The transaction cost economics (TCE) theory of trading favors

Trading favors is a pervasive business practice, especially in emerging economies. To date, a range of theories has been utilized to explore trading favors, but most extant studies focus especially on negative aspects of favors (e.g., corruption and bribery). We adopt transaction cost economics (TCE) to analyze systematically trading favors as an economizing practice serving efficiency purposes. From the TCE perspective, trading favors is a component of the relational contracting portion of transaction governance, and contributes to economizing on bounded rationality and bounded reliability. We hypothesize that trading favors will be more prevalent in (1) macro-contexts characterized by a vacuum of formal institutions as well as by excessive formal rules; (2) cultural contexts where in-group membership is highly valued; (3) high bounded rationality/low bounded reliability contexts where frequent opportunities exist for indirect reciprocity; and (4) cases whereby no asset-specific investment(s) in innovation need to be made by the supplier of the favor. Enforcement mechanisms such as in-group sanctions, access to formal contracting as a complement to favors, possibility of image scoring and incentive compatibility can function as critical components of the trading favors practice. We suggest a classification of favor trading practices based on their link to formal contracting and rate of recurrence, and describe a range of likely impacts.     

Favor prevalence in emerging markets: A multi-level analysis

Favors are a medium of exchange for social capital. Social capital creates social, political, and economic benefits for individuals, organizations, communities, and societies around the world. Favors promote cooperation between individuals and are used to bond individual actors with other individuals, groups, communities, and institutions. Favors are prevalent in business in emerging markets because of the presence of institutional voids, limited social and geographic mobility, and strong reciprocity norms. Favors create benefits and liabilities for business organizations and their networks. They produce outcomes beyond the favor exchange process that can be characterized as productive or perverse. Despite their prevalence and importance, favors and their dynamics are not well understood. We explore the antecedents, content, process, and consequences of favors. We conclude our multi-level analysis of favors with a discussion of the “breakeven” point for favors—the point where favors tip from having a positive effect to having a negative effect on organization performance. We present an integrated framework to explain the dynamics of favors in emerging market business contexts, and develop propositions to guide future research.     

Corruption and Organization in Asian Management Systems

From an organizational viewpoint, research on corruption is both a frontier and a challenging issue~in Asian management systems. Corruption is rampant in many Asian countries but organization theorists are surprisingly silent in addressing what impact corruption has on an organization and its operations. Contrary to the belief of some that corruption is necessary for business survival and growth in Asia, we argue that corruption is an evolutionary hazard, a strategic impediment, a competitive disadvantage, and an organizational deficiency. In this article we explain why an organizational perspective of corruption is an important research agenda in Asian management, outline how corruption differs from interpersonal business networking, and illustrate why corruption impedes organizational development.     

Work values of the next generation of business leaders in Shanghai, Tokyo, and Seoul

Understanding the work values of the current and future workforce is essential for designing a human resource management system that attracts, motivates, and retains talent. This study provides an updated, in-depth analysis of the work values of the next generation of business leaders in the commercial centers of China, Japan, and Korea. Although previous research has often clustered these countries together and labeled them Confucian Asia, survey results from more than 700 respondents reveal striking differences in work values across countries. The Chinese are more individualistic and career oriented, whereas the Japanese are more risk averse and work oriented, and the Koreans are often somewhere in-between. We argue that the value differences can be largely explained by different economic influences in these three countries. This study enhances our understanding of crossvergence theory by distinguishing economic influence in the economic development stage, economic growth, and inward foreign direct investments. While these economic indicators might be related, their influences on work values could be conflicting. The findings suggest that that each economic indicator has a unique effect on the development of work values.     

Industrialization and Values Evolution: The Case of Hong Kong and Guangzhou, China

This field study evaluated the convergence, divergence, crossvergence, and multi-crossvergence perspectives of value system evolution in industrializing regions. Value differences were identified among graduating business university students in the People's Republic of China, Hong Kong, and the United States. Specific value dimensions in this study reflected the primary influence of either industrialization or regional culture. Thus, our overall results suggest that both industrialization and culture influence the combination of values held in Hong Kong. This finding could be interpreted as supporting the crossvergence perspective of value system evolution. A more precise interpretation, however, is that some value dimensions converge with increasing industrialization, while others remain divergent.     

