in good esteem.

Unpleasant messages and whistle-blowing When Western executives intend to point out a certain mistake by the most senior or older members of Malaysian management, they ought to remember that this should not be done directly and personally. They should instead look for a third party, preferably a senior management peer, to intervene or provide such feedback.

Religious sensitivity Given that Malaysia is a multi-ethnic and multi-religious nation, Western partners are advised to inculcate religious sensitivity when dealing with Malaysians. It is imperative for Western partners, through research, to identify various religious requirements observed by the Malaysian partners with whom they deal. It should not be a surprise to find Malaysian Muslims who are working long hours or on late shifts during the fasting month of Ramadan requesting time off to break their fast, or to be allowed to leave the office earlier than usual. In corporate banquets or parties, it is essential to remember that beef should not be served to Malaysian Indians, who are Hindus, while the Muslims will be mindful of whether the food served is halal.

Manners and greetings Western executives should at all times bear in mind that most senior Malaysian counterparts – and more so for those in important government positions – prefer to be addressed formally and complete with their titles.

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Touching, hugging and embracing are certainly out of bounds, particularly with members of the opposite sex.

Conclusion It is imperative for prospective Western partners to build and develop crosscultural competence when attempting to establish partnerships with Malaysian companies. Although most cultural norms and values that are found across Asia are inherent in the Malaysian culture, a thorough understanding of the unique underlying assumptions and specific characteristics of the Malaysian culture is essential if Western partners wish to avoid potential cultural flashpoints that may derail what would otherwise be successful partnerships. Three key elements in cross-cultural partnerships or joint ventures are mutual trust, open co-operation and reciprocity. Although managing crosscultural aspects is an essential factor in forging successful partnerships, in the final analysis, what also matters is that a successful partnership requires the following key factors: ●

● ●

●

clear objectives laid out for all parties and agreement reached on the objectives and goals of the partnership or joint venture entity; agreement in advance on how the partnership is going to be run; careful and meticulous planning regarding who is going to manage the partnership; and prior agreement on how to resolve conflicts and disagreements.

With a clear focus on these four key success factors and cross-cultural aspects, Western businesspeople will be better equipped to forge fruitful partnerships or alliances in Malaysia.

Notes 1 ‘Western’ in this context is generalized to include nations in North America and Europe. 2 The deteriorating socio-economic and political situation in the 1960s was seen primarily in and interpreted in ethnic terms. Income inequalities were huge and poverty was rife among the Malays, also known as Bumiputera. Beginning with the New Economic Policy in 1970, the Government of Malaysia embarked on a systematic social re-engineering policy to eradicate poverty, and restructure society to eliminate the identification of race with economic function. One of the central objectives of the policy, which was followed subsequently by the National Development Policy in the 1990s and the National Vision Policy since 2000, was to improve Bumiputera wealth ownership. The explicit target was for Bumiputera to own at least 30 per cent of the total commercial and industrial activities in all categories and levels of operation. Restructuring efforts have since focused on, among other aspects, increasing the share of Bumiputera capital and expanding and consolidating a class of Malay capitalist through special privileges, including

250 Asian Values, Malaysian Style contracts and reserved equity stakes in companies. For a more comprehensive account of these policies, see Jomo (1986), Jesudason (1989), Brown (1993), Jomo and Edwards (1993), Rasiah (1995) and Rasiah and Shari (2001).

References Asma, A. (1996) Going Glocal – Cultural Dimensions in Malaysian Management (Kuala Lumpur: Malaysian Institute of Management). Backman, M. and Butler, C. (2003) Big in Asia – 25 Strategies for Business Success (Basingstoke, Palgrave). Bhagat, R. S. and Prien, K. O. (1996) ‘Cross-cultural Training in Organizational Contexts’, in D. Landis and R. S. Bhagat (eds), Handbook of Intercultural Training, 2nd edn (Thousand Oaks, Calif., Sage). Borys, B. and Jemison, D. B. (1989) ‘Hybrid Arrangements as Strategic Alliances: Theoretical Issues and Organizational Combinations’, Academy of Management Review, 14, pp. 234–49. Brown, J. (1993) The Role of the State in Economic Development: Theory, the East Asian Experience, and the Malaysian Case, Economic Staff Paper No. 52, Asian Development Bank, Manila, The Philippines. Gomez, E. T. and Jomo, K. S. (1999) Malaysia’s Political Economy: Politics, Patronage and Profits (Cambridge University Press). Graen, G. B. and Wakabayashi, M. (1994) ‘Cross-cultural Leadership Making: Bridging American and Japanese Diversity for Team Advantage’, in H. C. Triandis, M. D. Dunnette and L. M. Hough (eds), Handbook of Industrial and Organizational Psychology, Vol. 4 (New York, Consulting Psychologist Press). Grosse, R. E. (ed.) (2000) Thunderbird on Global Business Strategy (New York, John Wiley). Hofstede, G. (1980) Culture’s Consequences: International Differences in Work-Related Values (Bevely Hills, Calif., Sage). Hofstede, G. (1993) ‘Cultural Constraints in Management Theories’, The Academy of Management Executive, 7(1) pp. 81–94. Huemer, L. (1998) Trust in Business Relations: Economic Logic or Social Interaction? (Umeå, Borea Bokförlag). Hui, C. and Triandis, H. C. (1986) ‘Individualism–Collectivism: A Study of Crosscultural Researchers’, Journal of Cross-Cultural Psychology, 17, pp. 225–48. Jesudason, J. V. (1989) Ethnicity and the Economy: The State, Chinese Business and Multinationals in Malaysia (Singapore: Oxford University Press). Jomo, K. S. (1986) A Question of Class: Capital, the State and Uneven Development in Malaya (Singapore: Oxford University Press). Jomo, K. S. and Edwards, C. (1993) ‘Malaysian Industrialisation in Historical Perspective’, in K. S. Jomo (ed.), Industrialising Malaysia: Policy, Performance, Prospects (London, Routledge). Kaye, M. and Taylor, W. G. K. (1997) ‘Expatriate Culture Shock in China: A Study in the Beijing Hotel Industry’, Journal of Managerial Psychology, 12(8), pp. 496–510. Kras, E. S. (1995) Management in Two Cultures: Bridging the Gap between U.S. & Mexican Managers (Yarmouth, Me.: Intercultural Press). Lee, P. P. (2001), ‘Family business and modernisation’, The Star, 9 April. Lorange, P., Roos, J. and Bronn, P. (1992) ‘Building Successful Strategic Alliances’, Long Range Planning, 25(6), pp. 10–17.

David Wong and Michael Yeoh 251 Markus, H. R. and Kitayama, S. (1991) ‘Culture and the Self: Implications for Cognition, Emotion and Motivation’, Psychological Review, 98(2), pp. 224–53. Paik, Y. and Tung, R. (1999) ‘Negotiating with East Asians: How to Attain “Win–Win” outcomes’, Management International Review, 39(2), pp. 103–22. Parkhe, A. (1993) ‘Strategic Alliance Structuring: A Game Theoretic and Transaction Cost Examination of Inter-firm Cooperation’, Academy of Management Journal, 36, pp. 794–829. Pekar, P. and Allio, R. (1994) ‘Making Alliances Work – Guidelines for Success’, Long Range Planning, 27(4), pp. 54–65. Pornpitakpan, C. (2003) ‘Cultural Adaptation and Business Relationships: Americans Selling to Indonesians, Malaysians, and People’s Republic of China Chinese’, Journal of Global Marketing, 16(3), pp. 75–104. Rasiah, R. (1995) Foreign Capital and Industrialisation in Malaysia (London, St. Martin’s Press). Rasiah, R. and Shari, I. (2001) ‘Market, Government and Malaysia’s New Economic Policy’, Cambridge Journal of Economics, 25, pp. 57–78. Spekman, R. E. (2000) Alliance Competence (New York: John Wiley). Spekman, R. E., Isabella, L., MacAvoy, T. and Forbes, T. (1994) ‘Strategic Alliances: A View from the Past and a Look to the Future’, in J. Sheth and A. Parvatiyar (eds), Relationship Marketing: Theory, Methods and Applications (Atlanta, Ga: Emory University). Trompenaars, F. and Hampden-Turner, C. (1997) Riding the Waves of Culture: Understanding Cultural Diversity in Business (London, Nicholas Brealey). Tu, W. (1998) ‘Confucian Values in East Asian Modernity: Implications for Global Partnership’, Paper presented at the Hong Kong Economic Forum, Hong Kong SAR, 29 June 1998. Yeoh, M. (1998a) Management Challenges for Malaysian Companies (Petaling Jaya Malaysia, Pelanduk). Yeoh, M. (1998b) ‘Asian Values and Global Prosperity’, Paper presented at the Hong Kong Economic Forum, Hong Kong SAR, 29 June 1998.

11 Focus on China: New Challenges for Japanese–German Strategic Business Alliances in a Dynamic Environment: A Theoretical View of Third-market Business Collaboration René Haak

Introduction At the end of the nineteenth century and beginning of the twentieth century, economic activity became increasingly internationalized, and after the end of the Second World War this process accelerated. In particular, the last two decades of the twentieth century saw some dramatic turning points and far-reaching changes in the business environment that have had a lasting effect on the way business is done. The establishment of new dynamic businesses in fast-developing nations such as South Korea, Taiwan, Hong Kong and Singapore, together with the increasing presence of businesses operating on a global basis from Japan, Germany and other Western industrialized countries are examples of the rapid changes the business world has undergone in recent years. The collapse of the planned economies in Eastern Europe, the economic realignment of the Chinese Republic, and the evolution and consolidation of large unified economic entities such as the European Union (EU), the North American Free Trade Agreement (NAFTA) and the Association of South East Asian Nations (ASEAN) states have all drawn new features on the economic map of the world. Key words such as internationalization, globalization and inter-culturality now characterize this development, which is challenging management to maintain or gain a competitive advantage. It makes demands on the strategies and organizational concepts of international companies, but also offers numerous opportunities for entrepreneurial creativity (Fieten et al., 1997). The increasing speed of globalization will have a lasting effect on the way Japanese and German companies do business. For a long time, companies scaled their imports and exports to the size of their business within their national economies. With the liberalization of the global economic order and 252

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developments in information technology, businesses increasingly are forced to optimize all the stages of the value-added chain at a global level. China has offered promising opportunities for participation to both German and Japanese businesses since it ‘opened up’ at the end of the 1970s. The conditions created by the rapid development of the Chinese economy in the last two decades of the twentieth century gives rise to questions regarding the most appropriate internationalization strategy in German and Japanese business – both separately and jointly. This economic area is new and unfamiliar to many businesses, and although it offers opportunities, it also involves considerable political, economic and social risk. German and Japanese management need to decide whether targets will be better met with a traditional export or import strategy, or by a direct investment strategy, which is becoming increasingly relevant – by, for example, establishing a new subsidiary or acquiring a business in China. Furthermore, management also needs to consider the question of whether a collective strategy – that is, one based on co-operation – might also be successful. One of the forms of collective internationalization strategy is ‘third-market collaboration’, the theory of which forms the subject of this chapter. Third-market collaboration is a particular kind of general co-operative business venture. The organizational forms of business co-operation are subject to strategic considerations, and in concrete terms they are an expression of the collective internationalization strategy of a business. Leaving aside co-operation in the domestic market of the other partner, it is worthwhile asking whether Japanese–German business alliances represent a meaningful method of successful internationalization in China?

Collective internationalization strategies Management in a company doing business on an international basis confronts problems that go far beyond those faced by the management of a businesses active only on a domestic scale. International management has to deal with a number of questions that national management does not have to consider (Bartlett and Ghoshal, 1985, 1989; Dülfer, 1991). One of the most important questions for the management of an internationally active company is whether to move internationalization forward by investing directly in foreign markets, or whether an export strategy (perhaps even a collective internationalization strategy) might bring results. If the business decides on an export strategy, it must consider in its formulation questions concerning the market, the competition and the culture. If management selects a direct investment strategy, it must decide which business functions (for example, setting up a branch sales office, acquiring foreign production locations, R&D and so on) should be fulfilled in the foreign country (Dunning, 1993; Haak, 2001a). The questions that international management must tackle, which cannot all be listed here, can be assigned to different stages of the traditional

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management process: planning, organization, and the deployment of human resources, plus their subsequent management and control. The question of whether raw materials should be acquired or personnel employed locally will affect planning, as well as remuneration and appraisal of managers employed abroad, and these factors are affected by the deployment of human resources and the management structures and culture (Staehle, 1999). Frequently, management approaches assume that planning has priority. So we find that the problem with implementing strategic plans is often only discussed on a scientific basis as an afterthought. Implementing a strategy in an internationally active business is always a process of not only intraorganizational but also inter-organizational development, which the literature on international management does not take sufficiently into account (Sydow, 1993, p. 48). In more recent approaches to the management process, the familiar management functions are also differentiated. However, the plan-related conceptualization is replaced by a concept where all the functions have equal validity. Instead of being in a linear sequence, the management functions of planning, control, organization, leadership and human resource deployment are in principle given equal weighting (Steinmann and Schreyögg, 1997, p. 8). Depending on the requirements of the situation in question, ‘one or other of the management functions might enjoy priority’ (Sydow, 1993, p. 48). The important point with this new conceptualization is ‘that the strategy information is understood less as the result of formal planning but much more as an organised and self-organising process’ (Sydow, 1993, p. 49). A large proportion of the problems of international management are solved within the framework of business and management studies. These are questions of strategy formulation, particularly that of why a company should do business on an international scale, and the conditions under which a specific internationalization strategy is given preference (see Albach, 1981; Pausenberger, 1981; Lück and Trommsdorf, 1982; Macharzina and Welge, 1989; Welge, 1990; Welge and Böttcher, 1991). It should be noted, however, that questions of strategy implementation have been paid scant attention in business and management studies (Sydow, 1993, p. 49). In principle, companies doing business on an international scale have the option of pursuing their goals abroad through business alliances as well as through traditional internationalization strategies and direct investment. The opportunity to access the market and technology faster, and the chance to share risk while remaining able to influence the alliance partner motivates companies to adopt a strategy of international co-operation. There are other motives: lack of own resources to internationalize completely, avoiding additional overheads, and barriers to market access (Haak, 2000b). The formulation of collective internationalization strategies is particularly important for global and transnational strategies (Perlmutter, 1969; Porter,

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1985, 1986, 1990; Cichon and Hinterhuber, 1989). At the time of writing, increasingly international businesses are using ‘an organisational form positioned between the market and the hierarchy’ form of collective internationalization. The key manifestations of collective internationalization strategies such as joint ventures, added-value partnerships, licensed production and so on, combine hierarchical features with those of the market. In fact, ‘more so than is the case in real terms than in organisations referred to as hierarchies or as markets (e.g. markets with typically intense customer– supplier relationships)’ (Sydow, 1993, p. 64). Coalitions, strategic alliances, partnerships and co-operative ventures are conceptualizations, which, in association with the development of a collective internationalization strategy, are on the path to quasi-internalization. The theory of international business infers the concept of internalization, where this concept means ‘the substitution of market trading relationships with hierarchical co-ordination’. Quasi-internalization does not assume, however, complete substitution of the market by a hierarchy, but rather that purely market-related trading relationships are replaced by co-operative structures (Sydow, 1993). Conversely, quasi-externalization focuses on the relaxation of previously hierarchical trading relationships, that is, intra-organizational co-ordinated trading relationships. Company-internal hierarchical relationships are complemented by external, market-related elements. To give an example: a result of quasi-externalization could be that a whole functional area that previously was attended to in a single business (for example, research and development (R&D), certain production tasks) is now partially or completely carried out by a partner, or by legally independent businesses arranged in a network. If we consider the level of international business activity, we shall see that the collective strategies for internationalizing a business are not new in principle, but that they have become considerably more significant as the speed of globalization has increased. In some respects, this organizational form has existed since companies first began to do international business by exporting goods, services or knowledge (for example, by licensing). The strategy of collective internationalization that manifests itself in joint ventures, strategic alliances, value-added partnerships or increased international subcontracting is a strategic alternative to both exporting and to direct investment in a foreign country. More than other organizational forms of internationalization, collective internationalization strategy, for example, allows multinational and global strategy, or cost leadership and differentiation strategy, to be pursued at the same time. What do we understand by a collective internationalization strategy? It is clear that there is no generally binding definition for the term. The best way to gain an appreciation of the phenomenon of collective internationalization is to list the characteristics that distinguish it from other forms of

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entrepreneurial internationalization. These are: ● ● ●

● ● ●

the legal and economic independence of the business partner; voluntary and unforced co-operation; explicit agreement from the business partner regarding the co-operative venture, frequently in written form; ex ante co-ordination of business activity, agreed on both sides; a shared target; and partners collaborate constantly on the strategic levels agreed.

A further key towards defining the term ‘collective internationalization’ is that it excludes ad hoc forms of collaboration. Concrete discussions about long-lasting business relationships form a central determining element of collective internationalization strategies. Basically, the organizational forms of collective internationalization strategy can be classified into those with and those without shareholdings. Management and technical consultation contracts, licensing, sub-contracting, joint ventures, turnkey systems, franchising and co-production, to name just a few, are the most widely-seen manifestations or forms of collective internationalization strategy. There are no limits to business creativity, and unrestricted opportunities for innovation in the development of new organizational forms of these strategies (Haak, 2000a). For example, a company doing business abroad acquires, via licensing, the rights to patents, industrial design, trademarks or expertise from the licenser. These rights can be limited by time or by region. Franchising can be considered a specific form of licensing in which the licensee receives extensive management support from the licenser. There is also an attempt to create a unified external image for the licensees, to give an overall corporate identity. More sophisticated forms of collective internationalization include the international consortium which, for example, is building a turnkey system. Putting together a precisely-defined package of deliverables tailored to a customer’s needs means that the collaboration partners have been working together for some time and that they have the relevant expertise (Welge, 1990). There are other forms of collective internationalization, such as international sub-contracting and co-production. The difference between these two is that, in the first, the customer participates in production, the subcontractor fulfils the order according to the customer’s specifications, and the customer handles marketing only. Conversely, with co-production, production is on a reciprocal basis. The partners either supply each other with components, or are completely specialized and market eventually both finished products. The most intense form of collective internationalization is the joint venture, which arises when two or more partners participate in a business, either by acquiring an existing business or by founding a new one.

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The classification of a joint venture as business co-operation depends on the extent of the shares held, as, basically, both partners need to have a say in management – otherwise it would be considered a direct investment or a silent partnership. It should not be forgotten that collective internationalization strategies could include every element of the whole added-value chain of a business. Viewed in this way, it is possible to differentiate between international collective research and development strategies, acquisition strategies, and production and marketing strategies. The development and implementation of collective internationalization strategies frequently originate in the opening-up of markets and sharper international competition in the course of globalization. Many businesses are not capable of dealing with these challenges on their own, and for this reason, they try to combine their strengths with those of other companies. In general, collective internationalization means a long-term plan to create a union between businesses to pursue jointly certain strategic goals. The partners are resident in different countries. Particularly central to the strategy is the definition of organizational domains – in other words, the form of collective strategy (for example, joint venture, project, franchise and so on); specification of the target position among the competition; allocation and distribution of production and human resources; and a definition of the degree of autonomy in agreement with the chosen business partner. It should be noted here that the strategy is affected by the perception and interpretation of existing organizational relationships with the environment, and this in turn creates a framework for the interpretation of organization and environment. Here, the term ‘organization’ describes businesses as socio-technical systems, which ideally bundle non-material and material resources into a unique competence (Wernerfeldt, 1984). In addition to having a formal organizational structure, businesses use a specific organizational culture to achieve the organizational goals (profit targets, to name the most important but not the only one) by implementing the strategy. The concept of organization (frequently, but not always, as an expression of strategic consideration) determines how businesses interact successfully with their environment, and how these economic, social and political interaction processes are shaped. In traditional Management Studies, three levels of strategy are distinguished: corporate strategy; business strategy; and functional strategy. Among other things, corporate strategy defines in which environment and which networks a company should do business, which is important from the point of view of network research. The business strategy defines how the company or its various sections deal with competition (for example, cost leadership or product differentiation). The functional strategy is responsible for the concrete development of corporate and business strategies for each functional area.

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Under discussion is the question of enhancing these three strategy levels with an inter-organizational perspective covering collective internationalization strategy pursued by several companies jointly (Astley, 1984; Bresser, 1989). In the context of internationalizing business activities with the faster expansion of globalization, this collective internationalization strategy is becoming increasingly important, particularly with the creation of organizational forms such as strategic alliances, business networks and thirdmarket collaboration to achieve business goals in a global environment.

Third-country collaboration This organizational form as the expression of a company’s collective internationalization strategy is notable for the fact that both partners, based in their own countries, do business in a third country or third market. This can be an alliance between Japanese and German companies, for example, which both want to do business in a foreign market. On the other hand, it can be a Japanese–German third-country collaboration with a foreign partner company from the third country, so that there is a triangular form of (thirdcountry) collaboration. And other corporate partners might well join them. The types of third-country collaboration can be differentiated further on the basis of shareholding. There are a number of third-country collaborative ventures where no shareholding is necessary. Third-party collaborations based on shareholding can also take on different appearances. Different forms of third-country collaboration are also distinguished on the basis of their duration. Some are of a short-term nature, while others are set up with longer-term co-operation in mind. Another criterion is the concrete form taken by the activities. Some of these ventures include all the business activities in the partnership; others cover only some business functions, which will be carried out jointly in the third country (for example, building up a shared distribution network or developing a specific technology). There are many motives for a third-country collaboration. The initial consideration given to this form of collective internationalization is to gain a competitive advantage by entering into a partnership for the chosen target country (third country). Partnerships can achieve a competitive advantage that a company on its own cannot realize. Examples of key advantages achievable with third-country collaboration are the better use of companyspecific resources; knowledge of the competition and of the market; and technology-related considerations. A key reason for third-country collaboration is a company’s lack of resources, which might manifest itself in insufficient capital investment, but which frequently also shows up in too few employees to allow international expansion. Partners in the third-country collaboration then serve to stop a gap in human resources. Insufficient funds often force businesses to cooperate with a foreign partner in opening up a new market, for example, or

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in searching together for raw materials for production in the home countries of the partners. If, for example, a German business has in its possession a technology (for example, a processing technology) that a Japanese partner does not have, but has no financial resources with which to become active in the third country, then the German business can contribute the technology and the Japanese company the necessary capital to the venture. Another case: a lack of capital in a Japanese partner could mean that it contributes its knowledge of the target market and the German partner provides the capital to open up that market. Insufficient knowledge of the market in the third country can also result in third-country collaboration. Local partners in the third country can reduce the costs of the collaboration, allowing more resources for working on the market in other areas. Another reason for third-country collaboration is that it might make expansion of the production programme possible. Third-country collaborative ventures are particularly interesting for the internationalization of the partner companies when they all benefit from synergy effects. Two indicators are used to classify third-country collaborative ventures. On the one hand, the international collaboration in the third country can be based on contractual agreements. In this case, no new, independent companies result from the co-operation. On the other hand, the international collaboration can result in independent business unions which are active in the third country – for example, in China. Strategic alliances are positioned between the two. They can be based on a contractual agreement or result in the founding of business unions in third countries. Third-country collaborations frequently are created on the basis of sales and delivery contracts. A German company that plans to internationalize its business activities in Asia has the problem of how to set up its launch on to the various target markets in Asia. Each market operates under specific conditions and the German company needs to accommodate these requirements. Frequently, exporting is the first step towards internationalizing business activities. In the context of an export-orientated internationalization strategy, partners are sought with sufficient knowledge of the market in the target country. Japanese mediator organizations, which function as independent units in the target country, can then act between the German company and the customer in the foreign country. Large Japanese wholesalers could be the partners in these collaborative ventures. In this case, a contract is agreed between the German producer and the Japanese trading firm that establishes the specific activities for third-country collaboration in the target country. In this context, one can also talk of indirect exporting. This form of internationalizing business activities is frequently the preliminary stage to proceeding independently into the target country at a later date (for example, a company will build up its distribution network in the Asian target country or

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found a subsidiary). Notice will then be given of the contractual third-country collaboration, or it might expire. Japanese–German third-country collaboration can also arise as a result of technology contracts. There is a distinction between licence, expertise, technical help and advisory contracts.

Japanese–German third-country collaboration in China Leaving aside working together in the domestic market of one another, can it make sense for Japanese and German companies to collaborate in foreign (that is third-country) markets? Does this form of collaborative venture offer a promising base from which to enter the market and work it long-term, particularly considering the dynamic and difficult market places in China? The People’s Republic of China (PRC) is becoming increasingly significant as a market and as a production location for Japanese and German companies doing business on an international scale. At the same time, the Chinese government considers that these companies represent one of the most important mainstays for the economic and technological development of their country. From the point of view of strategic management in internationally active companies, investment in the Chinese market is being swept along by globalization and sharper international competition (Taylor, 1996; Konomoto, 1997, 1998; Li and Li, 1999; Haak, 2002). One thing is certain: many high-tech businesses are no longer tied to traditional locations. High-tech products, such as cars, for example, can be manufactured all over the world to more or less the same quality. The particular features of the Chinese market and the specific benefits offered by its locations almost clamour for the commitment of internationally active businesses. Inter-company ventures, joint development, production and sales, and the trade of components and technology are basic factors in the success of strategic management in the international organization of labour and decentralized production to secure a global presence. Only by being a leading technology producer based on the faster and more target-orientated implementation of product and process innovation is it possible to gain long-term market leadership in China. Japanese and German companies are well aware of this, and try to use the requirements and challenges of China as a market and a production location to their strategic advantage (Köllner, 1997; Kawashima and Konomoto, 1999; Konomoto, 2000). At the start of the new century, China is one of the most interesting markets in Asia, but also one of highest risk. The Chinese economy is growing at a speed and on a scale that Germany and Japan only experienced during the years of their ‘Wirtschaftswunder’ (economic miracle). The growth rate in 2000 was 7.8 per cent, following 7.1 per cent in 1999 – and it exceeded 7 per cent in both 2001 and 2002. Political reforms and opening up to the outside world laid the foundations for this economic development in the second half of the 1970s. The business

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dynamic has been maintained since then by investment from abroad and the increase in exports that this has initiated. The Chinese government is going further and building on more public investment, thus stimulating more growth. Joining the World Trade Organization (WTO) is also fuelling development, with a sustained impact on international companies. China is not a unified economic area. Commerce and buying power are concentrated mainly in the coastal areas, which is where most of the international companies have settled. In the north are the old heavy industry areas; Shanghai is developing into a modern technology and services centre in the east; and since the formation of the first special economic zone, the economic dynamic in the southern regions is developing along the lines of Hong Kong, the former British Crown colony that is now a Special Administrative Region (Ohmae, 2001). The income of the population is rising, particularly in the industrial centres, and new groups of consumers with a lot of money to spend need to be supplied with high-quality consumables, particularly modern products. German and Japanese companies trading on a global basis can no longer leave China, as both a production base and a market, out of their strategies. None of these companies wanting to maintain their market position in global competition can afford to ignore the Chinese market in the longterm. Market and technology leadership in China are key to the long-term successful penetration of other markets in East and South East Asia. To achieve this market and technology leadership, some companies see thirdcompany collaboration as a promising organizational form. In 2002, there were nineteen Japanese–German third-country collaborative ventures active in different sectors, including mechanical engineering, textiles, food, chemicals, cars, services and IT (Haak, 2000–02). Therefore, from the point of view of Japanese and German management, what reasons are there to use a third-country collaborative strategy to become active in China? First, German management welcomes Japanese companies as partners as they are frequently well-informed about China. Japanese management has at its disposal numerous contacts and personal relationships, is familiar with the different ways of thinking in China, and because of the good market position enjoyed by Japanese wholesale trading houses, has access to various distribution channels into the different, dynamically developing Chinese markets. In large international projects, merging financial resources and technological expertise can cut costs, reduce risk and build up synergies on both Japanese and German sides (Haak, 2000–02). In principle, Japanese management is prepared to work with German companies in third markets – because it is in their interest. Japanese intercompany unions (keiretsu) are showing a tendency to break up, and a strategic realignment is taking place in the Japanese wholesale trading houses (sˆogˆo shosha), with the result that Japanese companies are looking for new

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business partners with whom to open up and dominate in the long term the attractive but high-risk Chinese market. As a result of the excellent reputation that German technology and German quality enjoy in China, Japanese management is interested in German companies as partners. This applies not only to traditional industries such as mechanical engineering and plant construction, and vehicle manufacture and supply, but also to young industries with potential for the future, such as telecommunications and environmental technology (Haak, 2000–02; also Hilpert and Taube, 1997). This is true not only for large companies such as Siemens, Bayer, Volkswagen, BASF and so on, who are securing their market position with extensive direct investment, but also for many medium-sized German companies that have entered the Chinese market in recent years and made a name for themselves with their excellent products and manufacturing technology. It should also be noted that Chinese customers might be more tolerant of a German–Japanese partnership than a German or a Japanese company on it own. Basically, Japanese management hopes that co-operating with German businesses in China will bring an increase in the efficiency of existing activities, or create new potential. Discussions with representatives of Japanese companies working with German companies in China have revealed that four basic targets can be identified: ●

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The fundamental goal of increasing profits from business activities in China, mainly by entering the market more quickly, using the expertise provided by the German partner, and by complementing their own product range and acquiring financial help from both German government institutions and directly from the partner company. Lower costs through economies of scale and avoiding duplicated investment by entering the Chinese market together and exploiting cost benefits by division of labour beyond the specific target market. Targets to reduce risk by investing less capital and saving resources for other internationalization activities, or for restructuring businesses in Japan. Gaining prestige by working long-term with internationally well-known and admired German business partners (Haak, 2000–02).

The resources available to a Japanese company represent a deciding factor in determining the options for realizing commercial alternatives in the internationalization process. Resources are relevant for two reasons in co-operative strategy: first, the company’s own resources form a pool of offers for the potential partner, and second, the company needs the resources in order to exploit the benefits from the co-operative venture for its own ends. The key factors of capital, expertise, competence and time show clearly that Japanese businesses are trying hard to enter into co-operative ventures with German companies in China.

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Currently, capital investment is one of the factors limiting internationalization in Japanese companies. Even large, internationally-active Japanese companies are not in a position to enter the market with a 100 per cent subsidiary. Acquiring or founding a new company abroad with the aim of setting up a fully-owned subsidiary is even further out of the question for small and medium-sized Japanese businesses. Frequently, however, they are forced to go to China, because of their obligations to the kereitsu to deliver, even though they in fact need to use their capital for restructuring in Japan (Haak, 2001b). The investment made by small- and medium-sized Japanese companies in China is not only limited by a lack of capital, but direct investment is considered to be a risk. Medium-sized businesses are only prepared to invest a substantial proportion of their capital in China if the associated risks remain manageable. Japanese management assumes that collaborating with a German company in China can reduce the risk of entering the Chinese market, particularly if the option of a step-by-step approach to the co-operative venture is considered as experience increases. If, for example, the goal of the venture is to enter the Chinese market, a co-operation strategy is the best solution to the problem of capital, even if a German partner already has the required knowledge of the market which could be used, and, ideally from the Japanese point of view, it does not need to build up its own marketing organization. A different emphasis in expertise frequently provides the reason for German–Japanese collaboration in China. German and Japanese management both bring specific knowledge of the markets in the Chinese economy. A company’s competence, as well as its expertise, plays a crucial role in joint ventures in China (Haak, 2000–02, 2001b). In this chapter, competence, in contrast to expertise, is understood to be the capabilities of a business, which as a rule cannot be captured in written form. Interpreted more broadly, however, it can also mean a company’s culture, in this case Japanese and German company culture that might possibly merge into a new company culture in a joint venture with China as the target country. By combining the strong points of their company cultures, the German and Japanese parent companies could create an outstanding competitive advantage. However, one should not lose sight of the fact that, bringing together two different company cultures can also be associated with considerable difficulties, which can result in the failure of the cooperative venture. As yet there is no answer to the question of how to implement a new company culture into which the culture of each of the companies in the union can merge. At the time of writing we know more about the difficulties created when two different cultures meet than we do of ways of engendering new and successful company cultures. Competence should not only be understood as part of the package on offer from the company partnership, but also as the willingness of a company to enter into a co-operative venture. With direct investment only, a company can make its competence available to the subsidiary with no

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other influences. The prerequisite for this is, however, that the appropriate management qualities are available in the company. In a company with previously no experience abroad, direct investment without any knowledge of the market and the conditions overall represents a relatively high risk. For Japanese small- and medium-sized businesses, co-operative strategies reduce the risk, as the German partner’s competence optimizes the pooled resources. Under the market conditions prevailing in China, with product development becoming faster, the time factor is playing an increasingly important role in the profitable marketing of a product. Particularly in the case of hightech products, the time it takes for research and development costs to amortize continues to decrease. Empirical investigations show that, if a market launch is delayed by 10 per cent, the company results can be reduced by around 25–30 per cent. The conclusion for both Japanese and German companies is that a business with a new technology is forced to market it on a global scale as quickly as possible. They do not have the time to build up their own marketing channels in foreign markets. Japanese–German third-country collaboration might achieve a competitive advantage if each could share the established distribution structures of the other (Hilpert and Taube, 1997). Japanese–German third-country co-operative ventures in China tend to enjoy the benefit of more flexibility compared to other forms of internationalization. However, this makes monitoring more difficult for the partners, as loose forms of co-operation do not allow fast and effective access, particularly when changes to strategy are made in the parent companies. The advantage of flexibility is especially apparent when a Japanese–German co-operative venture comes to an end. Selling a foreign subsidiary is frequently very difficult, and often incurs a loss, whereas a third-country co-operative venture can be brought to an end with comparatively little effort (Haak, 2001b). What are the criteria that determine the success of a Japanese–German co-operative venture in a third country? Compared to German or Japanese companies tackling the Chinese market on their own, a good partner is crucial for success. The venture has a good chance of success if the new markets to be opened up are in related areas. The success rates for Japanese–German co-operation are much higher here than where Japanese or German businesses already active in China are acquired, as a whole or in part. Furthermore, both partners should join the partnership with the similar assumptions, and the venture should be equally important to both of them. However, it is not only the benefits of improved competitiveness and greater profit that result when German and Japanese businesses collaborate in the Chinese market. Third-country collaboration is also accompanied by friction and conflict resulting from different objectives, varying amounts of available resources, contrasting management styles and, as mentioned above, different corporate cultures, with different traditions in decisionmaking and problem-solving (Hammes, 1993; Harzing, 1999). What are the areas of conflict that must be overcome when Japanese and German companies enter into third-country collaboration in China?

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Assuming that the venture is put together from targets and means to achieve the goals set out by the company, it is possible to differentiate between target- and means-related conflicts (Hilpert and Taube, 1997). Target-related conflicts in Japanese–German third-country collaboration are caused by the incompatibility of objectives for the partnership on the part of the parent companies. If one (or even both) of the partners pursues opportunistic goals, then the venture is likely to fail in the short or mediumterm. Conflicts around target agreements, irrespective of whether they existed initially or became apparent in the course of the venture, are one of the central threats to Japanese–German projects in China, as they throw the basic consensus of the entire venture into doubt. A solid basic consensus on the goals of the Japanese–German collaboration is particularly crucial for success in the high-risk and dynamic Chinese markets. It can only meet the challenges of the competitive environment in China if the partnership has compatible targets. This competitive environment is extraordinarily dynamic in China; in some markets, double-figure growth rates are targeted so that, within the shortest possible time, the role of the market leaders, and hence the position of the competition, can change. Newcomers to the market are fairly common under these dynamic conditions. Target-related conflicts will encumber the Japanese–German thirdcountry co-operative venture from the beginning if there is insufficient discussion of targets in the preparatory phase, and the individual corporate targets of the Japanese and German parent companies are not co-ordinated. For example, if objectives that affect the whole joint venture directly are not aired, or only communicated incompletely, this can lead to misinterpretation and rapidly result in the destruction of the basis for any further cooperation. Problems could arise if the German partner ties the success of the venture in China to a financial result, for example, if the Japanese partner is pursuing a longer-term objective and values the knowledge more highly that accrues from working with the German partner (Haak, 2000–02). Further, it should be noted that target-related conflicts can arise not only between the German and Japanese partners, but where both companies are involved in China, the targets set by the local company can contribute to further conflict. In certain industries, including telecommunications, car manufacture and the agro-industrial and chemical sectors, Chinese involvement is a legal requirement. The three-sided collaboration mentioned above opens up further areas of target-related conflict as, under some circumstances, political and social objectives on the part of the Chinese partner enter into strategic and operative decisions. While German and Japanese companies are pursuing goals with the aim of opening up markets in China and using resources (labour force, power and so on), Chinese partners are looking primarily for opportunities to learn, in order to become independent eventually of the co-operative venture. It is also possible that target-related conflicts will arise as the result of changes to the overall data relating to the German–Japanese third-country

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collaborative venture in the course of the partnership. The reasons why a partner might shift its objectives are many and varied. For example, the significance of a partner might change over time. Technological innovation in a parent company might mean that one side becomes financially more powerful and better-placed globally, while the other might suffer a collapse in profits, losing its financial clout and becoming less attractive overall as a partner. There is also the danger that learning possibilities within the Japanese–German venture are distributed unevenly, allowing one partner to benefit more from working collaboratively than the other. Internal company changes, such as a new strategic alignment in association with newlyappointed management, or an increase in potential knowledge relevant to corporate policy, might even remove the basis for working together in the third country (Haak, 2000–02). As well as these target-related areas of conflict, there are conflicts that appear when the partners attempt to realize their joint targets, referred to as means-related conflicts. They take many forms and are a daily challenge to international management in Japanese–German third-country collaboration. Unlike the target-related conflicts, however, most means-related conflicts do not represent a threat to the third-country venture in China. The only problematic aspects are conflicts in the complementary nature of the resources, as the venture’s right to exist is thrown into doubt when it transpires after the partners have started working together that they cannot contribute the amounts that were expected to the project, or that these contributions are being withheld knowingly. Parallel to this is the much more frequently encountered situation where one of the partners develops capabilities or finds resources in the course of the partnership that fill gaps in its competence that existed before it entered into the partnership. If there are no other factors in favour of continuing the partnership, it is no longer meaningful for the newly-strengthened partner to work with the other, as a weakened partner can become an encumbrance (Hilpert and Taube, 1997). The weight can shift between Japanese and German partners in thirdcountry ventures when, while they are working together in China, one side is able to work up more competence in areas such as technology, expertise or customer contacts faster or to a greater extent than the other. This also means that there is a risk that the strengthened partner will end the cooperative venture, as it will not be prepared to nurse the weaker partner along. What is the role of trust in handling conflict in Japanese–German thirdcountry collaboration? Unlike conflict, trust is almost always associated with economically desirable consequences, which show up in more open communications, simpler co-ordination, lower transaction costs, additional opportunities to act, more effective learning processes, and stable interpersonal and inter-organisational relationships (Barney and Hansenz, 1994; Fukuyama, 1995), even ascribe to trust at organizational level the property of generating competitive advantage. For virtual organizations, trust is

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indispensable as a basis, although in these circumstances it is particularly difficult to engender. It appears to be impossible economically to transact many payments or services without at least a minimum of trust. Trust is particularly relevant for complex deliverables, which can only be produced with difficulty, or perhaps not at all, without knowing those involved (customer, partner in the group of companies, or work partner). Japanese–German joint ventures in China can only succeed if there is interplay between contracts and trust. This is not a static value, but rather is a dynamic process that is under the influence of both the different histories and cultures of the partners, and changing conditions. Without at least a minimum of mutual trust, on an institutional or a personal basis, a Japanese–German joint venture in China will become dysfunctional very quickly. On the other hand, Japanese and German collaboration also needs contractually-fixed parameters to guide the venture to success through its different phases. These contractually-fixed elements are intended to prevent opportunistic behaviour on the part of one partner. The rules, formulated jointly, set down ways to resolve differences of opinion (Campbell and Burton, 1994; Beechler and Stucker, 1998; Beechler and Bird, 1999). Contracts and trust can be seen as the central mainstay of a Japanese– German third-country collaboration. There is a difference, which should not be underestimated, in the way that German and Japanese management weight these two important aspects for the success of a third-country collaborative venture. Contracts are considered to be more important by German managers than they are by their Japanese counterparts. From the German point of view, contracts should be as detailed and comprehensive as possible, and personal relationships based on trust are ranked as having much less significance. In contrast, personal relationships and the existence of mutual trust are of supreme importance for Japanese management. The contractual relationship is seen as the manifestation of trust between the German and Japanese partners, and does not form the actual basis of the business alliance. Japanese managers do not consider the contractual rendering of the relationship between the partners dogmatic. In their view, it is perfectly possible for them to renegotiate it in the course of the alliance, and adapting internal and external conditions as required presents no problems. These different points of view and patterns of behaviour present problems when the contracts governing the alliance are designed and drawn up. Different demands are made on the amount of detail in the contracts, and there is also a discrepancy in the willingness to draw up flexible agreements. The distribution of the rights to take decisions and have control over the companies involved is tied closely to the question of how much weight should be accorded to trust and how much to the wording of the contract. There is a risk that one of the partners will dominate the partnership and take decisions over the heads of the other. Whereas too great a concentration on

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the decision-making power can lead to a partner’s rights being removed, there is also the danger that, if control is distributed too evenly, progress will be obstructed and possibly completely stifled. Communication problems represent another level of means-related conflict. The organization and the structure of the communication process in a Japanese–German third-country collaboration determines whether, and how quickly, the decision-makers involved in a joint project can supply the employees carrying out the project with the relevant information. Breakdowns in communication can prove to be a serious problem for thirdcountry collaboration. Reasons for the breakdown might be that too little time was planned for dialogue with the partner, or even that the wrong group of people is taking part in the briefings. The different languages and the socio-cultural character of the employees represent a central problem for Japanese–German third-country collaboration in China. It is misleading to believe that the language barrier between German, Japanese and Chinese speakers can easily be overcome with the use of English and the employment of interpreters. Japanese is a context-dependent language – that is, meaning and sense can only be derived from the context. And even if both Japanese and German management speak English, there is still a difference in communicative behaviour (Abegglen and Stalk, 1985; Hilpert and Taube, 1997; Haak, 2000–02, 2001b). Japanese and German managers interpret the verbal communications of their partners according to the context of behaviour and values that they are familiar with. Under certain circumstances, this can mean that verbal signals are misinterpreted, and that non-verbal signals are not even noticed. The socio-cultural conditionality of communication is the biggest problem in the communications process between Japanese and German managers, which can become more critical when a three-sided alliance also requires communication with the Chinese management. Lack of knowledge of the partner’s socio-cultural background can lead to misunderstandings that delay or obstruct the daily routine of the business in a Japanese–German third-country collaboration. This can also delay the trust-building process, when, for example, traditional customs are not observed when invitations are issued or gifts exchanged. In the past, trust has only been investigated on an interpersonal level. Previously it has remained in the domain of psychoanalysis and social psychology. However, trust is conceptualized in many different ways. Sociologists such as Luhmann (1988) and Giddens (1990) try to associate the rational with the emotional, the cognitive with the affective, and the descriptive with the normative, in a systematic conception of trust. It is often assumed that a relationship based on trust can develop into a stronger personal emotional–normative secure relationship. However, one should not lose sight of the fact that the person exhibiting the trust is always taking a certain risk. Trust always implies an advance payment with risk made in

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the expectation of later returns. The managers in the Japanese–German third-country collaboration must be aware of this in order to establish a basis of trust in regular, exchange of resources and information that is sufficiently resilient to take on the challenges of competition in China.

References Abegglen, J. C. and Stalk, G. (1985) Kaisha: The Japanese Corporation (New York, Basic Books). Abo, T. (1989) ‘The Emergence of Japanese Multinational Enterprise and the Theory of Foreign Direct Investment’, in K. Shibagaki, M. Trevor and T. Abo (eds), Japanese and European Management (Tokyo, University of Tokyo Press), pp. 3–17. Albach, H. (1980) ‘Vertrauen in der ökonomischen Theorie’, Zeitschrift für die gesamte Staatswissenschaft, 136(1), pp. 2–11. Albach, H. (1981) (ed.) International Management Economics. Zeitschrift Betriebswirtschaftslehre supplement 1/81, pp. 81–87. Asia Bridge (eds) (1996) Japan-Deutschland Initiative. ‘Was bringen strategische Allianzen mit japanischen Partnern in Asien?’ Asia Bridge, 1(10) pp. 1, 14–15, (Hamburg). Astley, W. G. (1984) ‘Toward an Appreciation of Collective Strategy’, Academy of Management Review, 9(3), pp. 526–35. Barney Jay, B. and Hansen Mark, H. (1994) ‘Trustworthiness as a Source of Competitive advantage’, Strategic Management Journal, 15/Winter Special Issue, pp. 175–216. Bartlett, C. A. and Ghoshal, S. (1985) Transnational Mangement, 2nd edn (Chicago, Ill., Irwin). Bartlett, C. A. and Ghoshal, S. (1989) Managing Across Borders. The Transnational Solution (Boston, Mass., Harvard Business School Press). Beechler, S. L. and Stucker, K. (1998) Japanese Business (London/New York, Routledge). Beechler, S. L. and Bird, A. (eds) (1999) Japanese Multinationals Abroad – Individual and Organizational Learning (New York/Oxford, Oxford University Press). Bresser, R. K. (1989) ‘Kollektive Unternehmensstrategien’, Zeitschrift für Betriebswirtschaft, 59(5), pp. 545–64. Buckley, P. J. and Casson, M. (1988) ‘A Theory of Cooperation in International Business’, in F. J. Contractor and P. Lorange (eds), Cooperative Strategies in International Business (Lexington, Mass./Toronto, Lexington Books), pp. 31–53. Bukhari, I. and Wurche, S. (1991) Konfliktfelder beim Management von deutschjapanischen (Joint Ventures in Japan). Diskussionsbeiträge. 64. Lehrstuhl für BWL und Unternehmenführung der Universität Erlangen-Nürnberg. Campbell, N. and Burton, F. (eds) (1994) Japanese Multinationals. Strategies and Management in the Global Kaisha (London/New York, Routledge). Child, J. (1998) ‘Trust and International Strategic Alliances. The Case of Sino-Foreign Joint Ventures’, In C. Lane and R. Bachmann (eds), Trust Within and Between Organizations. Conceptual Issues and Empirical Applications. (Oxford University Press), pp. 241–72. Child, J. (2000) ‘Management and Organizations in China: Key Trends and Issues’, in J. T. Li, A. Tsui and E. Weldon (eds), Management and Organizations in the Chinese Context (London, Macmillan), pp. 33–62. Chowdhury, J. (1992) ‘Performance of International Joint Ventures and Wholly Owned Foreign Subsidiaries: A Comparative Perspective’, Management International Review, 32(2), pp. 115–33.

