CRONYISM: THE DOWNSIDE OF SOCIAL NETWORKING. NARESH KHATRI University of Missouri 324 Clark Hall Columbia, Missouri 65211

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1 CRONYISM: THE DOWNSIDE OF SOCIAL NETWORKING NARESH KHATRI University of Missouri 324 Clark Hall Columbia, Missouri ERIC W. K. TSANG Wayne State University, Detroit THOMAS M. BEGLEY Northeastern University, Boston ABSTRACT Studies of social networking have focused primarily on its benefits. In this paper, we examine a potential negative outcome from social networking, cronyism. Although cronyism has been reported frequently in the media, it has not been analyzed systematically in academic literature. We present cronyism as an etic construct that exhibits different characteristics across cultures, and advance propositions on its characteristics in individualist versus collectivist cultures. In addition, we examine the likelihood of cronyism in combinations of individualismcollectivism, verticalness-horizontalness, and type of social networks. INTRODUCTION While most studies of networks have focused on their benefits, a theory of effective networks also requires understanding their downside. In this paper, we discuss a more subtle and widespread downside of social networking cronyism. We believe the construct of cronyism is important because its practice is extensive and its consequences serious. Crony capitalism, the granting of economic favors to friends and privileged associates, is widely regarded as a key factor in the Asian financial crisis of The practice of cronyism in Western countries has drawn relatively little attention. However, with the onset of the corporate governance crisis in the United States, we are seeing an increased interest in this phenomenon. We view social networking gone wrong as a prime contributor to the difficulties that lie at the core of the crisis in corporate confidence. As a key negative aspect of social networking, cronyism deserves serious attention from scholars. DEFINITION OF CRONYISM We define cronyism as favoritism shown by one member of a social network toward another member with the intention of producing personal gains for the latter at the expense of parties outside the network, guided by a norm of reciprocity. The definition has several key components. The online Oxford English Dictionary refers to favoritism as a disposition to show, or the practice of showing, favor or partiality to an individual or class, to the neglect of others having equal or superior claims. Membership in a social network can be based on kinship, friendship, ethnicity, religion, school, workplace, company, mutual interest, or any other grouping category. Academy of Management Best Conference Paper 2003 IM: C1

2 In other words, cronyism occurs when multiple parties are linked, but a formal structural relationship may not exist. Rather, a shared common bond provides the basis for favoritism. Intention is involved, that is, the action is intended to produce personal gains for the receiving party. Personal gain as the product emphasizes the personal nature of the intended benefits. At the expense of parties outside the network specifies that an act not accompanied by losses or lost opportunities for others is not meaningful favoritism. Finally, self interest is involved: an act of cronyism typically positions the giver to obtain reciprocal personal favoritism from the receiver in the future or reciprocates personal favor from the receiver in the past. A CROSS CULTURAL ANALYSIS If anything, social networks may play a greater role in the predominantly collectivist societies in Asia and elsewhere than the individualist societies of the West because of their greater emphasis on interpersonal relationships. Individualism-collectivism refers to the social connectedness among individuals. We postulate that cronyism will vary significantly between individualist versus collectivist cultures due to the latter s emphasis on interpersonal relationships. We first identify below attributes of networks and social exchanges in individualist versus collectivist cultures. Then we advance notions related to the likelihood of cronyism in individualist versus collectivist cultures and refine them through combinations with vertical versus horizontal cultures and clique versus entrepreneurial networks. Nature of Cronyism Although cronyism exists in both individualist and collectivist cultures, we argue that its manifestations vary along this cultural dimension. Two important manifestations are the nature of network ties between cronies and reciprocation of cronyistic acts. Network Ties. In individualist cultures, people do what is in their own best interests. Their willingness to work for the interests of others is determined by whether such actions are instrumental in achieving personal goals. Individualists commitment to their groups is based on rational interests and the groups are stable as long as their members perform mutually beneficial actions (Earley & Gibson, 1998). Since a primary purpose of networking is to secure resources toward task accomplishment, individualists engaged in social networking treat one another as means to mutually compatible ends. Treating network ties instrumentally, individualists do not mind changing groups to complete tasks or to meet their own goals. Groups in collectivist societies tend toward affect-based relationships based on shared values and norms among members bound together by common goals, interests, and commitments (Earley & Gibson, 1998). Collectivists belong to fewer groups than individualists, are more emotionally attached to their groups, and have in-groups relationships that are relatively stable over time. Since collectivists draw sharp boundaries between in-groups and those outside, ingroup ties are often dense as well as strong. By definition, individuals who engage in cronyism belong to a shared social network. Cronyistic ties will resemble the general category of network ties of which they are a part. Cronyism will be more instrumental, task-oriented, and short-term in individualist cultures because the ties on which it is based have those characteristics. On the basis of the discussion, we offer the following propositions. Proposition 1a: Cronyistic network ties are likely to be more instrumental and less affectionbased in individualist than collectivist cultures. Academy of Management Best Conference Paper 2003 IM: C2

