Guanxi 1

Running head: GUANXI

Guanxi: What Is It, and What Should Western Businesses Do With It

Jeff Burkhardt

University of Houston-Victoria

MGT6353

Fall 2005

October 25, 2005

Guanxi 2

Guanxi: What Is It, and What Should Western Businesses Do With It

“China possesses the weight and dynamism to transform the 21st-century global economy”

(Engardino, 2005, p. 118). Those were the words BusinessWeek used to describe the growing

importance of doing business in China. For the past two decades, China has been growing at an

astounding 9.5 percent a year. Furthermore, most economists figure China maintains the

fundamentals to keep growing in the 7 percent to 8 percent range for decades to come. In fact, by

mid-century, China should overtake the United States as the world’s number-one economy

(Engardino, 2005). In summary of China’s potential, Engardino (2005, p. 119) states, “The U.S.

and other established powers will have to learn to make room for China.” China is also a country

steeped in tradition and culture.

Overview

One such cultural tradition is the practice of guanxi (pronounced gwan-shee, with the emphasis

on the second syllable). Definitions of guanxi, however, are as plentiful as the Chinese people

who practice it. The Chinese word guanxi is not a term which can adequately be expressed by

and English-language equivalent of one word since the concept is too culture-specific. The term

guanxi commonly refers to relationships among people. It is comprised of dyadic, personal

relations between people who can make demands on each other. The stronger the guanxi, the

more demands can be imposed (Tung and Worm, 2001). The denotation and connotations for the

term do include, but also transcend the conventional translations of ‘connections’ or

‘relationships’ (Parnell, 2005). In fact, the Chinese phase “guanxi” consists of two characters.

The character “guan” means a gate or hurdle, and “xi” means to tie or connect (Lee, 2005).

Therefore, a literal definition could be construed as, “go through the gate and get connected”.

Today, there are even terms that clarify different guanxi functions:

Guanxi 3

La guanxi means “pull guanxi”, and implies that you are getting on the good side of

someone who is more powerful. Guanxi quo giang means that the relationship has gone

bad. Li shun guanxi means to make the relationship right. Guanxi wang is the noun

describing the guanxi network. (Glenn and Hammod, 2004, p. 26)

Regardless of its meaning, Guanxi is as a cultural and social product of the Chinese society,

“something sanctified over a period of two millennia by the theory and practice of

Confucianism” (Parnell, 2005, p. 31). The uniqueness of guanxi is deeply rooted in Confucius’

three principles. Li provides social resources, structure and status for guanxi to take roots. Ren

and xiao cultivate people’s positive attitudes toward each other, creating an environment for

guanxi to develop (Dong and Hackley, 2001). Confucianism also stress the social structure of the

society, based on a hierarchical order according to Confucianism, personal relationships are all in

hierarchical pairs (Dong and Hackley, 2004). “This basic tentet of Confucianism stresses the

importance of an individual’s place in the hierarchy of social relationships. Individuals are part

of a system of interdependent relationships, not isolated entities” (Tung and Yeung). The system

includes five basic relationships: ruler-subject, father-son, husband-wife, brother-brother, and

friend-friend. In each social structure everyone has an assigned place. Some are at the higher

level of the hierarchy, while others are deemed to be lower (Dong and Hackley, 2001).

At the core of guanxi are two, consensus, fundamental dimensions, although as many as seven

dimensions have been identified. The first is personal relationships. This is further segmented by

relationships among insiders and with outsiders. Zi ji ren are insiders and are highly trusted

because they are required to give accurate information. These are primarily comprised of family,

colleagues, and classmates. On the other hands, outsiders, called wan ren, are less trustworthy,

and are granted an entirely different status (Glenn and Hammond, 2004). The second dimension

Guanxi 4

is reciprocity, called bao or huibao. Reciprocal favor, called renqing, “is a strong social norm and

is morally binding for Chinese people, and those who do not repay favors are considered to have

‘no credibility,’ to have ‘no conscience,’ and to be ‘mean,’ and they loose face, reputation, and

ultimately personal relationships” (Lee, 2005, p. 32). In Chinese there is a common saying about

ren(qing): If one does you a favor, you’ll repay him or her ten times in return (Dong and

Hackley, 2001).

