Potential benefits and pitfalls
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). These connections can be indirect, i.e. through an intermediary, or can be direct. Focusing on business relationships, guanxi can provide a “moral and ethical framework” (Millington et al., 2004) within which transactions can occur. However, these transactions would not take place if not for the great emphasis placed on trust that guanxi places on relationships and individuals. It is this trust, plus the knowledge that connections need to be maintained for long-term periods, that “encourages appropriate forms of behaviour within the cultural context” (Millington et al., 2004).
Now, I will discuss the advantages of guanxi, followed by the disadvantages. The first benefit of deploying guanxi for a western firm is related to the importance of guanxi within the Chinese business environment. According to Seligman (1999), “The relative lack of a reliable legal system” enables guanxi connections to become of great importance to any firm who might deploy this method, as Seligman (1999) believes that “personal power has always been the key to getting things accomplished” in China. As there is not yet any formal markets established within China and therefore, information gathering is very difficult, especially for foreigners, this makes guanxi even more important in China’s current business environment.
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.