Confucian Capitalism An inquiry into the

relationship between East Asian Thought

and Firm Performance

I. Preface

The author declares that the text and work presented in this Master thesis is original and that no sources other then those mentioned in the text and its references have been used in creating the Maser thesis. The copyright of the Master thesis rests with the author. The author is responsible for its contents. RSM Erasmus University is only responsible for the educational coaching and beyond that cannot be held responsible for the content.

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II. Executive Summary

This thesis aims to contribute to the understanding of the role of Confucianism -an ideology prevalent

throughout and particular to the Orient- in the East Asian business context. The thesis provides a

historic synopsis of the debate on Confucianism and economic development, discussing Weber, whose

opinions are still influential to much of the recent research, as well as the relevance of the Asian crisis

of 1997. Consequently, focus shifts from the macro to the meso (firm) level. This part is pertained with

research that has related Confucian values to behavior and modes of organization characteristic for

East Asian businesses. Finally, the author examines whether Confucian values indeed have a

differentiating effect on behavior and firm performance, using a novel approach to explicate the

Confucian Orientation (CO) of East Asian business organizations. The research results indicate that

Confucianism can indeed be linked to certain behavior, but no relationship can be established

between CO and financial performance. The author discusses the implications of these results and

makes suggestions for future research.

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Contents

Preface ............................................................................................................................1 Executive Summary .......................................................................................................2 Introduction ...................................................................................................................4 An overview of the debate on Confucianism and economic performance ...............6 Early Protagonists ...........................................................................................................6 Post-war development: Culturalist contentions .......................................................7 Asian Crisis ................................................................................................................... 12 A closer look ................................................................................................................ 15 The central tenets of Confucianism ................................................................................ 16 Confucianism and the East Asian business organization ................................................ 18 Research ....................................................................................................................... 22 Limitations..................................................................................................................... 28 Research Results & Discussion ...................................................................................... 29 Conclusion ................................................................................................................... 33 Suggestions for future research .................................................................................. 34 Bibliography ................................................................................................................ 35 Appendix I: Confucianism ............................................................................................. 39 Appendix II: Index of ConfucianVocabulary .................................................................. 41 Appendix III: Elaboration on terminology ...................................................................... 44 Appendix IV: Statistics .................................................................................................. 46

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Introduction

Having studied Chinese language and culture for some five years and having resided in East

Asia for a year and a half, I’ve always had the intention to make a further inquiry into Chinese

business practice. For many, both Chinese and non-Chinese, Confucianism encompasses

much of what is regarded as quintessentially Chinese. Much researched social phenomena

such as guanxi, mianzi (face) and xinyong (trust) all find their antecedents in the teachings of

Master Kong (孔子, kong3zi), who became known in the West by the latinized name

Confucius. Having worked in a Taiwanese company, I feel that Confucian principles are still

an important part of Chinese business and social life. Therefore, I intend to investigate the

prevalence of Confucian values in Chinese business organizations, and whether and how they

relate to the performance of these firms.

The relation between Confucianism and economic performance became a topic of research for

economists and business scholars as part of the broader inquiry into the causes of the

successful post-war industrialization and economic development of the Asian nations.

However, the debate on the merits and demerits of Confucianism within a social economic

context has antecedents that can be traced back to the 18th century, when Voltaire praised the

Confucian political model of ‘benevolent despotism’, considering it an example for the West

(Yi et al., 2006).

Some have argued that Confucianism is a detriment to economic development. Others have

proposed the exact opposite, claiming that Confucianism is a catalyst for economic activity.

Still others insist that Confucianism is simply inconsequential to economic performance.

While the focus of the debate was first on the social-economic level, interest in the business

literature in the influence of culture on organizational behavior and business performance has

led to the inclusion of Confucianism amongst the subjects of business research.

In this thesis, I will perform an appraisal of the extant literature and examine the relation

between Confucianism and behavior within business organizations and subsequently, the

relation between Confucianism and company performance. First I will provide an historic

synopsis of the debate on Confucianism and economic development, discussing Weber, who’s

opinions are still influential to much of the recent research, as well as the relevance of the

Asian crisis on 1997, which all but put an end to the Asian economic fairy tale. Consequently,

focus will shift from the macro to the meso (firm) level. In this part, I will describe research

5

that has related Confucian values to behavior and modes of organization characteristic for

East Asian businesses. Finally, I will examine whether Confucian values indeed have a

differentiating effect on behavior and firm performance. I will use the linguistic instrument of

content analysis, examining the vision statements and management philosophies of a sample

of one-hundred and nineteen Taiwanese companies for vocabulary indicative of a Confucian

orientation. This orientation is linked to the prevalence of nepotism – a trait consistently

associated with Confucian values- within these firms. Consequently, CO is related to the

companies’ return on equity (ROE), to determine what –if any- effect adherence to Confucian

values has on financial performance.

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An overview of the debate on Confucianism and economic

performance

Early Protagonists

As early as the eighteenth century Renaissance thinkers such as Leibniz and Voltaire studied

the culture and political system of China, which they held in high regard (Yi et al., 2006).

They propagated the supremacy of the political ideology of ‘benevolent despotism’,

exemplified in the rule of the Chinese emperors (ibid.). Through their work and the Jesuit

missions to the Chinese court, the general Western public first became acquainted with

Chinese culture, resulting in a wide-spread but superficial infatuation. Indeed, when

imperialist forces made their way into China a little more than a century later, many

westerners came to regard Chinese culture with contempt.

The first serious and arguably most influential treatise on Confucianism and economic

development was Max Weber’s “The religion of China: Confucianism and Taoism”, first

published early in the twentieth century. In this seminal work, Weber expands on his

proposition that religion has a critical influence on the development of nations. In “The

religion of China” Weber sets out to prove that the Confucian tradition is detrimental to

modernization and economic development. The thrust of the original argument is that

Confucianism and capitalism -which is considered if not the only ideology promoting

economic growth certainly the most effective- have characteristics that are irreconcilable.

This inherent antagonism stems from fundamentally different religious views. Western

Protestantism regards God as detached and not partaking in the human world. In effect, the

human world without God is completely guided by objective goals and rational behavior.

Moreover, Protestant ethic itself motivates values such as diligence and the productive use of

time (Redding, 1993).

East Asian society presupposes that reality and all its facets are infused and guided by a

divine presence.1 Human relations are regarded as subject to the same principles as natural

phenomena and inherently ethical in nature. This precludes the possibility of creating the

objective and impersonal relations, based on economic rationality, that are fundamental to

modern industrial society. Confucian rhetoric implicitly assumes that some courses of action

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are preferable to others, because they are good in and of themselves, regardless of their

potential for value maximization. In a further extension of this argument, ethics, in the

Confucian perspective, are not a means but rather the final goal.

Weber’s thesis found significant support when Western scholars tried to explain the failure of

China to industrialize at the turn of the twentieth century (Feuerwerker, 1965). However, it

has to be noted that these scholars didn’t discriminate between Confucian values and the

institutions concomitant with dynastic society that are inherently antagonistic to

modernization. Similarly, Weber’s argument was based on an assessment of pre-communist

China. Later research on the same period has provided alternative explanations of China’s

difficult modernization process, ranging from the prevalent anti-Western sentiment at the turn

of the twentieth century, to the abundance of manual labor, to the absence of stringent

Malthusian constraints, which prompted the West to engage in Smithian economics and

mercantilism (Vries, 2001). The concurrent successful industrialization process of Meiji Japan

and the later economic boom of Singapore, Hong Kong, Taiwan and Korea lend credence to

these alternative explanations and pose questions about the tenability of Weber’s argument.

Nonetheless, Weber’s anti-Confucian thesis regained significance when some research

identified ‘Asian values’ (broadly similar to Confucian morals) as the root cause of the Asian

economic crisis of 1997 (Pye, 2000, Seong, 2003).

Post-war development: Culturalist contentions

The inquiry into the relation between Confucianism and economic development resurfaced

approximately half a century later. After the second world war, the East Asian Economies

underwent a remarkable development, characterized by rapid industrialization and double

digit growth. The characteristics of economic development of this region led researchers to

propose the existence of an Asian development model, or a mode of economic organization

called Confucian capitalism2 (Tu, 1991, Kim, 1994). Although the latter, when compared to

the former, puts greater emphasis on cultural facets, both imply that the economic

development of the East Asian region differs significantly from the rest of the world.

1 Here Weber extends his proposition to Daoism and popular religious traditions of China, since Confucianism is an ideology and by and large devoid of religious elements. However, Confucianism does propagate the conception of universal processes that are extant from the cosmological down to the individual level. 2 See Appendix 3

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Ethnocentrism

In his 2003 article, Seong describes how certain Korean intellectuals have employed the notion of Confucian

capitalism for political purposes. Rather than aiming to provide an objective assessment of the interplay

between traditional Confucian values and economic performance, they have taken the economic success of

the East Asian region to be de facto proof for the cultural superiority of nations adhering to Confucian

ideology. Moreover, their contentions implicitly justified morally objectionable practices such as

authoritarianism, corruption and nepotism, and even discrimination and human rights violations by placing

them under the banner of the glorious Confucian capitalist system.

