SOCIAL CAPITAL OF THE FIRM AND ITS IMPACT ON PERFORMANCE:
A SOCIAL NETWORK PERSPECTIVE AND ANALYSIS
Yanjie Bian
Hong Kong University of Science and Technology
Division of Social Science
Clear Water Bay, Kowloon, Hong Kong
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Revised June 5, 2001
Acknowledgement: The research reported in this chapter was partially supported by grantsfrom the School of Humanities and Social Science, Hong Kong University of Science and Technology (DAG97/98.HSS01, DAG99/00.HSS03) and grants from the Universities Grants Committee of Hong Kong (HKUST6052/98H, HKUST6007/00H). I thank Haixiong Qiu for his collaboration in the fieldwork and Anne Tsui and Tom Lee for their helpful comments on early versions of this chapter.
SOCIAL CAPITAL OF THE FIRM AND ITS IMPACT ON PERFORMANCE:
A SOCIAL NETWORK PERSPECTIVE AND ANALYSIS
ABSTRACT
A firm’s ability to seek and secure scarce resources through its CEO’s hierarchical, inter-organizational, and social connections is the firm’s social capital. A 1998 survey of 188 firms in Guangzhou city shows that these firms vary tremendously in level of social capital. Private and semiprivate firms in tertiary sector have a higher level of social capital than state-owned firms or firms in manufacturing sector, and firms whose CEO’s education or civil service rank is higher also tend to have a higher level of social capital. Finally, social capital increases a firm’s productive capacity, net of its structural and leadership characteristics.
INTRODUCTION
In Chinese economic sphere and elsewhere, we often observe the following phenomenon: firms rely on their employer and external managers’ network connections to collect valuable information, obtain scarce resources, and seek and secure rare business opportunities for the firms. To the extent that such information, resources, and opportunities contribute to the firms’ production and growth, employer and managers’ network connections are the firms’ social capital. Like its financial investments and human resources, a firm’s employer and external managers’ connections should be considered as contributing to its performance.
Thischapter has three purposes: First, I will review diverse perspectives on the concept of social capital. Second, I will conceptualize and measure a firm’s social capital in the Chinese context. Third, I will conduct statistical analyses of a sampling survey of 188 firms in Guangzhou to test hypotheses about variation and impact of social capital. My conceptual and statistical analysis is framed within a social network perspective on social capital, particularly associated with a renewed interest in social contexts in which economic activities and processes are embedded (Granovetter 1985; Uzzi 1999).
LITERATURE REVIEW
Social capital is a rather new concept having first appeared in the works of American economist Loury (1977) and French sociologist Bourdieu (1985). Loury, who examined U.S. segmented economies by race, critiqued the atomic nature of neoclassical theory by pointing out that black people live in poor social contexts that provide limited information about opportunities. In contrast to the term “human capital,” Loury coined the term “social capital” to capture the force of social contexts to both constrain and promote economic behavior and success of individuals and groups. On the other hand, Bourdieu studies social differentiation in contemporary France and attributes it to multiple forms of capital that are differentially possessed by individuals and social groups. In addition to economic, human, and cultural capitals, he perceives social capital as “the aggregate of the actual or potential resources which are linked to possession of a durable network of more or less institutionalized relationships of mutual acquaintance or recognition” (Bourdieu, 1985:248). Bourdieu is among the very first to explicitly link social capital to the network of social relationships.
Since Loury and Bourdieu, social scientists in general and sociologists in particular have shown enormous interest in the concept of social capital (see a review by Portes, 1998). Portes has offered a widely recognized definition of social capital, referring it to individuals’ abilities to access and mobilize scarce resources through their relationships in a social structure or social network. But clearly this is one of many definitions, and debates about exactly what constitute social capital and how it impacts human behavior are still evolving (Lin, 2000; Lin, Cook, & Burt, 2001). Confined to a social network perspective, three distinct approaches to defining social capital are identified: (1) the network membership approach; (2) the network structure approach; and (3) the network-embedded resource approach. Each is briefly described in turn.
Political scientist Robert Putnam (2000) is a leading proponent of the network relationship approach. This approach assumes that individuals engage in civil society through participation in voluntary organizations or networks such as churches, clubs, associations, and informal groups. From an individual’s point of view, the more memberships one has in voluntary organizations, the greater the likelihood one is engaged or integrated into society at large. The aggregate outcome of this process is that society at large maintains a high level of trust, or social capital. Putnam found a steady decline in numbers of people participating in voluntary organizations in all but one state (Minnesota) in the United States since World War II, a finding that makes him conclude that America’s social capital is declining.
