Book proposal and book review

19 The China Business Model. Copyright © Z. Chi and H. Seock-Jin. Published by Elsevier Ltd. All rights reserved.2017

http://dx.doi.org/10.1016/B978-0-08-100750-1.00002-4DOI:

CHAPTER 2

Guanxi Culture: How it Affects the Business Model of Chinese Firms

Zhang Chi and Hong Seock-Jin KEDGE Business School, Talence, France

2.1 INTRODUCTION

The Chinese term guanxi has been discussed in Western management publications since the 1980s when it first appeared as a concept for Western companies to consider when doing business in China. In order to succeeding in doing business in China, Western companies have spent many years trying to understand what guanxi is and how to practice guanxi in China. Guanxi has been special Chinese cultural factor and has played a very important role in Chinese social and economic systems. So, what is guanxi exactly?

According to the Chinese Xinhua Dictionary, the basic mean- ing of guanxi comes from combining two Chinese words: guan (关) and xi (系). Guan (关) means a “gate or barrier,” and xi (系) means “connec- tion or link.” So guanxi literally means to “go through the gate and get a connection.” The definition of guanxi given by the Chinese authority’s dictionary is “certain properties of contacts or relations among people.” So guanxi can be simply translated as “personal relationship” or “social con- nection.” Because guanxi is deeply rooted in Chinese culture, it is more complex than a purely personal relationship as found in Western countries. So we leave this Chinese word untranslated, because there is no English word with a correspondent meaning.

In research before 1990, guanxi was defined in a vague way as a “special” relationship or “particular” ties to differentiate it from common personal relationships (Alston, 1989). With subsequent in-depth studies of guanxi, more and more Western scholars have a better understanding of the guanxi phenomenon. Subsequently, guanxi has been defined as rela- tionships or social connections based on mutual interests and benefits, which is achieved by exchanging favors and giving social status between

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guanxi partners. So the guanxi interaction is not only commercial but also reflects a social act that binds exchange partners with reciprocal obliga- tions (Yang, 1994). Generally, it’s believed that guanxi is an interpersonal utilitarian relationship for reciprocal exchange, taking place only at indi- vidual levels (Davies, Leung, Luk, & Wong, 1995). Recent research, how- ever, has proved that this kind of interpersonal guanxi can also be applied at the organizational level (Cai, Jun, & Yang, 2010; Gu, Hung, & Tse, 2008).

Using a business perspective, guanxi is not only a cultural factor but also an institutional force and governance structure. At the firm level, guanxi can be regarded as social capital and a cooperative resource to gain clear advantages in terms of financial performance, marketing channels, and so on (Cai et al., 2010; Cao, Baker, & Schniederjans, 2014; Gu et al., 2008). Guanxi study has been favored by more and more Western investors in recent years. They see guanxi as a “magic weapon” to access Chinese markets and gain competitive advantages. Guanxi study is also seen as rela- tionship marketing in Chinese markets (Davies et al., 1995).

Different scholars define guanxi using different perspectives because the word guanxi can refer to different but related things: guanxi states, guanxi practices, and guanxi exchanges. In most cases, guanxi refers to guanxi states, i.e., the relationships or ties between people, firms, or even between indi- viduals and the government. This kind of guanxi relationship is based on emotional attachment and utilitarian purposes (see Section 2.6). Guanxi states come from guanxi bases (see Section 2.3). However, guanxi some- time means guanxi practices or guanxi behaviors (see Section 2.4). Guanxi practices refer to the process when people expand their guanxi networks though a set of social behaviors such as wining and dining. Guanxi is not only static but also a dynamic process. It needs to “pull guanxi” actively to achieve more mutual benefits. For instance, guanxi begins when one party starts to look for favors from another party. If another party cannot always respond to this favor, he or she will ask others to fulfill this favor through his or her guanxi networks. This process will involve more and more actors and will conclude only when the problem is solved or abandoned (Fan, 2002). Because guanxi is a utilitarian relationship based on exchanging favors, it can be used for exchange as social capital under a code or a set of social norms (see Section 2.5).

This chapter is divided into eight sections. After this introduction, the background of guanxi culture (Section 2.2) is presented. Then, three guanxi-related concepts are introduced in the following parts: guanxi bases (Section 2.3), guanxi practices (Section 2.4), and guanxi exchange

Guanxi Culture: How it Affects the Business Model of Chinese Firms 21

mechanisms (Section 2.5). Section 2.6 elaborates guanxi’s main charac- teristics, whilst Section 2.7 focuses on guanxi’s impact on business perfor- mance, with the conclusion in Section 2.8.

2.2 BACKGROUND

The deeply rooted Guanxi culture has profoundly influenced the way of doing business in China. It is therefore imperative to have a thorough understanding of why guanxi matters so much. The popularity of the guanxi phenomena in Chinese society can be explained from two aspects: traditional cultural values and modern social atmosphere.

2.2.1 Traditional Cultural Values Guanxi is a product of a Confucian culture that rules social behav- iors between people. Because guanxi culture is so closely linked with Confucianism, it’s necessary to understand Confucianism and its influence on guanxi culture.

