organizational innovations in a prior era. Japanese firms pioneered flexible production and process efficiency through the development of just-in-time, TQM, ...
1 A MANAGEMENT CAPACITY CONSTRAINT? OBSTACLES TO THE DEVELOPMENT OF THE OVERSEAS CHINESE FAMILY BUSINESS.
Michael Carney1
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Michael Carney, Department of Management, Faculty of Commerce and Administration,
Concordia University, 1455 de Maisonneuve Blvd. West, Montreal, Quebec, Canada. H3G 1M8
Abstract Overseas Chinese family businesses (OCFBs) have gained a reputation for cost efficiency, responsiveness, and flexibility as original equipment manufacturers (OEMs) and as pioneers of the mainland’s industrialization. This success is based upon a relatively simple ‘personally managed’ organization operating within a network of kin and ethnic relations. To what extent are mid-sized OCFBs now able to develop the capacity to compete in new strategic domains and manage more complex value chains? The paper examines competing views of the OCFBs organizational and competitive capabilities. The strategies of 50 mid-sized Hong Kong based manufacturing firms are used to provide insight into the questions of capabilities upgrading and long-term competitiveness in personally managed enterprises. In contrast to prevailing cultural and institutional accounts of OCFB behavior, the paper suggests that current (western) theory of the family firm and of organizational networks provide an alternative explanation of observed investment strategies and organizational structure.
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1. INTRODUCTION There is now a wide range of accounts of the global competitiveness and success of the OCFB.
The salient characteristic of personal entrepreneurial control embedded in a
geographically dispersed but close-knit ethnic network is sometimes viewed as a ‘post-modern’ type of organization. Many analysts see this form of enterprise as flexible, responsive and eminently equipped to meet the demands of fast changing consumer markets (Chen, 1995; Fung, 1996; Hamilton and Biggart, 1988; Koa, 1993; Limligan, 1986; Redding, 1994a, 1994b; Whitley, 1992). However, the tone of much of this writing is uncritical and laudatory. Some writers equate the success of Asian economies with the success of its entrepreneurial firms (Seagrave, 1995; Weidenbaum and Hughes, 1996). But to what extent is there a mistaken attribution? Many structural forms may thrive in a growing, resource abundant environment. If, as Krugman (1994) contends, the success of the newly industrialized Asian economies is due to macroeconomic investment and factor conditions and not to labor productivity gains or technological progress, then theories of OCFB competitiveness may need re-examination. Other assessments of the OCFB (Fukuyama, 1995; Koa, 1993; Yoshihara, 1988) suggest that kin based structures are inherently unstable and unable to survive more than two or three generations of management before weakening and disintegrating. Fukuyama (1995) points to the very great difficulty Chinese family businesses seem to have in making the transition from entrepreneurial control to professional management, a step that is a prerequisite for a firm to solidly establish itself beyond one or two generations of the founder. More generally the wealth preservation goals typically found in family firms, regardless of cultural or national context, indicate a pattern of inadequate reinvestment into the core business (Chandler, 1990). Emerging is recognition that the ‘personal management’ style of the OCFB is a major obstacle to organizational longevity. These dissenting views are more pessimistic about the competitiveness of family enterprise. In this paper I propose that Hong Kong manufacturing firms, which are predominantly OCFBs, have not created the managerial capacity needed to institutionalize and internationalize their businesses. Managerial capacity refers to the ability of an organization to develop products and technological skills of value in the market place, to coordinate the functional organizational sub-units where these competencies reside; to allocate resources to these units according to rational economic guidelines, and the ability to audit the use of resources. Implicitly this argument rejects the notion of the interorganizational network as the functional equivalent (Best, 1990) of managerial capacity.
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The paper begins with an examination of the OCFBs' strengths according to the existing literature. Secondly, its weaknesses are outlined from the perspective of transactions costs theory. Many accounts of the OCFB draw upon uniquely Asian cultural and institutional factors and several writers (e.g. Hamilton & Biggart, 1992, Whitley, 1992) explicitly reject western interpretations of Asian enterprise. The intention is to balance this view. Utilizing Chandler's (1990) notion of personal management, I argue that existing (western) theories of the family enterprise provide complementary explanations of investment decisions, product market strategies and the corporate structures widely adopted by OCFBs. Third, using available data I describe recent developments in the strategies of Hong Kong industrial firms. The paper concludes with a discussion of competitiveness issues facing OCFBs. 2 THE MANAGERIAL ENTERPRISE IN ASIA After fifty years of rapid economic development Taiwan, Hong Kong and the ASEAN region have produced few truly transnational industrial firms. This is in marked contrast with the managerial enterprises of northern neighbors Japan and Korea (see table 1). However, prior to World War II both Japan and Korea possessed few indigenous managerial enterprises. Big business in Japan was dominated by the zaibatsu, a corporate structure that promoted and coordinated domestic and international trade but which did not consolidate production units into efficient scale plants. Nor did the zaibatsu develop transnational marketing and sales organizations. Best (1990) argues that pre-war Japanese firms did not seek to advance through the competitive superiority of their business enterprises, rather they operated cartel-like structures within a framework of imperialist domination. Japanese enterprise gained a fresh start with the post-world war II dissolution of the zaibatsu, and while similar corporate structures regrouped in the guise of the keiretsu, the important innovation in post-war Japan was the creation of vertically integrated and geographically diversified managerial enterprises. Japanese firms, with the assistance of government, starting de novo invested in efficient scale plants, marketing organizations and in key functional areas resulting in a broad range of world scale enterprises. By 1990, Japanese firms dominated every industrial sector in Asia except agriculture and forestry. Table 1 here Hamilton and Biggart (1988) agree that the post-war development of Japanese industry is consistent with a Chandlerian interpretation of managerial hierarchy, however, these authors emphasize the importance of state industrial policy, institutional consensus about national priorities and the role of inter-organizational cooperation in Japan's success. The key point from
