ABSTRACT
This paper suggests a cross-country comparative framework for the study of inter-organizational relationships. It provides a perspective that links the micro-, meso- and macro-levels of analysis, dealing with the following issues: (a) the role of socio-organizational factors in relationships across organizational boundaries; (b) legal contractual arrangements, human capital features, and the practices of using information and communication technologies as key factors in the environment in which inter-organizational relationships are embedded; and (c) convergence versus divergence of cultural and institutional patterns of national business systems. Also, the effects of governance regime (Anglo-Saxon vis-à-vis Continental-European) and population size (large vis-à-vis small) are argued to play an important role in determining the quality of inter-organizational relationships across Western European national business systems. The conceptual argument presented in this article is illustrated by reference to Germany, the UK, The Netherlands and Ireland.
Introduction
More than ever in history, inter-organizational forms of cooperation are characteristic of today's business world. Relationships transcend organizational and industry boundaries as well as national borders. They form complicated and permanently changing networks with moving centers and peripheries. Not very surprisingly, contemporary management literature mimics this development by increasing the number of concepts and publications devoted to issues of inter-organizational relationships, varying from partner selection and alliance control to network structure and supply chain management (e.g., Jarillo 1988; Ebers 1997; Child and Faulkner 1998; Gulati et al. 2000; Kotabe and Mol 2006; Cropper et al. 2008).
With regard to the structure and design of inter-organizational relationships much has been said about the attractiveness of close forms of cooperation between legally independent organizations, providing an alternative possibility to the ‘traditional’ transaction modes of hierarchical internalization versus the market-oriented externalization of business activities (Williamson 1975, 1985). Depending upon the opportunities and threats involved, as well as the costs and benefits of these different options, a firm is supposed to select strategically the ‘optimal’ transaction mode, which under current conditions of capitalist development often means that ‘hybrid’ forms of cooperation are preferred (Nooteboom 1996).
Despite the enormous attention that these issues have received, and still do so in the current debates within organizational analysis and strategic management, the bulk of the existing literature in these fields seems to be too narrowly focused to get a firm grip on the central questions related to the social constitution of business relationships. Where the quality of inter-organizational relationships is under review, studies tend to either look at the micro-level of relationships where the role of inter-personally developed forms of trust, risk and power are analyzed (e.g., Mintzberg 1985; Lyons and Mehta 1997; Das and Teng 2001; Knights and McCabe 2003), largely bypassing the influence of macro-institutions, or indeed focus on the macro-level where national business systems (NBSs) are compared, more or less ignoring the underlying micro-mechanisms on which these systems build (e.g., Hollingsworth and Boyer 1997; Crouch and Streeck 1997; Whitley 1999; Hall and Soskice 2001). In contrast, this paper presents a comprehensive multi-level theoretical framework for analyzing the control, coordination and performance potential of inter-organizational relationships. It includes a variety of factors at the micro, meso and macro-levels of business relationships, and it looks at how these are to be inter-linked in an integrated framework.
This paper makes an attempt to connect the conceptual perspectives that are rooted in research on organizational behavior and the sociological theory of interaction, on the one hand, and in the analysis of governance structures of business systems, on the other hand. Three specific literatures play an important role in this context: research on (a) socio-organizational factors in inter-organizational relationships (at the micro-level); (b) legal contractual arrangements (LCAs), human capital features (HCFs), and the practices of using information and communication systems (PUICSs) (at the meso-level); and (c) convergence versus divergence of NBSs (at the macro-level). At the meso-level, our assumption is that LCAs, HCFs and the PUICSs provide the three most important formative patterns of behavior which reflect and shape not only socio-organizational factors such as trust and power at the micro-level but also macro-level arrangements such as the nature and dynamics of entire NBSs.
The argument is illustrated by reference to the cases of Germany, the UK, The Netherlands and Ireland. The UK and Ireland represent two variants of the Anglo-Saxon business system with strong forms of shareholderism, whereas Germany and The Netherlands are two examples of Continental-European business systems where authoritarianism mitigates the rules of the free market. The population size (large for Germany and the UK vis-à-vis small for Ireland and The Netherlands) is argued to be another crucial factor with regard to the control, coordination and performance of inter-organizational relationships as it impacts upon communication patterns among socio-economic elites and the degree of the openness of NBSs to international influences. Although produced and reproduced through recursive social processes of structuration (Giddens 1984), we see NBSs as structural arrangements that are relatively stable over time. The population size is an independent exogenous factor which also constrains and – at the same time – enables the dynamics of inter-organizational relationships but can hardly be assumed to be affected by micro-level phenomena, i.e., the behavior of economic actors.
What we ultimately want to explain are qualitative differences in and the performance potential of inter-organizational relationships, in relation to the specific features of the business environment in which they are embedded. The underlying assumption here is that qualitatively superior inter-organizational relations reduce control costs and thus may create a high performance potential. The consistency of the business environment and the adaptation of relationships to the prevailing environment are, in our view, key determinants with regard to the performance potential of inter-organizational relationships.
The argument presented in this paper is organized as follows. Section 2 defines central elements of our conceptual framework, using a graphical overview of the latter's basic structure. Section 3 suggests four different ‘ideal-typical’ inter-organizational relationship types that can be reconstructed against the background of our general framework. In section 4, five of what we call ‘logics’ are formulated to discuss our theoretical framework's implications as well as its underlying premises. Before reaching our conclusions (section 6), the theoretical assumptions developed in sections 2, 3 and 4 are illustrated by reference to the cases of the above-named four European NBSs (section 5).
