A West–East Perspective
Edited by Hans-Hermann Höhmann and Friederike Welter
Chapter 13: Trust in Small-firm Business Networks in East and West Germany
Teemu Kautonen and Friederike Welter INTRODUCTION Research has established that networks play an important role during the establishment, development and growth of small businesses (Greve 1995; Shaw and Conway 2000). This chapter focuses on the governance of smallfirm business networks. Business networks refer to the aggregate of continuous exchange and other co-operative relations that a firm is engaged in with other firms. Therefore, relations within business networks consist of series of transactions possessing a history and a future (Håkansson and Snehota 1995). The governance discussion, on the other hand, addresses the problem of achieving effective co-ordination at minimal transaction costs while accounting for bounded rationality, uncertainty and asset specificity, which give rise to a risk of opportunism (Williamson 1985). The fundamental governance issue is therefore on what basis a firm expects co-operative as opposed to opportunistic behaviour from the partner in a network relation and at what perceived risk. In this context governance mechanisms play a central role. The relation of trust to formal contracts and other forms of formal control has been a central topic in studies of the governance of inter-firm relations and networks (for example, Dyer 1997; Klein Woolthuis et al. 2002; Lorenz 1988). This chapter focuses on the role of trust as a substitute and complement to formal contracts in small-firm business networks. Hence, trust is defined as a broad category that subsumes different forms of informal governance in business networks, that is, those forms that cannot be enforced through the courts. Trust is an...
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