Asia Pacific Journal of Management, 22, 445–463, 2005 2005 Springer Science + Business Media, Inc.

Manufactured in The Netherlands.

Does a Micro-Macro Link Exist Between Managerial Value of Reciprocity, Social Capital and Firm Performance? The Case of SMEs in China
WEI-PING WU Department of Marketing and International Business, Lingnan University, Hong Kong ALICIA LEUNG Department of Management, Hong Kong Baptist University, Hong Kong wpwu@ln.edu.hk

Abstract. With the deepening of China’s economic reform, SMEs are starting to gain tremendous economic momentum and play an increasingly irreplaceable role in China’s century-long bid for economic resurgence. Using a micro-macro link approach, this study investigates the effects of managerial value of reciprocity on both social capital and firm performance in China’s rural SMEs. A structural equation modelling method was used to test hypotheses. Data from 177 SMEs in China provide supporting evidence that there exists a micro-macro link from managerial value of reciprocity, to social capital (trust) and to firm performance (both overall performance and competitiveness improvement). Keywords: China managerial value of reciprocity, social capital, transaction cost economics, performance, rural SMEs,

With the deepening of China’s economic reform, small and medium sized enterprises (SMEs) are starting to gain tremendous economic momentum and play an increasingly irreplaceable role in China’s century-long bid for economic resurgence. In 1999, according to the Chinese Economic and Trade Committee, there were more than 10 million SMEs officially registered. These comprised some 98 percent of all business and provided 60 percent of the gross national product (GNP), 40 percent of profits and taxes, and some 68 percent of exports (Anderson, Li, Harrison, & Robson, 2003). What is intriguing is that SMEs have achieved all these accomplishments without preferential treatment from the government (Peng & Heath, 1996; Luo, Tan, & Shenkar, 1998; Yang, 2004). How can SMEs be achieving rapid rates of growth while facing enormous handicaps such as lack of legitimacy, resources and government supports? Xin and Pearce (1996) pointed to the guanxi (managerial networking) that many SMEs utilize to manage scarcity (or hostility) by actively securing production factors, distribution channels, and institutional support. A growing number of the literature on Chinese management and organization has contributed tremendously to our understanding of the role of guanxi in firm performance (Luo & Chen, 1997; Peng & Luo, 2000; Park & Luo, 2001; Luo, 2003). Surprisingly, relatively little is known about the relationship between social capital and firm performance in the context of SMEs that have achieved rapid growth by overcoming seemingly insurmountable

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liabilities such as lack of legitimacy, resources and government supports. Moreover, most of the extant studies on business networks in China pay little attention to the impact of managerial value of reciprocity on social capital and firm performance. The central premise of the current study is that there is a micro-macro link from managerial value of reciprocity, to social capital (organizational) and to firm performance in Chinese rural SMEs. Chinese societies are considered to be high-power distance societies, where inequality of power is accepted and managers tend to centralize decision making, share little information, and expect and receive compliance from subordinates (Hofstede, 1980; Shane, 1994; Cheung & Chow, 1999). It is particularly true for SMEs in rural China where management styles of many SMEs can be rather paternalistic (Chow & Fu, 2000). Therefore, these settings offer a fascinating context in which to explore the micro-macro link (Luo & Chen, 1997; Peng, 2000; Peng & Luo, 2000). In their pioneering work, Peng and Luo (2000) proposed and confirmed the existence of a micro-macro link between managerial ties with executive of other firms and firm performance. We contend that in a rural SME, because of the existence of great power distance, the prevalence of paternalistic management styles and the widely held and practised social norm of reciprocity in China, a manager’s personal value of reciprocity can greatly influence the development of a firm’s social capital which, in turn, enhances firm performance. Specially, using survey data from rural SMEs in China, we demonstrate that a manager’s value of reciprocity can help the development of interorganizational trust and network ties and improve firm performance, measured by both competitiveness improvement and overall performance. Moreover, we propose and test a conceptual framework depicting that a manager’s value of reciprocity may affect firm performance indirectly via trust and network ties. Overall, the current study extends the work of Park and Luo (2001) and Peng and Luo (2000), by demonstrating, for the first time, that a manager’s value of reciprocity can have a significant impact on both social capital (trust and network ties) and firm performance (competitiveness improvement and overall performance) in the context of SMEs in rural China. Theorerical background and hypotheses Transaction cost economics Researchers adopted a theoretical stance informed by transaction cost economics (TCE) to examine alternative governance between hierarchy and market (Hennart, 1988; Jarillo, 1988; Williamson, 1991). Two key behavioural assumptions of TCE are opportunism and bounded rationality (Williamson, 1991). Williamson treated networks as hybrids between market and hierarchy. Transaction cost explanations view alliance formation as a means to reduce the production and transaction costs for the firms concerned. However, numerous researchers have criticized the TCE perspective on network governance for its singular focus on partner opportunism. For example, Gulati (1995) and Zaheer and Venkatraman (1995) pointed out that this approach fails to capture an important element in network governance, namely the role of interfirm trust and the evolution of interpartner relationships. A major weakness of TCE theory is that it overemphasizes cost minimization, neglects the value creation aspect of a transaction (Zajac & Olsen, 1991), and only faintly recognizes the influence of social structure on economic life (Uzzi, 1997).