Clearly, such considerations are of a political, rather than an economic nature. For example, even though

most will agree that authoritarian dictatorship is undesirable, empirical observation demonstrates that such a

mode of organization may very well expedite economic progress, especially in the early stages of the

process, were growth is contingent on resource mobilization. However, these dynamics do obscure the

scientific debate to the extent that scholars are inclined either to only evaluate the positive characteristics of

Confucian capitalism (Yeh, Lawrence, 1995) or refrain from making explicit statements about the potentially

superior aspects of this development model lest they be accused of ethnocentrism (see: Wilkinson, 1996).

One emerging perspective was that the unique cultural heritage of these nations endowed

them with systems of organization and values that yield higher efficiency and thus superior

economic performance. This proposition was first articulated by American political strategist

Herman Kahn in the late seventies, and has consequently been expounded by sociologists

such as Geert Hofstede. Hofstede et al. contend that culture is the ultimate determinant of

economic performance (Hofstede, 1991, Franke et al., 1991). Certain values promoted in

Confucian ideology, such as acceptance of hierarchy, valuing perseverance and thrift

(collectively referred to as Confucian Dynamism), and a collectivist outlook are held to be

responsible for the impressive economic growth of nations with a Chinese heritage. Hofstede

recognizes that certain Confucian values are detrimental to economic performance, but argues

that these are subjugated by the positive influences of Confucian Dynamism, because

collective societies have long-term orientations and emphasize the acquisition of skills and

knowledge.

A related paradigm seeks to place culture in an social-political institutional context, so as to

try and arrive at a holistic explanation of East Asian economic performance. However, doing

so explicates the differences between the various models of economic organization rather than

identifying a common denominator (Wilkinson, 1996).

The salient dissimilarities of Japan’s keiretsu, South Korea’s chaebol, and the family oriented

businesses of Singapore and the Chinese nations, make it problematic to contend that

Confucianism is the single most important determinant of organizational structure

(Wilkinson, 1996).

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Economic Explanations An alternate body of research pertaining itself with the development of the East Asian nations

adopted a different methodology. Economists adhering to the neo-classical perspective have

examined the economic performance of the ANICs ( Asian newly industrialized countries) in

the context of factor mobilization and factor efficiency, and have taken particular interest in

the singularity and sustainability of East Asian development. Using growth accounting they

trace economic growth back to two basic constituents, factor input and factor efficiency. The

foundation for this method of analysis was provided by Solow, who held that economic

growth consists of three elements; capital, labor and a miscellaneous factor called the Solow

residual. The Solow residual expresses the economical effect of technological progress and

increases in knowledge, such as more efficient management systems. Although all three

factors contribute to economic growth, only the growth resulting from the Solow residual is

deemed to be sustainable. This is because under conditions of full or near to full utilization,

capital and labor will be subject to diminishing returns, up to the point where further addition

will only serve to compensate for depreciation of extant utilized stock (Krugman, 1994).

Growth accounting therefore differentiates between economic growth engendered by factor

input (factor accumulation), which is finite and non-repeatable (that is to say, any input

dedicated to a particular activity is non-retrievable), and growth resulting from technological

progress, which is fungible and virtually unlimited.

Early analyses of the economic development of the dragons (China and Japan) and tigers

(Hong Kong, Taiwan, Singapore and South Korea) by amongst others Young (1992, 1994),

and Kim and Lau (1994) yielded the surprising results that the impressive growth rates could

almost in their entirety be accounted for by increases in factor input. This led Krugman, in his

1994 article “The Myth of the Asian Miracle”, to liken East Asian economic growth to that of

Soviet Russia, stating that “Once one accounts for the role of rapidly growing inputs in these

countries [i.e. the newly industrialized countries of Asia] growth, one finds little left to

explain.” The fact that over the last twenty years many East Asian economies have been

subject to diminishing growth rates seem to lend credence to Krugman’s contention. It is easy

to conceive how the political-economic model of the East Asian nations was well disposed to

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mobilize unutilized resources and direct investment, but become less instrumental when the

constraint of full factor utilization is approximated3.

Nonetheless, recent advances in the methodology of growth accounting have called into

question the earlier work of Young and his colleagues. Kim and Lee (2006) and Liao et al.

(2007) differentiated between technological progress and technical efficiency, that is, the rate

at which new knowledge is generated or accumulated and the degree to which this knowledge

is effectively internalized and utilized. These studies demonstrate that although economic

growth was and remains primarily investment driven, factor productivity is an (increasingly)

important constituent of ANIC economic growth (Liao et al., 2007). Furthermore, their

research shows a rapid increase in both technological efficiency and technological progress

vis-a-vis Western nations.

The unusual speed of technological progress in post-war Asian countries can be explained by

means of the catch-up theory (Page, 1994). This theory posits that less developed countries

can internalize extant knowledge from technologically more advanced nations at high speed

and low cost. Indeed, as utilization of capital and labor approximates the maximum, and

knowledge adoption is substituted for knowledge generation, growth rates of East Asian

economies seem to slowly approximate those of Western nations.

Figure 1: GDP growth of East Asia, US, and Europe

Source: www.ers.usda.gov/Data/Macroeconomics/Data/HistoricalRealGDPValues.xls

3 For a description of this political-economic system, coined the ‘Asian development model’ see the section “Asian development model” in Appendix III

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The preceding may serve to illustrate that from the outset, researchers from the Culturalist and

Neo-classical paradigm thus had a fundamentally different appreciation of the economic

development of the Asian nations and its significance. Culturalists postulated that Confucian

influenced cultural values were a leading cause of the ‘Asian Miracle’, having not only a

clearly differentiating influence on their national economies vis-à-vis those in the West, but

also being a source of competitive advantage, yielding superior performance. Neo-classical

researchers questioned whether Asian economic development even was all that extraordinary,

considering it a natural consequence of the utilization of latent resources. Consequently, if

cultural values would promote economic development, factor productivity surely ought to

have been greater than that of the Western nations. While the debate on the merits of

Confucianism was inconclusive, the advent of the Asian Crisis of 1997 would give rise to yet

another perspective.

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Asian Crisis

Inquiries into the causes of the economic success of the East Asian nations all but ceased with

the outbreak of the financial crisis of 1997. Failure to maintain a peg to the American dollar

prompted a massive devaluation of the national Thai currency. As investors struggled to

withdraw from the Thai economy, panic soon spread to other parts of the East and South East

Asian region. The toll of the crisis on the various Asian economies varied from nation to

nation and was mitigated or exacerbated by domestic economic conditions and financial

policies. While devaluation of the national currency occurred in nearly all East Asian nations,

the effects of the crisis where most grave in Thailand, Indonesia and Malaysia (see figure 2).

Researchers have proposed a host of explanations for the onset of the financial crisis. The

brunt of these focus on the results of excessive investment in the Thai economy (primarily in

the real estate sector) and poor lending policies resulting from premature privatization of the

financial sector without proper supervision (Stiglitz, 1998, Radelet, 1998, Corsetti et al.,

1999). Wong adds to these observations that the abundant availability of foreign credit greatly

increased the scale of the crisis, while prior intervention by the IMF in the Mexican crisis of

1994 presented the issue of moral hazard. Other accounts have pointed towards the cultural

antecedents of the crisis, identifying Asian Values, or its negative pendant ‘cronyism’ as the

culprit (Pagano, 2002, Alon, Kellerman, 1999). Whereas factors such as nepotism most

certainly have contributed to the creation of an non-transparent investment climate, the

developments of investment activities and credit management prior to the crisis directly relate

to the depreciation of the Asian currencies and the immediate withdrawal of foreign

investment. Moreover, Singh (2007) argues that the prevalence of corruption and other

practices associated with cronyism was due to the economic and social institutions

concomitant with the particular stage of economic development of the ANIC’s rather than

their culture. This seems plausible considering the fact that the Asian region hosts great

cultural diversity; as point in case, Thailand’s population is predominantly Buddhist, while

Indonesia’s and Malaysia’s are largely Muslim. Most Confucian nations incidentally fared

rather well.

In any case, the similarity of Korea’s pre-crisis financial policies with those of the South East

Asian countries (Radelet, 1998) seems to provide a better account for its dismal economic

performance than any explanation rooted in culture.