Confucianism is an ethical, religious, and philosophical system that has enjoyed a long-term dominant cultural influence in East Asia and Southeast Asia (including China, Korea, Japan, Vietnam, etc.). The philoso- phy was started by Confucius (551–479 BCE), one of the most influen- tial philosophers and educators in China, during the “Spring and Autumn” period (approximately 771–476 BCE). Confucian ideas have been used as a ruling ideology since the Han dynasty (206 BCE–AD 220), influencing Chinese intellectuals and laboring people alike for thousands of years.

The core value of Confucianism is Ren which means “love others” and “treat others well.” Ren codifies an ethical rule for personal relationships. It emphasizes that we should treat others with love and compassion to get along harmoniously and with friendship. It believes that through har- monious relationships, the whole society will become more tolerant and stable. Under this Confucian social theory, Chinese people pay particular attention to interpersonal relationships with others. In this way, Chinese society has become a relational society, and the guanxi (personal relation- ship or social connection) culture flourishes there.

Confucian theory also emphasizes that all relationships start from kinship and the clan system. It underlines that each individual person attaches to a whole family, and the worship of ancestors has priority over other relationships, giving emphasis to the family-value orientation of Chinese culture. Seen from this perspective, the Confucian culture can be

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interpreted as a clanship culture, with Chinese personal relationships and social order maintained by blood ties and emotion. Unlike the individual- ism found in Western countries, where each has a social division of labor, Chinese society consists of family units. Every Chinese is subordinate to his or her own family and is responsible to the family. In China, the fam- ily relationship always takes priority over other social relationships tied through contracts. So the guanxi phenomenon always starts from inside the family, then ventures to outside acquaintances. Because there is a lack of confidence in strangers, Chinese people choose to believe insiders (people with whom they share guanxi) rather than outsiders (people with whom they don’t share guanxi).

Guanxi shares some similarities in other East Asian cultures that are highly influenced by Confucianism: Kankei in Japan and kwankye in Korea have similar meanings as guanxi in China and it corresponds to blat in Russian culture. This phenomenon also exists in other societies dominated by collectivist cultures, such as Italy, Israel, and South Korea, which regard kinship as a key social resource (Gu et al., 2008). Even though guanxi culture shares some similarities with other personal network cultures in the world, guanxi operates in a unique way that is not exactly the same as its counter- parts in other cultures (Gu et al., 2008).

In summary, Chinese culture is deeply influence by Confucianism, which emphasizes interpersonal relationships, especially clanship. And guanxi phenomenon (people relying on social connections) is a product of Confucian values. China is a relational society, and Chinese people use guanxi as a basis for their important social resources.

2.2.2 Modern Social Atmosphere The traditional cultural viewpoint of guanxi reveals how it is embedded in Chinese society and deeply influences Chinese people’s daily life and social conducts. On the other hand, the Chinese modern social atmo- sphere, including contemporary and institutional Chinese environments, also promotes the development of guanxi culture. In this case guanxi means an “institutionally defined system” and is more related to institutional structure than cultural factors (Guthrie, 1998).

As mentioned, China is a relational society in which people rely more on personal relationships than rational laws. This can be partly attrib- uted to the Cultural Revolution, which took place in China from 1966 to 1976. During that period, social orders, organization disciplines, and laws were destroyed by frequent parades, and people preferred to believe

Guanxi Culture: How it Affects the Business Model of Chinese Firms 23

a person they knew rather than social orders (Yang, 1994). Even though this disaster is nearly 40 years past, and China has enjoyed high-speed eco- nomic development since the 1980s, Chinese business environments and legal systems have been criticized as unstable and of high uncertainty. Because of the absence of an adequate legal system and the lack of uni- versal formal rules, people rely more on personal relationships than formal contracts to avoid possible business risks. This is true for private compa- nies, which are more vulnerable to potential damages from an underdevel- oped legal system. Therefore in such an uncertain business environment, people rely more on guanxi and its informal rules and unwritten codes than formal structures, which are disadvantageous for protection and risk avoidance (Xin & Pearce, 1996). Guanxi is also regarded as a crucial insti- tutional force to counter outside high-risk environments (Cai et al., 2010). During this period of economic reform, because of the nontranspar- ency of market information and unclear policies, some important factors, such as key information, rare resources, land, and business licenses, were controlled by a small group of people. These “bourgeois individualisms” chase their own interests and adversely affected the social atmosphere (Yang, 1994). At this time, people needed to try to build guanxi with self- interested persons to gain key resources. With the deepening of China’s economic development, however, the Chinese government has begun to pay more attention to laws and regulations, and rebuild a rational-legal system. However, because more and more foreign investments are com- ing to China, market competition has become increasingly intense, which will weaken guanxi’s importance. In this view, people use guanxi to get rare resources though a “back door” (corruption), and political protection to counter the risks of an unstable legal system (Guthrie, 1998).

Apart from the uncertainty of the legal system, the inefficiency and ineffectiveness of business infrastructures and related institutions can be another main institutional reason causing guanxi culture formation in China (Gu et al., 2008). Chinese regulatory systems are criticized for their lack of efficiency and effectiveness because of underdeveloped infrastruc- ture, length of negotiations, bureaucratic delays, and institutional ambiv- alence. People believe that through guanxi practices many unnecessary business processes are cut and lengthy reviews are dramatically shortened. Accordingly, the treatment of related business formalities is more efficient. Therefore as long as the regular Chinese system remains ineffective and inefficient, guanxi will play an important role for subsequent effectiveness in business (Ambler, Styles, & Xiucun, 1999).