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Social capital Consequently, more and more researchers started to seek explanations of networks from the sociological perspectives, one of which is social capital theory. Coleman (1988) defined social capital as any aspect of social structure that creates value and facilitates the actions of the individuals within that social structure. Social capital is treated as a means of enforcing norms of behaviour among individual or corporate actors and thus acts as a constraint, as well as a resource (Walker, Kogut, & Shan, 1997). It is also defined as the sum of the actual and potential resources embedded within, available through, and derived from the network of relationships possessed by an individual or social unit (Nahapiet & Ghoshal, 1998). Social capital has been studied in a wide range of social activities including relations inside and outside the family (Coleman, 1988), relations within and beyond the firm (Burt, 1992), the organization-market interface (Baker, 1990), public life in contemporary societies (Putnam, 1993, 1995), and nations (Fukuyama, 1995). Social capital has been found to contribute towards the development of human capital (Coleman, 1988) and of intellectual capital (Tsai & Ghoshal, 1998), the formation of intra-organizational linkage (Tsai, 2000) and of interfirm network (Walker et al., 1997), and firm dissolution (Pennings, Lee, & van Witteloostuijn, 1998). However, social capital theory also suffers from similar weaknesses like TCE. It pays little attention to cost minimization while overemphasizing value creation. Integrative approaches of social capital and transaction cost In view of the incompleteness of existing approaches on business networks, efforts have been made to construct more powerful and balanced approaches. For example, Zaheer and Venkatraman (1995) developed a combined model of quasi-integration by drawing arguments from both TCE and the sociological exchange literature. They concluded that the combined model explains relational governance better than a model premised on traditional determinants of governance alone. Jones, Hesterly, and Borgatti (1997) integrated TCE and social network theories to provide a framework explaining why network governance emerges and thrives. They did so by explaining how social mechanisms influence the costs of transacting exchanges. Structural embeddedness is treated as a mediating variable between exchange conditions and social mechanisms. Carney (1998) offered a synthesis of sociological and TCE perspectives on production networks, substantiated with evidence from the Hong Kong watch industry. As the integrative approaches have been demonstrated more effective in studying interorganisational relationship than either TCE or social capital alone, this study will, therefore, mainly draw theoretical inputs from both TCE and social capital. Norm of reciprocity, networking and entrepreneurship in the Chinese context According to the cultural school of thought in the study of Chinese management and organization, the Chinese culture, embodied in the Confucian values such as the respect for authority, family/group orientation, and preference for personal relations (guanxi), fundamentally influences organizational behaviour (Redding, 1980; 87; Peng & Luo, 2000). Interaction among individuals and/or organizations is built upon trustworthy relationships

