The People Link: Human Resource Linkages across The Pacific 9781442654174

Table of contents :
Preface
Contents
International human resource linkages: Introduction
Culture, business organization and managerial behaviour in East Asia
Ethnic Chinese networks: A new model?
A portrait of Asia-Pacific immigration to Canada
Immigrants as trade catalysts
International human resource linkages and economic growth: An Afterword
About the authors
Centre for International Business

Citation preview

Hongkong Bank of Canada Papers on Asia Editor A.E. Safari an University of Toronto Managing Editor Wendy Dobson University of Toronto

Editorial Advisory Board David Bond, Hongkong Bank of Canada, Vancouver Edward K.Y. Chen, Lingnan College, Hong Kong Chia Slow Yue, Institute of Southeast Asian Studies, Singapore Farid Harianto, PEFINDO Credit Rating Indonesia Ltd., Jakarta Ralph W. Huenemann, University of Victoria Lawrence B. Krause, University of California, San Diego Karen Minden, Asia Pacific Foundation of Canada, Winnipeg Eleanor Westney, Massachusetts Institute of Technology, Cambridge, Mass. Ippei Yamazawa, Hitotsubashi University, Tokyo Soogil Young, Korea Institute for International Economic Policy, Seoul

Centre for International Business University of Toronto

Hongkong Bank of Canada

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Hongkong Bank of Canada Papers on Asia, Volume 3

The people link: Human resource linkages across the Pacific A.E. Safarian and Wendy Dobson, Editors

UNIVERSITY OF TORONTO PRESS Toronto Buffalo London

ISBN: 0-8020-4299-6 (cloth) 0-8020-8126-6 (paper) © Centre for International Business Joseph L. Rotman School of Management University of Toronto 105 St. George Street, Toronto, Ontario M5S 3E6 Printed and bound in Canada

Canadian Cataloguing in Publication Data Main entry under title: The people link: human resource linkages across the Pacific (Hongkong Bank of Canada papers on Asia ; v. 3) ISBN 0-8020-4299-6 (bound) ISBN 0-8020-8126-6 (pbk.) I. Canada - Foreign economic relations - East Asia. 2. East Asia - Foreign economic relations - Canada. 3. Organizational behaviour - East Asia. 4. Asians - Canada. 5. Canada - Emigration and immigration - Economic aspects. I. Safarian, A.E., 1924II. Dobson, Wendy. III. University of Toronto. Centre for International Business. IV. Series. HF3228.E37P46 1997

337.7105

C97-932072-0

Preface This volume is the third in a series that examines Canada's economic relationships with the countries of East Asia. In previous volumes, we established a baseline against which to measure developments in business and economic relationships, and found that Canadian business has not been doing very well in the dynamic economies in the region. In the second volume, East Asian Capitalism: Diversity and Dynamism, we examined the characteristics of the diverse East Asian business systems—the Korean chaebol, Japanese keiretsu, and the business system in China. We found that some broad differences exist in the ways business systems operate in East Asia, but that there is considerable diversity within the region. A future volume will examine East Asian corporate finance and evolving fiscal frameworks as these influence the private sector; another volume will follow through on the benchmarking concept with specific case studies of the successes and failures of Canadian firms in the region. The purpose of this volume is to illuminate the links among the peoples of the region that Canadians need to understand when doing business abroad or cooperating with East Asians in North America. The book's six papers examine the role of culture in institutional similarities and differences, both within East Asia and between East Asia and the west, the impact immigrants have on the receiving economy, the role of education and human capital in economic growth, and the role international linkages like trade, investment, cooperation and immigration play in the spread of knowledge. The authors come from a variety of disciplines including economics, organizational psychology and geography. Considering the importance of international human resource linkages to Canada's economic i

and business relationships with the region, we encountered a surprising dearth of Canadian scholarship on some topics and a lack of data on others. Since the purpose of the Hongkong Bank of Canada Papers on Asia is to promote understanding, provoke debate and stimulate further research, we hope that this volume will contribute to closing the gaps we have found. The series publishes timely and readable scholarly work in the fields of business and the social sciences, aimed primarily at the Canadian business and policy communities, to help increase their knowledge of and familiarity with East Asia's distant markets. The Hongkong Bank of Canada provides generous support. Professor A.E. Safarian is the series Editor. He leads a distinguished international Editorial Advisory Board which provides peer review and editorial advice. To stimulate high-quality research, the editors seek out top researchers and encourage them to write on subjects central to the Papers' mission. Manuscripts are commissioned and symposium and conference contributions are solicited. In addition, events are organized by the Centre for International Business to ensure timely dissemination to interested audiences. The University of Toronto Press cooperates in this project through its Scholarly Publishing Division. Support is also provided by Heather Munroe-Blum, Vice-President, Research and International Relations and by the Joseph L. Rotman School of Management at the University of Toronto. This volume was prepared with the assistance of staff of the Centre for International Business, particularly Vivien Choy and Sherene Hu. Catherine Gordon provided expert editorial assistance. Wendy Dobson September 1997

ii

Contents Preface

i

International human resource linkages: Introduction

1

Wendy Dobson

Cultural distinctions, organization and management Immigration and economic growth Human capital and economic growth Implications

2 6 8 9

Culture, business organization and managerial behaviour in East Asia 13 Robert Westwood Dimensions of cultural difference 15 Cultural specifics in East Asia and their implications for management and organization 22 Culturally-informed differences in organization and management 39 The case for cultural commonality and homogenizing models . . .56 Convergence or divergence? 60

Ethnic Chinese Networks: A new model?

73

Katharyne Mitchell and Brian Hammer Guanxi: The role of personal networks Chinese networks internationalized Case studies of Chinese conglomerates Ethnic Chinese networks: A new model?

74 82 87 95

111

A portrait of Asia-Pacific immigration to Canada

105

Michael Baker and Dwayne Benjamin

The flow of Asia-Pacific immigration A snapshot of immigrants from the Asia-Pacific The economic assimilation of Asia-Pacific immigrants Asia-Pacific immigration and trade Asia-Pacific immigration and investment Conclusions

107 116 120 124 126 127

Immigrants as trade catalysts . . Keith Head, John Ries and Donald Wagner Immigration in Canada Immigrants and international trade Statistical analysis Conclusion

131 132 137 140 149

International human resource linkages and economic growth: An Afterword 153 A.E. Safarian Human capital and growth 154 International linkages of learning and economic growth 159 The adaptation of business systems 165 About the authors

175

Centre for International Business

179

IV

International human resource linkages: Introduction Wendy Dobson

The first volume of this series noted that Canada's economic presence in the dynamic East Asia region has been small and declining, and discussed several things Canadian managers need to understand better: the strategies of Japanese multinationals and other East Asian firms and governments, the linkages between trade and investment, and the nature of the different business systems. The second volume expanded on the last of these by analyzing the diverse business systems Canadian firms in the region need to compete and cooperate with— specifically, how the different systems of business are organized, why they are organized in these ways, and why they are changing. This volume takes the process a step further by concentrating on some of the links among the peoples of the region. The basic premise is that investment in human capital has made a significant contribution to economic growth, particularly to the extraordinary growth of the Asian economies. The volume explores how international human resource linkages also relate to trade, investment and economic growth. Two of the papers look at the impact cultural differences have on human resource linkages. The first paper focuses on culturally distinctive approaches to organization and management. The second paper is more specific in its focus on Chinese ethnic networks. The two papers that follow explore the impact immigration to Canada has on our development, specifically on trade, investment, and economic growth. The final paper examines how investments in human capital (through

1

education, training and the quality of institutions) and international human resources linkages (through immigration, trade, investment and other mechanisms which spread knowledge, for example) contribute to growth.

Cultural distinctions, organization and management Volume 2 of the series noted broad differences in the ways business systems operate in East Asia, compared to business systems in Canada, the United States and much of western Europe. It also noted that there is considerable diversity in business systems within East Asia, and even within countries in the region. This volume explores this point further by examining culturally-based differences in organization and management generally, as well as in overseas Chinese networks.1 Westerners tend to assume that all organizations operate in similar ways. Admittedly, a hot research topic is whether business organizations are converging across the major economies. Even if this were the case, as some experts pointed out long ago, it would be important to determine when culture matters and to act accordingly (Adler, 1986). Indeed, the lack of such an understanding has been an important factor in many international business failures. Canadian business needs to study closely how East Asian cultures link to their business cultures. Professor Robert Westwood of the University of Sydney tackles this topic in the second paper. His contribution confirms that the cultural dimension is far more complex than popular accounts imply. He presents four broad dimensions of a basic framework for learning about cultural similarities and differences and then applies them in two ways. First he compares business systems and organizations among the major East Asian economies, excluding the Japanese but including the overseas Chinese. Next he looks at some of the central issues managers have to deal with—like organizational form and structure, leadership,

1

2

The term 'overseas Chinese' is a vague term used by some authors to refer to ethnic Chinese who have settled outside of China. Other authors refer to them as 'ethnic Chinese.' Both terms are used by the authors in this volume to refer to Chinese in the diaspora. Wendy Dobson

motivation, communication and handling conflict. Throughout these analyses, Westwood draws out similarities and differences, both among East Asian economies and groups, and with western approaches. It becomes clear from this analysis that there is no East Asian "culture," nor is there an East Asian "management system" in such a diverse region. But the region does have some important common dimensions: the pragmatics of a concrete situation tend to be emphasized, rather than universal principles (particularism); relationships matter more than roles or goals in transactions like negotiations (diffuseness); who you know matters more than what you do (ascription); belief in natural rhythms and harmony matter more than dominance over one's environment (external orientation); and attitudes towards time tend to be non-linear. These values give rise to common social drivers "... of subtle and complex governance of harmonious social relationships that lend order and coherence to the social system." Looking to the future, will rising trade and direct investment lead to convergence among the East Asian systems, or with western organization structures and management systems? Westwood observes that the large numbers of Asians exposed to western methods in US business schools are bound to produce some convergence in practices. But culture itself will be a sustained source of difference because core aspects of culture are entrenched in early socialization processes (as Katharyne Mitchell points out in the next paper on Chinese family networks). In addition, institutions provide a basis for differences—in attitudes towards education, in business-government relationships, and in the role and power of organized labour. The third paper shifts focus to ethnic Chinese (also known as overseas Chinese) networks. While not all of these organizations are successful cross-border networks, or even domestic conglomerates, ethnic Chinese networks are, nevertheless, important elements of business systems in Southeast Asia and the greater Chinese area, something Professor Linda Lim pointed out in Volume 2 of this series. In this volume, Professor Katharyne Mitchell and Brian Hammer present intriguing arguments that imply that western firms in the years ahead will have to learn far more about the cultural origins and organizational behavior of ethnic Chinese networks in order to compete or cooperate (or both) with them in international business. International human resource linkages: Introduction

3

Mitchell and Hammer's thesis is based on two arguments: first, that these networks are well-suited to competing in the global economy because of their adaptability and flexibility and, second, that they can be inclusive of outsiders. They see these organizations as much more than a vestigial form of mercantile capitalism originating in China, as some observers discount them, and more than exclusive, personal, trust-based linkages, as others portray them. Some have concluded that the structure and functioning of ethnic Chinese conglomerates confines them to trading, component manufacturing and wholesaling, and makes it difficult for them to develop high technology systems and products, foundations of future business growth (for example, Weidenbaum and Hughes, 1996:55-57). While industry data are

Table 1: Industrial profile 17 ethnic Chinese family groups Industry

Number of businesses

•finance, insurance and real estate •food • natural resources • infrastructure and transportation • hospitality • business services • electronics and communications • autos

17

• chemicals

11

Geographical origin

11

6 6 3 3 3 1

Number of businesses

• Hong Kong

4

• Indonesia

3

• Malaysia • Taiwan • Thailand • Philippines

3 3 3 1

Source: Dobson (1998), based on data from the Economist, 1996.

4

Wendy Dobson

scarce to refute this generalization, Table 1 suggests a broader set of industrial competencies, something Mitchell and Hammer also emphasize. The authors interpret guanxi, the complex form of social conduct in Chinese business transactions, in the context of the individual's role in normative social relationships, and as it relates to the Confucian legacy. They find that hierarchy influences everything, from the use of funds, information and credit, to cooperative group activities, and that patterns of behavior related to the Confucian legacy, particularly notions of obligation and reciprocity, have become institutionalized over time in networking and other events that facilitate business transactions. Using detailed case studies of four ethnic Chinese networks, they illustrate three characteristics of the new inclusive network model: • An individual's relationships and the clear moral basis for enforcement of mutual obligations influence the creation and expansion of business networks by family members and former employees. • The recent extensive cross-border expansion of the networks relies on more diverse connections than just family and employer-employee ties—and it is this evolution that allows networks to become inclusive of outsiders. • There is increasing acceptance of professional management methods like the use of legal contracts and greater separation between professionals and family members, alongside the traditional personalistic patterns. Outsiders who want to compete or cooperate with ethnic Chinese networks must understand these patterns of evolution and adaptation. To succeed, companies will have to make a considerable investment in building relationships and establishing trust. Business information and transactions will happen only after these relationships have been established. Looking to the future, one might ask what impact the "one child" policy in China will have on these business patterns. The system of International human resource linkages: Introduction

5

partible inheritance, explained by Gary Hamilton in Volume 2, suggests a significant impact, but one that demonstrates the adaptability of these networks. In the past, the spin-off firms, the tight subcontracting links and the continuation of small- and medium-sized firms were explained by the fact that each son receives a share of the business. In order to be the "boss," the spin-off would take a slightly new direction, yet retain close links with the others in the group. With the one-child policy and increasing emphasis on privatization in China, it is the township and village enterprises that are becoming more important in business networks. They operate through linkages among work units (danwei) in the same way these work among family firms.

Immigration and economic growth In the fourth paper, Professors Michael Baker and Dwayne Benjamin examine the economic impact of immigrant flows to Canada. This study and the one that follows are part of a growing Canadian literature on this subject. While the authors in this volume focus on Asian immigrants, the themes they develop are similar to those in a comprehensive study by DeVoretz (1995), which found that while the overall economic impact of immigration is positive, it has been diminishing with the inflow of unskilled and older workers since 1978, when family reunification criteria were liberalized. Baker and Benjamin find that Asians now account for 60 percent of the stock of immigrants in Canada, and that the main Asian source countries are China, Hong Kong and the Philippines. Immigrants are relatively young, likely to be employed, urban dwelling and educated, yet they earn less than comparable Canadians, a deficit that takes time to close. This study illustrates the significant data problems that arise when studying the impact of migrants in more detail. Data on industry of employment and geographic location by migrant are not readily available, nor are data that enable one to study the impact immigrants have on international trade and investment flows in any detail. Aggregate data are available that make it possible to relate trade and immigration flows, and these show a significant and positive relationship— immigrants prefer goods from their home markets and know a lot about them. The relationship between immigration and foreign direct 6

Wendy Dobson

investment (FDI) flows, however, does not appear to be significant. In the fifth paper, Professors Keith Head, John Ries and Donald Wagner focus exclusively on the impact immigrants have on trade.2 They describe immigration as foreign trade missions that arrive in Canada daily—with long term prospects for follow through. They point out how significant immigrants are to Canada's population profile: between 1985-95, 2.1 million immigrants arrived, equivalent to about 7 percent of the Canadian population. They find a strong relationship between trade and immigration. A 10 percent increase in immigrants is associated with a 1 to 1.3 percent increase in Canadian exports to that country and a much larger—3.1 to 3.9 percent—increase in imports from that country.3 These effects differ with the class of migrant: independents have much larger impacts than family or refugee migrants. Comparing Asian migrants with those from other parts of the world, Asians and Latin Americans exert the largest influence on trade with their home countries. Head, Ries and Wagner note that in order to carry on trade, significant information barriers need to be overcome. Sellers need to find out what products buyers want and be knowledgeable about distribution channels and government regulations. Buyers need to be assured of the quality of the products and reliability of the seller. Immigrants ease these barriers because of the knowledge they have about their home economies. Some even have business networks established before they arrive, a factor that is verified and outlined in more depth by Professor Mitchell's work on ethnic Chinese networks. 2

The analyses of the immigration-trade link, by both Ries, Head and Wagner and Baker and Benjamin, rely on a formal gravity model of trade between Canada and each of its trading partners developed in Head and Ries (1995). This model estimates the impact of cumulative stocks of immigrants from a given country on the imports from that country and the exports to it.

5

Baker and Benjamin's analysis of immigrants includes only Asia Pacific countries. They find a similar impact on exports, but a smaller impact on imports—of only 2 percent—which can be explained by heterogeneity of the sending countries.

International human resource linkages: Introduction

7

Human capital and economic growth The sixth and final paper, by A.E. Safarian, is based on two ideas about human capital and growth. These ideas complement the other papers, and we believe they are important to both analysts and practitioners, particularly businesses attempting to compete with or cooperate with firms in East Asia. The first idea is that human capital is critical to growth. Yet how human capital accumulates and operates can differ significantly between societies. The second idea is that international spillovers of human capital create important linkages between societies, again with significant effects on their growth. These international linkages occur in a wide variety of ways with different effects on the countries involved and different implications for the individuals and the firms involved. Safarian first focuses on the operation of the linkages between human capital accumulation and growth—through the two obvious mechanisms of formal education and training, and learning by doing. He notes a few things to be wary of when relating formal education and training to growth: education may be either a cause or consequence of growth; both education and growth may have a common underlying factor, such as technological change; much depends on whether fiscal and social incentives encourage talented or educated people to generate wealth; and what is being taught may be more important than the length of schooling. He introduces an interesting third link—the quality of institutions in a society —which include organization and management. Results of research in this area are still relatively inconclusive. As Westwood points out, culture matters in management and business, but so do a lot of other variables. For example, a recent effort to determine statistically the most significant factors which explain growth for a large set of countries found half of the factors were political and religious, and half were economic in nature. Safarian goes on to examine the international human resource links between societies, which as he notes, go well beyond those related to immigration, management and organization. He reviews a rich web of interrelationships that include trade, direct investment, cooperative forms of organization such as joint ventures, sub-contracting, research 8

Wendy Dobson

consortia and licensing, as well as education abroad and the many dayto-day informal contacts. He emphasizes that commercial implementation of knowledge, which is central to economic growth, spills over internationally in a variety of channels.

Implications This volume illustrates the human linkages between Canadian and Asian business and provides insights into how to take advantage of them. The studies suggest that these linkages have major implications for entering and operating in East Asian markets, adapting business organization and management when going abroad, and linking with Chinese networks in North America. Safarian concludes that, while trade offers opportunities to develop a market, it is limited by the degree of interdependence required to reduce the transactions costs involved in dealing with distant and unfamiliar markets. One way to reduce these costs is to develop linkages in Canada with Asian migrants who are familiar with preferences and practices in their home markets, as Head, Ries and Wagner point out. Cooperation provides the opportunity for longer-term commitments, and direct investment requires adaptation to local circumstances. How far must this adaptation go? Westwood emphasizes that understanding cultural similarities and differences is not as simple as the popular press implies, and requires much greater study. East Asian management and organization have some commonalities, and many local managers have studied western management methodology, but despite the transfer of business practices that has resulted, cultural differences persist. This makes it clear that companies need to adapt— particularly to the management issues addressed by Westwood—if they are to be successful in the region. Mitchell and Wagner's advice for linking with Chinese networks also emphasizes the importance of learning before investing. The barriers to entry are high, but entry is becoming more feasible because Asian networks have diversified over the past decade into new industries and new geographical areas. Companies need to invest in the research necessary to understand the relationships in the network, they must be willing to make deals that benefit all players, and they need International human resource linkages: Introduction

9

to recognize that the network will have a hierarchy of "rings" in which family will be first followed by more distant contacts. Outsiders start at the periphery and work inwards through a system of reciprocity and obligation, building trust as they proceed. At the same time, companies should keep in mind that, as Kunin and Lary (1997) have pointed out, Chinese Canadian entrepreneurs want to become, and see themselves as, part of the larger Canadian society. Finally, these studies raise two other, more general issues. First, as Head et al point out, the effects immigrants have on trade should be included in the evaluation of Canadian immigration policy. The second issue arises from some unexpected difficulties encountered when organizing this volume. We found that few Canadian scholars are working on education, training and human resource linkage issues, in spite of their relevance to ongoing academic debates, at least among economists. What research there is tends to focus on a single discipline, instead of being interdisciplinary. The authors in this volume also found a dearth of data on vital subjects like the economic "foot prints" of immigrants. We hope that this volume, which sometimes raises more questions than it answers, will provoke debate and stimulate research into the significant area of Asia-Pacific economic and business relationships.

10

Wendy Dobson

References Adler, Nancy. 1986. International Dimensions of Organizational Behaviour. Boston: Kent Publishing Company. DeVoretz, Don J. (ed.). 1995. Diminishing Returns: The Economics of Canada's Recent Immigration Policy. Toronto: C.D. Howe Institute. Dobson, Wendy. 1998. "Business Networks in East Asia: Diversity and Evolution." In Rong-I Wu. (ed.). Business, Governments and Development in Asia-Pacific. Economist, The. 1996. "A Survey of Business in Asia." March 9Head, Keith & Ries, John. Forthcoming. "Immigration and Trade Creation: Econometric Evidence from Canada." Canadian Journal of Economics. Kunin, Roslyn & Lary, Diana. 1997. Succeeding: Profiles of Chinese Canadian Entrepreneurs. Vancouver: Asia Pacific Foundation. Rong-I Wu. (ed.). 1998. Business, Governments and Development in AsiaPacific. Canberra and London: Routledge for the Pacific Trade and Development (PAFTAD) network. Weidenbaum, Murray & Hughes, Samuel. 1996. The Bamboo Network. New York: The Free Press.

International human resource linkages: Introduction

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Culture, business organization and managerial behaviour in East Asia Robert Westwood Western interest in East Asian1 management and business systems has risen in parallel with the rapid economic development of a number of the countries in the region. This interest mirrors the intense fascination with Japan following its own meteoric rise. The level of interest is sparked, not only by the speed and manner of the economic growth, but also, as with Japan, by the view that the management and business systems in the region are distinctive vis-a-vis any western model. It is this presumed difference that has led to sustained, at times florid, debate about the source of the success of these economies. Certainly, East Asia is widely assumed to be culturally "distant" from the west, and there have been various claims of differences in

1

'East Asia' includes the standard countries of Taiwan, Hong Kong, Macau and South Korea, but also those that might normally be considered as part of Southeast Asia: Indonesia, Malaysia, Philippines, Thailand and Singapore. Laos, Vietnam, Cambodia and Burma are excluded both because of ideological differences and because too little is known about their management and organization; the same is true of North Korea. Japan is also not being considered: a) because it displays a measure of cultural uniqueness, even within Asia, and b) because its management and business systems have been well documented and themselves display a distinctiveness. Mainland China poses an altogether different prospect. Its unique experiments in socialist market economics and enterprise reform make it difficult to incorporate into any comparison with other East Asian countries.

13

management and business organization both at the systemic level and at the level of specific styles and practices. Such differences, if they exist, pose significant problems for western business people functioning in the region, for western businesses locating, trading or engaging in alliances there, and, similarly, for business people and organizations from the region travelling to or transacting in the west. There have been attempts recently to subsume East Asian management under some encompassing umbrella based on certain assumptions of commonality, usually cultural.2 Varying degrees of such commonality have been assumed ranging from a generic Asian management system, to more specific, but still generalizing, Confucian or Chinese management systems. It is important to assess whether such claims are justified. And, given the forces of internationalization and globalization, is it meaningful to assume that any such differences are subject to erosion as cultural convergence takes place and management and business practice become more similar thereby easing some of the difficulties of east-west business and management dealings? These issues have significant implications for international business. If the culture(s) of East Asia are significantly different from those of the west, and if those cultural differences translate into differences in approaches to business systems, organization and management, then business transactions and relationships between East Asia and the west will be affected. It becomes important to understand the nature of those differences, their derivation, and their consequences. If there is an underlying cultural commonality in East Asia that manifests itself in a relatively coherent and identifiable management and business style, then the task for non-Asian business people transacting in East Asia is made somewhat easier since understanding the commonalities will facilitate business and management practice across the region. However, if there is no homogeneity of business systems and management in East Asia, but rather a variety of different systems that are still distinctive vis-a-vis western ones, then knowledge and understanding at the individual culture or country level is required.

2

14

See, for example, Berger and Hsiao, 1988; Chen, 1995; Hicks and Redding, 1983; Hofstede and Bond, 1988; Redding, 1990.

Robert Westwood

An alternative possibility is that, if the cultures are different, but this does not translate into differences in management and business practice (because business and management transcends culture, or is transcultural, or constitutes its own universalistic sub-culture), then, again, the contingencies facing outsider businesses and business people are less arduous. Finally, and more controversially, the very distinctiveness of East Asian cultures might be questioned, especially under conditions of internationalization, globalization and cultural convergence. Then, again the problematic nature of east-west management and business transactions begins to recede. The first aim of this paper is to examine differences in organization and management between East Asian and the west, and their implications for east-west business transactions and managerial behaviour. The second aim is to address the sources of those differences, including culture, and to determine whether there is any commonality among the business and management systems of East Asia since such commonality would simplify the task for foreign business people and managers.

Dimensions of cultural difference Any culturalist explanation of economic action and managerial behaviour must first show that important differences in culture exist between countries and regions. It must also go on to show that such differences actually have an impact upon organization and management and give rise to differences in approach, style and practice. This section primarily addresses the first of these issues. Early comparative management models and discussions tended to deal with the nation as the appropriate level of analysis: culture was either made equivalent to national identity or was considered as only one element in an array of environmental factors held to shape management systems (Farmer and Richman, 1965; Haire, Ghiselli and Porter, 1966; Harbison and Myers, 1959). A more specific focus on culture only really emerged in the early 1980s, stimulated in part by the growing recognition of the distinctiveness of Japan's management systems and the belief that this distinctiveness was rooted in Japanese culture (Ouchi 1981; Pascale and Athos 1981). But equally important in raising the visibility of cultural factors in management was the highly influential work of Gert Hofstede (1980a). Culture, business organization and managerial behaviour in East Asia

15

Hofstede used data from a large-scale survey of IBM employees in over fifty national subsidiaries to derive four dimensions of national culture: power distance, individualism/collectivism; masculinity/femininity; and uncertainty avoidance. The responses of individual employees in each national subsidiary were aggregated to provide a national score on each of these dimensions. Power distance measured the extent to which less powerful members of organizations and institutions like the family accept an unequal distribution of power and its perquisites. Individualism/collectivism measures the extent to which people value individual identities and freedom versus group participation and identification. Masculinity/femininity measures the extent to which high value is assigned to "masculine" qualities of competitiveness and assertiveness versus the more "feminine" qualities of nurturance and quality of life. Uncertainty avoidance measures the extent to which structure and predictability are valued and unstructured situations perceived as threatening. Following the development of Hofstede s four dimensions, Michael Bond in Hong Kong developed a Chinese Value Survey that attempted to construct a value survey from a purely indigenous Chinese perspective, by working with Chinese social scientists to identify the core values of Chinese culture. This process led to the creation of a 40-item questionnaire that was administered to 100 students in each of 22 countries. The analysis of the data produced four dimensions, three of which correlated significantly with three of the Hofstede dimensions (uncertainty avoidance being the missing dimension). However, the fourth factor had no direct counterpart in the Hofstede analysis, and Bond labelled it "Confucian dynamism" (since he believed that it reflected central values of Confucianism) or "long-term orientation" (Hofstede and Bond, 1988). At the "long-term" end of the dimension are the values of persistence, thrift, having a sense of shame, ordering relationships by status and observing that order. At the other end are personal steadiness and stability, protecting your face, respect for tradition, and reciprocation (of greetings, favours, and gifts). One of the great attractions of these studies is that they provide a clear, quantitative mapping of the relative position of various national cultures on each dimension, allowing an apparently objective assessment of how close various national cultures are to each other. 16

Robert Westwood

Table 1 shows the scores of the various countries of East Asia in terms of each of these dimensions. It reveals a significant degree of clustering of the East Asian cultures on high power distance and collectivism. On Hofstede's other two dimensions, however, there is a considerable amount of variability around the region. On the long-term orientation dimension of the Chinese Values Survey, the Philippines is, perhaps not surprisingly, an outlier. There are, however, a number of drawbacks to the studies. The value dimensions are very broad and general. They show that national differences are present and important, but they do not show how cultural differences influence behaviour in and of organizations. Cultural value differences may have an impact upon organization and management, but other, non-cultural factors are also likely to be of significance in accounting for differences in organization and management systems around the world. Sometimes extravagant and unsupported claims are made based on differences on scores on these dimensions— for example Hofstede (1994:167) maintains of the LTO scores that "The nature of the values involved...makes it very likely that these values were the cause and economic growth was the effect, the link between the two being formed by East Asian entrepreneurship." He also makes the extraordinary claim that the western cognitive paradigm is characterized by the search for Truth, while the Eastern one by the search for Virtue and that the latter represents a strategic advantage in economic terms! (Hofstede, 1994: 172). There are some other well known schema of broad cultural differences to which we can refer, although in doing so a level of speculation is necessary, since there has been no empirical investigation of these schema within East Asia.3 The following is a brief, speculative outline of the position of East Asian cultures on these additional core dimensions of culture. 3 The root of these schema (and indeed Hofstede's) is the classic work of Kluckhohn (1951), Kluckhohn and Strodbeck (1961) and Kroeber and Parsons (1958). Variations on their descriptions of dimensions or patterns of cultural difference can be found in Adler (1991); Trompenaars (1993); Maznevski, Nason and DiStefano (1993); Maznevski and DiStefano (1995).

Culture, business organization and managerial behaviour in East Asia

17

Table 1:

Scores and ranks of East Asian countries on Hofstede's dimensions Hong Kong

Indonesia

Malaysia

Philippines

Singapore

South Korea

Taiwan

Thailand

Power distance indexi

68(15-16)

78(8-9)

104(1)

94(4)

74(13)

60 (27-28)

58 (29-30)

64 (21-23)

Individualist^

25(37)

14(47-48)

27 (26)

32(31)

20(39-41)

18(43)

18(43)

20(39-41)

Masculinity 1,4

57(18-19)

46(30-31)

50 (25-26)

64(11-12)

48 (28)

39(41)

45 (32-33)

34 (44)

Uncertanty avoidance index 1

29(49-40)

48(41-42)

36 (46)

44 (44)

8(53)

85(16-17)

69 (26)

64 (30)

Long term orientation 2, 5

96 (2)

n/a

n/a

19(21)

48(9)

75(5)

87(3)

56(8)

1 . Rank in parenthesis out of 50 countries 2. Rank in parenthesis out of 22 countries 3. From the individualism-collectivism dimension 4. From the masculinity-femininity dimension 5. From the long term-short term dimension Source: Hofstede, 1994.

