Download Research on “Stereoscopic” Financial Institutional Framework Construction of Virtual Enterprises

Research on “Stereoscopic” Financial Institutional Framework
Construction of Virtual Enterprises*
HE Lifen1, LIU Yeqing2
1. School of Accounting, Hebei University of Economics & Business, China, 050061
2. School of Business, Hebei University of Economics & Business, China, 050061
[email protected]
Abstract: The construction of a financial system for virtual enterprises is the construction of a collection
of specific rules which will regulate the financial activities of virtual enterprises and coordinate all kinds
of their financial relations. The content of the financial institutional framework construction includes a
dominant financial system, a recessive financial system and financial governance. The construction of
the dominant financial system should be based on the life cycle. Different institutional arrangements are
made for different stages of life cycle and thus a dynamic “vertical” financial system can be constructed.
The construction of the recessive financial system is mainly concerned with financial ethics,
cross-cultural management and relational capital. As a guarantee for the implementation of the two
systems, dominant financial system and recessive financial system, financial governance and the former
two jointly constitute a “stereoscopic” financial institutional framework for virtual enterprises.
Keywords: Virtual Enterprise, “Stereoscopic” Financial Institutional Framework, Construction
1 Introduction
As an entirely new organizational form of modern enterprises, virtual enterprises are being accepted by
more and more enterprises and research work on virtual enterprises has become one of the focuses of
management theorists. Kenneth Press(1991), John A. Byrne(1993), William B. (1999), David
Walters(2000) and Omar Khalil(2002) have done research work on and given definition to the
organizational form of virtual enterprises. William H. Davidow(1992), Applegate L.M. (1996)and Henry
W. Chesbrough(2002) have given a certain description of the operation of virtual enterprises. While
Charles Handy(1995), Robert Weller(2001) and M. Lynne Markus(2001) have made an investigation of
the network technology which supports the operation of virtual enterprises. Research work on virtual
enterprises in China started in the late 1990s: Wan Lunlai(2001), Ye Fei(2003) and Zhang Xumei(2003)
have elaborated the characteristics of virtual enterprises). Ye Dan(1998), Li Jinyong(2000), Feng
Weidong and Chen Jian(2002), Chen Juhong(2002) and Sun Dongchuan, etc. (2002) have made
investigations of the organizational structure of virtual enterprises. Qian Bibo(1999), Lin Yong(2000),
Feng Weidong, etc. (2000), Li Huayan, etc. (2000), Ye Fei(2001) and Chen Juhong, etc. (2001) have
made analysis on the partner selection of virtual enterprises. Feng Weidong, Chen Jian, Zhao
Chunjun(2001), Ye Fei and Sun Dongchuan(2004), Yan Kun and Li Juan(2004) have carried out a
research into the problem of risk management of virtual enterprises. Wan Xueli(2000), Xu
Hanfeng(2003) have made an analysis on the problems of accounting assumptions, accounting
principles and accounting entity recognition, etc.. While Shi chunsheng, Li Jinsheng, etc. (2001),
ZhengYi, Qin Cuirong(2002), Xie Liangan(2003), Cheng Hongwei(2003), Qiu Yun(2003), Zhang
Houbin(2003), Zou Hang etc. (2004), Zhu Xiaoping(2004), Peng Lan(2004) (2005), Liao Chenglin, etc.
(2005), Liu Song, Gao Changyuan(2006), Zou Yan(2007) have investigated problems concerning
financial management of virtual enterprises.
As far as the present research results are concerned home and abroad, the study on virtual enterprises
*
This work was supported by the Hebei Planning program of Philosophy and Social Science of the year
2010: “Research on Financial Institutional Arrangements of Virtual Enterprise” (program No.:
HB10EYJ012 ).
