Chapter 6

Friction Between Information and Communication Technology and Relation-Based Governance

The revolution of information technology (IT) that began with the advent of the World Wide Web in the 1990s and culminated in the early 2000s has fundamentally changed the way we live and work. While many people, especially young people, take the use of IT, such as the Internet, for granted without thinking how much efficiency has been gained by using it, they may not realize that merely 2 decades ago, people would be glued to a large paper map with tiny fonts for hours to plan a trip and would desperately look for a public pay phone on the road if they were lost.

The key to understanding the IT revolution can be simplified to two basic features. The first is digitization. Information goods are content that can be digitized into a series of 1s and 0s. If the contents cannot be digitized, such as the mood of a board meeting, then it cannot be called an “information good” in the sense of IT. The second feature is the dissemination of information goods. Once the good is digitized, it can be replicated and transmitted on an extremely large scale with lightning speed virtually without boarders and limitations. The technology that enables the production and communication of information is called IT or ICT (information and communications technology); we will use these terms interchangeably in this book.

While the fact that the IT revolution has helped business to drastically improve its efficiency is widely recognized and hardly controversial, many people may not realize that the use of IT in business management and the benefit from using it differ with some interesting pattern across countries. In this chapter, we will examine how the IT revolution affects business and management practices in relation-based societies as opposed to rule-based societies.

The Use of ICT and Efficiency

To understand the cost and benefit of using ICT, we can start with looking at how a movie is made and distributed. To make a movie is not easy. First, the producer must identify a story, which is usually based on a popular novel, acquire the movie rights of the novel, convert it into a movie script, and then shoot the film, which requires a large amount of capital—tens or hundreds of millions of dollars—to hire the actors, rent studios, and so on. Once the movie has been successfully created, making an additional copy of the newly created movie is easy: If you already have a computer, you just need to buy a blank DVD+R, which costs about 25 cents or less. Based on this example, it is easy to see the cost structure of information goods: They are costly to produce and costless to reproduce.

From a business management perspective, if a firm wants to use ICT to fulfill its information and communication needs, it must invest resources (financial, human, and technological) to build an information technology infrastructure, which may include creating an IT department, purchasing equipment, staffing, and training all the employees to adopt and use IT. Since these expenditures are upfront and do not vary based on how many people will potentially use IT, they can be viewed as fixed costs. If there are few people in the firm who use the newly created IT system to communicate, then the average cost per user will be very high; alternatively, if there is a large number of people in the organization using the new IT infrastructure to communicate, then the average cost of using the IT system will be very low. Thus the inherent cost structure of ICT (high fixed costs and decreasing marginal cost) implies that large organizations benefit more from the use of ICT than small organizations. In a small organization, the traditional, face-to-face communication is more efficient (see Figure 6.1).¹

Figure 6.1. Cost of traditional versus IT-based communication

Another feature of ICT that affects its adoption and use is digitization. As we briefly mentioned, only content that can be digitized can be made into information goods. In other words, in order for firms to use ICT in business operations and management, the contents must be able to be digitized. If business operations and management rely on the type of information that cannot be digitized, then ICT is not very useful. For instance, an employee comes to work to find that the mood of the office is tense, and the boss seems to be worried by something, or a business owner learns secretly that his rival played golf with a government official, then later sees his government contracts being cancelled. This kind of information is difficult to quantify and thus may not be used in decision-making models. This discussion leads to our view that the use of ICT is more congruent with business operations and management that rely on formal decision-making processes based on quantifiable and publicly available information

The Internet and the Relation-Based Societies

If we compare the Internet (which is like the air and water for ICT) and the governance environment of the relation-based societies, we will find some very interesting contrasts (see Figure 6.2).² First, the Internet is a network without a center. The network consists of millions of servers that directly or indirectly link to each other. It is a decentralized network; no one—neither a country nor a firm or person—controls it. A relation-based society tends to be highly hierarchical, or centralized. Most are controlled by a dictator or a strong ruling circle. Second, the structure of the Internet is based on a universal platform on which different software and programs may communicate with each other through commonly recognizable protocols. A relation-based society, on the contrary, tends to maintain its own proprietary system that is not compatible with others. Third, information is free on the Internet. The very premise of the Internet is that it serves as a huge depository for all sorts of information for people to access, mostly free. In relation-based societies, much information is controlled by the state and labeled as “state secrets.”

