Special Issue: Trust in an Organizational Context: Contextual Confidence and Active Trust Development in the Chinese Business Environment

This paper contributes to the conceptual and empirical understanding of organizational trust. It confirms the importance of “contextual confidence” in institutions for building trust. Moreover, it extends models of trust production to include the effects of purposive action by the truster over and above the contextual prediction of trust emphasized in previous research. Accordingly, “active trust development” is conceptualized as a strategy to strengthen the basis for trust. Empirical evidence is drawn from a survey of 615 Hong Kong firms that manage operations in mainland China. Confidence in China’s institutional context was found to have a strong positive association with trust in the local staff working within that context. Active trust development was validated as a means of enhancing trust, though its effect on trust was not as strong as that of perceived institutional effectiveness. Active trust development initiatives are particularly valuable in an environment such as contemporary China, where the institutional foundations for trust remain underdeveloped. The positive correlation of trust with organizational performance provides an incentive for managers to explore these initiatives. At the same time, government and other bodies in China and elsewhere, which are in a position to create and promote effective institutions, are encouraged to intensify their efforts in that direction. (China; Cross-Border Relations; Institutions; Organization Theory; Trust) Introduction China provides a distinctive context for research on trust, testing the limits of theories emanating from modern Western societies. It is commonly and correctly regarded as a country in which economic relations are strongly dependent on trust while, at the same time, trust is difficult to build there beyond fairly restrictive circles defined by kinship or tight social networks (e.g., Fukuyama 1995, pp. 69–95). This has been seen as problematic, especially for foreign investors wishing to enter the Chinese market (Child 1994, 1998). The fact that China, among emerging economies, is the most important destination of direct investment by foreign companies lends practical significance to the degree of trust that the managers of those companies can invest in local personnel. The nature of trust in China and its impact on organizational behavior therefore present a challenge to our theorizing of the subject, as well as to managerial policies aimed at building trust in that context. Chinese culture is often noted for its particularism and insistence on building up trust through cultivating personal relationships into which it is difficult for foreigners to enter (Trompenaars 1993, Hickson and Pugh 2001). The question is, what gives rise to these distinctive characteristics? Scholars of trust have emphasized that its study needs to be sensitive to social context, including institutional norms and safeguards (Zucker 1986, Lane and Bachmann 1996, Bachmann et al. 2001). Some identify the root cause of the issue in China as the underdevelopment of its institutions compared to most other industrial countries, which permits both capriciousness and corruption (Child and Tse 2001). This helps to explain both why the Chinese do not easily extend trust outside their familiar social circles and why foreigners find it hard to trust the Chinese on general principles as embodied in effective institutions (EIU 1999). China’s entry into the WTO has therefore been welcomed as a commitment to developing such institutions according to international norms, but with reservations about how quickly this can be achieved (China Business Review 2000). China’s institutional limitations differentiate it as a context for trust and promise some new insights. It is possible to draw an analogy between what Zucker (1986, JOHN CHILD AND GUIDO MÖLLERING Contextual Confidence and Active Trust Development 70 ORGANIZATION SCIENCE/Vol. 14, No. 1, January–February 2003 pp. 82ff) describes as “the push for institutional-based trust” in the United States at the end of the 1800s and the changes currently occurring in the modernizing, but arguably not yet fully modern, Chinese society and economy. Unlike Zucker, who had to use historical analysis for the United States, trust researchers today can study and comment upon the developments in China in “real time.” The first aim of this article is to address the institutional perspective on trust with empirical evidence from a survey of 615 Hong Kong firms that manage operations in mainland China. Hong Kong is the largest source of direct investment into China, which entails direct working relationships between the managers of investing firms and their local mainland staff. In accordance with neoinstitutionalist views of trust (e.g., Zucker 1986, Lane and Bachmann 1996) that see trust relationships as dependent on trusters and trustees being embedded in, and making reference to, institutional norms, we test whether a positive perception of Chinese institutions by Hong Kong managers has a positive effect on their trust in local staff. Assuming a positive correlation between trust and performance, which we also test, we are therefore interested in whether the current endeavor of the Chinese authorities to build reliable institutions can be expected to foster business with and within China. A second, and equal, aim of this study entails the conceptual extension of current trust production models. It can be shown that research on trust to date regards the truster as a rather passive figure who reaches (or fails to reach) the state of trust on the basis of “given” factors such as her/his own