View source for Managing favours in a global economy

'''''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’<ref>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.</ref>. 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’<ref name="pmjd">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.</ref>. 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’<ref name="mpdj">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.</ref>. 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<ref>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.</ref><ref>Hoskisson, R., Eden, L., Lau, C., and Wright, M. 2000. ‘Strategy in Emerging Economies’,
Academy of Management Journal, 43: 249-267.</ref><ref>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.</ref><ref>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.</ref><ref name="pmjd" />.

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<ref>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.</ref>.

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<ref>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.</ref>. 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’<ref name="mpdj" /> (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<ref>Malinowsky, B. 1922. Argonauts of the Western Pacific. London: Routledge and Kegan Paul.</ref><ref>Mauss, M. 1990/1950. The Gift: The Form and Reason for Exchange in Archaic Societies. New
York: W.W. Norton.</ref>, sociology<ref>Blau, P.M. 1964. Exchange and Power in Social Life. New York: Wiley.</ref><ref>Burt, R. 1992. Structural Holes: The Social Structure of Competition. Cambridge, MA: Harvard
University Press.</ref><ref>Homans, G.C. 1958. ‘Social Behavior as Exchange’, American Journal of Sociology, 63: 597-
606.</ref><ref name="sc">Scott, W.R. 2008. Institutions and Organizations: Ideas and Interests. Thousand Oaks, CA:
Sage.</ref>, and economics<ref>North, D. C. 1990. Institutions, Institutional Change and Economic Performance. Cambridge,
UK: Cambridge University Press.</ref><ref>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.</ref>. 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.’<ref>Blau, P.M. 1964. Exchange and Power in Social Life. New York: Wiley, pg. 93.</ref>. 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<ref name="sc" />.

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<ref name="luo">Luo, Y. 2002. ‘Corruption and Organization in Asian Management Systems’, Asia Pacific
Journal of Management, 19: 405-422.</ref><ref>Rose-Ackerman, S. 2002. ‘&quot;Grand&quot; Corruption and the Ethics of Global Business’, Journal of
Banking and Finance, 26: 1889-1918.</ref>, and is considered
illegal as well as unethical in most countries’<ref name="pmjd" /> (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<ref name="luo" />.

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<ref>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.</ref>, managers would
often consider some transactions involving favors to be unethical’<ref name="mp">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.</ref>.
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’<ref name="mpdj" />. 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’<ref name="mpdj" />.

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’<ref name="bf">Bowie, N.E., and Freeman, R.E. 1992. Ethics and Agency Theory: An Introduction. New York:
Oxford University Press, pg. 21.</ref>.’ Those authors conclude that ‘an
adequate theory of agency needs assistance from ethical theory<ref name="bf" />’<ref name="mp" />. 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<ref>England, G.W. 1975. The Manager and His Values: An International Perspective. Cambridge,
MA: Ballinger.</ref>, provided they meet the tests of consistency noted above<ref>Carroll, A.B. 2004. ‘Managing Ethically with Global Stakeholders: A Present and Future
Challenge’, Academy of Management Executive, 18(2): 114-120.</ref><ref>Donaldson, T., and Dunfee, T.W. 1999. Ties that Bind: A Social Contracts Approach to Business
Ethics. Boston: Harvard Business School Press.</ref><ref>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.</ref>’<ref name="mp" />. 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==

*[[Blat (Russia)]]
*[[Jeitinho (Brazil)]]
*[[Sociolismo (Cuba)]]
*[[Compadrazgo (Chile)]]
*[[Pituto (Chile)]]
*[[Štela (Bosnia and Herzegovina)]]
*[[Veza (Serbia and the Balkans)]]
*[[Vrski (Macedonia)]]
*[[Vruzki (Bulgaria)]]
*[[Natsnoboba (Georgia)]]
*[[Tanish-bilish (Uzbekistan)]]
*[[Guanxi (China)]]
*[[Inmaek/ Yonjul (South Korea)]]
*[[Tapş (Azerbaijan)]]
*[[Agashka (Kazakhstan)]]
*[[Zalatwianie (Poland)]]
*[[Vitamin B (Germany)]]
*[[Jinmyaku (Japan)]]
*[[Jaan-pehchaan (India)]]
*[[Aidagara (Japan)]]
*[[Amici, amigos (Mediterranean and Latin America)]]

==Notes==
<references />
===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.<br>
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.<br>
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.<br>
Ledeneva, A. V. 1998. Russia’s Economy of Favours: Blat, Networking and Informal Exchange.
Cambridge, UK: Cambridge University Press.<br>
Ledeneva, A.V. 2006. How Russia Really Works: The Informal Practices that Shaped Post-
Soviet Politics and Business. Ithaca: Cornell University Press.<br>
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.<br>
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.