In advance, we would like to underline the conceptual and exploratory nature of our argument. Given the high complexity of a comparative and multi-level theory of inter-organizational relationships, our logics are tentative, whilst our cases serve merely as illustrations. However, we believe that the presented conceptual framework offers a fruitful perspective for a comprehensive analysis of the nature of inter-organizational relationships in the context of their country-specific environments.
2 The overarching framework
An all-encompassing conceptual framework of the control, coordination and performance of inter-organizational relationships must deal with different dimensions and with a wide variety of issues. To organize the argument, our theoretical framework is visualized in Figure 1.
Below, the key elements of our theoretical multi-level framework are defined and briefly discussed.
2.1 Inter-organizational relationships
As mentioned above, formal and informal inter-organizational linkages have gained increasing prominence across industries and countries in recent decades. Today, vertical co-operation and horizontal alliances of all sorts are more than commonplace in the business world. Here, we define inter-organizational relationships by placing emphasis on three features: inter-organizational relationships are formal arrangements that bring together assets (of whatever kind, tangible and intangible) of two or more legally independent organizations with the aim to produce joint value added. Both input and output are formally shared by the independent organizations that are involved in the relationship.
In a transaction cost economics terminology, inter-organizational relations between two parties (or in an organizational network that consists of more than just two organizations) are conceptually described as hybrid organizational forms – ‘neither market nor hierarchy’ (Powell 1990) – and some scholars believe that informality and the absence of strong formal rules is an important feature of such relations. The latter, however, does not always hold true when looking more closely at inter-organizational arrangements such as ‘strategic alliances’, ‘supply chains’, ‘licensing contracts’ and ‘joint ventures’ in various sector and country-specific contexts. A high degree of formality is often a key characteristic of such arrangements (Cropper et al. 2008).
2.2 Socio-organizational factors
Different forms of inter-organizational relationships can be distinguished according to the relative dominance of two channels of control and coordination (trust and power), on the one hand, and two sources of trust and power (institutional arrangements and inter-personal contact), on the other hand (Bachmann 2001). Trust is the expectation that actors will voluntarily reciprocate one-sidedly offered favors, even if this does not occur immediately and directly (Rousseau et al. 1998; Möllering 2006). According to Weber (1978), power is the chance that actors will do what another actor wants them to do, even if this is against their free will. Both trust and power function as social mechanisms that reduce uncertainty in the external relationships of organizations (Luhmann 1979; Giddens 1984; Bachmann 2001). Thus, trust and power facilitate transactions between vertically and horizontally cooperating organizations which might otherwise often not be possible.
2.3 Socio-legal factors
In many ways, the contract (explicit or implicit) can be seen as the cornerstone of a relationship between two independent organizations (Deakin and Michie 1997). Contracts differ in what they specify as the duties, responsibilities and expectations of each party of the relationship, and in how detailed the clauses are. Generally, contracts are necessarily incomplete as they are unable to foresee all possible events that may affect the relationship in the future. Particularly when sophisticated products or services are subject to the transaction, it is not feasible to take provision for all possible developments in the relationship. Thus, the actual practices of using contracts, as well as the relevant country-specific commercial law that a contract inevitably has to refer to, are essential parts of the socio-legal contexts in which inter-organizational relationships are embedded (Arrighetti et al. 1997; Burchell and Wilkinson 1997).
2.4 Socio-psychological factors
It would be difficult to fully understand the control, coordination and performance of an inter-organizational relationship without taking account of so-called human capital features. From the upper echelon literature (Boone et al. 1996, 2004), as well as from the research on leadership (e.g., Grint 1997) and entrepreneurship (e.g., Casson 2005), we know quite well that the features of the key personnel which makes decisions that affect the (internal and) external relationships of organizations are crucial determinants of an organization's behavior and performance.
Human capital features include objective characteristics (such as education and tenure) and subjective features (such as personality traits), which may both be measured at the level of an individual (e.g., an alliance's ‘CEO’) or a team (e.g., an alliance's top management team). What is particularly interesting in the context of this paper's argument, is that there is abundant evidence that such human capital features are associated with the development of trust (Boone et al. 1999), as well as the use of power (Conger 1988). For example Boone et al. (1999) find in a prisoners’ dilemma experimental setting that students with an educational background in ‘hard’ economic topics (such as finance) are much less likely to follow a cooperative trust-promoting strategy than their counterparts who specialized in ‘soft’ behavioral issues (such as human resource management).
2.5 Socio-technical factors
The distribution of knowledge is crucial in inter-organizational networks. Both the in-built functional features of information and communication systems, and – particularly – the ways of using these systems in the context of a specific cultural, economic and social environment are elements of the socio-technical arrangements that characterize NBSs in a significant manner. As we know from research on computer-supported cooperative work (CSCW) (e.g., Bannon et al. 1996), the literature on the social shaping of technology (Pinch and Bijker 1984) and actor network theory (e.g., Callon 1986), technical artifacts and the modes of their application are not only heavily intertwined with the social interests of their designers but also of their users.
Access to large databases, for example, can be either restricted to a limited number of powerful experts or specific features of the technical system can make it possible that data can be shared freely within a wider community of individuals who – in one way or the other – may be affected by decisions that build on the utilization of these data (Schneider and Wagner 1993). Since communication and information are largely technology-based today, the PUICSs play an essential role with regard to the control, coordination and performance of inter-organizational relationships. Trust and power-based relationships are not only reflected in features of information and communication systems, but the latter also influence the quality of relationships between their users.