predisposition, the perceived trustworthiness of the trustee, and/or relevant institutional safeguards. In other words, the context is seen to determine whether a truster trusts. What is overlooked in this perspective, however, is the very real possibility that the truster can influence her/his own context more or less deliberately in favor of trust. Thus we distinguish between contextual confidence and active trust development as paths to trust. We test whether the establishment of personal rapport and the transfer of business practices from the headquarter/parent company enhance trust in the local China staff. This additional research question has important implications because an affirmative result would indicate that not only Chinese authorities, but also the investors themselves can foster (though not guarantee) trust in Chinese business through purposive action. This view is commonsensical to practitioners operating in China, but has not yet been captured by systematic empirical research. In the next section, we lay the conceptual foundations for this article and demonstrate that influential models of trust production have been one-sided in focusing on the degree of contextual confidence that is “given” from the point of view of the truster, while overlooking active trust development through which trust can be “made” or “constructed.” We then present the Chinese context with particular reference to trust and develop hypotheses from this analysis. This is followed by the methods and results of the empirical study. Finally, we discuss the implications of our work for conceptual development, further empirical research, and management practice in China. Contextual Confidence and Active Trust Development For the purposes of this paper, we adopt the widely accepted definition of trust as “a psychological state comprising the intention to accept vulnerability based upon positive expectations of the intentions or behavior of another” (Rousseau et al. 1998, p. 395). A crucial question for trust research has been how this psychological state is produced, and a great amount of research has looked at the “sources,” “foundations,” or “bases” for trust, treating trust as a dependent variable and identifying the various independent variables from which it springs. The underlying mechanism for these models is that the truster somehow processes the “given” independent variables and thus reaches a state of trust or mistrust that can be relatively strong or weak. For Rotter (1967), it is a given personal predisposition as part of the truster’s personality that leads to trust. For Deutsch (1958) and Coleman (1990), trust is a matter of rational choice made by the truster but determined completely by the calculative processing of signals of trustworthiness and subjective probabilities (see also Dasgupta 1988, Gambetta 1988b, Hardin 1993, Williamson 1993, Bacharach and Gambetta 2001). In the rational choice perspective, the truster may influence the quantity and quality of information on which calculations are made, but does not influence the “trust game” as such. Mayer et al. (1995) combine Rotter’s concept of “truster’s propensity” with the rational choice idea of “perceived trustworthiness” and thus achieve a more complete model of trust production that, however, still leaves the truster in as passive a role as before. McAllister (1995) broadens the perspective further by including “affect” as a basis for trust next to “cognition,” but in his model the truster equally merely reacts to trust stimuli (see also Lewis and Weigert 1985 on “emotional trust”). The model developed by Lewicki and Bunker (1996) introduces calculus, knowledge, and identification as three bases for trust that build on each other over time. While this model is more dynamic and dyadic than the JOHN CHILD AND GUIDO MÖLLERING Contextual Confidence and Active Trust Development ORGANIZATION SCIENCE/Vol. 14, No. 1, January–February 2003 71 others, the trusters still remain rather passive because they only move to a higher stage of trust if and when the basis for this happens to develop. Only when trust needs to be repaired do Lewicki and Bunker expect the trusters to actively “work on” trust. Lane and Bachmann’s (1996) research exemplifies neoinstitutionalist approaches in that it emphasizes the role of institutions such as the legal system and trade associations for trust production. While this offers important insights, the potential role of trusters in shaping or building upon such institutions is underplayed. This is also true for the model developed by Zucker (1986). Accordingly, a truster can draw on past experience (“process”), signs of cultural similarity (“characteristics”), and/or institutions to produce the state of trust towards other actors. These bases are clearly relevant, but the truster’s influence on them is hardly discussed (though neither is it denied). It is important to note that Zucker’s analysis entails a notion of historical progression from traditional to modern societies reflecting the processes of industrialization and urbanization in Europe and America during the period of her study: 1840–1920. Interestingly, however, Zucker not only argues convincingly that trust in modern societies relies heavily on institutional bases, but also acknowledges the continued role of traditional sources of trust: prior exchanges and common characteristics. One would expect these traditional trust bases to play a relatively more significant role in modernizing societies like China, where institutions are not as yet effective. The central role of the family in Chinese business can be taken as evidence for this (Redding 1990). In one of the more recent comprehensive theories of trust, Sztompka (1999) includes all three groups