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Nonetheless, the experience of the Asian crisis is significant to the inquiry into the relation

between Confucianism and economic performance for two reasons. First, it inspired a new

body of research which based itself on Weber’s original assessment of Confucianism, and

explicated the potential hazards and downsides of Confucianism. Pye (2000) and Seong, 2003

focused their research on how Confucian motivated practices of nepotism and corruption lead

to socially and economically unfavorable outcomes. As noted before, some have even taken

Confucian values as the very cause of the crisis. Secondly, it demonstrates the lack of scrutiny

with which much of the pre-crisis Culturalist research was performed. The disregard for

cultural dissimilarities and a one-sided perspective of Asian values (Peng, 2007) were

explicated when explanations of the financial crisis fell short, and drew into question the

value of cultural accounts of economic performance on the macro level, which may serve to

explain the scarcity of such research after 1997. Moreover, Singh’s contention that institutions

are delineated by the stage of economic development rather than culture begs the question

whether behavior and attitudes exhibited by firms in a Chinese cultural context are indeed the

result of the Confucian tradition or should rather be attributed to their larger economic

environment, and consequently disappear with the development of corporate governance and

market supervision.

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Figure 2: GDP growth during the Asian Crisis

Source: www.ers.usda.gov/Data/Macroeconomics/Data/HistoricalRealGDPValues.xls

In the end, this exposition of research about the relationship between Confucianism and

economic performance thus yields three diverging perspectives, which conveniently cover all

possible outcomes of such an appraisal.

On the one hand, Culturalists propose that traditional values induce certain behavior that is an

important determinant of economic performance. Amongst them is a (decreasing) number that

maintain that Confucianism engenders economics growth. However, these researchers are

accused of drawing selectively upon the body of Confucian values, focusing on those that are

believed to promote economic growth while marginalizing those that seem detrimental to

development (Yeh, Lawrence, 2007). Others argue the opposite, stating that Asian values

propagate behavior and modes of organization that adversely affect the economy. This view

gained in both credence and popularity as the Asian crisis unfolded. However, based on the

previous paragraphs it is clear that this perspective at the very least cannot provide a

satisfactory explanation of the sudden economic downturn.

More importantly, all Culturalist arguments are of a rhetoric nature, and lack empirical

demonstrations of the proposed cause and effect mechanisms. Critics have rightly pointed out

GDP Growth during financial crisis

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that Culturalists seem to have taken the coincidence of Confucianism and the economic

development (or adversity) within the East Asian region as proof of a causal connection

between the two. Although their research provides ample demonstrations of the moderating

effects of culture on attitudes and behavior, it doesn’t subject the relationship between this

behavior and performance to the same kind of scrutiny. This calls into question the general

validity of Culturalist explanations of macro-phenomena.

The Neo-classical perspective provides more substantial insights into the accomplishments

and limitations of the model of political economy prevalent amongst the ANICs. Through

growth accounting, Neo-classical research has proven that, although increases in factor

productivity have occurred in the ANICs, factor accumulation was the primary vehicle for

economic growth. The rapid mobilization of factors can be attributed to a particular political

economical model, characterized by an export orientation, high savings and active

government involvement. This model was employed not only in those nations with a

Confucian heritage but also within many South East Asian nations, such as Malaysia,

Indonesia and Thailand (Freeman, Hew, 2002). Moreover, Asian nations do not achieve

higher factor productivity than their Western counterparts. Therefore, it cannot be maintained

that the economic development of the ‘Confucian’ nations is unique nor proof of cultural

superiority. This concludes the discussion on the macro-level.

A closer look

While Confucianism cannot be held to provide an explanation of the economic development

of the greater Asian region, the possibility remains that it has a distinctive influence on the

performance of individual companies. One group of researchers has aimed to elucidate how

cultural values influence attitudes and the behavior they engender within organizations, which

consequently is linked to business outcomes (See: Ralston et al., 1999, Friedman, Chi, Liu,

2006). Although focus thus shifts from the macro to the meso (firm) level, the questions

essentially remain the same:

a) Is there anything particular about the organization and behavior of East Asian

companies, and if so, are these characteristics influenced by Confucianism?

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b) Does Confucianism then bear on firms’ abilities to extract returns from their

investments?

First, I’ll provide a brief overview of the concepts and themes central to Confucianism, which

will aid in the appreciation of the subsequent sections. Second, I will provide an enumeration

of research on the relation between the institution of Confucianism and the behavior it

engenders, following the framework of Gordon Redding’s exposition on Confucianism in the

East Asian social-economical context. Finally, I will present my research, which aims to

provide the answers to the two questions posed just now. To do so, I will empirically test

whether behavior deemed characteristic of the East Asian business organization can indeed be

attributed to Confucian influence or whether we ought to admit the possibility that, as Singh

proposes, it is a mere consequence of the stage of development of the broader economic and

institutional context. Following, I will determine whether a correlation can be determined

between Confucianism and the financial performance.

The central tenets of Confucianism

After their initial grouping together by Mencius, the four virtues (思维, si4wei4) consistently

appear in Confucian writings to form the fundament for the Confucian ideology. These are 仁

(ren2), 义 (yi4), 礼 (li3), and 智 (zhi4) . Although they have no direct English counterparts,

these terms are commonly translated as “benevolence”, “righteousness”, “propriety” and

“wisdom”. These concepts might seem unrelated, but are in fact considered mutually

reinforcing and indispensable qualities for those who aspire to attain the stature of a

gentleman (君子, jun1zi, that is, one who leads through exemplary conduct).

Ren is the cultivation of the natural mutual affection that exists between those who are related

by blood. As a parent acts selflessly for the sake of the family, so can the practice of ren

benefit and elevate the whole of society. Yi is ren in action. It is the alignment of one’s

activities with the common good. Li is often rendered as ritual or etiquette. In Confucianism,

li is considered an expedient means for cultivating yi; through consistent practice of those

rituals and habits that are in accordance with yi, yi will become a second nature, requiring no

premeditation. Zhi cannot be simply equated with knowledge. It is a thorough understanding

of the other three virtues. It is the appreciation of logical structures on a meta-level as they are

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embodied within the various natural phenomena and the universe, so that they may be

internalized. It is for this reason that Confucianism places great emphasis on education; it is

not specific information but the process of continuous inquiry and reflection itself that is

paramount.

Of all the precepts of li, the most influential is that of the ‘five cardinal relationships’ (五伦,

wu3lun4). It sets out to describe the proper conduct within the most fundamental organization

of all, the family, and transposes these principles to the community and society at large. Each

of these relations are reciprocal and iterative; between leaders and subordinates, there must be

righteousness (yi) and loyalty (忠, zhong4), between father and son there must be kindness

(亲, qin1) and devotion (孝, xiao4), between husband and wife, there should be

discrimination ( 别, bie2, that is to say, each has their respective sphere of influence), between

the elder and the youth, there should be hierarchy (序, xu4) and finally there should be trust

(信, xin4) between friends.

The ‘doctrine of the golden mean’ (中庸, zhong1yong1) is tantamount to the five cardinal

relationships. It is comparable to it’s Western philosophical and mathematical counterparts, in

the sense that it ordains that actions be carried out to their proper degree. It is the law of

moderation and restraint, not giving in to one’s passions and not being excessive in both

actions and demeanor. It also provides the precepts for harmonious coexistence; by not acting

impetuously one can ensure that his actions do not violate the rights of others. Indeed, in

classical Chinese the words ‘moderation’ and ‘harmony’ are designated by the same character

(和, he2).

The above may serve to elucidate a crucial point; i.e. Confucianism is essentially a societal

ideology. Ren, yi and li are all precepts for personal conduct. So are the five cardinal

relationships and the doctrine of the golden mean. Confucianism can only exist in the context

of interpersonal relationships and the outcomes of human interaction, as opposed to Western

rationality which is pertained with objective cause and effect mechanisms. A close reading of

Weber reveals the same conclusion, and Hofstede implicitly concurs by stating that in East

Asian societies Truth is subjugated by Virtue, although they hold opposing views on what the

implications are for economic development (Hofstede, 1991).

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The following paragraph will expound on research that describes how adherence to a

relational rather than an objective logic might influence inter-organizational behavior.

Because the principles of the five cardinal relationships are held to transcend beyond the

boundaries of the family and permeate all interpersonal relations, it isn’t surprising that many

researchers have characterized East Asian Management styles as both paternalistic and

personalistic (Redding, 1993, Cheung, King, 2004, Xin, Pearce, 1996, Westwood, 1997).

Similarly, many researchers have indicated the importance of harmonious relations both

within and between organizations (Redding 1993, 1995, Friedman, Chi, Liu, 2006, Gamble,

Gibson, 1999).

Confucianism and the East Asian business organization

Redding (1993) considers paternalism, personalism and insecurity the most salient examples

of Confucian influenced behavior.

The traditional paternalistic orientation of the family was depersonalized through the vehicle

of Confucianism and propagated as the exemplary mode of relational ordering. To

characterize this Confucian model as autocratic would be an oversimplification. Instead, it is

based on an intricate combination of power and responsibility (corresponding to the principles

of ren and yi). Much of the de facto legitimacy for the authority of the business leader

tautologically stems from this professional predicate and his or her ownership of the business.

