Responsibility and Social Capital: The World of Small and Medium Sized Enterprises

Responsibility and Social Capital: The World of Small and Medium Sized Enterprises. Edited by Laura J. Spence, Andre Habisch, and Rene Schmidpeter. New York: Palgrave Macmillan, 2004.208 pp. $65.00. ISBN 1-4039-4315-X.

In recent years, Europeans have become more aware of the social context of

businesses and the issue of social responsibility. This volume reflects that awareness and concern. It was inspired by a 2002 interdisciplinary workshop entitled "Small and Medium Sized Enterprises (SMEs), Social Capital and Civic Engagement" at Brunei University in the UK. The book consists of a short introduction followed by ten chapters. Four of these deal with the concepts of social capital and social responsibility; the other six are empirical studies of SMEs in the UK, Germany, and the Netherlands.

Chapter One is a carefully written review of the social capital literature. This is not an easy task because of the interdisciplinary nature of the subject and the divergent approaches taken by different researchers. According to the authors, "social capital refers to networks, norms and institutions that enable collective action among the individual players of society including authorities, companies, nongovernmental organizations and interest groups" [3]. The authors hedge on the question of whether social capital is capital in the economic sense; i.e., whether "it is something that can be invested in and will yield a future return" [1O]. Nevertheless, social capital has value in the sense that created social relations are akin to long-lived assets that "can be mobilized to facilitate action" [8 J. Social capital is different from physical capital in that it "does not wear out with use, but rather with disuse," "it cannot be traded easily," and it is likely to be a "by-product of activities engaged in for other purposes" [U]. Chapter One also explains the specific features considered to be social capital, the functions of social capital, the downside of social capital, the problems of measuring social capital, and civic engagement and social capital. The treatment of social capital in this chapter is unexceptional, and the conception of social capital is narrow, since the examples deal only with external relationships of SMEs. Presumably this narrowness is deliberate, reflecting the other important focus of the book, namely social responsibility.

Chapter Two develops the links between social capital, social responsibility, and the activities of SMEs. It explains how investment in social capital might be a crucial part of the business strategy of SMEs. These investments enable SMEs to build positive reputations, manage risk, and gather information and "local knowledge."

Chapter Three is an empirical investigation of small firm owner-managers, particularly their orientation regarding profitability versus social responsibility. The findings are based on interviews with owner-managers of 20 small firms (fewer than 50 employees) in a broad range of business sectors in one county in the south of England. Based on the interviews, owner-managers were classified as (1) profit maximizing, but socially inactive; (2) profit maximizing, but socially active; (3) profit satisficing, but socially inactive; or (4) profit satisficing, but socially active. Excerpts from the interviews enable the reader to get a good feel for the thinking and motivation of the owner-managers. Contrary to neoclassical expectations, few responses were classified in the two profit maximizing categories. The authors conclude that "the reasons for being in business and running a firm are far more complex, and socially motivated, than purely financial reasons" [55].

Chapter Four explores SME social capital investment and experiences with civic engagement in Bavaria and West London. The findings are based on interviews with owner-managers and managing directors in 30 SMEs (250 or less employees). These firms networked within their sectors, developing social capital via cooperative informal links. They also networked across sectors, developing bridging social capital. This often helped with non-sector specific problems and issues. Finally, these SMEs were involved in volunteering and giving to charity. Some of these activities had financial payoffs to their business and some were an expression of community feeling, and a desire for camaraderie.

Chapter Five investigates the extent to which first-generation and second-generation South Asian business owner-managers in the Greater London area received support from ethnic networks. It was expected that Asian migrants, settling in a somewhat hostile environment and starting small businesses, would forge strong bonds with each other. The study findings are based on interviews with first-generation parents (usually a father) and second-generation sons or daughters in twelve firms which had both generations actively involved in the firm. The subjects of this study came from the Ismaili Muslim and Vanik Hindu communities, which are recognized as being highly entrepreneurial and having a strong social culture. As expected, first-generation owner-managers were more involved than the second-generation in these networks, but there was quite a bit of variability in the reliance on ethnic networks.