Sociologists have gone beyond network memberships to look at network structures as sources of social capital. This redirected attention to network structure is more closely in line with Loury’s and Bourdieu’s views of social contexts, although here social contexts are more focused in density structure of social networks in which individuals are involved. Because social actors may be involved in a dense network, a sparse network, or both, the question is which of the network structures provide greater sources of social capital?
Two leading scholars in this line of inquiry are James Coleman and Ronald Burt, whose specific arguments about what kinds of network structures lead to social capital differ. Coleman (1988, 1990) examines how social capital facilitates the creation of human capital and the maintenance of group solidarity. He identifies dense networks of frequent interaction, mutual trust, and norm of interdependence as social capitals. In a study of neighborhood effects on children’s school performance in the United States, he found such social capitals to be readily available among Catholic parents. For example, neighbors watch out for each other’s children, thus lowering children’s absenteeism and school dropout rates and maintaining and increasing children’s performances in school (Coleman & Hoffer, 1987). Burt (1992, 1997) has a different view in explaining economic actors’ competitive advantage. He views sparse networks as containing social capital. To Burt, a sparse network contains "structural holes"—disconnections between actors. Possession of these holes allows actors to be less constrained while gaining information and control benefits, thus boosting their economic success. His study of corporate managers in Chicago supports his explanation.
The third approach points to resources that are embedded in social networks. A key proponent for this approach is Nan Lin (1982, 1999, 2000), who emphasizes social contacts' resources, or social resources (i.e., information, influence, and services) that are embedded in networks of social relations. Extended from Granovetter’s (1973) notion of “weak ties”of infrequent interaction and low intimacy, Lin argues that networks of weak ties provide larger range, greater diversity, and higher upper reachability of “social resources” than networks of strong ties. When these resources are mobilized for purposes of instrumentalaction, they become social capital investments for gains. In short, network structures are proxies to social capital, but resources that are embedded in and mobilized from network structures are the end form of social capital.
The above three approaches all consider social capital as a social network concept, but they differ in the kinds of data necessary to measure the concept. Putnam’s membership-as-social-capital approach implies that social actors — individuals and organizations — who have more memberships in social structures or social networks have more social capital than those social actors who have less membership relationships in society. This approach requires data about ego-alter networks (or self-other networks), and in a study about firms such data can be obtained from a questionnaire survey of firms. The network structure approach, in contrast, requires data not only about ego-alter networks but also about alter-alter networks. Alter-alter network data are not easily obtained from a questionnaire survey of firms, but require a saturation sample of a sector or industry. The same sampling design is needed for the network-embedded resource approach, as data are needed about the resources that are possessed by alters (“other firms”). Constrained by the date reported in this study, I will use the membership-as-social-capital approach in my conceptual and statistical analysis that follows.
CONCEPTUALIZATION
Firms are economic actors and operate in the networks of relationships to other actors in the economy.[1] I thus raise the concept of social capital at the firm level. My intention here is to emphasize that firms in the Chinese context are not isolated from one another, but their abilities to access and mobilize scarce resources are dependent upon their network relationships to state agencies, firms within and across the industry, and other entities in the economy. To the extent that these resources impact upon the volume of production projects and profits, firms’ employer and managers’network relationships in economy and society are their social capital.
Two features of the Chinese macroeconomic structure are most relevant here. First is the hierarchical structure of government bureaucracy for macroeconomic control and coordination: central, provincial, municipal, district (or township), and subdistrict (or village). Second is that each level of the government hierarchy is a bureaucratic structure composed of industrial bureaus or companies that exercise control over or that monitor a number of firms, state or nonstate. If scarce resources are to flow through this macroeconomic structure, then Chinese firms will obtain such resources through one or all of the following three relational channels:
- A firm ought to seek and secure such resources within industry through its hierarchical relations to its government jurisdiction.
- A firm must seek and secure such resources across industry through its inter-organizational relations with other firms outside the confines of its own government jurisdiction.
- A firm can seek and secure such resources through its employer’s and managers’ broad social connections within and across industry.
Thus, I conceptualize the firm’s social capital in terms of three kinds of relationships: vertical relationships with the government, inter-organizational relationships with other firms across the industry, and broad social relationships in the community in which the firm is based.
