Business Groups and Financial Markets

A Weberian Analysis

Sandro Segre

• Publisher: Routledge
• Year: 2017
• Print ISBN: 9781138519930
• eBook ISBN: 9781351530347
• Topic: Business
• Subtopic: Business General
• Index: Business

This work builds on the classical sociological contributions of Weber, Simmel, and Toennies, and makes the case for different and alternative ideal-typical models of business relations, which the author calls "English" and "German."

The "English" model of business relations is characterized by free competition between firms. They abide by the ethical rules of fair business and the moral economy in market exchanges. Their relations are accordingly based on mutual trust. As a rule, they do not cultivate privileged relations with political authorities.

By contrast, the "German" model involves hierarchical relations between a group's major firm and its smaller units. There is no moral community binding together the different groups, and therefore no mutual trust between them. Business groups maintain close relations, based on reciprocal favours, with authorities.

The author compares the London and New York Stock Exchanges in the late nineteenth century, finding the former better approximates the "English" model, and shows this model's superior performance. "English" model countries such as Taiwan have been shown to be more competitive in market exchanges than countries such as South Korea, which approximate the "German" model. A new epilogue makes use of more recent information and confirms Segre's arguments.

1

Economic Communities, Business Milieux and Business Groups

Two alternative ideal—typical models of intercorporate relations, between firms and the political milieu, are outlined in this chapter in order to highlight how non-contractual elements—that is, normative, communitarian—in business relations may have a different relevance in the economic achievements of firms and business groups, depending on the prevalence of either model which, using a conventional denomination, are respectively called “German” and “English.” After having defined a few key concepts, such as community, moral economy, organizational field, organizational population, business groups and social capital, and having mentioned the constitutive elements of a “business community” and a “business milieu,” it will be focused on two countries, South Korea and Taiwan, which are respectively characterized—as will be shown later—by the prevalence of features characteristic of the “German” and the “English” model as ideal types. The theoretical reasons for the selection of these two countries will be briefly indicated. When two countries are compared, the case-oriented comparative method is used to identify those underlying similarities and differences between the two nations which may contribute to an explanation of theoretically relevant different outcomes. The approximation of these two countries to the two ideal–typical models will not be taken for granted, but rather argued. This comparison is made in order to explain their different ability, and in general the ability of countries approximating one model or the other, to successfully face competition in an international economic environment (Ragin 1987: Chapter 3; Ragin, Zaret 1983: 740–45).

South Korea and Taiwan in Comparative Perspective

South Korea and Taiwan have similar religious traditions influenced by China, and are therefore culturally comparable, as emphasized by studies of their capitalist development (Biggart 1997: 221–2; Hamilton 1997: 270–71; Hamilton, Biggart 1992: 198; Scitovsky 1989: 32–3). They have, moreover, experienced since the 1980s a difficult transition to parliamentary democracy (Lee 2007; Sato 2002). What is most important here, they are also comparable in economic terms. As the literature on economic development has pointed out, these two countries have experienced high export-led economic growth since the 1960s, still have a remarkable economic development that depends on foreign trade, are of approximately the same economic size, and are advanced capitalist economies that have similar (though not identical) quality of life index, GDP per person, and a relatively equal income distribution. With reference to the time period of the last twenty years, moreover, both countries have become complex economies that trade with similar partners (the US being the main export country, and Japan the most important supply source). They are currently able to offer a full range of products, and to compete worldwide with other advanced nations (Feenstra, Hamilton 2006: 8–9, 345–6; Hattoro, Sato 1997: 343–5; International Monetary Fund 2007: Statistical Appendix, table 2; McMichael 1996: 80–83; www.economist.com/media/pdf/QUALITY_OF_LIFE.pdf).

On the other hand, the distinctiveness of their development paths should not be overlooked. “Cross-county differences are especially apparent for South Korea and Taiwan” in the organization of their economies, and also in the economic outcomes that follow therefrom. South Korea as a “high-concentration economy” differ from Taiwan as a “low-concentration economy” (Feenstra, Hamilton 2006: 346; see also Hamilton, Biggart 1992: 187–8). This fundamental difference between the two economies has been indicated, during the last four decades of the past century, by the higher average size of manufacturing firms and higher capital-output ratios in the manufacturing sector in South Korea, as compared to Taiwan (Scitovsky 1989: 36; Timmer, van Ark 2000). Even to this day, business groups in Taiwan receive essential goods and services by “unaffiliated firms and other business groups,” whereas in South Korea they are supplied internally, “through intragroup transactions” (Feenstra, Hamilton 2006: 149). As a further difference, South Korea’s development has been more government-led, in contrast to Taiwan’s more market-led development. Accordingly, in Korea a small number of business groups have worked “as agents implementing the government’s plan in exchange for favored treatment in such areas as subsidized loans.” Networks are accordingly vertically organized. The government has given priority to, and directed, export-led economic growth by cultivating privileged ties with a restricted number of powerful, family-owned, closely supervised and rival business groups. In contrast, in Taiwan the government has refrained from favoring business groups, and development has been promoted “from below” by autonomous, horizontal and flexible networks based on personal relations and mutual trust (Hattori, Sato 1997: 349–50; see also Biggart 1997: 228–34; Feenstra, Hamilton 2006: 348–58; Hamilton 1997).

