DEFINING INFORMAL NETWORKS IN EMPIRICAL RESEARCH

Informal networks have been studied in several disciplines, among others, in economics, sociology or social anthropology. In economics, for instance, research on economic ‘clubs' finds that transaction costs for economic coordination of activities can be kept low through informal coordination and conciliation, peer pressure, and collective punishment (Buchanan, Reference Buchanan1965; Sandler & Tschirhart, Reference Sandler and Tschirhart1997). In sociology, the roots of informal network research can be traced back to Park (Reference Park1924), Simmel (Reference Simmel and Wolff1950), Homans (Reference Homans1950), Cooley (Reference Cooley1956), and Blau (Reference Blau1964), who analyzed patterns of interaction and communication in order to understand social life. In social anthropology, the development of exchange theory focused on the content of relationships that actors form and the conditions under which they evolve (Lévi-Strauss, Reference Levi-Strauss1969; Malinowski, Reference Malinowski1922). Role theory used the metaphor of ‘fishnets’ in studying organizations to describe the loosely coordinated work of units in an organization, thus implying the network concept (Katz & Kahn, Reference Katz and Kahn1966).

The most common understanding of informal networks implies that social networks have some utility in handling formal constraints. In the language of participants, this use is often referred to as mutual help or personal trust. In the language of observers, the situation is much more complex. According to the ‘topographical map’ of existing perspectives on social networks, students of social networks implicitly or explicitly make two choices. First, they treat ‘nodes and ties’ as either personal (represented by people) or impersonal (represented by organizations). Second, they consider networks internally (exploring their constitution and properties) or externally (exploring their implications in a broader socioeconomic context) (Ledeneva Reference Ledeneva, Bittner, Hackenbroich and Vockler2006).

For our purposes, the internal constitution and properties of informal networks can be distinguished by transactional content, the nature of the links, and structural characteristics (Tichy, Tushman, & Fombrun Reference Tichy, Tushman and Fombrun1979). Thus far, the dominant focus of network analysis has been structural characteristics, including network characteristics, such as size, density, centrality, bridging, and gatekeeping. Size and density have been underresearched, and even less so in emerging markets, but the existing studies provide a framework for analyzing informal networks in business (Shekshnia, Ledeneva, & Denisova-Schmidt Reference Shekshnia, Ledeneva and Denisova-Schmidt2017). Transactions can involve everything from an information exchange, advice, and benchmark intelligence to help and support. Efficient and effective information exchange is an explanation for bonding as well as a strategy for manipulating behavior. The discussion on the nature of the links includes the frequency of contact or relational strength. Granovetter (Reference Granovetter1973, Reference Granovetter2017) sharpened understanding of social networks by introducing a notion of the strength of ties in characterizing networks. However, the presumed reciprocal interaction of the nodes is simplified. Given networks’ multiplicity, it is essential to understand whether and in what way actors are linked to other networks and how networks overlap.

In terms of external implications, the conceptualization of networks, related to their multiplicity, overlap, and potential for channeling, is essential for overcoming opposite phenomena, such as the individual versus structure in sociology, subjectivism versus objectivism in social theory, and bounded versus absolute rationality in economics. The network effect can be understood as compensating for limited human capacity and human failure to match the assumption of perfect rationality of homo economicus, thus mitigating the issue of “bounded rationality” (Simon Reference Simon1957: 198; see also Klaes & Sent Reference Klaes and Esther-Mirjam2005). Belonging to networks benefits insiders, often without intentionality or even awareness. The value, capacity, and impact of informal networks is related to network capital, assessed through the prism of social network analysis or a social capital framework. From the social capital perspective, these ties are linked to the advantages and opportunities that people obtain through membership in certain communities or networks. According to Bourdieu (Reference Bourdieu and Richardson1986: 248–249) social capital is ‘the aggregate of the actual or potential resources which are linked to possession of a durable network of more or less institutionalized relationships of mutual acquaintance and recognition’. Whereas Bourdieu tended to associate social capital with the embedded advantages of the privileged and thus viewed it as negative, Coleman (Reference Coleman1988) introduced the notion of positive and negative social capital. Burt (Reference Burt1992; Burt & Burzynska, Reference Burt and Burzynska2017) further conceived the potential for brokerage between social networks.