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the perspective of this paper is that the mechanism necessary for the accomplishment of their industrial position is the managerial hierarchy. At the heart of Japanese performance is a salaried managerial class that created and implemented a series of organizational innovations comparable in range and depth to American organizational innovations in a prior era. Japanese firms pioneered flexible production and process efficiency through the development of just-in-time, TQM, layered production. They developed novel human resource management that emphasized teamwork, a culture of high product quality and a cooperative approach to subcontracting. Like their European and American counterparts in an earlier era (Chandler, 1990), it is the ability to deploy these managerial innovations in a wide variety of industries and sectors that lay behind Japan's international competitive performance. State support and complex corporate financial structures provided a nurturing environment for the development of organizational competencies but it is clear that such an environment is not a sufficient condition for the high level of competitiveness found in Japanese firms. The Korean economy is dominated by large family owned firms, However, following strong encouragement and detailed intervention from the state Korean firms have developed managerial capacity along the lines suggested by Chandler (Amsden, 1997; Bloom, 1994, Vogel, 1991). The few large firms of other nations listed in table 1, tend to be government-linked enterprises such as Sembawang Corporation and Singapore Airlines of Singapore, and state owned energy companies such as China Petroleum of Taiwan and Petronas of Malaysia. Others are former colonial agency houses such as Sime Darby and Golden Hope in Malaysia and Swire, Hutcheson-Whampoa, and Jardine-Matheson in Hong Kong. Most former colonial firms have now passed into the hands of Chinese entrepreneurs but their structures were established under different managerial regimes. Chinese entrepreneurs have established massive fortunes, in areas such as property and shipping, and the enterprises they control are often large in terms of financial assets. However, only a very few have developed large managerial hierarchies, Yoshihara (1988) provides several examples such as the Singapore Banks. However, none of this counters the main point here that for the most part OCFBs have developed along lines markedly different from those of Japan and Korea. OCFBs have, however, played a major role in Asian economic development, initially as first and second tier OEM subcontractors and later in the nascent industrialization efforts of mainland China. The question now arises about the extent to which OCFBs are poised to enter international markets on their own account.
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THE STRATEGIES AND STRUCTURE OF THE OCFB The key feature of the OCFB organizational structure is the concentration of decision making and management in the hands of family members and close trusted associates (Chen, 1995; Whitley, 1992). Chan’s (1982) historical perspective suggests that this structure has changed little in the modern era. Important issues and resource allocation decisions are rarely delegated to professional managers. Reliance on outsiders for managerial, technical, marketing skills is minimized.
Where professional managers are employed the roles are considered
subordinate to entrepreneurial roles held by family members or trusted friends (Redding, 1990; Whitley, 1992). OCFBs make little use of formal organizational structure, rules or written procedures (Chen, 1995). Nor do they typically create indirect or direct service functions such as personnel offices or market research. Employees are expected to be directly involved in the main products or services of the company which directly create profits (Chen, 1995). Whitley (1992) says OCFBs exhibit much lower degrees of role specialization and work standardization than comparable U.K. or Japanese firms. The OCFBs simple organizational structure is partly explained by small size, but as Kao (1993) notes even larger enterprises maintain ‘immature organizational patterns’. Within this elementary structure the role of the senior owner-manager is paramount. The OCFBs investment strategy and corporate structures can be summarized as prudent or tight allocation of capital in the original or core business and the adoption of a holding company financial structure. OCFBs make minimal investments in dedicated capital equipment but utilize available capital intensively (Redding 1994a). Profits earned in the core business are channeled into a broad range of business ventures, often into liquid investments such as land and property, or into quite unrelated sectors, usually with a trusted but experienced partner. Whitley (1992) refers to this pattern of capital accumulation and allocation as opportunistic investment. Many OCFBs in Taiwan, Singapore and Hong Kong have excelled in markets for electronic subcomponents, plastics, textiles and toys. The scale requirements of such industries are not capital intensive, and this may explain the pattern of small scale investing. However, causal forces seem work both ways, entrepreneurs do not invest in capital-intensive product market sectors. Capital intensive industries such as oil refining, telecommunications, and air transport are typically government owned and directed.
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Explanations of OCFB management structure typically resort to the region’s prevalent cultural characteristics; Hodder (1996) is an exception. Koa (1993) suggests that patriarchal traditions derive from China’s political and social turmoil that has produced a series of ‘life raft’ values, such as hard work, thrift, accumulation of family wealth, trust and reliance upon kin, which command deference to authority. Redding (1990) traces OCFF defensiveness and insecurity to the legacy of China's disdain for mercantile activity and its thwarting of modern capitalism. In the cultural view the prevalence of paternalistic family business structures is a natural outcome of a wider social structures and historical experience. While affirming the importance of the family among OCFBs Hamilton and Biggart (1988) suggest that generic cultural influences cannot account for the variations found among Asian organizations. They propose that the structures and patterns of Asian enterprise derive from particularistic institutional, political and market conditions found in different Asian countries. Wilkinson (1996) suggests that both cultural and institutional explanations of OCFB structures are deterministic in orientation and underestimate the importance of strategic choice and the effect of global competitive forces. Increasingly OCFBs in Asia are becoming sufficiently cosmopolitan to admit of other cultural influences, especially from, western and Japanese firms operating there, and from the western educated, second