XIVth International Economic History Congress

Helsinki, Finland, 21-25 August 2006

Session 95

Evolutionary Theories of Long-Run World Economic History:The Theory/History Interconnection Re-Examined

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Explaining the longevity of market-embedded clans:the case of Greek shipping1

Stavros IoannidesPanteion University, AthensEmail: stioan@panteion.gr

And

Ioanna Pepelasis MinoglouAthens University of Economics and Business

Email: iminoglou@aueb.gr

This is a draft conference paper, not to be quoted without permission of the authors

1 We wish to thank Eleni Thanopoulou and Yanis Varoufakis for their comments.

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Abstract

Most attempts to explain the superior performance of ethnic networks that operate ininternational markets describe these networks as static institutions. Thus, they cannotaccount for instances in which an ethnic institution may itself evolve and display acapacity to adapt to changing circumstances. This paper builds a theoreticalframework that can address such instances, taking the example of Greek shipping as acase in point. The fact that we are seeking to describe a dynamic institution promptsus to turn to evolutionary economics. Thus, the institution we will be describing musthave the capacity to change over time, while it must have the unintended consequenceof sustaining the group’s competitive advantage. On these grounds, we construct thetheoretical concept of the market-embedded clan. We argue that market-embeddedclans have important implications for the business forms that members tend to set up.The key conclusion of our analysis is that the efficiency of market-embedded clansversus other forms of business networks stems not only from their capacity to spreadrisk, but most importantly, from the fact that they ensure members superior access toentrepreneurial opportunities than non-members.

JEL Classification: L22;N83;N84;Z13.Keywords: Evolutionary Economics; Business Organizations; Ethnic Networks;Clans; Shipping.

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1 Introduction

There are instances where a network of agents supplying a market, outperform otheragents, who serve the same market but are not members of the specific group, despitethe fact that the characteristics of the membership do not warrant such apparentdifferences in performance. Such instances have been identified and discussedextensively in the literature on ethnic networks. Examples include the Jewishdomination of the diamond trade in Antwerp and New York, Chinese merchants inSoutheast Asia, Korean grocers in some major American cities, and many others. Inall these instances, while the strong correlation between superior performance andethnic origin is beyond doubt, the causal link between the two is far from obvious.

Most attempts to explain this puzzle describe ethnic networks as static institutions,which are perceived either as having emerged and being preserved through non-economic means, or as deliberately created constructs that economize on transactionand information costs. However, important as these insights may be, they cannotaccount for instances in which the superior performance of an ethnic network issustained for long periods of time. In such cases, the institution that ensures thegroup’s superior performance may itself evolve and display a capacity to adapt tochanging circumstances.

A good example of the longevity of an ethnic institution is Greek-owned shipping.For almost two centuries Greek-owned shipping has commanded market shares thatare entirely inexplicable by reference to Greek entrepreneurial success in any otherbranch of business. How can this phenomenon be explained? This paper attempts tobuild a theoretical framework that can satisfactorily address such instances, taking theexample of Greek shipping as a case in point.

The fact that we are seeking to describe a dynamic institution, i.e. an institution thatevolves through time, prompts us to turn to evolutionary economics for ideas. Wetake heed from Loasby’s (1999, p. 105) contention that ‘institutional economics mustbe evolutionary economics…. and evolutionary economics must be institutionaleconomics’. The essence of the evolutionary conception of the economy is thateconomic phenomena must be conceived as processes. On these grounds Loasby(ibid) maintains that ‘institutions are a response to incomplete knowledge… they mayhave unexpected consequences… and are likely to change over time’. Thus, theinstitution we will be describing must have the capacity to change over time, while itmust have the unintended consequence of sustaining the group’s competitiveadvantage through time. On these grounds, this paper attempts to construct thetheoretical concept of the market-embedded clan, which is a further development ofthe clan concept originally formulated by William Ouchi in 1980.

Ouchi put forth the concept of the clan as a potential alternative to markets andhierarchies, the polar organizational forms for Transaction Costs Economics. A clan isa group of individuals characterized by high degrees of ‘equity’, ‘goal congruence’,and shared understanding. These attributes allow members to act in a coordinatedfashion with minimal levels of bureaucratic control. Therefore, Ouchi’s originalconcept refers to a group that belongs to an organization, or is the organization. Thusthe clan is thought of as a substitute for hierarchy.

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However, the ethnic networks we want to deal with in this paper consist ofindependent traders, who do not act for a common goal but pursue their own selfishinterests. Therefore, we attempt here to extend the theory of the clan, by analyzing itsrelevance in the context of arm’s-length market relations. Thus, we have constructedin Pepelasis Minoglou and Ioannides (2004) the concept of the market-embeddedclan, which we contrast to the ‘organization-embedded clan’, as we describe Ouchi’soriginal concept. In that paper we argued that market-embedded clans have importantimplications for the business forms that members tend to set up. The key conclusionof our analysis is that the efficiency of market-embedded clans versus other forms ofbusiness networks stems not only from their capacity to spread risk, but mostimportantly, from the fact that they ensure members superior access to entrepreneurialopportunities than non-members. In this study we develop the evolutionaryimplications of the concept, as we seek to address the longevity of an institution:Greek shipping over two centuries.The paper is organized as follows. Section 2 discusses the problems related withinstitutional longevity that two widely cited accounts of ethnic trading networks,which are based on the static ideas of mainstream economics, have faced. Section 3presents a simple model that aims at the formal description of these problems. Theevolutionary ideas on which an alternative view of ethnic trading networks can bebased are introduced in Section 4. Section 5 discusses William Ouchi’s originalformulation of the ‘clan’ concept, while in Section 6 we attempt to extend the originalconcept to our concept of ‘market-embedded’ clans. In Section 7, we argue that theattributes of market-embedded clans may indeed account for their capacity to surviveand evolve through significant periods of time. We demonstrate the explanatoryrelevance of our analysis with data drawn from the historical evolution of the Greekshipping community, arguing that its longevity can be attributed to the fact that it hasalways displayed a set of market-embedded-clan-like characteristics. Finally, we sumup our conclusions in Section 8.

2 Ethnic networks in non-evolutionary perspectives

All accounts of the superior performance of ethnic networks –including the one weput forth in this paper place emphasis on the high intensity of trust relations amongtheir members. Trust is the reason that members prefer to cooperate with membersrather than with non-members. The accounts that are based on mainstream economicsview the institutions that sustain trust in a static light: as rigid structures that do notchange over time. It is for this reason, we argue, that such accounts cannot explaininstances in which ethnic institutions evolve and seem capable to adapt to thechanging circumstances facing their members. In this Section we will discuss twowidely cited contributions in this stream of analyses and we will point at problemsrelated to their assumptions about the rigidity of the institutions they theorize.

The first is Avner Greif’s (1993) notion of a ‘traders’ coalition’, which he employs inorder to analyse the business methods of the 11th century Maghribi traders: a group ofJewish merchants and their agents that conducted maritime trade in the westernMediterranean. According to Greif (1993, pp. 535-6), this group was initially formedand finally dissolved through political means: the expulsion of a group of Jewishtraders from Baghdad in the first half of the 11th century and the imposed cessation of

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their trading activities by the rulers of Egypt in the end of the 12th.2 It was a closedgroup -in the sense that membership remained unchanged for as long as the coalitionremained in existence-which was embedded in the Jewish communities of theWestern Mediterranean, yet with distinct cultural norms. Importantly, as we will seepresently, membership was transferred from generation to generation.