The concept of social capital has been used as a theoretical framework for discussing informal ties (Bourdieu, Reference Bourdieu and Richardson1986; Burt, Reference Burt1992; Lin, Reference Lin2001) by addressing the ‘intangible’ mechanisms behind economic interactions that could be used as a basis for comparison (Putnam, Reference Putnam1995). For empirical purposes, researchers tend to explore either the subversive side of networks (as in the B2B study discussed above) or the supportive side of networks, related to civic capital, economic growth, health, happiness, and well-being (Guiso, Sapienza, & Zingales, Reference Guiso, Sapienza and Zingales2010). In this special issue, we focus on the functional ambivalence in informal networks and discuss both the dark and bright sides, as well as establish the potential for achieving a balance by adjusting the formal and informal constraints within which networks operate.

Viewed from a broader perspective on informality, informal networks are shaped, driven, or regulated by institutional frameworks while also shaping, driving, and regulating them. Typically, informal networks are said to be more important in the coordination of activities in transitional economies, where formal institutions (e.g., contracts, formal rules, law, courts) are ineffective or nonexistent (North, Reference North1990; Peng, Pinkham, Sun, & Chen, Reference Peng, Pinkham, Sun and Chen2009). Yet, in both developing and developed economies, despite its simplistic nature the formal/informal dichotomy is useful for empirical research for several reasons. First, it allows us to envisage a spectrum of constraints – a full range of existing constraints on human behavior, from formal/legal regulations to social norms and informal pressure – that embraces their variety and multiplicity. Second, by pointing out the informal part of the formal, it prevents us from ignoring the hidden structures in uncodified or unarticulated forms, which would yield a distorted perspective of management, organizational behavior, business, and leadership. Third, the formal/informal dichotomy can be looked at dynamically, that is, it can imply either formalization of informal norms or informalization of formal rules. This perspective highlights the role of informal networks as tools and channels for backing up both formal institutions/organizations and informal institutions/values, norms, and ethics of behavior.

Our understanding of Douglass North's definition of ‘institutions’ is that they are ‘the humanly devised constraints that structure political, economic and social interaction. They consist of both informal constraints (sanctions, taboos, customs, traditions, and codes of conduct), and formal rules (constitutions, laws, property rights)’ (Reference North1991: 97; emphasis added). Interestingly, North puts ‘informal constraints’ before ‘formal rules’, which might reflect his views on their historical primacy. However, empirically the combination of formal rules and informal constraints that frame the ways in which informal networks operate creates constraints only when the legal rules and social norms are enforced. To become actual constraints, both rules and norms have to go through the ‘enforcement; belt, as illustrated in Figure 1, showing the gap between formal and informal institutions in the Europeanization of the western Balkans.

Source: INFORM Newsletter No.3, European Union Horizon 2020 research and innovation program, grant agreement No. 693537, p.2.

Figure 1. Closing the gaps between formal and informal institutions: A theoretical model

The model looks complex, yet its fundamental premises are consistent with Scott's (Reference Scott and Ritzer2004b) interpretation of institutional theory. Scott's (Reference Scott2004a) conception of institutions as durable ‘social structures’ consists of three pillars: (1) cultural-cognitive, (2) normative, and (3) regulative elements that give stability and meaning to social life. The first two pillars can be seen as informal constraints (cultural norms, customs, codes of conduct) and formal rules (normative prescription), while the third ensures that these elements both become actual constraints, i.e., regulated and enforced.

An important empirical question is whether informal networks can be considered social structures or institutions. Their potentiality and often dormant nature seem to support this notion. The fluidity and the context-bound nature of informal networks, relationship-based and rules-oriented, suggest otherwise. Informal networks appear to be universal in human society, but how work depends on the context, and their functionality varies significantly across countries and development stages. North describes economic development in two stages:

1. 1. Local exchanges within a village community, in which dense social networks of informal constraints facilitate local exchange with a relatively low transaction cost (Clifford Geertz, 1979; cited in North, Reference North1991).

