Business Research Paper

Question:

social capital and its effects in China. The social capital means that the expected collective, advantages, or economic benefits resulted from the favored treatment and cooperation between individuals and groups

Focus: Guanxi business

Answer:

Introduction

The concept of guanxi is used in China to signify the networks of relationships aimed at providing cooperation, economic benefits, and assistance among people involved in business activities. Through the use of the right guanxi, a business person is able to avoid the various risks and setbacks that occur in the course of doing business. A key philosophical foundation of guanxi is the notion of knowing the right people in business in order to achieve success.

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However, according to Dunfee observes many concerns have been raised regarding whether or not guanxi should be used in businesses and corporations (196). Some critics associate it with bribery while others term it as an unethical practice. This paper explores the meaning of guanxi, its relevance to China and its relationship with Confucianism. Guanxi’s common effects on Chinese society and economy are also explored. Its impacts are discussed in terms of social, economic, and political aspects.  Moreover, an evaluation is carried out on the ways in which the Chinese guanxi business impacts on the way China conducts foreign business.

The Meaning of Guanxi and Its Relevance to China

            Guanxi is a highly valued business philosophy in China. According to Ramasamya and Goh, guanxi has for a long time been the lifeblood for businesspeople in China (130). Ramasamya and Goh point out that guanxi streamlines all business undertakings (131). Guanxi is founded on the values of trust, cooperation, commitment to interdependence, and continuous dialogue between various parties.

According to Chenting and Sirgy, guanxi remains one of the main components of success in business operations in different parts of China (305). It impacts on how the Chinese people reason in terms of ethical aspects of business operations. For instance, guanxi has made bribery to be understood in a different light in the Chinese context. However, according to Chenting and Sirgy, there are variations in the degree to which Chinese business owners depend on guanxi to achieve success (305). For this reason, it is difficult to make generalizations on its impact on the ethical reasoning within the country’s business community.

Nevertheless, Luo claims that guanxi is the underlying philosophy around which business practices in China revolve (43). The truth of the matter, though, is that Guanxi has pervaded the business community in China. It has become synonymous with the right way of doing business in the country. It is recognized as a major factor that determines the performance of firms. Every business manager in China has to face the effect of guanxi in his routine operations. This applies to both local business people and foreign investors. For this reason, it is widely believed that any company that wants to achieve success in China has to put in place a guanxi network.

In guanxi, personal relationships are used by business people to gain favors. The need for mutual obligations among those who relate with each other in this way is implicitly acknowledged. This means that when a business manager receives favor from his friend in a certain government ministry, he is obliged to ‘return the favor’ in the future. For this reason, direct personal contact is necessary.  A business manager who fails to establish direct personal contact with friends is unlikely to make any progress as far as mutual cooperation is concerned.

Guanxi is also strongly pegged on reciprocal acts. A person who never returns a favor is frowned upon and considered untrustworthy. In this case, the favor goes to the partner who is at a point of disadvantage in a certain way. In other words, guanxi works best when the partners involved are not of equal rank. Once the weak person receives a favor, he does not have to return it in the same way. Rather, he needs to wait until an opportunity to return the favor presents itself in a completely different set of circumstances.

Another feature of guanxi is that it is not tangible. The partners involved have to build long-term relationships characterized by mutual exchange of favors. This brings about a feeling of commitment and equity among members of the network. Those who disregard this unspoken rule are humiliated by losing their social standing. When no member of the network is disregarding the rules of engagement, this creates opportunities for new members to be referred to the network by the existing members. 

It is evident that guanxi is based primarily on utilitarian benefits. There is no room for sentimentalities and emotions among the partners involved in the network. In fact, it is not a must that the partners be friends. The most important thing is that it should be almost impossible for the relationship to be severed. This explains why guanxi is based on personal relations that exist at the individual level. In the case of a personal sense of commitment, it is difficult to break down the feeling of mutual obligation. In contrast, people who have a strong sense of group membership may easily break away from the group merely because of a small misunderstanding.

However, the individualized nature of guanxi does not mean that it is not present at the organizational level. Many Chinese organizations encourage employees to utilize their guanxi for the benefit of their employers. They are normally encouraged through bonuses, commissions, and promotions. Luo observes that the trend towards increased use of guanxi as a basis of rewarding employees became evident during the 1980s (44).

Relationship between Guanxi and Confucianism

            Guanxi practice is a major feature of Confucian societies. In many Asian societies where there is Confucian influence, guanxi is also practiced. The relationship between Confucianism and guanxi manifests itself mainly with regard to the basic principles of human relations that dominate Chinese society. Hwang points out that in these principles, there is a lot of emphasis on the importance of friends, acquaintances, workmates, and fellow professionals in the process of forming guanxi networks (235). In this way, Confucian values are seen to be used in the formation of guanxi networks.

            In Confucian contexts, there is always a need for individuals to be motivated to engage only in doing the right things. In these societies, people are motivated by the fear of shame. Confucianism clearly stipulates the need for people to avoid actions that may bring shame upon their lives. In efforts to ‘save face’, people create numerous opportunities for guanxi to thrive. Once a person has received a favor, he has to work hard and return the favor in one way or the other in order to save face. This creates a society where people are always willing to reciprocate all the good things done to them.

