Consequently the Asian way of carrying out business through personal relationships is good.
A excellent review of the strengths and weaknesses of Asian business practices is to be found in Root, Hilton L.,Asia's Bad Old Ways, Foreign Affairs, March/April 2001, v80, n2, pp. 9-14. You may read a 500 word preview at:
foreignaffairs.org
Root explores how the existing system some call "capital cronyism" with its weak legal system, corporate opacity, and questionable business ethics, arose as an economically rational response to an uncertain and unpredictable business environment.
Whereas in the United States legally enforceable, arms length agreements are routinely made between a large numbers of independent businesses, Root states, "this kind of agreement is difficult in East and Southeast Asia, where inconsistent contract enforcement has forced firms to internalize risks by dealing only through closed [horizontal and vertical] production systems." In addition, these firms are reluctant to reveal profit details for fear of levies by arbitrary governments. As a reaction to these risk factors, many Asian firms depend on substantial "organizational capital" such as business ties within the family, and on trust and reputation relationships.
The problem is that as the Asian economies have recovered from the 1997 devaluation crises, the interwoven relationships of the global economy have also grown considerably more complex and vital. But since the concentrated horizontal and vertical trading relationships within family-oriented firms are so opaque with little previous need for enforceable contracts, and since the guanxi (personal relations"genand trust) cannot be simply transferred to an outside contractor, it has become increasingly difficult for these firms to acquire the foreign capital and global relationships necessary to merge into the global economic flow of goods and services -- in a sense they are "trapped in the network" they correctly constructed during a different era. As a result Root states, "few Southeast Asian business have transformed themselves into modern, complex corporations."
--fl
<edit> I highly recommend a subscription to Foreign Affairs to any investor. |