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2.3 GUANXI BASES

When we say that person A has guanxi with person B, it means that there’s a type of link between person A and person B. This link can be a family tie, social tie, or other kinds of ties. This link between people is called a guanxi base. Although guanxi bases do not necessarily produce active guanxi connections that make things happen, guanxi bases are still regarded as a prerequisite of guanxi practice (Yang, 1994; Yi & Ellis, 2000).

There are a variety of guanxi base types. For example, a guanxi base gen- erally can be divided into blood base and social base. The blood base is a familial tie, and a social base reflects a relationship gained through social activities. The nature of guanxi bases determines the quality of guanxi between persons. Some researchers classify guanxi into four categories, from the closest to the most distant: family and kinship, neighbors and native place ties, nonkin relationships of equivalent status, and nonkin superior- subordinate relations (Yang, 1994). Except for family and kinship, which is an inherent relationship, the three other sorts of bases can be categorized as sharing commonalities. These kinds of guanxi are based on commonalities shared by two persons, such as classmates (have studied at the same school), fellow villagers (coming from the same place), coworkers (working at the same company), and so on. In this chapter, guanxi bases are divided into two categories: kinship guanxi bases and commonality guanxi bases.

2.3.1 Kinship Guanxi Bases This type of guanxi base refers to relationships by birth or blood. It includes natal and nuclear families, extended families, consanguine relationships, and more distant sets of relatives. As discussed, because China is a family- oriented society, and Chinese people are deeply influenced by a kinship culture, family and kinship guanxi bases are ranked as the closest and most stable guanxi base. Within this family guanxi base, immediate family is the closest relationship, then comes the extended family, and the last is the dis- tant family. Family ties are relatively permanent and stable. Family guanxi is a pure emotional tie, every family member is obliged to make a contribution to the whole family without asking for anything in return. And the resource distribution inside the family is based on need, which is fair but not neces- sarily equal (Hwang, 1987). For instance, rich family members with worse economic situation will get more financial support from the whole family.

2.3.2 Commonality Guanxi Bases Yi and Ellis (2000) believe the establishment of guanxi begins with finding commonalities. These commonalities can be birthplace, school, company,

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profession, and so on. Through these commonalities, people feel close- ness and become tied together through these common points. This kind of guanxi base is also called “relationship by nature” (Fan, 2002).

2.3.2.1 Neighbors There’s an old Chinese saying that “close neighbors are better than distant relatives.” In daily life, close neighbors can have more interactions with people than with distant relatives, resulting in more emotional attachment compared to a distant relative whom they have hardly seen in years.

2.3.2.2 Same Hometown Sharing the same hometown is a native place tie, which the Chinese value greatly. Because China is such a large country with different regional cul- tures, people feel close to others who come from the same hometown. When people go to a new place far away, they will join an association composed of people from the same place to feel protected. This phenom- enon is very popular not only in China but also worldwide. For example, in France, people from Whenzhou (a city in the Zhejiang province) will associate together to do business and gain common benefits.

2.3.2.3 Same School This guanxi base includes classmates, alumni, teachers and students, and so on. Chinese people believe that the guanxi base of coming from the same school creates a valuable and long-term relationship. The guanxi established during campus life is emotional rather than utilitarian. There’s no pecuniary interest in this relationship, and people feel less at risk than through guanxi established at the workplace (Yang, 1994).

2.3.2.4 Same Working Place This guanxi base includes colleagues, masters and apprentices, superiors and subordinates, and so on. Compared to the same school guanxi, this kind of guanxi is more utilitarian. It is also less stable because of potential conflicts of interest in workplaces.

Certainly, in real life, guanxi bases are too varied to detail here. Even though a particular guanxi base could largely determine the quality of guanxi between individuals, no one guanxi base always maintains priority over the other bases. For example, we cannot say that classmate guanxi is better than colleague guanxi. The closeness of guanxi depends not only on the guanxi base but also another more important aspect: guanxi practice. Even though family guanxi has been regarded as the most stable and close guanxi base, it could also be weakened by distance and be less close than neighbor guanxi,

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for example. And the quality of the guanxi base will change as environments change: Neighbors’ relationships were at a high level of guanxi base during the 1980s because most Chinese lived in dormitory style quarters with a kitchen and toilet shared with neighbors. At that time, Chinese people had more interactions with neighbors. However, since the 1990s, Chinese people have moved to modern apartments instead of collective dormitories, living more separately so neighbor guanxi is not as close as before.