A firm’s vertical relationships with the government are oriented toward getting tangible and intangible resources from its government jurisdiction and other government agencies. Tangible resources include financial budgets, bank loans or grants, allocation of imported materials, and production projects. Intangible resources include economic information and business opportunities of all kinds. Although post-1992 reforms have decentralized economic control of the central government over both tangible and intangible resources, local governments and local officials retained greater discretion over these resources. State and collective firms are still under formal and informal influences of government jurisdictions through measures of economic regulation, macroeconomic control, and personnel management. Newly emerged, private, or semi-private firms, although not necessarily within the confines of government hierarchy, are either subsidiary units of state organizations, joint ventures with state or collective firms, or “red-cap” village and township enterprises under local state governments. Because these various vertical relationships with the government provide both constraints and opportunities for the firms, they are sources of social capital.
Firms develop inter-organizational relationships with other firms through trade, joint projects, loans and debts, and shareholdings. In pre-reform era inter-organizational relationships were channels of information and informal support, but in reform-era firms make deliberate efforts to develop inter-organizational relationships with suppliers and buyers to secure and develop their product markets. Because vertical relationships to the government are within industry, inter-organizational relationships with firms across industry are most important. In general, the greater and wider a firm’s inter-organizational relationships, the more the business opportunities for the firm, increasing production projects. Less inter-organizational relationships would mean that the firm survives in a more limited space. For these reasons, inter-organizational relationships are sources of social capital for the firm.
Firms operate in the economic sphere but their employers and managers (as well as ordinary employees) live in the much broader social space surrounding the firms. Although social relationships of employers and managers are not a firm’s attribute, they are the firm’s assets because they function as information bridges, channels of trust with other firms, and informal mechanisms through which scarce resources or profitable projects can be obtained. Thus, the broad social relationships of employers and managers are sources of social capital for the firm.
RESEARCH HYPOTHESES
One can reasonably anticipate that firms vary in level of social capital. What firms tend to have a higher level of social capital than do other firms? What impact does social capital exert on a firm’s production capacity? My arguments and hypotheses are proposed below to address these two questions.
The Structural Constraint Thesis
Firms operate and develop under the constraints of the economic structures in which they operate; so is their social capital. I am concerned about the constraints of two structures: ownership structure and industry structure. The basic ownership structure is between state ownership, which dominated the pre-reform economy and has continued in post-reform era, and private and semiprivate ownership, which emerged after 1980 and grew significantly after 1992. Under state ownership[2], a firm is given the right to use its property, but its government jurisdiction retains ownership rights and transfer rights, thus controlling or monitoring the firm’s financial conduct. Consequently, firms in the state sector lack both the motivation and the institutional (especially financial) flexibility necessary to develop social capital for purposes of generating profits.
Private and semiprivate firms are a sharp contrast. Having a full set of property rights and operating businesses on their own, private and semiprivate firms are both motivated and having institutional flexibility to develop all kinds of relationships that help in survival and growth. For example, they use social networks to market their products and to establish goodwill, they develop inter-organizational relationships to seek projects and opportunities of growth, and they cultivate ties with local governments to compete with state and collective firms for state projects and financial and human resources. Hence,
Hypothesis 1 (the ownership constraint hypothesis): Compared to state and collective firms, private firms are both less constrained from and more motivated to developing social capital and tend to have a higher level of social capital.
Firms operate in different industries. But here, most relevant difference lies in between the old manufacturing and commercial industries and the newly emerged tertiary sector industries. The new tertiary sector consists of entities in banking, communications, real estate, and social welfare. Firms in the new tertiary sector may be under different forms of ownership, but all faced similar market situations in the transitional economy. In contrast to manufacturing and commercial sectors that existed in pre-reform era, newly emerged tertiary entities must create and develop their networks in an increasingly competitive marketplace. Thus newly emerged entities in tertiary sector are under greater market pressure to develop social capital than are the long-existing entities in manufacturing and commercial sectors. Therefore,
Hypothesis 2 (the industry constraint hypothesis): Firms in the new tertiary sector industries tend to have a higher level of social capital than do firms in the old manufacturing and commercial industries.
The Business Leadership Thesis
Although structural constraints are rather fixed, business leadership’s reactions to these constraints are not. Firms may be positioned in an advantageous economic structure to develop social capital, but if their leaders’ efforts are not optimal, then the firm’s social capital will not develop automatically. Firms may be at a disadvantage in the economic structure, but their leaders can be highly motivated to break through structural barriers to develop social capital. Firms that have both structural advantage and leadership ability are best able to develop social capital; firms that have neither develop little social capital.