Universalism-particularism I would suggest that most East Asian cultures tend toward the particularist end of this dimension. In universalistic cultures, general, abstract and universal principles are developed which both guide behaviour and are the prime means for its evaluation. A person confronting a dilemma will ask "what is the general principle here and if I act inappropriately what universal principle will I have breached?" Because of the high level of abstraction, the universal principle is made to cover a wide variety of particular cases and should be adhered to and applied despite the specificities of the particular situation. In particularistic cultures the guidance and evaluation of behaviour and action is considered much more with reference to the particular concrete circumstances. When confronted by a dilemma or breach of behavioural norms, people will not refer to some internalized, universal principle, but to the practical exigencies and implications within that particular situation. Trompenaars (1993) sees the practical contrast between the two as one of a different perspective on rules versus relationships. That is because in particularistic cultures it is the overriding importance of specific and concrete relationships that demands attention in determining lines of action or in judging behaviour. People will ask themselves "what does my intended line of action mean for those with whom I am in a relationship, how will they judge my actions, and how will they respond to my actions?" These calculations have far more impact than any superordinate, abstract universal principle. This is especially forceful in much of East Asia given the collectivist nature of the cultures and the strong relationship-orientation that pervades the region. There are implications for such organization/management issues as organizational structuring, type and extent of formalization, the application of policies, nepotism, attitudes towards business ethics and the importance of relationships in organizational and business contexts.

Specificity-diffuseness This dimension deals with the extensiveness of our relationships with others and the extent to which people in different cultures compartmentalise and privatize different life spheres and the relationships that go with them. Culture, business organization and managerial behaviour in East Asia

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I would suggest that most East Asian cultures are relatively diffuse. For example, in business negotiations an Asian manager will traditionally be concerned about building up a relationship with his or her counterpart, attempting to get to know the person and establishing sentiments of trust and mutuality before the substantive elements of the negotiation are tackled. The negotiation situation is viewed as the onset of a relationship and effort must be expended to build and nurture it. Once the particular deal is concluded, the Asian manager does not expect that to be an end to the relationship but will see it as extending across time and place. Western negotiators tend to be much more specific. Their role as negotiator has very clear defining limits. The person is a negotiator for his or her company, but that does not define the person and is distinct from other aspects of the self, other roles and other spheres of their lives. The relationship they form during a negotiation is simply that— it has no legitimate or desired extension beyond that specific situation nor across time. The specific-culture person does not expect the negotiation role to penetrate into other life spheres or aspects of the self. Once the deal is concluded the western person moves on and the negotiation relationship remains confined to the specific situation of the negotiation. Again, the East Asian relationship-orientation is elementally connected here. Indeed, it is argued that the very concept of self in Asian culture is basically relational—you are a function of the network of relationships in which you are engaged. The whole fabric of the social system is constructed on the basis of subtle interpersonal bonds of mutual obligation. The person cannot be fragmented into a series of discrete roles or situational persona. Relationships, of all kinds, have high value and potential, they are not temporary and specific arrangements that have narrow and instrumental purposes. They have the potential, at least, for great intensity, persistence and extensionality. Achievement-ascription This dimension basically refers to the mechanisms by which people in a society attain status, power and position. In achievement-oriented cultures there is more emphasis on what people do, their competencies and accomplishments. This contrasts with ascriptive cultures where 20

Robert Westwood

the focus is upon who you are, where you come from and what your connections are. I suggest that East Asian cultures are towards the ascriptive end of the continuum, but that there is significant movement in the direction of achievement, particularly in the business world. In Malaysia, for example, there is a vestigial traditional status hierarchy based on notions of nobility, family and clan. This is reflected in the nomenclature that is still important within indigenous Malay society. Even in contemporary overseas Chinese business, nepotistic practices are very common and it is difficult for non-family members to get into key positions. This cultural inclination has implications for, among other things, leadership in East Asian contexts.

Internal-external orientation Kluckhohn and Strodtbeck (1961) discussed variable values and orientations of cultures to their environments and contrasted those with a "harmony with," "subjugation to" or "dominance over" perspectives. Trompenaars (1993) reconfigures this into an internal versus an external orientation, linking it to the psychological concept of the locus of control. US culture is perhaps the pre-eminent internally oriented culture where there is an exceedingly strong belief in the capacity, indeed the right, of people to intervene and manipulate the environment in the pursuit of the well-being and interests of people. A strong internal orientation is associated with firm values of personal self efficacy and the capacity of people to intervene and determine outcomes. It also relates to the emergence of applied science and all that has entailed for control and manipulation of the environment. In cultures with an external orientation, there is more of a belief that nature is the dominant force and that humans are a component in an holistic cosmology: integral not dominant. This is reflected, for example, in Chinese medicine which is holistic in nature and focuses as much on re-tuning the person to natural rhythms and proper connections as it does on treating a specific symptomology. Core religions in East Asia such as Buddhism and Taoism also place great emphasis on an harmonious cosmology. Externals will tend to give greater emphasis to the determining impact of external forces rather than Culture, business organization and managerial behaviour in East Asia

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internal efficacies. Such an orientation has implications for planning, decision making and motivation. Temporal orientation Following Hall (1976), there are presumed cultural differences in terms of how time is conceived. Western conceptions of time are linear, sequential, discrete and monochrome. There is also a strong orientation towards the future, at least in the US East Asian conceptions are non-linear, non-sequential, episodic and polychronic. They are also somewhat more oriented towards the past or the present. This has implications also for planning and decision making, and may have significant implications for problem-solving. There are also more mundane implications in terms of scheduling of activities and the work pace and regime of people from different cultural settings. The following sections explore the relationship between the core cultural values of specific countries/cultural groups in the region and particular aspects of management and organization behaviour.

Cultural specifics in East Asia and their implications for management and organization Attempts to construct accounts of distinct management/business systems are familiar in writing on Japanese management. In those writings, a good degree of myth has entered the account and some suggest that Japanese management is constructed less from the inherent, unique qualities of its culture, than from an ideological/political manipulation of that culture by ruling elites (Dunphy, 1987). In other parts of East Asia, attempts are now also being made to construct models of management and organization. These attempts include the exploration of traditional values and the determination of their relevance to an indigenous account of contemporary managerial and organizational behaviour. This section first briefly examines claims of this nature made with respect to cultures in East Asia and then turns to the specific and highly influential case of the Chinese communities in the region.

22

Robert Westwood

Diversity and commonality: Culture and management in non-Chinese East Asia Korea Korean management has been subject to culturalist accounts of varying degrees of sophistication and exclusiveness, from Whitley s (1992) cautious institutionalist account to Meek and Song's (1993) postConfucian analysis. In the latter, the Confucian heritage is explored in some detail, by outlining the core values of inwha (harmony between people), hierarchical structuring, collectivism and dependence, filial piety and social ritual, and certain values attached to human nature and its mutability. However, there is a failure to explain how these cultural values actually determine, or properly connect to, actual human resource practices. Indeed, this is a good example—and typical of culture-management theses in this area—of the construction of a classical cultural edifice that is only very weakly linked to the description of management practices that follow. Elsewhere one finds a mix of institutional and cultural explanations of Korea's distinctive organization and management.4 Korean business organizations are dominated by the chaebol. These are, structurally, extremely large, vertically integrated operations that function with a high degree of independence but which tend to have strong connections to the political elite and funding institutions. They are still mostly majority owned by families and there is the familiar East Asian pattern of the non-separation of ownership and control. There is, therefore, a high level of centralization and substantial control through a densely tiered hierarchical authority structure. The level of formalization is somewhat higher than would be apparent in ethnic Chinese family firms, but this tends to be overlain with substantial personalistic and informal relationship structures. The management style is rather directive and autocratic. Leaders expect a degree of compliance, deference and loyalty, and not to be challenged. Ideally, leaders are supposed to lead by example and to

4

See Cho, 1991; Chung and Lee, 1989; Lee and Yoo, 1987; Shin, 1984; Yoo and Lee, 1987.

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bring a moral quality to their leadership—moral, not in the sense of universalistic principle, but visible adherence to the standards of good conduct and appropriate behaviour. Malaysia Malaysia represents a distinct and complicated case because of its ethnic diversity. The business and commercial dominance of the Chinese is notable, but the Indian community is also significant and there have been intense, government sponsored, efforts to bring indigenous Malays more into the business world. There has been an attempt to delineate the values of indigenous bumiputra^ culture and to explore if business and management systems can be developed that remain in tune with that6 (see Dahlan, 1991). Traditional Malay life is based on the collectivism of the kampung (village). The core value nexus in bumiputra society is termed budi: a complex that expresses the ideal character and form of behaviour for the Malay. Two core elements are adab, which refers to the social obligation to display courtesy to others, and rukan, which is an injunction to act in ways that maintain harmony. There are also rules of behaviour to govern interactions within a sharply delineated status hierarchy, and general expectations of politeness, humility and proper deference. Malaysian leadership is again rather directive, but the Malay leader should be a halus person; that is, exhibit the culturally sanctioned qualities and behaviours that befits their status. Subordinates tend to be deferential to authority figures and will not readily question the leader or even initiate a line of action independently. The quality of personal relationships is again central to the governance and sense of order within the organization. Leader-led relationships can be very personalistic and paternalistic, often with systems of

24

5

Bumiputra (literally 'sons of the soil') refers only to indigenes in a general sense (differentiated from kaum mendatang, or 'immigrants') and masks a lot of ethnic and cultural diversity.

6

The Malaysian Institute of Management had an explicit programme of activities (research, surveys and workshops) to this end during the mid-1980s.

Robert Westwood

patronage. Public criticisms are to be avoided at all costs, indeed, any behaviours likely to damage face and dignity, or generate open conflict are shunned and will be responded to very negatively. Dismissals are rare and avoided if at all possible. Garsombke and Garsombke (1993) confine themselves to relatively objective aspects of manifest culture such as the use of titles and names, using meetings at the mosque to make business contacts, and not outraging religious sensibilities through inappropriate advertising imagery. This approach is largely pursued by another attempt to outline the distinctiveness of Malaysian management (Hamzah-Sendut, Madsen and Thong, 1989; Thong, 1991). The advantage is that wild speculations about the influence of culture are avoided—the disadvantage is that the cultural analysis remains superficial and says very little about why observed differences in management practice exists. However, this is not to say that such issues are not relevant to the pragmatics of doing business in Malaysia. The cultural landscape of Malaysia is also complicated by the adoption of Islam. The distinctiveness of an Islamic approach to business has also been addressed, albeit more outside of Malaysia than within (Badawy, 1980; Majid, 1991; Noorzoy, 1982). The issue of any distinctive, indigenous approach to business/management is further complicated by the colonial legacy which has left a residue of British approaches to administration. Indeed, the key issue for foreign business people in Malaysia is coming to terms with, and sensitively handling, the multicultural environment. One is likely to be dealing with not one, but three cultures and this requires a good deal of awareness and adeptness. Indonesia

Attempting to account for any indigenous business/management practice in Indonesia is similarly fraught with problems of inherent cultural, ethnic and linguistic diversity, with the same overlay of Islamic culture and religion. Also the colonial legacy plays a part since Dutch professors promoted an influential European form of business economics in pre-and immediately post-independence Indonesia. Widyahartono (1991) describes "the Pancasila way of managing in Indonesia." Pancasila are the Five Principles (or Pillars) enshrined in Culture, business organization and managerial behaviour in East Asia

25

the 1945 Indonesian constitution as a kind of expression of state ideology. Beyond that recent cultural imposition, the roots of Indonesian culture rest on notions of hierarchy, harmony (keselarari) and honour (kehormatari). Maintaining harmony and avoiding conflict are the prime directives. Another root for Indonesian management style is held to be centred on gotong royong (the group solidarity of traditional village life). The cultural need for harmony, conflict avoidance, respect for people's honour, andy^? protection, is said to lead to management practice in which visible, but rather ritualistic, consultation and apparent agreement sits alongside clear hierarchies and strong, albeit paternalisitc, leadership. Widyahartono (1991) coins the phrase bapakism, after the expression bapak (loosely—"follow the leader"), to capture the manager/leader-subordinate relationship. A bapak leader/manager is seen as analogous to a father: he thus commands respect and deference and should be "followed," but only in ways that sustain harmony, do not violate the face and honour of others, and avoids open conflict. Pareek (1988) has also outlined the core elements of Indonesian culture and shown a relationship with managerial behaviour and organizing. He suggests that Indonesian culture is characterized by a tendency towards fatalism (external orientation), ambiguity tolerance (weak uncertainty avoidance), high contextualism, particularism, a present and short term time orientation, a collectivistic orientation, an other-directed shame orientation, a somewhat feminine culture, a large power distance and an expressive interpersonal style. He attempts, partially, to relate these aspects of culture with managerial style and effectiveness, conflict management, and organizational climate and effectiveness, although this is not very convincing in purely statistical terms. The following are some of the implications for management he draws from the cultural analysis. He suggests that the time orientation and external orientation have a dampening effect on motivation. He also emphasizes the importance of good relationships and the need to avoid conflicts. Indeed, on his survey, 64 percent of managers agreed that "Avoiding conflicts is a major task of management." The large power distance and acceptance of hierarchy is reflected in their endorsement (82 percent) of the statement that "The hierarchical structure is generally the most efficient 26

Robert Westwood

way to coordinate the activities within a department." Authority is respected and people tend to be conforming and deferential. There are also intimations that group work is desired and effective, that collective decision making and responsibility will occur among non-hierarchical teams and that even group-based incentives may be more effective than individualized ones. It is suggested that there is a frequent use of rituals in organizations and this is a mechanism for uncertainty reduction! Indeed, Hofstede (1982) suggests that western management techniques are embraced as uncertainty-expelling rituals in Indonesia and that western management know-how has the status of ritual knowledge. This would seem to me to be culturally patronizing. Hofstede has also commented on the distinctiveness of Indonesian culture and the difficulties this raises for the use of foreign (notably Dutch) management practices. Thailand The cultural values of Thailand and their possible relationship to economic development have been explored by Komin (1988, 1995) based on his development of the Thai Value Scale. He suggests that Thai culture is primarily one of "individualism" or independent egoism, but also one in which social and interpersonal relations are critical. His notion of "individualism" here is not the western one of independent, achievement-oriented individuals, but rather one of necessary selfreliance together with a sense of self esteem, pride and personal dignity. Damage to personal dignity and "ego" is the most heinous experience for a Thai and may engender emotionally charged reactions. This needs to be born in mind in management situations since even a superior should be careful not to damage the face or personal dignity of the subordinate. The culture is also heavily structured into status hierarchies with sharp role differentiations, both vertical and horizontal. More specifically, Komin's results show nine core cultural value clusters: ego orientation, grateful relationship orientation (a kind of obligation/reciprocity norm), social smoothing relationship orientation (mechanisms for maintaining smooth relationships), flexibility and adjustment orientation, religio-psychical orientation, education and competence orientation, interdependence orientation, achievement-task orientation, fun-pleasure orientation. He also explores a Culture, business organization and managerial behaviour in East Asia

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fatalistic (external) orientation which could have its roots in Buddhist philosophy, or as a reaction to the uncertainties of a hostile environment. Some of these values require comment to avoid misinterpretation. The achievement motive actually refers to social achievement, not task achievement. On his survey "achievement" was actually the lowest valued item and respondents indicated that maintaining good relationships was more important than work. The strong sense of dignity and ego-pride is related to "face protection" and, in part, entails the avoidance of conflict situations and negatives for fear of offending the dignity of others. The reciprocity norm is very strong and can generate solid bonds of mutual obligation which become part of the structure of ongoing relationships. It can be used in situations of power inequality to generate ties of gratitude on the part of the less powerful who are not able to readily reciprocate the favour provided by the more powerful—akin to the on-giri relationship in Japanese culture. Smoothing mechanisms are subtle, implicit social rules of social interaction that are designed to keep a veneer of harmony and avoidance of social and "ego" damaging behaviours. Flexibility and adjustment are actually aspects of particularism. Thai people are situation sensitive, especially to the relationships they are engaged in and the other selves they are interacting with. Behaviour is adjusted to these contingencies. More detailed analysis of the relationship between Thai values and managerial and organizational behaviour has been provided elsewhere (Runglertkrengkrai and Engkaninan; 1987; Siengthai and Vadhanasindhu, 1991; Sila-on, 1979; Thompson, 1989). The place of Buddhism in the culture is widely recognized, but its impact on business/management can, at best, be considered indirect. In a manner similar to the Malay budi complex, the core component of Thai culture is kreng chai. This is a complex, not readily translated construct, but involves "the desire to be self-effacing, respectful, humble, and extremely considerate, as well as the wish to avoid embarrassing other people (and oneself), intruding upon them, or causing them to extend or trouble themselves." (Siengthai and Vadhanasindhu, 1991:234). It functions as a tacit rule system for the governance of smooth and harmonious social relations. The possession/display of kreng chai is a 28

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requirement for effective leadership, akin to the halus person in Malaysia and "virtuocracy" (Pye, 1985) in Chinese culture. There is again that common pattern of sharp hierarchical structures, clear paternalistic power, but with social obligations upon leaders to exhibit behaviours that are socially acceptable, "moral" and not in violation of the basic personhood of subordinates. Thompson (1989) used the expression dialogue ideal to refer to an important aspect of manager-subordinate relationships. It suggests that managers need to establish a dialogue with subordinates. However, this is not done so as to allow subordinates to make a substantive input into decision making or achieve some kind of operational consensus; its main function is for tacit, harmony sustaining understandings to be exchanged, and as a vehicle for the leader to demonstrate kreng chat. Harmony is further preserved by very strong social values against overt expressions of anger, aggression, or other strong negative feelings (chat yen yen) and through the concept of mai pen rai, which encourages Thais to recognize that difficulties and disturbances are inevitable in social relations, but that one should adopt a sanguine attitude towards them (Moore, 1974; Siengthai and Vadhanasindhu, 1991). Neither Siengthai and Vadhanasindhu, nor the other authors are really able to track the relationship between these core elements of Thai culture to actual organizational/managerial behaviour. Again, we are left with rather loose inferences from the presumed centrality of cultural values to behavioural specifics. Siengthai and Vadhanasindhu (1991:235) recognize institutional factors, particularly family, and the influence of imported foreign management ideas, but still claim that "Many characteristics of Thai businesses, however, are to a certain extent different from those found in the west." They suggest that this includes types of ownership, decision making, promotion policies, loss of face, leader-led relations and communication patterns. Despite the lack of explicitly analysed links to actual managerial and organizational behaviour, certain links can readily be inferred from the above discussion. Matters relating to leadership style have already been touched on. It is also clear that managers need to cultivate and maintain good relationships with their staff, even if the harmony is somewhat cosmetic. Open criticism of staff should be avoided, especially in public. This places pressure on the type of open performance Culture, business organization and managerial behaviour in East Asia

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appraisal systems common in the west. In decision making, the face and dignity of those involved needs to be taken into account, but this does not in any way imply participative mechanisms. Decision making often implies extensive levels of compromise in order to make these social adjustments. There is a high level of personalism, such that the ideas and actions of the manager cannot be depersonalized, nor can any criticisms or challenge to a managers' actions or decisions. Personal connections are also vital for getting things done and are more significant than formal system or procedures. Team work is not necessarily effective, unless it is with a naturally occurring, or carefully nurtured, in-group; but then strong ingroup/out-group sentiments may develop that are potentially disruptive. There is not a naturally strong orientation to work as an end in itself and task achievement is less important than social acceptance and approval. Thus social motivating mechanisms are necessary as well as material ones. Philippines In the Philippines the core value of kapwa (loosely translated as an expression of elemental unity between self and others—Enriques, 1986), and other values such as hiya (a sense of propriety and shame), pakikisama (a sense of going along with/being with others) amor propio (sensitivity to personal affront) and utang na look (sense of gratitude and indebtedness), have been linked to management style (Andres, 1985, 1989; Enriques, 1986, 1988; Hollnsteiner, 1965; Jocano, 1981; Soriano, 1991). There is some similarity here again between the cultural complex of the Philippines and that of Thailand and Indonesia. Leadership is once more directive and paternalistic. There is a strong relationship orientation and similar forms of tacit rules for smooth interpersonal relations, harmony maintenance and the protection of the face and dignity of others, even in superior-subordinate relationships. Systems of patronage are rife, and juniors will seek out a patron who can protect them and further their interests; in return the patron receives gratitude and loyalty. There is again a high level of personalism. Organization members are more likely to identify with, and exhibit loyalty to, a key person in the organization rather than the 30

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organization itself; with implications for organizational commitment. Strong authority is legitimized and indeed respected: subordinates will tend, at least on the surface, to be deferential and accommodating. Group sentiments tend to be strong, and teamwork can be effective in the right conditions. A manager should astutely avoid three key things in dealing with staff: being seen as socially inept and unable to get along with others (walang pakikisama), failing to reciprocate the loyalty and contribution of staff with proper displays of gratitude (walang utang na loob\ and displaying a lack of propriety (walang hiya). Jocano (1981) further suggests that the Philippine leader must observe three imperatives: relational (pakikipagkapwatao), emotional (damdamin), and moral (karangalon). Up until this point, the national management systems within East Asia have been summarized. We now look at the characteristics of ethnic Chinese organization and management. This management system is not bounded by a border but it is quite distinctive and has a significant impact. The "Overseas Chinese" and neo-Confucianism The Overseas Chinese7 (huaqiao) are a major economic presence throughout the East Asian region. Since there is no clear national, political, economic or even geographic entity that collectively codifies them, their economic status and contribution is never officially recorded and exact figures are largely absent. Even definitions are problematic. Chen (1995) suggests that the term includes Chinese nationals who live overseas, ethnic Chinese or people of Chinese descent who live outside China and who are nationals of other countries, and the Gangao tonbao and Taiwan tonbao (Chinese "compatriots" of Hong Kong, Macau and Taiwan). This population comprises some 51 million people and it is estimated that collectively they have assets of US$2.5 trillion and generate a GDP of over US$700 billion (Economist, 1996).

7

The term 'Overseas Chinese' is vague and dubious but has been deployed in the literature to distinguish ethnic Chinese living in other parts of Asia and beyond, from ethnic Chinese in mainland China.

Culture, business organization and managerial behaviour in East Asia

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The business presence and success of the Chinese in Hong Kong, Taiwan and Singapore is transparent and well known, but in Malaysia, Indonesia, Thailand and the Philippines it is more opaque. It is argued, however, that they "dominate trade in every East Asian country except Korea and Japan" (Kraar, 1994:45). For instance, the Economist (1996) estimated that in Indonesia the Chinese constitute only about 4 percent of the population, but control about 75 percent of stockmarket wealth; in the Philippines they form only 1 percent of the population but control over half of the stockmarket; in Thailand they account for 10-14 percent of the population but half the country's wealth; in Malaysia, they make up about a third of the population but control about 60 percent of the stockmarket. The most carefully considered accounts of Overseas Chinese (OSC) management have been provided by Gordon Redding. While accepting that culture cannot offer a complete and independent explanation of ethnic Chinese business/management and its success, Redding chooses to focus explicitly on the impact of culture. As he says in his seminal book The Spirit of Chinese Capitalism, culture "is not seen as the dominant cause of economic success, obliterating or ignoring other factors like economic policy. Culture is one of several key features, deserving of a respectable place in any account. No more than that, but no less either." (Redding, 1990: 12). He has argued passionately against a purely formal economic account of ethnic Chinese business success8 and for the impact of cultural values.9 In addition to his various general accounts of Chinese economic culture and forms of management and business, he has also focused on some specific issues and their cultural connections, such &s face, marketing, management education and development and international networks.10

8

See, for example, Clegg, Dunphy and Redding, 1986; Hicks and Redding, 1983; Redding, 1984, 1990.

9 See Redding, 1980, 1987, 1990; Redding and Hsiao, 1990; Redding and Martyn-Johns, 1979; Redding and Wong, 1986. 10

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Redding and Ng, 1982; Redding, 1982, 1986, 1995.

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Distinct aspects of OSC management and business are traced back to traditional Chinese values and the social and institutional arrangements to which they gave rise. The salient value complexes that anchor the analysis are paternalism, personalism and insecurity. This triad is further linked to the core philosophical-religious traditions of Taoism, Buddhism, and particularly, Confucianism. These value systems, in conjunction with some more pragmatic environmental factors, have given rise to particular social structures (centred on family, networks and ethnicity), relationship rules (such as filial piety, ^^/collectivism, non- co-operation, and limited and bounded trust), and rules for action (a work ethic, high pragmatism and an orientation towards money and frugality). These manifest elements of culture are complemented by speculation on Chinese modes of cognition (actually more like core cultural assumptions). Much is made of Chinese familism, with the suggestion that the family is the pre-eminent social unit in Chinese societies. Lau (1982) has described the essential ethos of Hong Kong's social fabric as constituted on "utilitarian familism" and as "minimally integrated." Chinese families are held to be self-sufficient, not integrated into a general community, competitive, and with members motivated "by the pragmatic exigencies of protecting and enhancing the family resources on which they in turn are highly dependent." (Redding, 1990:53). This is critical in economic terms because the family is fundamentally a socio-economic unit and not merely a socio-emotional one (Chen, 1995:85). Furthermore, as noted, there have been low inclinations among the Chinese towards the separation of ownership and control, and the development of the type of modern western capitalist economy based on rational bureaucratic organizations (Redding, 1990; Hwang, 1995). The vast majority of ethnic Chinese enterprises are family-owned and managed. Even when they become large, publicly-listed companies, the leading family retains dominant equity control and manages through personalistic managerial relationships. For large, diversified business groups the typical mode of organizing is for the ruling family to establish a holding company and to spin off semi-autonomous subsidiaries the leadership of which is overseen by trusted managers who are personally selected by the ruling head and with whom there Culture, business organization and managerial behaviour in East Asia

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is often a close, even family, relationship. An alternative is to construct "molecular" structures in an ad hoc manner through the use of temporary alliances and/or extensive subcontracting. All this legitimizes the use, by Redding and others, of the family-business model in explanations of Chinese business and organization.11 Importantly, it is not only that businesses are family owned, but that familistic-type structures, roles and relationships also pervade organizations and their management. It should be noted that there are pressures on this style of organization under the forces of modernization and internationalization (Austria, 1997; Hwang, 1995; Jou and Sung, 1995). I will have more to say about this later. For others,12 the cultural legacy, particularly the familism underpinned by the Confucian ethic, pervades all aspects of organization and management. Patrimonial traditions engender a paternalistic management style underwritten by large power distance, clear hierarchical order, unequal relationship structures characterized by power inequality but mutual obligation, and familistic roles and relationships transferred into organizational settings. The broad features of the OSC family business include: In terms of business practice: • family-ownership and non-separation of ownership and control • small-medium enterprises, or large "molecular" networks and/or personalistically-linked business group • individual units highly specialized, diversification through the structural arrangements outlined above • opportunistic growth strategies through volume expansion or diversification • maintenance of extensive networks of personal connections to external persons and bodies • non-formal, personalistic but effective horizontal relationships • strategically adaptive and "nimble" • reliance on informal sources of capital.

11

12

34

See also Chen, 1995; Jou and Sung, 1995; Whitley, 1992; Wong, 1985, 1988. Redding, 1990; Chen, 1991; Hwang, 1995; Oh, 1991; Hall and Xu, 1991. Robert Westwood

In terms of organization and management: • highly centralized with clear authority hierarchies and clear control by the "head" • limited delegation to a relatively small middle management group • paternalistic leadership style and organizational climate • low levels of formalization • reliance on personal/intuitive knowledge for business decisions and for reputation maintenance • personalistic control and coordination mechanisms • nepotistic employment practices, low reliance on external recruiting for managers • informal, subjective and personalistic performance appraisal • relatively closed, controlled and non-formalized information systems • seniority as a reward criteria, limited performance-reward linkages.13 Given this commonly occurring account of OSC organization and management, it is important to address the evidence that supports the model. Implicit is the question of the relationship between traditional Chinese values and contemporary management and organizational practice. Three analytic strategies and their attendant problems often plague this question. Firstly, culture is often used post hoc to explain observed or presumed differences in management/organization without being theorized in advance and without being operationalized. Secondly, analysis often proceeds via an exploration of traditional Chinese culture derived from secondary sources, frequently a type of popularist account of Confucianism, which is extrapolated inferentially to presumed implications for management and organization. Thirdly, and as a best case, aspects of Chinese culture are described and examined, empirical measures of distinctive Chinese management and

13

See Hwang, 1995; Kirkbride and Westwood, 1993; Redding, 1990; Redding and Hsiao, 1990; Redding and Wong, 1986; Westwood, 1992; Westwood and Chan, 1992; Whitley, 1990, 1992.