generation family who are now assuming positions of influence (Vogel, 1991). In the specific cases of Malaysia, Singapore and Hong Kong a potentially important influence upon the organizational structures and managerial practices of the OCFB is the former colonial agency houses whose franchise-owning, conglomerate business structures have been emulated by several local entrepreneurs. THE ROLE OF NETWORKS IN OCFB COMPETITIVENESS According to several writers, the relevant unit of analysis for understanding the competitive success of the OCFB is not the individual firm but the network (Biggart and Hamilton, 1992) or the business system (Whitley, 1992). The competitive strength of networks is the capacity for rapid response and adaptation to fast changing market niches. Product-based competition between network participants creates the incentive to incorporate minor, incremental, improvements in a process Best (1990) calls collective entrepreneurship. Small scale permits extensive customization and product differentiation. As an innovation process networks rely upon public knowledge, or information widely available within a particular location, rather than proprietary knowledge of managerial hierarchies. Networks generate product diversity through technological and design incrementalism that equips them to respond to specialized premiumprice market segments (Becattini, 1990; Saxenian, 1994). The ability to access and organize
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pools of low cost labor contributes to efficiency, but low cost alone is not a sufficient condition for success, lots of regions have pools of unutilized labor but not all are able to use it flexibly and productively. The clustered small-firm size structure of Taiwan and Hong Kong manufacturing industries conform in several ways to the notion of an flexibly-specialized production complex similar to those found in the craft based industrial districts of North East-Central Italy and Southern Germany (Sabel, 1989; Pyke, Beccatini, and Sengenberger, 1990). Disaggregated production networks function efficiently when they are embedded in a social system of obligation and reciprocity which is reinforced through recurring transactions between trading partners known to each other through kinship or ethnic ties (Lazerson, 1995). The economic value of coordinating production through such networks lays in the reduction of transaction costs. Networks are cost efficient relative to managerial hierarchy because they provide costless coordination. The extensive reliance upon generic assets creates production flexibility spawning an organic, spontaneous just-in-time inventory and delivery system in a form of kan-ban without the managerial overhead (Whitley, 1992). Credit and supplier qualification, production planning and quality control in hierarchies are all indirect activities that are supplied without cost in production networks. Therefore, the organization of production into networks is an important source of cost efficiency for OCFBs (Carney, 1998). When combined with the entrepreneurial acumen of the OCFB some writers (e.g. Fung, 1996) argue that this approach forms the basis of a highly competitive system of organization; one that is highly suited to emerging market conditions in mature economies. However, one paradox of strong social ties (Uzzi, 1997) is that, while promoting operational efficiency, they insulate firms from information that exists beyond their networks which leaves them open to external shocks. THE LIMITS OF NETWORKS The above account of OCFBs functioning is not challenged here. At issue are the longerterm competitiveness and the potential for the organizational development of the system. This section highlights two sources of development obstacles: one relates to the limited competencies of networks and the other the limits of family controlled enterprises. The former is based upon Williamson’s (1991) assessment of hybrid transactional structures, the latter stems from Chandler's (1990, 1991) comparative assessment of managerial, financial and personal forms of capitalism. In much of the writing on the competitiveness of the OCFB there is a heavy emphasis upon production and manufacturing performance (Lui and Chui, 1994; Glasmeir, 1994)). This emphasis draws attention away from critical organizational activities of marketing, technology
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development, and intellectual property creation. Writers that are skeptical of claims for network effectiveness (e.g. Ferguson, 1990; Florida and Kenny, 1990; Harrison, 1994) suggest that large but selectively integrated enterprises remain critical to national and regional success because of their capacity for functional coordination, long term investment, and global marketing and distribution. These views question the extent to which networks of small firms can remain competitive over the long run. The implication is that OCFBs may remain as peripheral subcontractors and distributors ceding organizationally powerful roles to Japanese, Korean or Western enterprises. Leading organizational theorists of Asian enterprise structure (Biggart and Hamilton, 1992; Whitley, 1992) tend to dismiss the work of Williamson (1985) and transactions cost theory because it appears insensitive to cultural and social factors. However, these writers may be understating the importance of economic rationality and structural efficiency. Institutions and culture may dispose entrepreneurs toward particular structural forms but these choices are not without consequences. Williamson (1991) points out that central question in transaction costs economics is the management of uncertainty or organizing for unforeseen contingencies. This is essentially the problem of adaptation. Williamson (1991) identifies two types of adaptive capacity that are necessary for high performance business systems, namely entrepreneurial and coordinated adaptability. The former reflects the capacity of economic agents to adapt to disturbances caused by relative scarcities indicated by changing factor and product prices. In management terms this may be described as ‘strategy as hustle’ (Fung, 1996). Neoclassical markets in which utility maximizing economic agents respond independently and autonomously to market signals are entrepreneurially adaptable in this sense. Coordinated adaptability is the ability to effect realignments between large scale dedicated or co-specialized assets (Teece, 1986) located at different stages in an industry value chain. In managerial terms this may be described as ‘strategy as commitment’ (Ghemawat, 1991) as firms must commit or lock into an industry through irreversible investments in non-fungible assets. According to transactions cost theory dedicated investments are more efficiently governed and better coordinated within large firms possessing extensive managerial hierarchies. Markets, hierarchies and hybrid-organizational arrangements, such as kin-based networks, each possess different adaptive and economizing capabilities: the organizational problem is to match the organization form with the prevailing kinds of uncertainty.
