The value of social capital in supply chains

Table of Contents

1. Introduction

2. Social capital
2.1. The curvilinear relationship

3. Positive aspects
3.1. Knowledge creation
3.2. Innovation
3.3. Buyer performance

4. Negative aspects
4.1. Costs
4.2. Creativity blockade
4.3. Opportunistic behavior

5. What factors are influencing the outcomes of social capital

6. Dealing with the dark side

7. Conclusion

8. Limitations and future research

References

1. Introduction

Since the development of supply chain management, management and academic researcher have pointed out the importance of social contacts, networks and relationships. Dense networks and loads of relationships were considered as competitive advantage and departments introduced extra budgets to invest in the relationships with any buyer or supplier to increase the social capital between those companies to the maximum, assuming a linear relationship between social capital and performance. However, the emphasis put on the bright side made companies blind for the negative effects of social capital and the fact that the relationship not can be understood as a linear function. This paper reviews selected pieces of literature on the topic of social capital in order to assess the paradox existing around the concept of social capital by studying how a buyer-supplier relationship can be affected positively as well as negatively by social capital. Furthermore, the specific concept of lock-in situations in supply chains will be explained and discussed.

The first section discusses general definitions of social capital and different interpretations of the concept. In two subsections, the positive and negative aspects of social capital will be discussed. Afterwards, the next section will outline the factors influencing the outcomes of social capital. Subsequently, the last section elaborates on how to guard against the negative outcomes of social capital and how to deal with them if they are inevitable. Finally, a conclusion will be drawn and the limitations are addressed.

2. Social capital

In order to be able to understand the positive and negative aspects of social capital, first of all one of the emerging business trends of the 21st century needs to be pointed out. After the industrialization in the 19th and 20th century and the rapidly growing importance of technology, the importance of human labor is on retreat. In a time, where human labor has been replaced a long time ago, knowledge and information have become one of the most valuable resources for companies today. There are many definitions of what social capital actually is (McFadyen & Cannella, 2004).

While some are saying that “social capital is defined as a valuable asset that stems from access to resources made available through social relationships” (Villena et al., 2011 p. 563) and focusing on the relationship between two actors, others define social capital as “those expectations for action within a collectivity that affect the economic goals and goal seeking behavior of its members, even if these expectations are not oriented toward the economic sphere” (Portes & Sensenbrenner, 1993 p. 1338) and put more focus on the relationship of individuals and their behavior within a collective. Others try to combine both points of views and define social capital as “the set of elements of the social structure that affects relations among people and are inputs or arguments of the production and/or utility function” (Schiff, 1992 p. 157). This paper will stick to the synthesization of Nahapiet and Ghoshal (1998), who divided social capital into three different dimensions with separate meanings, as it will be explained in the next paragraph.

One type of social capital is the relational social capital. It points out how the relationship between two individuals has been established throughout the history of a liaison as well as how much trust and respect has been established. Trust is created throughout interactions or transactions which result in a lower level of need of control for decision makers. Additional factors influencing the strengths of the relational social capital are respect, friendship, and reciprocity, whereas last relies to a mutual or cooperative interchange of privileges or favors (Villena, Revillla, & Choi, 2011). Therefore, the level of presence in the interactions points out how well known the interacting firms are and how many familiar actors are existing (Molina-Morales & Martínez-Fernández, 2009).

Second, there is structural social capital. It relies on the models or the ways of interaction between the actors, meaning with whom they interact and how they reach each other. According to the social capital literature, the density of contacts influences the speed of the information exchange and the availability of information for both interacting actors (Villena et al., 2011). McFayden & Cannella (2004) indicated that structural social capital is the way how the relationship is configured on the subject of the frequency and the number of connections between interacting partners.