Figure 6.2. Contrasting features of the Internet- and relation-based societies

These three major differences put the Internet and the government of relation-based societies at odds, and it is not surprising that most relation-based societies try to limit the use of the Internet by citizens and firms. In a book titled Open Networks, Closed Regimes: The Impact of the Internet on Authoritarian Rule, the authors discussed eight governments that severely limited the use of the Internet in their countries.³ They include China, Cuba, Singapore, Vietnam, Burma (Myanmar), United Arab Emirates, Saudi Arabia, and Egypt. As can be seen, they all are not rule-based, with perhaps Singapore being slightly more rule-based among them, whereas China and Vietnam are among the most relation-based. The fundamental question the book’s authors asked is whether the Internet will help to push these closed regimes open. They concluded that the rise of the Internet poses great challenges to these authoritarian (non-rule-based) regimes, but it alone cannot end authoritarian regimes. They noted that “authoritarian regions can guide the development of the Internet so that it serves state-defined goals and priorities.”⁴ As for the reaction of the citizens and firms to the state control and censorship of the Internet, they observed that “Internet users may back away from politically sensitive material on the web… and entrepreneurs may find it more profitable to cooperate with authorities than to challenge their censorship.”⁵

Yahoo!’s Dilemma in China

In 2004, the Chinese authorities asked the Hong Kong subsidiary of Yahoo!, a U.S.-based company, to submit the private e-mail records of Shi Tao, a Chinese journalist. Yahoo! obliged. The Chinese authorities used the records to sentence Shi Tao to a 10-year imprisonment for “endangering state security.”⁶ Yahoo!’s compliance with the Chinese authorities was heavily criticized back home in the United States. During a congressional hearing in which Yahoo! executives testified, Tom Lantos, the late U.S. congressman, blasted Yahoo!’s CEO Jerry Yang and company lawyer Michael Callahan: “Technically and financially, you are giants, but morally, you are pygmies.”⁷ In his congressional testimony, Yahoo! CEO Yang hinted that his company was in no position to defy such an order from the Chinese authorities.⁸

There are many similar cases in which firms or citizens are accused by a relation-based regime for using the Internet to commit a crime that “endangers state security.”⁹

In addition to the clash between ICT and relation-based government at the societal level due to the three fundamental differences, the use of ICT at the firm level in relation-based societies also encounters some resistance due to the incompatibilities between ICT and the organizational culture and structure.

The Interface Between Governance and ICT in Relation-Based Organizations

Cultural Compatibility

Culture can be defined and analyzed from many different angles. We focus on a dimension that is most relevant to the rule-based versus relation-based comparison: the low-context versus high-context communications. Low-context communication refers to the style of communication that is direct, explicit, and verbal, as opposed to high-context communication, which relies on the implicitly shared references between the parties and indirect, nonverbal expressions. It is well known that the Chinese culture emphasizes high-context communication style, whereas Americans prefer a more direct style of communication.¹⁰ In their book on Chinese communication style, Gao and Ting-Toomey cited an interesting example to illustrate the difference between American and Chinese ways of communication, which I paragraph here:

Scenario 1. Conversion between a Chinese man (C1) and another Chinese friend (C2):

C1: I am flying to New York for a vacation tomorrow! (I hope he will give me a ride to the airport.)

C2: That sounds fun! (He may need me to drive him to the airport.) Do you have someone to drive you to the airport? I can give you a ride.

Scenario 2. Conversion between an American (A1) and another American friend (A2):

A1: I am flying to New York for a vacation tomorrow! Can you give me a lift to the airport?

A2: That sounds fun! Of course, what time should I pick you up?

Scenario 3. Conversion between a Chinese (C1) and another American friend (A2):

C1: I am flying to New York for a vacation tomorrow! (I hope he will give me a ride to the airport.)

A2: That sounds fun! Have a good time! (If he needs a ride, he will ask me.)