In
technologically steady state product markets, entrepreneurial adaptability is an adequate mechanism for coping with disturbances to equilibrium; entrepreneurs react swiftly to changes in
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prices and product demand. For example, Lui and Chui (1994) suggest that the inability of Hong Kong’s garment making and consumer electronics firms to increase the sophistication of their production techniques is not detrimental to the development of the economy. Because consumer tastes change frequently they propose that firms succeed through improving their market intelligence and maintaining production flexibility, without abandoning labor intensive production technologies. The following proposition stems from transaction costs reasoning. P1: The adaptive capabilities of kin-based production and distribution networks are commensurate with the imperatives posed by technologically stable, variable cost sensitive, low asset specificity industries. Where technological, economic, or major regulatory changes create the potential for investment in assets with significant scale and scope economies autonomous entrepreneurial adaptation will lead to sub-optimal investment. Sub-optimization is a market failure: external costs and benefits (externalities) arising out of investments in specialized productive assets cannot be captured in the individual utility calculations of autonomous entrepreneurs. Failure by the private sector to provide such assets often leads to calls upon the state to provide them. For instance, R&D expenditures or investments in labor force training create benefits that an autonomous agent cannot fully appropriate. Seizing such opportunities require coordinated action and in this the hierarchy has advantages over entrepreneurial adaptation. Large firms internalize and capitalize the externalities. The contrary proposition to P1 can be stated as: P2 the adaptive capabilities of kin-based production and distribution networks are incommensurate with the imperatives posed by technologically dynamic, high fixed cost, high assets specificity industries. THE LIMITS OF FAMILY ENTERPRISE Chandler's work Scale and Scope (1990) takes its theoretical bearings from transactions cost reasoning and illustrates the advantages of coordinated adaptation. According to Chandler vertically integrated hierarchies offered the organizational capacity to exploit of the economies of scale and scope offered by technological breakthroughs in railroad transportation, mechanical, electrical and chemical engineering. He cites historical evidence from the UK, USA and Germany that shows successful and long lasting global firms made tripartite investments in efficient scale production facilities, international marketing networks, and in managerial hierarchy to coordinate the two. A nation’s long term success in an industry is ultimately determined by the creation of such firms and firms, (or regions) that do not invest in production, marketing and coordination
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mechanisms are driven out by firms that do (Chandler, 1991). Firms failing to invest in adequate organizational infrastructure are unable to keep up with technological changes because they lack the mechanisms to generate, improve and implement technology intensive investments. Chandler (1990) shows how British firms were weakened by adhering to family-controlled organizational structures. Many family enterprises were initially successful in periods of rapid industrialization but later became uncompetitive because they were unable to incorporate technological advances and cope with competition outside their protected markets. The relevance of the British experience is that by adhering to kin based structures OCFB may be choosing an ineffective organizational model. Chandler (1990) uses the term ‘personal management’ to distinguish managerial controlled enterprises from organizations which are either owner-managed or family controlled, the latter are normally entrepreneurially controlled in the first generation and family controlled in the second. In the latter case the founders and their heirs may recruit managerial hierarchies but continue to play influential roles either directly as senior executives or as major stockholders. The following paragraphs identify a series of propositions concerning the possible obstacles to the development of competitive skills in personally managed firms. Chandler (1990) argues that the managerial hierarchy is a needed to deploy large size, minimum efficient scale facilities and that personally managed, owner-operated enterprises lack sufficient capacity to do so. Occasionally personally managed enterprises have grown large by means of merger or by creating federated, cartel-like, structures to coordinate prices and output, a practice common in the UK. However, such enterprises rarely consolidated production into efficient scale plants and were unable to benefit from potential efficiency gains. The following proposition reflects the U.K. experience with capacity rationalization and arguably applies in the Asian context. P3: Personally managed firms operating within kin-based production and distribution networks provide insufficient managerial capacity to coordinate the industry-wide capacity consolidations necessary for the realization of scale and scope economies. Chandler (1990) further suggests that personally managed enterprises are also unwilling to undertake large-scale investments in distant places due to the concentration of risk that entails. Secondly, a thinly staffed organization lacks the ability to adequately monitor local performance from afar (Chandler, 1990). As OCFBs are said not to trust outsiders (Redding, 1990) they cannot effectively utilize locally available executive talent, which also weakens control.
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P4: Personally managed firms operating within kin-based production and distribution networks lack sufficient managerial capacity to monitor geographically dispersed business units. Third, succession based upon kinship may deprive firms of competent senior management. This is not to suggest that second-generation kin are incompetent rather that drawing managers from a very narrow talent-pool is a disadvantage not shared by managerially controlled enterprises. The small number of available executives means that attention is focused upon day to day operational matters to the detriment of longer term strategic planning, as noted the performance of foreign subsidiaries may be overlooked. To economize upon planning and monitoring, OCFBs must use abbreviated financial data as a means of allocating capital and assessing the effectiveness of subunit performance (Chandler, 1994). The characteristic corporate structure for this approach to top management planning is the holding company form. P5: Personally managed firms will typically develop a corporate financial planning style of corporate management within a holding company structure. Finally, Chandler speculates that there is likely to be a difference in the types of goal pursued by managerial enterprises and personally managed firms. There is fairly conclusive evidence that where the market for corporate control is weak managerial enterprises will pursue strategies aimed at maximizing the size and growth of the firm utilizing retained income. Personally managed firms show greater concern with family wealth preservation and will focus attention upon the near term income potential of the enterprises (Wong, 1985). A recent study shows that Hong Kong family owned firms pay-out a higher percentage of their earnings than do non-family controlled firms (Carney and Gedajlovic, 1988). Fewer retained earnings inhibits growth through internally generated funds. P6 the wealth preservation incentives operating in personally managed firms’ inclines toward the adoption of short-term income goals over longer-term asset building. Table 2 recapitulates the six propositions. Table 2 here The OCFBs of Hong Kong and Taiwan have excelled in markets such as bicycles, computer components, garments and textiles and watch making but for the most part their participation in international markets is as first and second tier subcontractors to Japanese, US and European OEMs. Most have yet to establish an international market identity in their own right. Another area of success is their role in China’s economic reform where OCFB capital and expertise has been pivotal (Vogel, 1989). The penetration of the China domestic market by Hong
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Kong based firms is often cited as an example of the value of conducting business in a flexible and politically responsive way. The importance of personal factors, trust-based relationships, entrepreneurial flexibility and influence with government officials has been of great value in the early years of reform. The managerial capacity argument suggests, however, that there are several grounds for caution about the sustainability of past performance. The ability to enter higher value added and technology based market segments has been questioned here and elsewhere. Also in question is the ability of the OCFB to be a continuing force in China’s industrial development. As nonChinese and Mainland China enterprises learn and assimilate each others distinctive practices advantages based upon cultural differences become less significant. Moreover, the advantages bestowed by political influence also appear to be fleeting. The recent problems encountered in Guangdong province by Hong Kong based Hopewell Holdings indicates that the worth of political capital can be quickly devalued. Hopewell’s founder established a number of important connections in the early 1980s and was the recipient of a series of major infrastructure projects, often against strong opposition from others in the Provincial administration (Vogel, 1988). However, once the early reforming generation of bureaucrats retired Wu found few allies in the province. Consequently many projects failed to realize an economic return Wu had trouble securing the necessary bureaucratic permissions to make adjustments. Hopewell was forced to sell off many assets, and in 1996 the firm’s stock had been downgraded to junkbond status (Cheng, 1996). Moreover, the development role of the OCFB on the mainland is now coming under scrutiny. China has become more selective in screening FDI projects and is now actively targeting large MNC investments focusing upon capital and technology intensive projects (UNCTAD, 1996). 3 EMERGING STRATEGIES OF MID SIZED HONG KONG OCFBS In this section the recent product-market and investment strategies of a subset of OCFBs are described. This data set is the largest 50 industrial stocks listed on the Hong Kong Stock Exchange (SEHK). The SEHK now includes a range of mid-sized industrial firms, as measured by revenues. Column three of the appendix shows these firms have 1994 revenues ranging from US$118 to US$847 million. These firms have achieved a size where one might expect activity beyond first and second tier subcontracting. The intent of the following is to explore the extent to which these firms are beginning to do this. The aim is to explore through secondary data; the major strategic direction taken by a cohort of publicly listed firms. The data are not intended to formally test the propositions listed in table 2 but to identify and illustrate emergent strategy.