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that tend to be usually highly personalized (Peng & Luo, 2000). As a result, economic exchanges are more likely to be reinforced through social exchanges that stress reciprocity rather than “rational” arms-length transactions typically found in the West (Yang, 1994; Yeung, 1997). Westwood, Chan, and Linstead (2004) argued that reciprocity is a universal social phenomenon, but is subject to cultural variation in its manifestation in actual social relationships and exchanges. In China, the concept of reciprocity, incorporated into the dominant social ethic by Confucian scholars, has been a social norm in social relationships and exchanges for hundreds of years. At the heart of Chinese culture is a concern for harmony and a fundamental relationship orientation (Westwood et al., 2004). Reciprocity is deeply embedded in Chinese social relations. To maintain social harmony, there are reciprocal obligations expected of all the parties in a social relationship. According to Chen and Chen (2004), reciprocity takes some distinctive Chinese characteristics. First, reciprocity of favour exchanges is the most pervasive rule guiding Chinese social and economic interactions. Second, the Chinese reciprocity emphasizes a long-term orientation. Third, what is reciprocated must be indeed of great value to the receiver. And finally, it is the unequal exchange in which both sides will practice trying to do more, improving with every new effort, in a system of escalating favours. Reciprocity is regarded as one of the key operating principles of guanxi building (Chen & Chen, 2004). Chinese guanxi network is defined as a group of people connected by personally defined reciprocal bonds or particularistic ties (Redding, Norman, & Shlander, 1993). In a series of recent studies on guanxi and performance, it has been demonstrated that the arguments of the cultural school are valid (Peng & Luo, 2000; Park & Luo, 2001). Both cultural values and institutional environment during the reform era have prompted Chinese firms to seek resources and government support through relationship building based on managers’ personal trust and personal ties (Peng et al., 2001). Peng and Luo (2000) found that managers’ micro interpersonal ties with top executives at other firms and with government officials help improve macro organizational performance. The current study extends their pioneering work by investigating how managerial value of reciprocity may have an impact on the development of social capital and consequently firm performance. Entrepreneurship can be divided into specific activities within a macro view or a micro view, yet all address the conceptual nature of entrepreneurship (Aldrich & Wiedenmayer, 1993). The micro view of entrepreneurship examines personal characteristics that are specific to entrepreneurship. The focus of the macro view is placed on environmental factors external to the entrepreneurial businesses which are capable of creating or destroying entrepreneurship by the nature of the climate they establish (Aldrich & Wiedenmayer, 1993). Many researchers seem to have followed a mid-range view and focused on the interaction between the entrepreneurs and the environment context. In the recent years, entrepreneurship is sweeping through the whole China. However, many of privately owned SMEs are still faced with numerous problems such as lack of legitimacy (Xin & Pearce, 1996; Tsang, 1996; Yang, 2004). Yang (2004) pointed out that tax deduction and access to a larger number of employees are the privileges a private enterprise cannot enjoy. As strategic responses to the lack of legitimacy, Chinese entrepreneurs used some peculiar behaviour such as concealment, co-operation, influence and escape (Tsang, 1996). Concealment refers to the covering up of its private identity by a private enterprise. To compensate for their marginal status, many private firms choose to co-opt local authorities that have the final say on their survival

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Figure 1.

Conceptual framework.

and development. They also use influence tactics such as donations and lobbying to reduce both the public resentments and modify the government regulations, consequently enhancing their legitimate status. In other words, entrepreneurs have been networking to redress some of their inherent disadvantages. Finally, some of the private businesses try to avoid tackling the problem of legitimacy by limiting the extent of business growth and expansion. Figure 1 presents the conceptual framework of the micro-macro link. Because of the paternalistic leadership and management styles of SMEs in China, a manager’s personal value of reciprocity is, to a great extent, the organizational value of reciprocity that can have a strong influence on the nurturing, building and developing of social capital (trust and network ties). Furthermore, social capital is expected to exert a positive influence on a firm’s competitiveness improvement and overall business performance. Managerial value of reciprocity is defined as the extent to which a Chinese manager follows the Chinese social norm of reciprocity such as repaying favours and benefits received from others. We define trust as a firm’s confidence in its exchange business partners (buyers and suppliers) not behaving opportunistically. For this study, networks ties refer to a firm’s aggregated strong ties or good guanxi with its business partners, government offices, and financial institutions. Managerial value of reciprocity The Chinese reciprocity is “marked by its long history, the high degree of consciousness of its existence, and its wide application and tremendous influence in social institutions” (Yang, 1967: 291). Reciprocity is regarded one of the key Chinese traditional cultural values that still have a strong impact on business and management practices in China (Redding, 1990; Kirkbride, Tang, & Westwood, 1991), especially in rural SMEs (Wu, 2000). This is because current economic reforms in rural China have not reached the level of those in urban areas (Chow & Fu, 2000). Since Chinese management style is also paternalistic and sharply hierarchical (Redding & Richardson, 1986; Westwood et al., 2004), a managerial value of owners/senior managers can often literally become the dominant value of an SME. Consequently, a manager’s personal value of reciprocity can have an impact on the development of a firm’s interorgnizational trust and ties with other organizations.