2.6 Organizational performance
‘Good’, value-adding performance is the raison d'être of business organizations. Measuring organizational performance, however, can be difficult when indicators are not defined precisely enough (Buijink and Jegers 1989). After the collapse of the stock exchanges’ Internet bubble, example after example of doubtful performance measurements emerged in the business press, the record-breaking figureheads being the bankruptcy of the ‘virtual’ energy trading giant Enron and the creative bookkeeping practices of Worldcom in the US. To avoid too much confusion, we suggest an important distinction between two types of organizational performance measures. First, there are many accounting-based performance yardsticks that target the short run, such as all kinds of profitability measures (from operating income and shareholder value to ROI and ROS) and size proxies (e.g., aggregate turnover and market share). Second, there are measures that try to capture performance in the long run, popular ones focusing on survival chances and sustainability proxies. For sure, short-term profitability can be high whilst long-run sustainability is low, and vice versa.
2.7 Governance regime and population size
Macro-level country features are produced and continuously reproduced by micro-level behavioral patterns of coordinating and controlling inter-organizational relations (e.g., Giddens 1984; Sydow 1998), but they can also take on the form of relatively independent structures. In this context, we focus on two country characteristics. First, the governance regime that prevails in a given NBS (i.e., the Anglo-Saxon versus the Continental-European business model) is an important element where the social constitution of inter-organizational relationships is to be revealed (e.g., Whitley 1999; Hall and Soskice 2001). Whilst the Continental-European business world is based on strong institutions and collectively binding rules of behavior, the Anglo-Saxon system is much more oriented to individualism and situational decision-making. Second, the size of the business system, measured in terms of population, is likely to have a considerable exogenous impact on these business models, influencing their consistency and internal dynamics. We assume that there are significant modifications of the ideal-types of the two named governance regimes in the smaller NBSs, as the latter tend to be more open to foreign influences and less inward-looking than their larger counterparts.
Referring to Figure 1 again, our over-arching framework suggests five logics regarding the linkages between its key elements (i.e., L1 to L5). The double-lined arrows in Figure 1 indicate the theoretical logics that are central to this paper's argument. Whilst a one-way arrow suggests a unidirectional causality, a two-way arrow indicates a reciprocal association. Apart from these linkages, other linkages between the elements of our framework, which are not depicted in Figure 1, for example between HFCs and the PUICSs, also deserve thorough empirical investigation but theory-based a priori prediction seems much more difficult here. In this paper, we want to focus on the indicated five relatively simple logics. Below (section 4), the five logics are discussed explicitly. Separately viewed, some of them are already quite well established in the current literature, but seen together they provide key assumptions of an innovative and integrated framework for future empirical research on inter-organizational relationships.
Before going into our five logics in more detail, we will introduce four simplified ideal-typical inter-organizational relationship forms which build on our assumption that trust and power are two central mechanisms that play a significant role in coordinating and controlling inter-organizational relationships (section 3). Note that we prefer to speak of ‘logics’ rather than hypotheses or propositions for two reasons. First, they all relate to rather lengthy arguments rather than short statements; and second, we want to signal that our overall line of reasoning neither implies the groundwork for a simple hypothesis-testing exercise nor should it be seen as an example of ‘formal’ model building.
3 Inter-organizational relationship forms
As many social scientists agree, trust as well as power can take on different forms. Bachmann (2001) draws on comparative research on different European business systems and suggests the following conceptual assumptions: Depending on the (informal) cultural and – specifically – (formal) institutional environment, there are (a) two distinct sources of trust and power in inter-organizational relationships and (b) two different ways in which these specific forms of trust and power are intertwined. First, the sources of trust and power are located at the inter-personal level and trust appears as interaction-based trust whilst power takes on a personal form. In this case either power or trust dominates the relationship between two actors. Second, trust and power originate with constitutive reference to the formal institutional environment in which a relationship is placed. In the latter circumstances, power – i.e., institutional-based power – is, by contrast, highly conducive to developing trust – i.e., institutional-based trust – in business relationships. Taking this further, we suggest combining both forms of trust and power in such a way that it renders four (rather than just two) potential trust–power patterns, associated with four ideal-typical forms of inter-organizational relationships. These are depicted in Table 1.
. | Institutional-based power . | Personal power . |
---|---|---|
Institutional-based trust | Pure Form 1 Fully institutionalized form (FI-form) | Hybrid Form1 Institutional-based trust/Personal power (IT/PP-form) |
Interaction-based trust | Hybrid Form 2 Institutional-based power/Interaction-based trust (IP/IT-form) | Pure Form 2 Fully personalized form (FP-form) |
. | Institutional-based power . | Personal power . |
---|---|---|
Institutional-based trust | Pure Form 1 Fully institutionalized form (FI-form) | Hybrid Form1 Institutional-based trust/Personal power (IT/PP-form) |
Interaction-based trust | Hybrid Form 2 Institutional-based power/Interaction-based trust (IP/IT-form) | Pure Form 2 Fully personalized form (FP-form) |
We distinguish two ‘pure’ inter-organizational relationship types, where the sources of trust and power are both either predominantly institutional-based or interaction-based. This is consistent with Bachmann (2001). But we also see two hybrid combinations, where trust is either institutional-based and power is person-based, or trust is interaction-based and power is institutional-based. The hybrid trust–power combinations may perhaps seem theoretically less likely to emerge, but we maintain that they do occur, especially in smaller countries where the formal institutional inventory of a given NBS is not (fully) congruent with its informal cultural traditions.