Characteristics of Guanxi in Business

Guanxi, which also plays a role in business in China, is often loosely compared to Western

networking. However, there are a few critical distinctions which must be made. First of all, both

guanxi and Western networking involve social interaction and social exchange, but, as identified

earlier, Guanxi is penetrated by Confucius’ principles, whereas Western networking is based on

socialization environments, such as cocktail parties, and is guided by professional standards

(Vanhonacker, 2004, May/June). It is this difference in social structure and cultural values that

most separates guanxi and Western networking. In Chinese culture, any behavior against the

hierarchical order is considered abnormal. This is in contrast to Western society, where social

interaction is based on equality, and respect is earned by individuals, not given by the social

structure (Dong and Hackley, 2001). Ironically, the second distinction is that guanxi is cultivated

among individuals, instead of among organizations, as is the case in the vast majority of business

relationships (Tung and Worm, 2001). In fact, each individual in Chinese society has his or her

own network. The primary reason for this is revealed by the third distinction between guanxi and

western networking. According to Yu (2002, p. 12), “(Guanxi) is more personal and often entails

an escalating reciprocity of favors and acts.” Kipnis (1997) points out that the production of

guanxi simultaneously creates human feeling and material obligation. Guanxi unifies what

Guanxi 5

Western bourgeois relationships separate, namely, material exchange and affectionate feelings.

In the United States, “business is business” (Lee, 2005). This is why it is said that in the United

States, relationships grow out of deals, and in China, deals grow out of relationships

(Vanhonacker, 2004).

Given these distinctions, Westerners doing business in China and with Chinese firms must be

aware of the potential implications that guanxi poses to their operations. Guanxi can be utilized

as an asset, or must be accounted for as a liability depending on the companies’ knowledge of,

and involvement in guanxi relationships. Two basic premises for the utilization of guanxi in

business operations are market entry and long-term success. According to a survey of the 50

largest European companies doing business in China, “most believed that it is extremely

important to have the right guanxi to gain market entry to China”, exhibiting a mean score of 4.1

on a 5-point scale (Tung and Worm, 2001). More specifically, there is one are where guanxi can

be particularly helpful in gaining market entry to China. “As you might expect, being a country

where the government recently controlled everything, China still has a lot of government and a

lot of regulations. Those regulations are not always applied evenly, and guanxi can help you get

favorable treatment” (Joseph, 2002, p. 45). According to one survey respondent (I-Man-AM),

“Politics is supremely important in building guanxi. They are the most important people to make

contact with…in China. It is said that there are 10 classes. The first is political officials and the

second is business men” (Hutchings and Murray, 2002). To a lesser extent, gathering information

related to market entry is also a useful byproduct of guanxi in business operations. Several

respondents indicated that, without guanxi, it is impossible to obtain accurate information (Tung

and Worm, 2001). The second premise for utilization of guanxi in business operations is long-

term success. Survey respondents also regarded guanxi as very important in attaining long-term

Guanxi 6

business success, resulting in a mean score of 4.0 on a 5-point scale (Tung and Worm, 2001).

Thus, guanxi was not only perceived as an important requisite to entering the China market, but

it was also considered as imperative for long-term success in that country. This sentiment is

proven by an analysis of sales performance among European firms operating in China from 1993

to 1995 relative to those of another Confucian society, Hong Kong:

In 1993, 33 percent of the European companies included in this study experienced sales

growth in excess of 20 percent and another 33 percent reported growth in excess of 10

percent. In 1995, 38 percent of the companies reported sales growth of more than 20

percent and 28 percent had experienced sales growth in excess of 10 percent. Despite

impressive gains in annual sales during these years, the fact remains that the growth for

large European multinationals lagged behind that attained by Hong Kong firms.

Furthermore, throughout the 1990’s China experienced the fastest rate of economic

growth in the world, reaching 40 percent growth per annum in some of the southern

provinces. These statistics suggest that the large European companies included in this

study may barely have kept pace with the growth of the Chinese economy. (Tung and

Worm, 2001, p. 526)

The flip-side is that Western businesses involved in guanxi must also account for potential

liabilities. The first is when one of the core dimensions of guanxi, reciprocity, runs amuck.

Over time, as reciprocity escalates:

The party with which a company maintains guanxi with may make unreasonable

demands on the company. If a company is no longer able to tolerate these unreasonable

requests, it should learn to say no. After all, the Chinese are understanding people, as

Guanxi 7

long as the rejection is phrased n a tactful way, and does not make them loose face. A

helpful rule is: Never turn down a request in front of other peoples. (Tsang, 1998, p.66).

