Networks, Supply, Distribution, and Customer

During the last five centuries, a large part of the world's long-distance trade was organized via trading networks. Their major function was to coordinate commodity exchange between markets and geographically separated production areas. In the risky and vulnerable economic environment of the early modern world, networks appeared to be a preeminent way to reduce transaction costs, diminish risks, and create durable commercial relations.

EARLY MODERN TRADING NETWORKS

The family firm was the predominant form of enterprise in early modern times (Casson 1996). The family firm's operations were characterized by a limited scale of operations and shortage of capital, and by a combination of economic and noneconomic factors in business (family members constituted the core of the firm's staff). Cooperation between family firms through by the way of networking solved many problems; for example, by pooling their resources, small firms could start large-scale, capital-demanding operations, such as those required for long-distance trade. Thus early modern trading networks worked as extended pools of family firms.

A high level of trust and close cooperation were typical features of the relationships between members in such networks. It was usual that members of the same family were placed in different cities or countries, carrying out trade in the whole family network's interest. Frequently, sons were sent as apprentices to relatives' trading firms abroad. They acquired commercial expertise while strengthening family bonds.

Family firms engaged in business together, cooperating with one another, rather than competing. Since business and family bonds overlapped, relationships were very personal and usually durable (though there are also many examples of failed relationships), and the level of trust was high; these were important preconditions for the extensive credit pools that emerged. In addition, networks functioned as important disseminators of business information; of course, only for the benefit of network members. This points to the exclusive function of network building, as opposed to its inclusive function. Cooperation among members of one network and competition between different networks unveil the two opposite aspects of networking.

Cooperating members of the same ethnic and religious groups are also commonly considered to be part of a network (Subrahmanyam 1996). Such networks, though, were larger than their kinship- and family-based equivalents. Nevertheless, they were characterized by the same high level of trust, credit pooling, reciprocity, durability of relationships, and preference for cooperation over competition. Normally, ethnic and religious identities went hand in hand.

Extended ethnic and religious networks were found in both early modern and modern times, and in Europe as well as in Asia, Latin America, and Africa. Armenian trading networks, for example, played a crucial role in long-distance trade in the eastern parts of Europe. Early modern Portuguese-Jewish networks were a fundamental component of the Dutch seventeenth-century commercial system. Greek shipping networks in the nineteenth and twentieth centuries successfully replaced large shipping enterprises. Communities (or diasporas) where language, culture, religion, and values were shared experienced reduced transaction costs.

In addition to trading networks, two other forms of commodity distribution were important in early modern long-distance trade: markets and chartered companies. Markets ranged in scale from small local markets to huge staple entrepôts, such as Antwerp, Amsterdam, and London. Such market exchange was characterized by price competition and relatively short-term relations, in contrast to the network based exchange. Chartered companies (such as the Dutch and English East India Companies) were large joint-stock enterprises, comparable to twentieth-century multinationals. They were characterized by big staffs of employees, large-scale operations, and complex hierarchies. In contrast to trading networks, early modern chartered companies required monopoly rights for specific commodities or specific areas, and they pursued their trade in close cooperation with the state. In areas in which chartered companies and merchant trading networks operated simultaneously, such as in the West Indies or in the Mediterranean, trading networks appeared to outperform companies, which might be seen as evidence of their efficiency.

THE RISE OF THE MULTINATIONAL ENTERPRISE AND THE DECLINE OF THE NETWORK

As the economic environment became increasingly stable, and as international property rights were strengthened, the importance of networks as a means of commodity distribution declined. This occurred in various stages. First, in the nineteenth century the institution of joint-stock enterprise made possible an expansion of the scale of operations. By the late nineteenth century, the family firms that dominated long-distance trade during the early modern era were partially replaced by multinational enterprises. Multinationals integrated commodity distribution within their hierarchies; they established their own sales departments and employed sales managers abroad.

The second important change concerned the accessibility of credits. As mentioned, credit pooling was a crucial function of early modern trading networks. With the institutionalization of credit markets, made possible by the advent of limited liability joint-stock companies, accessibility of credit dramatically increased, and the financing of commodity exchange and running the exchange itself became two separate tasks. In addition, the strengthening of property rights, legislation on enterprise with limited liability, bankruptcy laws, and other legal innovations made it easier for actors to raise a general trust. Trust (confidence) in the legal system began to replace interpersonal trust.