            Confucianism also influences people to pursue righteousness. It is impossible for a person to be considered righteous if he never repays favors done to him. In this way, guanxi has both its advantages and disadvantages. On the one hand, it is advantageous because one may request for favors. On the other hand, it is disadvantageous because one is obliged to repay every favor given. Failure to repay the favors may bring about dire consequences. In this way, it is evident that a strong relationship exists between Confucianism and guanxi.

Impact of Guanxi in China: Social, Political, and Economic Aspects

Guanxi has far-reaching social, political, and economic effects on Chinese society. From a social perspective, guanxi is a key part of social relations in China. It provides a normative framework of relations among people both in their work environments and in social settings. In this society, Guanxi is a key component of social dynamics. Hwang indicates that there is an ongoing debate on whether Guanxi is important for business operations as well as for legal frameworks within China and several other Asian societies (237).

 Moreover, guanxi is the most influential practice as far as the notion of social networking is concerned. Guanxi defines the place of the individual within the social structure. It assigns roles relating to trust and social roles. Moreover, guanxi spells out the need for information if sustenance is to be achieved within the social system. This philosophy also sets out the behaviors that individuals in society should maintain in order for information to be accessible to everyone. Moreover, adherence to the appropriate behaviors is necessary for determining the types of relationships that exists among people in society.

Guanxi also influences the extent to which the sustainability of social relations is achieved. Trust is viewed as a phenomenon that is constantly changing. Guanxi is based on the idea that relationships are constantly changing. Whenever there is a need for a transformation of the existing social order, individuals only need to change the ways in which information flows across social networks. Trust is viewed as the most important factor as far as the establishment of sustainability is concerned. Moreover, guanxi supports the notion of ‘randomness’ in life. This randomness is as important as order in society. However, in guanxi, there is a preference for continued certainty over lack of social order.

From an economic perspective, guanxi has a far-reaching impact as well. In fact, in China, the origin of guanxi is traced to the ‘marketplace phenomenon’. In a typical marketplace in rural China, one is sure to find people from all walks of life engaging in business transactions while at the same time interacting with one another. In this environment of high-level interactions, change is happening all the time. Everyone is looking for a bargain. Friends are gossiping and everyone is keen on sustaining the relationship in order to benefit even more in the future. In today’s society, guanxi does the same thing. People use guanxi to increase their chances of benefiting from associates within the network.

Guanxi increases the individual’s chances of economic survival in an environment that is full of uncertainty. Through constant social engagement, individuals are always willing together to provide economic assistance to a friend who is most in need. In many ways, this practice creates contributes to socio-economic and economic sustainability. In a way, guanxi creates an environment in which any individual can manage to achieve all his business objectives. The achievement of these objectives is vital for political sustainability.

Guanxi also influences politics in a big way in China. China’s political leaders are always keen to develop bilateral relations with other countries around the world, including the US. These relations are based on the concept of guanxi. Trust is vital in ensuring the sustainability of these relations. Whenever this trust appears to be broken, the future of such relations becomes uncertain. For example, throughout the 1990s China had been working had to build relations with the USA. However, in 1998, the country’s embassy in Belgrade was blown off by the US. This action triggered protests in major cities in China. According to Hammond, the reason for this violence was not just the bombing of the embassy; rather, it was fuelled by the feeling that the US had violated the trust that China had been building for many years (27).

Guanxi in East Asia

In East Asia, the guanxi system presents an excellent platform for business success. Many entrepreneurs in East Asia have achieved immense success in business simply by adhering to the rules of guanxi. Through guanxi, business exchanges are confined to members of a clearly defined group. The group adheres to an informal but highly efficient way of doing business. Contracting activities that are done through guanxi are less risky because there are fewer opportunistic tendencies from the public. Moreover, it is less costly to carry out transactions within the guanxi system.

Moreover, many successful East Asian entrepreneurs are bothered by weak enforcement mechanisms provided by the state, particularly in situations where third parties are involved. To deal with this problem, the entrepreneurs resort to the guanxi system. This system provides an efficient enforcement mechanism without the involvement of third parties. The implicit rules of guanxi, which have been sanctioned by society, are the ones that make guanxi such a powerful business instrument. All enforcement activities between the two parties involved are carried out privately.

The powerful tycoons who continue to dominate the economies of most East Asia use the guanxi system to survive. Most of these tycoons are from China. They are in control of capital markets in major East Asian economies such as Malaysia and Indonesia. For these entrepreneurs, business operations thrive largely because of the persistent use of the guanxi system. Virtually all contracts are entered into through personal relations as opposed to laid-down procedures. Using this approach, these entrepreneurs have been able to control large business empires.

