Managing favours in a global economy

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Original text: David J. Mccarthy and Sheila M. Puffer, D'Amore-McKim School of Business, Northeastern University, USA

A broad view of favours across the globe (as illustrated by the wide array of practices across nineteen countries provided in the content of the chapter) raises questions about the relationship between ‘economies of favours’ in post-socialist countries, provided in the introduction, and the ubiquitous nature of the exchange of favours in developed countries. The use of personal contacts for getting things done is extraordinarily important in everyday life for citizens of most countries as they seek employment, information, or access to institutions such as those in education and healthcare, and especially, as empirical data suggest, in seeking employment or advancement in one’s career. The phenomenon also features prominently in the conduct of business in emerging or transitional economies, as well as international business and management.

Emphasis on managing favours is important as it is usually managers who effectuate the practice in a global business environment by seeking contracts, as well as licenses to operate and various types of permits. ‘Favors span a number of issues such as corporate growth strategies, foreign direct investment, joint ventures and other alliances, multinational headquarters- subsidiary relations, knowledge transfer, human resources management, and business ethics’[1]. In addition, the use of favours by managers in emerging markets ‘impacts their organizational outcomes of firm growth, legitimacy, and reputation, as well as […] can facilitate or inhibit the international expansion of their firms’[2]. The realities of dealing with various governments and bureaucracies, represented by the entries in this volume, are inherent in the business arena of developing nations. However, they may also manifest themselves in developed economies, often resulting in lobbying governments, bureaucracies and elected officials, thus generating practices involving paying for favours, yet legalised in those environments.

Although ‘the use of favors is not limited to transition economies, [the authors] contend that it is more deeply ingrained culturally, more frequently employed, and more positively viewed in those environments having formal institutions with relatively weak legitimacy, more so than in developed economies’[3]. In fact, ‘several management scholars have identified systematic cultural differences between developed and developing countries which have an impact on management practices and firm behavior[4][5][6][7][2].

According to von Weltzien Hoivik, ‘outcomes from using favors in developed economies are likely to be less predictable than in emerging economies where cultural traditions generally place more pressure on the grantor of the favor to see that the desired outcome is achieved. For instance, regarding a job reference, the expectation in the US is that the person granted a favour is likely to gain an interview but not necessarily to be hired, while in emerging economies like the BRICs, being hired would be expected. Another example would be the permeability of lines between personal and business relationships in China, in contrast to the West, where they are separated by norms and rules regarding conflicts of interest[8].

Economies of favours can be viewed as part of the informal economies, defined as ‘commercial activities that occur at least partially outside a governing body’s observation, taxation, and regulation’ (see the Academy of Management 2012 call, http://www.aom.org/meetings). Although the informal economy is not regulated by societal institutions in the same way as the formal economy, it is not similar to the black market or shadow economies, where practices and transactions are basically instrumental and less defined by social capital and social exchange[9]. The importance of sociability is often a fundamental lens for viewing favours, yet insufficient by itself and should be viewed in the context of network theory, transaction cost theory, institutional theory, stakeholder theory, and ethical perspectives around the topics of agency theory and integrative social contracts theory (ISCT) (see the findings of the 2010 Northeastern University Colloquium).

In fact, the very definition of favours might need a change. We propose to understand favours as ‘an exchange of outcomes between individuals, typically utilizing one’s connections, that is based on a commonly understood cultural tradition, with reciprocity by the receiver typically not being immediate, and where the process and outcomes would not generally be considered bribery within that cultural context’[3] (McCarthy, Puffer, Dunlap, and Jaeger 2012: 27, 28). A cross-disciplinary outlook is essential in driving this change. For decades, favours fell into the themea of anthropology[10][11], sociology[12][13][14][15], and economics[16][17]. According to Blau, in contrast to economic exchange, the social exchange of favours ‘entails unspecified obligations’ and ‘involves favors that create diffuse future obligations…and the nature of the return cannot be bargained.’[18]. This view from an eminent sociologist contains many of the elements of the proposed, more complete, definition of favours. The cross-discipline consensus is that the use of favours is fundamentally anchored in the culture with its social traditions, referred to as an informal cultural-cognitive institution[15].

The definitions of favours seek to distinguish them from bribery, but the boundaries between the two are blurred. On the one hand, accepting the culture for favours can lead to bribery: favours may not constitute bribery per se and are generally not illegal in most countries, but they can result in negative consequences for the society, such as creating an uneven playing field for various actors (especially those excluded from the networks whithin which favours are exchanged). On the other hand, ‘favors may, in fact, be used to avoid paying bribes that carry associated costs and potential penalties. In contrast to favors, bribery involves a payment in money or in kind, with the expectation of something in exchange that requires unethical behavior on the part of the recipient of the bribe[19][20], and is considered illegal as well as unethical in most countries’[2] (Puffer, McCarthy, Jaeger, and Dunlap 2013: 329). To place the proposed definition of favours in perspective, favour exchange in China has been categorised as a social norm, while bribery is seen to be a deviation from the social norm[19].

