O ambiente de complexidade na China

8/10/2019 O ambiente de complexidade na China

1/17

Organizations as Adaptive Systems in Complex Environments: The Case of China

Author(s): Max Boisot and John Child

Source: Organization Science, Vol. 10, No. 3, Special Issue: Application of Complexity Theory

to Organization Science, (May - Jun., 1999), pp. 237-252

Published by: INFORMS

Stable URL: http://www.jstor.org/stable/2640330

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2/17

Organizations

s

daptive

Systems

in Complex

Environments h e a s e o h i n a

Max

Boisot

*

John Child

Department of Strategic Management, ESADE, P.O. Box 144, 08870,

Sitges, Barcelona, Spain

The

Judge Institute of Management Studies, Cambridge University, TrumpingtonStreet, Cambridge CB2 JAG,

United

Kingdom

Abstract

This paper treats organizations as adaptive systems that have to

match the complexity of

their environments. The nature of this

complexity is analyzed by

linking an institutional Information-

Space (I-Space) framework to the work of complexity theorists.

The I-Space framework

identifies the codification, abstraction,

and diffusion of information

as cultural attributes. Codification

involves the assignment of

data to categories, thus giving them

form. Abstraction involves a reduction in the number of cate-

gories

to which

data needs

to

be assigned for a phenomenon to

be

apprehended. Information is diffused through populations of

data-processing agents, thus

constituting the

diffusion

dimen-

sion. Complexity theorists

have identified the stability and

structure of algorithmic information complexity

in

a way that

corresponds to levels of codification

and

abstraction.

Their

identification of system partsandthe richness of cross-coupling

draws attention to the fabric of

information diffusion.

We

dis-

cuss two modes of adaptation

to complex environments: com-

plexity reduction and complexity absorption. Complexity re-

duction entails

getting

to

understandthe complexity and acting

on it

directly, including attempts

at environmental

enactment.

Complexity absorption entails creating options and risk-

hedging strategies, often

through alliances.

The analysis, and its

practical utility,

is

illustrated

with

ref-

erence to

China,

the

world's largest social system. Historical

factors have

shaped

the

nature

of

complexity

in

China, giving

it very different characteristics than those typical of Western

industrial countries. Its

organizations and other social units have

correspondingly handled

this

complexity through

a

strategy

of

absorption rather than the reduction

strategy characteristic

of

Western

societies. Western firms

operating

in China therefore

face a choice

between

maintaining

their norms of

complexity

reduction

or

adopting a

strategy

of

complexity absorption

that

is

more consistent with Chinese culture. The specifics of these

policy alternatives are

explored, together

with their

advantages

and

disadvantages.

The

paper concludes

with the outlines of a

possible agenda

for

future

research, focusing

on the

investigation

of

complexity-

handlingmodes and the contingencieswhich may bear upon

the choice between hem.

(Adaptation; China; Complexity; Organizations)

Introduction

As a theme for organizational scholars, complexity

has

undergone some important

transformations in recent

years.

It

figures

in

conference headings and, increasingly,

in the popular literature as a managerial topic in its own

right (Waldrop 1992, Lewin

1993, Casti 1994). Organi-

zational complexity was discussed

in

the professional

lit-

erature of the 1960s and 1970s, although not always ex-

plicitly

under that

heading

(Emery and Trist 1969, Etzioni

1961, Perrow 1970, Simon 1969, Bums and Stalker

1961). Organizational complexity circa 1970, however,

has a very different intellectual

flavour than what is of-

fered today.

Developments

in the nonlinear sciences, as well

as

in

biology

and in

physics,

have transformed the

subject.

Much

of the work

coming

out

of

research centres

such as

the

Santa

Fe Institute

in

New Mexico,

for

example,

with

its

emphasis

on

emergence

and far-from-equilibriumphe-

nomena, has radically different implications for

how we

approach complex organizational

processes than the

re-

search of three decades ago, concerned

as it was then with

abberations

from

stability

and predictability.

From the new perspective, organizationsare treated as

instances of adaptive systems (Holland 1975), that is, sys-

tems that have to

match in a

nontrivial

way

the

complex-

ity

of their environment (Ross Ashby 1954,

Wiener

1961), either to

achieve an

appropriate

measure of fit

with

it or to secure for themselves

a

degree of autonomy with

1047-703919911003/0237/$05.00

Copyright

C)

1999, Institute or OperationsResearch ORGANIZATION SCIENCE/Vol. 10, No. 3, May-June 1999

and the ManagementSciences pp. 237-252


3/17

MAX BOISOT AND JOHN CHILD Organizations as Adaptive Systems

respect to whatever constraints it might

impose (Varela

et al. 1991).

Does the fact that human organizations

are also inter-

pretative systems (Weick 1995), that they

function

partly

on the basis of internal representations

of the environ-

ments that they respond to, place them beyond the ana-

lytical reach of the new sciences of complexity? For, they

adapt,

if

at all,

to

the complexity

as their decision

makers

perceive

and

interpret

it rather than to

any objectively

given complexity

in

their environment.

And, given an

appropriate

set of

representational schemata, perceived

complexity

can

often be

significantly

reduced. Further-

more, they

also

have

the

capacity

to enact

some of

the

representations that they construct for themselves, thus

modifying

their

environmentproactively

as well as

adapt-

ing to it (Child 1972, Giddens 1984, Weick 1995). The

joint

effects

of

interpretation

and enactment have in the

past served to distinguish the social

from the natural

sci-

ences (Dilthey 1883/1988, Weber 1964).

The new approach to complexity

is

tending

to blur

that

distinction (Morin 1977).

Both

types

of

science

view

complexity

as

arising

out

of the number of

elements

that

go

to

make

up

a

system-social

or

natural-and the na-

ture of the interactions that

take

place

between the ele-

ments.

An

important

distinction

between

natural and

so-

cial systems resides

in

the tightness

of their

coupling.

Both might

be

open, but

social

systems

are

more

loosely

coupled

than

natural

systems

and thus

inherently

more

complex.

What do we mean

by

this?

Simply

that

in

the

former

case,

the

interaction between

the elements is

pri-

marily informational

rather than

energetic.

The

trade-off

between energy and informationis also visible withinnat-

uralsystems themselves.

The

binding energy

between nu-

clear

particles,

for

example,

is of the order

of

140 million

electronvolts,

that

between

the atoms that make

up

a mol-

ecule is

of the order

of five

million

electronvolts,

and that

between molecules is half an electronvolt. Clearly, the

combinatorial

power

of molecules-and

by implication,

the information content of an

assemblage

of molecules-

is orders of

magnitude greater

than that

of atoms or

sub-

atomic

particles.

The

degree

of

openness

of a

system

is

thus

partly

a reflection of its combinatorial

power

and so

is its

degree

of

complexity.

Finally,

the

complexity

of the environment

that

orga-

nizations are requiredto enact or adaptto reflects human

cultural

activity

and level of

development.

These

shape

both

the forces

that an organization

must

respond

to

as

well as the

representations

and behavioural

dispositions

through

which the

response

is channelled.

Much

evolutionary theorizing points

to

systems

evolv-

ing phylogenetically

to handle ever

more

complexity

over

time

(Schuster 1996).

