Guanxi should be well understood in order to succeed in operating in China. Similarly, it is one of the commonly misunderstood concepts. According to Dunning and Kim (2009), the building of guanxi often takes time, needs hard work as well as a good network development of contacts. Reports indicate that personal relationships have gained much significance in the Chinese culture; they need to be long-term and benefit to both the parties. One challenge that Western firms face is limited understanding of the Chinese guanxi and its implications for their business within the Chinese context (Lee et al 2001). This is because, within the western context, the relationships on business are looked at, from both sides on functional and beneficial basis; although the Chinese managers put emphasis on the moral and the social norms of guanxi when operating in China forms the guanxi Chinese culture. This implies that operating in China for businesses can be challenging and hence guanxi need to be understood while doing business in China. This is the basis of this essay that seeks to examine the impact of guanxi strategy while doing business in China. Firstly, this paper offers a definition of the concept and then explanations on the importance of guanxi within the Chinese context.
Definitions of guanxi
Guanxi, is a Chinese term often pronounced “gwan-shee” is defined as a “relationship” (Lee et al 2001). The term has two characters, guan, and xi. Guan implies a “door” or a “close-up” (Tian 2007). What this implies is that one that considers a door is viewed as one of us and that someone who is outside the door is not considered to exist or not one of us. Xi implies the extended relationships, for instance, the kinship or the family. By extension, this is a hierarchy. More often, the word is commonly used when referring on the development or to maintain the long term relationships. Generally, guanxi is a concept to draw up various connections so as to secure the favors of personal relations (Luo 2000).
It is through guanxi that people manage to form the relational network which the Chinese develop subtly but in a conscious manner. The concept is considered as a major dynamic within the Chinese society and so has been in the recent years. On the business world, firms are bound by guanxi either socially or business wise. Lee et al (2001) state that guanxi has a major determinant of business. Wong (2007) echo this statement by saying that to developing guanxi is a step by step work which engages each individual from the low level managers to those in power.
So and Walker (2006) postulate that guanxi is challenging and has an impact on business. Various studies show different cultural contexts, which are passed down generations (Wong, 2007; Lee et al, 2001). These include collectivism, power distance and Confucianism (Dunning and Kim, 2007). Under the three dimensions, there are other sub dimensions for instance “mianzi” or “renqing”, in which the former is viewed as a reputation in which a person earns in life from their actions while the latter shows resources which can be exchanged by an individual as gifts and the norms needed by one in abiding by the society.
Through the concepts of renqing and mianzi, it is a suggestion that one can use personal resources in order to build on guanxi, they need to be cognizant on the others mianzi, where the individual that gifts need to be conscious on gifting to enhance the face and the image in the society (Wong 2007). Hence, through engagement on offering reciprocal gift and getting benefits, one is able to establish relationships that build on trust to do business in China.
Impacts of guanxi
Guanxi is an important concept while doing business in China. Guanx, more so with the Chinese government can be of great significance for multinational firms to get the information such as the business opportunities and the government policies. In regard to the business opportunities, when there is a stringer Guanxi network in an organization, then the implication of this are opportunities for a business. According to Fan (2007) Guanxi has an essential role to play in terms of acquiring business opportunities in the Chinese market. One of the notable examples is the opening of KFC chain store in Tiananmen, Beijing in 1987. KFC benefited greatly from the Guanxi relationship with individuals in power in terms of building permission (Luo 2000). In so doing, it can be noted that Guanxi is an essential way to ensure that businesses get information about new policies by the state about business, for instance the import regulations and the export restrictions.
Davies et al (2005) assert that Guanxi is a vital method to get information on the government policies. Even for the leaders of organization, they can make use of Guanxi with the individuals in power so as to influence the policy decision making by the government (Gao & Tian 2004). There is less doubt that such would bring easiness for the firms in meeting their business goals. Hence, the conclusion by Leung (2001) is that the Guanxi is critical to global businesses within the Chinese market.