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organization practice taken, but the exact mechanisms by which the cultural values determine or explain the observed differences are inadequately detailed. Most of the works on ethnic Chinese management to date exhibit conceptual or methodological deficiencies in terms of one or the other of these three problematics. Even if it is accepted that the traditions of Chinese culture and the attendant social structures and values have been adequately rendered (an acceptance that must be significantly qualified given the enormous complexity and contestation involved), the question remains as to what impact this has upon contemporary Chinese society and business/management systems. Given the trajectory of much of the argument, let us consider the Confucian legacy. It ought to be acknowledged that much of its presumed, continued resonance in the modern era is based on certain assumptions. Most writers appear to accept tacitly the centrality of Confucianism in shaping core Chinese values over two and a half millennia. As a practical social ethic and guiding frame for social formation, it is held to have penetrated deep into mundane daily life, becoming "more than just a creed which [Chinese] can consciously accept or reject; it has become an inseparable component of the attitudes and behaviours which characterise East Asian cultural identity." (Oh, 1991:47). The influence on all aspects of life is claimed to be extensive, "It forms the foundation of all ethics and morality in business as well as social and personal life, detailing the attitudes and behaviours appropriate to every type of human relationship, from the top to the bottom of the social order, from the most intimate family relationships to the most distant associations, and in every area of daily life." (Oh, 1991:48). How is such a penetrating impact explained, given that Confucianism has few formal institutional mechanisms for its self perpetuation? The answer most commonly offered is that once adopted as the quasi-official ideology during the Han dynasty, (neo-) Confucianism became so implicit in education, political rhetoric and the framing of social order that it became an inherent part of the social fabric. Passing, for the ordinary citizen, into the realm of the takenfor-granted, it has been sustained through socialization practices (Hsu, 1947, 1970; Yang, 1986). We are, thereby, not dealing with textual, 36

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high Confucianism, nor with any of its complex reinterpretations through successive dynasties, but with popular or "vulgar" Confucianism enshrined as mundane modes of thought and practical values among the general population and passed on through successive generations via tacit processes. When we examine the evidence for such claims of a distinctive, Confucian-inspired, OSC business/management system, we find a relatively weak situation. Empirical evidence is offered by Redding in the form of data derived from "long conversations" with ethnic Chinese businessmen over dinner or similar quasi-social setting that reveal the beliefs, values, reasons and justifications relating to how these businessmen see their business world and the roles they perform within it. Much of it is tied back to the Confucianism "bedrock" of Chinese beliefs and values. Interview data are supplemented by additional survey and other data related to actual organizational structures and processes. This is an imaginative and plausible research design given the issues to be addressed and the orientations, work schedules and likely motivations of the "subjects." However, as Redding acknowledges, it is not a full-blown ethnography and is subject to flaws well known in anthropological research. But, most critically, it is only able to consider the "espoused theories" of the subjects and there is no guarantee that this represents the "theories in use" deployed to guide their real decisions and actions. Thus, while the data demonstrate a link between the espoused values and beliefs of the "subjects," and elements of the cultural legacy, the possibility remains that the "subjects" are constructing an account for the researcher that bears little relation to the values, beliefs and motives that actually inform their management and business practice. It must be said that the evidence is even weaker in most other studies. Even Whitley's (1992) excellent institutional analysis is devoid of original primary data, relying only on secondary sources and data available in the public domain relating to company structures and economic performance. Kirkbride and Westwood's (1993) account of management in Hong Kong builds a typical post-Confucian edifice which ties weakly to the account of human resource management practices which follow. Similarly, Yau (1988) constructs his account of Chinese culture out of Kluckhohn and Strodtbeck's (1961) cultural Culture, business organization and managerial behaviour in East Asia

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assumptions model, but again fails to adequately map the specifics of contemporary marketing practice onto it. The evidential basis for Chen's (1995) assertions for the cultural distinctiveness of Asian management is even weaker. His chapter on Sun Tzu's Art of War is typical, not only of Chen s book, but of many similar presentations. While the advice offered in this classic of military strategy from the fourth century BC could conceivably be of value to business strategists in a simple, general way, there is absolutely no evidence that Chinese business people actually base their actions on such advice. A similar picture emerges in the chapter dealing with^c^ renqing and guanxi. These are well known social regulating mechanisms in Chinese culture, and although they are described in some detail, the actual way these mechanisms function in organizational contexts is inadequately explored and no empirical evidence is offered. Chen is on stronger ground when dealing with such issues as changes in PRC state-owned enterprises, government-business relations in Japan and Korea, or Japanese distribution systems. But then, these are pragmatic, institutional accounts, not ones reliant on cultural analysis. The cases mentioned here are merely examples of a widespread trend in studies of OSC management to provide a detailed cultural values edifice but then to offer only weak arguments and evidence for its determining impact on actual management and organization. The overall discussion in this section indicates some broad areas of commonality in certain of the value complexes in the countries of East Asia with, concomitantly, similar implications for management and organizational behaviour. However, one should not be misled into assuming cultural homogeneity. Intimations of broad commonalities gloss the actual diversities that are also apparent, especially in the detailed social enactment of cultural values and in conjunction with complex and varied, non-cultural features of the environment and the weave of diverse values and social practices within the context of different business and economic systems. It must also be said that much of this exploration of the link between traditional culture and modern management and organization is speculative and lacks clear evidential support. At times the recourse to traditional values serves a rhetorical purpose as a counterpoint to the dominance of the west in terms of management theory and practice, not to say economically and ideologically. 38

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The next section looks at some more specific organization-management issues to further explore possible differences and the extent to which culture accounts for them. Space does not permit an analysis of all aspects of management and organizational behaviour. The selection of topics is somewhat arbitrary, but reflects those that are of significance for any managerial situation and for which culture apparently has a clearer determining impact.

Culturally-informed differences in organization and management Organizational form and structure There is evidence that a number of different features in organization and organizing are linked to cultural differences. Before looking at some specific arguments and examples, it is useful to consider the issue in general terms. Hofstede (1980a, 1991) has argued for the impact of culture on structuring, specifically noting the relevance of power distance and uncertainty avoidance. This is plausible since power distance relates to cultural values that legitimize the unequal distribution of power within a system and thus has a bearing on vertical differentiation and attitudes towards the structure of authority. Uncertainty avoidance has to do with cultural responses to uncertainty and the perceived need to deal with negative feelings associated with it. Cultures which find uncertainty particularly threatening and cause for anxiety, find it desirable to reduce the uncertainty by imposing structure on things so as to bring order, clarity and routine. As Hofstede (1994:140) puts it, "Organizing always demands the answering of two questions: (1) who has the power to decide what? And (2) what rules or procedures will be followed to attain desired ends?." In the more formal language of organization theory the former refers to centralization and the latter to formalization. The intersection of these two dimensions gives rise to four quadrants in which various cultures cluster. The US, Canada and a number of Northern European cultures cluster as small power distance-weak uncertainty avoidance cultures. In East Asia there is a mixed picture with Singapore, Hong Kong, the Philippines and Malaysia clustering as large power distance-weak uncertainty avoidance cultures, whereas Culture, business organization and managerial behaviour in East Asia

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Taiwan, Thailand, Korea and China are large power distance-strong uncertainty avoiding cultures. Hofstede links these positions to different "implicit models" of organization and to variations in the form of bureaucracy that is likely to prevail. He argues that North American and European cultural preferences lead to an implicit model of organization based on the village market and thus applies the label "market bureaucracy." The first cluster of East Asian countries have an implicit family model and are labelled as "personnel bureaucracies." The second group (Taiwan, Thailand, Korea and China) should conform to the classic model of bureaucracy and thus the form there is described as "full bureaucracy" and the implicit model is the pyramid. Let us examine these in structural terms. In North America and Europe, there is no strong demand for hierarchy or rules. Structurally, there is a low perceived cultural requirement to strongly prescribe either processes or work relationships. The requisite order for the organization is not primarily achieved through hierarchical structuring or through the imposition of a rule system, rather it is something like a negotiated order in which members negotiate for the exchange of power, influence and resources. Rigid hierarchies are de-emphasized, organizations can be flatter, more fluid and function with a good deal of decentralization. General policies which allow for flexibility of interpretation and implementation according to the situation are preferred to tight rules and procedures that are inflexibly applied and rigidly adhered to. We should expect organizations from these areas to be relatively less centralized and less formalized. However, the extent of structural differentiation and complexity is at times high, given the need to retain flexibility and to allow for the ad hoc adaptation to circumstances. Such organizations are also highly market sensitive and may differentiate themselves so as to be better placed to respond to market changes and diversities. In the large power distance-weak uncertainty avoidance contexts, relationships are prescribed and ordered by a tight hierarchy, but there is less perceived need to prescribe processes and behaviours through the imposition of a rigid rule system. For these cultures the family is the implicit model and, at least in the context of East Asia, this resonates with the patriarchal and familistic traditions. What is implied is that high power distance means that power tends to be 40

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concentrated, and in many firms in East Asian countries it will be concentrated in the (usually male) head of the family, as manifest in owner-managed businesses. Such heads have clear and strong authority to run the organization as they see fit and will assume the right to make all major, and often even minor, decisions. However, relationships are very important and are maintained, where possible, on a personal level. Thus, control of processes and behaviours is not accomplished through the imposition of a formal and impersonal rule system, but rather personalistically—with often direct involvement from the head—together with a tacit system of social norms and expectations governed by deeply ingrained principles of appropriate behaviour, role and authority acceptance, and social exchange mechanisms. In formal structural terms such organizations are likely to be relatively more highly centralized but with lower levels of formalization. In terms of complexity, typically there are lower levels of structural elaboration and the organization is kept simply and flexibly structured. The last cluster should exhibit features of classical full bureaucracy with sharp and clear hierarchies prescribing relationships as well as a rigid rule system which explicitly controls behaviours and processes. Such organizations should be relatively highly centralized and have high levels of formalization. They will also exhibit a reasonably high level of structural complexity with a prominent "technostructure" that establishes and maintains systems of control and routinizes activity. This schema makes intuitive sense generally—although there will naturally be a good deal of variation within cultures, especially due to other factors such as organization size and industry sector. The separation of the East Asian countries into "Full Bureaucracies" and "Personnel Bureaucracies" based on differences in uncertainty avoidance is troublesome however. For example, the Philippines being categorized as distinctly different from Thailand is hard to accept on these terms. Also, according to the model, Taiwan and Hong Kong are in different clusters. This may be true in terms of Hofstede's scores, but it hardly seems justifiable to categorize the organizational forms as being different. There is little evidence to suggest that Taiwanese firms are any more formalized than those in Hong Kong. Basically they share the similar features of being predominantly family businesses that are owner-managed with similar types of centralized, Culture, business organization and managerial behaviour in East Asia

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strong leadership and personalistic control mechanisms. The location of Korea makes a little more sense—if one is talking about the chaebol. These are extensively differentiated hierarchically, highly centralized, with higher levels of formalization than is apparent in typical ethnic Chinese family businesses. Certainly the Korean chaebol exhibit distinctive features, some of which are attributed to culture, others to institutional and strategic factors.14 Despite their size and extensive vertical integration, chaebol still tend to be owned by dominant family interests and have the same non-separation of ownership and control present among the ethnic Chinese (Cho, 1991; Chung and Lee, 1989). The Hofstede schema attempts to link cultural variables to organizational structuring, but operates at a high level of generality. Evidence for the distinction between the two East Asian clusters, other than the scores on Hofstede s dimensions, is not readily apparent. A common feature of many business enterprises in East Asia is the family ownership and the non-separation of ownership from control. This is as true of the extremely large Korean chaebol as it is of the myriad of OSC businesses spread throughout the region. This alone has certain implications for structuring and for management practice. It certainly engenders a high level of centralization, with the controlling family taking responsibility for extensive areas of decision making within the organization. There is relatively less delegation to lower level managers than is found in the west, and communication has a tendency to be one-way and downward. Indeed, in general terms, information is treated as a power resource and as the possession of the controlling heads. There is not the same type of open, multi-channel communication systems that one might find in a western company. Without making explicit reference to power distance or uncertainty avoidance, other writers have also suggested a cultural foundation for different approaches to organizing. In particular, Hamilton, Redding and Whitley all trace a socio-cultural and/or institutional account for different perspectives on authority, control and coordination, leading to

14

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See Cho, 1991; Whitley, 1992; Hamilton and Biggart, 1988; Kim, 1991.

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different approaches to organizing.15 Redding (1990) goes so far as to link this with a different cognitive framework with respect to rationality. The form of rationalism—particularly that impersonal, abstract concern with the rationalization of ends and the rational instrumentalism of means—that Weber described as a prerequisite for the formation of the ideal bureaucratic form, has never had a fertile ground within Chinese cultural values. Power remains ineluctably personalized, focused on the familistic model with patrimonial traditions; providing a patriarchal paradigm for power relationships. Relationships remain absolutely central to Chinese social order and hence personalistic relationships are elementally more important than any impersonal system. Legalistic frameworks have considerably less cultural coinage than the governance of behaviour through the intricacies of implicit rules of social exchange and the bonds of mutual obligation and trust. All this militates against the development of formally rational bureaucratic forms of organizing. Furthermore, Chinese culture has not encouraged the formal and systematic codification and dispersion of information, again, both necessary for formal bureaucracy (Boisot and Child, 1988). As noted earlier, Redding links the distinctive forms of ethnic Chinese management and organization back to the roots of Chinese culture, primarily anchored to Confucianism, but more specifically to the defining values of paternalism, personalism and insecurity. The first two are of most significance for organizational structuring. Paternalism generates and sustains familistic structures and relationship modes that function as a paradigm for structures and relationships in other contexts, including organizations. Family, lineage and patriarchal traditions constitute and legitimize a large power distance and a vertical ordering structure in social systems, again including organizations. Organizations have clear hierarchies and are highly centralized, but are also bonded by strong personalistic relationships governed by implicit and tacit social rules of appropriate behaviour, reciprocal vertical obligations, and systems of patronage.

15

Hamilton, 1991; Hamilton and Kao, 1990; Whitley, 1992 and Redding, 1990, 1991.

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Externally, ethnic Chinese organizations rely upon extensive networking and sub-contracting, interlocking directorates and the formation of business groups that are personally cemented at the centre of the web by the leading family's holding company, or in some form of loose, "molecular" structure of loosely coupled enterprises, again personalistically controlled. In more formal organization structure terms, the following features are dominant: • individual units are relatively small in size • high levels of centralization • low structural complexity and elaboration with an emphasis on line, not staff functions • relatively simple product or market-based differentiation • low levels of role specialization • low levels of standardization; low levels of formalization (except at the operational, workflow level). Evidence for this form of structuring is rather fragmented and sometimes only at the anecdotal or observational level. However, Redding and Pugh (1986) were able to empirically demonstrate structural differences between similar Hong Kong Chinese, British and Japanese manufacturing organizations in terms of centralization, formalization and structural complexity that broadly confirms the proposed model. Leadership The west has had a tendency to construct an authoritarian, even despotic, discourse about Eastern power and leadership. This is certainly the case with respect to China, where it goes back at least as far as Quesnay and Montesquieu (see Mackerras, 1989). Even Pye (1985) leans a little in that direction, although by referring to Chinese "virtuocracy" he acknowledges that the authoritarianism is ameliorated by a moral order and paternalistic relations. In contemporary management literature, Chinese leadership style continues to be described as autocratic, benevolently autocratic or didactic.16 16

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See Chen, 1995; Redding and Richardson, 1986; Chen, 1991; Chong, 1987; Redding, 1990; Redding and Wong, 1986; Wong, 1985, 1988; Silin, 1976.

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Similar attributions are made across East Asia.17 Some conceptions have moved away from a starkly authoritarian perspective to one in which there are twin components of, on the one hand, clear hierarchies, large power distance and robust authority, and on the other, social obligations to reciprocate subordinate loyalty, deference and respect with concern, consideration and protection. It is also argued that East Asian leaders, to be fully effective, should display a moral quality—although this is moral in the sense of adhering to socially sanctioned codes of behaviour and being an exemplar of appropriate modes of behaviour within the society. This dual requirement has been empirically demonstrated in Japan through Misumi's P-M theory (Misumi and Peterson, 1985) where effective leader-managers must give equal attention to both Performance (task, achievement and outcome issues) and Maintenance (social cohesion, inclusion, support issues). Research in mainland China has also found this to be relevant but has added a third factor, the "C" (Character) factor. This implies that leaders need to also exhibit a "moral character," and to inspire and motivate through being exemplars possessed of the characteristics of consideration for others, honesty, sincerity and ability to be open to self- and other-criticism (Ling, Chen and Wang, 1987; Ling and Fang, 1995). Westwood has constructed a detailed model of ethnic Chinese leadership (or "paternalistic headship") centred on the dual requirements similar to those outlined above.18 The model builds on an analysis of traditional cultural values, again with an emphasis on Confucianism. Figure 1 below outlines the core elements of the model. It is argued that ethnic Chinese leaders are able to meet the dual requirements for order/compliance and harmony through functioning within, or invoking, aspects of the dominant value system of the culture. Thus, requirements for order and compliance are met through

17

See Cho, 1991; Lee and Yoo, 1987; Shin, 1984; Whitley, 1992; Andres, 1989; de Leon, 1987; Hamzah-Sendut et al, 1989; Komin, 1990; Thompson, 1989; Widyahartono, 1991.

18

See Westwood, 1997; Westwood and Chan, 1992, 1995.

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structures and actions that draw upon traditions of patrimonialism, patriarchy, filial piety, large power distance, hierarchical status orders, authority acceptance and deference and role conformance. This provides for a well ordered and legitimized vertical structuring. Requirements for harmony are met via the collectivist, relationshiporientation mechanisms within the culture, social rules of reciprocity, mutual obligation, face and propriety, and implicit social ethics. Paternalistic headship is manifest in high levels of personalism, exemplary/moral leadership, harmony maintenance, conflict avoidance/diffusion behaviours, social aloofness, systems of patronage and nepotism, high centralization and low delegation, implicit and indirect communications, and reputation and network building activities. Chinese leaders, while having a personalistic style, tend to keep themselves aloof from their followers, maintaining a degree of social distance. They also tend to use information as a power resource, manipulating its dispersion in strategic ways. Furthermore, they are often not very explicit about their plans and intentions. Subordinates are supposed to correctly intuit or infer what the leader expects and intends and being able to do so is the mark of a loyal and successful follower. Chinese leaders also tend to play down the contribution and success of subordinates, sometimes even claiming any achievements as their own. Open praise for subordinates is not common. There is some empirical support for this construction, for example in Silin's (1976) ethnography of Taiwanese organizational leaders and Redding s (1990) dialogues with Hong Kong managers. Broad features of this model of leadership can be generalized to other cultures in East Asia. In broad terms, East Asian leaders have a clear and strong power position that is legitimized and is not usually questioned or open to challenge. This enables them to function with a fairly directive style and to engage in significant levels of centralization. However, this autocratic position is accompanied by rather intense social and interpersonal expectations that the compliance of subordinates be reciprocated with visible concern for the subordinates well-being and dignity. The face of subordinates should not be damaged and the leader should be cautious in the use of discipline and criticism. Ideally, leaders are expected to function as exemplars—being seen as carriers of the valued characteristics within the culture, and 46

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adhering to appropriate and valued norms of behaviour and propriety. Much of this is to maintain stable and harmonious relationships, even if only at the surface level. Foreign managers and companies should not expect ready acceptance of more participative styles of leadership. Ideas of empowerment and of high levels of unstructured, delegative responsibility will similarly not receive immediate support and, if contemplated, will need a lot of positive intervention, training and development. Foreign leaders will also need to work actively to get unsolicited positive contributions from subordinates. Even when solicited, the foreign leader should remain mindful that staff will often have become used to not expressing viewpoints which in any way run the risk of being interpreted as a challenge to the authority and ideas of the leader. This engenders a degree of reticence and circumspection on the part of the subordinate. Leadership styles which provide structure and clarity to the subordinates will be appreciated, thus western models such as Path-Goal leadership may have some coinage. It is my view that the more recent fashion for transformational leadership will, at least in the manner they are typically formulated in the west, have low resonance in East Asia. Motivation Hofstede (1980a & b) has been particularly critical of the cultureboundedness of "western" motivation theories and applications. He maintains that the majority of such theories are infused with the individualism of western culture and thus do not resonate with the collectivism and relationship-orientation that prevails throughout East Asia. This is particularly true of the needs-theories emphasizing self-actualization, growth and achievement. Self-actualization, for example, reflects a western view of the individual ego's striving for self-fulfilment, and is part of the western view of self and personality. East Asian and Chinese conceptions of self and personality are different and, indeed, Hsu (1970) points out that there is no easy Chinese translation of "personality." There is a Chinese conception of, what we might term, "personhood" (ren), but the full notion of personhood includes the focal person's embeddedness in social relations and their capacity to behave in full recognition of the personhood of others. As Hofstede (1994:74) Culture, business organization and managerial behaviour in East Asia

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Figure 1: A model for East Asian paternalistic headship

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suggests, it "includes not only the individual but also his or her intimate societal and cultural environment which makes his or her existence meaningful." Empirical, Maslow-like studies have revealed equivocal results. Among managers world-wide there has been some general support for the importance of the needs identified by Maslow, with self-actualization often reported as being the most important—but frequently the least satisfied. For example, a study of the CEOs of Thailand's top 500 companies revealed that they rated self-actualization and autonomy as the most important needs, but that self-actualization was reported as the least satisfied (Runglertkrengkrai and Enkaninan, 1987). In general terms, however, social and security needs may have higher salience in some East Asian contexts than self-actualization. McClelland (1961) made an important, somewhat controversial, contribution to the development debates of the 1960s when he linked the achievement need to entrepreneurialism and thus to economic growth and development. Controversial since he suggested cross-cultural variability in the strength of the achievement need or motive and that this contributed to differential levels and rates of development. There has been a substantial amount of empirical work on the achievement motive, including studies within Asia. The results have been mixed, and certainly the relationship between the strength of the achievement need and economic development has not held up over time (Hofstede, 1980b). Indeed, Hofstede argues that McClelland s conception of the achievement motive is embedded in "a typical Anglo value complex" (1994:124). He suggests that the achievement motive concept rests upon two cultural choices "a willingness to accept risk (equivalent to weak uncertainty avoidance) and a concern for performance (equivalent to strong masculinity). This combination is found exclusively in countries in the Anglo-American group and in some of their former colonies." (Hofstede, 1984: 13-14). This latter would include Hong Kong and Singapore, so that these should exhibit a high achievement motive. The Philippines, Malaysia and Indonesia conform to the same pattern, but more weakly so, whereas Thailand, Taiwan and South Korea are positioned, albeit not strongly, in the strong uncertainty avoidance-feminine quadrant and should, theoretically, be low achievement motive cultures. One can begin to see how McClelland s Culture, business organization and managerial behaviour in East Asia

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original link with economic development begins to fall down. Again, unfortunately, the empirical evidence is inconclusive. McClelland s (1961) own data suggests that Taiwan and China had a low achievement, low affiliation and high power profile, which he argued was typical of traditionalist, stagnant, authoritarian cultures! But, other studies have shown mixed results. One problem is clearly that much of the data is hopelessly out of date in an area of such dynamic change, but another is that the whole conceptualization is awry. Indeed, one Asian scholar suggests that the achievement motive may manifest itself in different ways and that "McClelland s conceptualization of the achievement motive as a well internalized predisposition in the self-reliant individual as a result of independence training is probably only one variety." (Yang, 1986:113). He draws an important distinction between (western) individual-oriented achievement motive and (Asian) social-oriented achievement (Yang, 1981). From the western perspective, individuals are motivated to pursue objectives that they set, and evaluate achievements according to their own, autonomous standards. For social-oriented achievement motive, both the objectives and the evaluations are a function of socially appropriate and sanctionable factors. In the Chinese context at least, it is achievement on behalf of the family, not for the self (Yu, 1974). A socially-oriented view of Asian motivation has also been expressed by Hsu (1970) when he proposes that the basic driving needs are for sociability, status and security, all of which are satisfied in an interactional manner. This is based on his view of the Chinese conception of the person and the relational view of self. People are primarily motivated to behave by the need to bring their actions and behaviour into line with social norms, expectations and evaluations. A particularly strong element in this motivational calculus is the negative motivation of avoiding social criticism, ostracism and the loss of face. On the positive side, the motivational driver is to achieve social acceptance, maintain harmony and preserve social relationships. It could be argued that the interactive, social aspects of motivation have been neglected in the west given the proclivities for individualized, ego-centred conceptions. However, it is likely that such an orientation is central to the collectivism relational cultures of East Asia. In the Philippines, for example, Andres (1985) has emphasized the 50

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importance of social and interpersonal relationships. As noted above, the core value of kapwa expresses a profound interconnectedness between self and other. This is expressed by a subsidiary value, that of pakikipaqkapwa, which also invokes a strong other-orientation and sense of fellow-being. It incorporates a complex of values ranging from superficial civil courtesies (pakikitungo) through to a deep sense of mutual and interpersonal sensitivity (pakikiramdam) (de Jesus, 1987). Indeed, de Jesus supposes that social needs are dominant in Philippine culture and a leading motivating mechanism is to give and receive pagkatao (personal dignity). While recognizing that important differences exist in the value systems of East Asian countries, there is some degree of commonality in the relational view of self, the salience of relationships and the value placed upon harmony. This has already been partly signalled in the discussion of some of the core values of the Chinese and in each country in the region; the budi, kapwa and kreng chai value complexes of Malaysia, the Philippines and Thailand respectively; and the core values of honour, harmony and group solidarity in Indonesia. It is not fanciful to suggest that these significant value orientations place the issue of motivation on a different footing to the individualistic, ego-centred conceptions of motivation that have been common in the west. When it comes to western "process" theories such as goal setting and expectancy theory, there has been little cross-cultural investigation or discussion. There are some potential cultural limits however. First, both expectancy and goal setting theory are future oriented and make assumptions about people's willingness and ability to think into the future and to base current actions on probabilities and future estimations. This may not be a universal inclination, especially in those cultures that have a here-and-now orientation, that are strongly oriented to the past or present, or that have relatively low internal orientations. The models also rely upon a rather linear, abstractive, rational and decontextualized view of things. Expectancy theory in particular has a rather mechanistic underpinning. Again, this may not resonate in cultures, such as many in East Asia, that are context dependent, holistic and not given to simple linear, uni-causal views things. In addition, of course, there could well be cross-cultural differences in conceptions of performance standards Culture, business organization and managerial behaviour in East Asia

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and how they should be communicated to subordinates. I have already noted the tendency for East Asian leaders to be implicit and indirect about their intentions. There assuredly could be differences in terms of valence, or the value people place upon possible outcomes. Finally, there may be differences in terms of what types of rewards are deemed to be appropriate and made available to employees. Goal setting applications such as MBO may have some limitations in East Asia given the high power distance, high levels of centralization and the low level of genuine dialogue between superiors and subordinates. Equally, frank confrontations of performance deficiencies may be problematic given tendencies for conflict avoidance and face saving. Another unexplored area in western motivation theory is the impact of, for want of a better term, motivation via negativity. By this I mean the motivational impact generated by the recognition of the negative consequences of certain lines of actions and behaviours. This is acknowledged, in a certain form, in reinforcement theory, but in East Asia it may have a wider implication tied into the relational orientation. I am particularly thinking about the possible motivational impact of East Asians considering the social consequences of being perceived to have acted in socially inappropriate ways, or to have broken tacit social norms. Social derision, ostracism and disapproval are powerful features of most East Asian cultures and are certainly things that people would be strongly motivated to avoid. This may be structured such that the breaching of the leaders expectations or the social norms of the organization would engender such negative social consequences and thus induce employees to show compliance in the performance of their tasks and duties. There is also the more immediate negativity of explicit and public criticism from the superior. The fear of this, and the consequent loss of face and dignity is a powerful motivator. An additional, distinctive East Asian perspective on motivation, and again one largely neglected in the west, is the notion of motivation through duty, or deontic motivation. Many of the cultures put high value on the proper adherence to one's social role and fulfilment of one's responsibilities within that role. There is almost a moral element in this and, of course, it has high functionality in sustaining a well ordered and harmonious system. Again, one could trace a familistic link for this. The cultural value of filial piety is in part fulfilled by 52

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the dutiful contribution of the child to the family, even at the expense of individual interest. In broad terms, I am suggesting that strong cultural pressures exist in East Asia for people to adhere to their roles and fulfil their duties properly. This is not only morally expected, but will garner the social approval and acceptance psychologically and socially necessary for viable existence in a collectivist culture. Furthermore, since the notion of self is relational, this type of fulfilment of ones social duties is, in fact, an affirmation of self and part of one's sense of identity and self worth. In more concrete terms, monetary rewards will, naturally, have a motivational impact in East Asia as they would anywhere, but there may be some weakened effects if the reward system is based on overtly competitive, individualized incentives. There is a tendency for relatively weak performance-reward links in many East Asian organizations. Pay systems based on seniority are still common as is the use of rather ritualistic bonus systems that again are not linked to individual performance. But, in addition to these extrinsic rewards and their motivational impact, any foreign manager functioning in East Asia must remain deeply cognizant of the relational and social context and the impact that will have upon the motivational state of the staff. Communication An obvious difference between western and East Asian organizational behaviour centres on communication styles and patterns. Asian cultures are for the most part high context communication cultures (Hall, 1976), whereas the US and a number of Northern European cultures are low context. In low context cultures, emphasis is upon the power of words themselves to convey meaning with relatively less emphasis on context. This entails a communication style that is direct and explicit. In contrast, Asian communication is implicit, indirect and subtle. The meaning of any communication act is only partially conveyed by the words themselves, significant meaning is embedded in the context; in the presumed or known nature of the relationship between interactants, in tacit, shared values and understandings, in non-verbal cues. Modes and patterns of communication are partly determined by the relative status differences between interactants. Where the culture Culture, business organization and managerial behaviour in East Asia

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is a high power distance as well as a high context one, then communication within the hierarchy will be governed by certain "rules." Juniors will be expected to display deferential communication styles and not to say things that can be construed as a challenge to the authority of the senior. There is a tendency not to proactively offer suggestions, nor promote independent positions, and, at least publicly, to acquiesce to the views and opinions of the senior. It has also been suggested (e.g. Redding, 1990; Silin, 1976; Thompson, 1989; Westwood, 1992) that East Asian leaders tend to be non-specific in communicating their intentions, plans and lines of action. Subordinates are expected to intuit or infer what these are by picking up subtle cues in the words and deeds of the leader. Indeed, it is considered the mark of a good follower that they be able to do so. Requirements for harmony, the need to avoid open confrontation, and values such as humility, modesty and non-extremism, also work to foster this subtle and implicit communication style.

