Organization and Management in the Embrace of Government

Organization and Management in the Embrace of Government

LEA’s Organization and Management Series Arthur Brief and James P.Walsh, Series Editors Ashforth • Role Transitions in Organizational Life: An Identity-Based Perspective Beach • Image Theory: Theoretical and Empirical Foundations Darley/Messick/Tyler • Social Influences on Ethical Behavior in Organizations Garud/Karnøe • Path Dependence and Creation Lant/Shapira • Organizational Cognition: Computation and Interpretation Pearce • Organization and Management in the Embrace of Government Thompson/Levine/Messick • Shared Cognition in Organizations: The Management of Knowledge

Organization and Management in the Embrace of Government

Jone L.Pearce University of California, Irvine

LAWRENCE ERLBAUM ASSOCIATES, PUBLISHERS

Mahwah, New Jersey

London

This edition published in the Taylor & Francis e-Library, 2008. “To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to http://www.ebookstore.tandf.co.uk/.” Copyright © 2001 by Lawrence Erlbaum Associates, Inc. All rights reserved. No part of this book may be reproduced in any form, by photostat, microform, retrieval system, or any other means, without prior written permission of the publisher. Lawrence Erlbaum Associates, Inc., Publishers 10 Industrial Avenue Mahwah, NJ 07430 Cover design by Kathryn Houghtaling Lacey Library of Congress Cataloging-in-Publication Data Pearce, Jone L. Organization and management in the embrace of government/Jone L.Pearce. p. cm. (LEA’s organization and management series) Includes bibliographical references and index. ISBN 0-8058-3769-8 (hardcover: alk. paper) 1. Organizational sociology. 2. Organizational behavior. 3. Management. 4. Bureaucracy. 5. Political science. I. Title. II. Series. HM786. P43 2001 305.3’5—dc21 00–046642 CIP

ISBN 1-4106-0078-5 Master e-book ISBN

To Maggie, David, and Harry

Contents

Series Editors’ Foreword About the Author Preface

xi xiii xv

1 Government’s Embrace

1

Chapter Organization

4

Studying the Organizational Effects of Government

9

2 Organizing in Spite of Government: Nonfacilitative Government

13

Independent Organizations

13

Effects of Governments on Independent Organization

14

Modernism and Governmental Facilitation

16

Neotraditionalism and Governmental Facilitation

18

Governmental Characteristics Facilitating Independent Organization

22

Nonfacilitative Government

35

3 Organizing by Personal Relationships: Understanding Trust

37

Organizing by Personal Relationships or Trust?

38

China Studies

41

Understanding Guanxi

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Nonfacilitative Governments and the Need for Personal Relationships

46

Evidence of Reliance on Personal Relationships Under Nonfacilitative Governments

49

4 Organizing by Personal Relationships: Meritocracy and Employee Empowerment

61

Effects on Organizational Form

61

Weber’s Rational-Legal Bureaucracy

64

Personal Relationships and Bureaucracy

69

Pseudobureaucracies

72

Effects on Human Resources Management Practices

76

Personal Relationships Are Inimical to Impersonal Meritocracy

78

Bureaucracies Empower Employees

79

Bureaucratic Means Without Bureaucratic Aims

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5 Engendering Participant Dissatisfaction, Fear, and Cheating

85

Perceptions of Workplace Justice

88

Dominance of Personal Relationships and Reward Allocations

91

Obsequious Subordinates

94

Distrust, Fear, and Wariness

95

Cheating and Rule Breaking

99

Organizational Commitment

101

Exploitation

104

Dissatisfaction and Alienation

105

Dysfunctional Organizational Behavior

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CONTENTS

6 Unpacking Culture

ix

109

Institutionalized Adaptations to Dependence on Personal Relationships

109

Relationships Dominated by Bargaining

111

Harmony in Interpersonal Relationships

119

Upward Gift-Giving

121

Supervisor-Subordinate Relationships Cultural Adaptations to Nonfacilitative Governments 7 Implications for Theory and Organizational Change

125 131 135

Bringing Governments Into an Understanding of Organization and Management

135

Better Practice: Organizational Change

143

Conclusion

147

References

149

Appendix

157

Author Index

167

Subject Index

171

Series Editors’ Foreword Jone Pearce opens her last chapter with the words, “Governments are critical to understanding organizations, not just because they may impose a regulation or tax that increases costs, but because they establish the framework on which all organizations are built. This is a framework with both direct and indirect consequences for these organizations and their participants.” This concluding thought makes a great introduction as well. We too believe that our field has paid too little attention to the political and economic context of organizations as we have developed and tested our theories about them. Jone Pearce at once calls attention to this lacuna and fills it. Drawing on her years of quantitative and qualitative research in emerging economies and her comprehensive reading over those years, we are treated here to a timely (and we suspect, timeless) treatment of these issues. Her contributions are many. For example, you will find yourself intrigued by some nonobvious insights about personal relationships at work. Her lively writing style only adds to our reading pleasure. We hope you will enjoy this book as much as we did. —Arthur Brief —James P.Walsh

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About the Author Jone L.Pearce is Professor of Organization and Strategy in the Graduate School of Management, University of California, Irvine. Her field is organizational behavior, with research centering on how the institutional context affects individuals’ behavior and their affective reactions in the workplace, often proposing and testing the mediating role of social processes. Her work has appeared in more than 60 scholarly articles in such publications as Academy of Management Journal, Academy of Management Review, Journal of Applied Psychology, and Organization Science. She has edited several volumes and has a book: Volunteers: The Organizational Behavior of Unpaid Workers (Routledge, 1993b). A Fellow of the Academy of Management, her honors include research grants from the National Science Foundation; a Fulbright Fellowship to the International Management Center, Hungary; Scholarly Contribution Awards (1998 from the Academy of Management and 1986 from the American Society for Personnel Administration); Teaching Excellence Awards; and an invitation to testify on legislation pending before the United States House of Representatives. Professor Pearce has been active in the Western Academy of Management, elected as President in 1995–1996; and in the Academy of Management elected as a Representative-at-Large on its Board of Governors 1995–1998; and now as Program Chair for the 2001 meeting and President in 2002–2003. BA 1974, Psychology, University of California, Berkeley; MA 1976, Administrative Sciences, Yale University; PhD 1978, Administrative Sciences, Yale University.

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Preface This volume is about how governments affect the ways people organize themselves, manage these resulting organizations, and respond to these organizations. It draws from my work over the past 11 years following organizations struggling with the transition from communism in Hungary, China, the Czech Republic, and Lithuania. Such settings are organizationally interesting in their own right, yet even more so for the window they open on the effects of governments. This volume was written primarily to introduce organizational scholars—those interested in organizational behavior, management, theory, and design—to the ways that governments can influence organization. However, it also was written with an eye to readers with practical interests in international management or governments. The impetus for the research was a leadership residential course for stateowned enterprise managers I cotaught in Tihany Hungary in April 1989. I became fascinated by these managers’ organizational complaints. Whereas many of their problems were the familiar ones of managers everywhere, others were quite literally inexplicable to me. I was swept up in trying to unravel these organizational mysteries, which were leading me on a quest that would take me in unexpected directions. In trying to fathom these organizations, I needed to spend more time with them, and I was very fortunate that my search for a research collaborator led to the incomparable Imre Branyiczki, then associated with Marx Károly Közgáztudomány Egyetem (which has since traded the philosopher’s name for the name of its city, becoming Budapest University of Economic Sciences), and we began a longitudinal data collection project that ran from the last months of 1989 until 1996. Later, I was able to conduct short-term projects in Czechoslovakia (since named the Czech Republic) and Lithuania, as well as begin another longitudinal project in China with Katherine Xin (now with the Hong Kong University of Science and Technology) that continues. As I learned more about how people operated in and through these organizations, I began to reexamine other more familiar organizations in a new light. Certainly, governments are a vital concern to those who run state-owned enterprises, so participants there focus on the thoughts, feelings, and actions of government officials. Yet, as the communist regimes came to an end and our studied organizations were privatized, governments still dominated managerial attention, but now for different reasons altogether. As we tried to understand why this should be so and began to read more broadly in sociology, economics, and political science, it seemed to me that governments’ effects had not been

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sufficiently recognized in the organizational sciences. Observed cross-national differences were psychologized as differences in values, with little exploration of why different actions and expectations might make practical sense in differing national circumstances. The one national circumstance that seemed to be making a very important, yet unrecognized, difference was government. This volume represents a broadening of that initial desire to understand how organizations made the transition from communism to include a broader exploration of the effects that differences in governments have on management, organizations, and organizational behavior. The research underpinning this volume did not proceed in a conventional fashion with hypotheses deduced from theory and then tested. Rather, in 19891 and my collaborators hoped to track what would happen to organizations and their participants as they faced the forces of transition—forces everyone expected to be powerful but that no one could foresee with any precision. As we learned more, we asked new questions and explored new scholarly literatures for guidance. We did collect systematic data when we could, and occasionally these data could be used to provide independent confirmation of the arguments presented here. Over the years, some of the ideas discussed here have appeared in earlier publications.1 I draw on data from several different studies and so would like to thank those who helped to support those studies. Imre Branyiczki and I together designed the 1989–1996 Hungarian longitudinal study, and he was primarily responsible for data collection. Our early data collection was supported by Vállalatgazdasági

1

Earlier published work includes Pearce, J.L. (1991). From socialism to capitalism. Academy of Management Executive, 5, 75–88; Pearce, J.L. (1993). Toward an organizational behavior of contract laborers. Academy of Management Journal, 36, 1082–1096; Pearce, J.L., Bigley, G.A., & Branyiczki, I. (1998). Procedural justice as modernism. Applied Psychology: An International Review, 47, 371–396; Pearce, J.L., & Branyiczki, I. (1997). Legitimacy: An analysis of three Hungarian–West European collaborations. In P.W.Beamish & J.P.Killing (Eds.), Cooperative strategies: European perspectives (pp. 300–322). San Francisco: The New Lexington Press; Pearce, J.L., Branyiczki, I., & Bakacsi, G. (1994). Person-based reward systems. Journal of Organizational Behavior, 15, 261–282; Pearce, J.L., Branyiczki, I., & Bigley, G.A. (2000). Insufficient bureaucracy. Organization Science, 11, 148–162; Pearce, J.L., & Čakrt, M. (1994). Ferox manufactured products and air products and chemicals. In D.S. Fogel (Ed.), Managing in emerging market economies (pp. 5–102). Boulder, CO: Westview; Pearce, J. L., Ramirez, R.R., & Branyiczki, I. (2001). Leadership and the pursuit of status: Effects of globalization and economic transformation. In M.McCall (Eds.), Global leadership II. Greenwich, CT: JAI Press; Xin, K., & Pearce, J.L. (1996). Guanxi: Connections as substitutes for formal institutional support. Academy of Management Journal, 39, 1641–1658; Xin, K., & Pearce, J.L. (2000). Harmony and ties in interpersonal relationships in China and the U.S. Working Paper, Department of Organization and Management, Hong Kong University of Science and Technology.

PREFACE

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Tudományos Egyesölet (Hungarian Business Economics Society) and an Irvine Faculty Fellowship. Later financial support was provided by my dean, Dennis Aigner, whose generous increase to my faculty research budget supported my many data collection trips to Hungary. The 1991 Czechoslovak case study was conducted in collaboration with Michal Čakrt, and was funded by the Unites States Agency for International Development (with Daniel Fogel as the principal investigator). Arunas Kuras and Romualdas Rimaitis assisted in data collection for the 1993–1994 Lithuanian study. Katherine Xin and I both designed the China–U.S. comparative studies, and she collected most of the unstructured interview data from China. Furthermore, I would like to express my appreciation to John Lara, whose cheerful assumption of family responsibilities during those many international data-collection trips made this work possible. The remaining comparative data were taken from several different studies conducted in the United States. Data collection assistance for the 1985 study was provided by Steve Sommer, Carol Sexton, and Greg Stephens. Together, Khalid Al-Aiban and I designed the 1987 U.S. comparative data, with him taking responsibility for data collection. Data collection assistance for the 1988 U.S. sample was provided by Steve Sommer. Finally, the 1992 U.S. data were taken from a large study I conducted with Lyman Porter and Anne Tsui (funded by a United States National Science Foundation grant, #SES-89123), with data collection assistance from Terri Egan, Brenda Edwards, and Jennifer Hite, and proposal assistance from Angela Tripoli. Data analysis assistance has been provided over the years by Greg Bigley, Patricia Martinez, and Sándor Tákacs. I also thank those who helped to bring this work to publication. The series editors, Art Brief and Jim Walsh, provided insightful feedback and suggestions on earlier versions of this manuscript. I am indebted to Anne Duffy, who has been extraordinarily supportive and helpful throughout the publication process. Another thanks to Sarah Wahlert, who moved the manuscript through the production process. I was ably assisted in the manuscript’s preparation by Valeska Wolf and Clare Lorenzo, and by Catherine Hammond’s editorial assistance. Certainly not least, thanks to Harry Briggs for his advice and support. Finally, this work rests on the work of two invaluable collaborators. First and foremost I would like to acknowledge the depth of my gratitude to Imre Branyiczki. He spent uncountable hours at companies charming and cajoling those with much to lose by trusting him and our promise of anonymity. Many of these ideas came out of our years-long conversations. He deserves the credit for any truths that may appear here. I am greatly indebted to Katherine Xin. She has been responsible not only for the Chinese data collection in the China—U.S. comparative studies, but also for many critical insights and ideas discussed here. I feel fortunate to have had the benefit of working with such a formidable intellect. The ideas developed here were shaped in conversations with Gyula Bakacsi, Greg Bigley, Michal Čakrt,

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Dan Fogel, Gábor Kornai, Imre Lövey, Lívia Markóczy, Patricia Martinez, Ian Taplin, the first class of Young Managers from Hungary’s Nemzetközi Menedzser Központ (International Management Center), and the many anonymous informants from China, the Czech Republic, Hungary, and Lithuania. I thank all of those who tirelessly explained the fine points to this naïve foreigner. I have had the luxury of circumstances allowing me to produce this book, but the insights are theirs.