Thus

in the case of

living systems,

for example, single-cell organisms give way to multicell-

ular structures,

and the cells

themselves grow and acquire

a more complex internal structure-i.e., eukaryotic cells

emerge from prokaryoticones. In this way and over time,

organisms grow

and

differentiate internally, acquiring

so-

phisticated data-processing capabilities as they do so.

With growthand specialization comes an abilityto handle

an ever wider and varied range of internal representations

of the external environment. As evolving organisms en-

hance their capacity

to

match the variety of the environ-

ments

they

encounter-for our

purposes, variety

offers a

good proxy

measure

of

complexity-so

do their survival

chances and reproductive fitness improve (Ross Ashby

1954).

Interpretative systems, however, have two quite dis-

tinct ways of handling the complexity that underlies the

variety:

(a) They

can either reduce it

through getting

to under-

stand it and acting on it directly. That is, they elicit the

most

appropriatesingle representation

of that

variety

and

summon

up

an

adapted response

to

match

it. Such

a strat-

egy

leads to

specialization

informed

by

relevant

codifi-

cation and abstraction

of the

phenomenon.

(b)

Or

they

can absorb it

through

the creation

of

op-

tions and

risk-hedging strategies.

That

is, they

can hold

multiple

and sometimes

conflicting representations

of en-

vironmental

variety, retaining

in their behavioural

rep-

ertoire

a

range

of

responses,

each of which

operates

at a

lower level of specialization. This approach develops be-

havioural plasticity.

There

may be less goodness of fit

between

any given response

and the state

of nature to

which it needs to be

matched,

but the

range

of environ-

mental

contingencies

that

an

organism

can deal with

in

this

way

is

greater

than

in

a

regime

of

specialization.

It

may

endeavour to enhance its

capability

to deal with a

wider

range

of

environmental contingencies by cooper-

ating closely

with a number

of other

organisms,

which

can assist with information and

interpretation

and share

risk.

These

strategies only partially overlap

with

those of

uncertainty

reduction and

absorption (Weick 1995). They

correspond

to two distinct

approaches to learning first

identified

by

Holland

(1975)

in

his work

on

complex

adaptive systems and subsequently elaboratedby March

(1991)

and

March

and

Levinthal (1993)

in an

organiza-

tion context:

exploitative

and

exploratory learning.

Each

of these

two

approaches

to

learning distinctively shapes

the

way

that data is

processed

and shared

among

the data-

processing agents

that make

up

an

organization's

social

system.

Since the

processing

and

sharing

of data are the

constitutive activities that

make

up

a cultural

process

238 ORGANIZATION CIENCE/Vol. 10, No. 3, May-June 1999


4/17

MAX BOISOT AND

JOHN CHILD Organizations as Adaptive Systems

(Boisot 1995, Schein

1992),

we would

expect

to

see or-

ganizations,

and

societies,

with

different cultures

vary

in

the extent to which

they

choose to reduce or absorb the

complexity that confronts them.

In

what follows, we develop the

argument that com-

plexity reduction and

complexity absorption represent

distinct cultural strategies adopted by adaptive systems

(Holland 1975).

This

is first addressed

analytically by ap-

plying an

Information-Space (I-Space) framework

(Boisot 1995) and linking this to the work of

complexity

theorists.

We

then move on to illustrate the

argument

with

reference to

China. China is the world's

largest

social

system, and one whose form of

complexity, and

custom-

ary modes of

handling it,

were

not familiar

to

the Western

firms

now operating there. We

analyze

the

choice these

organizations have faced between

maintaining

Western

norms of

complexity

reduction or

adopting

a

strategy of

complexity absorption that is more consistent with Chi-

nese culture. The

paper

concludes with the outlines of

a

possible agenda for future research, focusing on the in-

vestigation

of

complexity-handling

modes

and the con-

tingencies which

may

bear

upon

the

choice between

them.

Its

contribution is

thereforeby

way

of

an

explora-

tory exercise in

theory-building.

The

Framework

The

I-Space is an augmented

version

of the

framework

that we have used to

analyse different

aspects

of China's

modernization

(Boisot

and Child

1988, 1996).

The

origi-

nal

framework was

labelled

the Culture

Space

or

C-

Space.

The

C-Space

took

the extent to

which

data could

be shared in a

given population to be

a

function of how

far it

could be

codified,

that

is, compressed

into codes

(Boisot 1986).

Financial

information that

is

codified into

prices

and

quantities,

for

example,

can be shared more

readily

in

a

population

of market

players

than

information

that

is

replete

with

qualitative nuance.

Codification, however,

can be

greatly

facilitated

by

an

appreciation

of

structure. Structure abstracts

from

phe-

nomena

those

regularities

that

underpin

the

form

they

adopt, very

much in

keeping

with

Weber's

(1964)

use of

the ideal

type.

The

I-Space, therefore,

takes the

artic-

ulation and

sharing

of

experience

to

be

a

joint product

of

codification and

abstraction,

the twin

poles

of a structur-

ation

process through

which a

world

is first

created and

then

objectified (Giddens 1984).

Codification involves the

assignment

of data to cate-

gories-i.e.,

the

giving

of

form

or

formalization.

A

phe-

nomenon is well codified when the basis of

assignment

is clear

and

it can

be

performed

speedily

and

unproble-

matically-i.e.,

when black is black and

white

is

white

and no shades of

grey

emerge

to

cloud the

judgment.

Abstraction, by contrast, involves a reduction

in the

number of categories to which data needs to be assigned

for

a

phenomenon to

be

apprehended-i.e.,

it

involves a

discernment of the structures that underpin phenomena.

These structuresare multiple and often contradictory,one

of the reasons why the process of structuration has an

irreducibly hypothetical character.

Codification

and abstraction are distinct

strategies

for

economizing on data-processing

efforts.

They are,

how-

ever, mutually reinforcing (see Figure 1). While codifi-

cation-the giving of form to phenomena and catego-

ries-reduces the quantity of data that needs to be

processed in order to assign a given phenomenon to ap-

propriatecategories, abstraction saves on data processing

by reducing the number of categories that need to be con-

sidered

in

the

first

place-i.e., it facilitates the discern-

ment of structure.Both codification and

abstraction

have

the effect of

reducing

the

complexity

of

data-processing

tasks. Mapping Perrow's (1970) two-dimensional frame-

work for analyzing task complexity onto our two dimen-

sions

of codification and

abstraction

makes this

apparent

(see Figure 2).

We can establish an

equivalence

between

Perrow's dimensions

of

task complexity and our own as

follows:

The

Codification Dimension

Few Exceptions

=

Codified-i.e.,

a

speedy assign-

ment of

phenomena

to

categories implies

that the task is

routinizeable and has few

exceptions.

Many Exceptions

=

Uncodified-i.e.,

a slow

assign-

ment

of

phenomena

to

categories implies

that the task has

too

many exceptions

to be

easily

routinizable.

TheAbstraction Dimension

Understood

=

Abstract-i.e.,

one

apprehends

the

structurethat underlies

a

given phenomenon.