of trust foundations identified in the literature reviewed above (as do McKnight et al. 1998): “trusting impulse” (predisposition), “reflected trustworthiness” (cognition), and “trust culture” (institutions). Sztompka discusses the possibility of fostering trust at the government and abstract societal level, yet also underplays the possibility that individual trusters can actively shape the trust foundations and, as a result, make trust more or less likely. In conclusion, we acknowledge the value of the different trust models proposed and the idea that trust has to rest on certain foundations that may be just as diverse as the research aiming to identify them. We are not satisfied, however, with the notion that the truster can only draw on “given” contextual variables (including her/his own personality and cognitive capability). Rather, we wonder whether the truster can play a more (pro)active role in trust production, perhaps especially where the contextual foundations for trust are weak. As a first step in opening up this perspective, it is helpful to consider Luhmann’s claim that “trust has to be achieved within a familiar world” (1988, p. 95; see also Luhmann 1979). In the first instance, this clearly supports the above models to the extent that the trusters have to start from what they know; i.e., what to them is “given.” In the same source, however, Luhmann (1988, pp. 95– 97) goes on to note that actors do not just “happen” to be familiar with something; they play an important part in this through an active process of familiarization. Therefore, if familiarity is the general foundation for trust, then the idea of familiarization should lead us to conceptualize trust development as an activity for the truster rather than just a consequence of given factors. Familiarization could be particularly important when the context is ambiguous or uncertain and does not give confidence. This is the case when an actor enters a “foreign space” and does not know the local history and institutions or to whom they apply. Building on Giddens’s (1994, pp. 186ff) preliminary sketch of “active trust” as requiring intense and intimate communication, we assert that the idea of active trust development may be very relevant for modernizing societies such as China, where the strong institutions commonly associated with modernity are not yet working reliably. If we accept an interpretative epistemology, it follows that the context for trust and the actions of the truster represent a duality anyway (Giddens 1990, Sydow 1998, Möllering 2001). In other words, trust is a social construction: not simply “given” to trusters, but “made” by them as well. Interestingly, somewhat less academicand more practitioner-targeted publications on trust naturally talk about what managers can do to promote trust (e.g., Shea 1987, Handy 1995, Shaw 1997, Zand 1997, Shurtleff 1998). The evidence for “what works” is mostly anecdotal or cursory; however, it appears worthwhile to more systematically examine which kind of activities over and above a “given” context, promote trust. Therefore, in this article, we not only examine the “given” side of trust production (in this case the contextual confidence that Hong Kong managers have in mainland China, especially regarding its legal system, the behavior of officials, and the availability of competent human resources), but we also investigate active trust development by those managers using the examples of personal rapport development, local recruitment, and business practice transfer. Both categories are hypothesized to have positive effects on the trust that Hong Kong managers have in their mainland staff. As simple as this conceptual framework may appear, it extends the scope of trust production models and has important implications. If both positive effects are confirmed, then Chinese authorities should continue, and JOHN CHILD AND GUIDO MÖLLERING Contextual Confidence and Active Trust Development 72 ORGANIZATION SCIENCE/Vol. 14, No. 1, January–February 2003 probably even intensify, their efforts in building effective institutions and rooting out corruption, while foreign investors should be encouraged to start or reinforce active trust development initiatives, instead of just pointing at the current inadequacies of Chinese institutions. We also test the hypothesis that trust improves performance (Sako 1998, Zaheer et al. 1998) which, if confirmed, provides an incentive for management to pursue trustful relations with and within China. Trust in China: Research Hypotheses Contextual Confidence in Institutions China has long experienced difficulties with the institutionalization of legal norms and the administrative system, which persist despite its now considerable economic modernization. Its low levels of institution-based trust have deep roots in the capriciousness of China’s imperial and postimperial rule, the chaos and exploitation that accompanied periodic breakdowns of political and social order, and the lack of clear civil rights, including those of private property (Rodzinski 1983, Fukuyama 1995). Despite the continued institutional reform since 1979 that has begun to evolve a distinct body of legal rules and institutions, evidence suggests that the law in China is often still uncertain in its implementation and subject to political considerations (Lubman 1995, Child and Tse 2001). The difficulties facing managers in reaching trustenabling confidence in institutions and their representatives (“access points,” see Giddens 1990) are due to high levels of inconsistency, arbitrariness, and corruption on the part of officials. For example, managers cannot be certain that the courts will uphold sanctions against untrustworthy behavior by employees or that the payment of accounts