Others advocate avoiding guanxi altogether:

In China, using guanxi is often a mistake. Asking and accepting favors from officials may

help you achieve a short-term advantage, but inevitably those same officials will one day

ask for a return favor you may not wish to grant. If you refuse, the same officials who

assisted you will very likely turn against you and look for ways to punish your business.

(China, 2002, p. 6)

Even if reciprocity is not targeted directly at the company, it can still present adverse effects.

Since guanxi is based on relationships among individuals and not among organizations, as

identified earlier, Chinese employees will often seek favorable credit terms for clients, share

proprietary information, or sell competing products on the side, which obviously conflicts with

company interests, as a way of making good on outstanding obligations to the rest of their

network (Vanhonacker, 2004, April). Another, and potentially more harmful liability, is

corruption. Defenders would argue that guanxi is not the same as corruption because guanxi is

relation-focused where as corruption is transaction-focused (Vanhonacker, 2004, May/June).

Furthermore, it is said that corrupt practices challenge moral integrity, which is an essential

element of a true guanxi relationship. There is however, basis for this cautionary detail. In 1998,

China scored in the bottom half (58 out of 99) of the most corrupt countries in the world (Tung

and Worm, 2001). Given the current social climate in China, a perception of unethical behavior

in guanxi relationships exist because they are often used to hide corrupt practices. People with a

close relationship will be less likely to reveal corrupt practices because the relationship

supersedes the corrupt transaction (Vanhonacker, 2004, May/June). Even when there is no illegal

Guanxi 8

intent, the line between bribery and gift giving, for example, can be very fine indeed (Cheng et

al., 2002). Because of rampant corruption in the present Chinese economy, some Western

businessmen think that giving bribes is a legitimate way to establish guanxi (Tsag, 1998).

Finally, there is the cost or expense of guanxi, both a figurative and literal liability for

companies. “Guanxi…doesn’t exclude American manufactures from the Chinese market, but it

does produce a new set of costs that companies are not necessarily accustomed to in other

markets” (McClenahen, 2004, p. 40). Before establishing guanxi, a cost-benefit analysis should

be constructed.

Once a firm has carefully considered the cost-benefit of guanxi, and determine that it is in their

best interest, they must develop their network. To effectively do so requires four steps: planning,

building, maintaining, and auditing. Given the significance of this process, Thomas B. Gold

coined the term “guanxixue” (relationology) to describe the art of establishing and maintaining

guranxi. Naturally, planning initiates the process. “Guanxi can aid a distinctive strategic

positioning in China’s competitive environment, and thus it can become an important ingredient

in business strategy. But it requires a careful strategy and implementation plan of its own that

needs to be aligned with the firm’s business strategy” (Vanhonacker, 2004, May/June, p. 51).

First, this strategy will pinpoint short- and long-term guanxi targets and needs, and second, it

forces the company to think about how it will cope with the indebtedness created by guanxi:

Coping strategies can involve deniability, neutralization, complementarity, and face.

Deniability involves the ability to hide or to put distance in a relationship through, for

example the use of trusted intermediaries. Neutralization refers to the ability to balance

debts and obligations. Complementarity involves multiple parallel relations to guarantee

achieving the instrumental objective. The concept of face comes into play here in the

Guanxi 9

sense that, in building a network, you have to be careful not to create liabilities for the

guanxi target…, and to think about how you will offer a way out. (Vanhonacker, 2004,

May/June, p. 51)

Once plans are complete, construction begins. There are basically only two ways to facilitate

guanxi: through group identification or altercasting. Group identification, more specifically, can

be ascribed or achieved. Ascribed guanxi is based on kinship and locality. Kinship refers to

members of a person’s immediate and extended families, whereas, locality refers to the person’s

ancestral village or province (Tung and Yeung, 1996). “Many overseas Chinese, who may not

have visited their ancestral village, still feel a strong affinity to others whose forefathers are also

from that locality” (Tung and Yeung, 1996, p. 59). Achieved guanxi, on the other hand, is based

on common or shared experiences, such as going to the same school, or working for the same

organization (Tung and Yeung, 1996). For those that do not share one of these bonds,

altercasting serves as a suitable alternative. Altercasting is defined as rearranging the targeted

person’s network in such a way as to involve the individual who wishes to be included in it