2. 2. Market exchanges linking a village community to larger, urban, and interconnected ‘markets’. This stage of economic development is full of transactions among socially distant individuals, which increase transaction costs that call for formal rules to reduce risk of various kinds due to increasing transactions among strangers (North, Reference North1991).

North's views on the evolutionary nature of institutions seem to contradict the idea of informal networks as institutions:

However, informal networks certainly enable constraints, as the channels and ‘conveyer belts’ for enforcing cultural norms and formal/organizational changes through peer pressure. In other words, when social networks channel informal pressure, driven by personal relationships, formal rules and procedures are circumvented, and they are referred to as ‘informal networks’. Such informal networks are particularly essential when formal rules and informal constraints clash and impose contradictory demands on an individual. For example, in some institutional frameworks, both formal and informal constraints are so strong that an official cannot remain a good bureaucrat and a good brother at the same time, so informal networks enable and channel ways of navigating the constraints to help the brother while still keeping the bureaucratic job.

In other types of sociological ambivalence, some professionals are similarly vulnerable to conflicting demands on the job. Merton (Reference Merton1976) offers an example of a doctor who has to give a patient personal attention yet remain an impartial and impersonal expert. The idea of dual utility (i.e., a knife that can both kill and cure) applies to networks. Although an informal network per se is neither good nor bad, its functionality is defined by the nature of the formal and informal constraints that shape them. The conventional wisdom is that informal networks are good when they do not siphon public resources/funds/abuse power or betray trust and bad when they do. Nonetheless, understanding societies in which the boundary between public and private is blurred is challenging in empirical research.

Many theoretical debates have taken place in management studies and political science on the types of interaction between formal (grounded in codified rules enforced by hierarchies) and informal (grounded in norms, customs, and traditions enforced by social networks) institutions (Helmke & Levitsky, Reference Helmke and Levitsky2004), but empirical studies on such interactions are not plentiful. One reason is the typology itself. Although political scientists shed light on the dynamics of interaction between formal and informal institutions, they seem to deny informal institutions equal status. The primacy and (in)effectiveness of formal institutions define the types of informal institutions: accommodating, substituting, complementary, or competing (Helmke & Levitsky, Reference Helmke and Levitsky2004). The typology and comparative agenda have been formulated but not empirically tested.

The other reason for this empirical elusiveness of informality is that the notions of the formal and the informal are analytical constructs, which are often difficult to detach and analyze separately or possess dual utility that is hard to categorize. In fact, what is formal and what is informal are often contextual and depend on the perspective: ‘Like a quantum particle, we find them in two modalities at once: informal practices are one thing for participants and another for observers’ (Ledeneva, Reference Ledeneva, Ledeneva, Bailey, Barron, Curro and Teague2018: 7). One key challenge in trying to understand informality is to resist making analogies to formal institutions. Informality is fluid, seemingly irrelevant, or taken for granted – in other words, it appears nonexistent unless one is looking for it or questions it explicitly (Ledeneva, Reference Ledeneva1998: 4). Conventionally, this is the case when we perceive an environment as ‘normal’ because we were raised and socialized in it. In other words you find what you are looking for.

In emerging market studies, it is reasonable to question whether the formal/informal distinction remains useful for understanding developmental issues:

We focus here on the empirical evidence on informal networks in order to highlight the full spectrum of existing constraints, both formal and informal, to make them visible and to assess their potential for transformative change. In some countries, business success is barely possible without informal networks. Because informal networks are not codified and are not easy to study, their modus operandi, with their dark and bright sides, should be firmly on the agenda of leaders of multinational corporations in order to assess risks and seize opportunities. However, the three implications of the formal/informal dichotomy point equally in the opposite direction: the potential for formalizing informal networks, the crucial role of formal constraints in shaping the modus operandi of informal networks, and the complexity of constraints that drive the functional ambivalence of informal networks. (For a summary of quantitative studies used in this introduction and their effect sizes, see Appendix I, and for a summary of qualitative studies, see Appendix II.)

