Social capital and profitability

Menno van Dijk 1
June 18th, 2015
Article by: Menno van Dijk, Laurie Kemp
Social capital and profitability

This article is part of THNK VIEWS. We bridge theory and practice on organizing imagination and innovation by extracting key implications and offering new insights to innovation practitioners from a rich database of research papers. This article builds on research conducted by Matthias RassMartin DumbachFrank DanzingerAngelika C. Bullinger andKathrin M. MoesleinOpen Innovation and Firm Performance: The Mediating Role of Social Capital.

 

Everyone appears to be talking about the sharing economy and collaborative consumption nowadays, with some even wondering whether money will become superfluous in the future. Some speculate that the digitization of society will give rise to a reputation economy, with (online) trust serving as the new currency. Meanwhile, the recent financial crisis has left many pointing fingers not just at the banking system, but money-based business in general. Given the severity and societal backlash of the crisis, it is understandable that money has been disgraced to some extent. Yet, aren’t we being too harsh on money, ignoring its many benefits while over-romanticizing trust and social capital?

Rachel Botsman explores the currency that makes systems like Airbnb and Taskrabbit work: trust, influence, and what she calls “reputation capital.”

The research of Matthias Rass, Martin Dumbach, Frank Danzinger, Angelika C. Bullinger and Kathrin M. Moeslein examines the role of social capital in business settings and its effect on innovation outcomes as well as overall firm performance. The authors argue that social capital facilitates various innovation processes and activities. According to them, in the contexts of monetary exchange, the interchange of knowledge based on social ties and trust can further drive innovation and value creation. Trust and friendship induces people to share knowledge and information. In fact, it is even unacceptable to ask for a monetary exchange in some situations; doing a friend a favor should not require any financial compensation. Social capital, working on a basis of trust makes businesses more innovative because it:

  • Strengthens social ties by creating more trust and increasing the speed of exchange.
  • Improves the quality of thinking by increasing willingness to share tacit knowledge, and expose actors to more perspectives.
  • Increases innovation and creativity through increased knowledge sharing.

The authors state that social capital facilitates innovation “in the context of monetary exchange”, shedding light on a key insight that often goes unnoticed in today’s discourse on open innovation:

Social capital is great to spur innovation, in the presence of financial commitment. We take this one step further: doesn’t money offer a better way to build and regain trust in business than everlasting “You owe me and I owe you”s?

social capital
Social capital increases innovation and creativity through increased knowledge sharing. Click To Tweet

In the book, Antifragile: Things That Gain from Disorder, venture capitalist and academic Nassim Taleb compares commerce to academia, explaining, “commerce is fun, thrilling, lively, and neutral.” Academia —according to Taleb— is none of these. Academics distrust each other, with their petty obsessions, envy, and icy-cold hatred, [whereby] small snubs develop into grudges.” The result? “A level of envy almost never seen in business.” Doing business is a great foundation for trusting relationships because it allows parties to enter into a one-time agreement. Monetary transactions purify relations and allow for a business exchange that is specific to situation and context, without fuzzy commitments beyond what was initially agreed upon between two parties.

Think about it. Money ensures that both parties are fairly and equally compensated for their effort, knowledge or services. After any given deal, both parties have a blank slate and if successful, they may voluntarily choose to do business again in the future. Social capital based on trust can never accomplish this in and of itself, as it refers to a resource —something you can leverage. Per definition, such exchanges involve an expectation of reciprocity. This reciprocity often does not take place directly, but may take weeks, months, or even years to materialize. In the case of acquiring of selling knowledge, money resolves such expectations straight away.

social capital
Doing business is a great foundation for trusting relationships because it allows parties to enter into a one-time agreement. Click To Tweet

Up until the First World War, foreign disentanglement was the pillar of U.S. foreign policy. In his presidential farewell address, U.S. President George Washington explained that it was of uttermost importance to “steer clear of permanent alliance with any portion of the foreign world.” These alliances were found to be “undesirable and unnecessary”, due to their potentially corrupting effects in the long haul. One of his later successors, Thomas Jefferson, reiterated this view, pledging “peace, commerce, and friendship with all nations — entangling alliances with none”. Not only did these presidents consider trade to be the best way to build relationships with foreign parties, they also believed that long-term engagements based on pure trust risked muddying the waters with political intrigue and hidden motives. Conversely, commerce forces honesty and transparency. Since then, the U.S. has turned away from this approach, forging many treaties and alliances with foreign parties —often with detrimental results. Social ties tend to complicate matters, and may come with their own hidden motives for collaboration.

This is not to say that doing business on the basis of money is the only way of building trust. Rather, it is to say that we should not disregard cooperation based on monetary exchange, nor neglect the downsides of trust-based sharing and collaboration. Both money and social capital have the power to “bind and blind.” According American sociologist Xavier de Souza Briggs, we live in a time where trust based collaboration and social capital “have taken on a circus-tent quality, piling all things positive and social underneath”, while money has become its disgraced counterpart.

social capital
The most successful examples of innovation in the emerging sharing economy — Airbnb, Lyft, Uber — build their business around both the social capital of online reputation while using monetary exchange. Click To Tweet

Yet, the most successful examples of innovation in the emerging sharing economy, for instance Airbnb, Lyft, and Uber, build their business around both the social capital of online reputation while using monetary exchange. Their monetary incentives validate their businesses to a large extent. To compare, Couchsurfing, a platform similar to Airbnb in many ways, lacked such financial mechanisms, working on a pure trust-basis. It never reached Airbnb’s success. The peer-to-peer reviews and monetary transactions on which these start-ups are based work together to create viable, trustworthy business. Combined with the digitization of society, these platforms create new connections and communities. As a result, we are better equipped than ever to mitigate problems inherent to trust-based sharing, and successfully collaborate by combining the opportunities offered by open platforms and increased social inter-connection with financial exchange.

Our articles and blogs serve as a starting point for discussion and further exploration. We welcome your views and input. Do you agree with the views on social capital and money expressed in this article? How might we find ways for social capital and financial exchange to work and come to new heights, together? Will the emerging sharing and reputation economies give rise to a moneyless future or do you believe the sharing economy, too, requires financial exchanges?

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