Greif views this group as sustaining itself on the basis of strict reciprocity relationsamong members. If an agent cheated a merchant, he was sanctioned not just by thespecific merchant but by the whole group, - i.e, the traders’ coalition pursued whatGreif defined as a Multilateral Punishment Strategy (MPS) against cheaters. Thus, thecoalition was the outcome of a long chain of repeated games, in which agents chose tocooperate rather than defect, as the payoff for cheating was perceived to be lower thanthe stream of payoffs they expected to reap from cooperation in an indefinite future. Itis precisely these characteristics that explain the longevity of the coalition. This canbe seen, by considering two related questions. The first is why an end-game was neverplayed, i.e. why agents chose never to defect, even when in old age they shouldreasonably expect the stream of future payoffs to diminish. Greif’s answer is that thevalue of a trader’s reputation determined also his offspring’s standing in the coalition,thus discouraging opportunistic behaviour.

The second question is why a Maghribi trader might not choose to go into partnershipwith a non-Maghribi trader. Greif contends that in that case MPS would not bepossible, as it rested on intense communication and information-sharing among thegroup’s members. But such communication channels between member and non-member communities did not exist, thus merchants preferred to cooperate with agentswho were also members, rather than risk embezzlement in the absence of MPS. Themanner in which Greif answers these two questions reveals the problem regarding itscapacity to explain the longevity of the traders’ coalition;3 both the assumption ofunchanging membership –which was transferred from generation to generation- andthe assumption of no business ties with non-members imply a rigid institution, whichwill remain in existence only as long as these characteristics remain unchanged.

The second contribution we address is the account of ethnic trading networksintroduced by Jack Carr and Janet Landa (1994). Carr and Landa maintain that trustrelations among the group’s members reduce the transaction costs associated with therisk of breach of contract by one’s contracting partner. Ethnic trading groups arequasi-intentionally created clubs4 that aim at curbing opportunism. Thus they define(1994, p. 117) a club as: ‘any voluntary group deriving mutual benefit from thereduction of contract uncertainty… because: a) information about propensity to cheatcan be obtained cheaper for club members than non-club members; and b)sanctions… exist and are imposed on members who violate the rules of the game setby the club, thereby making it more expensive to breach contracts with club membersthan contracts with non-club members’. [Our emphasis]. Interestingly, both

2 Thus Greif’s account falls into the category of models that explain ethnic institutions as having beencreated through non-economic means, as we discussed in the Introduction.3 Moreover, although both of Greif’s answers make perfect sense in the context of an 11th centurytrading community, their relevance for more modern contexts is doubtful. For obviously, neitherintergenerational reputation nor lack of communication can be assumed to persist as societies approachthe modern form of market economies.4 The concept of the club was first introduced by Buchanan (1965).

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characteristics of ethnic networks as clubs are remarkably similar to Greif’s ‘traders’coalition’.

Carr and Landa treat ethnic clubs as voluntary –i.e. quasi-intentionally created-constructs. The implication is that a club will remain in existence for as long asmembers continue to believe that the probability of being cheated by a member issignificantly lower than by a non-member. This is the transaction cost that, accordingto Carr and Landa, the formation of the club aims to curb. But given that theprobability of breaching is all that differentiates transactions among members andnon-members, isn’t it reasonable to expect that trust relationships will sooner or laterbegin to be forged between specific members and specific non-members? If thathappens, the exclusive seeking of partners from within the club will begin to unraveljeopardizing the longevity of the institution.

3 The problem of longevity: a simple modelIn this Section we present a simple model that shows why this unraveling willinevitably be the case. We denote the traders supplying a market by . Then therewill be a subset, m, which comprises all elements of that belong to an ethnicnetwork. Therefore, all traders belong to one of two groups: Ai (i = 1, 2, … m), i.e.network members, or Aj (j = m+1, m+2, … M), i.e. the non-members. Every A agentcan transact both with other members and with non-members.

We assume that the production of a unit of output requires the cooperation of two Aagents.5 We also assume that each A agent can go into partnership with only one otheragent in every time period. The partnership expires in the end of the period and eachagent is free to seek a new partner for the next. In this context, the analyticallyrelevant question is whether a member of the network (Ai) will prefer to pair withanother member (another Ai agent) or with a non-member (Aj).

We can conceptualize the problem as a game of musical chairs; all M agents runaround a row of Q number of chairs, while music is playing. The moment the musicstops some Ai and some Aj agents will find themselves seated, while some others willbe standing. The ones sitting must now choose a partner to share their seats with. Thequestion then is whether an Ai agent will choose to share his/her seat with another Aior with an Aj agent.

This conceptualization of the problem helps to introduce and clarify some furtherfeatures of the model. What motivates our agents is the pursuit of a profit opportunity–sitting in a chair- and the avoidance of staying out of business –finding themselvesstanding. We assume that each pair of agents can only produce a unit of homogeneousoutput q per time period –i.e. can only occupy one chair-, thus the scale of productionis not an issue. In addition, the total output that can be produced in a time period (Q) –i.e. the number of chairs- falls in the following range:

m <2Q < M

5 This implies that the production of this output has all the characteristics of ‘team production’, as theterm was introduced by Alchian and Demsetz (1972).

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This merely implies that production could not take place exclusively within thenetwork, and that there is competition among agents to participate in partnerships.Finally, we assume that the business model is the same regardless of whether the pairof cooperating entrepreneurs consists of two Ai, or one Ai and one Aj agents.

In searching for a partner, every agent is motivated by the expectation of profit (EK),expressed simply as the difference between revenue (pq) and the sum of Production(PC) and Contracting Costs (CC). Thus, equation (1) describes the motivation ofagents:

(1) EK = pq – PC – CC

However, this relationship can be refined further. Production Costs (PC) can bebroken down to Input Costs (IC) and Organization Costs (OC). On the other hand,Contracting Costs (CC) can be broken down to Negotiation Costs (NC) and BreachingCosts (BC), i.e. the costs that an agent Ai will incur in the event that his/hercontracting partner breaches the contract. Taking these refinements into considerationwe have relationship (2):

(2) EK = pq – IC – OC – NC – BC

It is reasonable to think that Organization Costs (OC) and Negotiation Costs (NC) arelower when both partners are members of the network than when one of them is not.By contrast, we assume that Breaching Costs (BC) are identical regardless of whetherthe partners are members or not. However, following Carr and Landa (1994), weassume that the probabilities of Breaching Costs occurring are lower when bothpartners are members ( ii) of the network than when they are not ( ij), i.e. wegenerally assume that ii < ij. Thus relationship (2) can be expressed in the followingtwo forms, depending on whether it refers to pairs of members or not:

If both partners are members of the network:

(3a) EKii = pq – IC – OCii – NCii – iiBC

And if one partner is a network member and the other is not:

(3b) EKij = pq – IC – OCij –NCij – ijBC

Thus, an agent Ai will choose to partner with another member of the network (anotheragent of the m set) rather than a non member (an Aj agent) only if ii > ij.

Under what circumstances will this hold? According to our assumptions, a number ofterms in relationships (3a) and (3b) will be identical in the two partnering modes: wehave assumed that each pair produces a homogeneous output q; the market price pwill be the same for both modes, assuming perfect competition; finally, we haveassumed that all partnerships use the same technology and business model, thus wecan reasonably deduce that Input Costs IC will be the same in both modes. Therefore,for ii > ij to hold unambiguously, the following must hold:

(4a) OCii < OCij

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(4b) NCii < NCij

(4c) ii BC < ij BC

In fact all three relationships will hold, given our assumptions that ii < ij, and thatNCii = 0, while NCij > 0. However, it is important to show why these assumptions willhold in the context of an ethnic network. Relationship (4a) will hold because of theease of communication and coordination that characterize the membership. Therefore,the costs of organizing the production process will be lower when both partners aremembers. Relationship (4b) will hold because of the low haggling costs thatcharacterize dealings among members. This is the effect of relying on reputationrather than comprehensive contracts.6 Finally, relationship (4c) will generally holdbecause of the high intensity trust relations that exist among members, which reducethe danger of opportunistic behavior by one’s partner.

