The term capital can be defined as wealth owned by a person or organization in the form of money or assets. It also includes the wealth available for the purpose of investment or commencement of company. In other words, the term capital is used for that part of an amount of invested or borrowed money and does not include interest (Piketty, 2015). The different types of capital include physical, financial, human and social capital.
A renowned author Brian Uzzi who is also a globally recognized scientist, speaker on social networks and leadership and a consultant has represented his views on financial capital. The researches made by Brian Uzzi has been funded by private agencies and government and such researches also appeared in The Economist, WSJ, Newsweek, Fortune, The New Yorker, TV and other media outlets. The main outlook behind the focus on financial capital lies in the fact that financial capital performs an important role in the economy and this role enables the other types of capital to be owned and traded (Forum for the future, 2018). Financial capital is required by businesses and entrepreneurs for the purpose of obtaining the raw materials for manufacturing the products or to provide the services to the different sectors of the economy. This essay focuses on the views of Brian Uzzi on financial capital along with the opinions on the ease in seeking finance through networks and social relations.
Financial capital can be defined as equity or borrowed sums with the help of which the assets of the firm are acquired and the operations are funded. Capitalism, socialism, anarchism, feudalism and various other civic theories have different views regarding financial capital’s role in social life (Boso, Oghazi, Cadogan & Story, 2016). According to Uzzi, financial capital of a firm is affected by the social embeddedness. In other words, embeddedness has a great influence on which firms get capital and at what cost. The answer to these questions is capable of determining the growth of economies, life chances of firms, how markets stratify persons and firms through pricing and rationing of credit. Moreover, it is argued that the firms having strong networks and social relations benefit while seeking finance.
Uzzi further examined how the relationship between bank and borrower along with other networks affect the acquisition and cost of capital of the firm by making the use of social embeddedness approach. The term social embeddedness can be defined as the point up to which social relations and networking directs the commercial transactions through the use of exchange protocols linked with non-commercial, social attachments for governing business dealings. Such embedding provides benefits to the firms seeking finance by way of promoting distinct governance mechanisms along with the private information transfer. These are the factors by which banks and firms are motivated for finding integrative solutions to problems related to financing which are not possible through market relations and therefore possess different benefits (Uzzi, 1999).
Uzzi further argued by way of analyzing how lending is affected by networks and social relationships (Serrat, 2017). Loans are easily secured and lower interest rates are received when firms are tied with embedded ties to the lenders and in cases where their network of bank ties have a mixture of arm’s-length ties and embedded ties (Kadushin, 2012). Arm’s-length ties are the irregular and lean transactions that take place without any prolonged social or human contract among parties requiring entering into constant relations which will ultimately assists the parties in knowing each other. The aim of the study made by Uzzi was to enhance sociological theory on finance in a number of ways. The setting of interest rates was examined which are responsible for creating the value, thereby ranging the sociological research on markets to formation of price. The analysis was strengthened with the use of triangulation of theory, statistical analysis and fieldwork. The potential offers are analyzed by the firms by way of “shopping the market” which provides them with available options and assists them in securing loans with lower borrowing costs. This suggests that network embedded firms get easy access to information regarding the loan deals currently available in the market. Social embeddedness also enables the firms in accessing private resources of the lenders thereby enhancing the ability to grab better loan deals (Bruton, Khavul, Siegel & Wright, 2015). The fieldwork performed by Uzzi revealed that market is segmented into three strata by the bankers: entry-level firms, new corporate and midmarket.
According to Uzzi, embedded ties perform dual functions i.e. creating value in the dyad and motivating the change partners for sharing that value. Moreover, the bargaining power of those firms are optimized that hold expansive networks of arm’s- length ties to banks and ultimately get access to enormous possibilities relating to prices and loans which in turn increases their chances in obtaining corporate financing. Collaboration is promoted by embedded ties but a network of embedded ties can limit the access of the firm to new ideas and market information due to the inducement of over attentiveness to historical conventions and local resources (Semrau & Werner, 2014). The firm’s range of available options is optimized when a network is composed of both arm’s-length tie and embedded tie as the shortcomings of the ties is moderated in such a case (Dobbin, 2004).