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Rousseau, Sitkin, Burt, and Camerer (1998) argued that relational trust derives from repeated interactions over time between partners. Reciprocity provides such a driver for exchange partners to have repeated interactions which can help develop mutual trust between partners. In a similar vein, reciprocity is also pivotal in establishing close network ties because it can motivate business partners to adapt to one another’s needs to ensure that there is a continuation of exchanges between the two parties. Hence, reciprocity is a great facility with which exchange and social relation can get underway (Gouldner, 1960). Reciprocity is also considered to be an essential complement for the initiative of self-disclosure (Chen & Chen, 2004). In the context of interorganizational relationship, firms are expected to disclose necessary information such as knowledge to their exchange partners. Failure to reciprocate self-disclosure is a clear sign of not wanting to pursue the relationship (Chen & Chen, 2004). Consequently, in the absence of reciprocity, guanxi relation lapses (Alston, 1989). Without reciprocity, firms will find it extremely difficult to build trust and to develop network ties, as both are developed from business partners’ positive experiences of each other’s favours being reciprocated. From the perspective of TCE, reciprocity is regarded as one of the hostages that can check opportunistic behaviour (Macaulay, 1963; Maitland, Bryson, & Van de ven, 1985; Williamson, 1983). Reciprocity, whether treated as a hostage or deterrence, leads to the development of trust (Jarillo, 1988). Therefore, we reach the following hypotheses: Hypothesis 1a: There is a positive relationship between managerial value of reciprocity and trust. Hypothesis 1b: There is a positive relationship between managerial value of reciprocity and network ties. Trust Trust is a desirable Chinese traditional cultural value (Redding, 1990). Compared with Western societies such as the United States, Chinese societies are low-trust societies (Fukuyama, 1995). Furthermore, there is also a consistently lack of institutional constraints in China. The recent political and social history of China, involving a great deal of suspicion and betrayal (e.g. in the Cultural Revolution), means that people view others as threat and are less inclined to trust them (Atuahene-Gima & Li, 2002). It is argued that there are four facets of trust: belief in the good intent and concern of exchange partners, belief in their competence and capabilities, belief in their reliability, and belief in their perceived openness (Mishira, 1996; Nahapiet & Ghoshal, 1998). Barney and Hansen (1995) defined that trust is the confidence that one partner will not exploit the vulnerabilities of another. In view of the low trust in Chinese societies, we adopt this view and define trust as a firm’s confidence in its exchange business partners (buyers and suppliers) not behaving opportunistically. From the perspective of social capital, trust, a relational dimension of social capital, can have positive effects on the exchange of intellectual capital and it may indicate greater openness to the potential for value creation through the exchange and combination of resources between business partners (Nahapiet & Ghoshal, 1998). Tsai and Ghoshal (1998)

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found that trust contributed positively towards resource exchange and combination that in turn helped value creation. Trust is the cornerstone of cooperation on which firms can operate their business much more competitively by the effective combination and utilization of other network firms’ complementary resources and skills (Harrigan, 1985). Consequently, this effective resource exchange and combination lead to the creation of intellectual capital and help improve a firm’s competitiveness. Furthermore, from the perspective of TCE, trust not only checks opportunistic behaviour but also reduces the costs of finding an exchange partner (Granovetter, 1985). In addition, the presence of interorganisational trust is an extraordinary lubricant for network partners for better task coordination (Gulati, Nohria, & Zaheer, 2000). Trust can, therefore, lead to reduced costs of negotiation between partners, as under high trust conditions, firms are less inclined to rely on elaborate safeguards for specifying, monitoring, and enforcing agreements (Zaheer, McEvily, & Perrone, 1998). Clearly, trust is an effective means to lower information costs among members, decrease uncertainty faced by the contracting parties, and reduce transaction costs in the market (Wu, 2000). Therefore, with the presence of trust, firms can benefit from both the enhanced organizational advantage and reduced transaction cost. Consequently, a firm’s overall performance improves. Trust not only helps firms survive and become more flexible (Williamson, 1983), but also facilitates greater adaptability and resources procurement from other network members (Thorelli, 1986). Therefore, it is not surprising that interorganisational trust and a firm’s performance were found to be positively related (Zaheer et al., 1998). Thus, it can be hypothesized that, Hypothesis 2a: The greater the trust between a firm and its business partners, the more likely it will achieve better overall performance. Hypothesis 2b: The greater the trust between a firm and its business partners, the greater its competitiveness improvement. Network ties Interorganisational relationships include those a firm may have with external organizations such as buyers, suppliers, investors, government institutions, and the like (Dyer & Singh, 1998; Larson, 1992). For this study, networks ties refer to a firm’s aggregated relationships with its business partners, government offices, and financial institutions. Luo et al. (1998) demonstrated that rural SMEs in China have stronger incentives to cultivate guanxi with bureaucrats because they have more difficulties in obtaining preferential government treatment; a consequence of ‘liability of smallness’ and lack of legitimacy. Effective support from government offices can “strengthen and increase the efficiency” of firms (Nugent, 1993). Thus, good relationships with government offices can help firms get access to such valuable information as government policy on future economic development, taxation, and import and export regulations. Likewise, partnership with financial institutions can provide firms with a competitive edge in obtaining benefits such as easier access to loans. It was reported that it was hard for Chinese rural SMEs to obtain loans and they are encouraged to strengthen the goodwill consciousness (Asianinfo Daily China News, pg.1,

