~ Pergamon European Management Journal Vol. 15, No. 5, pp. 599---602, 1997 Published by Elsevier Science Ltd. Printed in Great Britain

0263-2373/97 $17.00 + 0.00

Books for Managers Asian Business Networks e d i t e d b y G A R Y G . H A M I L T O N , Berlin: Walter de Gruyter, 1996

Asian business systems operate on a different basis from European or Anglo-American systems. One major difference is the reliance upon networks, rather than markets or hierarchies (to use the now conventional distinction developed by Oliver Williamson) as the underlying principle of the organization of economic activities. Networks are cooperating associations of independent firms, with linkages often founded on shared family and regional origins: such networks are 'stronger than the individual firms that make up the networks' (p. 6).

Asian networks differ from Westem networks. 'Western network theory is based on voluntarist assumptions inherent in Western individualism: autonomous individuals or firms are interlinked; the basis of the linkage between actors rests on rational calculation and voluntary action ... Western network theory is "self- centred". By contrast, Asian networks are based neither on practices nor theories of voluntarism and individualism. Asian networks are normative, relational, hierarchical, and substantive' (Hamilton, pp.286--7).

The strength of this collection of papers is its detailed empirical demonstration of the different structures and modes of operating of networks amongst Japanese, Korean and overseas Chinese enterprises: the papers on the modus operandi of overseas Chinese enterprises are especially interesting.

Fundamental to economic action is trust between economic actors. Such trust may be based on mutual self- interest, upon external regulation or upon personal relationships. Network systems are based on personal trust

- - an essential in societies with weak governments, but with major advantages in other circumstances, especially in turbulent environments. The main advantages of network systems are flexibility (more flexibility than hierarchies), guarantees for the reliability of information (since unreliable information undermines reputations) and minimization of risk. 'In network modes of resource allocation, transactions occur ... through networks of individuals engaged in reciprocal, preferential, mutually supportive actions' (Powell, quoted p. 219). In such systems, demands for formal contracts may be regarded as insulting: if trust exists, contracts are unnecessary; if trust does not exist, contracts are only pieces of paper. Papers by Orru and Veda on Japan, and by Cheng-Shu, Numazaki, Wong, Kuo and Kiong on different groups of overseas Chinese, explore the significance of the concept of network systems with impressive empirical data.

Relational networks have major disadvantages. Chinese firms have difficulty in accommodating managerial and technological professionalism at a strategic level, since critical decisions are focused on family members. Decision-making is, as Kiong shows in his study of Chinese firms in Singapore, centripetal. Reliance on personal trust sets limits to firm growth, since such trust is difficult to transfer or institutionalize. The strength of relational ties within the Chinese communities inevitably results in tense relations with non-Chinese, possibly resulting in direct restrictions on the economic activities of firms - - as in Malaysia - - or in isolation from major areas of economic life - - as in Singapore, where Chinese enterprises have received little business from multinational corporations operating in the country. The strengths and weaknesses of network systems are well illustrated in Kuo's study of the

mandarin orange trade incident in Malaysia in 1985: Chinese entrepreneurs successfully resisted the Malaysian government's attempt to intervene in the mandarin orange trade with China, but also showed themselves to be vulnerable to new international competition (pp.127-8).

The three Asian systems discussed are shown to differ. The overseas Chinese systems are least structured. The Korean system is most structured, with the major role played by the State, although Korean chaebols are privately owned. Japanese inter-firm interactions are relational, but more structured than Chinese and less dominated by the State than Korean enterprises.

Two minor critical comments. The papers report research carried out in the late 1980s, and much has changed since 1990 1 most obviously in Hong Kong: there is cruel irony in Siu-Lun's comment that 'system trust is created mainly through the stable socio-political and economic framework afforded by British colonialism' (p. 23). Secondly, I hope Hamilton's comment on the a-morality of Western economic life is at least half in jest: "Even among friends, [the market economy is] a winner-take-all environment. Seeking morally unfair advantage in the West has always been legally okay' (p. 54).

Asian Business Networks is an impressive contribution to comparative international management, using a common but not constricting framework to indicate both similarities and differences between Asian business systems. For European readers interested in securing an overall understanding of networks, the papers by Redding, Cheng-Shu, Kuo and Kiong are probably most helpful; other papers may contain more data and less theoretical content than non-specialists require.

