Small Firms and Network Economies Recent development experience points to the way business networks can be the key to a dynamic small-business sector, especially where those links are built on high-trust cooperative relations. This book reviews different types of small-business network, illustrated by an international selection of case studies, including: • Chinese family business networks • ethnic minority business networks • Japanese and South Korean business group networks • European industrial districts. Network promotion initiatives in Singapore, New Zealand, Scandinavia and the UK are each discussed to provide a comprehensive and comparative assessment of small-business networks Martin Perry is a Senior Lecturer in economic geography, urban and regional planning and environmental subjects at the National University of Singapore. His previous publications include Singapore: A Developmental City State with L. Kong and B. Yeoh (John Wiley, 1997), Reform at Work: Workplace Change and the New Industrial Order with C. Davidson and R. Hill (Longman Paul, 1995) and Property and Industrial Development with S. Fothergill and S. Monk (Hutchinson, 1987). Routledge studies in small business Edited by David Storey 1 Small Firm Formation and Regional Economic Development Edited by Michael W. Danson 2 Corporate Venture Capital Bridging the equity gap in the small business sector Kevin McNally 3 The Quality Business Quality issues and smaller firms Julian North, Robert A. Blackburn and James Curran 4 Enterprise and Culture Colin Gray 5 The Financing of Small Business A comparative study of male and female small business owners Lauren Read 6 Small Firms and Network Economies Martin Perry Small Firms and Network Economies Martin Perry London and New York First published 1999 by Routledge 11 New Fetter Lane, London EC4P 4EE This edition published in the Taylor & Francis e-Library, 2002. Simultaneously published in the USA and Canada by Routledge 29 West 35th Street, New York, NY 10001 © 1999 Martin Perry All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Perry, Martin, 1956– Small firms and network economies / Martin Perry. p. cm. – (Routledge studies in small business : 6) Includes bibliographical references and index. 1. Business networks–Case studies. 2. Small business–Case studies. I. Title. II. Series. HD69.S8P47 1999 658´.044–dc21 98-44077 CIP ISBN 0-415-18392-8 (Print Edition) ISBN 0-203-05693-0 Master e-book ISBN ISBN 0-203-20746-7 (Glassbook Format) Contents List of boxes vii List of figures and tables ix Preface xi List of abbreviations xiv 1 Introduction 1 Networks at the micro level 4 Networks at the macro level 20 Purpose and scope of the book 23 Outline of the book 29 2 Analysing networks 31 Networks – from the bottom up 32 Networks – from the top down 42 Networks – intermediate perspectives 48 Conclusion 54 3 Family business in ethnic and social networks 55 Ethnic enterprise 56 Overseas Chinese networks 60 Ethnic business in a hostile environment 75 Family business 77 Conclusion 80 4 Community-based networks 81 Industrial district theory 82 The Italian case 89 Industrial districts in Japan 100 Baden-Württemberg 105 Silicon Valley 110 Conclusion 113 vi Contents 5 Organisational networks 115 Business groups 116 Business groups in Asia 120 Industry associations 128 Strategic alliances 136 Franchising 139 Conclusion 141 6 Subcontracting and supplier networks 142 Issues in subcontracting 143 Subcontracting in Japan 147 Changing buyer–supplier relations in Western manufacturing 154 Subcontracting for multinationals 157 Conclusion 172 7 Promoting networks in New Zealand 174 The network environment 175 Networking for export growth 181 Network associations 193 Lessons from New Zealand 194 Conclusion 198 8 Conclusion 201 Policy for networks 204 References 207 Index 226 Boxes 1.1 Transaction cost versus embeddedness perspectives on networks 7 1.2 What is in a transaction? 9 1.3 Testing for embeddedness through interlocking directorates 11 1.4 Functional equivalents for trust and Japanese work methods 13 2.1 Social networks and small-business managers in the UK 34 2.2 Motives for hub and spoke networks 40 2.3 The Japanese business system 44 2.4 Australia and Finland: contrasting small industrial economies 47 2.5 Explaining participation in small-business networks in Christchurch, New Zealand 52 3.1 Guanxi and overseas Chinese business 61 3.2 Subcontracting and personal ties in the Pearl River Delta 67 3.3 Ethnic business experiences in Australia 69 3.4 Succession issues in a family business 72 3.5 Singapore and the limits of guanxi 73 4.1 Proximity and networking 84 4.2 Counting industrial districts 92 4.3 Shoe making in Emilia-Romagna 93 4.4 Adjustment in the Prato woollen district 96 4.5 Reproducing industrial districts – learning from interfirm