But underlying this authority is an expectancy of moral conduct befitting a leader. Confucian

rhetoric alludes to the notion of the gentleman (junzi), who inspires through immaculate

demeanor and a display of appropriate concern for his subordinates. The undiminished

importance of this principle was confirmed in a study by Neelankavil, Mathur and Zhang

(2000) in which Chinese business professionals rated charisma –which is to be understood in

the Confucian sense- the most important quality of an effective leader.

The importance of authority and hierarchy has clear Confucian antecedents in the doctrine of

the five cardinal relations, as can be illustrated with the following excerpt from ‘the

Analects’: “A lord a lord, a minister a minister, a father a father, a son a son” (

君君，臣臣，父父，子子, Analects 12.11). This comment reiterates the importance of the

reciprocal relationships between ruler and subordinate; the ruler has to be righteous and

caring, the subordinate has to be loyal, and each should attend to their respective scopes of

19

work. However, Seong reports that this notion has also been used as justification for crude

authoritarianism. In any case, although managers have a certain autonomy in dealing with

routine operations, important strategic decisions are always made by the business head. A

distinguishing characteristic of the Chinese management model then seems to be a separation

of authority and autonomy. Business leaders with a Confucian cultural heritage seem to have

an intrinsically adverse disposition to empowerment strategies (Bae, Lawler, 2000). Likewise,

employees in traditional organizations seem to be indifferent to empowerment, if not looking

upon it unfavorably (Chen, Aryee, 2007). The nodal position of the business leader ensures

that he or she alone possesses the complete repository of extant information. Knowledge may

be shared with others at the discretion of the leader (Westwood, 1998). The combined

leadership aspects of centralized power and consideration for employees are to ensure order

and social harmony within the organization (ibid.), but do so at the cost of restraining

initiatives at the front end and the potential detrimental effects of group thinking (Forsyth,

1999) .

The second distinctive element of the Confucian model is personalism. Redding (1993)

defines personalism as ‘the tendency to allow personal relationships to enter into decision

making’. Each society has in some stage of its economic development relied on kinship

structures to mitigate the risk of defection. In the West these institutions gave way to a system

of impartial and equitable rules of trade and external enforcement mechanisms as the scale

and scope of economic activity increased (North, 1991). Despite the gradual adoption of these

mechanisms, the Chinese continue to rely to a great extent on kinship structures to deal with

agency problems.

One implication for the business organization is that one’s respective position and authority

within the organization are contingent on the relational proximity to the business leader, who

him or herself often attains that position as a result of social standing rather than purely on the

basis of professional merit (Westwood, 1997). Hall identified this mechanism of status by

ascription (i.e. based on who you are rather than what you did) as a common denominator of

collectivist cultures. The sustainability of managerial authority is also delineated by

personalism, as it is contingent on the managers relationship with his or her subordinates.

Another implication is that performance and results are permeated by a high degree of

subjectivity. Because superior-subordinate relationships have an interpersonal rather than

professional basis, there is a strong incentive for subordinates to withhold or misreport

unfavorable information or results so as to avoid conflict (Friedman, Chi, Liu, 2006, Gamble,

20

Gibson, 1999). Conversely, superiors are likely to rate subordinate performance in terms of

personal relation rather than on an objective basis (Gamble, Gibson, 1999). Like paternalism,

personalism has clear antecedents in the Confucian writings as expressed by the statement: “A

gentleman who cares for his kin is likely to extend the care to the populace and influence

them to approach nobleness” (Analects 8.2). But also here the principle of moderation needs

to be applied “A gentleman in amicable but not clannish” (Analects 13.23).

Finally, personalism influences inter-organizational relationships. The subject of guanxi and

its intricacies have been extensively researched. The trust that is engendered by personalism

allows for the formation of extensive alliances (Redding, 1995), sharing of resources and

significantly reduces transaction costs (Lovett, Simmons, Kali, 1999). The obvious downsides

are that the prerequisite of longstanding relationships might significantly slow down the

incorporation of newcomers that might bring valuable new knowledge or technology to the

network, and the potential that nepotism leads to the selection of partners that deliver sub-

optimal results. Nonetheless, guanxi are to be considered a viable alternative to the contract-

based alliances prevalent the West, especially given the academic interest in trust and self

enforcing safeguards as constraints of opportunistic behavior (Das, Bing, 1998).

Redding identifies insecurity, which he considers a result of historical uncertainty pertaining

to the tenability of property rights in China combined with the transient nature of new

societies such as Hong Kong, Taiwan and Singapore, as a factor reinforcing the family

orientation in business organizations. It emphasizes the importance of kinship ties as a

mechanism for mitigating risk associated with opportunistic behavior.

Altogether, this line of ‘Culturalist’ research seems more insightful than that which deals with

broad macro-economic trends, because it pertains itself with behavior and relationships within

the defined spectrum of the business organization. Moreover, this research provides a clear

logic about how the institution of Confucianism propagated certain values, which in turn can

be related to particular behavior, organizational forms and business practices.

Figure 3 : The relation between Confucianism, values and attitudes

21

In light of the previous, the effects of the described behavior and organizational structures on

business performance can be expected to be equivocal. The centrality and autonomy of the

business leader allow for swift decision making in the face of environmental change. Power

structures follow kinship ties, making them relatively simple and stable. Likewise, alliances

are formed along common lineage or origin, in which implicit trust is high. As a result, the

transaction costs and potential delays concerned with contract based alliances are significantly

mitigated. This facilitates rapid execution of business plans. On the downside, paternalism

and personalism might adversely affect the efficiency of business processes, leading to sub-

optimal outcomes. The centralization of power renders the quality of any decision contingent

on the cognitive capabilities of the business leader and the quality of the information he or she

possesses. A general tendency to avoid conflict might lead to improved work flow, but could

also motivate subordinates to omit important information that is potentially upsetting or

incongruent with the dominant perspective. When a concern for trustworthiness based on

extant relations dominates procurement or alliance considerations, this might go at the

expense of more objective measures such as task performance.

This exposition suggests that Confucian influences are an important moderator of inter and

intra-organizational behavior and attitudes. Practices such as ‘paternalistic headship’

(Westwood, 1998) and guanxi seem to have direct antecedents in the Confucian concepts such

as the ‘cardinal relationships’. While nepotism and hierarchical organizations are ubiquitous,

their manifestation in East Asia is certainly idiosyncratic, and are the result of a long cultural

development.

However, the economic effect and social desirability effectuated by Confucian influences are

contingent on the particular reading of Confucianism. As Seong notes, Confucianism is a

double-edged sword. If tendencies towards paternalism and personalism aren’t mitigated by

the principle of the Golden Mean, they can easily degrade into authoritarian dictatorialism,

oppression, nepotism and corruption.

22

Research

Research questions & hypotheses

The research summarized in the previous section implicates that culture influences the

behavior and actions of individuals and organizations alike. This behavior in turn will in part

determine the outcome of organizational efforts. This reasoning seems plausible, especially

considering the aforementioned Culturalist research that explicitly linked behavior to

attitudes. However, no research that I am aware of has linked these attitudes empirically to

Confucianism, and as such, the argument is incomplete. Secondly, no Culturalist research has

demonstrated an explicit link between Confucianism and financial performance.

The objectives of this research then are to answer the aforementioned questions, following the

approach presented below.

Figure 4: Interrelation between the research questions

Question a.1: Is there anything particular about the organization

and behavior of East Asian business organizations?

Question a.2: Are these traits influenced by

Confucianism?

Question b.1: Does Confucianism then bear on firms’ abilities to

extract returns from their investments?

Are these traits then a result of the stage of

development of the institutional environment?

YES

YES

NO

Question b.2: Is the relationship between Confucianism and

financial performance a positive or a negative one?

YES Why?

Why?

NO

NO ImpliImplications

Implications

23

Question a.1 has been examined at length in the previous section and thus need not be

subjected to further scrutiny. There are commonalties between say, the practice of guanxi and

nepotism and the concept of paternalistic headship and the autocratic organization. But to

argue that they are the same would be to disregard the intricate social structures and reciprocal

mechanisms that underlie the two (Kathri et al., 2006). As for the latter part of the first

question, the close association of Confucianism and certain types of behavior and

organization in much of the literature is bolstered by the intuitive logic of a causal mechanism

between the two. Therefore, I propose that:

A positive correlation exists between Confucianism and the distinctive behavior of East Asian

business organizations

Results of Neo-classical analyses conducted on the macro-level would suggest that the

influence of Confucianism on financial performance is non-existent or negligible. However,

behavioral and organizational studies on the meso level make a strong case for a

differentiating influence of Confucianism on intra and inter firm behavior. Moreover, given

that the outcome of this behavior is somewhat of a mixed bag, it is difficult to hypothesize

about the direction of any possible relationship between Confucianism and performance.

Therefore I will refrain from making predictions pertaining to the second research question.

