The Competitiveness of Networked Production: The Role of Trust and Asset Specificity

The paper offers a synthesis of sociological and transactions cost economics perspectives on production networks. Sociological explanations of network effectiveness (competitiveness) stress the importance of trust, and transactions costs emphasizes asset specificity. The approach here is comparative, the capabilities of networks are assessed against those of the vertically integrated, managerially co‐ordinated hierarchy. The argument is that the competitiveness of each form derives from different organizational capabilities. Neither is inherently superior – by supporting different strategies, networks and hierarchies can co‐exist. A distinction is drawn between those networks that rely on communal support and trust and those networks whose dynamism relies on individualistic and autonomous entrepreneurship. The absence of trust (or the surfeit of entrepreneurial zeal) leaves firms reliant on generic assets. Trust creates the conditions under which communities of firms can develop industry‐specific assets capable of delivering real services to network firms that are unavailable through market channels. The competitiveness of a production network is a function of the value adding activities undertaken by agents and the collective responses made to external threats or disturbances. The argument is illustrated with reference to the organization of watch (timepieces) production in Hong Kong