Figure

1

Structuring

Information

Codified

Uncodifled

Concrete Abstract

ORGANIZATION CIENCE/Vol. 10, No. 3,

May-June

1999

239


5/17

MAX

BOISOT AND JOHN CHILD

Organizations s AdaptiveSystems

Figure 2 Locating

Perrow's Typology in the Framework

Few Exceptions

a) Perrows Typology

Many Exceptions

Not Understood Understood

Codified

Few

Exceptions

MINIMUM

COMPLEXITY

Not Understood Understood b) Perrow's Typology in our Framework

MAXIMUM

COMPLEXITY

Uncodified

Many

Exceptions

Concrete

Abstract

Not

understood

=

Concrete-i.e., one does not

appre-

hend the

structurehatunderliesa

given phenomenon.

In

line with the

propositions hat we

earlier

derived

from

theC-Space, he

I-Space

takesthecodification

nd

abstraction f data o facilitate ts

sharing

among

a

popu-

lation of data-processing gents. Populationsof data-

processing gents,

uitably

defined,

make

up

the

diffusion

dimensionof

Figure

3.

Through

what ransactional

truc-

turesthese interact

with each

other

will

be

partlydeter-

mined

by

the

way

thatdataflows

along

the

diffusion

di-

mension.

Transactionaltructures

re

n

fact

implicit

n

Perrow'

typology,structureshat affect

the natureof

connections

possible

among

he

coupled

agents

thatmake

up

the

dif-

fusion

dimensionof the I-Space.The Diffusion

dimen-

sion

allows us to

specify

the

percentage

f

agents

sharing

a

given item of

data. The question that

might

then

be

asked is how

does such

sharing

of data affect the

inter-

actionamongagents?Althoughwe maywish to interpret

the

question

at the level of

social

systems,

the

issue

of

how

interactions

mong

data-processinggents

givesrise

to stable

organized

patterns urnsout

to be a general

one

and can be

addressed

ndependently

f a

given

level

or

area

of

application.

Stable nteraction

atterns

n

neural

networks,

or

example,

may

be the result of

Hebbian

learning Hebb

1949), a process n

which the

strength f

Figure 3 The Diffusion Curve

in the

I-Space

ABSTRAC

T

DIFFUSED

CONCRETE

UNDIFFUSED

connections

etweendata

processing

nodes-at

the

social

level we may call them agents-is a functionof (a)cou-

pling frequency

and

(b) coupling

ime.

In

sum,

n the

I-Space,

codification

ndabstraction

re

mutually reinforcing

activities and

both, working

to-

gether,

facilitate

he

process

of diffusion.

The curve of

Figure

3 thus

establishes

n

a

schematic orm he

founding

proposition

or our

analysis,namely,

hatcodification nd

abstraction

ncrease

he number f

data-processinggents

240

ORGANIZATION

CIENCE/VOl.

0, No. 3,

May-June

1999


6/17


that can be reached,

per unit of time, with a given mes-

sage. The reason s intuitivelyobvious.

Codification

nd

abstraction educe

an agent'sdata-processingoad by

ex-

tracting nformation-about

form and structure-from

data.

Messages

that

are codifiedand abstract re thus

n-

herently aster

to encode and transmit han those

which

arenot. Whether uchmessages

areeffectivelydealtwith

subsequently

y recipientsdepends

on how far they re-

quirea

sharedcontext for their

interpretationShannon

and

Weaver

1949,

Weick

1995).

The

I-Space

thus relates the flow of knowledge

and

informationwithina social system

to the structure f the

data hatact as

their

substrate.Clearly,

he characteristics

of such flows will condition he interactionshatarepos-

sible between agents.

Both the speed and frequencyof

interactionwill

reflect the time and effort required

or

transactionally

elevantknowledge o flow. Figure

4

lo-

cates

four nstitutionalized

ransactionaltructuresn the

I-Space as a functionof the knowledge lows thatchar-

acterizes hem.The cultural haracteristicsf thesetrans-

actional tructures re

summarized

n Table 1.

Our earlier

hypotheses(Boisot

and

Child 1996) sug-

gestedthat there had to be a goodnessof

fit

between

a

culture's

preferred

pproach

o

knowledge

lows andthe

transactionaltructureshat t madeuse

of. We examined

China'sattempt

at

modernizing

rom this

perspective,

noting that

the

country

could

plausibly

be interpreteds

modernizing

n

the lower regions

of the

C-Space.

This

entaileda decentralizationrom fiefs to clans

in

the con-

text of

modernization.

We called the

resulting

cultural

order Network

Capitalism.

We

suggested

hatNetwork

and MarketCapitalismeflect wo distinctwaysin which

Chinese

and

Westerncultures

espectively

deal with the

challenge

of

complexity.

Ourbelief

is that market

api-

talismreflectsa cultural

reference

or complexity

educ-

tion and

thatnetwork

apitalism

s more

strongly

attuned

to

complexityabsorption.

To progress

he discussion,however,

we first need to

explore

how

complexitymight

best be

interpreted

n the

I-Space.We turn o this next

with

reference o the work

of

complexity

heorists.

Complexityin the I-Space

We can

identify

two

quite

different

yet complementary

approaches

o

complexity.

The

first,

associated

with

the

work

of

Kolgomorov

1965)

and Chaitin

1974),

origi-

nates

n the

theory

of

computation

nd

goes by

the

name

of

Algorithmic

Information Complexity

or

AIC.

It mea-

sures

complexity

as

a functionof the

shortest

rogramme

that

will

describe

a

task or a

phenomenon.

Given that

n

Figure

4

Institutions

in the

I-Space

*

Mark

* Bureaucraies_

CODIFIED

ABSTRACT

DIFFUSED

CONCRETE

UNDIFFUSED

the absenceof compressible

egularities,he shortest

ro-

grammes coterminouswiththe phenomenatself, Gell-

Man,

amongothers,has observed hat

AIC equates om-

plexity with randomness.

He suggests nsteada measure

which

he labels effective complexity (Gell-Mann

1995)

and thatequatescomplexity

with the size of the shortest

programme

hatdescribes he regularities

n

a given

phe-

nomenon. The second approach

o complexity

draws

from

biology

and studiesof artificial

ife (Holland1975,

Kauffman

1993,

Langton1992, Ray

1992).

It defines

complexity

n termsof the

density

and variability

f in-

teractions hat take

place

among coupledagents (Varela

et

al.

1991).

The two

approaches omplement

ach

other

in the sense thatthe first ocuses on the

contentof infor-

mation lowsamongagentsand the secondon the struc-

ture of the interactions hat such

flows allow

among

agents.

The

first,

n effect, measures

ognitivecomplex-

ity,

whereas he second

measureswhat we

might

call

re-

lational

complexity.

If

we now

try

to

map

hesetwo measures

f

complexity

on to

the

I-Space,

t becomes clear

that

the

codification

and abstraction

imensionsof the

space

offer a

measure

of

cognitivecomplexity,

whereas

the diffusion dimen-

sion,

through

he

transactional

tructures

hat it

engen-

ders,

allows us to capture

relational

complexity.

Rela-

tional

complexity

is best

understood

hrough

a brief

overviewof the

work of Stuart

Kauffman.

Kauffman, uildingontheworkof Wright 1931),con-

structs itness andscapes-i.e., any

well-defined

roperty

in its distribution

cross

an

ensemble-using

what he

terms NK Boolean

networks,

hat

is,

nodes interlinked

with

varying degrees

of

density.

Boolean networks

are

nonequilibrium

pen thermodynamic

ystems.