European Management JournalVo115 No 5 October 1997 5 9 9

BOOKS FOR MANAGERS

The collection overall provides an impressive demonstration of the importance of networks as a means of structuring economic relations.

Roderick Martin

THE INNOVATION WAR Industrial R&D ... the

Arms Race of the 90's by CHRISTOPH-FRIEDRICH VON BRAUN, Prentice-Hall, New Jersey, USA, I997

This book offers an interesting and peculiar perspective on industrial technological innovation. It raises some doubts about the extent to which technological progress matches actual-market and social needs and means increased profits for the innovating firm.

It starts by offering an overview on the foundations of the industrial R&D and how the approach of firms to technological research has changed over time. The author points to evidence that since World War II R&D spending has been growing constantly and rapidly (growth rates of R&D investments have significantly outstripped sales growth). The increased amount spent in R&D did not correspond to a proportional growth in sales and/ or profits. The analysis of 30 major corporations in the electronics industry provides the evidence for this. Moreover, the increased investments in R&D did not generate sales growth either in the short or in the long term. This should raise doubts about the optimal allocation of R&D budgets. However, there is a common understanding that maintaining high levels of R&D budgets is a pre-requisite for long term survival. The author challenges this view and provides evidence of its impact.

He especially concentrates on the effect of increased R&D on the shortening of product life cycles. This is a very challenging view of time-based competition and its long- term effect on a firm's profits and sales. The author demonstrates that

time-based competition brings an improvement of a firm's results until the firm is able to sustain a continuous shortening of life cycles. However, there is a lower limit to a product life cycle and when the acceleration ends there occurs a sharp decline in sales volumes. The more cycles have been accelerated, the larger the decline will be. For this reason, the author introduces the concept of Acceleration Trap. Such a trap can be avoided when the new product introduced is not a substitute for an already existing one. In other words, such traps can be avoided with continual diversification which, however, often fails. The author also shows that firms forced by such need to accelerate often introduce innovations which do not respond to any market requirement.

He therefore introduces the concept of 'competition driven R&D' which is different from the traditional 'market pull' and 'technology push' forces. The competition forces firms to invest in R&D as they are constrained to continuously innovate. However, such behaviour is not rational at all. The spiral of constant growth in R&D spending in a sense feeds itself as firms to define the R&D budget often rely on information and data concerning the behaviour of competitors. The belief that competitors are increasing their budget is a reasonable justification for a firm to allocate additional efforts on its own. Such competition driven R&D leads to an escalation spiral which is similar to that of an arms race. The book provides a variety of parallels between the arms war and the innovation/R&D war.

The author also puts forward an explanation for such sub-optimal allocation of resources in R&D, which are closely related to how R&D is perceived within a firm and how it relates to the other functions. Among others:

of° the control on R&D is predominantly led by the members of the R&D community

°~° top managers and management of other functions see R&D as an extremely complex and often not accessible box

°:° the assumption that technical

progress is a means to solve any kind of problem the shortage of tools and methods for externally controlling R&D the attitude of R&D people to privilege objectives which marginally take into account financial aspects.

The author gives recommendations and suggestions to both end the escalation spiral and improve the efficiency of R&D spending. His suggestions are summarised into four main principles. They are:

o,'o incorporating R&D into the company, that is making the R&D function dialogue with the rest of the organisation

°:o identifying critical skills and the interactions between R&D and technology

°:° adopting a long term approach in R&D decisions, which means to look at the real 'markets' of the future, often totally new and unrelated with the current ones

°:o focusing the R&D efforts, which requires also a narrow and demanding selection process for R&D projects and programs.

I found this book very interesting as it challenges many common views on industrial innovation and opens the readers' eyes about different perspectives. It also gives a substantial and sound explanation to the changed policy of some companies, especially in high-tech industries, who began to recognise, in the recent past, that excessive acceleration in new product introduction can be dangerous and erode sales volumes and profits over the long term.

Vittorio Chiesa

Financial Derivatives: An Introduction to Futures, Forwards, Options and Swaps by KEITH REDHEAD, Prentice Hall, I997, 377pp, £,21.95, ISBN 0-13-241399-X

No one can dispute the rapid and continuing growth in the use of financial derivatives over the past

600 European Management Journal Vo115 No 5 October 1997