THE DARK AND THE BRIGHT SIDES OF INFORMAL NETWORKS

The moral ambiguity involved in discussing both the dark and bright sides presents an obstacle that requires a delicate touch. Obviously, neither scholars nor practitioners are keen on appearing to overlook the negative aspects of networking deliberately. Informal networking is conventionally connected to the risk of corruption associated with gifts, favoritism, nepotism, insider trading, and fraud. In other words, merely exploring the bright side of informal networking might create the impression of support for dubious, quasi legal, questionable, or unprofessional behavior. The ethics of conducting ethnographic fieldwork in contexts with normative frameworks that may vary from the mainstream is not a new issue. Methodologically, social and legal anthropologists studying corruption recommend suspending normative judgments about behavior while collecting data but resuming it when they are analyzed. More generally, the negative bias has to be confronted, mindful that negative events are more powerful than positive ones. In social psychology, it is said that ‘bad feedback has more impact than good ones [sic], and bad information is processed more thoroughly than good. Bad impressions and bad stereotypes are quicker to form and more resistant to disconfirmation than good ones’ (Baumeister, Bratslavsky, Finkenauer, & Vohs, Reference Baumeister, Bratslavsky, Finkenauer and Vohs2001: 323). Baumeister et al. (Reference Baumeister, Bratslavsky, Finkenauer and Vohs2001) find few exceptions to the rule that ‘bad is stronger than good' and speculate that nature may have shaped the human psyche to be more sensitive to negative events as part of risk management and developing a survival instinct.

However, ignoring the dark side by focusing on the bright side may not be the best approach either. Psychological research suggests that a focus on reducing the effects of the dark side in relationships may be more influential in improving relationships overall than investing solely in the bright side (Baumeister et al., Reference Baumeister, Bratslavsky, Finkenauer and Vohs2001). Inspired by psychological research, we take a more holistic approach and consider both aspects of informal networks. We employ a strategy of transforming informal networks by trying to reduce their dark-side effects (e.g., by increasing transparency), as well as exploring the potential of the bright side, along with an assessment of their respective effectiveness and time horizon.

Studies on the dark side of informal networking point out its vulnerability to corrupt behavior, competitive advantage, channeling favors, and abuse of power, often exercised with a nod to cultural practices and traditions. For instance, guanxi and corruption are said to be supported by the Chinese culture of giving gifts (Luo, Reference Luo2008). Russian culture includes kinds of cooptation known as kormlenie (feeding), that is, allowing civil servants to feed off the office and the constituency, which persisted through tsarism and the Soviet period and are observed to this day. Favoritism in hiring and promotions, in which candidates are recruited or promoted not because of merit and competence but because of knowing the right people, can prevent an organization from advancing and limit its potential for creativity and innovativeness (Horak, Reference Horak2017; Banovic, in Ledeneva et al., Reference Ledeneva, Bailey, Barron, Curro and Teague2018). In South Korea, which is often described as a networked society, respective networks (i.e., in-groups) have ‘flexibility, tolerance, mutual understanding as well as trust. Outside the boundary, on the contrary, people are treated as “non-persons” and there can be discrimination and even hostility’ (Kim, Reference Kim2000: 179).

Countries have different levels of tolerance for the social cost of competitive advantage, correlated to their level of openness. Not only do business expatriates face difficulty in integrating into a society and a business environment with a low level of receptiveness caused by tight domestic networks but society as a whole, which sharply distinguishes in-groups and out-groups, can also suffer because of segregation (Kim, Reference Kim2000; Renshaw, Reference Renshaw2011).

For instance, the bright side of informal networks refers to an informational advantage that members possess (Gu, Hung, & Tse, Reference Gu, Hung and Tse2008). Separate informal networks that become connected, or bridged, benefit from the larger amount of information available because of being connected. People can be motivated to connect networks – i.e., to become ‘a node’ – by potential benefits, at least for a while, from the connection, as most information flows between networks via nodes (Burt, Reference Burt1992, Reference Burt1995, Reference Burt, Lin, Cook and Burt2001; Coleman, Reference Coleman1988). The bridging of networks is usually conducted via weak ties, whereas strong ties are related to bonding social capital and serve to exchange information within an extant network. Organizations are said to benefit most in terms of information acquisition when their managers can draw on a diversity of ties – i.e., on a mixture of strong and weak ties with peers as well as non-peers (Burt, Reference Burt1997, Reference Burt2000).

