Exchange structures in transition: Lending and trade relations in Chinese business groups

The networks of interfirm relations that developed in business groups durin g economic transition are central to China's reform and are becoming an imp ortant part of the country's emergent economic structure. Using a recent an d original data set that includes direct observations of economic choices m ade by firms, the process by which these interfirm lending and trade ties e merged and evolved in the early stages of reform is explored. Initially, in formation from sources external to the network dominated the formation and direction of exchange relations. Firms turned to their prior connections, l ook advantage of market position, and drew on bureaucratic power to develop alliances. Over time, internal influences gained importance, and managers increasingly drew on internal nontrade relations and other indicators insid e the business group to identify lending and trade partners. The results de monstrate the central but changing role that social relations and environme ntal cues played in the creation of economic structure during China's trans ition. This study also contributes to an understanding of the processes of organizational adaptation to a major economic transition and interfirm alli ance formation more generally. The findings reveal that firms select exchan ge partners of known reputation and solicit relations that reduce uncertain ty, even when there is a cost involved.