3.1 Fully institutionalized form (FI-form)
The fully institutionalized form of inter-organizational relationships presupposes a tight and coherent system of institutional arrangements that govern the behavior of social actors. Here, trust and power arise in inter-organizational relationships because the institutional arrangements of the NBS provide collectively generated and monitored rules of business behavior. In such a system, power is largely anonymous and actors have little chance to opportunistically utilize their individually available resources of power against the existing powerful order. Power, in other words, is embodied in hierarchical decision-making processes and collectively accepted rules of social inclusion and exclusion. This form of power produces a high level of predictability in inter-organizational relationships. Under these conditions, trusting a business partner implies low risk and will, therefore, occur frequently. In many situations, institutional-based power and institutional-based trust will be difficult to disentangle. Both of these social coordination mechanisms tend to be amalgamated in a strong form of institutional control of business behavior.
3.2 Fully personalized form (FP-form)
Alternatively, trust and power can emerge at the inter-personal level – i.e., without constitutive references being made to the institutional framework of the NBS. Especially where strong and reliable institutions and generalized rules of behavior do not exist, economic actors need to base their decisions on interaction-based trust and/or individually mobilizable resources of power. In these circumstances, trust and power appear as two distinct channels of social control. Also in this case, both mechanisms can occur in combinations, but here it makes a very important difference whether trust or power dominates the relationship. Each option implies specific chances of saving transaction costs and fostering the innovativeness of the involved parties. Generally, the inherent risk of trust is high under these conditions, implying that the powerful party will tend to draw on his or her individual resources of power where possible and avoid investing trust in many situations.
3.3 Institutional-based power/Interaction-based trust form (IP/IT-form)
The first hybrid trust–power combination emerges where strong forms of power-promoting formal institutions are characteristic of the NBS, whilst the informal cultural order builds strongly on an ethics of trust, co-operation and collective problem-solving. In this case, institutional-based power operates next to interaction-based trust. Thus, on the one hand, inter-organizational relationships cannot benefit from trust-generating institutions which implies that actors largely have to develop trust at the inter-personal level, if trust is the preferred coordination mechanism to begin with. On the other hand, power is embedded in an institutionalized context of hierarchy-supporting arrangements, so that actors are likely to frequently fall back on generalized rules of power-related behavior. This is a scenario that may in practice work out in different ways and thus needs to be specified by means of detailed empirical research.
3.4 Institutional-based trust/Personal power form (IT/PP-form)
The second hybrid trust–power combination occurs where a relatively strong institutional-based trust-promoting framework characterizes the NBS, but where at the same time the informal cultural foundations of business behavior encourage individualistic strategies and the use of personal power. In such a context, institutional-based trust goes hand in hand with personal power. This implies, on the one hand, that trust development is backed by institutional arrangements (e.g., social norms of business behavior or commonly accepted technical standards) so that inter-organizational relationships can be based upon shared trust-promoting arrangements. Power, on the other hand, is developed and sustained with reference to personal authority as strong forms of institutional power are more or less absent. Again, how this mixture of institutional-based trust and personal power works out in practice depends on many accidental factors and is thus to be treated as an empirical question.
4 Five logics
Our general framework for analyzing inter-organizational relationships generates opportunities to systematically explore the theoretical assumptions that emerge when the different conceptual building blocks that we have discussed so far, are put together. In this paper, we suggest five logics, which together provide a fruitful framework for future empirical research. The first logic simply summarizes the argument outlined above as to the four ideal-typical forms of trust–power combinations in inter-organizational relationships.
Logic 1 (trust and power in inter-organizational relationships)
As elaborated upon above, two channels of socio-organizational control and coordination – trust and power (dimension 1) – as well as the two different sources of trust and power – institutional-based versus inter-personal and interaction-based (dimension 2) – work together to produce four different trust–power combinations. The latter are associated with four different ideal-typical forms of inter-organizational relationships.
Logic 2 (socio-legal, socio-psychological and socio-technical factors)
The socio-legal (LCAs), socio-psychological (HCFs) and socio-technical factors (the PUICSs) are mediating variables in determining the role and relative importance of trust and power in controlling and coordinating inter-organizational relationships. Table 2 links, tentatively, our four ideal-typical forms of trust–power combinations with illustrative examples of the influences that LCAs, HCFs and the PUICSs can have on inter-organizational relationships.