linkages in three localities 98 4.6 The Seto ceramics district and lean production 101 4.7 Networking in Neckar-Alb, Baden-Württemberg: the case of mechanical engineering 107 5.1 Family business and group formation in Taiwan 125 5.2 The Tainanbang guanxiqiye 126 5.3 Industry associations in New Zealand 129 5.4 Small-business cooperatives in Japan 131 5.5 Influences on industry cooperation for rationalisation 133 5.6 Collective action by the Japan Spinners Association 1950–90 134 6.1 Definitions 143 6.2 Arm’s length and obligational contracting styles 148 6.3 Supplier independence in Japan: the case of the semiconductor manufacturing equipment industry 152 6.4 Vendor rating programmes 155 6.5 Global commodity chains 158 6.6 The Local Industry Upgrading Programme (LIUP) 165 6.7 Bicycles in Taiwan 166 viii Boxes 6.8 Acer’s ODL strategy and implications for subcontractors 169 7.1 Network relations of members of the Canterbury Business Advisory Foundation 178 7.2 Industry structures and JAGs 185 7.3 The Danish Technology Institute’s network programme 188 7.4 Network broker effectiveness 191 7.5 Learning from existing cooperation 196 Figures and tables Figures 4.1 Industrial districts in the Third Italy (1995) 90 4.2 Community-based industries in Japan (1974) 104 7.1 Map of New Zealand 180 Tables 1.1 Network, market and hierarchy relations compared 5 1.2 Small-firm networks 25 2.1 Measuring demand and supply networks 35 2.2 Business system origins and key components 43 3.1 Typical characteristics of Chinese family business 63 3.2 Investment from ethnic Chinese states to selected Asian countries 1986–90 66 B4.1 Profile of two Emilia-Romgna shoe-making districts (1992) 94 6.1 Summary of MNC subcontracting strategies 161 7.1 Summary of JAG operating practice 183 Preface The purpose of this book is to provide a guide to understanding the significance of the role of networks in small-business development. There has been much advocacy of the idea that economies based on high levels of business trust and cooperative relations, within and between businesses, provide a recipe for economic success. Subjecting this claim to critical scrutiny provides the principal motivation for this book. In line with this objective, the emphasis in this review is to assess networking in terms of the relationships between economic performance, industrial structure and society. This focus on the context in which small-business networks operate is designed to assist business decision makers, public policy makers and others interested in local economic development assess the significance of the claims about networks. While there is a great emphasis in the ‘serious’ literature about business networks on the importance of history and social relations in the formation of networks, rather less tends to be heard about more contemporary forces that sustain network relations (and which may shift to break down existing forms of cooperation) such as market conditions, technology and other industry characteristics. Identifying the significance of such contemporary intermediate influences on networks provides much of the discussion for the chapters which follow. Another objective behind the writing of this book was to correct the tendency to view networks as somehow more progressive, sustainable and democratic ways of conducting business than competitive market relations. This claim has merit, but it can overstate the reality of business relations in competitive markets, which in practice can still depend highly on personal relations and trust. There is also a tendency to overlook the fact that the conditions which sustain some often praised network economies are distinctly unprogressive. Dependence on ethnic uniformity, the privileging of work over other life interests and reliance on connections to political elites variously sustain particular examples of business networks. In a similar way, the book aims to counter arguments that see universal binary trends in industrial organisation. Thus, in contrast to the claims about the end of mass production and the shift to an era of customised production, this account favours awareness of the variability in market trends. In some contexts, opportunities for network relations are growing; in other cases they are declining. The specific origins of this book are in the author’s research into business networks in New Zealand. This small industrial country has been undergoing a radical shift in its public policy environment in favour of a minimalist government role in business development and employment matters. Amidst xii Preface the dominant advocacy of the belief that ‘competitive markets’ alone will promote economic prosperity, a few experiments have been implemented which seek to show that cooperation between business also has a role to play.