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Business Success Through Social Networks? A Comment on Social Networks and Business Success By HENRIK EGBERT* ABSTRACT. In the literature on entrepreneurship in developing coun- tries, the argument that social networks are an essential factor for entrepreneurial success has been given considerable attention. This article challenges this one-sided view by pointing out negative and restrictive effects of social networks on entrepreneurial success in particular, and on economic development in general. The article is structured as a comment on Kristiansen (2004), who worked on social networks and conducted field research in the city of Tanga, Tanzania, similar to the author, who had done the same two years previously. The findings from a six-month field research are used in order to articulate important aspects left out in Kristiansen’s discussion. I Introduction KRISTIANSEN (2004) FOCUSES ON the influence of social and cultural aspects on entrepreneurial success. He refers to the concepts of social network and social capital in order to elucidate the idea that those entrepreneurs who can activate more resources through social net- works are more successful than those who cannot. He concentrates on *Henrik Egbert lectures at Justus-Liebig-Universität Giessen, Germany; e-mail: [email protected]. He studied economics at the Freie Universität Berlin and Bayreuth University and has been lecturing at several German universities as well as at Sofia University, Bulgaria. In 1997, he conducted field research for his dissertation on social networks of entrepreneurs in Tanzania (published 2001 as Netzwerke als unternehmerische Ressourcen und Restriktionen [Berlin: Verlag für Wis- senschaft und Forschung]). His interests include private entrepreneurs in economies in transition, social networks, and markets. In 2006, he published “Cross-Border Small- Scale Trading in South-Eastern Europe: Do Embeddedness and Social Capital Explain Enough?” International Journal of Urban and Regional Research 30(2): 346–361. American Journal of Economics and Sociology, Vol. 68, No. 3 (July, 2009). © 2009 American Journal of Economics and Sociology, Inc.

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Business Success Through Social Networks?

A Comment on Social Networks andBusiness Success

By HENRIK EGBERT*

ABSTRACT. In the literature on entrepreneurship in developing coun-tries, the argument that social networks are an essential factor forentrepreneurial success has been given considerable attention. Thisarticle challenges this one-sided view by pointing out negative andrestrictive effects of social networks on entrepreneurial success inparticular, and on economic development in general. The article isstructured as a comment on Kristiansen (2004), who worked on socialnetworks and conducted field research in the city of Tanga, Tanzania,similar to the author, who had done the same two years previously.The findings from a six-month field research are used in order toarticulate important aspects left out in Kristiansen’s discussion.

I

Introduction

KRISTIANSEN (2004) FOCUSES ON the influence of social and culturalaspects on entrepreneurial success. He refers to the concepts of socialnetwork and social capital in order to elucidate the idea that thoseentrepreneurs who can activate more resources through social net-works are more successful than those who cannot. He concentrates on

*Henrik Egbert lectures at Justus-Liebig-Universität Giessen, Germany; e-mail:

[email protected]. He studied economics at the Freie Universität

Berlin and Bayreuth University and has been lecturing at several German universities as

well as at Sofia University, Bulgaria. In 1997, he conducted field research for his

dissertation on social networks of entrepreneurs in Tanzania (published 2001 as

Netzwerke als unternehmerische Ressourcen und Restriktionen [Berlin: Verlag für Wis-

senschaft und Forschung]). His interests include private entrepreneurs in economies in

transition, social networks, and markets. In 2006, he published “Cross-Border Small-

Scale Trading in South-Eastern Europe: Do Embeddedness and Social Capital Explain

Enough?” International Journal of Urban and Regional Research 30(2): 346–361.

American Journal of Economics and Sociology, Vol. 68, No. 3 (July, 2009).© 2009 American Journal of Economics and Sociology, Inc.

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an African context, in particular on entrepreneurs with an African andAsian background in the Tanzanian city of Tanga. His empirical datawere collected in 1999 and consist of 12 qualitative case studies onbusinessmen, all active in the wood business. From the empiricalfindings he draws conclusions and makes suggestions about possiblepolitical measures.