However, this is merely a static description of the decision problem facing anindividual network member in the choice of partner. The question is whetherrelationships (4a), (4b) and (4c) continue to hold with the passage of time. In fact, thiscannot be the case. Recall that all three spring from two attributes of ethnic networks:a) the ease of communication and coordination that stem from the common culturalbackground and b) the high intensity of trust among members. Although bothattributes will hold initially, the passage of time will inevitably tend to erode them.The reason is that some members will sooner or later have to partner with non-members, even if that were not their original intention. This is because some profitopportunities may be discovered by non-members, in which case an Ai agent mayhave to go into partnership with an Aj agent, or remain out of business for the currentperiod. In the musical chairs simile, some members will choose to accept theinvitation of a non-member to share a seat, rather than remain standing.

For some, this experience will be entirely negative, thus strengthening their quest fora network partner for the next period. However, for others the experience may provepositive. Some of the latter may find themselves pleasantly surprised in terms ofrelationship (4a), implying that they have been able to organize production with lowercost than they had initially expected, given that their partner was a non-member. Buteven those that were not surprised will expect that the Organization Costs will belower the next period if they choose to stick to the same non-member partner, becauseof the experience that will have been gained. On the other hand, successfulcooperation boosts trust between partners, thus both Negotiation and Breaching Costs–i.e. Relationships (4b) and (4c)- will be lower the next period. In terms of theprobabilities we introduced above, we therefore expect that with the passage of timethe difference ii - ij (which Carr and Landa (1994, p. 119) describe as the ‘degree oftrustworthiness’) will tend to diminish. Thus, the passage of time erodes thecommitment of network members to enter partnerships exclusively with members.

6 Note that relation (4b) is not probabilistic, as it is generally expected that Negotiation costs will belower among members than among non-members.

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4 Towards an evolutionary account of ethnic networks

The above analysis has shown that accounts of ethnic networks that consider them asstatic institutions cannot explain the longevity of networks on the basis of theassumptions adopted in these accounts. In the case of Carr and Landa, club-likearrangements will be dissolved in the long run as members will begin to cooperatewith non-members. In Greif’s case, who, after all, is describing an institution thatremained in existence for two centuries, its longevity was ensured by a set of verycommunity-specific features, which cannot hold for more modern market contexts. Itis such shortcomings that prompt us to turn to evolutionary economics.

The fundamental idea of evolutionary economics is that theory should focus oneconomic change, rather than equilibrium states, and that change is endogenous(Dopfer, 2005 and Witt, 2003). Thus, change and endogeneity are the key conceptsthat our analysis must be based on.7 Let us look at them in turn. As we are seeking todescribe an institution that has survived for a long period of time, we must be able toshow that it has the capacity to adapt to changing circumstances. However, it mustalso have the capacity to retain its essential characteristics, which confer to memberstheir competitive advantage. Obviously, both elements refer directly to two importantattributes of evolutionary systems: adaptation and retention.8

Endogeneity now merely demands that changes in the institution of an ethnic tradingnetwork are brought about by the operation of forces from within. These forces arethe economic actions of members. However, this is not the end of the story, as twofurther possibilities arise. The first is that the members intentionally create theinstitution. These are usually referred to as formal institutions, which, according toWitt (2003, p. 18) are ‘deliberately conceived and implemented, often after longdebate, and are subject to usually also more or less broadly discussedtransformations’. Hayek (1973) describes such institutions as ‘man-madeorganizations’, a clear reference to their intentional origins. Clearly this is Carr andLanda’s account of ethnic trading ‘clubs’ that we discussed above. However, we havealready seen that such an institution cannot survive for long, given that sooner or latermembers will begin to transact with non-members.

It is the second possibility that is of direct relevance for our task here: that theinstitution is created unintentionally, i.e. that it is an informal institution. According toWitt (2003, p. 18), such institutions result ‘in an unintended way from continuinginteraction between individuals, and the individuals usually do not even consciouslyreflect on them’. The idea of social structures that are products of human action butnot of intentional design goes back to the Scottish Enlightenment and finds its moremodern expression in Hayek’s concept of spontaneous order. The notion ofspontaneity refers precisely to the unintended character of the resulting institution. Onthe other hand, the concept of order refers to the fact that in some important sense theinstitution continues to have the same core character regardless of the changes it

7 Obviously, both concepts are incompatible with Greif’s model, as his traders’ coalition remainedunchanged for almost two centuries, while endogenous forces of change were blocked by the strictconvention that that institution developed, as we saw in the previous Section.8 See Dopfer (2005, p. 15).

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undergoes. As Hayek (1968, p. 184) maintains, ‘the concept of an “order” which … Iprefer to that of equilibrium, has the advantage that we can speak about an order beingapproached to varying degrees, and that order can be preserved throughout a processof change’. Thus, the concept of spontaneous order nicely captures both evolutionaryaspects of the institution we are seeking to describe here: adaptation and retention.

Spontaneity implies that neither the emergence, nor the further evolution of theinstitution in question is deliberately designed in order to achieve specific results forthe members. Thus, the institution may have emerged historically from solidarityamong the members of an ethnic group –stemming from kinship, ethnic origin,religion, or whatever- regardless of any economic activity they may have beenengaged in.9 While the feelings of solidarity may continue to play an important role inthe further evolution of the institution, it should not be assumed that they will overridenormal economic motivations for an indefinite future. Therefore, spontaneity impliesthat the institution also evolves spontaneously, in the sense that the actions of theindividuals that sustain it were not undertaken in that aim but stemmed from thepursuit of their selfish economic interests.

5 William Ouchi’s original concept of the clan10

Before we proceed to construct the analytical concept of the market-embedded clan,in this Section we introduce the original concept of the ‘clan’ of William Ouchi(1980). Ouchi considers that transaction costs stem from the agents’ quest for equityin transactions. Disputes about equity may arise from two sources: either from theambiguity of individual performance measurement, or from the possibility ofopportunistic behavior. Thus, Ouchi (1980, p. 137) maintains that market relations areefficient when there is low performance ambiguity and high levels of opportunism orgoal incongruence, while bureaucratic governance is efficient when both performanceambiguity and goal incongruence are high. He then proceeds to define an alternativemechanism to markets and hierarchies, the clan, as ‘the obverse of the market relationsince it achieves efficiency under the opposite conditions: high performanceambiguity and low opportunism.’

Performance ambiguity stems, of course, from the specific production activity a groupof agents are engaged in. Thus, the crucial attribute of clans is the second aspect, thelow levels of opportunism among members or goal congruence. The fact that themembers of the clan share similar or, more generally, compatible goals, implies that,at least in principle, they view their relationship as inherently equitable. Of course, forconfidence in equity and in goal congruence to reign within a group, membershipidentities play an important role. These identities will be known if the relationship hasa history. Ouchi claims that ‘a clan will emerge only if there is a strong socialmemory’. This historical memory prompts members to view equity as something thatwill ultimately prevail, and not necessarily as manifesting itself in each and everytransaction. Ouchi describes this historical aspect of the clan through the notion of

9 In respect of the emergence of the institution, therefore, Greif’s notion of a traders’ coalition shouldbe considered as a spontaneously created order.10 This Section and the next draw heavily from Pepelasis Minoglou and Ioannides (2006).

