Informal Network Leadership

Proactive Versus Reactive Strategic ChoicesGlobal managers know that developing networks in a host country can be a tedious endeavor. Whereas developing friendly work relationships locally is often regarded as less problematic, developing informal networks is challenging but important for business success. The function of informal networks becomes relevant for transactions under ambiguity that require trust and commitment between actors. Global, or expatriate, managers need the support and goodwill of a variety of stakeholder in business, like colleagues, employees, customers, suppliers, government representatives, community leaders, and many more to fulfill their companies’ mission, which is, simply put, to build a successful and profitable market presence and become a respected and hopefully liked local actor. Why is it so difficult to build a network of deep relationships abroad? Here are some of the major reasons.

Informal networking—one size fits all?
We often think of networking, in a nutshell, as an activity that in principle everybody can do and that requires going out there and meeting people, being extroverted, doing small talks, being likeable, and most importantly, thinking instrumentally and mentioning things that we possess or can do that a potential network partner wants. However, the conventional ideals of networking are not as universal as we may think. Informal networking abroad follows different ideals than managers are used to in their home country. Due to different values and norm systems, the way that social ties are chosen, concluded, maintained, and deepened differs across cultures. Societal structures play an important role in setting the framework for networking possibilities as some cultures sharply distinguish informal networks in in-groups from out-groups. Out-group members are often per se not relevant for any networking activity. Global mangers are often regarded as out-group members per se. Given their status and that they are being exposed to a new business culture, it is tough to engage in network building. While culture can change, informal networks appear to be persistent. There is no shortage of evidence that country-specific informal ties and networks maintain their importance in many countries. Some well-known examples of informal networks we refer to here range from yongo and inmaek in South Korea, guanxi in China, wasta in the Middle East, or blat/sviazi in Russia and large parts of the post-Soviet Union. These informal ties and networks are embedded in the respective cultural environments. Hence, the nuances of these informal networks vary across countries. However, they have in common that they play an important, sometimes central, role in doing business in the respective countries while they are difficult to penetrate for outsiders. The dilemma is that expatriate managers are outsiders.

Informal networking abroad follows different ideals than managers are used to in their home country. Due to different values and norm systems, the way that social ties are chosen, concluded, maintained, and deepened differs across cultures.

How to network effectively aboard?
For the reasons put forward above, it is an important competency for global managers to thoroughly understand a respective networking context and to proactively lead the network-building process to help the local business prosper. There are two basic strategic choices—reactive and proactive—that can be pursued.    

Reactive strategy. A reactive strategy focuses on learning how to comply with local norms and imitating what local competitors do. Global managers can learn local practices, values, and norms of behavior and change their specific routines, practices, and behaviors over time to resemble local norms. By doing so, global managers may gradually become more of an insider in a particular host country. However, this is a daunting task for outsiders, as many informal networks feature rather particularistic and personalistic characteristics. Trying to get network access can lead to disappointment, especially for those global managers—although not all—from Western countries where interpersonal ties in business are typically believed to be more rational and instrumental. The primary approach of the reactive strategy is therefore related to harnessing the informal networks of local managers. A way for foreign companies to overcome the lack of informal networks is by hiring local managers who possess strong informal networks. However, this approach involves substantial costs and certain risks. Harnessing the local managers’ informal networks may result in considerable costs being incurred to understand the quality and influence of their informal ties and how they can be beneficial, yet this may not guarantee the acquisition of the same level of informal networks as local counterparts. In other words, hiring local managers who possess influential informal networks may lead to a single access point to networks for a foreign firm, which would be a too narrow a focus on one or a few local individuals. There is also a risk that these individuals may become too powerful in decision-making within the organization, which may result in a loss of control. Moreover, local managers may use a foreign company to accumulate social capital for their own gain and eventually leave the company, taking those important networks with them as well as insider knowledge. Further, trust issues may arise as well as difficulty in controlling the information exchange within the informal network of the local manager. Some informal networks feature behavioral ethics that demand loyalty between informal network members to be of higher priority than to a corporate code of conduct. Hence, there is a risk that competition-relevant information and intellectual property would travel via informal networks to competitors. How to control this risk is an issue firms must care about. A proactive strategy is not risk-free either but represents a second option to develop informal networks in host countries.