In 1997, I conducted a six-month field research on entrepreneurshipin the city of Tanga. I sought to answer the question of whether thesocial networks of entrepreneurs can be considered a resource or aconstraint for their enterprises; in other words, I focused on a researchquestion very similar to that of Kristiansen. The entrepreneurs who Iinterviewed were the owners of private companies, active mainly inthe production sector. The companies were both small (5 to 19employees) and medium (20 to 150 employees), and their ownerswere of African, Asian, and Arabic ethnic origin. The data werecollected by employing half-standardized questionnaires as well asin-depth interviews, open interviews, and case studies, thus combin-ing quantitative and qualitative methods. Interviews with state authori-ties and managers of parastatal companies provided additionalinformation. A total of 131 entrepreneurs were interviewed. Theresults are presented in several papers (for an overview, see Egbert2004; for complete results, see Egbert 2001). The topics are theinfluence of the entrepreneur’s religious community on businesssuccess (Egbert 1998), the effects of the entrepreneur’s family onbusiness success (Egbert 1999a), and the impact of organizationalnetworks on business success in the wood and timber sector (Egbert1999b).

The fact that two social scientists focus on almost the same researchquestion and conduct research at the same place,1 unaware of eachother’s efforts, prompted me to an open response and to discussresearch findings critically. In what follows, I draw on my quantitativeand qualitative data collected in 1997 to comment on Kristiansen’sarticle. The perspective I choose is that social networks can beconsidered institutions and that institutions are not cost-free. Concern-ing Tanzania, transaction costs related to networks are likely to belower than those of markets. Taking account of this, I follow a newinstitutional economics perspective on social networks (see also

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Egbert 2006). Before I proceed with the comment on selected aspectsof Kristiansen’s research, I would like to emphasize that I agree withmany of the points he makes. However, three aspects do deservemore attention, to my mind. They are: (1) social networks as con-straints to entrepreneurial success, (2) human capital and socialnetworks, and, (3) generalizations and political recommendationsregarding social networks. I focus on these aspects below.

II

Social Networks and Entrepreneurship

A. Social Networks as Constraints to Entrepreneurial Success

The statement I make that social networks2 of an entrepreneur can beconsidered constraints as much as they can be considered resourcesrequires a few notes on the term “success.” Indicators for businesssuccess of a company are the number of employees, profit, turnover,working capital, capacity utilization, and the years of operation of acompany, to mention but some prominent ones. Additionally, thetemporal development of the indicators provides further insights, andcorrelations between indicators also can be helpful to validate thedata. For measuring the success of an enterprise I use the followingindicators in my quantitative analysis: the level of capacity utilization,the development of capacity utilization and of the number of employ-ees over the last years, and the company profits. Further indicatorsused are the foundation of a second or third enterprise by the owner,the changes in the working capital over time, and the size and the ageof the enterprise. According to these indicators I classify companies asbeing “successful,” “stagnating,” or “unsuccessful.” After that, thesocial networks of the entrepreneurs (e.g., family, religious commu-nity, business partners, former schoolmates) are identified, and cor-relations between engagement in social networks and businesssuccess are tested.

I agree with the idea that an entrepreneur can gain essentialresources for his or her enterprise through social networks (seeoriginally Aldrich and Zimmer 1986; Kristiansen 2004: 1152). Contactswith persons in an entrepreneur’s religious community, friends,

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co-ethnics, former classmates, and so forth can be helpful in providingresources (e.g., information, financial capital, labor, tools, and machin-ery). Empirical findings prove that this fact is also true for Tanzania(e.g., Egbert 2001; Murphy 2002 for innovation networks). However,this represents only one side of the issue. There is the other side thatseems to be rather neglected by Kristiansen and that can be ofparticular relevance for developing countries, namely, that socialnetworks of an entrepreneur can constitute a constraint to businesssuccess as much as they can foster it. First, social networks includesocial obligations and responsibilities, and thus resources may bededucted from the enterprise in order to meet the private obligationsof an owner. Requests for money from members of the entrepreneur’sfamily, former schoolmates, neighbors, or friends are commonexamples. In this way, social networks can cause problems for busi-ness growth or lead to a business failure. Second, even for entrepre-neurs who are successful, social networks may be an impediment totheir success. I elucidate both points below.

The first point refers to the extended family (see Nafziger 1969 forNigeria; Kennedy 1980 for Ghana; Fafchamps and Minten 2002 forMadagascar). It is well-known that the extended family of an entrepre-neur does not only have positive effects on the enterprise by providinginputs (information, labor, capital), but that it is often a burden(Trulsson 1997: 167–172, 2000 for Tanzania).3 Particularly, if an entre-preneur uses the financial resources of the company to satisfy needs ofhis or her extended family, this deduction of resources can hamperbusiness growth, as a result. I use a sample of 74 entrepreneurs whowere interviewed about the influence of their extended families on theircompanies (Egbert 1999, 2001). The sample is divided in two groups,one with entrepreneurs of African ethnic origin, the other of Asian orArabic ethnic origin. The first difference between the two groups is thatAfrican entrepreneurs regularly provide family members with compara-tively small amounts of money. Asian or Arabic entrepreneurs givelarger sums for special occasions only, and it is rather considered anincentive for the receiving person to set up a company of his own. Thesecond important difference is that African entrepreneurs providefamily members with capital even if they are fully aware that financialhelp does create problems for the enterprise. Table 1 shows that for