The market is heterogeneous for the loans which imply that where the complementarity in the networks is high, the ability of the firms to obtain finance and lower their financing costs should be enhanced (Muldrew, 2016). The ability of the firm to shop the market and partnering with a bank for the compatible loan structure with its credit profile brings about a growth in the access to capital. In corporate financing context, ability of the firm to obtain market information and to investigate the information acquired through both private resources and the novel information circulated among the players in the market is increased due to complementarity.
The two dependent variables are corresponded to the stages of corporate financing process. The first stage of corporate financing process consists of acquiring of capital by the firm. The second stage includes the estimation of cost of capital which is the interest rate on the loan acquired by the firm (Thibierge & Beresford, 2016). It is difficult to determine whether the lack of loan suffered by a firm is a result of credit rationing by bank or a self- restricted consumption of the firm. Therefore, a convention is adopted which assumes that when the need for credit of a firm is controlled, the firms without loans were denied credit.
Bankers have a saying, “a relationship is worth a basis point”. The belief of the bankers is reflected in the saying that the measurement of the value is done on an ambiguous and old- fashioned manner. Statistical and ethnographic evidence shows that more the commercial transactions between a bank and a firm are embedded in social attachment, greater expectation of reciprocity and trust shape transacting, which in turn promotes transfer of private resources along with providing governance benefits which are not accessible through market ties. Majority of the studies conducted regarding the behavior of financial capital puts its focus on the usage of mechanisms relating to formal governance such as written contracts and access to public information. Therefore, embeddedness is considered as the channel to governance arrangements and resources the emulation of which is difficult through other exchange mechanisms.
The whole research conducted by Uzzi provided with the conclusion that the eligibility for the financial capital of a firm is related with social relations and networks framed by it ibn the market. Such a network produces a value which is at premium when it creates a channel with the help of which the private information obtained through relationships and public information obtained through market is linked.
Therefore, it can be concluded that the outcomes of the financial market is stratified by the social structure by way of influencing the firm that gets credit along with the cost of credit (Leenders & Gabbay, 2013). The criteria for meeting the financial selection lies in the ability to provide a product that depicts the characteristics of a firm and opportunity structures that are socially arranged. The firms that have high network complementarity and embedded relations are considered to be more eligible for the credit and for receiving lower cost of financing. Therefore, exchange creation for mutual benefit and market making is considered to be dependent upon networking and social relations. This assists in generating premium benefits for the economies and firms whenever they provide a bridge for the purpose of integration of private resources of relationships with the public resources of the market. This means that social relations and networking is a key to building financial capital.
References
Boso, N., Oghazi, P., Cadogan, J.W. and Story, V.M., 2016. Entrepreneurial and market-oriented activities, financial capital, environment turbulence, and export performance in an emerging economy. Journal of Small Business Strategy, 26(1), p.1.
Bruton, G., Khavul, S., Siegel, D. and Wright, M., 2015. New financial alternatives in seeding entrepreneurship: Microfinance, crowdfunding, and peer?to?peer innovations. Entrepreneurship Theory and Practice, 39(1), pp.9-26.
Dobbin, F. 2004. The New Economic Sociology: A Reader. Princeton University Press, 2004.
Forum for the future. 2018. The Five Capitals, [Online]. Available at: https://www.forumforthefuture.org/project/five-capitals/overview [Accessed on: 18 February 2018].
Kadushin, C. 2012. Understanding Social Networks: Theories, Concepts, and Findings. Oxford University Press, USA, 2012.
Leenders, R. Th. A. J. and Gabbay, S. M. 2013. Corporate Social Capital and Liability. Springer Science & Business Media, 2013.
Muldrew, C., 2016. The economy of obligation: the culture of credit and social relations in early modern England. Springer.
Piketty, T., 2015. About capital in the twenty-first century. American Economic Review, 105(5), pp.48-53.
Semrau, T. and Werner, A., 2014. How exactly do network relationships pay off? The effects of network size and relationship quality on access to start?up resources. Entrepreneurship Theory and Practice, 38(3), pp.501-525.
Serrat, O., 2017. Social network analysis. In Knowledge solutions (pp. 39-43). Springer, Singapore.
Thibierge, C. and Beresford, A. 2016. A Practical Guide to Corporate Finance: Breaking the Financial Ice. Springer, 2016.
Uzzi, B., 1999. Embeddedness in the making of financial capital: How social relations and networks benefit firms seeking financing. American sociological review, pp.481-505.
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