Data Collection

When comparing the economic performance to cultural traits, the influence of other factors

such as resource endowments, economic and political stability and protectionist measures are

ignored. By limiting the assessment to the firms operating in a single national economy, the

aforementioned factors are homogenized, so that any relationship between Confucian

ideology and financial performance can be measured more accurately.

Although China is the origin of Confucian thought, measurement of Confucian values there is

likely to be impeded because of political considerations (the Chinese Communist Party is still

reluctant to permit the public propagation of traditional ideas). Also, reliable and complete

financial performance data is notoriously difficult to come by. Instead, this assessment will

take Taiwanese enterprises as its focus. The Republic of China is representative of the East

Asian region because it has a distinct Chinese cultural heritage and a development trajectory

similar to the other ‘little dragons’ (Hong Kong, Singapore and South Korea).

24

A sample of TSEC-listed companies (n=115) was selected from within four different

industries (the commodities, consumer electronics and service industries and financial sector).

I used the industrial categorization employed within the ISIN code query system.

Research Design

Research on the firm level has focused on describing and explaining causal relationships

between culture, behavior and outcome. In this instance, I examine a particular cultural

expression, Confucianism. I seek to measure the degree to which Confucian ideas are

prominent within the Taiwanese business organization (i.e. Confucian Orientation). This is

linked to a type of behavior that has been ascribed to Confucian influences, nepotism. The

relatedness of members of top management to the company Chair may serve as a proxy for

nepotism. Subsequently, I will asses the relation between Confucian orientation and these

companies’ financial performance. I chose to directly correlate Confucian Orientation to

performance rather than examining the relation between behavior and performance because it

would be near impossible to adequately capture all organizational behavior that might be

subject to Confucian influence. It would be impetuous and uneconomical to try and construct

a complex model which aims to describe the specific effects of any particular kind of

Confucian influenced behavior before having determined whether any relationship between

the prevalence of Asian values and financial performance can be discerned at the aggregate

level. Moreover, this allows for the unlikely but not impossible instance that Confucianism

influences performance even if the behavioral traits that are particular to the East Asian

business organization cannot be accounted for by Confucianism.

Figure 5: Scrutinizing the relations between culture, behavior and outcome

Underlying logic Research Design

Culture

Behavior

Outcome

Confucian Orientation

Financial Performance

Nepotism

25

Confucian Orientation

To identify organizations with a Confucian orientation (CO), I relied on linguistics, using a

methodology similar to that employed by Yadav et al. in their 2007 article “Managing the

Future: CEO Attention and Innovation Outcomes”. They conducted a content analysis of

CEO’s statements to shareholders. Sentences indicative of a forward looking and in- or

external orientation were counted and adjustments were made to accommodate for the

comparison of letters of unequal lengths. Yadav et al. recognize the possibility that these

letters are simple propaganda tools with little or no relevance to the actual strategy, but

conclude that if this is the case, consequent analysis using statements as a proxy should yield

no results. The obvious merit of this approach is that it allows for the collection of

information on the orientation of a great number of business organizations without having to

hold time-consuming interviews. Moreover, by quantifying these orientations, they can be

directly compared to a great number of business metrics.

The contention of Chinese business researcher Tu Wei-Ming confirms the suitability of a

linguistic approach to assessing Confucian Orientation within companies: …prior to the impact of the West in the mid-nineteenth century, Confucian culture seems to have dominated East Asian education both for the elite and the general public, family relationships, social organizations, and bureaucracy, at both central and local levels (China since the thirteenth century, Yi Dynasty Korea since the fifteenth century, and Tokugawa Japan since the seventeenth century). Even in world views and cosmologies, Neo-Confucian metaphysics seem to have left an indelible imprint in the verbal expressions and thought patterns of East Asia.

To compile an index of key Confucian vocabulary, I first enumerated the most important

philosophical and ethical Confucian concepts in academic expositions of Confucianism and

authoritative Confucian texts. To ensure the centrality of these terms their incidence in the

Confucian canon was indexed.4 Only those terms that were regularly recurring in the

Confucian discourse were considered. I proceeded to cross reference these with a Confucian

lexicon, the 孔子大辞典 (kong3zi da4 ci2dian3), taking care to leave out any terms that were

overly esoteric or peripheral. Because in some instances usage of classical Chinese idiom

might lead to grammatically incorrect modern day Chinese, I listed modern synonyms

whenever available, using the Standard dictionary of Chinese (han4 zi biao1 zhun3 zi4 dian3).

The English translations and explanations were taken from the Li’s translation of The

4 For this research I used the versions from http://chinese.dsturgeon.net, which has an excellent collection of Classical Chinese texts

26

Analects, Legge’s translation of Mencius, and RoutledgeCorzons Encyclopedia of

Confucianism. I further provided references to various passages in the Confucian canon in

which these terms occur, so as to provide a backdrop for the reader. References have the

format X 1.2. The letter (‘X’) refers to the particular literary work (see table below). The ‘1’

and ‘2’ refer respectively to the chapter and paragraph. The index is included in the Appendix

II. The particularities of this research topic necessitated some adjustments to Yadav’s et al.

research methodology. Although content analysis is a suitable means for detecting Confucian

orientation, it would be presumptuous to assume that this would allow for a completely

accurate representation of the degree or strength of this orientation within a particular

organization. The great differences in the length of the various statements further decrease the

precision of this type of measurement. Therefore, I opted for categorical rather than

continuous measurement of Confucian Orientation.

The aforementioned index was employed to record usage of Confucian terminology in

corporate documents and statements. Only the terms and synonyms included in the index

were registered to ensure a minimal level of subjectivity. The absence of conjugations or

suffixes in the Chinese language further enabled me to avoid deviations. Given the brevity of

many statements, I decided that the incidence of one Confucian term would be sufficient

proof of CO. If subsequent statistic analysis would yield no results, the prerequisite number of

used Confucian vocabulary would be increased to determine whether lack of accuracy was an

issue. Initial analysis of twenty-five random letters to shareholders yielded no results. This

isn’t wholly surprising since the content of these letters generally has a tactical focus,

summarizing the various relevant developments and results of the previous year and outlining

operational strategy for the near future. Confucianism, being a worldview and system of

ethics, is pertained less with the “what” than with the “how”. Although profitability and

growth can be held to be universal objectives of business organizations, views on how these

objectives should be brought about can differ considerably. In a departure from Yadav’s

methodology, I thus chose to work with corporate vision statements (企業愿景, qi3ye4

yuan2jing4) and management philosophies (經營理念/哲學 jing1ying2 li3nian4/zhe3xue2),

because they describe the organization holistically, i.e. in terms of corporate values and raison

d’être.

27

Nepotism

Even though the enumeration of (supposedly) Confucian influenced behavior presented in

figure 3 isn’t exhaustive, it would be beyond the scope of this thesis to scrutinize all of the

above elements. Instead, I will focus on nepotism and see whether it is indeed more prevalent

in Confucian organizations. Corporate governance requirements in Taiwan stipulate that

companies include an overview of related members of top management in their annual report.

For the purpose of this research I chose to focus only on kinship relations between the

company chairman, whose role in the company is more akin to than of the Western CEO and

top management. This decision was motivated by the Chair’s central position within the

company (Chung, 2003) which would allow him to be relatively unhampered in making

hiring decisions. The presence of members of top management related to the Chair then might

serve as an indication of personalistic tendencies within the organization. Although the

Chinese notion of implicit interpersonal relationships (guanxi) is far more intricate than

Western understandings of kinship, encompassing for example also bonds between those who

share a common geographic origin, information about such relations is much harder to obtain

and therefore they shall be omitted from this research. Companies having one or more

members of top management related to the Chair are coded one and those having none are

coded zero. A chi-square analysis will serve to determine whether there is indeed a

discernable correlation between Confucian orientation and top management relatedness.

Because the measured dimensions originally are continuous categorical variables rather than

true binomial values, I deemed the chi square test more appropriate than the binomial model.

Confucian orientation and financial performance

The inquiry pertaining to the relationship between Confucian orientation and financial

performance is of a more explorative nature. In light of the widely diverging opinions about

the influences of Confucianism, no a priori contentions were made about the strength or the

direction of the supposed correlation between the two variables.

For each company I calculated average ROE over a four year period (2004-2007), using data

from the Wharton Research Data Service, or from the respective company’s annual reports.

I chose ROE as an indicator of financial performance because it is a measurement of the

efficiency of entrepreneurial activity. Using ROE then might serve to elucidate whether

Confucianism indeed influences organizational behavior in a way that bears on the company’s

ability to extract returns on their investments.

28

The existence of a relationship between CO and ROE is tested using an independent samples

t-test. The sample is divided in companies with and without a Confucian influence. If CO

indeed has an influence on the financial performance of companies, then this ought to result in

a significant divergence between the performance of the companies within the two categories.