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serial equity.11

Confidence in equity implies that members strongly presume that reciprocity will bethe principle that guides behaviour towards each other. But just as in the case ofequity, reciprocity need not manifest itself in every transaction between members ofthe clan. Thus, confidence in reciprocity can be seen as increasing over time and, as aconsequence, we can talk of ‘serial reciprocity’ analogous to serial equity with theformer “guaranteeing” the latter. Thus, in a group with all the attributes of a clan thefear of opportunism is greatly constrained. Trust and mutual understanding among themembers replace or generally reduce the need for mutual monitoring, both pre-contractual and post-contractual. consequence of this is that the contracts, whichbind the members of the group, need not be as complete as when opportunisticbehavior is an ever-present eventuality. On these grounds, Williamson and Ouchidistinguish between ‘hard’ and ‘soft’ contracting.12

The possibility of soft contracting among clan members provides a first explanationfor the efficiency of the clan form: economizing on haggling costs. However, there isa second issue, arguably of even greater importance: economizing on informationflows among members. One source of performance ambiguity is that members do notshare the same knowledge about what to do and how to do it.13 With goal congruence,clan members trust each other that whatever action they take based on the knowledgethey possess will ultimately, given serial equity, be beneficial for all.14

6 The concept of market-embedded clans

Although the clan concept was initially proposed as an alternative to markets andhierarchies, both Ouchi’s (1980) original contribution as well as subsequent work(Ouchi, 1981 and 1984; Williamson and Ouchi, 1981; Wilkins and Ouchi, 1983;Alvesson and Lindkvist, 1993), have employed it almost exclusively in the context oforganizations, i.e. as a substitute for hierarchy. However, a useful distinction betweentwo clan types may be drawn: organization-embedded and market-embedded clans.The former refers to a group whose members occupy different, but consecutive layersin a corporate organization. In the latter, by contrast, every member of the clan cantransact both with other members and with non-members across a market interface.15

11 See Ouchi, (1984, pp. 27-8): ‘In a clan, however, equity is achieved serially rather than on the spot.That is, one clan member may be unfairly underpaid for three years before his true contribution isknown, but everyone knows that his contribution will ultimately be recognized, that he will still bethere, and that equity will be achieved in the end. This is what is meant be serial equity’. [Emphasisadded]12 See Williamson and Ouchi, (1981, p. 361): ‘Under hard contracting, the parties remain relativelyautonomous, each is expected to press his or her interests vigorously, and contracting is relativelycomplete. Soft contracting, by contrast, presumes much closer identity of interests between the parties,and formal contracts are much less complete. This is the clan-type management style’.13 Wilkins and Ouchi, (1983, p. 471): ‘clan members may share general orientations, but notnecessarily specific knowledge.’14 These considerations are especially relevant when new knowledge, i.e. learning, is taken intoaccount. New knowledge in an important sense always stays within the clan, for members operate onthe conviction that all new knowledge that they obtain individually will be used for the benefit of thegroup as a whole, rather than for personal gain.15 Ouchi offers some hints on the existence of market-embedded clans, although he does not use theterm. His paradigmatic case is the informal revolving-credit societies of the Japanese-American and of

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Nevertheless, the fact that a clan exists means that, somehow, the transactions amongmembers differ in important respects from those with non-members.16

In order to construct the concept of the market-embedded clan all characteristics ofclans are considered in turn. We start with equity. In organization-embedded clans,serial equity is ensured by the redistribution of organizational returns. But how canserial equity be ensured in the case of market-mediated relations? One way would bethrough the ex post redistribution to clan members of market-determined returns. Ineffect, this would transform the clan into a trust-like arrangement. Unlike a typicaltrust, however, the purpose of which is to redistribute monopolistic rents, we haveassumed that clan members carry on their transactions in competitive conditions.Thus, serial equity can be ensured only if redistribution takes place ex ante rather thanex post. In effect, what is actually redistributed ex ante is profit opportunities, ratherthan market returns. Clan-members are thus assured that, in the long run, they willhave better access to profit opportunities than non-members.

The emphasis on the ex ante features of market-embedded clans marks a seriousdifference between this concept and Carr and Landa’s focus on breaching costs. Morethan a cost-reducing mechanism, a market-embedded clan is an institution that offersto members superior access to profit opportunities, and thus higher long-run averagereturns, than non-members. This is a crucial feature of market-embedded clans thathas implications for their capacity to maintain themselves for significant periods.

Serial reciprocity, as has been shown, is the means for promoting serial equity withinthe clan. However, in the case of market-embedded clans reciprocity manifests itselfless in exchanges between two specific agents and more in the members’ assurancethat, sooner or later, other members will bring entrepreneurial opportunities to theirattention and that they will be asked to join a partnership to exploit them. Animportant aspect of this view of serial reciprocity is that members have an incentive omake sure that a constant pool of potential partners is maintained. This has importantimplications for the notion of goal congruence. For although we are dealing withindependent traders transacting across a market interface, in an important way goalcongruence can still be assumed for clan members, as there is one obvious goal thatmembers share and non-members do not: the preservation/sustaining of the clan itself.

These considerations help explain the difference between the concept of the market-embedded clan used in this paper and Avner Greif’s notion of a ‘traders’ coalition’.Greif views this group as sustaining itself on the basis of reciprocity relations among

the Chinese-American communities, known as Tanomoshi and Hui respectively. Ouchi, (1981, pp. 85-7): ‘A Tanomoshi or Hui typically consists of about one dozen individuals... Once a month, the groupgathers at one member’s home for dinner, and each person brings with him a pre-specified sum ofmoney, perhaps $1,000. The host of the evening keeps the whole sum. The group meets in this fashionfor twelve successive months until each person has put in $12,000 and has taken out $12,000. In thismanner, people who would have great difficulty saving the whole sum of $12,000 are able to raisecapital.’ However, these revolving-trade societies differ from the general concept of the market-embedded clan that is being constructed here, because relations among members are not typical marketrelations, as each one is obliged to deal exclusively and consecutively with every other member.16 The concept of the market-embedded clan thus falls within the general tradition initiated byGrannovetter’s (1992) ‘embeddedness thesis’. However, as will be shown below, our concept of themarket-embedded clan rests on an economic rationale (a mechanism that ensures clan members ofsuperior access to profit opportunities) rather than social relations at large.

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members, which are strictly observed in each and every transaction. In market-embedded clans, by contrast, the idea of serial reciprocity means that a member Amay ask another member B to join him in period 1, without presuming that B willinvite A to join him in period 2. Reciprocity is thus thought to prevail as long as amember chooses to partner with another member, regardless of whether therelationship between two specific members is always reciprocal.

Unlike in organization-embedded clans, where the identities of members are knownthrough membership in the same organization, in market-embedded clans membershipmust be established through some kind of accreditation mechanism. To ensurecredibility, this mechanism itself must be the product of a historical process, forcredibility hinges on past effectiveness in awarding membership status. Once thehistorical credibility of the mechanism has been established, it allows it to play also aforward-looking role, i.e. to select new members as a response to the enlargement ofthe original market that the group is active in. Again, this mechanism is extremelyimportant for the issue of longevity that we are investigating here.

What are the sources of superior efficiency the market-embedded clan warrants to itsmembers (vis-à-vis non members)? At least three may be identified. The first is thatmembers have better access than non-members to knowledge of profit opportunities,which arises from the ex ante character of serial equity. The second source is the easeof coordination in the pursuit of fresh entrepreneurial opportunities, that arises fromtrust and the common cultural background shared by clan members, which implygreat ease in summoning resources to take advantage of new learning. The thirdsource of efficiency is the superior ability of members (compared to non-members) tospread risk, which stems from the ease with which a member may find partners forparallel ventures. To sum up, Figure 1 maps the differences between the attributes ofmarket–embedded clans and of those of Ouchi’s original clan concept.

Figure 1: Attributes of market-embedded and organization-embeddedclans

Attributes of clans Organization-embeddedclans

Market-embeddedClans

Serial equity ensured ex post ex ante

Nature of congruentgoals

Organizational goals Maintenance of the clanitself

Identities of membersestablished through

Membership of the sameorganization

The clan as anaccreditation mechanism

Serial reciprocitymanifest

Among pairs of specificclan members

In the seeking of partnersamong the members atlarge

Moving away from the contextualization of our theoretical proposition within theliterature, our next step is to demonstrate how the concept of the market embeddedclan may allow us to explain the longevity of ethnic networks. For this purpose, wenow turn to Greek shipping.Current research on Greek shipping and especially the seminal work of GelinaHarlaftis –from which we cite extensively in what follows- has established that Greek

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shipping remains, even today, a predominantly family business, which is, however,embedded in a wider yet tight network. We argue here that it is the form of thisnetwork, namely the fact that it has all the characteristics of a market-embedded clan,that explains its success and especially the fact that it has sustained itself for more thattwo centuries.