2.4 GUANXI PRACTICES

Guanxi bases reflect the existing links between individuals, but they can- not guarantee producing an active guanxi. An active guanxi relationship means individual people can take advantage of a guanxi base to achieve his or her own goals. For example, when you ask a favor of your class- mate, whom you haven’t spoken to in 10 years, he may refuse your request because of the lapse in time. However, an active guanxi may also be estab- lished between two individuals (person A and person B) with no exist- ing guanxi base. In this case, they need a mediator or introducer (person C) to establish guanxi between them. Even though a guanxi base between person A and person B does not yet exist, both have a guanxi base with the mediator person C. Through their social network, a guanxi relation- ship can be established. In fact, in modern society, with the increase in social networks, establishing guanxi in this way is getting more and more popular. Unlike previous guanxi, which are based on existing guanxi links, this method reflects an acquired relationship (Fan, 2002). In the business world, because acquired guanxi (guanxi established through social activities) is most popular, this article focuses on social-based guanxi. Simply, we need to use guanxi practice to find guanxi or to establish guanxi base, and these guanxi practices contain a set of activities that follow Chinese social norms. Generally there are two phases to go from stranger to close guanxi part- ners: guanxi initiation phase and guanxi cultivation and maintenance phase.

2.4.1 Guanxi Practice During the Initiation Phase The guanxi initiation phase is a process during which an outsider becomes an insider of a particular guanxi circle. People with a guanxi base include groups of people sharing commonalities (kinship can also be regarded as a group of people sharing commonalities). Inside a guanxi group is a guanxi network, and these insiders are called in-group members or in- network members. Insiders of the guanxi circle are treated very differently from outsiders in that insiders are trusted more and receive more help.

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Therefore outsiders need to go through the group barrier and become insiders to obtain useful information and resources. The key point of guanxi initiation is to find the commonality (link point) and establish the guanxi base. In a collective society such as China, people feel emotional attachments with others who share common characteristics (Zhuang et al., 2010). Perceived similarity is proved to be an ancestor to guanxi establish- ment (Lee, Pae, & Wong, 2001). These similarities can be created by nature, but they can also be acquired by social activities such as knowing a person in common and dining at the same place, and so on.

2.4.2 Guanxi Practice in the Cultivation and Maintenance Phase Just because a guanxi base or link has been created doesn’t mean that an active guanxi has been established. People need to cultivate guanxi and maintain guanxi through guanxi practice. These practices are used to develop the quality of guanxi between individuals through the exchange of gifts and favors. Guanxi practices are formalized as a series of social activities or social rituals such as gift-giving, exchanging of favors, banquets, and so on (Yang, 1994). The Chinese believe that through these guanxi interactive behaviors, their guanxi state will be improved (Zhuang, Xi, & Tsang, 2010).

2.5 GUANXI EXCHANGE MECHANISMS

Because guanxi is based on reciprocal obligations and exchange of favors, it can be explained by social exchange theory (Yang & Wang, 2011). With this perspective, there are two basic things that we need to establish: (1) what exactly is being exchanged in this relationship and (2) under what rules?

2.5.1 Renqing (Favor) Guanxi is a process of exchanging favors, and this kind of favor is called renqing in Chinese (exchanging resource in guanxi). Unlike in Western con- texts, where favors refer only to tangible or specific things such as money, goods, or services, renqing can also include some abstracts such as opportu- nity, affection, and so on. When someone does you a favor, you will own him or her renqing. And you need to pay this renqing at the appropriate time. Renqing is the exchange resource in guanxi relationships. Compared with other resources in social exchange, such as goods, information, lands, and so on, renqing is a resource of high particularism and middle concrete- ness (Hwang, 1987). Renqing is highly particular because it can be repaid only by a particular person in particular way. Unlike other resources such

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as money, renqing can be transferred through people. And renqing can hardly be measured. Second, renqing is considered to be middle concrete because it can be repaid by tangible goods and also intangible affections.

Table 2.1 summarizes the differences between renqing resources and other common social exchange resources, such as money, service, goods, information, and so on.

Table 2.1 delineates the differences between renqing and other exchange resources in the following six aspects: value, measurement, favor return circle, process, transferability, and boundary. Common social exchange resources such as goods or information have certain prices. Although renqing contains emotional and beneficial elements, it can never be calculated objectively, so the renqing exchange is an unequal exchange. Subsequently, in common social exchange, when a partner returns the favor, the exchange process is finished, and this reciprocal action will be returned in a short time. However, because renqing cannot be clearly mea- sured, one cannot pay off all the renqing he or she owes, and so the renqing exchange is an endless process. In addition, Chinese culture is oriented long term (Hofstede, 2001). A renqing favor does not need to be repaid immediately; you can return the favor when the other partner needs it. Therefore renqing is a long-term action. And, because renqing is a resource of high particularism, renqing exchange can take place only between par- ticular people, although goods, money, and services are transformable resources. Lastly, unlike Westerners, who separate business and private favors, Chinese people mix the two relationships and will do a business favor to repay a personal renqing (see Hwang, 1987; Wang, 2007).

Table 2.1 Difference Between Renqing Resources and Common Social Exchange Resources

Renqing Resources Common Social Exchange Resources

Sources

Value Unequal value Equal value Hwang (1987) Measurement Can’t calculated

objectively Have a certain price Hwang (1987)

Favor return circle Long term Short term Wang (2007) Process Endless process Clear start and end

points Hwang (1987)

Transferability Nontransferable Transferable Hwang (1987) Boundary Mix business and

personal favors Business and social

relationships are separated.