Favour exchanges are defined by both culture and the stage of development of a country’s formal institutional system ‘can lead to different perceptions regarding the ethicality of using favours. In developed economies where agency theory is fundamental to explaining corporate governance and managerial behavior[21], managers would often consider some transactions involving favors to be unethical’[22]. In emerging economies, however, agency theory has far less impact on business and managerial behavior because strong, legitimate formal institutions are required to effectuate the principles of that theory, and those are generally lacking in those economies’[3]. Thus, ‘the use of favors in such economies is based in the cultural-cognitive institutions that fill the void created by the weak legitimacy of formal institutions in those countries. Individuals thus are often faced with a pervasive bureaucracy due to the communist or colonialist pasts of these countries. Thus we posit that the ethicality of using favors, including those used to achieve business goals, is highly dependent upon the context, particularly the country and its cultural context, and more specifically the communities within that country’[3].

In fact, ‘although often claimed to be an amoral theory, agency theory is used in practice by some Western businesspersons to judge the ethicality of corporate governance and other decisions and behaviours. Some critics thus argue that it must be considered in the context of morality: ‘Most agency theorists, despite the denials, make moral claims. Moreover, these moral claims are open to challenge’[23].’ Those authors conclude that ‘an adequate theory of agency needs assistance from ethical theory[23][22]. In contrast to agency theory that is usually based in some form of capitalism in developed economies, the consideration of integrative social contracts theory (ISCT) may be preferred to judge the ethicality of favours and transactions involving those practices, particularly in undeveloped or developing economies. This is because ISCT takes into account the cultural-cognitive institutions of individual countries based on their historical traditions and values. ‘ISCT acknowledges the legitimacy of many local norms, doing so in an inductive fashion by observing behaviors and recognizing underlying cultural values. ISCT recognizes what “is” in the context of a local community as the basis for legitimacy of local norms, provided they are consistent with hypernorms and the theory’s priority rules, rather than what ‘ought to be’ as the basis for ethical legitimacy. Local norms will generally prevail as the ethical standard if they are ‘consistent norms’ that are more culturally specific, reflecting cultural variations[24], provided they meet the tests of consistency noted above[25][26][27][22]. In summary, rather than the more rigid interpretations of the appropriateness, and even ethicality of practices such as favours inherent in agency theory, ISCT provides an appropriate level of flexibility for those behaviours by recognising their cultural-cognitive foundation, but with limitations. Thus this theory is far more appropriate and useful for judging ethicality of practices such as favours in developing economies, and can often be applied with value in developed economies.

The various practices presented in this chapter fall under an overarching umbrella of favours, although the practice in different countries may manifest itself in numerous and varying ways. The definition of favours, differentiated from bribery, has proven to be a useful tool with which to review the entries in this volume and to relate them to the different cultural, legal, and institutional environments. While recognising the ubiquitous nature of such practices, we also acknowledge significance of the cultural-cognitive institutions, inclusive of a countries’ historical and cultural traditions and values. Given that developed economies have more stable and legitimate formal institutions, they might be less reliant on such informal institutions as exchange of favours, even as the increasing complexity of modern societies seem to produce an unintended consequence for seeking informal shortcuts.

