solution. Lack of trust corresponds to a lack of cooperation between different groups in society, between business and society, between the public sector and business, and between the public sector and NGOs. In this perspective even the development problem can be framed in terms of lack of trust within the society of a developing country. Overregulation and the depression of entrepreneurial activities on the one hand and ‘hit-and-run’ strategies such as tax evasion on the other constitute a behavioural equilibrium of mutual distrust that has to be overcome if development is to be fostered (Habisch, 1998).
We argue that business, and MNCs in particular, should not take a victim’s perspective on this state of affairs; rather they are well-equipped to contribute to the renewal of social capital. First, large corporations are not only complexes of contracts but also manifestations of very extended networks of trust. Second, large corporations have numerous resources that are pertinent to investment in social capital: not simply the wealth they can bring to bear in market and non-market activities but also their extended networks with each other and their even wider networks with a whole range of businesses and governmental and social stakeholders. Third, large corpo- rations are increasingly regarded as key players in social governance as governments withdraw from, seek assistance with or simply never had the capacity to meet social expectations of good governance (Moon, 2002;
Moonet al., 2004). Fourth, by virtue of their increasingly conspicuous status in new national and global politics, MNCs have most to lose if trust in business in general declines (Habisch, 1999).
It should also be noted that there is a collective action issue here. If, as the secretary general of the OECD recently concluded, ‘[r]estoring market integrity is essential to winning back public confidence and to helping economies grow’ (Johnston, 2003), who is responsible for investing in social capital to that end? Whereas in the twentieth century capitalists were content to rely on governments to meet their collective interest in maintaining social stability, given the current decline in trust in govern- ment and the fall in governance capacity, particularly on a global scale, this looks as though it will not be a sufficient solution in the twenty-first century. Thus the imperative for MNCs to address social capital is all the more pressing.
The following sections elaborate on the concept of social capital and relate this to business.
problems, as recognized by Ostrom and Ahn (2001, p. 8, emphasis added):
The traditional model of collective action … assumes atomized individu- als seeking short-term selfish goals that lead each individual not to contribute at an overall efficient rate to collective projects. In this view, individuals will not voluntarily tackle a whole host of jointly beneficial projects in both the private and public spheres because they wait for others to take the costly actions needed to benefit them all. Collective action problems have been identified as shirking within private firms, as a lower rate of entrepreneurial activity, as an inability to provide local public goods, and as the likelihood that common-pool resources will be over-harvested or destroyed instead of harvested at an optimal level.
Collective action problems are endemic in all societies …We see the theory of collective action as a key theory for all of the social sciences and thus view social capital as a crucial factor for all social scientists and policy makers in their effort to understand and promote more effective ways of solving collective action problems in all facets of economic and political life.
Social capital has been deployed in the analysis of a wide range of issues, including the family, youth behavioural problems, education, public health, community functioning, democracy and governance, and economic devel- opment. More narrowly it has also been deployed in the analysis of business organizations, for example, in explanations of career success and executive compensation; job seeking and recruitment; internal resource exchange, product innovation and intellectual capital; the reduction of turnover rates and entrepreneurial success; and strong supplier relations and production networks (see Adler and Kwon, 2002).
Notwithstanding its topicality, the concept of social capital has been criticized because it appears vague and hard to verify empirically. Critics claim that social capital is used to explain too many things at the same time – and in the end nothing at all (for example Solow, 1997). In some respects this reflects the nature of social capital. Like gravity, social capital is invisible.
However we can see the effects of both. Gravity enables us to keep our feet on the ground. Social capital enables mutual confidence, which in turn rids us of the transaction costs that would be necessary to alleviate suspicion.
Imagine a world in which suspicion replaced mutual confidence: ‘If strict controls were imposed on all corporation personnel, then embezzlement, management fraud and other trust violations would be greatly reduced, but very little business would be done’ (Cressey, quoted in Shapiro, 1987, p. 650). Or as Arrow (1972, p. 357) puts it: ‘Virtually every commercial trans- action has within itself an element of trust, certainly any transaction conducted over time. It can plausibly be argued that much of the economic backwardness in the world can be explained by the lack of mutual confidence.’
Similarly, according to Fukuyama (1995) the secret of business growth is the ability to trust employees, managers, shareholders and, wider stake- holders. This informs his analysis of comparative business systems and his conclusion that social and economic systems that do not advance beyond family business cannot produced the large business organizations that are vital to substantial economic growth.
