Guanxi and its impact on business in China
To describe a place as a land of contrasts has become somewhat of a cliché, but nowhere does this familiar line apply more than to China. With its diverse climate, fifty six ethnic groups, eight major cuisines, political events that have seen at least four radically different political systems, and two hundred spoken dialects, China is one of the most complex and varied nations in the world. Despite all of the differences that lie within China, there is an extraordinary degree of unity in China, partly due to the predominance of one ethnic group (the Han), a long tradition of Confucian values, and the fact that all two hundred languages are held together by the same written language, which is Mandarin . Because of this unity, the Chinese civilization continues to be a unified and powerful culture that that has evolved for over two millennia to become what it is today. The Chinese have become a leading force in the 21st century broad-spectrum global business in a matter of just a few decades, especially since 2001, when China acceded to World Trade Organization membership. (Walker, 2007, p.16) This has been somewhat of a surprise to the rest of the world, especially considering it is a communist state that up until 1976 was under the oppressive regime of Mao Zedong, which brought about large-scale economic strife in the PRC (People’s Republic of China), especially during the notorious failure of the Great Leap Forward. This social and economic plan, used from 1958 to 1960, was based on the Marxist Theory of Productive Forces and aimed to use China’s vast population to rapidly transform the PRC from a primarily agrarian economy run by peasants into a modern, industrialized communist society (Wikipedia). The Great Leap Forward resulted in a major economic and humanitarian disaster, with estimates of the number of people killed by famine during this period ranging from 14 to 43 million.
The Great Leap Forward resulted in a major economic and humanitarian disaster, with estimates of the number of people killed by famine during this period ranging from 14 to 43 million. (Wikipedia)
Projections of current trends, however, suggest that within the next twenty years, China will surpass the economy of the United States. (Walker, 2007, p.16) As China strives to be a leader in technology and in today’s global economy, it aims to find compatible ground between tradition and modernity, embracing phenomenal changes in order to survive and prosper in today’s world. In the massive migrations of rural populations to major urban areas due to the emergence of employment opportunities in emerging manufacturing powerhouses, and in construction work due to the startling pace of land development in large cities such as Shanghai and Shenzhen, we can readily observe the rapid rate at which change is sweeping over this enormous nation. There is, however, still a strong undercurrent of strong ancestral roots and traditions that are deeply engrained in the people of China. America and other powerful economies of the world are not only having difficulty in competing with what the Chinese currently have to offer, which includes a much larger workforce at a much cheaper cost, but they are also having difficulty in learning how to work effectively with this unique culture in order to attain common business goals and to be able to tap into what is, potentially, the biggest market in the world.
How can the United States adapt to the way that business is conducted in China, so that we can compete and co-exist with this nation that is such a threat to us, yet at the same time such an ally? A survey conducted among 50 employees in Silicon Valley’s hi-tech industry revealed that over 60% of them felt that they had not been provided with adequate cross-cultural training by their companies prior to being sent on important business assignments to Asian countries. Joel Schneider, Director of Global Compensation at a prominent semi-conductor company, says, “It is important that effective training is conducted prior to international assignments as in many circumstances you only have one time to make a good first impression and this first impression will determine how successful you are at accomplishing your goals in the Asia”. Perhaps a good place to start is uncovering some of the most intriguing cultural differences to westerners when it comes to working in China and acknowledging the long tradition of Confucianism, and the role it plays in business, as well as other important factors that stem from this ancient philosophy. Although the State has officially designated China’s religion as Atheist, the teachings of the ancient philosopher Confucius still play an important role in the Chinese perspective. In essence, Confucianism revolves around the concept of harmonious relationships, and the idea that if proper behavior through respect, duty and loyalty are shown in the different types of relationships that exist between people, society as a whole will function smoothly. When doing business in China it is possible to see the enormous influence of Confucianism and other ancient philosophies have had on different business practices, most noticeably when it comes to the importance of long-term interpersonal relationships and Guanxi when it comes to business. Guanxi is a unique social dynamic in Chinese society and is one of the first words any businessperson learns upon arriving to China. In the November, 2007, issue of Business Week, Frederik Balfour refers to guanxi as the key to everything in China, including “securing a business license, landing a distribution deal, even finding that coveted colonial villa in Shanghai. Fortunes have been made and lost based on whether the seeker has good or bad guanxi.” (Balfour, 2007, p.84) Loosely translated, guanxi means “connections” or “relationships”, although neither of those words reflect the wide cultural implications that have been present in Chinese society for thousands of years. Basically, it describes a network of contacts which an individual can call upon when a favor is needed, and through which he or she can both exert influence and benefit from the influence of the others in the network.