1 Government’s Embrace Governments are important to organization, establishing and enforcing the rules under which organizations operate. They can make a course of action profitable or illegal. Governments may be stable guarantors of open and fair dealing, or they may be bumbling inept entities unable to control even their own officials. Governments facilitate the establishment and enforcement of the fundamental understandings necessary to action: who is entitled to what uses (use rights); who may legitimately sell products, land, and equipment (ownership rights); and what actions are acceptable (contract law). They are extraordinarily various, ranging from centuries-old tradition-encrusted institutions to the bandit in control of a small region, with every imaginable variation in between. Yet however various they are in form and practice, governments are always important to organizations and their participants. They establish the rules by which organizations must play and have the means to use physical force to coerce compliance. Because those who operate and work within organizations must always contend with the governments ruling over them, it is remarkable that government is virtually invisible in theories of organization and management. Certainly it has become a truism that economic activity is enmeshed in institutions (Polányi, 1957). That is, individuals act in the context of their expectations about the meaning and effects of their actions. Yet governments have not figured prominently in the institutions examined by theorists of organizations, organizational behavior, or management. Social institutions (Granovetter, 1985), cultural ones (Hofstede, 1980a) and historical experiences (Guillén, 1994) have received scholarly attention, whereas the effects from different forms of sovereign government are only rarely noted. To illustrate, corruption among government officials has been widely discussed in the popular management press but rarely addressed or explained in the scholarly organization and management literature. Yet surely the ability (or requirement) to avoid the enforcement of inconvenient laws results in different organizational strategies, organizational practices, and attitudes and behavior of participants than what would obtain in a society wherein enforcement of the rule of law is strict and assured. Economists have sought to analyze corruption as a cost of business, but rarely have organization and management scholars analyzed how corruption affects the way the participants organize their work and their relationships with one another. Moreover, corruption is just one 1

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example; the same strange silence confronts such government practices as erratic and opaque laws and regulations, requirements that organizations take state-owned partners into their ventures, or the practice of favoring cronies and family members in government contracting, among others. Despite O’Reilly’s (1991) call for more sociologic and conceptual explanation in organizational behavior, such explanations have been scarce, a situation this work is intended to address. Certainly, the fact that scholarship and research is dominated by those living in societies with comparatively strong, predictable, and supportive governments has played a part in this omission. Because governments in the societies wherein most scholars work tend to be strong, predictable, and supportive of independent organizations, the only visible scholarly focus on governments concerns differences in the content of particular laws, such as the German requirement, not found in many other developed countries, that large corporations place employee representatives on corporate boards. Yet no one in these societies is uncertain about how such government mandates are created, or doubts that these large corporations must comply with whatever the law requires. Because most scholars are not as familiar with the organizational effects of weak, erratic, and hostile governments, few scholarly theories have been cognizant of how the embrace of government affects management practice, organizations, and organizational behavior. The arguments presented here are derived from insights gained from the collapse of communism. Communism was an experiment in direct government control over all of the organized activities of a modern society. It can be viewed as an ambitious attempt, in numerous societies with vastly different cultures and histories, to operate in violation of many fundamental social science theories. For example, Parsons and Smelser (1956) argued that a central feature of modernism was the differentiation of societal subsystems, yet communism tried to recombine these subsystems into a single party-controlled one. Weber (1947) feared that the world would be dominated by bureaucracies because of the superiority of their rational pursuit of technical efficiency, yet in communist societies bureaucratic rationality was subordinated to political ideology. Under communism, organizations looked funny, and their participants acted in ways that appeared peculiar to the visitor steeped in knowledge of social science theory and organizational practice in the developed world. In seeking to learn more about why such unexpected behavior should have occurred, the author learned that the government-driven organizational forms and organizational behavior were not anomalies. Whereas the government interventions in communist countries were stark enough to draw the author’s attention, further research and observation led to the proposition that the effects of governments on management and organization are pervasive, powerful, and underappreciated by scholars in management, organization theory, and organizational behavior.

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Practitioners working in such countries certainly appreciate the power of governments, but they have received little explanatory assistance from scholars. Practitioner pamphlets, films, and books provide vivid anecdotes for those struggling with the complex challenges of international work. However, they offer little explanation. Rather, the reader is required to take the differences described as a fact of life and admonished to be sensitive to others’ differences. But surely not in all circumstances. Should Canadian managers adapt themselves to a Javanese view of time as holistic in their factory there? We all know they will do no such thing. Without an understanding of the reasons for particular international differences, useful advice about when to adapt and why cannot be given, nor can predictions about changing practices be made. Anecdotes help to caution new arrivals, but they are limited guides for the long hard work of organizing in countries not your own. Practitioners have been forced to make one ad hoc adjustment after another with no sense of why some may work and others may fail. This neglect of government’s role in management and organization is becoming an increasingly important problem. Large complex organizations arose with modernization, yet increasing global economic and institutional integration has placed organizations that developed in modernist societies into ones that governments are not willing or capable of supporting. Such spreading internationalization has been followed by a growth in scholarly and professional interest in international management. Whereas the amount of writing about international management increases, useful theories have not kept pace. This is the gap in understanding that this work seeks to fill. Although some scholars have sought to explain the role of governments in international differences in organizational behavior and practices, with few exceptions, such explanations are specific to a particular country and scattered in various scholarly journals ranging across fields such as political science, sociology, economics, anthropology, and psychology. This makes their insights unusable by practitioners and difficult to access for many organizational scholars. As demonstrated in this volume, governments have powerful effects on the fundamental ways in which organizations operate and on their participants’ expectations, attitudes, and behavior in the workplace. Here the scholarly ideas from these scattered social science disciplines addressing these effects are integrated with the author’s own research into a coherent argument about the effects of government on management practice, organizational form, and individuals’ organizational behavior. This work is an explanation of how governments’ ability and interest in facilitating independent organization affects organizing and organizational behavior. As governments vary from those that successfully facilitate independent organization to those at the other end of this dimension that actively seeking to impede independent organization. Facilitating governments are supportive, seek to provide predictable laws and regulations that they are

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capable of enforcing. As governments become less facilitative, the less supportive they are of organizations, and the more unpredictable and weak they become. Although a difference in governments’ facilitation of independent organization is not the only international difference affecting organizations, it is an important one, with powerful implications for organization theory, behavior, and management practice, that has yet to receive a systematic and comprehensive analysis. In this volume, the focus is on understanding the effects of nonfacilitative government, but it is addressed primarily to scholars and practitioners in rich, developed societies with facilitative governments, for several reasons. First, those living under nonfacilitative governments already know what they face. Rather, it is the scholar or practitioner who has worked only under facilitative governments and implicitly assumes its comforts who most needs assistance in understanding what nonfacilitative governments do to organizations and their participants. When confronted with organizations operating under nonfacilitative governments, they make blunders such as misunderstanding the meaning and uses of introductions, or ignoring the mutual obligations inherent in their local business relationships. Those who do not understand the role of government facilitation in organizations assume that others’ practices must result from ignorance, or from that vague all-purpose cause, cultural differences, instead of viewing them as practices and assumptions that others have found useful in their circumstances. Second, scholarly theories implicitly assuming facilitative government are partial without recognizing it. The study of organizational theory and behavior under nonfacilitative governments provides insights, elaborations, and modifications of these partial theories developed under facilitative governments. In some cases, this work provides empirical evidence to support and reinforce ideas that have not received broad testing, such as Redding’s (1990) argument that weak and hostile governments lead to organization based on personal relationships. In other cases, it suggests that a theory may be mischaracterizing a phenomenon, with potentially misleading results, as in scholarly descriptions that characterize reliance on mutual dependence in transactions as “trust-based.” Finally, this work adds new topics and insights to these disciplines, such as the study of employee obsequiousness, harmony in interpersonal interaction, and passivity. Although no scholars of organizational theory and behavior would maintain that governments are irrelevant, it is now time to begin understanding in what way s they are relevant and why. CHAPTER ORGANIZATION Organizational adaptations to differences in government facilitation have been numerous and significant. Although the central idea is a fairly abstract one, it

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has substantial implications for many of the most vexing organizational puzzles faced in international management. Figure 1.1 summarizes the arguments to be made, and where possible, tested here.

FIG. 1.1. Organization and management in the embrace of nonfacilitative government. The central insight developed and illustrated in chapter 2 is that a primary role of government is to facilitate effective complex organization. Among other organizational effects, strong facilitative governments create legal infrastructures and enforcement regimes that allow sufficient advance planning to enable participants to judge whether personal and financial investments are worthwhile, and to rely on more efficient impersonal coordination. Yet not all governments develop and enforce the policies that facilitate such organizational work. Some governments do not do so because they are hostile to independent organizations. Communist governments are extreme examples of hostility to

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independent organization, but there are many other examples of governments hostile to independent organizations in particular industrial sectors (e.g., oil). Similarly, governments facilitate organization by ensuring predictability in laws and regulation. Finally, governments may simply be too weak to effectively facilitate organizations. Lack of enforcement can take different forms. Some governments are incapable of enforcing their own laws because they lack organizational skill or control over all their territory. Alternatively, some governments may be unable to control their own local officials, who then are free to hijack local agencies for their own personal use, However, just because governments may not be able or willing to facilitate independent organization, people do not stop organizing because such efforts are not made easier by governments. Rather, they organize as best they can under the constraints they face. Chapter 3 draws on the work of others such as Redding (1990), who have suggested that individuals adapt themselves to nonfacilitative government by basing their organizations on personal relationships. This adaptation is best documented in the burgeoning study of Chinese guanxi, or relationships. Under nonfacilitative governments, individuals seeking to organize will build the predictability and support they need via their own personal networks by cultivating relationships of mutual dependence with useful others. How such relationships look and how they are built and sustained as the basis for organization is illustrated with empirical and case descriptions from the research of the author and others in a number of countries. The arguments and data presented in this chapter call into question scholars’ use of the term “trust” to characterize transactions based on personal dependence. Such relationships may be characterized by personal warmth and trust, but more often they are wary, distrustful relationships, quite accurately described by the economists’ term “mutual hostages.” In chapter 4, the effects that a dominance of personal relationships have on the form and practices of organizations operating under nonfacilitative governments are examined. For example, it is proposed that dependence on personal relationships fosters high levels of centralization, because so much depends on personal relationships and it thus cannot be delegated. Nevertheless, although this dependence on personal relationships in organizing would seem to compel small organizational size, large organizations are found operating in societies with nonfacilitative governments. This suggests an anomaly: large organizations operating under technical circumstances that should make this very difficult or even impossible. In this chapter, the form and operation of such large organizations are proposed to provide insights into bureaucratic organizational practices. The large organizational type produced under nonfacilitative government is a distortion of bureaucracy that has been called pseudobureaucracy. This organizational form mimics the formal policies of bureaucracy without its goals

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of purposeful, goal-directed meritocracy. Drawing on the studies of political scientists and anthropologists of developing countries, pseudobureaucracies are analyzed in detail. This analysis leads to several propositions. First, when organizations are dominated by dependence on personal relationships, impersonal trust is damaged. Second, goal-directed purposeful meritocracy arose from and depends on the relative empowerment of employees. That is, in contrast to what some scholars assert, bureaucracy in practice seems to empower employees relative to the organizational alternatives. Finally, professional human resources management practices appear to be particularly sensitive to dependence on personal relationships in organizations. Therefore, various distortions of human resources management departments observed in organizations operating under nonfacilitative governments are described. Chapter 5 reports the tests of several behavioral and attitudinal implications of nonfacilitative government and the resultant dependence on personal relationships in organizations. The self-reports of professional, technical, and administrative employees from Hungary, Lithuania, and China are compared with those of their counterparts in the United States. These employee reports confirm the rather negative accounts from scattered social science disciplines investigating organizational behavior under nonfacilitative governments. Interestingly, there has been comparatively little systematic research in the field on the kind of negative behaviors described under nonfacilitative governments that pose no immediate risk to employers, such as obsequiousness, distrust of coworkers, and exploitation of others. Certainly, such behaviors may be found in any workplace, so the insights and new measures developed for these tests may be extended more generally to the study of this darker side of organizational behavior. In this chapter, employees working in the organizations operating under nonfacilitative governments report less workplace procedural justice; more obsequious employee behavior; greater distrust, fear, and wariness of others at work; more cheating and rule breaking; less employee organizational commitment; more exploitation of others; and lower job satisfaction than their counterparts working under facilitative governments. These results are consistent across the different studied countries, and confirm the observations of numerous scholars from varied social sciences. Thus, they leave little doubt that employees working in the organizations dominated by personal relationships under nonfacilitative governments are unhappy with their coworkers and their workplaces. Chapter 6 focuses on analyses of the complex adaptations employees make to working in organizations dominated by dependence on personal relationships. By building on the comparisons reported in the previous chapter, more complex adaptations to working in organizations based on personal relationships under nonfacilitative governments are analyzed. These include the dominance of bargaining in the workplace, a normative expectation of interpersonal harmony:

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upward gift-giving; and such features of workplace authority relations as distrust, paternalism, and passivity. These patterns are the basis for reflections on the way the concept of culture has been applied in organizational behavior. The adaptations can be characterized as behavioral patterns that become enculturated in participants’ expectations and assumptions. However, reflection on the role of these patterns as adaptations to nonfacilitative government suggests that there has been an overreliance on psychological theories of comparative organizational behavior. It is true that these psychological approaches have provided many valuable insights. Nevertheless, this psychological dominance of cross-national organizational behavior has been limiting because it mislabels what can be highly changeable expectations as the stable values of personality theory. As proposed in chapter 6, such theories cannot explain the changes in expectations and behavior that occur in response to governmental, economic, and technologic changes. Finally, in chapter 7 the question of change in organizations dominated by dependence on personal relationships is addressed. Drawing on the longitudinal study in Hungary and the work of others studying organizational change under nonfacilitative governments, insights into organizational changes in response to governmental change are developed. Because governmental changes in the former communist countries have been so rapid, these studies also provide the opportunity to isolate the relative facilitation of governments from the societal culture. The work concludes with a summary of the arguments and a discussion of the implications for understanding management and organizational theory and behavior. Particular attention is directed to the implications for both scholarly theories and practice. Examples include the distinction between trust and mutual dependence, the difference between bureaucracy and pseudobureaucracy, the dysfunctional effects of such personal relationship-based organizations on employees’ experience of work and their performance, the effects of bargaining and paternalism on employee attitudes and behavior, and the value of structurebased theories in international management. The implications for understanding the relation of personal relationships to meritocracy, bureaucracy, and alienation, one approach to deconstructing culture, and for a better understanding of nonproximal influences on organizational behavior are explored. This argument also has several important practical implications, not so much for those who have worked long under nonfacilitative governments, but for those who assume facilitative government and yet are unaware of its practical effects on management and organizational practices. For example, these managers can benefit from insight into why such things as relationships are so important in these settings, and into the fact that cheating does not arise from individual moral deficiencies in such societies. This work has implications for

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whether managers can create organizations in which the internal corporate cultures are based on trust, responsibility, and merit in societies wherein people have learned that success really depends on obsequious ingratiation. STUDYING THE ORGANIZATIONAL EFFECTS OF GOVERNMENT The aforementioned ideas developed from the work of social scientists in a variety of social science disciplines and from insights gained from the author’s own research. The literature addressing the effects of nonfacilitative government comes from a wide range of sources, usually written for audiences far different from the audiences for whom this work is intended. Therefore, some care is taken to introduce these ideas and explain their relevance for scholars in organization theory and behavior and for management practitioners. The research program consists of direct observation and the collection of archival and other secondary source material as well as participant self-reports in the forms of structured and unstructured interviews and questionnaires from nine research projects. The studies are listed in Table 1.1. More detailed information regarding organization sampling and procedures can be found in the Appendix. When possible, assertions are tested, relying on data that have not been filtered or interpreted by other researchers or the author, namely, the reports of participants blind to the explanations presented here. Unquestionably, causal statements are made in this work that are not definitely proved by the data and prior research cited. Certainly, there is a risk in trying to isolate the effects of government on organizing and organizational behavior. Governments and their societies are inexorably intertwined. Previous writers have suggested that governments reflect their societies (Banfield, 1958; Geertz, 1973; Hamilton & Biggart, 1988; Putnam, 1993) and provide compelling evidence that existing cultures inexorably stamp their formal organizations of government. Certainly, a detailed discussion on the causes of nonfacilitative government are beyond the scope of this work (Lipset, 1994; Tocqueville [1835–1840] 1968; Weber, 1947).1 Many other factors vary with governmental characteristics, and because it is not possible to do experiments in which governmental features are randomly varied while other historical, 1 Scholars of political institutions have noted that “brittle” governments (i.e., incapable of sustaining themselves) can result from extreme poverty, a mismatch of ethnic and political boundaries (Lipset, 1994), few civil associations (Tocqueville [1835– 1840] 1968), and nontraditional authoritarian regimes (Weber, 1947), among others. Furthermore, fundamental transitions such as those that occured in the formerly communist states will certainly weaken government. For example, China is undergoing a rapid economic transformation with its dominating formal institution, the communist party, becoming increasingly less significant (Nee, 1992) The Economist has been providing a chronicle of these processes, for example in the March 8, 1997 issue.