The third aspect of the change concerned the network's role as intermediary of information. With the rising amount of printed or other relatively easily accessible information, even the network's function as intermediary of information declined in importance.

Economics and business theory's lacking interest in the network concept also reflects the decline of the network as the means of distribution. In economic theory, the transformation of the world economy since the late nineteenth century has been described as a transformation of an economy based on inefficient small-scale, low-technology enterprises into large multinational corporations, characterized by professional management, rapid technological innovation, and growth, and by large-scale international operations. It was a transformation of personal capitalism, capitalism of the family firm, into managerial capitalism, capitalism of the multinational enterprise (Chandler and Hikino 1994). Neoclassic economics also pointed to market competition as the major factor contributing to increased economic efficiency, and as the basis for sustained economic growth. The fact that competition could also be damaging and costly did not receive much notice. The two paradigms (the neoclassic market paradigm and that of managerial capitalism) dominated economic science until the 1970s.

THE RENAISSANCE OF THE NETWORK

Between 1970 and 2000, interest in the network concept increased considerably. Economists, sociologists, business historians, and others have rediscovered the network. There are two events that especially stimulated the network's renaissance: first, the deep crisis and following transformation of the Western European and American economies between 1970 and 2000; and second, the simultaneous process of globalization and the remarkable growth of the East Asian economies (Japan, South Korea, Singapore, Taiwan, and China). The large-scale multinational enterprise was no longer seen as the supreme form of enterprise. Multinationals' complex hierarchical structures entailed high transaction costs. In addition, such big and hierarchical structures met with difficulties adjusting to the unstable conditions of the modern world economy. Smaller enterprises, on the other hand, could rapidly adjust, and they could overcome the problems of small-scale operations by networking with other enterprises. Again, as in the early modern period, network credit pools (transformed and modernized) became an important tool for small-scale businesses in their competition with large multinational enterprises. This organizational model, based on cooperation and networking, appeared to be the major competitive advantage of the Asian economies.

However, the difference between the modern Asian enterprise networks and European and American multinationals is very much a matter of interpretation. In fact, the differences between enterprise structures and coordinated forms of production and commodity distribution are not so large.

In Europe and North America the family firms, as well as other kinds of network cooperation, existed during the rise of managerial capitalism. The development of the Italian economy in the post-1945 period, for example, was based very much on cooperating family firm networks. In Japan, on the other hand, family ownership did not appear to play a very important role, following the expectations of managerial capitalism. However, relationships among Japanese enterprises can easily be considered to be typical network relationships. In the modern complex economies, the different forms of enterprises and the different forms of enterprise interaction complement each other. For one task, a network among small-scale enterprises might be the most efficient way, for another task, the complex structure of a multinational enterprise might be better. Networks as a means to organize production and commodity distribution transcend cultures, regions, and time periods.

SEE ALSO Capitalism;Religion.

BIBLIOGRAPHY

Brown, Jonathan, and Rose, Mary B., eds. Entrepreneurship, Networks and Modern Business. Manchester: Manchester University Press, 1993.

Casson, Mark, ed. The Theory of the Firm. Cheltenham: Edward Elgar, 1996.

De Goey, Ferry, and Veluwenkamp, Jan Willem, eds. Entrepreneurs and Institutions in Europe and Asia 1500–2000. Amsterdam: Aksant, 2002.

Chandler, Alfred D.; Hikino, Takashi: Scale and Scope: The Dynamics of Industrial Capitalism. Cambridge, MA: Belknap Press, 1994

Hancock, David. Citizens of the World: London Merchants and the Integration of the British Atlantic Community, 1735–1785. Cambridge: Cambridge University Press, 1995.

Powell, Walter W. "Neither Market nor Hierarchy: Network Form of Organisation." In Markets, Hierarchies, andNetworks: The Coordination of Social Life, ed. Grahame Thompson. London, Sage Publications, 1991.

Subrahmanyam, Sanjay, ed. Merchant Networks in the Early Modern World. Aldershot, U.K.: Variorium, 1996.

Leos Müller