Trust and Antitrust in Asian Business Alliances

The World Economic Forum unveiled a survey on perceptions of trust prior to its 2003 Annual Meeting in Davos, when its chosen theme was ‘Building Trust’. The survey results show clearly that the level of trust worldwide is fading: ‘We are more distrustful than ever of our leaders and our [elected] governments whether it be as a parliament or a congress. It follows generally that we do not think we are being “governed by the will of the people”. The highest levels of trust worldwide are enjoyed by the armed forces, non-government organisations, and the United Nations’ (World Economic Forum, 2003).

The outstanding economic success of Japan in the 1960s–1980s, followed by the remarkable growth of the four ‘Asian tigers’ (the economies of Taiwan, Hongkong, South Korea and Singapore) – and later the ASEAN countries, together with China – built a solid foundation for a school of thought emphasizing the advantages of the East Asian model as an alternative to Western-style capitalism. The latter may be also defined as ‘all-American’ or ‘Anglo-Saxon’. Even the critics of the East Asian model had to admit that the success of this region succeeded in making it one of the three major centres of the world economy within a very short time-span. However, after the Asian crisis of 1997–8 a new reality is emerging.

‘There is enough in the world for everyone’s need, but not enough for everyone’s greed’:² this statement, attributed to Mahatma Gandhi, serves as a useful starting point for this analysis of the dynamics of trust, self-interest and wealth creation.

After the end of the Second World War, the wide gap between rich and poor countries continued for decades. Both capitalist and Marxist scholars observed the phenomenon with pessimistic opinions about the possibility of significant development in the lagging nations. Capitalist economists argued that the Third-World countries lacked the basic requirements for successful economic growth – such as capital, productive human resources, natural endowment, technology and competent government. Some Marxists attributed the backwardness of the poor nations to their dependency on more developed, advanced industrial countries.

One of the most formidable challenges in creating and managing business in China is cross-cultural negotiation with Chinese businesspeople (Ghauri and Fang, 2001; Stone, 2001). The Chinese are described as the world’s toughest negotiators (Mann, 1989). In the words of Lucian W. Pye (1986, p. 74), ‘for centuries they [the Chinese] have known few peers in the subtle art of negotiating. When measured against the effort and skill the Chinese bring to the bargaining table, American executives fall short.’ A survey in the late 1990s among 127 Western companies doing business with China shows that Western business executives considered knowledge and skills about negotiation in China to be the most important factor for success in trading relationships with the People’s Republic of China (PRC) (Martin and Larsen, 1999).

A comparison by Low and Sirpal (1995) of modern-day Western business and corporate strategies with ancient Chinese classical strategies of war suggests that there is considerable overlap in concepts between the two (Thomas, 1995). This suggests that the Chinese people faced and dealt with similar problems of modern-day living more than 2,000 years ago. Ancient Chinese treatises in the areas of philosophy, administration, management and strategy continue to provide much wisdom for business applications in the twenty-first century. It is just unfortunate that all these treatises were written in the Chinese language, which is not accessible to the majority of the English-speaking world (Low, S. P., 1996, 2003). Studies have, however, shown that these ancient Chinese treatises have many similarities to modern-day management practices (Low and Yeo, 1993; Low, 1995; Low and Tan, 1995; Low and Lee, 1997).

This chapter examines the role of trust in the development of cross-cultural alliances. We argue that trust building constitutes an inseparable part of interorganizational learning processes, and is crucial for alliance evolution. We present a framework to support our argument and illustrate its application, with respect to the trust that needs to be developed between individuals and their organizations, be they from the same or from quite different countries. If the countries are different – for example, in alliances between European and Asian firms, we might expect individuals to espouse rather different ethical stances that may interfere with the strict terms of the alliance, and ultimately bring about its downfall.

