關系 The Role of ‘Guanxi’ in China Business Howard Davies

Objectives To clarify the meaning of ‘關系’ To note how ‘關系 is perceived by Western observers To consider 3 different explanations for the importance of guanxi in China To consider the role of guanxi in the future

What is Guanxi 關系?

What is Guanxi 關系? “the set of personal connections which an individual may draw upon to secure resources or advantage when doing business or in the course of social life” Davies 1995

Write Down Your Ideas on Guanxi

Some Ideas On Guanxi? Personal Reciprocal obligations Continuing over time if nurtured Declining if neglected Insider/outsiders New friends/old friends Networks of connections ‘Investing’ in guanxi Consideration for others ‘People’ orientation

WHAT ARE WESTERN PERCEPTIONS OF GUANXI? Guanxi = Corruption and Complication Building guanxi is expensive and time-consuming Without guanxi nothing can be done Difficult to identify who is the decision-maker Negotiations take too long

How Can We Explain Why Guanxi is so Important in China?

How Can We Explain Why Guanxi is so Important in China? Guanxi may be the product of Chinese culture Guanxi may be a very useful response to institutional weakness in China Guanxi may be a response to the opportunities arising from administrative controls

關系 as a Product of Chinese Culture I the Chinese individual’s experience is of “self in relation to other”, not the autonomous and self-contained self of the West - wu lun五倫 Chinese people tend to put others into categories more sharply than Westerners Chinese people are more family-oriented and regard helping the family as an ethical imperative - giving business to a relative seen as a god thing, not a bad thing

Guanxi as a Product of Chinese Culture II Individuals are linked by: the ‘expressive’ tie - family - distribution by need ‘instrumental’ tie - strangers - earning a living - ‘mixed’ tie - with non-family people you expect to interact with into the future

關系as a Product of Chinese Culture III In the ‘mixed’ tie individuals have an obligation to do favours and to reciprocate those favours If someone asks me for a favour, whether I will give it depends on how will others think of me if I give or if I refuse? how big and how soon will be the return favour from them?

Guanxi as a Product of Chinese Culture IV If I have a good network of connections I will get what I want Developing good guanxi is more profitable in China than elsewhere (BUT IS THIS REALLY TRUE?)

The Results? Negotiations take longer ; time is needed to build up the personal side of a business relationship the consequences for the networks of all participants need to be taken into account The “real” decision-maker is difficult to identify; it is the whole network, not an individual Network members not involved in the business may be involved in meetings

Guanxi as a Response to Institutional Weakness Society needs arrangements which support transactions WHAT DOES THAT MEAN?

Guanxi as a Response to Institutional Weakness Society needs arrangements which support transactions I must have confidence that I will be paid for goods I supply and that I will receive the goods I have paid for how can I have that confidence?

Guanxi as a Response to Institutional Weakness Society needs arrangements which support transactions I must have confidence that I will be paid for goods I supply and that I will receive the goods I have paid for private armies - inefficient and expensive religion? trust legal system

Guanxi as a Response to Institutional Weakness Fully developed economies use the legal system to support transactions China does not have a fully developed legal system 300,000 lawyers needed What about trust as a substitute?

Is Guanxi a Substitute for the Missing Legal System? Mistrust of strangers is strong in Chinese culture But a group of people who know that they will transact with each other into the future will behave in a trustworthy way the ‘folk theorem’ in game theory Use of guanxi allows transactions to take place; GREAT PRACTICAL USE

Guanxi as a Response to ‘Rent-Earning Opportunities’ In a planned economy, shortages create opportunities to earn rents Even in a market economy administrative controls creat opportunities unless the administration is properly designed Individuals may try to get access to resources through bribery (which might be efficient) Or they may use their ‘guanxi’

What Are The Private Costs and Benefits of Guanxi?

What Are The Private Costs and Benefits of Guanxi? dinners, gifts (appropriate to the situation) not usually money, help with kids’ education BENEFITS access to resources and permissions favoured position for getting contracts

What Are the Social Costs and Benefits of Guanxi?

What Are the Social Costs and Benefits of Guanxi? inefficiency if people deal with a limited pool of others corruption may have social consequences BENEFITS allows transactions to take place in the absence of trust and effective institutions

Empirical Work? Hong Kong Managers dealing with China Business identified sources of information dealing with bureaucracy sources of resources transactions support

What was Most Important? Transaction Supporting Function of Guanxi Then Getting Information Resources Ranked Last

What Does That Imply? The Positive Aspects Are More Important?

What of the Future? Will Guanxi Remain So Important? a better legal system will make it less necessary as transaction support a market economy and administrative reform will make it less profitable but is Chinese culture unchanging?

The Possibilities? 1. Guanxi is inefficient and is only currently used because the benefits outweigh the costs. IT WILL BECOME LESS IMPORTANT, WHICH IS A GOOD OUTCOME 2. Guanxi is more efficient than a legal system and continues to be important for that reason, WHICH IS A GOOD OUTCOME 3. Guanxi is inefficient but so deeply rooted in Chinese culture that it remains very important. THIS IS A NEGATIVE OUTCOME