See also

Notes

  1. Puffer, Sheila M., McCarthy, Daniel J., and Peng, Mike W. 2013. ‘Managing Favors in a Global Economy’, Asia Pacific Journal of Management, 30(2), 321.
  2. 2.0 2.1 2.2 Puffer, Sheila M., McCarthy, Daniel J., Jaeger, Alfred M., and Dunlap, Denise. 2013. ‘The Use of Favors by Emerging Market Managers: Facilitator or Inhibitor of International Expansion?’, Asia Pacific Journal of Management, 30(2), 329.
  3. 3.0 3.1 3.2 3.3 McCarthy, Daniel J., Puffer, Sheila M., Dunlap, Denise R., and Jaeger, Alfred M. 2012. ‘A Stakeholder Approach to the Ethicality of BRIC-Firm Managers’ Use of Favors’, Journal of Business Ethics, 109, 27, 28.
  4. Aycan, Z. 2004. ‘Leadership and Teamwork in the Developing Country Context’, in H.W. Lane, M. Maznevski, M.E. Mendenhall, and J. McNett (eds.), The Blackwell Handbook of Global Management: A Guide to Managing Complexity. Hoboken: Wiley-Blackwell: 406.
  5. Hoskisson, R., Eden, L., Lau, C., and Wright, M. 2000. ‘Strategy in Emerging Economies’, Academy of Management Journal, 43: 249-267.
  6. Jaeger, A. 1990. ‘The Applicability of Western Management Techniques in Developing Countries: A Cultural Perspective’, in Jaeger, A., and Kanungo, R. (eds.), Management in Developing Countries. London: Routledge: 131-145.
  7. Jörgensen, J., Hafsi, T., and Kiggundu, M. 1986. ‘Towards a Market Imperfections Theory of Organizational Structure in Developing Countries’, Journal of Management Studies, 23: 417- 442.
  8. von Weltzien Hoivik, H. 2007. ‘East Meets West: Tacit Messages About Business Ethics in Stories Told by Chinese Managers’, Journal of Business Ethics, 74, 457-469.
  9. Bruton, G. D., Ireland, R. D., and Ketchen, D. J. 2012. ‘Toward a Research Agenda on the Informal Economy’, Academy of Management Perspectives, 26(3): 1-11.
  10. Malinowsky, B. 1922. Argonauts of the Western Pacific. London: Routledge and Kegan Paul.
  11. Mauss, M. 1990/1950. The Gift: The Form and Reason for Exchange in Archaic Societies. New York: W.W. Norton.
  12. Blau, P.M. 1964. Exchange and Power in Social Life. New York: Wiley.
  13. Burt, R. 1992. Structural Holes: The Social Structure of Competition. Cambridge, MA: Harvard University Press.
  14. Homans, G.C. 1958. ‘Social Behavior as Exchange’, American Journal of Sociology, 63: 597- 606.
  15. 15.0 15.1 Scott, W.R. 2008. Institutions and Organizations: Ideas and Interests. Thousand Oaks, CA: Sage.
  16. North, D. C. 1990. Institutions, Institutional Change and Economic Performance. Cambridge, UK: Cambridge University Press.
  17. Polanyi, K. 1957. ‘The Economy as Instituted Process’, in K. Polanyi, C.M. Arensberg, and H.W. Pearson (eds.), Trade and Market in the Early Empires. New York: The Free Press.
  18. Blau, P.M. 1964. Exchange and Power in Social Life. New York: Wiley, pg. 93.
  19. 19.0 19.1 Luo, Y. 2002. ‘Corruption and Organization in Asian Management Systems’, Asia Pacific Journal of Management, 19: 405-422.
  20. Rose-Ackerman, S. 2002. ‘"Grand" Corruption and the Ethics of Global Business’, Journal of Banking and Finance, 26: 1889-1918.
  21. Jensen, M.C., and Meckling, W.H. 1976. ‘Theory of the Firm: Capital Managerial Behavior, Agency Costs, and Ownership Structure’, Journal of Financial Economics, 3: 305-360.
  22. 22.0 22.1 22.2 McCarthy, D. J., and Puffer, S. M. 2008. ‘Interpreting the Ethicality of Corporate Governance Decisions in Russia: Utilizing Integrative Social Contracts Theory to Evaluate the Relevance of Agency Theory Norms’, Academy of Management Review, 33: 11-31.
  23. 23.0 23.1 Bowie, N.E., and Freeman, R.E. 1992. Ethics and Agency Theory: An Introduction. New York: Oxford University Press, pg. 21.
  24. England, G.W. 1975. The Manager and His Values: An International Perspective. Cambridge, MA: Ballinger.
  25. Carroll, A.B. 2004. ‘Managing Ethically with Global Stakeholders: A Present and Future Challenge’, Academy of Management Executive, 18(2): 114-120.
  26. Donaldson, T., and Dunfee, T.W. 1999. Ties that Bind: A Social Contracts Approach to Business Ethics. Boston: Harvard Business School Press.
  27. Spicer, A., Dunfee, T.W., and Bailey, W.J. 2004. ‘Does National Context Matter in Ethical Decision Making? An Empirical Test of Integrative Social Contracts Theory’, Academy of Management Journal, 47(4): 610-620.

Further reading

DeGeorge, R.T. 1992, ‘Agency Theory and the Ethics of Agency’, in N.E. Bowie and R.E. Freeman (eds.), Ethics and Agency Theory: An Introduction. New York: Oxford University Press: 59-72.
Donaldson, T., and Dunfee, T.W. 1994. ‘Toward a Unified Conception of Business Ethics: Integrative Social Contracts Theory’, Academy of Management Review, 19: 252-284.
Flynn, F. J. 2003. ‘How Much Should I Give and How Often? The Effects of Generosity and Frequency of Favor Exchange on Social Status and Productivity’, Academy of Management Journal, 46(5): 539-553.
Ledeneva, A. V. 1998. Russia’s Economy of Favours: Blat, Networking and Informal Exchange. Cambridge, UK: Cambridge University Press.
Ledeneva, A.V. 2006. How Russia Really Works: The Informal Practices that Shaped Post- Soviet Politics and Business. Ithaca: Cornell University Press.
Puffer, S. M., McCarthy, D. J., and Boisot, M. 2010. ‘Entrepreneurship in Russia and China: The Impact of Formal Institutional Voids’, Entrepreneurship Theory and Practice, 34: 441-467.
Schuster, C.P. 2006, ‘Negotiating in BRICs: Business as Usual Isn’t’, in S. Jain (ed.), Emerging Economies and the Transformation of International Business: Brazil, Russia, India and China (BRICs). Cheltenham, UK: Edward Elgar: 410-427.