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societal, and cultural features are held constant, the effects of governments can never be isolated with complete confidence. For example, it is not possible to isolate relative nonfacilitative government from other common covariates, such as the spread of democracy, and then watch individuals build their organizations over time. TABLE 1.1 Research Studies Years

Countries

Collaborators

Methods

Sampled organizations from relatively nonfacilitative governments 1989–1996

Hungary

Imre Branyiczki

Longitudinal data collection consisting of structured and unstructured interviews, archival and popular press reports, and questionnaires

1991

Czechoslovakia Michal Čakrt

Case study

1992–1993

China and the United States

Katherine Xin

Structured interviews

1993–1994

Lithuania

Arunas Kuras

Unstructured interviews and questionnaires

1997–1998

China and the United States

Katherine Xin

Unstructured interviews and questionnaires

Sampled organizations from relatively facilitative governments 1985

United States

Unstructured and structured interviews and questionnaires

1987

United States

Khalid Al-Aiban Unstructured and structured interviews and questionnaires

1988

United States

Unstructured and structured interviews and questionnaires

1992

United States

Lyman Porter and Anne Tsui

Structured interviews and questionnaires

This limitation was approached in several ways. First, an attempt was made to collect data from four different countries with nonfacilitative governments but very different cultures and histories. For example, according to Hofstede’s (1980a) cultural dimensions, China is a highly collectivist culture, whereas Hungary is one of the most individualistic. Common practices found across all sampled countries are, it is hoped, more likely to reflect the common factor—

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nonfacilitative government—than nongovernment-related differences in cultural values or history. Second, the focus was on those countries that have been experiencing the most rapid changes in government: communist and reforming communist countries. Here, rapidly changing governments provide an opportunity to link governmental policies and practices directly to changes in organizational practices and individuals’ expectations, attitudes, and behavior. Third, the data collection provided many opportunities to talk to people. They were asked to describe actions and pressed for explanations. Participant accounts that strongly implicate nonfacilitative government in their attitudes and behavior are reported throughout. Finally, although readers are cautioned that the examples and tests presented in this volume are not and cannot be definitive proof, the author does not shy away from stating the bold belief that government facilitation does matter decisively in the organizational practices as well as individual attitudes and behavior documented in this discussion. The author has tried to avoid couching causal arguments in academic terms such as “is associated with” and “covaries.” So much consistent data from so many sources suggest to the author that governments affect management practice, organizational form, and organizational behavior in the ways that she describes. She may have gotten it wrong, but these erroneous ideas will not be corrected by hiding them in obfuscation. It seems best for the author to lay out her case and let others take their best shots.

2 Organizing in Spite of Government: Nonfacilitative Government Governments are not the only factors affecting organizational form and behavior, but they are important, malleable, and ill-understood elements. Governments are important because organizations look different and function differently. Moreover, their effects on their participants all are affected by differences in these institutions. Governments matter in organizing: They make the rules by which organizations operate and hold the monopoly of legitimate coercive power. Yet, management scholars have largely treated them anecdotally, one governmental policy at a time. In this effort to provide a broader perspective, it is necessary to develop a framework of governmental effects. This framework is based on the idea that governments vary in their facilitation of independent organization. INDEPENDENT ORGANIZATIONS Independent organizations are those that operate independently of direct government dictate. They are not components of government, nor do they exist to achieve government-determined objectives. The concept of independent organization is key to the discussion, but one that is difficult to define because it does not exist as an absolute. Certainly, all organizations depend on and reflect the governments operating in the places where they do business. Yet, there are differences in both the degree and in the nature of dependences that has a profound effect on the form of organization and the behavior of the participants. A sufficient difference in degree becomes a difference in quality, as the Pacific Ocean is a very different entity than a raindrop. Independent organizations are free to set their own goals rather than pursue those imposed on them by the government. Independence may be completely absent, as in government ownership of a railroad or an armaments factory. Independence also may vary with differing levels of government interpenetration. Governments interpenetrate organizations when they establish laws and regulations governing organizational policies and practices. They vary from extensive interpenetration of independent organizations to none, what typically is called laissez faire. 13

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The more extensive the government’s interpenetration within organizations, the less it can operate in pursuit of its own nongovernment-determined goals. For example, independence has been reduced in organizations such as private primary schools facing government mandates to provide social services to their pupils, oil drilling companies required to enter into joint ventures with stateowned partners, and business service firms believing it is wise to hire the regional government leader’s son to secure governmental support. In each case, governments (or their agents) have decided that they can best achieve their own goals (improved social service provision, societal retention of profits from mineral extraction, family enrichment) by using their coercive governmental power to require that nominally independent organizations carry out this function. Certainly, greater interpenetration reduces the independence of nominally nongovernment organizations. Heretofore, the study of governmental effects on organizations and management practice has focused on the effects that differing levels of government interpenetration have on nongovernmental organizations. For example, the field of economics has long focused on the study of how different regulatory practices (e.g., minimum wage laws, domestic-content requirements for manufacturers, financial reporting requirements) affect organizations. Such work has made invaluable contributions to policymaking in the developed countries. However, it does not exhaust the ways that governments affect the form, practices, and behavior of participants in the independent organizations operating in their jurisdictions. In this discussion, the focus is on the effects of relative government facilitation on independent organization. Governments vary not only in the relative extent of their interpenetration of organizations, but also in the extent to which they facilitate independent organizations in doing their work. As detailed in the following discussion, government facilitation depends on fostered predictability, policies to support independent organization, and sufficient capability of the government to enforce its own laws and regulations. EFFECTS OF GOVERNMENTS ON INDEPENDENT ORGANIZATION Douglass North (1990) provided one of the best-known cases for the importance of what he calls institutions in economic exchange. Following Adam Smith, he argued that a major function of institutions, such as governments, is to reduce unpredictability by establishing stable structures for human interaction. He suggested that as economic exchange increases in complexity, involving more numerous exchanges among more individuals across greater expanses of space and time, unpredictability increases. Furthermore, variability and specialization also increase unpredictability.

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15

When exchanges are simple, involving local trade, repeated dealings with the same parties, a common set of values, and informal arrangements such as tradition, religious precepts, and ritual are sufficient to sustain them. As complexity increases, however, participants’ attempts to maintain personalized relationships break down, and they find that impersonal exchange requires the enforcement of a government with formal laws and regulations. North suggested that as the size and scope of exchange increases, the participants attempt to maintain personalized exchange as long as they are able to do so, through reliance on kinship ties, exchange of hostages, and codes of conduct, often with traditions and religious rituals designed to constrain participants. However, as exchange scope and complexity increases, enforcement by government becomes essential. Therefore, when exchange extends beyond simple local transactions, people find that they are working with and depending on strangers, and that the clear connection between quality of work and reward can become muddied by complexity, time, and distance. North noted that attempts to maintain personalized relationships and establish codes of conduct remain, yet, by themselves, they are insufficient for complex undertakings requiring impersonal relationships. In complex exchanges, this coercive third party—government—becomes essential because the opportunities to cheat rise with increasing complexity, and people will not take the risks involved in such efforts if they believe they will be cheated of their benefits. Governments maintain and enforce formal constitutions with legal systems for settling complex disputes that make cheating more difficult. Formal legal systems can handle more complex disputes, and more complex exchanges require formal organizations with hierarchies producing even more complex property rights claims (Van Creveld, 1999). For example, complex intellectual property rights and copyright laws enable film producers to invest large financial resources in production of a film that otherwise could easily that be stolen by someone making numerous copies from one videotape. Without reliable governmental legal and enforcement systems in place, these producers could never cover their costs, and so would not make films. In short, these formal governmental rules help to reduce the unpredictability that arises when exchanges are no longer repetitive transactions in which known participants operate with shared informal understandings. This is a primary function of governments. For all but the simplest most tradition-bound activities, governments are needed to create legal infrastructures and enforcement regimes that enable buying and selling to strangers, as well as planning far enough ahead to allow the participants to judge whether personal and financial investments are worthwhile. Fligstein (1996) summarized these ideas in a model to explain the importance of governments, or what he called states, in providing stable and reliable conditions under which organizations form, compete, cooperate, and exchange. He reiterated that governments are important to the formation and ongoing

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stability of markets because independent organizations could not function without a set of rules governing which actions are not permissible (e.g., the elimination of competitors) and who is entitled to the products, services, and profits of organization. Governments may intervene directly or regulate, but Fligstein (1996), making a point central to the current argument, suggested that governments can vary in their capacity to intervene. That is, some governments cannot maintain sufficient control over their citizens or their own officials to ensure reliable enforcement. Many states do not have the capacity to enforce their laws, and such incapacity can be doubly costly, both in the absence of this necessary function and in the unpredictability of erratic, partial enforcement. Therefore, governments are necessary to complex organizations. Yet, North (1990) and Fligstein (1996) focused on the role of formal and strong government in the economic development of Western countries, so their argument takes on a teleologic cast. A case for the necessity of formal government to complex organizational activity seems to imply that organization would not exist in the absence of favorable government conditions. In any case, the authors are silent on the subject of complex organizations under no government or nonfacilitating governments. Yet, complex organizations do operate in countries without the advantages of strong governments capable of enforcing their laws. If North and Fligstein are right, somehow individuals have found ways to overcome these impediments. To understand how they organize in the absence of facilitative governments, it is necessary to draw on a literature that addresses what is called modernism and traditionalism. MODERNISM AND GOVERNMENTAL FACILITATION The arguments of North (1990) and Fligstein (1996) suggest that complex organizations depend on modern governmental forms, indicating that insights might be gained from an understanding of the concepts of modern and traditional societies. The distinction between modern and traditional societies began with modern social science itself (Comte [1832–1840] 1855; Toennies [1887] 1957). Because these have been central concepts in the comparative institutions work of so many disciplines, these societal forms have been called by many different names. For example, Weber (1947) called the modern form rational-legal authority and distinguished it from traditional authority. Parsons and Smelser (1956) analyzed modern and primitive forms; Putnam (1993) described civic communities and amoral familism; and Coleman (1993) labeled the modern societal forms purposive organization, in contrast to traditional, primordial social organization. Recent scholars have sought to elaborate the different forms and practices of traditional societies, with Collins (1997), for

NONFACILITATIVE GOVERNMENT

17

example, exploring what he called agrarian-coercive and Walder (1986) investigating neotraditional political systems. Although these theorists make the distinctions necessary for their analytic focus, all agree that what commonly have been called modern societies are characterized by highly differentiated subsystems, which tend to be purposely constructed around offices, not persons. Government is distinguished from business, and education from family, with each of these subsystems expected to operate according to different rules. Consequently, for example, in modern societies it is appropriate to provide for others in a family on the basis of their needs, with infants and the infirm receiving more time and support, whereas in business, compensation may be based on the market value of the participants’ contributions. By contrast, in traditional societies, less differentiation exists between subsystems, and relationships are dominated by concern for who the person is rather than for his or her nominal office. Therefore, a person might obtain an appointment as foreign minister because he is the king’s brother, with his status as the king’s brother, not his office, dominating his dealings with others. Modernism certainly appears to be what North (1990) and Fligstein (1996) described, so independent organization would appear to require modernist facilitative government institutions. Yet, there is a growing body of work indicating that large complex organization does take place in traditional societies under conditions of government nonfacilitation and even active impediment. The most important of these studies on nonfacilitative government is Putnam’s (1993) report on the development of new regional agencies in the more modernist north of Italy and the more traditionalist south. Having become a unified country only relatively recently, Italy contains regions that have experienced centuries of differing government forms. Northern Italy has a long tradition of self-governance via communal republics and thus has local societies rich with independent associations and civic engagement. In the South, centuries of occupation and then local despotic rule created a civic culture first described by Banfield (1958) as amoral familism, characterized by self-reinforcing patterns of distrust, exploitation, and stagnation. In the North, citizens attended public forums, and expected their elected representatives to heed their concerns. In the South, wealthy families and crime syndicates controlled the institutions of government, dispensing favors and exacting retribution on the basis of personal loyalties. Thus, the North had government institutions that could be characterized as modern, that is, differentiated from local business organizations, with participants obtaining office on the basis of merit not on loyalty to a powerful patron. In contrast, the South was more traditional, with less subsystem differentiation, and with favoritism dominating decisions. In 1970, the Italian central government implemented a new regional government intended to assume some local and some federal functions. This

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provided a unique opportunity to study the effects of modernist or traditional local expectations for government on the form and character adopted by these nominally identical organizations. Although these are government organizations rather than independent organizations, Putnam’s study provides a unique opportunity to examine how nominally identical complex organizations changed in response to local expectations of government functioning. Putnam (1993) and his colleagues found that these new regional organizations replicated the expectations and governmental practices of the societies in which they operated. The northern regional governments attracted the active participation of citizens and were judged to be more effective, with higher levels of performance and citizen satisfaction than the new regional institutions in the South. In the South, the regional governments were appropriated by local elites and crime bosses, and southerners continued their traditional roles as alienated, dependent supplicants. Yet, it should be noted that the new regional government organizations in the South were as large and as complex as those in the North. Although historically, large complex organizations may have arisen under the facilitating conditions of modernist societies, increasing global economic and institutional integration has placed large organizations in societies with less facilitating governments. Even the most traditional societies may have international air travel and host local branches of large multinationals. Yet, without facilitating governments, these complex organizations, such as Putnam’s southern Italian regional governments, would be expected to look and function differently under differing conditions of governmental facilitation. Just how different is suggested by a close study of organizations under communism. Insight into how organizations appear without the facilitation of modernist governments is suggested by the growing empirical work on the transition from communism to capitalism. This work provides vivid illustrations of organizational practices and organizational behavior, first under hostile, and later under weak government. NEOTRADITIONALISM AND GOVERNMENTAL FACILITATION Scholars have consistently characterized communist societies as neotraditional rather than modern. According to Walder (1986), who coined the term, communist neotraditional societies are a variant of a classically traditional society. Virtually all scholars who have studied communist societies note that participants rely more on personal favoritism and illegality and there is less differentiation between the government and other institutions than in modern capitalist societies. Walder (1986) contended that despite the superficial trappings of modernism, the societies of communism were neotraditional because they operated primarily on favors and personal ties. He contrasted them with modern organizations, that have restrictions on the personal discretion of

NONFACILITATIVE GOVERNMENT

19

supervisors, open conflict and contracts. In communist neotraditionalism, the workplace is the focal point for the delivery of public goods and services not available from other sources. The party tries to eliminate all competing organizations, and the discretion of supervisors is relatively unrestrained by enforceable regulations. Despite these organizations’ modernist forms, “particularism” was necessary to communist political control. Particularism refers to actions based on an exclusive attachment to one’s own group, nation, family, or circle of friends. To maintain political control under communism, wide discretion was delegated to local managers and party officials (usually the same people), who were free to exercise this discretion as they saw fit. Party officials had substantial influence over promotions, raises, and the nonwage benefits supplied by the employer, as reflected in the quotation in Box 2.1. Although such extensive supervisory discretion may have been more complete in Asian than in European communist workplaces, in all of these societies, the local managers/party officials retained wide latitude in making particularistic decisions about many more things than in any modern workplace. For example, in communist Hungary, many consumer goods simply were not available on the market, so refrigerators, apartments, and foreign travel were distributed to companies who would, in turn, decide who would receive them. Company managers had complete discretion to distribute these goods to whomever they favored. This resulted in the central feature of communist society workplace culture: a form of institutionalized particularism known as patron-client relations. As Walder (1986) suggested, patron-clientelism was not separate from the formal organization, but rather emerged from standard party practices. He emphasized that patron-clientelism was in fact created by party practices, as party leaders tried to control the workers by developing relationships with a few loyal and cooperative workers. Although the party allocated this discretion to local managers with the intention that they could allocate rewards and punishments on the basis of employees’ (or their family members’) political loyalty, such wide discretion, of course, invited wide abuse. For example, in a series of interviews in 1989, the author asked managers to recount any examples of wrongdoing at work, which are reported in Box 2.2. The lack of legal constraints on those in power in communist societies has been widely noted (Burawoy & Krotov, 1992; Litwack, 1991; Simis, 1982; Voslensky, 1984). Litwack (1991) argued that communist societies functioned in the virtual absence of legality, providing few constraints on those in powerful positions. As Simis (1982) stated, the lack of constraint on the personal power of leaders under communism has a long history. The Soviet regime never considered itself bound by the law and any organ within the system, from a district council to the Supreme Soviet, and any court, from a people’s court to

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the USSR supreme court can—indeed must—violate the law on orders from its opposite number in the party apparat. (Simis, 1982, p. 28) Stark (1989) set forth two relevant points: First, fundamental legal principles in communist societies tended to be based on vague regulations, so that it was difficult to be confident that one would not be arbitrarily punished. Second, actors in these societies typically assumed that they would need to act in a less than legal way to operate effectively. For example, in the companies studied in Hungary, Czechoslovakia, and Lithuania, gifts of various sorts were commonly used to secure reliable supplies. A private entrepreneurial research site in Hungary in the early 1990s had a competitive niche of “knowing how to get paid in communist countries.” For example, in 1988, a large bank in Leningrad wanted to buy a business machine company’s coin-counting machines. The bank was not authorized to pay for such machines, so they looked among their banking clients and found one with a product—marble—that could be sold in the West for convertible currency. The business machine company therefore organized a joint venture between itself, the bank, and the marble quarry. The Russian marble quarry shipped marble to Austria, diverting it from its plandictated destination, and delivered it to an Austrian-based joint venture (between the business machine company and an Austrian import-export company), which sold it for convertible currency. When the marble was delivered to the Austrian trading house, the business machines were delivered to the bank, and any remaining convertible currency profits were divided among the marble quarry, the Leningrad bank, the Hungarian business machine company, and the Austrian import-export company. Notably, this prominently successful entrepreneurial company collapsed once its sophisticated expertise was no longer needed after Hungary’s full conversion to a market economy. Box 2.1 In China, shop officials screen requests for factory housing and special distributions of consumer items. They review and approve requests for benefits under state labor insurance guidelines: vacations, annual home leave, personal leave, visits to sanatoria, special medications, and welfare and loan payments. Shop supervisors are also responsible for writing character reports, relaying information to the party and security apparatus, securing permission for workers to travel, and deciding on the application of fines and other punishments for breach of factory rules. (Walder, Communist Neo-Traditionalism: Work and Authority in Chinese Industry © 1986, The Regents of the University of California, p. 22. Reprinted with permission.)