270 Focus on China: Japanese–German Business Alliances Cichon, W. and Hinterhuber, H. H. (1989) ‘Globalisierung und Kooperation im Wettbewerb’, Journal für Betriebswirtschaft, 39(3), pp. 139–54. Deutsch–Japanischer Wirtschaftskeis (ed.) (1995) Gemeinsam in Zukunftsmärkte? Möglichkeiten deutsch–japanischer Kooperation in dritten Ländern. Niederschrift der Podiumsdiskussion des Deutsch–Japanischen Wirtschaftskreises (DJW) in Kooperation mit der Handelskammer und dem Ostasiatischen Verein (OAV) of 29 May, in Hamburg. Deutsch–Japanischer Wirtschaftskeis (ed.) (1996) Der Nutzen von Handels und Investionsversicherungen für deutsch–japanische Kooperationen in Drittländern. Niederschrift der Vortrags- und Diskussionsveranstaltung of 13 March, Düsseldorf. Dülfer, E. (1991) Internationales Management (Munich, Oldenbourg). Dunning, J. H. (1993) Multinational Enterprises and the Global Economy (Wokingham, Addison-Wesley). Ernst, Angelika, Hild, Reinhard, Hilpert, Hanns, Günther and Martsch, Silvia (1992) Technologieschutz in Japan: Strategien für Unternehmenskooperationen, Studien zur Japanforschung, 9, pp. 20–25. Fieten, R., Werner, F. and Lageman, B. (1997) Globalisierung der Märkte – Herausforderungen und Optionen für kleine und mittlere Unternehmen, insbesondere für Zulieferer (Stuttgart, Schäffer-Poeschel). Fukuyama, F. (1995). Trust (New York, The Free Press). Geringer, M. J. and Hebert, L. (1991) ‘Measuring Performance of International Joint Ventures’, Journal of International Business Studies, 22, Summer, pp. 249–63. Giddens, A. (1990) The Consequences of Modernity: The Raymond Fred West Memorial Lectures (Stanford, Ca., Stanford University Press). Haak, R. (2000a) ‘Kollektive Internationalisierungsstrategien der japanischen Industrie – Ein Beitrag zum Management internationaler Unternehmungskooperationen’, Zeitschrift für wirtschaftlichen Fabrikbetrieb (ZWF), 95(3), pp. 113–16. Haak, R. (2000b) ‘Zwischen Internationalisierung und Restrukturierung – Kooperationsmanagement der japanischen Industrie in fortschrittlichen Technologiefeldern’, Industrie-Management, 6, Globalisierung und Regionalisierung, pp. 64–8. Haak, R. (2000–02) Research Project at the German–Japanese Economic Association. Interviews with German and Japanese Management in China, Germany and Japan. Documentation at the German–Japanese Economic Association, Tokyo. Haak, R. (2001a) ‘Strategisches Management in dynamischer Umwelt – Markt- und Technologieführerschaft in der chinesischen Automobilindustrie’, Zeitschrift für wirtschaftlichen Fabrikbetrieb (ZWF), 96(1/2), pp. 46–51. Haak, R. (2001b) ‘Japanese–German Interfirm Networks in China’, in Fujitsu Research Institute (ed.), Conference Papers, Japan and China. Economic Relations in Transition, January 18–19, Paper 18 (Tokyo, Fujitsu Research Institute). Haak, R. (2002) ‘Japanese Business Strategies Towards China: A Theoretical Approach’, in H. G. Hilpert and R. Haak (eds), Japan and China. Cooperation, Competition and Conflict. (Basingstoke, Palgrave). Hammes, W. (1993) Strategische Allianzen als Instrument der strategischen Unternehmensführung (Wiesbaden, Gabler). Harzing, A. W. (1999) Managing the Multinationals – An International Study of Control Mechanisms (Cheltenham, Edward Elgar). Hilpert, H. G. (1992) Marktstrategien deutscher und japanischer Unternehmen in der asiatsich-pazifischen Region. Studien zur Japanforschung, 6, Munich pp. 1–46.

René Haak 271 Hilpert, H. G., Martsch, S. and Heath, Chr. (1997) ‘Technologieschutz für deutsche Investitionen in Asien. Die Situation in China, Indien, Indonesien, Korea und Vietnam’, Ifo Studie zur Entwicklungsforschung, 30, Munich. Hilpert, H. G. and Taube, M. (1997) Deutsch–Japanische Unternehmenskooperationen in Drittmärkten, Studien zur Japanforshung, 12 (Munich). Kawashima, I. and Konomoto, S. (1999) ‘Time for More Autonomy: Problems of Japanese Companies in East and Southeast Asia’, Nomura Research Institute Quarterly, 8(3), pp. 18–31. Köllner, P. (1997) ‘Japans Rolle in der industriellen Arbeitsteilung in Ostasien: Theorie und Praxis’, Japan aktuell Wirtschaft Politik Gesellschaft, 5(4), pp. 171–7. Konomoto, S. (1997) ‘Japanese Manufacturing in Asia. Time for a Reassessment’, Nomura Research Institute Quarterly, 6(3), pp. 70–83. Konomoto, S. (1998) ‘Industrial Policy in China and the Strategies of Japanese Transplants’, Nomura Research Institute Quarterly, 7(3), pp. 36–47. Konomoto, S. (2000) ‘Problems of Japanese Companies in East and Southeast Asia’, Nomura Research Institute Papers, No. 18 (Tokyo, Nomura Research Institute). Li, F. and Li, J. (1999) Foreign Investment in China (Basingstoke, Macmillan). Lück, W. and Trommsdorf, M. (eds) (1982) Internationalisierung der Unternehmung als Problem der Betriebswirtschaftslehre (Berlin, Technischen Universität). Luhmann, N. (1998) ‘Familiarity, Confidence, Trust: Problems and Alternatives’. In Gambetta, D. G. (ed.), Trust (New York, Basil Blackwell). Macharzina, K. and Welge, M. K. (1989) (eds), Handwörterbuch Export und internationale Unternehmung, (Stuttgart, Poeschel). Ohmae, K. (2001) ‘Asia’s Next Crisis: Made in China. Rapid Evolution of Chinese Economy Threatens Regional Status Quo’, The Japan Times, Tokyo, 30 July. Pausenberger, E. (ed.) (1981) Internationales Management (Stuttgart). Perlmutter, H. V. (1969) ‘The Tortuous Evolution of the Multinational Company’, Columbia Journal of World Business, 1, pp. 9–18. Porter, M. E. (1980) Competitve Strategy: Techniques for Analyzing Industries and Competitors (New York, Free Press). Porter, M. E. (1985) Competitive Advantage: Creating and Sustaining Superior Performance (New York, Free Press). Porter, M. E. (1986) Competitive in Global Industries (Boston, Mass., Harvard Business School Press). Porter, M. E. (1990) The Competitive Advantage of Nations (New York, Free Press). Sako, M. (1992) Prices, Quality and Trust: Inter-firm Relations in Britain and Japan (Cambridge University Press). Staehle, W. H., von Conrad, P. and Sydov, J. (1999) Management (:eine verhaltenswissenshaftliche Perspective, Vahlen, Munich). Steinmann, H. and Schreyögg, G. (1997) Management (Wiesbade, Gabler). Sydow, J. (1993) Strategie und Organisation international tätiger Unternehmen – Managementprozesse in Netzwerkstrukturen’, in H.-D. Ganter and G. Schienstock (eds), Management aus soziologischer Sicht (Wiesbaden: Gabler), pp. 47–82. Sydow, J. (1998) ‘Understanding the Constitution of Interorganisational Trust’, In C. Lane and R. Bachmann (eds), Trust Within and Between Organizations. Conceptual Issues and Empirical Applications (Oxford University Press), pp. 31–63. Taylor, R. (1996) Greater China and Japan. Prospects for an Economic Partnership in East Asia (London/New York, Routledge). T¯oy¯ o Keizai (2000) Kaigai shinshutsu kigy¯ o s¯ oran ’00, kigy¯ obetsu-hen (General Survey of Japanese Companies Abroad ’00, Volume by Firms), Tokyo, T¯ oy¯ o Keizai Shinp¯ osha.

272 Focus on China: Japanese–German Business Alliances Welge, M. (1990) ‘Globales Management’, in M. Welge (ed.), Globales Management. Erfolgreiche Strategien für den Weltmarkt (Stuttgart, C. E. Poeschel), pp. 1–16. Welge, M. K. and Böttcher, R. (1991) ‘Globale Strategien und Probleme ihrer Implementierung’, Die Betriebswirtschaft, 51(4), pp. 435–54. Wernerfeldt, B. (1984) ‘A Resource-based View of the Firm’, Strategic Management Journal, 5(2), pp. 171–80.

12 Trust and Antitrust in Cross-cultural Alliances: Cross-cultural Management Challenges in Japan Pawel Komender

Challenges for companies in Japan in the twenty-first century The current economic situation in Japan We are going to win and the industrial West is going to lose, there’s not much you can do about it because the reasons for your failure are within yourselves. Your firms are built on the Taylor model. Even worse, so are your heads. With your bosses doing the thinking while the workers wield the screwdrivers, you’re convinced deep down that this is the right way to run a business. For you, the essence of management is getting the ideas out of the heads of the bosses and into the heads of the labourers. We are beyond the Taylor model. Business, as we know, is now so complex and difficult, the survival of firms so hazardous, our environment so increasingly unpredictable, competitive and fraught with danger, that our continued existence depends on the day-to-day mobilisation of every ounce of intelligence.1 More than a twenty years after Konosuke Matsushita, founder of Matsushita Denki, also known as Panasonic, made this statement, we ask whether the state of the Japanese economy is still consistent with his prediction? How does the Japanese economy look so far in the twenty-first century? By all accounts, it is suffering from meagre growth, deflation, increasing unemployment, huge debts in the financial sector … the list goes on. But the Japanese economic situation at the time of writing has to be studied more carefully. For example, while most Japanese car manufacturers have been in trouble, and could only manage a turnaround with the help of non-Japanese investors, Toyota and Honda have been thriving. While Minolta has been struggling, Sony has been growing steadily. While the Japanese media has been reporting daily about the poor state of the economy, large-scale construction projects are under way and new buildings frequently appear on the Tokyo skyline. One thing is clear: the Japanese crisis should not be overstated. With a population of 127 million, a GNP per 273

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capita of approximately US$34,000 and an unemployment rate of 5.5 per cent2 (still quite low compared to the European Union), Japan remains the second largest economy in the world and a market with enormous purchasing power. The recession has rendered Japanese companies an easier target for mergers and acquisitions (M&A). In spite of, or in a way thanks to, the economic downturn, Japan has become an even more attractive market for Western companies.

Challenges facing companies in Japan at the start of the twenty-first century Looking at the slow economic reform process in Japan, and the instability of the world economy, the Japanese recession may persist for a long time. The crucial factor during this period will be the ability of management to ensure growth and profitable activities. Several areas will demand particular attention. Although most companies in Japan have pretty clear mission statements and objectives, they lack concrete strategies to achieve these objectives. What can the company do best? What are its strengths and weaknesses? To which customer segments can it deliver the highest value? Companies need to pause and reconsider their strategies by answering these basic questions. With globalization progressing at such a fast pace, companies in Japan must face two particular challenges. First, in light of the increasing M&A activity, selecting the right partner as well as negotiating and implementing co-operation are critical success factors. In Japan, a manager has to be familiar with many particularities in order to carry out a merger or acquisition successfully. In merger negotiations, there possibly are other people outside the board of directors or other official decision-makers who have a decisive influence. Second, once co-operation has been established, a new corporate culture will need to be introduced. This new corporate culture will need to ensure employees satisfaction and optimize their performance – thus leading to higher profits and growth. This will be a particular challenge when a Japanese and Western company are involved.

Summary The Japanese economic recession at the beginning of the twenty-first century must be looked at in a different way. Depending on the quality of the management, there will be both winners and losers. Japan, the second largest economy in the world, is a very attractive market. The recession makes Japanese companies an easier target for M&A – a unique chance for Western businesses to enter into or reinforce their presence in the market. An important challenge for companies in Japan will be to redesign their basic strategies, but the biggest challenge will be the creation of a new corporate culture after a merger or acquisition between a Japanese and Western company.

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Japanese versus Western management styles Educational background Education lays the groundwork for a future professional career. It shapes an individual’s behaviour, attitudes, goals and actions. The differences between Japan and the West start at the educational level. In Japan it is the school or university a person has attended that is important; the subjects taken do not play any role at all, and the curriculum tends to be very general. Even if you are enrolled to study business, you still have to study other unrelated subjects at the same time. There is much fact memorization and few creativity sessions or discussions. Students are discouraged from challenging the views of the lecturer. Even extracurricular activities organized by the university allow little room for individualism. During a ski resort trip organized by a well-known university in Tokyo, for example, the bed curfew had to be strictly observed, and the students were allowed to use only certain ski lifts. There was no particular reason why, as the tickets were valid for the entire area and the students financed the whole trip themselves. Students graduating from a university have a very high level of general knowledge and are extremely disciplined. Unfortunately, they lack professional skills, creativity and individualism, and are unable to start their professional life without further training. A career with a Japanese company (as well as with some foreign companies in Japan) usually starts with off-the-job training. Such training involves learning very basic things such as the dress code, phone etiquette, polite forms of the Japanese language and companyspecific procedures (for example, how to fill in an expenses claim). They do not learn at this stage any professional skills such as how to use a computer program, or certain sales tools. Such things are mastered later, on the job. For managers dealing with a cross-cultural environment in Japan, it is vital to understand this background. Many Western managers fail to foster an effective corporate culture simply because they are unaware of the differences between Japanese and Western education systems and their resulting effects.

Corporate culture in Japan The traditional Japanese business culture is governed by strict rules. Not only employment conditions, such as compensation, vacation time, or severance pay, are all laid out in written form, but processes such as order fulfilment and payment auditing are laid down in a similar way. Employees usually receive a handbook with a detailed description of how they are to carry out particular tasks. Of course, managers abide by these rules as well in their decision-making process. In exceptional cases, a manager is expected to consult a superior or a committee – for example, a management committee – and make the decision with them. Action taken without prior approval is rejected.

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Many Western managers consider this rigid corporate culture to be lacking in motivation and efficiency. Most Japanese, however, are accustomed to following strict patterns of behaviour and do not feel comfortable without such control. Western business, generally lacking such an explicit control structure, very often demotivates Japanese employees, thus reducing the performance of the entire organization. Another element of the Japanese business culture is continuity. This involves job security on the one hand, and loyalty to the company on the other. As a rule, employees are dismissed only on the grounds of gross offences, or because of the catastrophic financial situation of the company. However, their contracts are not terminated because of inadequate performance. Similarly, employees rarely change their employers. Even in crisis situations, employees remain extremely loyal to their companies. This is clearly an important advantage. The Japanese perform significantly better if they do not fear losing their jobs (indeed, perhaps we all do). This security stimulates them to perform at a higher level; importantly, there is a group control – for example, if an employee becomes lazy, his or her co-workers rally quickly to pressure the employee to work. The feeling of solidarity is another outstanding, and perhaps the most important, aspect of Japanese corporate culture. Group acceptance is crucial for the Japanese. Each employee makes every effort to go along with the team, and each employee strives to perform better and abide by the rules. But such strong group solidarity can also have a different effect: if someone is especially ambitious and exhibits above-average performance which sets him or her apart from the group, he or she can quickly lose acceptance and recognition. Such employees are expected to motivate other workers and help them perform better also. The seniority principle is an important part of the corporate culture in Japan. Talented and skilful employees will not be promoted until they reach a particular age. However, their step-by-step career is as good as secure. Unless something unexpected happens – for example, the company goes bankrupt – they can easily predict their entire professional future, including promotions, and their income and retirement pension. Even in the event of bankruptcy or a merger, Japanese managers would do their best to ensure continuity in their employees’ careers with another organization. As economic globalization and internationalization accelerates, so will the various corporate cultures have an increasingly strong impact on one another. In this context, some Japanese businesses are attempting to adapt Western cultural elements to their systems, such as a compensation system based on individual performance. But at the time of writing, traditional Japanese corporate cultures remain dominant.

Corporate management in Japan Traditional Japanese corporate management is quite different from the Western management style. Japanese managers are focused more on

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employees’ needs and welfare rather than profits and shareholder value, and the company is the centre of the employees’ life. Even their immediate family is only a second priority. Spouses are expected to support their partners so that they can devote themselves fully to the company. In return, companies provide a secure working environment for their employees, as described in the previous section. Furthermore, employees are usually provided with housing and a substantial retirement allowance. Companies also help employees’ families by granting extra vacation days and financial support for weddings, funerals, relocation, and so on. Of course, Japanese shareholders are aware of the companies’ focus on welfare, and do not expect short-term financial gains. In fact, shareholding in Japan is usually motivated by the desire to maintain long-term relationships rather than to increase profits. Consequently, in the past there was very little pressure on companies from the shareholders’ side to boost earnings. Any business relationship entered into by a Japanese company is intended to be a long-term one. For example, if a new supplier comes up with a better and cheaper product than the current supplier, a company will still be reluctant to switch. Rather, it will put its supplier under pressure to develop a better product and consider a better price. The supplier will also be given enough time to do this. If the supplier does not succeed in developing a comparable product within a certain period of time, only then does the new supplier have a good chance of entering into a business relationship with the company. This is why numerous Western companies have been

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Orientation primarily on employees’ needs and welfare rather than profit and shareholder value Long-term perspective Conservative, slow response to the changing environment Common rather than individual responsibility Personal relationship orientation; decisionmaking by consensus Management by strict rules rather than creativity and individual concepts High sense of equality and fairness Unconditional customer orientation often resulting win–lose situation in the short term but win–win in the longer term Emotional rather than rational decisionmaking

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Primarily shareholder value and profitorientated Short- as well as long-term perspective Flexible and usually ready for drastic changes, sometime over-reacting with too many/unnecessary changes Individual responsibility for decisions and actions Decision-making by power or democratic majority Management by creativity and individual concepts, few rules existing Little, or only some, sense of equality and fairness, concentrating on subject, not people Conditional customer orientation often resulting in either win–win or lose–win situation Mainly rational decision-making

Figure 12.1 Japanese versus Western management styles

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struggling to sell their products in Japan. Japanese managers’ steadfast orientation on relationships instead of profitability is at least partly to blame for the recession of the late 1990s/early 2000s. Although countless companies are suffering because of the economic downturn, many managers are still reluctant to change their attitudes. Another trademark of traditional Japanese management is the slow and bureaucratic decision-making process. Japanese managers do not like taking personal responsibility, so all decisions are made by a group consensus. There are often certain rules and written forms that have to be approved and signed by various individuals, thus preventing swift and effective decision-making. On the other hand, such procedures demonstrate equality and fairness. The broadly inclusive decision-making process motivates the process participants positively; and once a decision is made, its implementation is usually very quick. In contrast, Western managers make decisions quickly, but the implementation of them takes time, since the decisions then have to be ‘sold’ to the people involved. Japanese companies are extremely customer orientated. They tend to fulfil the wishes of every customer, they never contradict their customers and are indulgent during price and conditions negotiations. In the Japanese business culture, the customer–supplier relationship is not an equal one. The customer is situated well above the supplier in the social hierarchy. By fulfilling customer wishes extensively, the supplier creates a win (customer)–lose (supplier) situation to start with, because the cost and effort put into satisfying the customer’s demands is immense. Nevertheless, the customer usually places high value on these efforts, and rewards the supplier with a long-lasting relationship. In the long-term, the supplier will recover its initial expenditure. In contrast to the situation in Japan, Western managers often speak of a ‘partnership’ with the customer that entails an equal position and equal rights. During sales meetings, for example, they discuss and argue like equal partners, sometimes even placing their know-how above the customer’s by saying: ‘We are specialists in this area, we have been selling our product to many companies in the industry. We therefore know what the best solution would be for you.’ With such a rational argumentation, a win–win situation is often achieved. However, a (supplier) win–lose (customer) situation results just as often. Customers may soon realize that the solution offered is not the best one available and may pursue another solution (with another supplier). Thus, there will be no long-term relationship. In Japan, this sales approach would probably have disastrous consequences. Not only is the customer supposed to be more important than the supplier, but the customer also supposedly knows the business best. By telling the customer so bluntly what should be done, the supplier commits the fatal mistake of making the customer feel inferior.

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On the whole, Japanese managers are very emotional, which of course influences their decisions. They attach great importance to the personal relationship they have with their business partners, a relationship determined by such factors as politeness, appropriate behaviour, respect, trust and so on. Immediate financial or other tangible gains are often of secondary importance. Western companies frequently wonder why their products are not bought, although they are obviously better and cheaper than those of the competition. They do not realize that the proper and respectful way of communicating with the customer is as important as, and sometimes even more important than, having the right product and the right price. The enduring recession has brought about some changes in the traditional Japanese corporate culture and management discussed above. Many Japanese companies have realized that, in order to become profitable again, they must be more rational in their decision-making process. However, a vast majority of Japanese businesses still operate primarily according to traditional management styles.

Summary The differences between traditional Japanese management and Westernstyle management are substantial. The roots of these discrepancies lie in the effects of the education systems. While Western education promotes creativity, individualism and a concentration on professional aspects, the Japanese stress obedience to rules, discipline, the importance of groups over individuals, and generalized professional training. While graduates from a Western university usually have the skills to start their professional career as soon as they graduate, Japanese graduates need to continue their training with their employers before taking on professional assignments. As a logical consequence of this, new employees in Japan are not expected to show tangible performance. They are required to learn and maintain a high level of discipline by obeying company rules and their superiors’ instructions unquestioningly. The Japanese corporate culture is distinguished by its continuity, solidarity and principles of seniority. In contrast to Western-style management, the Japanese run companies traditionally with an orientation towards employees’ needs and welfare. Employees maintain a long-term perspective, and react conservatively and slowly to the changing environment. They feel a common sense of responsibility, and focus on personal relationships, especially customer relationships. Decisions are made by consensus, but with emotion rather than rationality to guide them. Everyone is expected to adhere to strict rules, but there is a high sense of equality and fairness. In reaction to the ongoing recession, the traditional Japanese corporate culture and management have started to change, but the extent of these changes has so far been very limited.

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Cross-cultural alliances in Japan at the start of the twenty-first century General trends in cross-cultural alliances in Japan The recession has been forcing more and more Japanese managers to re-think their situation and management style, and many are opening themselves up to new managerial ideas. The number of Japanese companies accepting foreign stakeholders and adapting Western management styles – such as Mitsubishi–DaimlerChrysler, Nissan–Renault, Roche–Chugai or Wal-Mart–Seiyu – is increasing. In general, the trend towards investing directly into Japan has been showing steady growth (see Figure 12.2). But alongside a few success stories of cross-cultural alliances in Japan, there have been a number of failures. The success of a cross-cultural alliance depends heavily on the management of the M&A process, the knowledge, experience and (even more importantly) the attitude of the Western managers in charge towards the Japanese people and their culture.

Success stories of cross-cultural alliances in Japan The co-operation between Renault and Nissan mentioned above is an excellent example of a successful cross-cultural alliance. In 1999, Renault took a 36.6 per cent stake in Nissan and agreed on a plan to revive the heavily indebted, loss-making Japanese automotive manufacturer. The main objectives were basically to reduce the massive debt amounting to more

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Figure 12.2 Direct investments to and from Japan Source: Japan Economic Foundation and Ministry of Finance, Japan.

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than US$11 billion and to start making a profit again. Mr Carlos Ghosn took on that extremely daunting challenge. Ghosn had previous experience with similar assignments, having orchestrated the 1991 merger between Michelin North America, where he was CEO, and Uniroyal Goodrich.3 Only three years after the Nissan revival plan was made, a significant turnaround has been achieved. How did Ghosn achieve this? He applied elements of Western management while still bearing in mind the traditional Japanese corporate culture. On the one hand, he broke with Japanese tradition by dismantling Nissan’s numerous non-core financial and real estate investments, particularly those locked up in the so-called keiretsu partnerships. These investments were made solely for the purpose of relationship management and had no real financial value. Furthermore, he discarded the seniority principle by introducing a compensation system based on performance. He also clearly defined and assigned responsibilities to managers when bringing Renault managers into the Nissan organization. On the other hand, Ghosn also realised the importance of respecting the Japanese culture, and showed particular consideration for Nissan’s strong, traditional identity. In doing so, he gave due regard to his Japanese colleagues at all times and made them realize that Renault was there to support Nissan in restoring its business, not to take it over. Instead of imposing changes on the organization, he introduced cross-functional teams that brought together people from different departments. He managed to build trust by creating transparency throughout the entire company, including the overseas affiliates. Everyone knew what everyone else was doing. People who had previously built walls between each other were now working together. He managed the turnaround with the employees, not against them. In the beginning, the Japanese were very sceptical about Ghosn and his role, but at the time of writing, he is being seen as a hero. Ghosn neither introduced Western style management nor adjusted it to the traditional Japanese corporate culture. He combined the two and created a new, highly effective environment. His former experience in dealing with cross-cultural alliances was surely one vital prerequisite for his success. His charismatic personality and respectful attitude towards the Japanese culture, however, played the decisive role in creating the successful Western– Japanese alliance. Another example of a successful cross-cultural alliance was the takeover of a business unit of a Japanese distributor by a medium-sized European machinery construction company. The Japanese distributor was relatively small but very well known and respected within the industry. It had two lines of business: software production; and the distribution and maintenance of the machines produced by the European company. In the late 1990s, the distributor ran into financial difficulties in the latter business area. The only plausible alternative for the European company was to take over the business unit, which included about a hundred employees. Offers

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were made to the employees and the date was set for the takeover. But the employees hesitated. Leaving a secure, familiar environment for a performance-orientated, unreliable gaishikei (foreign company) was not easy. They had an alternative: to stay with their former employer, who simply could not lay them off because of legal regulations. They could have been, and most, in fact, were, offered positions with the remaining business unit. The management of the European company noticed the strong influence of the trade unions and decided to talk to them, rather than to ignore or battle with them. The managers realized that a good relationship with the unions might be beneficial for all participants. As a result, not only open and sincere discussions were initiated, but a personal relationship with the unions was also established. Convincing a few union representatives in a small group was much easier than convincing a hundred people individually. If the company had proceeded in the latter way, it would have had no chance of getting the employees on the side of the new company in the limited period of time available. The management of the European company recognized the importance of a group decision (consensus) for the Japanese. It also understood the how to build a trustworthy relationship with the employees. At the time of writing, the company is very prosperous. The Japanese distributor, by the way, no longer exists. Unfortunately, there are also examples of failed cross-cultural alliances in Japan. Western managers often think that the same rules apply in Japan as elsewhere. This was the case with a large Western agro-chemical company that was trying to take over a Japanese distributor. In Japan, unlike in the West, it is not uncommon that the actual work or responsibility of a company employee or manager does not match his or her official title. For months, the leaders of the Western company worked on the board of directors, especially the chairman, trying to convince them to accept the takeover. The reality was that it was not the current, but a former, chairman – who was long retired – who was the key person to persuade. Thus the takeover attempt failed.

Prospects Although the number of cross-cultural alliances in Japan has been growing, there are still many industrial areas and companies that have experienced little change. In the pharmaceutical industry, for example, the co-operation between Roche and Chugai is still considered a rare phenomenon. Against the background of the major consolidations in the industry, and the accelerating globalization of the markets, the pharmaceutical branch should see more changes in the future. Yet even at the domestic level there are difficulties, as illustrated by the failed merger between Taisho and Tanabe. Japan, being the second largest market in the world, will undoubtedly attract increasing numbers of Western investors. Furthermore, the resistance

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to cross-national alliances will decrease, partly as a result of the financial pressure and partly because of an increase of open-minded management practices. All new cross-cultural alliances will be watched closely. The development of further alliances in the future will be influenced by the success rate of the previous ones.

Summary The number of direct foreign investments and cross-cultural alliances in Japan has been increasing steadily in recent years. The persisting recession has forced more and more Japanese managers to re-think their situation and open up to foreign stakeholders. Managing a cross-cultural alliance in Japan is a very challenging task. There are some success stories, as with Renault–Nissan, but there are also failures. Success depends on management and its previous experience with crosscultural alliance building, its knowledge of the Japanese market and culture and, above all, its sensitivity and respectful attitude towards traditional Japanese corporate culture. An effective cross-cultural alliance in Japan neither imposes Western-style management nor adapts the traditional Japanese management style: it combines elements of both and creates a new, individual corporate culture. As the second largest economy of the world, Japan will probably attract a growing number of Western investors and foster cross-cultural alliances in the future.

Cross-cultural management challenges in Japan Considering the economic recession and increasingly globalized world economy, irrespective of the aforementioned increases in cross-cultural management in Japan, it is obvious that this kind of management will become more prevalent. At the same time, major challenges have to be confronted. As discussed earlier, the roots of traditional Japanese management are deeply embedded in culture and education. As a result, change can only be of an evolutionary, very long-term nature. In contrast, Western management styles often lack the necessary flexibility and respect needed to deal with other cultures. Then how can cross-cultural management be created in Japan within a short period of time? As was proved in the Renault–Nissan case, a deep understanding of different cultures and, above all, the personal attitudes of managers will play an essential role in the efficient practice of crosscultural management. In general, several factors will be crucial.

The right selection of managers The first basic step towards creating a successful cross-cultural alliance is selecting the right management team. Western companies frequently select their Japan managers based on the product or other company-specific know-how.

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With Japanese managers, English language proficiency is often the most important criterion. In order to cope with an extremely challenging task, the personality of the candidate is nearly as important as their professional skills. Other decisive factors are the candidate’s knowledge of Japan, and any related experience. Sometimes companies appoint a Japanese manager who has spent a long time abroad – but they did not consider the fact that, because of the manager’s long absence from Japan, this person may not be aware of the current Japanese business environment. Even worse, their fellow Japanese colleagues might not accept this person, as he or she has become ‘too foreign’. This, by the way is not confined to Japan alone – there are the so-called ‘banana people’ in China (Chinese, but Western-educated – yellow skinned with a white inside, as it were) who are treated with suspicion; as are the ‘coconuts’ in the Caribbean (locals who have received a European education – who look normally black-skinned, but espouse white ideas) – we all need to be subtly culturally aware. Non-Japanese candidates may be adequate for the job in Japan, but in addition to the aforementioned necessary abilities, they must have a genuine interest in Japan and in the position. Financial rewards as the sole motivational factor will not be enough. Selecting the appropriate managers for Japan is a very fundamental success factor. Without a fully competent and motivated management team, a cross-cultural alliance in Japan will not stand a chance of success.

Balancing profit and shareholder value with employees’ needs and welfare Social welfare historically has been more important than profit and shareholder value in Japan – which means that it will not be easy to just switch this prioritization. Japanese managers and employees still identify themselves overwhelmingly with the traditional values. It is crucial for crosscultural managers to convince their teams of the importance of profits and shareholder value. This can be done through discussions, seminars or workshops. Actual case studies showing the consequences facing companies that do not pay enough attention to financial objectives4 would provide a powerful argument. However, even when the team is convinced of the need to focus on profitability, it will still expect the employees’ social needs to be fulfilled. Culture and mentality will not change overnight. That is why, in order to keep a high level of motivation, it will be necessary for management to continue the social welfare mission (see Figure 12.3).

Management under the motto: ‘Our employees are our most important assets’ In keeping with the topic of employee welfare, it is important for managers not only to state, but also to implement, the motto: ‘Our employees are our

Pawel Komender 285 Profit, shareholder value orientation

High

Western Western management Management

Cross-cultural Cross -Cultural management Management

Traditional Japanese Japanese management Management

Average

Average

High

Employees’ needs, welfare orientation

Figure 12.3 Future orientation of cross-cultural management in Japan

most important assets.’ Many companies make nice commitments, for example, during annual meetings, but do not implement them in daily business life. The result is that employees are dissatisfied and either leave the company or passively oppose corporate policies. A European machinery constructing company was dismissing employees one after the other because they did not identify themselves with the policies. Only after a long time did the company realize that perhaps there was something wrong with its approach, and not with the employees. Unfortunately, there are many such examples. Sometimes it is indeed necessary to terminate employment. This, however, should be a last resort. Many Western companies argue that their primary responsibility is towards their shareholders. But at the end of the day, the employees are the ones who will have to turn shareholders’ investments into profits. Consequently, the first choice should always be to create a cross-cultural alliance with the people who are already on board, management as well as employees. Managers should try to draw on their long experience and knowledge of the business, and not see them as ‘old and worn out’. When goodwill and a co-operative spirit are shown, the same will almost certainly be reciprocated.5

Management according to objectives: bottom-up, not top-down Many Western managers in Japan struggle with setting realistic objectives. Typically, they do not have enough knowledge of the particularities of the Japanese market. Freshly transferred from Europe, the USA or some other location, they have an excellent understanding of other markets. After studying some literature on the Japanese market (in English) and holding discussions with their English-speaking colleagues, they assume they have

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sufficient information to draw up a business plan. Usually, this is quite wrong. The Japanese market is full of lateral market dynamics, unofficial rules and peculiar business habits. Western managers often think ‘If it works in Europe and in the USA and elsewhere, then it must work in Japan as well.’ Yet they often hear from their Japanese colleagues: ‘Japan is different, it will not work here, it is impossible to do it in Japan.’ As a result, Western managers either become disillusioned or wield their power to impose objectives on to their Japanese organization. It is not difficult to predict to what consequences such an approach leads. In order to create a realistic set of objectives for a company operating in Japan, the first step is to acknowledge that both statements above are equally wrong and equally right. In other words, combining them renders the correct statement: ‘Objectives set in accordance with the situation in the Western or global markets can also be achieved in Japan. However, the approach, the budget, the effort and the timeline for achieving them may be different.’ The second step would be to obtain as much information as possible about the market situation – for example, by examining Japanese-language documents, talking to the different departments and sales people, speaking directly to the dealers, customers, potential customers and (ideally) with lost customers. Of course, all this is very difficult without excellent Japanese language skills, but the problem may be avoided by using the services of a Japan-experienced professional consultant or, at the least, a trustworthy bilingual secretary or assistant. On the one hand, detailed information will allow the manager to set realistic objectives and measures to achieve them, and on the other, it is also easier to confront possible rejection statements by Japanese colleagues. The objectives should be drafted basically with a bottom-up approach. This would ensure motivation and co-operation from the entire organization. If necessary, the objectives of single departments or employees could be challenged, using previously conducted research.

Flexibility and an open-minded attitude Significant differences between traditional Japanese and Western corporate cultures require that managers have a high level of flexibility and an open-minded attitude when creating a cross-cultural alliance in Japan. Since the new environment should incorporate elements of both cultures, as mentioned above, the most difficult part is how to balance these elements. Which elements, and to what extent should certain elements be adapted from which approach? This, of course, depends on the particular situation. For example, a performance-related compensation or promotion system may work in certain cases (for example, for Renault–Nissan). In other cases, the result was exactly the opposite: in one case, after introducing a performance-related compensation system in a Japanese subsidiary of a European company, the results worsened. All the salespeople were unanimous

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in feeling uncomfortable with the system, and therefore could not produce better results. In the light of this, managers of cross-cultural organizations must be flexible and possess the ability to adjust their management style to suit the situation.

Decision selling rather than imposing The importance of the bottom-up approach – that is, involving employees in the objective-setting process – also applies to any other decision-making process. Nevertheless, some decisions must be made exclusively by the company leaders. Then how can these decisions be communicated in an effective way? A universal answer cannot be given. One of the most frequent mistakes in communication lies in sending e-mail messages. Western managers forward their Japanese colleagues messages as ‘cc:’ and thereby consider them to be ‘informed’. Furthermore, they assume that, if there is no reaction, this means that the Japanese colleagues agree with the contents. Generally speaking, this is not true, and severe problems can arise at a later stage. Another major mistake is thinking that signed, written contracts or agreements in Japan require the unconditional fulfilment of their terms. Western managers often feel victorious when, after putting a considerable amount of pressure on their Japanese business partners or employees, they finally sign a particular document. Only later on there are problems with the fulfilment of the document, because the other party did not understand – that is, did not in fact agree to the terms. Japanese law as well as Japanese common sense require fairness and mutual understanding when finalizing agreements. Therefore, if one party signed a document under pressure and without fully understanding the terms, the agreement may be subject to dispute. Managers of cross-cultural organizations in Japan must have the skills to communicate decisions effectively. Again, sufficient knowledge of the Japanese culture and society is an important pre-condition for successful corporate management in Japan.

Real and sincere but not unconditional customer orientation While Japanese companies are traditionally extremely customer-orientated – that is, are always ready to adjust their products to meet the customers wishes, Western companies try to sell their products by arguing that they are advantageous for the customer just as they are, and not as the customer would like them to be. The consequences of both approaches are that, while Japanese companies struggle to produce profits, Western companies struggle to penetrate the market. Again, the solution to the problem lies in combining the two different approaches. The customer should get what he or she wants, but his or her willingness to pay for the product modification must be exploited. Alternatively, genuine arguments should be prepared to convince the customer that modifications are unnecessary. Much attention must be paid, though, to the way it is communicated. Emotions play

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a critical role in the decision-making process in Japan. The supplier must give the impression that it is following the customer’s instructions, and not the reverse. This can be achieved, for example, by posing well-targeted questions instead of making blunt statements. Customer orientation means that the offered products and services must deliver value to the customer, value of which the customer is aware and perceives as important. It also means that the customer must be willing to pay an adequate price in return for the value. Determining the value to customer, and thus an adequate price, as well as communicating the value effectively, poses a prime challenge in the Japanese market.

Summary The economic recession and increasing economic globalization have revealed how cross-cultural management will become more widespread in Japan. At the same time, major challenges will have to be confronted. Several factors will determine the effectiveness of cross-cultural management in Japan. Managers must be selected based not only on their professional knowledge, but equally, or even more importantly, based on their personal characters, their orientation on profits and shareholder value, and their respect for employees’ needs and welfare. Managers must run the company under the motto ‘Our employees are our most important assets.’ Objectives must be decided on bottom-up rather than top-down basis. Flexibility and an open-minded attitude are crucial. Decisions must be ‘sold’ rather than imposed, while customer orientation must be sincere and real, but not unconditional.

Conclusion Japan is the second largest economy in the world, and an extremely attractive market. At the time of writing, in spite of the continuing recession, the Japanese economy is essentially very sound. Undeniably, many businesses have got into financial trouble in recent years. At the same time, however, many companies have been very successful. The recession made market entry and M&A relatively cheaper, thus attracting more direct foreign investment. Operating a cross-cultural alliance in Japan is no easy task. There are significant differences between the traditional Japanese and Western corporate culture and management style. There are some success stories, but there have also been failures. With the speed of globalization picking up and the need to break out of the recession becoming even stronger, cross-cultural management will also become increasingly commonplace in Japan. Yet this can only happen if major challenges are confronted. The key to overcoming these challenges will depend on the personal skills and attitudes of the managers, and not

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solely on their professional abilities. The skills to achieve ‘hard’, quantitative results, which lead to an increase in shareholder value, while simultaneously motivating and satisfying employees, will be decisive factors. A real and sincere, but not unconditional, customer orientation, and a focus on providing value to the customer in exchange for a willingness to pay for that value, will be crucial. Managers’ experiences, a detailed knowledge of Japanese culture, and a genuine commitment to the challenge will also be important determinants of success. The handful of success stories should be used as benchmarks of how cross-cultural management can work in Japan.

Notes 1 2 3 4 5

Konosuke Matsushita speaking in Tokyo, 1979 – quoted in Pascale, R. ((1990): 27). Simon, Kucher and Partners. See Carlos Ghosn, ‘Saving the Business Without Losing the Company’, Harvard Business Review, January 2002. Cf. second example under 3.2, the faith of the Japanese distributor. See Note 3 re: Carlos Ghosn.

13 Clusters as ‘ba’ for Knowledge Management Yoko Ishikura

Introduction In the knowledge-based economy of the twenty-first century, it is critical for a firm to employ knowledge creation, knowledge sharing and knowledge management to constantly and speedily upgrade its competitive advantage. However, the growing needs of firms are making knowledge management increasingly complex. Specifically: (i) The need to maintain global competition in serving customers worldwide. National boundaries have been losing significance in corporate strategy, as firms reach customers beyond their home base, and face competitors from distant countries. As a result, the geographical coverage of knowledge management has broadened significantly. (ii) The need to collaborate with other firms on value-chain activities. Alliances and networks with other companies have become more important as the majority of firms contract value-chain activities, such as production and marketing, to outside experts who are more efficient and specialized. Many firms collaborate in networks through alliances that often go beyond national boundaries. Therefore, not only internal but also external knowledge management is necessary, even in conducting day-to-day activities. (iii) The need to work with diverse types of organizations. Various kinds of organizations and institutions, such as governments, trade organizations, universities and NPOs, have begun playing a significant role in determining a firm’s performance. Universities and other research institutions are important in discovery and basic research, and many start-ups with roots in university research have become common in the USA and other countries. Non-profit organisations (NPOs) have become vocal, exerting an increasing influence on the shaping of both regulations that directly affect a firm’s performance, and public opinion about free trade and globalization. Firms now need to manage

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knowledge not only within their organization and surrounding industry, but also much more broadly with other constituencies. Knowledge management, in order to work, needs to be based upon trust (Kim and Mauborgne, 2003). Recently, however, many incidents, such as the accounting fraud at Enron and WorldCom, and the non-disclosure of safety information in the processed food and auto industries, have shaken trust and left the public in doubt. When firms need to manage knowledge about customers and competitors beyond national boundaries, handle daily activities in collaboration with other firms in various industries with different cultures, and learn to work with and around organizations and institutions with which they have little experience, various inter-organizational and cross-cultural issues arise. Those related to trust, which form the foundation of knowledge management, become particularly difficult to identify and resolve. At the same time, ‘clusters’ are attracting a lot of attention. Clusters (Porter, 1998) consist of competitive industries and firms that are ‘geographically concentrated’ and form vertical (suppliers, channels buyers) and/or horizontal (common skills, technology and/or inputs) relationships. Silicon Valley and Hollywood are often cited as examples of clusters in a region, and the fashion and leather goods industries in Italy as clusters in a country. Clusters point to the importance of ‘location’ even in the move toward globalization. Recently, many cluster initiatives (Porter, 2001a, 2001b) have been discussed as an alternative approach to economic development. Few attempts have been made, however, to combine knowledge management and clusters.1 This chapter identifies the concept of ‘ba’ (the Japanese word for ‘space’), or shared context in motion (Nonaka et al., 2000), as a key to combining the two. It addresses the issue of trust in the cluster, which firms have almost taken for granted in their networks and alliances. It analyses the significance of clusters and the role of trust in firms’ strategy from a knowledge management perspective. First, I shall review the relevant literature: the knowledge management literature as it relates to ba and different approaches to strategy, and strategy literature as it relates to the global co-ordination of value-chain activities and clusters. I shall then introduce examples of cluster development in Japan, showing how knowledge creation takes place in a ‘cluster’, which by definition involves a diverse group of organizations. I shall then discuss the characteristics of ba required for successful knowledge conversion in clusters. I shall describe how to move along the knowledge spiral to link a cluster to global competition, and in the process explain the importance of trust. Finally, I shall propose recommendations for firms to make optimum use of clusters.

292 Clusters as ‘ba’ for Knowledge Management

Literature review Knowledge conversion and ba A firm can be viewed as a collection of knowledge assets. Some treat knowledge as one of the most important resources for a firm’s competitive advantage. Nonaka and others (Nonaka and Takeuchi, 1995; Nonaka and Toyama, 2002) propose four modes of knowledge conversion between tacit and explicit knowledge. Tacit knowledge refers to personal, subjective, informal and experiential knowledge, such as an intuition, a hunch or a ‘feel’ for emerging customer needs. Explicit knowledge refers to objective, formal and systematic knowledge, which is usually processed, transmitted, stored and maintained by an IT system. The four modes of knowledge conversion (socialization, externalization, combination and internalization) form the evolving spiral of the knowledge-creating ‘SECI’ process (see Figure 13.1). Socialization is the conversion of tacit knowledge to a different form of tacit knowledge. It often takes place in informal social meetings and may go beyond organizational boundaries, as in the case of interaction with customers and suppliers. Empathizing plays a key role in socialization. The conversion of tacit knowledge into explicit knowledge through articulation is called externalization. In externalization, metaphor and analogy are often used to enable others to share knowledge. Concept creation in new product development is an example of externalization. Tacit

Socialization

Externalization

Tacit

Explicit Internalization

Combination

Explicit

Process

Means

Socialization

Direct experience

Create tacit knowledge

Knowledge type

Individual to individual

Externalization

Dialogue/Reflection

Articulate tacit knowledge

Individual to group

Combination

Framework application

New explicit knowledge

Internalization

Learning by doing

New tacit knowledge

Figure 13.1 SECI model of knowledge conversion Source: Nonaka and Takeuchi, 1995.

Unit

Group to organization Organization to Individual

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Combination occurs when individual pieces of explicit knowledge are connected to create systematic sets of explicit knowledge, which are then disseminated among members of an organization. Databases can help in this process. Internalization is related to ‘learning by doing’. It is the process of embodying explicit knowledge as tacit knowledge. Product concepts and manufacturing procedures (explicit knowledge) are actualized through action and practice. Knowledge of such procedures becomes technical know-how when it is internalized as an individual’s tacit knowledge. Through the SECI spiral of continuous knowledge creation and utilization, tacit and explicit knowledge expand in terms of quality and quantity, from the individual to the group, and on to the organizational level. At the time of writing, firms face many contradictions and dilemmas, such as ‘global integration and local adaptation’, ‘a large organization to take advantage of scale and a small organization to be agile, “centralized and distributed leadership” and ‘speed and patience’. Nonaka and Toyama (2002) propose that a firm’s ability to synthesize is the key to dealing with such contradictions. The synthesizing capability of a firm is embedded in its knowledge vision, its ba, its creative routines, its incentive systems and its distributed leadership. The Japanese word ba means not just a physical space, but a specific time and space (Nonaka et al., 2001). It is a time–space nexus and is defined as shared context in motion – physical, virtual and mental space – to encourage knowledge conversion. In ba, information is given meaning through interpretation to become knowledge. New knowledge is created from existing knowledge through changes in meanings and contexts. Ba or shared context determines the outcome of knowledge conversion as it creates the context in which knowledge is created, shared and utilized. Who and how they participate in the context determines the outcome of the knowledge-creation process. In knowledge creation, generation and regeneration of the ba shared context is the key, as ba provides the energy, quality and place to perform the individual conversions and to move along the knowledge spiral. As for the role of trust in ba, von Krogh et al. (2000) state that care and trust determine the network of interaction in ba, as they form the foundation of knowledge creation. They further state that trust compensates for the lack of knowledge on the part of other participants. Trust is also reciprocal, based on mutual dependence. Nonaka et al. (2001) touch upon the need to reconsider the boundaries of the firm, as ba is not limited to a single organization today, when joint ventures, alliances with competitors and interactive relationships with customers are needed increasingly for a firm to compete. Recently, Nonaka (2002) has proposed a knowledge-based view of the firm to integrate two different approaches to strategy conceptualization – namely

294 Clusters as ‘ba’ for Knowledge Management

the ‘resource-based’ view (RBV) of the firm, and ‘positioning’. The resourcebased view of the firm focuses on socialization as it centres on internal context with the individual as the unit of analysis. The positioning school, represented by Porter, focuses on combination (explicit to explicit) with the market as the unit of analysis. Nonaka argues, however, that both of these approaches lack a ‘process’ view. He states that the ‘process’ of knowledge creation and conversion between tacit and explicit is a key, and not just the outcome of these activities. He argues that viewing the firm in terms of knowledge enables us to see the knowledge spiral from individual to group and from group to organization with the interface of the market. Following this approach, ba becomes even more important, as it provides a place for conceptualization and dialogue (see Figure 13.2). When the boundary of ba is set but open at the same time, and the knowledge spiral moves from individual to group, and from group to organization, with the interface of the market, building trust becomes more challenging as the value systems of individuals from diverse organizations differ significantly.

Global co-ordination and cluster The issue of configuration – where to locate value-chain activities throughout the world – and co-ordination has been debated extensively in the strategy literature. As an industry develops and becomes more globalized, firms begin to conduct their value-chain activities in dispersed locations around the world. Downstream value-chain activities, such as sales and service, are conducted in numerous country markets rather than being concentrated physically in one location. How to manage these activities on a global scale has been an important issue for global managers.

Externalization

Individual tacit knowledge

Concept creation at ba

Pr oc e

ss

Resource-based view

Internalization

Positioning view of strategy

Test in the market Practice

Combine/apply explicit knowledge in the market

Figure 13.2 Knowledge management and strategy conceptualization Source: Nonaka, 2002.