Ideal-typical forms . | LCAs Legal contract arrangements . | HCFs Human capital features . | PUICSs Practices of using information and communication systems . |
---|---|---|---|
FI-form Fully institutionalized ‘pure’ form | Detailed contracts, following standardized guidelines, signal macro-level high trust ex ante | Top managers make much use of formal hierarchical power | Strict macro-level privacy rules dictate what can and what cannot be communicated electronically |
FP-form Fully personalized ‘pure’ form | Detailed tailor-made contracts offer devices to punish opportunistic behavior in court ex post | Top managers must develop person-based authority | What is and what is not communicated electronically is established in micro-level inter-personal relationships |
IP/IT-form Institutional-based power/Interaction-based trust hybrid form | Detailed contracts, following standardized guidelines, signal macro-level high trust ex ante | Top managers make much use of formal hierarchical power | What is and what is not communicated electronically is established in micro-level inter-personal relationships |
IT/PP-form Institutional-based l trust/Personal power hybrid form | Detailed tailor-made contracts offer devices to punish opportunistic behavior in court ex post | Top managers must develop person-based authority | Strict macro-level privacy rules dictate what can and what cannot be communicated electronically |
Ideal-typical forms . | LCAs Legal contract arrangements . | HCFs Human capital features . | PUICSs Practices of using information and communication systems . |
---|---|---|---|
FI-form Fully institutionalized ‘pure’ form | Detailed contracts, following standardized guidelines, signal macro-level high trust ex ante | Top managers make much use of formal hierarchical power | Strict macro-level privacy rules dictate what can and what cannot be communicated electronically |
FP-form Fully personalized ‘pure’ form | Detailed tailor-made contracts offer devices to punish opportunistic behavior in court ex post | Top managers must develop person-based authority | What is and what is not communicated electronically is established in micro-level inter-personal relationships |
IP/IT-form Institutional-based power/Interaction-based trust hybrid form | Detailed contracts, following standardized guidelines, signal macro-level high trust ex ante | Top managers make much use of formal hierarchical power | What is and what is not communicated electronically is established in micro-level inter-personal relationships |
IT/PP-form Institutional-based l trust/Personal power hybrid form | Detailed tailor-made contracts offer devices to punish opportunistic behavior in court ex post | Top managers must develop person-based authority | Strict macro-level privacy rules dictate what can and what cannot be communicated electronically |
Here, the underlying assumption is that the way in which these variables are reflected in relationships among organizations, is both a result and a condition of how trust and power do their jobs as social mechanisms of controlling and coordinating expectations and interactions between business partners.
For the sake of brevity, we will not discuss Table 2's four cases with regard to the three mediating factors (LCAs, HFCs and the PUICSs). Rather, we will concentrate here on only one example – the fully institutionalized form. In this case, LCAs are routinely reflected in detailed contracts, spelling out ex ante as many conceivable contingencies as possible. This legal practice is part of a high-trust environment, in which trusting parties detail many ins and outs of their transaction on paper up-front. Also, this interaction mode is reflected in HCFs. Top managers exercise the formal power that comes with their position in a relatively de-personalized manner. In the domain of the PUICSs, strict macro-level privacy rules dictate what can and what cannot be communicated electronically, and how information and communication systems are specified and used in regard to their technical and social purposes. Again, this implies behavior that follows rather universalistic guidelines that are reflected in relatively bureaucratic procedures and rules of communication and information exchanges.
Logic 3 (influence of governance regime)
Business systems are associated with governance regimes that influence the processes in which trust and power as well as LCAs, HCFs and the PUICSs are shaped and worked out at the level of inter-organizational relationships. Within the confinements of this paper, we concentrate here on the likely impact of only two features of governance regimes: high versus low ‘hierarchical rigidity’ and high versus low ‘shareholderism’, which both can be seen as very basic dimensions in most characterizations of NBSs.From a cultural perspective, Hofstede (1991), for example, has pointed out that countries differ widely with respect to features such as hierarchical rigidity, and that the prevalent governance regime may or may not imprint people with a strong sense of hierarchy. Countries that score high in this dimension (e.g., Germany or France) are typically – but in theory not necessarily – also characterized by a high level of institutional-based power (Lane 1995), whereas their counterparts (e.g., the UK or the US) encourage the use of personal power more strongly.Also, we distinguish Anglo-Saxon shareholder governance regimes (high shareholderism) from Continental-European stakeholder systems (low shareholderism), a distinction that is primarly instititutionally rooted and equally widely discussed in the literature (e.g., Gordon 1996; Scott 1997; Hall and Soskice 2001). Here, we expect that low shareholderism goes hand in hand with a high level of trust in inter-organizational relationships and strong institutions, whereas the opposite holds true for high shareholderism. Whilst in Anglo-Saxon countries, such as the UK, the relationship between different parties, e.g., ‘capital’ (i.e., employers) and ‘labor’ (i.e., employees), tends to be based upon conflict, rather than cooperation, the reverse can be said about Continental-European countries, such as Germany. This can be studied, for instance, in the ways in which labor law and patterns of participation in collective decision-making processes are shaped (Lane 1995). The degree of shareholderism is certainly not only influential on the quality of relationships of this kind. Rather, it is equally important in determining the quality of vertical as well as horizontal relationships between cooperating business organizations (Lane and Bachmann 1996; Marsden 1998).
Logic 4 (influence of population size)
Larger countries are associated with homogenous and stable forms of trust and power (as well as LCAs, HCFs and the PUICSs) in controlling and coordinating inter-organizational relationships. Hybrid forms of trust and power, by contrast, tend to occur more often in smaller countries. In the latter case, on the one hand, the relative importance of networking activities and personal reputation, which are a direct consequence of the size of a country, offer ample opportunities to develop tailor-made arrangements where the ‘qualitative’ level of inter-organizational relationships is concerned. On the other hand, hybrid forms of social control result from the greater openness to foreign influences, implying that elements from foreign ‘pure’ systems are in small countries often mixed to create effective forms of coordinating and controlling inter-organizational relationships.Oriented to contingency theory, a multi-fit concept (Heijltjes and van Witteloostuijn 2003) ties together our Logics 1 to 4, suggesting a performance argument which is covered by Logic 5.
Logic 5 (contingencies for organizational performance)
The short and long-term performance of an inter-organizational relationship is enhanced if the different pieces of the contingency puzzle (i.e., ideal-typical form of the trust–power combination, LCAs, HCFs, the PUICSs, governance regime and population size) complement one another and produce a perfect fit, so that the inter-organizational relationship's internal features (Logics 1 and 2) are aligned with the environmental characteristics (Logics 3 and 4).