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Taking a very long view is desirable when exploring the evolution of family firm strategies. The firms analyzed in Chandler (1990) often have over a century of history but in Southeast Asia family enterprises are considerably younger. Some OCFBs such as C&P Pokphand and the Overseas Chinese Bank were founded in the 1920s (Yoshihara, 1988). The firms in this sample are comparatively young, generally less than 25 years old. As young firms they have not yet confronted seriously challenging strategic events such as market maturity in the core business or the succession of the founder. In the western firms analyzed by Chandler these issues often took decades to resolve. It may be, therefore, premature to attempt a comparable Chandlerian analysis. With this caveat in mind however we may examine the development of several enterprise with the expectation that many are likely to make significant transformations in the coming years. DATA The data used here is a convenience sample and may be subject to the limitations of sample bias. That is Hong Kong manufacturers may differ systematically from OCFBs in other sectors and in other countries. Both the relative youth of the firms and their concentration in manufacturing may limit the generalizability of these findings. However the sample does have a number of benefits. First, the precise identification of an OCFB is actually fraught with difficulty. In this paper I am referring to ethnic Chinese entrepreneurs living outside Mainland China. There are large concentrations of such entrepreneurs in South East Asia, especially in Hong Kong, Taiwan, and Singapore. In these countries it is possible to recognize an OCFB due through the name of the largest stockholder. When the largest stockholder is another firm one must trace back to ownership to the final source. The data sources used here normally specify the ultimate holding company or individual. In other countries in the region, such as Thailand and Indonesia, ethnic Chinese entrepreneurs have adopted non-Chinese surnames, but Hong Kong this is not the case. Firms in the Hong Kong manufacturing sector are almost all controlled by a single individual or family unit. The manufacturing sector in Hong Kong, unlike manufacturing in Singapore or the financial services sector of Hong Kong, has virtually no foreign direct investment (Chen and Li, 1989). In other words we can be reasonably sure that these firms are actually closely held, ethnic Chinese businesses. Secondly, an analysis of Hong Kong’s mid-sized manufacturing firms is an appropriate site for exploring issues of managerial capacity enhancement since the initial success of the territory was based upon manufacturing performance. It is in this sector, the former core of the economy that we might expect to see development. Information about firms’ strategy and financial performance is taken from two secondary sources. The first source is Corporate International's Hong Kong Company Handbook (1994)
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which contains coverage of 473 primarily local Hong Kong companies listed on the Hong Kong stock exchange. The handbook provides five year financial summaries for the largest 200 companies (based upon market capitalization) and two year summaries for the remainder. These data are extracted from firms’ audited financial reports. The second source is company Wardley Cards (Wardley Data Services, 1995), which provide textual data on firm history, structure, subsidiaries, and recent acquisitions and divestitures. Accounting data (Balance sheet, income, and cash flows) are also reported in great detail. Key strategic decisions are described and commented upon by company Chairmen. Also consulted was Thornton’s Guide to Hong Kong Companies (1995). Recall that the intention here is not detailed hypotheses testing but an attempt to describe prevailing strategic patterns and to look at exceptions to the norm among a class of firms. The data used here are arguably sufficient for this purpose. What I did was to scrutinize these data and attempt to identify for each firm the 1) major investment decisions in the past five years, 2) major product and market changes and 3) plans and intentions with respect to China. The process is quite subjective; however, where possible in the discussion below I have attempted to provide corroborating sources. 1994 revenues (Turnover) rank the fifty firms listed in the appendix. Articles about the firms from the Hong Kong Business press were collected over a period of six months during the author's visit to Hong Kong. Omitted from appendix are firms whose principle business is distribution, retailing and trading, engineering and construction. Also excluded are transportation, power and communications utilities, and trading companies with minor manufacturing interests. An important class of manufacturers omitted from this list is the growing number state and privately owned firms from China. These firms are subject to forces and influences different from those examined here. The firms in the appendix and whose strategies are described below are locally owned and publicly listed firms whose main business is some form of manufacturing. These include holding companies whose subsidiary businesses derive at least 50 percent of their revenues from manufacturing. Clearly the extent to which these firms are representative of OCFBs generally is questionable. Ideally the data should contain enterprises from the Financial and commercial services sector. Arguably Hong Kong OCFBs are similar to Taiwanese and Singaporean manufacturing firms, both have a similar size structure to Hong Kong manufacturing. However, in both these countries the technological sophistication of firms is somewhat higher due to factors other than internal development. Foreign direct investment by Western and Japanese enterprises plays a large role
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Singapore manufacturing and has been an important external technology source for local firms. In Taiwan, government has sponsored technology development, partly as a response to indigenous firm inactivity. According to Fukuyama (1995) few manufacturing firms in either of these countries, with some notable exceptions, have developed competencies in other functional areas such as marketing and international distribution. PRODUCT MARKET STRATEGIES For most large manufacturers the key product market strategies remain original equipment maker (OEM) supply combined with sectoral flexibility. Hong Kong manufacturers specialize in low priced consumer markets (see the core business column of the appendix) produced under contract for overseas firms. However, some mid sized manufacturers appear to be adopting a Chandlerian three pronged strategy of developing a managerial and marketing infrastructure. For instance, Johnson Electrical Holdings is building a proprietary product range in miniature electrical and industrial motors. Beginning as a supplier of OEM components supplier to the toy industry, the firm established its own manufacturing facilities in Switzerland, China and Thailand between 1989 and 1992. It also established technical support centers in Germany, the US and Shanghai. It has also set up separate marketing offices in Japan and Switzerland. Sender (1994:70) says this firm ‘unlike most Hong Kong companies... has focused on its product, shunning the tendency to make a fortune in the property market’. In other words Johnson's focused strategy is deemed exceptional. There is little evidence that Hong Kong's larger manufacturing firms have yet developed the capability to produce, distribute and internationally market a product of their own design or manufacture. When firms do move downstream into marketing and brand management they do so through the acquisition of established brands. So far, leading examples of this strategy have delivered mixed results. Table 3 gives some details of top 50 firms that have attempted this strategy. Brand acquisition has been common in the watch industry, an important subset of manufacturing, where firms have tried to break out of the low-cost segments by acquiring or licensing prestigious European brands. This strategy appears to be working for Egana International, which developed some expertise by licensing for several years before acquiring Cerruti. On the other hand Asia Commercial’s Swiss subsidiaries are currently reported to be incurring heavy losses. In Garments, Lai Sun reports healthy growth for its acquired brands. However, it has emphasized Asian markets with these brands. Laws International’s acquisition of US retailer Judy’s ended in bankruptcy. Novell Enterprises acquisition of a denim jeans marketer
