Banks and Business Networks

Management, Governance and Financial Implications

Josanco Floreani, Enrico Geretto, Maurizio Polato, Giulio Velliscig

• Publisher: Routledge
• Year: 2022
• ISBN:
  9781000634952
• Edition: 1
• Topic: Économie
• Subtopic: Banques et services bancaires

While there is a vast amount of literature examining firm's networks from an industrial organization perspective, the financial implications of networking remain underexplored. This book fills this gap, by investigating the phenomenon of business networks in the context of management and governance processes, and the related effects on interactions with the financial system in general, and credit institutions in particular. Networking is examined both from the demand (firms) and supply (banking institutions) perspective, thus, the book offers several contributions. It outlines the critical issues connected to business aggregations from the point of view of the management of information flows, and addresses the problem of identifying the role of banking ecosystems, in light of the transformations taking place in the financial industry, considering the growing complementarity between bank and market instruments in corporate financing. It explores the problem of identifying rating models for business networks, as well as, for individual participants on a stand-alone basis. Further, the book analyses a sample of networks in Friuli-Venezia Giulia and profiles a number of specific business cases.The book will be of particular interest to researchers and scholars in the field of banking and finance but also entrepreneurship and small business management. It will also find an audience among scholars from a wide array of additional fields, working on the relationship between financing concerns and growth opportunities.

Chapter 1AGGREGATION PHENOMENA AND BUSINESS NETWORKS

SUMMARY: 1.1. Business Aggregations. – 1.2. Aggregation Tools in Network Form. – 1.2.1. Motives and Operational Advantages. – 1.2.2. Potential and Size Limitations. – 1.2.3. Types of Aggregations. – 1.3. The Network Contract. – 1.3.1.A Legal Framework. – 1.3.2. The Organizational Complexity of the Networks. – 1.3.3. Aggregation Models.

1.1. Business Aggregations

In the field of management sciences, referring to “cooperation among companies” opens up a wide range of definitions, concepts and terminologies that hide rather different disciplinary meanings and traits (Culpan, 2009).

The disciplinary variety and the number of methodological approaches are an invitation to make a positioning choice within the wide and varied literature on the subject of cooperation among enterprises, useful for providing the interpretation keys that this work sets out to favor.

The choice is to subscribe to the strategic management approach studies that attribute to the cooperation among enterprises a meaning linked to the lasting production of benefits for the partners, so that they preserve the conditions for the sustainability of the competitive advantage. The emphasis on the strategic dimension makes it possible to highlight the essential features that qualify business aggregations:

The awareness in the orientation towards the pursuit of shared objectives and the achievement of economic benefits distributed among the partners (purposiveness).

The durability and dynamism of relationships (long-term horizon). The exchange, transfer and joint development of resources and skills (interfirm resources transfer).

The implementation of specific and complementary activities to consolidate control of the value chain or to explore new business areas (cooperative exploitation and exploration).

The coexistence of two different types of risk: the general economic risk linked to obtaining the expected performance from the collaboration, and the relational risk, linked to the undertaking of behavior patterns that are not consistent with the pursuit of the objectives of the aggregation by one or more partner enterprises (performance and relational risk).

Moreover, each aggregation tends to assume a specific configuration that derives from the combination of three basic elements: the characteristics of the partners, the type of economic activities that are the object of the collaboration and the control and governance of the relationships (Albers et al., 2016).

The issue of governance in aggregations involves the decision-making problem in the choice among several available alternatives. The decision-making area concerned highlights three different decision-making levels, organized according to a hierarchical order (Reuer et al., 2016): a) the choice between either supporting investments for the establishment and management of an aggregation or managing a transaction that involves one or more market negotiations, or specific operations involving risk capital (e.g. mergers, acquisitions, joint ventures); b) the decision pertaining to the legal structure of the aggregation, the alternative being either forms that require interventions on risk capital or forms that are independent of capital investments, as they are regulated through contracts or informal agreements; c) the choices concerning the regulation of a wide range of aspects that are decisive for the effective functioning of the aggregation and concerning, among other issues, the methods for distribution of the results gained, the division of tasks, the protection of investments in knowledge, the organization and coordination of operational activities, the management of uncertainty and risk and the sharing of decision-making power.

In comparison with businesses that choose to set up their competitive action solely on the exploitation of internal resources and those that can be acquired through market negotiations, the collaboration strategy exposes businesses to greater uncertainty and risk, the origin of which is traceable to the adoption of opportunistic behavior patterns by the partners, fueled by the possibility of exploiting information asymmetries to their own advantage.

The distribution of decision-making power takes on particular importance in aggregations due to the simultaneous participation of different economic actors, capable of expressing differentiated power relationships that arise, for example, from the exploitation of a position of supremacy on the reference market, from the economic potential of the resources held, and from the ability to govern the sector’s technology.