In such

networks,

N

refers

to

the

number

of

parts

n

the

system

under

consideration-genes

in a

genotype,

amino acids

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Table

1

Institutions

in

the

I-Space

Undiffused Information

Diffused Information

Codified Information

Bureaucracies Markets

*

Informationdiffusion limited and under central control

*

Informationwidely diffused, no control

*

Relationships impersonal and hierarchical

*

Relationships impersonal and competitive

*

Submission to superordinate goals

*

No superordinate goals-each one for himself

*

Hierarchical coordination

*

Horizontal coordination through self-regulation

*

No

necessity to

share values

and beliefs

*

No

necessity

to

share values and beliefs

Uncodified Information

Fiefs Clans

*

Informationdiffusion

limited

by

lack of

codification

to

*

Information s

diffused but still

limited

by

lack

of codification to

face-to-face relationship

face-to-face

relationships

*

Relationships personal and hierarchical (feudal/charismatic)

*

Relationships personal but

nonhierarchical

*

Submission to

superordinate goals

* Goals are

shared

through

a

process

of

negotiation

*

Hierarchical coordination

*

Horizontal

coordination through negotiation

* Necessity to share values and beliefs

*

Necessity to share values and beliefs

in a protein, etc. Each part makes a fitness contribution

which depends upon that part and on

K

other

parts among

the

N. In

effect,

K reflects how

richly

cross-coupled the

system is. A geneticist

would

say that

it measures the

richness of epistatic interactions among system compo-

nents (Kauffman 1993). With K

=

0

for example, there

are

no

epistatic interactions. With

K = N - 1, on the

other hand, each node

in the

network

is

epistatically af-

fected by every other

node and

we obtain

the largest value

for K.

The

behaviour

of the links between nodes can

be

tuned

by employing a control parameter,P.

In

this way they

can be made to exhibit order, chaos, or a phase transition

between those

two states that is labelled the

edge

of

chaos. It is in this phase transition that complex behav-

iour emerges. If,

for

example,

we let P be the fractionof

the

2K

positions

in

the

Boolean function with either

a

1

response or a

0

response, whichever is the larger fraction,

P will

range

from 0.5 to

1.0.

The deviation

of

P

above

0.5 then measures

the internal

homogeneity

of

the

Boolean function.

The critical

value,

PC,

dentifies the lo-

cus of a

phase

transition

in the

behaviour

of a

dynamical

system. In our scheme, a high value for P-i.e., close to

1.0-reflects

a

high degree

of

stability

and structure and

a low

level

of AIC. It thus

corresponds

to

an

information

environment

high

in

codification

and

abstraction.

Low

P,

by contrast,

that

is,

P close to

0.5,

is

low in

stability

and

structure

and

high

in AIC.

It

corresponds

to

an informa-

tion environment

low in codification and

abstraction.

P,

therefore is a

reflection of

cognitive complexity.

The

higher the value

of P, the lower the level of cognitive

complexity.

In

discussing his Boolean

networks, Kauffman ob-

serves:

As systems

with

many parts increase both the

number of these

parts

and the

richness of interactions

among the parts, it is typ-

ical that the number of conflicting

design constraints among the

parts increases

rapidly. These conflicting constraints imply

that

optimization can attain

only

ever

poorer compromises.

Further,

it is clear that conflicting constraints are a very general limit in

adaptive

evolution. Each part

of an

adaptive system costs some-

thing.

For

example,

additional

genes

and

proteins require

met-

abolic

energy (Kauffman 1993, pp. 53-54).

Beyond a certain

point,

Kauffman

points out, total costs

will

exceed total fitness, and

increasing either N or K will

no

longer

be

profitable.

The limits of

complexity

have

been attained.

Beyond the point the

system undergoes

a

phase

transition

into the chaotic regime.

A

high

value

for our control

parameter, P, however,

allows

higher

values to be achieved for

K or N before a

phase

transition occurs than do lower

values of P. An-

otherway

of

saying

this is that there is a

trade-off between

cognitive and relationalcomplexity. A low degree of cog-

nitive

complexity

allows one to handle

a

higher

degree

of

relational

complexity

and vice versa

without under-

going

a

phase

transition

into chaos. In

other

words,

cod-

ification and

abstraction facilitate the orderly

processing

of information

among larger

numbers of

interactingper-

sons.

Table 2

presents

the

complexity

characteristics of our

242

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MAX BOISOT

AND

JOHN

CHILD

Organizations as

Adaptive Systems

Table

2

The

Complexity

of

Transactional

Structures

Overall

Relational

Cognitive

Transactional

Complexity

Complexity

Complexity

Markets High (High K) Low (High P) Medium

Bureaucracies

Low

(Low

K)

Low

(High P)

Low

Fiefs

Low

(Low K)

High (Low

P)

Medium

Clans

Medium

(Medium

K)

High (Low

P)

High

four

transactional

structures,

relating

these to K and P

in

Kauffman's

scheme. N

specifies the number

of

agents to

be located in a

given

I-Space

and hence

establishes the

size

of

its

diffusion

dimension.

It defines

the

size of

the

agent

population

on

which K and P

will

operate and it is

set

by

identifying those

agents

who

might

be

candidates

for involvement in transactionalarrangements.Once an

I-Space has

been

created,

however,

N

becomes

fixed.

In

Table

2, we

take

markets

to be

characterized

by

high

K,

bureaucraciesand fiefs

by low

K,

and

clans

by medium

K.

It

might

at

first

sight

seem

surprising

to

impute

a

low

K to

bureaucracies.

After

all,

rational-legal

bureaucracies

are

associated with

an

increase in

the size of

organiza-

tions.

While this is

true,

it is

also

the case

that

by

hier-

archically

ordering

reporting

relationships, bureaucracies

severely restrict the

number of

agents that one

is

required

to

interact

with:

one

superior and

usually

a

few

subordi-

nates.

Having

established

some initial

correspondence be-

tween Kauffman's variables and our own, we can now

build

on

his

analysis

to

tentively partition the

I-Space into

the

three

phases

that he

identifies

namely,

the

Ordered,

the

Complex,

and

the

Chaotic.

Since,

in

contrast to

Kauffman, our

partitioningexercise is

not

derived

from

a

series of

simulations or

from

the use

of

Boolean

net-

works, it

must of

necessity remain

schematic. It is

shown

in

Figure 5.

Although it

is not

possible

to

establish

more than

an

approximate

correspondence

between the

location

of

the

three

phases

and those

of the

transactional

structures

of

Figure

4,

it

is at

least

intuitively

plausible to

argue

that

bureaucracies

seek out

the

stabilityof the

ordered

regime

andthatthe otherthreetransactional ormsrepresentthree

distinct

responses to

different

mixes of

cognitive and re-

lational

complexity.

Markets,

for

example,

have

banished

cognitive

complexity by

codifying

everything into an

ab-

stract set

of

prices but

have to

deal

with the

relational

complexity

of

large

numbers

bargaining

(Williamson

1975,

Hayek

1945).

Interactions

between

players

may be

simple (high

P)

but

codified

and

abstract

information

Figure 5

Phase

Transitions

in the

I-Space

CODI'MD

E

REG

9 Bur.atucrscle

CM4O1IC

REGIME

UNCOOPDIF

DIFUSED

flows

favours

epistatic

nteractions n a

large

scale

(high

K). Theassumption f self-regulation ives thistransac-

tional form

homeostatic

tability.