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Certainly, according to Parsons and Smelser’s (1956) distinction between highly differentiated modern societies and less differentiated traditional ones, communism can be seen as a less differentiated form. The party assumed control of all the other societal subsystems. First, and most important, it assumed control of the government. Second, the party, via designated government agencies, acquired all independent organizations. It not only took over businesses such as shoe factories and banks, but it also created and funded groups such as trade associations, women’s associations, and environmental groups, mimicking modern associational pluralism without the substance. This subordination of the artistic, scientific, social, economic, and legal subsystems to one political entity under communism has been amply described by scholars (Burawoy & Krotov, 1992; Kornai, 1992; Voslensky, 1984; Xin & Pearce, 1996). Box 2.2 Manager A’s large construction company sponsors sports teams that host and visit foreign clubs. High-ranking party officials in the company always appoint themselves as officials of these clubs so they can obtain foreign travel. What the manager thought of as wrongdoing was not this, but the fact that these clubs were only partially supported by company funds, with the remainder coming from “voluntary” workers’ contributions through their [party controlled] trade union…. A previous employer of Manager B was created as a “workplace” for relatives of high party officials to provide them with additional family income. The organization had virtually no real work to do. On the one hand, he said he had a wonderful “quality of life”— little work to do and a warm, supportive supervisor. On the other hand, he didn’t like “being forced to do illegal things” for the powerful. For example, he was asked to list the son of a Central Committee member as an employee so the son could get company housing, even though the son never set foot in the company. (See Appendix; 1989–1996 Hungarian longitudinal study) However, this communist attempt at total societal integration overwhelmed the capacity of government institutions, some more completely than others (Boisot & Child, 1988). This breakdown meant that semiautonomous actors bargained and traded on personal relationships instead of following formal procedure (Antal-Mokos, 1998; Kornai, 1992; Stark, 1996; Walder, 1986). Consequently, governments and organizations under communism functioned more like those of traditional societies than like those in modern ones, not because they tried to recreate the grace and predictability of traditional societies, but because

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substantial, unconstrained discretion needed to be delegated to local party officials to ensure that any political dissent could be quickly managed, and because government decision makers could not cope with such a complex information problem. In turn, these officials with wide discretion were themselves controlled by the unpredictable threat of investigations or purges. During the transition from communism, these features of neotraditionalism— dependence on personal ties, patron-clientelism rather than legality, vague regulations, and undifferentiated subsystems—were exacerbated by the confusion attending such a mammoth change. For example, Hsing (1998) describes the experiences of Taiwanese investors in China. He noted that a partnership with the local military unit and a good relationship with the local public security bureau allowed Taiwanese factory managers to ignore Chinese labor and tax laws. These factory owners would hire retired People’s Liberation Army officers as personnel directors, who would use their personal connections to staff the factory. This was simply an extension of the existing practice in which the local Chinese communist government officials’ mixed the government and business functions of the newly formed independent private organizations. As described by Hsing, there was no sharp distinction between private and public domains in transforming China (i.e., the subsystems continued to be the weakly differentiated ones of neotraditionalism). In summary, theorists agree that complex organization is facilitated by effective maintenance and enforcement of laws supporting independent organization established by a capable government. Such societies have long been characterized as modern, yet we discover that complex organization can and does occur in societies without facilitating governments, but that organizational practices may look quite different in such settings. Before exploring these differences in depth, the ways in which governments facilitate and impede independent organization can be summarized as follows. GOVERNMENTAL CHARACTERISTICS FACILITATING INDEPENDENT ORGANIZATION Three characteristics that affect the extent to which governments facilitate independent organization are represented in Fig. 2.1. All three should be regarded as dimensions along which governments may vary, with the different combinations giving the varied forms of nonfacilitative government their distinct characters. Therefore, governments may vary in the extent to which they are hostile or supportive of independent organization, erratic or predictable in their polices and practices, and weak and thus incapable of enforcing their polices and regulations or strong and capable of seeing the laws executed. These characteristics are proposed to be multiplicative, such that a hostile, erratic, and weak government would be the extreme case of government nonfacilitation, but

NONFACILITATIVE GOVERNMENT

23

an implacably hostile government, an extremely erratic one, or a government thoroughly incapable of enforcing its will also would be nonfacilitative.1

FIG. 2.1. Dimensions of governmental characteristics facilitating or impeding independent organization. Before these characteristics are discussed, it is necessary to note that this list does not include government facilitation of a particular organization via monopoly concessions enforced by the coercive power of government, as when the British government granted the East India Trading Company the exclusive right to trade in the Far East. Such concessions or any other special treatment for a favored organization certainly would be seen as facilitative of that particular organization. However, these practices are not facilitative of independent organization. Such organizations are creatures of the governments that create and sustain them, and this fact certainly affects the form of the organization and its managers as well as its participants’ actions, as is detailed by those studying privatization (Antal-Mokos, 1998; Estrin, 1994). To the contrary, when such politically favored organizational forms become dominant in the economy, their politically focused practices tend to create impediments for independent organization.

1

For the mathematically inclined, if we give a value of zero to extremely hostile (no support), highly erratic (no predictability) or weak (incapable) governments, when we multiply them together, any one value of zero would produce zero facilitation.

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Hostile or Supportive Governments may view their role as supportive of independent organization or as hostile. Impediments to independent organizing may be a purposive strategy, intended to make independent organization as difficult and costly as possible. The clearest example of this hostility to independent organizing is communism, in which independent organizations of all kinds are illegal. Interestingly, independent organization was difficult to eradicate by communist authorities. Simply forbidding it was insufficient. In the early years of communism, the authorities found they were unsuccessful in eradicating petit bourgeois activity.2 Whereas plants and shops could be nationalized, small manufacturing or services run from the owner’s home were hard to find and suppress. Furthermore, authorities found that individuals would pool their meager finances to provide seed capital for more ambitious underground operations. Government officials approached this problem in several different ways. First and most prominently, they established price and wage controls designed to provide for basic needs but leave virtually no cash available to hoard as seed capital. Second, they required that all able-bodied adults have a work unit (i.e., full-time job in a state organization). A worker who failed to present a work-unit identity card when asked could face prosecution for vagrancy. These and a host of other policies, taken as a whole, were designed to eradicate independent organizing, thus constituting nonfacilitation of independent organization in an extreme form. Nevertheless, even under these ambitious attempts to impede independent organization, it does occur. Communist societies’ second economies and black markets have been extensively documented (Stark, 1989). In the author’s own research, the founder of one studied Hungarian private entrepreneurial company had been “out of business” for only a few years during the most oppressive period of Hungarian communism (early 1950s). He had run a company until the communists nationalized it, and then continued small-scale manufacturing in his apartment, taking care to have an official place of work in a state enterprise to avoid arrest for vagrancy. In the 1960s, he slowly expanded his business as various reforms permitted increased independent activity. Hostility to independent organization can be subtle and partial. For example, governments can impede independent organization by maintaining control of a critical resource. (E.g., government ownership of all banks as in many European formerly communist countries in the early 1990s). When governments control a critical resource, they do so to further their own objectives. These objectives might be in the public interest, as when government officials on the boards of state-owned banks in Poland, the Czech Republic, and Hungary during the early 1990s directed the banks to provide credit for large companies on the verge of bankruptcy to avoid massive social dislocation in the regions these companies 2

Dr. Imre Branyiczki, personal communication.

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25

dominated. Similarly, governments may want to maintain control of scarce building materials to ensure that high-priority infrastructure projects are completed in a timely manner. When critical resources are acquired on open markets, any financially viable organization can obtain what it needs. When the government controls these resources, organizations in political favor receive them. Nevertheless, whether government officials’ intentions are benevolent, mistaken, or venal, under these circumstances, those wishing to build independent organizations become dependent on these government officials’ favor for their prosperity. Hsing (1998) noted that China’s local officials have monopolized key economic resources like credit, loans, foreign exchange, and raw materials. They also possess regulatory authority in granting tax relief and issuing investment permits. This has made the local officials the most competitive players in China’s new economy. (p. 118) Additionally, the managing director of the studied large Czech gas products and equipment company described the effects of his extensive dependence on the local governmental authorities’ discretion under communism: Ten to fifteen years ago the local authority discovered a shortage of hay. All companies in its region were made responsible for a quota of hay and accountable for it to the county communist party committee. Our assigned meadows were inaccessible for the heavy mowing equipment so we had to select those people from Ferox who understood how to work hand scythes. Our managerial problem was how to choose people who knew how to cut hay! Which employees were needed least that day? Our lawyer went out to cut hay. We had to provide lunches and transport them. Then the local committee decided that yields were too low so we were invited to purchase a quota of fertilizer each spring. (See Appendix; 1991 Czechoslovak Study) In China, as independent individual and communal enterprise was allowed, stepby-step, one of the last things the government retained was control over what it called strategic goods (e.g., steel, lumber, and cement). Therefore, small entrepreneurial companies found that if they wanted to build a factory or other business structures, they needed to procure critical building materials from government officials. Because there is always a shortage of any governmentprovided resource (Kornai, 1992; Nove, 1983), these supplies were problematic. How then could the executives of independent organizations ensure their procurement of critical supplies? They could do so only by building good

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personal relationships with the government officials, or their superiors, who controlled such supplies. As described in chapter 3, this might be done by forming a joint venture with them (or a favored state-owned organization), by taking government officials’ relatives as partners, or by insuring that in other ways the nominally independent organization pursues these officials’ objectives. Dependence on a government monopoly for a critical resource reflects a lack of support for independent organization. Managers of such organizations are not free to obtain that resource, and whatever the intentions of such restrictions, they do not facilitate independent organization. Therefore, governments vary in the extent to which they are hostile to independent organization or supportive. Hostile governments seek to impede independent organizations. The impediment can involve forbidding independent organization through various practices designed to make independent organization costly or difficult. Those seeking to organize independently under hostile governments find that they become dependent on those with the power to grant dispensations, provide a critical resource, or just look the other way. Erratic or Predictable When governments seek to support independent organization, one of the most important ways they may do this is by fostering a predictable environment in which organizations can operate. As North (1990) noted, as economic exchanges become more complex, the participants need the greater predictability that only formal governments can provide. Unpredictability can be distressing and costly not only to businesses. Even if people wish to dedicate themselves to the service of others, they need to know that their teacher salary, however small, will be reliably paid, that the hospital will have electricity, or that the funds they have raised for orphans will be used to help them and not to enrich their keepers. No one will donate to a worthy cause if he or she fears the possibility of being duped, nor will any undertake years of study if there is little possibility of practicing one’s art or science in the future. In all their forms, independent activities and organizations depend on governments to provide predictability by securing their property and punishing those who would misrepresent themselves to gain at another’s expense. The importance of unpredictability has long been a central one to both organizing and organizational behavior (Katz & Kahn, 1978; Thompson, 1967). An early theorist of organizational design, Thompson (1967), conceptualized organizational designs as ways to isolate and limit the costs of unpredictability stemming from the nature of the task performed. The classic example provided by Thompson is the manufacturing plant. Sales fluctuate seasonally, but it is more efficient to run manufacturing operations at a constant pace so parts can be ordered in advance (avoiding rush shipments), overtime work can be avoided (which can reduce quality and add to costs), and workers can be hired and

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trained before needed. If the widely variable seasonal sales orders arrived directly at the plant, the costs of a responsive manufacturing process would quickly escalate, and the inevitable delays could mean the loss of customers. Thompson (1967) suggested that the solution to this classic problem of predictability is to forecast sales demand and to manufacture products at a constant rate, allowing them to accumulate in a warehouse ready for shipment when the order arrives. Thus, the amount of unpredictability in the work has a direct effect on organizational form and practices as organizations seek to isolate the unpredictability. This allows them to gain the efficiency and performance advantages of greater predictability of operations wherever possible. Here it is proposed that just as organizations vary in form based on the unpredictability inherent in the task and technology they use, so also will they take different forms and adopt different practices in order to manage the unpredictability arising from differences in government facilitation. Unpredictability affects not only organizational design, but also the behavior of individuals working in these organizations. Those studying individuals’ behavior in organizations also have been concerned with the effects of unpredictability. At the individual level, unpredictability usually has been framed as role ambiguity, an absence of usable knowledge about the effects of one’s actions, and this is expected to lead individuals to experience greater tension, job dissatisfaction, a sense of futility, and lower self-confidence (Kahn, Wolfe, Quinn, Snoek & Rosenthal, 1964; Pearce, 1981). For individuals, greater unpredictability can mean wasted effort, and even paralyzing neurosis because they fear that any action they take may result in punishment (Seligman, 1975). Government unpredictability can be expected to have the same effects as task-based unpredictability, producing fear, dissatisfaction, and as discussed later, complex coping strategies among individuals. In fact, psychological distress can be even more severe, because governments maintain coercive powers more threatening than the more limited risks of job malperformance. Furthermore, managers running independent organizations will seek to buffer their organizational work from governmental unpredictability for the same reasons, if not in the same ways, they buffer task unpredictability. The primary way governments build predictability is through the provision and enforcement of property rights. Property rights define who has claims to the use and dispose of property, material goods, and profits (what some call “residual claims”; Jensen & Meckling, 1974). As Fligstein (1996) argued, these are more contested than many theorists seem to assume in all societies, so they properly should be seen as varying from highly ambiguous (as in societies transitioning from communism; Nee, 1992; Stark, 1996) to assumed as a given for most practical matters. Governments establish and enforce rights to hold private property, to keep it for personal use, and to use any profits. Whereas the incentive value of being able to retain profits is obvious, the important role of