Limitations

In spite of the insights that this research might provide, it is subject to some important

limitations. Some of these pertain to the methodology. A simple methodological construct as

the one employed in this study can never achieve an exhaustive description of the intricate

interplay between business strategy and traditional cultural heritage. Because of the

exploratory nature of this research, Confucianism is treated as a discrete variable. Depending

on the results of the research, a more detailed model addressing the influence of Confucian

individual attitudes and behavior may be called for.

Most importantly, the study doesn’t consider non-financial measurements to assess the

influence of Confucianism on business performance. Obviously, only considering the

financial effects of a value system primarily concerned with ethics will result in a incomplete

and one sided assessment. A full account of the merits and demerits of Confucianism to

businesses requires a very comprehensive and in depth evaluation of its influence on a

multitude of aspects such as financial performance, stakeholder relations, international

competitiveness etc.

A final limitation pertains to cultural scope. Although Confucianism is an important

constituent of the national cultures of Korea, Japan and those countries with a predominantly

Chinese population, the amalgamation with extant cultural values in Korea and Japan led to

diverging interpretations of Confucianism. Furthermore, the economical organization in Japan

and Korea differs significantly from that of Taiwan. This reservation should be extended to a

degree to mainland China, being a transitional economy, and Singapore, where Western

business models have had arguably more impact on the organization of firms then elsewhere

in East Asia (Redding, 1995). Nonetheless, the cultural proximity, a result of the cohesiveness

of Chinese society, renders it plausible that results from this research are also significant for

these nations.

29

Research Results

Confucian Orientation

Financial Performance

o

+

o

Nepotism

Research Results & Discussion5

Figure 6: Summary of the research results

Linguistic analysis yielded fifty-four companies with a Confucian Orientation out of the total

sample of one-hundred and nineteen. The most frequently used terms were 誠 (cheng2,

sincerity) 信 (xin4, trust) and the baihua (modern-day) variant for cheng, chengxin, a

combination of the two characters.

One might hypothesize that the organizational cultures of older companies exhibit more

traditional values. However, according to the results of an independent samples t-test there

was no statistically significant difference between the average age of companies with

(M=73.4, S=15.6), and without (M=77.9, S=16.5) Confucian Orientation (t(113)= 2.529, p >

.10).

Members of top management with a kinship relation to the Chair where found in fifty-nine

instances. The Chi square analysis indicated a significant effect (2(1, N= 115) = 4.525, p<

.05). Indeed, within companies with a Confucian Orientation members of top-management are

more often related to the Chair then in companies without CO. The proposition in the

‘research questions’ section was that a positive correlation exists between Confucianism and 5 Detailed statistical output can be found in the Appendix IV

30

the distinctive behavior of East Asian business organizations. The findings pertaining to

nepotism support this proposition.

Figure 7: Distribution of Nepotism (TMT) over companies with and without a Confucian

Orientation (CO)

10

CO

70.0%

60.0%

50.0%

40.0%

30.0%

20.0%

10.0%

0.0%

Pe

rce

nt

1

0

TMT

__

The second research question pertained to the relationship between Confucian orientation and

financial performance. The results for the independent samples t-test demonstrates that there

is no significant difference between the ROE of companies with a Confucian Orientation

(M=.091 S=.097) and without (M=.056 S=.015) (t(113)=1.409, p> .10). If the conclusion is

that Confucian Orientation is inconsequential to financial performance, then Confucian

influenced behavior cannot moderate financial performance either. Indeed, a control test

measuring the correlation between nepotism and ROE yielded no significant results6.

The outcome of this research thus refutes a crucial assumption held by many researchers of

the East Asian business organization; namely that Confucianism is an important moderator of

financial performance. Confucianism indeed still is an important element of contemporary

East Asian culture and as such has a clearly discernable influence on the values and

perspectives held within many East Asian business organizations. The research findings

suggest that these values do indeed promote certain attitudes and behavior. However, the

particular interpersonal dynamics within the East Asian business organization are

6 See Appendix 4.4

0= Does not possess said trait 1= Possesses said trait

31

inconsequential to performance. As such, the apparent juxtaposition between the Neo-

classical and Culturalist perspectives can be accounted for; it is plausible that Confucianism

can explain to a great extent certain modes of organization and interpersonal dynamics

particular to East Asian businesses, but it certainly doesn’t affect conduct in such a way as to

have a distinguishing influence on the ability to extract returns.

Although perhaps surprising, these conclusions are by no means new. d’Iribarne reported

similar findings when researching the organizational culture of one company’s subsidiaries in

the Netherlands, France and the UK in the late eighties. While recognizing the marked

differences in organizational culture, he found that there was little divergence in the efficiency

and performance of the respective businesses. Differences in culture then ought to be regarded

as historically dependent mechanisms for coping with varying environments, both natural

(resource endowments) and manmade (social exchange)7, while serving the universal

objectives of wellbeing and proliferation. As a point in case, the potential detrimental effects

of nepotism on the performance of Taiwanese businesses seem to be offset by a traditional

emphasis on education. Within this era of global competition, Darwinian mechanisms decide

the success or demise of the business corporation. Those companies that propagated values

that are severely detrimental to financial performance have surely been ousted of the business

arena during the six decades of East Asian development.

An examination from the knowledge based view (KBV) of the firm further confirms the

validity of the research results. An extension of the resource based view of the firm, the KBV

asserts that firms are able to extract above-average returns because they possess knowledge

that is valuable, rare, cannot be perfectly imitated and is non-substitutable. Based on the

understanding of culture presented above, Confucianism may be considered a form of

knowledge. Its values implicitly embedded in an intricate thought-system which is historically

bound to the East Asian region and exotic to those without a Chinese cultural heritage, it most

certainly seems sticky and ambiguous. But even if one would allow for the contention that the

attitudes and behavior related with Confucianism is rare (a dubious statement considering the

size of the East Asian population) and inimitable, many of its values are not. For example,

within a random sample of mission statements of twenty European and American firms, eight 7 Although this argument might seem tautological, culture isn’t static and thus is prone to be change in reaction to prevalent ideologies, social occurences etc. For example, the Reformation is considered to have been instrumental to the propagation of equalitarian principles, which are a fundament of contemporary West-European culture.

32

mentioned the centrality of trust and integrity. Although no doubt important prerequisites to

good business conduct, these values can hardly be considered to be particular to companies

with a Confucian orientation. Important idiosyncrasies do exist. For example, whereas in the

West, contracts are deemed essential to engender trust, personal relationships supersede the

importance of contracts in much of Asia (Lovett et al., 1999). In any case, the values that

delineate the business arena are the same. Trust is a universal requirement for commercial

activity. Diverging behavior and modes of organization ought to be regarded as a

manifestation of the unique historical and cultural experiences of the different regions.

Research has pointed out that these mechanisms have their specific merits and drawbacks

(Redding, 1993, Das, Bing, 1998), but no-one has proven the superiority of the one to the

other.

Finally, it should be noted that although many of the researched companies propagated

Confucian values, a small majority did not. These non-Confucian companies rather

emphasized business objectives such as value creation, company profitability and growth.

Researchers have claimed that globalization causes the values held by East Asian managers to

approximate those prevalent in the West (Pascale, Maguire, 1980). Indeed, in many

companies members of top management held degrees from American universities, which

might well have influenced them to adopt Western business models and practices. Due to the

cross-sectional design of this research, no assertions can be made as to whether a tendency

towards the abandonment of traditional values in favor of Western values and business

practices is taking place. In any case, the age of a company is unrelated to its Confucian

orientation. It would seem plausible that the companies or industries that were already firmly

established before or early on during the internationalization of the Taiwanese economy might

retain more traditional characteristics. The research results however indicate that there is no

such simple characterization of the Confucian company. However, since Confucian values are

as prevalent amongst the more recently established companies as older firms, it seems

unlikely that they will rapidly give way to Western business practices.

33

Conclusion

If Confucianism is neither consequential to financial performance nor apparent in every East

Asian company, then should it from here on be ignored?

Obviously, the answer is no. This thesis merely proposes that what East Asian companies do

doesn’t differ significantly from their counterparts from around the world. Therefore, the

‘how’ might actually be the more important question. Although there is ample proof that

intensified international contact has led to the exchange of cultural values and effectuated a

shift in thinking and behavior, it would be presumptuous to assume that this trend will result

in ubiquitous ‘Westernization’. East Asian business professionals might have adopted

American management philosophy and terminology, but such terms and ideas are but at the

surface of culture and of a transient nature. Pragmatic by nature, the Chinese have a history of

adopting Western science and technology while ‘retaining their core’, dating back to the late

Qing Dynasty (Feuerwerker, 1958). Confucianism seems to convey many values crucial to

Chinese society, which might serve as an explanation for its tenacity. Concepts like mianzi

(face), guanxi (reciprocal relation), xinyong (trust) and hexie (harmony) will persist as

important implicit elements of social interaction and organization. Therefore, studies

reporting large shifts in managerial attitudes should not be taken at face value.