7 Market-embedded clans as evolving institutions: explaining longevity

The efficiency attributes of market-embedded clans that we discussed above, havethree implications for the longevity of market-embedded clans as institutions, whichare, of course, consistent with the evolutionary principles we put forth in Section 4and the data on Greek shipping. First, in market-embedded clans there are incentivesoperating upon members to seek partners from within the membership, even thoughcooperation with non-members is not blocked and it may even have had positiveresults in the past for a specific member. Second, the members of the clansystematically opt for more volatile business organizations than non-members, a factthat has significant implications for the growth of the membership and for thescreening of new members. Third, market-embedded clans have superior capacity toadjust to market growth or contraction. The musical chairs model that we introducedin Section 3 will be again useful.

7.1 Sustaining the clan: an unintended outcome of individual action

The first question we must address is why clan members cooperate and, especiallycontinue to cooperate, with other members rather than non-members. We canreasonably assume that, initially, cooperation among members is preferred fortransaction costs-economizing reasons, as the high-intensity trust relations within theclan translate into lower Organization, Negotiation and Breaching Costs (see relations4a, 4b and 4c in Section 3). However, the question is why the preference for memberswill continue, given that the passage of time will inevitably tend to erode theadvantages of cooperating with members, as we have shown.

If a clan member finds himself standing after the first round of the musical chairsgame, he may have to accept the invitation of a non-member to share the seat that thelatter has already found rather than remain standing, thereby building a relationship oftrust with the specific non-member, as discussed in Section 3. We argue here,however, that, even in that case, a member will seek to form a partnership withanother member in the next period. The reason is that the probability that a clanmember will find a seat, either in the first or in the second round of the game is higherthan the probability of a non-member. After all, this is precisely the basis of ourcontention about the efficiency of market-embedded clans in the ex ante distributionof profit opportunities.

However, the survival of the clan over time can only occur if partnering with a clanmember today increases the chance of profitability in the next period. An Ai agent –i.e. a member- who has already found a seat in the first round, will choose anothermember of the clan as a partner if he believes that he thus improves the chances to beasked to join a partnership in the next period, thus reducing the risk of finding

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him/herself standing. Initially, agent Ai will be indifferent between inviting anotherclan member to share seats or a non-member with whom the agent has cooperated inthe past and have thus established trust. With both, transaction costs will be expectedto be low. But the reason a member chooses to cooperate with another member is thathe/she thus increases the probability that a member will invite him/her to participatein a partnership in the future. Therefore, there is a positive feedback between thechoice of partner in this period and finding a partner in the next.

This positive feedback explains the extent to which we reasonably describe clanmembers as having congruent goals. The maintenance of the clan can be thought of asa goal shared by the membership to the extent that they all realize that pickingpartners exclusively from within the clan increases their chances for more profitablebusiness in the future. Therefore, sticking to partners from within the clan is not just atransaction cost-reducing choice; much more than that, it is a choice that ensureshigher returns, as it reduces the Knightian uncertainty17 about whether an agent willhave access to entrepreneurial opportunities in the future. In the context of equations(3a) and (3b) in Section 3, the important thing is that the expected profit EK is higherin the case of cooperation between members compared to cooperation between amember and a non-member EKii>EKji, rather than the transaction costs -that aresummarized in the right hand side of the equation - being lower.Before explaining the longevity of the Greek shipping market-embedded clan, namelyhow Greek ship owners stuck to collaborating with other clan members, it is useful tofirst briefly outline the historical evolution of Greek shipping in modern times.Modern Greek shipping was essentially born in the second half of the eighteenthcentury within the context of the growing presence of Greeks in the fastly expandinginternational trade in the Ottoman Empire.18 By the end of the Napoleonic Wars, theGreek merchant fleet –which reportedly reached some 1,000 ships- had becomeprominent in the sea routes for the trade in staple commodities linking the Black Seain the east to Marseilles in the west.19 Initially, there was no clear division of labourbetween commerce and shipping as most Greek merchants were also ship owners.20

The process, whereby shipping was to become a primary or near exclusive activity forthe mercantile diaspora, began circa the1870s. Indeed, this transition towards aspecialization in shipping came about as a smooth evolution of roles; it was the largediaspora merchants of the Black Sea who played the key role in this process becomingalso financiers of the transition from sail to steam around the 1900s.21

By the opening of the twentieth century, the Greek shipping fleet was the twelfthmaritime power in the world while around the time of World war I Greek shippingbegan to expand from the Mediterranean to all ocean routes. 22 By 1939 ships under

17 See Knight (1921).18 See Hassiotis, (1993); Leontaritis (1987); and Kremmydas (1985).19 See Leontaritis, (1987).20 Pepelasis Minoglou (2005; Harlaftis, 1996 ).21For examples of merchants who played a key role in the transition to shipping becoming clearly a

separate activity see Harlaftis(1996). For examples of Ottoman based Greek merchants who played an

important part in this transition to steam, see Harlaftis and Kardasis, (2000).22See: Harlaftis,

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the Greek flag had reached the ninth position in the world tonnage23 and in the lastdecades, it prevails in terms of owned tonnage as the number one maritime power inthe world economy.24 During its transition from a late eighteenth century merchantdiaspora based fleet (of secondary importance) to its position of twentieth centuryinternational supremacy, Greek shipping has been characterized by a remarkablecontinuity: Throughout, it has been owned and operated by a closed communitywhich resembles a market embedded clan.Continuity has been possible because over time the members of this community havebased their expansion of business activities (and of the size of Greek shipping) solelyon the basis of collaborations within the group.Three strategies have been followed to make this possible.First, each member of the clan would establish a web/crisscross of interlockingpartnerships /joint collaborations with other existing clan members. For example, inthe nineteenth century, a specific merchant would be involved in parallel andconsecutive projects, each one with a different combination of partners, all of whohowever belonged to the clan. As new partners would be amassed, old ones wouldnot be dropped, and an on-off relationship would eventually be established with thelatter.25 For every individual clan member, the larger the number of ad hoccollaborators, the more was the likelihood that he would have access to futureentrepreneurial opportunities.

Second, continuity of membership within the clan –especially in times of crisis, wasmaintained as the existing weaker members were given financial assistance from thestronger ones. For example, in the interwar years there were seventeen shippingfirms/offices in London which represented about 100 Greece based shipping firmsfrom Andros, Chios, Kassos, Cephallonia and Ithaca. These London based firms actedas financiers and provided to the Greece based firms not only capital but alsoinformation on international shipping market. They facilitated also other Greekshipping firms to weather the impact of the financial crisis of 1929-1931 and thedifficult years of the early thirties.26

Third, in order to ensure the longevity of the clan and the availability of futurecollaborators within the clan, existing members pro-actively provided for theregeneration of the clan by initiating the younger generations to the business andcultural practices of the clan by taking them into their business as live-in trainees andproviding for their formal commercial education. First hand accounts of this practicein the nineteenth century are well documented in the autobiographies of AndreasSyngros and Dimitrios Vikelas.27 Within twentieth century shipowning families therewas great emphasis on the formal and informal initiation of male descendents to theGreek shipping business culture.28 In sum, the above examples and points show thepersistence of interclan business dealings throughout the history of Greek shipping.

23 Before WWII, Greek owned tonnage under other flags existed but it small share in the world fleetwas not affecting the world shipping hierarchy to any significant extent. See: Thanopoulou (1994).24 See: Harlaftis (1996).25 For a first hand accounts see for example Syngros (1908/1998). Also, research on the Rallis Brosportrays such examples, (Vourkatiotis, 2004 ).26 See: Harlaftis (1999).27 See: Syngros (1908/1998) and Vikelas, (1908/1997).28 See: Thanopoulou and Theotokas,(2006).