Conflict-handling Given the sensitivities in interpersonal relationships, one might anticipate that approaches to conflict in some East Asian countries be different from those in the Anglo-American context. The strong requirements for social harmony prevalent through much of East Asia have been noted and this engenders a desire to avoid open conflict. Studies on conflict-handling preferences in Hong Kong revealed a pattern of compromising, avoiding, accommodating, collaborating and competing, in that order. This contrasts with the pattern of a UK sample which was: collaborating, competing, compromising, avoiding and accommodating (Kirkbride, Tang and Westwood, 1991; Westwood, Tang and Kirkbride, 1992). This indicates that the Chinese are low in assertiveness and high in co-operativeness. The study empirically demonstrates a clear cross-cultural difference in an important area of organizational behaviour. However, the difference still has to be accounted for. The authors again rely upon the presumed central aspects of Chinese culture. They assert that the cultural pressure for harmony militates against behaviours that are openly confrontational and for behaviours like compromising, which preserve smooth relationships. Furthermore, since Chinese culture is 54

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collectivism problems are defined in terms of their collective, rather than individual, importance and impact. This again leads to sentiments of co-operation and de-emphasizes actions likely to unsettle collective solidarity. The hierarchical nature of Chinese culture, large power distance, and the conformance to authority and hierarchy are also invoked. Under such cultural values people are highly sensitive to authority structures in relationships, but more importantly to the implicit order offered by the hierarchical structures. One's social obligation is to conform to one's role in the structure and not to do things that unsettle or challenge that order. Not surprisingly, the more micro social regulatory mechanisms of face and reciprocity are also taken into account. Conflict situations, if allowed to become open and overt, are likely to pose a threat to some parties' face and this takes the exchange into dangerous ground (see also Brunner and Wang, 1988; Redding and Ng, 1982). The reciprocity norm implies that any concession should be returned which engenders a trajectory of compromise. Finally, the authors note the significance of guanxi, the subtle and implicit network of relationships of mutual obligation, a highly significant component of Chinese social order. Maintaining good guanxi relationships is critically important for social reputation, social efficacy and the ability to do business. People in interaction must be wary not to damage guanxi relationships, not only with those with whom they are interacting, but with others in the guanxi network not actually present. Similar cultural implications for Asian conflict behaviours have also been proposed by Yuen (1992). It could be broadly argued that parallel types of values and social mechanisms prevail in other East Asian contexts. Yuen also points out that there is a general dislike of juridical solutions to conflict. This means that parties to a conflict may seek out respected intermediaries to try and progress the conflict rather than put it up for legalistic settlement. This is partly confirmed by Leung (1987) who showed that Chinese respondents preferred compromise or mediation rather than the legalistic adjudication preferred by American respondents. Kirkbride, Tang and Westwood (1991) explore the implications of these cultural orientations and conflicthandling preferences for negotiation behaviour. Ismail (1991) has presented some similar arguments to explain the difficulties of Culture, business organization and managerial behaviour in East Asia

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implementing formal performance appraisal processes, especially the open interview, in the Malaysian context.

The case for cultural commonality and homogenizing models The preceding discussion has emphasized important variations among East Asian business and management systems in managerial and organizational behaviour. I have argued that culture is an important, if not the only, determinant of such variation. While there is no unified management model, some common features of organization and management approaches within East Asia can be identified and understood. These common features are discussed below. Let me make my position very clear at this point. The notion of East Asian culture is valid only as a piece of analytic abstraction or as an element of political-ideological rhetoric. Similarly, the notion of an all-embracing conceptualization of any Asian management or even East Asian management system lacks validity. There is simply too much variance, even in cultural terms, around the region to justify that. When one further considers the myriad non-cultural factors, such as political economy, stage of development, structure of labour markets, education system, form of industrial organization, banking structures, and the wide variance in the nature and pattern of such factors in the various countries in the region, then the notion of a common system of organization and management becomes even more untenable. At the enterprise level, there is little concrete evidence to suggest equivalence in either organizational form or management style. One only has to compare the situation in South Korea with that of Hong Kong, or Indonesia with Singapore, for that to be readily apparent. Rejecting homogenizing labels for the patterns of organization and management across the region does not mean that one should rule out common features that are important and that would be of some assistance to outsiders confronting business transactions within the region. Furthermore, there is a level of cultural similarity that can usefully be understood by outside business people. Many of these common features have been drawn out in the discussion above. They begin with Hofstede's clusters, most notably the fact that all East Asian cultures are large power distance, collectivist cultures. There is further 56

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commonality in that most are particularistic, have a leaning towards ascription, are diffuse rather than specific in relationship terms, have a tendency towards an external orientation and have a polycentric view of time. Furthermore, all the cultures have a strong relationship orientation wherein the nature and quality of relationships takes on central significance in almost all activities and social structures and the very notion of self is relational. The notion of social harmony is also prevalent throughout the region and has a profound impact on relationships and behaviour at all levels and in all situations. There is, in each location, some form of cultural complex which contains values and implicit social rules for the governance of appropriate behaviour and the management of relationships, for example the budi complex in Malaysia, kreng chat in Thailand and kapwa in the Philippines. Amongst the Chinese and the Koreans there is the Confucian social ethic with its value support for vertical ordering, bonds of mutual obligation and rules of reciprocity. There are, again, strong social injunctions for the appropriateness of social behaviour—within the status hierarchies— such as the tacit rules of propriety (//), the relational notion of personhood (reri) and doing the reasonable, "right" thing in an appropriately contextualized and particularistic manner (yi). These are by no means identical cultural systems, and certainly not so in their structural and behavioural manifestations, but there is a degree of commonality in the basic social and motivated drivers for this subtle and complex governance of harmonious social relationships that lends order and coherence to the social system. It is this commonality, especially in view of the general distinctiveness of these forms when contrasted with the west, that can provide the western business person with some broad orienting framework when transacting in the East Asian context. I hope I have said enough in the preceding discussion to tease out some of the more specific organizational, managerial and organizational behavioural implications of these value systems. The next question is whether a lower level of generality will justify the proposition of a degree of isomorphism within the region. The most obvious, and most commonly-studied variant, are attempts to collect the ethnic Chinese business and management systems under one rubric, and the application of the broad post-Confucian Culture, business organization and managerial behaviour in East Asia

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hypothesis in attempts to embrace the ethnic Chinese and South Korea. The post-Confucian hypothesis has some plausibility and appeal—however, it can only be taken in its weakest version. This version suggests that certain post-Confucian values, in conjunction with a particular set of other, non-cultural factors—such as levels of education, world trade opportunities, fiscal and other government policies, infrastructural development—have been partially instrumental in facilitating an approach to economic activity, organizing and management that has proven highly efficacious. Redding s contribution is notable here and provides some evidence for at least a common foundation for the varieties of ethnic Chinese management in the region. He takes a primarily cultural approach but acknowledges institutional factors which are emphasized by other analysts. Both Redding and the institutionalists eschew both formal economic analysis19 and naive culturalism. Institutionalists provide an historical analysis that emphasizes societal conceptions about authority and its various manifestations in controlling and coordinating resources. They also focus on social networks and their roots in "kinship and native place collegiality" (Hamilton, 1991.' 48). Whitley provides a thorough analysis of three forms of "East Asian Business System" (Whitley, 1990, 1992) following the institutional or societal effects approach in organizational theory.20 Rejecting orthodox "economic rationalism," he contends that distinctive business systems, and the organizational and management practices they contain, are contextually constituted by specific institutional configurations. He argues that "Distinctive business systems are particular arrangements of hierarchy-market relations which become institutionalized and relatively successful in particular contexts." (Whitley, 1992:10), and that it is the "coherence and stability of these

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19

See Whitley, 1992; and Hamilton and his colleagues: Hamilton, 1989, 1991, 1996, 1997; Hamilton and Biggart, 1988; Hamilton and Kao, 1990; Hamilton, Orru and Biggart, 1987; Hamilton, Zeile and Kim, 1990; Orru, Biggart and Hamilton, 1996.

20

See, Granovetter, 1990; Lincoln, 1990; Maurice et al, 1986; Orru, Biggart and Hamilton, 1996.

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institutions, together with their dissimilarity between nation states [which] determine the extent to which business systems are distinctive, integrated and nationally differentiated." (Whitley, 1992:13). South Korea, Japan and the OSC are held to have identifiable and distinct business systems—centred on the chaebol, the kaisha, and the Chinese family business (CFB). The analysis is primarily at the level of market-firm or hierarchy-market relationships, but the business system is also composed of inter-firm relationships as well as the structural configurations within firms. With respect to the latter, he gives particular prominence to authority structures, hierarchical dependence relationships and varying conceptions of managerial authority and role. The analysis enables him to identify and discuss significant differences in organizational structures and interrelationships, managerial practice, approaches to market organization and hierarchy-market structures between the three forms, and to explore the institutional contexts that gave rise to these differences. In spite of the macro-level and institutional focus, Whitley acknowledges the impact of culture in determining the specifics of a business system. The institutional frame is composed of both proximate and immediate elements. It is the former which involves an historical analysis and a discussion of the development of authority structures and relationships. But he also probes cultural areas such as the significance and role of the family, patterns of trust and co-operation and matters of cosmology, metaphysics and ontology—the broad beliefs and assumptions that for many are the heart of culture. He talks about the impact of "traditional ways of understanding the world and preferred ways of acting in it" (Whitley, 1992:17), and of "social conventions, rationalities and moral codes." Furthermore, he maintains that the beliefs, priorities and understandings of organizational and economic decisionmakers help shape institutional contexts which themselves frame economic rationalities, markets and the actions of firms. The immediate institutional frame consists of: the policies and structures of the state, the nature and operation of the financial system, the education and training system, and the form and functioning of the labour market. But also the "more general and diffuse attitudes and beliefs about work, material values and authority relations." (Whitley, 1992:16). The latter again abuts with culture. At all points of the argument, culture is Culture, business organization and managerial behaviour in East Asia

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present, albeit a little grudgingly, at an almost foundational level. These are plausible arguments and lend credence to the case for a relatively coherent, distinctive OSC family business model and a distinctive Korean approach to management and organization. It should be noted that the empirical evidence is largely absent and that we are still operating with a fairly high level of generality. In addition, substantial variations exist between the ethnic Chinese communities and the enterprises they contain. Certainly, the business landscape in Singapore is very different to that of Hong Kong for example, and Chinese managers in Indonesia confront entirely different practical problems and contingencies compared with their counterparts in Malaysia. However, there is some elemental level of shared perspective with respect to such matters as how power and authority should be structured, what type and intensity of relationships are appropriate in organizations, and what should be done about conflicts, that lends the possibility of a degree of comprehension for foreign business people dealing with the ethnic Chinese in whatever context they may be located.

Convergence or divergence? Looking to the future, it is pertinent to examine whether there exist forces for convergence in cultures and in management and organization systems, both within the region and in relation to the west. Some analysts suggest that trends in both directions can be discerned (Webber, 1969). There is obviously increased interdependence and interpenetration in the business world as levels of international trade and foreign investment continue to escalate. This fosters a trend toward convergence as accommodation and familiarization takes place. Then there is the presence of forces of cultural homogenization such as global mass consumerism, standardization of products, global mass media and telecommunications, and the commodification of culture itself. A particularly pertinent force for convergence with respect to business and management is the management education and training "industry." It needs to be acknowledged that the US occupies a dominant position in terms of management theory, research and pedagogy. US perspectives have also been successfully promoted and promulgated on a worldwide basis. East Asian managers have been as much the 60

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recipients of this orthodoxy as any other management cadre around the world. Many senior East Asian managers have received a management education in the US, especially the new generation. If they have not studied in the US, they have studied at business schools in Asia the curriculum design and material content of which is invariably USbased. Then there is management training and development in companies in East Asia which, again, very often makes use of US-derived theories, models and methodologies. The US also has an approach to business/management that is perceived to be successful and is an object of desire and emulation for many East Asian business people. Furthermore, there is significant exposure to US management practice directly through their extensive presence in operations throughout the region. These are highly significant forces for convergence of management practice and there is some suggestion that the business world actually constitutes its own sub-culture which may over-ride national cultural differences and generate a shared managerial ethos that is international and pan-cultural in nature. On the other hand, culture itself is a source of sustained difference. Despite the impact of the forces described above, cultures are robust and do not change easily. Core aspects of culture are entrenched in socialization processes within societies and in this way culture penetrates deep into the psyche of the people, forming a taken-for-granted, unreflexive bedrock of assumptions and values that are not altered easily by surface changes. Furthermore, as argued in this paper, culture has become a component of political and ideological discourse. There is something of a resurgence of cultural pride in East Asia and elites are responsible for promoting that and generating notions of distinctiveness, identity and nationalism. It is these rhetorics and sentiments that have partly contributed to the search for, and declaration of, Asian, Chinese or Confucian management. There is some sense of resistance to the cultural hegemony of the west and a desire to see the promotion of distinctive Asian ways, including in the business and management area. Finally, beyond the cultural level, the institutional frameworks for business and management in East Asia remain different—both with respect to the west and within the region itself. Here are just a few examples: Culture, business organization and managerial behaviour in East Asia

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• Attitudes towards education and the educational system are often distinct. • The relationship between business and government is different in Korea than it is in Hong Kong and both are different from the US. • The role, structure and power of organized labour is similarly different. These variable and distinctive institutional frameworks are alone sufficient to sustain some important differences in business and management practice. There is little doubt that important observable differences between East Asian and western organization and management exist. The extent to which culture explains these is not as simple as popular accounts would imply. Empirical work demonstrating the link between cultural values and specific organization/management practices is weak or absent. Western managers seeking to understand this dimension of doing business in East Asia should examine closely how national and ethnic cultures link to business cultures. The academic community also needs to develop detailed, indigenous empirical work that carefully examines the actual practice of organization and management in the region and explicitly links that to cultural values, while taking account of the possible determining effects of other factors. In a globalizing world, forces for convergence are at work; they will continue to play out into the future and it is extremely difficult to predict where they will lead. For the moment, however, there are substantial and important differences in management and organization between East Asia and the west. These pose certain difficulties for international business transactions and cross-cultural management. It is very important that these differences are well understood in order to facilitate cross border exchange.

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Safarian, A.E. & Dobson, W. (eds.). 1996. East Asian Capitalism: Diversity and Dynamism. Hongkong Bank of Canada Papers on Asia, Volume 2. Toronto: University of Toronto Press. Shin, Y.K. 1984. Characteristics and Tasks of Korean Enterprises. Seoul: SNU Press. Siengthai, S. & Vadhanasindhu, P. 1991. "Management in a Buddhist society—Thailand." In J. M. Putti (ed.). Management: Asian Context. 222-38. Sila-on, A. 1979- "Management—Thai style." Business Review. 12 (August): 11-13. Silin, R.H. 1976. Leadership and Values: The Organization of Large-Scale Taiwanese Enterprises. Cambridge, MA: Harvard University Press. Sinha, D. & Kao, H.S.R. (eds.). 1995. Social Values and Development: Asian Perspectives. New Delhi: Sage. Soriano, E.V. 1991. "Management in pakikisama society— Philippines." In J.M. Putti (ed.). Management: Asian Context. 61-77. Thompson, A.G. 1989. "Cross-cultural management of labour in a Thai environment." Asia Pacific Journal of Management. 6/2: 323-338. Thong, G.T.T. 1991. "Managing process in bumiputra society." In J.M. Putti (ed.). Management: Asian Context. 159-76. Trompenaars, F. 1993. Riding the Waves of Culture: Understanding Cultural Diversity in Business. London: Nicholas Brealey. Webber, R.A. 1969. "Convergence or divergence?" Columbia Journal of World Business. 4(3): 75-83. Westwood, R.I. 1997 (forthcoming). "Harmony and patriarchy: the cultural basis for 'paternalistic headship' among the overseas Chinese." Organization Studies. 3. Westwood, R.I. (ed.). 1992. Organizational Behaviour: Southeast Asian Perspectives. Hong Kong: Longman. Westwood, R.I. & Chan, A. 1995. "The transferability of leadership training in the East Asian context." Asia Pacific Business Review. 2(1): 68-92. . 1992. "Headship and leadership." In R. I. Westwood (ed.). Organizational Behaviour: Southeast Asian Perspectives. 118-143. Culture, business organization and managerial behaviour in East Asia

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Westwood, R.I., Tang, S.F.Y. & Kirkbride, PS. 1992. "Chinese conflict behaviour: cultural antecedents and behavioural consequences." Organization Development Journal. 10(2): 13-19Whitley, R. 1992. Business Systems in East Asia: Firms, Markets and Societies. London: Sage. . 1990. "Eastern Asian enterprise structures and the comparative analysis of forms of business organization." Organization Studies. 8: 125-47. Widyahartono, B. 1991. "The Pancasila way of managing in Indonesia." In J. M. Putti (ed.). Management: Asian Context. Wong, S.L. 1988. "The applicability of Asian family values to other sociocultural settings." In P. L. Berger & H. H. M. Hsiao (eds.). In Search of an East Asian Development Model. . 1985. "The Chinese family firm: a model." The British Journal of Sociology. 36(1): 58-72. Yang, K.S. 1986. "Chinese personality and its change." In M. H. Bond (ed.). The Psychology of the Chinese People. . 1981. "Social orientation and individual modernity amongst Chinese students in Taiwan. "Journal of Social Psychology. 113: 159-70. Yau, O.H.M. 1988. "Chinese cultural values: their dimensions and marketing implications." European Journal of Marketing. 22(5): 44-57. Yoo, S. & Lee, S.M. 1987. "Management style and practice of Korean chaebols." California Management Review. 29(4): 95-110. Yu, E.S.H. 1974. "Achievement motivation, familism and hsiao: a replication of McClelland-Winterbottom studies." Unpublished thesis: Dissertation Abstracts International, 35(593A), University Microfilms no. 74-14:942. Yuen, E. 1992. "Conflict-handling processes." In R. I. Westwood (ed.). Organizational Behaviour: Southeast Asian Perspectives. 36279.

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Ethnic Chinese networks: A new model? Katharyne Mitchell and Brian Hammer1

As ethnic Chinese networks gain increasing prominence in international business, their significance is subject to competing interpretations. One interpretation is that they are family-based enterprises advancing an invisible and exclusive web of networked Chinese capital. This view generally associates trust or family-based connections in the business world with ethnic bonds based on social and cultural norms. It suggests that these bonds help create an ethnic web of "personalistic" linkages and business transactions that are increasingly cross-border in scope. Another interpretation is that ethnic Chinese networks are a vestigial form of mercantile capitalism rooted in pre-modern China, a form that is ill-equipped for the large-scale enterprises that characterize global business. It suggests that Chinese business practices are rooted in "feudal" stages of capitalist development, best suited for certain kinds of economic activity, like property investment and speculation, and implies that Chinese firms will only achieve scale and efficiency if they adopt the modern, hierarchical structures of Japanese and western multinational corporations. We present a third view. Taking into account the historical and cultural underpinnings of ethnic Chinese business organization, we

1 This paper draws on materials from

Mitchell, 1993, 1995b.

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believe that network-based organizations are particularly well-suited to being competitive in the global economy and that they can be inclusive, rather than exclusive, of outsiders. The success these organizations have had in high-profile property investments in the major cities lining the Pacific Rim has also been evident in a variety of other industrial sectors, including manufacturing, agribusiness, and business, personal and financial services. In most instances, Chinese business enterprises, both large and small, rely on historically and culturally embedded personal networks that they adapt to particular institutional, political and social milieux. This paper takes a careful look at how ethnic Chinese networks have evolved and what impact they have on business today. It begins with a summary of the development of personal connections, guanxi, in Chinese society and how these connections are central to the organizational system of Chinese business. Then it outlines why these trust-based Chinese business practices are worthy of study, and how they have continued to be important in contemporary international business ventures in a slightly modified form. The third section uses case studies to illustrate how these practices have continued in tandem with more "modern" techniques of professional management and how businesses have expanded into new and diverse sectors of economic activity. The final section examines how new kinds of partnerships with "outsiders" are becoming possible.

Guanxi: The role of personal networks In general, Chinese firms are extremely successful at networking, as they have both experience and institutions backing them. Their networks—guanxi— are based on an organizational system that has developed through time, not on a unique quality of "Chineseness." Two important attributes of Chinese history and culture help explain the role of personal networks in Chinese businesses. One is the importance of the normative social relationships that underly business networks. The second is the Confucian legacy, which is open to multiple interpretations. We see Confucianism as a socio-historical phenomenon, rather than as a set of fixed cultural characteristics. Analyzing Confucianism in the broad sweep of history makes it possible to move away from 74

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stereotypical formations of "authoritarianism" or "familialism" to an understanding of the patterns that have become institutionalized through time. More important, this approach allows for the possibility of interaction between Chinese and western forms of business practice. The individual in society Ethnic Chinese networks are based on the embeddedness (i.e., the deep, historic sedimentation) of social roles in Chinese society. Hierarchically patterned relations between individuals (such as those between ruler and subject, and between father and son) affect everything from the use of money, information and systems of credit, to the formation of mutual aid societies and entrepreneurial conferences designed specifically for ethnic Chinese in the diaspora.2 The organizational structure of most Chinese businesses is based on these socially embedded relations and their numerous, flexible and overlapping interconnections. Before we can understand how these linkages affect the organization of business in the contemporary era, we need to look at the role of the individual within the wider society. In Confucian thought there exists an organic relationship between the individual and society; individuals are viewed as social beings who are dependent upon their reciprocal and relational position to others. Five cardinal relations are central to Confucian thought. They are the relations between parent and child (affection, qiri)\ between ruler and subject (righteousness or justice, yi)\ between husband and wife (distinction, bie)\ between old and young (order and hierarchical succession, xu)\ and between friends (sincerity, xiri). In various guises, these relations have become the founding principles and norms of the Chinese social order.3

2

Entrepreneurial conferences like these are becoming increasingly common. For example, the fourth in the series of Greater Chinese Entrepreneurs Conventions was recently held in Vancouver, B.C. in August, 1997.

3 See Confucius, Analects, Section 3. See also Yang. C.K., 1959' 7.

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The inherently embedded quality of the individual in relation to others is described by a Chinese sociologist through the use of metaphors (Fei, 1992). Individuals form organizations in Western societies much as separate pieces of straw might belong to a small bundle, which belongs to a larger bundle, which in turn makes up a stack. In other words, the pieces and bundles fit together in an orderly and functional fashion, yet each individual piece is clearly demarcated and discrete. In contrast, the individual in Chinese society is more like the center of the circles that appear when something is thrown into a lake. Each circle reflects a level of social influence, with the closest circle being the most important (e.g., the family members) extending out to the farthest circle (e.g., the members of one's regional association). An individual's degree of personal power is reflected in the strength and breadth of these ego-centered rings. Everyone's circles are interrelated and elastic. A key corollary to this concept is the element of reciprocity. The individual is not only linked to others structurally, but with a profoundly moral sense of obligation and duty as well. It is this two-way, reciprocal, moral relationship among individuals within the five cardinal relations and the relations extending out from them that establishes the central ordering principle in business relations, and in society as a whole.4 The roles and relationships of individuals are defined within this moral structure; in principle, there is no self that can exist outside of it.5 Ethnic Chinese networks are part of a system of relations between the individual, at the center of an elastic ring of contacts, and the others, who make up the surrounding rings. This system is hierarchical in the sense that those closest to the central figure will form the closest ties. It is also expandable, in the sense that those within the ringed

4

5

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The five cardinal relations are the most important but are by no means the only important relationships between people. In the Erh ya, the oldest dictionary of Chinese, there were "more than one hundred specific terms for various family relationships" (King, 1985: 58). The original source is Fung, 1964: 21. See the introduction by Hamilton and Wang, in Fei, 1992: 11-13.

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network will generally become the center of their own separate, yet interconnected ringed network. The system has a "moral" dimension through the element of reciprocity, which ensures that those operating within this system will conform to the norms and obligations of "returning favours" and extending mutually beneficial networks. Individuals who break this code risk complete ostracization and thus the end of their business relationships and careers. The organizational foundation of Chinese businesses is thus a set of networks based on normative social relationships (Hamilton, 1994). What constitutes the "norm" has to do with the ordering principles of the civilization as a whole. In Chinese society, the central ordering principle is the hierarchical and embedded social relationships between members of the extended family and between regional and clan associates. Although these relations become transformed in various ways, the role of the individual as a member of a codified and highly regularized social group is a key component of all Chinese societies. Interpretations of the Confucian ethic In many contemporary accounts of Chinese capitalism, authors have fixated on the importance of the so-called Confucian ethic as the primary cornerstone of Chinese society and business practices. Popular accounts highlight the individual Chinese business superstars, and analyze their family's success based on their supposedly Confucian values of thrift, hard work, savings, authoritarianism (both at the family and state levels) and respect for education (Seagrave, 1995; Kotkin, 1993). The depiction of Confucianism as an essentially authoritarian cultural regime is upheld from within Chinese society by afficionados such as Lee Kuan Yew who, as Prime Minister, spoke frequently of the necessity for the state to control society and restrict its "excesses," much as the patriarchal Confucian father would maintain control over his family.6 But the oft-heralded importance of this type of Confucianism for Chinese society and business practices is superficial and misleading.

6 For

a discussion of Lee's many speeches on this theme, see Wee, 1996 and Ong, 1997.

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The most important impact Confucian philosophy has had on contemporary Chinese societies has been the notion of obligation, and of the reciprocity of individuals joined together within social groups. Confucianism is less concerned with an authoritarian force coercing individuals at the bottom of a social order to conform to the dictates of society or a patriarch, than it is with the normative obligations those joined together in a social group have to each other, extending outward and upward in flexible and expanding rings. This networked organizational system also distinguishes ethnic Chinese business patterns from other "personalistic" methods of conducting business. These types of business patterns developed along with various institutional supports, like clan halls, regional place associations, and "umbrella" organizations such as the Chinese Benevolent Associations in both local and overseas communities. These institutions were primarily involved in maintaining the social "glue" necessary for normative relationships and practices to continue over time and space. The contemporary evolution of these types of institutions has led to new forms of organization, such as the Greater Chinese Entrepreneurs' Conferences, the Chinese Business Fairs, and a number of other international ethnic Chinese conferences devoted primarily to business connections and transactions.7

Guanxi and the global economy Guanxi is a complex form of social conduct drawing on a variety of ethical, instrumental and aesthetic values which both compete with and complement one another in the expression of "personalized ethics"—a system of interpersonal relations with roots in the 7

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Some dialect groups have attempted to use the internet as a means to strengthen networks (see Soh, 1995), After two or more generations outside of mainland China, however, participation in ancestral home and dialect organizations is complicated by a strong identification among younger generations with their country of birth, rather than with that of their ancestors (see Chuan, 1995; see also Kynge, 1996; Hicks and Mackie, 1994, Braadbaart, 1995). As Edgar Wickberg (1996) writes in "What Is the Future of the Overseas Chinese Huiguan?", younger generations are choosing instead to join alumni associations and the like as members of a new "international Chinese middle class."

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Confucian tradition and kinship roles. In its many forms guanxi is founded on culturally-embedded ideas of reciprocity, mutual trust and obligation. Elements of emotional attachment (ganqing), loyalty (yiqi\ and propriety (renqing) distinguish guanxi from impersonal forms of purely instrumental and impersonal relations. In practice, guanxi and the guanxi networks are not designed exclusively for egocentric gain, but rather for members of a group or social category. While constitutive of social bonds, guanxi is possible only through the culturally prescribed performance of kinship ethics (see Yang, 1994). Some authors attribute international economic success of guanxi networks to a kind of primordial legacy. They attribute the existence of these networks outside of China to two unifying characteristics: a common written language and an overwhelming sense of "Chineseness," a feature "...stronger than any equivalent in the West, even for the most chauvinist Western countries" (Redding, 1993:108). The existence of Chinese ethnic networks around the world is also seen to provide evidence that there is something unique about Chinese people and their cultural legacy. This legacy is perceived as one so strong that it seems as if "they carry some internal 'programming,' almost as it were genetically, which causes the type to reproduce itself, perhaps even regardless of milieu" (Redding, 1993:115). This view fails to take account of two factors. First, overseas Chinese communities are diverse. Other authors question the existence of homogeneous "Chineseness" among "third-, fourth- or fifth-generation Filipino, Indonesian or Thai Chinese" (Braadbaart, 1995: 179; Chuan, 1995). Second, the idea of "a Chinese spirit" tends to ignore the mutuallyreinforcing relationship between economic, political and historical forces, as well as the socio-cultural relations in which Chinese business practices are embedded (Brown, 1995:1; Olds and Yeung, 1997). Broader interpretations emphasize the common underpinnings of Chinese business relations and the ways in which a shared cultural history becomes institutionalized to reflect pressures imposed by the state and market forces in the geographical regions in which the diaspora is located. Another form of conventional wisdom assumes that guanxi-bzsed or personalistic business relations are not as well suited for international business as are the more scientifically-managed Japanese and Ethnic Chinese networks: A new model?

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western multinational corporations (Redding, 1993; Yoshihara, 1987). Yet extended family networking has important attributes, such as the ability to facilitate flexibility, the flow of information and timesensitive decision-making. Rather than succumbing to stagnation and parochialism owing to the dearth of outside professional management and the over-reliance on "family," this form of business organization can survive generational change and geographic distance quite effectively. Indeed, a number of the most successful Chinese conglomerates, such as those headed by the Li family in Hong Kong, and the Liem and Riady families in Indonesia, have been invigorated by the new management ideas introduced by sons educated in the United States or Canada (Sender, 1991). Rather than a one hundred percent turn to "western" -style professional management, however, the second and third generation offspring have blended older traditional, intuitive and personalistic styles of business with techniques of "modern" management. This mix has proven effective as these corporations extend and diversify their holdings to "new" sites in China, North America and Europe (see the case studies that follow). Often the western-educated sons, such as Stephen and James Riady, or Richard and Victor Li, will operate as the primary liaisons on development projects in North America and Europe, and will oversee the management of the company's overseas banking, broking and insurance affiliates. Not only is it possible for family and network-based Chinese businesses to become multinational corporations in a variety of settings, but this particular type of hybrid business organization has often been shown to be highly advantageous in the context of the modern global economy, where high-speed decision-making and the use of subcontractors is particularly important (Mitchell, 1995a; Yeung, 1997:20; Olds and Yeung, 1997). Restructuring in the global economy in the 1970s and 1980s has been characterized by financial deregulation, cross-border financial flows, quick and flexible decision making, subcontracting, and the effective exchange of information (Mitchell, 1995b:366). This restructuring has shaped, to a great extent, new patterns of economic activity, not only among overseas Chinese business networks, but also more generally. In this era of deregulation, the circulation of financial capital is often separated from national economies. Such "capital flows 80

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between porous 'nation-states'" (Agnew and Corbridge, 1995: 166) are further facilitated by innovations in information technology, and are frequently founded on a principle of short-term profit motive. The family and network-based organization of Chinese business in East and Southeast Asia are at an advantage in the financial marketplace—a marketplace in which many Chinese businesses have already participated, albeit on a smaller scale. Many Chinese businesses have had the advantage of experience in these regions, and have spent years establishing a system of contacts or guanxi network to facilitate the flow of funds. The advantages realized by Chinese businesses in a deregulating and privatizing world are noted by Linda Lim: Local Chinese businesses, already the major players in the private sector, were among the first to benefit from these reforms. It was they who had the capital resources, the technical and managerial expertise, the local and external market contacts, and the local experience and bureaucratic connections, to take advantage of the new business opportunities created by liberalization and privatization. . . . Financial liberalization and the development of local capital markets made it possible for Chinese firms — some of them huge family-owned conglomerates — to raise more capital for expansion (Lim, 1991). Chinese business practices organized around guanxi are particularly relevant in international business, forming a relatively reliable structure of social relations across time and space which facilitate the rapid dissemination of information and credit. Chinese business networks are a model of integrated power among small units, a "global network many Western multinationals have tried to create in their own organizations" (Kao, 1993:24). Given the way in which Chinese businesses utilize guanxi structures in a global economy, it is unlikely that actions taken within one nation state to induce democratic reforms would impinge significantly on network-based capitalism that is multinational in character. This view is contrary to Lim's (1996) hypothesis that the advent of democratic reforms in Southeast Asian countries could result in the loss of access to political and bureaucratic guanxi, and thus economic success. Ethnic Chinese networks: A new model?