As with any other form of capital, social capital is a resource. More specifically, this resource is the confidence that others have in the subject actor or that the members of a single entity have in each other, be they individuals, groups of people, institutions or organizations.2This confidence enables the subject to act without the constraints that suspicion (the antithesis of social capital) might otherwise impose. Coleman (1990, p. 302) equates social capital to other forms of capital because it is ‘productive, making possible the achievement of certain ends that would not be attainable in its absence’.
Similarly in the political context Putnam (1993) argues that social capital is not only ‘nice to have’ but is also an asset in terms of economic development, administrative responsiveness and ‘making democracy work’.
Adler and Kwon (2002) extend this argument by underlining the extent to which social capital resembles other forms of capital (see also Ostrom and Ahn, 2001). First, like other forms of capital, social capital is ‘a long-lived asset into which other resources can be invested, with the expectation of a future (albeit uncertain) flow of benefits’ (ibid., p. 19). They note that this asset can be both an ‘endowment’ of some long-term historical legacy or
‘constructible’ through deliberate actions. Second, they see social capital as
‘appropriable’ for other purposes (for example friendship ties can be deployed for information gathering) and ‘convertible’ in that it can lead to economic advantage. Third, they view social capital as a substitute for or complement to other resources, for example improving economic efficiency by reducing transactional costs. Fourth, social capital resembles physical and human capital but differs from financial capital in that it needs mainte- nance. However unlike financial and physical capital, social and human capital do not depreciate with use but rather the opposite – the more they are used the stronger they get. Fifth, like environmental capital (for example clean air, safe streets) but unlike many other forms of capital, social capital is a collective good in that it is not owned by those who benefit from it.
Moreover, unlike pure public goods, some groups can be excluded from its benefits. Hence Adler and Kwon see social capital as a unique form of capital in that it is located ‘among’ rather than ‘within’ the actors and is not amenable to quantification, even though some of its effects can be measured.
Adler and Kwon distinguish social capital from its sources and effects. The substance of social capital is the resource of relations between the actor and other actors, and relations among actors within a collectivity, or networks that are characterized by mutual goodwill and confidence (ibid., p. 19). The
sources of social capital are social relations as opposed to market and hierarchical relations, in which favours and gifts are exchanged. The terms of exchange are diffuse and tacit but over time the exchange is symmetrical (ibid.) As noted above this can be in the form of the long-term endowment of propitious social development. However, it can also be something that is consciously constructed given the ‘opportunity, motive and ability’. The opportunity resides in different configurations of networks. The motive resides in what Putnam (1993, pp. 182–3) describes as ‘generalised generosity’:
‘Not “I’ll do this for you, because you are more powerful than I” nor even “I’ll do this for you now if you do that for me now” but “I’ll do this for you now, knowing that somewhere down the road you’ll do something for me.”’
This motive is also captured in Coleman’s (1990, p. 307) contrast of Hume’s image of farmers not assisting one another ‘for want of mutual confidence and security’ with a situation in which ‘one farmer got his hay baled by another and … farm tools are extensively borrowed and lent, [and therefore] the social capital allows each farmer to get his work done with less physical capital in the form of tools and equipment’.
These norms and habits and incentives for trust can reside in social institutions and networks, and Adler and Kwon (2002) observe that social capital may not only be a bottom-up process but also that appropriate and responsive leadership can play a part in social capital building.
Adler and Kwon also identify a range of effects of social capital. Benefits include access to information, the improvement of information and the acquisition of new knowledge and skills; capacity (or what they call
‘influence, control and power’); and solidarity, particularly in respect of compliance with local rules and norms, reduction of the need for formal controls, speedy dispute resolution and the prevention of long-term griev- ances. In all these cases Adler and Kwon point not only to benefits for the actor but also, through positive externalities, to advantages to the wider social aggregate. They also note the risks of social capital, which tend to be the result of excessive social capital. They warn of redundancy (for example in information stores and network contacts) and overembeddedness (for example in reducing the flow of new ideas and preserving power inequali- ties). They argue out that in social capital there are no invisible-hand mechanisms to deal with these risks.
In sum, the social capital literature argues that social networks of coop- eration and the evolving norms of reciprocity minimize mutual fear of exploitation and help generate public and private goods. The accumulation of these goods instils confidence in further social transactions and even more social capital is accumulated. Cooperation depends on and replenishes social capital. Tables 5.1 summarizes the sources, substance and effects of social capital.