Guanxi is based on the traditional Confucian values of loyalty, accountability, mutual obligation and, ideally, goodwill and personal affection, as well as ancient customs used to build and maintain interpersonal relationships throughout society (Chen, 2001, p.46). The relationships formed by guanxi are personal and not transferable.There is also an emphasis on family ties, pervasiveness and shared experience. The strongest guanxi occurs among family members, but it can also form among individuals who have shared a meaningful experience. Since the Chinese prefer to do business with people they know, they devote a lot of time and energy developing relationships with people they find respectable. It is this sort of commitment that truly defines Guanxi. With its focus on relationships and shared history, guanxi is a manifestation of the Confucian respect for the past, a cultural value that many Chinese cherish, which can also be seen in the way predecessors and older people are regarded as role models. “People defer to the elders of the group. In a business sense, Asians are very hierarchical in their deferring of communication to the senior person in the room or business unit”, explains Joel Schneider, who despite having never received Cross-cultural training prior to traveling to China on business assignments, noticed the strong emphasis on long-term interpersonal relationships and guanxi almost immediately: “In China there is much more emphasis on socialization and interpersonal relationships, and they are directly connected to business. In order to do business with them, you need to have the relationship and support of the Asian colleagues or you will not get anything done. You may think that you get things done, but information will be difficult to come by and it may not be as valid and originally thought. In general, it is my perception that Asian cultures do not trust U.S. based companies mainly because it is their belief that it is all about profits, whereas in the U.S. we are challenged by understanding the Asian culture because they do not have the same sense of urgency around business problems”. According to The Geert Hofstede analysis for China, Long-term Orientation is the highest-ranking factor. This is in stark contrast with Western culture, which is focused primarily on short-term, impersonal, business oriented relationships and quick results. However, the Chinese rank lower than any other Asian country in the Individualism factor. This can be attributed primarily to Confucian philosophy and Communist rule and the emphasis both of these ideologies place on collectivist culture as a means to societal harmony. It is perhaps for this reason that the Chinese rely so heavily on their guanxi, as opposed to seeing the value in independent, individual accomplishments. Collectivist societies have a strong sense of responsibility to the group, and it is important to members of a collectivist society to know that they are able to find trust and loyalty within their group, which they see as one of the main benefits of Guanxi, as it provides all members of a group with a measure of confidence and trust necessary to underpin business transactions. (Ferraro: 102-104) . An equally important benefit of guanxi is the protection it offers from uncertainty and other threats. For the Chinese living overseas, guanxi has provided a safety net in their host societies, where although citizens, they are sometimes treated as outsiders and often regarded with suspicion (Chen, 2001, p.47).For the Chinese, the westernized, more bureaucratic route is not favored when it comes to business relations and transactions because it often takes longer and involves more red tape than conducting business with guanxi. Furthermore, when there is a perceived risk, there will be less risk when doing business with guanxi because of the established trust and loyalty. (Jordan, 2003, p.101). This also eliminates the need for contracts when for many Chinese, which is a major source of frustration for western companies doing business with Chinese partners. In fact, some Chinese view the signing of a contract as a sign of commitment as an insult. (Chen, 2001 p.142)
In her book Business Anthropology, Anne Jordan provides an example of the immense power that Guanxi holds in Chinese culture when she addresses a case study conducted by Josephine and Alan Smart of Hong Kong investment in South China. In this study they explain that soon after China opened its doors to Western investors in the 1980s, Hong Kong investors used their kinship and pre-existing social networks in China to invest in small-scale businesses, which were dominant at the time. The Smarts explain that millions of lines of personal relationships and transactions radiated out from Hong Kong into South China. While much transnational investment was bureaucratically mediated, the Hong Kong- South China investment was socially- mediated, reflecting the role of Guanxi in Chinese business transactions. (Jordan, 2003, p.101). It is in examples such as this one where it can be observe the level of power that good Guanxi connections have in Chinese culture is evident, and how critical it is for Westerners to develop interpersonal relationships when conducting business in Asia, in general. “It is critical to develop personal relationships with Asian counterparts”, says Schneider.” This is important so you can be a trusted ally in the work place.” It is important for Westerners to be aware of cultural differences and to have a flexible attitude when it comes to working with the Chinese. This means spending time with business partners outside of work, and getting to know them in order to establish relationships with them. “It is customary to go out and have drinks, Karaoke, and socialize with your counterparts outside of the workplace. This social interaction will allow much more business possibilities and will lessen the amount of hesitation and tension with your project partners”, says Schneider. These activities may often seem outside of the business realm to Americans, but this type of socializing is vital to participate in while engaging in business in China, because it represents an honest effort to understand the needs, goals, values, opinions and interests of the people one is working with (Ferraro, 2006, p.134). Learning to distinguish guanxi relationships can also be a key to understanding a company better, especially in terms of deciphering organizational charts. Schneider has found, working in the fields of global compensation and Human Resources for the past twenty years that is extremely challenging, as a westerner, to understand the roles and responsibilities of company employees in Asia as the organizational charts do no reflect the true hierarchy of power or the role that Guanxi plays in the organization. He says, “Some jobs are exaggerated by the job title and do not have the same true responsibilities US based companies have and in addition, the organizational charts do not indicate the personal relationships of key employees in the company. Moreover, I have found that on many occasions, some Asian countries do not even have job titles or, if they do generic job title assigned to them are very ambiguous and generic, especially in the general work force.” If there is one central theme running through the literature of international business, it is the that the single most important consideration is building relationships over the long run rather than focusing on a single transaction or contract. (Ferraro, 2006, p.133) This is especially true in China, where relationships are one of the most highly valued cultural and societal elements. Understanding guanxi and its significance, as well as knowing how to cultivate and manage it, is not only a valuable took when it comes to working with the Chinese, but can also potentially provide a strong foundation for creating and properly managing personal networks, both personal and organizational, throughout the world. The increasingly powerful presence of China in both Asia and the rest of the world when it comes to the realm of international business should be a major motivating force for the westerner to learn and be aware of some of the main cultural differences that exist regarding ways business is conducted and viewed in the East and West. Joel Schneider offers his perspective on the emphasis companies should place on Cross-cultural training for their employees as the world becomes increasingly globalized: “As many Asian companies have found successes in areas that were previously a dominated by the West, U.S. companies are more sensitive to the way we are perceived in this shrinking, globalizing world. At the end of the day we can conclude that, although there are some glaring differences between the way we each see the world and how we make decisions, we need to overcome our differences in order to attain common goals and succeed in today’s and tomorrow’s competitive world of international business.”