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was unsuccessful but an alliance with the leading US Hillfiger brand is reported to be doing exceptionally well. Table 2 here Among the established brand acquirers the strategy of Semi-Tech stands out, along with its business partner Tomei International, the firm has a clearly focused strategy of identifying and acquiring companies with turnaround potential and assisting their return to profitability. Like Johnson Electric, Semi-Tech seems intent upon establishing a global distribution system. SemiTech has acquired a variety of troubled businesses and divisions such as Singer, Brother, and Pfaff in Sewing Machines and Sansui, Akai and Nokia’s TV manufacturing operations. In each of these cases the Semi-Tech’s entrepreneurial founder, James Ting, stresses the value of the brand name value and global distribution network of the acquisitions (Byrnes, 1994; Kaptzan, 1996). Interestingly, Semi-Tech’s real estate disposals have funded this acquisition and turnaround strategy. With the possible exception of Semi-Tech, the firms listed in table 3 are not managerial firms with strong turnaround skills most are seeking to enhance their marketing organizations from strong production positions. If firms are prepared to take the time to absorb the abilities of the acquired firm then this strategy represents one mode of competence upgrading. Acquisitions are risky in the best of circumstances and the failure rate experienced to date is unsurprising. PRODUCING, DISTRIBUTION AND MARKETING IN CHINA Mainland manufacturing operations are a key component of Hong Kong firms strategy, 47 of the 50 firms (94%) listed in the appendix conduct production operations in China. However, a number of firms are beginning to re-orient toward production and marketing for the Chinese domestic market, if this becomes a major trend it will mark a significant strategic departure. The strategy marks an important shift from OEM manufacture to focus directly on an emerging mass consumer market in China. This approach goes beyond relocating production as the intent is to develop marketing and distribution assets that are specifically adapted to mainland users needs. Such firms stand to become first-movers in a market that has not been penetrated by international firms. In the past, western firms such as Jardine, Swire and Hutcheson had little success reaching Chinese markets beyond the treaty ports (Osterhammel, 1987). The onus is upon OCFBs to actually develop and invest de novo in marketing and distribution assets, either individually or with local partners, as these facilities are not presently in place.
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A number of firms have adopted a joint-venture approach toward mainland marketing, reflecting a variety of risks but due in part to government policy favoring such ventures. In many cases the domestic partner brings little managerial capacity to the venture beyond necessary bureaucratic permissions. To consolidate these strategies firms must move beyond joint ventures if they are to develop long lasting competitive advantages. Typical of a Chinese market penetration strategy is that of Elec & Eltek International Holdings. As an electronics subcomponent manufacturer for North American firms it enjoyed moderate but uneven success. In 1989, Elec & Eltek established a joint venture for marketing and development of its own branded fax machines in the mainland. The company intends to be a major supplier of telecommunications products to China. It also set up printed circuit board factory in China whose production was intended for domestic markets. However, like many firms, the thrust of the strategy seems blunted by diversification into property development in Hong Kong and Guangzhou. Other first movers are Great Wall Electronics and Legend Holdings, which have gained large market shares with own brand consumer electronics. While Legend is newly listed on the SEHK and is reliant on joint ventures for PC component production, Great Wall has moved beyond an early joint venture based strategy. The emergent product-market strategies of manufacturing firms such as Johnson Electric, Semi-Tech International, Great Wall, and Novell Enterprises indicates the importance of strategic choice. These are family owned entrepreneurial firms that are following strategies different from most OCFBs. However, the dominant strategic tendencies of the OCFB are illustrated in their investment strategies INVESTMENT STRATEGIES Observations of Hong Kong’s top 50 industrials suggests that earnings in the original, core business are rarely re-invested to develop and grow that business but to fund unrelated businesses and assets. Property is the preferred investment. The prototype manufacturing to property firm is found in the textiles/garment sector. The textile business (cotton fabric manufacture and garment making) was the first major industrial sector to develop after WWII. As the sector matured, firms began to exit the business or transplant production to the mainland. These firms discovered that they occupied a valuable ’land bank’ in Hong Kong (Lui and Chui, 1994). While a few firms sold unneeded property others diversified into property development and the property rentals business. A leading example is Lai Sun Garment (International) Ltd. While the company states that garment manufacturing for export is the core business, the property business accounted for 50% of turnover and 75% of profits in 1993. The firm’s largest subsidiary,
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Lai Sun Development is an affiliate property company, which has a larger asset base and market capitalization than the parent. Another large garment manufacturer, Laws International, has followed an almost identical strategy in the property sector. USI Holdings, Winsor Industrial Corporation and Novell Enterprises are large textile/garment firms, which have diversified into property development. Indeed, among the major garment firms only one, Fountain Set Holdings, has not followed this route. Firms outside the textile/garment sector have also developed significant property businesses from funds generated in manufacturing. For example, Playmate Toys grew rapidly on the success of the Ninja Turtle product line. Their attempts to develop related businesses such as video games have not yet proved successful, the main strategic thrust has been into the development of commercial and residential property. Large watch manufacturers such as Asia Commercial Holdings, National Electronic, Pacific Concord, and Stellux have all entered the property development sector on the basis of earnings generated in the core business. At least twenty-six of the top fifty manufacturing firms listed in table 2 have diversified into property in some capacity. The second major investment pattern in Hong Kong enterprise is the phenomenon of ‘perennial fissioning’ (Tam, 1990) which refers to the tendency for firms to engage in frequent corporate re-organizations. A common strategy is to de-merge business units into a separate legal entity and re-list the entity as a new public company. While one observes significant mergers and acquisitions activity in Hong Kong, the de-mergers and the creation of spin-off companies sometimes offset these. Table 4 below lists some major de-mergers undertaken by top 50 firms. Table 4 here A significant share of the de-merged companies assets are ultimately concentrated in the hands of a single family owner or private company, possibly depriving minority shareholders from sharing the full value of their holdings. However, fissioning when taken together with opportunistic investment and minimal investments in core business, has a number of consequences for competence development 4 DISCUSSION: PERSONAL MANAGEMENT AND OPPORTUNISTIC INVESTMENT The prevailing tendency among Hong Kong’s mid-sized manufacturing firms is the adoption of a holding company format to support the pursuit of conglomerate or unrelated diversification. Once a certain size and scope of operations is reached many firms appear to break up and re-organize assets into two or more enterprises. Conglomerate organizations typically