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Bartlett and Ghoshal (1998) propose the ‘transnational’ corporation model. They argue that the firm should think about the activity level of the value chain, such as development and manufacturing, and decide whether to centralize or disperse each activity accordingly. Recently, however, many multinational corporations have found it extremely difficult to apply the ‘transnational approach’ to value-chain management and have returned to a simpler model which concentrates key activities in a single physical location, because the lack of physical context or ba makes it difficult to coordinate value-chain activities that are in physically dispersed locations. Porter (1998) points out that corporations with superior performance in a specific industry are not scattered around the world, but rather tend to congregate in a single location, despite the move toward globalization. Porter calls this single location – a critical mass of unusual successes in a particular field – a ‘cluster’. He stresses the importance of ‘location’ as being relevant even in the age of globalization, and proposes the ‘Diamond system’, whose four factors, described below, are the determinants of the productivity, and productivity growth, of the location: (i) Factor conditions: cost and quality of inputs, including human, material, knowledge and capital resource inputs. (ii) Demand conditions: degree of sophistication of domestic demand for the products or service of the industry. (iii) Related and supporting industries: existence in the country of internationally competitive suppliers and other related industries. (iv) Context for firm strategy and rivalry: domestic conditions controlling the establishment, structure and management systems of the corporations in question, and the characteristics of competition among domestic rivals. (Figure 13.3 shows the four factors in detail.) Porter (2001a, 2001b) has recently gone a step further in expanding the role of the ‘cluster’ in economic development, indicating a shift of focus from the macroeconomic to the microeconomic foundation of economic development. He claims that competitiveness is determined by the productivity with which a nation, region or cluster uses its human, capital and natural resources. Productivity and productivity growth are determined not only by macroeconomic, political, legal and social contexts, but also by the microeconomic capability of the economy and the sophistication of local competition, as the microeconomic business environment is composed of an array of skills, knowledge, rules, policies, supporting industries and institutions surrounding competition. Many statistical and field-based studies of clusters throughout the world have been conducted recently and the latest cluster literature points out the importance of ‘institutions for collaboration (IFCs)’, which promote collaboration among players, such as universities, trade associations and firms, showing the importance of the collaboration ‘process’ among these diverse

296 Clusters as ‘ba’ for Knowledge Management

Rivalry

Factor (input) conditions

• Intense competition among locally-based firms • Local context encouraging appropriate investment

• Factor quality and specialization • Information, scientific and administrative infrastructure • Physical infrastructure • Natural, human and capital resources

Demand conditions • Demanding local customers • Lead customers

Related/supporting industries • Strong, locally-based firms • Competitive related industries

Figure 13.3 Cluster Source: Porter, 1998.

players. Both the increased attention to IFCs and to the ‘process’ of collaboration raise the importance of building trust among those with multiple objectives, diverse interests and different value systems. This chapter applies the knowledge conversion model, in particular the ba concept, to the cluster. I shall touch upon the issue of trust, which is assumed to exist in the knowledge conversion process in clusters. I shall propose actions for a firm to take in making optimum use of the cluster for knowledge management. My focus will be on firms, although clusters also involve other organizations and institutions.

Case studies of the TAMA and Kinki clusters The TAMA cluster2 The TAMA cluster is one of nineteen industrial cluster initiatives sponsored by METI (the Ministry of Economy, Trade and Industry) in 2001. METI defines an industrial cluster as a concentration of industries where worldclass ventures emerge one after another – that is, global perspective is incorporated from the beginning. It is a production technology cluster composed of electronic/electric component, machine tool, machining, precision machine and software firms (see Figure 13.4). TAMA stands for Technology Advanced Metropolitan Area, as well as for the Tama region of Tokyo. The TAMA cluster, with a total population of 10 million in a 3,000 square kilometre

Yoko Ishikura 297 Industry

• Joint order receipt • Contract research Customer • Large firms Networking/collaboration • General Machining** Machine tools** • Machinery • Electric transportation • Precision Electronic/electric** (Research dept.** Design, prototype dept.*)

Input Raw materials • Chemical • Plastic • Rubber

Related services • Construction • Utilities • Transportation • Other services

Precision machinery**

Software* Own products

Joint research

Joint development

Research organization • Universities* • Other institutes*

IFC • TAMA Association • TAMA TLO

Supporting industry • Specialized trading company • Placement/recruiting* • Financial services Support

Figure 13.4 TAMA cluster Note:

*

Competing with firms in Japan;

**

Competing with firms internationally.

Source: Own research and following METI, 2001.

area, boasts a total shipment of manufactured products worth ¥26 trillion (or US$21.6 billion) – double that of Silicon Valley.3

Historical background In 1996, the Kanto bureau of METI conducted a survey on a possible production technology cluster in the Tama area (the south-western part of Saitama, the Tama area of Tokyo and the central part of Kanagawa). The survey found that the region was home to many small- and medium-sized companies with design, manufacturing and marketing capabilities in specialized areas, as well as numerous development laboratories belonging to large corporations, such as Toshiba, NEC, Fuji Electric, Honda and Olympus. There were also forty universities with engineering departments in the area. However, few cases of collaboration and joint work connected these organizations for potential cluster development. In 1997, representatives of companies, universities, trade associations and local governments formed an ad hoc committee to promote networking and collaboration among companies of various sizes, universities and other research institutions. The committee was named the TAMA Committee. The formal TAMA Association was formed in 2001, with a membership of more than 400. This self-governing association is funded and operated using membership fees.

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Current status In 2003 (the time of writing), the TAMA Association has some 500 members, including 280 companies, twenty-seven universities and seventeen local government agencies. Association members include a leading search/recruiting firm and a financial services company, as well as large corporations in the region. Professor Furukawa of Tokyo Metropolitan University is the president, with the board consisting of the chairmen of Fuji Electric and Toho Electronics, and the presidents of Sigma Opticals and the TAMA Technology Licensing Organization (TAMA TLO). Seven staff from local governments and financial services institutions in the region support the administration, with Mr Okazaki as the head.

TAMA Association activities The TAMA Association identifies the technological ‘needs’ of member firms, while TAMA TLO, which was incorporated in 2000, identifies and collects ‘seeds’ from universities. Together they hold patent seminars and forums to introduce new research ‘seeds’ to universities as well as to patent consulting projects. The TAMA Association initiates and supports various activities for cluster development. For example, it established TAMAWEB, a website consisting of the product/technology databases of member firms and the research topics of universities. The Association also plans and conducts Business Plan contests in which small firms receive training in business presentation, rehearse their business plan presentations with presentation experts, and prepare business plan presentations for venture capital and other funding organizations. Additionally, it co-ordinates various area technology consortiums to promote collaboration among large corporations and small firms, and supports joint development and consulting projects. The Association features a co-ordinator system whereby retirees of large corporations, Certified Public Accountants (CPAs), certified social insurance experts, certified small business consultants and engineers serve as consultants for member companies and as co-ordinators for collaboration. Some eighty co-ordinators are registered at the time of writing. Co-ordinators must pass qualifying exams consisting of a skill training programme, reportwriting and ‘test’ visits to small and medium firms. The Association increased the difficulty of the exam when it gained a greater understanding of the actual skills required to co-ordinate joint development for commercialization. For example, they found that CPAs and certified small business consultants were less skilful than were retirees from large corporations who had management experience. To qualify as a co-ordinator, a candidate must be able to ‘share’ passion and empathize with the top management of small businesses. Co-ordinators

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visit member firms at their request, identify potential topics for collaboration in the TAMA cluster, and co-ordinate joint projects with universities and large corporations. They receive post-project feedback from the clients. The Association also has a ‘virtual lab’ system. Specifically, R&D facilities and equipment belonging to two large corporations, five universities and four research institutes are registered with the Association, and available for use by small- and medium-sized companies. The Association co-ordinates three incubation facilities belonging to large corporations and financial institutions in the area. For example, Fuji Electric converted a housing facility into an incubation centre, furnished with equipment and experienced personnel, to provide members with total support for commercialization. The TAMA Association has also initiated smaller-scale informal gettogethers in the three prefectures that constitute the TAMA region (Saitama, Kanagawa and Tokyo itself). Called Mini-TAMA groups, they meet every third Friday of the month and are operated by members in each prefecture. At Mini-TAMA meetings, universities and research institutes introduce research topics to member firms. Panel discussions featuring members are sometimes held, and lab visits are planned. The Association also serves as the base for recruiting various organizations. As it has neither the funds nor the staff to support collaboration and joint projects itself, it explores, identifies and taps many outside experts with skills and expertise, such as venture capitalists, trading companies and placement firms for the necessary task, and serves as a hub for collaboration. For example, it is more effective to recruit member companies with the cooperation of financial institutions, which have long lists of potential candidate companies. Meanwhile human resource transfer is accomplished effectively with the help of a leading recruiting company. The results of joint development projects, the commercialization of new technology through co-operation with university professors, and other collaboration between firms and universities, are documented and saved. Indeed, the METI Kanto bureau has conducted several studies to identify the number of joint projects and collaborative activities in operation to assess the effects of the TAMA cluster. Several people have played key roles in the TAMA cluster. Professor Furukawa, president of the Association, has long championed the concept of the TAMA cluster and been very active in promoting the region. Mr Okazaki, head of the administrative staff at the time of writing, serves as a producer who can co-ordinate funding by using his extensive experience in local and central government. He knows what types of subsidy are available from which government agencies, and how to qualify for each, so that the collaboration can be funded. Mr Kato, chairman of Fuji Electric, has championed the idea of the TAMA cluster as a driver for promoting innovation within large corporations and changing rigid decision-making practices.

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Dr Ibuka, the president of TAMA TLO, has demonstrated the importance of customers and the market in commercializing technology, based on his experience of heading the research arm of Yokogawa Electric, and of being involved with many development projects involving government subsidies and universities. Finally, several officials at different levels of government – local, bureau and METI headquarters – have advocated the concept of the TAMA cluster and have done research and conducted surveys to prove the effectiveness of cluster development.

Tosei Electrobeam4 Tosei Electrobeam was founded in 1977 as a spin-off. With seventy employees, it had sales of ¥950 million in 2002. This company specializes in machining prototypes for large corporations by combining the most advanced laser beam equipment with its own technological know-how. To meet demand for shorter prototype delivery time (sometimes within a day), the company collaborates as a co-ordinator with small, but specialized, companies in the region. It has some 300 repeat customers, the majority from the R&D departments of large corporations. Tosei Electrobeam interprets customer needs, meets with a number of small but specialized companies (about thirty regular ones, the majority with 300 to 500 employees) and co-ordinates projects. Capitalizing on its location and extensive network, it forms horizontal relationships with other members in which each contributes its own specialist skills as needed. The name of each company is announced, to ensure equal relationships. Some collaboration is done with universities in the region as well.

The effect of the TAMA cluster Firms in the TAMA cluster have grown by more than the national average in terms of total shipment, and have a higher R&D-to-sales ratio than the national average. Their success ratio of commercialization is three times the national average.5

Kinki biotechnology cluster6 The Kinki biotechnology cluster covers Osaka, Kobe, Kyoto and Nara, in the Kinki region of Japan. Its core is formed by the chemicals, pharmaceuticals, foods and beverages industries (see Figure 13.5). Cluster initiatives began in 2002 with the start of the Kinki Biotechnology Cluster Committee, part of the Kinki Biotechnology Industry Association. The Association was established in 1985 under the leadership of President Yamamura of Osaka University, the bureau chief of METI, and the president of the Osaka Science and Technology Centre. In deciding on developing a biotechnology cluster in the Kinki area, those involved had a strong idea that the biotechnology industry would lead the next generation of innovation in the world after IT. There was also concern

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Input

Networking/collaboration

Raw materials • Agriculture • Plastic • Rubber

Joint and order receipt

Industry Chemicals*

Pharmaceuticals*

Food*

Beverages

Machinery • Chemical • Precision* • Control*

Related services

Joint research

Venture business

• Research institutes • Universities,** other institutions*

• Testing/inspection* Database, Promotion of joint work • Design IFC • Kinki Bio Committee

Customers • Within clusters: chemicals, pharmaceuticals, food (Research dept.)* • Outside clusters* chemicals, pharmaceuticals, food • Consumer market • Hospitals

Promotion of networking Supporting industries • Specialized training (Healthcare, chemical, agriculture) • Financial services

Figure 13.5 Kinki biotechnology cluster Note:

*

Competing with firms in Japan

**

Competing with firms internationally.

Source: Own research and following METI, 2001.

that Japan was falling behind the USA in this industry with enormous future potential. From the initial stage of the Kinki cluster initiative, the vision was to become No. 1 in the world in some aspects of biotechnology, although many people thought that the USA was leading this industry in the same way that it had led IT. The cluster committee recently began to create a database of research and researchers, and sponsored several bio-related seminars, workshops and a regular business plan contest called the Biotechnology Venture Award, all of which focus on biotechnology start-ups. Several start-ups by university professors have emerged since the start of the twenty-first century. Of these, Anges-MG was the first Initial Public Offering (IPO) in September 2002 and has been by far the most ‘successful’ venture, surviving Death Valley by allying with Ishihara Sangyo and Daiichi Pharmaceuticals. Anges MG has excellent world-class programmes in three fields, all of which are patented.7 Anges-MG have used lab facilities made available at the Industrial Research Institute (Sansoken) in Osaka. The top management group consists of Professor Morishita of Osaka University and Dr Kotani, who has extensive experience with a US bio venture. Anges-MG has had several CEOs with different skills and expertise to meet the changing needs of the venture business. When financial knowledge was required, a former investment banker

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assumed the position. He followed someone familiar with patent applications worldwide. Another start-up by professors from Osaka University is Soiken, with sales worth ¥750 million in 2002.8 The company has two major lines of business – contract clinical development, and food development, using results from research at the university. The targets for their first business are large food manufacturers in the region. To remain independent and autonomous, they have maintained equal relationships with many university laboratories for research seeds, and have avoided exclusive relationships with a limited number of labs. Soiken gets contracts for clinical development from food processing companies in the Kinki area that do not have an in-house clinical development capability. This creates the cash flow to fund the current operation. At the same time, the company is developing a biomarker to measure how tired a person is quantitatively. Soiken intends not to license the biomarker to a single company in the area, but to establish it as a de facto standard that can be used worldwide.

The cluster as a ‘ba’ for knowledge conversion among firms and institutions A cluster is a physically close concentration of firms and organizations in certain related industries, which provides ‘ba’ for knowledge conversion among various participants. Through competition and co-operation among participants, a cluster promotes and enhances continuous innovation over time. Clusters and firms interact with each other (see Figure 13.6). Clusters create environments in which firms are pressured as well as provided with support to innovate constantly and to reap the benefits of innovation. Geographical proximity provides a good context or ba to create, share and make the best use of knowledge. By establishing and maintaining various mechanisms for knowledge conversion, a cluster helps firms to develop new technology and commercialize new products and services quickly and easily. Firms, on the other hand, help clusters to evolve and upgrade through their own innovations. New start-ups further develop the cluster. Thus a cluster promotes productivity improvement, innovation and commercialization by interaction between with firms.

From information to ‘knowledge’ When a ba includes external members and diverse participants, as does a cluster, it is important to have information about the four factors in the Diamond as a first step to knowledge conversion (see Figure 13.7 for specific items). Firms need information about cluster members, including their profiles and needs. Cluster participants need to provide this information through digital or other information networks. Websites can be effective for this. It is even more important that information is updated constantly to

Yoko Ishikura 303 Firm

Geographically concentrated group of firms and institutions in related industries

Firms provide higher value by commercializing new products/services

‘ba’ for Knowledge management

Evolution of cluster

Promotes continuous innovation through competition and co-operation

Mechanism for innovation

Cluster

Pressure and support from participants

Through innovation process

Figure 13.6 Cluster and firm

Rivalry • What are competitors’ strategies? • Any regulations limiting free entries and exits? Factor conditions

Demand conditions

• • • •

• Who are the users of technology and products? • What are their specific needs? • Where to go to access needs?

Where are people and knowledge located? What type of research is under way? Who provides funds? How can we get funds?

Related/supporting industries • Who can provide raw materials, parts and services we need? • How about the co-operation in technology development and experiment?

Figure 13.7 Specific information required

enable it to remain current. When pursuing innovation, no one looks at outdated information: its short life span needs to be remembered. In the TAMA cluster, TAMAWEB serves as an information network. When the website began, people were excited and posted information, partly out of curiosity. As time passed, however, updating the website and making it

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user-friendly turned out to be more challenging than the initial establishment of the information network. When the TAMA Association discovered that university professors have little incentive (and/or skill) to update their current research, it decided to install a reverse search engine. It also hired content co-ordinators to make the information on the website understandable and user-friendly. The co-ordinators interpreted the information to convert it into ‘knowledge’. Their success in knowledge conversion was proved by more than 100,000 monthly hits on the TAMA website.

Knowledge conversion in various types of ba In this section, I shall describe the type of ba that clusters offer, and the kind of knowledge conversion that takes place in different ba.

Types of ba For a cluster to become a ba for knowledge conversion, actual interaction and networking among firms and institutions needs to take place in different types of ba. Various alternative forms of ba exist. Figure 13.8 shows some specific examples of ba by using a physical and virtual continuum as the horizontal axis and players as the vertical axis. Examples of ba from TAMA cluster are the Virtual Lab, the Virtual Forum, the MINI TAMA groups and other small, informal get-togethers; the series of business plan contests, the area consortium, and consulting projects.

Information network Physical Informal get-together Business plan contest, area consortium Consulting project Shared lab Virtual forum

Virtual

Virtual lab Mental Individual Players

Firms Small Large

Figure 13.8 Examples of ‘ba’

Co-ordinators Universities

Government

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The Kinki biotechnology cluster has experimented with a shared lab system and its Biotechnology Venture Award.

Knowledge conversion in the ba Next, I shall describe knowledge conversion in different types of ba, using cluster cases. A MINI TAMA group is a great ba for socialization, as it provides physical space for sharing experience. Its informal atmosphere, without a set agenda, provides a place for socialization among start-ups, engineers from large corporations, and researchers from universities and other institutions. The series of business plan contests promotes knowledge conversion through externalization (idea to business concept) and combination (business concept to business plan that can be explained and demonstrated to venture capitalists and others who fund the venture). At the Virtual lab, several types of knowledge conversion take place. For example, engineers from a small spin-off with an idea (tacit knowledge) hold a dialogue with engineers from large corporations experienced in development (externalization). They sometimes experiment together (internalization) by using the facilities at the lab. Consulting projects conducted by the co-ordinators of the TAMA cluster indicate the importance of actual experience for sharing, and of action for knowledge conversion. Only those co-ordinators with actual development and management experience are able to hold meaningful dialogues to help small start-ups to encourage externalization and combination to happen. They do not happen with CPAs or consultants lacking shared experience, even though a physical ba is provided. Because of the use of language and the shared experience of developing and managing a business, trust developed between the retirees (or those with significant managerial experience) and the top management of startups, even though they were initially from different-sized companies. On the other hand, knowledge in a vacuum was not enough to build trust between the management of start ups and CPAs/consultants. In the Kinki biotechnology cluster, the shared lab where biotechnology researchers can conduct lab tests using the most modern machines and equipment was very effective for socialization and internalization.

Ba requirements for productive knowledge conversion Next, I shall explain some requirements for interaction within a cluster that make knowledge conversion productive. It is one thing to organize a cluster, but quite another to make it beneficial to its members and the region by creating a good ba for knowledge conversion. The government can establish cluster committees or institutions for collaboration, and cluster initiatives can provide the physical and virtual ba. However, to make a cluster productive as a ba for knowledge conversion, the following

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are required: (i) increasing diversity of participants; (ii) equal, flexible, and dynamic relationships; and (iii) unique participants.

Increasing diversity of participants A cluster, by definition, involves diverse groups. They include firms of various sizes with vertical and/or horizontal relationships, universities, research institutes, government agencies at different levels, and institutions for collaboration. These organizations differ significantly in terms of culture, routine and evaluation systems. This diverse composition can promote knowledge conversion, as it produces contradictions and dilemmas to be resolved, and stimulates knowledge conversion. In the case of the TAMA cluster, association membership from the beginning has been diverse, by design. As the Association continues its work, it continues to add more service organizations, such as placement service companies and local financial institutions. By permitting entry to similar organizations, constructive and mutually beneficial collaboration can be sought, so that knowledge conversion and the upward knowledge spiral continue.

Equal, flexible and dynamic relationships When involving diverse organizations, it is important to keep relationships and interaction on an equal basis, flexible and dynamic. Unlike interaction in keiretsu, where relationships are rigid, with ‘downstream’ firms having a stronger hand than those ‘upstream’, interaction in a ‘cluster’ must be equal and flexible to allow knowledge conversion to occur. In the TAMA cluster, relationships are neither rigid nor constraining. They are flexible and can be changed at any time. Members take the conscious decision to participate in networking activities, such as the MINI TAMA groups. They join the consortium and participate in joint development efforts as long as they can see the value of spending the time and energy. They are free to leave when they no longer see the value of remaining. In the TAMA cluster case, co-ordination by Tosei Electrobeam symbolizes the equal relationship, as each joint project is temporary, with every member being responsible for a certain part or process. The TAMA Association itself epitomizes the equal relationship, as membership fees fund its operation. It is flexible and dynamic in approach, as illustrated by its many successes and failures. In the Kinki biotechnology cluster, Soiken’s approach to maintaining contacts with universities and major customers also represents this type of effort.

Unique participants As the networks and relationships in a cluster are characterized by their equal, flexible and dynamic natures, and members must have their own

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unique strength. Unless each member brings something that no one else can offer to the cluster, few other members will find it worthwhile to collaborate. Thus uniqueness is a ‘must’ for members. For firms, new technology or know-how are good examples of unique assets. In the case of the Kinki biotechnology cluster, Anges-MG has patents in three fields. In TAMA, Tosei Electrobeam is one of Japan’s most advanced firms in laser-beam machining. This is unique strength. It is best if the uniqueness is defensible, such as by patents (as in the case of biotechnology ventures, such as Anges-MG and Soiken in the Kinki cluster). In the case of a production technology cluster, like TAMA, unique production know-how and engineering suffice. If no other firm can offer a particular technology, the firm, no matter how small, is the ‘only one’ in the world from which the technology is available. Possessing such ‘one-and-only’, unique technology, a firm gains strong negotiating power, with customers, suppliers or collaborators in the same location or elsewhere. Uniqueness provides confidence, even for small start-ups. The supplier with unique technology can play on a level field with large customers or suppliers. As some of these unique strengths tend to be in the form of tacit knowledge, ba provided by the cluster becomes very productive for knowledge conversion. Not only small start-ups with ideas or know-how, but also large corporations, such as Fuji Electric and Daiichi Pharmaceuticals, can bring unique assets to the cluster. These include resources in the form of facilities, equipment, people with extensive experience, and/or funds for development. In the case of large corporations, the uniqueness must be specific to cluster development. With each participant bringing in ‘unique’ or ‘one-of-a-kind’ assets specific to the cluster, mutual dependence arises. Clusters, unlike an organization, do not have in most cases, performance appraisals of their own, and it is not possible to incorporate trust into performance appraisals.

Leadership for knowledge conversion Knowledge conversion requires distributed leadership (Nonaka and Toyama, 2002). In clusters, champions who believe in the value of the cluster are committed to cluster development and the potential competitiveness of the cluster emerges to initiate knowledge conversion. Whether from the business community, research institutes, universities or different levels of government, these champions promote, enlighten and market the concept of clusters to increase the competitiveness of a region. I shall now describe two types of leadership – single company, and institutions for collaboration (IFC) – which take knowledge conversion leadership in clusters. Tosei Electrobeam’s role in active knowledge conversion, by using both physical and virtual networks, illustrates the importance of leadership in knowledge conversion. The president of Tosei Electrobeam understands the need for the speedy delivery of prototypes to the research departments of large corporations in the region. He interprets the information from the contact person at a research institute as tacit knowledge

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(socialization). He then externalizes it as a joint project involving a group of collaborators by holding dialogues with a network of small companies (explicit knowledge) possessing special skills or know-how. In the process, he uses physical ba (visits and meetings) as well as virtual ba (websites) to narrow down his list of potential collaborators. Next, he combines each task with the chosen collaborator (combination) to complete the work. This process takes place very quickly. The experience is then internalized at each company and accumulated in the form of know-how. The TAMA Association is a very effective IFC for leading knowledge conversion. It has a clear vision for developing the TAMA production technology cluster by building a network for promoting innovation within it. The Association has established various ba for knowledge conversion (socialization, externalization, combination and internalization) – an information network, virtual lab, series of business plan contests, consulting projects and so on. In addition, it has experimented with various approaches, changing direction when they did not work. It has maintained champions in different fields – different levels of government, universities, large and small corporations, and research institutes. It has also kept the gates open and recruited diverse organizations as deemed to be necessary. The Association also documents collaboration and project results, and stores them to form a base for further development. Furthermore, surveys are often conducted in the TAMA cluster to monitor and track results, and document them (combination and internalization).

Cluster evolution and movement up the knowledge spiral A cluster does not function as effective ba for knowledge conversion unless it evolves and moves along the knowledge spiral. For a cluster to promote upward movement along the knowledge spiral, the following are needed: a long-term view and tangible output of innovation; and regional and global perspectives.

Long-term view and tangible output of interaction There have been many clusters in which the initial effort to promote interaction succeeded, but which evaporated without tangible results. Knowledge conversion and management take a long time and so does cluster development. Clusters do not happen overnight; they take years to develop. It can be seen clearly from the historical background of some clusters, such as the wine cluster in Australia, that their development has taken many years of continuous effort (Porter and Slovell, 2002). And clusters mature and die if left unattended. They need to evolve to remain ‘productive bas’ for innovation. Cluster members need to have a long-term viewpoint. At the same time, short-term tangible output is required to maintain knowledge conversion. A cluster needs to produce something of value for participants and the region in order to continue.

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Even in a biotechnology cluster, where commercialization occurs many years after the initial discovery, milestones are needed, as in the case of Anges-MG, so that participants can sense progress being made. Anges-MG’s IPO encouraged further knowledge conversion. Sales in the market would be good tangible output in a production technology cluster like TAMA. For that purpose, value chain activities as a whole would need to be co-ordinated. In the TAMA cluster, more focus has been placed on upstream activities, such as research, development and engineering, by both the Association and the government. To provide tangible results, and thereby move along the knowledge spiral, downstream activities, such as marketing and sales, are critical for cluster success. Large corporations can play a significant part in becoming customers of new technology, and the government can act as a supporter and promoter of sales, not only in the cluster, but also worldwide.

Regional and global perspective Clusters must possess both ‘local’ and ‘global’ perspectives to move along the spiral. A focus on the downstream activities of the value chain in a physical cluster is ‘local’ by definition. And yet the cluster must have a global perspective. Unless participants have a vision that extends beyond the physical region to make their cluster of a world class with international competitiveness, the knowledge spiral will not materialize. A cluster needs a vision or an idea of what it wants to attain. A cluster also needs to be updated and to evolve. To do so, getting out of the ‘region’ box and into the global arena is indispensable. A cluster has significance in the physical proximity of its members, and in that sense is very ‘local’. At the same time, it needs to be open to the world – ‘global’. Some small companies in the Kinki and TAMA clusters see themselves in relation to the world and not to their peers in the region. They are the ones constantly upgrading the cluster. Soiken’s concept of combining short-term clinical development for customers in the region with longterm basic research that covers a wide area around the world is an interesting example of this.

Trust and integrity One of the most important underlying assumptions for a cluster to function as a ba for knowledge conversion is the existence of trust. Trust is the foundation upon which flexible and dynamic collaboration and networking are built. Participants disclose information about innovations or research on the information network because they trust that others will not take advantage of, or abuse, it. They keep updating their own information because they trust that the latest information, even though it may contain some semiconfidential information (if identified by experts), will benefit their collaborative effort. They join the consortium and start developing a new product

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or process jointly because they trust that combining their skills and know-how will bear more fruit than operating alone. They outsource marketing and sales activity in commercializing their innovation, as they trust that parties are professionals in their own field and will do a professional, much better job than they could themselves. In that sense, trust compensates for a lack of knowledge. But trust is fragile (Galford and Drapeau, 2003). It assumes that other members are ethical, law abiding, willing to work together and will not put their own interests before the interests of the group or cluster. Successful clusters require considerable effort and understanding on the part of all parties, and are characterized by diversity, flexibility and dynamic collaboration. Trust may easily be gained when members deal with others in the same industry, have competed in the past, or know each other’s strategies and behaviour. But a cluster goes far beyond that. Diversity and flexibility – the factors that make trust very difficult – are what make clusters work successfully. When firms of different nationalities or cultures join together, they need to start from scratch. When a firm takes a global approach to innovation by targeting the world as a potential market for its innovation, that firm cannot work alone. It needs people from other countries and organizations who will handle downstream activities in physically distant locations. Here, trust must play a significant role. Firms need to recognize that innovation arises from constructive conflict and positive clashes between different ideas and notions. They need to depend on each other to bring out the best in each. They need constantly to be willing to be challenged, and to take on new challenges. In that sense, they depend heavily on each other, underpinned by trust.

Conclusion So, how can a firm make the optimum use of a cluster if it wants to make it the most appropriate ba for knowledge conversion in this ‘borderless’ era? Firms can use a cluster ba to reflect and identify their own uniqueness in the wider context. First, they need to identify to which cluster they belong, and at the same time firms need to take stock of what they have – both tangible assets, such as facilities and equipment, and intangible assets, such as people and knowledge. They need to disclose what they can offer the cluster. Firms, particularly large ones, may feel overwhelmed by this task, as they themselves may not know what they have. It is possible that the unused facilities of large firms may function quite well as incubation space for innovation. Large firms may also have many competent engineers ready for spinoff. Meanwhile, small firms may feel that they have much less to contribute than to gain. However, they may find that their accumulated know-how of production technology (tacit knowledge) is ‘one-of-a-kind’ in the world when exposed move widely through cluster interaction. Clusters provide

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a ba for each participant to gain more knowledge about itself in a larger and more diverse context.

Firms should take action to initiate knowledge conversion The critical factors in a cluster for knowledge management are action and interaction. Firms must take action to make the best use of their cluster. They cannot simply disclose information and then ‘wait and see’. Unless firms take action, they will not discover what they can get out of their cluster. Clusters do not always function according to plan. It is important to have a shared vision for the region, as in the case of many successful cluster initiatives in the USA, Australia and elsewhere. However, it is a case of much trial and error in the process of developing a cluster. Unless firms are ready to experiment and escape the restrictions of their own rigid planning process, the best aspects of a cluster will not be realized. We often start with pre-conceived stereotypes and views of the parties involved in the cluster. For example, we hear that Ministry A is only interested in industry development, while Ministry B is interested in creating a centre of basic research excellence. We believe that large firms copy innovative ideas or designs created by small start-ups once they see their large market potential. Or we think that small firms have few people worth contacting, and that universities are very bureaucratic, with professors living in ivory towers with no sense of the outside world. Only by working closely with these people from different organizations can firms determine whether or not these views are based on fact. There will inevitably be some surprises on their part as they gain first-hand experience with start-ups and government entities with a different ‘logic’ or mentality and value systems. Firms naturally make mistakes. They may not collaborate initially with the ‘best’ partners in new product development. They may need to get out of one relationship or network to try another, if the original one does not produce a tangible output within a certain time frame, or if they do not see obvious progress. At the same time, they may find ‘softer’ by-products through participating in a consortium in the cluster. For example, the entrepreneurial spirit found in small start-ups can be contagious, and spread to large firms. A cluster is organic and thus constantly evolving. It is ‘alive’ in the sense that it changes course depending on the type of knowledge that is created and shared in the ba. It is not a place where a set vision or direction is always sought. Rather, a cluster is ba where action and interaction among diverse participants create energy, and new knowledge is born.

Trust forms the foundation… Firms should recognize that trust forms the foundation of knowledge management in a cluster, and that, while it takes a long time to develop, it is easily broken. By increasing knowledge accumulated in the cluster, converting knowledge from tacit to explicit through interaction with other members of

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the cluster and solidifying trust through increasing knowledge of each other and the context, firms can further develop and upgrade the cluster to which they belong. Knowledge is the main driver in the twenty-first century. Knowledge needs to be created, shared and managed by firms, but not only with their most familiar constituencies of customers, employees, competition, shareholders and suppliers. Firms need to realize that regional economic development is highly intertwined with their own performance. They have a very active role in identifying, developing and updating the cluster. Without commitment to developing the region, firms will not make the optimum use of clusters. If firms want to maximize the benefits of the cluster’s ba, they need to be aware of the importance of creating new knowledge, converting the tacit knowledge that resides within their own organization into explicit knowledge, and sharing this knowledge with other institutions whose people have different value systems and routines. For this, trust is indispensable. Through knowledge conversion, more new knowledge will be generated. When more knowledge, particularly of the tacit kind, is created and shared by people from different organizations and institutions, mutual trust will be further strengthened. In the case of the TAMA cluster, mutual trust existed among the key people representing different constituencies. This mutual trust developed further as they gained more knowledge about each other – both tacit and explicit. When knowledge conversion takes place in various ba, mutual trust is strengthened, further paving the way for more knowledge conversion. Once the process of knowledge conversion based on mutual trust starts, the pace and quality of knowledge conversion accelerate. Participants can identify areas that need redirection, re-examination or further action. They involve more diverse organizations and institutions. Without trust, this would be quite difficult.

Notes 1 For some examples, see Corno et al., 1999. 2 This section on the TAMA cluster is adapted from http://www.tamaweb.org and a series of interviews by the author. 3 METI (Ministry of Economy, Trade and Industry) (2001) ‘Industrial Cluster Projects’ (in Japanese). http://www.tamaweb.gr.jp/TAMA/index_v3.html [Accessed August 2003]. 4 This section on Tosei Electrobeam is based upon interviews with the author. 5 METI, as Note 3. 6 This section on the Kinki Biotechnology cluster is adapted from METI ‘Kinki Biorelated Industries Project’ December, 2002, Bio Industry Promotion Section, METI and a series of interviews. See p. 542. 7 http://www.anges-mg.com/home.htm, interview conducted in February 2003; ‘AnGes-MG, Venture Business’, Nikkei Business (in Japanese) 3 February 2003. Further details can be found at http://www.anges-mg.com/en/home.htm in English. 8 http://www.soiken.com/indextop.html – interview conducted February 2003.

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References Bartlett, C. and Ghoshal, S. (1998) Managing across Borders: The Transnational Solution, 2nd edn (Boston, Mass., Harvard Business School Press). Corno, F., Reinmoeller, P. and Nonaka, I. (1999) ‘Knowledge Creation within Industrial Systems’, Journal of Management and Governance, 3, pp. 379–94. Galford, R. and Drapeau, A. S. (2003) ‘The Enemies of Trust’, Harvard Business Review, February, pp. 89–95. Ishikura, Y., Kanai, K., Fujita, M., Maeda, N. and Yamasaki, A. (2003) Clusters in Japan (Tokyo, Yuhikaku Publishing) (in Japanese). Kim, C. and Mauborne, R. (2003) ‘Fair Process: Managing in the Knowledge Economy’, Harvard Business Review, January, pp. 127–36. Nonaka, I. (2002) ‘Integration of Strategy and Organization in Terms of Knowledge’, Soshiki Kagaku, 36(1), pp. 4–13 (in Japanese). Nonaka, I. and Takeuchi, H. (1995) The Knowledge Creating Company (New York, Oxford University Press). Nonaka, I. and Toyama, R. (2002) ‘A Firm as a Dialectical Being: Towards a Dynamic Theory of a Firm’, Industrial and Corporate Change, 11, pp. 995–1003. Nonaka, I., Toyama, R. and Konno, N. (2000) ‘SECI, Ba and Leadership: Unified Model of Dynamic Knowledge Creation’, Long Range Planning, 33(1), pp. 5–34. Nonaka, I., Izumi, H. and Nagata, A. (2003) Toward the Theory of Knowledge-based Country: a New Paradigm of the Policy Process (Tokyo, Toyo Keizai) (in Japanese). Porter, M. (1998) Michael E Porter – On Competition (Boston, Mass., Harvard Business School Press). Porter, M. (2001a) Clusters of Innovation: National Report Council on Competitiveness. http://www.compete.org/nri/clusters_innovation.asp [Accessed August 2003]. Porter, M. (2001b) ‘Clusters of Innovation Initiative: San Diego Report, and also Clusters of Innovation Initiative: Pittsburgh Report’, Council of Competitiveness. http://www. compete.org/nri/clusters_innovation.asp [Accessed August 2003]. Porter, M. and Slovell, Orjan (2002) The Australian Wine Cluster – Supplement (Boston, Mass., Harvard Business School Case Study). von Krogh, G. Ichijo, G. K. and Nonaka, I. (2000) Enabling Knowledge Creation (Oxford University Press).

Further reading on clusters in Japan 1. For information on TAMA cluster – http://www.tamaweb.org (in Japanese). 2. For information on Kinki cluster: ‘Kinki Bio related industries project’ December, 2002, Bio Industry Promotion Section, Kinki Bureau, METI – http://www.meti.go.jp/topic/datae20308aj.html 3. And ‘AnGes-MG, venture business’ Nikkei Business 3 February 2003 (in Japanese). 4. And – http://www.anges-mg.com/home.htm as well as 5. http://www.soiken.com/indextop.html 6. Forthcoming A new survey to be conducted by the Industrial Cluster Research Committee, METI, on the Mitsubishi Research Institute and UFJ Research Institute.

14 A Cross-cultural Comparative Study of German and Singaporean Employees’ Trust Decisions Following a Takeover: Implications for Cross-border Mergers and Acquisitions Günter K. Stahl and Chei Hwee Chua

Mergers and acquisitions (M&As) are an increasingly popular strategy for achieving corporate growth and diversification. The worldwide value of deals increased from US$462 billion to over US$3.5 trillion during the 1990s. Although the USA is the largest M&A market, Europe and Asia have outpaced it in terms of growth rates. Between 1990 and 1999, the number of M&As in the USA recorded a 10 per cent compound annual growth rate, while Europe and Asia-Pacific recorded a higher growth rate, of 13 per cent and 27 per cent, respectively (Sirower and Hasson, 2000). Cross-border M&As, in particular, are becoming an increasingly popular alternative to greenfield investments or strategic alliances as a vehicle for internationalization. The number of cross-border deals more than quadrupled between 1997 and 2000, with the number of transactions increasing from 2,100 to 9,200 (Levy, 2001). According to a KPMG survey, out of all M&As executed yearly, the percentage of cross-border M&As increased from 26 per cent in 1997 to 41 per cent in 2000 (Levy, 2001). Despite their popularity and strategic importance, however, M&As frequently fail. Failure rates reported in the M&A literature typically range between 50 per cent and 70 per cent, or sometimes even higher (see, for example, Hall and Norburn, 1987; Porter, 1987; Hunt, 1990; KPMG, 1999). For example, a KPMG survey found that 83 per cent of 107 of the largest cross-border M&As completed between 1996 and 1998 were not successful in terms of shareholder-value creation (KPMG, 1999). Theoretical frameworks for explaining M&A success and failure have traditionally focused on financial and strategic factors – for example, the degree of ‘strategic fit’ or industry relatedness between the acquiring firm and the target company. It is only recently that research endeavours have begun to analyse the ‘softer’, less tangible social, cultural and psychological issues involved in integrating merging or acquired firms. Factors such as 314

Günter K. Stahl and Chei Hwee Chua 315

cultural fit, the pattern of dominance between merging firms, similarity of management style, the combining firms’ preferred mode of acculturation, and the social climate surrounding a merger or an acquisition have been recognized increasingly as being crucial to M&A success (see Cartwright and Cooper, 1996; Schweiger and Goulet, 2000; Marks and Mirvis, 2001 for reviews). Recently, Stahl and Sitkin (2001) have suggested that trust may play a key role in the success and failure of M&As. Although few attempts have been made to examine the role that trust plays in the post-M&A integration process, a large body of research on inter-organizational trust has shown that the development of trust is crucial to the success of strategic alliances (see, for example, Ring and Van de Ven, 1992; Das and Teng, 1998; Zaheer et al., 1998). Since alliances and M&As share many characteristics, it seems reasonable to assume that trust also plays an important role in the M&A process. In fact, evidence from M&A case studies (Buono et al., 1985; Olie, 1994; Cartwright and Cooper, 1996), as well as interviews with managers and employees of acquired organizations (Schweiger et al., 1987; Napier et al., 1989; Krug and Nigh, 2001) consistently stress that trust is crucial to the success of M&As. The purpose of this chapter is twofold. First, we shall examine the previously neglected, but potentially critical role that trust plays in the M&A process, and discuss a number of variables related to the characteristics of the initial takeover situation and post-acquisition integration process that may play a role in the process of trust development in the aftermath of an M&A. Second, since there is evidence that trust dynamics within and between organizations may vary depending on national culture (see, for example, Harnett and Cummings, 1980; Doney et al., 1998; Whitener et al., 1999), we shall examine whether individuals’ trust reactions to a takeover differ across cultures, by using a policy-capturing approach to test the variables discussed as determinants of target firm members’ trust in the acquiring firm management, in a sample of German and Singaporean employees.

Determinants of target firm members’ trust in the acquiring firm management Evidence showing the crucial role that trust may play in the post-acquisition integration process can be drawn from a large body of research on intra- and inter-organizational trust. This research suggests that trust is important in a number of ways. Trust can improve the quality of employee work performance, problem-solving and communication, and can enhance employee commitment and citizenship behaviour. It can also improve manager– subordinate relationships, the implementation of self-managed work groups, and the firm’s ability to adapt to complexity and change. Further, trust can decrease agency and transaction costs by limiting the need for

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monitoring and control, and eventually providing firms with a competitive advantage (see Mayer et al., 1995; Jones and George, 1998; Rousseau et al., 1998; Kramer, 1999 for reviews). Research on inter-organizational trust has shown that trust is also crucial in the formation and implementation of co-operative alliances between firms, such as joint ventures, R&D collaborations, and marketing partnerships (Ring and Van de Ven, 1992; Das and Teng, 1998; Zaheer et al., 1998). The latter line of research seems particularly relevant to the study of M&As, because the factors that are held responsible for the poor performance of alliances are in part those theorized as being associated with M&A failure (Cartwright and Cooper, 1996; Marks and Mirvis, 1998; Evans et al., 2002). Perhaps the most telling statement on the critical role that trust plays in the integration process following a merger or an acquisition is that of Daniel Vasella, Chairman of the Board and CEO of Novartis (cited in Engeli, 1999, p. 5): Trust is the most important of our values … Only in a climate of trust are people willing to strive for the slightly impossible, to take decisions on their own, to take initiatives, to feel accountable; trust is a prerequisite for working together effectively; trust is also an ally to fight bureaucracy … Among all the corporate values, trust was the one that suffered most from the merger … We need to create a culture based on trust. Stahl and Sitkin (2001) have suggested that trust between members of the target firm and the acquiring firm may play a key role in the post-acquisition integration process. Specifically, they proposed that certain characteristics of the initial takeover situation, in particular the nature of the relationship between the acquiring and target firms, as well as the acquirer’s integration decisions and actions, will affect the target-firm members’ trust in the acquiring-firm’s management. And the degree to which target-firm members trust the acquiring-firm’s management will, in turn, affect both target-firm members’ attitudes and intentions, as well as their post-acquisition behaviour and performance. Based on prior research on intra- and interorganizational trust as well as M&A integration, the following factors seem to be particularly critical in influencing target-firm members’ trust in the acquiring-firm’s management: takeover friendliness; extent of control imposed by the acquiring firm; interaction history between the acquiring and target firms; cultural distance between the acquiring and target firms; and attractiveness of the acquiring firm’s human resources (HR) system. We shall now discuss each of these proposed determinants of target-firm members’ trust in the acquiring-firm’s management.

Takeover friendliness The most extreme and probably most devastating form of hostility in M&As is the unwanted takeover attempt, occurring when a company either overtly

Günter K. Stahl and Chei Hwee Chua 317

or covertly seeks acquisition of another firm against its will (Hogan and Overmyer-Day, 1994). Although prior research has not addressed the relationship between mode of takeover and trust, it has been argued that hostile takeover tactics can result in sharp inter-organizational conflicts and major difficulties in integrating the acquired company (Buono and Bowditch, 1989; Larsson, 1990; Hambrick and Cannella, 1993). According to Hunt (1990), the tone of the negotiations – whether it is friendly or hostile – is likely to be the most important influence on post-acquisition integration success, because of its effect on the quality of the interpersonal relationships between the members of the two organizations. Friendliness is likely to generate perceptions of goodwill and trust, and will enhance the quality of communication and collaboration between acquiring and target firms. In contrast, target and acquiring firms’ executives in a hostile takeover often battle with each other in a public forum, with each being suspicious of the other’s intentions, and claiming the other party’s inadequacy and lack of trustworthiness (Hambrick and Cannella, 1993). Executives of acquired firms have often likened the unwanted takeover to a rape, and described the acquiring firm’s managers as attackers or barbarians – people not to be trusted (Marks and Mirvis, 2001). Therefore we expect the level of target firm members’ trust in the acquiring firm’s management to be greater when the mode of takeover is friendly.

Imposed control Imposed control refers to a situation in which the acquiring firm removes autonomy from the target firm and imposes a rigorous or standardized set of rules, systems and performance expectations on it in order to gain control quickly (Jemison and Sitkin, 1986; Datta and Grant, 1990). The capability and tendency of the acquiring firm to impose control on the target firm depends partly on the power differential between the two organizations; for example, as manifested in differences in size (Pablo, 1994). Imposed control can be devastating from the perspective of target-firm members (Jemison and Sitkin, 1986; Buono and Bowditch, 1989; Schweiger and Walsh, 1990). Removal of autonomy and being put under close monitoring will probably lead to feelings of helplessness, hostility and distrust on the part of the target-firm members (Jemison and Sitkin, 1986; Olie, 1990). Because controls tend to signal the absence of trust, their use typically hampers its emergence (Sitkin and Roth, 1993; Sitkin, 1995; Rousseau et al., 1998). Hence, we expect the level of target-firm members’ trust in the acquiring firm management to be less when the acquiring firm imposes a high degree of control on the target firm.

Interaction history Few studies have explored the impact of combining-firms’ interaction history on the process and outcome of M&A integration. Nevertheless, there is

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a large body of research on the role that trust plays in work groups, strategic alliances and socially embedded partnerships from which to draw indirect evidence. This research has shown that trust develops over time through repeated interactions between partners (Ring and Van de Ven, 1992; Gulati, 1995; Lewicki et al., 1998; Zaheer et al., 1998). Providing evidence that familiarity breeds trust in inter-organizational relationships, especially in strategic alliances, Rousseau et al. (1998, p. 399) noted that ‘[r]epeated cycles of exchange, risk taking, and successful fulfilment of expectations strengthen the willingness of trusting parties to rely upon each other and expand the resources brought into the exchange’. In the context of corporate acquisitions, prior contact between the acquiring and target firms can thus be considered a pre-condition for assessing the other firm’s trustworthiness, especially in the absence of other trustworthiness indicators such as a strong positive reputation. Hence we expect the level of target-firm members’ trust in the acquiring firm’s management to be greater when there is a history of interaction between members of the acquiring and target firms through mutually beneficial collaborations.

Cultural distance Despite strong anecdotal and theoretical evidence indicating that cultural barriers can pose major obstacles to fully reaping envisaged integration benefits in mergers and acquisitions (Nahavandi and Malekzadeh, 1988; Cartwright and Cooper, 1996; Very and Schweiger, 2001), studies on the impact of cultural distance on M&A performance have yielded mixed results (see Stahl et al., 2002, for a review). While some studies found that cultural differences had the expected negative effect on acquisition performance (see, for example, Chatterjee et al., 1992; Weber, 1996), others found an unexpectedly positive effect (for example, Larsson and Risberg, 1998; Morosini et al., 1998). Contrary to accepted wisdom, empirical studies indicate that cross-border M&As are not necessarily less successful than domestic transactions (Bühner, R., 1991; Bleeke et al., 1993; KPMG, 1999), providing further evidence for the complex relationship between national cultural distance and M&A performance. However, to date, no study has examined the impact of cultural differences on trust in acquisitions. Prior research on intra- and inter-organizational trust has shown that shared values or other sources of cultural similarity facilitate the development of trust between organizational members (Gabarro, 1978; Sitkin and Roth, 1993; Sarkar et al., 1997). In contrast, culture barriers, stereotypes and chauvinistic biases are cited frequently as a source of hostility and distrust between members of merging organizations (Olie, 1990; Elsass and Veiga, 1994; Malekzadeh and Nahavandi, 1998). Thus, we expect the level of target-firm members’ trust in the acquiring firm’s management to be less when the national cultural distance between the acquiring and target-firms is high.

Günter K. Stahl and Chei Hwee Chua 319

Attractiveness of acquiring firm’s HR system Although few studies have examined the impact of the acquiring firm’s HR system on acquisition success, several authors have stressed the importance of the quality of post-acquisition reward and job security changes in determining target-firm members’ reactions to a takeover (see Schweiger and Walsh, 1990; Evans et al., 2002, for reviews). In a study on the effects of a merger involving two brokerage firms in the reinsurance industry, Graves (1981) found that employee reactions depended on personal benefits and losses attributed to the merger. In a study of British takeovers conducted by Hunt (1990), the degree to which the target-firm members’ career opportunities were expanded in the post-acquisition implementation phase was related directly to acquisition success. In a similar vein, Larsson’s (1990) study of Swedish acquisitions revealed that increased job security, rewards, and opportunities for future career advancement reduced target-firm members’ resistance to a takeover. The strategic alliance literature also addresses this issue. Specifically, research on inter-organizational trust has shown that the perceived benefits derived from an alliance have a positive effect on the mutual trust and commitment of the parties involved (Anderson and Weitz, 1989; Morgan and Hunt, 1994; Sarkar et al., 1997). Hence, in the context of corporate acquisitions, we can expect the level of target-firm members’ trust in the acquiring firm management to be greater when the acquiring firm’s HR system is attractive. Figure 14.1 summarizes the proposed relationships between the five variables, and target-firm members’ trust in the acquiring firm’s management.