The third, and the least studied, part of social capital is cognitive social capital. It refers to the common culture, the congruent goals and the shared believes or dimensions of a relationship. It is assumed that specific, institutionalized rules influence the harmony of (similar) interests and therefore lead to a more opportunistic behavior. This behavior influences the cost structure of the company in the way that it can reduce monitoring costs and increases motivation of the individual actors within the firm (Villena et al., 2011). When analyzing the different dimensions providing the shared visions, it is important to not undermine the fact that those dimensions are often influenced by the same social capital. Thus, an interaction between those dimensions is expected (Molina-Morales & Martínez-Fernández, 2009).

In the following, this paper will discuss the effects social capital in buyer-supplier relationships has on several performance related factors of companies. It will also discuss the paradox involving social capital, meaning that the collaboration between a buyer and a supplier firm can become a key mechanism to reduce costs and improves innovation and teamwork effects, but, also can slow down organizational development and force companies into lock-in situations (Narasimhan, Nair, Griffith, Arlbjørn, & Bendoly, 2009; Villena et al., 2011). One of the most important questions while discussing social capital is how much social capital has a positive effect on performance and if there can be too much of interaction, trust and culture similarities between two companies or actors.

2.1. The curvilinear relationship

Having the idea of social capital introduced and the complexity of the concept analyzed, it seems to be straightforward that the relationship between the effects of social capital and the degree of social capital is not only linear. All researchers hypothesized inverted, curvilinear relationships for any type of social capital. This is due to the fact that, if companies simply ask for an increase of social capital within a buyer-supplier relationship the end product will be an increased cost structure and a rising complexity which harms creativity (Villena et al., 2011). As a result, Molina-Morales and Martínez-Fernández (2009) concluded that after a certain point, further investment in social capital will not result in additional future benefits, but even harm strategic and operational performance of one or both involved companies. The graphic below illustrates the relationship between performance and social capital.

Figure 1: The inverted curvilinear effect of social capital on performance

illustration not visible in this excerpt

Source: own illustration

As a matter of course, the peak point of this relationship is different for every buyer-supplier relationship and only to detect under certain circumstances. Those circumstances and possible methods to protect a company against the negative aspects of social capital will be discussed later in this paper. In the following subsections, the positive and negative aspects will be categorized and described.

3. Positive aspects

In former research, several positive effects of social capital in buyer-supplier relationships can be found. The positive aspects that directly influence the performance of the companies are knowledge creation, innovation and buyer performance.

3.1. Knowledge creation

McFadyen & Canella (2004, p. 739) stated that “[…] according to theory, social capital and knowledge creation will have a positive relationship because social capital directly affects the combine-and-exchange process and provides relatively easy access to network resources”. Using the number of relations as well as the strength of relations as depended variables for social capital, it was predicted that those factors have a quadratic relationship to knowledge creation. In the research, both hypotheses were supported, leading to the conclusion that knowledge creation is positively influenced by a specific amount of social capital. In those cases, the strengths of the relationships had a stronger marginal effect on the knowledge creation process than on the probability of an increased resource opportunity (McFadyen & Cannella, 2004).

3.2. Innovation

A similar line of reasoning was used by Molina-Morales and Martínez-Fernández (2009) to analyze the effect of social capital on innovation of firms who are clustered in one territory. The idea was that frequent interactions between humans and a specific level of trust would positively (at an inverted curvilinear rate) influence the rate of innovation within companies. The research could support the hypothesis that the “[…] effect exerted by obligations resulting from common norms and values, such as trust in firms, will have a quadratic (inverted U-shaped) relationship with innovation creation” (Molina-Morales & Martínez-Fernández, 2009). Reviewing on the hypothesis of McFadyen and Cannella (2004), those findings are understandable due to the fact that both authors are using similar variables (innovation creation and knowledge creation). Contradicting to that is the unsupported hypothesis “The intensity in social interactions that a clustered firm maintains has a quadratic (inverted U-shaped) relationship with innovation creation” (Molina-Morales & Martínez-Fernández, 2009 p. 1010).

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