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July 12, 2002). Close ties with government offices and financial institutions can provide a much more favourable business environment, which encourages business partners to share resources such as knowledge and cooperate much more productively. Moreover, close ties with other firms are, in many cases, the only alternative for continuous survival and growth, as horizontal linkages and manufacturing relatedness seem to be an avenue to improved competitiveness (St. John & Harrison, 1999). For example, a close relationship between supplier and buyer can pave the way for both parties to share business information and resources. McEvily and Zaheer (1999) argued that network ties help the development of competitive capabilities by broadening and deepening market knowledge. Close relationships between buyers and/or sellers can help firms establish cross-functional capabilities to cope with technology uncertainty and to tackle technological changes. Close ties are found to be positively associated with collection of market intelligence (Yli-Renko, Autio, & Spaienza, 2001), and resource exchange and combination (Tsai & Ghoshal, 1998). Furthermore, the process for firms to interact with network members can lead to possible creation of new products and services. Consequently, this results in a firm’s competitiveness improvement and overall performance enhancement. Furthermore, close ties with exchange business partners can minimize opportunistic behaviour and the costs associated with market uncertainty. Close ties can limit partner opportunism (Kale, Singh, & Perlmutter, 2000) and consequently help to reduce transaction cost (Gulati et al., 2000). The costs of opportunistic behaviour in a network can become extremely high because the damage to one’s reputation can influence not just the specific alliance in which one behaved opportunistically, but all other current and potential business partners (Gulati et al., 2000). Because business networks are usually exclusive and relatively small in size, it is more likely that such behaviour will be discovered and that the information will spread rapidly through the network. Therefore, with reduced transaction cost, firms can improve their competitiveness and achieve better overall performance. It has been demonstrated that a manager’s personal networking (guanxi) can improve an organization’s performance (Peng & Luo, 2000). Hypothesis 3a: The closer the ties a firm has with its network partners, the more likely it will achieve better competitiveness improvement. Hypothesis 3b: The closer the ties a firm has with its network partners, the better a firm’s overall performance. Methodology Sample and data collection The population for this empirical study consists of both privately and collectively owned rural SMEs in the manufacturing sector in Zhejiang Province, a coastal province of China, that has witnessed unprecedented growth of rural SMEs in recent years. The target respondents were CEOs. Rural SMEs for contact were at least three years old so as to ensure their business operations were fully-fledged.

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We randomly selected two hundred and fifteen SMEs, employing less than 500 people, from the directory provided by the local government office. Local research assistants, trained with data collection skills, collected data in August 1999. They distributed structured and undisguised questionnaires in person to the CEOs of SMEs, and collected the questionnaires upon completion. We provided informants with specific instructions about how they should complete the questionnaire. Thanks to the data collection method, we received a total of 201 questionnaires, resulting in an extremely high response rate of 93 percent. After a careful screening process, 177 cases were considered useable. There were 113 (63.9%) privately owned SMEs, 49 (27.7%) collectively owned SMEs and 15 (8.5%) unspecified. 37.8 percent of the firms employed 1–50 people, 21.5 percent of the firms employed 51– 100 people, 20.2 percent of the firms employed 101–200 people and 20.5 percent of the firms employed 201–500 people. Measures In early 1999, we conducted a field visit to Zhenhai County in Zhejiang Province, China. Based on the views and comments received from 20 randomly selected local SMEs, we made some revisions to the original version of the questionnaire and ironed out such problems as misleading, confusing, and inappropriate items. These SMEs were subsequently excluded from the final data collection exercises. All the respondents received a questionnaire written in Chinese. A back translation method was used to make sure that English questions were properly and accurately translated into Chinese. This applied to all of the scales except managerial value of reciprocity which was directly developed from several popular Chinese sayings. We conducted a reliability test of all the scales. The results showed that all Cronbach alphas were above Nunnally’s (1978) recommended threshold of .60. All the scales were developed from a detailed literature review, except the managerial value of reciprocity scale, which was based on a collection of popular Chinese sayings. We used Chinese sayings because we believe that local CEOs from the rural SMEs were able to identify Chinese traditional values and norms more readily from Chinese sayings than from standard items used in the existing literature. Managerial Value of Reciprocity (α = 0.65) was measured by asking informants their degree of agreement on four selected popular Chinese sayings, emphasising the importance of reciprocity in one’s life, such as “Kindness is a debt that should be repaid” and “Favours must be reciprocated.” Trust (α = .60) was measured by three items including “We spend very little to hire lawyers for commercial purposes” (McPherson, 1984), and “We normally do not sign any formal business contract with our business partners.” The scale was designed to reflect the confidence facet of trust. Network ties scale (α = .64) was measured by three items including “We have many close business partners,” “We have very good business relationships with local government offices,” and “We have very good business relationships with banks.” All of the items were developed from Rowley (1997). Competitiveness Improvement (α = .74) was measured by four items including “The alliance with business partners has helped us beat our competitors” and “The support received from our business partners has enhanced our product quality.” The items were developed from Larson (1992) and Song and Parry (1997). Overall Performance