Takeover friendliness

(+)

Imposed control

(–)

Interaction history

(+)

Cultural distance

(–)

Attractiveness of acquirer’s HR system

(+)

Level of target firm members’ trust in the acquiring firm’s management

Figure 14.1 Proposed determinants of target-firm members’ trust in the acquiring firm’s managementa Note:

a

(⫹) leads to a higher level of trust; (⫺) leads to a lower level of trust.

320 Employees’ Trust Decisions Following a Takeover

Relative importance of determinants It seems unlikely that employees of acquired companies will give equal importance to all acquisition-related information available to them, and are influenced equally by the characteristics of the takeover situation and post-acquisition integration process discussed in the preceding sections. Intuitively, it seems plausible that characteristics of the post-acquisition integration process that have an immediate impact on target-firm members’ work situation and career, such as the friendliness of the takeover situation, the degree of imposed control by the acquiring firm, and the attractiveness of the acquiring firm’s HR system, have a greater relative importance in determining target-firm members’ trust reactions to a takeover than more peripheral aspects such as interaction history and national cultural distance between the acquiring and target-firms. Nevertheless, depending on the cultural orientations of target-firm members, variables considered to be relatively peripheral in one culture may be considered to be important in others. The next section will discuss this in more detail.

Moderating effects of cultural orientation Prior research on trust has suggested that trust dynamics within and between organizations may vary, depending on national culture. Comparative management scholars and cultural anthropologists have shown that individuals from different cultures vary in their assumptions about how people should relate to each other, their orientation regarding time, the extent to which they tend to tolerate or reduce ambiguity, and so on (Kluckhohn and Strodtbeck, 1961; Hofstede, 1980; Trompenaars, 1993). Such cultural orientations set up expectations about behaviour and provide a frame for interpreting the behaviour and trustworthiness of others. For example, perceptions of trustworthiness may be rooted in demonstrations of professional competence and open two-way communication for individualist cultures, and in behavioural consistency and the long-term demonstration of integrity in collectivist cultures (see, for example, Doney et al., 1998; Whitener et al., 1999). In the context of acquisitions, these findings suggest that the characteristics of the takeover situation and post-acquisition integration process in determining individuals’ trust decisions may vary according to the national culture of the individuals, including the relative importance they place on these determinants. For example, the extent of prior contact between the two firms involved in an acquisition may be of critical importance to individuals from cultures characterized by a strong relationship orientation, such as Asians, but it may not be relevant to members of more individualistic Western cultures. While business transactions in Western cultures are carried out largely on a calculated and contractual basis, Asians place a much greater emphasis on building trust through personal contact and collaboration over time (see, for example, Redding, 1990; Yum, 1991). In much the same

Günter K. Stahl and Chei Hwee Chua 321

way, the relative importance of the other proposed determinants of trust, such as takeover friendliness, imposed control, cultural distance, and attractiveness of the acquiring firm’s HR system, may vary, depending on the target-firm members’ cultural orientations.

A comparison of German and Singaporean employees’ trust decisions following a takeover Since the amount of trust that a given party has for another party can be conceived of as the result of a decision-making process (Mayer et al., 1995), we employed a decision-making exercise using a policy-capturing technique to investigate the five proposed determinants of target-firm members’ trust in the acquiring firm’s management. Through this policy-capturing technique, the decisions of individuals in particular domains can be modelled by presenting them with a series of experimentally designed decision scenarios (Pablo, 1994). We simulated employees’ trust decisions following a takeover by constructing a set of hypothetical takeover scenarios with the decision criteria based on the five proposed determinants of target-firm members’ trust in the acquiring firm’s management. These experimentally designed takeover scenarios were presented in the form of a questionnaire. Each questionnaire contained sixteen randomly varied takeover scenarios. After reviewing each scenario, respondents were asked to indicate on a 5-point Likert scale, ranging from 1 (very little extent) to 5 (very great extent), the extent to which they would trust the acquiring firm management if they were a member of the target firm. This research design allowed us to study the trust decisions of individuals in a variety of takeover scenarios. Our study consisted of two samples of employees. One sample was 197 Germans and the other was 213 Singaporeans. Each sample represented a broad group of individuals who varied in age, gender, level of education, prior experience with M&A, and positions they held in their companies. German employees were selected for this study because Germany is a major economic player in the world and is the world’s third-largest investor abroad. Since the mid-1990s, German MNCs have been heavily involved in cross-border mergers and acquisitions (Kühlmann, 2001). Singaporean employees were selected as a comparison sample because Singapore is a leading economic player in Asia, and companies in Singapore have been heavily involved in M&As since the late 1990s, together with other Asian countries affected by the 1997 Asian financial crisis. By 2001, the M&A volume in Singapore accounted for more than a quarter of the M&A volume in the Asia-Pacific region, excluding Japan (Lee, 2001). By including both samples in our study, we were able to assess potential cross-cultural differences in individuals’ trust decisions following a takeover. The dependent variable in this study was respondents’ trust decisions, and the independent variables were the five decision criteria based on the

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proposed determinants of target-firm members’ trust in the acquiring firm’s management. The independent variables were specified in the hypothetical takeover scenarios as follows: takeover friendliness was the degree of friendliness of the acquiring firm’s takeover tactics – that is, whether the target firm was acquired with the support, or against the will, of the management of the target firm; imposed control was the extent to which the acquiring firm removed autonomy from the target firm and imposed its own culture and systems on to the target firm; interaction history was the extent of personal contact target firm members had with members of the acquiring firm prior to the takeover; cultural distance was operationalized through the distinction between domestic and cross-border acquisition; and attractiveness of acquiring firm’s HR system was the degree to which the acquiring firm’s HR policies and reward systems were known to be employee-friendly. To examine the influence of the five decision criteria on our respondents’ trust decisions, we used the standard policy-capturing approach described by Pablo (1994). We analysed our data in two steps. First, we used multiple regression analysis to obtain the vector of beta weights – that is, the standardized regression coefficient associated with each of the five independent variables for each respondent in both samples of German and Singaporean respondents. Then we obtained the mean regression coefficient averaged across all respondents in each sample, and tested whether it was significantly different from zero for each independent variable. Table 14.1 presents the mean regression coefficients (beta weights) that resulted from our data analysis. A beta weight that is significantly different from zero shows that the decision criterion played a significant role in Table 14.1 Influence of decision criteria on respondents’ trust decisions in hypothetical takeover scenarios Decision criteria

Standardized regression coefficients German sample Relative importance of decision criteria

Takeover friendliness Imposed control Interaction history Cultural distance Attractiveness of acquirer’s HR system Notes:

a

n ⫽ 197;

b

Mean of beta weightsa

Singaporean sample Relative importance of decision criteria

Mean of beta weightsb

2 4 5 3

0.32** ⫺0.13** 0.11** ⫺0.14**

2 4 2 5

0.23** ⫺0.13** 0.23** ⫺0.04

1

0.41**

1

0.55**

n ⫽ 213; * p ⬍0.05; ** p ⬍ 0.01.

Günter K. Stahl and Chei Hwee Chua 323

respondents’ trust decisions. Our findings reveal that all five decision criteria played a significant role in German respondents’ trust decisions. As expected, German respondents’ trust ratings were higher when the mode of takeover was friendly, when there was a long interaction history between members of the acquiring and target firm, and when the acquiring firm’s HR system was known to be employee-friendly. On the other hand, also as expected, their trust ratings were lower when the acquiring firm imposed a high degree of control on the target firm, and when the national cultural distance between the acquiring and target firm was high – that is, in a crossborder takeover. For Singaporean respondents, four decision criteria played a significant role in their trust decisions. As expected, Singaporean respondents’ trust ratings were higher when the takeover mode was friendly, when there was a long interaction history between members of the acquiring and target firm, and when the acquiring firm’s HR system was known to be employee-friendly. On the other hand, also as expected, their trust ratings were lower when the acquiring firm imposed a high degree of control on the target firm. Contrary to our expectations, though, cultural distance did not have a significant influence on Singaporean respondents’ trust ratings. Table 14.1 indicates that German and Singaporean respondents displayed both similarities and differences in the relative importance they placed on each decision criterion. The two samples were similar in the relative importance they placed on the attractiveness of the acquiring firm’s HR system, takeover friendliness and imposed control. Attractiveness of the acquiring firm’s HR system was the most important decision criterion in both samples. This finding is consistent with the results of prior studies (for example, Graves, 1981; Larsson, 1990), which have shown that employee reactions to a merger or an acquisition depend primarily on personal benefits and losses attributed to this event. Takeover friendliness was the second most important decision criterion in both samples. Thus the social climate surrounding an acquisition – whether the climate is friendly or hostile – is a key factor in influencing employee reactions to a takeover. Perhaps surprisingly, imposed control was only the fourth most important decision criterion in both samples. Since imposed control has an immediate impact on target-firm members’ work situation and role in the organization, we had expected it to be a more important decision criterion in respondents’ trust decisions. On the other hand, German and Singaporean respondents were different in the relative importance they placed on interaction history and cultural distance. While interaction history was the least important decision criterion in German respondents’ trust decisions, it was the second most important decision criterion for Singaporean respondents – more important than imposed control and cultural distance, and equal in importance to takeover friendliness. This finding can be explained in terms of differences in basic cultural orientations (Kluckhohn and Strodtbeck, 1961; Hofstede, 1980) that set up expectations about behaviour and provide a frame for interpreting

324 Employees’ Trust Decisions Following a Takeover

others’ trustworthiness. As comparative management scholars have noted (for example, Redding, 1990; Yum, 1991), Asian cultures are in general characterized by a strong relationship orientation. Much importance is placed on building trust through personal contact and collaboration over time in business relationships. To Singaporean respondents, the extent of prior contact with members of the acquiring firm may have implied the strength and quality of the relationship, and thus have a critical influence on their trust decisions. On the other hand, business transactions in Western cultures are carried out largely on a calculated and contractual basis. To German respondents, who come from a more individualistic culture, the extent of prior contact with members of the acquiring firm may have been less relevant than the other decision criteria examined. While cultural distance was a significant decision criterion in German respondents’ trust decisions, and relatively more important than imposed control and interaction history, it did not play a significant role in Singaporean respondents’ trust decisions. Apparently, being taken over by a foreign acquirer seems to be a threatening event to German respondents, but not to Singaporean respondents. Why do Singaporean respondents seem to be immune to the threat of a cross-border acquisition? A possible explanation may be found in Singapore’s corporate landscape, which is characterized by a strong presence of foreign multinational corporations who account for more than 50 per cent of employment. Given the openness of Singapore’s economy and its heavy reliance on subsidiaries of foreign multinational corporations, Singaporean employees are likely to have had the experience of working for a foreign company and/or are accustomed to the prospect of working for the subsidiary of a foreign multinational corporation. Moreover, Singapore is a multicultural society, and Singaporeans are accustomed to dealing with cultural differences in both their work and personal lives. In conclusion, the findings of this policy-capturing study suggest that the characteristics of the initial takeover situation and post-acquisition integration process play a key role in influencing target-firm members’ trust in the acquiring firm and that employee trust reactions to corporate takeovers depend partly on national cultural orientations.

Implications for practice Much prescriptive advice has been offered in both academic and popular management literature on how best to manage the post-acquisition integration process. However, as noted by Schweiger and Walsh (1990), most of the advice given has not been based on sound theoretical reasoning and empirical research. The findings of this policy-capturing study and the model of trust in the post-acquisition integration process on which this study is based have a number of implications for the management of corporate acquisitions. In M&As, special emphasis is usually put on the strategic and financial goals of the transaction, while ‘human factors’ do not receive much

Günter K. Stahl and Chei Hwee Chua 325

attention (Nahavandi and Malekzadeh, 1988; Cartwright and Cooper, 1996; Stahl and Sitkin, 2001). The findings of this study suggest that the ‘softer’, less tangible, psychological, social and cultural factors play a key role in the post-acquisition integration process. Characteristics of the initial takeover situation, such as hostile takeover tactics or lack of prior personal contact, can be major obstacles to achieving integration benefits because they can undermine target-firm members’ trust in the acquiring firm’s management. Therefore, sociocultural implications have to be considered in the early stage of the acquisition process, in the evaluation and selection of a suitable target, and in the planning of the integration process. Consistent with a ‘process perspective’ on acquisitions (Jemison and Sitkin, 1986; Hunt, 1990; Haspeslagh and Jemison, 1991), the findings of this study suggest that the outcome of an acquisition depends heavily on the management of the post-acquisition integration process. While characteristics of the initial takeover situation may form the upper bound on the degree of success that an acquisition can achieve, top management’s integration decisions and actions will determine the degree to which that potential is realized (Pablo et al., 1996). Being aware of the tendency to remove more autonomy from the target firm than might be necessary in order to achieve the projected synergies, and resisting this tendency if necessary, can go a long way towards building a relationship based on trust. Carefully setting the appropriate tone during, and after, the negotiations, providing opportunities for interaction between members of the target and acquiring firms, and improving incentive and reward systems, will also have a positive impact on trust, and increase the chances for successful integration. Effective HR policies and practices, including career development and reward systems, seem to be particularly critical in influencing target-firm members’ trust and commitment. Many acquired businesses lose key employees soon after the acquisition, which is a major contributory factor when they fail (Krug and Hegerty, 1997; Evans et al., 2002). Effective and open communication is a vital element for success in retaining key employees, while financial incentives and career opportunities are also important. If members of the target firm feel confident in the acquirer’s HR and career development systems, perhaps seeing the takeover as a chance for greater job satisfaction and increased prospects for compensation, development and promotion, they will be much more likely to stay (Hunt, 1990; Larsson, 1990). An important implication of this study for practice is that executives involved in cross-border M&As need to recognize that employees with different cultural orientations make their trust decisions differently, and that executives have to adapt their integration-related decisions and actions accordingly. It is essential for an acquirer to understand the cultural values, assumptions and norms in the environment in which the target company operates, and to pay attention to cultural differences that may create obstacles to achieving integration benefits. A thorough due diligence process – but

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focussed on cultural aspects – can be helpful in this regard. The purpose of cultural assessment is to evaluate factors that may influence the organizational fit, to understand the future cultural dynamics as the two organizations merge, and to prepare a plan of how the cultural issues should be addressed if the deal goes forward (Marks and Mirvis, 1998; Evans et al., 2002). In addition to assessing corporate culture, cross-border deals require an assessment of the national culture of the target company. The findings of this study indicate that in some cases – for example, the acquisition of a German company by a foreign firm – national cultural differences have a detrimental effect on trust. Further, the acquiring firm’s management must not only pay attention to the target’s culture, but to its own culture as well. The ‘know thyself’ adage applies equally well to companies as it does to people. Only after an executive team has reached a clear, sophisticated understanding of both their own culture and that of the target firm can cultural integration planning be conducted and measures taken that will help to (re)build a culture based on trust.

References Anderson, E. and Weitz, B. (1989) ‘Determinants of Continuity in Conventional Industrial Channel Dyads’, Marketing Science, 8, pp. 310–23. Bleeke, J., Ernst, D., Isono, J. and Weinberg, D. D. (1993) ‘Succeeding at Cross-border Mergers and Acquisitions’, in J. Bleeke and D. Ernst (eds), Collaborating to Compete: Using Strategic Alliances and Acquisitions in the Global Marketplace’ (New York, John Wiley). Bühner, R. (1991) ‘Trends and Determinants of Technology Development from the Demand Perspective’, in Könlg, W., Poser, H., Radtke, W., Schnell, W. H. (eds) Technological Development, Society and State (Singapore, World Scientific Publishers) pp. 122–6. Buono, A. F. and Bowditch, J. L. (1989) The Human Side of Mergers and Acquisitions: Managing Collisions Between People, Cultures, and Organizations (San Francisco: Jossey-Bass). Buono, A. F., Bowditch, J. L. and Lewis, J. W. (1985) ‘When Cultures Collide: The Anatomy of a Merger’, Human Relations, 38, pp. 477–500. Cartwright, S. and Cooper, C. L. (1996) Managing Mergers, Acquisitions, and Strategic Alliances: Integrating People and Cultures, 2nd edn (Oxford: Butterworth Heinemann). Chatterjee, S., Lubatkin, M. H., Schweiger, D. M. and Weber, Y. (1992) ‘Cultural Differences and Shareholder Value in Related Mergers: Linking Equity and Human Capital’, Strategic Management Journal, 13, pp. 319–34. Das, T. K. and Teng, B.-S. (1998) ‘Between Trust and Control: Developing Confidence in Partner Cooperation in Alliances’, Academy of Management Review, 23, pp. 491–512. Datta, D. K. and Grant, J. H. (1990) ‘Relationships between Type of Acquisition, the Autonomy Given to the Acquired Firm, and Acquisition Success: An Empirical Analysis’, Journal of Management, 16, pp. 29–44. Doney, P. M., Cannon, J. P. and Mullen, M. R. (1998) ‘Understanding the Influence of National Culture on the Development of Trust’, Academy of Management Review, 23, pp. 601–20.

Günter K. Stahl and Chei Hwee Chua 327 Elsass, P. M. and Veiga, J. F. (1994) ‘Acculturation in Acquired Organizations: A Forcefield Perspective’, Human Relations, 47, pp. 431–53. Engeli, H.-P. (1999) ‘Klippen einer Fusion – Novartis International AG’, Paper presented at the Conference ‘Den Erfolg der Internationalisierung gestalten’, Deutsche Gesellschaft für Personalführung, Offenbach-am-Main, 8–9 February. Evans, P., Pucik, V. and Barsoux, J.-L. (2002) The Global Challenge: Frameworks for International Human Resource Management (New York, McGraw-Hill). Gabarro, J. J. (1978) ‘The Development of Trust, Influence, and Expectations’, in A. G. Athos and J. J. Gabarro (eds), Interpersonal Behavior: Communication and Understanding in Relationships (Englewood Cliffs, NJ, Prentice-Hall) pp. 290–303. Graves, D. (1981) ‘Individual Reactions to a Merger of Two Small Firms of Brokers in the Reinsurance Industry: A Total Population Survey’, Journal of Management Studies, 18, pp. 89–113. Gulati, R. (1995) ‘Does Familiarity Breed Trust? The Implications of Repeated Ties for Contractual Choice in Alliances’, Academy of Management Journal, 38, pp. 85–112. Hall, P. D. and Norburn, D. (1987) ‘The Management Factor in Acquisition Performance’, Leadership and Organization Development Journal, 8, pp. 23–30. Hambrick, D. C. and Cannella, A. A. (1993) ‘Relative Standing: A Framework for Understanding Departures of Acquired Executives’, Academy of Management Journal, 36, pp. 733–62. Harnett, Donald L. and Cummings, Larry L. (1980) Bargaining Behavior: An International Study (Houston, Tx., Dame Publications). Haspeslagh, P. and Jemison, D. B. (1991) Managing Acquisitions: Creating Value Through Corporate Renewal (New York, The Free Press). Hofstede, G. (1980) Culture’s Consequences: International Differences in Work Related Values (Beverly Hills, Calif., Sage). Hogan, E. A. and Overmyer-Day, L. (1994) ‘The Psychology of Mergers and Acquisitions’, International Review of Industrial and Organizational Psychology, 9, pp. 247–81. Hunt, J. W. (1990) ‘Changing Patterns of Acquisition Behaviour in Takeovers and the Consequences for Acquisition Processes’, Strategic Management Journal, 11, pp. S. 69–77. Jemison, D. B. and Sitkin, S. B. (1986) ‘Corporate Acquisitions: A Process Perspective’, Academy of Management Review, 11, pp. 145–63. Jones, G. R. and George, J. M. (1998) ‘The Experience and Evolution of Trust: Implications for Cooperation and Teamwork’, Academy of Management Review, 23, pp. 531–46. Kluckhohn, F. R. and Strodtbeck, F. L. (1961) Variations in Value Orientations (New York, Harper & Row). KPMG (ed.) (1999) Unlocking Shareholder Value: The Keys to Success (London, KPMG). Kramer, R. M. (1999) ‘Trust and Distrust in Organizations: Emerging Perspectives, Enduring Questions’, Annual Review of Psychology, 50, pp. 569–98. Krug, J. and Hegerty, W. H. (1997) ‘Postacquisition Turnover among U.S. Top Management Teams: An Analysis of the Effect of Foreign Versus Domestic Acquisition of U.S. Targets’, Strategic Management Journal, 18, pp. 667–75. Krug, J. A. and Nigh, D. (2001) ‘Executive Perceptions in Foreign and Domestic Acquisitions’, Journal of World Business, 36, pp. 85–105. Kühlmann, T. M. (2001) ‘The German Approach to Developing Global Leaders via Expatriation’, in M. E. Mendenhall, T. M. Kühlmann and G. K. Stahl (eds), Developing Global Business Leaders: Policies, Processes, and Innovations (Westport, Conn., Quorum), pp. 57–71.

328 Employees’ Trust Decisions Following a Takeover Larsson, R. (1990) Coordination of Action in Mergers and Acquisitions: Interpretive and Systems Approaches Towards Synergy (Lund, Lund University Press). Larsson, R. and Risberg, A. (1998) ‘Cultural Awareness and National versus Corporate Barriers to Acculturation’, in M. C. Gertsen, A.-M. Søderberg and J. E. Torp (eds), Cultural Dimensions of International Mergers and Acquisitions (Berlin, de Gruyter), pp. 39–56. Lee, S. F. (2001) M&A Yearbook: Singapore (Hong Kong, International Financial Law Review, IFLR). Levy, A. (2001) ‘Promises Unfulfilled’, Bloomberg Markets, 10(4), April, pp. 37–45. Lewicki, R. J., McAllister, D. J. and Bies, R. J. (1998) ‘Trust and Distrust: New Relationships and Realities’, Academy of Management Review, 23, pp. 438–58. Malekzadeh, A. R. and Nahavandi, A. (1998) ‘Leadership and Culture in Transnational Strategic Alliances’, in M. C. Gertsen, A.-M. Søderberg and J. E. Torp (eds), Cultural Dimensions of International Mergers and Acquisitions (Berlin, de Gruyter), pp. 111–127. Marks, M. L. and Mirvis, P. H. (1998) Joining Forces: Making One Plus One Equal Three in Mergers, Acquisitions, and Alliances (San Francisco: Jossey-Bass). Marks, M. L. and Mirvis, P. H. (2001) ‘Making Mergers and Acquisitions Work: Strategic and Psychological Preparation’, Academy of Management Executive, 15, pp. 80–92. Mayer, R. C., Davis, J. H. and Schoorman, F. D. (1995) ‘An Integrative Model of Organizational Trust’, The Academy of Management Review, 20, pp. 709–34. Morgan, R. M. and Hunt, S. D. (1994) ‘The Commitment–Trust Theory of Relationship Marketing’, Journal of Marketing, 58, pp. 29–38. Morosini, P., Shane, S. and Singh, H. (1998) ‘National Cultural Distance and Crossborder Acquisition Performance’, Journal of International Business Studies, 29, pp. 137–58. Nahavandi, A. and Malekzadeh, A. R. (1988) ‘Acculturation in Mergers and Acquisitions’, Academy of Management Review, 13, pp. 79–90. Napier, N. K., Simmons, G. and Stratton, K. (1989) ‘Communication during a Merger: The Experience of Two Banks’, Human Resource Planning, 12, pp. 105–22. Olie, R. (1990) ‘Culture and Integration Problems in International Mergers and Acquisitions’, European Management Journal, 8, pp. 206–15. Olie, R. (1994) ‘Shades of Culture and Institutions in International Mergers’, Organization Studies, 15, pp. 381–405. Pablo, A. L. (1994) ‘Determinants of Acquisition Integration Level: A Decision Making Perspective’, Academy of Management Journal, 37, pp. 803–36. Pablo, A. L., Sitkin, S. B. and Jemison, D. B. (1996) ‘Acquisition Decision-making Processes: The Central Role of Risk’, Journal of Management, 22(5), pp. 723–46. Porter, M. E. (1987) ‘From Competitive Advantage to Corporate Strategy’, Harvard Business Review, 65, pp. 43–59. Redding, G. (1990) The Spirit of Chinese Capitalism (Berlin, de Gruyter). Ring, P. S. and Van de Ven, A. H. (1992) ‘Structuring Cooperative Relationships between Organizations’, Strategic Management Journal, 13, pp. 483–98. Rousseau, D. M., Sitkin, S. B., Burt, R. S. and Camerer, C. (1998) ‘Not So Different After All: A Cross-discipline View of Trust’, Academy of Management Review, 23, pp. 393–404. Sarkar, M., Cavusgil, T. and Evirgen, C. (1997) ‘A Commitment–Trust Mediated Framework of International Collaborative Venture Performance’, in P. W. Beamish

Günter K. Stahl and Chei Hwee Chua 329 and J. P. Killing (eds), Cooperative Strategies: North American Perspectives (San Francisco, New Lexington), pp. 255–85. Schweiger, D. M. and Goulet, P. K. (2000) ‘Integrating Mergers and Acquisitions: An International Research Review’, Advances in Mergers and Acquisitions, 1, pp. 61–91. Schweiger, D. M., Ivancevich, J. M. and Power, F. R. (1987) ‘Executive Actions for Managing Human Resources Before and After Acquisition’, Academy of Management Executive, 1, pp. 127–38. Schweiger, D. M. and Walsh, J. P. (1990) ‘Mergers and Acquisitions: An Interdisciplinary View’, Research in Personnel und Human Resources Management, 8, pp. 41–107. Sirower, M. L. and Hasson, C. (2000) ‘The Morning After’, CFO Asia, March. Sitkin, S. B. (1995) ‘On the Positive Effect of Legalization on Trust’, Research on Negotiation in Organizations, 5, pp. 185–217. Sitkin, S. B. and Roth, N. L. (1993) ‘Explaining the Limited Effectiveness of Legalistic “Remedies” for Trust/Distrust’, Organization Science, 4, pp. 367–92. Stahl, G. K., Evans, P., Pucik, V. and Mendenhall, M. (2002) ‘Human Resource Management in Cross-border Mergers and Acquisitions’, in A.-W. Harzing and J. van Ruysseveldt (eds), International Human Resource Management: An Integrated Approach (2nd edn) (London, Sage). Stahl, G. K. and Sitkin, S. B. (2001) ‘Trust in Mergers and Acquisitions’, Paper presented at the annual meeting of the Academy of Management, Washington, DC. Trompenaars, F. (1993) Riding the Waves of Culture (London, The Economist Books). Very, P. and Schweiger, D. M. (2001) ‘The Acquisition Process as a Learning Process: Evidence from a Study of Critical Problems and Solutions in Domestic and Cross-border Deals’, Journal of World Business, 36, pp. 11–31. Weber, Y. (1996) ‘Corporate Cultural Fit and Performance in Mergers and Acquisitions’, Human Relations, 49, pp. 1181–202. Whitener, E. M., Maznevski, M. L., Hua, W., Saebo, S. and Ekelund, B. (1999) ‘Testing the Cultural Boundaries of a Model of Trust: Subordinate–Manager Relationships in China, Norway and the United States’, Paper presented at the annual meeting of the Academy of Management, Chicago. Yum, J. O. (1991) ‘The Impact of Confucianism on Interpersonal Relationships and Communication Patterns in East Asia’, in A. L. Samovar and R. E. Porter (eds), Intercultural Communication: A Reader (Belmont, Wadsworth), pp. 67–79. Zaheer, A., McEvily, B. and Perrone, V. (1998) ‘Does Trust Matter? Exploring the Effects of Interorganizational and Interpersonal Trust on Performance’, Organization Science, 9, pp. 141–59.

15 Creating Trust in the Korean Chaebol John Barry Kotch

Introduction The ‘chaebol’ – the family-owned conglomerates and crown jewels of the Korean economy – with assets greater than the half trillion (US$) Korean GNP (where one trillion is 1012) have suffered a pounding of late: on the issue of trust.1 Two of the top five chaebol, with sales in excess of US$100 billion and US$50 billion, respectively, have been mired in scandal.2 Hyundai’s Asan subsidiary – bankrolled by the late Hyundai chairman, Chung Ju Yung, and at the forefront of South–North tourism at Mt Kumgang – has been accused of serving as a government conduit in funneling US$500 million to Pyongyang to facilitate the June 2000 inter-Korean summit, while SK Corporation has been at the centre of an insider trading and accounting fraud scandal.3 In both cases, the South Korean government appears to have been either complicit or less than candid in its response, thus compounding the issue of trust. The fact that Hyundai Asan’s president, as well as former South Korean president, Kim Dae Jung, have had to apologize publicly for the ‘payoff’, while denying that it took place at all, has called into question whether inter-Korean reconciliation has been driven by bribery, casting a pall over the achievements of Kim’s sunshine policy of engaging the North.4 The Special Prosecutor has uncovered corroborating evidence of complicity by key government officials in the summit payoff scandal, resulting in the arrest of former Chief of Staff, Park Jie Won, and Director of National Intelligence and Unification Minister, Lim Dong Won. They are both currently (September 2003) in jail or under house arrest and awaiting trial. In late July 2003, the opposition Grand National Party (GNP) pushed through a second Special Prosecutor bill aimed specifically at ascertaining former president Kim Dae Jung’s knowledge of and role, if any, in the scandal. In early August 2003, Hyundai Asan President, Chung Mong Hun – who had been directly implicated in the scandal and undergone repeated questioning – committed suicide, throwing into doubt the immediate future North–South economic cooperation.5 330

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Further, the political fallout from the affair could easily play into the hands of conservatives, who fear North Korea and distrust its intentions, threatening to imperil the political agenda of Korea’s new president, Roh Moo Hyun, who has staked his Administration’s goals on lessening tensions with the North in what amounts to a ‘good neighbour’ policy of ‘peace and prosperity’, reasons in promoting Roh’s vision of Korea as a North East Asia regional hub.6 Equally important, the affair illustrates the symbiotic relationship that has always existed between the chaebol and the South Korean government, a relationship dating back more than four decades to the rule of Park Chung Hee who, together with the founding chaebol industrialists, laid the foundation for Korea’s ‘economic miracle’ and the country’s ascension to major industrial status. Previously, however, payoffs were commonplace – regarded as mandatory political contributions to ruling party politicians – and when exposed, resulted routinely in suspended prison sentences for chaebol chieftains.7 But the alleged Hyundai payoff has taken the practice to a whole new level – scandalizing statecraft itself. The central issue is the role of Hyundai Group companies in passing funds to North Korea and the extent to which their ability to function as a business has been compromised by having acted as an arm of government policy. In one sense, however, this is merely an extension of the political realm of the chaebol’s economic role in globalization.

The politicized business world of the chaebol Over the 1990s, chaebol such as Hyundai, LG, Samsung and Daewoo have become global players in markets both near and far. LG established a beachhead in China in the early 1990s, investing an annual US$1 billion and building a network of relationships with Chinese state companies and provincial governments, providing such basics as toothpaste, TV tubes, microwaves and dishwashers, to the burgeoning Chinese market.8 Elsewhere, LG Electronics purchased the American consumer electronics pioneer Zenith, while the LG Group positioned itself as the single largest foreign investor in India’s computer software complex at Bangalore.9 Before its collapse and bankruptcy in 1999, Daewoo built a wide-ranging network of overseas automotive and electronics subsidiaries with plants in Eastern Europe to serve the Western European market as well as the Central Asia ‘stans’, giving it a foothold in the former Soviet Union.10 All these entrepreneurial forays were based on close ties with foreign governments, taking advantage of local economic and political conditions similar to those that existed at the time of Korea’s own economic take-off, measures replicating the by now familiar modus operandi of business–government collusion. Nevertheless, this was not the only path to chaebol growth and glory. For example, Hyundai followed the path of turnkey construction projects

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overseas centred on the Middle East, paralleling its heavy industry and shipbuilding ventures in Korea, although in 2002, it broke with tradition – breaking ground for a mammoth 500,000-automobile production plant for the American market in the southern state of Alabama.11 Only Samsung became a global player, and thus the leading producer in flat screen computers, TV displays and DRAM chips, by relying almost exclusively on domestic production facilities, although it too has recently moved offshore with new operations in Mexico and Kuwait.12 The latest chapter in the seamy side of chaebol business practices occurred in February 2003 with the disclosure of insider trading and accounting fraud at SK Global, the International trading subsidiary of SK Corp., Korea’s third largest chaebol with sales approaching US$50 billion. This resulted in the arrest, incarceration and imposition of a three-year sentence on the Chairman of SK Corporation, Chey Tae Won, and the detention of SK Group Chairman (and Federation of Korean Industries – FKI – Chairman), Son KilSeung, casting a long shadow over the business practices of other chaebol and raising fears of a possible hostile takeover.13 Some have argued that this could in fact work to the advantage of South Korea in the long term, by improving corporate governance and shareholder value, as well as transparency and accounting standards.14 More important has been the financial, economic and political fallout on other chaebol – for example, the willingness of foreign lenders to provide fresh loans to SK and other Korean conglomerates, and sending ripples through the financial and currency markets, beginning with massive redemptions of trust funds and extending to Korea’s sovereign credit rating, but with Moody’s downgrading it two notches, from positive to negative.15 It has since become a textbook case of the causes (greed) and consequences (loss of investor confidence) of mis-stating corporate earnings and losing the trust of investors. One asset manager at Samsung Investment Trust, Lim Chang-gue, was of the opinion that: ‘The repercussions from the SK Global financial scandal are choking the financial industry and may trigger a storing of bankruptcies, especially among small and medium-sized companies.’16 According to Dominique Dwor-Frecaut, ‘The SK Global scandal seems to have prompted a complete reappraisal of Korea’s progress, with a move from extreme optimism to extreme pessimism.17 The reality lies somewhere in between the two extremes.’18 The ultimate fate of SK remains unclear. Having paid off its foreign creditors and bondholders, SK Group is struggling to keep the company from going into receivership while some members of the group and their stockholders are opposed to a multi-billion dollar bailout that would siphon off earnings for many years to come (‘Kim Hyun-chul, Sovereign Urges SK Corp. Reform’, The Korea Herald, 12 August 2003). In response, the Korean government attempted to stem the slide, with some success in stabilizing the financial and currency markets through

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market intervention and floating government stabilization bonds. In addition, high-level senior Blue House and government officials were dispatched to the USA, Europe and Hong Kong to bolster the confidence of foreign investors.19 However, coming at a time of great geo-political uncertainty – for example, the increasing concern over North Korea’s nuclear ambitions in the aftermath of the war in Iraq – these efforts have been less than convincing, again demonstrating the vulnerability of the Korean economy to both manipulation from the inside, and political and economic developments on the outside.20 Nor are these isolated incidents. In 1999, in the biggest corporate malfeasance of all, Daewoo chairman, Kim Woo-chang bilked his company out of tens of billions of US dollars, leading to the largest corporate collapse and bankruptcy in history (over US$80 billion) until topped by the Enron and WorldCom debacles in the US in 2001.21 Since 1999, half of the top Korean chaebol have collapsed as a result of over-indebtedness, over-expansion, corporate plunder, or a combination of all three.22 And of the top five chaebol, only Samsung and LG have escaped scandal, although Samsung chairman, Lee Kun Hee, was among those indicted for paying bribes to former president, Chun; and, more recently, for attempting to pass on company stock to his sons in a tax-free transfer.23 Under a recently unveiled corporate reform plan, President Roh intends to close the loopholes pertaining to transfers of wealth, making them all subject to taxation.24 The effect has been immediate on the Doo-san group (one of the top thirty chaebol), with the controlling family members waiving their right to convert bonds with warrants into common stock, after pressure from civic groups, notably the People’s Solidarity for Participatory Democracy (PSPD) led by Professor Jang Ha Sung, of Korea University.25 Korea’s aspirations to sustain high levels of economic growth (in the neighbourhood of 5 per cent per annum), and to achieve globalization and regional hub status by around 2010, depend largely on putting its economic house in order, including the completion of the corporate reform and financial restructuring agenda begun under the Kim Dae Jung Administration.26 This means targeting the chaebol – the motor of Korea’s economic driven economy. But whether Roh is prepared to ‘walk the walk’ as well as ‘talk the talk’ remains very much in doubt.27 The chaebol have always been integral to Korea’s drive for modernization under Park Chung Hee, globalization under Kim Young Sam and Kim Dae Jung, and will be again if Roh Moo Hyun’s vision of Korea as a North East Asian regional hub is to be realized.28 They will have a critical role to play in making this vision into a reality – utilizing their export expertise in managing a logistics hub centred on the peninsula.29 Under President Park, the funnelling of funds through state-controlled banks was the method of choice.30 Successful chaebol were rewarded with larger loans (often interest-free) as well as more lucrative projects. Park also

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demanded that the chaebol enter the previously uncharted waters of shipbuilding, petrochemicals and steel, thus laying the foundation for Korea’s emergence as a modern industrial economy.31 At the same time, however, there was a downside. While the chaebol benefited from monopolies and easy credit, their focus was on sales rather than profit.32 For the Korean government, the annual rate of economic growth – on which its political support and de facto legitimacy depended – became the only number that counted, while, for the chaebol, growth in market share became the measure of their performance.33 Park’s successors, both military and civilian, allowed the chaebol to function on a looser leash, more concerned with shaking them down for political and personal contributions. Roh and Chun were the champions in this contest, which subsequently earned them long prison sentences, while chaebol titans were served lesser terms. All the time, many were ignoring or playing down their profligate ways, unprofitable investments and doubtful business practices that was later to bring the Korean economy to its knees. When the ‘chickens came home to roost’ during the 1997 economic crisis, Kim Dae Jung initially adopted an ‘iron fist’ policy towards the chaebol whose over-expansion and over-leveraging had brought the Korean economy to the brink of collapse.34 They were held responsible for Korea’s economic crisis because of the lavish lifestyles of their leaders, over-expansion and over-indebtedness, especially of foreign currency denominated debt. The Korean government was forced to bail them out, and the IMF – along with the USA – was forced to bail out the Korean government.35 The SK scandal triggered a similar reaction – albeit on a smaller scale – affecting stock, bond and foreign exchange markets alike. Nor was the government itself blameless, having permitted Korean banks to become the personal piggy banks of the chaebol, to the detriment of small and medium-sized enterprises. The bill from the Korean Asset Management Corporation (KAMCO) for cleaning up bad loans exceeded US$100 billion.36 In the corporate restructuring that followed the 1997 financial crisis, the chaebol were cut down to size – forced to spin off weaker subsidiaries, subjected to stiff ceilings on debt levels (below 200 per cent of equity), and prohibited from engaging in cross-shareholdings and loan guarantees between group companies. Further, in a series of ‘big bangs’, whole parts of chaebol empires were swapped or merged (including Daewoo Electronics into Samsung Electronics, and LG Semicon into Hyundai Semicon to form Hynix). Korean government subsidies to these companies have created major economic friction between the USA and Korea, and, most recently, the imposition of penalties – for example, a countervailing duties tariff.37 Around the iron fist, however, was a velvet glove. Kim Dae Jung’s muchvaunted second-nation building, centring around small and medium-sized enterprises and envisaged as a challenge to the chaebols’ economic dominance – never got off the ground.38 While Kim could not dethrone the

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chaebol he was able to tame them for a time, but they have emerged learner but meaner – their dominance of the Korean economy is now more secure as a result of the enforced corporate restructuring. In essence, Kim could not go too far, since chaebol exports were the key to rebuilding Korea’s foreign exchange reserves and re-igniting economic growth – accounting for more than 50 per cent in 2002 and 80 per cent in the fourth quarter alone.39 So … if the chaebol had put the Korean economy in the soup, they were also a major factor in getting it out. However, Kim received only the grudging support of chaebol chiefs in creating a Tripartite Committee that included labour leaders and bureaucrats, functioning as a vehicle for reining-in wage demands, maintaining price stability and dampening inflationary pressures in the economy. The turnaround Kim engineered put Korea on the fast track to economic recovery. How well he succeeded can be measured by Korea’s climb to a position of having the world’s fourth-largest foreign exchange reserves holdings (from less than US$5 billion in 1997 to more than US$120 billion at the time of writing), trailing behind only China, Japan and Taiwan.40 Under Roh’s corporate reform plan, Kim Dae Jung’s initiatives will be expanded and strengthened, including banning chaebol with assets of more than US$4 million from investing more than 25 per cent of their assets in sister companies and spinning off financial units if they are used as illegal sources of capital.41 The Korean Fair Trade Commission has threatened the four top chaebol with investigation, although the government has made it clear that maintaining the strength of the economy would trump prosecutorial zeal, a policy put to the test in the dismissal of the chief prosecutor over the handling of the SK case.42 As with Kim Young Sam and Kim Dae Jung before him, those close to Roh have shown themselves ‘willing to temporize idealism with the reality of the chaebol contribution to the economy’.43

The dimension of trust According to the World Economic Forum’s Corporate Global Citizenship Initiative, a corporation’s obligations and responsibilities extend beyond its employees and shareholders to other stakeholders, such as customers, suppliers and society-at-large in concentric circles, and should be held accountable for how well or poorly they perform.44 Implicit in each of these relationships is the element of trust. Corporations, particularly large corporations such as the chaebol, can manufacture products but they cannot manufacture trust: that must be earned. In this regard, the concept of social capital that refers to ‘the ability of people to work together in a group or organization for common purposes’ is highly relevant.45 It constitutes an extra layer of glue beyond nationality and material resources in certain societies, such as Korea, whose cultures

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place a premium on them. However, the glue can also harden, and the result is a lack of transparency that carries with it a high cost.

Trust within the organization All political, economic and social institutions in a given society fit within its common cultural mould. In cases where the culture is hierarchical and non-transparent, as in Korea, the conditions fostering trust are weak. In the Western corporate model, trust among employees is largely a function of expectation: does the corporation treat its employees fairly, or at least meet them halfway? While this is both a subjective call and subject to reevaluation based on personal experience and feedback from peers, it also presumes the existence of objective standards for measuring group behaviour. Moreover, it speaks to the efficiency and effectiveness of the corporation and the ‘quality of the workplace’. By contrast, the model in the East is strikingly different. Extrapolating from the Japanese model, in which the cultural dynamics are similar to those in Korea, research has determined that mutual assurance rather than trust is the key variable. Such mutual assurance is predicated on ‘the stability of interpersonal and inter-organizational relationships [such that] individuals within such a society can count more strongly on in-group bias for preferential treatment’.46 Moreover, such an environment fosters a strong mentality not to ‘rock the boat’. In short, in situations where trust based on experience is replaced by trust based on mutual assurance, there is a lower threshold of objectivity – for example, the duty to fully disclose the relevant facts or factors and meeting generally accepted standards of truthfulness, is less important. Consequently, the reliability and trust that can be placed in corporate financial reports and audits is seriously diminished, because they are prepared primarily for the benefit of outsiders.47 The result is a higher tolerance of malfeasance. Malfeasance in the West is more often a function of commission – that is, active and wilful disregard of objective standards – either individually or as part of a wider conspiracy. But in the East, it is more a function of omission, given the relative absence of such standards; thus it is tolerated, if not condoned. Indeed, the problem of corruption in Korea goes well beyond the chaebol: it is endemic to the society as a whole, permeating its private as well as its public institutions. As Donald MacDonald has observed, ‘corruption [in Korea] in the Western sense is not seen as such, but is seen as part of Confucian obligations … [Thus] providing jobs for one’s relatives – condemned in the West as nepotism – is still both a virtue and a matter of course in Korea’.48 Just how deeply bribery and corruption are embedded in the society, and systemic in its institutions, can be seen from the fact that transgressors come from all walks of life, with the public sector leading the way. A random

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list of recent indictments or convictions includes the former deputy of the national tax service, the chairman of the steel giant POSCO, the former head of the Fair Trade Commission, and several Army generals, to cite just the latest crop.49 Corruption was even reported in funds set aside to bail out bankrupt corporations.50 In the 1999 survey by Transparency International, Korea ranked eighteenth out of the top nineteen exporting countries in its willingness to pay bribes:51 in the 2002 index it is still ranked eighteenth, but now of twenty-one countries. The lack of transparency in corporate governance has a negative effect on trust. In Reforming Korea’s Industrial Conglomerates, an Institute of International Economics publication, Edward Graham points to the existence of a ‘vicious circle’, in which the lack of transparency and oversight from the financial sector promotes weak corporate governance.52 Of thirtyfive major countries recently surveyed (2003) by Price Waterhouse, Korea’s corporate sector was found to be the least transparent.53 Further, the lack of trained manpower, primarily auditors and financial accountants, short-circuits the flow of thorough, complete and accurate financial information on which transparency depends. Finally, ‘uncertainty regarding the value of assets deters would-be buyers from purchasing, wary that it might come with unseen liabilities’.54 LG has recently taken a major step in the right direction by adopting an innovative corporate restructuring plan by placing all its companies into one of two holding companies: LG Chemical Investment (LGCI) or LG Electronics Investment (LGI). According to LG, the remaining companies in the group will now be able to concentrate on core competencies – doing what they do best (for example, product research, development, manufacturing, marketing or distribution) undistracted by complex dealings between subsidiaries.55 This is expected to increase management autonomy and accountability, thereby ensuring greater transparency and maximizing shareholder value.56 However, it will be difficult for other chaebol to emulate LG’s example, because of stringent legal financial requirements to qualify for a holding company status.57

Trust among workers Labour relations within the chaebol have historically left much to be desired. During the 1980s and, to a lesser extent, the 1990s, the battle to form genuine unions within chaebol enterprises took the form of pitched battles on the streets and the factory floor, with progress closely paralleling the general political developments that followed the end of military rule.58 Prior to that, workers had been kept in line and prevented from organizing by a combination of police, company-hired thugs, political intimidation and bribery.59 During strikes, it is still common practice for management to file for damages and attack the assets of unions and workers, including wages and/or personal assets.60

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According to Labour Minister, Kwon Ki-hong, to address this problem the new administration is ‘building industrial relations of participation and cooperation on the basis of trust … improving the quality of work and balance of power between labor and management’.61 This, together with active labour participation on the Tripartite Committee, will go a long way towards restoring trust. However, with greatly improved wages, working conditions and, in some cases, participation in management, in recent years, workers have been concerned primarily with keeping their jobs. Yet today, this has changed today, as reflected in greater labour militancy. It has made Korea one of the least flexible labour markets in the industrialized countries, with trust taking a back seat to the politics of lifetime employment.