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private property for organizing nonprofit independent organizations such as schools, charities, or political parties should not be underestimated. This is so because when private property rights are secured by governments, individuals wishing to organize an activity are free to purchase or hire a facility to conduct their good works. Without this right, only those who are politically favored can obtain a room to organize a conference or teach others. Under reform communism in Hungary (1968–1989), small-scale independent businesses were allowed, but commercial property was not private. This meant that only those independent organizations favored by local officials could operate. Interestingly, the transition from communism has blurred property rights in many instances. Stark (1996) described how the clear status of collective property eroded with the growth of the second economy under Hungarian reform communism. Then, it was common for managing directors of stateowned enterprises to use state-owned assets for private business or to develop sideline businesses, as was illustrated earlier by the Russian bank and marble company. These allowed the executives to obtain supplies or parts not otherwise available, to ensure that workers received the higher compensation necessary to prevent them from leaving for the growing private sector, and to provide opportunities for personal enrichment. Nee (1992) called such ambiguous property rights hybrid property. Stark (1996) presented evidence to show that such transformation, rather than clearer privatization, served to blur property rights, the boundaries of organizations, and the legitimacy of justifications for managerial action, all tending to decrease predictability. He suggested that transformation to a capitalist economy has been impeded by an overabundance of accountability, as reasons for any actions can be offered. Because so many different ministries, agencies, and banks have a voice, each can be put off by a story that one of the others will not permit, or that they require or prevent it. Under such unpredictability, independent organization is not facilitated. As an illustration, under communism health care services, such as dentistry, were state property, and dentists were instructed to serve all the patients in their jurisdiction on a first-come, first-served basis. However, under Hungarian reform communism, dentists would take patients on a private basis (patients paid a fee to get more rapid or more extensive service than allowed by the state). It was common for dentists in the late 1980s to see their state patients in the morning and their private patients in the afternoon in their state provided and provisioned offices. Once private dentistry and medicine were legalized at the end of that decade, its development was impeded because it was not economically feasible for a dentist to purchase equipment and pay office rent when their competitors continued to use their state-owned equipment and space to see private patients. Furthermore, when government laws are written and openly published so all may have access to them, this increases predictability. First, and obviously,

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written laws and regulations are clearer than spoken promises and assurances. In addition, codified laws and regulations foster predictability by reducing dependence on the personal goodwill of government officials. The importance of this practice is best seen in its violation. In China, some laws are nebu, a state secret. Factory managers can never be confident that the supplies they need to import will not be subject to a customs agent’s personal assessment regarding whether a nebu regulation applies to their imported parts. It is not surprising that remaining in the good graces of these officials remains a pressing priority for executives in China. This is not as rare as many readers unfamiliar with nonfacilitative government may assume. For example, Putin’s earliest decrees after becoming acting president of Russia in January 2000 contained numerous secret paragraphs (Gessin, 2000). In addition to secret laws, the wording of written laws may be so vague that government officials are free to apply them at their own whim (Redding, 1990; Stark 1996). The consequences of vague laws and the wide latitude they give government officials are illustrated in the article in Box 2.3. Although these examples are extreme, milder variants are pervasive. Moreover, clear, open laws that foster predictability are applied prospectively, not retroactively. Clearly, a law that did not exist at the time of the action would not be knowable by the actor. Yet, frequently, laws that are fundamental to organization are applied retroactively. For example, in the Czechoslovak case study, the managing director of an American-Czech joint venture complained that the tax laws for the current year had not yet been passed by the legislature. Yet, current law stated that the chief financial officer and chief executive officer were liable for criminal penalties (with prison terms) if any accounting law was violated, making them quite nervous. Another retroactive lawmaking practice is seen when governments unable (or unwilling) to control inflation through control of their own spending declare certain currency notes void. For example, in 1987 the military junta in Burma canceled all banknotes of the two highest denominations, thereby destroying 80% of the money in circulation, and so most the populace’s savings. Governments also seek to foster predictability for organizations by building various kinds of supporting infrastructure in many ways. Governments may invest in public goods, such as roads, education, or health care, that facilitate independent organization by reducing transportation costs, providing a healthy labor pool able to learn sophisticated technologies, and the like. Governments may establish legal frameworks encouraging the movement of capital to profitable organizations by establishing laws requiring transparent financial institutions, bankruptcy procedures, and other institutions that encourage investment in companies run by strangers rather than a cousin’s machine shop.

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Box 2.3 Do you want to deter Russian crooks from bothering your Moscow office? These days, a superstubborn receptionist rather than a lot of gun-toting bodyguards is likely to be a businessman’s best ally. Criminally minded officials rather than hoodlums are now the biggest threat to corporate security in Russia, and fending them off is a question of brain rather than muscle. It used to be different. In the anarchic days of the immediate postSoviet era, any visible business was likely to be visited by beefy, singleminded men, offering security from their competitors in return for a large cut of the profits. Refusals were inadvisable. Two things have changed. First, companies’ own security has become a lot better…. Second, the more intelligent crooks have realized that the state’s powers to extort are far more menacing than those of a mere private hoodlum. The criminal infiltration of state bodies that have the power to snoop and confiscate has been one of the most sinister developments in Russia during the past few years. Russia’s idiosyncratic system of public administration gives bureaucrats sweeping powers, and their victims correspondingly little recourse. Given a peek inside a company’s books and files, bent officials can face managers with the unappetizing choice of a huge back-dated fine for some fictitious or trivial offense (most likely compounded at some arbitrary and punitive rate of interest), or, alternatively, an “administrative payment” to the official concerned. (The Russian Mafia means business [1998, July 4], p. 60, The Economist) Another form of government-supplied predictability is maintained by institutional structures and processes that include regulation, insurance agencies, and the like (Shapiro, 1987). For example, the existence in the United States of a Securities and Exchange Commission that requires certain financial information be disclosed about companies seeking to have shares publicly traded, monitors for insider trading, and so forth helps to facilitate predictability by increasing the amount of information openly available. In short, unpredictability is both costly to organizations and personally distressing to those who must work in such environments. Governments seek to counter these problems by establishing the rights to hold property privately, and by codifying laws, applying them prospectively not retroactively, and writing them in ways that minimize the discretion of individual officials. Governments also facilitate predictability by the provision of physical, intellectual, or fiscal infrastructure. As the examples illustrate, many erratic governments are not that way by choice, but may find themselves coping with circumstances so unprecedented that they make predictability impossible, at least in the short run.

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Weak or Strong Governments differ not only in the extent of their support for independent organizations and in the predictability they provide, but also in their ability to enforce their laws and regulations. That is, many governments are incapable of maintaining stable and reliable enforcement. This has enormous practical implications for independent organization that are only now being explored by scholars. Many governments are weak, and thus unable reliably to enforce their laws governing property rights, contracts, and the like (Fligstein, 1996; RoseAckerman, 1999). Sometimes the failure of government is pervasive, whereas other times, governments may reach only limited territories or groups. Writers such as North (1990) and Fligstein (1996) have articulated the role of governments to those who may have lost sight of its importance in maintaining the conditions for independent economic activity because strong facilitative government is taken for granted in their societies. Yet strong governments are far from the rule, as is illustrated in Box 2.4. Geertz (1993) described how first the Moroccan Alawite monarchy, next the colonial powers, and then the postrevolutionary governments struggled to bring these hundreds of competing centers of power under their control. Such halfpolities become increasingly unmanageable as the demands for government facilitation commensurate with complex organization confront governments consisting of such weak groups and individuals all struggling to gain (or avoid) control. This is so because these contending groups render governments incapable of carrying out their own directives. Such nonfacilitation may range from the mundane to profound. There are numerous examples of Western executives who took government facilitation for granted and then were surprised by the effects of its absence. One is illustrated in the article excerpted in Box 2.5. In this case, it is clear that Chinese officials did not intend to impede Avon Products and Mary Kay, but that these companies rather were the unintended victims of a central government unable to control its local officials. Such a weakened government was forced to develop heavy-handed laws and enforcement regimes to prevent the more serious problem of pervasive fraudulent business practices. Furthermore, governments are weakened when government offices are acquired by patronage or sale. These sales sometimes reflect the government’s inability to control its local officials (such sales rarely are legal and formalized). Weber (1947) provided numerous illustrations of how the sale of government offices produced inept government. To cite one of his examples, when the office of provision supplier to the armies was sold, armies literally died of starvation in the field. Once supply provision became professionally managed, armies were more reliably provisioned.

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Even when not producing inept officeholders, the sale or patronage disbursement of government offices impedes independent organization. When offices are bought, government officials realize that their job security does not depend on responsive, expert service. This leads to distortions in the administration of law and regulation. Often, these officials, expecting to sell decisions to recoup their investment, coerce payments from those requesting permissions, permits, and licenses. Wade (1981) provided a detailed analysis of how corruption among Indian canal engineers had a negative effect on economic development by leading to faulty canals. He suggested that office selling was based on the assumption of a certain level of bribery opportunity. Contracts therefore were let to those organizations paying the largest bribe, who felt no need to produce functioning canals, and the resulting unreliable water supply was distributed to those private farmers who paid the highest price to the official. Weak, incapable governments create serious operational difficulties for independent organizations. To cite just one contrast, in the United States executives normally do not worry that the fire safety inspector will threaten them with an unfavorable evaluation unless they have secured personal protection through a good relationship with someone in that office, a common practice in China. This is not to say that executives operating in societies with capable governments do not have vehicles for obtaining favorable laws and regulations. It is just that they do so largely by attempting to get them written in public forums rather than by inducing an official to produce a favorable review as a personal favor. Box 2.4 Traditional Morocco consisted of an enormous, ill-organized field of rapidly forming and rapidly dissolving political constellations on every level from the court to the camp, every basis from the mystical to the occupational, and every scale from the grand to the microscopic. The continuity of the social order lay less in any durability of the arrangements composing it or the groups embodying it, for the sturdiest of them were fugitive, than in the constancy of the processes by which, incessantly reworking those arrangements and redefining those groups, it formed, reformed, and re-reformed itself. (Geertz, The Interpretation of Cultures © 1973, Little, Brown, p. 246)

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Box 2.5 Wuhan, China—Door-to-door sales networks can seem dangerously intriguing to people still gullible about tales of easy money, so when a craze for selling ankle massage machines hit this city early this year, it spelled trouble. Many thousands of wide-eyed men and women clamored for a chance to sell, convinced that it was the road to riches. They were willing to pay up to $500, almost a year’s salary for most urban workers, just for the right to cart an ankle massager door-to-door. But the frenzy, for selling was limited, it turned out, to selling. Few people wanted to buy. And no wonder: Anyone who looked closely could see that the ankle massager does not really massage the ankle at all. It simply shakes it back and forth. “I lost my own money, my wife’s money, my parents’ money, my brother’s money, my friends’ money,” said Fu Yanbing, who borrowed from so many to buy a small truckload of ankle massagers. “My wife says I have a year to pay it all back or she wants a divorce.” In April, citing a rash of fly-by-night operations like the one that tricked Mr. Fu, the Chinese government banned all door-to-door selling, or direct sales. When the announcement was made, managers at many of these companies closed shop and fled, provoking riots in Wuhan and other cities where salespeople were unable to return unsold goods. The ban has been a disaster for American companies like Amway, Avon Products, and Mary Kay, which have spent heavily trying to apply a direct sales formula for soap, cosmetics, and other products in China’s vast market. The ban was intended to clamp down on illegitimate sales operations, many of them run by local Chinese and Taiwanese businessmen, which played shamelessly on the native aspirations of a people still emerging from poverty and not yet wise to the dark side of capitalism. For a directsales giant like Amway, it has been a lesson in the utter unpredictability of doing business in China. Amway has invested more than $100 million since it came to China in 1995, and it was careful to secure official approval while building a network of 80,000 distributors, or people selling door-to-door full-time. In 1997, Amway sold $ 178 million of personal care products. Chinese officials met extensively with Amway executives in Beijing recently, insisting that Amway shift its sales from the street into stores. Amway executives say they are committed to staying in China, but want to try to avoid sacrificing their core sales method. “We realize the Chinese have concerns,” said Richard Holwill, Amway’s director of international affairs, based in Washington. “But we have a basic bond with our distributors worldwide that we will not sell in the retail outlets.” Executives at Avon and Mary Kay also expressed amazement that faced

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with a situation that called for better regulation and supervision, the Chinese authorities instead issued a blanket ban on door-to-door sales, effectively punishing legitimate operations along with fraudulent ones. (A smile, a shoeshine, and a scam in China [1998, May 27] p. A4, The New York Times. Copyright © 1998 by the New York Times Co. Reprinted by permission.) In summary, weak government can be characterized by a general inability to enforce contracts and collect taxes impartially, what commonly is called the “rule of law,” in which individuals and organizations are treated without favor, as equal before the law, by the police and judiciary. The impartial application of laws facilitates organization in several ways. First, it makes the costs of different undertakings more predictable. As Lipset (1994) stated: Where power is arbitrary, personal, and unpredictable, the citizenry will not know how to behave; it will fear that any action could produce an unforeseen risk. (p. 15) Second, organizational activities involve numerous risks based on the fact that most transactions cannot be completed on the spot. Few are paid at the end of each workday, and many kinds of products must be built over time according to specifications. Even in the case of goods or services that could be delivered and paid for on the spot, it may be more economical to take delivery when available and pay invoices once a month. All these transactions become more costly or impossibly risky without rule of law. Sometimes rule of law fails because, although a formally impartial legal system exists, it can be suborned in practice. Litwak (1991) described how illegality permeated all aspects of Soviet life, despite formal laws (see also Vaksberg, 1991). For example, tax rates (annual assessments on state enterprises) were continually set and adjusted only after government officials reviewed existing conditions, justifying this as needed to remove any inequalities. Litwak (1991) described how, despite Gorbachev’s stated intention of removing the personal discretion on which illegality was based: Virtually every law that has promised stable taxation to eliminate uravnilovka and make profit incentives operable has been overtly violated or revoked to the preservation of discretionary expropriations. (p. 86)

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NONFACILITATIVE GOVERNMENT The practices of government that operate either to facilitate or to impede independent organization have been clustered into three dimensions, as summarized in Fig. 2.1. Government hostility to independent organization may take the form of purposive strategy, as under communism, or the hostility may be partial or subtle, as when governments control a critical resource. Governments build predictability through the establishment of laws, the enforcement of property rights, and the provision of public goods. Without these things, erratic and unpredictable governments make planning difficult and can foster fear and distrust. Finally, many governments are incapable of enforcing their laws and regulations. Government weakness can lead to abuse of power by allowing unconstrained local officials to increase others’ personal dependence on them. Governments can facilitate independent organizations by supporting them, by acting predictably, and by enforcing laws and regulations. The three can operate independently, inasmuch as governments may be highly facilitating on one dimension, say supportive of independent organization, while impeding on the other two dimensions, such as erratic and weak governments incapable of enforcing their laws and regulations. Nevertheless, we often see governments clustered at the ends of all three dimensions. The modernist societies that have been the settings for most organization and management scholarship enjoy comparatively facilitative governments that are supportive of independent organization and relatively predictable and strong. Therefore, theories originating in these societies have tended to neglect the effects of nonfacilitative government on the operation and experiences of organizations. Because they have no experience with nonfacilitative government, its effects on organizations have not been visible to them. To begin a redress of this theoretical imbalance, the remainder of this work focuses on the effects of nonfacilitative government. However, throughout this work, the implications for organizations and their managers working under facilitative governments are addressed.

3 Organizing by Personal Relationships: Understanding Trust Whereas there are many reasons why governments may impede or fail to facilitate independent organization, the forms that organizations take under these circumstances are singularly dominated by reliance on a single factor: personal relationships. Without facilitative government, impersonal relationships are insecure, and when there are none of the substitutes for complex impersonal dealings that a facilitative government can provide, organizing depends on personal relationships. The hallmark of modern societies has been the institutional arrangements that can produce impersonal trust among strangers— when the scope of business activity expands beyond what can be accommodated by a friendship or kinship circle (Fligstein, 1996; North, 1990). If governments are unwilling or unable to provide the institutional infrastructure needed to support impersonal trust, individuals have no choice but to continue their reliance on the only means available to them: the personal relationships they build themselves. When government officials can use the coercive power of government at their own discretion, all others become dependent on the personal beneficence of these officials. Such government support must be personally secured, and may be obtained in many ways, all of them costly. A portion of the profits may be shared through partnerships, paid directly to officials as fees, or through such provisions as a scholarship for the official’s daughter to attend college in California. Yet, as shown in this chapter, such a return to traditional reliance on personal relationships does not, in practice, reflect warmer and more personally meaningful relationships, as suggested in the organizational literature. The following chapter elaborates on the argument that organizing and workplace organizational behavior is dominated by personal relationships. Then this proposition that those seeking to organize depend more on personal relationships for the support and predictability not provided by a facilitative government is tested using data from Chinese studies. Furthermore, observations are reported suggesting that in organizations dominated by personal relationships, the character of these personal relationships used to cope with nonfacilitative government seems to have been overly romanticized by scholars studying only organizations operating under facilitative governments.