The different organization of the Korean and Taiwanese economies and their different mechanisms of development have been given causal relevance in accounting for Taiwan’s superior economic performance, for some authors have pointed to Taiwan’s greater variety of final goods as giving relative immunity to financial crises and economic downturns (Feenstra, Hamilton 2006: Chapter 8). A better performance in a competitive international market is here considered an indicator of success of a national economic system, taken as the unit of analysis. While no empirical assessment of comparative successes is unproblematic, this particular indicator of success is consistent both with authoritative explanations of trade performances of South Korea and Taiwan, and with a leading approach in organization theory. The superior economic performance of Taiwan in comparison to South Korea may be assessed in terms of superior global competitiveness as measured by a number of indicators, and in particular by their respective business competitiveness (World Economic Forum 2007). It may also be assessed in terms of higher responsiveness to international demand, as indicated by higher labor productivity and greater ability to compete in the international market (Feenstra, Hamilton 2006: 2, 8–9, 345–6; Timmer, van Ark 2000).

Taiwan outperforms South Korea also according to the Human Development Index, an indirect measure of international performance developed by the United Nations. This index “is about much more than the rise or fall of national incomes. It is about creating an environment in which people can develop their full potential and lead productive, creative lives in accord with their needs and interests” (United Nations Development Programme 2007). This measure considers indicators such as literacy, education and health opportunities, in addition to a conventional economic indicator (the log of gross domestic product (GDP) per capita at purchasing power parity (PPP) in United States dollars (USD)) (en.wikipedia.org/wiki/Human_Development_Index). In keeping with the theory of organizational ecology (which will be briefly presented later on in this chapter), survival capabilities in such an environment are a function of adaptation and selection processes. Literacy, education and health opportunities are “efficiency enhancers,” to use the World Economic Forum’s expression (World Economic Forum 2007). In other words, by creating and maintaining global competitiveness they concur in upgrading a country’s ability to adapt to the international economic environment, and to diminish its selective pressure on them.

It has been maintained that Taiwan’s excellent economic performance may in the long run be endangered by the country’s outsourcing to China of her production of OEM (original equipment manufacturing) and ODM (original design manufacturing). For financial resources to support “investment in R&D, intellectual property creations and branding” in Taiwan may become insufficient because of this industrial policy (East-West Center 2007). This contention seems questionable. First, this pessimistic forecast is not shared by other authoritative sources. According to the Economist, “real GDP growth will average 4% in 2007–11,” driven by both domestic and external demand (Economist Intelligence Unit 2007b). Second, Taiwan companies have greatly profited from playing the role of middlemen in China’s trade relations with the US and other developed countries: Taiwan’s outsourcing to China has promoted steady commercial relations between these two countries to their mutual benefit (Whalley 2006: 9, 12–14).

In any case, outsourcing to China similarly affects Taiwan and South Korea, and does not therefore involve any difference in their opportunities to compete economically in the international market (Whalley 2006: 9, 12–14). South Korean companies are heavily involved, as are their Taiwanese counterparts, in import and export trade with China. In fact, these two countries are among China’s most important trading partners (The US–China Business Council 2007). Outsourcing to China, and more generally strong economic interchange with this country, has not been conducive even in the case of South Korea to the expectation of unfavorable consequences. On the contrary, GDP growth in South Korea is expected to remain quite substantial, and comparable to Taiwan, in the next five years. This growth has been imputed, in addition to strong domestic demand, also to growth in the export volume to China (Economist Intelligence Unit 2007a). Outsourcing to China should therefore be beneficial to both countries in the near future, as it has been so far.

If the thesis of Taiwan’s outperforming South Korea in the international competition is accepted, there still remain to be explained the reasons for the better achievements of Taiwan, but also for the ability lately shown by South Korea to overcome the economic difficulties encountered in the recent past. In this regard, we will consider some theories concerning organizations—the theory of structural contingencies and the “ecological” theory—and dwell on a recent and complex economic theory, which integrates the previous ones and aims at satisfactorily explaining the reasons for Taiwan’s better competitive capacity on the international markets compared to that of South Korea. Taiwan’s superior performance, it will be argued at the end of the second chapter, may in general indicate the higher achievements of the “English” model against the “German” one. A brief evaluation of both organizational theories and this recent economic theory shows, along with their explicative contribution, some deficiencies in their argumentations that suggest the opportunity to provide a more indepth explanation.

