| Under the direct impact of IT and economic globalization, business networks such as subcontracting, franchising, strategic alliances, virtual enterprises and industry clusters etc. have spread rapidly all over the world and resulted in enormous success of "the Asian Four Dragons", "Silicon Valley", "Third Italy" and the small and medium-sized Chinese businesses since 1980s. The phenomenon of inter-enterprise networking indicates that traditional labor division inside an enterprise is turning into labor division among enterprises, rivalrous competition among enterprises is evolving into coexistence of competition and cooperation, and business networks will be an important production organizational mode in the 21th century. The purpose of this paper is to probe into the mechanisms of business networks' formation and their operation, the laws governing the change of business networks' forms and their influences on China's economic transition. Business networks are so complicated an economic phenomenon that there are related theories on business networks in many disciplines, such as economics, sociology, management science and organization studies. However, these theories lack a common micro foundation. Business networks, which are organizational forms lying between hierarchy and market, are a kind or a set of long-term and relatively stable contractual relations for a certain common objective between enterprises. Thus contract is an ideal starting point to study problems on business networks.From the viewpoint of contract, the relational contract theory can be taken as a basic micro theory on business networks because relational contracts are the basis of business networks' formation and of their operation. On the author's opinion, a relational contract can be formed by two ways, one is asset specificity facilitating bilateral dependence and the other is individual social capital locking both parties in. When macro social capital is so insufficient that opportunist behaviors appear, the relational contract formed by individual social capital is an effective method to reduce transaction cost. Even if macro social capital is enough to produce general trust, relational contracting is indispensable to both parties because the lure from asset specificity is so big that general trust cannot prohibit the "hold-up" opportunist behavior. From the viewpoint of governance, since relational contract is formed by asset specificity, it is an implicit self-enforcing mechanism, and a repeated-game reputation mechanism different from law or moral, i.e., a calculative trust mechanism. Analyses on franchising, strategic alliances, and long-term relationships in procurement of steel needed for railway manufacturing factories demonstrate that relational contract incentives are the principal problem in business networks' operation, and that ownership arrangement and other contractual elements can be taken as important means for relational contract incentives. According to the author, social capital is not only an exogenous environmental factor, but can be an endogenous one also. In the operation of business networks, such as Japanese subcontracting, NUMMI Joint Venture and "Silicon Valley", a lot of social capital (non-calculative trust, norms and social networks) is created, and social capital will in turn stabilize and promote business networks. Therefore, the mechanism of business networks' operation is dominated by calculative trust, and social capital, such as non-calculative trust, norms and social networks, acts as its important complement.According to the degree of formal contracts' effect on relational contracts, business networks can be divided into two types: a contractual one and a relational one. It can be concluded from the relational contract theory that the relational type characterizes a transitional economy. It is an inevitable fact that the development of Chinese family business and its networks, and emergence of many rent-seeking business networks appear in Chinese economy transitional peri...
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