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Publisher: Frankfurt School of Finance & Management gemeinn

Trust and Social Networks: Growth Foundations for Energy Service Companies in China

Genia Kostka and Kyoung Shin publish field study*

Frankfurt/Main - Scientists and industry leaders generally agree that the market for energy service companies has a huge potential in China. China\'s ratio of energy use to GDP is 1.5 times the world average. This considerable discrepancy between China\'s energy consumption per capita and that of developed economies points to a high and untapped potential for energy efficiency measures.

The Chinese government has been actively supporting energy efficiency measures in the last decade. Concrete measures were approved in the National People\'s Congress. Provincial governments and cities such as Shanghai and Beijing have formulated additional local policies to support projects of energy service companies.

Under such favourable conditions one would expect energy service companies to thrive as they did in other developing countries such as Brazil. Yet in China, energy service companies did not realise their growth potential.

Why has the energy service companies\' industry been a disappointment in China? How can the industry fulfill a valuable role in reaching energy efficiency goals? Genia Kostka and Kyoung Shin have addressed these questions. Their reseach concludes that energy service companies, in order to develop within the Chinese energy market, have to be part of a social network, in which they become trusted members. Genia Kostka and Kyoung Shin assumed that private Chinese energy services companies were in fact not part of such networks, not trusted and therefore unable to realise their growth potential.

In order to verify this hypothesis, Genia Kostka and Kyoung Shin conducted over 30 interviews in 2011 with Chinese and international energy service companies in Beijing, Hebei, Baoding (Hebei) and Dalian (Liaoning), as well as members of the Chinese Energy Management Company Association (EMCA).

The interviews produced the following results:

- The entire Chinese energy service companies market works within a system that is based on relationships in which one partner trusts the other.

- International energy-service companies did either not realise or know this. They acted in ways they were used to from their home countries and tried to imitate market mechanisms familiar to them.

- Public Chinese energy service companies recorded strong growth, since they are part of networks that are based on trust. They are spin-offs of state-owned companies and therefore in a better starting position than private international energy service companies. The majority of their customers are governmental organisations, public institutions and enterprises from the heavy industry, which are generally state-owned.

- Local entrepreneurship as well as social and political networks are key factors that decide on success or failure of energy service companies in China. The majority of them are based in large cities, far away from the actual project site, which further limits their ability to embed themselves in local networks, the main source of trust building. Again the public energy service providers are in a better starting position, since they belong to close-meshed networks that possess connections to politics. These relationships make it easier for new customers and banks to have confidence in them.

- Private and international energy service companies grow if they are successful in establishing network resources.

Conclusion: The Chinese market for energy-service companies is organised by a system of network connections. There are no developed market institutions. Foreign businesses have to accept this and amend their structures and business practices accordingly. Trying to establish the structures of US-American or European energy service provider markets only represents an additional obstacle to growth for them. Genia Kostka and Kyoung Shin are available for giving interviews and authoring guest articles. An English version of the study is available for download under \"Publikationen / Arbeitsberichte, Working Papers\" on Genia Kostka\'s website:

*Professor Dr. Genia Kostka is Dr. Werner Jackstädt Assistant Professor for Chinese Business Studies at the Frankfurt School of Finance & Management. Kyoung Shin is Research Associate in the Department of Political Studies of the Massachusetts Institute of Technology (MIT). Their joint study has been published as Working Paper No. 168 of the Frankfurt School of Finance & Management: Energy Service Companies in China: The Role of Social Networks and Trust.

Frankfurt/Main, 26th July 2011

Publication and Reprint free of charge; please send a voucher copy to Frankfurt School of Finance & Management gemeinnützige GmbH .

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