receivable by other organizations can be enforced. The problem has been recognized at the highest level: Former Premier Li Peng stated that the struggle against corruption “is a matter of life and death for the nation” (quoted by McDonald 1995, p. 175). While institutions preventing arbitrary behavior may not work consistently in China, the perceived availability of educational institutions and training can at least provide people with reliably certified competencies that should assist managers in placing trust in such people when they employ them and in delegating local organizational responsibility to them. Satisfaction with the availability of competent human resources should therefore strengthen contextual confidence among the managers of investing firms which in turn enhances their trust in local management. China is improving rapidly in the area of institutional development in education, though not at a pace that meets demand (UNDP 1999). More generally, neoinstitutionalist research on trust (Zucker 1986, Lane and Bachmann 1996) has shown that the embeddedness of trusters and trustees in social systems plus the institutional support provided by rules and norms, if and when they are seen as effective, strongly promote trust relations. Contextual confidence thus matches Luhmann’s (1979) concept of “system trust,” a kind of abstract trust (see also Giddens 1990) that can support trustful relations between individuals. These considerations suggest that contextual confidence is likely to be a significant factor in the trust that the managers of foreign investing firms can have in their staff in mainland China. They lead to the following hypotheses: HYPOTHESIS 1. The more confidence managers of foreign investing firms have in the effectiveness of China’s legal system, the stronger their trust in their staff in mainland China. HYPOTHESIS 2. The less arbitrary foreign managers perceive Chinese officials to be, the stronger their trust in their staff in mainland China. HYPOTHESIS 3. The more satisfied foreign managers are with the availability of competent human resources in China, the stronger their trust in their staff in mainland China. Active Trust Development According to this analysis, China is a modernizing, but not yet modern, economy and society in which the extent to which trust in business relations can rely on contextual confidence supported by a comprehensive institutional system will remain variable for some years to come. To leave the analysis at this point, however, would neither be theoretically complete, nor useful for organizational policy. The question arises whether foreign managers (representing investors) have certain possibilities to foster trust in this type of environment through their own actions (see Humphrey 1998 for similar considerations in the context of India). Therefore, the focus of our analysis has to shift to the notion of active trust development. This concerns the innovative ways in which foreign managers can seek to build trust in Chinese partners and staff in a context where they cannot readily benefit from the close personal relationships that form an important traditional basis of trust in China, and cannot necessarily draw on institutional supports either. Because active trust development depends heavily on the truster’s ability to make a leap of faith (see Giddens 1991, Möllering 2001) rather than on confidence in the context, the resulting trust is liable to be rather tentative in nature and thus carry a higher perception of risk. JOHN CHILD AND GUIDO MÖLLERING Contextual Confidence and Active Trust Development ORGANIZATION SCIENCE/Vol. 14, No. 1, January–February 2003 73 One strategy in active trust development is to establish personal rapport with the staff of operations in China, thereby establishing a system of personal relationships both within and outside the business venture. Such personal relations not only enhance the exchange of relevant information, they also motivate the parties involved to behave less opportunistically towards each other, given their mutual knowledge of (and identification with) each other’s interests and problems as well as a reciprocal feeling of responsibility (Cullen et al. 2000). A second strategy is to locally recruit managers (Lassere and Ching 1997). Investors demonstrate that they are willing to increase their vulnerability by relying on local managers rather than sending in expatriates. Ideally this will pay off, as local managers appreciate such signals of trust and reciprocate by using, to the advantage of the investor, the respect and authority they enjoy when dealing with local workforces and business partners. In practice, localization has its hazards (Gamble 2000), and during the recruitment process it appears necessary for building good relationships with local managers to carefully screen for those people who, thanks to their youth and education, possess favorable attitudes and skills from the point of view of the investing company. A third strategy of active trust development involves a company attempting to substitute its own “micro-” institutionalization for the lack of institutional foundations, through importing its familiar practices, rules, and standards into its cross-border operations. The transfer to China of standardized practices (accounting, quality, production, HRM, and so forth) is intended to infuse familiarity on both sides with a view to the expected conduct of local Chinese personnel (Lu and Björkman 1997). For their part, many employees in China working for outside companies look favorably on their employers because the firms tend to behave as rational bureaucracies applying norms of equity and transparency (Child 1994). As a consequence, their Chinese staff are more likely to be