Trying to get network access can lead to disappointment, especially for those global managers—although not all—from Western countries where interpersonal ties in business are typically believed to be more rational and instrumental

Proactive strategy. Foreign companies and their foreign managers are viewed as belonging to a different class of actors compared to their local counterparts because of their foreign roots and origin. As a result, they are often shielded from institutional isomorphic pressures. This means that, as long as they act within the boundaries of formal laws and regulations, foreign companies have the discretion to choose their appropriate level of responsiveness to the local environment. Being exposed to a multitude of diverse and often culture-bound local practices and patterns of activity, foreign companies can enjoy some latitude to choose a variety of different patterns that they think fit them best (a fact known, for instance, in Japan as gaijin [Engl. foreigner] bonus). In contrast, local companies often fail to challenge existing norms, expectations, and routines institutionalized in the society because this requires a great deal of time and effort to gain support from local constituents and incurs substantial costs in the form of sanctions from actors who deem such a challenge illegitimate. Foreign companies can confront local norms with fewer costs because they are less expected to adopt locally established practices or social norms. Therefore, foreign companies may overcome the disadvantages arising from the lack of informal ties by deviating from the local way of building and capitalizing on informal networks. Instead, they can proactively develop more extensive diverse and instrumental ties across different groups of actors and not be constrained by cultural norms or in-group/ out-group sentiments and animosities. This can be used as an advantage over local rivals. Hence, foreign companies can capitalize on their competitive strength and reputation to build their informal networks. The competitive strength and reputation of foreign companies can affect their legitimacy in host countries, alleviate opportunistic behaviors of local stakeholders, and increase social acceptance of institutionally deviating behaviors. Large foreign companies with a strong brand name or technology leaders are usually seen as competitive players, and those credentials draw local attention and can be turned into networking power. Thus, foreign companies can effectively enhance their informal networks by driving various initiatives for collaborations. Besides that, many international business clubs (such as the Rotary Club and the Lions Club) and special interest groups for specific industries also represent international networking platforms at the upper and top management level in many countries, providing various networking opportunities for their members through regular meetings, forums, and conferences. While foreign firms compete with local firms for high-quality network ties, access, and influence, it remains an open question whether a proactive strategy can beat local firms in their networking activities. Nevertheless, a proactive strategy can open up opportunities to foreign firms that local firms may not have, and that is the sweet spot upon which foreign firms can build their networking power.

Although a proactive strategy provides some benefits that cannot be achieved by a reactive strategy, it does not come without drawbacks. A proactive strategy calls for a long-term approach. Foreign companies often need to invest for a long time to create informal networks. This fact questions the common practice of using limited expatriate contracts that allow leaders to stay for a limited time, usually 3–5 years, in a country. Given this rather short time frame, effective networks can hardly be established.

Conclusion – Better Go DIY
In sum, the lack of host-country-specific informal networks can be a double-edged sword for foreign companies. Depending on their capability to build and maintain their own differentiated informal networks, the absence of host-country-specific informal networks could offer either a competitive disadvantage or a window of opportunity to create advantages based on a firm’s foreign status. Finally, as complying with local cultural standards can be difficult for foreign firms, especially when local norms deviate sharply form a foreign firm’s convictions in terms of, for example, ethics, gender equality, diversity and inclusion, etc., foreign companies should focus on building their own organically grown informal networks rather than conforming to local norms in order to benefit in the long run.

More here:

Lee, J., Paik, Y., Horak, S., & Yang, I. (2021). Turning a liability into an asset of foreignness: Managing informal networks in Korea. Business Horizons, forthcoming.
DOI: 10.1016/j.bushor.2021.04.002