Logic 5 implies that we can expect specific ideal-typical forms of inter-organizational relationships (a) performing better and (b) being found more often in environments with ‘fitting’ features, irrespective of whether the trust–power combination is a ‘pure’ or ‘hybrid’ one. The latter can be interpreted as a result of adaptation or as a consequence of selection processes that occur in NBSs over longer periods of time.
5 Countries
By way of illustration, we apply the above argument to four countries that differ markedly with regard to the two country features that we have explored in the theoretical part of this paper: governance regime (Logic 3) and population size (Logic 4). The central difference between the smaller countries, The Netherlands and Ireland, builds on their orientations towards two divergent business models which are more purely represented in the larger business systems of Germany (Continental-European model) and the UK (Anglo-Saxon model). In The Netherlands, many informal network-based relationships are a means to make the rigid institutional arrangements of the Continental-European business system more flexible, whilst in Ireland network relationships based on close cooperation are a means to produce more stability within the business system than this is usually the case in the UK. Given these broad differences, the question is how inter-organizational relationships are likely to be shaped in this set of four countries. Here, our assumption is that high-performance types of inter-organizational relationships, and the associated LCAs, HCFs and PUICSs, are adopted and selected as a result of organization-level learning and environment-level selection processes, respectively, as argued in ecological theories of organizational fields or populations (Hannan and Freeman 1977) and, in similar vein, in (neo-)institutionalist approaches (e.g., DiMaggio and Powell 1983). In terms of combinations of different forms of trust and power determining the quality of inter-organizational relationships, the country-specific combinations are depicted in Table 3.
. | Institutional-based power . | Personal power . |
---|---|---|
Institutional-based trust | Fully institutionalized form (Germany) | Hybrid IT/PP-form (Ireland) |
Interaction-based trust | Hybrid IP/IT-form (The Netherlands) | Fully personalized form (UK) |
. | Institutional-based power . | Personal power . |
---|---|---|
Institutional-based trust | Fully institutionalized form (Germany) | Hybrid IT/PP-form (Ireland) |
Interaction-based trust | Hybrid IP/IT-form (The Netherlands) | Fully personalized form (UK) |
5.1 Germany: the institutionalized system
The German business system is characterized by a strong and coherent institutional framework (Lane 1995). In these circumstances, trust as well as power will appear predominantly in their institutional forms. Trust and power, in other words, are mechanisms that emerge in business relationships because generalized rules of behavior and abstract patterns of social regulation govern the system. At the level of individual interaction this means, for instance, that the power a purchasing manager of a buyer firm may have over a sales manager of a supplier firm, has little to do with her or his individual skills of communication or personal obligations that might result from previous interactions between the two individuals. Rather, the power a business partner may be able to exert on his or her counterpart depends on impersonal factors such as market position, size and reputation of the organization represented by the individual manager, as well as technical standards or legal and social norms of business behavior that the two parties refer to in their relationship.
The sources of power, by the same token, are the prime sources of trust in inter-organizational relationships in this system (Lane and Bachmann 1996). This means that, for example, the sales manager of a supplier firm can develop trust to the purchasing manager of a large and powerful buyer firm because he or she can rely on the fact that the other party's idiosyncratic or opportunistic motives will not dominate the relationship. Both parties’ behavior is controlled by powerful rules embodied in ‘anonymous’ institutional arrangements that channel their mutual expectations and provide stable patterns of inter-organizational interaction. The use of legal contracts and the ways in which information flows between business partners are organized, produce mutually highly predictable patterns of behavior. Standardized contracts and reliable routines of knowledge exchanges based on uniform ways of using information and communication technology reduce risk and can be taken as good reasons to invest trust in a business relationship. Impersonal power which an individual can hardly utilize in order to maximize his or her own individual profit at the expense of another party rules supreme in this system. As far as the recruitment of top managers is concerned, much depends upon formal criteria (i.e., documented educational background) whilst idiosyncratic talents seem to be less important (Stewart et al. 1994).
This is certainly not to say that a NBS as strongly oriented to ‘organized form of capitalism’ (Scott 1997) as the German one has no room at all for personal forms of trust and power. For example, interaction-based modes of trust and power emerge where the most senior business people come together in supervisory boards of various large firms (‘inter-locking directorates’), or where informal communication is a key feature of network ties in regional business communities (Piore and Sabel 1984; Sengenberger et al. 1990; Fornahl and Brenner 2003). However, flexibility at the micro-level is only accepted within the limits and because of the existence of an overarching strong institutionalized framework in which such behavior is deeply embedded.
5.2 The UK: the individualized system
In the UK, generalized rules of business behavior exist only in a relatively rudimentary form. Compared to Continental Europe, the institutional framework of this business system is patchy, and can neither be deemed a very reliable source of trust nor can it be described as powerful or influential with regard to the behavior of managers. Thus, the coordination of expectations and interactions between, for instance, a purchasing manager of a buyer firm and a sales manager of a supplier firm has to substantially draw on sources of trust and power that are rooted in inter-personal contacts rather than in institutional arrangements (Lane and Bachmann 1996). This means that the predominant form of trust is interaction-based, while the power that may become relevant for relationships between organizations is primarily based on individually attributable resources such as, for example, communication skills of the boundary-spanners.