Chapter Six is practically oriented. It is designed to give a good idea of what SMEs are doing with regard to community and social issues, and what could be done to encourage such behavior. In SMEs, "customer relationships are often based on personal knowledge of the customer's needs, while employee relationships are more family-like, with greater cordiality and social integration" than is true for large enterprises [97-8]. Thus, "96 percent of SMEs feel they have responsible business practices" [98]. But, to a large extent, these practices did not come about through explicit, intentional study and design. SMEs tend to progress through distinct, identifiable stages, and SMEs have several orientations to social responsibility. An important conclusion of the study is that the type of encouragement, such as supportive persuasion, that works the best will be different for firms in different stages and of different types. The chapter provides suggestions for mechanisms, messages, and mediums for encouraging engagement.

Chapter Seven looks at corporate citizenship, or the philanthropic involvement of SMEs in Germany. The findings are based on inquiries with 240 SMEs and large firms in manufacturing industries and the service sector. Philanthropy here means donating goods and services, lending resources, employer and employee involvement, establishing charitable foundations, and money donations. A high percentage of firms have been involved in corporate citizenship: 82.4 percent over a four year period and 68.4 percent on a regular basis. Small firms (below 100 employees) spend more (0.25 percent of sales) on philanthropy than large firms (500 or more employees) (0.05 percent). This chapter provides a good summary of the main types of philanthropy, its strategic aims, its benefits for firms, and which types of firms are involved in philanthropy. One important motivation for philanthropy is to gain a reputation for trustworthiness. Corporate citizenship activities serve to signal the moral behavior of the firm and show that the firm can be relied on not to be opportunistic. In this way, corporate citizenship can be a substitute for product guarantees.

Chapter Eight is concerned with the strategies and instruments used by small and large businesses in the Netherlands to be more socially responsible. A key question is: Do large firms make greater use of formal organization and methods? The findings are based on questionnaire responses from 111 large and small firms in two Dutch provinces. Three strategies for organizing a company's ethical behavior were identified: (1) a compliance strategy in which the required behavior is clearly specified and organizations that do not comply are punished, (2) an integrity strategy that relies on individual employees to act in accord with clear internalized core values, and (3) a dialogue strategy in which organizations are expected to be responsive to the ideas, interests, and values of others, especially key stakeholders. Small firms were found to prefer a dialogue strategy, but many lacked any strategy. Large firms favored the integrity strategy. Firms used many strategies to facilitate responsible behavior- codes of conduct, compliance audits, an annual social report, an internal social handbook, appointing a trusted and confidential person to whom members can communicate abuses, establishing an ethics committee, and providing training to employees. Larger firms tend to make use of all these instruments, the most popular ones being the social handbook and a confidential person. Small firms were less inclined to use formal instruments, probably because they are less visible to the public and because their smaller scale would entail larger relative costs for using these instruments.

Chapter Nine argues that social capital has an inherent moral aspect which is implicit (but not explicit) in many of the social capital writings, leading to confusion about the nature of social capital. The implicit normative aspect is found among the social capital authors who have lauded the positive consequences of increasing various types of social activity and who have lamented the decline of social relationships in other areas. To make the missing ethical dimension more explicit, the chapter proposes a "twin ethics test." The suggestion is that it would be legitimate to regard certain social relations as social capital if it is ethical for an individual to use these relations to raise his or her performance in a specific situation, and if these relations are good for the society to which the individual belongs. If an affirmative answer cannot be given for both, the created social relations could not be legitimately considered social capital or, alternatively, these social relations might be considered "negative social capital".

Overall, this book is a solid piece of research. The empirical research is largely qualitative, not sophisticated, but certainly informative. The reader comes away with a good understanding of how European SMEs are managing their external relationships, the extent to which SMEs are socially responsible, and what could be done to improve relationships. I would recommend this book to anyone wanting to know more about social capital, social responsibility, and SMEs.