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7.2 Organizational fluidity and membership growth

The effectiveness of ex ante access to profit opportunities crucially depends on thetypes of business organizations that the members will tend to set up compared to thoseof non-members. Obviously, the more fluid are the organizational forms adopted bymembers, the easier it is to constantly reshuffle partnerships in order to takeadvantage of profit opportunities. In the musical chairs model, it is important thatmembers can easily change partners in every period, in order to increase their chancesof finding seats rather than remain standing. We have seen that this is the way inwhich serial reciprocity is maintained within the market-embedded clan.

It will now be argued that the characteristics of market-embedded clans that wediscussed in the previous Section have four systematic implications for the ways inwhich clan members will organize their dealings. Thus, significant differencesbetween the business organizations set up by clan members and non-members are tobe expected. Given the common cultural background, the relations of trust, thecommon norms and business practices, and a relatively common businessconception29 among clan members, we expect that:

First, the degree of hierarchy in these organizations will be generally low and fluid,rather than reflect a standard social division of labor. Therefore, agent A in venture Xmay be subordinate to agent B, while exactly the reverse hierarchical relationshipbetween A and B exists in venture Y, where both A and B are clan members.

Second, the organizations set up by clan members will look more like volatilepartnerships than corporate organizations with merged ownership of non-humanresources. The abundance of like-minded potential partners makes the dissolution andreconstitution of partnerships an option that by passes the need for a long-termcommitment of resources in a corporate firm. Thus, agents will tend to enter intopartnerships for specific projects rather than general business, the extreme case beinga specific partnership per project.

Third, organizations set up by clan members will tend to be not only volatile but alsoless vertically integrated (i.e. shallower) than the ones of non-members.30 Given theease of establishing and dissolving partnerships and the existence of a wide pool ofpotential partners, the major advantage of vertical integration according to standardtransaction costs analysis,31 i.e. that it curbs opportunism- is abolished. Therefore, inthe context of market-embedded clans, vertically related activities will tend to stayindependent, organized as partnerships among clan members.32

29 The term is used as in Witt, (1996) and (2000).30See: Granovetter, (1985, p. 503), who comes to the same conclusion on the basis of his‘embeddedness’ perspective31 See Williamson (1985, Chapters 4 and 5).32 There is a further reason why vertical integration is relatively obsolete in market-embedded clans.According to Langlois (1992), integration may be an efficient strategy in the case of dynamictransaction costs, i.e. costs that may arise in the future because it is not possible to secure the requiredresources when they are actually needed. The notion of dynamic transaction costs is intimately relatedto new learning. Thus, according to Langlois, one reason for vertical integration may stem from the factthat it ensures that any new knowledge acquired by the members at different levels of the organizationstays within the overall organization. This is precisely what the clan achieves anyway. Clanmembership and the possibility of partnership relations with other members give each member access

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Fourth, a market-embedded clan can be a larger and more diverse network than anetwork linking many families. Of course, the historical origin of a clan may be afamily network or even a single extended family. However, it can also be independentof families, as in the case of immigrant groups that come together, based on thegeographical region of their country of origin. In either case, these considerations areimportant because they imply a much broader potential scope of activity for a clanthan for an extended family or a family network.33 Thus, in the organizations that clanmembers will set up, we expect to find that the family element is less pronounced thanin the business organizations of non-members.

Turning again to the historical facts, we will dwell here on the issue of organizationalfluidity only, as membership growth was discussed in the previous section. Over time,the members of the market embedded Greek clan have set up organizations whichwere marked by the four characteristics discussed above. More specifically, duringthe nineteenth century the Greek diaspora merchant houses -from which Greekinternational shipping sprang- had all of these four characteristics as has beenanalysed in detail in Pepelasis Minoglou and Ioannides, (2006). Figure 2 from thistext summarizes these features and contrasts them with the nineteenth centuryprototype of Merchant House/ Trading Company.

Figure 2. Organisational framework: British TCs versus Greek Diaspora Merchant Houses

Typical British TC Typical Chiot Greek MerchantHouse

Hierarchy High

The core TC had a clearly definedheadquarter and multiple whollyowned branches

Low

The core Merchant House did nothave a clearly defined headquarterand the branches often consisted ofshort term ad hoc collaborationswith other clan members.

Vertical integration Rather high

Vertical activities internalised

Rather low

Vertically-related activities tendedto stay independent, organized asvarious partnerships among clanmembers.

to new knowledge. Therefore, in the clan context, vertical integration becomes obsolete also withregard to dynamic transaction costs.33 The framework of family or kinship-based networks of trust has been employed by some scholars inthe historical analysis of Diaspora Greek and other ethnic trading groups. For example see: Chapman,(1995); Baghdiantz McCabe, et al (2005); Ojala, (1997).

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Volatility Low

The TC spread out through partlyowned family based affiliates.

High

The Merchant House spread outthrough multiple ad hocpartnerships with clan members forspecific projects, the limiting casebeing a specific partnership perproject.

Family element in the firm Strong

Family ties were the predominantrelationships among partners

Less pronounced

Clan membership was thepredominant relationship amongpartners

As already mentioned above, by the early twentieth century the Greek merchant house erahad ended and was superseded by the rise of Greek shipping as a mainly separate activity(in part because some members of the Greek diaspora mercantile bourgeoisie from the1870s onwards were turning to a specialization in shipping and in part because thecommercial basis of the Greek mercantile diaspora was being fastly eroded from the 1900sonwards largely as a result of the rising nationalist bourgeoisie or other socio-economicdevelopments (such as communism) in Eastern Europe and the Mediterranean.) Thisshipping community –which was a continuation of the market –embedded clan –maintained the same principles of business organization. Indeed, even today this is also thecase. Recent research on Greek shipping firms in the second half of the twentieth century orthe last thirty years clearly reveals that these organizations compared to their westerncounterparts (in the same line of business, namely that is tramp shipping) were lesshierarchical, more volatile organizationally and less vertically integrated and embedded in anetwork -which was wider than a family one-than their western counterparts. Throughoutthe twentieth century there was a lack of separation between management and ownershipwithin Greek shipping firms. There were few managers and most of them were eitherrelatives of the shipowner or minor shareholders in the company. However, although withinGreek shipping the typical firm has been a) small and b) a family one, certain features werepresent which are not always typical of either small or family firms. First, in someinstances firms were based on co-ownership among clan members and not members of thenarrow family.34 Second, not all family firms were small. In the large shipping firms, a corefirm would manage a number of autonomous sub –firms, each sub-firm owning one ship.This gave shipowners a greater degree of flexibility and was consistent as a form with atradition, which had been inherited from the past. One could argue that this characteristicwas a ‘parafthora’/mutation of the nineteenth century Greek diaspora culture of multiplediverse interclan collaborations. In any sense, it is evident that management flexibility wasthe underlying need for maintaining a fluid business organization of this type.Third, especially in the second half of the nineteenth century and the last quarter ofthe twentieth century, a culture of post start-up fragmentation was established. “Companies that are controlled by one family usually split a few years after theirfounding. Usually this phenomenon concerns companies that are controlled by

34 For example, for details on co-ownership in the interwar years see Harlaftis ( 1997).

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brothers who are first generation shipowners”. 35 Moreover, from firms that began asco-ownerships among nonrelated clan members, new (often family based) firmsemerged a few years after their founding.36 Thus, what appears to have happened isthat though there is a rather high degree of continuity in the clan in terms of itsmembers, there is a low degree of continuity in firms-as the latter rarely survive for ageneration. This lack of continuity is also evident even in the cases where thefounders of the companies are still alive.37 This tendency exists in the family or clanmember based firms, regardless of whether traditional or non traditional Greekshipowners are involved, as testified for example from K.Hadjipateras in anautobiographic letter to his grandsons.38

Fourth, from the above argumentation, and on the basis of the available statistics onthe distribution of firms by size, it may be easy to reach the false conclusion thatGreek twentieth century shipping is a typical example of small business. This changeswhen tonnage figures are taken into account. Moreover, the fact that these numerous‘small’ family firms, whose number still constitutes a large part of the total,39 are partof a wider whole which we have described as a market embedded clan allows them tohave a scope of activities much wider than the scope that could be expected of smallfamily firms. The wider context of the clan allows these small family firms to forminformal alliances which although they do not have the formal character of a firm,they permit a scope of activity that could be achieved only by a much largerfirm/organization. Such ‘firms’ play the role of leaders, such as for example inLondon in the nineteenth century the Vaglianos and in the twentieth century theKulukundis.