3 Proposition 1b: Cronyistic network ties are likely to be more short-term oriented and less stable in individualist than collectivist cultures. Favors. The basis for network ties is social exchange, which is defined as voluntary actions of individuals that are motivated by the returns they are expected to bring and typically in fact bring from others (Blau, 1964: 91). Social exchange is an ongoing reciprocal process in which actions are contingent upon rewarding reactions from exchange partners. A key tenet of social exchange theory, the norm of reciprocity, holds that individuals who benefit from favors received are obligated to reciprocate in the future; otherwise, the exchange process may not sustain. However, unlike economic exchanges, the benefits from social exchanges are not usually contracted explicitly. Consequently, exchange partners are uncertain whether or when they will receive benefits, and if the magnitude of benefits received will align with their expectations. Unstable group membership makes it risky to grant a favor without the hope of receiving one in return in the foreseeable future: if the giver or receiver leaves the group shortly after the initial favor is granted, it may go unreciprocated. The rational, goal-oriented individualist includes such calculations in deciding whether to perform a favor. The giver is more likely to offer the favor when believing it will be reciprocated quickly. Similarly, the receiver, having been on the opposite side of such exchanges in the past, is aware that reciprocation is expected in a timely fashion. Collectivists, who derive personal identity through the in-group and its successes, are less likely to interact with others as individuals than as members of groups. Since much activity occurs within the context of the group, collectivists are less likely to define themselves apart from their groups. The collectivist tendency to view group membership as long-term, often permanent, results in a less hurried attitude toward reciprocation of favors. Since shared group membership is anticipated well into the future, collectivists know the time will come for a return favor. In addition, concern with group solidarity induces collectivists to perform favors for group members with less of an eye toward one-to-one reciprocity than toward the furtherance of group benefit (Marcus & Kitayama, 1991). The discussion leads to: Proposition 2a: Favors in cronyistic social exchanges are likely to be reciprocated in a shorter period of time in individualist than collectivist cultures. The emphasis on isolated individuals socialized to make decisions based on rational selfinterest underlies much of the Western research on equity rules, which allocate resources to individuals in proportion to their contributions (e.g., Messick & Cook, 1983). An individualist who offers a favor of a perceived value expects to receive a favor of similar value. Collectivists do not follow equity rules as strictly when exchanging favors. In fact, reciprocation of a favor with one of equal value might end the relationship, while repayment with a larger one tends to continue the relationship. Hwang (1987) argues that the norm of reciprocity in collectivist societies is more socially situated than a universalist equity equation would permit. To the extent that equity rules apply, mutual exchange of favors in collectivist societies, shaped by the long time period the relations are expected to last, need not be similar. Proposition 2b: Favors in cronyistic social exchanges are likely to be more similar in value in individualist than collectivist cultures. Likelihood of Cronyism Cronyism is more widespread in collectivist than individualist cultures because of the former s strong emphasis on interpersonal relationships. The dimensions of verticalness- Academy of Management Best Conference Paper 2003 IM: C3