trustworthy. This strategy of transferring standardized practices has been advocated quite strongly by western consultants (e.g., Meier et al. 1995), whose discussions connect it with the advocacy of methods to secure greater control over operations in China. Interestingly, introducing control into an unfamiliar context may help to establish the familiarity and predictability that enables trust building. In this sense, trust and control can be seen as complementary rather than as conflicting. We return to this point in the discussion section. The strategies for active trust development outlined above are expressed in the following hypotheses: HYPOTHESIS 4. The more that managers of foreign investing firms use methods to establish personal rapport with the staff of their operations in mainland China, the stronger their trust in that staff. HYPOTHESIS 5. The more that managers of foreign investing firms recruit managers for their operations locally in mainland China, the stronger their trust in local staff. HYPOTHESIS 6. The more that managers of foreign investing firms succeed in transferring their own business practices to operations in mainland China, the stronger their trust in local staff. Control Variables: Length of Time in the Environment and Cultural Similarity Two other potential correlates of trust are treated as control variables. By its very nature, active trust development requires time to be realized. While it is possible that relationships between foreign managers and local staff may deteriorate over a period of time with a resulting decline in trust and that it may take time to recognize untrustworthiness, this does not detract from the point that the development of trust itself requires time, especially when it cannot draw on generalized institutions but only on individual investments. The length of time that a company has had operations in mainland China therefore constitutes a relevant control variable. A second relevant control variable is the degree of cultural similarity that may exist between the managers of firms investing in China and local Chinese staff. In addition to the possibility of belonging to the same extended family, cultural similarity arises with membership of common social networks. Among the Chinese these networks can be quite extensive, taking on clanlike qualities (Boisot and Child 1996). They are typically linked to a common hometown or region. These considerations suggest a positive relationship between cultural similarity and trust. The overall reason for this is that we are more “fluent” in reading the trust-relevant signals, symbols, and patterns of our own culture than others. Signaling theory (Bacharach and Gambetta 2001), symbolic exchange theory (Haas and Deseran 1981), ethnomethodology (Garfinkel 1967), Zucker’s (1986) processand characteristic-based forms of trust and many other approaches lead us to conclude that, as a rule, actors trust others more easily if their cultural background is similar, and most easily if they come from the same background. According to this argument, when managers of foreign investing firms are Hong Kong Chinese, the location of their mainland units in the culturally more contiguous province of Guangdong rather than other parts of China will provide an additional basis for them to trust their local mainland staff. There is a historically strong ethnic, JOHN CHILD AND GUIDO MÖLLERING Contextual Confidence and Active Trust Development 74 ORGANIZATION SCIENCE/Vol. 14, No. 1, January–February 2003 cultural, and language linkage between Hong Kong and Guangdong. The two territories share large Cantonese and Chiu Chow communities. About 95% of the residents of Hong Kong are Cantonese-speaking, and the majority of Hong Kong people were either born or are descended from counties and villages in Guangdong Province (Mondejar 1994). As many as 80% of Hong Kong’s Chinese population have relatives in Guangdong (Hobday 1995). Given that the foreign investing firms studied here are from Hong Kong, these considerations suggest that the cultural similarity between Hong Kong and Guangdong should be treated as a further control variable. Empirical studies into expatriate experiences in mainland China do, however, present a serious qualification to this. Rather against expectation, it has been found that cultural similarity can introduce strains into the relations between expatriate and local personnel. Selmer (1998) comments that “paradoxically, the common Chinese heritage seems to aggravate the adjustment problems of Hong Kong managers in China instead of facilitating acclimatization” (pp. 158ff). The tolerance of local staff for differences in Hong Kong managers’ style, compensation, and privileges appears to be reduced by the perception that they are members of the same ethnic culture, and this can cause resentment and hostility. We also hypothesize (see Hypothesis 7) that the ability to develop higher levels of trust in the staff of crossborder organizational affiliates located in China will enhance the performance of those units. This assumption is consistent with academic thinking (Sako 1998, Steensma and Lyles 2000, Zaheer et al. 1998), and it also informs the importance that managers commonly attach to the generation of trust within and between organizations (Kramer and Tyler 1996, Lane and Bachmann 1998). For a cautionary note in this regard, however, see Kern (1998) on the detrimental effects of a “surfeit of trust,” such as complacency and lack of constructive criticism. HYPOTHESIS 7. The stronger the trust of Hong Kong managers in their mainland China staff, the more satisfied they will be with the performance of their China operations and the faster the growth of such operations will be in terms of sales and profit.