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What are the potential benefits and pitfalls to western firms when deploying guanxi connections in China? Under what conditions would you recommend the use of guanxi?

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Introduction

What are the potential benefits and pitfalls to western firms when deploying guanxi connections in China? Under what conditions would you recommend the use of guanxi? Guanxi can be described as a "system of personal connections that carry long-term social obligations" (Millington et al., 2004), and, according to Seligman (1999), without guanxi "your life is likely to be series of long lines and tightly closed doors, and a maze of administrative and bureaucratic hassles". This essay introduces the above question by first describing guanxi and its importance in Chinese business, then discussing the benefits and pitfalls of guanxi to western firms. It will conclude by reviewing the optimum conditions, in my opinion, in which western firms should deploy guanxi. Guanxi is deeply embedded in Chinese history with strong links back to times of Confucianism, thus is a prominent feature in today's Chinese business environment. Parnell (2005) suggests that "perhaps [guanxi is] the key, distinctive social institution defining, directly or indirectly, virtually all social interaction in China", signalling the importance of guanxi in all aspects of life in China, not just in a business context. Literally, guanxi means "relationship or relation" (Bian, 1997 cited by Millington et al., 2004). However, in reality it represents an exchange of reciprocal favours through interpersonal connections in order to satisfy personal interests (Bian, 1997 cited by Millington et al., 2004). ...read more.

Middle

This is beneficial for the foreign firm due to, yet again, "limited resources and a distribution system that is under strict administrative control" (Law et al., 2000). By maximising guanxi with government officials, as suggested by Law et al. (2000), will enable foreign firms to obtain personal gains in the resource-allocation process. However, it must be noted that, if the new entrant is to recruit local employees then they must understand how the manager-employee guanxi will affect the behaviour of both the manager and the employee. According to Law et al. (2000), Chinese managers may make decisions regarding employees based on their guanxi, and thus, foreign firms may view job assignment and promotional decisions as biased. On the other hand, employees may expect managers to treat them different to other employees based on the quality of their guanxi. Foreign firms may view both of these reasons as disadvantages of guanxi due to the bias involved. This can be overcome though, through training managers and employees to adhere to the organisation's regulations and culture, rather than their guanxi relationship. As mentioned previously, guanxi can be a means for getting things done in China, but can "equally often also [be] a formidable obstacle" (Seligman, 1999). This can be especially true for foreign firms, new to the Chinese market, who are unfamiliar with guanxi and how to establish successful guanxi networks. ...read more.

Conclusion

Therefore, one instance where it is likely to be usefully deployed is where information coding and diffusion is poor. This means that guanxi may be the only available option as using any other method of information gathering is likely to produce inaccurate, unreliable and too little information to base a decision on, as is frequently the case in China. However, as mentioned earlier, there are some disadvantages to consider when deploying a guanxi strategy, including corruption and abuse of the person-to-person relationships that guanxi maintains. Hence, I believe that guanxi is most suitable in the search or information and/or the establishment of contacts, for example, searching or potential suppliers or identifying candidates for interview, in China's current business environment. Although, I would recommend against making decisions wholly based on information gathered through guanxi, due to the exchange of favours principle that guanxi is based on. However, I believe that China's business environment is likely to change in the future and thus, the importance of guanxi in business culture may be questionable. This is because Parnell (2005) suggests that the theory and practice adopted by western organisations is incompatible, and thus irreconcilable, with the Chinese guanxi. He argues that, due to the transformation of China's industries, many new large formal organisations may be created and hence, the loyalty of a Chinese to a particular relationship or network, i.e. guanxi, is therefore likely to be replaced. ...read more.

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