This implies that individuals – at least the powerful ones – often have a choice between whether they want to base an inter-organizational relationship more on power or more on trust. Here, personal power and interaction-based trust tend to appear as alternative ways of coordinating expectations and interactions between business partners. In this system, the use of legal contracts and the organization of information flows across organizational boundaries is often dominated by situational advantages and opportunistic motives rather than universalistic rules (Sako 1992). The relative absence of collectively accepted norms and standards of business behavior is also mirrored in top management behavior and in the way in which information and communication systems are used. In this business system, powerful actors do often not hesitate to exploit their opportunities to maximize their interests, whilst less powerful managers and organizations are often forced to ‘trust’ their business partners and thus to accept high risks in their external relationships. Who does and who does not emerge as a powerful actor depends, to a considerable extent, upon leadership-related sets of characteristics of individual managers.
Similar to the case of the German system, there are also phenomena that do not seem to fit easily into the overall picture but rather reflect practices which are generally more associated with the contrasting business system (i.e., the Continental-European system). Some of these mis-fitting characteristics can in fact be quite well developed in the UK. Examples are the strong forms of regulation where consumer protection or intellectual property rights are concerned. But these institutional forms of controlling and coordinating business relationships can in no way fundamentally challenge the dominant model of ‘liberal capitalism’ (Hall and Soskice 2001). Rather, they are the exception and, on the whole, are only to be seen as a necessary minimum of collective control.
5.3 The Netherlands: bottom-up networks
The Dutch business system is historically oriented to the fully institutionalized model (Hartog 1999; den Butter and Mosch 2001; Spithoven 2002). The fact that this business system is much smaller than the German one, however, allows for considerably more flexibility in inter-organizational relationships. Like in Germany, institutions play a very important role and provide an overall framework of business behavior. At the same time, however, many informal arrangements are possible because managers often know each other personally and frequent face-to-face contacts are easy to arrange where geographical distances are short. Under these conditions, trust and power are not as much channeled through generalized norms and abstract rules of business behavior as this tends to be the case in the German system. The institutional framework of the Dutch business system may well be seen as a prime source of stable and reliable relationships at the micro-level, but it is characteristic of this system that the mechanisms of coordinating expectations and interactions are substantially supplemented by networking activities and personal reputation. It is not so much individually available resources of power and interaction-based trust – the latter being typical for the individualized system (UK) – but a hybrid combination of interaction-based trust and institution-based power that plays an important role in the Dutch system.
Within the Dutch framework of institutional arrangements, networking and personal reputation are constitutive elements in the processes that determine the nature, quality and dynamics of inter-organizational relationships. Legal contracts are not used opportunistically, but as such they are no guarantee for efficient relationships either. The deep social embeddedness of contractual relationships into the specific situational circumstances plays a crucial role in the interpretation and application of otherwise rather standardized contracts. In a similar vein, there are reliable generalized norms of using information and communication systems on which individuals can fall back if necessary. An adequate understanding of the practices using these systems, however, in most cases requires an analysis that makes them visible as means to control information flows within networks in which personal reputation works as an effective entry barrier. Similarly, the selection of top managers is the result of a betwixt-and-between mixture of formal characteristics screening and informal networking processes.
In The Netherlands, an interesting example of hybrid forms of controlling and coordinating business relationships is reflected in the prevalent corporate governance practices. Dutch society has a long history of economic openness, implying much influence from abroad. A clear reflection of this is the large number of huge multinational enterprises (MNEs) such as Philips, Shell and Unilever, which is untypical for a small country like The Netherlands. These MNEs operate in a global marketplace that is dominated by Anglo-Saxon modes of conduct. As a result, these MNEs have largely adopted Anglo-Saxon corporate governance practices. Although these are embedded in various forms of path-dependent formal and informal arrangements, the Anglo-Saxon way of managing a business has become a strong tendency throughout this business system which, in principle, is traditionally more oriented to the Continental-European governance regime (van Ees et al. 2007).
5.4 Ireland: top-down networks
The Irish business system, at first glance, seems a little bit difficult to assess because a huge proportion of this country's economy is in the hands of foreign-owned enterprises. In the late 1990s, for example, more than two thirds of the manufacturing net output was accounted for by non-Irish investments (Ruane and Gorg 1997). This, clearly, brings a number of unusually heavy foreign influences into the Irish business system. However, looking at the Irish system as a whole, with special emphasis on its historical traditions, there cannot be much doubt that Ireland can hardly be understood without major references being made to the British business system. Although the desire to distance oneself from the British heritage has been strong in Ireland after the country's partition in 1921 (Roper 2000), Irish business relationships do generally not build on many strong institutional arrangements and collectively binding rules of behavior. Nonetheless, some orientation towards the Continental-European system does appear in various important respects.
Similar to The Netherlands, personal reputation is crucial in the Irish business system. However, networks are built on the basis of and as an important supplement to dyadic personal power-based contacts in organizational relationships. Networking is thus not a means to make the rigid patterns of the institutional order more flexible, as this is the case in The Netherlands. Rather, it is a means to produce more stability, rule-based behavior and institutional-based trust within a system which otherwise would conflate with the liberal capitalist model that prevails in the UK.
When LCAs and the PUICSs in inter-organizational relationships are under review, it appears that there is significant room for the opportunistic use of individual resources of power. Due to the size of the system, however, there is little chance that pulling these resources too strongly could pay off. In a small business community like Ireland, this would have immediate and disastrous effects on the reputation of the individual manager, as well as on the reputation of the organization he or she represents. Social networking, similar to The Netherlands, is an important feature of the Irish system. But, contrary to the Dutch system, inter-organizational networks are based on routinization and stabilization effects in inter-personal relationships rather than on the idea of making a highly institutionalized system more flexible. This is also mirrored by the selection processes of top managers where reputation and collective judgment prevail.