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about 55 percent of all entrepreneurs, financial support for theextended families does not constitute a burden for their businesses.However, while nearly no entrepreneur of Asian or Arabic originsupports his family if it constitutes a burden, African entrepreneurs paytheir families despite the trouble it causes for their business (resultscorrelate significantly with success indicators). This example indicatesthat a considerable number of African entrepreneurs are unable (orunwilling) to control the influence of their relatives, which, in turn, canresult in a business failure, in other words, bankruptcy.

The second point focuses on the entrepreneurs who are membersof an ethnic-religious community, such as the Bohras (for details, seeAmiji 1975). The Bohras are a subgroup of the Asian inhabitants inEast Africa and are famous for being successful businessmen. In mysample, the Bohra entrepreneurs are overrepresented in comparisonwith their percentage of the total population, and their businesses canbe considered successful. On the one hand, commitment to theirhierarchically structured community is generally high, and severesocial control limits deviant behavior in private and in intra-community business affairs. On the other hand, for its members thecommunity provides an interest-free loan scheme that allows taking

Table 1

Financial Support of the Extended Family Providedby Entrepreneurs

AfricanOrigin

Asian orArabic Origin

Financial support is provided and is not aburden for the enterprise

54% 56%

Financial support is provided but is aburden for the enterprise

40% 3%

Entrepreneur does not financially supportthe extended family using companyresources

6% 41%

n 35 39

Source: Egbert (2001: 104).

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credit for business investments. No other religious community in thecity provides such an opportunity for its members. It can be arguedthat the severe social control (and, with it, the high personal costs ofleaving the community) leads to the formation of a stable, closely knitnetwork based on religious sectarianism and ethnicity. By offeringfinancial support to its members, for instance, in fostering business,the community contributes directly to entrepreneurial success (fordetailed results, see Egbert 1998, 2004: 299–302). A closer investiga-tion4 shows that some entrepreneurs have been excluded from thecommunity or have positioned themselves at its periphery. Noticeably,these “outsiders” own the most successful companies included in mysurvey. In other words, the entrepreneurs who have decided to leavethe community or who have been excluded (and are ostracized) havegained more business success than those successful entrepreneurswho are inside the network. One may argue that the release of theformer from network obligations has brought about more prosperityfor their enterprises. The mechanism of how this works deservesadditional research attention.

B. Human Capital and Social Networks

The human capital of an entrepreneur affects the performance of hisor her enterprise: the higher the formal educational degree, the morelikely it is for an entrepreneur’s company to develop successfully(see Bates 1990), and also the longer it survives on the market.Kristiansen observes that entrepreneurs of Asian ethnic origin have ahigher formal education than African entrepreneurs and that theformer are more successful than the latter. For both groups, theresults of my research indicate a positive correlation between formaleducation and business success, as well. Kristiansen concludes (2004:1167) that “obviously, a generally higher level of education givesadvantages in obtaining resources for entrepreneurial endeavor,through or outside social networks.” While it is true that, in general,entrepreneurs of Asian origin have higher formal education thanentrepreneurs of African origin, it is controversial that a high level offormal education constitutes a precondition for activating businessresources through networks. I included in my sample (n = 78) 10

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entrepreneurs of Arabic origin. They either received no formal edu-cation or they left school with a considerably lower formal degreethan Asians and Africans alike. Following Kristiansen as regardshigher education, one could expect that these businessmen wouldnot be successful. However, according to the size of the companies,their existence in years, capital utilization, and the number of asecond or third enterprise, the businessmen of Arabic origin areamong the owners of the most successful companies in the city. Thisresult contradicts Kristiansen, who compares only entrepreneurs ofAfrican and Asian origin.5 The network compensation hypothesisformulated by Brüderl and Preisendörfer (1998: 216) is supportive ofmy empirical findings. The hypothesis goes that “entrepreneurs witha less favorable human capital profile and with less financialresources struggle harder to mobilize their social contacts andreceive more support out of their network.” In the case of theentrepreneurs of Arabic origin and concerning formal educationallevels, the hypothesis proved to be correct: these entrepreneurs aremembers of a closely knit network with multiple structures including(international) family relations, ethnicity, and organizational tiesamong their companies (Egbert 2004: 302–304). Hence, a low degreeof formal education does not presuppose less intensive networkingand less entrepreneurial success.