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(α = .88) was measured by four items. The example items are “This company is satisfied with its past three years’ business performance”, “This company is satisfied with its past three years’ ROI”, and “This company is satisfied with its past three years’ business growth.” These items were developed from Larson (1992) and Burt (1992). The scale was meant to assess a firm’s overall performance in terms of its business growth, sales growth and ROI. The questionnaire also contains background information questions such as gender, age, firm type, and so on. A Likert-type scale was used ranging from “1” for strongly agree to “5” for strongly disagree. Convergent validity concerns with whether multiple measures of the same construct are in agreement. According to Anderson and Gerbing (1988), convergent validity can be tested with a measurement model by examining whether each indicator’s estimated pattern coefficient on its posited underlying construct is significant. To test the convergent validity of the measurement model, a confirmatory factor analysis was conducted resulting in a significant model (χ 2 = 29.14, p = .258, goodness-of-fit index [GFI] = .968, normal fit index [NFI] = .949 and comparative fit index [CFI = .950). Therefore, convergent validity was achieved. Discriminant validity was then assessed by a principal component factor analysis of all variables using a varimax rotation method. The factor analysis extracted five expected factors—overall performance, competitiveness improvement, managerial value of reciprocity, trust, and network ties—with each variable loaded onto its corresponding construct factor. Therefore, discriminant validity was also achieved. Analysis and results To test the hypotheses, we used AMOS 4.0 (Arbuckle, 1999), which is a replacement of LISREL by SPSS Inc. It is widely accepted that LISREL has computational limitations regarding models with too many indicators (Bentler & Chou, 1987). The chi-square values, associated degrees of freedom, and probability of levels of the evaluated structural models are presented in Table 1. Also reported are the GFI, the NFI, and the CFI. It is quite clear that the hypothesized model has a good fit, with the fit indexes all exceeding the commonly accepted threshold value of .90 (NFI = .947, CFI = .992 and GFI = .966). Figure 2 represents the final model with the maximum likelihood parameter estimates. Managerial value of reciprocity had a positive effect on trust ( p < 0.1) and network ties
Table 1. Results of nested-models comparison procedure. df 26 25 28 X 2 ( N = 177) 30.174 29.140 46.856 1.034 16.682∗∗∗ X 2 ( N = 177) NFI .947 .949 .917 CFI .992 .992 .964 GFI .966 .968 .950

Model Final Model Nested Model 1a Nested Model 2b

Note: NFI = normal fit index; CFI = comparative fit index; GFI = goodness-of-fit index. ∗∗∗ = p < 0.001. a = a path, network ties → trust, is added. b = two paths, reciprocity → trust and reciprocity → network ties, are dropped.

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Table 2. The final model. Construct relationship Hypothesised Relationship Reciprocity → Trust Reciprocity → Network ties Trust → Competitiveness Network ties → Competitiveness Trust → Performance Network ties → Performance Additional Relationship Reciprocity → Competitiveness Reciprocity → Performance Competitiveness → Performance 0.270 −0.170 0.304 2.343 −0.995 1.761 0.019 0.320 0.078 0.221 0.432 0.183 0.012 0.369 0.004 1.926 3.135 2.241 0.360 2.853 0.158 0.054 0.002 0.025 0.719 0.004 0.874 Parameter estimate t-statistic p-value

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Figure 2.

A Structural equation model of managerial value of reciprocity, social capital and firm performance.

( p < 0.01), indicating that a manager’s personal value of reciprocity does help build trust and network ties at the interorganizational level, lending support to both Hypothesis 1a and Hypothesis 1b. In addition, we found that, though not hypothesised, reciprocity had some mixed effects on competitiveness improvement and overall performance. Interestingly, although managerial value of reciprocity had a significant effect on competitiveness improvement ( p < 0.05), relationship between reciprocity and overall performance was insignificant. Trust had a significant positive effect on both competitiveness improvement ( p < 0.05) and overall performance ( p < 0.01). Thus, both H2a and H2b are supported.