4 horizontalness and clique-entrepreneurial networks help explain the likelihood of cronyism in the two cultural types. Individualism-collectivism. Work-related social networking in individualist cultures emphasizes economic efficiency. Collectivist cultures feature a more encompassing networking form that values personal relationships in economic relations (e.g., guanxi in China, wa in Japan, and inhwa in Korea). Collectivists prefer to handle business transactions through someone they know and business relationships usually start from personal relationships (Alston, 1989). Collectivist cultures are by definition more relationship-oriented than individualist cultures. People in collectivist cultures tend to allocate rewards more generously to in-group than outgroup members (e.g., Triandis, 2002). Overly generous reward allocation results in cronyism. In cultures that emphasize small, dense, in-group relationships based frequently on kinship or other ascriptive ties, members feel obliged to take care of each other (Earley & Gibson, 1998). When the possibility arises to favor in-group members at the expense of outsiders, many collectivists feel duty-bound to show favoritism; otherwise they may face sanctions from group members. Proposition 3: Acts of cronyism are more likely to occur in collectivist than individualist cultures. Verticalness-horizontalness. People in horizontal cultures emphasize equality, see one another as interchangeable, and favor equal distribution of resources. Horizontal cultures provide checks and balances due to the relative equality of people. Equality safeguards unbiased treatment. People in vertical cultures take hierarchy as a given and accent status differences as well as respect for authority. They engage in intense competition for high status positions and symbols. The primacy of power dynamics and acceptance of hierarchy in vertical cultures provide superiors considerable discretionary power as they are seldom required to justify their decisions (Hofstede, 1997). Superiors make decisions that balance favors with loyalty rather than merit. When combined with individualism-collectivism, the vertical-horizontal dimension produces four categories that have received increased attention recently as a set of distinct cultural patterns: vertical collectivism, horizontal collectivism, vertical individualism, and horizontal individualism (Bhagat, Kedia, Harveston, & Triandis, 2002). In vertical collectivist cultures, people focus on in-group allegiance, stress conformity and loyalty, are willing to sacrifice their own interests for in-group goals, seek to maximize in-group success in competition with outgroups, and yield to the dictates of in-group leaders. In horizontal collectivist cultures, people focus on common in-group goals, interdependence, equality, and harmony. Since people see themselves as similar to others, they do not submit easily to authority but instead favor communal sharing to provide a sense of oneness that enhances in-group cohesiveness. Vertical individualist cultures emphasize status differences and reward individual achievement. Self-reliant, independent individuals compete intensely to win and be the best. Triandis (2002) argues that corporations in the United States have vertical individualist cultures. With heavy pressure to meet the standards of a demanding boss, whether that boss is an individual or an institution such as the stock market or government, conditions are ripe for cutting corners. By contrast, horizontal individualist cultures emphasize equality with an accent on people doing their own thing. De-emphasizing status, these cultures encourage people to pursue their personal interests, make their own choices, and avoid group entanglements. Scandinavian countries are considered horizontal individualist cultures. Academy of Management Best Conference Paper 2003 IM: C4