Fiefs, in

contrast o

markets,deal

with

small

numbers

(low

K), and

usuallyon

the

basis of

loyalty

anda

complex

set of

reciprocal

bligations.They

do

so,

however,

n an

environmentn

which

cognitive

complexity s high

(low

P).

Finally,

clans

appear

o

exhibit

the

highest

level of

complexity

of

all

our

transactional

tructures.

Although

the

numbers

nvolvedare

smaller han

hose

required or

efficient

markets

hey

are

higherthan in

fiefs

(medium

K).Cognitive

omplexity,

however,

s

high (low

P).

Here,

overall

transactional

omplexity

is

not

the

product of

largenumbersbargaining ut of a complexset of inter-

actions

among

a

sizeable

numberof

players.When

the

numbers

hat

participate n

clan

transactions

o

up, or

cognitive

andrelational

omplexity

are

increased,

lans

are

prone

to

slip into

chaotic

behaviour.For

that

reason

theymustbe

considered

n

edgeof

chaos

phenomenon

(Langton

1992).

Cultures,

ike

individuals,

ary

in

the

extent to

which

they

need

order

and

stability

n their

commercewith

re-

ality (Hofstede

1980, Boisot

1995). The

seeking

of

order

and

stabilitycan be

interpreted

n

the

I-Space

as a

move

from

whatever

region

one finds

oneself in

towards

he

point

0 of

Figure 5

(top

left-hand

corner).Point 0

thus

acts as an attractorn the I-Spaceandoffers an escape

from

chaos.

But how

far do

individualsor

cultures

actu-

ally

want

to

escape?For

instance,

do

theywantto

move

wholesale

nto the

ordered

egime?

Or

might

they

settle

for

the

excitementsof

the

complex

regime?Much

will

depend

on

how

they

feel

about

complexityand

the un-

certainty

hat

it creates.

Attractorsother

than

point

0

might

be on

offer.

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MAX BOISOT

AND JOHN

CHILD Organizations as Adaptive Systems

Point 0 in the orderedregime is a world in which events

are predictable and

from

which uncertainty has been ban-

ished. It is the preferred location of those who seek tran-

quility, hence its attractiveness to monopolists

for whom

the best of all monopoly profits is a quiet life (Hicks

1935, p. 8). The complex regime is more difficultto man-

age, with the degree of difficulty rising in line

with

the

level

of

complexity. Here, the

world

is perceived

as a

discernible set of alternative possibilities that

can be re-

sponded to but which require a repertoire of flexible re-

sponses. Contingencies

can

be

managed

but

rarely opti-

mally.

In

the

chaotic

regime, nothing

stable can be

discerned and hence

nothing

can be

managed.

It can

only

be allowed for in the hope thatorganized complexity

will

emerge

from chaotic

processes

themselves.

Our discussion

of

Kauffman

suggests

two

ways

of

moving

towards

point

0

in

the

I-Space,

whether from the

chaotic towards the

complex regime,

or

from the

complex

towards the orderedregime:

(1) Reduce cognitive complexity through

acts of cod-

ification and abstraction-i.e.,

aim for

a

high

P.

(2) Reduce relational complexity by keeping

the num-

bers

of

transacting agents down-i.e.,

aim for

a low

K.

Of

course,

it

has

to

be

recognized

that

to

the extent that

relational complexity is a productof the density

of

inter-

action

among agents

as

well as of

the

number

of

partici-

pating agents,

it will be

reduced

both

by keeping cogni-

tive

complexity down-i.e., establishing

codified and

abstract rules of interaction among agents-as

well as

by

limiting the number of agents that

can

interact.

Both

strategies, however,

involve

complexity

reduc-

tion. The first strategymoves one up the I-space towards

greater codification

and

abstraction.

It allows one to

deal

with

large

numbers but

only by keeping

transactions

cog-

nitively simple.

Where the numbers

are

limited

we

find

ourselves

in

the ordered

regimes

characteristicof bureau-

cracies;

where

numbers

are not

limited

we

find

ourselves

in the medium

complex regimes

characteristic of market

processes.

The

second strategy moves one towards

the left

in

the

I-Space by reducing

the number of

agents

that

one has to

deal with. Where

interactions among agents

are

cogni-

tively simple

we find

ourselves

once more in the ordered

regime

of bureaucracies.

Where, however, they

are

cog-

nitively complex, we find ourselves in the medium com-

plex regime characteristic of fiefs.

Yet

as

we have

already argued, reducing complexity

is

only

one of the

ways

available to

us for

dealing

with it.

For it can also be absorbed. This is the transactionalstrat-

egy

we

associate

with a clan order. It can

only

function

under conditions

of trust

and shared values

where

the

risks associated

with

uncertainty

and

ambiguity

can

be

pooled

among agents and where mutual adjustments are

possible.

Clans are higher in entropy production than either the

ordered regime of

bureaucracies

or

the complex regimes

of markets or fiefs-that is, they consume more time and

social resources in order to maintainthemselves in a state

of dynamic equilibrium-but in

compensation, they

offer

a

greater potential

for

adaptation

and renewal.

Ourgeneral

proposition

is that

culturesvary

in

how far

they aim to reduce

complexity as

a

whole, but to the ex-

tent that

they

do so

they

will

reduce

cognitive

and rela-

tional

complexity

to

different degrees. Cultures whose

development

trajectories

have allowed

them

to

build up

an

institutional capacity in the

upper regions

of

the

I-

Space, for example, are more likely to aim for a

reduction

in

cognitive

complexity

and to transact in

large numbers

either

through

bureaucracies or

markets.

By contrast,

cul-

tures

whose institutional investments aremainly confined

to the lower regions of the I-Space may have little choice

but to hold

cognitive complexity constant

and to

reduce

relational

complexity by keeping the

numbers

down to

what can be

managed

in

face-to-face situations.

Clearly,

relational complexity will

be lower

in fiefs than in clans

so

that

in the latter case more

complexity

will

need to

be

absorbed.

Handling Complexity-the

Case

of China

Applying

Kauffman's

parameters,

China is

characterized

by

a

low

P,

a

high N,

and a level of

K that

is

high within

the society's constituentunits, but low (albeit now rising)

between those units.

Low

P

In

China,

social

order

in the

past

has been

precarious

and

unpredictable,

due in

large

measure to the

problem

of

establishing

an

adequate system

of

governance

within

a

country highly

differentiated

by

geography, language,

and

local identities. The

periodic

breakdown and

frequent

arbitrariness of central

authority,

and the

lack

of clear

rights generated considerable

uncertainty.

While the im-

perial bureaucracy

did not

normally

extend

down

beyond

district

capitals,

the

state

could

nevertheless

arbitrarily

intervene in people's lives for financial or military pur-

poses.

As

Fukuyama (1995) notes,

the Chinese

state

pro-

vided

few social services

in

return

for its

demands,

de-

spite

the

injunctions

of Confucius

concerning

the

obligations

of the

paternalistic Emperor:

In

traditional

China,

there were

no

established

property rights.