In Scenario 1, the conversation was based on the high-context communication mode. The need to have a ride was not even mentioned; it was hinted at best. In a relation-based environment, people usually do not interact with strangers and rely on close friends to help each other. When dealing with close friends who have interacted many times and known each other well, direct, explicit communication is not necessary; relying on implicit messages and hints are sufficient. Furthermore, the indirectness in asking a favor may save face if the other party cannot fulfill the favor, preserving the good relationship.

On the contrary, Scenario 2 is based on a rule-based environment in which business and social exchanges tend to be conducted at “arm’s length” between people who meet for the first time. Dealing with strangers is part of one’s daily life and work. In such a situation, direct and explicit communication is the only way to effectively convey what you mean rather than subtle hints for which shared experience and mutual references are a prerequisite to comprehend.

Obviously, a misunderstanding occurs in Scenario 3, when the rule-based way meets the relation-based way.

As we discussed earlier, the contents of ICT must be the information that can be digitized. Many types of high-context information, such as hints, shared past experiences, or the mood of the message, cannot be digitized and thus cannot be stored and transmitted through ICT, limiting the use of ICT in a relation-based organization. Next we discuss some specific issues that relation-based firms face in adopting ICT in their management and operations.

Informational Compatibility

A management information system (MIS) is an ICT-based internal control tool that integrates and analyzes business operation and management-related information to aid strategy formulation and decision making in an organization. For MIS to function, it must rely on and can only process digitized and codified information. However, a great deal of information within an organization that is vital for strategy formulation and decision making, such as the mood in the factory, gossip, rumors, or the conflict between two managers, cannot be digitized, as Mintzberg noted.¹¹

An encounter between a researcher with a local business leader in Vietnam may illustrate informal and yet efficient information gathering:

“I know where you were this morning,” the leader of one of the largest land development companies in HCMC [Ho Chi Minh City] told me. I was startled by this revelation, since I had not told him I had been interviewing another company that morning. I was not aware of any connection between the two companies because I had been introduced to them through different people.¹²

Later, the researcher learned that leader had an informal network that extended to the other company she interviewed.

The rumor that a firm’s major client was seen having a long conversation with a competitor of the firm at an industry gathering cannot be verified or quantified for entry into the MIS database to be analyzed. But several months later the MIS database showed that a contract with the client was not renewed. In a relation-based environment, this type of information is more important than that in a rule-based environment for business intelligence and decision making, as most deals are based on private relationships. So, due to the lack of informational compatibility, the use of MIS in relation-based firms is more limited.

Decision Mode Compatibility

The decision mode of relation-based firms does not have a high compatibility with MIS aided by ICT for the following reasons.

First, MIS is most efficient in disseminating large amounts of information to many users. With the aid of ICT and MIS, an entry-level manager may have access to as much information about the market competition and firm’s operation as the firm’s CEO (of course, excluding confidential information as such board meetings or other information on a need-to-know basis). This democratization of information access has greatly empowered the rank-and-file staff members and managers to make decisions on their own and has consequently made the modern organizations more flat and flexible in terms of decision making. Of course, the above scenario is only possible if the vital information, such as market intelligence and intraorganizational information, can be digitized, which tends to be more the case in rule-based rather than relation-based firms.

Second, for relation-based firms, most vital information for decision making is secretive (as private relationships tend to be secretive and exclusive) and controlled by the head of the firm. The reasons for this are that first, private relationships are hard to delegate, so the big boss must tend them in person; second, due to the lack of exit options for the subordinates in a relation-based firm (see chapter 5), they are unlikely to voice their honest opinions and take responsibilities to make decisions, which in turn makes centralizing decision making a necessity, and the boss usually relies on his gut feeling about the market (which lacks publicly verifiable information) and his private relationships with other key players in the market, nullifying the use of MIS for decision making.

Mode of Vertical Communications

In our survey on IT governance and usage in American and Chinese firms, we found an interesting difference between American and Chinese managers and professional staffs. We asked both American and Chinese respondents to what degree they use ICT to communicate (a) with their supervisors and (b) with their subordinates. We found that Americans reported that they use ICT to communicate with their subordinates and bosses more or less equally (with the use of ICT for upward communication being slightly higher), and the Chinese managers indicated that they use more ICT to communicate with their subordinates than with their bosses. What can we make out of this difference?