Undoubtedly, in Ireland many large (and often foreign) firms generally follow the rules of the Anglo-Saxon business world. But at the same time, large sums of EU money have been used to support small and medium-sized firms (SMEs) in developing their competitiveness and innovativeness. The Irish socio-economic system thus exhibits a hybrid mixture of both the Anglo-Saxon and the Continental-European business model rather than a ‘pure’ trust–power combination. Whilst we suggest that in The Netherlands trust is more developed at the level of interaction and power more guaranteed by institutional arrangements, we see the opposite combination, i.e., institution-based trust and interaction-based power, as dominant in the Irish case. This, however, is a tentative assumption and needs further exploration by means of empirical research.
By way of summary, Figure 2 locates the four countries discussed above on a continuum that runs from the fully institutionalized form of the trust–power combination to its fully personalized counterpart.
From the argument above, empirically researchable propositions may be derived as to how the quality of inter-organizational relationships is determined in these four countries, depending upon their location on this continuum (Logics 1 and 4). As far as performance is concerned (Logic 5), we assume that those inter-organizational relationship types that fit nicely with the macro-environment in which they occur outperform those inter-organizational relationship forms that do not fit with their environment. For example, we think that it is unlikely that the FP-form of inter-organizational relationships is very successful in Germany, whilst relationships that would fit in the German system are relatively inefficient in the UK. Our so far only theoretically grounded assumption would be that the cultural and institutional order of the German business system as well as the size of the country encourage the dominance of institutional-based forms of trust and power, whereas it is not by accident that we find more personal forms of trust and power in inter-organizational relationships in the UK. In The Netherlands and in Ireland, we predominantly find ‘hybrid’ combinations of trust and power that coordinate and control inter-organizational relationships. However, they also seem to be well adapted to their environment which equally renders a high performance potential.
6 Conclusion
The specific forms of trust and power (as well as their specific combinations) that go hand in hand with specific forms of cultural (informal) knowledge and institutional (formal) arrangements of a given business environment will, according to the argument outlined in this paper, produce country-specific qualities of inter-organizational relationships, suggesting cross-country divergence rather than convergence over time. Not only are inter-organizational relationships likely to be shaped along the lines of the rules that dominate the environment in which they occur, but there are also non-fitting inter-organizational relationship types which are not very successful and thus sooner or later selected out because of country-specific path dependencies that manifest themselves in the dynamics of NBSs (Sorge 2005).
However, in the face of current globalization processes some scholars suggest a different view. For one, the neo-liberal ‘revolution’ is spreading across the world, particularly after the breakdown of the Berlin Wall, implying a convergence of NBSs towards the Anglo-Saxon model (Gordon 1996). Under these conditions, it may be argued, inter-organizational relationships across the globe reveal a tendency to develop towards the FP-form. Additionally, large international networks of firms are becoming more and more important in a globalizing business world, prominent examples being the impressive network formation in many knowledge-intensive industries. Thus it may be argued that hybrid forms and combinations of trust and power which amalgamate the cultural and institutional flavors of partners from different countries are increasingly becoming the norm. In other words, hybrid inter-organizational relationship combinations such as the IP/IT and IT/PP types that include elements of both inter-personal arrangements and institutional regulation may be on the rise. If this holds, the hybrid ‘third-party guarantor’, who acts as a broker and/or mediator of information will play an increasingly important role in many socio-economic systems, not least in many rapidly growing transition economies (van Ees and Bachmann 2006). In this case, we would – on the basis of the theoretical framework suggested in this paper – expect that this will also be strongly reflected at the meso-level, i.e., in the LCA, HCFs and the PUICSs.
If hybrid combinations of trust and power should – against the background of the current processes of the globalization of economic markets and organizational strategies – in fact be most successful in the coming years, then The Netherlands and Ireland might benefit. In this case, we predict that particularly the knowledge-intensive services sector in Germany will have good reasons to move towards the Dutch example and encourage more flexibility and interaction-based forms of trust; and British managers, particularly of the manufacturing sector, will find the Irish model advantageous which draws more on rule-based behavior and institutional-based forms of trust. This would imply that ‘well-fitting’ hybrid combinations of trust and power as developed in such countries as Ireland and The Netherlands, being associated with specific betwixt-and-between socio-legal, socio-psychological and socio-technical features may result in a perfect balance between stability and flexibility, and thus lead to greater innovativeness and superior performance, at least in the medium-term future. Of course, whether we are in the middle of processes of convergence or divergence (and what is the direction of this development), is again largely an empirical question.
References
Reinhard Bachmann is Professor of Strategy at the University of Surrey. He has published widely in journals such as Organization Studies, British Journal of Sociology, Cambridge Journal of Economics etc. Together with Christel Lane, he edited Trust Within and Between Organizations (Oxford University Press, 1998/2000), and with Akbar Zaheer, he edited the Handbook of Trust Research (Edward Elgar, 2006). He is a member of the Editorial Boards of Organization and Organization Studies. His work emphasises the role of social mechanisms (trust, power etc.) and societal influences (institutional arrangements, cultural traditions on the structure and quality of organizational relationships and business strategies.
Arjen van Witteloostuijn is Research Professor of Economics and Management at the University of Antwerpen in Belgium, Professor of Institutional Economics at Utrecht University in the Netherlands and Professor of Strategy at the University of Durham in the United Kingdom. He holds a PhD in Economics from Maastricht University (The Netherlands). He is one of the editors of the Journal of International Business Studies. He has published widely in journals such as the Academy of Management Journal, Academy of Management Review, American Sociological Review, Economica, Management Science, and Strategic Management Journal.