Through

much

of

Chinese

history,

taxation

was

highly arbitrary;

the state

subcontracted tax collection to local officials or tax

244

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MAX

BOISOT AND

JOHN CHILD

Organizations as Adaptive

Systems

farmers,

who were free to set the level of

taxation at whatever

the local

population could endure.

Peasants could also be

drafted

arbitrarily

or

militaryduty or to

work

on

public works

projects

(Fukuyama 1995, p.

87).

The threat of

disorder, and

consequential

massive un-

certainty,arose from a combination of naturaland official

capriciousness. For

example, Seagrave, in his

study

of

the

Overseas

Chinese,

notes how mass

emigrations from

South

China were

caused by invasion

from the North,

imperial repression and

taxation,

and

natural calamities

both local and in

the North. The

latter led to

furtherpres-

sures from a

movement of

population southwards. The

result, as Seagrave

put it, was that to

the ordinary Chi-

nese,... chaos is

always just

around the corner

(Seagrave

1995, p. 183).

The

institutional

environment has provided

few guar-

antees

for

the

members of

Chinese society. Historically,

the Chinese

have

not been protected

by

a

legal

system

that was independent of the state and

supreme

in its

own

right. In the

absence of a

codified commercial

law, mer-

chants and

producers were at

the mercy of a system in

which

imperial officials and their

acolytes could

exercise

arbitrary

power through taxes,

licensing fees,

and restric-

tions on trade and

travel.

Even

today, despite continued

legal reform

since 1979 which

has begun to evolve a dis-

tinct

body

of

legal

rules and

institutions,

evidence

sug-

gests that the

law

in

China

remains a tool of

state ad-

ministration

and

always

within close

reach

of the

Chinese

Communist

Party (Lubman

1995, p.

2).

Thus little

pro-

gress has been

made

in

the

effective ability

of

China's

laws to provide a means of controlling official arbitrari-

ness

(ibid., p. 11).

Nor

has

China, even

today, developed

a

strong

civil

society

to

constrain,

and hence

modulate,

the

power

of

the

state

(Nevitt,

1996).

High

N

China

as

a

socioeconomic

system

displays

a

high

level

of

Kaufmann's

N.

It

consists of

many

and differentiatedele-

ments. These are

today

manifest

in

the

presence

of

mul-

tiple

business

systems

(state-controlled,

collective,

and

private, each with

different

governance systems and lev-

els of

marketization), many

regions

which

contrast in

wealth, education,

and

culture,

different

provincial and

other local authorities to which much power has now de-

volved,

and

significant

generational

differences

(Child

1999a). Under the new wave

of economic

reform,

state-

owned

enterprises

are

further

differentiating

the nature of

their

governance systems (Child

1999b).

Its internal dif-

ferentiation lends

China the character of a

complex

cel-

lular

society.

Levels of

K

The

cellular nature of China's society gives rise

to ten-

sions within its governance system which in

turn com-

pound the

complexity

of the

system.

The

society

is char-

acterized by

a

high N but low levels of

K between its

constituent units,

a

configuration

which

would of itself

be conducive to a hierarchicalmode of coordination from

the

centre.

Indeed,

Confucian

philosophy legitimized

the

expectation that government should

play an intervention-

ist role in China. It

has, however, always proved

a prob-

lem to coordinate the many

units in the system from the

centre. In the past fifty years,

attempts to do so have

shifted

dramatically,

indeed

sometimes

violently,

from

mechanical

coordination

via

central

planning

to the use

of

personal charisma

by

the

Party Chairman.

The

variable

and uncertain nature of central

authority

has

encouraged

local

powers to make up the

deficiency, and

in

turn strong

local

loyalties

have added

to the

problems

of

securing

effective central governance.

Thus,

levels of

K

are high within the

system's constit-

uent

units,

especially

within local

communities which

have

close-knit networks

embracing administrative, po-

litical,

and

business groups. This combinationcreates ten-

sions between the central and

local levels

in

the

gover-

nance system, and

consequent ambiguities

about their

respective jurisdictions. While laws and

regulations

are

formulated

centrally,

coordination between national

gov-

ernment bodies is

often ineffective

and,

in

addition,

the

laws

and

regulations

are administered

locally.

This

can

give rise to considerable

ambiguityas to who is the

gov-

ernment and behavioural

inconsistencies between dif-

ferent agencies and localities.

Ambiguity

about

governmentaljurisdictions

and

pow-

ers

contributes to

a

low level

of

stability

within the Chi-

nese

system

and hence the low

level

of P

already

noted.

The form of

complexity

in China

(low

overall K com-

bined with

high

local

K

and low

P) poses

far

greater

dif-

ficulties for

those

engaged

in economic

relationships,

than

does a

high

N

per

se. For it describes a situationin which

economic

governance

tends to be

organized

through

in-

tensive relations coordinated

according

to

implicit

rules-in other

words,

at the lower levels of the

I-Space.

Despite the tensions with the

centre,

much of

this socio-

economic

coordination in

present-day

China is

in the

hands of local government and Partyofficials. This is not

to

say,

of

course,

that

any

kind of national

plan

is

being

imposed-indeed,

the

contrary

tends to be true because

of

the

local variation

that this system creates.

The

ability

of local

authorities

to

exercise

significant power

stems in

large part

from the

high

levels of

K

within local com-

munities and the core role

that authorities

play

in them

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MAX BOISOT AND JOHN CHILD

Organizations as Adaptive Systems

even

in relation to nonstate

enterprises. Indeed,

the

prop-

erty rights they enjoy over Chinese enterprises remain

considerable. Despite the objectives

of the economic re-

form, many state and collective enterprises

are

beholden

to governmental bodies (at

the local level with the ex-

ception of certain strategic sectors), especially for work-

ing capital

and the enforcement of transactions. There are

fears that the

current

corporate governance

reforms will

leave governmental agencies largely in control even of

smaller enterprises, despite the declared aim

of

the re-

forms to separate governmental from business functions

(Child 1999b). This dependence on government can ex-

tend to

the

joint

ventures

that

Chinese

enterprises

form

with multinational companies.

The cognitive complexity (low P) which is caused by

ambiguities

as to

the

locus of

power

and initiative in the

Chinese

system,

is added to

by

the lack

of

transparency

of

many

Chinese laws and/or their uncertain

enforcement,

as

is

the case with intellectual property rights. Local gov-

ernmentalagencies have powers to interpretregulations,

issue licences, and impose taxes,

which furnish

ample

scope

for

negotiation

and

corruption.

Even

some national

regulations

and

taxes

have been

imposed retrospectively.

There also continues to be

a

shortage

of two

key

busi-

ness

resources, namely

domestic

working capital (much

of

it

being administratively

redirected

to

propping up

ail-

ing state-owned enterprises),

and

high quality,

well-

trained

managers.

When neither the

availability

of work-

ing capital,

nor

the loyalty

of

key

local

managers,

can be

taken

for

granted,

further elements

of

uncertainty

are in-

jected into the business environment. Infrastructuralim-

itations, especially

in

the transportation

of

goods,

add an-

other source of

uncertainty.

Each of these uncertainties

increases the temptation

for

local agents to act opportun-

istically-for example,

to

renege

on

an

employment

or

supply

contract in order to take

advantage

of available

economic rents.