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ORGANIZING BY PERSONAL RELATIONSHIPS OR TRUST? Long recognized, organizing based on personal relationships has been called organizing based on trust (Arrow, 1974; Bradach & Eccles, 1989), personal trust (Luhmann, 1979), clan-based organization (Ouchi, 1980), or character- or process-based trust (Zucker, 1986). Unfortunately, theorists did not derive these ideas from close observations of how such relationship-based organizations operate in practice. Rather, in some cases they have contrasted historical accounts of organizational dependence on personal relationships with modernist forms of impersonal organization to understand better the origins of impersonal organization. In others, they have sought to highlight the advantages of interpersonal trust in reducing the need for the costly surveillance systems of bureaucratic organization. In all cases, they could assume the context of modernist facilitative government. The attention paid to organizations operating under the difficult circumstances of nonfacilitative government in this discussion suggests that previous scholars’ use of the term “trust” can be a misleading description of personal relationship dependence in organizing. Trust has become a topic of growing interest to scholars of organizational theory and behavior. However, as the study of trust has expanded, so too has the number of meanings ascribed to the term. Bigley and Pearce (1998) suggested that there is a conceptual commonality these diverse definitions: Trust is based on the idea that actors (whether they be individuals, groups, or organizations) need to act despite their vulnerability to others. One way for action to take place in the face of this vulnerability is for the actor to trust that the others will not seek to exploit that vulnerability. For example, Kee and Knox (1970) suggested that trust involves situations in which at least one party has something meaningful at stake and is aware of the potential for betrayal and harm from the other (see also Pearce & Henderson, 2000). Similarly, Gambetta (1988) suggests that “for trust to be relevant, there must be the possibility of exit, betrayal, defection” (p. 217). Luhmann (1979) made a distinction important to the present argument: One can trust particular people or groups (here called “personal trust”), and one can trust organized systems (here labeled “institutional trust”). Personal trust is the belief that particular individuals or groups will not harm you based on your repeated interactions with them or your knowledge of their reputations. Granovetter (1985) and Shapiro (1987) argued that this type of trust, based on familiarity, interdependence, and continuity in relationships, plays an important role in reducing the potential uncertainty of social life. As Granovetter (1985) suggested, when given a choice, all will choose to work with, buy from, and sell to those with whom they have a relationship of trust built on personal experiences or reputation. Institutional trust is a belief that others will not harm one based on a system of institutionalized rules, structures, and expectations. Such trust is signaled by

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the presence of certain practices and structures that serve to reinforce expectations. For example, in the United States, the Federal Deposit Insurance Corporation assures bank depositors that a bank collapse will not mean the loss of their savings. It needs to be emphasized that institutional trust does not replace existing networks of personal trust, which are possible whenever particular people have frequent interaction and interdependence, but provides for the possibility of confident action under circumstances in which the size and complexity of transactions or the necessity for cross-cultural interaction precludes the possibility of establishing sufficiently extensive personal trust. Also relevant is Zucker’s (1986) distinction between three modes of trust. Characteristic-based trust is trust in others based on characteristics that one has learned to associate with trustworthy behavior. Often such characteristics are those that made the other similar to one’s self (e.g., a shared ethnicity), but they also can be characteristics that mark a stranger as possessing certain knowledge (e.g., a licensed accountant, who could be trusted to produce a balance sheet). Process-based trust is trust in one another that emerges from repeated interactions. When people work together frequently, they get to know each other and learn to trust or not to trust each other on the basis of personal experience. Finally, Zucker (1986) described how the growth of industrialization overwhelmed these two modes of trust in the United States during the 19th century. In their place arose bureaucracies and intermediaries such as professions, government licensing, and financial institutions to substitute institution-based trust for the now inadequate characteristic- and process-based trust. Zucker (1986) described how the personal trust relationships, satisfactory for economic life two centuries ago, were disrupted in the United States by the geographic spread of economic activity, the inclusion of members from different national groups (through immigration), and the sheer complexity of economic transactions that developed. She provided persuasive evidence that personal trust relations were supplemented by the development of mechanisms that fostered institutional trust. Although not Zucker’s (1986) focus, institution-based trust clearly is a feature of modernism supported by facilitative government. Licensing regimes based on particularism or bribes do not produce such trust. All too often when governments are nonfacilitative, licensing and credentialing bodies become captured by the powerful to be used as a source of revenue (Kohli, 1975). If it is widely known that credentials can be bought, they no longer signal the bearers’ expertise. Financial institutions that make loans to those favored by government officials will not foster institution-based trust. Without facilitative governments, institutional trust is not an available mode of trust. Furthermore, outside of small homogeneous traditional societies even characteristic-based trust is limited. Characteristics based on credentialing cannot be used if the credentialing bodies are not free to set and enforce standards. Without facilitative governments, those

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who wish to organize or exchange goods are reduced to reliance on personal knowledge of those to whom they may be vulnerable. Others have seen direct personal knowledge of those on whom one depends as an alternative method governing economic transactions. Ouchi (1980) argued that clans are more efficient than either formal organizations or markets when it is extremely difficult to evaluate individual performance. Clans are face-to-face groups of members sharing common values and beliefs who are confident that all the members share the same goals. Members of clans need neither the performance evaluations of formal organizations nor the clear signals of prices. However, clans are limited because they require goal congruence and traditions, requirements that may not be met in many situations. Certainly, the fact that Ouchi chose a word associated with traditional societies to describe organizations relying largely on personal relationships is consistent with the arguments made in this discussion. Similarly, Bradach and Eccles (1989) suggested that economic activity can be governed by combinations of three different control mechanisms: price, authority, and trust. Such trust is built up over time by repeated interactions. These authors echo Arrow (1974) who argued that when trust governs exchanges, “It is extremely efficient; it saves people a lot of trouble to have a fair degree of reliance on other people’s word” (p. 23). Bradach and Eccles (1989) also emphasized that trust can be valuable because it averts the costs of settling disputes in courts and of monitoring partners’ behavior for cheating (see also Kramer, 1999). These authors, like their predecessors, consider control by trust to be an unqualified good: It reduces opportunism, and therefore the costs of monitoring and the need for sanctions. Yet such opportunism-controlling trust requires either confined and stable face-to-face interactions or a facilitative government. Insight into the subtle yet critical role of facilitative government can be found in Sabel and Zeitlin (1985). They studied industrial groupings as alternatives to large-scale mass production. These industrial federations of artisans and shops each specialized in one phase of production and relied on personal relationships of mutuality and reciprocity rather than on a superordinate authority to coordinate their work. Sabel and Zeitlin (1985) observed that such extensive personal trust depended both on facilitating political institutions and on generations-long traditions of cooperation. They found that governments had a crucial role in fostering the personal trust necessary for the effectiveness of the trust-based organization that Arrow (1974), Bradach and Eccles (1989), and Ouchi (1980) described. The current study draws on this rich literature, but approaches the problem of relationship-based organization from a different angle. Ouchi (1980) and Bradach and Eccles (1989) made powerful arguments for the advantages of the less familiar trust in the face of large intellectual disciplines focused on markets (economics) and formal organizations (organization theory). Yet, their work

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reflects its origins in modernist societies with its assumed presence of facilitative government. The focus in this discussion is on how organizations operate when nonfacilitative governments make personal relationships the only available option for organizing. This is not the positive view of trust among friends—Macaulay’s (1963) common honesty and decency—but rather, closed circles that develop in the face of vulnerability and fear. The burgeoning literature on Chinese business practices describes these closed circles in detail. CHINA STUDIES Gordon Redding (1990) was among the first to suggest that the distinctive pattern of organization based on personal relationships, what he calls “Chinese Capitalism,” was developed by Chinese merchants who found themselves working in societies with weak and often hostile governments. His important work, drawing on a wide-ranging historical review and extensive current data on overseas Chinese (ethnic Chinese living in Southeast Asia), is the most complete treatment of organizational strategy and behavior under noncommunist, nonfacilitative government. Redding (1990) suggested that these behavioral patterns developed in response to the long-standing hostility toward business and the weakness of the imperial Chinese governments. This derived partly from the incapacity of the early dynasties to extend their centralized control into a vast and impoverished agricultural society without developed cities. Commerce and trade were never highly esteemed by a society that valued scholarship and agriculture, and merchants sought to turn their wealth into honorific titles, government offices (if at all possible), or agricultural holdings (Chan, 1977; Feuerwerker, 1984). That is, independent business and trade were never highly respected or seen as worthy of government support. By contrast, Jardine (1996) described the great status of merchants in Renaissance Europe, illustrating her argument with portraits of Jan van Eyck and Erasmus dressed as merchants, who intended to advertise themselves as highly respected, cosmopolitan merchants rather than artists or scholars. In contrast to Europe at the same time, imperial Chinese governments never developed or allowed independent financial institutions, independent guilds or large-scale trade fairs in the interior of the country. Redding (1990) illustrated this Chinese antipathy to independent organization by citing Chan’s (1977) prefatory phrase from an official document announcing the formation of a ministry of commerce: “because by social convention…industry and commerce are thought of as matters of the last importance” (p. 19). Furthermore, when not aloof, imperial Chinese government officials could be predatory. The primary problem was a lack of codified law. All sectors of society were completely dependent on the personal decisions of government

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officials. Legal rulings were based solely on government officials’ interpretation of general Confucian principles. There were no independent lawyers who could guide or represent business people (or anyone else) in dealing with government officials. Historians have documented how Chinese merchants and manufacturers were subject to the demands of corrupt local officials. These government officials used techniques such as destroying receipts and demanding personal payments, manipulating deadlines to extort late payments, holding cargo at ransom, among others. As Redding (1990) summarized: The position of merchant then became increasingly vulnerable the more he prospered. He had no resort to a system of property rights, even when his prosperity allowed him to buy land, as land ownership remained precarious and irrational…. The property which he held in his business was represented in cash and tangible assets rather than in shares, and was thus also subject to various forms of confiscation, operating commonly through the tax system. (p. 124) In addition, there were no Chinese free cities or guilds acting independently in their members’ interests. Government officials kept a close watch over all such activity. Only officials could claim any legitimate power, and no other person could assert any standing independent of the government, regardless of wealth or social station. When guilds did exist, they were largely honorific societies engaged in distributing honors and in occasional charitable activities. Imperial Chinese government was hostile to independent organization. Enforcement was unpredictable, and it was often weakened by wars. By the 20th century, Europe, and by extension the Americas, had centuries-long traditions of independent organizations facilitated by governments that China did not have. Redding (1990) suggested that the distinctive pattern of overseas Chinese relationship-based business developed because those conducting business learned to rely on clan- and family-based connections to provide the protection they could not assume from their hostile, unpredictable, and weak governments. Networks of family and friendship relationships could not be seized by officials; individuals could develop and control them. Without facilitating government institutions, organizations could not be depersonalized. Without predictable enforcement of contracts, business could be conducted only with those well known to those conducting business. Because Chinese business people were unable to rely on facilitative governments, they confined their dealings to members of their own clan or village. Such clans may have had members in far-flung geographic locations, but their business relationships were governed by tradition and shared values, supported by frequent personal contact and strong normative expectations of obligation to members of their network. Redding (1990) suggested that when Chinese merchants moved overseas to Southeast Asia, they often faced hostile,

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unpredictable, or weak governments in these new lands, conditions for which their traditional business practices were particularly well suited. Davies (1995) also explicitly linked the use of guanxi to China’s weak legal system. Redding (1990) proposed that dependence on personal relationships is central to such organizations. To operate overseas, Chinese merchants and manufacturers required a supportive network of ties among those who had confidence in one another through either family or long-standing stable relationships of mutual obligations. This situation still obtains in China, but it also persists at a lesser extent even in nonmainland Chinese countries such as Singapore, Hong Kong, and Taiwan that have developed comparatively more facilitative legal and governmental institutions. For example, Sit and Wong (1989) reported substantially more reliance on local relationships among small and medium-size Hong Kong firms than would be found among their Western counterparts, with 34% of subcontracting relationships based solely on verbal agreements. Wu and Wu (1980) provided a detailed description of how particular industries in Southeast Asia are organized around regional ethnicities. For example, the Hakka specialize in leather goods, whereas the Yunnanese specialize in jewelry. Many other researchers have described the importance of personal relationships in business among the Chinese (Chan & Chiang, 1994; Davies, 1995; Jacobs, 1980; Tsang, 1998; Yang, 1994). Chinese relationship-based organizing has come under increasing scholarly scrutiny, producing a vivid picture of the operation of organizations dominated by personal relationships. For example, Yeung (1997) described the activities of Suntec Investment, based in Singapore but serving as an investment vehicle for a group of Hong Kong executives. He analyzed the close friendship and regional ties of these partners and the ways in which they used their connections to win the bid for Singapore’s largest private development project. Yeung suggested that Suntec had substantial bargaining power within Singapore by virtue of its guanxi muscle, with its benefits of rich personal relationships, mutual interdependence, and obligation with the powerful, rather than any technical advantages arising from its operation of the businesses themselves. In studies of executives in China, the author found that they reported utter dependence on the personal relationships of their participants. The owner of a small Chinese textile trading company was explicit about the importance of relationships (Box 3.1). As he and others reported, personal relationships dominated all strategic and operational decisions in their organizations. UNDERSTANDING GUANXI Relationships are critical to a business operating without facilitative government. However, it would be misleading to imply that these business relation-

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ships are characterized by a warm feeling of trust. Redding (1990) noted that these relationships rather reflect “the hard edge of an unsentimental society” (p. 192), as reflected in Box 3.2. Box 3.1 In my mind all business is connections and trust. That is all it is. No trust, no connections, no business. I could not have opened my store in [the main street] if my cousin’s husband had not been in charge of that district’s business planning. If my business partner’s father were not the director of the Light Industry Bureau, I would not be in this business. (See Appendix, 1992–1993 China—U.S. study)

Box 3.2 The instrumental view of relationships, the opportunistic “using” of other people, is likely to lead to friction only when one of the partners is naive, and the naive do not survive in this environment. More typical is the working out of a cautious, watchful accommodation, each being aware that both buyer and seller should be wary of each other. (Redding, S.G. The spirit of Chinese capitalism, 1990, p. 192. Reprinted with permission from Walter deGruyter, Inc.) This contrasts with Arrow (1974), Bradach and Eccles (1989), and Ouchi’s (1980) characterization of these organizational forms as trust based. This anomaly needs to be explained. Insight into the nature of these relationships can be gained by a closer examination of Chinese guanxi. The term guanxi means relationship, but it is not a precise term in the social scientific sense; it has many subtle connotations. Guanxi is an instrumental personal tie that can range from strong, warm personal loyalties to a tie based on mutual gain or threat of exposure. The expectations of others in guanxi relationships can be extensive and subtle, as, for example, when those who have good guanxi with one another are obligated to help each other and anyone else with whom the guanxi partner has strong guanxi. Guanxi is both a relationship between two individuals and a relationship between the personal guanxi networks of those individuals. An individuals’ acquaintanceship with another is affected by the character of the relationships each has with others and the strength of any connections they may have in common.