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demonstrates the following features: (1)broad study is being made relating to all the aspects of virtual
enterprises and fruitful results have been achieved, (2)construction of mathematical models together
with qualitative analysis is emphasized in the research methods so that the conclusions are convincing to
some extent. However, the majority of the current study on virtual enterprises is conceptual and
descriptive, and there is a lack of systematic research on the solution of problems occuring in the actual
operation of virtual enterprises and thus research on this subject appears relatively narrow. Meanwhile,
research work done on the financial system of virtual enterprises is obviously insufficient. Financial
system is a collection of specific rules which regulate the financial activities of enterprises and
coordinate all kinds of their financial relations, with the aim of improving the efficiency of financial
resources allocation and ensuring a smooth operation of the enterprise. Although much fruitful research
has been done on financial system: Guo Fuchu(1989), Tang Yeguo(1995),Yang Shu’e(1997), Feng
Jian(1998)(2005),Song Xianzhong(1999), and Li Xinhe(2005) have made investigations of such
problems as financial management system, content of financial system, etc, there is little research work
done on virtual enterprises from the perspective of financial system, with only a few relevant issues
scattered in the preliminary study of accounting and finance of virtual enterprises, such as the
investigation of problems concerning risk management, cost management and profit distributions of
virtual enterprises. Those studies are mostly limited to the analysis of a single question with a lack of
operability and guidance for enterprises and at the same time they ignore the connections between
various kinds of financial issues. At present, , virtual enterprises are becoming a trend of development
and major operation pattern for enterprises under the circumstance of network economy . And the
exploring financial system of virtual enterprises helps to develop theories on financial system and gives
guidance on the concrete operation of virtual enterprise financial system.
2 A Summary
On the one hand, the construction of financial system should cover specific rules which regulate the
financial activities and deal with financial relations within an enterprise. On the other hand, it should
contain the design of the internal financial governance structure of an enterprise. For this reason, the
authors hold the view that the construction of a financial system for virtual enterprises is the
construction of a set of specific rules which will regulate the financial activities of the enterprises and
coordinate all kinds of their financial relations, so as to improve the efficiency of financial resources
allocation and ensure a smooth operation of their financial work The financial system of a virtual
enterprise includes various kinds of financial regulations, specifications formulated by the enterprise, its
ideology and internal financial governance structure and mechanism. From the point of view of new
institutional economics, three aspects should be taken into consideration for the construction of the
financial institutional framework: formal constraints, informal constraints and the implementation
mechanism.
The construction of the financial institutional framework is the formulation of relevant regulations and
constraints for the financial affairs of an enterprise. Part of it can be explicitly stipulated in written
provisions, and part of it is intrinsic to the financial behavior of an enterprise and the content varies from
enterprise to enterprise, with no unified classification available. For this reason, the financial system can
be classified into a dominant financial system and a recessive financial system. Meanwhile, the effective
implementation of these two financial systems requires a guarantee from the financial governance.
Therefore, the construction of financial institutional framework of virtual enterprises includes three
aspects: the dominant financial system, the recessive financial system and financial governance.
。
3 Dominant Financial System of Virtual Enterprises
3.1 Content of dominant financial system of virtual enterprises
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Dominant financial system is a collection of various kinds of systems which are explicitly stipulated in
written form with unified standards and binding force. Specifically, it includes a macro-financial system
and a micro-financial system. The macro-financial system is a set of institutional specifications which
are formulated by a country or a government agency and are applicable to and must be obeyed by the
enterprises. It can not only strengthen the binding force of the financial system, but also save the
institutional construction cost for the enterprises. The current laws and regulations in many countries fall
into this category such as the “Company Law”, the “Securities Law”, the “Tax Law” and the “General
Principles of Corporate Finance” promulgated by China Ministry of Finance. Actually, the financial
constraints of such laws as the “Company Law”, the “Securities Law” constitute the institutional
environment for the financial activities of the enterprises. “General Principles of Corporate Finance” in
different countries carries the basic rules and specifications by which various types of enterprises inside
a country must abide. The new “General Principles of Corporate Finance” promulgated in 2006, China
has replaced the former one and has become the behavior guidelines for the rational organization of
financial activities and proper handling of financial relations for the enterprises. This is a symbol of the
gradual improvement and perfection of the new financial institutional system which regulates the
financial behavior of the enterprises with new general rules, prevents financial risks and is a good
support of the current financial supervision. While industry financial system is the financial system
formulated in compliance with the general financial principles according to the characteristics of
different industries.