The wide

range

of

unethical behaviours which the

Chi-

nese

categorize

as

corruption

not

only

create

great

un-

certainty

in business

relationships,

but also most under-

mine

the development

of

trust. The problemis recognized

at the

highest

level. Former

premier

Li

Peng, addressing

the National

People's Congress

in March

1994

stated that

the struggle against corruption is a matter of life and

death for the

nation

(quoted by

McDonald

1995, p. 175).

There are several

specific practices

which

are

quite

com-

mon,

and which are

particularly

nimical

to

the establish-

ment of trust. One

is

product piracy, including

the

illegal

use of their

foreign partners'

brand names

by

Chinese

enterprises.

The chief

executive

of a

global

U.S.

house-

hold

goods company

told the second author that this was

the

single greatest problem

his firm

faced in China. An-

other is

embezzlement,

a

problem

which

has led many

foreign companies

to

insist that

they

control the

appoint-

ment

of chief

financial officers for their China

joint ven-

tures.

A third

practice, and

probably

the most

common,

is thatof bribery.Bribery, of course, implies the threat of

non-cooperation or even reneging on

agreements

if

side-

payments

are not made.

The low level of P in the

Chinese context generates

high levels of cognitive complexity and

uncertainty. This

poses considerable

problems

for local

Chinesepeople, not

just

foreign investors.

Historically,

the

Chinese have

sought

to

adapt

to these

contingencies by

forming

rela-

tional

networks with

lower numbers but

denser

interper-

sonal links than those

typical

of

Western countries. This

represents

a cultural

preference for

absorption,

rather han

reduction, as the means for

dealing with the nature of

complexity

in

China.

The

reliance on dense

interpersonal

links, in which friendship,identity, andtrustoverlay eco-

nomic

transactions, tends by its nature

to

exclude non-

Chinese

participants.

These

specific relationships, based on trust and

implicit

(noncodified)

norms,

fall

into two broad

categories.

The

firstcomprises the

extended family, and to a lesser

degree

relationships

stemming

from

a

common formative

expe-

rience in

hometown

and

school,

all of

which

provide

for

group loyalty and shared

identity. This trust s based

upon

blood and

upbringing,

and

it

often takes on fieflike

qual-

ities. The

foundations

of

trust within these

close social

units

are

those of identification and

affect. It

is

found in

the Chinese

family business,

in

both mainland and over-

seas Chinese communities. It has also provided the basis

on which the directors of

state

enterprises agreed

to form

horizontal

groups,

and on which

many joint ventures be-

tween PRC

enterprises

and overseas

Chinese investors

have

been

established.

The second

category

is

the

network,

which

can some-

times

be

quite extensive, taking

on

clanlike

qualities.

Boisot and Child

(1996) suggested

that the

clan

system

of social

governance

has

been the

appropriate

institu-

tional structure to

adopt

for

economic transactions in

China. Trust within the clanlike

networks

is

based on

what

the

Chinese know as

guanxi. Guanxi refers to the

credit which

a

person

or

a

group

has with

others,

based

on the giving of assistance or favours, or deriving from

personal recommendations. It is

significant

within work

units,

and even more so for

the

development

of

interor-

ganizational

relations in which

the actors have no

other

foundation on which to

establish trust in a

society

where

institutional

guarantees

and

protection

are

weak. There

is

a risk involved in

offering

the

favours

through

which it

is

hoped

to build

up guanxi,

and

the

main

guarantee

246

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against lack of reciprocity lies in the strong social

norms

by

which the

acceptance

of favours

places

an

obligation

upon

the

recipient.

Personal networks are therefore particularly

significant

modes of economic

transacting

in

China because

of

the

weak

institutional sanctions against reneging on conmit-

ments. Both shared social identityandguanxi can provide

the foundations for

long-standing relationships

which

govern business transactions

and

upon

which

transac-

tional networks are built. To an

important extent,

trans-

actions within the Chinese business system are governed

by

the

relatively

tacit norms and

expectations

which ac-

company

these

trust-based relationships, rather than by

the more codified rules

characteristic

of

transactions

reg-

ulated

either by hierarchical rules

or

by laws of contract

applied

to market

dealings (Boisot

and Child

1996).

This

is the case even within the ostensibly bureaucratic

PRC

state-owned enterprise, where typically key nonns

of

con-

duct remain

implicit

and

where strong fieflike loyalties

exist around

key officeholders (Child 1994).

Thus, whereas we might characterize the Western

or-

ganizational

context as

exhibiting

a low

degree

of

cog-

nitive

complexity

and a

high degree

of

market-based re-

lational

complexity,

the

Chinese organizational context

displays

a

high degree

of

cognitive complexity

and mod-

erate levels of clan-based relational

complexity.

These

differences in

organizational context,

we would

hypoth-

esize,

will be reflected in a

cultural preference by Western

organizations

on

the one hand for

deploying cognitive

strategies that reduce complexity, and a cultural

prefer-

ence

by

Chinese

organizations

on the other hand

for

de-

ploying relational strategies that absorb

complexity.

Two Approaches to Complexity

Management:

Western

Firms

in

China

It

is

clearly

not

easy

for the

managers

of a

foreign

com-

pany

to enter into these close-knit Chinese

relationships,

but without some connection to them it

may

also be dif-

ficult for such

managers

to be able to make

good

sense

of

the

cognitively complex implicit understandings

within

the

system.

It is

virtually impossible

for Western-

ers to

enter

into

the

first

relational

category

based

on

fam-

ily

or

other groupings with

a

strong shared

identity.

It

may, however, be possible though still difficult, for them

to

gain acceptance

as trusted

partners

of somewhat looser

clanlike networks.

This

presents

the

foreign

firm with two alternative

ap-

proaches

towards

handling

the

high complexity

and weak

institutional context in China. The two approaches reflect

the fact that when faced with the

challenge

of

operating

within a system located in

an unfamiliar part of the I-

Space, organizations can endeavour either to maintain

their familiar mode of handling complexity and enact the

environment to permit this, or

to adapt their mode of com-

plexity handling to the local situation with the assistance

of local partners.The first approach s thus familiar to the

firm, but not to the context. The second approach is un-

familiar to the firm,

but

culturally

more attuned to

the

context. These contrasting approaches reflect, according

to our argument, fundamental differences

in

the

nature of

the

complexity

that

respectively

confronts China and

Western countries.

It

will become evident

that

there

is

some parallel between the two approaches and, respec-

tively, the

K'

and

r

strategies identified

in

biogeo-

graphical and evolutionary models. Put simply, the

K-

strategy involves

a focused efficient investment in a given

reproductive attempt and is suited to a slowly-changing,

predictable environment,

while the

r-strategy

involves

many reproductive attempts

spread

over a

range

of

possible environmental situations. The latter are less ef-

ficient in

themselves,

but

offer a

greater

chance

of

species

survival in

complex,

unpredictable environments

(MacArthur and

Wilson

1967,

Hannan and Freeman

1989).

The

first alternative is an

attempt to reduce cognitive

complexity through imposing

familiar routines and stan-

dards

upon

business

in China.

It

approximates

to what

cross-cultural theorists term

a

domination

strategy

(Tung 1993). This imposition attempts to replicate the

structured articulation of

information that in Western

countries

is assisted

by supporting

institutions.

