Chapter 16

THE IMPORTANCE OF SOCIAL CAPITAL TO THE MANAGEMENT

OF MULTINATIONAL ENTERPRISES
Relational networks among Asian and Western firms

Michael Hitt, Ho-Uk Lee and Emre Yucel

 Introduction
• Firms operating in a network have many more resources they can
access to increase their ability to compete than do single firms
operating independently.
• To be competitive, most firms need additional resources and thus
attempt to develop their own networks to gain competitive parity
or, more importantly, a competitive advantage.
• In this competitive environment, firms with social capital have an
advantage.
• Social capital is defined as the relationships between individuals
and organizations that facilitate action and thereby create value.
• The web of social relationships that develops entails norms, values
and obligations and yields potential opportunities for the members

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 Introduction
• Social capital has become an important asset to
multinational firms because of the need for
appropriate resources (e.g. information,
technology, knowledge, access to distribution
networks, etc.) to compete effectively in global
markets. Therefore, multinational firms may be
able to gain a competitive advantage because of
their social capital.
• This chapter will reflect on the meaning of the
social capital considering Asian and Western
firms as examples.

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 Social Capital
• Social capital has been defined in different ways:
– Coleman (1990): social capital is created when the relations
among individuals change in a manner that facilitates action;
– Burt (1992) defines social capital as opportunities a player
receives through relationships with other players such as
colleagues.
– Burt (1997) suggests as well that social capital is a quality of
individuals; it contributes to an individual’s human capital
– Both Coleman (1990) and Burt (1992), suggest that social capital
springs from the relationships among people.
– Tsai and Ghoshal (1998): the norms and values associated with
relationships contribute to social capital as well.
– Thus, most conceptions of social capital include relations or networks of
relationships among individuals and organizations. These relationships
facilitate action and thereby create value .

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 Social Capital
• Effective management of businesses requires dissemination, absorption, and
utilization of knowledge
• Firms may acquire knowledge from external sources or develop knowledge
internally. Regardless of the source, knowledge must be disseminated throughout
the organization for maximum effect via knowledge networks; i.e. interactions
among different members of the organization.

• We have different types of knowledge:

– Conscious knowledge (knowledge that can be retrieved and stored from records)
– Automatic knowledge (tacit knowledge of individuals)
– Objectified knowledge (the highest form of socially explicit and shared knowledge available)
– Collective knowledge (tacit experiences and enactment of the collective, routines, etc.)
– The most valuable technical and commercial knowledge in organizations is embedded in tacit collective
knowledge

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 Social Capital
• Social capital can be used to access knowledge but it also is helpful
in exploiting collective knowledge.
• Social capital facilitates the creation of inter-firm linkages that
facilitate product innovation, expedite resource exchange.
• However, not all outcomes are positive. Most firms experience information
asymmetries that create knowledge gaps because of inadequate
knowledge dissemination.
• Solution to this problem: effective social capital helps to overcome
this problem. Social relations impose symmetry through exchanges
• Information symmetry, then, contributes to a shared vision through
continuous interaction of managers and employees.

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 Social Capital
• Multinational firms use internal social capital to integrate
units operating in disparate locations and cultures. The
internal units operating in multiple and diverse country
markets must be bound together by shared values, goals
and global vision (we call this “loose coupling).
• Moreover, the firm’s relationships with all of its
stakeholders produce social capital that serves as input to
both strategy formulation and implementation
• Social capital is hence critical for firm’s success especially for multinational
firms that need to effectively integrate internal business
units across geographic (e.g. country) boundaries, as well
as manage relationships within a large external network of
firms.

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 Social Capital
• This form of social capital (inter-organizational
network) can be used to facilitate market
expansion and competitive positioning and
consequently may lead to competitive advantage.
• Three dimensions of social capital help to
produce competitive advantages:
– social interaction: is necessary to establish the
network ties
– relationship quality and network ties where
relationship quality defines the strength of those ties.

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 Social Capital
– One problem might arise:
• Firms are limited by the boundaries of their network. They
may be unable to take advantage of some opportunities
because the network does not provide access to the
appropriate resources to do so which might lead to political
behavior if constraints are not resolved.
• Firms might reach dysfunctional competition and social capital
will hence become an organizational liability
• Internal political fragmentation can serve as a barrier to
knowledge and resource transfer

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 Asian Relationships, Networks and
Management Practices
– East Asian countries in general and China, Japan, and Korea in particular
have been greatly influenced by Confucianism.
– The philosophy of Confucius stresses that individuals are not isolated
entities but a part of a larger system of interdependent relationships.
– Confucius promulgated a code of ethical behavior that was to guide
interpersonal relationships in everyday life. This code can be summarized
by the so-called “five relationships”: ruler/subject, father/son,
husband/wife, elder brother/younger brother, and friend/friend
– As such, building and managing effective relationships have been innate in
the cultures of China, Japan, and Korea.
– Despite differences as concerns the nature of interpersonal relationships,
they all imply Asian society, Western societies (i.e. North America, Western
Europe) business dealings are more based on the concept of transactions
rather than that of relationships. Social capital is more pronounced in Asian
society than in Western societies.

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 Alliances and Trust
– Alliances and networks of firms have become a common
means of doing business in the 21st century.
– Networks play a central role in the formation of new firms and
the growth of existing firms, primarily because they provide
access to resources needed to survive and compete in local,
national and global markets.
– This fact has greatly increased the effects of social capital on
the competitive capabilities of firms
– Social capital facilitates the formation of alliances and
contributes to the management of relationships in networks.
– Firms without adequate social capital may experience
challenges in gaining access to resources necessary to
compete, especially in global markets.

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