Cao et al. (2014)

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2.5.2 Renqing Rule Guanxi is a mixed tie that contains emotional and utilitarian purposes. In terms of exchange, guanxi exchange respects renqing rules (Hwang, 1987), which are the social norms and behavior rules that guanxi partners need to follow during their reciprocal exchanges. Similar to trust and relationship commitments, which play very important roles in relationship marketing, renqing is the underlying mechanism of guanxi (Wang, 2007).

Renqing rules can be interpreted through two parts: reciprocity rules and empathy rules (Wang, 2007). Reciprocity rules refer to when guanxi part- ners are obliged to return favors as necessary. Guanxi is based on mutual benefits and interests, so when you receive a favor from someone, you need to pay it back at a future time. Furthermore, in a guanxi network, you need to help the insiders who are in trouble even if they don’t ask for specific requests. If you refuse to return a favor, you will lose face (your social repu- tation), which could cause your guanxi relationship to end (Hwang, 1987). Unlike common social exchange, the favor exchanged in guanxi is not equal. According to the reciprocity rule, the favor returned always has higher value than what was received. The reciprocity rule indicates the obligation to return the favor; however, when to return this favor and in what way is another thing. The way to return favors should respect the empathy rule.

Empathy means the ability to see a situation from another person’s perspective, which involves understanding, consideration, forgiveness, and ganqing (affectional attachment) toward others (Wang, 2007). In a guanxi relationship, there are usually two parts: a renqing allocator and a renqing petitioner. Because renqing return is a long-term situation and cannot be measured precisely, an empathic petitioner shouldn’t ask for an imme- diately returned favor or equal-valued return favor. As for the allocator, being empathetic means figuring out the exactly need of petitioners and doing them favors at the appropriate time. China is a high-context coun- try, and people prefer to present their desires obscurely. Consequently, the renqing allocator needs to do corresponding favors according to a particu- lar situation even without petitioners’ directly asking. The empathy rule here is similar to “anticipatory communication” (Wang, 2007). If you fail to interpret a petitioner’s need, or pretend to not understand, you will be criticized for not understanding renqing.

2.5.3 Xinyong (Trustworthy) and Mianzi (Face) Xinyong can be translated as “trustworthy” or “credible” in English. If we say someone has xinyong, it means this person is trustworthy and reliable.

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Whether a person can fulfill his or her reciprocal obligation depends on his or her xinyong credit. Different from systems of trust in the West at the organizational level, xinyong is an interpersonal trust (Leung, Lai, Chan, & Wong, 2005) and is not based on written contract but a person’s oral commitment. Xinyong is based on one’s past reputation of returning favors, which is highly related to one’s business ethical integrity (Hwang, 1987; Leung et al., 2005). People prefer to do a renqing exchange with one who has high xinyong credit, because he or she has shown the ability to respect renqing rules. One who does not have xinyong will lose his or her future opportunities to exchange favors.

People who violate the renqing rule in a guanxi exchange will not only lose xinyong but also lose mianzi (face). Mianzi refers to one’s reputation, social stature, and the power to influence others in guanxi relationships. The Chinese place a high value on their mianzi, hence “saving mianzi rather than losing it becomes a primary objective in Chinese society” (Hwang, 1987).

2.6 GUANXI’S MAIN CHARACTERISTICS

Previously we introduced three guanxi-related concepts: guanxi state, guanxi practice, and guanxi exchange. This part focuses on guanxi’s main characteristics in order to differentiate it from other confusing concepts, such as pure interpersonal relationships, relationship marketing, and so forth.

2.6.1 Utilitarian Aspect As discussed, guanxi is based on mutual interests and benefits. Therefore people establish guanxi for certain purposes. The guanxi process is full of reciprocal exchanges, and guanxi parties are bound by obligation and indebtedness (Yang, 1994). Therefore the utilitarian aspect is a main char- acteristic of guanxi that differs from common interpersonal relationships.

There are at least three main differences between guanxi and a pure interpersonal relationship: first, the reciprocal process is not always equal. As an old Chinese says, “The favor of a drop of water has been rewarded with the gratitude of a fountain of water”: when we receive a favor, we should repay this favor with value added. This concept is deeply rooted in Chinese society and results in a social norm of profound reciprocity. Second, guanxi practice needs to comply with some existing rituals, such as gift exchanging, wining and dining, and so on. Maintaining guanxi is

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more formal than the cultivation of common personal relationships. Third, guanxi relationships are not a purely emotional attachment. People need to use guanxi to achieve certain goals, such as obtaining key information, rare resources, special service, and so on (see Chen, Ellinger, & Tian, 2011).

2.6.2 Emotional Aspect Chinese people often use the word ganqing to indicate the emotional closeness of guanxi among parties in a network. Ganqing plays a very important role in guanxi interactions. This emotional closeness can be used as a key indicator to describe the quality of guanxi between two peo- ple. The more affection between each other, the better guanxi they have. Guanxi is not a pure utilitarian relationship; it contains affective commit- ment and a caring attitude toward others. Sometimes, people rely more on its emotional value than its utilitarian value (Wang, 2007). Individuals’ emotional attachments can be improved through social activities such as wining and dining. Through frequent social interaction between parties, affectional bonds between parties strengthen, improving their guanxi.