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A flexible and expandable definition of "family," the resilience of global network capital that has been built up over time, the hybrid quality of management practices and the vast accumulation of experience and people links in a wide range of institutions will most likely allow for the continued success of these businesses. In Indonesia, for example, Chinese firms had an advantage, not because of superior management or efficiency, but because of accumulated experience in private enterprise and, thus, better access to customer and credit networks (Braadbaart, 1995). Guanxi is also a means of insurance against an uncertain future. In Indonesia, the network capital of ethnic Chinese conglomerates ensures some protection from potential political interventions in the post-Suharto era. Some analysts predict that the mutual financial interests among Chinese conglomerates are so great that a Chinese-controlled conglomerate suffering economically would have detrimental effects on its partners and on major sectors of Indonesia's economy (Backman, 1995:40-42). As long as the conglomerates such as the Salim Group are deemed "useful," it is likely that this type of business and business organization will continue, despite political reform (Backman, 1995:174). This same theme of global interconnectedness and reliance on the Chinese economic engine can be found in many of the other economies of Southeast Asia, and increasingly in Europe and North America as well. While this does not provide complete insurance regarding a future political backlash against ethnic Chinese businesses in southeast Asia, it indicates the increasingly high economic stakes involved for all players. Even when government policies negative to ethnic Chinese have been implemented, such as the government economic policy favouring native-born bumiputras in Malaysia, the flexibility and the interlocking quality of the network system has made it possible for businessmen such as Robert Kuok to continue to thrive. Extending the business network to include links with the United Malays National Organization (UMNO) and Malay royal families has made the success or failure of Kuok s family conglomerate of compelling interest to a wide body of prominent politicians and leading figures in society (Sender, 1991). With such an extensive interlocking of business interests, it is unlikely that a major economic or political backlash will threaten ethnic Chinese business in southeast Asia in the foreseeable future. 82

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Chinese networks internationalized Ethnic Chinese business organizations have a number of well-known characteristics. They tend to be small and medium-sized enterprises which are owned and managed by family members; vertical and horizontal integration within firms is at relatively low levels; they involve a large number of subcontracting operations based on personalistic networks linking firms backwards to sources of supply and forward to consumers; and transactions within these networks occur with considerable speed and flexibility. Relational ties are absolutely central to the business organization and to the functioning of Chinese societies in Taiwan, Hong Kong, Singapore, Malaysia, the Philippines, Thailand and Vietnam. The networked relations in which business people operate are elastic, flexible, shifting and overlapping—with the norms and obligations of individuals defined in relation to others within the network. The most central relational ties involve family members, with "family" defined quite broadly, beginning with close, inner-circle relations and stretching to connect quite distant relations and their families and in-laws. The family thus operates as a system of contacts as well as an emotional unit (Montagu-Pollock, 1991). These contacts often begin with kinship, but may extend outward to include classmates and co-regionals as well. One crucial feature of the centrality of the relational core is the degree to which ownership, management and control of business remains within the family. Nearly ninety percent of business in Taiwan is family owned, and management is largely conducted by family members (Lin, 1996). Even in large business groups the "core group is usually constituted by family members, good friends or old colleagues" (Kao, 1996).8 Extensive family ownership and management is also documented in studies of Chinese business practices in Hong Kong (Lau, 1982; Wong, S. 1985, 1988; Redding, 1993), South Vietnam (Barton, 1983), the Philippines (Wickberg, 1965), and Thailand (Gray, 1988). 8

Of the 100 largest firms in Taiwan (controlling 20 percent of the country's GDP), all but two are owned by either one person or by close partners, or by a family. Of the two exceptions, one is foreign owned and the other is union owned. See Montagu-Pollock: 1991: 23.

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These authors have found that when large-scale operations are extended overseas, some successful entrepreneurs may hire professional managers to manage various aspects of the business operations. The general pattern, however, is for the "core deal-making" to be conducted in the "traditional" (family-managed) way (Montagu-Pollock, 1991). The emphasis placed on maintaining family control is also evident in the desire to win control and establish one's own family as a nodal point in the network. The desire for control—for ownership and management of one's own business, is evident in the rapid turnover of employees who leave the parent firm in order to establish another, usually related, business. This pattern has occurred with great regularity in Taiwan and Hong Kong, with the proliferation of small businesses in similar lines (such as wigs in Hong Kong or plastic flowers in Taiwan). Redding (1990) interviewed seventy-two Chinese businessmen from Hong Kong and Singapore and found that the most intense and often expressed drive was the desire to be one's own boss. The role of employee or worker was often perceived with some degree of contempt, or as a stepping stone to real achievement (owning one's own business). A number of respondents believed the desire to be natural and instinctual, an integral component of Chinese society.9 This succession of subdivisions, rather than leading to cut-throat competition and chronic disputes and bankruptcies, has been an important means for extending networks and leading to new business ties and opportunities.10 The growth of these networks extends guanxi

84

9

See the interviews in Redding, 1993: 88-94. We disagree with the notion of a natural or inherent characteristic such as a "drive to control" or to "be one's own boss." However, we think long-standing Chinese cultural traditions emphasizing entrepreneurship have unquestionably had an impact on conceptions of success and failure in business practice.

10

This practice of subdivision and spin-off operates in family concerns as well, where different family members may run different enterprises, even with separate account books—but within the connected guanxi web. Hamilton and Biggart (1988: S83-85) link this tendency to the cultural practice of patrilineage and equal inheritance among sons. Assets within a Chinese family are always considered divisible (among surviving sons), but the decisions about these assets are expected to be made in light of long-term family interests.

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(personal ties or connections) in the business world; in the fast-moving and flexible world of subcontracting, the extension of guanxi is crucial for the dissemination and reception of business information, as well as for the expansion of contacts and opportunities. According to Hamilton, employers will sometimes even provide the capital necessary for a former employee to get started in a spin-off (subcontracting) firm. The new owner-manager is then bound through ties of obligation and reciprocity to the former employer, whose guanxi network is thereby enlarged and enriched.11 A fundamental tenet of this system is trust. The ethic of trust is absolutely central to the business success of Chinese entrepreneurs in Hong Kong, Taiwan, and in many overseas communities.12 In order for the established norms of obligation and reciprocity to operate effectively, businessmen must trust that the other players involved in business transactions will uphold certain expectations, including the expectation to maintain and continue a given moral order.13 The greater trust accorded family members and those of the same native place within this moral order is implicit; not only do consanguineous bonds (including those extended in space) form a firmer basis for trust and information-sharing, but owing to the threat of communal sanctions, they are also crucial as a means of control over those who don't conform. Finally, by relying largely on the trust inherent in close relationships, it is possible to justify keeping economic benefits within a relatively tight (albeit shifting) community network. The moral contract described here in an abstract way can operate effectively in conjunction with "legal-rational" systems such as those described by the sociologist Max Weber. Weber compared Chinese

11

Montagu-Pollock, 1991. For an extensive study on the importance of guanxi in Chinese business practice and in society at large, see Yang, 1994.

12

Case studies documenting the importance of trust in Chinese business relations in Hong Kong include: Silin, 1972; Wong, 1988; Sit and Wong, 1989. See expecially, Wong, S., 1996 and Kao, 1996.

^ Wong Siu-lun (1996) defines the expectations that social actors have of one another within a system of personal trust as continuity of the natural and moral order, technical competence, and fiduciary responsibility.

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(Confucian) and Western (Puritan) societies to demonstrate the difference between the use of particularist and universalist trust, believing that universalistic, "systemized" trust predicated on a shared community of faith (such as that held by the Puritans) was essential for the rational and methodical business framework integral to the growth of modern capitalism in Europe (Weber, 1951:242). The initial dichotomy, however, has proven false; empirical studies have demonstrated that "system trust and personal trust' can be mutually reinforcing, and that concepts such as traditional and modern, and universalism and particularism often operate in contemporary Chinese capitalism in a "both/and" rather than an "either/or" way (Wong, S., 1996).14 Within the larger, both/and framework, trust must be achieved, rather than assumed (by blood or by native place ties), although it is unquestionable that those with an ascribed relationship have a preliminary advantage. Kao (1996) writes, "Persons with ascribed relationships have certain advantages in obtaining 'personal trust,' because they have more opportunities to develop a trusting relationship. However, there is no guarantee that they will be automatically trusted. It depends upon their achievements, upon demonstrating that they can be trusted." In large-scale, inter-firm, international, mixed Chinese-Canadian or mixed Chaozhou-Shanghainese types of ventures, where ascribed relationships cannot extend far enough, initial personal trust is often won on the basis of reputation. The reputation of business players is crucial for the extension of the enterprise at every level of Chinese society, including the willingness of banks and other businessmen to extend credit, to join in joint venture opportunities, and to develop and market products successfully both on a local and international level.15

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14

For an interesting critique of the misleading applications of Weber's theories of capitalist development (or non-development) in China, see Hamilton, 1985.

15

See Lin, 1996 for a discussion of the importance of reputation in the world of finance in Taiwan. See Redding, 1993 for a similar discussion regarding Hong Kong.

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Within the extended moral economy of trust, credit arrangements are based on the implicit assumption of reciprocity or obligation; policing of behavior occurs through information sharing, through the news about someone's good or bad deeds, through reputation. It is on these tenets that successful operation of the entire system is based. Information sharing continues long after a partnership is secured, and serves to cement the relationship as well as aid in business intelligence that is useful in more general endeavors. Using information to solidify relational ties, and to maintain the moral economy through enforcing communal behavior, has had numerous repercussions in the world of money, credit and high finance. In order to examine contemporary patterns of behavior in finance, it is again necessary to locate institutional developments historically and comparatively.

Case studies of Chinese conglomerates This section studies the development of four family conglomerates: the Li Ka-shing, Chearavanont, Kuok and Liem family businesses, nominally headquartered in Hong Kong, Thailand, Malaysia and Indonesia. As the studies show, the business interests of ethnic Chinese firms are diverse—from the Liem Sioe Liong family's cement plants in Indonesia to the Li Ka-shing family's Concord Pacific property development firm in Vancouver. While many ethnic Chinese enterprises remain small or medium-sized, others have grown into large multinationals organizations extending throughout East and Southeast Asia. In 1995, Hong Kong and Taiwan were home to more than half of the largest 500 Overseas Chinese companies, but Malaysia, Thailand, Singapore and Indonesia also had significant numbers of large companies (Yazhou Zhoukan, 1994). The location of company headquarters tells only a small part of the story. Ethnic Chinese-owned conglomerates form "interlocking directorates" based on personal trust linkages which are critical to understanding investment patterns among the largest and most successful companies in East and Southeast Asia (Wong, 1991). These linkages lead to "colleagues and not competitors at the top" (Backman, 1995:161). Rather than being characterized by "footloose" capitalism of atomistic individuals in a globalized economy, Chinese business practices are a form of capitalism based on internationalized networks Ethnic Chinese networks: A new model?

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of social relations. These relations shape local variations in the workings of capitalism and the direction in which capital flows (Hakansson andjohanson, 1993).

The Li Ka-shing family, Hong Kong Based in Hong Kong, patriarch Li Ka-shing has built the family fortune around three major companies: Cheung Kong Holdings, Hutchison Whampoa, and Hongkong Electric Holdings. Cheung Kong Holdings recently took control of Hutchison Whampoa's stake in Hongkong Electric Holdings as part of Mr. Li's three-part restructuring scheme announced in January 1997 (Guyot, 1997: A12). Like many of the large Hong Kong Chinese conglomerates, Mr. Li began as a small businessman in the post WWII period. He started a plastic flowers business in 1951, and in the following decade began to purchase property around his factory. From this early property acquisition, Mr. Li developed the immensely successful property development corporation, Cheung Kong, which he took public in 1972 (Tanzer, 1994). In 1979, Mr. Li made business history in Hong Kong by crossing the ethnic divide to purchase a major interest (22.4 percent) in the traditionally British-owned trading concern, Hutchison Whampoa. Since that purchase, Mr. Li has been a leading player not only in Hong Kong, but also in enterprises throughout Asia and more recently in North America. In Canada, for example, Li Ka-shing invested in major property development in downtown Vancouver as well as in the oil refiner Husky Oil. In China, the Li family has diversified its holdings. It has developed container shipping terminals in Shanghai, Zhuhai and Yantian. Expansion in the Philippines, however, has proven difficult as President Ramos has overturned two successful bids by Hutchison Whampoa to operate the port terminal in the newly developed industrial park and free port in Subic Bay (Wall Street Journal, 1997). Although no longer owned by the family, Richard Li developed the satellite television network, Star TV in Hong Kong. Other Asian ventures have included the purchase of investment and insurance companies in Southeast Asia, retail establishments in Taiwan and property development in Malaysia and Japan. In the process, the Li family has nurtured close ties, in the form of joint ventures and strategic alliances with other major ethnic Chinese business players as well as 88

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government officials in mainland China. These alliances include joint ventures with Gordon Wu, Robert Kuok, Mochtar Riady (Lippo Group), and other major overseas Chinese families (Backman, 1995). Li also has interests in CITIC Pacific, a subsidiary of CITIC Hong Kong, which in turn is a wholly-owned subsidiary of CITIC (China International Trust and Insurance Corporation), a company founded by the PRC government (ICC, 1992). From a start in plastic flowers manufacturing, Li Ka-shing and his family have developed a wide range of interests in property development, oil exploration, power plant construction, telecommunications, ports, hotels and supermarkets, and many other areas. These interests represent diversification in numerous business sectors, but also diversification by region. The extension of the family holdings to include Canada in the 1980s is a good example of the ways in which contemporary ethnic Chinese networks can operate successfully across borders. For example, following Li Ka-shing's purchase of the former Expo lands in downtown Vancouver in 1988 (these lands comprised nearly one sixth of the entire downtown area), his oldest son, Victor Li, was put in charge of the land's lucrative property development. The purchase and development of the land was carried through with the successful sharing of inside information, the pooling of capital, the extension of mutually beneficial networks, the reliance on reputation and trust, and the mix of "traditional" and "modern" management styles— all characteristics of contemporary ethnic Chinese networks. Equally successful in bringing together diverse business and crossborder organizations is Richard Li, Li's youngest son, who launched Star TV, a pan-Asian satellite broadcaster. Richard Li utilized both his father's widespread reputation, intuition and familial connections and his own professional management skills to bring together a "U.S. satellite vehicle, a rocket launcher made in the PRC, and international expertise in broadcasting" (Kraar, 1994:108). This successful international project, which led to Star TV's purchase by Rupert Murdoch, increased Li's original investment in the company sixfold. Li's reputation as a businessman with a "Midas touch," who sees opportunities worldwide and acts quickly to take advantage of them, is only superseded by his reputation as a businessman who takes care of his partners. The head of Wing Tai Holdings, Edmund Cheng, says of Li: Ethnic Chinese networks: A new model?

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'He convinces people that he looks out for them; anyone will work with him because he leaves room for others' (quoted in Sender, 1991:33). This quality of trust and reputation has allowed Li to move into new areas (both in terms of sector and geography) and form new networks—often first with family, clan and dialect group relations, but then extending out in expanding rings, in highly successful contemporary business ventures.

C.P. Group (Dhanin Chearavanont), Thailand The Chearavanont family is a leading member of the Teochiu Chinese community in Thailand, a regional group whose ancestral home is in northeastern Guangdong Province. The CP Group, which the Chearavanont family controls, also began modestly, as a farm seed supplier. Today, CP is reportedly the largest single overseas investor in mainland China. CP has gained a virtual monopoly in Thailand's chicken industry, from raising chickens to processing, packaging and marketing the meat (Sender, 1991: 41). Today agribusiness still comprises a significant portion of the Group's annual profits. CP's joint-venture with Continental Grain, a U.S. agribusiness giant, to establish a feedmill and chicken farm was the first foreign-invested firm in Shenzhen, the new economic zone in Guangzhou province near Hong Kong. The CP Group continued its involvement in the chicken market and invested in Kentucky Fried Chicken franchises in Shanghai, Jiangsu and Zhejiang. Beyond agribusiness, the CP Pokphand subsidiary in Hong Kong also manages numerous joint ventures in mainland China, including machinery and motorcycle manufacturing, property development, and beer brewing. CP's partner in the Luoyang Ek Chor motorcycle plant is the Chinese defense industry giant NORINCO (Northern Industry Group of Companies) (Goldstein, 1993:67). The CP Group also has interests in telecommunications and property in Bangkok and Hong Kong, as well as in telecommunications infrastructure development in parts of mainland China. In 1996, an agreement between the US-based retailer, Wal-Mart, and the CP Group to develop a low-end retail chain in mainland China (modeled after Wal-Mart, in North America) was dissolved. Despite this setback CP continues to expand its presence in mainland China 90

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with an aggressive investment strategy in department stores, oil refineries, and petrochemical plants (Goldstein, 1993:66). In 1994, the youngest daughter of Dhanin Chearavanont followed the trend among Thai-Chinese family businesses, by marrying a member of another powerful family in Thailand's Teochiu Chinese community. She married the son of the chairman of the M Thai Group, a conglomerate with close business links to the CP Group and interests in chemicals and real estate, as well as a bank in Shantou, the major city in the Teochiu region of China's Guangdong Province (Backman, 1995:156-157). This kind of intermarriage of the scions of Chinese business and finance is common, and is continuing now on a global rather than just a regional scale (Seagrave, 1995). It is evident here that the kinds of familial and regional networks that have long comprised the inner ring of contacts for most ethnic Chinese businesses are continuing to remain of importance in the contemporary economy. Rather than limiting the businesses geographically, however, these types of intermarriages often help to expand the system of contacts across international borders. Indeed, another prominent Thai-Chinese marriage in 1988 brought together many of the richest ethnic Chinese in Southeast Asia. The wedding of Chali Sophonpanich boasted a guest list that "read like a who's who of the region's wealthy overseas Chinese, many of whom had begun their business lives on the strength of a handshake from "Uncle Chin" after having been turned down by their own country's banker" (Sender, 1991:29). These types of interfamily ties are still common, but with an international component that is becoming increasingly important in the contemporary period. The C.P. Group, which has also recently expanded into financial services in China, is another example of a corporation that has diversified widely and rapidly in the last decade and a half, and which has made strong connections in China and with U.S.-based corporations such as Wal-Mart. As with Li's companies, the C.P. Group has shown that the network-based system is durable and flexible enough to extend to new regions and into new sectors with great success.

The Robert Kuok family, Malaysia Robert Kuok has led the development of a Kuok family fortune with major subsidiaries of the family business stretching across Southeast Ethnic Chinese networks: A new model?

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Asia. Worth an estimated $2.1 billion, Robert Kuok built his conglomerate based on his success in the sugar plantation and refining industry in his native Malaysia. Still based in Malaysia is The Kuok Brothers Company, a major plantation, a commodity trading company and a global processing concern. In Singapore, Kuok Ltd. is engaged in general trading, holding and property through its Kuok Oils and Grains company. Today, as the worlds largest producer of both Mandarin and Cantonese language television programming, and as a major shareholder in The South China Morning Post, Hong Kong's premier English-language newspaper, as well as in the Bangkok Post, Kuok's business interests play a significant role in the media and popular culture in Hong Kong and beyond. In agribusiness, the Kuok family continues to have a considerable investment in palm oils in Malaysia and vegetable oils in mainland China. With a 30 percent interest in Perlis Plantation Berhad, the Kuok Brothers Sdn Berhad are also involved in commodity trading, plantations and mining, entertainment and retailing (Worldscope, 1997b). Federal Flour Mills Bhd, a subsidiary of Perlis Plantation Berhad (Graham and Trotman, 1997a), was founded in 1962. Through its many subsidiaries, Federal Flour Mills engages in the processing, trading and marketing of a variety of agricultural commodities, as well as shipping, and development of computer and tele-communications systems (Graham and Trotman, 1997a). Other companies include Pelangi Berhad, a property development and investment concern, with minor involvement in concrete roofing tiles and concrete (Worldscope, 1997a). Singapore-based Pacific Carriers Ltd. (PCL) engages in ship management, freight trading and other facets of the maritime industry through its offices in Southeast Asia, Australia and Panama (Wu and Duk, 1995:35). Among Kuok's primary business partners is Indonesian billionaire Liem Soie Liong, chairman of the Salim Group, a business relationship developed in the 1950s sugar industry in Indonesia (Backman, 1995: 328). In some instances they act jointly to dominate markets in Southeast Asia. An example is the Salim Group's purchase of an interest in a Malaysian flour mill, a sector in Malaysia over which Kuok already has a substantial control (Backman, 1995:161). Recently, Kuok has also developed close ties with Li Ka-shing of Hong Kong, and Top Glory of Singapore, a subsidiary of Richard Li's Pacific 92

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Century Group. Together they are developing Shanghai's US$590 million Everbright City. The Kuok Group in Singapore is also partners with Li Ka-shing in shopping center developments in Japan (Backman, 1995:161, 327-330). Kuok's Kerry Group also has a 13.5 percent stake in CITIC Pacific. In turn, the Kerry Group and CITIC Pacific are also partners in Hong Kong's new Western Harbour Tunnel project (Backman, 1995: 330). The fraternity among most Chinese developers is evident in the contemporary business arrangements and partnerships between Kuok, Liem, and Li Ka-shing. Rather than a "pre-modern" kind of guild relationship, however, the pooling of resources, capital, contacts and information between businessmen like these three reflects a highly successful form of networking within the contemporary global economy. In an era of hostile acquisitions and takeovers in western business practices during the 1980s and early 90s, most Chinese conglomerates emphasized harmony and long-term success for all the business players involved in a deal. With the success of other partners or contacts, the business network was extended, as was the overall system of contacts and information reaching down through the next generations and out to new geographical regions. Liem Sioe Liong's Salim group Liem Sioe Liong emigrated from Fujian to Indonesia in the 1930s to work in the peanut oil trade. He now controls Indonesia's largest conglomerate, the Salim Group, which is estimated to account for five percent of Indonesia's gross national product. His companies control the domestic cement and flour industries, and the Salim Group has interests in automobile assembly, processed foods, banking, and steel, among others. In many ways the Liem business practices characterize contemporary ethnic Chinese business organization and management. Liem himself has made use of extensive links with other Hokkien families hailing from China's Fujian province. These ethnic Hokkien links include partnerships with Robert Kuok, with Malaysian Khoo Kay Peng, and with Indonesian Mochtar Riady, whom he recruited to help manage the Bank of Central Asia (Rees and Sullivan, 1995: 61; Kraar, 1994:107). In addition to numerous large-scale partnerships with Ethnic Chinese networks: A new model?

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other Hokkien Chinese, however, Liem has extended his network outside traditional dialect group relations. He has " played the role of foster parent to almost every Indonesian conglomerate" according to a British equity analyst in Jakarta (Sender, 1991:30), and has expanded his contacts worldwide. Liem s son Anthony now manages the Salim Group, and mixes a more "professional" management style with the guanxi-b&sed practices of his father. One example of this hybrid management style is evidenced in the Hong Kong-based First Pacific Corp., a company that has remained consistently profitable. As with the Kuok, Li and C.P. Group, the Salim Group has diversified widely and successfully both in activities and in geographical regions. The majority of the literature related to the role of personal trust in Chinese business practices focuses on Southeast Asia. However, recent work has also begun to address the role of guanxi in the form and location of overseas Chinese investment in post-Mao China (Hsing, 1995). Wanks (1996) research in southern China has also pointed to the rise of clientelist guanxi in the development of private enterprises in a marketizing economy. However, the existence of personal trust is not a result of continuing vestiges of bureaucratic inefficiencies in a partially marketized economy. Instead, the international business systems of the ethnic Chinese are likely to play a very important role in Chinas economic integration into the global economy (Wank, 1996; Hsing, 1995). The role of network capital is both economic and political. In Hong Kong, the role of PRC government investments in Hong Kong businesses is two-fold. For the Hong Kong-based company, the development of close ties with government officials who may assist in opening doors to business expansion in mainland China is imperative to assure stability for their current holdings. However, from Beijing's point of view, such investments in Hong Kong companies may also be a means of gaining political and economic control of Hong Kong s businesses and the families who own them. As noted above, CITIC Pacific, a subsidiary of CITIC based in Beijing, is a major investor in a multitude of Hong Kong companies. CITIC Pacific's holdings include interests in the two Hong Kong-based airlines (Cathay Pacific and Dragonair) as well as in Hongkong Telecom, and Hong Kong Light and Power (Naughton, 1997:11). With partial ownership in a 94

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vast array of influential businesses in Hong Kong, the Chinese government, via its Hong Kong subsidiary, has also become an active participant in the web of interlocking directorates with linkages to overseas companies throughout Southeast Asia.

Ethnic Chinese networks: A new model? These case studies illustrate some of the organizational strategies and business practices of leading ethnic Chinese conglomerates. There are three important factors to note. First, the position of the individual within a set of codified social relations has influenced the form of business activity. Implicit obligations, such as between an employee beginning a new business and his former boss, or between a son taking over part of a corporation and his father, lead to expanding business networks that are autonomous yet "morally" bound together. The mutual understanding between all business partners that obligations will be eventually "repaid" and that favours will be returned has led to informal business deals relying on nothing more than a nod or a handshake. Those who renege on these informal contracts are swiftly sanctioned by being completely ostracized from future business dealings. Networking of this kind often leads to many harmonious, mutually beneficial partnerships between conglomerates, as seen in the Kuok, Liem and Riady ventures, and also to the continual expansion of networks by family members and former employees. Second, one of the primary ways that these partnerships are secured is through business trust. In the past, trust was won primarily on the basis of ascribed (e.g., familial) relations ordered on Confucian principles. The strongest (family) relations would form the innermost ring of a ringed network system, and would extend outward to include clan members, dialect groups, and regional associates. In the last two decades, with the expansion and diversification of larger Chinese businesses, these networks have extended further. Relations of trust can be "achieved" through reputation and through diverse connections like colleges, clubs, churches and fraternal organizations. As in the case of the Liem, Riady and Li families, western-educated children have helped to extend these networks through new contacts made "outside" the traditional extended family structure. Ethnic Chinese networks: A new model?

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Third, with the extension of ethnic Chinese businesses across borders, many families have opted to employ more "professional" styles of business alongside those considered in the west to be more "traditional." In these cases, the hybrid is one in which guanxi remains central to the business operation, and obligation, reciprocity and trust underpin all business deals. At the same time, "professional" techniques relating to the use of legal contracts, greater degrees of separation between, for example, the chairman and the company, and the use of professional management and information sources, etc. are also employed. These hybrid management styles are evident in all of the four case studies. The generational changes and spatial expansions of Chinese conglomerates in the last two decades have led to new opportunities for non-ethnic Chinese businesspeople to become part of this networked system. The interlocking organization of business does not rest on primordial characteristics of "Chineseness," but rather on socio-cultural patterns that have been institutionalized through time. As these patterns change in the context of increasing globalization, the opportunities for new types of cross-border and cross-ethnic collaboration increase. Understanding the foundations of ethnic Chinese business organization, and how it is both different from and similar to western forms is the first step in establishing incipient connections. Some of the important elements to consider include learning the history of personal as well as business relations in local areas. Forming social links takes time, and often occurs in stages of familiarity. Preliminary business connections may be primarily "economic," resting on small business deals done on a legal, contractual basis. A second stage may involve banquets, golf and factory tours. It is not until a third stage, which some have labelled "familial," that partners become "effectively part of the same extended family" (Tanzer 1994:142). It is at this third stage that business "trust" is secured, and the social obligations of one individual to another to return favours and to extend business contacts and information become implicit. Building up personal trust and reputation over time can eventually lead to the formation of an autonomous yet interlinked, "morally"

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connected network, in which the extended "family" members rely on each other in hard times as well as in times of profitability. In planning for the long term, then it is imperative to acquire a knowledge base that emphasizes the human element as much as industrial and financial factors.

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A portrait of Asia-Pacific immigration to Canada Michael Baker and Dwayne Benjamin

In recent years, the Asia-Pacific region has been the largest single source of immigrants to Canada. This paper summarizes the results of a study that explored the interactions between these immigrants and the Canadian economy (Baker and Benjamin, 1997).1 Initially, our objective was to estimate the total economic contribution of this group of immigrants to the Canadian economy, however conceptual problems and data limitations made this an impossible task. Instead, we were able to get a partial picture based on economic links that are relatively well defined and quantifiable in publicly available data. Why focus on this group of immigrants? The reasons are partly historical: Canadian immigrants have traditionally hailed from European countries or the United States. It was only with the revision of the immigration laws in the 1960s that larger inflows from the Asia-Pacific, or more generally Asia, were permitted (Green, 1976 and 1995). The growing importance of this group represents a distinct break in the historical trend. In addition, Asia-Pacific immigrants are just one manifestation of an evolving relationship between Canada and Pacific rim countries. A study of these individuals complements the more widely appreciated trade and financial bases of this association. Finally, the media is the principal source of information about these 1

The statistical analysis underlying much of the following discussion can be found in this paper.