Chaebol shareholders and trust At the next level, that of the shareholder, there is again a major deficiency that can be traced to accountability – a first cousin of trust. Most chaebol are still family-owned – even if more nowadays are being professionally managed. This translates into controlling, or near-controlling, interests held by members of the extended family. According to Graham, ‘despite holding less than a majority of the stock outstanding, control is maintained through a combination of nepotism, limited minority shareholders rights and protection, and negligent boards of directors’.62 To break this stranglehold over chaebol management, the new chairman of the Fair Trade Commission has pledged a policy ‘to improve the corporate governance of large business groups in order to establish a transparent and fair economic system’.63 Further, even where stock is widely held, corporations tend to be thinly capitalized and the stock price highly volatile, leaving minority shareholders at the mercy of market fluctuations and insider trading. Graham has made the point that those who do not participate in management must nevertheless ‘have the same access to the same information regarding the financial and operating results of these firms’.64 This is especially important, since volatility, a staple of Korean financial markets, only adds greater risk and uncertainty for minority shareholders, as well as shaking their trust and confidence. Indeed, in 2002, the Korean stock market was among the most volatile in the world. Moreover, market capitalization in Korea rarely, if ever, exceeds bank loans as a source of finance. Therefore, the chaebol are under no particular pressure to meet shareholder or market expectations relating to earnings, and tend to treat profit and loss figures as proprietary rather than public information, irrespective of whether the company is publicly held. In Donald Kirk’s definitive study of Hyundai, Korea Dynasty, the author has noted that ‘The desire for secrecy among Korean businessmen [stems from] an authoritarian view that the public does not have a right to know anything beyond the level of self-serving publicity.’65

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This has given rise to numerous minority shareholder lawsuits, the most prominent of which has been directed against Samsung.66 However, Korean courts have been reluctant to rule on these, inasmuch as the concept of a shareholder fits uneasily into the chaebol mindset and, by extension, in to their view of a market economy. However, under President Roh’s new corporate reform plan, a whole series of measures will be introduced to enhance shareholder rights while also mandating increased financial disclosure by chaebol management. These include a system under which a successful lawsuit brought by a single shareholder against a company affects all other shareholders (in a ‘class action’ effect), initially applicable to stock price manipulation, accounting fraud and insider trading.67 Further, it will curtail chaebol voting rights over their subsidiaries under certain circumstances, while family-owned conglomerates will be required to disclose stake information regarding controlling shareholders, including owners and their relatives.68 According to the OECD (2003), ‘The prevalence of closely-controlled businesses in Asia places minority shareholders at risk of exploitation when controlling shareholders and managers strip assets from the company through abusive self-dealing, who pay themselves excessive compensation, and engage in insider trading or act in their own interests to the detriment of the company.’69 OECD considers shareholder protection a priority area, along with the monitoring of companies by banks so spreading a corporate governance culture.70 In the wake of corporate scandals in the USA – Enron, WorldCom and other malefactors – a record number of resolutions have been filed at US annual meetings designed to put pressure on corporations to be more responsible and accountable to shareholder interests and the bottom line of profitability.71 A similar trend is now under way in Korea. Not surprisingly, SK Global Corporation shareholders were agitated at the annual meeting, calling on the entire management team to resign.72 And they are not the only ones: a score of companies have witnessed boisterous shareholder meetings in 2002/3 and the number is growing all the time.73

The chaebol and consumers Finally, consumers – traditionally the orphans in Korea’s chaebol-dominated economy, with few rights and little protection other than ‘buyer beware’ – are due for some relief. Horror stories abound, especially among automobile purchasers, the biggest purchase for most consumers after a house or apartment. Despite the commendable efforts of the Korean Consumer Protection Board and its dispute settlement procedures, as well as governmentmandated product recalls, Korean consumers face an uphill struggle in overcoming product defects. For example, Korean auto manufacturers only replace parts that are safety-related.

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Some disgruntled vehicle owners have gone so far as picketing automakers’ headquarters or creating websites to join forces with other buyers in a similar predicament.74 However, under a new public law suit system, the government will be able to file complaints with the court against companies on behalf of consumers, to maintain and enhance customer confidence in Korean products.75

Chaebol suppliers and trust Beyond the shareholders are chaebol suppliers, who similarly have suffered heavy-handed treatment. In essence, they form part of a family in which affiliated companies are at the mercy of their patrons. One the one hand, as in the automobile industry, they are virtually guaranteed supplier contracts irrespective of the quality of the product, although this is slowly changing. Donald Kirk notes that Mando Machinery, controlled by Hyundai, supplied it with electric motors, steering units, brakes, alternators and auto transmissions76 based on competition. While this seems cosy they are still subject to the whims of their chaebol superiors. Such relationships are characterized by mutual dependency rather than trust.

The chaebol and Joint ventures The leading chaebol, particularly Samsung and LG (LG-Philips), have entered into numerous joint ventures with Western companies. A recent case study of Samsung-Qualcomm’s joint venture in wireless telecommunications (CDMA cell phone technology) by the noted economist, Lawrence Krause (2003), describes how Qualcomm’s CDMA technology was married successfully to Samsung’s capital and R&D capabilities to move into a market already heavily dependent on cell phones. This highlighted the role of trust in a corporate cross-cultural context.77 While Samsung and Qualcomm were drawn to each other as a matter of mutual interest, negotiating a partnership was not an easy undertaking. Under the licensing agreement, Qualcomm gained the royalties and Samsung gained the technology, as well the right to benefit from technological improvements. While both companies benefited from a productive partnership, it was still not trouble-free. In particular, difficulties arose when Qualcomm negotiated the CDMA licensing agreement with Samsung’s competitors, such as LG, Korea Telecom and SK, while Samsung itself entered into a technology agreement with European producers Nokia and Ericsson, putting the continued viability of the original joint venture to the test.78 Nevertheless, the partnership – albeit strained – has endured, suggesting that mutual trust must have played at least some part. However, with a new Korean platform coming on line, Samsung, along with other Korean mobile carriers, has cut back on royalty payments to Qualcomm.79 Business is business!

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The chaebol and public trust We should not lose sight of the fact that the chaebol model is more than a consequence of government funding and preferred treatment during the early years of Korea’s export-led expansion. Rather, it is rooted in, and a reflection of, Korea’s Confucian culture. Thus, although the Kim Dae Jung Administration was committed to enhancing the role of small and mediumsized enterprise, such entities have, for the most part, become part and parcel of the chaebol chain. In a family-centred, Confucian-based society, it should not be a surprise that family-owned enterprises continue to hold sway as the natural business model, as they have the best fit. The issue is not their continued relevance (in the absence of an alternative corporate structure), but how to make them more responsive and responsible to the demands of a globalizing Korea, thereby enhancing the level of trust they command. However, this will be neither be quick nor easy. Kirk meticulously details the tenacity of the chaebol structure and modus operanadi – in particular, centralized control, epitomized by the sacrosanct chairman sitting at the apex of a family hierarchy who tolerates no interference.80 At Hyundai, the ‘veneration of central authority helps explain the iron grip Chung and other chaebol leaders have over their budding empires’.81 In the world of the chaebol, he notes ‘the term top-down actually understates the management style at Hyundai … Loyalty went even further than unquestioned obedience … . The company man did not only do as told, but perceived what his boss wanted and did it even if he had to break the law, e.g. bribe an official [while] the top manager [was] responsible not only for certain things but for the total consequences.’82 Thus, while ‘the degree of central control might vary from chaebol to chaebol, from company to company within each chaebol, and from situation to situation … the emphasis in literally every case, was upon one man at the top’.83 More broadly, this seemed to hold for the society as a whole with Confucian values at the heart of Korean governance as well as business.84 According to Sa Kong Il, Director of the Institute for Global Economics, ‘the Confucian cultural heritage inculcates a value system based on correct superior–subordinate relationships of the sort conducive to a smoothly operating hierarchy but hardly to greater trust’.85

Whither the chaebol? Although the chaebol are much maligned in the press, Korean students nevertheless compete vigorously for chaebol jobs, which are viewed as a mark of success. While hiring by the chaebol has levelled off in recent years as result of Korea’s economic crisis, this has not diminished their allure for Korea’s next generation of leaders – it has only made the competition for

342 Creating Trust in the Korean Chaebol

jobs keener. In short, the hold by the chaebol over Koreans, young and old, remains as great as ever. Why is this the case? There are several good reasons. The chaebol – better than any other societal institution – manifest the Confucian past, even as they symbolize the modern age. They are ‘the bedrock beneath a glittering glass and steel overlay of Western and Japanese modernization. And they illustrate better than anything else why reform in Korea is always a “work in progress” and show a minimal adjustment of the ever present mantra’.86 As Kirk notes: Workers and managers might lower the level of confrontation, owners might rely more on experts and technicians than gut instincts, larger companies might forgo the urge to absorb or smother the smaller ones, government and business might distance themselves from one another, while resisting payoffs and bribes, but everyone knew that such reforms would end as quickly as they had begun.87 For all the talk of reform, unless Korea is able to transcend its Confucian past, it can never fully throw off the chaebol yoke of top-down control and replace it with trust. And until the chaebol proves worthy of public trust, the Korean ‘discount’ will remain a necessary component of the business landscape in a hesitatingly globalizing hermit Kingdom.

Conclusion This chapter has examined the practices of the Korean chaebol and their potential for promoting trust. In analysing chaebol relationships with a multitude of stakeholders, ranging from family owners and the Korean government to shareholders employees, suppliers and customers, it is evident that, on virtually every index, there is opacity, coercion and the absence of trust. It must be stressed, however, that the chaebol, their values, beliefs and behaviour patterns cannot be divorced from the culture of which they are an integral part. Indeed, they are creations of that culture, and more specifically, a particular era in Korea’s government-directed, industrial development. Paradoxically, however, while the Korean government itself has undergone a profound transformation from a military autocracy to a representative democratic government in which trust plays its part, most chaebol have changed hardly at all since the 1960s in terms of their modus operandi. Whether in the light of the recent burgeoning of Korea’s latent nationalism, coupled with the desire to play a larger role on the world stage, thereby fulfilling Roh Moo Hyun’s vision of Korea as the North East Asian regional hub, the chaebol can evolve from being part of a giant export machine and towards dynamic free-market enterprises is the great unanswered question for the next decade of Korea’s economic development.

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Notes 1 Korean chaebol assets total US$600 billion, exceeding the country’s GNP, Yoolim Lee, ‘South Korea Retreat on Corporate Reform’, International Herald Tribune, 27 March 2003; Chaebol sales surpassed US$400 billion in 2002. 2 Sang-soo Park, ‘Conglomerates Share of Sales Hits Ten Year High’, with top five accounting for 19.4 per cent and about 30 per cent of the profits, The Korea Herald, 8 April 2003. They also account for 40 per cent of ordinary income, Jung-won Joo, ‘Top Five Firms Show Domination’, The JoongAng Daily, 8 April 2003. 3 Yong-jin Oh, ‘SK Chairman Quizzed by Prosecutors’, The Korea Times, 22 February 2003; Kyung-ho Kim, ‘Arrest Warrant Due for SK Chief’, The Korea Herald, 22 February 2003; Joon-hun Nho, ‘SK Thrown into Uncharted Territory’, The Korea Times, 22 February 2003; Yong-taik Lee, ‘SK in Turmoil after Arrests’, The JoongAng Daily, 24 February 2003. 4 Yong-bae Shing, ‘Hyundai Sent Secret Money to North Korea’, The Korea Herald, 31 January 2003; ‘Hyundai Boss Ties Cash, Summit’, The JoongAng Daily, 17 February 2003; ‘Hyundai Sent $5000 million to North’, The Korea Herald, 17 February 2003; Ryu Jin and Na Jeung-ju, ‘Roh Urges Kim to Explain Summit Deal’, The Korea Times, 4 February 2003; Young-jin Oh, ‘Kim Apologizes for Summit Scandal’, The Korea Times, 15 February 2003, Korea Herald/Korea Times, February 2003; Yong-bae Shin, ‘President Takes Blame for Payoff’, The Korea Herald, 15 February 2003; Ser Myo-ja and Kim Jung-hee, ‘Knew of Cash, Kim Says’, The JoongAng Daily, 15 February 2003; Howard French, ‘Kim Apologizes to South Koreans for Cash Sent to North’, International Herald Tribune, 15–16 February 2003; Hal Piper, Op Ed, ‘Now Apologize for a Lame Apology’, The JoongAng Daily, 17 February 2003. 5 ‘GNP demands special counsel on NK payoff’, The Korea Herald, 5 February 2003; ‘Hyundai Boss Ties Cash, Summit’, The JoongAng Daily, 17 February 2003; ‘President Takes Blame for Payoff,’ The Korea Herald, 15 February 2003; ‘Payoff Probe may Target Ex-president’, The Korea Herald, 24 March 2003; ‘Hyundai Chief Grilled in Payoff Probe’, The Korea Herald, 15 May 2003; ‘Payoff Probe to Call Ranking Aide’, The Korea Herald, 27 May 2003; ‘Ex-presidential Aide Grilled in Payoff Probe’, The Korea Herald, 29 May 2003; ‘Former Intelligence Head Probed in NK Payoff’, The Korea Herald, 23 May 2003; Kang-Joo-an, ‘From the Grave, New Charges’, The JoongAng Daily, 6 August 2003; Seou, Jee-yeon, ‘Mong Hun Victim of Political Scandal’, The Korea Times, 5 August 2003; James Brooke, ‘Ex-Leader of Hyundai Plunges to his Death’, International Herald Tribune, 5 August 2003; Kim Hyun chul, ‘Chung’s Death may Shake up Hyundai Firms’, The Korea Herald, 5 August 2002; Seo-Hyun-jin ‘Inter-Korean Business Projects may Suffer from Loss of Chung’, The Korea Herald, 5 August 2003; Lee, young-jong and Ser, Myo-ja ‘North Halts Kumgang Tours’, The JoongAng Daily, 6 August 2003. 6 John Barry Kotch, ‘Roh Moo Hyun Steps Forward’, The Japan Times, 7 March 2003. 7 See Donald Kirk Korean Dynasty; Hyundai and Chung Ju Yung (Armonk, M. E. Sharpe, 1994). 8 See John Barry Kotch, ‘Korea’s Security Dilemma and the Diplomacy of an Emerging World Power’, Korea and World Affairs, Winter 1997, pp. 629–52; ‘China Develops a Trading Seoul Mate’, The Asia Times, 17 February 1996; ‘LG to Invest $10 Billion in China by 2005’, The Korea Times, 28 May 1996. 9 ‘LG Aims to Emerge as India Largest Software Firm by 2003’, The Korea Times, 18 June 1997.

344 Creating Trust in the Korean Chaebol 10 ‘Daewoo Group Ready to Become Borderless Global Conglomerate’, The Korea Times, 15 July 1997; ‘Daewoo Bets Future on Emerging Global Markets’, The Korea Times, 7 August 1997; ‘UZ–Daewoo Leading Auto Leading Economic Development in Central Asia’, The Korea Times, 18 July 1997; Pyoon Jae-yung, ‘Samsung to put $500 million into Texas Chip Plant Upgrade’, The JoonAng Daily, 5 May 2003; ‘Samsung Electronics to Invest in U.S. Chip Plant’, The Korea Herald, 26 June 2003. 11 ‘Hyundai Picks Montgomery for U.S. car plant’, The Korea Herald, 14 March 2002; ‘Alabama Wins Hyundai’s Car Plant’, The Korea Herald, 3 April 2002; ‘Hyundai Motor Break Ground for U.S. Plant’, The Korea Herald, 18 April 2002; ‘Hyundai Mobis Selects Alabama Plant Site’, The Korea Herald, 12 November 2003; ‘Hyundai to Sell 1 Million Cars in U.S.’, The Korea Herald, 3 February 2003. 12 Kim Hyo-jin, ‘Samsung Opens Mexico Appliance Plant’; Kim, Chang-woo, ‘Experience Brings Samsung Kuwait Deal’, The JoongAng Daily, 10 April 2003. 13 Chong-mo Yoo, ‘SK Group in Danger of Being Dismantled’, The Korea Herald, 13 March 2002; Yon-se Kim, ‘SK Accounting Fraud Exceeds W 2 trillion’ [US$1.7 billion], The Korea Times, 1 April 2003; ‘SK Accounting Fraud Set at $2.8 billion (3.7 billion won)’, The JoongAng Daily, 24 April 2003; Young-wook Kim, ‘Groups Fearful of SK Fallout’, The Jooang Daily, 7 March 2003; Young Lyoul Lee, ‘SK Trouble Worries Other Chaebol’, The Jooang Daily, 22 February 2003; ‘SK Global Declares Painful Self-rescue Measures’, The Korea Herald; Hyun-chul Kim, ‘What Lies Beneath Can Still Surprise’, The JoongAng Daily, 26 March 2003; Don Kirk, ‘Korean Banker Sees Possibility of More Fraud’, International Herald Tribune, 11 April 2003; Yon-se Kim, ‘Hyundai Construction Suspected of Tricky Accounting in the 1990s’, The Korea Times (10 September 2003); Cheong-mo Yoo, ‘SK Vulnerable to Hostile M&A’, The Korea Herald, 17 April 2003; Yonsam Cho, ‘SK Corp’s Debt Ratings are Cut to Junk by S&P’, International Herald Tribune, 8 May 2003; Kim, Ji-ho, ‘Fate of SK Global in Doubt’, The Korea Herald, 21 May 2003; Kim Yung-chul, ‘SK Pressed to Bail Out Trading Unit’, The Korea Herald, 21 May 2003; ‘SK Telecom Plagued by Embattled SK Global’, The Korea Herald, 3 June 2003; ‘SK Creditors Unite to repel Foreign Investors Challenge’, The Korea Herald, 6 June 2003; Kim Young wook, ‘SK Group Announces Restructuring’, The JoongAng Daily, 19 June 2003; Kim, Jae-kyung, ‘SK Seeks to Protect Chey Tae-won-tae’, The Korea Times, 9 June 2003; ‘Foreign Investors Accept Bailout for SK Global’, The Korea Herald, 31 July 2003; ‘Foreign Investors Urge More Reforms’, The Korea Herald, 7 August 2003; ‘Fate of SK Global at Crossroads’, The Korea Herald, 14 July 2003. 14 Sang-soo Park, ‘Markets Recovering from SK Crisis’, The Korea Herald, 15 March 2003. Some even saw a silver lining as a spur to greater transparency and accounting reform. Ji-tae Kim, ‘SK Global Scandal to Promote Transparency’; and Yim-se Kim, ‘SK Fraud to Accelerate Accounting Reform’, The Korea Times, 14 March 2003; William Pesek, Jr., ‘Despite Setbacks South Korea Inc. Seems on Track’, International Herald Tribune, 31 March 2002; Yoolim Lee and Yongsam Cho, ‘Fund Move May Signal Hostile Bid for SK Corp.’, International Herald Tribune, 11 April 2003; Youngsam Cho, ‘SK Investors Meets with Roadblocks in Seoul’, International Herald Tribune, 15 April 2003; Sang-woo Kim, ‘SK Says It Has Plan to Counter Bid’, The JoongAng Daily, 16 April 2003; Donald Kirk, ‘Monaco Firm Has Seoul on Edge’, International Herald Tribune, 21 April 2003. 15 Kwang-ki Kim and Hyun-chul Kim, ‘Creditors Work on SK Game Plan’, The JoongAng Daily, 13 March 2003; Byeong-gee Hong, ‘Lenders Pressure SK Global’, The JoongAng Daily, 15 March 2003; Jae-kyoung Kim, ‘SK Scandal Shakes Fund

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16 17 18 19

20

21 22 23 24

25 26 27

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Management Co’s’, The Korea Times, 17 March 2003; Yoolim Lee, ‘South Korea Retreats on Corporate Reform Pledge’, International Herald Tribune, 27 March 2003; Byong-gee Hong, ‘Creditors Unhappy with SK’s Progress’, The JoongAng Daily, 12 April 2003; Brett Cole, ‘Foreign Creditors Balk at Reprieve for SK Global’, International Herald Tribune, 9 April 2003; Sung-tae Sim, ‘Korea’s Outlook Rating Dealt Blow’, The Korea Herald, 12 February 2003. Brett Cole, ‘Foreign Creditors Balk at Reprieve for SK Global’, International Herald Tribune, 9 April 2003. Dwor-Frecaut quoted in Kim Jae-Kyoung, ‘Korea mired in 4th recession in history’, The Korea Times, 22 August 2003. William Pesek, Jr., ‘Despite Setbacks South Korea Inc. Seems on Track’, International Herald Tribune, 31 March 2002. Young-jin Oh, ‘Top Presidential Aides (Ban, Ki-moon and Cho-yoon Ja) Head to Washington for Consultations’, The Korea Times, 6 April 2003. Jin-pyo Kim, Minister of Finance and Economy and Deputy Prime Minister, followed on 14 April 2003; Chi-dong Lee, ‘Minister Kim Outlines Seoul’s Commitment to Open Door Policy’, The Korea Times, 12 April 2003. Both missions were aimed at calming investment jitters. James Brooke, ‘South Korea Tries to Rekindle Investor Interest’, International Herald Tribune, 16 April 2003. Sung-tae Sim, ‘Korea’s Outlook Rating Dealt Blow’, The Korea Herald, 12 February 2003; Lee, Chi-dong, ‘Moody’s Alerts Security Concerns’, The Korea Times, 12 February 2003; ‘NK Threats Weigh Down on National Ratings’, The Korea Times, 3 May 2003. Donald Kirk, Korean Crisis: The Unraveling of the Miracle in the IMF Era (New York, St. Martin’s Press, 1999). Kotch, ‘Whither the Chaebol?’, Journal of the American Chamber of Commerce in Korea, May–June 1999, pp. 12–16. Hyung-kwon Cho, ‘Lee, Kun-hee Received $13 Million in Dividends’, The Korea Times, 1 April 2003. Seung-hyun Kim, ‘Bailout Fund Probe Nabs 10’, The Jong Ang Daily, 2 April 2003; Sung-tae Sim, ‘New Administration to Ensure Fair, Free market System’, The Korea Herald, 25 February 2003. Sung-jin Kim and Dong-ho Yoo, ‘Doosang Struggles to Avoid Becoming Target of Next Corporate Crackdown’, The Korea Times, 25 February 2003. Hilton Root’s study for Milken Institute and ‘Asia’s Bad Old Ways’, Foreign Affairs. Yoolim Lee, ‘South Korea retreats on Corporate Reform Pledge’, International Herald Tribune, 27 March 2003; Yoolim Lee, ‘South Korean Groups to be Investigated’, International Herald Tribune, 5 May 2003; Yoolim Lee, ‘South Korean Leader Vows to Speed Reform’, International Herald Tribune, 9 May 2003; Sarah McBride (Wall Street Jounal) ‘Corporate Reform Suffers in Asia’, The Korean Herald, 8 May 2003; William Pesek, Jr. ‘Seoul Shouldn’t Bail out the Gamblers’, International Herald Tribune, 7 May 2003. Chi-dong Lee, ‘Roh to Launch Council to Make Korea Financial Hub in NE Asia’, The Korea Times, 22 February 2003; Robert J. Fouser, ‘Korea in the Northeast Asia Age’, JoongAng Ilbo, 28 February 2003; ‘Seoul Short on Time for Hub Vision’, The Korea Herald, 25 July 2003. Se-moon Chang, ‘Chaebols’ Role Crucial in Realizing Hub Plans’, The Korea Times, 25 February 2003. Kirk, Korean Dynasty, pp. 60–7.

346 Creating Trust in the Korean Chaebol 31 32 33 34 35 36 37 38 39

40 41

42

43 44

Ibid. S. G. Warburg Securities (2000) ‘What Is a Chaebol?’ Ibid. Kirk, Korean Crisis. Ibid. Ibid. So-young Moon, ‘Deferment Sought in Hynix Case’, The JoongAng Daily, 8 April 2003. Kotch, Whither the Chaebol? Jee-yeon Seo, ‘Exports Contributed to More than Half of Korea’s Economic Growth’, The Korea Times, 27 February 2003; Jae-kyoung Kim, ‘Exports Constitute 80% of Growth in Fourth Quarter’, The Korea Times, 12 April 2003. The latest figures show foreign exchange reserves at US$122.44 billion as of 15 April 2003, The Korea Herald, 18 April 2003. Chi-dong Lee, ‘Roh’s Economic Plan Faces Grim Reality’, The Korea Times, 25 February 2003; Sung-tae Sim, ‘New Administration to Ensure Fair, Free Market System’, The Korea Herald, 25 February 2003; Kim Sung-jin, ‘Chaebol asked to Make Public Ownership Structure’, The Korea Times, 6 May 2003; Kyunghee Park, ‘Seoul Orders Groups to Cut Cross-shareholding’, International Herald Tribune, 7 July 2003; Lee Sang, Ryeul and Limb Jae-un, ‘Shareholder Suit Bill Advances’, The JoongAng Daily, 24 July 2003; Sim Sung-tae, ‘Panel to Probe Related-party Transactions’, The Korea Herald, 20 May 2003. Sim Sung-tae, ‘FTC to Probe Top Four Conglomerates’, The Korean Herald; Heejin Koo and Yoolim Lee, ‘South Korean Business Groups to be Investigated’, International Herald Tribune, 11 April 2003; Ki-tae Kim, ‘56 Chaebol Placed on FTC Watch List’, The Korea Times, 2 April 2003. Kirk, Korean Dynasty. Caroline Bergrem, Project Manager, Global Corporate Citizenship Initiative, World Economic Forum: Corporate citizenship can be defined as the contribution a company makes in society through its core business activities, its social investment and philanthropy programmes, and its engagement in public policy. It is determined by the manner in which a company manages its economic, social and environmental impacts and its relationships with different stakeholders, in particular shareholders, employees, customers, business partners, governments and communities. (Jane Nelson, Director, Business Leadership and Strategy, The Prince of Wales International Business Leaders Forum, 2002)

45 James S. Coleman, ‘Social Capital in the Creation of Human Capital’, American Journal of Sociology, 4, 1998, pp. 95–120. 46 Roderick M. Kramer, Abstract: ‘Trust and Distrust in Organizations; Emerging Perspectives, Enduring Questions’, Annual Review of Psychology, 1999, p. 12; and Yamagishi, T. and Yamagishi, M., ‘Trust and Commitment in the United States and Japan’, Motiv, Emot, 18, 1994, pp. 129–66. 47 See Samuel A. DiPiazzi and Robert G. Eccles, Building Public Trust: The Future of Corporate Reporting (New York, John Wiley, 2002) for an enlightening discussion of a three-tier model of corporate transparency. 48 Kirk, Korean Dynasty, p. 36. 49 Among government ministries, Construction, National Defence, Planning and Budget, Justice, and Finance and Economy received the poorest scores. Hyun-jin

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63

64

Seo, ‘Law Enforcement Bodies (Police, Tax and Customs) Top Corruption List’, The Korea Herald, 9 April 2003; ‘Embezzlement Uncovered in Defense Ministry’, The Korea Times, 10 April 2003; Hyung-jin Kim, ‘Four Generals Charged in Corruption Case’, The Korea Herald, 11 April 2003; Seo-Soo-min, ‘Army General Arrested for Bribery’, The Korea Times, 12 April 2003; Youngsam Cho, ‘Chairman of Posco Resigns under Fire’, International Herald Tribune; Dong-ho Yoo, ‘Ex-FTC [Fair Trade Commission] Head Mired in Graft Scandal’, The Korea Times, 12 April 2003; Kang-su Ju, and Jung-ha Kim, ‘Ex-Commission Boss Arrested’, The JoongAng Daily, 19 April 2003; Kyung-ho Kim, ‘Extradited Ex-Tax Official Faces Music’, The Korea Herald. See also ‘Corruption in the Business Community’, The Korea Herald, 30 October 2002. Seung-hyun Kim, ‘Bailout Fund Probe Nabs 10’, The JoongAng Daily, 2 April 2003. The Korea Herald English Update, 5 November 1999. Washington DC, 2003, pp. 156–62; and Edward Graham, ‘Korea Has a Long Way to Go to Upgrade Transparency’, The Korea Herald, 10 March 2003. Ibid. Ibid. Jun-hun Nho, ‘LG Moves Steadfastly Towards Pure Holding Company’, The Korea Times, 10 March 2003; Jooh-hun Nho, ‘LG Stocks Rise Following De-mergers, Reintegration’, The Korea Times, 17 March 2003. Ibid. Jeo-yeon Seo, ‘Chaebol Face Obstacles in Establishing Holding Co.’, The Korea Times, 26 March 2003. Kirk, Korean Dynasty, pp. 218–51; Kim Young wook, ‘Pitch Battle Breaks Out: Sides Clash Over Management of Korea, Inc.’, The JoongAng Daily, 21 May 2003. Ibid. Hyun-ok Ha, ‘Standoff at Doosan Comes to an End’, The JoongAng Daily, 13 March 2003; Sao, Jee-yeon, ‘Militant Korean Labor Unions Discourage U.S. Investment’, The Korean Herald, 23 June 2003; Kim, Sung-jin, ‘South Korea Worst in Labor Relations’, The Korea Times, 28 June 2000. Don-ho Yoo, ‘Labor Management Ties Should Be Based on Trust Principle’, The Korea Times, 18 April 2003; Kyung Hee Park, ‘Hyundai Deal Fuels Wider Demands’, International Herald Tribune, 8 August 2003; Kim Mi-ho, ‘Spirited Debate Underway on Labor’s Management Role’, The Korea Herald, 11 August 2003; ‘Angry Business Leaders Talking Tough to Labor’, The Korea Herald, 3 July 2003; William Pesek, Jr., ‘Troubling Sings of in South Korea Union Victory’, International Herald Tribune, 13 August 2003; ‘Roh Wants Global Labor Rules by 2003’, The Korea Herald, 1 July 2003; ‘Labor Conflicts Threat to South Korean Economy’, The Korea Herald, 1 July 2003; ‘Seoul Confirms Tough Labor Policy’, The Korea Herald, 7 July 2003; ‘Korea Possess Strongest Anti-Business Sentiment Among Developed Countries’, The Korea Herald, 8 August 2003; ‘Foreign Investment in Korea Halved’, The Korea Herald, 2 July 2003. ‘Family-Owned Chaebol’s Painful Transition to Public Control’, The Korea Times, 17 March 2003; see also Edward Graham, Reforming Korea’s Industrial Conglomerates, pp. 162–8 for a good discussion of corporate governance issues. Speech by Chul-kyu Kang, Chairman, Fair Trade Commission, ‘Revamping Corporate Governance Urgent’, Seoul Foreign Correspondents’ Club, 11 April 2003. Edward Graham, ‘Attack Insider Trading at the Root’, Op Ed, The JoongAng Daily, 7 March 2003.

348 Creating Trust in the Korean Chaebol 65 Kirk, Korean Dynasty, p. 1. 66 Graham, Reforming Korea’s Industrial Conglomerates, p. 168. 67 Chi-dong Lee, ‘Roh’s Economic Plan Faces Grim Reality’, The Korea Times, 25 February 2003; Sung-tae Sim, ‘New Administration to Ensure, Fair, Free Market System’, The Korea Herald, 25 February 2003. 68 Ibid. 69 ‘Asian Minority Shareholders at Risk: OECD’, The Korea Herald, 29 March 2003. 70 Ibid. 71 Claudia H. Deutsch, ‘Shareholders Dissent Gets Louder’, International Herald Tribune. 72 Deok-hyun Kim, ‘SK Corp Infuriates Shareholders’, The Korea Times, 15 March 2003. 73 Ka-young Lee, ‘Small Shareholders Vent Ire’, The JoongAng Daily, 22 March 2003; Young-wook Kim, ‘Cut in Hynix Capital Draws Ire’, The JoongAng Daily, 26 February 2003. 74 ‘Picketing car makers headquarters, some aggrieved owners say, is the only way to get some attention to their gripes about the lemons they bought’; ‘Defects not limited to mass-market vehicles’, The JoongAng Daily, 7 April 2003. 75 Chi-dong Lee, ‘Roh’s Economic Plan Faces Grim Reality’, The Korea Times, 25 February 2003. 76 Kirk, Korean Dynasty, p. 153. 77 Lawrence Krause, ‘The Partnership between Korea and the United States’, East–West Center, Honolulu, Hawaii, 8 January 2003, pp. 7–9. 78 Ibid. 79 Deok-hyun Kim, ‘Qualcomm Marginalized in Wireless Internet Biz’, The Korea Times; ‘Qualcomm’s Strong Growth Ending’, The Korea Herald, 26 April 2003. 80 Kirk, Korean Dynasty, p. 35. 81 Ibid., p. 34. 82 Ibid., p. 35. 83 Ibid., p. 41. 84 Ibid., p. 35. 85 Sa Kong Il and Leroy Jones, Government, Business and Entrepreneurship in Economic Development, The Korean Case, 1980, p. 18. 86 Kirk, Korean Dynasty. 87 Ibid.

References Coleman, J. S. (1998) ‘Social Capital in the Creation of Human Capital’, American Journal of Sociology 4, pp. 95–120. DiPiazzi, S. A. and Eccles, R. G. (2002) Building Public Trust, The Future of Corporate Reporting (New York, John Wiley). Graham, Edward (2003) Reforming Korea’s Industrial Conglomerates (Washington, DC, Institute of International Economics). Kirk, D. (1994) Korean Dynasty: Hyundai and Chung Ju Yung (Armonk, NY, M. E. Sharpe). Kirk, D. (1999) Korean Crisis: Unraveling of the Miracle in the IMF Era (New York, St. Martin’s Press). Kramer, R. M. (1999) ‘Trust and Distrust in Organizations; Emerging Perspectives, Enduring Questions’, Annual Review of Psychology, 1 January, pp. 12–28.

John Barry Kotch 349 Krause, L. (2003) ‘The Partnership between Korea and the United States, the New Economy from a US Perspective’, Presentation to the ‘Conference on Balancing the Partnership between Korea and the United States’, East–West Centre, Honolulu, Hawaii. 8 January. OECD (2003) ‘Asian Regulators Identify Bank Governance and Minority-Shareholder Protection as Priorities for Corporate-Governance Reform’, A summary report of the Fifth Asian Roundtable on Corporate Governance held in Kuala Lumpur, 27 March, .http://www.oecd.org.document/15/0,2340,en_2649_201185_2503119_ 1_1_1_1,00.htm. [Accessed August 2003]. World Economic Forum, Corporate Global Citizenship Initiative, http://www.weforum. org/site/homepublic.nsf/Content/Global⫹Corporate⫹Citizenship⫹Initiative. Yamagishi, T. and Yamagishi, M. (1994) ‘Trust and Commitment in the United States and Japan’, Motivation and Emotion, 18(2), pp. 129–66.

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Part IV Personal and Public Roles

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16 Developing Trust: Obstacles and Understanding Lionel Stapley

This chapter starts from the position that ‘trust’ is an essential element in building and maintaining alliances. However, while ‘trust’ is a commonly used term, precisely what we mean by it is far from clear. I shall therefore seek initially to provide an explanation of the concept of trust. In doing so I shall seek to show how it develops and how it is perpetuated. Having outlined something of the meaning and relevance of trust to contemporary organizations, the central thrust of the chapter will be devoted to the many obstacles that may prevent the development of trust, or may result in a loss of trust by one or both parties in the relationship. The chapter will conclude with some cutting-edge practices that will increase understanding and help those concerned to ‘get together’ and develop trusting alliances that will endure.

What we mean by ‘trust’ We all know what the experience of trust is like, and we can all recount situations where we were able to feel both trusting and trusted. When we explore those situations we can begin to appreciate that, for trust to exist, there needs to be a relationship between a human being and another object – usually another human being. Even if we speak of trusting ourselves, it is in relation to something or someone else. We might, therefore, as our first point of understanding, posit that trust is a relational concept. When we continue to reflect on our experiences we will also realise that trust is not a continuous experience. As has been said, it is difficult to achieve and easy to lose. Trust does not remain automatically once it exists; it is something that may weaken in experience along a range from complete trust to dis-trust. We might take, then, as our second point of understanding, that trust is a dynamic process. And, as a third point, that trust is situationally specific or unique. In other words, no two situations are the same when it comes to trust. Continuing our reflection of previous experiences, we might ask, how do we describe trust? And here I am left in difficulty, because words do not seem 353

354 Developing Trust: Obstacles and Understanding

adequate to describe this phenomenon. However, this may in itself be valuable as it points us in the direction of feelings and emotions. Like other emotions, for example love, we know what it is when we experience it but words are inadequate to cover the range, quality and multitude of related emotions. We might take as a further point, then, that trust is a mainly emotional state. Further reflection will clearly inform us that trust does not just happen. It needs to be based on positive experiences that encourage within us this emotional state of trust. These may be experiences gathered over a period of time, or perhaps experiences of such a quality that we feel secure enough to trust another object, usually another person. We might, then, also say that trust develops as a result of our positive experience of other people. Trust does not have to be mutual. We can trust someone or something else without the need for them to trust us. However, for a genuine relationship, we might say that there is a need to trust and to be trusted. To summarize, we might say that trust is characterized as follows: ● ● ● ● ●

it it it it it

is a relational concept; is a dynamic process; is situationally specific or unique; is a mainly emotional state; and develops as a result of our experience of other people.

This has been a brief but, I hope, useful introductory exploration of the phenomenon we call ‘trust’. It will be helpful for our later application if we can obtain a deeper understanding of the concept. In the process of doing so, I shall seek to answer the question, ‘How does trust develop?’ To help find answers to this question, and in the resulting application, I am going to take a psychodynamic approach, which I consider to be the most helpful means of explaining human behaviour. Indeed, in true psychodynamic fashion, I shall start with an exploration of the role of trust in our very first relationship – that between mother and infant.

How does trust develop? Basic to the psychoanalytic approach is the premise that we develop from infancy onwards. We never completely forget the ways of functioning that we learnt earlier and, in particular, the ways that we learnt first of all, as infants. Thus, although we may not be aware of it as mature adults, we carry with us ways of functioning and relating to people that are essentially infantile. To understand these ways we must return to the world of the infant. As was stated above, the issue of trust goes right to the heart of our very first experience as humans, the relationship between mother (or other carer) and child, and it is felt that this relationship will provide us with the deeper understanding that we seek. Winnicott (1988) would say that there is never ‘just an infant’. He meant that, intrinsic to the picture of infancy is a

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caretaker who, from the point of view of the infant, is something more than ‘another person’, who relates to and assists the growth of the infant. The mother provides the very context in which development takes place, and from the point of view of the newborn she is a part of the self. She provides a true psychosocial context; she is both psycho and social, depending on whose perspective we take, and the transformation from which she becomes for the infant gradually less psycho and more social describes the very evolution of life itself. Being held in the mother’s womb, then being held in the mother’s arms, is the first boundary within which the infant’s personality can develop. The mother’s sensitivity to this growth provides the protection of a boundary which helps the child to extend and expand, and within which he or she can include more and more experience of the world. From the outset this is a two-way relationship, where the infant signifies his or her needs through crying and gestures. In the beginning, needs are very few, but are terrifying if they are not met. The degree of frustration that the newborn child can tolerate without disintegrating, without going back to what seems a state of chaos and distress, is minimal. The early relationship to what I shall refer to as the maternal holding environment is characterized by infantile dependency. A relationship grows through the ability of both parties to experience and adjust to each other’s natures. The relationship develops through the infant getting to know the mother as she presents herself to interpret and meet his needs, which are emotional as well as physical. The baby needs to have not only food and comfort but also the security of a loving relationship in which he can grow and learn to know himself and a range of feelings. Developmental psychology (see, for example, Stern, 1985), has demonstrated that the infant has an innate capacity to seek out and make use of the various characteristics of a human caretaker. The infant prefers the human face and voice above other visual and auditory stimuli, and feels comforted by rhythmic rocking and the sound of the mother’s heart and the familiar smell of her body. Yet the nature of this fit between what the infant is reaching out for and what the mother can provide is not a static phenomenon; it is intrinsically dynamic, providing the basis for a subtle reciprocal interaction between mother and baby, which contains within it the potential for increasingly complex exchanges. For the infant to develop there is a need for a ‘basic trust’, and for what Winnicott (1971) has termed ‘a good enough mother’. This basic trust is developed as a result of the infant’s perceived experience of his or her maternal holding environment. Another concept used by Winnicott in regard to this relationship is that of maternal empathy, by which he meant that the mother intuitively knows what to do, she is able to empathize, to feel into the child, to truly experience what the infant is experiencing. Empathy has been described as ‘feeling into’ – that is, the ability to perceive the subjective

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experience of another person. It is posited that empathy is a process where we imitate the distress or elation of another, which then evokes the same feelings in us. In family life we frequently empathize with the pain and suffering or sheer delight of our parents, siblings or children. A ‘good enough’ mother will be experienced by the infant as ‘trustworthy’. Erikson (1959) also referred to trust in this first relationship. He was of the view that mothers create a sense of trust in their children by that kind of administration which in its quality combines sensitive care of the baby’s individual needs and a firm sense of personal trustworthiness within the trusted framework of their culture’s lifestyle. This forms the basis in the child for a sense of identity that will later combine a sense of ‘being all right’, of being oneself, and of becoming what other people trust one will become (ibid., p. 249). From this very first relationship – that between mother and infant – it seems clear that ‘trust’ is a vital and important element in the development of the infant. The exploration has provided us with a deeper understanding of some of the requirements of a trusting relationship. Starting from a dependent position, as the infant does, the mother provides an environment that we might refer to as a ‘trusted framework’ that enables the infant to be able to trust and be trusted. To achieve this trusted framework, the mother must provide physical and psychological support and, most importantly, to provide for the infant’s emotional needs, she must provide maternal empathy. In other words, she must communicate with the infant at an emotional level. There will then develop what has been referred to as ‘basic trust’, a requirement for the healthy development of the infant. I would suggest that the requirement of meeting the infant’s emotional needs is a key factor in understanding the development of trust in all relationships. Doubtless, emotions have been a factor in relationships since time began. However, it is only in recent times that the issue of ‘emotions’ has become a significant part of social and management thinking. Daniel Goleman’s book, Emotional Intelligence (1995) served to inspire thinking and developments in the field, and since then others have also written on the topic (for example, Stapley (2002), which seeks to explore the dynamics concerned in the control and management of emotions by managers and leaders). From these we gather a better understanding of the subject matter, but they may not have translated into actions. A contemporary view of trust would tend to support the notion that the linkage between trust and emotions has not been developed successfully, as the following short section shows.

A contemporary view of trust A typical example is that of Berkhard Sievers (2002), who wrote that not for one moment did he doubt the relevance of trust both in everyday life and in organizations and society at large, because no one could be against trust

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per se. Trust, he stated, is like motherhood and apple pie – a good thing and a necessary constituent of the social fabric. Others have expressed similar views, as the following examples show. As Elliot Jaques (1996, p. 15) put it: ‘People do not have to love each other, or even to like each other, to work together effectively. But they do have to be able to trust each other in order to do so.’ There is no doubt that trust is an important source of social capital within social systems (Fukuyama, 1995). It may even be said that trust forms such an important part of the basis of the current social structure that without trust and trustworthiness we could not have our form of society. However, Sievers (2002) expressed his contemporary view of the use of trust as follows: ‘Though it is the case that both individuals and organisations would not be able to face or survive to the next day without a high amount of trust, the excessively important role given to trust in the literature on organisations is, to a major extent, not in accord with my own experience of working with people in enterprises.’ Sievers expresses his reservations about the present use of trust as being partly a concern about its fashionable character, and the ‘lightness’ (not to say ‘naivety’) with which it is often treated. To support this view he cites the following example: ‘Leadership is a relationship, founded on trust and confidence. Without trust and confidence, people don’t take risks. Without risks, there is no change. Without change, organisation movements die’ (Kouzes and Posner, 1995, quoted in Dando-Collins, 1998, p. 26). As Sievers (1999) states, ‘This is an extreme example of what is widely propagated as “business wisdom”. In other words, trust has become the current “in-word” and it is thrown around as some sort of panacea for organisational and societal problem solving without any real appreciation or understanding of what trust means and why it is so important.’ Thankfully, this book provides the opportunity to move from this so-called ‘lightness’ of view to provide a somewhat deeper exploration that will enable us to develop an appreciation and understanding of this phenomenon. Building on the exploration of the first relationship between mother and child, I shall now move to some of the factors that will affect relationships across a wide range of alliances – including some obstacles and, I hope, generating understanding.

Obstacles and understanding The process of developing alliances will inevitably evoke processes of authority, power and politics. By their very nature, power and politics do not exist in the private world of ‘self’; they are relational concepts that require us to have an interaction with another person or another group. Following Eric Miller (1985), I start from the premise that the submission of this chapter – regardless of my intentions, regardless of what I write and almost regardless of whether it is read or not – is a political act. It involves

358 Developing Trust: Obstacles and Understanding

me in a system of political relationships and relatedness that has been created by the editors of the book. A similar situation occurs with regard to building alliances to do business, which may similarly be described as a political act – regardless of the intentions of either party. Having entered this political institution, both parties will be connected by the task and roles of the relationship; but, in addition, they will also be affected by roles in other political systems beyond the project. For example, one level of political system within which the parties may perceive themselves to be related is as a miniature element in a set of international relationships. At the international level, the political system will be shaped by national cultures and politics, and these will have some effect on the individual or group relationships that arise out of doing business. In situations where alliances are developed between Western and Asian organizations there is every possibility that they will be particularly liable to be affected at this level. Another level of political system is the inter-institutional political system. At this level the political system will be shaped by, among other things, the size of each of the respective organizations; whether or not they are new or long-established; whether they are cash rich or short of funds; and by their organizational cultures. Again, all these factors will have an effect on the individual and group relationships that arise out of doing business. And yet another level is the intra-institutional political system. Here, relationships will be shaped by internal factors in each of the organizations. Not least of these factors will be the formal strategies, structures, policies and management style. As with the other levels of the political system, this will also have its effect in like manner. For each of the parties to the relationship, much of the influence at each of the levels described above is similar to the language that we use – that is, ‘part of our taken for granted assumptions’. As such, each in his or her own way may be liable to see little need for explanation or, indeed, little possibility of disagreement. However, nothing could be further from the truth. As Kegan (1982) has said, ‘If there is a truth it’s in the person, in each person. You can’t come down on one person with some other person’s truth.’ At all levels of political interaction there is the potentiality for disaster, and if there is a lack of trust between the parties, this potentiality will almost certainly be realized. It does not require too much imagination to understand that the greater the differences between the parties, the greater the potential for conflict and disaster. Each of the levels of political activity referred to above is important, but there is yet another level – the interpersonal level. It is this particular level of political activity – what has become known as the ‘politics of identity’, that is a constant element of our lives, on which I will now concentrate. Inevitably, this requires an analysis of the conscious and unconscious processes through which the biological condition of individuality is

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transformed into consciousness of individuality: an awareness of a boundary between ‘me’ and ‘not me’ and a ‘sense of self’. To gain a deeper appreciation of what is involved it will help to consider the process that each party adopts in gaining an understanding of ‘me’.

Classifying and conceptualizing reality The world we respond to, the world towards which our behaviour is directed, is the world as we symbolize it, or represent it to ourselves. Changes in the actual world must be followed by changes in our representation of it if they are to affect our expectations, and hence, our subsequent behaviour. As Britton pointed out, ‘I look at my world in the light of what I have learned to expect from my past experience of the world’ (Britton, 1970, p. 15). We put objects which to us are similar into the same category, even though we can perceive differences among them. Britton explains that, without such patterns, the world appears to be such an undifferentiated homogeneity that human beings are unable to make any sense of it, but even a poor fit is more help than nothing at all. By the use of words and language we impose a scheme for classifying and conceptualizing our reality. Several authors who have commented on the ‘taken for granted’ nature of language have referred to this scheme of things. However, the fact that we, who are familiar with our symbols, do not have to think about them when we think with them should not hide the fact that all these symbols have to be supported by a vast intellectual structure. This structure is composed of the stock of knowledge that results in our perceived reality. Because the symbolic representation is as the members of a particular society have learned to experience it, we can appreciate that words are used differently in different societies. In this way, language may not be a means of communication but rather form a barrier to such communication. Indeed, anyone who has had the experience of working in a foreign land will appreciate and understand just how difficult this problem can be. And anyone involved in developing alliances between Western and Asian organizations will find this a particular difficulty. When we refer to different groups speaking different languages it is not always readily obvious that the words and language are different. There would be no problem accepting this if two people were speaking in two obviously different languages, such as German and French. The difficulty arises in accepting that different versions of any particular language are in fact very different. The fact is, we should be better advised to treat them as being just as different as German and French. As Wittgenstein (1953) said, ‘If a lion could talk, we could not understand him’ (p. 223) on the basis that, in the end, understanding human beings depends on a familiarity with a particular society. Again, this may be a greater issue if the languages have developed from different roots – the European languages are somewhat

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similar, but they have vastly different roots from those of Asian or African origin. From this we can conclude that, if two groups show marked differences at certain points, we can also expect to have difficulty in finding exact translations at these points. At first sight, this would seem to have grave consequences for people working in alliances with others who are clearly different. However, since our reality is not static but constantly changing, we can expect to find changes in the meanings of words and phrases, and changes in the style of discourse. It therefore follows that it is possible for both parties to change their perception of reality and, in doing so, to adopt a shared language. In developing a relationship, the ambiguity that exists at the boundary is a source of anxiety, and it is the boundaries that matter. We concentrate our behaviour on the differences rather than the similarities, and this makes us feel that the markers of such boundaries are of special value, or sacred or taboo. Contact is the point where the boundaries of the individual (‘me’) meet other boundaries, such as those of social systems (‘not me’). The boundary is at the location of a relationship where the relationship both separates and connects. In contemporary terms, the boundary is at the interface. The contact point, at the boundary, is where awareness arises. With awareness, the individual can mobilize energy so that the environment can be contacted to meet a need. The contact boundary is where one differentiates oneself from others. But it is important to see these states as momentary points in a dynamic process, not as fixed structural conceptions (Stapley, 1996).