Examining a key corporate role: The influence of capital allocation competency on business unit performance

Research on the role of the corporate office in firm performance has focused on establishing how much performance variance can be attributed to a “corporate effect,” with little attention devoted to understanding how this influence occurs. In this study, we model capital allocation competency as a dynamic managerial capability and find that lower levels of allocation competency in the form of excess investment to business units with relatively poorer future prospects reduce business unit performance. We also find that market conditions affect performance implications of capital allocation—allocation competency is more salient in more competitive markets. These results enhance our understanding of how the corporate office influences business unit performance through its role in allocating capital across business units. Copyright © 2014 John Wiley & Sons, Ltd.     

The many futures of Asian business groups

What does the future hold for Asian business groups? This paper discusses three rival hypotheses whose predictions for the future of Asian business groups differ from the predictions of the prevailing institutional voids hypothesis. The latter is a two stage model that posits that business groups first emerge to solve market failures for affiliated firms. Subsequently government initiates the construction of a “soft market infrastructure” that plug institutional voids and so weakens the rationale for group affiliation. Groups should then unravel and dissolve. Yet, business groups remain important in Asian countries that have attained high levels of market development, which casts doubt on the institutional voids hypothesis. In this paper I review three alternative hypotheses of business group development—life cycle, state-led industrialization, and crony capitalism perspectives. A synthesis of these rival hypotheses suggests that Asian business groups are likely to persist in many possible future scenarios.     

Government regulation, corruption, and FDI

We analyze favors as utilization of informal modes of exchange within a formal economy, relating their negative aspects to corruption. This exercise enables us to integrate them into a model linking national institutional factors to the magnitude of cross-country FDI flows. In our empirical tests of FDI inflows in 55 countries across four distinct time periods, we find that the level of economic regulation is a major determinant of the extent of FDI inflows as well as the level of corruption, but corruption does not have an independent influence on levels of FDI inflows. Our results have important policy implications regarding the role of the state in influencing the location decisions of MNEs.     

The influence of brand image and company reputation where manufacturers market to small firms: A customer value perspective

Branding research has largely focused on consumer goods markets and only recently has attention been given to business markets. In many business markets the company's reputation has a strong influence on buying decisions which may differ from the more specific product related influence of the brand's image. In this paper we investigate these differences by testing the hypotheses about the influences of brand image and company reputation on customers' perceptions of product and service quality, customer value, and customer loyalty in a business market where there are three manufacturers marketing their brands directly to a large number of small firms. The results indicate that the brand's image has a more specific influence on the customers' perceptions of product and service quality while the company's reputation has a broader influence on perceptions of customer value and customer loyalty.     

The personal touch of business relationship: A study of the determinants and impact of business friendship

Business friendship refers to the integration of “business” dealings and personal “friendship” that permeates many markets. As relationship marketing and customer relationship management become increasingly prevalent practices, business friendship as a fundamental element embedded in business relationships needs to be better understood. This paper studies how business friendship is formed and its impact on key marketing outcomes. We propose that business friendship is driven by three factors spanning business and personal domains—congeniality, rule adherence and business reputation. Our empirical analysis is based on survey and actual sales data from 263 client firms of a leading provider of business intelligence and strategic planning services. The results show the three factors contribute significantly to business friendship. We find that business friendship between the client and the supplier significantly impacts the sales to the client, and this impact is further moderated by how the two parties share responsibilities in achieving common goals. In addition, we show that business friendship induces one party to accommodate and cooperate with the other (i.e., compliance), and to engage in positive word-of-mouth. The framework and findings shed lights on how companies may influence (and be influenced by) business friendship as they increasingly emphasize long-term business relationships.     