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The spirit of guanxi is also evident in the entrepreneurs’ choice of managers in these business empires. In many cases, a family member is chosen to run the empire. It is rare for professional managers to take over the running of businesses. This is in line with guanxi, which emphasizes on personal relations as opposed to the rule-based systems that are ordinarily used in developed Western countries. In such business operations, secrecy is highly valued. Entrepreneurs rarely disclose crucial information. On the most trusted individuals are given access to crucial company information. To protect this element of secrecy, business empires are anchored in pyramids of shareholdings.

Effect of guanxi on foreign trade

The Guanxi has a far-reaching impact on foreign companies that have operations in China. It has created a situation where there is an increased global integration of business practices in China. China is one of the largest recipients of foreign direct investments. Holds the second position after the US. The core aim of these investors is to exploit the opportunities available in the Chinese market.

Even in the context of this heightened business interest by foreign companies, the practice of guanxi continues to thrive in China. The Guanxi system continues to be of great importance in credit policy as well as in marketing activities. This reality has forced foreign companies to follow suit by starting to adopt guanxi principles. The influence of guanxi is also evident in the way foreign companies adopt accounting-related activities.

However, the influence of guanxi is not as strong in China as it used to be prior to the onset of huge FDI inflows. The foreign companies may have contributed to this decrease in reliance on guanxi. Today, many firms, both foreign and local, no longer rely solely on guanxi in their marketing activities; they also make use of partner firms in efforts to market themselves. Nevertheless, in many cases, marketers still consider guanxi to be a source of business opportunities.

Some foreign companies operating in China are keen to avoid the guanxi business model because of the long time that has to pass before trust is built. Moreover, guanxi comes with numerous obligations. A company operating in a foreign country may not be willing to be burdened with obligations arising from an alien business culture. The aspect of the guanxi system that many foreign companies consider beneficial is the use of a credit policy that provides for numerous payment options. Moreover, guanxi is normally beneficial in situations where companies are faced with liquidity problems. At such times, companies that belong to guanxi networks manage to get valuable liquidity-related assistance. 

In efforts to cushion themselves from the negative impact of lack of familiarity with guanxi, many foreign companies enter into joint ventures with Chinese companies. In this way, foreign companies are able to benefit from the advantages of companies with guanxi. Moreover, through such joint ventures, foreign companies are able to establish relations with influential people, thereby increasing opportunities for assistance whenever problems arise. This means that foreign companies need to enter into China through a joint venture in order to boost their performance in the country. It is also important for such companies to put into consideration the length of their business activities in China. In case the company intends to operate in the country for many years, an entry in the form of an independent company may be necessary. In such a case, the company would need to form guanxi networks in order to obtain a competitive advantage over other foreign companies. 

Guanxi also has an impact on foreign companies that export products to countries with guanxi systems such as China. Such companies have had to appreciate the crucial role that guanxi plays in all spheres of business operations in China. However, not all companies understand the effect of guanxi on the way the exported goods are perceived upon shipment into China. There is a need for exporters to understand the role of various guanxi variables in engaging in business negotiations, solving problems, and entering into partnerships.

In recent times, questions have been raised on whether the guanxi system has become less important for Chinese multinationals in the contemporary era of globalization. Indeed, multinational companies are increasingly interested in the reform policies that are aimed at opening up the country to foreign investors. However, there are some parts of China where business operators have no confidence in the rule of law. In such areas, guanxi continues to thrive. In this regard, one can make the assumption that if a proper framework was put in place in all regions, many multinational companies would stop focusing too much on guanxi networks. In the meantime, guanxi continues to be deeply entrenched in China. It is a crucial phenomenon that multinational companies cannot afford to ignore as long as they continue operating in Chinese society.

Conclusion

            In summary, Guanxi is the most dominant way in which business operators in China seek to amass social capital. Guanxi is related to Confucianism and it is an integral component of Chinese culture. The influence of guanxi is also evident in East Asia. In this region, Chinese tycoons have managed to use the power of guanxi networks to build large business empires. It brings about numerous social-economic and political benefits.

In areas where the rule of law has not been properly entrenched, businesspeople use guanxi to deal with numerous challenges, particularly those relating to business contracting procedures. In such an area, even multinationals cannot afford to ignore the power of these networks. The fact that some critics view guanxi as an unethical practice has not stopped this long-standing culture from thriving in today’s globalized world.

Works cited

Dunfee, Thomas. “Is Guanxi Ethical? A Normative Analysis of Doing Business in China”. Journal of Business Ethics 32.5 (2001): 191–204. Print.

Hammond, Scott. “The ancient practice of Chinese social networking: Guanxi and social network theory”. Journal of Human Systems Management 6.1 (2004): 24-31. Print.

Hwang, Dennis. “Guanxi and Business Ethics in Confucian Society Today: An Empirical Case Study in Taiwan”, Journal of Business Ethics, 89.8 (2009): 235–250. Print.

Luo, Yadong. “Guanxi: Principles, philosophies, and implications”. Human Systems Management 16.1 (1997): 43-51. Print.

Su, Chenting and Sirgy, Joseph. “Is Guanxi Orientation Bad, Ethically Speaking? A Study of Chinese Enterprises”. Journal of Business Ethics 44.9 (2003): 303–312. Print.