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immigrants for many native born Canadians. It seems likely that less "newsworthy" but nevertheless important characteristics of this group are missed in these outlets. In our investigation, we examined how the flows of immigrants from the Asia-Pacific regions are influenced by Canadian aggregate economic conditions, and in turn some of the measured contributions these individuals make to the Canadian economy. We relied on publicly available (government) data that lacked the level of detail that we would have preferred. Our measures of the contributions of these immigrants were necessarily selective: 1. The value the labour market puts on the skills immigrants bring to their adopted country (their earnings). Our focus on the earnings of these immigrants follows a tradition in economics of determining relative worth through market valuation. What a person earns is viewed as an accurate measure of the value of goods and services he or she brings to the Canadian economy. 2. The effect immigrants ham on trade or investment between Canada and the Asia Pacific region. Immigrants bring their own (distinct) preferences for goods and services, as well as inside knowledge of their source country. Connections between Canada and the Pacific rim may arise through the importation of a specific commodity demanded by these immigrants, for example, or through a flow of capital to an investment opportunity previously unknown to Canadian investors. It is abundantly clear, however, that our examination did not exhaust the possibilities. We did not attempt to measure any contribution these immigrants make to, say, the entrepreneurial talent pool, or the cultural wealth of the country. We also missed any impact they have on the economic outcomes of the native born. And our focus on the impact of Asia-Pacific immigrants at the national level masked the considerable heterogeneity of this group, and the possibly different effects they have in certain cities (in Vancouver or Toronto, for example). These limitations were largely inherent in the sources of information we used—we chose to root our analysis firmly in data rather 106

Michael Baker and Dwayne Benjamin

than construct a more speculative account. Finally, we used the experience of Asia-Pacific immigrants in the United States as a point of comparison throughout the analysis. This provided an important check on our conclusions, as well as a means to surmount some important conceptual obstacles. Our study suggests that the flow of Asia-Pacific immigrants to Canada is largely the result of historical and political factors. Relative differences in economic performance between Canada and the various source countries appear to play a fairly minor role. A snapshot of these immigrants reveals a very heterogeneous group. For example, those from Hong Kong are more educated than the typical immigrant to Canada, while others, especially groups who are primarily refugees, are less educated. As a whole, the economic progress of Asia-Pacific immigrants is quite similar to other groups. Their earnings growth rate after arrival (their "assimilation") is comparable to the rate of immigrants from other parts of the world, but, perhaps surprisingly, they start out at a somewhat lower earnings level. Finally, there appears to be some correlation between both imports and exports and the stock of immigrants from this region. On the other hand, we found little evidence of a relationship between the stock and foreign investment.

The flow of Asia-Pacific immigration Figures 1 and 2 show the number of Asian immigrants to Canada and the US since 1955, placing more recent immigration patterns in historical perspective. Note that "Asian" immigrants here include immigrants from South Asia and the middle east, as well as the Asia-Pacific region. Partially because of the relatively small numbers of immigrants from Asia prior to the mid-1960s, publicly available data do not provide much detail on the Asian region until the 1970s. As Figure 1 shows, the number of Asian immigrants to both countries has increased steadily since 1970, with the US receiving just over 250,000 Asian immigrants in 1995, approximately double the flow to Canada. In fact, the US receives a higher number of immigrants from all source countries, though Canada receives more as a percentage of its population. Expressed as a percentage of total immigration, Figure 2 shows that Asian immigration now accounts for over 60 percent of A portrait of Asia-Pacific immigration to Canada

107

Figure 1:

Asian immigration to North America

Figure 2:

Asian immigration as a percentage of total immigration

immigrants to Canada, compared to under 40 percent of those to the US. Some, but not all of this difference can be explained by the greater importance of Mexican immigration to the US. For example, the dip in the US share in 1990 primarily reflects a change in US immigration law, and the subsequent legalization of Mexicans already living in the US. For both countries, however, it is clear that Asia has become the largest source of new immigrants. Figures 3 and 4 show the immigration patterns more finely, focusing on the largest sources of Asia-Pacific immigration. A couple of data limitations are worth mentioning. First, the overall Asia-Pacific share is slightly understated, because smaller immigrant source countries, like Singapore, Japan, Malaysia, and Indonesia are not reported in the figures (comparable data could not be obtained for both the US and Canada). Second, China and Taiwan are pooled, reflecting reporting practices in the US data until the early 1980s. These caveats aside, a couple of patterns are apparent. First, the share of Asia-Pacific immigration has been increasing slightly faster in Canada than in the US. The current shares are 35 percent of immigrants to Canada, compared to 25 percent in the US. Second, the relative mix of the source countries differs between Canada and the US. For example, Hong Kong and China are the two most important source countries for Canada, with the Philippines a close third. For the US, China, Vietnam, and the Philippines are the most important countries, while South Korea was an important source of immigrants until the mid-1980s. Not surprisingly, these patterns of immigrant flows reflect different historical connections between the United States and Canada, and the various countries in the Asia-Pacific region. Note, however, that there still remains considerable year to year variation in the relative shares of immigrants from the different source countries. What determines these observed changes in the flows of immigrants from different countries, or for that matter the overall share from the Asia-Pacific? To investigate this question, we constructed an econometric (statistical) model relating immigrant flows to a variety of economic variables, measured in both the immigrant source countries, as well as Canada and the US. Our focus was on economic determinants, which potentially include both demand and supply factors. On the demand side immigration policy is likely to play a dominant 110

Michael Baker and Dwayne Benjamin

Figure 3:

Asia-Pacific immigration as a percentage of total immigration to Canada

Figure 4:

Asia-Pacific immigration as a percentage of total immigration to the US

role, because labour is not freely mobile across international boundaries. While this policy is the creation of a political process, it is still likely to be sensitive to Canadian economic conditions. The supply side is viewed as a product of the decisions migrants make in response to economic opportunities in their home country and in Canada. Most empirical economic models of migration give larger play to supply side factors because the important variables are more likely to be observed and are more easily quantified. In our analysis, we also adopted what is essentially a supply side approach. Immigration flows to Canada from a given source country in a given year were viewed as a function of 1) the level of economic activity in Canada (real GDP per capita and the unemployment rate); 2) the level of economic activity in the source country (real GDP per capita) as well as its potential supply of migrants (population density); 3) the level of total immigration to Canada; 4) population density, which may affect the well-being of residents of the immigrant source countries, and 5) separate intercepts (fixed effects) for each source country. The model underlying this specification was of individuals making the decision to migrate to Canada based on their prediction of where their economic status would be maximized. The measures of GDP per capita represented the income level they might expect to receive in Canada, as well as the status they were potentially giving up in their home country. We used the Canadian unemployment rate to represent the risk of migration, or more precisely for the probability of employment on arrival in Canada. The level of total immigration was included to capture aggregate changes in demand side factors. The Canadian government sets a total immigration target each year. Since this target is to some degree affected by domestic economic conditions, by including total immigration in our model we could more precisely isolate changes in economic factors that impact the supply side. We used population density to reflect congestion in the source country, which may adversely affect the utility of those contemplating staying in the source country. It also reflected cost of living, at least in terms of real-estate. Finally, we included the country fixed effects to capture any "permanent" differences in the levels of immigration flows across countries that are unrelated to economic conditions. For example, in a broader context one might expect A portrait of Asia-Pacific immigration to Canada

113

higher levels of immigration from the United Kingdom than from other countries due to the historical connection Canada has with this country. The country fixed effects would capture these kinds of factors. In fact, it was these country fixed effects that appeared to be the primary determinants of immigration flows.2 We found little consistent evidence that our economic variables were related to immigration flows in the anticipated way. For example, in some of our results the level of immigration was positively correlated with economic conditions in the source country. Our supply model of migration would predict just the opposite, as declining economic conditions should provide a greater incentive to migrate, all else equal. Of course it is possible that source country GDP is simply capturing the fact that more developed countries have more highly skilled citizens who are a better match to the Canadian labour market. Of the economic variables, only population density had a significant effect in accordance with the predictions of the economic model—immigration levels were highest from the most densely populated countries, holding other factors constant. In contrast, the country fixed effects were significant. The first column of table 1 presents the relative order of the estimates.3 If migration flows were completely determined by our economic variables then the country fixed effects would not matter. What the information in table 1 tells us, for example, is that relatively more immigrants to Canada come from China than Hong Kong, even after we account for the great differences in economic conditions between the two countries (and therefore the fact that we might expect relatively more Chinese immigrants given the lower levels of GDP per capita relative to Canada). More generally, the order in the table reveals that poorer countries send relatively more immigrants to Canada for reasons other than low income.

2

The regression estimates underlying the following discussion, as well as other statistical results cited in this paper, can be found in Baker and Benjamin, 1997.

3 The ordering is taken from the results in column 4 of table 1 in Baker and Benjamin, 1997: 313.

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Michael Baker and Dwayne Benjamin

Table 1:

Relative immigration flows by source country controlling for economic conditions

f

Relatively higher flows

Levels to Canada

Difference from US

Malaysia

Hong Kong

China

China and Taiwan

Philippines

Vietnam

Indonesia

Philippines

Thailand

Japan

Korea

South Korea

Japan

Thailand

Taiwan Relatively lower flows

Hong Kong Singapore

* We also examined differences in immigration flows to Canada and the US using a similar model. The advantage of adding immigration flows to the US was that we were able to account for additional demand and supply factors that are common to the two countries. This approach also provided some indication of whether the differences in the source country composition of immigration to Canada and the US could be accounted for by differences in economic conditions in the two countries. The results of estimating this model, however, did not make a stronger case for the importance of economic factors. As before, it was the country fixed effects that told the story. Furthermore, they were consistent with patterns in figure 3 and 4. The ordering of the country fixed effects (i.e., the "unexplained" differences in immigration patterns) are presented in the second column of table 1. Canada receives relatively more immigrants from Hong Kong than the US (given relative economic conditions), but relatively fewer Korean immigrants. The conclusions we can draw from this analysis are necessarily very limited given that the most important explanatory variables in the statistical analysis were country fixed effects which capture things we A portrait of Asia-Pacific immigration to Canada

115

cannot see or directly interpret. This suggests that to the extent that the data are informative, it is political and historical factors that determine relative immigration flows. These might reflect an historical association between Canada and different countries due to, for example, Commonwealth ties, or disruptive internal strife in certain source countries over the sample period which led to an outflow of refugees. What is clear, however, is that relative economic conditions play a very limited role, at least to the extent that they were captured by our measures of GDP per capita and the Canadian unemployment rate. The implication of this finding, if taken at face value, is that immigration from this region will continue to be important, even as these countries experience the growth rates associated with the "East Asian Miracle," and especially if there is political uncertainty.

A snapshot of immigrants from the Asia-Pacific Next we turned to a closer examination of the immigrants themselves. How do immigrants from the Asia-Pacific compare to immigrants from other areas or to native born Canadians? The large samples available in the Canadian censuses allowed us to construct a profile of these different groups in number of dimensions.4 Table 2 presents information on decade of arrival among the stock of immigrants resident in Canada in 1991. Consistent with the information in figures 1 through 4, it is clear that Asia-Pacific immigration is a very recent phenomenon. Immigrants from "Other regions" are fairly evenly distributed across the decades, while the bulk of immigration from the Pacific rim occurred in the 1970s and especially the 1980s. Because migration is more common among the young, Asia-Pacific immigrants also tend to be younger than immigrants from other regions.

4

116

The following information is based on a sample of males and females, ages 16-64, excluding the Atlantic provinces, from the 1991 Canadian census. A full description and explanation of the sample selection can be found in Baker and Benjamin, 1997.

Michael Baker and Dwayne Benjamin

Table 2:

Percentage distribution of immigrants by origin, by decade of arrival Females

Males

HK

Ch

P

V

1950s

1

17

0

0

25

1

3

0

0

2

24

10

12

7

1

2

1960s

9

26

8

14

11

1

9

25

1970s

34

26

47

45

39

26

31

27

37

41

40

27

1980s

55

45

46

55

23

60

50

51

59

49

24

E/SE

50

HK=Hong Kong, Ch=China, P=Philippines, V=Vietnam, E/SE=East/Southeast, 0=0ther regions Source: 1991 Canadian Census

0

HK

Ch

P

V

E/SE

0

Tables 3 and 4 provide additional points of comparison. While most immigrants to Canada settle in urban areas this tendency is especially pronounced among those from the Asia-Pacific. At the upper end almost 100 per cent of immigrants from Hong Kong live in a city. Unemployment rates are fairly similar for immigrants from different regions, with the exception of those from Vietnam. As is widely known, immigrants have more education on average than native born Canadians and this is true for most immigrants from the Pacific rim region. Here again those from Vietnam, and this time China, are the exceptions. Finally, in table 3, males from the Asia-Pacific have mostly higher rates of poverty and lower earnings than native born Canadians. For females (table 4), the poverty rates are similar, and there is no single conclusion to be drawn about earnings. While these statistics provide useful information on each of the groups at a point in time, any comparisons across groups can be misleading because they beg the question "why?." For example, why do most immigrant males from the Asia-Pacific region, or for that matter all male immigrants, earn less than native born Canadians? There are many potential explanations that range from the contentious to the mundane. For example, one reason may be that immigrants are younger, on average, and the young are typically paid less than the old for a variety of reasons. The lower levels of earnings (and education) for Vietnamese immigrants may be related to the fact that a there is a high proportion of refugees in this group.5 Some may see discrimination in these numbers. The wide range of these suggestions highlights the need to think carefully about why immigrants might command different labour market compensation than native born Canadians. They also suggest that we might want to refine the statistics in tables 3 and 4 to hold more things constant in any comparison.

5

118

Sixty-five percent of Vietnamese immigrants arriving between 1986 and 1990 were refugees. This compares to 1 percent of the Chinese and 0 percent of those from Hong Kong and the Philippines.

Michael Baker and Dwayne Benjamin

Table 3:

Selected characteristics: Males

Live in a city (%) Unemployed (%) Education (years) Poor (%) Self employed (%) Earnings ($)

Hong Kong

China

Philippines

Vietnam

East/Southeast

Other Regions

Native Born

97

94

95

95

93

84

59

5

7

8

13

7

8

8

16.0

13.2

15.4

12.6

14.9

13.8

13.5

20

23

12

25

26

15

12

13

17

5

6

18

14

11

22,343

18,714

20,571

15,874

18,722

22,6704

24,277

Source: 1991 Canadian Census

Table 4:

Selected characteristics: Females

Live in a city (%) Unemployed (%) Education (years) Poor (%) Self employed (%) Earnings ($) Source: 1991 Canadian Census

Hong Kong

China

Philippines

Vietnam

East/Southeast

Other Regions

Native Born

97

95

94

95

93

85

61

6

7

5

12

8

8

7

14.8

11.6

15.3

11.7

13.7

13.1

13.5

22

22

19

29

15

8

2

4

26 11

17

6

6

5

13,468

10,275

16,638

8,704

10,078

13,025

12,981

The economic assimilation of Asia-Pacific immigrants The preceding tables have revealed how immigrants "get by" in their adopted country. They have also provided a direct measure of one contribution immigrants make to the Canadian economy: the value the labour market puts on the skills that they bring to Canada. The two points are related: successful migration is often measured by quick attainment of the economic outcomes of, say, the native born, while through the point system Canada seeks out immigrants whose contribution will equal if not exceed that of its citizens. These issues are at the heart of what economists typically mean by "economic assimilation." Economists examine the rate of earnings growth immigrants experience after their arrival in Canada and compare it to the rate of growth for the native born. If the rate for immigrants is higher we say they are assimilating. A higher growth rate does not necessarily mean higher earnings, however, at least initially. There is widespread evidence that immigrants initially experience an earnings disadvantage upon arrival in their adopted country (Baker and Benjamin, 1994; Bloom and Gunderson, 1991; Bloom, Grenier and Gunderson, 1995; Borjas, 1985; Grant, 1997). The full process of assimilation may involve an initial earnings deficit, followed by catch up, and perhaps overtaking, if immigrants' earnings growth exceeds that of native born Canadians. The initial earnings deficit may arise because immigrants aren't necessarily well matched to the needs of the Canadian labour market at the time they arrive. Educational or training credentials they received in their home country may not be recognized, or they may not be fluent in French or English. One explanation of their higher earnings growth after arrival is that immigrants are "positively selected" from their home country, which is to say that they have higher than average (perhaps unobserved) skills than their compatriots who do not migrate, and than the average native born Canadian. As noted earlier, Canada attempts to direct the assimilation process by selecting some immigrants on the basis of a point system. Those without direct family connections to Canadian citizens are evaluated on their anticipated match to the needs of the Canadian labour market. The point system applies to independent and business class applicants, and, to a lesser extent, to those admitted as assisted 120

Michael Baker and Dwayne Benjamin

relatives. On the other hand refugees and family class immigrants are not evaluated in this way. We made a number of modifications to the raw earnings comparisons in tables 3 and 4 in an attempt to measure the economic assimilation of Asia-Pacific immigrants. First, we controlled for things like age and education so we could compare immigrants and the native born on a level playing field. Second, we mapped any earnings differences between immigrants and the native born into an initial deficit which is experienced just after arrival, and an assimilation rate, which is the difference in earnings growth rates between natives and immigrants. Third, we examined information about whether immigrants from a certain country were admitted under the point system, and their language skills, to assess whether these factors accounted for the relative, initial earnings deficits across groups. Figure 5 shows the initial earnings deficits and assimilation rates of male immigrants from the Asia-Pacific and from other regions of the world.6 The plots are based on regression analysis in which we controlled for labour market experience, education, marital status and weeks worked. In each case the earnings profiles are the percentage difference between immigrants and similar native born Canadians. Figure 5 contains the profiles of individuals who migrated to Canada between 1976 and 1980, and those who immigrated between 1981 and 1985. The first thing to note is that immigrants from the AsiaPacific experience a larger initial earnings deficit (at zero years migration) than those from other regions. The difference between AsiaPacific and other immigrants is estimated to be almost 25 percentage points. On the other hand, it appears that Asia-Pacific immigrants experience slightly faster earnings growth after arrival. This is somewhat misleading, however, as the underlying regression coefficients indicate that the difference between the growth rates of the two types of immigrants is not significant in a statistical sense.

6

The figures are based on table 6, column 2 of Baker and Benjamin, 1997: 329-

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121

Figure 5:

Earnings growth of immigrants relative to native-born (Canadian)

Table 5:

Proportion of immigrants arriving between 1986 and 1990 who were evaluated under the point system: By region of origin Hong Kong

82%

China

41%

Philippines

56%

Vietnam

8%

Asia-Pacific total

59%

Other regions total

44%

Source: 1991 Canadian Census

The message from this analysis is that Asia-Pacific immigrants experience a somewhat larger earnings deficit than other immigrants on arrival to Canada, but the same rate of earnings growth. The net result is that it takes them longer to "catch up" to the earnings levels of their native born counterparts (about 27 versus 17 years). A similar conclusion holds for immigrants arriving between 1981 and 1985. Again, Asia-Pacific immigrants face a larger initial earnings deficit (under 10 percentage points), and while their earnings appear to grow at a faster rate, the underlying regression coefficients indicate that in fact the growth rates are similar across the two groups. What accounts for the variation in initial earnings deficits across immigrants from different regions? Table 5 contains information about the proportion of immigrants from different regions who were admitted to Canada under the point system. The data are for individuals arriving in Canada between 1986 and 1990. Immigrants who are not evaluated under the point system are presumably not well matched to Canada's labour market, and therefore may experience lower economic outcomes on arrival. The data indicate that there is a tremendous amount of heterogeneity within Asia-Pacific immigrants. The proportion passing through the point system ranges from 82 percent for immigrants from Hong Kong to 8 percent for those from Vietnam (who are mostly refugees). At the level of detail used in the earnings comparisons the proportions are, perhaps, just the opposite of A portrait of Asia-Pacific immigration to Canada

123

what we might expect. A lower proportion of immigrants from other regions of the world are evaluated under the point system, yet these same individuals experience a relatively smaller initial earnings deficit (for the group of immigrants who arrived between 1986 to 1990, the deficit for Asia-Pacific immigrants is 11 percentage points larger than that for other immigrants). There is no obvious connection between the point system and the earnings differences documented in figure 5 at this level of detail. Another possibility is that the lower initial earnings Asia-Pacific immigrants command is something peculiar to the Canadian labour market or economy. To try to investigate this possibility we performed similar earnings comparisons for Asia-Pacific immigrants settling in the United States. This cross country comparison was not completely appropriate, for, as we have seen, the country composition of AsiaPacific immigrants in Canada and the United States differs. Nevertheless, the composition helped us determine whether the larger initial earnings deficits were a "Canada" or "Asia-Pacific" effect. In fact, the results indicate that Asia-Pacific immigrants to the US also experience a larger deficit than immigrants from elsewhere, although the difference is smaller than in Canada.7 Whatever lies behind the initial differences is, to a certain extent, common to immigrants to both countries.

Asia-Pacific immigration and trade Our next step was to examine any effects Asia-Pacific immigrants may have on the content of trade between Canada and the rest of the world, or the flows of international investment, since these effects could lead to benefits to the Canadian economy that exceed the contribution measured in the labour market. There are a number of ways in which immigrants from the Asia-Pacific might expand trade (see Head and Ries, 1995; Globerman, 1995; and Gould, 1994). First, they bring knowledge about their home country markets. This may decrease the transactions costs of exporting to these countries. Alternatively, they

7

124

The results are reported in table 7 of Baker and Benjamin, 1997.

Michael Baker and Dwayne Benjamin

may also have a preference for goods produced in their country of origin, increasing imports and trade in the other direction. To try to measure these effects we examined how the levels of imports and exports between Canada and a given source country are related to the stock of immigrants from that country living in Canada. Of course, other factors influence trade and we attempted to control for them in the analysis. This involved accounting for the level of economic activity in different countries (GDP), the real terms of trade, and measures of the "openness" of different economies (the value of trade as a proportion of GDP). The results of the analysis indicate that there does appear to be a significant correlation of trade with immigration.8 For example, we estimate that a 10 percent increase in the stock of immigrants from a given country in the Asia-Pacific region is associated with a 3 percent increase in exports from Canada to that country. Similarly, a 10 percent increase in the stock is associated with an 8 percent increase in imports. More generally, Canada's trade with the Asia-Pacific is tilted towards those countries from which it receives a lot of immigrants. It is important to note that the interpretation of these correlations is not completely straightforward. One possibility is that immigration leads to the increase in trade through the mechanisms mentioned above. But the opposite may also be true: that is, increased trade may lead to increased immigration flows. For example, as contacts between Canada and countries in the Asia-Pacific increase through trade, potential migrants learn more about Canada and it becomes a more desirable destination. Finally, there may be some common unobserved factor at work that increases connections between Canada and the Asia-Pacific and leads to higher trade and immigration. The "globalization" of the world economy could be such a factor. It is very hard to delineate among these alternatives. We tried comparing results across Canada and the United States to try to control for factors that affect both countries simultaneously. The results of this analysis support the previous conclusions. Both Canada and the

8

The following discussion is based on the results presented in table 10 of Baker and Benjamin, 1997.

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125

United States have more trade with the Asia-Pacific countries from which they receive more immigrants. While the Canada-US comparison helps control for overall trends in the globalization of trade, and importance of immigration from Asia overall, it still remains difficult to sort out the causal relationship between immigration and trade. Nevertheless, to the extent that controlling for past trade patterns helps control for causality between trade and immigration, the results suggest that immigration is associated with stronger trade links, both in terms of imports and exports.

Asia-Pacific immigration and investment Immigrants bring knowledge of investment opportunities in their source country. They may also become a liaison for flows of foreign capital into Canada. We looked at whether immigration affects flows of investment in the same way it affects trade by taking a similar approach to our analysis of the effects on trade. We looked for a correlation between the value of Canadian (source country) investments in a given country in the Asia-Pacific (in Canada) and the stock of immigrants from that country in Canada, controlling for other factors that may affect investment flows. In this case these other factors included the level and growth of economic activity (GDP in Canada and the source country), the rate of price growth of investment goods and the change in value of Canadian companies, represented by the growth rate of the TSE stock price index. The results of this analysis do not point to a strong relationship between investment and immigration.9 The estimated correlations were not significant in a statistical sense, and varied widely with changes in the control variables. A similar conclusion held when we added the US data to the analysis. Overall, we were unable to find any relationship between aggregate foreign investment and the stocks of Asia-Pacific immigrants in Canada. As usual, we cannot conclude that there is no relationship between immigration and investment—only that there is no evidence suggesting one exists.

9 The following discussion is based on the results presented in table 12 of Baker and Benjamin, 1997.

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Michael Baker and Dwayne Benjamin

Conclusions The results of our study do not point to any overwhelming differences between Asia-Pacific immigrants and those from other regions of the world. They assimilate at the same rate as other immigrants, but (at least recently) start with a somewhat larger initial earnings deficit. We cannot find a strong relationship between their presence in Canada and the levels of foreign investment. While there does appear to be a correlation between trade and immigration from this region, it is not possible to offer an unambiguous interpretation. Finally, the flow of migrants from this region to Canada seems to be largely a function of historical and institutional factors rather than the result of economic forces at the individual level. That said, it is also clear that our analysis is but a first step in a much longer march. We also found evidence that just hints at the tremendous heterogeneity of immigrants from different parts of the Asia-Pacific region. It may be that Asia-Pacific immigration is too coarse a category; that important relationships between immigration and various types of economic activity lie hidden in the details. The release of the 1996 census should permit some of these questions to be analyzed, at least for Canada. Alternatively, the important effects of Asia-Pacific immigration on Canada may lie in other dimensions that we have not examined here.10

10

Some of these questions await the release of finer data, which will allow analysis by country of origin, or the evaluation of the effects of immigration at the city level (i.e., Vancouver, Toronto).

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References Abowd, John & Freeman, Richard (eds.). 1991. Immigration, Trade, and the Labor Market. University of Chicago Press. Baker, Michael & Benjamin, Dwayne. 1997. "Asia Pacific Immigration and the Canadian Economy." In Richard G. Harris (ed.). The Asia Pacific Region in the Global Economy. 303348. Baker, Michael & Benjamin, Dwayne. 1994. "The Performance of Immigrants in the Canadian Labor Market." Journal of Labor Economics. 12: 369-405. Bloom, David, Grenier, Gilles & Gunderson, Morley. 1995. "The Changing Labor Market Position of Canadian Immigrants." Canadian Journal of Economics. 28: 987-1005. Bloom, David & Gunderson, Morley. 1991. "An analysis of the earnings of Canadian immigrants." In John Abowd and Richard Freeman (eds.). Immigration, Trade, and the Labor Market. Borjas, George. 1985. "Assimilation, Changes in Cohort Quality, and the Earnings of Immigrants." Journal of Labor Economics. 3: 463-489. DeVoretz, Don (ed.). Diminishing Returns: The Economics of Canada's Recent Immigration Policy. Toronto: C.D. Howe Institute. Globerman, Steven. 1995. "Immigration and Trade." In Don DeVoretz (ed.). Diminishing Returns: The Economics of Canada's Recent Immigration Policy. Gould, David M. 1994. "Immigration Links to the Home Country: Empirical Implications for US Bilateral Trade Flows." The Review of Economics and Statistics. 302-316. Grant, Mary. 1997. "New Evidence on Immigrant Assimilation in Canada." Unpublished paper, University of Toronto. Green, Alan C. 1995. "A Comparison of Canadian and US Immigration Policy in the Twentieth Century." In Don DeVoretz (ed.). Diminishing Returns: The Economics of Canada's Recent Immigration Policy. Green, Alan C. 1976. Immigration and the Postwar Canadian Economy. Macmillan of Canada.

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Harris, Richard G. (ed.). 1997. The Asia Pacific Region in the Global Economy. Calgary: University of Calgary Press. Head, Keith & Ries, John. Forthcoming. "Immigration and Trade Creation: Econometric Evidence from Canada." Canadian journal of Economics.

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Immigrants as trade catalysts Keith Head, John Ries, Donald Wagner1

Canada admitted 2.1 million immigrants during the ten-year period ending in 1995, a figure equal to 7 percent of the 1996 population. These new arrivals may be expected to affect Canadian society both socially and economically. Economic analyses of the effects of immigration have traditionally focused on labour markets and social services. This paper considers another way immigrants affect the Canadian economy—it looks at their impact on international trade. Immigrants are in a unique position to facilitate trade between Canada and their countries of origin. Traders need detailed and accurate information before they can conduct business with prospective foreign partners. Exporters must find overseas sales opportunities and decide whether to adapt products to suit foreign preferences. They need to navigate through unfamiliar government regulations and distribution channels and must convince potential buyers of their reliability and product quality. The familiarity immigrants have with the products and business environment of their countries of origin may be instrumental for bridging informational gaps and increasing Canadian trade. This suggests that immigrants might expand trade, but it does not provide a way to measure the magnitude of immigration's effect on Canada's imports and exports. While there is anecdotal evidence about

1

Faculty of Commerce, University of British Columbia. The authors thank Meng Zhang for capable research assistance and SSHRC for financial support.

131

immigrants that successfully engage in foreign trade, there are other stories of immigrants who are unproductive or who only remain in Canada long enough to obtain citizenship. Immigrants are not homogeneous. Some are admitted because of their individual qualifications, others have family members in Canada, and still others seek asylum as political refugees. The overall impact of immigration and trade requires a detailed statistical analysis and should consider the trade effects of different kinds of immigrants. This paper uses data on 136 countries from 1980-1992 to estimate the relationship between trade and immigration.2 Our results may be summarized as follows: • Immigrants increase both imports and exports between Canada and the source country. • A 10 percent increase in immigrants from a country is associated with a 1.0-1.3 percent increase in exports to that country and a 3.1-3-9 percent increase in imports from that country. • Among the three primary classes of immigration—independents, family, and refugee—independents have the largest impacts and refugees the least. • The entrepreneur immigrants, a subcategory of independents, appear, surprisingly, to affect trade less than all other categories except refugees. • Immigrants from East Asia and South America exert the largest influence on trade with their countries of origin.

Immigration in Canada Immigration has been an important component of population growth in Canada and immigrants constitute an important segment of Canadian society—according to the 1991 Census, one in six residents of Canada was born in a foreign country. The annual level of immigration has fluctuated widely the past couple of decades and is influenced by both political and economic events.3 During the recession of the early 1980s, Canada's immigra-

132

2

The statistical results are based on Head and Ries (forthcoming).

3

See Green and Green (1996) for a detailed discussion of immigration policy in Canada.