It is

pur-

sued

through

a combination

of

complementary

external

and internalactions. The external approach s to enact the

environment to reduce its

complexity through

measures

such

as

lobbying foreign governments

to

pressure

China

into

creating

a more codified environment, especially

via

legislation

and

its effective

enforcement, deploying big

corporate guns

to

negotiate

Chinese institutional

toler-

ance of

the

foreign

investor's

intentions,

and

using

the

Chinese need

for

technology

and finance as

bargaining

levers for the introduction of Western

norms. Coca-

Cola's

highly publicized policy

of

contributing

to local

economic

development has,

for

example, generated

con-

siderable

goodwill

and tolerance for its

application

of its

preferred global policies

to

China

(cf.,

Nolan

1995). By

enacting

ratherthan

negotiating

the

environment,

this

ap-

proach

endeavours

to

restrict

involvement in the

system'

s

relational

complexity

and hence favours 100% foreign

ownership

and control over

China

operations.

A

major

element

in the internal

approach

is the

impor-

tation

of standardized

systems (accounting, quality, pro-

duction, HRM,

and

so

forth)

which enforce

predictability

ORGANIZATIONCIENCE/Vol.

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MAX

BOISOT

AND

JOHN

CHILD Organizations as Adaptive Systems

onto Chinese behaviour and lock the China

venture into

a multinational corporation' global network. MNCs

have, for example, preferred to apply their

own environ-

mental protection standards

n the face of unclear expec-

tations from Chinese law enforcers and the high trans-

action costs of negotiating new or modified standards

(Tsai 1997). Other internal features

in

the complexity-

reducing strategy include the establishment

of control

over personnel selection so as to recruit employees, pref-

erably young people, who are untainted by Chinese

work and institutional norms, and a reliance upon a com-

bination

of

training

and attractive rewards to mould Chi-

nese workplace behaviour (Lu and Bjorkman 1997).

This approachhas been advocated by Western consul-

tants (e.g.,

Meier et al.

1995)

and

management

writers

(e.g.,

Vanhonacker

1997).

It relies

on

the

rapid

establish-

ment of codified structuresand

systems,

and

those

adopt-

ing it are prepared o incur short-termcosts in the process.

One cost is that the control has

to

be

secured

through

a

capital

investment sufficient to secure a

large majority

of

joint

venture

equity

or sole

ownership.

Such control nor-

mally requires

a

heavy presence

of

expatriates

n

the

early

life of the Chinese affiliate,

which

imposes

a heavy

fi-

nancial burden,

and there

can

be considerable

conflict

with local

personnel

as

the

foreign parent company's

structures and practices

are

applied.

The

intention

is

to

replace expatriates with homegrown Chinese managers

who can

run

and accept foreign systems as

soon as they

can

be

found and trained.

There

is some

doubt, however,

whether the early re-

placement of expatriatesis going to be feasible with this

approach.

One

reason is that it bases

cooperative

rela-

tionships between the Chinese and foreign parties almost

entirely upon calculation,

and not on

any

firmer bases of

mutual commitment or trust. As

such,

it is

likely

to en-

gender only

the most basic level

cooperation

between the

partners.

The

primary

basis

of

the

relationship

lies

in the

promise

of

favourable

rewards to the Chinese

partner,

n

terms

of

dividends, employment,

and

technology transfer,

and to individual Chinese employees

in

terms

of

high

levels of

personal

income. There is no doubt that this buys

cooperation, but only up

to a

point

and not on

a

basis of

a

commitment to the

joint enterprise.

It

is

not surprising,

therefore, that many foreign managers complain about

their

partners' instrumental,

even

underhand, attitude to-

wards the

protection

of

resources such as

technology

transfer and brand

equity,

as

well

as

about the

difficulty

of

retaining good Chinese managers.

There is a

danger,

then,

with

this

approach

that order is

purchased

within

the China venture or

subsidiary

but at the

expense

of the

external

certainty

that can

be

secured.

Its advocates

argue

that, given time, learning about external complexity can

be achieved and the

level

of external

entropy correspond-

ingly reduced. Despite the strength with which a com-

plexity reduction, go-it-alone, approach is being ad-

vocated

among foreign companies

in China

(Johnstone

1998), the evidence so far available in terms of the rela-

tive

profitability

of

foreign-invested enterprises

with dif-

ferent levels of foreign control does not unequivocally

supportthe argument (Andersen Consulting 1995, Pan et

al.

1999)

The alternative approach to dealing with the complex-

ity

of

the Chinese system

is

one

of

using local Chinese

capabilities

to

absorb

it. This

requires

an

attempt

to

en-

gage

with relevant clans and

to enter

into

more intensive

relationships (i.e., high relational complexity) with Chi-

nese

partners

and other

significant groups.

This is not

easy,

and

may

take

years

rather than months. Clans are

predicated

on

outcomes

from an

iterated prisoner's di-

lemma

relationship

that

are

in favour of

cooperation

ratherthan defection. Resources are secured fromoutsid-

ers

through opportunistic

behaviour and are used to cross-

subsidize transactions between insiders.

For

transactions

between clan

members,

the shadow of the future is

therefore

very positive

and real

(Axelrod 1984).

How-

ever,

the favourable conditions for

benefiting

from co-

operation

are extended

only to

those who

have become

accepted

as

members

of the

clan. An

outsider,

such as a

foreign

firm in

China,

has to find

ways

of

demonstrating

benefit to

prospective partners

and

their

wider

clans

(i.e.,

social

networks)

so as to

buy

its

way into the clan. For-

eigners choosing cooperation with Chinese partnersbe-

fore demonstrating

that

they

are in an iterated

game

will

tend to

confront

defection as the

preferred

Chinese

op-

tion. This

implies

that

they

have to offer

substantialbene-

fits to their

prospective

Chinese

partners

so

that

the

costs

of defection to

the

latter

are

high,

and

that once accepted

it

is

important

to

maintain the

trust

of the Chinese

party.

Again,

there are both external and

internal routes to

doing

this. The external one

includes the co-opting, on

the basis of

mutual

benefit,

of

Chinese

partners

who have

institutional

influence,

and

allowing

them to handle the

external

complexity

which derives

mainly

from

the

bu-

reaucracy

and its manifestations of

arbitrarybehaviour.

The internal route may comprise several measures. First,

an involvement of

Chinese

managers

in the decision

pro-

cesses

of

joint

ventures

or

subsidiaries, appealing

to

the

venture's

collective

identity

and mutual

benefit

in so

do-

ing. Second, adapting procedures such as personnel ap-

praisal

and

the conduct of

meetings

to suit the local

cul-

tural

context, though retaining reporting systems

which

are

compatible

with those of

the

foreign

investor.

Third,

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MAX

BOISOT AND JOHN CHILD Organizations as Adaptive Systems

developing long-term relationships through frequent

con-

tact

between Chinese and foreign board

members,

a

planned

programme of visits between foreign and

Chi-

nese

executives, relatively lengthy assignments of

foreign

executives to China joint

ventures, and emphasizing the

need for

cultural sensitivity.

All

these positive

relationship-building moves have, nevertheless, to build

on

the perception of clear economic advantage by the

Chinese as well as the

foreign partner.

This second

approach attempts

to

absorb

complexity

in

the Chinese

context by giving primacy to

establishing

a

set

of

enduring relationships

both with

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