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Yang (1994) described the long process of testing her fellow students underwent in establishing the level of their guanxi with one another. Selfdisclosure was slow and measured compared with that of the American students among whom Yang had lived previously. She explicitly tied this wariness to the system of political informers prevalent in China during the 1990s. Although the slow development of guanxi relationships is a practice with a long cultural tradition, it appears to be sustained by living under a government in which betrayal by one’s fellows is a real possibility. Although the use of interpersonal relationships created by nonfacilitative governments are best documented in the scholarly literature in China, there is ample evidence that others working under nonfacilitative governments also rely on personal relationships. For example, the Russian term “blat” and the Haitian term “pratik” refer to the same type of instrumental personal tie. Emphasis on the importance of taking the time to build personal relationships when conducting business in countries, such as Brazil, Mexico, the Arabic countries, and Asia is a standard feature of international management textbooks (Deresky, 1994). A saying in Latin America reflects this concept: “A los amigos todo, a los enimigos nada, al extrano la ley” (for friends everything, for enemies nothing, for strangers the law). Descriptions of wary, distrustful relationships also are found in scholarly descriptions of non-Chinese workplaces operating without facilitating governments (Putnam, 1993; Voslensky, 1984). For example, Haraszti (1977) described a Hungarian factory during the communist period (see excerpted in Box 3.3). Therefore, many observers have noted the dependence on personal relationships in China and other societies without facilitative governments, characterizing such relationships as often wary and distrustful, despite the participants’ mutual dependence on one another. This seems to present a contradiction. On the one hand, participants in these relationships must trust one another because they cannot rely on impersonal mechanisms. On the other hand, observers describe wary and even antagonistic relationships, that few would characterize as trusting. One way to resolve the contradiction may be to counter the implicit assumption that trust is undifferentiated (i.e., if someone is trusted to do one thing, he or she can be trusted in all things). Clearly, we trust others in particular areas, as I might trust certain coworkers to deliver their portion of the project by the deadline, but not enough to give them ownership of my house. With repeated interaction, people will learn what to expect of one another, both good and bad. The absence of an institution-based trust does not necessarily imply that characteristic- and process-based trust would be any higher. Rather, there may be less trust overall, and thus more limited and constrained organization. How then are such relationships maintained? They are more accurately characterized as relationships of mutual knowledge and dependence rather than trust. In many cases, the economists’ felicitous phrase, “mutual hostage taking,”

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is a better characterization than mutual trust. The partners need each other and are more useful to one another in the relationship than outside it. Given the unpredictable legal environment and dependence on arbitrary officials, participants often are in a position to do serious mutual harm to one another. Therefore, they would follow the old adage, “Hold your friends close and your enemies closer.” Box 3.3 Almost everyone in the section is a member of a brigade. After 2 months I learned I had been attached to the “First of May” brigade; to this day I have no idea who the other members are…. The foreman decides who belongs to which brigade, and the trade union secretary lets us know the decision during a meeting…. That is to say, a brigade is not composed of workers involved with a single type of machine, but includes an assortment of borers, millers, and turners. This most effectively prevents members of a brigade from discussing anything in common or from regulating the level of production to defend themselves against revisions of the norm…. Furthermore, this division excludes all possibility of cooperation in production. It even prevents rivalry, if that has anything more to it than this bitter struggle against ourselves and against others which goes on quite independently of the brigades. (Haraszti, A Worker in a Worker’s State © 1977, Penguin/Putnam, p. 67)

NONFACILITATIVE GOVERNMENTS AND THE NEED FOR PERSONAL RELATIONSHIPS Summarizing and extending the foregoing literature, dependence on personal relationships in organizing under nonfacilitative governments arises for several reasons: protection, information, and dependence management. Protection To begin with, if laws and regulations are not predictably enforced, the only way to protect yourself from government power is to cultivate personal relationships with government officials. Gambetta (1988; 1993) described how the personal ties characteristic of the Sicilian Mafia served to protect the organization’s members under a weak government and a dangerous environment. Varese (1994) proposed that the weakened and erratic government of Russia after the collapse of the Soviet Union led to the rise of the Russian “mafias.” When

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47

threatened, people band together in small clusters for security. These clusters are of vital importance to their members, because to be excluded is to face certain ruin. By contrast, those who live under the protection of a facilitating government are freer to venture forth and work with strangers who might help with a new market or provide a fresh source of funds. They do not need to cling to those who can protect them from danger. In other words, weak, hostile, and unpredictable governments produce a more threatening environment. Those seeking to organize independently face unpredictable government officials who may expropriate their businesses, levy unexpected taxes and fees, and possibly threaten their personal safety. Personal relationships with the powerful, often government officials, provide the only protection available under nonfacilitative governments. Information In addition to protection, facilitative governments help to provide useful information, and when that information is not freely available to all, personal relationships with those in a position to know are particularly useful. Katz and Kahn (1978) argued that the more information a manager possesses, the more politically effective the manager will be. People will tell their close connections things they would not pronounce publicly. Nonfacilitative governments limit information. As Khanna and Palepu (1998) argued, this is because in emerging markets there are problems with inadequate financial disclosure and an absence of intermediaries such as investment bankers, venture capitalists and an active business press. Therefore, executives lack adequate financial information about potential partners. Khanna and Palepu found that in India and Chile, this favored the growth of large heterogeneous business groups because such groups have competitive information advantages in such environments. Their visibility made them more trustworthy recipients of financial support and more attractive to managerial talent. In addition to their role as signals, personal relationships produce information that can help reduce the costs of transactions. Khanna and Palepu (1998) reported data indicating that obtaining loans and capital in India and Chile is substantially more expensive for companies that are not part of a large business group because financial institutions consequently view them as more risky. In developed societies with facilitative governments, credit and capital suppliers can rely on extensive databases and regulatory bodies that allow them to assess risk more accurately, thus reducing the cost of capital. This often is reflected in the substantially higher interest rates on business loans in countries with less facilitative governments. For example, during the 1989–1996 longitudinal study in Hungary, interest rates on business loans ranged from 30% to 45% per year, which were substantially higher than the single-digit rates of Western Europe at that time. Therefore, it is not surprising to find that in China personal

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introductions mean that the introducer backs or supports the people being introduced, and this provides information about their reliability. Those with personal relationships know one another, producing information about reliability and performance unavailable elsewhere. Under nonfacilitative governments, personal relationships can produce information for the participants that would be more widely available to all under more facilitative governments. Dependency Management Finally, when governments are nonfacilitative, they become a critical dependency that must be managed. A critical dependency is one that must be managed to ensure the organization’s survival. Pfeffer and Salancik (1978) summarized the argument that different organizations working under facilitative governments face different critical dependencies because of differences in their revenue sources or technologies. For example, in the United States, for these universities that depend on external grant monies, a critical dependency is attracting and retaining faculty members who obtain large external grants. Purely teaching schools depend more on attracting students, who are their primary source of revenue. Because of this dependence on different faculty contributions, the varied types of universities reward different faculty contributions. When government officials administer laws in erratic and personal rather than impersonal ways, they make the government officials themselves a critical dependency. Their benevolence and goodwill must be maintained if the organization is not to be mired in audits, seizures of assets, or other interference at the discretion of the officials. Reliance on personal relationships under high levels of unpredictability in organizational life appears to be a general phenomenon. There is evidence that organizational executives try to manage their nontask and financial critical dependencies by seeking to build personal relationships with those on whom they are dependent. Some years ago Pennings (1980), in his review of the literature on interlocking governing-board directorates, reported strong evidence that executives manage their dependencies by building personal relationships. For example, they placed executives from those organizations on which they were most dependent on their firm’s board of directors. About half of all members belonging to U.S. boards of directors surveyed by Pennings reflected their corporations’ critical dependence on reliable supplies of financial capital. He found that, indeed, the more extensive the proportion of financial executives on a company’s board, the lower the company’s interest rates, and thus their costs of doing business. Similarly, Larson (1992) described how trust, reciprocity, and mutual dependence were central to less secure high-growth entrepreneurial firms because of the greater unpredictability they faced. Certainly, the threats posed by nonfacilitative governments are at least as problematic as those involved in

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49

technological or market shifts. Under facilitative governments, organizations operate within predictable, supportive institutional systems. The participants do not fear that their competitors may harness the power of government to expropriate their company or have them thrown in jail for tax fraud. Furthermore, as much as executives detest having to battle in court over patents, they have the luxury of assuming a sufficiently facilitative government to make patents and copyrights safe enough to have economic value. To restate this concept in more general terms, the greater our dependence on others, the more likely we are to cultivate a personal relationship of mutuality with those on whom we depend. This may be done by placing such persons on our organization’s board of directors, but this is not the only relationshipenhancing option. Executives also may arrange for an appointment in a prestigious club or a prominent position in a professional association for someone they wish to cultivate. Jacobs (1980) found that interorganizational relationships in Taiwan were enhanced by giving gifts and hosting banquets. None of these practices would be visible in data sets confined to lists of boards of directors. That is, formal appointments in organizations hardly exhaust the opportunities for the building of mutual dependence. Under nonfacilitative governments, personal relationships are more critical because they become the primary available way to build and sustain organizational work. Because facilitative government and other structures of modernism are intended to build substitutes for personal relationships where complexity and scope require extensive exchanges with strangers, when those substitutes are not available, personal relationships with the powerful are all that is left. Relationships provide protection and needed information, so they become critical to survival. Whereas personal relationships are useful for virtually any dependency, they are particularly well suited for managing the insecurity posed by nonfacilitative governments. Such environments are significantly more threatening and opaque, so the protection and information that relationships with the powerful provide are quite simply indispensable. EVIDENCE OF RELIANCE ON PERSONAL RELATIONSHIPS UNDER NONFACILITATIVE GOVERNMENTS It would be useful to have systematic tests of the insights that scholars such as North (1990), Redding (1990), and Davies (1995) have regarding the role of personal relationships when governments are nonfacilitative. The researchers have observed the operations of organizations and their participants in a country or two, or have traced the historical development of institutional forms in one set of circumstances. Khanna and Palepu (1998) have provided evidence for the effectiveness of formal business groups in prereform Chile and India, but

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business groups do not exhaust the possibilities for building personal relationships. The author and her colleague, Katherine Xin, have undertaken to test hypotheses derived from the preceding arguments regarding the effects of differences in government facilitation on executives’ dependence on personal relationships in organizational work. In addition, the longitudinal project in Hungary provides an opportunity to isolate the effects of government. Hungary’s transition from communism involved an abrupt weakening of government strength, which occurred simultaneously with a reduction in hostility to independent organizations with their legalization. This is in contrast to the centuries-long evolutions occurring in most other societies that make it difficult to isolate the role of government. Dependence on Personal Relationships Under a Nonfacilitative Government In the first study, we proposed that during China’s transition, personal relationships would be more critical for the independent privately owned companies than for either the communally owned or state-owned enterprises (for more details, see Xin & Pearce, 1996). In China, state-owned enterprises, owned by the central government, were the backbone of their socialist economy. These state-owned enterprises obtained most supplies and delivered their output according to government directive. However, beginning with the reforms of the 1970s, rural communes, municipalities, and other local and regional entities were allowed to develop businesses, such as manufacturing facilities. These are called communally owned enterprises, and as Nee (1992) articulated, these organizations were quasi-independent of government. Their ownership by local governments gave them priority access to supplies and prevented any threat of expropriation or extortion by government officials. However, they sold their products in highly competitive international markets. Finally, in the late 1980s, private individuals were permitted to own and operate wholly independent businesses. The explosion of economic activity in the 1980s and the difficulty a communist country had regulating, controlling, and facilitating these numerous independent and quasi-independent organizations was reflected in the earlier story of door-to-door sales in China. Not only was much of the legal infrastructure necessary to a capitalist economy not yet developed, the government found itself struggling to implement an appropriate legal sy stem for communal and independent businesses. That is, in the 1980s, China’s government became less hostile to independent organizations, yet their proliferation increased unpredictably and exposed pervasive government weakness. The author’s group proposed that under these circumstances, the executives of independent, privately-owned companies would have a greater need to manage their dependence on government officials by building personal

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relationships with them than would the communal or state enterprises. Without a facilitative government, all Chinese executives fear arbitrary action by government officials, yet, because government officials oversaw governmentowned organizations, executives there had less to fear from arbitrary assaults by their governmental colleagues. By contrast, independent companies would have no such structural protection. The author’s group suggested that, consistent with the foregoing theories, the executives of these independent organizations would have needed to substitute for their relative lack of structural protection by endeavoring to build their protection via personal relationships. As a test for the idea that personal relationships are more important for independent and communal enterprises, executives in the independent companies should report, first, greater dependence on their personal relationships for business success, second, that their most important business relationships are with national government officials, and third, that these relationships are most useful as a defense against threats, as compared with the experience of executives managing state-owned enterprises. It was found that, after controls were used for organizational age and size,1 the executives of the independent companies did indeed report that their interorganizational relationships were relatively more important to the success of their businesses, that more of these important connections were with national government officials, and that the relationships were more likely to be used to defend the organization from threats than reported in the communal or state enterprises of their counterparts (Table 3.1). It can be seen that the relationship pattern of the communal enterprise executives’ differed from that of the stateenterprise executives in only one way: They gave primacy to cultivating relationships with national government officials, as did the independent company executives. An example of how these independent company executives used personal relationships to defend themselves from the threats inherent in working under a nonfacilitative government is illustrated by the quotation in Box 3.4 from the owner of an independent computer company. “X” is the general-manager interviewee’s administrative assistant and the son of an important government official hired to strengthen the relationship with the father.) It is worth noting that this quotation does not reflect a warm trusting relationship so much as the conniving adversaries seeking to extract as much as possible from one another.

1

It was necessary to control for age and size because these were confounded with the different ownership types. The independent organizations were younger and smaller than the communal and state organizations. Because smallness and newness are known liabilities for organizational survival, it might be possible that the executives in the independent companies established more connections for these reasons rather than for the hypothesized reason of structural protection. (See Xin and Pearce, 1996, for a more complete discussion of this issue.)

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Box 3.4 My company had bad luck. We were audited for income tax fraud. There is no real income tax law. The Auditing Bureau has Red Eye Disease [jealousy]. Whenever they see a private company making money, they come and find trouble. My company got in the newspaper for excellent performance, but that performance did not come easy. I don’t want to get in the newspaper anymore. The tax auditor just showed up one day, and wanted to see our income tax return copies and company books. There are no standardized rules for keeping books in China, especially for private companies like ours. If they want to find fault with your income tax, they will always find something wrong. If we were found guilty of tax fraud, we could face thousands of yuan in fines and the possible suspension of our business license. All our hard work would be gone like the wind. Our accountant was very worried. However, my administrative assistant is X, a high official’s son. I called X into my office, and told him the situation. He smiled and said, “Give me a 2,500-yuan fee [equivalent to a middle manager’s six-month salary], and I will take care of everything.” I had no choice. So I said, “I will give you 2,500 yuan, but you will lose your job if you cannot handle this crisis.” I stayed in my office, restless. By noon, my phone rang. X asked me to go to lunch with the auditors at the best restaurant in the city. We hired a Mercedes Benz and went to lunch. The auditors kept saying that they needed only a working lunch. I was worried that X had gone overboard, but X was right. After expensive drinks and Peking duck, the head auditor started to praise our accounting sy stem, saying how good and efficient it looked. This lunch lasted 3 hours, and cost plenty, but saved my company. After lunch the head auditor left me a notice requesting 2,500-yuan income tax supplement. The reason he had to force us to pay the supplement was that he had to report to his boss on what he accomplished that day…. There are too many threats for small companies like mine. There are no laws really to protect you. You cannot compete with state-owned companies; they are rich and powerful. The only way we can protect ourselves is through personal connections, trust, and being flexible. I hired X, a high school graduate, with his father’s connections in mind. It does not sound right but everyone does it; you have to be open-minded. If I had refused to give X the 2,500-yuan fee, I probably would be out of a job and the company would be gone. (See Appendix; 1992–1993 China—U.S. study)

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These data provide an independent confirmation of the extent to which executives operating independent organizations under nonfacilitative governments depend on personal relationships. Under China’s nonfacilitating government the lower their structural protection via government ownership the more likely these executives were to report depending on their personal relationships for protection and seeking that protection by cultivating relationships with government officials. Nevertheless, this study did not directly compare organizations under governments that differ in their facilitation of independent organization. Therefore, it was decided to further explore these ideas with comparative data from executives working under a facilitative government. TABLE 3.1 Dependence of Chinese Independent, Communal, and State-Owned Company Executives on Their Personal Relationships Independent c,d

Reported importance of relationshipa,b

3.79

Relationship with national government officialb

0.44d

Use of the relationship as a 4.53c,d defense against threatsb

Communal 3.18

e

State-Owned 3.17

p

p < .01

0.50d

0.24c,e

< .01

4.03e

4.05e

< .01

a

First variable is the response to question, “How important is this relationship to you?” as rated from 1=(not important) to 4=(vitally important). Next is the response to the question, “What is the primary reason for the person’s usefulness?” coded as 1=(important connection in national government) or 0=(important connection in nongovernmental company). Finally, the executives rated their agreement with, “This relationship is useful as a defense against threats,” as rated from 1=(strongly disagree) to 5=(strongly agree).

b

Comparisons are from the 1992–1993 China—U.S. study, and were first reported in Xin and Pearce (1996).

c

Significantly different from communal executives’ reports.

d

Significantly different from state executives’ reports.

e

Significantly different from independent executives’ reports.