Keith Head, John Ries, Donald Wagner

tion policy limited annual inflows to less than 100,000 people. In 1985, the new Conservative government instituted changes that resulted in steady increases in immigration, topping out at 255,724 in 1993. In recent years, immigration levels have been maintained at slightly more than 200,000. Figure 1 presents the levels of immigration over the last 10 years, and provides a breakdown by the regions of origin. It shows the growing importance of immigrants from Asia in the immigrant mix. The high share of Asian immigrants over the last decade greatly contrasts with the predominately European stock of immigrants in Canada. Figure 2 shows the composition of Canada's stock of immigrants—individuals living in Canada who were born in a foreign country. Europeans constitute the largest group, 62 percent of the total, with Britain (20.3 percent) and Italy (9.4 percent) being the two largest source countries of foreign born in Canada. Canadian immigrants divide into three broad categories—family, refugee and independent. Unlike the family and refugee categories, admission of independent immigrants is based primarily on their expected contribution to the Canadian economy. The independent category of immigrants can be further subdivided into the following categories—entrepreneurs, investors, self-employed persons, skilled workers and assisted relatives. Entrepreneurs, investors and selfemployed persons constitute the business immigrant category. Canadian immigration officials use a point system to evaluate prospective independent immigrants. Points are awarded for education, occupational skills, and language ability. A person can immigrate if he or she scores at least the minimum requirement for his or her category. The minimum number of points required (out of a possible 100) are as follows: entrepreneur 25; investor 25; self-employed 70; skilled worker 70; and assisted relative 65. Qualifying as an entrepreneur or an investor can be considered a 45 point bonus towards admission as an independent. The criteria to be considered as an entrepreneur or investor are as follows:

Entrepreneur • The person must have the intention and ability to make a substantial investment in a business in Canada. Immigrants as trade catalysts

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Figure 1:

Immigration to Canada by Origin

1985-1995

Figure 2:

Composition of immigrant population, 1991

• The business must make a significant contribution to the economy. • The business must create one or more jobs other than for the person and his or her dependents. • He or she must actively manage the business. Investor • The person must have had a successful business and accumulated through his or her own personal efforts a personal net worth of at least $500,000. • He or she must invest at least $250,000 or $350,000 (depending on the province) in an approved project. The project must make a significant contribution to the economy of the particular province and must contribute to the creation or continuation of jobs in Canada. (Alternatively, a person can invest $500,000 in certain guaranteed projects.) From 1979 to 1994 the family category comprised 39 percent of all immigrants to Canada, refugees comprised 18 percent, with the remaining 43 percent falling into the independent category. Figure 3 shows that the share of independents in total immigrants fluctuated over the years. This partly reflects their roles as a residual: until very recently the number of independents fell or rose as needed to achieve overall target immigration levels. The share of business immigrants in the total rose over time reaching 13 percent in 1994, with half being entrepreneurs. In recent years, a higher share of immigrants has been admitted to Canada based on their qualifications. The immigrant population in Canada is a heterogeneous group in terms of their countries of origin as well as the business skills they possess. New immigrants tend to be Asian whereas older immigrants are European. Independent immigrants are likely to have greater skills than family-class or refugee-class immigrants because they are only admitted if they meet specific criteria related to their potential to contribute to the Canadian economy. The empirical analysis that follows considers the effect all immigrants have on trade, as well as the effect of specific kinds of immigrants.

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Immigrants and international trade While trade has increased relative to GDP in the postwar era, crossborder trade flows remain much lower than the levels that would prevail in a fully integrated world economy. Manufacturers in Canada sell over 60 percent of their goods to the Canadian market even though Canada represents only 2.5 percent of world consumption of goods and services. With the dismantling of most formal barriers to international trade, one might suppose that transportation costs explain why trade largely remains within national borders. However, McCallum (1995) and Helliwell (1996) find that Canadian provinces trade twenty times as much with other provinces than with equally distant locations in the United States. This result indicates that trade crossing a national border is more costly to the parties involved than trade between equally distant trading partners in the same country. We hypothesize that informational barriers constitute a significant portion of the costs of exporting to foreign markets and that these costs may be mitigated by the immigrants. Trade involves matching sellers and buyers. This is more difficult when the parties to the transaction reside in different countries. Sellers need to learn the types of products desired by buyers. They must be knowledgeable about distribution channels and government regulations. Buyers, in turn, need to be assured of the quality and reliability of the seller. Much of this information may be obtained through market research but requires initial outlays of time and money. Moreover, prospective business partners may be unwilling to reveal sensitive information about themselves. They may try to conceal such things as financial difficulties or plans to expand into the business of their partners. In principle, assurance may be obtained through detailed contracting; however, it may be prohibitively expensive to write and enforce contracts that cover every possible contingency. Since business practices and institutions may vary significantly across countries, it is likely that the information cost associated with trade will be higher for foreign trade than trade within national borders. Furthermore, the sheer distance between domestic and foreign partners inhibits the exchange of accurate information about trading opportunities. Immigrants are likely to ease these informational barriers because of the knowledge they have about their home economies. Not only do Immigrants as trade catalysts

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Figure 3:

Business and other independent share of immigration

they understand local customs, laws, and business practices, their language skills and contacts in their previous countries of residence will serve to lower trading costs. Some immigrants might even come with business networks already established. As a result, immigrants have an advantage over most non-immigrants in conducting trade with their countries of origin. Among immigrants, independent immigrants may be best able to promote trade due to the selection process used by immigration officials which increases the probability these immigrants possess skills that may be useful for international trade. Stories of immigrants who have come and built thriving businesses are easy to find. For example, the April 1990 edition of the Globe and Mail Report on Business Magazine describes a number of such stories. One example was the experience of a Syrian immigrant who set up an importing business. The business imports high end clothing from Italy, Germany and Spain, and imports towels and bathrobes from Syria. His business then sells these goods to Canadian clothing stores and store chains. At the time of the article, this entrepreneur was also considering exporting lumber to a Syrian businessman. The Syrian businessman wanted to do his business with an ethnic Syrian. Another story describes a Swedish immigrant whose family had a furniture company in Sweden. He set up a furniture-making plant in Ontario. His company started with local sales, but has now begun to export into Eastern United States. A third story describes an individual who immigrated from the United Arab Emirates. This man represents Canadian companies conducting business in the Middle East. A fourth story describes a German who produces remanufactured wood and exports it to Japan and Europe. These examples suggest that the knowledge immigrants have of trading opportunities can be expected to increase both Canadian imports and exports. Another mechanism serves to increase imports only—immigrant tastes and preferences. Many factors affect a person's preferences, including culture and tastes previously acquired. Immigrants are likely to have a preference for goods that were available in their countries of origin. Some of those goods might not be produced in Canada, or might be slightly different from the goods available in the country of origin. As a result, we would expect the demand for imports from the immigrants' countries of origin to rise. Immigrants as trade catalysts

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Three hypotheses emerge from this analysis: • Immigrant knowledge bridges informational barriers and increases trade. • Independent immigrants are likely to have stronger effects on trade than family-class or refugee-class immigrants. • Immigrants should have a larger effect on imports than exports due to preferences for goods originating from their countries of origin. The following section tests these hypotheses using data on trade and immigration in Canada. This information in this section is based on findings from Head and Ries (forthcoming).

Statistical analysis The analytical method We analyzed Canadian bilateral trade flows with 136 countries over the period 1980 to 1992. Using regression techniques, we assessed the relationship between trade flows and immigration levels after controlling for various factors that influence trade. The econometric specification was based on the "gravity model" which is used to model international trade patterns. The gravity model obtains its name from an analogy to the gravity formula in physics in which the attractive force between two objects is proportional to the product of their masses and negatively proportional to the distance between them. In international trade, the set of exporting and importing opportunities between two countries depends on their economic "mass," measured by gross domestic product, and the cost of transporting goods between them, measured by distance between the two countries' economic centers. The gravity equation has been commonly employed in empirical studies and has generally performed very well. The simple formulation explains about three-quarters of the variation in trade volumes. Furthermore trade theorists have shown that contrary to the impression of many, the gravity equation can be given a rigorous mathematical derivation from underlying assumptions about the economic forces that drive trade. Indeed, it appears that the gravity equation is broadly consistent with 140

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both classical and modern trade theories.4 We added several variables to the basic gravity formulation: openness, adjacency, and relative prices. Countries like Hong Kong and Singapore have a high ratio of trade to GDP. This suggests that tariffs and various other barriers to trade are smaller in those countries than the barriers of other countries. Openness is measured as the ratio of total imports and exports to GDP and we used it as a proxy for trade barriers. Since the US shares a land border with Canada, the distance costs may differ from the distance costs associated with trade with other countries. As a result, a variable was included in the model to allow Canada to have a unique trading relationship with the United States. A variable was also included to adjust for relative price levels. We expected that Canada's imports would be high and its exports low for a partner country with relatively low prices. The above variables—economic size, distance and adjacency, openness, and relative prices—served as the controls in our study. We then investigated whether, other things equal, an increase in the number of immigrants in Canada from a particular country would raise bilateral trade between Canada and 136 trading partners. Our sample of trade data began in 1980 and ended in 1992. In each year we needed a measure of the population of immigrants originating from each country. The obvious candidate—the actual number of immigrants—posed two problems. First, population counts are only available in the 5-year Population Censuses and do not exist on an annual basis. Second, this measure implicitly treats all immigrants equally regardless of whether they immigrated in, say, 1950, as opposed to, say, 1980. Nonetheless, we estimated the stock of immigrants for each year using Census and arrival data and employed it in the analysis.5 We also used a second measure, the cumulated flow of immigrants from each country that arrived after 1970. Thus, the number of Hong Kong immigrants influencing trade in 1985 would be the sum of those who arrived from 1970 and 1984. This measure has its own drawbacks—it does not incorporate the roughly 3 percent of immigrants who leave Canada 4 These results are demonstrated by Deardorff (1995). 5

See the appendix of Head and Ries (forthcoming) for details.

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through death or remigration—but it focuses on the newer arrivals who may be more important for current trade.

Results for total immigration Our econometric specification posited that trade is a function of partner GDPs, distance, openness, adjacency, prices, and levels of immigration. The augmented gravity model explained approximately 90 percent of the variation in Canada's trading patterns (which countries we export to and import from). The regression results indicated that immigration has a positive effect on both imports and exports. The estimated effect was large and statistically significant regardless of which immigration variable we utilized. In the case of the variable measured as the cumulative sum of arrivals after 1970, the results suggested that a 10 percent increase in immigrants would lead to a 1.3 percent increase in exports and a 3.9 percent increase in imports.6 Using the stock measurement of immigrants, our statistical tests indicated that a 10 percent increase in immigrants would lead to a 1.0 percent increase in exports and a 3.1 percent increase in imports, a figure about 25 percent lower than the first result.7 We used the first set of regression results and trade and immigration numbers to estimate the dollar amount of trade a given number of immigrants generate. This calculation showed that the 233,000 people who immigrated to Canada in 1992 increased Canadian imports by $1.9 billion and increased Canadian exports by $0.7 billion. Thus, other things being equal, the 1992 immigrants decreased Canada's trade balance by $1.2 billion. Per immigrant, this amounted to $8,000 in imports and $3,000 in exports.

6 Standard deviations for these results are equivalent to 0.15 percent for exports and 0.26 percent for imports. These standard deviations imply that, if, in reality, immigration had nothing to do with trade levels, there would be less than 1 percent probability that we would get data that suggested so strong a relationship between immigration and trade.

7 Standard deviations are equivalent to 0.14 percent and 0.24 percent respec-

tively. Again, if immigration had nothing to do with trade levels, there would be less than 1 percent probability that we would get data that suggested so strong a relationship between immigration and trade.

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The result that the effect on imports was larger than the effect on exports appears consistent with our earlier hypothesis. Recall that we posited two avenues through which immigrants may increase trade: bridging information gaps and preferences for home goods. The latter would only affect imports and not exports thus we expected the import effect to be higher than the export effect. However, it is noteworthy that the effect on imports was almost three times as large as the effect on exports. It might indicate that immigrants find it easier to set up import businesses than export businesses. The difference in results between the two measures of immigration raises another interesting question. Why did the use of the first measure of immigration (i.e. the sum of all immigration starting in 1970) produce a stronger result than the use of the second measure (the estimated stock of immigrants)? One reason may be that newer immigrants have a stronger effect on trade than older immigrants. People who immigrated long ago may no longer have knowledge of trading opportunities or connections to their former home countries. Moreover, they may have acquired Canadian tastes and preferences over time and have reduced their demand for products from their countries of origin. A second reason may be that the criteria for immigration have evolved over time to favour applicants with skills useful for promoting international trade. Indeed, the entrepreneur and investor classes were created in 1976 and business class immigration has increased over time. A third reason relates to the changing national composition of immigration. Most people who immigrated long ago came from Europe. Most new immigrants come from Asia. Perhaps Asian immigrants are more likely to conduct trade than immigrants from other regions of the world. Next we explored whether the effect of immigration on trade varies according to immigration category and country of origin.

Immigrant heterogeneity Earlier, we hypothesized that independent immigrants expand trade more than family-class and refugee-class immigrants because independents are screened to ensure that they will be able to make an economic contribution to Canada whereas no such screening process exists for refugee and family immigrants. Within the independent category, Immigrants as trade catalysts

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entrepreneurs may promote trade the most due to their intention to start a new business in Canada. Moreover, provincial governmental guidelines encourage entrepreneurs to start export businesses.8 Recall that an entrepreneur's business must make a significant contribution to the economy. The guidelines of British Columbia, Saskatchewan, Manitoba, Ontario and New Brunswick all express preference for exporting businesses or import-replacing businesses. We tested these propositions by making use of our knowledge of the share of each category of immigrant in the overall total. We amended our specification to allow the immigrant effect to vary according to the proportion of each immigrant category in the overall total. We considered five mutually exclusive categories: family, refugee, non-business independents, entrepreneurs, other business (investor and self employed). The results of this analysis are summarized in Figure 4. As hypothesized, independent immigrants had the strongest effect on trade. If all immigrants from a country were independents and the total increased by 10 percent, then imports would increase by 4.7 percent and exports by 1.9 percent. Family-class immigrants had a lower effect on both imports and exports while refugee-class immigrants had even smaller effects with virtually no influence on exports. These results conform to the reasoning outlined previously. Independents have the largest effects on trade due to their relatively high level of skills and knowledge whereas refugees should have small effects since they likely have severed ties with their countries of origin. The results for entrepreneur immigrants, however, appear puzzling. Even though this group has a high level of business skills, they were estimated to have substantially smaller effects than all the other categories except refugees. It should be noted that the estimates for entrepreneurs were measured with a great deal of imprecision. While the estimated effects for entrepreneurs were significantly smaller than

8 The federal government has full authority over the admission of immigrants. Nevertheless, the provincial governments provide guidelines and participate in the review of some entrepreneur immigrant applications.

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Figure 4:

Immigrant heterogeneity: Classes of immigration

those for independents, they were not significantly different from those of family-class immigrants.9 Other business (investors and self employed) immigrants also had smaller effects that were imprecisely estimated. One possible explanation for the entrepreneur category's low estimated trade effects is that entrepreneurs only need to score 25 points in the rating system. As a result, admissions in the entrepreneur category might include individuals who do not meet many of the criteria that other independent immigrants meet. For example, they might have very limited ability to speak English or French. A further explanation of the small relationships associated with the entrepreneur category is that immigrant entrepreneurs do not necessarily trade primarily with their countries of origin. This argument certainly appears to follow from the anecdotes described above. Entrepreneur immigrants may start export-oriented businesses that target other markets. For example, new high technology industries might export primarily into the most developed markets, and not the immigrants' countries of origin. However, opportunities to trade with other countries are open to immigrants and non-immigrants alike. The difference in opportunities between immigrants and non-immigrants lies in trade with the immigrants' countries of origin. Thus, one would still expect that if immigrant entrepreneurs are successful exporters in Canada, they should be exporting more to their countries of origin. Another potential explanation for entrepreneurs' relatively small effect on imports may be because import businesses are not deemed to make a contribution to Canada. British Columbia's guidelines describe

9 Statistical significance depends on the estimated differences in the elasticities (the immigration effect on trade) and their associated standard errors. The elasticity for the family category was 0.113 with a standard deviation of 0.016. The coefficient for the refugee category relative to the family category, was -0.081, with a standard deviation of 0.016. The coefficient for the independent category (relative to the family category) was 0.073 with a standard deviation of 0.020. The coefficient for the entrepreneur category (relative to the family category) was -0.075 with a standard deviation of 0.073. Finally, the coefficient for the other business category (relative to the family category) was -0.063 with a standard deviation of 0.047.

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importing businesses as "unacceptable." Immigrants are also encouraged to start businesses that produce goods that substitute for imports. However, we hesitate to conclude that this policy was responsible for entrepreneurs' low effect on imports. After all, these same guidelines encourage entrepreneurs to set up export businesses but our evidence indicates these efforts generally failed. The relatively small effect on trade for the category we term "other business class" was not surprising. These immigrants are admitted for their capital (investors) or as artists (self employed) and do not necessarily bring trade knowledge or connections to Canada. Thus far, we had assumed immigrants have equivalent effects on trade regardless of their countries of origin. In the ensuing analysis, we relaxed this assumption and examined the impact of immigrants from different regions on imports and exports. We considered ten regions: Oceania, East Asia, South Asia, Western Europe, Eastern Europe, North America, Central America, South America, the Middle East and Africa. We amended the statistical analysis to allow immigrants from each region to have separate effects on trade. Aside from the inherent interest in seeing if trade effects differ by region, we also hoped to shed additional light on two of our previous results. First, we found that newer immigrants had larger effects than older immigrants. As shown previously, in recent years the composition of immigrants has shifted towards Asia. Our result that newer immigrants had a larger impact on trade than older immigrants may have arisen because Asian immigrants are most likely to generate trade with their home countries. Another surprising result was the low trade effect for business-class immigrants. It turns out that many of the countries that produce the highest proportion of business immigrants were Middle Eastern countries. Four out of the top five countries are Qatar, United Arab Emirates, Kuwait and Saudi Arabia (Taiwan is the fifth). It is possible that entrepreneurs from the oil-rich countries do not affect trade much with their home countries, and are thus driving down the results for the entrepreneur and other business categories. Figure 5 reports estimated import and export effects of independent-class immigrants for our different regions that result from this specification of our model. It reveals that immigrants from East Asia and South America generated the most trade from their countries of Immigrants as trade catalysts

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Figure 5:

Immigrant heterogeneity: Countries of origin

origin.10 We estimate that a 10 percent increase in East Asian and South American independent immigrants increased exports by 2.9 percent and 3.6 percent and imports by 7.4 percent and 6.6 percent. The estimated effects for South Asia and Western Europe were much smaller. A reason why recent immigrants showed a stronger correlation with trade appears to be that East Asian immigrants trade more than other immigrants. However, even in this new specification that controlled for country of origin, we continued to find entrepreneurs had smaller trade effects than other independent and family class immigrants.

Conclusion The government of Jean Chretien has led three high-publicity trade missions to nations in Asia and Latin America. The stated purpose of these Team Canada activities is to create jobs by expanding exports to non-traditional markets. Implicit in this is the assumption that export opportunities will not be exploited automatically. Would-be sellers and buyers need to be connected by third parties who act as catalysts in the trading relationship. Our research has uncovered statistical evidence that many foreign countries are sending de facto trade missions to Canada on a daily basis. With little fanfare, immigrants arrive in Canada and then often create trade linkages between their new home and their country of origin. On average, an immigrant will generate about $8,000 of additional imports into Canada and $3,000 of exports. Our results are consistent with the idea that immigrants have information and contacts that facilitate international transactions. The fact that the import effect is higher than the export effect suggests that immigrant tastes and preferences for products available in their countries of origin also affect Canada's trade. The stronger immigration

10

The figure does not display the impact of North American immigrants. The estimated effect is 9 percent but the standard error is so large that it is not statistically significant.

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effects for countries that send a large proportion of high-skill (as evaluated by the point system) immigrants suggests that education and linguistic ability contribute to the trade creation process. Do our results provide an argument for expanding immigration? Additional trade typically makes a country better off, since it can specialize in the production of goods, and since consumers get more choice in what they buy. It may well be that imperfect information and inadequate networks cause Canadian exporters to miss out on export opportunities to emerging markets and overemphasize the internal and US markets. Similarly, foreign producers might be able to offer many valuable products to the Canadian market. Viewed in this light, immigration seems quite valuable. On the other hand, our results suggest that, in the latest year available, immigrants generated a decrease in the trade balance of about $1.2 billion. A large deterioration in the trade balance could cause currency depreciation and push down real incomes in Canada. A complete assessment of the effect of immigration on Canadian economic welfare must consider labour markets, capital markets, and social services. Our results indicate that immigrant effects on trade should be included in an evaluation of Canadian immigration policy.

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References Deardorff, Alan. 1995. "Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?" National Bureau of Economic Research (NBER) Working Paper 5377. Green, Alan and David Green. 1996. "The Economic Goals of Canada's Immigration Policy, Past and Present." Research on Immigration and Integration in the Metropolis Working Paper Series No: 96-04. Head, Keith and John Ries. Forthcoming. "Immigration and Trade Creation: Econometric Evidence from Canada." Canadian Journal of Economics. Helliwell, John. 1996. "Do National Borders Matter For Quebec's Trade?" Canadian Journal of Economics XXIX. No. 3, August, 507-522. McCallum, John. 1995. "National Borders Matter: Canada-U.S. Regional Trade Patterns." American Economic Review. 85:615623, June.

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International human resource linkages and economic growth: An Afterword A.E. Safarian

This volume has looked at how human resource linkages across the Pacific interact with trade, investment and economic growth. In particular, it has explored how these linkages are developed by immigration and by different forms of organization and management. This paper examines more fully how investments in human capital contribute to growth, and then looks at some international human resource linkages that have not already been discussed. Economic growth results from the accumulation of labour and capital, which are increasing in quality and variety through skills development and technical change. This is driven by a set of incentives that depend on the private and public institutions of a society. The remarkable economic growth of a number of Asian economies has been attributed, for example, to high rates of accumulation of physical and human capital, and to market-oriented government policies, good macroeconomic management, and government interventions to promote exports and growth (World Bank, 1993). The first section of this paper focuses on how human capital (schooling and skills development) and social capital (the conventions and norms within which individuals and organizations operate) contribute to growth. Both human and social capital accumulate and operate in different ways in different societies, a point that those hoping to deal successfully with particular societies need to recognize. The diversity of experience in the Asian region, and the difficulty of 153

pinning down what is meant by social capital, suggest that care needs to be exercised when comparing "Asian" and "western" experience and values.

Human capital and growth Two of the papers in this volume—Head, Ries and Wagner; Baker and Benjamin—have noted the relationship between immigration and various aspects of growth. The broader issue is how far growth is driven by formal education and training, as well as by formal and informal on-the-job learning.

Formal education One frequently sees data showing higher educational scores (even at similar income levels) for most East Asian countries. Standardized tests on mathematics and sciences, for example, show young students in South Korea, Singapore and Japan scoring among the top three or four of 41 developing and developed countries, Hong Kong in fourth position in mathematics, while students in Thailand were close to the international average in both cases (Economist, 1997). It is important to add that public expenditure on education in East Asia as a percentage of GNP has not been rising in recent decades.1 What is distinctive about East Asia is the higher percentage of public spending at the primary and secondary levels compared with other regions. The World Bank report (1993) notes that the fuller provision of such basic education reflected higher income growth, more equal distribution of income, and slower growth of the school-age population than was the case elsewhere. One result is that adult illiteracy rates have plunged throughout East Asia.2

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1

The data for 1970 and 1992 were 8.5 percent and 7.6 percent for Canada, 1.3 and 2.0 for China, 2.8 and 2.2 for Indonesia, 4.1 and 4.7 for Japan, 4.3 and 4.4 for South Korea, 4.8 and 5.5 for Malaysia, 2.2 and 2.3 for the Philippines, and 3.5 and 4.0 for Thailand, according to various issues of the UNESCO Statistical Yearbook.

2

For example between 1959-60 and 1995 illiteracy for those 15 years and older as a percent of the total population in that age group fell from 30 to 8 in Hong Kong, 61 to 16 in Indonesia, 29 to 2 in South Korea, 78 to 17 in Malaysia, 28 to 5 in the Philippines, 50 to 9 in Singapore and 32 to 6 in Thailand. See various issues of the UNESCO Statistical Yearbook.

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Perhaps the most inclusive set of data are those prepared by Barro and Lee (1996), who examine the extent to which the population 15 years or older has partly or fully completed primary, secondary or tertiary education over the period I960 to 1990. The levels of completion for East Asia and the Pacific are consistently higher than those for developing countries more generally. This is also true for average years of schooling of females compared with males, a ratio that rose very rapidly in East Asia. Barro and Lee also give various measures of the quality of school inputs, measures which yield a more mixed picture of the relative attainments of East Asian education. The Barro and Lee data contain a warning about the relationship of growth to education. The former centrally planned economies have had very strong growth in educational attainments at both secondary and tertiary levels coupled with poor performance in the quality of growth and, more recently, in quantity as well. James Brander (1992) has put the point well. Comparisons of schooling in relation to growth are subject to several important qualifications. First, higher education levels may be either the cause or the consequence of growth. Second, higher education and growth may both result from some common underlying factor or factors, such as technological change. Third, much may depend on whether fiscal and social incentives encourage talented or educated people to generate wealth rather than to pursue rent-seeking or redistributive activities. Other writers have noted that what is being taught—the accumulation of knowledge—and not merely length of schooling, is what is central to growth. Improvements in knowledge, whether embodied in human or physical or social capital, are the key to growth.3 3This point seems to be central to the debate over whether the rapid growth of East Asian economies is driven mainly by increased inputs of labour and capital as argued by Young (1994) and Krugman (1994), rather than improvements in productivity. Others would argue such inputs include increased knowledge, or that the productivity side (and related organizational characteristics) may be driving the increases and improvements in raw inputs.

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Learning by doing The other candidate for a link between human capital accumulation and growth is training on the job, which spills over into learning by doing. Arrow (1962) observed that learning is a product of experience, that it takes place as a problem is solved. He went on to show that such a process was subject to sharply diminishing returns if the same problem is solved more than once. Lucas (1993), among others, has noted that the growth process involves the introduction of new and more advanced products and processes and improvements, with a continuing cycle of learning by doing. It is difficult to measure learning of this kind in an overall sense, yet examples exist that have had major effects across industries. The spread of knowledge in Japanese multinational firms is a case in point, as noted in the section below on the adaptation of business systems. Another point to note is that a competitive setting, which involves the introduction of new products and methodologies, is conducive to the learning process. Numerous studies, including the World Bank Report on East Asia, note that the openness of the economy has been a powerful stimulus to learning renewal, whether the learning occurs through trade, investment, technology flows or in other ways. Despite some qualifications, openness has been increasingly true of most of the East Asian economies and those with more openness appear to have fared better (Helliwell, 1996; Edwards, 1997). The link to schooling and experience should be noted. Absorption and adaptation of knowledge from abroad is by no means easy. A skilled population is more likely to absorb this knowledge successfully.

Differences in organization and management Another strand of research has asked how far the successful introduction of new products and processes depends on the quality of the institutions of society, and how these institutions differ by country. Volume two in this series examined one aspect of this in terms of similarities and differences of Asian business systems. Two of the papers in this volume explore this topic further. Mitchell and Hammer concentrate on ethnic Chinese networks. Westwood deals with East Asian culture and business organizations more broadly. It may be noted that Westwood's conclusions are similar to those we reached in the second 156

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volume of this series: despite the diversity of cultures and business systems in East Asia, there are enough common characteristics to give western business people a framework within which to operate. The Mitchell-Hammer and Westwood papers set out in some detail the organizational and management differences between East Asia and the west, and relate these to underlying cultural differences. The following comments relate these studies to economic growth. There is a wide-ranging debate about whether cultural differences are being affected by forces like internationalization and industrial modernization, and how important the cultural factor is in comparison with the influence of government and of economic forces. The debate is plagued by differences in definition, measurement and deciding whether culture is cause or effect. A recent survey of the issues in the Economist (1996) concluded that culture will continue to have an important influence on individuals and countries, but that it has not become more important than government or the economic force of globalization and that its influence is declining under the pressure of the other two. A survey article of Silicon Valley in the Economist (1997) concluded that "culture, irritatingly vague though it may sound, is more important to Silicon Valley's success than economic or technological factors". The second sense of the term used here, namely the organization and management of the firm or industry, is much narrower than the first which refers to a broader set of values. In most of what follows we will be dealing with culture in the second sense. Helliwell (1996) has explored whether institutional differences have a measurable effect on economic growth. He uses particularly a study by Mauro (1995) who developed an index of bureaucratic efficiency for 68 countries. The index reflects the efficiency of the judicial system, the absence of red tape, and the absence of corruption. Helliwell finds that the countries as a whole, and also the 13 Asian countries which are included, develop more efficient institutions as per capita GDP rises. However, institutional quality as such does not appear to affect subsequent economic growth. This contrasts with the findings of Helliwell and Putnam (1995) on Italy, showing regional growth is higher where the quality of regional government institutions is higher. Helliwell notes that a study by Inglehart (1994) does find a relationship between growth and those societies where children International human resource linkages and economic growth: An Afterword

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are taught values oriented to achievement. However, Helliwell's attempt to relate growth to various measures of social capital does not show a positive relationship for a sub-set of 17 OECD countries which have better data.4 The inconclusive note of Helliwell's survey and extensions is not atypical of this literature. Much work remains to be done before we can accurately measure just how much of the differences between the overall growth rates of various countries reflects the differences in business organization and social capital, however plausible it may seem at the level of individual firms, regions or countries to expect that such differences matter. Conceptualization and measurement are difficult, but a number of other suggestive results can be cited. We noted earlier the observation by Brander (1992) that growth may be related to the incentives for talented or educated people to generate wealth rather than to pursue rent-seeking or redistributive activities. On the assumption that much activity by lawyers is rent-seeking while much activity by engineers has entrepreneurial or technological effects, Murphy et al (1991) find a significantly higher growth rate for economies with higher college enrollments of engineering students than those with higher enrollments of law students. This study drew on two samples for 91 and 55 countries and allowed for the interaction of the measures with various other determinants of growth. The negative relation between rentseeking and growth has been examined by other scholars, such as Olson (1982) and Baumol (1990). The link between these studies and two of the papers in this volume is evident to the extent that trustbased relationships rely less on formal contract and legal enforcement. Finally, it may be noted that testing of 62 variables which have been used to explain growth for many countries showed that 22 of them are highly significant statistically. Fully half of the 22 reflect a variety of political and religious variables (Sala-i-Martin, 1997).

4It is important to note here, as Westwood brings out, that achievement motivation in Western societies is oriented to the individual, while in Asian societies it is more likely to be socially (or family) oriented.