Further, from an economic perspective, informal networks contribute to a reduction in transaction costs and the risk of free riding by network members, because they have established mutual trust as well as peer pressure. This lowers the cost of monitoring and supervision. For example, if someone is hired for a job on the recommendation of a network member, an obligation is created between that person and the recommender as well as the network that enabled and backed this decision. In addition, if that person, after obtaining the job, becomes a free rider or exploits the position for personal gain, the recommender's reputation is put at risk (Burt, Reference Burt2000; Lew, Reference Lew2013). Further, informal ties and networks are often based on a certain level of trust, and they support cooperation and mutual help, provide sociability and emotional support, and hence reduce loneliness (Ledeneva, Reference Ledeneva, Ledeneva, Bailey, Barron, Curro and Teague2018). However, exchanges of any kind lead to an implicit contract that demands reciprocity; therefore, maintaining ties through reciprocal favors and satisfying demands can be time consuming, costly, and, at times, burdensome.

Nonetheless, informal networks can be seen as a reliable resource in uncertain environments with a weak legal system (Gu et al., Reference Gu, Hung and Tse2008). As mentioned in the context of guanxi and wasta, its mediation function plays an important role in conflicts, whether in business or in family affairs (Barnett, Yandle, & Naufal, Reference Barnett, Yandle and Naufal2013). However, as the perceptions of the bad dominate those of the good, ‘people generally speak of wasta in negative terms and think largely of its corrupt side, negating the traditionally positive role it has played in mediation’ (Hutchings & Weir, Reference Hutchings and Weir2006a:147). When people speak about leveraging their networks, they often mention leveraging their friends, which they suggest is a good thing; in contrast, when people talk about others leveraging their networks, they often use words such as blat and wasta, which more often have a negative connotation. In other words, there is a double standard. The dark sides and the bright sides of informal networks are summarized in Table 1.

Table 1. The dark sides and the bright of informal networks

CONTRIBUTIONS TO THIS SPECIAL ISSUE

The contributions to this special issue add to our knowledge on informal networks in several ways, taking their dark and bright sides into account. They cover a range of informal network ties and types as they offer new insights on informal aspects of management in China, with a focus on guanxi as well as the functioning of the less studied network types, such as elite networks in Malaysia, wasta in Arab countries, and bazaaries in Iran.

In alignment with MOR's mission, contributions on China and guanxi are well represented in this special issue, in acknowledgment of the pervasiveness and importance of informal networks in China and their relevance for network theory and practice. Other types of networks covered, in the Middle East and Southeast Asia, are excellent examples for understanding informal governance in emerging markets and their respective business culture more thoroughly. Each of them represents a springboard for further research on informal networks in emerging markets. We have organized the order we discuss the manuscripts below by country or region, starting with three contributions on China, followed by Iran, the Arab Middle Eastern region and Malaysia. We briefly describe the contributions to the special issue as follows.

Based on institutional logics theory, Xi Chen in her contribution entitled ‘The State-Owned Enterprise as an Identity: The Influence of Institutional Logics on Guanxi Behavior’, explores the organizational factors that might influence the guanxi behavior of employees at Chinese publicly listed firms, joint ventures, and state-owned enterprises (SOEs). On the bright side, guanxi behavior can lead to greater trust among individuals, sociability, and a sense of belonging. It can also positively influence career development. On the dark side, the effects of guanxi include favoritism, particularism, abuse of power, and exclusion. Chen found that guanxi behavior is connected to a collectivistic identity at Chinese SOEs. As guanxi behavior seems to be connected to the socialist institutional logic of SOEs, institutional transition can be challenging.

By exploring the role of business expatriates in China, Shuang Ren, Doren Chadee, and Alfred Presbitero assess in their study titled ‘Influence of Informal Relationships on Expatriate Career Performance in China: The Moderating Role of Cultural Intelligence’, the dependence of expatriates’ career performance based on their ability to develop guanxi with local employees. They show the positive effect of guanxi on expatriate performance, linked to the level of their awareness about cultural norms and values in China. The expatriates studied come from the United States, France, South Korea, and Taiwan and manage foreign enterprises in Beijing and Shanghai. The evidence suggests that the prevalence and persistence of guanxi influence is found not only among the Chinese managers (Bian, Reference Bian2018, Reference Bian2019) but also among expatriate managers working in an increasingly globalized China. Although this study offers a timely analysis about the importance of culturally specific social capital in expatriate career development and performance, it makes a larger point about the need to understand the extent to which the interplay of informal networks and cultural intelligence facilitates and affects globalized enterprises in locations with operational relevance.