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Surprisingly, contrary to our predictions, network ties turned out to be having no significant impact on both competitiveness improvement and overall performance. As a result, Hypotheses 3a and 3b were not supported. Obtaining an acceptable level of good of fit suggests that the proposed model explains or fits the data quite satisfactorily. However, other models, based on alternate theories, may provide equal or better fit. Thus, a stronger test of the chosen final model is to test competing models that estimate other theoretically plausible relationships between the constructs. For this study, we estimated two other competing models by conducting nestedmodels comparison tests. In the first of these models (Nested-model 1), we estimated a model wherein we introduced a path from network ties to trust, while retaining all other relationships in our final model. However, this model, with a GFI of .968, NFI of .949, and CFI of .992, did not provide any significant improvement over our final model. Subsequently, we estimated another model wherein we dropped two hypothesized paths from reciprocity to trust and from reciprocity to network ties while retaining all other relationships. This model resulted in an inferior fit with X 2 (2, N = 177) = 16.682 ( p < 0.001). In other words, the fit of the restricted model is poorer (NFI = .917, CFI = .964 and GFI = .950) than the final model. Therefore, the results of the nested comparison tests increased the acceptance of our final model. Statistically, it is possible to find a best-fit model by adding or dropping some paths. However, our primary goal here is to assess the basic adequacy of a model that simultaneously accounts for the multiple dependent relationships that we theoretically propose, rather than to find a best-fit model that was not theoretically ex ante. It is also likely there are other interesting relationships, which may exist among the variables. Discussion and conclusion To extend previous studies contending a micro-macro link between managerial networking and firm performance in emerging markets (Peng & Luo, 2000), this study shifted its focus to a manager’s value of reciprocity and its effect on social capital and firm performance of rural SMEs in China. Mixed results indicate that while there is a micro-macro link from a manager’s value of reciprocity, to trust and to firm performance (both competitiveness improvement and overall performance), an incomplete link is detected from a manager’s value of reciprocity, to network ties and to firm performance. Though not as comprehensive as we wish, the findings do provide a convincing support to the central premise of the current study that there exists a micro-macro link from a manager’s value of reciprocity, to social capital and to firm performance. Consistent with the existing literature that reciprocity leads to the development of trust (Jarillo, 1988), a manager’s value of reciprocity was found to be positively and significantly related to both trust and network ties. Reciprocity is one of the links that sustain a network relationship (Williamson, 1983; Wu, 2000). Since reciprocity is a widely held social norm in China and an owner/manger’s personal value dominates that of an SME, managerial value of reciprocity constitutes the very ingredients for Chinese rural SMEs to nurture, build and develop both trust and network ties with other firms and organizations.

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As expected and in line with most of the existing literature, trust was found to have a significant and positive effect on both competitiveness improvement and overall performance. However, it was surprising to find that network ties had no significant impact on both competitiveness improvement and overall performance since it was suggested that guanxi with local government offices and support from local banks are extremely important for firm performance (Park & Luo, 2001) and especially for that of SMEs in China (Xin & Pearce, 1996). Nevertheless, a closer scrutiny of the existing literature on the social capitalperformance relationship reveals that this finding may not be as intriguing as it seems. The existing empirical results on social capital-performance relationship remain largely inconclusive, and range from a positive relationship (Andersson et al., 2002; Park & Luo, 2001) to a negative relationship (Rowley, Behrens, & Krackhardt, 2000). With the occurrence of over-embeddedness, network ties can have negative effects on firm performance (Zaheer et al., 1998). Uzzi (1997) found that feelings of obligation and friendship may be so great between transactors that a firm becomes a “relief organization” for the other firms in its network. In the Chinese context, it was found that guanxi has no effect on growth and expansion decision (Lau & Busenitz, 2001). To develop and maintain a close business relationship not only costs money but also needs lots of time. According to Chen and Chen (2004), before one can use guanxi, great efforts are needed in initiating and building guanxi. With the great power distance in China, SMEs usually lie at the lower end of the power spectrum within a network. SMEs may have to spend more time and efforts in initiating, building and maintaining guanxi. Consequently, any benefits from having close network ties may be offset by the costs involved in developing and maintaining these ties. Therefore, we would suggest, as a possible explanation, that over-embeddedness may be the key reason for a non-significant relationship between network ties and firm performance found in the current study. In addition, our results show that, though not hypothesized, managerial value of reciprocity had a positive and significant indirect effect on performance through competitiveness improvement, but no direct effect was found between managerial value of reciprocity and performance. This finding indicates that while managerial value of reciprocity helps improve a firm’s competitiveness, it does not have a direct impact on the firm’s overall performance. We must be cautious in our interpretation of the results. A possible explanation is that a manager’s personal value of reciprocity may do very little to enhance a firm’s overall performance directly but it can have an indirect impact on overall performance via competitiveness improvement. In other words, the effects of a manager’s value of reciprocity need to be channelled through competitiveness improvement to have an impact on overall performance. Another plausible explanation may be found from the measures we used for the two different dimensions of firm performance. The scale of competitiveness improvement was designed to measure a firm’s resultant competitiveness improvement through collaboration with its business partners. However, the scale of overall performance was designed to measure a firm’s overall business performance in term of their business growth, sales growth and ROI for the past three years. A manager’s personal value of reciprocity may be significant enough to impact on a firm’s competitiveness improvement resulting from business relationships but not enough to influence a firm’s overall performance directly. In addition, there may be other factors which could be more powerful in exerting their influence on a firm’s overall performance as well.