C. Generalizations and Political Recommendations

There are several generalizations in Kristiansen’s paper. Althoughgeneralizations prove to be useful in most cases, taking account of“the limitation of the empirical data” (2004: 1164), one should becareful in formulating policy recommendations. Unfortunately, thegeneralizations made are not always based on sound argumentation.For instance, if Kristiansen’s survey is not representative (n = 12), ashe himself writes (2004: 1164–1165), then is it justified to drawconclusions from the wood sector for entrepreneurs in other lines ofbusiness? There is no hint in the paper answering this question. Othersectors (e.g., banking, transport, chemicals, engineering, etc.) aredifferently structured, and other social networks are likely to be ofrelevance.

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Further, the black-and-white picture of “subcultures” that Kris-tiansen draws is highly problematic. While it is analytically useful todistinguish between entrepreneurs of African, Asian, or Arabic origin,it is questionable—and probably dangerous—to generalize from thisdifferentiation. Each of these subcultures deserves a more profoundand separate consideration. I elaborate on this below.

There is a detailed record that entrepreneurs of the Asian subculturedo not belong to a single social network; Asian subculture is, rather,fragmented into Bohra, Goan, Hindu, Ismaili, Ithnaashari, Sikh, Sunni,and so forth (see, for Tanzania, Bharati 1970 and Voigt-Graf 1998:48–76; see Chande 1998: 79–86 for Tanga). The description of theAsian Muslims in East Africa as “fervently united” (Kristiansen 2004:1166) does not correspond to the reality, neither in the city of Tanganor in Tanzania as a whole. For some of the above-mentionedcommunities, social networks based on ethnicity and religion play animportant role; for others, success is influenced by their membershipin social clubs or gained through international family bonds. Further-more, being of Asian origin does not necessarily imply success, eventhough African entrepreneurs and state officials like to make thiscorrelation; many companies with Asian owners can be classified as“stagnating,” indeed.

What is true for members of the Asian subculture is also true formembers of the African subculture. In Tanga, one can find entrepre-neurs of African origin who run very successful enterprises. It iswell-known that members of the Chagga, who are originally from theKilimanjaro region and are mostly Christians, have set up thrivingbusinesses all over Tanzania. Members of this group often competewith entrepreneurs of Asian origin (Chande 1998: 88–90). From mysample, it becomes obvious that the greatest number of successfulAfrican entrepreneurs in the city belong to ethnic groups that havemigrated from the hinterland to the coast (mostly Christian); and theless successful entrepreneurs belong to ethnic groups that have tra-ditionally settled at the coast (mostly Muslim). In my sample (n = 78),the African entrepreneurs with a migrant background (not born in thecity) were significantly more successful than nonmigrants (born in thecity). Since, by and large, migrants are more motivated, mobile, andhave stronger entrepreneurial endeavors in comparison with nonmi-

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grants, it is likely that they are more successful in business thannonmigrants. In a subsample including only companies in the woodand timber sector in Tanga (n = 57), I identified the migrants stemmingfrom the Usambara and Pare mountains as the rather successfulAfrican entrepreneurs.6 It is surprising that migration backgroundplays no role in Kristiansen’s discussion on business success. To sumup, making generalizations based on a crude differentiation betweentwo subcultures renders little scientific insights into the discourse onbusiness success.

One of Kristiansen’s (2004: 1167–1168) policy recommendations isto “improve ordinary people’s access to education and information.Knowledge, skills and modern technology for access to business datashould be utilized to even out preconditions for social networking andentrepreneurial success for various ethnic groups in Africa.” His mainargument for this conclusion is that social inequalities can endangerpeace and even national unity.

Better access to education can be considered a positive tendency(see Söderbom et al. 2006 for manufacturers in Tanzania); however, asI have outlined above, a high educational degree is not a necessaryprecondition for success through social networks. Improved access toinformation presumably produces only limited effects. Empiricalinvestigations in other African countries show that entrepreneurs donot always use available information. For instance, even when infor-mation about cheating of agents is available, this does not lead to theirpunishment by a trade partner or to their exclusion from future trading(see, e.g., Fafchamps 2001, 2002; Fafchamps and Minten 2001). Hence,before improving access to information, it would be useful to inves-tigate, first, whether African entrepreneurs in Tanzania use alreadyavailable information; second, whether they have capital to pay formore information and for business innovations resulting from infor-mation; and third, why exactly African entrepreneurs do not try tofollow the successful business practices of their Asian or Arabic fellownationals, something that they observe on a daily basis.