Different enterprises differ from each other in organization and business activities, so not all the
financial problems that occur during the operation can be regulated by the macro-financial system
including laws, regulations and general financial principles. As a result, a financial system aimed at an
enterprise, the micro-body, is quite necessary. The micro-financial system is exactly the financial system
of an enterprise, which means the specific regulations with which the management of an enterprise
regulates its internal financial behavior and handles its financial relations. Enterprise financial system
differs from financial systems of other kinds for it is easy to operate and convenient to implement.
3.2 The idea of the construction of dominant financial system for virtual enterprises
The theory of life cycle plays a very important role in facilitating a deeper understanding of the changes
in technology, enterprises, industries and even in a country. And as an important research method and
way of thinking, the theory of life cycle is widely applied in the research of business management. The
application of the theory of life cycle has opened up a new perspective in the research into dominant
financial system in virtual enterprises. Virtual enterprises are often targeted at market opportunities and
they possess the distinctive characteristics of a life cycle from the time of their formation when a market
opportunity is discovered, their business operation, the achievement of their scheduled targets, till their
dissolution. Therefore, the application of the theory of life cycle is very essential to the research into
different life cycles and different stages of a life cycle in a virtual enterprise. Given these facts, research
on the financial system of virtual enterprises should start from the life cycle of the enterprises with
inquiries made respectively into the brewing stage, the founding stage, the operating stage and the
dissolving stage with the aim of constructing a dynamic “vertical” institutional system. The features of
financial activities in different stages of a virtual enterprise can be well grasped with this design of
financial system. And the focal point of the financial work of a virtual enterprise can thus be emphasized,
making it convenient to implement the financial system.
3.2.1 Dominant financial system in the brewing stage of a virtual enterprise
The brewing stage is the initial stage of the establishment of a virtual enterprise. Management of this
stage is the foundation of the future operation of the virtual enterprise, which determines the goal, mode
and basic framework of its operation. Core enterprises are the first ones to recognize the market
opportunities and they are the initiators of the establishment of virtual enterprises. Therefore, the core
enterprises should be the dominant financial system makers during the brewing stage of a virtual
enterprise. Financial activities in this stage mainly involve the identification and evaluation of the
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market opportunities, estimation of the expected future earnings and so forth.
3.2.2 Dominant financial system in the founding stage of a virtual enterprise
When a core enterprise determines to realize its market opportunities by founding a virtual enterprise,
and meanwhile sets a goal and selects an appropriate operation mode, it begins to form a virtual
enterprise, and at this point of time, the enterprise enters the founding stage. The main task during the
founding stage is the selection of partners, setting up of the information network, optimization and
reorganization of the resources of its member enterprises. In this stage, the main content of the financial
system consists of financing system (including the defining of a financing goal and selection of
financing method) and investment system (including investment risk management system, financial plan
implementation monitoring system and investment system for the information infrastructure) and so
forth.
3.2.3 Dominant financial system in the operating stage of a virtual enterprise
A virtual enterprise enters its operating stage after it established and begins its normal production and
business activities. This stage is the essential stage for the operation of a virtual enterprise and is a
important phase in the financial institutional arrangements of the dominant financial system. The
management in this stage mainly includes partnerships management, task allocation and coordination,
feedback on the operation and operation supervision, etc. And the specific financial institutional
arrangements should rely on the content of management in the operating stage. The financial system in
this stage mainly consists of financing system, investment system, risk management system, profit
distribution system, cost management system and performance evaluation system.