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require minimal managerial capacity: resource allocation decisions are based upon financial data rather than strategic assessment (Williamson, 1985). The need for managerial coordination is further reduced because significant proportions of assets are concentrated in property and other portfolio forms of investment. Because there is little or no operational interdependence between business units underperforming assets can be easily liquidated. A strategy of buying and selling business units and properties can be very profitable during a period of rising asset values, but it is rarely a source of sustainable competitive advantage. While conglomerate organization is generally held in the West to be an uncompetitive organizational form, another view proposes that conglomerate organization is an appropriate form for developing nations with weak institutional environments. Khanna and Palepu (1997) suggest that conglomerates add value in these contexts by imitating functions of several institutions that are present only in advanced economies. For example, in the absence of product-market regulation and weak contract enforcement regulations, enterprises in emerging markets face higher costs in establishing valuable brands than firms operating in more regulated and stronger institutional environments. A conglomerate with a reputation for quality and credibility can use its good name to enter a range of otherwise unrelated businesses. Khanna and Palepu (1997) suggest their argument applies in nations such as India and Indonesia. However, it would seem to follow that as the institutional environment increases in its sophistication, as they appear to be in Hong Kong, Singapore and Taiwan, then the value of the conglomerate 'reputation' effect must diminish and lose its competitive value. However, as Ghemawat and Palepu (1998) note a rent generating reputation may also stem from close contact to government bureaucracy. Conglomerate status may derive from a generalizable ability to leverage resources and permissions from the government. In protected markets such firms become a magnet for market seeking foreign investments. To the extent that Southeast Asian economies are subject to the forces of trade liberalization then the advantages of guanxi are also likely to diminish. In this paper I have proposed that the characteristics of minimal formal organization and top management dominated by kinship and ethnicity, the Hong Kong OCFB corresponds to Chandler’s (1990) notion of ‘personal management’. There are two key drawbacks to the personal management style of the OCFB; the first is the problem of competence enhancement, the second is the problem of opportunistic investment. The first issue has attracted most attention but it is roots may lay in the latter. There is substantial agreement that personal management does not support the creation of organizational specific or industry capability in any profound way. The
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absence of commitment by Hong Kong firms to a particular industry noted by Fung (1996) is a source of product market flexibility but it means that competitive capability in a sector must be somewhat superficial. Simple organization structures such as those found in the OCFB appear unable to provide the coordinating capacity necessary for the operation of complex value chains. Inevitably, a small managerial team must focus upon day to day operations, to the detriment of longer term planning. Second, the absence of strong employee loyalty to a firm, emphasized by Tam (1990) and Whitley (1992), and the associated high staff turnover reduces the firms ability to create organizational learning or firm specific competencies which are embedded in its human resources. Similarly, high turnover among transacting partners in loosely affiliated production networks inhibits inter-organizational learning (Leung, 1989). Chen and Li (1989:132) point to a 1984 study of the Hong Kong electronics sector which highlighted a range of weaknesses including: ‘ (1) the inability of firms to accumulate experience, (2) the failure to retain buyer loyalty and accumulate consumer recognition, (3) inability to plan their marketing and corporate activities (4) the unrewarding position of becoming a buyers market for overseas traders”. Arguably, some 15 years later this assessment remains valid. These weaknesses represent a failure to develop proprietary competencies but they should not surprise us as they stem directly form the structures and strategies widely adopted by Hong Kong’s manufacturing firms. The major strategic evolution among Hong Kong industrials is the wholesale relocation of manufacturing capacity to the mainland. This must be judged a strategic continuity rather than an enhancement of organizational competence since the objective is to utilize a low cost labour pool. Redding (1994) and Fung (1996) concede much of this but both argue that western approaches to competence development are less relevant to the OCFB as their entrepreneurial skills and access to global networks are sufficient to assure continued competitiveness. While Fung (1996) in particular attaches great emphasis to the brokering and intermediary functions performed by Hong Kong’s holding companies the fortunes of British firms in earlier era suggest that these capabilities provide only fleeting advantages (Chandler, 1991). The threat stems from modern vertically integrated firms, which have now begun to effectively imitate the flexibility found in networks, and through the ability to dominate strategic alliances, can play a central role in governing geographically dispersed production networks (Amin and Robbins, 1990; Harrison, 1994). Secondly, the phenomenon of frequent reorganization and de-merging, evident in this sample of firms, can be understood in the light of a managerial capacity constraint. A major