Fine-Tailored for the Cartel-Favoritism in Procurement

In this paper, we investigate the interaction between two firms, which are involved in a repeated procurement relationship modeled as a multiple criteria auction, and an auctioneer (a government employee) who has discretion in devising the selection criteria. Our main result is that favoritism substantially facilitates collusion. It increases the gains from collusion and contributes to solving basic implementation problems for a cartel of bidders operating in a stochastically changing environment. A most simple allocation rule where firms take turns in winning, independently of stochastic social preferences and firms’ costs, achieves full cartel efficiency (including price, production, and design efficiency). In each period the selection criteria is fine-tailored to the in-turn winner: the “environment” adapts to the cartel. This result holds true when the expected punishment is a fixed cost. When the cost varies with the magnitude of the distortion of the selection criteria (compared to the true social preferences), favoritism only partially shelters the cartel from the environment. We thus find that favoritism generally facilitates collusion at a high cost for society. Our analysis suggests some anti-corruption measures that could be effective in curbing favoritism and collusion in public markets. It also suggests that the much-advocated rotation of officials is likely to be counter-productive.     

The effect of cultural differences in perceptions of transactions costs on national differences in the preference for international joint ventures

This study presents a theoretical explanation of why the cultural trait of power distance represents greater perceptions of transaction costs and lower perceptions of governance costs across societies. It demonstrates that cultural differences in perceptions of transactions and governance costs as represented by Hofstede's (1980) power distance index explain national differences in the preference for international joint ventures after market size, government limitations on sole ownership and uncertainty avoidance have been controlled. The study concludes that cultural differences in transaction costs provide an important extension to the transaction costs theory of joint ventures.     

Regional Market Variations: The Northeast Versus The South

The notion of the “rise of the Sunbelt” and the “decline of the Northeast” has raised the spectre of relentless economic disintegration of the northeastern states and the lure of boundless affluence across the southern and southwestern rim. What is myth and what is reality in these emerging perceptions? This paper reviews the trends of the past fifteen years, and speculates on the possibility of unsettled economic weather in the Sunbelt and valid investment potentials in the Northeast. Alternative future scenarios are suggested in the light of the marked acceleration of the thrusts of change of the last five years.     

The use of favors by emerging market managers: Facilitator or inhibitor of international expansion?

This article explores the use of favors by emerging market managers, the impact of using favors on their firms’ growth, legitimacy, and reputation in a variety of business environments, and how the use of favors affects firms’ paths to international expansion. We discuss the concept of favors, and to illustrate the process of favors, we look at culturally rooted examples of their use by managers from the BRIC countries of Brazil, Russia, India, and China. Utilizing neo-institutional theory, we create a typology of four types of environments in which managers and firms from emerging markets conduct business with various relational entities (e.g., governments, customers, suppliers, competitors, alliance partners). We posit that the use of favors by managers compensates for the relatively weak legitimacy of formal institutions in emerging market environments, with favors illustrating the resulting reliance upon informal cultural-cognitive institutions. We develop propositions regarding the impact of the use of favors on the organizational outcomes of growth, legitimacy, and reputation of emerging market firms doing business in each of the four environments. This leads to further propositions regarding how the use of favors can influence their firms’ internationalization growth paths. We conclude that the impact of favors on international growth paths results from the fit or non-fit of their use with the level of legitimacy of the formal institutional environment of the focal relational entity in various business transactions.     

The chief executive: A breed apart

This study tested the theory that the characteristics of British chief executives would be different from that of the subordinate top management team from which they emanated. The study focused upon variations in experiences over three sets of variables: corporate influences; e.g. tenure, mobility, functional experience, international exposure; domestic influences; e.g. education, family influence; and their self-concept; e.g. aspiration levels, executive success traits. Substantial differences emerged between the two groups across all sets of variables, particularly within the corporate category.     

Entrepreneurial knowledge spillovers: discovering opportunities through understanding mediated spatial relationships

In recent years, increased attention has been directed toward the formation of new ventures from new knowledge that is created by incumbent firms. This process focuses on a firm-centric approach that considers entrepreneurial opportunities from a spin-off and an endogenous perspective. Differently, what kind of Knowledge Spillovers (KSs) can influence the development of a start-up from an exogenous perspective? Considering this point of view, in what ways can knowledge be transferred? What kind of spatial filter can influence the travel of knowledge?Analyzing the KSs that sustain the growth of the start-up with a collaborative approach, the Geppetto case study concerns the main dyadic relationships developed by an Italian start- up thanks to its relationship with an Incubator. As these findings demonstrate, network entrepreneurial KSs are activated by “generating relationship” between the Incubator and its main business partners, which then are used in the “recipient relationship”. In this latter instance, the business partners of the Incubator become partners of the start–up thereby improving its growth. In particular this transfer of knowledge occurs in a relational space between heterogeneous actors that are characterized by business relational proximity.     