(Tung and Worm, 2001). Such rearrangements can best be accomplished by the use of

intermediaries. One executive offered the following example of altercasting: “A way to establish

guanxi is to hire the children of people you are trying to target” (Tung and Worm, 2001). Next in

the process is maintenance. The high cost of building guanxi networks leads Chinese merchants

to strive to maintain such personal networks through favoritism, loyalty, and mutual obligation

(Hwang, 1987). Given the instrumental nature of guanxi, on way to establish relations is to offer

immediate rewards. “When a gift has been received, or a request for a favor has been granted,

there is a symbolic breaking down of the boundaries between persons” (Tung and Worm, 2001,

p. 531). The final step is auditing. Since guanxi is a crucial company resource, it is worthwhile

Guanxi 10

for management to audit their company’s guanxi with its outside stakeholders, such as

customers, suppliers, and government bodies. A guanxi audit also enables management to

analyze the progress that the company has made in playing the guanxi game and to identify the

strengths and weaknesses of the current guanxi network.

Conclusion

In conclusion, China is an emerging, new economy, with a foothold in the past through time-

honored traditions and cultural values. Companies that embrace such cultural values as guanxi,

and learn how to use it to their benefit, will not only be welcomed with open arms, but also stand

to gain from what is expected to be one of the greatest economic expansions of the 21st-century.

To the timid, guanxi will never amount to more than costly, and unnecessary favor swapping. To

those who truly understand guanxi, it will serve as a valuable business partner when conducting

operations in China.

Guanxi 11

References

China Business Insider. (2002, April 26). Guanxi = connections, which can be double-edged

sword. China Business Insider, 2002, 6-7.

Cheng, L. T. W., Szeto, W. F., Wright, P. (2002, February). Guanxi and professional conduct in

China: a management development perspective. International Journal of Human

Resource Management, 13, 156-182.

Dong, Q., Hackley, C. A. (2001, Summer). American Public Relations Networking Encounters

China’s Guanxi. Public Relations Quarterly, 46, 16-19.

Engardino, P. (2005, August 22). China and India: the new economy. BusinessWeek, 3948, 117-

119.

Glenn, L. M., Hammond, S. C. (2004, Fall). The ancient practice of Chinese social networking:

Guanxi and social network theory. Emergence: Complexity & Organization, 6, 24-31.

Hutchings, K., Murray, G. (2002, September). Working with Guanxi: An Assessment of the

Implications of Globalisation on Business Networking in China. Creativity & Innovation

Management, 11, 184-191.

Hwang, K. K. (1987). Face and favor: the Chinese power game. American Journal of Sociology,

97, 944-974.

Joseph, D. R. (2002, August). Empty Promises. Ceramic Industry, 152, 44-45.

Kipnis, A. B. (1997). Producing Guanxi. Durham, NC: Duke University Press.

Lee, D. Y. (2005). Guanxi, Turst, and Long-Term Orientation in Chinese Business Markets.

Journal of International Marketing, 13, 28-56.

McClenahen, J. S. (2004, April). China’s Cultural Challenge. Industry Week, 253, 38-46.

Guanxi 12

Parnell, M. F. (2005). Chinese business guanxi: an organization or non-organization?. Jounal of

Organisational Transformation & Social Change, 2, 29-47.

Seligman, S. D. (1999, September/October). Guanxi: Grease for the Wheels of China. China

Business Review, 26, 34-38.

Tsang, E. W. K. (1998, May). Can guanxi be a source of sustained competitive advantage for

doing business in China?. Academy of Management Executive, 12, 64-73.

Tung, R. L., Worm, V. (2001, June). Network capitalism: the role of human resources in

penetrating the China market. International Journal of Human Resource Management,

12, 517-534.

Tung, R. L., Yeung, I. Y. M. (1996, Autumn). Achieving Business Success in Confucian

Societies: The Importance of Guanxi (Connections). Organizational Dynamics, 25, 54-

65.

Vanhonacker, W. R. (2004, May/June). Guanxi Networks in China. China Business Review, 31,

48-53.

Vanhonacker, W. R. (2004, April). When Good Guanxi Turns Bad. Harvard Business Review,

82, 18-19.

Yu, L. (2002, Fall). Blending Cultural Business Styles. MIT Sloan Management Review, 44, 12-

13.