Dr. Manmohan Singh in 1994, when finance minister. He subsequently became Prime Minister of India (Source: Wikimedia Commons)
Ideas for Leaders #341

Modernizing without Westernizing: Social Ties and Indian Business

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Key Concept

The modernization of India’s economy, begun in the early 1990s when Manmohan Singh, then finance minister, introduced a series of reforms, has not reversed centuries-old traditions. Personal affiliations and kinship ties, long the bedrock of Indian society, continue to exert a powerful influence in the financial sector. India’s economy has been liberalized — but not, necessarily, Westernized.

Idea Summary

Classical and neo-classical economic theory is predicated largely on an ‘impersonal’ model, in which transactions between parties are governed not by social obligations and kinship ties but by rational and objective calculation of individual gains. 

This model is particularly associated with industrialized societies and the mature market economies of the West. One might, therefore, reasonably assume that as countries develop economically and their markets become more ‘efficient’, the importance of personal ties in business recedes.

A recent study from INSEAD Singapore and the Indian School of Business tests this assumption by looking at the influence of social affiliations in India. Focusing on the financial sector, the researchers show that personal ties and affiliations between CEOs and analysts remain important for the functioning of Indian capital markets.

More specifically, they suggest that, in a country where the quality of publicly available information about listed companies is often poor, the kind of personal connections frowned upon in the West lead to better information flows and, by extension, more accurate EPS forecasts.

The researchers tested for three ‘bases of affiliation’ and mutual trust in India. The first two were what might be termed ‘institutional’ or traditional: the caste system and regional language. The third was the more contemporary ‘old-school tie’ of attending/graduating from the same university. They found that traditional and contemporary bases for affiliation co-exist in Indian society today — and that someone’s personal preferences are usually related to their age. Older CEOs were more likely to be influenced by affiliations of caste and language.

A chief executive who entered the workforce after the economic reforms begun in 1991, on the other hand, was more likely to transfer private information to an analyst if they went to the same university. (Increased urbanization and mobility have made the traditional ties of caste and language less salient in Indian ‘economic exchange’.)

Importantly, the researchers found no evidence that younger people were less influenced by social ties: differences between the generations were in kind, not in strength.

The study lends support to the ‘embeddedness perspective’ in economic theory, which, contrary to classicism and neo-classicism, holds that economic action is often underpinned by social relationships.

It also, however, shows that the power of these relationships can be moderated by the ‘micro-institutional’ environment — in this case, the organizational form of a company. Where chief executives worked for Indian business groups, often dynastic firms controlled by the same family or families, the importance of ties was greater. Where, on the other hand, they were running subsidiaries of Western multinationals, the effect of social ties was much less profound.

The former type of organization seems to be more ‘hospitable’ to connecting with others on the basis of social ties. The persistence of Indian business groups — “repositories and carriers of behavioural norms drawn from traditional institutions”, according to the researchers — could, therefore, be important for the persistence of multiple bases of affiliation in Indian business and finance.

Business Application

The study underlines the need for a ‘think-local’ approach to global business that avoids Western preconceptions.

“India,” says Balagopol Vissa in a recent interview with INSEAD Knowledge, “is a big country that is modernizing but is modernizing in its own special way. Sometimes modernization and Westernization, which are two distinct concepts, may get mixed up”.

Importantly, social and kinship ties in India could survive developments such as increased transparency and regulations that bring business and finance more in line with Western models and codes of practice.

The next changes in India may be more evolutionary rather than revolutionary. Vissa continues: “New actors may affiliate very differently from the existing actors — but relationships will continue to be important when doing business in India.”

Some of the findings of the research will apply to other economies in Asia. Leaders doing business in emerging markets need to bear in mind that social and cultural traditions can withstand dramatic economic change.

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Authors

Institutions

Source

Idea conceived

  • January 2014

Idea posted

  • March 2014

DOI number

10.13007/341

Subject

Real Time Analytics