Comparative Dependence on Personal Relationships Under Facilitative and Nonfacilitative Governments Comparative data were collected in a country judged to have a more facilitative government: the United States. Executives were expected to depend more on

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their personal relationships in their organizational work under the less facilitative Chinese government than in the United States with its centuries-old legal and economic systems and its frequent self-characterization as “a nation of laws, not men.” For the reasons outlined earlier, Chinese executives were expected to be more dependent on personal relationships than American executives. Although it was expected that interorganizational personal relationships would also be used by American executives to manage their critical dependencies, the overwhelming need of Chinese executives operating without a facilitative government to secure their existence should have been reflected in several differences. First, it was expected that Chinese executives would report greater dependence on their personal relationships, second, that these relationships would be used to protect them against threats to a greater extent than they are by the Americans, third, that they would be more likely to ask the connection to make an exception or grant them a dispensation, and finally, that such business relationships would more likely be built on a personal foundation than the business relationships of the matched American executives. Chinese executives, who must operate without a comparatively more facilitating government, are proposed to be more dependent on their personal relationships than American executives no matter what their industrial sector. Whereas Americans operate under a government in which such fundamental threats as arbitrary local officials and expropriation of their firm by government officials are unimaginable, Chinese executives do not have this luxury. Because Chinese executives do not have secure property rights, their most critical dependency is to secure their businesses from basic threats to their existence by building personal relationships (i.e., good connections) with those in a position to protect them. As Hsing (1998) noted, government officials have great personal discretion in the granting of licenses, building permits, taxes, and the like. If the preceding arguments are correct, executives operating in such nonfacilitative environments would seek personal relationships with those in a position to protect their business from expropriation, and from whom they can obtain the permissions needed for certain transactions. They need officials’ personal approval to obtain a favorable location for their organization, to secure convertible currency, or to get loans or supplies, which can become scarce overnight. In the United States, these critical dependencies are handled by impersonal government regulation or the market, and do not require the intervention or protection of powerfully placed good connections. Another reflection of Chinese executives’ use of their personal relationships to solve the different critical dependencies as they work under a nonfacilitative government is their use of relationships to cope with unpredictability resulting from instability and change. New regulations and laws to establish an infrastructure for private enterprise in China are being developed, revised, adapted, and changed. Furthermore, unlike the formerly communist countries of Europe, China is not adopting, wholesale, the European Union’s legal structures

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for a market economy. Rather, it is attempting to develop a third way by maintaining extensive government ownership of, involvement in, and control over a market economy (McKinnon, 1994). What China is attempting to do has no historical precedent, so innovative policies are developed and found not to work (or to have unintended consequences), so they are scrapped, modified, or circumvented. Furthermore, the opaque nature of law-making in China means that these fundamental changes are made more rapidly and with less advance notice than they would be in the United States, with its open political debates and free press. These frequent changes in laws and regulations create many challenges for those operating businesses in China. Often, no legislation applies, or there are contradictory directives, or a secret law may apply in a given case. Even with the best of intentions, executives find themselves caught in impossible and contradictory situations. It simply would not be possible to know every law because many are vague or mutually contradictory (see Gregory, 1989; Newman & Nollen, 1998; Pearce, Branyiczki, & Bakacsi, 1994 for discussions of the contradictory demands placed on enterprise executives in societies making the transition from central planning). Under these circumstances, executives use their personal relationships with government officials to help them cope with this unpredictability. There is no possibility to trust in the laws, because they are too unclear and change too often and too unpredictably. The only safe harbor is to have good connections in the government to ensure that you are warned and protected from unreasonably harsh interpretations of unknowable laws and regulations. Not only would Chinese executives see themselves as more dependent on relationships to secure themselves from threats posed by nonfacilitative government, but once these relationships are established, the ability to obtain dispensations from laws and regulations can be used offensively as well as defensively. Certainly, whereas nonfacilitative governments create difficulties for those organizing independently, it must also be noted that aggressive executives can profit from the predictability and support they have built interpersonally that their competitors may not have. In both cases, whether executives need protection from unpredictable interference or seek to use the possibility of favorable treatment to their competitive advantage, they need to have some way to obtain dispensations. The ability to gain the favorable backing of officials under nonfacilitative government can be a powerful competitive advantage, and a weak, nonfacilitating government provides more scope for those who wish to benefit from their good connections. In contrast, American executives can expect to conduct business without much need to use good personal connections to obtain relief from law or regulatory enforcement. In the United States, it is more difficult for local authorities to grant dispensations: Stronger government means that officials are more constrained by law. Therefore, American executives were expected to be

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less likely than Chinese executives to report the cultivation of personal relationships for the purpose of obtaining legal and regulatory dispensations. Finally, because personal relationships with government officials are more critical to executives operating under relatively nonfacilitative governments, and because executives expect to ask officials for dispensations that may be risky for the officials, it was expected that proportionately more of these relationships would have a personal rather than a professional or occupational basis. That is, as the earlier quotation indicated, the Chinese executives would report that they knew their business connections personally first, then built businesses based on that connection. By contrast, American executives would be more likely to cultivate relationships based on their business involvement, attending professional association meetings or involvement in a favorite charity. This is consistent with the observations of Jacobs (1980), Redding (1990), and Yang (1994), who have commented on the family or home village basis of Chinese guanxi relationships. With a facilitative government executives are free to build relationships to solve critical dependencies arising from markets or technologies. They join associations or hire consultants because they want to develop relationships with those knowledgeable and capable in those areas. Under nonfacilitative governments, the need for basic security becomes the overriding critical dependence. This difference should be reflected in reports of all Chinese executives (in independent, communal, and state organizations), indicating that their most important business connections are personal friends whom they have known for a longer period of time rather than purely business associates as with comparable American executives. These arguments, in fact, were found to be supported by the executives’ reports (Table 3.2). Indeed, Chinese executives reported that they depend significantly more on personal relationships for their organizations’ success; that they use relationships more as a defense against threats and as a way to obtain exceptions to rules, laws, or regulations; and that they have known their connections longer and experience a relationship based more on personal than on purely business contact with their most important business connections than do a matched sample of American executives. The self-reports of these Chinese and American executives provide consistent, independent confirmation that Chinese executives under a less facilitative government are more dependent on their personal relationships, and that they need to cultivate such relationships with government officials secure themselves against threats from arbitrary and potentially predatory government officials, and to secure personal dispensations from rules, laws, or regulations that may be vague or erratic.

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TABLE 3.2 Dependence of Chinese and American Executives on Personal Relationships Chinese Executives

American Executives

p

Reported dependence on relationshipa,b

3.26

2.62

< .01

Use of the relationship as a defense against threatsb

4.18

3.70

< .01

Use of the relationship to obtain exceptions to rules

0.17

0.01

< .01

The characterization of 0.22 relationship as more personal than business

0.06

< .01

Length of relationship (years)

6.94

< .01

9.30

a

This variable is the responses to the following interview questions: “How would you characterize your dependence on one another?” (1=little mutual interdependence, 2=the person depends on me more than I depend on him or her, 3=we are both dependent on one another, 4 =I depend a great deal on this person whereas he or she is not very dependent on me).” This relationship is useful as a defense against threats,” as rated from 1=(strongly disagree) to 5= (strongly agree). In response to the question “The last time you called on this person for assistance, describe the circumstances,” and presented with 14 choices, if the category “to obtain rule exception treatment” was selected this variable=1, otherwise=0; executives were asked “How did you first meet?” with the categories relatives, home town, former classmates=1 and political activities, industry association and in the course of doing the job=0. b

Data are from the 1992–1993 China—U.S. study. (See Appendix)

As the quotations hopefully have illustrated, when these Chinese executives speak of their dependence on their personal relationships, they speak of a dependence born of arbitrary nonfacilitative government. Yet, although substantial differences are found between Chinese dependence on personal relationships, as compared with American settings, such observations cannot definitively demonstrate that this arises from differences in the extent of government facilitation rather than some other feature of society or culture. Studies of the transition from communism can help isolate government facilitation from these other variables.

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The Effects of Government Change Countries such as China have institutionalized behavior patterns that have endured for centuries. As such, it is difficult to isolate nonfacilitative governments as a primary factor in the observed differences in the reliance of the Chinese on relationship-based organization. Indeed, it could be argued that such patterns lead to nonfacilitative government because participants learn to rely on their own personal relationships and thus see no need to press for strong facilitative governments. Fortunately, the political transitions in the other formerly communist countries provide a natural intervention that allows us to began isolating the effects of government. First, Whiteley, Henderson, Czaban, and Lengyel (1996) discovered that, contrary to their expectations, personal relationships became more important to the executives of state-owned companies during the early stages of Hungary’s economic transformation. They found that these corporatized (but state-owned) enterprises still depended on the government, with executives continuing to focus on their relationships with government officials rather than on their customers. Apparently, the political maneuvering and frequent changes in policies and personnel during the early transformation led to substantial unpredictability that executives tried to manage by maintaining personal relationships with government officials. Furthermore, Whitley et al. (1996) found that the relationships of these enterprises’ with their customers and suppliers had changed very little, with continued high levels of informal communication, when compared with similar British executives. Whitley et al. (1996) summarized their results as suggesting that the expectations that corporatization (i.e., increased autonomy) for state-owned enterprises awaiting privatization would lead to more impersonal market-driven actions by executives were obviated by a nonfacilitative government. Increasing government unpredictability made personal relationships with government officials, suppliers, and customers even more important. In an environment of uncertain privatization, rife nonpayments by state-owned customers, and transforming legal and banking environments personal relationships helped to ensure survival. Second, in a paper based on the 1989–1996 longitudinal project in Hungary, Imre Branyiczki, and the current author proposed that the increased unpredictability in the early period of the transition led Hungarian managers to be even more dependent on the good graces of government officials than they had been under reform communism (Pearce & Branyiczki, 1997). The process of privatization in Hungary was long and drawn out, characterized by changes in ruling parties with shifting political objectives. The transition introduced new players (foreign owners or alliance partners), but these simply added to the complex maze of relationships that needed to be maintained. As Stark (1996) noted, in Hungary, large state combines were broken into hundreds of incorporated shareholding companies. These increased 20-fold, and limited liability companies went from 450 to 79,000 between 1989 and 1994. These

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entities were in turn owned by a myriad of new government agencies. In addition to the old Ministry of Industry, there were various holding agencies, and privatization agencies themselves formed and revised over time. Furthermore, complex joint ventures and alliances with domestic and foreign private companies added to the dense network of parties with a say, a stake, or an opinion about these recast organizations. Hungarian enterprise executives needed to redouble their efforts to foster and sustain good relationships with an exploding number of other executives and government officials. Yet, unpredictability began to overwhelm the capacities of individuals to cultivate relationships. A heavy personal investment in cultivating good connections could be wasted as people rotated into and out of power, as it was for the managing director in the porcelain factory, described in Box 3.5. In Hungary, as government unpredictability increased, executives sought to manage it by cultivating relationships with those who could help or protect them. The upheaval of the transition meant that it became more difficult to know who had power, leaving many invested in relationships that were no longer useful and mistakenly ignoring the newly important. Nevertheless, their assumptions that unpredictability could best be managed by relationshipbuilding remained. Box 3.5 The managing director had been enrolled in a Western-university sponsored Master’s of Business Administration program and had decided that he needed to reorganize the company to get rid of what he called “old party hacks” in middle management. The factory is located in a distant small village where there would be no other job opportunities for fired middle managers, and so it perhaps should not have been surprising that a middle-manager party hack would fight his removal as vigorously as he would fight his physical death. Half of the ruling company council was composed of these middle managers (the managing director had appointed his direct subordinates to this reform-mandated council when it was created to help him maintain his personal control). Apparently these middle managers were able to persuade their colleagues on the company council that this managing director was a very dangerous man, and that a majority had voted to fire him last month. The real use of what had been widely seen of formalistic and meaningless powers by the company council shocked the country; the story was front-page news in the Budapest newspapers. The managing director felt so humiliated that he moved out of his company house immediately and no one knows where he is. (See Appendix; 1989–1996 Hungarian longitudinal study)

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Personal Dependence and Trust When governments are nonfacilitative, organizations become dominated by dependence on personal relationships because this is all that participants have. Descriptions of business practices in China as well as evidence from the author’s own work underpin the argument that under nonfacilitative governments, those running organizations depend more heavily on their personal relationships, and that they use those relationships to secure protection from threats that are more completely managed by facilitative governments. Under nonfacilitative governments, executives are more likely to try to develop relationships of mutual dependence with government officials, because these officials are less constrained when their governments are weak, unpredictable, or hostile. As also reflected in the quotations, although this reliance on personal relationships has been called trust-based authority, these relationships are not necessarily characterized by the warmth and supportiveness usually associated with that word. Rather, this is organizing based on mutual personal dependency rather than trusting relationships. The relationships are characterized by varying norms of mutual obligations and binding mutual dependence. Under nonfacilitative governments, personal relationships with government officials provide executives with the support and predictability they need to organize. The participants may have warm trusting feelings about one another, but this is not necessary, nor, as these data indicate, is it common.

4 Organizing by Personal Relationships: Meritocracy and Employee Empowerment Organizational dependence on personal relationships as a means to operate without facilitative governments may have many effects (e.g., financial and strategic), that are beyond the scope of this work (see excellent descriptions of strategic implications in Redding, 1990; Khanna & Palepu, 1998). In this chapter the effects of relationship-based organizing on organizational form are discussed. It is proposed that organizing based on personal relationships results in highly centralized organizations that, whether large or small, undermine performance-focused meritocracy and disempower employees. Furthermore, these organizational practices are best illustrated by distortions in human resources management departments. EFFECTS ON ORGANIZATIONAL FORM Highly Centralized Decision Making Redding (1990) suggested that dependence on personal relationships led to highly centralized decision making in the overseas Chinese organizations he observed. He described the process by which all decisions, both trivial and important seemed to gravitate to the owner’s desk: “When authority becomes so bound up with a person, it becomes very difficult for others to exercise it on his behalf. It remains indivisible” (p. 131). The organizations are so dependent on the executives’ own networks of personal relationships that the executives must conduct business directly among the principals who have the relationship. For example, important knowledge about what is possible and who is protecting whom cannot be disclosed for fear of exposure. Such extreme centralization also fosters secrecy. Along with the strong hint of corruption in many of these relationships, it was found that a substantial proportion of Chinese executives reported that their most important business connections were kept secret from others. On a 3-point scale, with response options ranging from 3=(completely secret) to 1=(completely open), Chinese 61

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executives reported a mean of 1.75, as compared with 1.03 for the Americans (p