Summarising the theoretical discussion in this Section, and on the basis of thehistorical review that preceeded, it can be argued that the members of a market-embedded clan are expected to construct business forms that are: a) less hierarchical,b) more volatile organizationally, c) less vertically integrated and d) less dependent ondirect family relationships than those of non-members. This (based on all fourfeatures) organizational fluidity is extremely important for the issue of the longevityof market-embedded clans that we are investigating here. It allows a verydecentralized adoption of new partners and, therefore, the decentralized screening ofnew members. Thus, individual choices of new partners promote the socialacceptance of new membership by the whole clan. The ease with which this is donestems from the fact that the constant reshuffling of partnerships reduces a singlemember’s exposure to the possibility of being cheated by a new member, who provesto be unreliable.

35 See: Theotokas, 1998. See also: Thanopoulou and Theotokas ,(2006).36As Thanopoulou and Theotokas (2006) comment: “It should be noted that a certain percentage ofthese firms started with the cooperation of more than one families and ended- up, after the classic typeof split observed in Greek shipping, to be owned by one family alone” (Theotokas, 1998, Theotokas-Harlaftis, 2004).37 From the interwar period onwards only a small percentage of firms kept the same name andorganizational structure for more than a generation (for example, S.Livanos Hellas and AndriakiShipping). See Theotokas (1997), chapter 7.38 See: Hadjipateras, (1994).39 The share was 64,5% in 2005. See Thanopoulou and Theotokas (2006).

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7.3 Adjustment to changing market conditions

Organizational fluidity has further implications for the issue of longevity. UnlikeGreif’s ‘traders’ coalition’, it allows the efficient growth of the market-embeddedclan, in response to the growth of the market at large. The musical chairs model isagain useful here. The evolutionary adaptation of the clan to changing circumstances,as we argued in Section 4, means that it must have the capacity to adjust to changes inmarket conditions. In the musical chairs simile, this is the total number of chairs –which we have denoted by Q in our model. As Q grows –i.e. the market- the higherprobability for members to find seats will only be sustained if the membership canalso grow, i.e. adjust to the expansion of the market. This growth can take manyforms, e.g. the creation and acceptance of new members, as we discussed in theprevious Section, or even the assimilation of another market-embedded clan, whichhappens to be culturally close to the original clan.40

Even more importantly, our theory of market-embedded clans may explain theircapacity to survive in situations of severe market contraction –i.e. situations where thenumber of chairs Q shrinks drastically. In such situations, it is conceivable that thewhole clan may be thrown out of business at a particular moment –all members willremain standing in the musical chairs model. However, the characteristics of themarket-embedded clan confer to it the unique capacity to re-emerge. There are severalconsiderations that may explain this possibility. First, the small size of the averagebusiness unit in the context of a market-embedded clan –which is related to theorganizational fluidity that we have already discussed- makes it easier for members tosqueeze back into the market after an initial period that they may have ‘remainedstanding’. Second, even when temporarily out of business, a member still has a poolof potential partners to choose from, as soon as the possibility of going back intobusiness presents itself. By contrast, a non-member would have to go through theprocess of finding a trustworthy partner starting from scratch. Finally, the readiness ofsuch a pool of potential partners allows a member to choose the ‘best’ partner for thework at hand, rather than search the one whom he considers to be the mosttrustworthy. Therefore, the possibility of clan members to outperform non-memberscomes to the fore once more.

Let us now turn again to the historical facts. In the text above we have traced thegrowth in size of the Greek shipping as the original Chiot market embedded clan grewby integrating-and even assimilating to some extent- the Ionian ‘clan’ from the 1870s,and then the Andriotes and Cassians and individuals from other areas of Greece. Weare now going to discuss the ways in which the Greek shipping market embedded clanadjusted to changing external conditions –some of which even took the shape of asevere market contraction. Three types of creative reaction/adaptation can bedetected: shifts in geographical locus; changes in the line/object of business activity;and temporary withdrawal from active business. There was a also a fourth category ofcreative reaction: Rebirth following a war catastrophy: Namely, following WWI andWWII, although the Greek shipping fleet suffered losses, it was able to re emerge onan ever larger scale.

40 Interestingly, the Maghribi traders’ coalition could not expand towards culturally related groups, asevidenced from Greif’s discussion of the fact that the Maghribis never established business connectionswith Medieval Italy, in spite of the fact that they could have easily established links with the severalJewish trading communities that were already active there.

22

Below we present some historical data on the four processes of creative reaction.Regarding the first type of creative adaptation, shifts in geographical locus wererather ‘frequent’. As a result of the closure of Dutch ports between 1780 and1782,Greek merchant houses in Holland shifted their operations to Trieste.41 A few decadeslater, Greek merchant-shipping houses seized great opportunities for profit as a resultof the Napoleonic Wars and the vacuum created because of France’s temporaryabsence from the Eastern Mediterranean for more than a decade (c. 1789-1815). In themid nineteenth century following the Crimean War – and the relative decline ofOdessa as the main center of grain exports of Southern Russia – Greek merchantsquickly shifted their operations from Odessa to the rising Sea of Azov ports which by1910 handled over half of the total grain exports of Southern Russia. 42

In the twentieth century, by which time the mercantile clan had transformed into ashipping clan a first major example of a shift in geographical locus is the desertion ofthe ports of the Black Sea and Constantinople by Greek shipowners. This came as areaction to the blocking of the Black Sea soon after the beginning of the Balkan wars;the cessation of the exportation of Russian grain after the Russian Revolution; and theGreek Turkish war of 1920-22. The Greek fleet turned to London and Piraeus wherethey established their headquarters. During the turbulent 1910s Greek shipowners alsostarted to explore systematically the transfer of bulk cargoes across the world oceans:the Atlantic, Indian and Pacific.43

With respect to the second form of creative adaptation, the following two are goodexamples: 1)The partial but large shift towards shipping in the 1870s as a result of thenarrowing profit margin in the grain trade; 44 and 2) within shipping, the transitionfrom sail to steam in the end of the nineteenth and early twentieth century. Thisprocess was successfully carried out in large part because prominent merchant-shipowners helped to finance this innovation.45

As for the third form of creative response, the temporary withdrawal from businessduring times when the market is contracting, the key question is not why this strategyper se was followed, but rather how were they able to do it? The answer is that theability to survive the periods of inaction when the ships were tied in the ports –wouldnot have been possible had the ties within the clan not been strong and mutualfinancial assistance among clan members not been at play. For within the clan therewas a tradition whereby the stronger members facilitated the weaker ones when indistress.