For an in-depth study of this aspect of relational governance, it may be useful to resume a proposal for the classification of aggregations built by cross-referencing the different qualifications undertaken by the following variables: a) the degree of centralization of decision-making power; b) the spatial location, internal or external to the aggregation, of the subject exercising the prerogatives of governance. The combination of these variables leads to the distinction among three different types of aggregations (Provan and Kenis, 2008):

Network Administrative Organizations (NAO), aggregations governed by a super-ordinate and external entity, which undertakes the role of intermediary for the enterprises in the aggregation since it is responsible for carrying out the coordination and organization tasks, leaving individual companies with the responsibility for conducting operational activities, which they often accomplish through bilateral relationships.

Lead Organization-Governed (LOG) networks, aggregations that are governed in a cetralized way by a member entity appointed to such governance, undertaking the leadership and centralizing decision-making power for itself, based on an evident competitive superiority over the other enterprises.

Participant-Governed Networks (PGN), aggregations governed jointly by the companies that are members of the aggregation, according to decentralization schemes and a horizontal distribution of decision-making power.

The last type – the PGN – is considered the simplest and most widespread form of governance in practice, since it is particularly suitable for regulating and organizing collaboration among small-sized enterprises that resemble each other in terms of strategic orientation, structural set-up and levels of performance, aimed at carrying out the development of new products and the creation of new business areas (Venkatraman and Lee, 2004).

The LOG governance structure is typical of aggregations in which economic exchanges of a horizontal type take place, among businesses that compete in different but complementary activities or having a high potential for commercial integration, or of a vertical type, among enterprises that intervene in the same production chain by carrying out economic operations that are combined in sequence to make the product or service available to the final consumer. In both configurations, the key element is the presence of a enterprise which, by virtue of a recognized competitive superiority, undertakes a leadership role in the governance of relations and therefore orients strategic decisions, determines objectives, intervenes in the allocation of resources and defines marketing policies. Partner enterprises are identified and selected through a process of assessment of the qualitative and qualitative level of their assets, resources and skills, which must be functional to the specific needs of the leading enterprise.

Finally, the NAO typology is the direct emanation of a centralized governance structure, entrusted to an external entity, sometimes specifically created for running and coordinating the network. In this way, partner enterprises can focus on governing the operational side of their relations, organizing the terms and conditions of the exchanges among them. The choice of appointing an external and super-ordinate entity for the strategic governance of the aggregation is supported by the acquisition of some advantages, including the improvement in the legitimacy and reputation of the network, the greater effectiveness in solving specific problems inherent to the network, and the reduction of management complexity which, on the other hand, characterizes the types of governance based on shared decision-making mechanisms.

In the context of non-equity aggregations, the Italian economic fabric has long been fertile ground for the application and dissemination of two types of aggregation that mainly involve medium or small-sized companies: Temporary Associations of Enterprises (Associazioni Temporanee di Imprese, ATI) and districts.

The former continue to be the most used form of aggregation in the context of public tenders for the award of contract works that require the setting up of complementary skills and resources, which are difficult to find in one individual enterprise. The latter, on the other hand, have represented for many decades a stable form of organization of economic activities within local areas, where territoriality, sociality and business were perfectly integrated, giving birth to a dense network of economic exchanges that determined the growth and diffusion of wealth of specific geographical areas.

Districts were formally recognized by Law n. 317 dated October 5^th, 1991, on “Interventions for the innovation and development of small enterprises”, as a sui-table tool for promoting the development, innovation and competitiveness of small businesses. In the language of business and economics, industrial districts correspond to limited territorial areas hosting a population of small and medium-sized manufacturing and service companies operating in the same field with various specializations, and therefore interconnected by relationships (Becattini, 1989). Industrial districts have been present since the 1960s and represented a dynamic component of the Italian economy until the early 1990s. Later on, the success of this entrepreneurial formula was significantly reduced due to the combined effect of the economic crisis and of internal forces of transformation, which impacted the traditional district configuration by breaking down the high density of enterprises and the relationships between them.

With reference to the aggregation forms that require, in addition to inter-organizational collaboration, also a financial commitment determined by the participation in risk capital, the national situation highlights three types: consortia, European groups of economic interest and joint ventures.

The consortium is an inter-organizational form of cooperation among enterprises that is particularly consolidated in our legal system, which defines it as the contract by which some entrepreneurs create a new economic entity for regulating or carrying out certain phases of the economic process governed by the respective companies (Art. 2602, Civil Code). Therefore, consortia, even in the form of consortium companies (Art. 2615-ter, Civil Code) have a mutual-aid purpose.