Different classifications As was stated above, we make meaning out of our experiences, and experience itself is at the boundary between the two worlds – external interaction and internal interpretation. I now want to move on to an exploration of how the transformation of knowledge affects the power and politics of a relationship between the different parties. The approach taken will be to explore the notion of knowledge under the distinctions referred to as ‘knowing about’ and ‘knowledge of acquaintance’. The type of knowledge that we refer to as ‘knowing about’, or cognitive knowledge, can be communicated through words and symbols which may be understood in the same way. In many circumstances, this type of knowledge will not present too much difficulty. However, working across the boundary in a situation where one party to the relationship is working from a Western approach to management and the other party to the relationship is working from an Eastern approach, may present considerable difficulties. But this sort of knowledge can be shared by written texts and by word of mouth, making it possible for some sort of understanding to develop. The much deeper and more difficult problems are likely to occur with regard to the type of knowledge we refer to as ‘knowledge of acquaintance’.

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This type of knowledge is a prerequisite to knowing more about the roles and relationships that we are involved in – and this type of learning starts with oneself. This will include the developed and shared attitudes, beliefs and values of each party. Attitudes have been defined as relatively lasting organizations of feelings, beliefs and behaviour tendencies directed towards specific persons, groups, ideas or objects. An individual’s attitudes are a product of the person’s background and various life experiences. As with personality, significant people in a person’s life – parents, friends, members of social and work groups – have a strong influence on attitude formation. Attitudes are made up of beliefs and feelings towards someone or something. One cannot observe attitudes per se, but attitudes serve as a guide to behaviour. The behaviours associated with an attitude can be identified by anyone who observes interaction between people. Thus attitudes are very important to people, because attitudes dictate the way they interact with and treat other people or groups. When evaluative feelings are attached to personal beliefs, attitudes are formed. An attitude is a conscious and selective judgement about a person, object, concept or event. An attitude provides a mental predisposition to behave with consistency towards its subject. As forms of cognitive learning, attitudes tend to endure or persist over time. But attitudes can be changed. The changeable character of attitudes is important when we seek to manage performance, reduce conflict among groups, shape a corporate culture, or adopt ethical behaviour. Attitudes can apply to general classes of objects or groups, or to a specific person or idea. We can appreciate, therefore, that attitudes will exert a predictable influence on our behaviour. We develop what we might refer to as ‘personal value systems’ by organizing a constellation of beliefs concerning preferable modes of conduct or existence. Since values are more general or abstract than attitudes, their influence on behaviour tends to be less direct. As with attitudes, values are learned and may change as a result of societal or organizational experience. We conceive of values as normative propositions, held by individual human beings of what human beings ought to desire – that is, the desirable. They are supported by internalized sanctions (the conscience), and function as: (a) imperatives in judging how one’s social world ought to be structured and operated; and (b) standards for evaluating and rationalizing the propriety of individual and social choices. The primary function of values in terms of organizational behaviour is that they serve as determinants and guidelines for decision-making and action. Although, of necessity, values have their origins in the influence of parents or parental figures, this dynamic continues through life, with

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societal influences becoming more influential as time goes by. As was stated earlier, the much deeper and more difficult problems are likely to occur with regard to this type of knowledge – the ‘knowledge of acquaintance’. In any alliance between Western and Asian organizations, there could be serious discrepancies in this type of knowledge, which we might also refer to as ‘internal’ knowledge. The important thing here, for this so-called ‘internal’ knowledge, is that involved in comparing external sensory data with (including that derived from) other parties in an alliance. It may be the case that, for both parties of the alliance, there is no match between internal and external knowledge – and thus no real understanding of the other party’s position. Coming from what may be seen as totally different cultural backgrounds, each has developed internal knowledge quite different from the other. At the surface level, this can be observed in the national and organizational cultures, and in the way that organizations are managed. Yet a further aspect that we need to consider is the impact of knowledge itself. Since knowledge is incompatible with anxiety, though not with despondency or despair, the drive to know, ‘inquisitiveness, the parent of the scientific method’, may be regarded as a way of trying to eliminate anxiety. But as Liddell (1956) points out, anxiety accompanies intellectual activity, as its shadow. By this he meant that knowledge has a habit of revealing unexpected areas of ignorance, and this in turn tends to engender the very anxiety that it sets out to reduce. Trying to establish a relationship with people coming from a different background may be exceedingly anxiety-provoking. Faced with a potentiality for disaster at the various levels of political system, and differences in the bases of knowledge – the many obstacles that may prevent the development of trust, or may result in a loss of trust, by one or both parties in the relationship – there is a need to go into these situations with an open mind and an understanding of these problems. In the next section, I shall conclude with an analysis and some cutting-edge practices that will increase understanding and help those concerned to ‘get together’ and develop trusting alliances that will endure.

Analysis and cutting edge practices Building an alliance or relationship is, as has been stated, a political act, a process of managing the interface between two social systems. This is a process that requires individuals in both systems to take a leadership role. What do we mean by leadership? It seems that the essential point, for this discussion, is that leadership always involves attempts on the part of the leader (influencer) to affect (influence) the behaviour of a follower (see, for example, Tannenbaum et al., 1961). It may be helpful to assume, therefore, that both parties are engaged in a political process whereby they are taking a leadership role in seeking to influence each other. In doing so, this will inevitably involve the use of power, which is the potential for influence. And, attempts to influence may be by persuasion, manipulation, request or cajoling.

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It is suggested that the most important way that parties who are trying to build an alliance can ‘attempt to influence and to affect desired behaviour of other parties’ is to provide the sort of environment that will treat each of them as autonomous individuals. What constitutes the right sort of environment, how this is achieved, what benefits this will achieve, and why, are some of the main topics of this part of the chapter. For the moment, though, I shall concentrate on the individual and suggest that those much envied and admired, so-called ‘charismatic leaders’, are those that provide the sort of environment that encourages others to admire and respect them, and to seek to emulate them. This role model is then internalized by others who adopt the same sorts of values that are modelled by the leader. In this way, they internalize the very values that result in them wanting to be committed members of an alliance. As part of the process of learning about leadership we need to understand why it is that others identify so willingly with such leaders. A number of reasons were referred to earlier in the chapter. For example: ●

●

●

the need, at first (a necessity in infant life) for attachment to authority figures; the need to develop a basic trust in the leader based on experience that shows them worthy of that trust; and the need to know that they will not be ‘let down’.

The sorts of leaders referred to above provide positive responses for others on all these counts, but, I would suggest, they also respond to such leaders because: ●

those leaders have a high level of self-awareness – especially an awareness of their emotions.

This enables them, in turn, to gain access to the emotions of others. They are capable of ‘feeling into’ others – or, put another way, they are capable of a high degree of empathy. When people say that they feel understood, they do not just mean that the other person understands what they say or what they mean – a cognitive understanding. They also mean that the person understands them and treats them as real and complete human beings – that is, that they also understand their feelings or emotions. Each of the parties to the relationship wants to be treated as people who have: ● ● ● ● ●

●

desires to be creative; the ability to think; the right to be valued; an opportunity to participate in making decisions; the choice to be autonomous individuals who are not dependent on others for the way their working lives are organized; and, most especially, the right to be treated as people with feelings or emotions; people who experience love and affection, anger and frustration, lethargy and excitement, boredom and pain.

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If either of the parties is not able to get in touch with and understand their own feelings there is little chance that they will be capable of ‘feeling into’ the other party. This is a vital aspect, because even in alliances between Western and Asian organizations, where there are such huge differences in internal knowledge, as described above, we are all human and all share the same sort of emotions. So we can relate at an emotional level even when there are difficulties at other levels. What will not help in forming and maintaining alliances is adopting a hard-hearted, macho, negotiating approach where rationalization or denial of all sorts of feelings will come into play – since these will almost inevitably result in a lack of trust. If we are to manage the interface between the social systems in a way that develops trust, there is a clear need for self-awareness. Therefore, before looking at the role of each party to the relationship with regard to the provision of what will be referred to as a ‘facilitating environment’, I first need to clarify some of the issues concerning self-awareness.

Self-awareness of emotions I shall start with the notion that the self is the organizing function within the individual, and the function by means of which one human being can relate to another. No matter what our human experiences are, they always go beyond our particular methods of understanding at any given moment. There is no methodology that will provide a complete and satisfactory explanation of our behaviour, and the best way that we can gain an understanding of our identity as a self is to look into our experience. As human beings we can reflect on some past experience and can picture ourselves as doing something, and can then also re-experience the feelings we had when we were actually doing that thing. This was the process used at the start of this chapter, when developing a meaning of ‘trust’. By reflecting on previous experience, we gain a greater depth of selfawareness. Above all, we can understand the emotions attached to our behaviour. The greater the awareness, the greater control we have over our behaviour. Take, for example, the common experience of driving a car. The less aware you are of how to drive a car, or of the traffic conditions you are driving through, the more tense you are, the more anxiety you will experience and the firmer a hold you will keep on yourself. But, on the other hand, the more experienced you are as a driver and the more conscious you are of the traffic conditions and of what you need to do in emergencies, the more you will be able to relax at the wheel, the less anxiety you will experience, and you will have more of a sense of control. You will have the awareness that it is you who are doing the driving, that it is you in control. As with any other activity, driving a car is not just an activity, it also involves thinking and feeling. If we were to limit our reflection to thought only we would ignore a huge part of our experience. Many readers will be familiar with the extreme feelings associated with road rage. How could we

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possibly say that driving a car only concerns thought? Clearly it involves varying degrees of feelings, as does building alliances. Failing to recognize the part that emotion plays in a relationship, and telling another party to think about what they are doing when they are overwhelmed by feelings of anger, will be of little value. What is required is contact at the level of feelings. Self-awareness expands the control we have over our lives, and with that expanded power comes the capacity to let ourselves go. The more selfawareness we have, the more spontaneous and creative we can be at the same time. In discovering our feelings it is important that the individual gains an understanding of the experience that it is they who are doing the feeling. That they are the active ones who own the feelings they are experiencing. This carries with it a directness and immediacy of feeling, and the individual experiences the feelings on all levels of themselves. The more selfawareness an individual has, the more alive they are. Self-awareness brings with it the experience that it is ‘I’, the acting one, who is the subject of what is occurring. We might say that these people feel with a heightened aliveness (Stapley, 2002). When parties are building alliances they frequently are trying to understand each other’s behaviour, and are constantly making interpretations of that behaviour. Indeed, the ability to make such interpretations reasonably accurately is a necessary social skill. Yet this constantly practised skill can be exceedingly difficult, because every direct and immediate experience of feeling and desiring is spontaneous and unique. That is to say, the desiring and feeling are uniquely part of that particular situation at that particular time and place. To be able to respond in a helpful way, in what are sometimes highly complex situations, it is important that the parties who are negotiating are aware of their feelings. In this way, they do not prevent themselves from really getting to know the others involved. If the individuals concerned are not so aware, they may be so preoccupied by their own feelings – especially negative feelings such as cynicism – or by their own reactions to others, that these considerations will overshadow the relationship and distort their perceptions and reactions. If the feelings of the individuals can be worked on by self-reflection and self-understanding, they will be freer to observe, listen, take in and understand what is going on in the ‘here and now’. Faced with any experience, the emotional learning that life has given us, such as the memory of a past disastrous relationship, sends signals that streamline our decision-making process by eliminating some options and highlighting others at the outset. In this way, the emotions are involved in reasoning – as is the thinking brain. As was stated above, regardless of cultural differences, which we acknowledge are likely to be considerable in any alliance between Western and Asian organizations, we all share the same human emotions. Consequently, while we may find it difficult to communicate at various levels of knowledge and politics, we can communicate at an emotional level. Bearing in mind that

366 Developing Trust: Obstacles and Understanding

trust is mainly an emotional state, it is even more important that we do so. However, I would not want to deny that the frustration of misunderstanding between the parties is likely to create considerable difficulties and anxieties. In such circumstances, there is a need for a high level of selfcontrol and self-awareness. There is much evidence that people who are emotionally adept – who know and manage their own feelings well, and who read and deal effectively with other people’s feelings – are at an advantage in any domain of life such as picking up the unspoken rules that govern success in organizational politics. People with well-developed emotional skills are also more likely to be content and effective in their lives, mastering the habits of mind that foster their own productivity. These people master abilities such as: ● ● ● ●

●

being able to motivate themselves; being able to persist in the face of frustration; being able to control impulses and delay gratification; being able to regulate their moods and to keep any distress from swamping their ability to think; and being able to empathize and to hope.

Conversely, people who cannot marshal some control over their emotional life fight internal battles that sabotage their ability for focused work and clear thought (Golemen, 1995). Overall, our goal should not be emotional suppression, but balance. Every feeling has its value and significance. A life without passion would be a dull wasteland of neutrality, cut off and isolated from the richness of life itself. What is required is appropriate emotion – feelings proportional to circumstances. When emotions are too muted they create dullness and distance. Individuals who are experienced by others as ‘cold fish’ do not inspire; rather, they appear uncaring and uninspiring. Equally, when others experience individuals as ‘raving lunatics’, those people may be regarded as unapproachable. It is only when feelings are owned and expressed in an appropriate and proportional way by individuals that they will be regarded as inspiring. The first step is self-awareness, catching the worrisome episodes as near their beginning as possible – ideally, as soon as, or just after, a fleeting image triggers anxiety. To be effective, we need constantly to monitor the cues we receive for anxiety. Both emotions and fantasies can have a considerable impact on all of us, and this means that individuals not only need to understand relationships with others but also their relatedness to these other people – that is, the way that emotions and fantasies affect the way they relate to other individuals or groups. Where individuals are experiencing negative feelings about other parties to the relationship, such as feeling angry with them or not trusting them, this will affect the way they relate to them. This may be the case with both parties. For example, they may fantasize that the other party ‘does not

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care about others’ or ‘is angry with them because they disagreed with them in the last meeting’. The reality may be somewhat different, but in such cases, the likely outcome is that the respective individuals will not have any desire to communicate with the person fantasized about for fear of the results.

A facilitating environment A facilitating environment will depend on many factors, and can only ever be regarded as a ‘good enough’ environment. However, there are certain principles that can be followed that will result in the sort of environment first described by Winnicott (1965). In order to explain what is meant by ‘good enough’ we need to see it in the original Winnicottian context of infant development and to build on some of the notions already referred to throughout the chapter. Winnicott informs us that infant development does not occur unless the circumstances are good enough. A facilitating environment is first absolutely and then relatively important, and the course of development can be described in terms of absolute dependence, relative dependence and towards independence. For the infant, and, it is postulated, for the members of an alliance, the quality of the holding environment is vital. There is a need to develop a sense of security where they will carry around an expectation that they will not be ‘let down’. In the holding environment developed by the alliance, the quality of conditions needs to be the same as in the maternal holding environment if it is to be regarded as a ‘facilitating environment’ – that is, one that is healthy in the sense of there being maturity: one in which there will be progression. If all parties are to express themselves in a creative, spontaneous way; if they are not to be overwhelmed by anxiety; if they are to have the confidence to overcome setbacks and still pursue their desires, they need to accept the responsibility for ensuring and developing a facilitating environment. In a manner similar to that used earlier to describe the so-called charismatic leader, the ‘good enough’ mother is attuned to the baby both psychologically and emotionally. This is what is required if a facilitating environment is to be provided, and a healthy, trusting relationship is to develop.

Basic trust in a facilitating environment Both sides have an important role to play if there is to be an environment where there is sufficient trust so that all can begin to satisfy their needs for self-esteem by participating in the planning, organizing and controlling of their own tasks. The various needs of individuals such as growth, belonging, self-esteem, recognition and self-actualization can only be met where there is a mature situation. That is, a situation where individuals are able to be themselves, and to understand and experience other people as distinct individuals who are separate and perhaps different from them, and to be able to take part in co-operative relationships with these differentiated others. It is the role of both sides to ensure that such a mature situation exists.

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Trust in interpersonal relationships is essential if full and open communication is to occur in a relationship. An open, non-manipulative sharing of information is required for the effective solving of task problems. This all sounds simple, but as with the position in the maternal holding environment, trust does not exist automatically – it has to be developed from experience. In the alliance situation, much will depend on the sort of facilitating environment that is developed by the individuals concerned. Relationship orientations, which are based on the manipulation of others, generate widespread distrust at all levels. This widespread distrust of one party by the other is one of the initial problems encountered in any relationship. Trust is exceedingly difficult to come by and very easy to lose. Sadly, as is frequently the response in these circumstances, rather than try to develop a strategy to change fundamental attitudes and practices in order to achieve the conditions for progression, the more typical approach by many is to seek more leverage for their power-based, paternalistic tactics of bargaining, manipulation, intimidation, deception, legalistic manoeuvring, brinkmanship, conciliation, defamation, capitulation and appeasement. Of course, these tactics only serve to reinforce the lack of basic trust, and make the prospects of developing co-operative relations even more remote. The result is an immature situation where there is little, if any, chance of progression. As happens in any relationship, the real problem arises when we feel ourselves threatened but have little control over the activities posing the threat. It is when we feel we cannot influence the most important things that happen to us, when they seem to follow the dictates of some inexorable power, that we give up trying to learn how to act on them, or to change them. And, of course, there is a constant possibility that, in any alliance between people from very different cultures, one or both of the parties will feel threatened and out of control. In the most general sense, task satisfaction is a pleasurable or positive emotional state resulting from the appraisal of one’s task experiences. This positive assessment or feeling seems to occur when the task is congruent with the individual’s needs and values. Where there is no such congruence, where our values and needs do not match our task, there is a high likelihood that we shall not only experience dissatisfaction but perhaps disaffection as well. A basic need of all concerned is for ‘esteem’ – both self-esteem and recognition from others. Most people have a need for a high evaluation of themselves that is firmly based on reality – recognition and respect from others, especially significant others. We are in constant need of reassurance, although the same time sense that makes it possible for us to worry about what may happen also makes it possible to postpone the satisfaction of present needs and put up with current discomforts in the expectation of future rewards. This is a state of mind that we refer to as hope. Hope offers more than a bit of comfort in an anxiety-ridden world; it plays a surprisingly potent role in life, offering an advantage in realms as diverse as school

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achievement and bearing up in onerous jobs. It is more than the sunny view that everything will turn out all right – it has been defined by Snyder (1991) as a ‘belief that you have both the will and the way to accomplish your goals, whatever they may be’. As with hope, optimism is a state of mind that means having a strong expectation that, in general, things will turn out all right in life, despite setbacks and frustrations. Optimism is an attitude that helps us to avoid falling into apathy, hopelessness or depression in the face of adversity. While the pessimistic individual’s feelings lead to despair, the optimistic individual’s feelings will be bright and hopeful. Where individuals have a high evaluation of themselves – a high self-esteem – they will have the self-belief that they have mastery over the events of their lives and can meet challenges as they arise. Another of the mainsprings of action in all team members is a desire for competence. Competence implies control over environmental factors, both physical and social. People with this motive do not wish to wait passively for things to happen; they want to be able to manipulate their environment and make things happen. The competence motive reveals itself in adults as a desire for job mastery and professional growth. Developing a competency of any kind strengthens the sense of self-esteem, making an individual more willing to take risks and seek out more demanding challenges. Those who have a high evaluation of themselves are able to bounce back from failures; they approach things in terms of how to handle them rather than worrying about what can go wrong. In any alliance between Western and Asian organizations, this may be most difficult to achieve. Indeed, the dynamics are likely to have the reverse effect, unless those concerned are sufficiently self-aware. If these needs are to be met, the conditions required are very much the same as those required in the maternal holding environment. In a facilitating environment, alliance members can respond in responsible and productive ways to an environment in which they are given an opportunity to grow and mature. A self-actualizing man or woman is an individual behaving at his or her most productive level. An individual is most likely to behave in self-actualizing ways if the culture in which he or she operates is characterized by openness, trust, a willingness to confront conflictual issues, and if they have challenging goals. In other words, in the alliance we are looking to develop a sort of ‘neutral’ culture, an alliance culture that will serve to bridge the two ‘home’ cultures, and will permit them to develop a working relationship. A facilitating environment will ensure that the anxiety of venturing into the unknown, the process by which individuals develop new skills and ways of behaving, is contained, so that the processes they are involved in are not fundamentally disruptive. Any change will involve a loss – it will mean a change from the comfortable, routine, known way of doing things. A giving up of things taken for granted. All change will result in some level of anxiety.

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Where the right sort of environment exists, the anxiety can be controlled, because the thread of continuity has not been broken and can always be given a reassuring tug. Spontaneous growth follows from the consolidation of familiar patterns of expectation. A facilitating environment will provide the consistency, confirmation and continuity that helps team members to make sense of their world: it will both hold them and let them go. When a party to the relationship offers security two things are done at once. On the one hand, because of the party’s help, other individuals feel they are safe from the unexpected, from innumerable unwelcome intrusions, and from a world that is at times not known or understood. On the other hand, other individuals are protected by their actions from their own impulses and from the effects these impulses might produce. For example, by providing support and encouragement to others, even when they are experiencing what might be regarded as the ‘most rotten luck’, will shield them and keep them in touch with reality. It will also protect them from their impulse to fantasize that there is a jinx on them, or a similar gloomy thought. Perhaps the most outstanding and most continuously operative of all alliance members’ needs is that for emotional response from other alliance members. I use the term emotional response advisedly, since the eliciting of mere behavioural responses might leave this need quite unsatisfied. We all know what it’s like to be alone in a crowd, and we all know what it’s like to be dealt with by someone who is acting like a ‘cold fish’. It is this need for a response, and especially for praise, which provides individuals with their main stimulus to socially acceptable behaviour. One of the reasons why alliance members may abide by the values of the alliance is because they desire approval.

Conclusions Viewing trust as a relational concept; a dynamic process; situationally specific or unique; a mainly emotional state; and a phenomenon that develops as a result of experience of other people helps us to understand some of the difficulties and importance of the phenomenon. Similarly, exploring our very first experiences as humans, the relationship between mother and child, provides us with a deeper understanding of why trust is so important. And it also begins to explain something of the many obstacles to developing trust in relationships. The process of developing alliances will inevitably evoke processes of authority, power and politics. By their very nature, power and politics do not exist in the private world of ‘self’; they are relational concepts that require us to have an interaction with another person or another group. Having entered this political institution, both parties will be connected by the task and roles of the relationship; but in addition they will also be affected by roles in other political systems beyond the project. For example,

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as a miniature element in a set of international relationships; as part of an inter-institutional political system; or as part of an intra-institutional political system. At each level of political interaction there is the potentiality for disaster, and if there is a lack of trust between the parties this potentiality will almost certainly be realized. The world we respond to, the world towards which our behaviour is directed, is the world as we symbolize it, or represent it to ourselves. A difficulty is that each party symbolizes its world in a different way. In developing a relationship, the ambiguity that exists at the boundary of the different parties is a source of anxiety, and it is the boundaries that matter. We concentrate our behaviour on the differences, and not the similarities. This makes us feel that the markers of such boundaries are of special value, or sacred or taboo. It is at the interface of the two systems that problems are likely to occur. Some further problems are associated with different classifications of knowledge. The type of knowledge that we refer to as ‘knowing about’, or cognitive knowledge, can be communicated through words and symbols which may be understood in the same way. In many instances, this type of knowledge will not present too much difficulty in building alliances. However, much deeper and more difficult problems are likely to occur in regard to the type of knowledge we refer to as ‘knowledge of acquaintance’. This type of knowledge is a pre-requisite to knowing more about the roles and relationships we are involved in – and this type of learning starts with oneself. This will include the developed and shared attitudes, beliefs and values of each party. As we have seen, there are many potential obstacles to understanding and the development of trust. There are frequent opportunities for conflict and misunderstanding, some of which have been described above. But with adequate preparation and development we can ensure that we reduce the potential for such problems to manageable dimensions. There are two particular ways that we can achieve this: self-awareness and the creation of a facilitating environment. When parties are building alliances each frequently is trying to understand the other party’s behaviour and constantly making interpretations of that behaviour. Indeed, the ability to make such interpretations reasonably accurately is a necessary social skill. Trust being a mainly emotional state, there is a need for a high level of self-awareness if we are to be able to make ‘good enough’ interpretations of the other party’s behaviour. Those individuals who have a high level of self-awareness – especially an awareness of their emotions – enables them, in turn, to gain access to the emotions of others. They are capable of ‘feeling into’ other team members – or, put another way, they are capable of a high degree of empathy. Both sides have an important role to play to encourage an environment where there is sufficient trust so that all can begin to satisfy their needs for

372 Developing Trust: Obstacles and Understanding

self-esteem by participating in the planning, organizing and controlling of their own tasks. A facilitating environment will depend on many factors, and can only ever be regarded as a ‘good enough’ environment. For the infant – and, it is postulated, for the members of an alliance – the quality of the holding environment is vital. There is a need to develop a sense of security where members will carry around an expectation that they will not be ‘let down’. In the holding environment developed by the alliance, the quality of conditions needs to be the same as in the maternal holding environment if it is to be regarded as a ‘facilitating environment’ – that is, one that is healthy in the sense of there being maturity – and in which there will be progression. If all parties are to express themselves in a creative, spontaneous way; if they are not to be overwhelmed by anxiety; if they are to have the confidence to overcome setbacks and still pursue their desires, they need to accept the responsibility for ensuring and developing a facilitating environment. That is not to say that one party cannot set the scene, and through their leadership qualities start the process of developing a facilitating environment. In the same way that I described the activities of the so-called charismatic leader and the ‘good enough’ mother, this requires us to be attuned to the other party, both psychologically and emotionally. I do not want in any way to minimize the potential difficulties of working in cross-cultural alliances: on the contrary, I want to highlight the difficulties referred to in this chapter. However, I do not want to give the impression that this is an impossible task. Indeed, the main message I want to put forward is that we can build successful alliances between even the most diverse organizations and cultures. However, if we are to ‘get together’ and develop trusting alliances that will endure, we need to work hard on the development of a facilitating environment.

References Britton, J. (1970) Language and Learning (Harmondsworth, Penguin). Dando-Collins, S. (1998) The Penguin Book of Business Wisdom (Ringwood, Victoria, Penguin). Erikson, E. H. (1959) Identity and the Life Cycle (London, W.W. Norton). Fukuyama, F. (1995) Trust: The Social Virtues and the Creation of Prosperity (New York, Free Press). Goleman, D. (1995) Emotional Intelligence (New York, Bantam). Jaques, E. (1996) Requisite Organization: A Total System for Effective Managerial Organization and Managerial Leadership for the Twenty-first Century (Arlington, Va., Cason Hall). Kegan, R. (1982) The Evolving Self (London, Harvard University Press). Kouzes, J. M. and Posner, B. Z. (1995) The Leadership Challenge (San Francisco, JosseyBass). Liddell, H. S. (1956) ‘Emotional Hazards in Animal and Man’, in C. Rycroft (ed.), Anxiety and Neurosis (Harmondsworth, Penguin).

Lionel Stapley 373 Miller, E. J. (1985) ‘Organisational Development and Industrial Democracy: A Current Case Study’, in E. J. Miller (ed.), Task and Organisation (London, John Wiley). Sievers, B. (1999) ‘Psychotic Organization as a Metaphoric Frame for the Socio-analysis of Organisational and Interorganizational Dynamics’, Administration and Society, 31(5), pp. 588–615. Sievers, B. (2002) ‘Against All Reason: Trusting in Trust’, Paper presented at ISPSO Symposium, Melbourne, Australia. Snyder, C. R. (1991) ‘The Will and the Ways: Development and Validation of an Individual-differences Measure of Hope’, Journal of Personality and Social Psychology, 60(4), p. 579. Stapley, L. F. (1996) The Personality of the Organisation (London, Free Association Books). Stapley, L. F. (2002) It’s an Emotional Game (London: Karnac). Stern, D. N. (1985) The Interpersonal World of the Infant: A View from Psychoanalysis and Developmental Psychology (New York, Basic Books). Tannenbaum, R., Weschler, I. R. and Massarik, F. (1961) Leadership and Organisation (New York, McGraw-Hill). Winnicott, D. (1965) The Maturational Processes and the Facilitating Environment (New York, International Universities Press). Winnicott, D. (1971) Playing and Reality (Harmondsworth, Penguin). Winnicott, D. (1988) Human Nature (London, Free Association Books). Wittgenstein, L. (1953) Reliable Knowledge (Cambridge University Press).

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Name Index Key: f ⫽ figure; n ⫽ note; t ⫽ table. Abdul Rahman Ahamad 38 Abdul Wahid Omar 38 Albach, H. 254 Allio, R. 231 Anderson, D. 165 Anderson, R. 74 Annan, K. 114, 115 Araujo, L. 127 Argent, R. 154 Arino, A. 186t, 187, 188 Asma, A. 237 Axelsson, B. 127 Backman, M. 233 Barraclough, R. 167 Barsoux, J-L. 327 Bartlett, C. 295 Batra, R. 68 Beamish, P. W. 186t, 187 Bengtsson, L. 30, 195 Bergrem, C. 346(n44) Bernstein, H. 155 Berry, J. W., et al. 12, 28 Dasen, P. R. 28 Poortinga, Y. H. 28 Segall, M. H. 28 Best, M. 226(n7) Bies, R. J. 30, 81, 195 Bingham, T. 161 Bitton, A., et al. 78(n13), 79 Glantz, S. 79 Neuman, M. 79 Boddy, D., et al. 186t, 187, 188, 193 Macbeth, D. 193 Wagner, B. 193 Borrus, M. 209, 227 Borys, B. 231 Botero, F. 163 Böttcher, R. 254 Bovard, J. 69 Bowden, C. 79(n18) Bowditch, J. L. 326

Bowles, S. 83 Bradman, G. 169 Brandenburger, A. M. 16, 127 Britton, J. 359 Bromiley, P. 183 Bronn, P. 250 Brown, J. 250(n2) Buchel, B. 186t, 187 Buddha (Prince Gotama Siddhartha, c.563–483) 102–3, 104, 105f Buffett, W. 79(n20) Buono, A. F., et al. 315, 326 Bowditch, J. L. 326 Lewis, J. W. 326 Burt, R. S. 328 Butler, C. 233 Camerer, C. 328 Cannon, J. P. 326 Carter, C. 118 Cartwright, S. 315 Ch’ien Ssu-ma 99 Ch’in Shih Huang 99–100 Chan, L. 169 Chan, W. T. 130–1, 132, 135 Chandler, A. 68, 78(n10) Chatterjee, S., et al. 318, 326 Lubatkin, M. H. 326 Schweiger, D. M. 326 Weber, Y. 326 Cheah, H. B. 21, 73, 75 Cheah, M. 75 Chen, M. 135, 142 Chen, M. J. 129 Chen Shin-horng 214 Cheshire, K. 154–5 Chey Tae-won 332 Chiao, C. 137, 142n Child, J. 145 Ching (Duke of Chi) 133 Choe, S. 71 Choi Kyu-Ha 108

375

376 Name Index Chu, C. N. 17, 135 Chu Hsi (1130–1200) 93 Chua, H. 156 Chua Chei Hwee 26–7 Chun Doo-Whan 108, 109, 110, 333, 334 ‘Realization of Just Society’ 108 Chung Duck-koo 35 Chung Ju-yung 330, 341 Chung Mong-hun 330 Clarke, K. 172 Cobb, C., et al. 74, 80 Gorman, G. 80 Wackernagel, M. 80 Cobb, C., et al. 74, 79 Halstead, T. 79 Rowe, J. 79 Cohen, W. M. 184 Collins, J. 82 Confucius (c.551–479 BC) 12, 88, 92, 93–5, 96, 98, 100, 104, 105f, 131–2, 135 Coo Nguyen, T. D. 69 Cook, A. 163 Cooper, J. C. 141 Cooper, M. 76 Cooper, C. L. 315 Corno, F., et al. 312(n1), 313 Nonaka, I. 313 Reinmoeller, P. 313 Cox, T. 12 Cummings, L. L. 183, 315 Daim Zainuddin 37 Dando-Collins, S. 357 Das, T. K. 315 Dasen, P. R. 28 Davies, H., et al. 145, 146 Leung, T. K. P. 146 Luk, S. T. K. 146 Wong, Y. H. 146 Davis, J. H. 30 Dawes, R. M. et al. 8, 29 Kragt, A. J. C. van de 29 Orbell, J. M. 29 de la Torre, J. 186t, 187, 188 Dechant, S. 118 Deng Shao Ping 95 Di Bello, L. 192 Dieter, H. 73 Dimney, C. 172–3 Dinur, A. 182

Domingo, P. 158 Doney, P. M., et al. 320, 326 Cannon, J. P. 326 Mullen, M. R. 326 Dore, R. 78(n5) Dorfman, P. 29 Douthwaite, R. 72, 74 Doz, Y. L. 186t, 187, 188, 190 Dwor-Frecaut, D. 332 Eberhard, W. 132 Edmondson, A. 78(n4) Edwards, C. 250(n2) Edwards, P. 157 Egan, Sir John 163 Eigen, P. 17 Ekelund, B. 329 Elliott, S. 168 Emerson, R. W. 88 Engeli, H.-P. 316 Erikson, E. H. 356 Ernst, D. 23–4, 209, 216, 220, 225(n1, 3–4), 227 Ernst, D., et al. 212, 228 Ganiatsos, T. 228 Mytelka, L. 228 Estrada, J. E. 48 Evans, P. 329 Evans, P., et al. 319, 327 Barsoux, J.-L. 327 Pucik, V. 327 Fang, T. 14, 21, 22, 139n, 145n Feenstra, R. 212 Fiorina, C. 88 Florin, J. 195 Ford, D. P. 191 Frank, T. 68 Frasca, T. 76 Friedman, M. 68 Friedman, T. 71–2, 73, 79(n17) Fruin, W. M. 186 Fukuyama, F. 79(n16), 132 Furukawa, Professor 298, 299 Galbraith, J. K. 73 Gandhi, M. K. 21, 61, 77 Ganesh, U. 182, 185, 186t, 187 Ganiatsos, T. 228 George, J. M. 316 Ghoshal, S. 295 Ghosn, C. 26, 281, 289(n3, n5)

Name Index Giddens, A. 268 Glantz, S. 79 Godley, W. 73 Goleman, D. 356 Gooman, G. 80 Gordon, D. 74, 76 Gordon, D. M. 83 Goulet, P. K. 315 Goussevskaia, A. 23, 220 Graham, C., et al. 68, 80 Litan, R. E. 80 Sukhtankar, S. 80 Graham, E. 337, 338, 347(n62) Granovetter, M. S. 16 Graves, D. 319, 323 Greider, W. 72, 79(n23) Grosse, R. E. 245 Gulati, R. 194

Hobday, M. 216, 226(n10) Hofstede, G. 12, 16, 121, 233, 234, 235n, 235, 239, 247 Hogarth, R. 8 House, R., et al. 16, 29 Dorfman, P. 29 Hanges, P. 29 Javidan, M. 29 How, R. 165 Hsieh, D. 191 Hsun Tzu (c.298–238 BC), 93, 98 ‘declared unorthodox’ 98 Hu, H. C. 134 Hua, W. 329 Huber, G. P. 186 Huemer, L. 245 Hui, C. 235 Hunt, J. W. 314, 317, 319

Haak, R. 24–5 Haaland, J. I. 229 Haas, R. D. 61 Hagen, J. 71 Haggard, S. 209, 227 Håkansson, H. 127 Halim Saad 36–8 Hall, P. D. 314 Halstead, T. 79 Hamel, G. 186t Hampden-Turner, C. 233, 234, 235n, 235, 239 Han Fei Tzu (c.280–233 BC) 97–100, 104, 105f, 108, 111 ‘Five Vermins’ 99 ‘Having Regulations’ 98 Handley, J. 159 Hanges, P. 29 Harnett, D. L. 315 Harrison, D. 79(n18) Hartmann, T. 68, 77 Hawken, P. 79(n24) Hawkins, P., et al. 75, 81 Lovins, A. B. 81 Lovins, L. H. 81 Hayden, T. 79(n24) Hemsley, A. 168 Henderson, H. 79(n24) Henricksson, K. 30, 195 Higgs, R. 78(n7) Hirschman, A. 78(n8) Hirschman, A. O. 211 Hobbes, T. 21, 62, 63, 64–6, 66–7, 72, 77

Ibuka, Dr 300 Ichijo, G. K. 313 Inkpen, A. C. 15f, 182, 186t, 187 Ishikura, Y. 26 Ivancevich, J. M. 329 Jackson, J. 79(n23) Jan Yu (disciple of Confucius) Jang Ha-sung, Professor 333 Jaques, E. 357 Jarvis 165, 169 Javidan, M. 29 Jemison, D. B. 231 Jesudason, J. V. 250(n2) Johanson, J. 127 Jomo, K. S. 250(n2) Jones, A. 171 Jones, D. 31 Jones, G. R. 316 Jones, R. 212 Jordan, M. 79(n19) Joynt, P. 12

94

Kale, P., et al. 183, 194 Perlmutter, H. 194 Singh, H. 194 Kato, Mr (Chairman of Fuji Electric) 299 Kaufmann, D., et al. 118(n3), 119 Kraay, A. 119 Zoido-Lobaton, P. 119 Kegan, R. 358 Kennedy, J. F. 21, 77

377

378 Name Index Keynes, J. M. 74, 76 Khaneman, D., et al. 8, 30 Slovic, P. 30 Tversky, A. 30 Khanna, T., et al. 183, 186t, 187, 194 Gulati, R. 194 Nohria, N. 194 Kidd, J. B. 19, 20, 23, 143, 184, 191, 220 Kidd, J. B., et al. 11, 30 Richter, F.-J. 30 Stumm, M. 30 Kierzskowski, H. 212 Kim Dae-jung 27, 57, 107, 110, 330, 333, 334–5, 341 ‘people’s government’ 110 visit to North Korea (2001) 110 Kim Il-sung 110 Kim Jin-pyo 345(n19) Kim Jong-il 110 Kim Jong-pil 109, 110 Kim Woo-chang 333 Kim Young-sam 109–10, 333, 335 ‘civilian government’ (motto) 109 Kindred, J. 192 King, D. C. 119 Kirk, D. 338, 340, 341, 342 Kitayama, S. 235 Klein, N. 79(n23) Klinger, S. 69 Knack, S. 79(n16) Koh, P. 173 Koizumi, J. 41, 53, 56 Komender, P. 25–6 Konno, N. 313 Korten, D. 75, 76, 78(n6), 79(n17) Kotani, Dr 301 Kotch, J. B. 27 KPMG 314 Kraay, A. 119 Kragt, A. J. C. van de 29 Kras, E. S. 245 Krause, L. 340 Krug, J. A. 315 Krugman, P. 68–9 Kumar, R. 186t, 188 Kuttner, R. 68, 78(n6, n9) Kwon Ki-hong 338 Labiner, J. M. Lall, S. 212

71

LaMagna, R. C. 18 Lane, P. 184, 187, 195 Lao Han 125 Lao Tzu (‘Old Master’, c.604–531 BC) 88, 95–6, 97, 100, 104, 105f, 141 Lappe, F. 82 Larsson, R. 318, 319, 323 Larsson, R., et al. 183, 186t, 195 Bengtsson, L. 195 Henricksson, K. 195 Sparks, J. 195 Larsson, R., et al. (1999) 11, 30 Bengtsson, L. 30 Henricksson, K. 30 Sparks, J. 30 Lawrence, D. 162 Lay, K. 69 Lazonick, W. 71 Lee, S. M. 128 Lee Hoi-chang 110 Lee Kuan Yew 95 Lee Kun-hee 333 Lester, R. K. 215 Leung, T. K. P. 146 Leung Heng Keng 174 Leung Yun Chee (d. 1971) 173–4 Levinson, M. 68 Levinthal, D. A. 184 Lewicki, R. J., et al. 10–11, 11f, 18, 30, 71, 81, 191, 192, 195 Bies, R. J. 30, 81, 195 McAllister, D. J. 30, 81, 195 Lewis, J. 79(n16) Lewis, J. W. 326 Li Su 98 Liao, J. 195 Liddell, H. S. 362 Lilley, P. 18 Lim Gill-Chin 21–2, 27, 118(n9) Lim Chang-gue 332 Lim Dong-won 330 Lin, Y. T. 132 Lincoln, A. 110 Litan, R. E. 80 Long See Hong 161 Lorange, P., et al. 231, 250 Bronn, P. 250 Roos, J. 250 Lord of Yue 152 Lovins, A. B. 81

Name Index Lovins, L. H. 81 Low, S. P. 17, 21, 135, 151 Lowndes, N. 168 Lubatkin, M. 184, 187, 326 Lubatkin, M., et al. 185, 186t, 188, 195 Florin, J. 195 Lane, P. 195 Lück, W. 254 Luhman, N. 268 Luk, S. T. K. 146 Luo, Y. 145 McAllister, D. J. 30, 81, 195 Macbeth, D. 193 MacDonald, D. 336 McEvily, B. 329 Macharzina, K. 254 Machiavelli, N. 100 McIntyre, R. 69 Mackenzie, G., et al. 71, 81 McKinsey 222 Mahathir bin Mohamed, Dr 37, 48, 52, 57 Makhija, M. V. 182, 185, 186t, 187 Mar, P. C. M. 18 Marks, M. L. 315 Markus, H. R. 235 Massarik, F. 373 Matsushita, K. 273, 289(n1) Mattsson, L. G. 127 Mayer, R. C., et al. 8, 30, 316, 328 Davis, J. H. 30 Schoorman, F. D. 30 Maznevski, M. L. 329 Megawati Sukarnoputri 48 Mencius (c.390–305 BC) 93, 105f Mendenhall, M. 329 Merricks, T. 154 Miller, E. J. 357 Mirvis, P. H. 315 Miscoll, E. 215 Mo Tzu 98 Moayedi, P. 165 Mohamed Eusoff 155 Mohd Kassim, Sheriff 37 Moingeon, B. 78(n4) Moore, S. 69 Morishita, Professor 301 Morosini, P., et al. 318, 328 Shane, S. 328

379

Singh, H. 328 Morrell, P. 154–5 Mouzas, S. 127 Mullen, M. R. 326 Multimedia Development Corporation 227(n17) Mun, K. C. 135 Murray, G. 156, 171 Mytelka, L. 228 Nalebuff, B. J. 16, 127 Napier, N. K., et al. 315, 328 Simmons, G. 328 Stratton, K. 328 Napoleon 101 Navaretti, G. B., et al. (2002) 212, 229 Haaland, J. I. 229 Venables, A. 229 Nelson, J. 346(n44) Neuman, M. 79 Nicholson, R. 163 Nigh, D. 315 Nohria, N. 194 Nonaka, I. 26, 182, 292, 293, 294, 294n, 313 Nonaka, I., et al. 293, 313 Konno, N. 313 Toyama, R. 313 Norburn, D. 314 Nti, K. O. 186t, 188 Nye, J. S., Jr., et al. 118(n1), 119 King, D. C. 119 Zelikow, P. D. 119 O’Connor, D. 216 O’Sullivan, M. 71 OECD (Organisation for Economic Co-operation and Development) 86, 339 Oestreich, D. 79(n16) Okazaki, Mr 298, 299 Olie, R. 315 Orbell, J. M. 29 Oxfam 79(n19) Pablo, A. L. 322 Palast, G. 78(n15) Palley, T. 71, 75 Park Chung-hee 107–8, 110, 331, 333–4 Park Jie-won 330

380 Name Index Parkhe, A. 184, 186t, 187 Partnoy, F. 68 Pausenberger, E. 254 Pearce, J. L. 145 Pekar, P. 231 Pender, J. 209 Perlmutter, H. 194 Perrone, V. 329 Pesek, W. 73 Polanyi, K. 78(n8) Poortinga, Y. H. 28 Pornpitakpan, C. 246 Porter, M. E. 218, 294, 295, 296n, 314 Power, F. R. 329 Prashad, V. 68 Price Waterhouse 337 Pucik, V. 327, 329 Pye, L. W. 121, 128, 133 Rand, A. 68 Rankin, K. 72, 78(n6) Rasiah, R. 226(n7), 250(n2) Raynsford, N. 154 Redding, G. 320, 324 Reeder, P. 158 Régnier, P. 23 Reich, R. 70–1 Reilly, J. 79(n23) Reina, D. 79(n16) Reina, M. 79(n16) Reinmoeller, P. 313 Reinsch, B. 225 Rhee In-Je 110 Rhew Hyong-gyu, Professor 118 Rho Moo-hyun 57, 110–11, 331, 342 corporate reform plan (2003) 333, 335, 339 ‘participatory government’ 110 Richter, F-J. 18, 19, 20, 23, 30, 143, 184, 191 Ring, P. S. 315 Risberg, A. 318 Roach, S. 209 Rodrik, D. 226(n10) Roh Tae-woo 108–9, 110, 334 Roos, D. 31 Roos, J. 250 Root, H. 345(n26)

Rossett, P., et al. 79(n19), 82 Collins, J. 82 Lappe, F. 82 Rousseau, D. M., et al. 316, 318, 328 Burt, R. S. 328 Camerer, C. 328 Sitkin, S. B. 328 Rowe, J. 79 Ruggie, J. 346(n44) Ryan, K. 79(n16) Sa Kong-il 341 Saebo, S. 329 Sako, M. 78(n3) Santayana, G. 76 Schapiro, M. 78(n13) Scheer, R. 78(n15) Schlefer, J. 76, 78(n6) Schlevogt, K-A. 17 Schoorman, F. D. 30 Schweiger, D. M. 315, 319, 324, 326 Schweiger, D. M., et al. 315, 329 Ivancevich, J. M. 329 Power, F. R. 329 Scribner, S., et al. 182, 195 Di Bello, L. 192 Kindred, J. 192 Zazanis, E. 192 Segall, M. H. 28 Shahril Ridza Ridzuan 38 Shakespeare, W. 88 Shane, S. 328 Shang Yang (Lord Shang) 99 Shari, I. 250(n2) Shields, J. 69 Sievers, B. 356, 357 Silva, L. I. da 76 Simmons, G. 328 Sims, A. 157 Singh, H. 194, 328 Sirimanee, C. 166 Sirpal, R. 151 Sitkin, S. B. 315, 316, 328 Skeoch, K. 174 Sklar, H. 69 Slivinski, S. 69 Slovic, P. 30 Smith, A. 21, 62, 63–4, 66–7, 76, 78(n6) Snyder, C. R. 369

Name Index Son Kil-Seung 332 Soon, P. Y. 151 Soros, G. 68 Sparks, J. 30, 195 Stahl, G. K. 26–7, 315, 316 Stahl, G. K., et al. 318, 329 Evans, P. 329 Mendenhall, M. 329 Pucik, V. 329 Stansel, D. 69 Stapley, L. F. 28, 356 Stern, D. N. 355 Stoica, M. 195 Stratton, K. 328 Stumm, M. 30 Sturgeon, T. J. 215, 226(n5) Sukhtankar, S. 80 Sullivan, K. 79(n19) Sun Tzu 100–2, 105f, 135, 136 Swain, J. 164 Szulanski, G. 186 Takeuchi, H. 182 Takeuchi, J. 220 Takeuchi, R. 292 Tannenbaum, R., et al. 362, 373 Massarik, F. 373 Weschler, I. R. 373 Tao Zhugong 22 business principles 151–77 history 152–3 Tay Chin Seng 171–2 Tayeb, M. H. 12 Teng, B-S. 315 Theobald, R. 79(n24) Thoreau, H. D. 96 Thucydides 76–7 Toyama, R. 292, 293, 313 Triandis, H. C. 235 Trommsdorf, M. 254 Trompenaars, F. 12, 233, 234, 235n, 235, 239 Tselichtchev, I. 20–1, 209, 210 Tung, R. L. 12, 135, 141 Tversky, A. 30 UNCTAD (United Nations Conference on Trade and Development) 193n, 196 SME survey (1998–9) 200–2