Guanxi has always been regarded in Western research as a Chinese ver- sion of relationship marketing (Davies et  al., 1995). Unlike simple transac- tional relationships, guanxi has many things in common with relationship marketing: trust and mutual understanding, cooperative behavior, develop- ment of networks, long-term orientation, and so on (Wang, 2007). Guanxi is quite different from Western relationship marketing, however, because of its unique emotional aspect. First, guanxi is a personal relationship that contains an affectional element. Unlike Western networks, which are commercial, guanxi is also a social network. People in guanxi relationship exchanges not only provide beneficial favors but also affection (feelings, care attitudes, etc.). Relationship marketing is an impersonal relationship that becomes estab- lished more on a firm level and is built only for commercial purpose with no personal or emotional aspects. Relationship marketing is much more rational than guanxi. Second, relationship marketing is universalistic. This relationship is open to any other commercial partner. Any potential business partners can build this relationship if they are willing to sign the contracts and respect them. But Chinese society is a low trust society(Fukuyama, 1995). Chinese people trust only people with whom they share guanxi or are inside their guanxi circle. The guanxi circle is a highly specific network. The Chinese treat insiders and outsiders totally differently in terms of trust. In guanxi relationships, people rely more on oral commitment than written contracts in relationship marketing efforts (see Wang, 2007).

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2.7 GUANXI AND BUSINESS

The guanxi phenomenon is anchored in Chinese daily life. It contains a set of social norms (renqing rule) that heavily influence Chinese social behaviors and interpersonal interactions, including business behaviors. Many foreign managers regard guanxi as a rule of doing business in China. Indeed, many researches have pointed out that guanxi has a big influence in every aspect of the business domain, including relationship marketing, supply chain management, market performance, market channeling, and so on. Business people can benefit from their social networks with either government officials or business partners. This part focuses on guanxi and people looking for business interests (include investment, business oppor- tunities, rare resources, etc.) through their guanxi networks.

Before we discuss its impact on business performance, one crucial question needs to be raised: because guanxi has been described as a rela- tionship at the personal level, how does this personal relationship turn into a benefit at the organizational level?

In business circumstances, guanxi refers to the cross-organizational con- nections between each company’s representatives. These persons are also called channel-boundary personnel, representing their company directly and communicating frequently with the other company’s representatives (Park & Luo, 2001; Zhuang et al., 2010). Guanxi in business situations is also a reciprocal relationship based on mutual benefits, so when channel-bound- ary person A of company A does a personal favor for person B, who is a representative of company B, person B could return this favor by showing favoritism during a business exchange between company A and company B. This is how a corporate exchange can be personalized. In Western cultures, people always make a clear distinction between business interests and private interests, but such “business is business” behavior culture cannot be applied in Chinese firms. In a guanxi culture–dominated company, business exchange also involves renqing exchange (benefits and emotion). A personal obligation can be paid by business actions, which in turn increases corporate benefits. And, as discussed, unlike trust and commitment, the cornerstone of relation- ship management, Chinese people rely more on a personal trust—xinren— than contract trust or system trust at the organizational level. Personal reliability is always more important than confidence in corporations. So in China, people build personal guanxi first, then business relationships can be developed based on this good personal guanxi. Whereas, in Western cultures, personal relationships are always built after successful business cooperation.

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Even though guanxi is in force, personal relationships do play an important role at the firm level; guanxi remains a personal asset and can hardly be transformed to an organizational property. Guanxi, which is a personal network, can be transferred only interpersonally, not from a person to an organization (Fan, 2002). When an employee leaves his or her company, his or her guanxi asset will be separated from the com- pany at the same time. So, organizational guanxi is actually based on per- sonal guanxi among cross-organizational boundaries staff (e.g., company representatives).

2.7.1 Business With Government Guanxi Previous guanxi research (before 2000) focused on guanxi’s function in terms of government officials. Because the Chinese legal system is unde- veloped and the business infrastructure is far from efficient, small and private companies need to rely on guanxi to get protection from risks caused by unstable investment environment. In such a situation, guanxi functions as a substitute for formal institutional support (Xin & Pearce, 1996). Companies can get benefits from government guanxi in the fol- lowing four ways:

2.7.1.1 Resource Acquirement The original Chinese economic system was based on a central planning economy, and still today the Chinese market is not totally opened. State- owned companies still contribute a large part to Chinese industrial out- put (50% in 1998 and 25% in 2011). Many rare resources, such as land, raw material, and special licenses, are strictly controlled by the central gov- ernment and local governments. And these resources are usually not open to the public. Only people who have government guanxi (insiders of this guanxi circle) can access procurement of these rare resources (Davies et al., 1995).

2.7.1.2 Information Access Because of underdeveloped business infrastructures, the information about government policy, regulation, and market trend is not publicly transparent. Much information is kept confidential, and only insiders have the access to it. Establishing guanxi with government officials is an important way to access key information and avoid environmental uncer- tainty (Davies et al., 1995).

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2.7.1.3 Get Protection In the background of weakened institutional forces and an unstable invest- ment environment in China, especially before the 1990s, a close rela- tionship with important government officials could get protection from unstable conditions and ward against appropriation or extortion (Xin & Pearce, 1996).

2.7.1.4 Antibureaucracy The Chinese government has been criticized as bureaucratic and lack- ing efficiency. However, if you have guanxi with some officials, you can break this bureaucratic barrier and get a quick response for relevant for- malities. Guanxi can help you save time and chase quick-moving business opportunities.