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Great care should be taken in the generalization of the results. Since we set out to focus on a special context of SMEs in rural China, some of the findings may not be applicable in other cultural contexts such as the USA where there is less power distance than in China. Although the principle of reciprocity is universal, in the Chinese case, the concept has particular salience (Kirkbride et al., 1991; Westwood et al., 2004; Chen & Chen, 2004). Nevertheless, it does not compromise the significance of the findings since SMEs in rural China are becoming a formidable economic force which will not only change the face of China’s economic reforms but also, to some extent, the world economic structure through their increasing integration into the global production value chains. Nevertheless, the findings may be applicable to other Chinese societies or societies heavily influenced by Chinese cultural values such as overseas Chinese communities, Taiwan and South-East Asian regions. In addition, we believe there is scope to improve upon and refine some of the measures used. For example, we used perceptual measures to assess firm performance. It would be useful to include some objective measures such as actual growth rate and return of investment in the analysis, and examine how they relate to subjective measures. Though we did include some objective questions in the questionnaire, CEOs from rural SMEs were reluctant to answer those questions which they believed to be too sensitive. We decided not to use the objective data because much of it was missing and therefore lacked reliability. Taking the special context of rural SMEs into consideration, we believe that subjective data might be more reliable than self-reported objective data which could be dodged to some extent for the purpose of tax evasions, etc. It is hoped that with the improvement of the local business environment, such information will be easier and more accurate to obtain in future. However, the inclusion of two dimensions of firm performance—competitiveness improvement and overall performance and the positive relationship found between them does help ensure the quality of the findings. The findings suggest several research avenues for future inquiry. First, network centrality as a moderator in the relationship between social capital and firm performance should be investigated. The power a SME holds within a set network can moderate the relationship between social capital and firm performance. Second, overembeddedness or dark side of guanxi should be studied. It has been widely reported in China that illegal power-money exchanges between government officials and entrepreneurs are on the rise. It is important to investigate the negative impact of guanxi on firm performance. The findings may provide both theoretical and practical insights into the argument that different dimensions of social capital may affect firm performance differently (Koka & Prescott, 2002). Third, the respective impact of both strong ties and weak ties on firm performance in rural SMEs should be investigated separately. Finally, other Chinese pro-networking managerial values can also be included in research models to further substantiate the theoretical predictions of the current study of a micro-macro link. For example, it is proposed that long-term equity principle is the primary operating principle to follow at the guanxi using stage (Chen & Chen, 2004). Its deficiencies notwithstanding, this study represents one of the first attempts to investigate a micro-macro link from a manager’s value of reciprocity, to social capital, and to a firm’s performance in terms of its competitiveness improvement and performance

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enhancement in the context of rural SMEs in China. The findings are clearly encouraging. A manager’s personal value of reciprocity has been found to be an important ingredient for developing trust and building network ties and improving competitiveness. It is confirmed that interorganisational trust, both as a resource and as a constraint of opportunism, has great power to improve both a SME’s competitiveness and its overall performance. Most important of all, the results lead us to the conclusion that both managerial value of reciprocity and resultant social capital (trust) may have contributed towards the recent success of rural SMEs in China, by overcoming the liabilities such as a lack of legitimacy, resources and government supports through managerial networking.

Appendix 1 Managerial value of reciprocity 1 2 3 4 Others’ kindness (Renqin) is a debt that should be repaid. Favours must be reciprocated. Interpersonal exchanges must be mutually beneficial. If one respects me by one inch, I should reciprocate by one yard.

Network ties 1 We have many close business partners. 2 We have close relationships with banks. 3 We have established very good working relationships with local government offices. Trust 1 We usually conduct business with our business partners by verbal agreement. 2 We normally do not need to sign any formal business contract with our business partners. 3 We spend very little to hire lawyers for commercial purposes. Competitiveness improvement 1 The alliance with our business partners has helped us beat our competitors. 2 The support received from our business partners has enhanced our higher quality. 3 Forming a business alliance with business partners helps our company to respond more promptly to market demands. 4 With the support from business partners, our company has become more efficient. Overall performance 1 This company is satisfied with its past three years’ ROI. 2 This company is satisfied with its past three years’ business growth.

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3 This company is satisfied with its past three years’ net business profits. 4 This company is satisfied with its past three years’ business performance.

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