Business Community and Milieu

According to an authoritative definition, all communities share the following characteristics: first, a community is “a web of affect-laden relations among a group of individuals, [. . .] a set of shared values, norms and meanings, and a shared history and identity—in short, a shared culture”; Second, “a relatively high level of responsiveness” to their members’ “true needs,” as they can be empirically determined (Etzioni 1996: 3, 5). This and other contemporary conceptions of community (see, for example, Brint 2001: 8–9; Nisbet, Perrin 1977: 98), have the merit of not implying the false assumptions that the relations among the members of a community are characterized by egalitarianism, inevitable conformity, and the prevalence of face-to-face relations, that is, actors’ simultaneous presence (Cohen 1985: 28–37; Giddens 1990: 114–26; Urry 1987: 228–9). The second and the third assumptions were present in Toennies’s work and have limited its theoretical relevance, as we shall see.

Furthermore, these definitions stress not only the structural (in terms of mutual stable relations) but also the symbolic components of a community, in agreement with Toennies (Cahnman 1995: 119–20), and with contemporary scholars as well (Cohen 1985). Finally, while these definitions show on the one hand the enduring, albeit not always recognized, influence of Toennies (Brint 2001: 2–5; Ferrara 1996: 609–10; Giddens 1990: 115) and Durkheim, are on the other hand compatible with the emphasis placed by some contemporary authors— such as Giddens, in particular—on the processes of disembedding and re-embedding of social relations, namely the processes of uprooting relations from local contexts of interaction, their restructuring across indefinite spans of time/space, and their reinsertion within globalized “communities” of shared experience (Giddens 1990: 21, 140–43; see also Albrow et al. 1994: 374–6; James 1996: 31–3).

Communities have been further distinguished on the basis of the major reasons for their members’ belonging—shared activities or beliefs—and the constitutive elements of the structural and symbolic components have been better detailed. Interaction frequency, which connotes the structural component, encourages—other conditions being equal—participation in the community life, the creation of mutual support obligations and practices, reciprocally kind feelings, and in short, a strong and conscious adhesion to the community as a symbol of identity. Finally, communities may be produced by the more or less close position of their members, or have an elective nature and therefore disregard any territorial constraint, as in the case of “virtual” (when members interact without getting in touch face-to-face, as in computer-mediated communications) and “imaginary” communities (when members share beliefs but do not establish direct relations among them) (Brint 2001).

Business, or market communities share activities and beliefs, there is no need to interact in physical closeness, and individuals and firms’ economic action has produced shared obligations and common identities. These communities should not be mistaken for organizational population and organizational fields. An organizational population is defined as a set of organizations which are equally vulnerable in relation to environmental conditions, because they share the same organizational form (that is, the same structure and the same rules). The individual organizations forming a population share, in other words, the possibility to conform to the conditions of the outer environment, and therefore, to collectively survive. This may happen through processes of variation, selection, retention, and finally, competition with other organizations or populations. An organizational, or institutional, field is defined as an orderly set of shared knowledge and norms, as well as a common regulation system. These regulatory, normative and cognitive elements identify an institution. An organizational field includes, therefore, a plurality of interconnected organizations, which take part in an organizational population, have an institutional nature, and deliberately keep to a set of shared rules, norms and knowledge (Baum 1996: 78; Davis 2005: 486–7; DiMaggio, Powell 1983: 148; Hannan, Freeman 1977: 934–8; 1989; Lanzalaco 1995: 111–19; Lin 2001a: 187–9; Scott 1995: 33–62, 102).

At least some of these definitional aspects of community (shared activities and/or beliefs, structural and/or symbolic component) are included in essays concerning the presence and weight of normative elements in business relations. These elements are given as tacit assumptions and therefore are not stipulated or mentioned in contracts. An example is the principle—which regulates activities and beliefs, relations and norms—of honoring commitments, producing a good product (Macaulay 1992: 275), and conforming to the rules of fair competition prescribed by institutional arrangements (Abolafia, Biggart 1991: 218–19). These norms and practices are constitutive of the so-called “moral economy,” that is, “a moral community in which trustworthy behavior can be expected, normative standards understood, and opportunism foregone” (Granovetter 1994: 466–7; see also Lie 1997: 346–7). The necessary trust for building and keeping a moral economy involves, for the actors engaged in economic exchanges, two requirements: a) being trustworthy, in the sense of having a good reputation with one’s partners (trustworthiness); and b) being confident, in the sense of perceiving others’ intentions as benevolent (trustfulness) (Lee 2000; see also Erikson, Parent 2007: 259–60).