Finally, the results should warn Culturalists who all to readily proclaim the superiority of one

culture (and its concomitant institutions and practices). This warning ought to be extended

also to those Culturalists that hold the Asian institutions with a relational orientation to be

inferior to Western contract based market-mechanisms. The complex organization of social

relations propagated in many East Asian nations are as far from the primitive kinship ties

described by North (1991) as are the modern day institutions in the West. Moreover, whereas

regulations and contracts can only serve to deter undesirable behavior, Confucianism contains

a holistic system of ethics, which has the potential to inspire virtuous conduct. The teachings

of Master Kong just might hold some lessons, which the West cannot afford to ignore.

34

Suggestions for future research

The results of this study have been instrumental in demonstrating the potential of using

linguistic analysis also with complex concepts. Such analysis can be a time-efficient

instrument for detecting and measuring cultural orientations, which can prove useful both in

practice and in research. It contributes a means of explicitly identifying Confucian thought

and expressions and assessing the relation which was assumed to exist between this ideology

and characteristically East Asian modes of organization and behavior. To those who readily

accept such a relation, this might seem trivial. However, if this assumption wouldn’t have

been subjected to further scrutiny, it would have been impossible to refute Singh’s contention

that modes of organization and behavior ought to be attributed to the stage of development of

the economic institutional environment. Moreover, it allows for an objective assessment of

the relation between culture and performance.

But because deep-held values and beliefs will often not be articulated, linguistic analysis is a

crude instrument, uncovering only the tip of the iceberg. A more sensitive and elaborate

methodology might yet improve the power of such analysis. In particular, analyzing a greater

amount of internal and external communications over an extended period of time would yield

a more accurate representation of a company’s Confucian Orientation and would allow for the

detection of longitudinal tendencies. Moreover, it would enable analysis of Confucian

Orientation on the ratio level, something which, because of the large disparity in length of the

mission statements, I was unable to do for this research. This would further improve any

subsequent analysis of the correlation between Confucianism and the attitudes and behavior

attributed to it.

More importantly still, due attention ought to be given to the non-financial effects of

Confucianism. In particular, research should examine the influence Confucianism exerts on

the ethical standards on East Asian business. As noted before, ethics are the focal point of

Confucianism. But like most ideologies, the desirability of its outcomes are contingent on

interpretation. Such research might prove much more useful to our understanding and

appreciation of Confucianism in the business context.

35

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Appendix I: Confucianism8 For a subject that has received much attention over the last decade (a database search yielded

19,100 articles that were specifically pertained with “Confucian Capitalism” and 7,780 that

addressed the topic of Asian Values), Confucianism is generally poorly understood by

Western researchers. This can be partially attributed to the fact that research of Confucianism

has been directed at specific texts and as such has provided a particularly eclectic composition

of Confucianism. The resulting lack of clarity has all to readily been mistaken for Eastern

mysticism and thus obstructed attempts to provide a structured overview of the Confucian

ideology as it relates to the greater society. Fortunately, the enduring interest for this topic has

prompted Eastern scholars to provide more comprehensive accounts in Western languages.

This paragraph will provide a brief historical overview of the life of Confucius and the spread

of his teachings.

History of Confucianism: a synopsis

The origin of Confucianism lies with Confucius (Chinese: 孔子, kong3zi), who was born into

a family of lower aristocracy 551 BC in the state of Lu (鲁). This period was one of great

social upheaval, which might explain the emphasis on harmony and ritual that is pervasive

throughout his teachings. A fervent student of a plethora of subjects and a gifted teacher,

Confucius’ reputation attracted a following of younger noblemen who sought to be accepted

as his disciple. In the meantime, Confucius himself sought employment at the high office of

one of the many states, hoping that such a post could provide him with a platform from which

he could subdue the prevalent chaos and turmoil. Even so, Confucius never held a position of

political significance, be it because he refused to work under rulers of questionable moral

quality (which is the traditional reading) or otherwise. His main legacy consists of a collection

of texts which Confucius edited and thought essential literature for those who sought to attain

the posture of a true gentleman. Amongst these are the Five classics (五经, wu3 jing1) and a

collection of aphorisms and dialogues with his students which is known as the Analects

(论语, lun4yu3). Although he gathered a great body of students during his lifetime, and his

8 This paragraph draws on ChaBong Kim’s “Ä Confucian Theory of Leadership”, and David Lee’s translation of “The Analects of Confucius”

40

ideology was carried on by such influential teachers as Mencius (孟子, meng3zi) and Si

Maqian (司马迁, si1 ma3qian1) who, in a departure from traditional Confucianism, provided

the moral antecedents for the pursuit of profitable activity. But it wasn’t until the Song (宋,

960-1279) Dynasty, when Confucianism replaced Buddhism as the state ideology, that

Confucianism firmly established itself as a fundament of Chinese society. At this time,

scholars Zhu Xi (朱熹, zhu1 xi1) and later Wang Yangming (王阳明, wang3 yang2ming2)

consolidated Confucian rethoric and infused it with Daoist elements so as to arrive at a

complete metaphysical worldview and concrete template for political and individual conduct.

It was also during this period that Confucianism became an ubiquitous ideology and

predominant influence in the political philosophy of Korea. However, it was only during the

Edo period (1603-1879), that Neo-Confucianism traversed the sea to become a major

constituent of Japanese society, although Confucianism had already made forays in both

nations long before.

41

Appendix II: Index of ConfucianVocabulary

Abbreviation Text

A The Analects of Confucius (Li, D., ed.).

G Guanzi

M The Analects of Mencius

L The Book of Rites

X Xunzi

H Han Shi Wai Zhuan

仁, ren2 Translation Benevolence, Humanness, Humanity Exposition See p. 16 Synonyms, related concepts

博爱, bo2ai4, love for humanity, fraternity

慈, ci2, benevolence, benignity, affection Sources A 13.19， A 12.2， A 17.6

义, yi4 Translation Rightness, Righteousness, Appropriateness Exposition See p. 16 Synonyms, related concepts

Sources A 4.10, M 8:39 M 5:11 礼, li3 Translation Ritual, Propriety Exposition See p. 16 Synonyms, related concepts

Sources A 3.4, A 6.25, A 8.2 智, zhi4

Translation Wisdom, Understanding, Prudence Exposition See p.16 Synonyms, related concepts

知 zhi1 (knowledge, understanding)

慎 shen4 (prudence) Sources A 7.19, A 6.11, A 19.22

信, xin4 Translation Trust, Trustworthiness

42

Exposition Trust was designated the fifth virtue by Neo-Confucian scholar Zhu Xi, but already had an important position in the discourse of Confucius and Mencius.

Synonyms, related concepts

Sources A 1.13, A 17.6, M 11.16 爱, ai4

Translation Love, affection Exposition In Neo-Confucian rhetoric, the original four virtues were expanded

with four complementary values. Ai was paired with ren. In the Confucian sense, ai signifies boai, love for humanity, similar to the Christian notion of love. Therefore, the more specific notion of boai and the related concept of ren will be used for the purpose of this research.

Synonyms, related concepts

Sources 忠, zhong4

Translation Loyalty, Fidelity Exposition Within Confucianism, appropriate relations are defined through the

wulun. Because each of these relations are between different constituents, they are governed by slightly dissimilar reciprocal principles. The superior-subordinate relationship demands zhong, between siblings there should be fraternity(悌, ti4) etc.

Synonyms, related concepts

孝

Sources A 1.8, A 4.15, A 9.25 孝, xiao4

Translation Filiality, Filial Piety Exposition The concept of Xiao is similar to that of zhong, but refers specifically

to the reverence and dedication a child should have for his parents. Because of its specific focus, it will be excluded from this research.

Synonyms, related concepts

忠, zhong4, loyalty, fidelity

Sources 和, he2 Translation Harmony, natural ease, to harmonize, Exposition He, in the Confucian sense refers to act of applying concepts and

opposites to their appropriate measure, and the situation that is a result thereof.

Synonyms, related concepts

平, ping2, Balance, to balance

Sources L 6.6, L 19.12, X 17.3 道, dao4 Translation Way, Path, Governing Principle Exposition Dao, in pre-Confucian references, referred specifically to virtuous

43

rulership. Later, its meaning was extended to signify the path to virtuous living for all humankind. In Neo-Confucianism, this concept was infused with the Taoist understanding of Dao being the Governing Principle of the universe and everything therein. This notion resonated with the Confucian concept of the Heavenly Mandate (天命, tian1ming4), which refers to those universal principles which man can’t change, and men’s personal calling, which could be known through moral conduct.