Staying with China, Katarzyna Burzynska and Sonja Opper analyze in ‘Interbank Relations, Environmental Uncertainty, and Corporate Credit Access in China’ how informal banking networks in China help a company to secure new bank loans, if it has prior loans. As the findings in this study confirm that close-knit banking networks facilitate access to credit, the question of whether these networks are good or bad becomes critical. On the bright side, after banks obtain more information on the borrower, they can reduce the risks of lending. In addition, reliable borrowers have better access to loans, as shown by the study results. On the dark side, banking networks lack transparency in terms of creditor evaluation criteria, and they can bias competition, as it is unclear whether the best firms end up with the most advantageous banking networks. Moreover, the risk of political interference remains, adding yet more bias. These findings are based on an analysis of a large number of publicly listed corporations on China's stock market and advance our understanding about how the interplay between informal networks and network embeddedness both facilitates and constrains business strategies by Chinese corporations.

We now shift focus to the Middle East, which we recognize is diverse, having similarities and differences such as the fact that some countries are predominantly Arabic while Iran practices Shi'a Islam. Two studies in this special issue analyze, respectively, Iranian bazaaries and wasta. Marina Apaydin, Jon Thornberry, and Yusuf M. Sidani refine the Uppsala internationalization model by exploring how informal networks can help firms to internationalize in their article on ‘Informal Social Networks as Intermediaries in the Foreign Markets’. They use the case of Iranian bazaaries, an important resource that is similar to guanxi in China, and define them as ‘a cohesive homogenous group of Shia merchants historically proven being capable of an economic or even political action’. They are seen as the main actors and gatekeepers of economic activity in Iran. Enriched by the historical context of the bazaaries, this study illustrates the present-day ways in which they influence the process of internationalization. The study suggests that bazaaries could play an important intermediary role at multinational enterprises (MNE) in the internationalization process and have a positive impact on performance, if not survival, of MNE subsidiaries in Iran. This is especially the case where the leadership of MNEs faces constraints due to Shi'a Islam. Bazaaries in Iran show similarities to other forms of brokerage and informal networks such as guanxi and yongo. On the bright side, they facilitate team spirit, cooperation, and loyalty. On the dark side, they are prone to bribery, cronyism, and corruption.

In the article entitled ‘Wasta: Advancing a Holistic Model to Bridge the Micro-Macro Divide’, Sa'ad Ali and David Weir revisit the definitions of wasta and review the extant literature on it. They reveal the multidimensional nature of wasta, which is used in the Middle East and is interpreted, on the one hand, as a structure, and, on the other hand, as a process embedded in distinctive values and morals of behavior. Thus, wasta can represent a clan structure as well as a process of mediation, for example, settling disputes between families. Because the notion of wasta is closely tied to family and clan affairs, including strong obligations to benefit an immediate and extended family, wasta is by nature exclusive. In addition, distributing resources and benefits to in-groups is time consuming, costly, and might be ethically questionable because people without wasta are left out. The bright side of wasta is its high family and clan cohesion, which gives its members protection and security.

Even less research on informal ties and networks has covered Malaysia, in particular the role played by directors’ networks in the capital market. In their study, Effiezal Aswadi Abdul Wahab, Mohd Faizal Jamaludin, Dian Agustia, and Iman Harymawan investigate the relationship between directors’ networks and accruals quality as a proxy for earnings. In the paper entitled ‘Director Networks, Political Connections and Earnings Quality in Malaysia’, the authors find that politically connected directors’ networks negatively influence firms’ accruals quality. Networks created by directors exert managerial influence, lead to board directorship overload, and prevent effective monitoring. However, although the results are significant for politically connected directors, this is not the case for directors with no political connections. The authors speculate that having politically connected directors on the board can be seen as liability for the firm.