As we just discussed, people in a rule-based environment tend to use low-context information, which can be more easily digitized and transmitted by ICT. Furthermore, in a rule-based environment, rules tend to be equally applied to everybody, including both the supervisor and subordinates, so there should not be a systematic difference in using ICT for upward or downward communications. In a relation-based environment, in addition to the fact that high-context communication is often used, which is difficult to be conveyed via ICT, the relationship between a supervisor and a subordinate is more unequal than in a rule-based environment. In other words, using culture scholar Hofstede’s term,¹³ there is a greater power distance in relation-based organizations. Digitized information, such as e-mail, is viewed as cold, faceless, and certainly not something that can be used to cultivate cordial, personal relationships. In a relation-based setting, the subordinates tend to have a strong motivation to cultivate a warm, individual relationship with the boss. And understandably, the motivation to develop a good relationship with a boss is expectedly stronger than in rule-based environments. Thus our survey results may reflect the fact that while bosses may use ICT to reach down, most people prefer the more personalized mode, such as face-to-face, when communicating with their superiors in relation-based countries like China.

The Commitment Problem

Adopting IT in operation and management may jeopardize existing relationships, including relationships within a firm between manager and staff and relationships between firms. The reason for this is that IT, especially the Internet, drastically reduces the search cost for market information and new partners, making long-term commitment to relationships, such as a supplier relationships or any employment relationship, harder to maintain. For example, a story told by Guo Fansheng, the CEO of Huicong Company in China, vividly illustrates the conflict between the introduction of IT and the reliance on relations. As all executives know, a major headache in most purchase departments is that the purchasing manager may take kickbacks, which are difficult to verify and punish. So when Guo selected a purchasing manager, he would put paramount importance on the loyalty and integrity of the candidate and test and retest to make sure he or she was trustworthy so that he could make a long-term commitment to this relationship. Such a relation-based arrangement worked fine until the Internet arrived. Once his firm needed to make a major purchase, he ordered his purchasing manager to get bids and the manager presented the best bid to Guo. Out of curiosity, Guo put an anonymous message on a purchasing Web site to solicit bids. Many bids came in and, not surprisingly, some of them were lower than the best bid his manager presented to him. The difference was as wide as over 1 million yuan ($140,000). Guo was furious. He called the manager in, showed him the lower bids he got from the Web, and asked him if he had taken any kickback. The manager adamantly rejected his accusation. Guo said, “Then you must be grossly incompetent, and either way, you’re fired.”¹⁴

Did Guo do the right thing to fire the manager? He hinted that it may not be a well-thought-out decision, since it is very likely that with an opening bid on the net, it is almost certain that he will find a lower bid than his manager can get through his own established personal network. The conclusion Guo drew was to open the purchasing process to the Internet. Of course, in doing so, he may have lost some capable purchasing staff members who may feel that their expertise—cultivating long-term relationships with suppliers—is threatened.

How ICT Affects Corporate Governance

From our analysis above, while firms in the rule-based environment have substantially improved their efficiency through the use of ICT and MIS in operation management and strategic decision making, it is clear that due to its culture, information and communication mode, and decision mode, the use of ICT and MIS in relation-based firms is more limited to processes that can be easily digitized, such as processing paychecks, automating production, and bookkeeping (the use of MIS in accounting may be limited as relation-based firms manipulate accounting information more heavily, as we showed in chapter 3). The conventional wisdom predicts that with the adoption of ICT, which puts all firms in an equal footing, firms in developing countries will leapfrog to catch up to the firms in the developed world in productivity and efficiency. Based on our analysis, this may not be the case if the firms in developing countries are relation-based and limit their use of ICT only to simple processes. Their gains in efficiency from the use of ICT may not be as big as that of their counterparts in rule-based environments. Thus it is possible that the gap in ICT-based efficiency gain may be widening instead of narrowing. On the other hand, in the increasingly globalized market, the competitive pressure from the rule-based firms that have made substantial gains from fuller adoption of ICT will force relation-based firms to transform themselves into more rule-based firms so that they can become more competitive as they grow and expand beyond their traditional domain. And, indeed, a greater effort to realize the potential from the adoption of ICT in true decision making will help them in the process.