3.2.4 Dominant financial system in the dissolving stage of a virtual enterprise
A virtual enterprise will be faced with its dissolution once the market opportunities have been basically
realized or when a project has been accomplished and the basis for cooperation between the member
enterprises has disappeared. The content of management in the dissolving stage contains the
identification of the project termination, handling of the affairs after the dissolution, profit distribution
and so forth. As a virtual enterprise is a non-existent enterprise in the legal sense, its property rights are
rather ambiguous, so conflicts are easier to occur during its dissolving stage. To avoid the conflicts
among member enterprises, corresponding financial systems should be formulated for the regulation of
the financial behavior during the dissolving stage of the virtual enterprise.
4 Recessive Financial System of Virtual Enterprises
Recessive financial system is intrinsic to the business activities of an enterprise, such as the financial
ethics, values which can not be stipulated in written form, but it has a corresponding regulating effect
and binding force on the financial activities and financial relations. The binding force of the recessive
financial system is weaker than the dominant financial system, though, it constitutes a internal drive for
the effective financial operation of an enterprise with a kind of invisible force of “soft constraints”, and
this financial system requires a conscientious implementation of its members. The construction of a
recessive financial system of a virtual enterprise mainly involves financial ethics, cross-cultural
management, relational capital, etc.
4.1 Financial ethics
A virtual enterprise is a collection of independent enterprises with their own codes of conduct and values.
They get combined for a common goal and this combination calls for good financial coordination. Thus
financial ethics is emphasized in virtual enterprises than in traditional enterprises. Financial ethics refers
to the self-regulating codes of conduct and the values of an enterprise with financial activities as its
essential content. It provides a invisible constraint for the handling of financial activities and relations of
an enterprise. Financial ethics should be treated as the basis of the construction of recessive financial
systems of a virtual enterprise, on which financing ethics, investment ethics and distribution ethics will
be gradually developed. When ethics is incorporated into the company governance and gets
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corresponding cultivation and perfection, the enterprise gets lifted ethically to a higher standard, which
provides a guarantee for the coordinated development of the virtual enterprise.
4.2 Cross-cultural management
Traditional enterprises create a culture after a longtime exertion of efforts and cultural accumulation.
Different from traditional enterprises, with the support of network technology, virtual enterprises
transcend the boundary of space to select their partners worldwide and this ensures the sharing of
resources, and with their complementary advantages, effective cooperation between all the parties can
be achieved. Member enterprises of a virtual enterprise are usually from different cultures which call for
the management of cultural communication and merging. The cross-cultural management has some
influence on the recessive financial institutional arrangement of a virtual enterprise. Culture can help to
improve the comprehensive strength of an enterprise, and financial culture is the aspect of a culture
shown in the field of finance. A financial cultural environment needs to be created which emphasizes
mutual trust. And a management mode for cross-cultural personnel should be established. Meanwhile,
the financial culture needs constant cultivation, and then it can play an active role in the improvement of
the recessive financial system of a virtual enterprise so as to achieve the expected result of the
construction of financial institutional framework.
4.3 Relational capital
As a collection of enterprises, a virtual enterprise makes it possible for all the core resources to
transcend the boundaries of the individual enterprises and flow to the whole enterprise network. 55% of
the resources of American manufacturers are from outside suppliers and the percentage in Japan is as
high as 69%. All this can fully demonstrate that the production and operation of an enterprise are not
isolated, but cooperative, with much reliance on each other. Through the relationship established
between all the member enterprises, a virtual enterprise combines all kinds of resources and can produce
an excess return greater than the total sum of all the individual gains, which is called relational rents. An
enterprise can turn its unique partnership resources into the relational capital it possesses and derives the
relational rents from it. It is the relational rents that become the source of improvement in its efficiency
and competitiveness. Based on this, the relational capital of a virtual enterprise is more associated with
the unique relationship resources such as mutual trust, friendship, commitments exclusively shared
among the member enterprises. The relational capital of the virtual enterprises is not obtained overnight,
but after a complicated dynamic process with improvement in each different stage and with the joint
efforts of all the member enterprises. In the preliminary stage when relational capital is obtained, due to
lack of information about the partners, suspicion, spying and probing acts are unavoidable and the
partnership of the enterprise is quite unstable. With time, partners will make judgements about their
confidence to the virtual enterprise based on the behavior of each other. Suspicion decreases gradually
and mutual trust will occur if partners keep placing more reliance on each other and then genuine
partnership comes into being. Cooperation based on partnership helps to generate relational capital
which can further stabilize the virtual enterprise. However, if member enterprises cannot obtain
relational capital and relational rents through cooperation, the virtual enterprise will be confronted with
its dissolution.