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advantage of de-merging unrelated businesses like property and manufacturing is that it provides owners with an accurate daily market valuation of the respective firm’s assets (Rappaport, 1990). From the perspective of operational management, this is important information. In the absence of internal managerial control systems stock market feedback is a vital and perhaps the sole source of control and investment appraisal. However, de-merging businesses inhibits longer term strategic planning whereby firms could rely upon systematic, internal cross subsidization of business projects. In other words demerging deprives firms of a reliable source of ‘patient capital’. This is not to say that firms are deprived of capital, as Whitley (1992) notes OCFBs are an effective means of mobilizing capital, rather capital allocation is ‘personalized’ in the hands of entrepreneurial owners and not instituted in the ranks of middle level professional managers. Clearly this creates problems of control and accountability and goes to the very heart of the failure to establish long lasting enterprises. So long as the entrepreneurial founder remains at the helm then of the enterprise then these firms may continue to accumulate capital and remain profitable. However, entrepreneurial acumen is rarely hereditary and succession often spells the end of the enterprise’s growth. Professional management of the capital allocation process remains an enduring strength of the modern corporation and OCFBs appear not to have developed processes that imitate it. Wong (1985) and Redding (1990) attribute the fragmenting tendency of the OCFB to an absence of norms of primogeniture and the need to provide heirs with an inherited business to manage. This may be true but leaves unexplained the observed pattern of unrelated opportunistic investment. Again a more proximate explanation is the failure to develop managerial capacity. A managerial capacity explanation focuses attention upon the weakness of the OCFB organizational structure in managing large complex organizations. By failing to pay attention to functional development in areas such as design and marketing highly profitable manufacturing firms have been unable to create internally a range of investment projects that could absorb generated surplus earnings. The data presented here suggests that firms have attempted to expand through the value chain by purchasing expertise and assets (e.g. brand equity) but the outcomes of this strategy have been mixed. Unable to manage expansion in the core business, entrepreneurs have channeled cash into liquid investments, such as property and real estate (Koa, 1993; Lassere and Schutte, 1995; Yoshihara, 1988). On one view opportunistic investing may be viewed as the, economically rational, redirecting of capital from lower to higher profit potential businesses. If returns are greater in property than in textiles then the patterns observed among Hong Kong firms represent
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an optimal allocation of resources. However, this merely begs the question of why firms appear unable to find a profitable internal use for surplus cash. The dilemma is resolved when viewed from the perspective of personal management from which the rationality of the OCFB strategy is readily apparent. First, as family enterprise owners, entrepreneurs naturally pursue strategic goals different from managerially controlled enterprises. Managerial hierarchies prefer to utilize internally generated funds over stock issues to do this since they are able to escape project by project scrutiny from capital markets in pursuit of long term growth (Jensen, 1989). In contrast, family owned firms are more concerned with wealth preservation and assured income streams of than with long term growth. While there is less international evidence to support this argument, the extremely high dividend payout ratios among Hong Kong firms is consistent with this view. Ownership concentration, or undiluted control of assets, provides a variety of benefits to majority owners. Yet to the extent the owners share of a firm's equity constitutes a significant portion of his or her wealth then there is a high degree of risk which may be reduced by creating a diversified portfolio of assets. The pattern of opportunistic investment needs to be seen in this light. OCFB entrepreneurs maintain majority control in their enterprises but in so doing they escape the discipline of the market for corporate control, a situation that allows investment misallocation to go unquestioned. A full analysis of OCFB ownership and financial investment strategies in the context of Asia’s emerging capital markets is beyond the scope of this paper but may offer a fruitful complement to prevalent cultural accounts. In the US the separation of ownership and control set the scene for the growth and expansion for of managerial enterprise. In Japan and Korea, the state played a stronger role in shaping the incentives facing enterprises; however, both countries have produced a class of salaried managers capable of managing the large and geographically dispersed enterprises that these countries have created. To the extent that the OCFB remains the major instrument for economic development then the prognosis for managerial capacity development is not good. The desire for family control and income will likely inhibit the development of organizational capabilities since it deprives the firm of the research, marketing and human resources assets needed to compete in technologically advanced markets. The implications for managers of OCFBs are quite clear. To compete in technology and capital intensive industries and on a global scale requires the creation of a wide cadre of professionally trained managers. While there is a clear trend toward the professionalization of second generation owner-managers, often sent to engineering and business schools in Europe and
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the USA (Vogel, 1992; Weidenbaum and Hughes, 1996), it seems doubtful that family and kin could supply sufficient talent to manage the detailed operations of a global corporation. The academic debate on this question seems deadlocked: For example, Granovetter (1994) argues that Korean and French family business groups embarrass the Chandlerian argument for managerial professionalization since these firms have persisted and thrived in recent years. On the other hand Fukuyama (1995) argues that it is the systematic failure of family owner-managers to modernize Korean and French industry that has necessitated state intervention and dirigiste industrial policy. While the academic debate seems unlikely to end on that note, there are signs that in Mainland China a managerial solution seems to be favored. Chinese policy makers and officials recently modified FDI and joint venture regulations to favor larger scale technology intensive projects and seem intent upon creating a regulatory regime that would clearly establish property rights. In part this stems from the success of earlier reforms that promoted light manufacturing and construction (Vogel, 1988). However, there is a realization that the first wave of industrialization pioneered by first mover OCFB may not serve China well. First, much investment is seeking cheap labor, which China has in abundance, but it promotes a dependent development path that China is anxious to avoid. Secondly, because domestic firms and overseas partners often created fictitious projects foreign investment may have been massively overstated, by a factor of six according to Krugman (1994). OCFBs thrived in an environment of weak contract laws and underdeveloped regulatory policy, which were a disincentive to western and Japanese investment, but this situation is changing. Kohut and Cheng, (1996) cite an economist from the Shanghai Foreign Investment Commission economist who says ''new commercial laws will be put in place, multinationals will feel more secure about investing there…. The trend is good because multinationals bring in technology’. Another official says that his office prefers the western method of striking deals with a team of lawyers. 'That way there are fewer disputes. We don't want to resolve issues through wining and dining but through the law' (Kohut and Cheng, 1996). In this scenario unless the personally managed OCFB begin to move beyond deal-making and cost efficiency based skills they may be pushed out of a key market whose development they pioneered. Acknowledgements: An earlier version of this paper was presented at a conference on the Asian Multinational Corporation and Business-Government Relations at the National University of Singapore, February 1997. I would like to thank APJM Associate Editor N. Roa Kowtha and three anonymous APJM reviewers for their thoughtful and constructive comments. References
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