Confucian Capitalism An inquiry into the relationship between East Asian Thought and Firm Performance I. Preface The author declares that the text and work presented in this Master thesis is original and that no sources other then those mentioned in the text and its references have been used in creating the Maser thesis. The copyright of the Master thesis rests with the author. The author is responsible for its contents. RSM Erasmus University is only responsible for the educational coaching and beyond that cannot be held responsible for the content. II. Executive Summary This thesis aims to contribute to the understanding of the role of Confucianism -an ideology prevalent throughout and particular to the Orient- in the East Asian business context. The thesis provides a historic synopsis of the debate on Confucianism and economic development, discussing Weber, whose opinions are still influential to much of the recent research, as well as the relevance of the Asian crisis of 1997. Consequently, focus shifts from the macro to the meso (firm) level. This part is pertained with research that has related Confucian values to behavior and modes of organization characteristic for East Asian businesses. Finally, the author examines whether Confucian values indeed have a differentiating effect on behavior and firm performance, using a novel approach to explicate the Confucian Orientation (CO) of East Asian business organizations. The research results indicate that Confucianism can indeed be linked to certain behavior, but no relationship can be established between CO and financial performance. The author discusses the implications of these results and makes suggestions for future research. 2 Contents Preface ............................................................................................................................1 Executive Summary .......................................................................................................2 Introduction ...................................................................................................................4 An overview of the debate on Confucianism and economic performance ...............6 Early Protagonists ...........................................................................................................6 Post-war development: Culturalist contentions .......................................................7 Asian Crisis ................................................................................................................... 12 A closer look ................................................................................................................ 15 The central tenets of Confucianism ................................................................................ 16 Confucianism and the East Asian business organization ................................................ 18 Research ....................................................................................................................... 22 Limitations..................................................................................................................... 28 Research Results & Discussion ...................................................................................... 29 Conclusion ................................................................................................................... 33 Suggestions for future research .................................................................................. 34 Bibliography ................................................................................................................ 35 Appendix I: Confucianism ............................................................................................. 39 Appendix II: Index of ConfucianVocabulary .................................................................. 41 Appendix III: Elaboration on terminology ...................................................................... 44 Appendix IV: Statistics .................................................................................................. 46 3 Introduction Having studied Chinese language and culture for some five years and having resided in East Asia for a year and a half, I’ve always had the intention to make a further inquiry into Chinese business practice. For many, both Chinese and non-Chinese, Confucianism encompasses much of what is regarded as quintessentially Chinese. Much researched social phenomena such as guanxi, mianzi (face) and xinyong (trust) all find their antecedents in the teachings of Master Kong (孔子, kong3zi), who became known in the West by the latinized name Confucius. Having worked in a Taiwanese company, I feel that Confucian principles are still an important part of Chinese business and social life. Therefore, I intend to investigate the prevalence of Confucian values in Chinese business organizations, and whether and how they relate to the performance of these firms. The relation between Confucianism and economic performance became a topic of research for economists and business scholars as part of the broader inquiry into the causes of the successful post-war industrialization and economic development of the Asian nations. However, the debate on the merits and demerits of Confucianism within a social economic context has antecedents that can be traced back to the 18th century, when Voltaire praised the Confucian political model of ‘benevolent despotism’, considering it an example for the West (Yi et al., 2006). Some have argued that Confucianism is a detriment to economic development. Others have proposed the exact opposite, claiming that Confucianism is a catalyst for economic activity. Still others insist that Confucianism is simply inconsequential to economic performance. While the focus of the debate was first on the social-economic level, interest in the business literature in the influence of culture on organizational behavior and business performance has led to the inclusion of Confucianism amongst the subjects of business research. In this thesis, I will perform an appraisal of the extant literature and examine the relation between Confucianism and behavior within business organizations and subsequently, the relation between Confucianism and company performance. First I will provide an historic synopsis of the debate on Confucianism and economic development, discussing Weber, who’s opinions are still influential to much of the recent research, as well as the relevance of the Asian crisis on 1997, which all but put an end to the Asian economic fairy tale. Consequently, focus will shift from the macro to the meso (firm) level. In this part, I will describe research 4 that has related Confucian values to behavior and modes of organization characteristic for East Asian businesses. Finally, I will examine whether Confucian values indeed have a differentiating effect on behavior and firm performance. I will use the linguistic instrument of content analysis, examining the vision statements and management philosophies of a sample of one-hundred and nineteen Taiwanese companies for vocabulary indicative of a Confucian orientation. This orientation is linked to the prevalence of nepotism – a trait consistently associated with Confucian values- within these firms. Consequently, CO is related to the companies’ return on equity (ROE), to determine what –if any- effect adherence to Confucian values has on financial performance. 5 An overview of the debate on Confucianism and economic performance Early Protagonists As early as the eighteenth century Renaissance thinkers such as Leibniz and Voltaire studied the culture and political system of China, which they held in high regard (Yi et al., 2006). They propagated the supremacy of the political ideology of ‘benevolent despotism’, exemplified in the rule of the Chinese emperors (ibid.). Through their work and the Jesuit missions to the Chinese court, the general Western public first became acquainted with Chinese culture, resulting in a wide-spread but superficial infatuation. Indeed, when imperialist forces made their way into China a little more than a century later, many westerners came to regard Chinese culture with contempt. The first serious and arguably most influential treatise on Confucianism and economic development was Max Weber’s “The religion of China: Confucianism and Taoism”, first published early in the twentieth century. In this seminal work, Weber expands on his proposition that religion has a critical influence on the development of nations. In “The religion of China” Weber sets out to prove that the Confucian tradition is detrimental to modernization and economic development. The thrust of the original argument is that Confucianism and capitalism -which is considered if not the only ideology promoting economic growth certainly the most effective- have characteristics that are irreconcilable. This inherent antagonism stems from fundamentally different religious views. Western Protestantism regards God as detached and not partaking in the human world. In effect, the human world without God is completely guided by objective goals and rational behavior. Moreover, Protestant ethic itself motivates values such as diligence and the productive use of time (Redding, 1993). East Asian society presupposes that reality and all its facets are infused and guided by a divine presence.1 Human relations are regarded as subject to the same principles as natural phenomena and inherently ethical in nature. This precludes