Doing Business in Korea: What Contributes More than Social ...

Is social relationship a critical business requirement in Korea? What can we learn from the weak correlation between trust formation and social relationship in Korean businesses? ????

There is popular belief that social relationship is of paramount importance in doing business in Korea. As the old adage goes, ?It?s not what you know, but who you know that?s important.? But is it really the case?

Not necessarily, according to the research that Ludwig Bstieler and Martin Hemmert conducted on non-chaebol¹Korean firms². The research was aimed at identifying factors important to establishing trust in Korea, given that trust is essential to new business development. Previous researches also suggested that trust takes on more importance in a society like Korea, where outsides are given less trust and less opportunities of interaction.

Not surprisingly, the social relationship was one of the three factors that the authors tested as positively influencing trust formation (See Table 1 for the survey questions), but the research finding was quite unexpected.

They found that there are no meaningful ties between social relationship and the development of trust. The other two factors, communication quality and perceived fairness, however, positively contributed to establishing trust with Korean companies, whether you are a domestic or foreign partner. Communication quality and perceived fairness can mean different things to different people, but the research defines the former as timely, accurate, adequate and complete communication and the latter as fair resolution of disagreements, shared benefits, mutually-agreed adjustments and benefits proportionate to one?s efforts.

Then the authors went on to test a hypothesis that naturally follows: if there is no direct relation, does the social relationship indirectly affect trust formation by moderating the other two factors? The outcome also provides food for thought, as pre-existing social ties turned out not to reduce the importance of communication quality, although they did mitigate effects of perceived fairness.

This outcome defies our long-held belief that social ties are the most important contributor to business success in Korea. What are the reasons? The authors offered several explanations, the most noteworthy of which are dynamic nature of trust formation, development of institutional protection, and loss of valuable business opportunities.

First, pre-existing social connections have a dynamic influence on trust. Upon introduction of a third person or organization via a mutual contact, an initial mode of trust is established. Based on the perceived behavior over time, however, one or both parties may conclude later that the other is not trustworthy. This dynamic process renders the initial connection relatively insignificant, compared to quality communication and consistent demonstration of fairness.

Second, development of institutional protection reduces importance of social networks. In Korea, personal networks have often acted as a substitute for institutional rules and frameworks. As economies develop, however, Korean companies become better protected even if their counterparts turn out to be less trustworthy.

Third, over-reliance on existing networks limits future growth. Cultivating new relationships increases the likelihood of new business opportunities, so conducting business solely based on the pre-existing ties stifles innovation that many Korean companies pursue.

Implications for foreign corporations eyeing the Korean market are clear. First, they need to be aware that social connections may be less important in Korea than is widely assumed, especially as the nation provides a better institutional protection. Second, they are well-advised to cultivate more professional means contributing to trust formation in lieu of social connections. Social ties may make unfair relations more accepting to Korean firms for a while, but they don?t have any role in forming trust in the first place. Rather than being concerned about the lack of social ties, foreign firms need to focus more on timely, reliable communication and fair treatment to successfully conduct business in Korea.

Social networks and relationships have played an important role in Korea due to cultural heritage and institutional voids, but things do not remain static. It is time to recognize the dynamic nature of one of the strongest Asian economies, and infer from it broader implications for other Asian nations. Asia is quickly moving up the development stage, so the conventional wisdom that social relations override other business factors may not hold true over time. Those acting fast to the change will eventually win the hearts of Asian corporations and reap the benefits that others may fail to fully realize.

Table 1?Survey questions

Measuring Value	Questions
Trust in Partner	This partner?s representatives were frank in dealing with us
	Promise made by the partner?s representatives were reliable
	If problems (such as delays) arose, the partner?s representatives were honest about the problems
	The partner?s representatives made sacrifices for us during the project
	We felt the partner?s representatives were on our side
Communication Quality	The communication between us and the partner representatives were untimely/timely
	The communication between us and the partner representatives were inaccurate/accurate [you can rely on it]
	The communication between us and the partner representatives were inadequate/adequate
	The communication between us and the partner representatives were incomplete/complete
Perceived Fairness	Disadvantages were fairly resolved
	Benefits were evenly shared
	Adjustments to project specific agreements were mutually resolved
	Benefits were fair compared to efforts
	Benefits were fair compared to partner

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Methodology

Bstieler and Hemmert surveyed 165 independent (non-chaebol) Korean machinery manufacturers of fifty or more employees with external new product alliances. They analyzed 47 complete responses. The purpose was to find correlation between trust, the dependent variable, and communication quality (independent variable 1), perceived fairness (independent variable 2), and social relationships (independent variable 3). To derive an unbiased result, researchers controlled factors such as the existence of contractual safeguards, prior successful alliance experience, prior relationship length, location of the partner and company size.

Source

Ludwig Bstieler, Martin Hemmert (2008): Trust formation in Korean new product alliances: How important are pre-existing social ties?, in Asia Pacific Journal of Management, Vol. 27, Issue 2, pp. 299-319

Author

The article was written by Janet Chang, an MBA candidate for the Johnson School of Business, Cornell University and a part-time research associate at the Human Capital Leadership Institute.

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Endnotes

¹ Chaebol refers to a South Korean form of business conglomerate. The word chae means wealth or property, while bol means fraction or clan. The term is similar to the English word ?conglomerate,? but Chaebol refers more specifically to family-controlled corporate groups in Korea.

² The authors excluded chaebol member firms in the research because trust is not an issue of high relevance for business relations within chaebols due to a very close and hierarchical relationship among member firms. Trust formation is unnecessary as all member firms are deemed trustworthy under the control of the same family.

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