Normative standards, and trust itself, may result from economic action embeddedness in a network of both personal (Granovetter 1985: 504; see also Fligstein, Dauter 2007: 112–13; Lie 1997: 349–51), and impersonal relations, and therefore they change along with the change of the (instrumental and/or affective) contents existing in the network of relations (Woolcock 1998: 185). Normative standards and grant of trust are relevant for the formally rational economic relations of modem capitalism, even when they take place within family relations, and personal relations in general. In that case, impersonal aspects, implicit in the economic calculation of corporate profit, are intertwined with the normative, solidarity and ethical aspects of a moral economy (Swedberg 2005a: 247; Weber 1958: 304; 1981: 356). However, this happens only if the moral position presented to real or potential customers actually corresponds to the value positions and the prevailing practices in a particular organizational population.

As it has been shown particularly in the case of organizations operating in the insurance area, this correspondence may fail in presence of one or more of the following circumstances: a) different moral outlooks by different sectors or actors within a field or an organizational population; b) relatively low cohesion and/or internal solidarity within that field or population; c) practices not conforming to moral economy, spread among some categories of actors present in that field or population; and d) authorities’ insufficient institutional control on that sector (Heimer 2001). Behaviors conforming to moral economy assume not only the presence of more or less wide social and normative contexts in which the individual actors’ economic action is placed, but also the relevance of motivations other than individual constraints and incentives. Their presence is not denied or belittled but, it has been argued, they are not enough to ensure actors’ stable cooperation.

Keeping to the theses expressed by some representatives of rational choice theory, a normative regulation of the behaviors of actors who want to pursue an individual advantage is in their interest, because otherwise they would not achieve that advantage in the long run. However, cooperative behavior needs some incentives, such as prizes for those who cooperate and punishments for those who do not cooperate, since failing incentives, the pursuit of short-term individual benefits prevails and instead along with common good, individual long-term advantage is sacrificed (the alternative between choosing individual short-term benefit and long-term common good consists in the so-called “prisoner’s dilemma”). To be effective, normative regulation involves cooperation among actors, while it remains fragile if the norms of reciprocity (in the sense of rewarding others’ cooperative behaviors and punishing their non-cooperative behaviors through similar behaviors) are only the norms that govern individual advantage pursuit.

In fact, making others respectful of norms is costly (in the broad sense, not only in economic terms) and there is no interest in shouldering this cost if one has no knowledge and control on future partners in relations. Consequently, norms are not used ultimately as guidance and a constraint in behaviors, and therefore have no credibility. On the other hand, the norms which prescribe the behaviors among the same actors or actors’ groups are credible because in that case, there are collective sanctions supported by mutual social control, which considerably reduce uncertainty in transactions. In this regard, in the economic field, relevant are the norms prescribing correctness and punctuality in honoring one’s commitments, and in general the norms of moral economy, because these norms regulate both contractual and personal and informal relations between the parties. This has been shown in several market sectors, and financials markets represent an important example (Carruthers 2005: 369–70; Elster 1989c; Ferrary 1999; Granovetter 2002: 36–42; Heckathorn 1990: 377; 1993: 382; 1996: 254, 265–7; 2001: 278; Keister 2002: 46–9; Power 2005: 261–3; Swedberg 2005b: 196). Furthermore, cooperation may be prescribed as a general norm, irrespective of individual advantages that may derive from it (Lindenberg 1996: 309–10). In that case, it achieves a credibility that norms, based on individual advantage, cannot have (Granovetter 2002: 40).

Norms, prescribing those with whom one should cooperate, also quite often prescribe those with whom one should not. Therefore, mutual trust tends to remain circumscribed within limited milieux. On the other hand, relations based on trust, which are not closed in milieux relatively impermeable to external interactions, but draw instead advantages from the existence of individual actors’ ties with a plurality of separate groups, result advantageous not only for those actors and groups, but also for a larger community they contribute to build (Granovetter 2002: 52–3). This is also valid, and perhaps particularly, in economic exchanges. Mutual trust, it has been argued, is very important for successful business relations, irrespective of whether internalized norms or economic self-interest govern trustworthy conducts (Granovetter 1994: 467–8). While personal trust does not require “emotional intimacy,” and may also result from “institutionalized personal ties or informal or informalized codes of sincerity and honor” and Durkheim (Granovetter 1990: 119), interpersonal trust in economic life depends both on “concrete personal relations and structures (or networks) of such relations” (Granovetter 1985: 490–91), and norms of generalized reciprocity (DiMaggio 1994: 37–8).

Reciprocity, as a regulating principle of econo...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Preface
• Introduction
• 1 Economic Communities, Business Milieux and Business Groups
• 2 Toennies, Weber and Simmel: Their Contributions to Contemporary Research and Theories Concerning Economic Communities
• 3 A Weberian Account of Social Norms and Trust in the Stock Exchanges and Other Financial Markets
• Conclusion
• Epilogue to the Transaction Edition
• Bibliography
• Index