It is true that social inequalities based on differences in the eco-nomic status of social groups may endanger peace. However, oneshould be careful not to overemphasize the dissimilarities betweenAfricans and Asians. Social differences within the African population

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are as important for peace as the aforementioned ones. The success ofentrepreneurs with a migrant/Christian background, on the one hand,and the lack of success of entrepreneurs from a nonmigrant/Muslimbackground, on the other hand, could lead to considerable ethnictensions rising from economic inequality. Differences in economicsuccess and well-being among African entrepreneurs could be dan-gerous sources of radical Islamic ideas among the Muslim population.

Finally, the negative effects of social networking on the economy asa whole are significant and cannot be ignored in policy recommen-dations. Networks are exclusive. They include certain persons andexclude others. While transaction costs for those enterprises whoseowners are inside the networks are low, the opposite effect—that is,higher transaction costs—arise for those enterprises whose owners areexcluded. In this way, networks protect their members and discrimi-nate against nonmembers. Enterprises that operate ineffectively butenjoy network protection may remain on the market, while moreeffectively operating enterprises without such protection might notsurvive on a market. Furthermore, the effects of networking arenegative, especially on consumers who will have to pay higher pricesfor goods and services. Additionally, what can be called positiveeffects of networks on an enterprise, from a different viewpoint can beregarded as corruption, for instance, if access to resources, such ascapital, technology, or bureaucratic goodwill, is a privilege only formembers of social networks. Even though in Tanzania social networksof particular groups seem to provide better access to resources, thuscontributing to their members’ business success, it is a misguidedattempt to appeal for policy measures that aim at fostering network-ing. Such a policy is biased, especially if it would hamper thedevelopment of markets. There is evidence that social networksevolve because markets in Africa do not work properly and becauseproperty rights are poorly protected by juridical systems there (see,e.g., Lyon 2000 for Ghana). Social networks are important forsharing information and for contract enforcement (Fafchamps 2001).However, nonmarket structures of exchange—like social networks—can be self-enforcing and prevent market structures from establishing.As Kranton (1996) shows, structures of reciprocal exchange reinforcereciprocal exchange further. That is why social networks in business

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could be considered important at particular stages of the developmentprocess, but strengthening them through political interventions couldimpede market development for a long time.

III

Closing Remarks

A ONE-SIDED PERSPECTIVE dominates the research on social networks ofentrepreneurs in Africa. Social networks are often seen as a cure-allconcept,7 especially in the absence of functioning markets and juridi-cal systems. In this article, I claim that in an African context actor-oriented approaches to entrepreneurship should also consider thenegative effects of social networks on business performance. If policymeasures aim at reinforcing such structures, severe negative repercus-sions for market development must be expected. Therefore, socialnetworks cannot be regarded as a proper remedy for the deficienciesin African economies.

Notes

1. One of the entrepreneurs in Kristiansen’s case study had been inter-viewed by me two years earlier.

2. The research about the effects of organizational networks on economicsuccess, as discussed in industrial district models, is not the focus of thisarticle. For organizational networks in Africa, compare McCormick and Ped-ersen (1996) and McCormick (1999).

3. See, additionally, Fischer (2003) for family relations in a Tanzaniancompany.

4. From a total of 78 questionnaires (main sample), 13 were answered byBohras. Their enterprises are represented in food and soft drinks production,chemicals, wood processing, printing, and metal processing. Quantitative datawere supplemented by qualitative data from open interviews. Since thesample of Bohra entrepreneurs is small, results are only representative for thecity under research.

5. Additionally, see Fafchamps and Minten (2002) for traders in Madagascar.6. Of the 57 owners, 54 are of African and 3 of Asian origin. Thirty-four

interviewees have a primary school education and 18 (32 percent) secondaryschool. Only five entrepreneurs (9 percent) received a special higher schooltraining, diploma, or bachelor’s degree. In 1997, 42 enterprises had betweentwo and four employees, 13 enterprises between 5 and 10 employees, and

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only two enterprises had more than 10 employees (for details, see Egbert2001: 136–144; for information on the timber sector in Tanzania, also seeBlanc 1997: 46–49).

7. In another context, Portes (1998: 2) speaks of social capital as a cure-allconcept. In my view, this remark also applies to social network approaches.

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