UNDP (United Nations Development Programme) 88, 118(n3) evaluation of South Korean governance 111–14 Urata, Y. 50n, 51n Van de Ven, A. H. 315 Vasella, D. 316 Venables, A. 229 Vo Van Kiet 166 von Krogh, et al. 293, 313 Ichijo, G. K. 313 Nonaka, I. 313 Wackernagel, M. 80 Wagner, B. 193 Walsh, J. P. 319, 324 Warner, M. 12 Weber, M. 15–16, 15f Weber, Y. 318, 326 Weisskopf, T. E., et al. 79(n24), 83 Bowles, S. 83 Gordon, D. M. 83 Welge, M. K. 254 Welsch, H., et al. 184, 195 Liao, J. 195 Stoica, M. 195 Wen Zhong 152 Weschler, I. R. 373 Whitener, E. M., et al. 315, 320, 329 Ekelund, B. 329 Hua, W. 329 Maznevski, M. L. 329 Saebo, S. 329 Wilding, R. 6 Winnicott, D. 354–5, 367 Wittgenstein, L. 359 Womack, J. P., et al. 5, 31 Jones, D. 31 Roos, D. 31 Wong, D. 24 Wong, Y. H. 146 World Bank 85–6, 87, 88 World Economic Forum 3–4, 27, 335 Wu, Emperor (140–87 BC), 95 Wu, E. B. 133

87,

381

382 Name Index Xin, K. R.

145

Yamamura, President (of Osaka University) 300 Yang Bin 43 Yeo, V. 159 Yeoh, M. 24, 234 Ying, W. J. 142 Yum, J. O. 320, 324

Zaheer, A., et al. 315, 329 McEvily, B. 329 Perrone, V. 329 Zak, P. 79(n16) Zazanis, E. 192 Zelikow, P. D. 119 Zhu Rongji 135 Zoido-Lobaton, P. 119

Subject Index Key: f ⫽ figure; n ⫽ note; t ⫽ table. Abbey Hanson Rowe 159 absent-mindedness (feigned) 125, 126 absorptive capacity 184, 187, 220, 225 Accenture 223 accountability 91, 92, 100, 116, 337, 338, 339 accountants 337 accounting 5, 39, 213 fraud 291, 330, 332, 339 rules 68, 69 standards 34, 332 Acer group (Taiwan) 226(n10) acquisition 253, 257 adaptations 246 adults 354, 369 ‘essentially infantile’ 28 advanced manufacturing technology research 227(n14) advanced newly-industrialized economy (ANIE) 106 affiliates 213, 281 affirmative action (Malaysia) 236 affluence (Malaysia) 232 Afghanistan 70 age 129, 132–3, 236, 321 Agency for Revival of Industries ( Japan) 41 Agency Theory 8–9 ‘Agenda 21’ 115 agglomeration economies 212, 218 Agilent 220 agriculture 42, 98, 106, 152 Alabama 332 alliance-building 365, 371 alliances/partnerships 7, 20, 25, 191, 197, 290, 291, 293, 358, 359, 363, 367, 368, 370 cross-cultural 16, 23, 249, 285, 286, 288, 372 inter-corporate 55 multicultural 188 strategic 9

trust ‘essential element’ 353 Western-Asian organizations 362, 364, 365, 369 see also strategic alliances aluminium cladding design 157 AMD 220 Amec 155–6, 164 Ampang: FACB Business Centre 155 Analects (Confucius) 93, 94, 95, 105f, 130, 135 Anam (contract chip assembler, South Korea) 214 AnGes-MG 301, 307, 309, 312(n7) Angola 119(n11) annual meetings (corporate) 339 Annual Report on Corruption (2003) 17 anomie 11, 16, 17, 22, 27, 85, 111, 116 Anti-Monopoly Law ( Japan) 42 anti-terrorism 4 anti-trust (monopoly) laws 64 antitrust (distrust, mistrust) 16, 210, 224 cross-cultural management challenges in Japan 273–89 emergent views 9–12 see also distrust APEC 44, 52 Argentina 73, 197, 199, 200 armed forces 3, 4, 98 Arosa Development Sdn Bhd 155 Art of War (Sun Tzu) 100–2, 105f, 135, 136, 143 chapter one (‘Launching Plans’) 101 chapter four (‘Tactical Dispositions’) 101 translations 102 ‘victory without fighting’ 101, 136, 141 Arthur Andersen 69 artificial intelligence 173 ascription 235f, 236, 239

383

384 Subject Index ASEAN, see Association of South-East Asian Nations ASEAN Free Trade Area (AFTA) 51, 231 ASEAN Plus Three (APT) 52–5 Brunei meeting (2001) 52–3 Phnom Penh meeting (2002) 53, 54 Singapore meeting (2000) 52 ASEAN Regional Forum 52 ASEAN-China Free Trade Area (possibility) 53, 54 ASEAN-Japan Free Trade Area (under consideration) 53–4 ASEAN-Korea Free Trade Area (expected) 53, 54 Asia 4, 5, 19, 20, 21 Asia-Pacific region 227(n15), 314, 321 Asian crisis (1997–8) 24, 26, 32, 43, 44, 47, 49, 84, 110, 171, 209, 321, 334 aftermath 23, 46 distress of local SMEs (Thailand) 197–200 lessons 237 Malaysian recovery 232, 235 resilience of SMEs 196–208 Asian Mind Game (Chu, 1991) 102 Asian Miracle 84 Asian partners: relationship-based system 13 Asian tigers/dragons 32, 84, 111, 114, 197 Asian values 84, 116 ‘collectivists, feminine, high power-distance, high uncertainty-avoidance’ (Hofstede) 233 diversity 232–3 Malaysian culture in management 234–9 Malaysian-style 231–51 myth or reality 232–4 assassination 108 assembly 226(n8, n10), 209–10, 217, 218, 219, 220, 225 asset accumulation 159 acquisition 159 management 171 quality 159 assets 337 tangible and intangible 310

Association of South-East Asian Nations (ASEAN) 25, 32, 252 ‘high-risk zone’ (post-11 September 2001) 56 loss of dynamism 56 new regionalism 52–5 poor member-states 54 A.T. Kearney 47 AT&T 190–1 AT&T-Olivetti alliance 190–1 attitudes 288, 361, 371 auditors/auditing 36, 68, 69, 336, 337 Australia 224, 308, 311 Austrian economics 68 authoritarianism 237 Confucian 84, 95 modern military 111 authority 132, 357, 370 authority figures 363 automobiles/cars 45, 205, 226(n10), 260, 261, 339–40 automotive industry/sector 35, 202, 204, 232, 331, 332 ‘car manufacture’ 265, 273 non-disclosure of safety information 291 ‘vehicle manufacture’ 262 autonomy 78(n7), 257, 363 Axe (brand name) 174 Azerbaijan 119(n11) ba (Japanese, ‘space’) 26 clusters 290–313 knowledge conversion 304–5 knowledge management 290–313 literature review 292–6 requirements for productive knowledge conversion 305–7 ‘time and space’ 293 trust and integrity 309–10 types 304–5 Baco Contracts 156, 157 bad debts/loans 34–5, 36, 40, 41, 158, 167, 199, 334 baht (Thai currency) 201 Balfour Beatty 164, 171 Balfour Kilpatrick (contractor) 158 Bali Bank 40 Bali bombing (2002) 49 Ban Hin Leong Group 173

Subject Index 385 Bandung 48 Bangalore 331 Bangkok 23, 166, 206 Bangladesh 119(n11) Bank for International Settlements (BIS) 36 Bank of Korea 109 bank loans 35, 338 Bank Restructuring Agency (IBRA) 40 Bank Universal 40 bankers 205, 207 banking 36, 45 bankruptcy 61, 199, 203, 205, 332, 333, 337 Bankruptcy Law (Thailand, 1940), amended (1999) 39 banks 35, 38, 39, 40, 42, 57, 167, 171, 198, 334, 339 reserves 41 bargaining 127 distributive 127 integrative 127 barriers to entry 9 BASF, 262 Bayer 262 BBC World Service 18 BCA Bank 40 BCM 226(n7, n12) behaviour 20, 101, 102, 248–9, 279, 320, 323, 354, 361, 362, 363, 369, 371 competitive versus collaborative 183 confrontational 237–8 ‘essentially infantile’ 354 organizational 361 socially-acceptable 370 behaviourists 8 Beijing 124 Olympic Games (2008) 175 beliefs 361, 371 benign market (Smith) 63–4, 66, 67, 75, 76 best practice 70, 151, 205 betrayal 109, 111 Bible 97 BICC 171 ‘Big Deal’ (South Korea) 36 Bill of Goods 4 Bill of Rights (USA) 68 Bills of Lading 13

biotechnology 301, 307, 309 Biotechnology Venture Award 301, 305 Birmingham 154 Blue House 333 board of directors 25, 86, 274 body language 248 Bogor Declaration (APEC, 1944) 44 borrowers’ credibility 41 Bosch 207 Bovis 155–6, 169, 171 brain circulation 224 brands 173, 214, 215, 218, 226(n10) Brazil 76, 92 breach of contract 192 brevity 243 bribery 14, 19, 43, 109, 110, 235, 330, 336, 337, 341, 342 British Airways 171 British Aluminium 156 British Property Federation (BPF) 158–9 British Transport Police 166 brokerage firms 319 Brunei 52 Buddhism 22, 85, 93, 97, 102–4, 105f, 106, 108, 128, 232 ‘Eight Right Ways’ 103 four truths about life 102–3 ‘secular religion, mixed with shamanism’ 103 various forms 103 Buddhist Scriptures 102–3, 105f Bumiputera (‘sons of the soil’, Malays) 236, 239, 249–50(n2) Malays 229(n9) bureaucracy/bureaucrats 37, 95, 316, 335 Bush administration (2001–) 69–70, 78(n15) business community 39 creativity 256 cycle 153f, 169–70 environment 125, 126 functions 258 growth 170 linkages 196–208 networks 258 opportunities 157, 165, 253 plan contests 301, 304f, 305 plans 298

386 Subject Index business – continued practice 151, 152 principles 151–77 schools 204 sector 117 strategy 135 Business Week 5 ‘business wisdom’ 357 ‘buyer beware’ 339 California 226(n12) Cambridge University 38 Canada 112t, 113t, 114 capabilities 213, 214, 217, 222, 223, 225 design and engineering 221 innovative 210, 222, 224, 225 maintenance work 221 systemic nature 221, 227(n16) capital 49, 55, 84, 198, 201, 203, 211, 212, 215, 225, 259, 262 Capital (Marx) 119(n2) capital adequacy ratio 36, 40 capital controls (Malaysia) 235 capital flows 64 capital investment 258, 263 capital markets 41, 238 capitalism 68 Anglo-Saxon model 20, 32, 43–4, 55 East Asian model 20, 32, 33, 43–4, 55, 56 global free-market 72 captivation (in sales promotion) 153f, 156–7 Cardiff Millennium Stadium 168 career development 319, 325 Caribbean 72, 284 Carriage of Goods by Sea Act (1992) 13 cash flow 170, 184, 302 CDL Hotels 159, 169 Celestica 227(n13) celue (stratagem) 125 Central America 72 Central Asia 331 central banks 38, 199 Central Intelligence Agency (South Korea) 108, 110 Central Provident Fund 172 Certified Public Accountants (CPAs) 298, 305 Ch’i 100

Ch’in Dynasty (c. 221–207 BC), 98, 99–100 chaebol 27, 35, 36, 108, 109 assets 330, 335, 343(n1) central control 341 consumers 339–40 creating trust 330–49 dimension of trust 335–6 earnings 338 family-owned 338, 339 joint ventures 340 performance measure 334 politicized business world 331–5 prospects 341–2 public trust 341 suppliers 340 top five 330, 333, 343(n2) top four 335 trust within the organization 336–9 trust among shareholders 338–9 trust among workers 337–8 Changchun 122 Chartered Institute of Building (CIOB, UK) 161 chemicals 261, 265, 300 Chicago School 68 chief executive officers (CEOs) 5, 6, 9, 11, 15f, 17, 156, 205, 215, 239, 281, 301, 316 China, People’s Republic of (PRC) 4–5, 17, 18, 19, 32, 45, 57, 73, 95, 100, 104, 165, 174, 192, 215, 227(n15), 233, 234, 284, 331 ASEAN Plus Three (APT) 52 Buddhism 103 business culture 121 business negotiating style 22 coastal areas 261 competitive environment 265 customs duties on IT-related goods (East Asia, 1995–2000) 45t economic realignment 25 fastest-growing economy 56 global factory 47, 51 HDI 111, 112t, 113t, 114 high-risk market 262 inward FDI 46, 48 Japanese-German third-market collaboration 260–9 market 260

Subject Index 387 China, People’s Republic of (PRC) – continued negotiating strategy 121–50 new regionalism 51–5 ‘not a unified economic area’ 261 production location 260 property market 171 reform 135 structural changes 43 trade liberalization 44 two kinds of relationships 123 WTO accession 17, 20, 44, 175, 231, 261 China Entrepreneurs Survey System (CESS) 191–2 Chinese concept of trust 12 challenge 51 companies 192 culture (competitive construct) 135–42 handshake 14 market 51 Chinese negotiation strategy comparison situation 125 Confucian values 129 ‘cooperation-competition’ 121–50 initial meetings/pre-negotiation sessions 144 long-term interest 143f, 143 nine empirical examples 122–6, 144 paradox 126–7, 129, 143 short-term profit 143f, 143, 145 trust 143f, 143, 144 win-lose (yin) approach 126, 127, 143f, 143, 144, 145 win-win (yang) approach 126, 127, 134, 143f, 143, 144 Chinese stratagems ( ji) 135–42 Chiquita 72 Chosun Ilbo (Korean newspaper) 118(n7) Chosun Kingdom (Korea, 1392–1910) 106 Chou Dynasty (1044?–256 BC) 93 Christianity 106, 109, 110, 141, 232 Chugai 280, 282 Chulalongkorn University: SASIN Graduate Institute of Business Administration (Bangkok) 197, 203 circuit design 224

Cisco 220 citizenship 315 Citroën 232 City Development Ltd 161 City Developments (Singapore) 169–70, 174 civic organizations 117 local 89, 90f national 89, 90f civil liberties 78(n7), 87, 113t civil society 87, 111, 112t Cleveland Bridge (steel fabrication business) 172 Clinton Administration 225 closed economy 211–12 clusters 26, 211, 218–19 ba for knowledge management 302–10 case studies 296–302 cross-border 218 definition 296 ‘diamond’ system 295, 296f, 302 diversity of participants 306 equal, flexible, dynamic relationships 306 evolution 308–9 exported-oriented 212 global co-ordination 294–6 information to ‘knowledge’ 302–4 literature review 292–6 long-term view and tangible output of interaction 308–9 nature 291 optimum use 310 regional and global perspective 309 unique participants 306–7 co-branding 231, 246 co-opetition, see ‘cooperation-competition’ co-production 256 cognitive understanding 363 ‘cold fish’ 366, 370 Cold War 77 collaboration 127, 188, 189, 290, 299, 309, 324 behavioural learning ‘important component’ 189 competitive/co-operative elements 187 dynamic 310

388 Subject Index ‘collaboration conditions’ (Goussevskaia and Kidd) 181, 185–8, 189, 190f, 192–3 definition 185 four major dimensions 185, 189, 193 governance 185, 186t, 187, 190f, 192, 193 inter-firm 192, 193 inter-organizational diversity 185, 186t, 187, 190f, 191, 193 knowledge type 185, 185–6, 190f, 193 relational quality 185, 186t, 187–8, 190f, 191, 192, 193 relationships with inter-organizational learning processes 190f collaboration hubs 299 collaboration ‘process’ 295–6 collaborative agreements, project-based 231 collaborators 307 collective internationalization strategies 253–8 characteristics 255–6 collective learning 183 combination 305, 308 knowledge conversion (SECI model) 292, 292f, 293, 294 commerce 152 commercialization 302, 309, 310 Commission on Anti-Corruption (South Korea) 110 commitment 319, 325 communication 92, 122, 206, 244, 245, 266, 315, 320, 365, 367, 371 breakdown 268 with customers (‘more important than right product’) 279 means 359 open 325 communism 57, 137 community-orientation 234 companies/firms 17, 42, 57, 70–1, 152, 182, 295, 298, 312 acquiring 315–21, 322–6 affiliated 221, 340 Asian 23, 181, 210, 215 challenges in Japan 274 contradictions and dilemmas 293 differences in size 317 domestic 211 downstream/upstream 306

dynamic free-market 342 East Asian 55, 56 European 181 European Union 47 foreign 24, 211, 224, 231–2 with foreign capital (in East Asia) 46 German 253, 258, 259, 261 German and Japanese (joint internationalization) 25 high-technology 260 Hong Kong 145 internal change 266 Japanese 231, 253, 258, 259, 261, 263, 275 large 6, 197, 198, 199, 201, 304f, 310, 311 large (with worldwide reputation) 134 local 225, 265 Malaysian 237, 240, 242 medium-sized German 262 need for collaboration 290 new 263 North American 231 private 211 privately-held 86 publicly-traded 86 should take action to initiate knowledge conversion 311 small 220, 304f, 309 Taiwanese 221 target 315–21, 322–6 USA 47 Western 241, 243, 274 zero employees 6 company image 157 company value 42, 43 competence 110, 262, 263, 264, 266, 320, 369 cross-cultural 24, 243, 244, 246, 249 cultural 232 ethical 92, 117 governmental 92 inter-subjective 92 technical 92 three types 117 competence trust 78(n3), 191 competition 22, 43, 55, 56, 253, 279, 291, 295, 302, 312 challenges in China 269 Chinese stratagems 135–42 global 196, 290

Subject Index 389 competition – continued international 257 between nations 32 competition strategy 127, 143f competitive advantage/edge 35, 36, 72, 214, 252, 258, 263, 264, 266, 290, 292, 316 competitiveness 51, 55, 200, 295, 307 international 36, 309 competitors 9, 66 elimination 67 stronger/weaker 64 complicity 9, 89, 92 components 196, 202, 205, 209, 212, 214, 217, 218, 226(n8) automotive 204 electronic 226(n11) compromise 243, 237 computer chips 35 contract assemblers 214 design 5, 222, 223 offshore assembly 216 computers 45t, 190, 214, 220–1, 226(n11), 275 flat-screen 332 Condor 69 conflict avoidance 129, 133 prevention 53 resolution 133 reduction 361 willingness to confront issues 369 Confucian authoritarianism (South Korea) 108 Confucian gentleman, see junzi Confucian idea 116 Confucian scholarship 99 Confucian School 21, 85, 92, 93–5, 98, 100, 105f Confucianism 27, 84, 95, 111, 128, 141, 144, 232, 234, 336, 341, 342 Classical 93 co-operative construct of Chinese culture 129–35 control and work ethic 109 Five Cardinal Relationships 131, 132, 133 Five Constant Virtues 130 Han 93 lack of influence in South Korea 111 three principles of ranking 132–3

Confucianists (South Korea) 106 conglomerates 33–4, 35, 37, 38, 40, 42, 110, 197, 198, 199 paradigm shift 34 see also chaebol consensus 235, 241, 282 consequences negative intended/unintended 64 positive unintended 63, 67 construction 17, 22, 157, 161, 165, 166, 168, 169, 171, 174, 273 case studies 152, 153, 154–73 ‘cowboy’ builders 154 Construction Industry Training Board (CITB, UK) 170 consultants 162, 205, 298, 305 consulting firms 210, 223, 245 consulting projects 304f consumer electronics 216, 220, 224 consumers 61, 261 chaebol 339–40 contract disputes 191 contract manufacturers (CMs) 211, 215, 216–17, 219, 226(n11), 227(n14, n16) component suppliers from Japan and Taiwan 220–1 multiple linkages 220–2 Taiwanese 220 US (arrival in Malaysia) 220 upgrading efforts of Malaysia’s higher-tier suppliers 221–2 contractors 158, 160, 162, 163, 164, 167, 168, 197 contracts 12–13, 14, 19, 20, 122–3, 126, 130, 188, 241, 244, 256, 259–60, 276, 287 advisory 260 carriage 13 interplay with trust 267 psychological 9 renegotiable 267 ‘contracts’ 8 contractual agreements 190, 259 contractual trust 78(n3) control 242 cooperation 22, 123, 126, 127, 191, 302 Confucianism 129–35 open 249

390 Subject Index cooperation-competition (‘co-opetition’) 16, 22, 121–50, 302 negotiation strategy 127, 143f, 143, 144 paradox 126–7, 143 cooperative ventures 263 coordination 191, 214, 256, 266 global 294–6 informal means 188 inter-firm 187 inter-organizational 183 coordinators 298, 304f copyright 167 core competence 213, 337 corporate citizenship 346(n44) debt 199 form of organization 68, 78(n10) governance 34, 36, 38, 39, 46, 86, 190, 332, 337, 338, 339, 347(n62) growth 274, 314 malfeasance 68, 333 misconduct 61 models 153f, 162–3 personhood (USA) 68 reform 27 responsibility 115, 116 structure 341 tax minimization efforts 69 corporate culture 25, 27, 163, 263, 264, 274, 286, 288, 326, 361 Japanese 275–6, 281, 283 new individual 283 Corporate Global Citizenship Initiative (World Economic Forum) 335 Corporate Social Responsibility Initiative (World Economic Forum) 27 corporations 27, 68, 336, 338, 339 bankrupt 337 Japanese 42 large 297, 299, 300, 305, 335 large and small 308 rise and relative decline (USA) 78(n10) corruption 14, 17, 19, 34, 69, 85, 88, 92, 93, 95, 106, 109, 110, 113t, 114, 115, 116, 118–19(n11), 188, 336, 337 anti-corruption measures 116 control of 87

Corruption Perception Index (CPI) 88, 113t, 118–19(n11) cost-reduction 259, 261 counterfeit goods 192 counterfeiters 18 countries/nations in transition 116, 119(n11) courts (of law) 339 creativity 275, 363, 372 credit 153f, 170–1, 334 credit control vigilance 153f, 158 credit crunch 198 credit facilities 200 creditors 198, 332 crime 70 ‘commercial’ 43 organized 18 crises 78(n7), 92 critical mass 159 cronyism 33, 37 cross-cultural alliances 12, 23, 197 collaboration conditions 181, 185–8, 189, 190f, 192–3 dissolution 189 failures 280, 288 framework 189–92 general trends 280 inter-firm learning ‘important source of change’ 189 Japan 280–3 prospects 282–3 role of trust 181–95 success stories 280–2, 288, 289 cross-cultural issues 291 cross-cultural partnerships adaptation 246 Asian-Western (in Malaysia) 231–51 body language 248 building a third culture 246–7 building trust by first building relationships 244–5 concision and brevity 243 cross-cultural research and training 245–6 flashpoints 239–43, 249 heaping praise 247–8 hierarchies and protocol 242–3 imperatives 231–51 improving odds of success 243–4 individual and group 241

Subject Index 391 cross-cultural partnerships – continued involvement and roles 241 losing face 248 macro perspectives 244–7 manners and greetings 248–9 micro perspectives 247–9 opinion-voicing 243 planning, implementation, control 242 religious sensitivity 248 results and time horizons 242 rivalry among individuals 247 rules and relationships 240–1 status 241 unpleasant messages and whistle-blowing 248 cross-debt guarantees: banned (South Korea), 1998) 35 cross-shareholding 33, 35, 42, 334 cultural: anthropologists 320 boundaries 20 competence 9 complexity 11 differences 16, 365 distance 318, 319f flashpoints 24 group 89, 90f interaction 12 literacy 5, 7, 19 orientation, 320–1 ‘culturalists’ 12 culture 53, 94, 124, 127, 253, 291, 306, 342, 368, 369, 372 Asian 324 Chinese 22, 129–35 hierarchical 336 Hofstede’s definition 121 Japanese 281, 283, 287, 289 Malaysian 245, 246 national 27, 233, 310, 315, 320, 324, 326, 358 national and international 190 organizational 184, 187, 358, 362 societal 184, 187 third/alternative 246–7 traditional Chinese 121–2, 128–9, 144 Western 240 culture clash 232 culture-crossing 17

currencies 199, 202 national 198, 200–1 currency speculation 167 curtain-walling 156, 157 customer contacts 266 orientation 153f, 154–5, 278, 287–8, 289 relations 214 satisfaction 155 service 9, 22 customers 6, 14, 70, 124, 157, 158, 160, 196, 213, 259, 286, 291, 293, 297f, 300, 301f, 306, 307, 312, 335, 342 Chinese 262 segments 274 customization 223 customs (tradition) 268 Daewoo 35, 244, 331, 333 Daewoo Electronics 334 Daiichi Pharmaceuticals 301, 307 DaimlerChrysler 280 databases 293, 301 DataRoam Access 156–7 Davis Langdon and Everest (DL&E) 154–5, 160, 174 debt 66, 67, 199, 273, 280, 334 corporate 199 foreign-currency 334 private 198 debt collection 153f, 158, 167–8 debt relief 75 decanting 169 deception 17, 100, 101, 104, 105f, 126, 140, 141–2, 144, 192 decision-making 25, 157, 187, 213, 216, 223, 238, 268, 274, 275, 278, 279, 288, 299, 321, 361, 363, 365 ‘selling rather than imposing’ 287 decisiveness (‘don’t be wishy-washy) 153f, 165 Declaration of Democracy (Roh Tae-woo, 1987) 109 Dell 219, 220 demand 295, 296f, 303f domestic 201 domestic collapse 198 local 205

392 Subject Index democracy 56, 57, 68, 74, 75, 87, 95, 108, 113t, 114, 199, 342 Democratic Justice Party (South Korea) 109 Democratic Liberal Party (South Korea) 109 Democritus 88 dependence/dependency 340 absolute 367 infantile 355 relative 367 towards independence 367 design 161, 165, 214, 220, 221, 223, 227(n15), 256, 297 design and development (D&D) 219 design, development, and engineering (DD&E) 215 desire and thirst (Buddhist teaching) 103 developers 165, 171 developing countries/economies 116, 212 development finance 75 development process 21, 61–83 developmental psychology 355 devotion 104, 105f Dingtao (Shandong Province) 152–3 direct investment 253, 257, 262, 263, 264 to and from Japan (1995–2000) 280f distribution/distributors 232, 258, 337, 259, 261, 281, 282, 289(n4) distrust 8, 9, 10, 11f, 11, 17, 19, 29, 70, 73, 76, 88, 186, 191, 192, 231, 317, 353, 368 of leaders 3–4 non-family members 132 origins 4 see also mistrust diversification 170, 221, 314 diversity 310 inter-organizational (two types) 184–5 divide-and-rule tactics 125, 126 division of labour 51, 76, 262 Dong-a Ilbo (Korean newspaper) 118(n7) Doo-san group 333 Dow Jones Industrial Average 73 downsizing 41, 71, 203, 219 downturns 215, 217 Drake & Scull 166

DRAM chips 332 driving a car 364–5 Dubai 159 due process of law 100, 108 due diligence 325 dullness 366 dyadic alliance relationship 10f, 10 dimensionality 10, 11f multi-dimensionality 10f dyads 4, 7, 16 e-mail 287 Earth 96, 105f East Asia 18, 32–58, 234, 261 bilateral political problems 49 exports (1980–97) 50t FDI (1980–94) 51t imports (1980–97) 50t internationalization 197–8 intra-regional bilateral problems 52 intra-regional trade 50t, 50 inward FDI (1990–9) 46, 46t liberalization 44–9, 55, 56, 57 new regionalism 49–55 structural reform 197–8 transformation of political systems 56 westernization 32–44, 55, 56, 57 winners and losers 56 East Asian Economic Caucus 52 East Asian Economic Miracle (World Bank, 1993) 197 East Asian Free Trade Area 53 possibility of 54–5 East Asian Summit (proposed, 2001) 52 Eastern Zhou Dynasty (770–221 BC) 151 economic development regional 312 shift of focus (macroeconomic to microeconomic) 295 economic exploitation 21, 72 economic growth 27, 33, 41, 209, 333, 334, 335 Chinese, 260 ‘flying geese’-style 47, 56 long-term 233 meagre (Japan) 273 productivity-driven (Malaysia) 218 South Korea 106–7, 111

Subject Index 393 economic institutions 212 economies of scale 223, 262 education 94, 104, 105f, 116, 117, 165, 234, 236, 275, 321 Edward Cullinan Architects 163 efficiency 22, 34, 51, 70, 78(n9), 151, 242, 262, 276, 336 electric industry 201, 202, 205 electronic Bills of Goods 13 electronics 23, 201, 202, 206–7, 209, 210, 225(n1), 226(n2), 331 international knowledge sourcing 222–4 linkages (Malaysia) with OEMs 219–20 multiple linkages with contract manufacturers 220–2 Second Industrial Master Plan (IMP2, Malaysia) 218–19 structural weaknesses (Malaysia) 216–18 upgrading prospects (Malaysia) 209–30 Eleventh of September (2001) 56, 70, 174 elites 38, 56, 100 Emerald Hill Group 174 emotion 133, 233, 236, 240, 248, 279, 287–8, 354, 356, 363, 368, 370, 371 self-awareness 364–7 emotional appropriation 366 balance 366 learning 365 Emotional Intelligence (Goleman, 1995) 356 empathy 355–6, 363, 366, 371 emperors 97, 100 empirical evidence 74, 318 employee commitment 315 employee welfare 239 employees 27, 42, 48, 69, 70, 71, 75, 78(n10), 191, 258, 281, 282, 286, 287, 289, 335, 336, 342 Asian 233 empowerment 247 German and Singaporean 27, 314–29 key (lost soon after acquisition) 325 Malaysian 238

‘most important asset’ 284–5 needs and welfare 277, 284, 285f non-regular contract 43 part-time 43 socio-cultural character 268 temporary 43 trust decisions following a merger 314–29 employees’ handbook ( Japan) 275 employers 71, 141, 312 employment 209, 216 competition 341–2 dominated by SMEs 198 fixed-term 43 flexible 43 full 199 lifetime 42, 43, 182, 338 Malaysia 217 movement offshore 5–6 Singapore 324 employment/working conditions 75, 275, 338 Energy Cable 171 enforcement 104, 105f Eng Teknologi 226(n7) engineering 161, 206, 214, 218, 221, 224, 227(n16), 297, 307, 309 mechanical 261, 262 engineers 161, 205, 218, 225, 226–7(n12), 305, 310 electronics 226(n12) immigrant 224 enlightenment (Buddhist) 102–3, 105f Enron 68–9, 70, 92, 291, 333, 339 ‘pivotal lessons’ 69 entrepreneurs/entrepreneurship 174, 196, 204, 223, 252 environment business/corporate 170, 257, 273, 302, 336, 363, 369 cross-cultural 275 cultural 325–6 ‘good enough’ 367 holding 367, 372 maternal holding 368, 369, 372 microeconomic business 295 natural 115, 116, 162–3 environmental technology 262 equal rights 68 equality 278

394 Subject Index ERA Mobile Access Network (MAN) 156–7 ERA Realty Network 156 Ericsson 340 ESRI (Redlands, California) 157 estate agents 157 ethical behaviour 361 ethical imperative 70 ethics 117, 188, 310 ethnicity 249(n2) ethno-centricity 16 euro 73, 168 Euro-Asia Realty 161 Europe 4, 24, 49, 52, 53, 54, 118(n1), 220, 223, 225, 249(n1), 285, 286, 314, 333 Central 51 Eastern 25, 51, 331 Western 203 European Union 25, 51, 55, 72, 252, 274 exports to East Asian countries 50t, 50 FDI in East Asia 46, 46t, 51t imports from East Asian countries 50t, 50 exchange 269 exchange rates fixed (Malaysia) 235 Korean won-US dollar 118(n7) expatriates 223, 233 expectations 9, 173, 317, 320, 323, 336, 338, 359, 368, 369, 370 unreal 154 experience 263, 264, 280, 283, 285, 291, 292f, 305, 321, 354, 359, 360, 361, 364, 368 expertise 182, 256, 260, 262, 263, 266 exports/exporting 51, 106, 200, 206, 253, 261, 333 indirect 259 Malaysia 210–11, 216, 226(n2, n8) expressions ganchiku no aru (Japanese, ‘suggestive’) 13 oku fukai (Japanese, ‘deep and wide’) 13 external trust (ET) relationship 90f, 91 externalization 294f, 305, 308 knowledge conversion (SECI model) 292, 292f extravagance 166

face (lien/lian), 121, 129, 133–5, 140, 143, 234, 235 loss 248 utilization 125–6 face-saving 13 face-trading 134 ‘facilitating environment’ 364, 367–70, 371, 372 facilities management (FM) 160, 165 factor conditions 295, 296f, 303f failure 369 ‘fair dealing’ 188 Fair Trade Commission 337 Fair Trade Commission (South Korea) 338 fairness 278 family 27, 36, 89, 90f, 91, 134, 135, 141, 142, 198, 277, 341, 342 Chinese extended 132 family businesses 236 family and group orientation 129, 131–2 fantasy 366–7, 370 fashion and leather goods (Italy) 291 fast-moving consumer goods (FCMG) 245 fast-moving world 9, 10 FDI, see foreign direct investment FDI Confidence Index 47 Federation of Economic Organizations ( Japan) 55 Federation of Korean Industries (FKI) 332 fen gong (‘divided our work’) 125 filial piety 234 financial disclosure 339 information 244, 337 institutions 41, 42, 167, 198, 299 management 153, 187 markets 198, 338 planning 219 reports (corporate) 336 results 265 stability 75 system 75 financial companies (FCs) 39 Financial Institutions Development Fund (FIDF, Thailand) 38 Financial Sector Restructuring Authority (Thailand) 39

Subject Index 395 flagships 212, 213–14, 217, 218–19, 220, 221, 223, 224, 226–7(n12) two types 215 flexibility 71, 153, 214, 237, 242, 264, 286–7, 306, 310 labour market regulations 219 Flextronics 227(n13) folk literature (Chinese) 137 food 261, 302 Forbes 244 Ford 41 Foreclosure Law 39 foreign affiliates (Malaysia’s electronics industry) 226(n2) foreign aid 75 capital 47 investors 34, 35, 37–8, 73 lenders 332 production locations 253 reserves 110 foreign direct investment (FDI) 4, 20, 33, 44, 45, 47–8, 51, 55, 196, 197–8, 203, 221, 283, 288 into China 5 global total (2002), 193n intra-regional (East Asia) 50 Japanese, in Thailand 200 Malaysia’s electronics industry 210–11 SMEs linked to 201–2 Foreign Investment Promotion Law (South Korea, 1998) 45 foresight (developing total business plans) 153f, 163–4 formalization 182, 187 Former Soviet Union 331 franchising 256, 257 fraud 43, 166 free market 63, 67, 68, 70, 76 beyond 74–5 myth 68, 69 free trade 64, 72, 76, 290 free trade areas (FTAs) 49, 51, 53–4, 231 Free Trade Association of the Americas (FTAA) 51 Freedom of Association and Collective Bargaining Convention (1987) 87, 112t friends/friendship 89, 90f, 124, 131, 132, 198, 361

‘front yard strategy’ (Gordon) 74 frustration 245, 355, 363, 366, 369 Fuji Electric 297, 298, 299, 307 gaishikei (foreign company) 282 game theory 127 General Electric (GE) 216 General Motors (GM) 35, 244 general public 69, 117 generals (South Korean Army) 337 Geodata 157–8 Germans 240 Germany 24, 252 employees’ trust decisions 321–6 HDI 112t, 113t, 114 ‘world’s third-largest investor abroad’ 321 gift-giving 14, 268 global economy 70 information service networks 223 network integration 218–19 global production networks (GPNs) 23 Asian suppliers 214–15 asymmetry 212 benefits from integration 210 characteristics 212–13 flagships 213–14 information systems 212 intra-firm and inter-firm transactions 213 knowledge diffusion 212 Malaysia’s upgrading prospects in electronics industry 209–30 outsourcing based on contract manufacturing 215–16 scope 212 winners and losers 210 globalization 21, 25, 27, 197, 198, 210, 212, 224, 231, 252, 255, 257, 258, 260, 274, 276, 282, 283, 288, 290, 291, 294, 295, 331, 333, 341, 342 after free trade: from miracles to crises 73 implications 72–4 role of military and constant war 73–4 US ‘biggest beneficiaries and drivers’ 71 Globetronics Multimedia Technology, 226(n7, n12)

396 Subject Index Golden Safeguards 22, 153, 153f, 164–73 Golden Standards 22, 153, 153f, 154–64 ‘good enough mother’ (Winnicott), 355–6, 367, 372 good governance 75, 85, 92, 94, 98, 117 WSSD 114–16 good judge of character 153f, 154 goodwill 78(n3, n5), 317 governance 20, 21–2, 27, 84–120, 185 analytical framework 85–92 Asian thought 92–105, 118(n6) aspects 86 definition 85–7 goals 104, 105f key values 104, 105f Korean presidential 22 ‘meaningless’ (for Buddhists) 103, 104, 105f means of implementation 104, 105f measurement 87–8 objective indicators (UNDP) 87, 111, 112t, 114 re-structuring 117 six dimensions 87 South Korea 341 subjective indicators (UNDP) 87–8, 111, 113t, 114 unsustainable 111 see also sustainable governance Governance and Development (World Bank, 1992) 85 governing without artificiality 96, 97 government/s 3, 19, 20, 40, 44, 68, 69, 72, 78(n6–7), 95, 290, 300, 304f, 308 Chinese 161, 260, 261 East Asian 199 foreign 331 Hong Kong 167 Japanese 41, 56, 305, 309 Malaysian 164, 222, 226(n6), 236, 243, 249(n2) provincial (China) 331 South Korean 36, 330, 331, 332, 334, 342 Thai 38–9, 200 Western 47 government agencies 17, 306 behaviour and policies 91 corruption 119(n11)

effectiveness 87, 113t, 114 failure 116 funding 341 intervention 67 ministries 311 policies 210, 224 Grand National Party (GNP, South Korea) 110, 330 Greater China 135 greed 21, 61, 62, 77, 332 definition 78(n2) ‘greed is good’ 62, 63, 66 Greeks 240 greetings 248–9 Grenoble 224 Gross National Product (GNP) Japan 273–4 South Korean 330, 343(n1) group 241 group control 276 ‘Group of Twenty’ 3 groups 292f, 294, 361, 370 ‘groupthink’ 237–8, 243 Guangdong (Kwangtung) Province 124, 173 guanxi 13, 15, 22, 121, 130–1, 134, 145 guo (state) 132 Hainan Island 158 haj (pilgrimage to Mecca) 174 Han Dynasty 95, 98, 100 handshake 14, 244 haragei (Japanese, ‘belly talk’) 13 hardware 6, 223 hardware production 215 harmony 104, 105f, 129, 133, 134, 105f, 162, 233, 234, 237, 242 Harvard University 108 hateke zukuri (Japanese, ‘ploughing the field’) 14 Heaven Confucian 93, 98 Taoist 96–7 Warfare School 105f heavy industry 261, 332 Helsinki 224 herd instinct 153f, 168–9 hierarchy 129, 132–3, 242–3, 255 High Court (UK) 167 Hindus 248 Hitachi 205, 220

Subject Index 397 Ho Chi Minh City 160, 166 Hobbesian nations 72 Hobbesian practices 67 Holford Associates 159 holistic harmony 96, 98 holistic view 105f Hollywood 291 home-owners 172 Honda 204, 273, 297 honesty 94, 122, 130, 151 dishonesty 153f, 166–7 Hong Kong 24, 32, 47, 84, 103, 124, 141, 145, 162, 203, 206, 233, 238, 252, 261, 333 customs duties on IT-related goods (East Asia, 1995–2000) 45t HDI 111, 112t, 113t, 114 inward FDI 46 Hong Kong dollar 167 Hong Leong Group 168 hope 366, 368, 369 hostage-taking 49 hotels 124, 160, 166, 169 House of Representatives (Thailand) 166 housing 42, 92, 160, 163, 172, 277, 299 luxury condominium developments 161 human capital 24, 225, 295 Human Development Index (HDI) 107, 111, 112t, 113t Human Development Report (UNDP, 2002) 118(n3) human nature 93, 98, 99, 101 human resource management (HRM) 5, 15f, 16 human resources (HR) 22, 84, 117, 151, 157, 211, 221, 227(n16), 239, 254, 257, 258, 299 attractiveness of post-merger system 319, 319f bottleneck (Malaysia) 218 human rights 56, 92, 118(n5) human suffering 102, 103 Hynix 334 Hyundai 35, 330, 331, 338, 341 Hyundai Asan (Hyundai subsidiary) 330 Hyundai Engineering and Construction C. 35 Hyundai Semicon 334

i mu chih hsin (‘trust about moving a wooden pole’) 99 i-Ching 140 IAC Kawneer 156, 157 IBM 213, 223 IC design houses 214 ICs 226(n8) Iceland 119(n11) ideal types 66 idealism 335 IFCs, see institutions for collaboration immigrants (skilled) 223, 225 impatience 243, 244 implementation 242 import diversification scheme (South Korea) 45 licensing 45 quotas 45 tariffs 45 imports 44, 217, 218, 226(n8, n10) imposed control 317, 319f impoverishment 21, 72 incentives 218, 222, 225, 325 carrot/stick 100 and rewards 87, 325 rewards/punishment 100 income distribution 75 income inequality 249(n2) incompetence 114 inconsistency 22, 27, 85, 116 India 5, 206, 227(n15), 233 Individual Action Plans 44 individualism 13, 235f, 235, 241, 247, 275, 320, 324, 358 individuals 63–4, 90f, 91, 117, 152, 174, 241, 292f, 294, 304f, 362, 364, 366 ethical stances 181 Indonesia 40, 45, 47, 48, 49, 56, 92, 162, 197, 199, 227(n13), 233 CPI 119(n11) cross-border mergers and acquisitions 46 currency speculation 167 customs duties on IT-related goods (East Asia, 1995–2000) 45t investment environment 48 inward FDI 46, 47 provincial governors 48 trade liberalization 44 Indonesia: Interior Ministry 48

398 Subject Index Indonesia: Minister of Labour 48 Industrial Contract Services 160 industrial upgrading (IU) 210, 211–12, 224, 225, 225(n1, n10) industrialization 33, 41, 206, 212 export-led (downside) 209 Malaysia 218 industrialized countries 226(n6) industries related/supporting 295, 296f, 297f, 301f, 303f South Korea 106 inequality 210, 224 infancy 363, 367 and trust 354–6 inflation 106 informality 126, 245, 304f, 305 information 8, 101, 117, 157, 244, 269, 286, 302–4, 307, 338 false 192 non-disclosure 291 information asymmetry 183 information and communications technology (ICT) 6, 7, 91, 224 information network 304f, 308 information systems 212, 221 digital 215 information technology (IT) 25, 212, 220, 223, 253, 261, 300, 301 clusters 227(n15) Information Technology Agreement (ITA) 44 information technology and communications (ITC) 4 information-sharing 244, 368 infrastructure 24, 42, 43, 160, 165, 167, 172 Malaysia 232 Penang 206 Initial Public Offerings (IPOs) 225, 301, 309 innovation 24, 213, 238, 302, 303f, 303, 308, 309, 310 home sales 158 incubation space 310 input imports 218, 226(n10) inputs 218, 226(n10), 291 inscrutability (Eastern) 13–15 insider trading 68–9, 330, 332, 338, 339 instinct 96, 97, 105f Institute for Global Economics 341

Institute of International Economics 337 institutions 3–4, 116, 312 institutions for collaboration (IFCs) 295–6, 301f, 307, 308 integrated manufacturing centres (IMCs) 218–19 integration cultural 326 post-acquisition 315, 316 Intel Corporation 206, 207, 213, 220, 224, 226(n12) intellectual capital 6 intelligence (information) 126, 205 inter-culturality 252 inter-organizational learning 181–5 interaction 187, 311, 325, 357, 370 external 360 inter-firm 188 interpersonal 183 political 358, 371 tangible output 308–9 interaction history 317–18, 319f interest rates 73, 74, 167, 205 interface (company) 74–5 internal strength 101 internal trust (IT) 89, 80f, 101 internalization 294f, 305, 308 knowledge conversion (SECI model) 292, 292f, 293 international business 89, 90f, 175 civic organization 89, 90f, 91 competition 260 consortium 256 knowledge sourcing 210, 225 public organization 89, 90f International Convention of Civil and Political Rights 87, 112t International Monetary Fund (IMF) 3, 35, 39, 91, 198, 334 ‘fundamental mistakes’ 198–9 ‘neglected micro-dimensions of Asian crisis’ 199 International Standards Organisation (ISO) 205 internationalization 252–3, 255, 263, 276 East Asia 197–8 motives 254

Subject Index 399 internationalization – continued strategy (German and Japanese businesses) 25 see also third-market business collaboration internet 91 interviews 121–2, 201, 222, 315, 312(n2, n4, n7–8) ‘intrapreneurship’ 204 investment 19, 24, 164, 168, 209, 212, 216, 221, 225, 335 avoiding duplicated 262 enabling environment 116 investment banking 238 investment jitters 345(n19) Investment and Loans Programme (Japan) 41, 42 investment security 24, 232 investments 73, 285 greenfield 314 investors 70, 165, 169, 198, 206 foreign 162 Japanese 202 non-Japanese (in Japan) 273 trust 48 US 202 Western 48 invisible hand 64, 76 IP trade 214 Iraq 70, 333 Ishihara Sangyo 301 ishindenshin (Japanese, telepathy) 13 Islam/Muslims 49, 174, 232, 248 Isuzu 204 Italy 291 Japanese manufacturing alliances 191 Jabil 219 Jabil Circuit 227(n13) Jakarta Special Capital District 48 Jamaica 72 Japan 6, 13, 24, 25, 32, 33, 40–1, 56, 73, 95, 111, 118(n1), 162, 198, 199, 203, 204, 205, 217, 223, 224, 225, 226(n11), 238, 252, 263, 301 ASEAN Plus Three (APT) 52 Buddhism 103 challenges for companies (twenty-first century) 273–4 component suppliers 220–1 cross-cultural alliances 280–3

cross-cultural management challenges 273–89 current economic situation 273–4 direct investment to and from (1995–2000) 280f economic crisis ‘should not be overstated’ 273–4 exports to other East Asian countries 50t, 50 FDI in East Asia 46, 46t, 51t HDI 112t, 113t, 114 imports 50t, 50 management 276–9 new regionalism 49–55 option of bilateral FTA agreement with major ASEAN countries 54 share of FDI and trade in other East Asian countries 50 structural reforms (Koizumi era) 41 trade with East Asia 50–1 winners and losers 274 Japan: Foreign Ministry 54 Japan: Ministry of Agriculture, Forestry and Fisheries 54 Japan: Ministry of Economy, Trade and Industry (METI) 296, 297n, 297, 300, 301n Kanto bureau 297, 299 Japan: Ministry of Finance 41 Japan Inc. 26 Japan-Korea Free Trade Area (possibility) 54 Japan-Singapore Free Trade Area (2002) 51, 54 Japanese corporate model 336 structural economic failure (1990s) 32 electronics makers 216 manufacturing subsidiaries in UK 19 Japanese-German alliances in third markets 252–72 areas of conflict 264–8 basic targets 262 can be ended ‘with comparatively little effort’ 264 Chinese involvement 265 Japanese-German (in China) 260–9 means-related conflicts 266–8 role of trust in handling conflict 266–7

400 Subject Index Japanese-German alliances in third markets – continued shifting objectives/power of partners 266 success rates 264 target-related conflicts 265–6 ji (Chinese stratagems) 135–42, 144, 145n bargaining without bargaining 141 empty city stratagem 139, 140 ‘kill with borrowed knife’ 137, 140 negotiating tactics 140, 145n Taoist influence 140–2 jia (family) 132 Jinro 35 job security 172, 276, 319 Johannesburg Declaration on Sustainable Development (2002) 115 Declaration 19 115 Johor/Singapore High-Technology cluster 220, 227(n13) joint learning 184, 187 joint ventures 55, 164, 165, 170, 213, 231, 232, 246–7, 249, 255, 256–7, 265, 293, 316 chaebol 340 cross-cultural 244 Siemens and Westinghouse (aborted) 244 joint-venture negotiation 122–3 Joong Ang Daily 118(n7) Judaeo-Christian beliefs/influence 12, 141 Judaism 141 jun jun, chen chen, fu fu, zi zi (Confucius, ‘let ruler be ruler …’) 133 junzi (‘Confucian gentleman’, ‘cultivated man’) 22, 130, 133, 135, 142–4 just-in-time (JIT) deliveries/production 6, 205 Kanagawa prefecture 297, 299 Kedah 227(n13) Keidanren 56 keiretsu 14, 42, 261, 263, 281, 306 Kentucky Fried Chicken (KFC) 174 Kenya 119(n11), 174 KEPCO 36 Khazanah Nasional 37 Kia 35 kings 97, 100