5 We expect the two vertical cultures to be higher in cronyism than their horizontal counterparts because they pressure individuals to cross the bounds of socially acceptable behavior to succeed. Individualism-collectivism is also important: cronyism looks different for vertical individualists than vertical collectivists. Cronyist alliances of vertical individualists are motivated by individual competition, pursuit of personal goals, and the promise of short-term paybacks whereas cronyism among vertical collectivists is driven by inter-group competition, pursuit of in-group goals, and expectations for enduring relationships where reciprocity evens out over time. Therefore, Proposition 4a: Acts of cronyism are more likely to occur in vertical collectivist than horizontal collectivist cultures. Proposition 4b: Acts of cronyism are more likely to occur in vertical individualist than horizontal individualist cultures. Type of Network. In classifying the forms networks take, Burt (1992) stated that a major definitional criterion is how contacts are connected within the network. He delineated two types of connections, clique and entrepreneurial. Clique networks are typically small and dense whereas entrepreneurial networks are large, with disconnected contacts. Members of clique networks interact more frequently and intensively through stronger ties than members of entrepreneurial networks, whose interactions are more loosely organized and broadly diffused. When each type of network takes place within certain cultural patterns, it influences behavior through either reinforcing or counteracting the effects of the patterns. Clique networks encourage cooperation as tight social relations steer members toward harmonious action. Emphasis on status in vertical collectivist cultures encourages norms that support in-group competitiveness against out-groups and sacrifice individual for group goals. The inter-group competition that clique networks reinforce as well as the loyalty and commitment of members to their in-groups often create obligations for favoritism. The dynamics of cooperation based on cultural emphasis with cooperation as a characteristic of clique networks produce a high likelihood of cronyism. The consistent focus of cultural pattern and network type on in-group success against out-groups along with the pressure of a respected leader to contribute to group solidarity makes favoritism toward fellow in-group members natural and expected. Entrepreneurial networks often include people with diverse styles, interests, and goals. They encourage competitive within-network behavior because the loose connections and diffuse ties influence members to firmly establish their own interests so they will not be lost in the larger network s focus. Entrepreneurial networks show less cronyism than cliques in vertical collectivist cultures because cultural pressure for in-group harmony is offset by network tendencies toward self-interested action. With muted emphasis on close social relations, vertical collectivists in entrepreneurial networks do not feel as strong a sense of obligation to favor network colleagues. Horizontal collectivists in clique networks share a sense of in-group solidarity that encourages cronyism. However, their relative lack of competitive drive for status tempers the impetus to gain in-group advantage. In entrepreneurial networks, there is little tendency toward cronyism as the cultural drive to cooperate clashes with the network tendency to compete. Moreover, weaker entrepreneurial network social ties render cronyism less likely. Proposition 5a. Within collectivist cultures, acts of cronyism are most likely to occur in vertical clique networks and least likely to occur in horizontal entrepreneurial networks. Academy of Management Best Conference Paper 2003 IM: C5

6 Cronyist alliances of vertical individualists are driven by interpersonal competition, pursuit of individual goals, and the promise of immediate paybacks. Their tit-for-tat, you scratch my back I ll scratch yours deal making includes quickly reciprocated, similar-worth favoritism. The loose, diffuse nature of entrepreneurial networks provides opportunities to bend rules and take advantage of structural holes (Burt, 1992). In horizontal individualist cultures, clique networks form based on narrowly defined common interests rather than mutual gain and entrepreneurial networks form loose temporary alliances to satisfy personal needs. Although the strong tendency toward individual freedom makes horizontal individualists less likely to be cronyists in general, clique networks are marginally more prone to cronyism than entrepreneurial networks because their sharper boundaries create more in-group versus out-group thinking and greater pressure to favor ingroup members. Proposition 5b. Within individualist cultures, acts of cronyism are most likely to occur in vertical entrepreneurial networks and least likely to occur in horizontal entrepreneurial networks. CONCLUSION Although many studies have indicated the benefits of social networks, much less is known about their downside. In this paper, we explored the dynamics of cronyism as an important potential drawback of networks. Adopting a contingency perspective, we argued that cronyism is an etic construct with manifestations that differ across cultures. Identifying individualismcollectivism as a cultural dimension expected to have significant effects on cronyism, we advanced propositions on expected characteristics of cronyism in individualist versus collectivist cultures. In brief, we argued that networks in individualist cultures are expected to be more instrumental and short-term oriented, with favors in network exchanges reciprocated at similar value in a shorter period of time. When predicting the occurrence of cronyism, we introduced the concepts of verticalness-horizontalness and clique-entrepreneurial networks. We posited that status-linked verticalness combines the tendencies of 1) collectivism with clique networks to reinforce in-group solidarity versus out-groups and 2) individualism with entrepreneurial networks to reinforce self-interested competition, producing especially strong effects on cronyism. We believe the effects of cronyism at network and organizational levels are far-reaching. For some network members, cronyism may be desirable as it entails higher pay increases and faster promotions. However, once cronyism penetrates, an organization s performance may be in jeopardy: we liken cronyism to cancer and believe organizations riddled with it are unlikely to perform effectively enough over time to survive in a competitive environment. In conclusion, this paper addresses a neglected area of research on social networking that has important implications for both theory development and managerial practice. REFERENCES AVAILABLE FROM THE AUTHORS Academy of Management Best Conference Paper 2003 IM: C6

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