A key issue in the business and economic landscape of the early twenty-first century, coloured by globalization, is the gradual increase in partnerships between Asian businesses and their Western counterparts. The level, breadth and depth of Asian–Western1 business partnerships in the form of strategic alliances at the time of writing are, arguably, unprecedented. Fuelled by the rapid liberalization of markets – China’s entry into the World Trade Organisation (WTO) and the imminent establishment of the ASEAN Free Trade Area (AFTA), to name but two examples – it is evident that an everincreasing number of North American and European companies are jostling to establish alliances with Asian companies as a means of penetrating the lucrative markets of developing Asia.

At the end of the nineteenth century and beginning of the twentieth century, economic activity became increasingly internationalized, and after the end of the Second World War this process accelerated. In particular, the last two decades of the twentieth century saw some dramatic turning points and far-reaching changes in the business environment that have had a lasting effect on the way business is done.

We are going to win and the industrial West is going to lose, there’s not much you can do about it because the reasons for your failure are within yourselves. Your firms are built on the Taylor model. Even worse, so are your heads. With your bosses doing the thinking while the workers wield the screwdrivers, you’re convinced deep down that this is the right way to run a business. For you, the essence of management is getting the ideas out of the heads of the bosses and into the heads of the labourers. We are beyond the Taylor model. Business, as we know, is now so complex and difficult, the survival of firms so hazardous, our environment so increasingly unpredictable, competitive and fraught with danger, that our continued existence depends on the day-to-day mobilisation of every ounce of intelligence.¹

In the knowledge-based economy of the twenty-first century, it is critical for a firm to employ knowledge creation, knowledge sharing and knowledge management to constantly and speedily upgrade its competitive advantage. However, the growing needs of firms are making knowledge management increasingly complex.

Mergers and acquisitions (M&As) are an increasingly popular strategy for achieving corporate growth and diversification. The worldwide value of deals increased from US$462 billion to over US$3.5 trillion during the 1990s. Although the USA is the largest M&A market, Europe and Asia have outpaced it in terms of growth rates. Between 1990 and 1999, the number of M&As in the USA recorded a 10 per cent compound annual growth rate, while Europe and Asia-Pacific recorded a higher growth rate, of 13 per cent and 27 per cent, respectively (Sirower and Hasson, 2000). Cross-border M&As, in particular, are becoming an increasingly popular alternative to greenfield investments or strategic alliances as a vehicle for internationalization. The number of cross-border deals more than quadrupled between 1997 and 2000, with the number of transactions increasing from 2,100 to 9,200 (Levy, 2001). According to a KPMG survey, out of all M&As executed yearly, the percentage of cross-border M&As increased from 26 per cent in 1997 to 41 per cent in 2000 (Levy, 2001).

The ‘chaebol’ – the family-owned conglomerates and crown jewels of the Korean economy – with assets greater than the half trillion (US$) Korean GNP (where one trillion is 1012) have suffered a pounding of late: on the issue of trust.¹ Two of the top five chaebol, with sales in excess of US$100 billion and US$50 billion, respectively, have been mired in scandal.² Hyundai’s Asan subsidiary – bankrolled by the late Hyundai chairman, Chung Ju Yung, and at the forefront of South–North tourism at Mt Kumgang – has been accused of serving as a government conduit in funneling US$500 million to Pyongyang to facilitate the June 2000 inter-Korean summit, while SK Corporation has been at the centre of an insider trading and accounting fraud scandal.³ In both cases, the South Korean government appears to have been either complicit or less than candid in its response, thus compounding the issue of trust.

This chapter starts from the position that ‘trust’ is an essential element in building and maintaining alliances. However, while ‘trust’ is a commonly used term, precisely what we mean by it is far from clear. I shall therefore seek initially to provide an explanation of the concept of trust. In doing so I shall seek to show how it develops and how it is perpetuated. Having outlined something of the meaning and relevance of trust to contemporary organizations, the central thrust of the chapter will be devoted to the many obstacles that may prevent the development of trust, or may result in a loss of trust by one or both parties in the relationship. The chapter will conclude with some cutting-edge practices that will increase understanding and help those concerned to ‘get together’ and develop trusting alliances that will endure.