Early literature emphasized the guanxi between business people and government officials (Gu et  al., 2008). This kind of guanxi has been regarded as a magic weapon enabling entrance into the Chinese market and providing a company strategic advantage. Such a view was formed during a time of imperfect legal systems and weakened institutional forces. Additionally, business-government guanxi was always involved in corrup- tion. Because guanxi practice is a process of reciprocal exchange, if you want to get rare resources, rare information, special treatment, or protection, you needed to pay back monetary favors to key government officials. It’s a money-power exchange trade, which causes unfair competition and has a negative impact on the whole market. However, as the economy has devel- oped, the Chinese government has paid more and more attentions to laws and regulations in order to build a rational-legal system. In addition, the Chinese market is becoming more competitive with deeper marketization, so its government is decreasing its interference in the market. For these rea- sons, government guanxi is losing its importance for business development.

2.7.2 Business Guanxi Guanxi has been proven to have a positive influence on business results, specifically financial performance including sales growth, sales trends, cost savings, market expansion, market share increasing, supply chain perfor- mance including supplier development, strategic purchasing, outsourc- ing, bullwhip effect reduction, and increasing company reputations. But how does guanxi influence business performance? The following points describe guanxi’s direct and indirect influences on business performance.

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2.7.2.1 Direct Influence This part presents the business behaviors that can be affected directly by guanxi behaviors and discusses how guanxi works.

2.7.2.1.1 Trust Trust plays an important role in Western relationship marketing. Similarly, guanxi is highly related to trust. As described previously, guanxi exchange is based on social norms of obligation and reciprocity, and people need to respect these norms in order to keep xinyong and avoid losing face. Therefore guanxi can improve interpersonal trust (Lee et al., 2001; Leung et  al., 2005). Trust can effectively avoid business interruptions caused by opportunistic behaviors (Gu et al., 2008).

2.7.2.1.2 Information Sharing Guanxi reflects emotional feeling toward others. This emotional close- ness promotes better interaction among business partners. Together with trust, good interaction encourages business partners to have open com- munication and to promote information-sharing behaviors. In addition, under renqing rules, good guanxi will lead to more reciprocal information exchange (Cai et  al., 2010), including business opportunities and market trends, helping business performance (Cao et al., 2014; Yi & Ellis, 2000).

2.7.2.1.3 Resource Acquirement The cooperative firms in guanxi networks have the possibility of access- ing partners’ resources to achieve resource complementarity. Reciprocal behaviors will take place in resource exchanges. Through guanxi links, distant people also can have the chance to have cooperative resources exchanges (Park & Luo, 2001).

2.7.2.1.4 Cost Savings Cost savings related to guanxi practice can be produced in three ways: lower transaction costs, lower information research costs, and lower resource research costs. First, interpersonal trust in guanxi relationships produces reliability that can eliminate unnecessary administrative process to facilitate future transactions (Gu et  al., 2008). Simplified transaction processes save transaction time and cost. Second, guanxi promotes coop- erative behaviors, and lower transaction costs can be achieved by synergic

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practices between business partners (Cao et  al., 2014). Additionally, because of more frequent information exchange produced by guanxi prac- tices, information research cost decreases. Third, because guanxi networks permit access to partner resources, resource research costs also will be reduced by resource sharing.

2.7.2.1.5 Satisfaction Because guanxi contains reciprocal exchanges for in-circle members, exchange partners can obtain increasing satisfaction through these mutual benefits. This satisfaction is gained by acquiring necessary information and resources from a partner’s company. In addition, the nature of guanxi is a close relationship that increases satisfaction naturally (Leung et  al., 2005).

2.7.2.1.6 Interdependence Once a partner invests in a guanxi relationship, the other partner has to pay back and invest more into this relationship. Otherwise, he or she will lose face because of violating the renqing rule. As the investment in special assets increase, business partners become more dependent on each other.

2.7.2.1.7 Negotiation Better interaction in guanxi relationships can promote better negotiation. Moreover, the affection attachment, good interactions, and interlock- ing mutual obligations between guanxi partners results in less conflict and coercive power use (including reward, referent, expert, etc.) when fac- ing disagreements. Guanxi relationships are useful to reduce and resolve conflicts (Chen et al., 2011).

2.7.2.1.8 Flexibility A close guanxi relationship among business partners can achieve a better negotiation and control benefits with a set of reciprocal obligations that one partner can use to influence other’s decision behaviors. This control behavior can help companies to anticipate future exchanges and to make real-time exchanges, increasing company’s flexibility when facing uncer- tain environments (Gu et al., 2008).

2.7.2.1.9 Cooperation Based on the renqing rule, reciprocal obligations are based on mutual inter- est by both partners. Furthermore, trust and emotion mechanisms in

Guanxi Culture: How it Affects the Business Model of Chinese Firms 37

guanxi increase the willingness to cooperate. Together with guanxi’s influ- ence on using noncoercive power and on avoiding conflicts, guanxi con- tributes a lot to firms’ cooperating (Zhuang et al., 2010).

2.7.2.1.10 Coordination Coordination refers to the synchronization of business activities among partners. It’s believed that the trust and emotional ties built in guanxi can increase the frequency of information exchange, which in turn increases the coordination between guanxi partners.