Kinki biotechnology cluster 300–2, 305, 309, 312(n6) Kinki Biotechnology Cluster Committee 300, 301, 306 Kinki Biotechnology Industry Association (1985-) 300 Kista/Stockholm 224 Klang Valley 163, 164 know thyself 27, 326 know-how 6, 184, 204, 278, 307, 308, 310 ‘knowing about’ 360, 371 knowledge 17, 24, 212, 224, 225, 265, 280, 293, 295, 302–4, 359, 371 general ability to utilize 187 characterisation 23 collective acquisition and development 188 foreign sources 212 formalization 23 sticky 186 target market 259 types cognitive 371 explicit 292, 292f, 293, 294, 294f, 311, 312 ‘internal’ 362, 364 new 26, 184, 311, 312 objectified and explicit 182, 186 organizational 213 tacit 23, 26, 182, 185, 213, 292, 292f, 293, 294, 294f, 305, 307–8, 310, 311, 312 ‘knowledge of acquaintance’ 360–1, 362, 371 knowledge base 213, 225 domestic 212 narrow domestic 212 knowledge conversion 302, 308, 309, 312 and ba 292–4 in the ba 305 ba requirements 305–7 diversity of cluster participants 306 equal, flexible, dynamic relationships 306 ‘firms should take action’ 311 four modes 292 leadership 307–8

Subject Index 401 SECI (socialization, externalization, combination, internalization) model 292–3 trust 311–12 unique cluster participants 306–7 knowledge domains 184, 187 knowledge management 7, 15, 15f, 26, 311 clusters as ba for 302–10 external 290 internal 290 ‘needs to be based on trust’ 291 optimum use of cluster 296 strategy conceptualization 294f knowledge spiral 308–9 knowledge transformation 360 knowledge-creation 212, 293 ‘process’ view 294 knowledge-exchange/sharing 23, 182, 183, 191, 192, 213 international 224 ‘sticky’ 11–12 knowledge-sourcing (international) 221–2, 222–4 Kobe 162, 300 Komag 219 Korea ‘cash for summit’ scandal 110, 111 Japanese colonial rule (1910–45) 106 North-South summit (June 2000) 330 see also North Korea; South Korea Korea Dynasty (Kirk, 1994) 338 Korea Gas 36 Korea Telecom 36, 340 Korea University 333 Korean Asset Management Corporation (KAMCO) 334 Korean Consumer Protection Board 339 Korean Exchange Bank 35 Korean Fair Trade Commission 335 Korean Military Academy 108 Koryo Kingdom (Korea, 924–1392) 106 Kuala Lumpur city railway 38 Kuala Lumpur Stock Exchange 37 Kuching (Sarawak, Malaysia) 227(n13) Kuwait 233, 332 Kvaerner 160, 172 labour 107, 184, 260, 338 low-cost 219

skilled 24, 206, 232 unskilled 199 labour costs 215, 217 exchange system 43 force 265 leaders 335 market 109, 218, 229(n9), 338 militancy 338 relations 337 rights 75 Laing 168 land banks 170 Land Department (Thailand) 166 land prices 162 language/s 122 Asian and African 360 Chinese 124, 151 English 5, 125, 151, 268, 284, 285 European 359–60 French 359 German 359 Japanese 204, 268, 286 laowai (foreigners) 125 laser-beam equipment 300, 307 law 14, 99, 105f, 111, 122, 167, 341 enforcement lacking 192 international 118(n5) Japanese 287 law and order 87, 113t law and punishment 130 lawyers 126 LCB (later Shinsei Bank), 41 LCI 227(n16) leaders 3, 356 charismatic 363, 367, 372 self-awareness 363 leadership 213, 242, 357, 362 GLOBE studies 15f, 16 lean production 5, 6 learning 26, 93, 105f, 187, 224 benefits from integration in GPNs 210 cognitive 361 collective 188 double-loop 184 inter-organizational 185–9 interpersonal 19 reciprocal 188 learning behaviour (origins) 184 learning efficiency 212

402 Subject Index learning possibilities (uneven distribution) 266 learning processes 185, 186t, 188–9, 190f, 216, 266 behavioural learning 186t, 189, 190f, 191, 193 content learning 186t, 188, 189, 190f, 191, 193 process learning 188, 189, 190f, 193 relationships with collaboration conditions 190f learning races 183 learning strategies (path dependent) 183 learning-by-doing 292f, 293 Legalist School (China) 22, 85, 93, 97–100, 104, 105f ‘anti-intellectual’ 99 strong nation, law, punishment/reward, selective trust 98–9 Leibenstein, H. 78(n5) Levenshulme 171 Leviathan 62, 65 LG Chemical Investment (LGCI) 337 LG Electronics (chaebol) 331, 333, 337, 340 LG Electronics Investment 337 LG Semicon 334 LG-Philips 340 li (propriety, ritual) 93, 130, 133 Liberal Democratic Party (LDP), Japan 56 liberalization 20, 21, 25, 44–9, 55, 56, 57, 64, 238, 252 licensing 122, 255, 256, 260, 340 lien (or lian), see face linkages 211 Asian firms with foreign firms 209 backward 196, 212, 226(n10) cross-border 212 forward 196, 212, 226(n10) international 211 lack of efficient domestic 217 limited 212 resilience of SMEs during Asian Crisis 196–208 liquidation 42, 171 literature 19 benefits of guanxi 131 business-to-business relationships 127 Chinese negotiation strategy 129 ‘Chinese style’ of negotiation 128

collaboration conditions 185, 186t collective or reciprocal learning 188 guanxi 145 inter-organizational knowledge 182 inter-organizational learning 184 inter-organizational trust 315 international management 254 Japanese market 285 knowledge conversion and ba 292–4 knowledge management 291 management (academic and popular) 324–5 mergers and acquisitions 314 negotiation 127 organizations (role given to trust) 357 strategic alliances 319 strategy 294 strategy implementation 254 strategy management 291 trust 118(n4) LKT 226(n7) loan defaults 167 guarantees 334 repayments 191, 192 loans 38, 171, 205, 333 housing 172 non-performing 39 preferential 33, 35 local authorities 40, 207 business 89, 90f content regulations 45–6 government 89, 90f, 91, 206, 297, 298, 300 logic 12, 13 logistics 4, 218 logos 12 London 159, 160, 166, 170 London: Docklands 166 London: Jubilee Line Extension ( JLE) 164, 166 London: Royal Opera House, Covent Garden 158 London School of Economics 38 London Underground 166 Long-Term Credit Bank of Japan 41 long-termism 265 love 94, 99, 104, 105f loyalty 70, 84, 94, 95, 104, 105f, 108, 234, 276, 341

Subject Index 403 M&A, see mergers and acquisitions Macau 171 McDonald’s 73 McDonnell Douglas 73 Machiavellian practices 67 Machine that Changed the World (Womack, Roos and Jones, 1980) 5 machine tools 296 machinery 204, 301f Malacca 207 Malaysia 24, 44, 45, 47, 48–9, 52, 57, 155, 162, 174, 197, 198, 199, 226(n11), 227(n15), 233 Asian values 231–51 cross-border mergers and acquisitions 46 cultural flashpoints 239–43 culture audit 235f currency speculation 167 customs duties on IT-related goods (East Asia, 1995–2000) 45t electronics industry (upgrading prospects) 209–30 ethnic violence 49 government-enforced restructuring 36 import dependence 217 importance of public-private partnerships (2001–02) 206–7 industrial structure 211, 216 inward FDI 46, 47, 219 management culture 234–9 SME survey (1998–9) 200–2 trade liberalization 44 US investment 215 Malaysia: Finance Ministry 38 Malaysia: Ministry of International Trade and Industry 216 Malaysia Airlines 232 Malaysia Association of SMEs 6 Malaysia Resource Corporation Berhad 38 Malaysian dollar 202 Malaysian Institute of Microelectronics Systems 226(n12) ‘Malaysian way’ 240–1 management 5–6, 38, 86, 151, 168, 206, 248, 252, 257, 273, 274, 282, 283, 338, 339 bottom-up, not top-down 285–6, 287 comparative 320 cross-cultural 283–8

customer-orientation 287–8 decision-selling 287 Eastern approach 360 ‘employees our most important assets’ 284–5 flexibility and open-mindedness 286–7 future orientation 285f German 261, 267, 269 international 253–4, 266 Japanese 261, 262, 263, 267, 269 Japanese versus Western styles 275–9, 285f Malaysia 234–8 national 253 profit balanced with employees’ welfare 284, 285f realistic objectives 286 selection of managers 283–4 SMEs 205 Western 247, 276, 360 worker participation 338 management autonomy 337 behaviour (cultural explanation) 128 co-ordination 244 information 244 practices 187 qualities 264 studies 224, 254, 257 style 264, 288, 315, 341, 342, 358 managers 145, 193, 218, 225, 275, 288, 289, 315, 356 Anglo-American 17 Asian 13 Chinese 17, 191 Japanese 19 ‘Nordic executives’ 121 Managers Association of Indonesia (Apindo) 48 Manchester 155–6, 160 Manchester Airport 170 Mando Machinery (Hyundai) 340 manufacturing 4–5, 20, 174, 202, 203, 209, 214, 220, 221, 226(n2), 227(n16), 232, 295, 297, 337 procedures 293 shift to China 215 value chain-based (Malaysia) 218 Marco Polo Developments 162 market, the 14, 210, 294, 300

404 Subject Index market access 184, 254 capitalism 78(n5) capitalization 338 conditions 201 cycles 197 economy/-ies 43, 50 entry 288 excess 78(n6) failure 67, 116 fluctuations 338 forces 162, 169 leadership 216, 260, 261 opportunities 173 position 261, 262 power 215 reach 184 research 162 segmentation 221 segments 239 share 334 transformation 66–7 ‘market place is battlefield’ (Chinese proverb) 135 market-knowledge 263 market-orientated reforms 57 marketing 163, 203, 206, 214, 218, 219, 223, 232, 239, 246, 256, 257, 263, 264, 290, 297, 309, 337 boldness 153f, 159–60 golden rules 157 marketing opportunities 153f, 161–2 marketing partnerships 316 marketisation 78(n9) markets 253, 255, 340 affluent 24 Asia-Pacific 219 Asian 123 Chinese 263, 265 currency and financial 212 domestic 202, 209 financial and currency 332–3 Japanese 219, 283, 285–6 local 238 new 258 opening up 257, 258 USA 211 Western Europe 331 Marlin Land 165 maruah (dignity) 234, 235 Marxists 84

mass production 62, 75, 210 materials 192, 227(n16) maternal holding environment 355 Matsushita 224 Mazda 41, 204 Mecca 174 mechanical and electrical (M&E): contractors 166 quantity surveyors 154 media/press 3, 91, 111, 273, 341 Chinese newspapers (in Singapore) 174 press freedom 87, 113t medical oil 174 mergers and acquisitions (M&A) 25, 26, 39, 40, 41, 160, 215, 274, 280, 288 cross-border 46–7, 314–29 cultural fit 314 failure 282, 316, 325 hostile takeovers 332 ‘human factors’ 324–5 initial takeover situation, 315, 320, 324, 325 performance 318 post-acquisition implementation/ integration 315, 319, 320, 324–5 strategic and financial goals 324 strategic fit 314 Sweden 319 trust decisions 314–29 UK 319 meritocracy 241 Mexican CME 40 Mexico/Mexicans 92, 245, 332 microcomputers 190 microprocessors 226(n8) Microsoft 18, 226(n12) Middle East 174, 232, 332 Midlands (UK) 160 ‘might is right’ ethos 75 military autocracy/rule 337, 342 Milken Institute 345(n26) ‘mindful market economies’ (Korten) 75 Ming Dynasty (1368–1644) 136 Mini TAMA groups 299, 304, 305, 306 mini-GPNs 214 Minolta 273 minority shareholders 36, 338, 339 mistrust 22, 62, 85, 89, 92, 111 of government 118(n1) see also trust

Subject Index 405 Mitsubishi 204, 205, 232, 280 modernization 333, 342 modular production networks (Sturgeon) 226(n5) monetarist economics 68 money laundering 18 monitoring 11f, 11, 244–5, 264, 316, 317 monopoly 64, 334 Moody’s 332 moral capital 85, 119(n2) cultivation 129, 130 education 93 law 101, 105f persuasion 87, 104 morality (reciprocal) 141–2 mortgage rates 167, 172 motivation 276, 284, 289, 366 Motorola 220, 224 Mott Green & Wall 154–5, 174 Mt Kumgang 330 Multimedia Super Corridor (MSC) 211, 222–4 Bill of Guarantees 211, 222, 227(n17) concept 222–3 diversifying international linkages 223–4 incentives 222, 227(n17) skills mismatch (priority areas) 222–3 multinational corporations/transnational corporations (TNCs) 23, 72, 140, 237, 295 foreign 324 global 3 Japanese automotive and electronic 200 local affiliates 205, 206, 207 local suppliers (role of trust) 196–208 multi-cultural environment 15 SMEs linked to 201 multiple listing services (MLS) 157–8 mutual assurance 336 loan guarantees 33 stock ownership 42 sympathy 63 Nara 300 nation-state

141

national boundaries 290, 291 business 89, 90f government 89, 90f, 91 interest 67, 72 National Association of Realtors 157 National Charter of Education (South Korea) 107 National Congress for New Politics (NCNP) 110 National Development Policy (Malaysia, 1990s) 249(n2) National Election Commission (South Korea) 118(n8) National Institute of Tourism (Vietnam) 160 National Vision 2020 Policy (Malaysia, 2000-) 237, 239, 249(n2) nationalism 342 nationalization 34, 38, 40 natural resources 295 NEC (Japanese corporation) 297 need 21, 61, 62, 77 definition 78(n2) negotiation/s 127, 128, 245 neo-classical economics 68 Neo-Confucian School 93, 95 nepotism 188, 336 network coordination 215 economies 223 governance (asymmetrical) 213 participation 209 resources 214 networking 309 networks 257, 290, 291 international social 225 peer group 24, 225 role of trust between TNCs and local suppliers 196–208 small companies 308 see also global production networks networks of networks 215–16, 226(n5) New Democratic Republican Party (South Korea) 109 New Economic Policy (Malaysia, 1970–90) 249(n2) new product development 311 new product introduction (NPI) 214 new regionalism 49–55

406 Subject Index newly-industrialized countries (NICs/NIEs) 46t, 104, 106 New York 70, 169, 206 New Zealand 72, 119(n11), 159, 169, 174 niche markets/players 223, 227(n16), 238, 239 Nigeria 119(n11) Nissan 26, 41, 280, 281, 283, 286 Niwel (contractors) 171 Nokia 340 nomunication (Japanese, ‘nomu’, to drink) 14 non-aggression 96, 105f non-desire 96, 105f non-government organisations (NGOs)/pressure groups 3, 19, 87, 112t, 114, 115, 200 non-market processes 67 non-profit organizations (NPOs) 290 non-tariff barriers 45t norms 182, 188, 243, 246, 325 North America 4, 54, 203, 205, 249(n1) North American Free Trade Agreement (NAFTA) 25, 51, 252 North Korea 110, 330, 331 market economy enclaves (2002–) 43, 57 nuclear ambitions 43, 333 Norway 112t, 113t, 114 Novartis 316

organizational culture 257 domains 257 learning 7, 9, 11, 15, 15f, 23, 181, 191 processes 190–1 structure 187 organizations 78(n16), 184, 292f, 294, 306, 353, 356, 372 cross-cultural 287 Western and Asian 358, 359 original brand name (OBM) manufacturing 226(n10) original design manufacturing (ODM) 214, 216, 220, 221, 227(n16) original equipment manufacturers (OEMs) 215, 216–17, 219–20, 226(n7, n11) Osaka 162, 300 Osaka: Industrial Research Institute (Sansoken) 301 Osaka Science and Technology Centre 300 Osaka University 301–2 osewa ni naru ( Japanese, ‘indebtedness to others’) 14 ostentatiousness 153f, 165–6 outside directors 36 outsourcing 203, 213–14, 215–16, 231 Overbury 168 Overseas Chinese (Malaysia) 244 Overseas Development Assistance (ODA), by Japan 54

OECD (Organisation for Economic Co-operation and Development) 196 OECD Principles of Corporate Governance (OECD, 1998) 86 O.E.I. Parts Co. Ltd. 204 office electronics 190 ‘office jobs’ 5 office space 162 oligarchy 33, 34, 35, 38 oligopoly 64 Olivetti 190–1 Oman 233 openness 68, 286–7, 369 opinion-voicing 243, 247 opportunism 61, 71, 111, 187, 265 optimism 163, 369 organization 254 terminology 257

pacifism 97 Pakistan 174 Panasonic 273 ‘parallel financial micro-climates’ (Douthwaite) 74 paranoia 11f, 17 parent companies 263, 264, 266 incompatibility of objectives 265 parliaments 39, 40, 87, 112t participation 87, 111, 112t particularism 234, 235f, 238 partners 17, 187, 188 ‘best’ 311 Chinese 265 Malaysian 245 weakened 266 Western 245, 246 patents 192, 212, 256, 298, 307 patience 126, 132

Subject Index 407 PCBA 220, 221 PDA suppliers 214 peace 74, 92, 163 Peloponnesian War 76–7 Penang 206–7, 219 higher-tier suppliers 226(n7) retrenched workers 229(n9) state government 218–19 total factor productivity (TFP) of manufacturing (1995–7) 217 Penang cluster 218–19, 224 Penang Development Centre 211 Penang-Kulim High-Technology cluster 220, 227(n13) penny-pinching 153f, 164–5 pension funds 37 People’s Solidarity for Participatory Democracy (PSPD) 333 people’s well being 94 perception 188, 257 Peregrine Securities 171 perfect competition 64, 68 performance 70, 75, 86, 91, 159, 182, 218, 281, 282, 290, 295, 307, 312, 315, 316, 361 personal guarantee (principle) 154 personal and public roles developing trust: obstacles and understanding 353–73 ‘personal value systems’ 361 personality 284, 361 Pew Research Center 71 pharmaceuticals 282, 300 Philippines 5, 45, 47, 48, 49, 233 cross-border mergers and acquisitions 46 customs duties on IT-related goods (East Asia, 1995–2000) 45t inward FDI 46, 47 possible bilateral FTA agreement with Japan 54 trade liberalization 44 philosophy 12, 116, 128, 151 Phnom Penh 53, 54 photonics 222, 223 Pidemco Land 168 Plan of Implementation (WSSD, Johannesburg, 2002) 115, 116 Section v 116 planning 242, 254, 372 centralized 43 Poland 159

polarization 64, 66 political acts 357–8, 362 destabilization 56 institutions 358, 370 opposition 56 rights 87, 113t stability 24, 48, 87, 113t, 114, 232 system 358, 371 turmoil 48 will 53 politics/politicians 34, 38, 100, 357, 358, 370 polity score 87, 113t Poole Stokes Wood 160 Portsmouth Football Club 167 Portugal 112t, 113t POSCO (steel giant) 337 ‘positioning’ 294, 294f pound sterling 172 poverty 53, 115, 249(n2) power 66, 78(n7), 97, 265, 317, 338, 357, 368, 370 power distance 235f, 237, 239, 242, 243 praise 247–8, 370 preferential treatment 38 price/s 12, 172, 174, 192, 288 falling 167 not to be slashed arbitrarily (Tao Zhugong) 153f, 168, 170 world-market 74 prisoner’s dilemma 72, 78(n5) private finance initiative (PFI) projects 160, 165, 169 private groups 89, 90f private institutions (erosion of trust) 84 private sector 70, 86, 197, 207, 236 self-regulation 64 privatization 36, 38, 40, 41, 43, 57, 64, 70, 232 problem-solving 126, 127, 315, 368 process engineering/re-engineering 214, 219 perspective (on acquisitions) 325 processed food (non-disclosure of safety information) 291 processing technology 259 procurement 227(n16) product acquisition 153f, 160–1 awareness 159 concepts 293

408 Subject Index product – continued defects 339–40 development 214 knowledge 22, 151, 155 life cycle 169 quality 161, 340 value 160 production 24, 33, 205, 206, 216, 257, 290 ‘agile’ 5 decentralized 260 expansion 259 geographically-dispersed 213 global chains 196 ‘increasingly fragmented’ 212 SMEs 205 production costs 232 productivity 158, 211, 217, 218, 226(n6), 302, 366 growth 295 products 337 high-technology 264 blind endorsement 153f, 172–3 commodity-type 210 professionals 233 professors 223, 301, 302, 303 profit and loss figures 338 profit-seeking 21 profitability 34, 43, 75, 163, 279, 284, 339 profiteering 69, 166 profits 18, 25, 35, 42, 68, 76, 126, 143f, 143, 166, 168, 237, 242, 262, 264, 266, 274, 277, 284, 285f, 285, 287, 334 chaebol 343(n2) long-term 239 targets 257 promotion (performance-related) 286 Proof of Entitlement 13 property developers 155 development 170, 174 investment 154 market 156, 162 prices 165, 167 Property Perfect PLC 166 protocol 242–3 Proton 232 Proton City cluster 226(n10) Proximal 18

psychoanalysis 28, 268 psychodynamics 354 psychologists/psychology 8, 101, 104, 126, 188, 203, 314, 356 public amenities 167 funds 199 institutions (erosion of trust) 84 interest 63 investment 261 law suit system 340 policy 117 projects 165 relations 91 sector 17, 86, 197, 207, 236, 336 well-being 91 public-private partnerships (Malaysia, 2001–02) 206–7 punishment and reward 98–9, 104, 105f purchasing 66 purchasing power 67, 274 Pyongyang 330 Qi (state) 152 qijia (orderly regulation of family) 132 Qing Dynasty (1644–1911) 136 quality 227(n16), 260, 262, 293 control 205 life 107 work 338 Quality Mark 154 quantity surveyors 154, 160 Quantum 219, 220 quasi-externalization/quasi-internalization 255 Queensland 154 questionnaires 321 race 236 racism 170 rail engineering 171 rapacious market (Hobbes) 64, 66, 67, 68, 70, 72, 75, 76, 77 Raptor 69 ratification of rights instruments 87, 112t raw materials 45, 202, 254, 259, 297f, 301f RDC Land 161 re-learning/re-skilling 221 real estate 281

Subject Index 409 case studies 152, 154–73 purchase by foreigners (Malaysia) 164 reality 9, 17, 102, 127, 282, 332, 333, 367, 368, 370 classification and conceptualization 359–62 representation 359 Realtors Information Network (RIN) 157 recession 70, 174, 219, 232, 274, 277, 280, 283, 288 Malaysia (mid-1980s) reciprocity 144, 188, 249, 293 recognition 367, 368 recruitment 153f, 158–9, 299 Reforming Korea’s Industrial Conglomerates (Graham, 2003) 337 regional integration see new regionalism regionalism 20, 21 regulation 75 quality 87 securities and financial markets 68 regulators/regulatory agencies 68, 69, 70 reinsurance industry 319 relational concepts 353, 354, 357 relationship-building 242, 244–5 relationship-orientation 324, 368 relationships 126, 234, 362, 366 business in China 123 customer-supplier 255 government-business (paradigm shift) 34 hierarchical 237 horizontal 291, 300, 306 inter-firm 193 inter-organizational 14 interactive 293 international 358, 371 leadership 357 long-term 277–8 management-subordinate 315 mother-child 354–6, 370 personal 129, 130–1, 132, 142, 188, 261, 279, 368 political 358 pre-merger/acquisition 320 stability of interpersonal and inter-organizational 336 stable 266 superior-subordinate 236, 241, 341 sustainable 20

task and roles 370 vertical 291, 306 religion 20, 103, 107, 116, 128, 232, 234 sensitivity (Malaysia) 248 remuneration/pay 172, 254 excessive 339 performance-related 286 ren (humanity, benevolence) 14, 130, 133 Renault 26, 35, 41, 244, 280, 281, 283, 286 Renong Group 36–8 renqing (Chinese, ‘human feelings’) 14 reputation 134, 262, 318 research 24, 301, 309 basic 309, 311 joint 297f, 301f research capabilities 210 research and development (R&D) 5, 43, 211, 214, 218–19, 221, 223, 253, 255, 257, 299, 309, 337, 340 collaboration 316 cost amortization 264 Japanese offshore model 6 sales ratio 300 research institutes/institutions 290, 299, 306, 307, 308 ‘public laboratories’ 223 reserve funds 153f, 171–2 resource allocation 33, 34 resource efficiency 75 resource-based view (RBV) 294, 294f resources 216, 258, 264, 266, 269 respect 130, 246, 279, 368 disrespect 236, 243 respect for age and hierarchy 129, 132–3 implications for foreign negotiators 133 response, human need for 370 response speed 153f, 157–8 restructuring 27, 34, 35, 36, 197–8, 202, 263 corporate 334, 335, 337 financial 334 nationalization 38 private corporate debt 199 saving resources for 262 results 242 retailing 45, 232

410 Subject Index retirement allowances 277 benefits 48 funds 73 return on investment 242 rewards 247, 319, 368 rhetoric 12–15 Richard Ellis 161 risk 8–9, 21, 25, 62, 131, 198, 207, 233, 238–40, 248, 253, 260, 266, 268, 318, 338, 357, 369 risk-reduction 261, 262, 263, 264 risk-sharing 254 Roche 280, 282 roles 358 Malaysian workplace 241 RosettaNet (California) e-business standards 219–20, 226(n11–12) rule of law 12–13, 56, 87, 113t, 114, 116 rulers 99 rules (and regulations) 87, 104, 117, 162, 234, 240, 295 Russia/Russians 200, 240 St. Lucia 72 Saitama prefecture 297, 299 Salem Group 40 sales 218, 219, 294, 309, 310, 334 sales and delivery contracts 259 sales promotion 153f, 156–7 Sammi 35 Samsung 35, 331, 332, 333, 339, 340 contract with GE 216 Samsung Electronics 334 Samsung Investment Trust 332 Samsung Motors 35 Samsung-Qualcomm 340 sanitation 115 Sanmina/SCI 227(n13) sasshi (Japanese, empathy) 13 Saudi Arabia 159 scandals 332 chaebol 330 corporate 339 Scandinavians 240 Schal 158 school/alumni group 89, 90f ‘second budget’ (Japan) 41, 42 Second Industrial Master Plan (IMP2, Malaysia) 218–19 secrecy 101, 105f, 338

security 370, 372 Seiyu 280 selective trust 89, 105f, 104, 105f self 130–1, 141, 357, 364, 370 honest understanding of 105f sense of 358 self-awareness 363, 364–7, 369, 371 self-control 133, 366 self-esteem 367, 368, 369, 372 self-interest 14, 62, 63–4, 66, 67, 76, 77, 234 self-preservation 64–5 self-sacrifice 105f Semen Gresik 40 semiconductors 45t, 215, 217, 218, 224, 226(n11) US firms 216 senior/top management 191, 205, 236, 241, 298, 301, 305, 325, 341 Malaysian and US 238–9 seniority 42, 95, 276, 281 ‘sense of propriety’ (Smith) 63 Seoul National University 109 Sepang (international airport) 164 services 106, 261, 297f sex/gender 133, 321 Shah Alam-Kuala Lumpur Highway 164 shame 130, 134, 235 Shanghai 45, 161, 261 shared lab system 304f, 305 shareholder meetings 339 protection 339 rights 86, 339 value 219, 242, 277, 284, 285f, 289, 314, 332, 337 shareholders 27, 34, 36, 69, 86, 285, 312, 335, 342 foreign 280 trust (chaebol) 338–9 shareholdings 256, 258 Shenzhen 156 Shih-chi (Ch’ien Ssu-ma) 99 Shinsei Bank 41 Shinto 103 shipbuilding 35, 332, 334 shogun 95 short-termism 242, 265 Shorter Oxford Dictionary on Historical Principles (1975) 134

Subject Index 411 shudan (financial-industrial groupings) 42 Siemens 220, 262 Sierra Leone 112t, 113t Sigma Opticals 298 signals, verbal and non-verbal 268 ‘silence’ 12–15 silent partnerships 257 silicon foundries 214, 216 Silicon Valley 73, 224, 291, 297 Silla Kingdom (Korea, 57BC–924AD) 106 Sime UEP Properties 163, 164 simplicity 96, 97, 105f sincerity 126, 130, 144 Singapore 24, 26, 32, 45, 47, 57, 84, 124, 159, 162–3, 170, 171, 173–4, 199, 203, 207, 210, 217, 219, 224, 225, 226(n11), 227(n15), 238, 252 APT meeting (2000) 52 ‘Confucian elitism’ 95 CPI 119(n11) customs duties on IT-related goods (East Asia, 1995–2000) 45t employees’ trust decisions 321–6 en bloc property sales 161 HDI 111, 112t, 113t, 114 high-technology cluster 220, 227(n13) inward FDI 46 Koizumi speech (January 2003) 53 ‘a leading economic player in Asia’ 321 multiculturalism 324 real estate 156–7 residential property market 168 trade liberalization 44 Singapore: Boat Quay 163 Singapore: Miramar Mansion 161 Singapore: Mohamed Sultan club 174 Singapore: Moulmein Lodge 161 Singapore: Newton Mansion 161 Singapore: North Oaks executive condominium 168 Singapore: Woodlands (Woodsvale project) 168 Singapore Bus Service (SBS) Group 170 Singapore-Kunming railway 52–3 Singbus Land Pte Ltd 170 single-mindedness 153f, 155–6 SK Corporation 332, 340 SK Global Corporation 332, 339

SK scandal 334, 335 SK Telecom 36 skill base (regional) 26 skills 24, 204, 205, 210, 211, 214, 222, 224, 225, 275, 288, 289, 291, 295, 310, 369 demand-supply mismatch (Malaysia) 217–18 imported 225 ‘small is beautiful’ 156 small and medium-sized enterprises (SMEs) 6, 19, 42, 184, 236, 297, 298, 310, 332, 334, 341 bankruptcy 199 business linkages and resilience during East Asian crisis 196–208 case studies 204 domestic-market-orientated 23 economic contribution 198 export orientation 200–1 family-owned 201, 203 fear of losing management control 203 impact of Asian crisis 198–9 Japanese 263, 264 linked to FDI and foreign equity participation 201–2 Penang 206–7 policy neglect 199–200 production decrease 200 Sino-Thai 204, 206 survey (South Korea, Malaysia, Thailand, 1998–9) 200–3 survey (Thailand, 1999–2000) 203–6 upstream linkages (Thailand) 23 SMT, multi-tier 220 social capital 335, 357 contact 123 contract 65, 66, 71, 77 control 93 harmony 134 hierarchy 133 insecurities 70 interaction 182, 183, 245 networks 134, 224 planning 162 progress 118(n5) psychologists/psychology 8, 134, 268 re-engineering 241 sensitivity 235

412 Subject Index social – continued skill 365, 371 status 133 structure 357 systems 362, 364 tensions 72 unrest (Thailand) 199 social capital (Marx) 119(n2) socialization 305, 308 Chinese stratagems 137 knowledge conversion (SECI model) 292, 292f society 78(n16) collectivist (Malaysia) 235f, 237, 239, 241, 247–8 ways to serve 165 society-at-large/community-at-large 27, 134, 335, 356 sociology/sociologists 15f, 203, 268 software 5, 6, 157, 224, 281, 296, 331 ‘embedded’ 214, 222, 223 Sogo Department Stores 41 Soiken 302, 306, 307, 309 Solectron 220, 227(n13) Sony 273 South Africa 159 South Kalimantan 48 South Korea 24, 27, 32, 45, 47, 57, 84, 85, 92, 95, 100, 106–14, 116, 198, 199, 203, 216, 217, 226(n11), 227(n15), 233, 238, 252, 334, 335, 338 ASEAN Plus Three (APT) 52 Buddhism 103, 106 cross-border mergers and acquisitions 46 customs duties on IT-related goods (East Asia, 1995–2000) 45t economic crisis (1997) 106–7, 110 economic growth 106–7, 107–8, 111 economic structure 106–7 economic vulnerability 333 elections 109, 110, 111, 118(n8) erosion of confidence in government 111, 114 export-led expansion 341 foreign exchange reserves 335, 346(n40) governance 22, 85, 107–11, 111–14 government deficit 106 HDI 111, 112t, 113t

industrial upgrading 225(n1) inward FDI 46 international reserves 106 ministries 346–7(n49) new regionalism 52–5 possibility of FTA with ASEAN 54 ‘regional hub’ vision 331, 333, 342 religion 106 SME survey (1998–9) 200–2 sovereign credit rating downgraded 332 structural reform 35 trade liberalization 44 unsustainable governance 108 South Sumatra 48 South-East Asia 234, 261 Special Drawing Rights 75 special economic zones 156, 171, 261 Special Prosecutor bill (South Korea) 330 specialization 24, 155, 211, 213 spin-off companies 247, 300, 305, 310, 334 spontaneity 96, 97, 105f stability 233 stabilization macroeconomic fundamentals 199 counter-cyclical 75 stabilization bonds 333 stadiums 155–6, 160 staff low turnover 182 non-performing 248 quality 159 stagnation (‘stick-in-the-mud’) 153f, 170 Stanford University 108 Stanhope (developer) 160 start-up companies 301, 302, 305, 307, 311 state/s 44, 57, 66, 101 minimalist state 64, 65 role (East Asian model) 33, 34, 35 role in economy (China) 43 sovereign 65 strong 104, 105f State Council (PRC) 191 state-owned enterprises 43, 86, 331 status (Malaysia) 241 stock exchanges/stock markets 167, 198 stock options 14 stock price manipulation 339

Subject Index 413 Straits Times 191 strategic alliances 213, 231, 238, 258, 259, 318 general considerations of ‘learning’ 15f interaction of West and East 15–16 see also alliances strategy 151, 210, 224, 358 business 257 cooperative 262, 264 corporate 257 functional 257 three levels 257–8 strategy conceptualization 293 strikes 109, 174, 337 students 225, 341 sub-contracting/sub-contractors 200, 201, 204, 205, 206, 213, 226(n10) international 256 Taiwanese 216 Subang Jaya (Klang Valley, Malaysia) 163 subsidiary companies 19, 35, 69, 170, 213, 253, 260, 263–4, 286, 324, 331, 334, 337, 339 difficult to sell 264 subsidies 300, 334 Sun Tzu-like strategist 22, 142, 143f, 143, 144 Sung Dynasty (960–1279 AD) 93 suppliers 14, 70, 217, 220, 277, 278, 288, 291, 307, 312, 335, 342 Asian 214–15 chaebol 340 higher-tier 214–15, 217, 221–2, 226(n7) local 213, 217, 220, 225 lower-tier 214–15, 217 supply chains 4, 5, 6, 7, 14, 214 support services 218, 219, 221, 224, 225 Supreme Court (USA) 68 sustainability 21, 233 ‘sustainable abundance’ (Cheah and Cheah) 75, 77 sustainable development 74–5, 84–120, 162, 240 sustainable governance 22, 100 conditions for 91–2 ‘prerequisite to sustainable development’ 118

South Korea 106–7 towards 116–18 Sweden 119(n11) Syarikat Danasaham 37 Syarikat Prasarana Negara 38 synergies 21, 62, 67, 188, 247, 259, 261, 325 system-on-chip (SOC) design 214, 227(n15) Taisho 282 Taiwan 24, 32, 33, 45, 84, 103, 111, 141, 198, 203, 217, 225, 226(n11), 227(n15), 252 component suppliers 220–1 customs duties on IT-related goods (East Asia, 1995–2000) 45t industrial upgrading, 225(n1) inward FDI 46 takeover friendliness 316–17, 319f TAMA Association 297, 298–300, 303, 306, 308, 309 post-project feedback 299 ‘virtual lab’ system 299 TAMA Committee 297 TAMA Technology Licensing Organization (TAMA TLO) 298, 300 TAMAWEB (website) 298, 303–4 Tanabe 282 Tao Te Ching 95–7, 105f Taoism/Taoist School 22, 85, 93, 95–7, 103, 104, 105f, 106, 128 ‘became secular religion’ 97 permeates ji (Chinese stratagems) 140–2 tariffs 44, 45t, 53, 334 Tarmac (contractor) 163 tasks 242, 358 allocation 187 satisfaction 368 tax 48, 56, 69, 333 burden 48 evasion 69 Taylorism 273 teams 248, 369 technical code 117 cooperation 205 help 260 technicians 205, 221 Techno Lifestyle Pte Ltd 172

414 Subject Index technocrats 34, 37, 38, 44, 108 technological innovation 266 technology 84, 184, 224, 258, 259, 266, 291, 310, 340 access 254 commercialization 300 German 262 new 307, 309 Technology Advanced Metropolitan Area (TAMA) cluster 296–300, 303–9, 312, 312(n2) composition 296 current status 298 diagrammatic representation 297f effect 300 historical background 297 Technology Forecasters, Inc. 215 technology leadership 261 technology transfer 182 Tel Aviv 224 telecommunications 45, 140, 226(n11), 238, 239, 262, 265 CDMA cell phone technology 340 wireless 91, 340 telephones 190 television 91 terminals (airport) 170, 171 terms of trade 226(n8) terrorism 77 textiles/garments 201, 202, 261 Thai Rak Thai Party 199 Thailand 23, 38, 45, 47, 166–7, 199, 205, 227(n13), 233 Buddhism 103, 104 cross-border mergers and acquisitions 46 customs duties on IT-related goods (East Asia, 1995–2000) 45t financial sector 38 HDI 111, 112t, 113t, 114 internationalization 197–8 inward FDI 46, 48 possible bilateral FTA agreement with Japan 54 SME survey (1998–9) 200–2 trade liberalization 44 Thailand: Ministry of Finance 199 Thailand: SME Bill (2000–) 200 Theory of Moral Sentiments (Smith, 1759) 63

‘thick face, black heart’ 17, 19, 29, 143 third-market business collaboration 252–72 advantages 258 collective internationalization strategies 253–8 determinants of success 264 duration 258 German-Japanese, Japanese-German (in China) 25, 260–9 motives 258–60 three-sided 265 types 258 Thirty-Six Stratagems (Anonymous) 136, 137–9, 143 Thomas Vale (contractor) 160 Three Kingdoms (Chinese folk novel) 137 ties: weak and strong 17 time 9, 10f, 10, 20, 23, 165, 193, 235f, 237, 239, 242, 245, 262, 264, 302, 303, 306, 320, 324, 356, 362, 365 see also ba Time dotCombhd 37 ‘timeshare’ schemes 171 titles (Malaysia) 239, 242–3, 248 tiu lien (diu lian), ‘lose face’ 134 TNCs see under ‘multinational corporations’ tobacco companies 69 Toho Electronics 298 Toho Life Insurance 41 Tokyo 162, 275, 299 Tokyo: Tama region 296, 297 Tokyo Metropolitan University 298 tooling 219 Tosei Electrobeam (1977–) 300, 306, 307, 312(n4) Toshiba 297 total factor productivity (TFP) 217, 226(n6) ‘total solution manufacturers’ 207 tourism 159, 160, 330 Toyota 205, 273 trade 4, 55, 212 international 4 intra-regional 209 trade associations 290, 295, 297 trade deficits 73 trade practices 21, 72 trade secrets 167

Subject Index 415 trade unions 40, 71, 109, 282, 337 membership 87, 112t, 114 pickets 236 trademarks 256 trading companies 299 Trafalgar House 172 training 5, 102, 204, 205, 206, 207, 245–6, 275, 298 transaction costs 213, 266, 315 transactions 21, 213 translation 97, 102, 118(n6), 122 transnational technical communities 223 transparency 34, 86, 92, 94, 185, 281, 332, 338 absent/lacking 336, 337 three-tier model 346(n47) Transparency International 17, 337 transport/transportation 162, 206 triangulation (‘virtuous’) 207 Tripartite Commission (South Korea) 335 Tripartite Committee 338 trust absence 342 in acquiring firm’s management 315–21 activities reducing 192 analysis and cutting edge practices 362–70 antecedents 20, 21–2, 59–177 antonyms and synonyms 118(n4) Asian business 3–31 Asian governance and commerce 20, 23–7, 179–349 Asian thought 92–105 ba for knowledge conversion 309–10 ‘basic’ 355, 363, 367–70 chaebol 330–49 chain 206 contemporary view 356–7 corporate cross-cultural context 340 cross-cultural variations 88 definitions/meaning 61, 88–9, 353–7 degree 185 development 353–73 development and maintenance 16–18 Eastern inscrutability 13–15 Eastern and Western concepts (individual level) 12

emergent views 9–12 erosion (USA) 70 facilitating environment 367–70 factors affecting 91 infancy 354–6 institutional form 16 inter-organizational 316, 318, 319 interpersonal 268 interplay with contract 267 intra-organizational 316, 318 investor 332 lacking 245, 371 level 88–91 matrix of trust relationships 89, 90f, 91 mutual 249 nature 1–58 ‘obstacle’ 78(n4) obstacles and understanding 357–9 personal and public roles 20, 28, 351–73 psychodynamic approach 354 rebuilding (between government and people) 99 ‘relational concept’ 353, 354, 370 role in handling conflict 266–7 self-awareness 363, 364–7 social dimension 61 structure of book 20–8 system dimension 61 systematic conception 268 traditional views 7–9 types 104, 105f units of analysis 88–91 see also antitrust trust in Asian governance and commerce 179–349 Asian values, Malaysian style 231–51 clusters as ba for knowledge management 290–313 creating trust in chaebol 330–49 cross-cultural management challenges in Japan 273–89 electronics industry (Malaysia’s upgrading prospects) 209–30 employees’ trust decisions following a merger 314–29 Japanese-German alliances in third markets 252–72

416 Subject Index trust in Asian governance and commerce – continued role of trust in process of alliance evolution 181–95 TNCs and local suppliers during East Asian crisis 196–208 trust decisions following a merger 314–29 attractiveness of firm’s HR system 319–21, 322, 322t, 323, 325 cultural distance 318, 319f, 320, 321, 322, 322t, 323 Germany-Singapore comparison 321–6 implications for practice 324–6 imposed control 317, 319f, 320, 321, 322, 322t, 323, 324 independent variables 321–2 interaction history 317–18, 319f, 320, 322, 322t, 323, 324, 325 mean regression coefficients (beta weights) 322, 322t moderating effects of cultural orientation 320–1 multiple regression analysis 322 relative importance of determinants 320, 322t takeover friendliness 316–17, 319f, 320, 321, 322, 322t, 323, 325 Trust Fund Bureau (Japan) 41, 42 trust funds 332 trust reactions 27 trust relationships 117 trust-building 244–5, 268, 281, 296 Asian business 3–31 trustworthiness 117, 286, 317, 318, 320, 324, 356, 357 truth 234, 240 universal 235 Try (building contractor) 167 Tsukuba 224 Turkey 200 turnkey construction projects 331–2 turnkey systems 256 twofold differentiation phenomenon 47 UCATT 164 uchi (in-group identity) 14 UCLA 108 unbounded trust 96, 97

uncertainty 8, 73, 125, 172, 183, 188, 235f, 238, 239, 333, 337, 338 UNCTAD (United Nations Conference on Trade and Development) 23, 197, 206 underdevelopment, myth of 84 unemployment 199, 273, 274 Unico 226(n7) Unidata 243 Unification Democratic Party (South Korea) 109 Uniroyal Goodrich 281 United Arab Emirates (UAE) 233 United Engineers (Malaysia) (UEM) 37–8 United Kingdom 6, 19, 158, 169, 224 HDI 112t, 113t, 114 United Kingdom: Home Office 169 United Liberal Democrats (South Korea) 110 United Malays National Organization (UMNO) 36–7, 38 United Nations 3, 85, 91, 114, 116, 117–18, 118(n10) United Nations Charter (Preamble) 118(n5) United Overseas Bank (UOB) 163 United States of America 6, 24, 47, 49, 51, 52, 53, 102, 118(n1), 157–8, 204, 206, 220, 223, 224, 225, 285, 286, 290, 301, 311, 314, 333, 334 armed forces 73–4 contract manufacturers 215 defence budget 74 economic vulnerabilities 70 exports to East Asian countries 50t, 50 FDI in East Asia (1990–9) 46, 46t FDI in East Asia (1980–94) 51t HDI 112t, 113t, 114 imports from East Asian countries 50t, 50 self-interest, free market, systemic corruption 68–72 systemic failing 69 United States International Trade Commission 72 universal trust 89, 94, 103, 104, 105f universal unbounded trust 104, 105f

Subject Index 417 universities 210, 223, 275, 290, 295, 297–300, 301f, 304f, 305–8, 311 overseas 218 ‘twinned’ degree programmes 232 Western 108 university degrees 236 University of East London (UEL) 163 university graduates (Malaysia) 218 Uruguay 119(n11) US dollar 73, 118(n7), 167 value (to customer) 288, 289 ‘value guarantee repurchase’ agreements 158 value-added 218, 224, 226(n8) benefits from integration in GPNs 210 value-added chain 253, 257 global 25 value-added partnerships 255 value-added products 23 value-chain 213, 214, 218, 290, 291, 294, 295, 309 downstream activities 294 value-creation 231, 244 values 116, 246, 361 Confucian 84, 341 cultural 325 shared 318, 371 venture capital 225, 298, 299 verbal agreement 130 victory (without war) 104, 105f Vietnam 57, 160, 166, 174 inward FDI 47–8 violence 210 virtual forum 304, 304f virtual lab 304, 304f, 305, 308 virtual organization 266–7 visas 45, 225 voice and accountability 87, 113t Volkswagen 262 volume manufacturing 225 Volvo 244 voter turnout 87, 112t, 114 voting rights 339 wage demands 335 wages 71, 109, 192, 338 minimum 48 Wal-Mart 206, 280 Wan (present-day Henan Province) 152

war 73–4, 74–5, 77, 100–2, 118(n5), 210 ancient Chinese classical strategies 151 ‘war of every man against every man’ (Hobbes) 62, 65, 77 ‘war on terrorism’ 24, 70, 225 warfare 67, 140 Warfare School 22, 93, 100–2, 105f Warring States Period (475–221 BC) 152 Washington 345(n19) waste 74, 162, 163 Waterbank Properties (S) Pte Ltd 170 Way of Heaven 130 weak ties, strength of 16 wealth creation 21, 62, 61–83 Wealth of Nations (Smith, 1776) 63 websites 36, 37, 298, 302, 308, 312n, 313n, 340 well-being of people 99, 104, 105f West 131, 231 definition 249(n1) Western corporate model 336 influence 233 investors 282 specificity 12–13 westernization 20, 32–44, 55, 56, 57 whistle-blowing 248 Wimpey and Shepherd 165 Wirtschaftswunder (Germany, Japan, PRC) 260 women 87, 112t, 139, 229(n9) work attitude 157 work ethic 234 work groups 318 workers/workforce 15f, 16, 236, 247, 273, 342 laid-off 217, 229(n9) Malaysian 241 skilled 227(n15) trust (chaebol) 337–8 working environment 277 working life 363 workplace 182, 336 workplace group 89, 90f World Bank 3, 39, 114, 199 involvement in political issues prohibited 86, 114 World Economic Forum annual meeting (‘Building Trust’, Davos, 2003) 3

418 Subject Index World Economic Forum: Global Corporate Citizenship Initiative 346(n44) World Investment Report 2001 (UNCTAD) 196 World Summit on Sustainable Development (WSSD, Johannesburg, 2002) 85, 114–16, 118, 118(n9) delegates 115, 118(n10) good governance 114–16 World Trade Organization (WTO) 3, 4 Chinese accession 17, 20, 44, 175, 231, 261 Ministerial Meeting (1996) 44 WorldCom 69, 92, 291, 333, 339 Wu (state) 100, 152 wu wei principle (Taoist) 141 wuchang (virtue) 130 wulun (Five Cardinal Relationships) 131

Xiamen 219 xin (trust) 130 xiushen (moral cultivation)

132

Yamaichi Securities 41 yi (righteousness, justice) 12, 130 yin-yang principle 129f, 129, 140–1, 143f, 143, 144, 145 Yokogawa Electric 300 Yue (state) 152 Zenith 331 zhi (wisdom) 130 zhiguo (governing of state) 132 zhong yong (moderation) 133 Zhong Yong (Confucian classic, ‘Doctrine of the Mean’) 133 zhongcan (Headquarters, General Staff, People’s Liberation Army) 124 Zhuhai 171