Synonyms, related concepts

天命, tian1ming4, Heavenly Mandate, Direction

道德, dao4de2, Moral Virtue Sources A 4.9, A 4.15, A 8.13 德, de2 Translation Virtue, Morality Exposition Synonyms, related concepts

道德, dao4de2, Moral Virtue

品行, pin3xing2, Moral conduct Sources A 6.29, A 12.10, A 16.12 恕, shu4 Translation Reciprocity, Altruism, Considerateness Exposition Shu is the conduit which enables proper relations and a harmonious

society. Within Confucianism, all relationships are dyadic. The centrality of the concepts of balance and harmony (he, ‘the doctrine of the Golden Mean’) clearly feed back into the notion that all relationships are reciprocal (even distinctive concepts such as ‘truth’ and ‘good’ are dualistic in nature, always being relative to their opposite). Relationships are focused on each constituent playing the appropriate role and fulfilling his or her duties to the proper degree.

Synonyms, related concepts

Sources A 4.15, A 15.24, M 13.4 勤, qin2 Translation Diligence, Attentiveness Exposition Qin is popularized as one of the eight virtues, but these are a

contemporary construct. Therefore references of qin in the classical Confucian canon are very limited.

Synonyms, related concepts

Sources 俭, jian3 Translation Frugality, Temperate, Economical Exposition Jian is popularized as one of the eight virtues, but these are a

contemporary construct. Therefore references of jian in the classical Confucian canon are very limited.

Synonyms, related concepts

44

Sources 诚, cheng2 Translation Sincerity, Honesty, Integrity Exposition Synonyms, related concepts

真心, zhen1 xin1, Integrity, Honesty

实意, shi2 yi4, Honesty Sources X 3.9, X 11.15, H 6.24

Appendix III: Elaboration on terminology

Much research has interchangeably used the terms “Asian development model”, “Asian

Values” and “Confucian capitalism”. Although these concepts overlap to a certain extent,

there are important distinctions between them which, might well have led to much confusion

about, and elusiveness of the modus of economic development in East Asia within the

scientific discourse. In lack of a generally accepted common parlance of economic and

business research of East Asian nations, the definitions below will serve to clarify the inquiry

into the topic at hand.

The Asian Development Model

After the second world war, Japan, and later South Korea, Hong Kong, Taiwan and Singapore

all adopted Smithian strategies, producing labor intensive consumer goods for the

international market, allowing them to fully capitalize on their low labor costs (Harvie, Lee,

2002). This in stark contrast to the Western nations who, with the Great Depression still fresh

in mind, relied on import-substituting industrialization. Capitalizing on competitive labor

costs while emphasizing export indeed proved to be a very successful growth strategy for

many East Asian nations (Freeman, Hew, 2002). Furthermore, these nations possessed

sociopolitical characteristics that are prerequisites or catalysts for stable economic

development. The processes of capitalization in these nations weren’t paired by the social

upheaval that was characteristic of the same transformation in the West. An authoritative

government allowed for efficient mobilization and allocation of resources (Richter, ed., 2000,

Ahn, Choong, Yong, 2001)

Another commonalty is that many of these economies initially relied on strong industrial

policies targeted at developing the technology industry. Closed intra industry competition

ensured that these sectors developed the prerequisites for good performance on the global

market. Intensive cooperation didn’t exist only between the government and the technological

45

industry, but also between business sectors. The Japanese and Korean economies up to today

are characterized by intricate systems of vertical and horizontal industry integration

(Wilkinson: 1996). These conglomerates facilitate access of equity for insiders, and provide

substantial economies of scale and competitive clout. Industrial development was paired with

high investments in education. This greatly facilitated the transition from a labor driven to a

knowledge based economy, when rising labor costs adversely affected economic growth.

Although the economic development of the East Asia has by and large followed this pattern, it

is the result of a particular mode of political economy, and none of its constituents, nor any

combination thereof is exclusive to nations with a Confucian heritage. Indeed the same

combination of trade policies and active government control was characteristic of many of the

South East Asian economies prior to the financial crisis of 1997 (Phongpaichit, Pasuk, Baker,

1995, World Bank, 1993).

Asian Values

Western scholars have used the concept of Asian Values to denote primarily Confucian

induced attitudes that are prevalent within societies with a common Chinese cultural heritage.

(Pye, 2000). A detailed exposition of the these values and the behavior they engender will

follow in the subsequent section.

Confucian Capitalism

The term “Confucian Capitalism” can be traced back to the publications of early Western

admirers of the achievements of the Eastern nations such as Kahn. They postulated that the

model of economic development was explicitly driven by cultural factors. Subsequently, this

postulation was adopted by several Japanese and Korean researchers who fortified it by

linking it explicitly to the Confucian tradition.

Inquiries into the development of the economy of the East Asian nations made under the

header of Confucian capitalism have in fact by and large focused on Asian Values.

The syntax of the term itself suggests that Confucian capitalism is first and foremost a model

of political-economic organization which is infused with elements of a particular ideological

system. I therefore take Confucian capitalism to be the summation of Asian values and the

Asian development model. Although both the cultural and political –economical constituents

exist independently, together they designate and describe a modus of economic activity which

is particular to the two dragons and four tigers.

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Appendix IV: Statistics

4.1 Properties of data set “ROE” Descriptives Statistic Standard Error ROE Mean 0.07295 0.01219 95% Confidence Interval Lower Bound 0.04879 for Mean Upper Bound 0.09710 5% Trimmed Mean 0.08059 Median 0.08128 Variance 0.017 Std. Deviation 0.13077 Minimum -0.47654 Maximum 0.34273 Range 0.81928 Interquartile Range 0.12469 Skewness -1.187 0.226 Kurtosis 3.712 0.447 Descriptives Kolmogorov-Smirnov a Shapiro-Wilk Statistic Df Sig. Statistic df Sig. ROE 0.122 115 0.000 0.921 115 0.000 a Lillefors Significance Correction Histogram: ROE

__

47

4.2 Chi-Square Test

Confucian Orientation and Nepotism

CO* TMT Cross Tabulation TMT 0 1 Total

CO 0 Count 39 26 65 Expected 33.3 31.7 65 Residual 5.7 -5.7 1 Count 20 30 50 Expected 25.7 24.3 50 Residual -5.7 5.7

Total Count 59 56 115 Expected 59 56 115 Chi-Square Tests Asymp.

Sig. Exact Sig. Exact Sig.

Value df (2-sided) (2-sided) (1-sided) Pearson Chi-Square 4.525 1 0.033 Cont. Correction 3.760 1 0.052 Likelihood Ratio 4.553 1 0.033 Fisher’s Exact Test 0.040 0.026 Linear Association 4.485 1 0.034 N of Valid Cases 115

4.3 T-Test

Confucian Orientation and Return on Equity

Group Statistics CO N Mean Std. Dev. Std. E. M.

ROE 1 51 0.091 0.097 0.0139 0 65 0.056 0.152 0.0189 Independent Samples Test Levene's Test t-test for Equality of Means 95% Conf. Interval F Sig. T df Sig. (2-

tail) Mean Diff. SE Diff. Lower Upper

ROE Equal Var. Assumed 2.970 0.088 -1.409 113 0.162 -0.035 0.025 -0.083 0.014 Equal Var. Not Ass. -1.483 109.804 0.141 0.035 0.023 -0.081 0.012

Boxplot: Confucian Orientation and Return on Equity

10

CO

0.40

0.20

0.00

-0.20

-0.40

-0.60

RO

E

108

15

87

36

77

__

50

4.4 T-Test

Nepotism and Return on Equity

Group Statistics TMT N Mean Std. Dev. Std. E. M.

ROE 1 57 0.716 0.118 0.0157 0 59 0.711 0.144 0.0187 Independent Samples Test Levene’s Test t-test for Equality of Means 95% Conf. Interval F Sig. t df Sig. (2-

tail) Mean Diff. SE Diff. Lower Upper

ROE Equal Var. Assumed 0.235 0.629 -0.020 114 0.984 -0.001 0.0245 -0.049 0.048 Equal Var. Not Ass. -0.021 111.246 0.984 -0.001 0.0244 -0.049 0.048

Boxplot: Nepotism and Return on Equity

10

TMT

0.40

0.20

0.00

-0.20

-0.40

-0.60

RO

E

65

15

108

87

36

77

____

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4.5 T-Test

Confucian Orientation and Firm Age

Group Statistics CO N Mean Std. Dev. Std. E. M.

Age 0 64 77.88 16.482 2.06 1 55 73.38 15.645 2.11 Independent Samples Test Levene's Test t-test for Equality of Means 95% Conf. Interval F Sig. t df Sig. (2-

tail) Mean Diff. SE Diff. Lower Upper

Age Equal Var. Assumed 0.097 0.756 2.529 113 0.13 6.918 2.735 1.499 12.338 Equal Var. Not Ass. 2.494 99.410 0.14 6.918 2.774 1.415 12.422

52

Boxplot: Confucian Orientation and Firm Age

10

CO

100

80

60

40

Es

tab

lis

he

d

89

__