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International linkages of learning and economic growth Schooling and skills development offer too narrow a view of a society's ability to develop, absorb and transfer technology in the processes of wealth creation. Similarly, the international human resource links between societies go well beyond those of immigration and management organization which have been examined intensively in this volume. In this section we sketch more broadly the various kinds of links and their characteristics. There is a rich web of private interrelationships throughout the Pacific in the form of international trade, direct investment, cooperative forms of organization, migration and education abroad, and a host of shorter-term and less formal contacts. While the United States and Japan often dominate these linkages, they are in fact substantial for other countries. Ethnic Chinese dominance of direct investment in China is one well-known example. Another is the important technical role of Malaysian-based engineers, often educated in Singapore, in Japanese-owned electronics firms in Indonesia (Harianto and Safarian, 1997). The following discussion makes two main points: • Commercial implementation of knowledge is central to economic growth, and this knowledge, embodied in human capital, spills over internationally in a variety of channels. • These channels offer important choices and challenges to businesses operating in the region, not least in the degree to which organization and management that have been developed in one context can be adapted to another. International trade Trade, technology, training and transfer of people are closely linked. The link is most obvious when, for example, machinery is imported that embodies knowledge developed abroad and technical personnel are brought into a country to help with installation, operational problems, and training. This can be a demanding and drawn-out process. Von Hippel and Tyre (1993), have noted 27 problems that affected two novel process machines in their first years of use in production, and numerous studies attest to the additional costs of transferring this International human resource linkages and economic growth: An Afterword

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knowledge to affiliated firms abroad, much less to non-affiliates (for example, Teece 1977). The huge trade in components also embodies knowledge, as does, more evidently, the construction, installation and training involved in turnkey projects. Nor should one restrict knowledge transfers to capital goods. Learning of many kinds occurs in the trade in consumer goods, not only through the influence on tastes and through imitation of products or actual reverse engineering, but in marketing and financing problems encountered in different societies. One attempt to measure the effects on growth internationally is reflected in Coe and Helpman (1995) and Coe, Helpman and Hoffmaister (1997). The basic (and limiting) assumptions are that knowledge is embodied in R & D stocks in the developed countries, and that this knowledge spreads internationally through foreign trade. The measured effects on total factor productivity of both developed and especially developing countries are substantial. Indeed, for most developing countries and for smaller developed countries, international spillovers have a larger effect on total factor productivity than do their own research stocks. Hejazi and Safarian (1996) have used the Coe and Helpman study to show that one part of these spillovers is through foreign direct investment, which is discussed in the next section. The first volume in this series dealt at length with the Canadian presence in Southeast Asia through trade and foreign direct investment. Information about Canadian sales of business services in the region has recently become available (Schembri, based on special tabulations by Statistics Canada, 1997). Canadian exports of business services to all countries, including Southeast Asia, grew by 9-7 percent per year in 1985-93, compared to 6.1 percent for merchandise exports.5 By 1993 exports of business services to all countries totalled

5The term business services includes consulting, management and administration, R & D, royalties, films and broadcasting, advertising, insurance and other financial commissions, computer, communications and other business. Details on these for Canada are given by Schembri (1997) for Japan, ASEAN, and for Hong Kong, South Korea and Taiwan combined. Information on China is sparse.

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$11 billion or about 8 percent of the size of merchandise exports. Schembri details the growth of the Asia Pacific market for these services and concludes that, particularly if Japan is excluded, it is the fastest growing market in the world for imports of both business and education services. Canadian business service exports to that region rose by 14.6 percent per year in 1990-93, from $539 million to $811 million. Excluding Japan, which accounted for $284 million in 1993, the growth rate was 24.7 percent. Except for Japan, these increases in service exports are largely to non-affiliated firms. They are, in effect, largely in the form of new contracts on a project basis rather than transactions with subsidiaries or joint ventures of Canadian firms in the region (Schembri, 1997, Table 7). Foreign direct investment Firms choose foreign direct investment primarily because it is a more effective way of developing, using and transferring certain types of knowledge than is either trade or the cooperative forms noted below. By effective we mean profitable from the firm's viewpoint, as well as socially effective, particularly for newer or more complex forms of knowledge. Multinational enterprises have become so dominant that much of the world's trade takes place within them and most of the cooperative forms of technology transfer have these enterprises as one or all of the partners. In the APEC countries the share of foreign direct investment flows in domestic capital formation more than doubled during the 1980s. In the early 1990s China became the second largest recipient of these flows, next only to the United States. The large inward direct investment stock, about half from within the region, has led to substantial growth and restructuring of APEC economies. One example is the repeated pattern by Japanese firms of locating production abroad for goods in which they are no longer competitive, only to have the recipient countries in turn relocate production abroad as their costs rise. Another example is the close relation between increased direct investment and increased trade for many sectors of industry. Direct investment in the Asian region has been analyzed extensively (for example, Ramstetter, 1991; Ahmad et al, 1996). Here we International human resource linkages and economic growth: An Afterword

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note briefly two of the key trends on technology transfer.6 First, about three-quarters of the world's civilian R & D is performed by multinational firms (Dunning, 1993). While this R & D has been concentrated in parent firms, recent trends point to increased dispersion among affiliates. Second, technological and other kinds of alliances with otherwise unrelated firms have also increased very rapidly. Modern information technology in particular now permits co-ordination of both production and R & D activities with affiliates and with non-related parties located in many centres. Component production and assembly, marketing activities, and, more selectively, accounting, procurement and, increasingly technical and R & D capacities, are being located in a growing number of Asian centres. City centres as different as Singapore, Bangalore and Penang (Malaysia) exhibit such trends (United Nations, 1995). While our understanding of the ways knowledge is transmitted to other countries has expanded, we continue to have a limited understanding of what is being transmitted. For example, Canada now has a large stock of business investment abroad. We know from several studies that the Canadian firms involved, unlike parent firms in many other countries, are not especially research intensive, on the whole. What, then, are the firm-specific advantages that allow them to operate successfully abroad? They could be marketing advantages, training programs, on-the-job learning, special resource or patent advantages and a variety of strategic capabilities including dealing with governments effectively. We simply do not know very much about the content of knowledge transfers in such firms, both in terms of explicit or coded knowledge and especially implicit knowledge. Cooperative forms A great deal of technology transfer between countries is through cooperative forms of organization, such as joint ventures, sub-contracting, research consortia and licensing. Many governments in Asia prefer cooperative forms rather than direct investment, and many investors favour them also, partly to minimize the substantial learning costs in 6

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See United Nations 1995, 148-68 for fuller comment. A.E. Safarian

the diverse Asian setting. Two of the papers in this volume deal with cooperative forms in the Asian context. The spread of cooperative forms of enterprise is due to many factors. In the case of technology alliances, for example, the risks involved in expensive R & D projects are reduced for each partner, and the specialized skills of the partners can be brought to bear on a problem. Joint production or marketing agreements may carry other types of advantages. The spread of cooperative forms is probably associated with the development of network forms of multinational operation, as distinct from the earlier "stand-alone" operations. What one sees in network organizations compared with earlier approaches is greater specialization and integration of international operations both within multinational firms and with independent parties. Liberalization of trade and investment regulation has contributed to the development of these networks, as has the easier co-ordination associated with substantially reduced transport and information costs. "Alliance capitalism" has been widely studied in the past decade, particularly in the developed countries. The experience of Asian countries has received far less attention, perhaps in part because the emphasis has been on technological alliances which appear to be more common among the developed countries, but also because of difficulty in measuring the less formal alliances which are common in Asia (Safarian, 1997). These problems are being overcome, thanks in part to the publication of three volumes on cooperative strategies from the perspective of North America, Europe and the Asian Pacific area, edited by Paul Beamish and Peter Killing (1997). A number of the articles in all three volumes point to the ways in which market performance in cooperative forms of business, regardless of the geographic locale, depends on the development of trust and informal monitoring systems. For example, Li and Shenkar (1997) point out that careful attention must be paid to the sometimes differing strategic objectives of local partners and of multinational enterprises if a joint venture is to minimize conflicts that could threaten its performance. They go on to make their point with a sample of 90 Chinese manufacturing companies. Makino and Delios (1997) examine the experience of 558 Japanese joint ventures in Asia in overcoming their lack of local International human resource linkages and economic growth: An Afterword

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knowledge through partnership with local firms, the joint venture's experience in the host country, and the foreign parent's experience in the host country. The need for the first of these declines, for example, as the third increases. Yeung (1997) uses three case studies of Hong Kong-based multinationals in Southeast Asia to explore cooperative strategies that yield competitive advantage. The strategies he describes include intra-firm internalization of entrepreneurship based on regional ties, inter-firm collaboration based on personal friendships, and extra-firm cooperation based on political patronage.

Migration and education abroad Two of the papers in this volume consider the impact of immigration. Formal education involving colleges and universities abroad is still another major way in which knowledge is transferred between countries. The increased demand for skills as rapid development occurs can create large demands for the export of education services from countries with well-established colleges and universities. This can occur in several ways—education of students who live abroad, collaborative programs between foreign and domestic educational institutions to educate students at home, "correspondence courses" which may now be delivered by a variety of technologies, and so on. We do know something about the enrollment of students from the Asia Pacific region in two sets of Canadian programs, those for colleges and trades and those for university undergraduate programs.7 Over the years 1975-92 enrollment in these programs has increased at an annual rate of 7 percent (10 percent for the former group and 5 percent for the latter). By 1992-93 there were 23,000 of these students in Canada, about 12,500 of whom were in college and trade programs. This represented 30 percent of the enrollment of all foreign students in such programs in Canada. It has been estimated that students from the Asia Pacific region spent over $200 million in Canada. By the early 1990s,

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What follows is based on Schembri (1997). The numbers below refer to nonCanadians who have received permission from the Canadian government to study in Canada. They do not include non-Canadian students who have the status of permanent resident.

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students from Hong Kong were about 60 percent of the total undergraduate enrollment from the region while those from Singapore and Malaysia were about one quarter. Students from Japan and the Philippines together accounted for about half of those from the region who were in college and trade programs, while about 20 percent were from Hong Kong. An additional 4,600 post-graduate students from the Asia Pacific region were registered in 1992, 2,519 of whom were from China. Research on this topic appears to be quite limited. There is little analytical work, for example, on calculation of rates of return to education abroad. Nor is there comprehensive information and analysis of public sector and private sector programs of training or of collaborative programs between Canadian universities and organizations abroad. Examples of efforts include establishing a patent office in Thailand and training of patent examiners both for that country and for China. Initiatives like these, which reflected efforts by Canadian federal government agencies, assisted by private sector participants, can have a significant impact on trade and investment when multiplied over many programs. Other mechanisms to spread knowledge There is obviously a long list of shorter-term or less formal mechanisms by which knowledge is spread, including trade and technical conferences, subscriptions to technical journals, sales of technical books, access to websites, and so on. Unfortunately, little of a systematic nature is known about the overall volume of these exchanges, much less of their economic impact. This is one of several areas that might well be worth systematic study. Another would be a case study of how formal education in Canada affects East Asian linkages over time, perhaps for one or several universities in depth.

The adaptation of business systems Two issues arising directly from this survey of international linkages pose a challenge to Canadian businesses in the Pacific. One is the particular mode of entry and operation, the other is the related but broader issue of how much business organization and management must be adapted to the circumstances of each country. International human resource linkages and economic growth: An Afterword

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The first issue, the mode of entry and operation, has been studied widely (for example, Dunning, 1993). The first three types of international linkages described above—trade, direct investment, and various cooperative forms—each offer significant choices and challenges, which partly depend, of course, on local conditions in each country, particularly laws and regulations regarding foreign access to the market and the ability of local firms and other institutions to absorb imported technologies. That being said, trade does offer opportunities to develop a market involving some learning and collaboration with local business but it is also limited in time and in the degree of interdependence between the parties to the exchange. Cooperative forms involve the challenge of working with individuals and organizations that take different approaches to business relations, as this and the preceding volume develop, but which also offer deeper and longer-term commitments than may be possible through trade alone. Direct investment goes a stage further; it may well be necessary to adapt to local circumstances, but both explicit knowledge such as manuals and especially non-coded knowledge can often be applied more directly through the firm's own routines rather than through trade or cooperative forms. Both cooperative forms and direct investment may involve substantial continuing learning opportunities. The second issue—how far business organization and management must be adapted to the circumstances of each country—is more complex. Canadian marketing organizations in most cases have had serious problems when penetrating a market as close and apparently as familiar as the United States (O'Grady and Lane, 1996). Penetration of more "distant" markets, in both the geographic and cultural senses, presumably raises even larger challenges. The key issue then is how far "western" organization and management systems must be modified in the context of "eastern" settings. The quotation marks are necessary, among other reasons, because national and even intra-national business systems vary in both the west and east, as volume II brought out in detail. Nevertheless, a substantial body of work points to some stylized cultural and value similarities among groups of nations, with many implications for managers of international firms. We concentrate here, therefore, on the question of transfer and adaptation of organization and management systems. 166

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An example might help bring out the challenge businesses face when they try to adapt to local environments (Steers et al, 1990). A South Korean and American team interviewed 100 executives, scholars and government officials and searched archival and published material, in an effort to compare Korean, Japanese and U.S. work environments. The work environments were very similar in Korea and Japan. Both had a work ethic classified as high (moderate to low in the United States), a focus of achievement on the group (more on the individual in the United States), a social contract designed to preserve harmony (ensure justice), career success based on seniority (individual performance), relationships with subordinates which were paternalistic (as distinct from bureaucratic), business interactions based on personal relationships (as against legal contract), and a subordinate role for women (as against an "equal" one, at least in principle). These contrasts are overdrawn, of course. There is likely to be a gradation of differences and overlap by firms in many cases. Yet these or similar differences have come out of a number of studies, as Westwood explains. One cannot infer from these studies just how far they reflect longstanding cultural differences. They may be due in part to particular historic circumstances, and they are capable of change. South Korea, after all, borrowed Japanese production and management methods. Japan borrowed many U.S. methods, with important adaptations, after World War II, and the United States and others have since borrowed and adapted Japanese methods. Underlying these differences in work environments are organizational and managerial practices designed to improve the competitiveness of the firms. These practices involve a wide range of production arrangements, human resource relationships, and supplier and customer relations.8 In earlier decades of this century a particular set of organizational and managerial practices known as mass production gave U.S.-based firms substantial advantages over those elsewhere. In more recent decades a set of organizational and managerial practices

8

These are described in detail, and their effects on competitiveness noted, in United Nations (1995), chapter 3.

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known as lean production has given Japanese-based firms similar advantages. Just-in-time delivery of components, quality-control circles, and a multi-skilled workforce are some of the production practices in use, while a high degree of autonomy at lower levels of the organization, job rotation, long-term employment and team work are some of the labour-relations aspects. A set of "best-practice" systems has been developing in recent years (for example, flexible automated technologies) based in part on a response to and adaptation of Japanese methods. These organizational and managerial practices spread in various ways. Sometimes they spill over from firms, as with the movement of personnel to unrelated firms. A dominant form of transfer is within multinational firms, both to subsidiaries and to other members of the firm's network, such as a joint venture operator or a production subcontractor. Another important mechanism is imitation by other firms of the successful innovations of their competitors. Just how much adaptation of organization and management practices actually occurs as firms go abroad can be shown by examining Japanese direct investment. Lean production was introduced into Japan in part because the market was then believed to be too small for the mass production techniques of foreign firms, but also to avoid what were seen as confrontational and inefficient labour and supplier practices abroad.9 The results were higher levels of training hours, employee suggestions and team work (and lower rate of absenteeism) in Japanese lean producers. This was evident in Japanese automobile firms both in Japan and in North America, compared with their American and European mass producers. The organizational and managerial learning involved, in other words, was at least partly transferable abroad (Womack, Jones and Roos, 1990). Similar conclusions on

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The widely-noted version is that Toyota modified U.S. practices or adapted earlier Japanese practices so as to meet these challenges, hence "Toyotism" as against "Fordism". The actual situation was more complicated. Some of the labour relations practices now widely admired were linked earlier with negative aspects of Japanese management (Yamashita, 1991, 124).

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transfer were reached for a broader set of industries—machinery, electronics and auto parts—in a carefully analyzed sample of 40 Japanese and U.S. plants (Nakamura et al, 1996). Not all organizational and managerial practices are equally transferable, however. Studies of Japanese direct investment in four ASEAN countries and Western Europe show that practices like career development, on-the-job training, quality control circles, regular shift meetings and company uniforms have a much better chance of being adaptable abroad than do company unions, seniority wage systems or lifetime employment (Yamashita, 1991, 15; United Nations, 1995, 177 based on studies by JETRO). Something of a hybrid style of management is more likely to emerge, rather than simple transfer of existing styles. This is even more likely to be the case where adaptation to local circumstances involves an understanding of more than one culture and set of management practices, as in Malaysia. Mitchell and Hammer's article in this volume suggests that ethnic Chinese networks can also change as they adapt to different sectors, scales of activity and markets, and that they are able to cooperate with those outside the network. Westwood points to significant current differences between East Asian and western organization and management, while pointing also to differences within East Asia. Cultural differences are at least part of the explanation for these differences. More broadly, whether organization and management will converge with internationalization is less clear; Westwood sees pressures for convergence but also for the reverse. The key point for business people and others who deal with East Asians is to keep in mind that culturallyinfluenced differences in organization and management do exist in the organization and leadership of the firm, motivation of the people in it or dealing with it, communication and conflict resolution. Westwood has noted how these can affect western businesses dealing with East Asians. Our review of Japanese experience abroad suggests the adaptations go in both directions.

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References Ahmad, Ashfaq, Someshwar Rao and Colleen Barnes. 1996. Foreign Direct Investment and APEC Economic Integration. Ottawa: Industry Canada, Working Paper 8. Arrow, Kenneth. 1962. "The Economic Implications of Learning by Doing." Review of Economic Studies. 155-173. Barro, Robert J. & Lee, Jong Wha. 1996. "International Measures of Schooling Years and Schooling Quality." American Economic Association Papers and Proceedings. 218-23. Baumol, William. 1990. Entrepreneurship, Management and the Structure of Payoffs. Cambridge, Massachusetts: The MIT Press. Beamish, P.W. & Killing, J.P. (eds.). 1997. Cooperative Strategies: North American Perspectives; Cooperative Strategies: European Perspectives; Cooperative Strategies: Asian Pacific Perspectives. San Francisco:

The New Lexington Press. Brander, James. 1992. "Comparative Economic Growth: Evidence and Interpretation." Canadian Journal of Economics. 25, 4, 792-818. Buckley, PJ. & Muchielli, J.-L. (eds.). 1997. Multinational Firms and International Location. Cheltenham, U.K.: Edward Elgar Publishing. Coe, David & Helpman, Elhanan. 1995. "International R & D Spillovers." European Economic Review. 39, 859-887. Coe, D.T., Helpman, E. & Hoffmaister, A.W. 1997. "North-South R & D. Spillovers." Economic Journal. 107, 440, 134-149. Dunning, John H. 1993. Multinational Enterprises and the Global Economy. Wokingham, England: Addison-Wesley Publishing. Economist, The. 1997. "A Survey of Silicon Valley." March 29. 1-20 and "World Education League." March 29. 21-23. Economist, The. 1996. "Cultural Explanations." November 9. 23-26. Edwards, Sebastian. 1997. "Openness, Productivity and Growth: What Do We Really Know?" Cambridge, MA: NBER Working Paper 5978. Harianto F. & Safarian, A. E. 1997. "MNEs and Technology Diffusion: A Southeast Asian Experience." In PJ. Buckley and J.-L. Muchielli (eds.) Multinational Firms and International Location. 170

Harris, Richard G. 1996. The Asia Pacific Region in the Global Economy. Calgary, Alberta: University of Calgary Press. Hejazi, Walid & Safarian, A. E. 1996. "Trade, Investment and United States R & D Spillovers." Canadian Institute for Advanced Research, Economic Growth and Policy Program, Working Paper 65. Helliwell, John F. 1996. "Economic Growth and Social Capital in Asia." In Harris, The Asia Pacific Region in the Global Economy. Helliwell, John F. and Robert D. Putnam. 1995. "Social Capital and Economic Growth in Italy." Eastern Economic Journal. 21, 3, 295-307. Inglehart, R. 1994. "The Impact of Culture on Economic Development: Theory, Hypotheses and Some Empirical Tests." Ann Arbor, University of Michigan. Krugman, Paul. 1994. "The Myth of Asia's Miracle." Foreign Affairs. 73, 6, 62-78. Li, Jia Tao & Shenkar, Oded. 1997. "The Perspectives of Local Partners: Strategic Objectives and Structure Preferences of International Co-operative Ventures in China." In Beamish and Killing (eds.), Cooperative Strategies: Asian Pacific Perspectives. 300-322. Lucas, Robert. 1993. "Making a Miracle." Econometrica. 61, 2, 251272. Makino, Shige & Delios, Andrew. 1997. "Local Knowledge Transfer and Performance Implications for Alliance Formation in Asia." In Beamish and Killing (eds.). Cooperative Strategies: Asian Pacific Perspectives. 375-402. Mauro, P. 1995. "Corruption and Growth." Quarterly Journal of Economics. 110,681-712. Murphy, Kevin M., Schleifer, Andrew & Vishny, Robert W. 1991. "The Allocation of Talent: Implications for Growth." Quarterly Journal of Economics. 503-30. Nakamura, M., Sakakibara, S. & Schroeder, R.G.. 1996. "Japanese Manufacturing Methods at U.S. Manufacturing Plants: Empirical Evidence." Canadian Journal of Economics. 29 Special Issue, S469-S474. International human resource linkages and economic growth: An Afterword

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O'Grady, Shawna & Lane, Henry W. 1996. 'The Psychic Distance Paradox." Journal of International Business Studies. 27, 2, 309333. Olson, M. 1982. The Rise and Decline of Nations. New Haven: Yale University Press. Ramstetter, Eric, editor. 1991. Direct foreign Investment in Asians Developing Economies and Structural Change in the Asia-Pacific Region. Boulder, Colorado: Westview Press, Inc. Safarian, A. Edward. 1997. "Trends in the Forms of International Business Organization." In Leonard Waverman, W.S. Comanor and A. Goto. Competition Policy in the Global Economy. 40-65. Sala-i-Martin, Xavier. 1997. "I Just Ran Two Million Regressions." American Economic Association Papers and Proceedings. 87, 2, 178-83. Schembri, Lawrence L. 1997. "Canadian Exports of Business and Education Services to the Asia Pacific Region." In Harris (ed.). The Asia Pacific Region in the Global Economy. Steers, Richard M, Yoo Keun Shin, Ungam, Gerardo R. & Nam, Sanghnom. 1990. "Korean Corporate Culture: A Comparative Analysis." Research in Personnel and Human Resources Management. Suppl. 2, 247-262. JAI Press, Inc. Teece, D.J. 1977. "Technology Transfer by Multinational Firms: The Resource Cost of Transferring Technological Knowhow." Economic Journal. 87, 242-61. UNESCO. Statistical Year Book, various years. Paris. United Nations. 1995. Transnational Corporations and Competitiveness. New York and Geneva: UNCTAD, Division on Transnational Corporations and Investment, von Hippel, Eric and Marcie Tyre. 1993. "How Learning by Doing is Done: Problem Identification in Novel Process Equipment." Research Policy. 1-11. Waverman, Leonard, W.S. Comanor and A. Goto. 1997. Competition Policy in the Global Economy. London, Routledge. Womack, J.P., D. T. Jones and D. Roos. 1990. The Machine that Changed the World. New York: Rawson Associates. World Bank. 1993. The East Asian Miracle: Economic Growth and Public Policy. New York: Oxford University Press. 172

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Yamashita, Shoichi, (ed.). 1991. Transfer of Japanese Technology and Management to the ASEAN Countries. Tokyo: University of Tokyo Press. Yeung, Henry Wai-Chung. 1997. "Cooperative Strategies and Chinese Business Networks: A Study of Hong Kong Transnational Corporations in the ASEAN Region." In Beamish and Killing (eds.). Cooperative Strategies: Asian Pacific Perspectives. 22-56. Young, Alwyn. 1994. "The Tyranny of Numbers: Confronting the Statistical Realities of the East Asian Growth Experience." Cambridge, Massachusetts: National Bureau of Economic Research, Working Paper 4680.

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About the authors Michael Baker (PhD Michigan), is an Associate Professor in the Department of Economics, University of Toronto. His previous research includes studies of the economic impact of immigrants to Canada; the incentive effects of the UI system, the dynamics of unemployment, the effects of minimum wages, and sex and ethnicity based wage differentials in the Canadian labour market. He is currently studying the dynamics and (changing) inequality of labour earnings in Canada, and the effects of pay equity legislation, among other topics. Dwayne Benjamin (PhD Princeton University), is an Associate Professor in the Department of Economics, University of Toronto. His previous research has examined the economic performance of immigrants in Canada; the impact of minimum wages on youth employment; the evolution of male-female earnings differentials; the role of ethnicity in the Canada and US labour markets; and the impact of public pensions on retirement behaviour. He is also studying the performance of labour and land markets in developing countries, including a new project exploring the impact of land property rights and exchange restrictions on farm efficiency in rural China. Wendy Dobson (PhD Princeton University), is Professor and Director, Centre for International Business, University of Toronto. She has served as Associate Deputy Minister of Finance in the Canadian government and President of the CD Howe Institute. Her most recent publications include Multinationals and East Asian Integration (edited with Chia Siow Yue, 1997) and Managing USJapanese Trade Disputes: Are There Better Ways? (edited with Hideo Sato, 1996). Brian Hammer is a graduate student in the Department of Geography, University of Washington, Seattle. He has studied at the Johns HopkinsNanjing Institute for two years, and is currently engaged in research on trade and migration along the Sino-Vietnamese border.

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Keith Head (PhD MIT), is Assistant Professor, Faculty of Commerce and Business Administration, University of British Columbia. His research interests include foreign direct investment, international trade policy and economic geography. Professor Head's recent publications include "Inter-city Competition for Foreign Capital: Static and Dynamic Effects of China's Incentive Areas" (Journal of Urban Economics) and "Immigration and Trade Creation" (forthcoming in the Canadian Journal of Economics). Katharyne Mitchell (PhD, Geography, University of California at Berkeley), is Assistant Professor of Geography, University of Washington in Seattle. Her interests include Chinese business organization and society, urban geography, and contemporary Pacific Rim connections between Hong Kong and the Pacific Northwest. Her publications include "The Spatial Expansion of Chinese Businesses" to be published in 1998 in Globalization of Chinese Business Firms, edited by Kris Olds and Henry Yeung; "APEC and the New Global Economy" (1994, Journal of Far Eastern Business); "Flexible Circulation in the Pacific Rim: Capitalisms in Cultural Context" (1995, Economic Geography); Diaspora and the Politics of Space (forthcoming, University of California Press). John C. Ries (PhD Michigan), is Associate Professor, Faculty of Commerce and Business Administration, University of British Columbia. His primary research interests are international and Japanese business and economics. Fluent in Japanese, Ries has worked as a researcher at the Ministry of International Trade and Industry in Tokyo. He is the author of a number of articles on these topics in the Canadian Journal of Economics, Journal of Industrial Economics and the Journal of International Economics, among others. A. E. Safarian (PhD Berkeley), is Professor of Business Economics at the Faculty of Management, University of Toronto. He has served as Dean of the University's School of Graduate Studies and as President of the Canadian Economics Association. He was elected a fellow of the Royal Society of Canada in 1973. He is author of Multinational Enterprise and Public Policy (1993) and Foreign Ownership of Canadian Industry (1966).

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Don Wagner is a Ph.D student in the Policy Analysis Division, Faculty of Commerce and Business Administration, University of British Columbia. His fields of interest are international business and economic development. Robert Westwood (PhD in Management, University of Bath), is Senior Lecturer in Organizational Behaviour, Graduate School of Business, University of Sydney. His research interests include cross-cultural and comparative management issues with a focus on Asia and Chinese communities; the meaning and experience of work; women in management and other gender issues in management, work and organizations; language, power and organization; alternative paradigms and methodologies for understanding organizations and management. Prof. Westwood is the editor and chief contributor to Organisational Behaviour: Southeast Asian Perspectives published by Longman in 1992.

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Centre for International Business Mission Founded in 1993, the Centre's mission is to focus the University of Toronto's expertise in international economics and strategic management in ways that assist Canadian businesses to increase their international competitiveness and to develop strategies to become world leaders in their fields. Strategic Direction The Centre's research has two aims: 1. To analyse global economic trends and assist executives in understanding the risks and opportunities inherent in those trends that are beyond their control. 2.

To study trends in international business and provide executives with knowledge applied to building lean, innovative and internationally competitive organizations.

The research strategy is formulated in consultation with an Advisory Committee, and is carried out in collaboration with members of the global research networks of the Centre's Associates. Ongoing direction is carried out by Wendy Dobson, Director, in consultation with a Steering Committee which includes Professors Joseph D'Cruz (strategic management), Jack Mintz (tax policy and public finance), Peter Pauly (international economics), Alan Rugman (international business) and Tom Wilson (business economics, fiscal and tax policy).

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Key research issues • Global research on international business, focusing on firm competitiveness, behaviour and strategies. • Global research on the economic environment for international business, including policies that affect trade and investment. • International environmental research that recognizes that, in a globally-integrated business environment, both the economic and environmental effects of environmental policies must be examined in a cross-national perspective. Programs and services International Business Perspectives

Published quarterly and disseminated widely to the business and policy communities, Perspectives presents concise analyses and interpretations of current developments in the global economic environment and anticipates future trends that will have an impact on North American businesses. Particular attention is paid to anticipating developments in the G-7 economies and in East Asia. The CIB Roundtable

Round tables, held monthly, provide a forum where CEOs can focus on and discuss developments in international business and in the global economic environment. In sessions led by Associates and invited speakers, the focus is on anticipating, interpreting and responding to these developments. The International Business Conference

Organized annually by the Centre and the Faculty of Management in collaboration with the Globe and Mail, the Faculty brings together senior private and public sector leaders in "sleeves-up" sessions addressed to challenges faced by Canadian businesses seeking to become world leaders in their sectors and to translate these into "take-away" benefits.

Centre for International Business Joseph L. Rotman School of Management University of Toronto 105 St. George Street Toronto, Ontario, Canada M5S 3E6 Tel: 416-978-2451 Fax: 416-978-0002

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