The European Economic Interest Group (EEIG), despite its limited success in Italy, is an interesting subject of analysis in the review of the main forms of aggregation between SMEs. The EEIG is a legal entity whose purpose is making it easier to establish collaborative forms between companies having their registered offices in different Member States.

The term joint-venture indicates the establishment by two companies belonging to different countries of a new legal and economic entity, intended to operate for a long period of time in the same business in which the parents companies are already present (horizontal JV), upstream or downstream of the production chain (vertical JV) or diagonally (diagonal JV). Joint ventures are not governed by a dedicated legislation. The regulatory rules of reference will depend, in fact, on the legal form that the aggregation will take in the specific case. The establishment of a JV does not imply, for the parent companies, a loss of legal and financial autonomy, as the operation involves the contribution in the risk capital of a newly established company, or rather, the regulation of the collaboration by means of a contract. A distinction arises, then, between two types of JVs: equity (jointventure corporation), and non-equity (contractual joint-venture).

1.2. Aggregation Tools in Network Form

1.2.1. Motives and Operational Advantages

Over the past few years, economic and social phenomena have outlined continuous and incessant changes, fueled by multiple and interconnected forces mainly attributable to technological innovation, to the fast diffusion and evolution of new needs, to the reduction of space-time distances and to the emergence of new social sensitivities.

It is no less evident that the managerial tools and practices put in place by enterprises to try to deal with this complexity have also been the focus of innovation processes.

In this regard, an option increasingly activated by small and medium-sized enterprises, and supported by policies and tools developed by institutional actors, is the one based on the potential of inter-organizational cooperation (Smith et al., 1995). Through cooperation, multiple advantages can be obtained, both in terms of economic and financial performance and of the strategic strengthening of the competitive position:

Reduction of the financial commitment on the part of the individual business for new investments, since the requirement is shared among the partners according to a logic based on the supervision of specific phases of the value chain and on the affinity between new investments and the technical-productive structure of the partners.

Mitigation of the operational risk due to the recalibration of the methods of carrying out economic activities.

Qualitative and quantitative growth of the enterprises through a greater commitment to product and process innovation, the increase in the variety of products offered, and the expansion into new market spaces including at the international level.

Essentially, the design and activation of economic production functions with flexible and dynamic boundaries, which go beyond those of the individual enterprise to expand within the perimeter of other enterprises and institutions, marks a significant differentiation from the past that deserves a particular attention on the part of researchers in the corporate and economic fields (Ricciardi, 2010).

The economic-business literature and the policies supporting enterprises implemented by the main institutions of our country highlight the importance of collaborative forms for all types of enterprises and, in particular, for small and medium-sized enterprises (Massari et al., 2015).

Basically, two currents of thought oppose each other. One interprets SMEs as an economic phenomenon in its own right, an original expression of a way of doing business capable of offering an alternative to large dimensions, in which the emphasis on the dimensional problem is dampened in favor of a stronger attention to qualitative growth, and resolved by reference to inter-company relations (Ferraris Franceschi, 1993). The other school of thought believes that SMEs are defective companies as they have not yet become large enough, and that excessive dimensional fragmentation is a brake on the growth capacity of our economy (Nardozzi, 2003). This latter position is broadly confirmed by the studies on the national economic system, supported by statistical surveys that attempt to outline the framework of the competitiveness of our country with respect to some reference economic variables, such as, for example, productivity, the wealth generated and innovation.

One of the options increasingly exercised to grow in qualitative but not quantitative terms, too, is the participation in business networks, which at first approximation can be defined as a set of businesses which, while maintaining their legal autonomy, share objectives, interests and planning and start an economic production fueled by the resources that each enterprise decides to pool, and coordinated through trust-based relationships and/or formal mechanisms.

1.2.2. Potential and Size Limitations

The issue of size and the role of small and medium-sized enterprises has always been the subject of a lively debate, also in the field of business and economic research (Simon et al., 2007).

In any case, the economic preponderance of the small and medium size is undeniable. In the European economic context, restricting it to the nonfinancial sectors only, small and medium-sized enterprises represent 99.8% of the total number of enterprises and create 57.4% of the added value by employing 66.8% of the workforce. This phenomenon takes on even more significant proportions within the national context, where the percentage of the small business segment within the macro-category of SMEs exceeds 82% (Cerved, 2016).

It is therefore natural to wonder whether, and above all how, th...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• List of Figures and Tables
• Introduction
• 1. Aggregation Phenomena and Business Networks
• 2. Business Networks, Information Management and Value: Evolutionary Profiles
• 3. Assessment of Creditworthiness and Rating in Business Networks
• 4. The Relationship between Networks and Banks. Analysis of a Sample of Networks in Friuli-Venezia Giulia and of a Few Business Cases
• 5. Elements for a Conclusion in an Evolutionary Perspective
• References
• Index