5 Financial Governance of Virtual Enterprises
Financial governance is needed as a guarantee for the successful implementation of both the dominant
financial systems and the recessive financial systems. Based on the property right relations between the
internal divisions in an enterprise, financial governance helps to achieve a balance system with financial
interaction and mutual constraint between the different divisions and it can guarantee regulated financial
activities and proper handling of all the financial relations. There is no explicit narration about financial
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governance which is achieved through property right allocation. It only exists in the organizational form
and the management structure of the enterprise. It basically determines the identity of the executors of
financial institutional arrangement and the roles they play in the complex enterprise, as well as the rights
they enjoy and the constraints they are faced with. After these aspects get united by means of financial
authorization, decentralization, monitoring and so forth, the property rights of the enterprises will get
deployed so as to restrain the financial activities and coordinate the financial relations.
Virtual enterprises are different from traditional enterprises so that their financial governance needs to
demonstrate the idea of “common governance”. The mechanism of the common governance of virtual
enterprises is to enable all the financial bodies of a virtual enterprise to enjoy equal opportunities to
share the property rights and make automatic adjustments to their financial activities through effective
institutional arrangement. Specifically, scientific management need to be achieved through the financial
decision-making system and then financial behavior gets well guided and regulated. A readjustment of
the old distribution pattern of financial rights is needed through a financial constraint and incentive
mechanism in order to achieve coordination between member enterprises.
6 Relations Between Dominant Financial System, Recessive Financial System and
Financial Governance
Both dominant financial system and recessive financial system are institutional regulations for financial
activities and financial relations. However, they take distinctively different forms. In terms of the form,
dominant financial system is demonstrated in specific written language, and it gives reference for the
implementation of the laws, financial regulations and internal financial specifications as required.
Recessive financial system means invisible regulations, the running of which entirely rest with the
conceptions and ideology of the individuals concerned with the financial affairs. In practice, dominant
financial system is the core of the entire institutional arrangements which plays a direct role in guiding
the financial activities and relations. Recessive financial system is a supplement to the dominant
financial system which can help strengthen the consensus and reduce frictions in financial relations. In
addition, financial institutional arrangements need a guarantee from financial governance for the smooth
implementation of the institutional regulations. Through rational distribution of property right,
clarification of the rights and functions, financial governance ensures the effective operation of the
financial system. Only when perfection is achieved in all the three aspects: dominant financial system,
recessive financial system and financial governance, can perfect financial institutional arrangements be
constructed. The relations between dominant financial system, recessive financial system and financial
governance are shown in the following figure.
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Hard constraints
Dominant financial system
Soft constraints
Institutional regulations
Recessive financial system
Guarantee
Financial institutional framework
constrant
constrant hard
Guarantee
Financial governance
Implementation mechanism
Figure 1 Relations between dominant financial system, recessive financial system and financial governance
7 Conclusion
The financial institutional framework of virtual enterprises is a complex system which plays a vital role
in financial practices. In this framework, dominant financial system and recessive financial system act as
the main content and financial governance acts as the guarantee for the former two. This kind of design
takes a form of “horizontal” institutional arrangement. Meanwhile, based on the theory of life cycle, a
“vertical” dominant financial system aimed at the stages of the life cycle is constructed. Thus a
“stereoscopic” financial institutional framework of virtual enterprises is constructed.
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