Firm Characteristics and NPD Program Success: The Significant Influence of Global Discovery Management

Managing new product development (NPD) with a global point of view is argued to be essential in current business more than ever. Accordingly, many firms are trying to revitalize their NPD processes to make them more global. Therefore, examining global NPD management is one of the top priorities for research. While scholars have examined global launch management, there has been scant attention on the direct effect of global discovery management on NPD success. Therefore, this study investigates how a globally managed discovery phase enhances a firm's overall NPD success. Drawing upon the resource‐based view (RBV) and using Kotabe's ( 1990 ) generic model for market success in global competition as the overarching framework, this study examines four drivers of NPD success: global discovery management, the firm's “global footprint,” its inbound knowledge sourcing practices (i.e., “open innovation proclivity”), and nationality of the teams (i.e., “cross‐national global NPD team use”). The hypotheses are tested using a sample of 255 business units from multiple industries, headquartered worldwide, and surveyed during the 2012 PDMA Comparative Performance Assessment Study (CPAS). The PLM‐SEM analyses show that, of the four drivers examined, only global discovery management strongly influences a firm's NPD program success. The findings enhance our understanding of the particularities in global NPD. Based on the study's results, suggestions are provided as to how multinationals can leverage their international operations in the course of their front‐end activities.     

Representational predicaments at work: How they are experienced and why they may happen

Representational predicaments reflect unfavorable perceptual or attributional incongruence between subordinates and superiors about the employees’ work, and adversely affect morale. Critical incident interviews were held with 63 Hong Kong Chinese employees from over 50 organizations. Stories about undervaluation of contextual performance were compared with stories about duly appreciated contextual performance, and stories about negative spotlighting (disproportionate emphasis on shortcomings or mistakes) were compared with stories about fair treatment of mistakes. Subordinates attributed undervaluation of contextual performance to: the superior’s unfamiliarity with the employee’s work, the superior’s perception that the work was of marginal importance, the subordinate’s lack of empowerment to report contextual performance, the lack of considerate attention by the superior, and the subordinate’s felt need to keep a low profile. Underlying factors were inhibitions against employee voice, leadership styles characterized by lack of benevolence and lack of individualized consideration, and absence of close subordinate-superior relationships. Subordinates attributed negative spotlighting to: the superior’s abusive behavior, prejudicial and hostile attitudes, or insistence on one “right way”; rivalry between the superior and the subordinate; and the absence of legitimate channels for upward feedback. Underlying factors were absence of just grievance procedures, and leadership styles characterized by authoritarianism, which could be compounded by lack of benevolence and lack of moral restraint, leading to abusive supervision. Cross-cultural research could establish whether large power distance and other cultural and institutional factors render Asian employees especially vulnerable to representational predicaments.     

Spatial Linkages in Returns and Volatilities among U.S. Regional Housing Markets

This article investigates spatial linkages in returns, idiosyncratic risks and volatilities across 19 U.S. regional housing markets. Using Case & Shiller housing price indices from 1995 through 2009, we find that interconnections across markets can be “wider” and “stronger” than would normally be expected. They are “wider” because, in addition to geographic closeness, economic proximity is also an important source of influence; they are “stronger” because of the significant contagion effects during the 2007–2009 subprime and financial crises. The increased comovement and interdependence, especially among more geographically diverse regions with similar economic conditions, may help explain the failure of geographic portfolio diversification strategies.     

Determinants of attitudes toward multinational firms: Host arab society elites

Indigenous elites provide the crucial linkages between their domestic societies and the international economic order. The study attempts a measurement of the weight or salience of five personal variables to the process of attitude formation toward multinational firms among host Arab society elites. These variables are: (1) nationalism, (2) internationalism, (3) economic ideology, (4) confidence, and (5) satisfaction in direct personal contact. It is hypothesized that these variables will have influence upon an elite's attitude toward multinational firms. The result of the empirical study points out that an elite internationalism orientation, economic ideology preference, and satisfaction in direct personal contact with multinational firms will positively influence attitudes towards multinational firms (MNFs).