Fourth, regarding extraordinary circumstances, –e.g wars-Greeks have repeatedlyexploited trade embargoes and war situations to make through illegal meansexorbitant profits. 46 Moreover after both of the twentieth century World Wars in spite

41 Frangakis-Syrett, (1995).42 Pepelasis Minoglou (1998).43 See: Harlaftis and Kardassis, (2000).44 See: Pepelasis Minoglou, (1998).45 See: Chatzioannou and Harlaftis (Forthcoming).46 For example, this was the case during the Napolenic Wars. A micro example at a later time are forinstance The Vagliano brothers from Cephalonia who are known to have exploited the Crimean War to

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of heavy losses to the Greek fleet -40% in WWI and 70% in WWII- Greek shippingembarked on a fast route of expansion and enhanced its ranking among the leadingshipping nations of the world. For example, in the interwar years, which were years ofcrisis for international shipping, the Greek fleet expanded and new names entered thescene, often with the financial help of already established shipowners. 47 The reboundhad a not the form of recovery but essentially of rebirth. This was also the case for thepost WWII period where renewal and expansion was largely driven by relatively newarrivals such as Aristotle Onassis and Stavros Niarchos.

Throughout the two hundred years of the expansion of Greek shipping, themembership of its market embedded clan has grown along with it. In this processthere have been elements of both continuity and change. Before delineating thegrowth path a few words are necessary regarding a basic technique allowing for theexpansion of membership. This was that clan members enabled select employees oftheirs to join the clan. This they did either by selectively minimizing entry barriers byupgrading successful agents to partners or by providing financial backing tosuccessful employees wishing to start their own business.48 Within the more specificcontext of twentieth century Greek shipping, the expansion of business collaborationswithin the group was largely attained through a strategy whereby the first ventures ofnew shipowners would be financed by their (ex-employers) under whom they wouldindeed often place –at least temporarily-the services/operations of their ships.Newcomers in this context would set up enterprises that were something like spin offsof an existing strong shipping firm. There is the example in 1923 of TheodorosSyrmas who as an employee (captain) of the S G Embiricos shipping firm in Londonbought a twenty year old ship from the same firm. For the first six years of hisownership of the ship –of which he was captain-the vessel was managed by SGEmbriricos. This according to Gelina Harlaftis was a general pattern in the twentiethcentury for many successful uprising shipowners.49 For example in the post WWIIera there is the example of George Antonatos who was an employee of the shippingfirm J.C. Carras . While still an employee at Carras, the latter helped Antonatos –ashe did other select employees- to make his first steps as a shipowner. The first twoships which Antonatos purchased in 1961 and 1962 were in fact managed by the firmof Carras for some years.50

Before proceeding to our final synthesis in this Section, let us first turn to a briefinformative account of clan membership in terms of numbers andgeographical/occupational origin: At first (c.1780-1830) the clan was small in sizeand basically consisted of a few Chiot merchants in Smyrna, Amsterdam, Trieste.From this initial preparatory phase emerged the so called Chiot phase (1830-1860)which includes some sixty families the members of which excelled in what we

enhance their business, by transporting illegally grain exports from the Azov to Constantinople, earningexorbitant profits.See: Harlaftis and Chatziioannou (Forthcoming)47 Harlaftis (1997).48 There is the example of Skouloudes who went into business with the help of his employer Rallis inConstantinople. See Syngros (1908/1998).49 See: Harlaftis, (1999).50 Oral Testimony of Calliope Antonatos the widow of George Antonatos to her daughter EviAntonatos, Athens, May 2006. It is interesting also to note that Carras in the late 1950s bought sharesin the ships of the Xylas family and gave them to Antonatos. Carras kept the dividends until he waspaid back and the shares eventually remained in the hands of Antonatos who sold them eventually so asto purchase his first ship in 1961.

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describe as ‘mercantile business’ and they were found all over the internationalmaritime grain and cotton trade routes spreading from Taganrog in the East,throughout the whole Mediterranean and reaching up to London and Liverpool inBritain. In the next phase, the so-called Ionian phase (1870-1900), the core consistedof some 120 to140 families. Merchant shipowners from the Ionian islands werepredominant within the clan, but the Chiots continued to be ever present as the newarrivals intermarried and intermingled into Chiot families.51

The birth of the larger group of the Ionian phase itself came out of the initial coregroup of the Chiot phase through a deliberate process of widening the geographicalorigin of the clan; as some well established Chiots such as Sevastopoulos,Scaramangas and Negreponte provided capital to rising Ionians such as for examplethe Cephallonians Vergottis and Metaxas. 52

In the twentieth century as the Greek clan grew in size53 and became a ‘purely’shipping clan it numbered some 300 families in 1914-5; about 640 families in 1975and some 548 families in 1990. 54 Within the clan, in the second half of the twentiethcentury not all members were from old established shipping or merchant families orex employess of shipping families. In a sample of fifty companies it was found thattwenty eight were created either by former officers (usually captains) or bymanagers/white collar workers who had worked in shipping.55 Outsiders -unrelated toshipping or/and from other areas of Greece-would enter shipping for a profit -oftenbut not always- in collaboration with an already established shipowner. This categoryusually did not stay long in shipping, but nevertheless a few were highly successfuland remained. The Chiots and the Ionians are still important within the shipping clanalthough Cassian and others have also become prominent. Thus, whereas in the 1950samong the ten top Greek shipowners the eight belonged to traditional Chiot andIonian shipping families, in the next half century the picture was different. Namelywithin the top ten ‘extended’ families-although a large share originated from withinthe traditional shipping clan- almost none were descendents of the old shippingfamilies. However, within this new phase of evolution of the clan continuity with thepast is evident given: 1) adherence to the same principles of business organization; 2)the persistence of some descendents of old shipping families 3) and the large numberof employees drawn from the traditional ‘naftotopoi’, i.e. the localities with amaritime tradition. 56

8 Concluding remarks

We set out in this paper to analyse a ‘dynamic’ institution, namely an institution thathas the capacity to change over time, while, at the same time, it sustains an ethnicgroup’s competitive advantage. To this end, we have constructed the concept of the

51 For example, the most important family of the Ionian phase married into the Melas family and hischildren married into the Ralli, Negreponte and Petrokokkino, all of which were prominent diasporamerchant families originating from Chios..See: Harlaftis (1996).52 See: Harlaftis, (1996).53 And as the rise of the Chiots had been helped by the Ionians, the leaders of the latter -such as theLondon based Vaglianos- in turn helped further the expansion of Greek shipping in general through thekey position they held in London. See Chatziioannou and Harlaftis (Forthcoming).54 See: Theotokas, (1998 ).55 See: Theotokas, (1997).56 See; Theotokas and Harlaftis, (2003).

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“market-embedded clan”, which we distinguish from the concept of “organization-embedded clans”, as we describe William Ouchi’s (1980) original notion. Ouchi putforth the concept of the clan as a potential alternative to markets and hierarchies. Inhis view, a clan is a group of individuals characterized by high degrees of ‘equity’,‘goal congruence’, and shared understanding. These attributes allow members to actin a coordinated fashion with minimal levels of bureaucratic control. By contrast, theethnic network we deal with in this paper consist of independent traders, who do notact for a common goal but pursue their own selfish interests. Therefore, we attempthere to extend the theory of the clan, by analyzing its relevance in the context ofarm’s-length market relations. The key conclusion of our analysis is that theefficiency of market-embedded clans versus other forms of business networks stemsnot only from their capacity to spread risk ex post, but most importantly, from the factthat they ex ante ensure members superior access to entrepreneurial opportunities thannon-members.

We have analysed three attributes of market-embedded clans that explain theircapacity to evolve through time, to adjust to changing circumstances while retainingtheir core elements that sustain the group’s competitive advantage. First of all, wehave shown that clan members have an incentive to cooperate and, especiallycontinue to continue to cooperate, with other members rather than non-members.Second, we have seen that, given the common cultural background, the relations oftrust, the common norms and business practices, and a relatively common businessconception among clan members, they generally tend to opt for more fluidorganizational forms, a fact that enhances the group’s ability to adjust. Third, we haveseen that a market-embedded clan has the capacity to adjust to changes in marketconditions, i.e. to grow when the market expands and to survive in situations of severemarket contraction.

Finally, we have shown that all three attributes are found in the network of Greek-owned shipping, which has been a major player in global maritime activity for morethan two centuries.

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