By deploying guanxi, this allows employers to access their employees social networks, which, especially for new entrants to the Chinese market, is an efficient and effective method of accessing an ever-expanding, virtual network of a range of services and products, and in particular information. The more guanxi is used, the more trust is developed between guanxi agents. Thus, typically, the network grows to include, second, third, fourth, and so on, parties, and hence the larger the network of available information grows.
However, perhaps the most important advantage to foreign firms is that typically the information gathered from guanxi networks is incredibly reliable, rich and of more use than other means. This can be key for new entrants into the Chinese market due to the lack of a trustworthy legal system and weak institutional structure in order to establish their own networks within the Chinese market.
In addition, guanxi “may offer significant transaction cost advantages” in this new environment by reducing search costs and negotiation fees and thus, enabling transactions to operate under “an efficient mechanism” (Millington et al., 2004). Specific to foreign firms, the reduction in direct and indirect costs will enable firms to reduce their set-up costs in China, but also, in the long-term, should reduce costs related to information gathering. However, as will be discussed later, expensive incentives, used in the exchange of favours, can sacrifice the cost-savings gained from guanxi.
Law et al. (2000) believes that a critical factor in the management of Chinese employees is to build and maintain good guanxi with them. This is particularly relevant to foreign firms as one of the major attractions of entering China is the abundant, cheap labour available. If seen as advantageous by the new entrant, guanxi can enable employees to maximise potential relationships with key government officials that employees may have through their networks. 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. However, as discussed by Parnell (2005), there are difficulties in attempting to develop a guanxi network: “guanxi networks are by definition informal; if they are made formal and explicit, i.e. public, then this unofficial ‘entity’ will immediately become dysfunctional”. Although it could be argued that if guanxi networks are not made formal and explicit then it will be very difficult for foreign firms, not just to learn how to establish them, but also to understand the benefits of implementing guanxi.
In relation to this, although “guanxi is seen by many as the most important element in business success in China”, Poon (2005) acknowledges that it is impossible to establish overnight. Therefore, she suggests that a new entrant to the Chinese market should find someone with suitable guanxi networks. This is why it is important for the foreign firm to fully understand and appreciate its managers and employees guanxi networks as these could become key to successfully operating in China. However, it would be naïve of the foreign firm to believe that guanxi is a quick solution to the lack of legal system and weak institutional structure.
However, the main disadvantage commonly linked with guanxi is the possibility of bribery and/or corruption due to the strong person-to-person relationships that guanxi is based on. A number of academics have noted this and some believe that while guanxi remains important in China, this is the reason why guanxi is now in decline (Millington et al., 2004). Millington et al. (2004) state that guanxi ties could have been weakened due to the rapid changes occurring in China – urbanisation, privatisation and influx of western companies – with fundamentally different ethical and operational systems. Steidlmeier (1999) cited by Millington et al. (2004), supports this notion by acknowledging that “guanxi may result in a set of ethical priorities that are different to the Western norm”. Millington et al. (2004) believe the rationale behind this weakening of guanxi is that western businessman and academics “identify aspects of guanxi with corruption” due to the emphasis on reciprocal favours and gift giving. However, they also believe that “clear distinctions” should be drawn, as gift giving related to guanxi is primarily aimed at relationship building, whereas bribery is associated with “illicit transactions” (Millington et al., 2004).
If employees are caught dealing with corruption or bribery, which is against the majority of western organisation’s regulations and cultures, then this can lead to dismissal of staff. This can increase recruitment costs for the firm, and can be a continuous problem for the foreign firm if they don’t fully understand guanxi. to overcome this barrier, western firms should attempt to train Chinese managers to adhere to the organisation’s regulations and cultures. According to Millington et al.’s (2004) study regarding buyer-supplier relationships in China, a number of western firms have responded with certain measures, including: educating buyers with the company’s ethics on giving gifts; restrict person-to-person relationships dominating decisions; and instantly sacking anyone found accepting ‘red envelopes’, a form of bribery.
To conclude, I would recommend that guanxi be used where the benefits outweigh the costs. 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.
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