2.7.2.2 Indirect Influence Regarding key indicators of business performance (such as finan- cial performance and marketing performance), guanxi’s influences are not direct but occur through mediators who have been introduced previously.

2.7.2.2.1 Long-Term Orientation Compared with other countries, Chinese society puts a great value on a long-term orientation (Hofstede & Hofstede, 2001). Satisfaction, mutual trust, and interdependence help to promote companies’ future collabora- tion in the long term.

2.7.2.2.2 Financial Performance Financial performance is one of the most important indicators of business performance. This includes sales growth, net profits growth, cost savings, and so forth. Cost decreases can be achieved by transaction cost savings, information research savings, and resource research savings. Long-term orientations can increase relationship quality and, together with controlled behaviors in guanxi relationships, have a positive effect on financial per- formance (Lee et  al., 2001). In addition, through guanxi networks, more business opportunities for financial resources will open for exchange part- ners. And through the access of key information about market trends and the cooperative behaviors with business partners, companies will find out about real-time market changes and be able to quickly respond. Such agil- ity augments a company’s financial performance, especially sales growth (Gu et al., 2008).

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2.7.2.2.3 Market Performance Similar to financial performance, market performance is also a key indica- tor that reflects business performance. Market performance can be shown by the increase of market share. Guanxi has been proven to have a positive impact on market channels (Zhuang et  al., 2010) and develops a firm’s effectiveness and responsive capability. In this way, a firm’s market share will increase. Cooperative and coordinated behaviors in guanxi networks can both improve financial performance and increase market share by sharing market information and benefits control (Gu et al., 2008).

2.7.2.2.4 Supply Chain Performance Supply chain performance can be improved through guanxi practices in terms of supplier development, strategic purchasing, and outsourcing (Lee & Humphreys, 2007). Supplier development is achieved through regularly exchanged favors between guanxi partners. Long-term orientations, open communication, and a cooperative culture in guanxi lead the development of strategic purchasing. And trust fostered in guanxi encourages compa- nies to outsource to their business partners. Furthermore, because of close relationships and frequent information sharing, the bullwhip effect will decrease and supply chain performance will be improved (Cao et al., 2014).

Table 2.2 shows guanxi’s influence on business performance based on the previous explanations.

Table 2.2 Guanxi’s Influence on Business Performance Guanxi’s Key Elements Mediate Influence on

Business Performance Final Influence on Business Performance

Reciprocal obligation Trust Long-term orientation Financial performance Market performance Supply chain performance

Information exchange Resource exchange Cost saving Satisfaction Interdependence Cooperation

Emotional closeness Trust Information exchange Satisfaction Cooperation Coordination

Interaction Information exchange Satisfaction Negotiation Flexibility

Guanxi Culture: How it Affects the Business Model of Chinese Firms 39

2.8 CONCLUSION

Guanxi (Chinese interpersonal relationship) culture plays a very important role in Chinese society. Firstly, as a product of Confucius Culture, guanxi is deeply rooted in Chinese daily life. Secondly, due to the inefficiency and ineffective- ness of Chinese business infrastructures and related institutions, Chinese people rely more on personal guanxi for commercial protection and risk avoidance.

Guanxi originated in clanship. It referred to family relationship and developed later into social relations. Guanxi is established on guanxi base (such as kinship, neighbors, coworkers, classmates). However, only guanxi cannot necessarily produce active guanxi (i.e., using guanxi to have things done). Guanxi must be cultivated and maintained through a set of social activities like dinning and winning.

The process of maintaining guanxi is called guanxi practice, in which people exchange renqing favor. As a specific guanxi exchange resource, renq- ing includes not only tangible things like valuable goods and money, but intangible affections and opportunities as well. Guanxi exchange respects a set of social norms which is called renqing rule. Renqing rule focuses on reciprocity, which means guanxi partners are obliged to return favors as necessary. If one partner failed to do so, he or she will lose xinyong (per- sonal credit) and mianzi (face, social statue, and reputation).

Guanxi contains both a utilitarian aspect and an emotional aspect. On one hand, unlike pure personal relationship, guanxi is based on mutual interests, and people establish guanxi is for certain beneficial purposes. On the other hand, guanxi contains affective commitment and caring attitude toward others, so emotional closeness can be used as a key indicator to describe the quality of guanxi. Guanxi’s emotional aspect differs it from Western relationship marketing.

As the development of Chinese economy, it is more and more common that people seek business interests (include investment, business opportuni- ties, rare resources, etc.) by using guanxi network. In business circumstances, guanxi refers to the cross-organizational connections between each compa- ny’s representatives. It is believed that a personal obligation can be paid by business actions, which in turn increase corporate benefits. In other words, closer guanxi (frequent guanxi interactions and renqing exchanges) between two companies’ channel-boundary persons could lead more collaborative behaviors between companies. And these collaborative behaviors (include mutual trust, information sharing, resource acquirement, cost saving, negoti- ation, etc.) could turn ultimately into a better business performance in terms of finance, marketing, and supply chain. So for Western people who want to invest in China, or doing business with Chinese partners, guanxi practice with key personnel is an inevitable process.

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