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Trust, Exchange and Social Embeddedness: The Case of The Israeli Diamond Industry

Berger, R. (1998). Trust, Exchange and Social Embeddedness: The Case of The Israeli Diamond Industry. (Unpublished Doctoral thesis, City, University of London)


Research by behaviourally orientated scholars such as Burt (1997, 1992); Nahapiet and Ghoshal (1998); and Granovetter (1985) have helped to illustrate that once analysis moves away from the abstract economic models of perfect information and frictionless exchange, reality is based on the complexities of imperfect competition. This reality is based for instance, on social structures, personal contacts and relationships to facilitate successful exchange.

The researcher believes that the realities of such social capital, structure and relational effects are especially true and important in the Israeli diamond industry. The significance of this proposition rests on the fact that it is very difficult to ascertain the quality and value of polished diamonds, especially at the time of exchange. This is further augmented by the traditional and in many cases secretive nature of exchange methods and conventions of the diamond industry based on medieval Jewish law and values.

In such a case, the ability to identify the characteristics of others in exchange rather than solely the quality and price of the products exchanged becomes crucial to facilitate exchange (Darby and Kami, 1973; Choi et al, 1995). The basic proposition of the approach is that the structure and content of ties among the various actors in a network significantly affect individual's behaviour as well as the behaviour of the network as a whole (Uzzi, 1996, 1997). In this view, it is the relationship between potential exchange actors that determine exchange and not solely the product exchanged. Thus, the unit of analysis in this doctorate thesis shifts the focus of enquiry from the qualities of the transaction to the qualities of the relationship.

Researchers have generally bestowed positive effects of social capital on performance, but have not discussed its limitations. The researcher argues that social capital may have limits. This paper illustrates that initially social capital may improve competitive advantage, but as the market becomes more rationalised limitations to social capital set in. The researcher illustrates its limits with empirically tested propositions and discusses its implications in the context of the Israeli diamond industry.

In terms of limiting the scope of enquiry, the researcher suggests that it is useful to consider the effects of social capital on firm performance and limit social capital to trust and reputation as the conduit through which exchange is undertaken. Trust and reputation are important variables of social capital as it influences a firm’s attractiveness as an exchange partner (Dollinger et al, 1997; Burt, 1997; Fombrun, 1996; Barney and Hansen, 1994). Furthermore, it is an essential part of socially based exchange that may lead to a competitive advantage (Uzzi. 1997; Kramer and Tyler, 1996; Barney and Hansen, 1994).

Diamond firms were found to be fundamentally family run business units, where the owner was involved in all key aspects of the business and consequently had firsthand knowledge of all the firm's strategy and administrative activities. Hence, the relationship between managerial characteristics and firm performance were found to be fundamentally important in order to forecast a firm’s economic performance.

The researcher saw the diamond industry as an important case study to research as the diamond industry as a whole and the Israeli diamond industry in part was found to be an under researched area in business. The diamond industry is Israel’s chief export and the only industry that Israel is globally dominant in.

Publication Type: Thesis (Doctoral)
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Departments: Bayes Business School
Bayes Business School > Bayes Business School Doctoral Theses
Doctoral Theses
[thumbnail of Berger Thesis 1998_redacted.pdf]
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