On the other hand, multinational firms benefit from Guanxi in terms of getting access to the sources of resources. Due to scarcity of some of the necessities as well as shortage of professionals, firms doing business in China depend on Guanxi in order to get access to the resources in the country (Tian, 2007). Studies by Davies et al (2005) offer further explanations on this by stating that most of the production materials which are controlled by the local authorities, for instance the bricks, plaster or power equipment. On this note, the good relationship with the government officials is of great essence for firms so as to get the resources necessary for higher efficiency. Further, the strong Guanxi network can create reliable supply of the common materials of production that are important in the success of businesses. For instance, Shanghai Volkswagen (SVW), that is a joint venture signed between Volkswagen AG and the group of the Chinese partners, has developed good relations with the suppliers; hence, they are able to get the needed parts characterized by high quality and faster shipment from the suppliers, this has been a major contributor in the success of SVW to a wider extent (Wong 2007).
Other notable benefits of Guanxi is on development of corporate reputation, enlargement of the market share as well as motivation of employees. In a study by Fan (2007), Guanxi is critical in terms of developing the reputation for an organization since it promotes an organization and the products which influence effectiveness. In a study by Davies et al (2005), they argued that Guanxi is essential for firms so that they build on their images. For example, the positive programs for an organization on TV are likely to enhance the corporate reputation and this is realized effectively when they have Guanxi with the people. Liu and Roos (2006) consider Guanxi as being effective in terms of obtaining new customers as well as to maintain the existing ones.
This implies that, Guanxi can be essential in extending the market share for a firm. On a similar note, Hofstede (2001) state that recognition of effective marketing relies heavily on Guanxi relationships. Further, it is believed that the positive relationships between the employees in a firm is a motivation to work. In a report by Luo (2000), the success of Sony China, to a wider extent has been due to the good internal relationship in the firm that refer to Guanxi between the people that are working for Sony. Hence, the benefits of Guanxi indicate that the business benefits are able to be eased and improved business efficiency relies wholly on China’s Guanxi.
Similarly, the other impact of Guanxi on businesses is the reduction of risk of losing business relationship in case of the losses or the temporary suspension of the operations brought about by unforeseen situations (Leung et al, 2005). This implies that when a supplier is not able to supply enough amount of products as a result of issues of production, due to which a customer can lose business, such issues ordinarily can be dealt with on the basis of the contractual obligations of business. Although with the Guanxi relationships, that are built on trust and understanding, the suppliers are less likely to cut short the relationship or to call for high liabilities. This has a positive impact on the business since it lowers the costs as well as risks of losing the long term relationships due to the issues on performance. This is quite essential for ensuring business growth and correction of the issues related to production for future business growth.
Despite that, critics argue that Guanxi is an inherently flawed concept and is often associated with bribery as well as corruption despite the many benefits associated to it. Luo (2000) and Wong (2007) state that business organizations spend a huge amounts of money for the bribes in China and corruption is considered as a major factor that has had a critical impact on business development in the country. Lee et al (2001) concurs with this statement by claiming that the relationship of corruption behavior is a major negative aspect of Guanxi in China. It is possible for the organizations to offer money to those in power for immediate or future favors as aprt of establishing the Guanxi with the people. From such point of view, some of the businesses would offer special benefit to a person who has Guanxi with them through misuse of power in getting the personal gain, more so the monetary gains as a return.
In such a manner, Guanxi related to corruption and bribery. Considering that the Chinese government has put more attention to bribery and corruption, the businesses which are found to be involved in such kind of activities are likely to get punishment. In a report by Wong (2007), when the multinational firms that are listed under the US capital markets get involved in bribery allegations, for instance payment of cash, they get punished through the Foreign Corrupt Practices Act (FCPA). For example, the Diagnostic Products Corporation, that is a California based firm that manufactures medical equipment got fine $ 4.8 million by FCPA in 2005 and was supposed to deliver its gross profits, that is net profit plus interest, that it generated by the Chinese Subsidiary to U.S government over a period of 10 years, since the Chinese subsidiary had been found of bribery allegations with some of the Chinese doctors and the hospital administrators (Tian, 2007). Further, in any kind of international enterprise that is involved in allegations of bribery and corruption, it is likely to affect its reputation, lose its customers and lose the competitiveness in the global market. All these, indicate that global firms, more so the non-Chinese global firms that do not fully understand the Chinese culture of doing business, need to be careful in handling the Guanxi relationships.
Nonetheless, despite the increased significance of Guanxi as portrayed by scholars for multinational firms, the concept seem to de reducing due to the advanced opening and reformation policies in China. Dunning and Kim (2007) argue that the absence of the rule of law is the major reason why Guanxi is viewed to be vital in doing business in China. On the other hand, Vanhonacker (2004) state that the significance of Guanxi in operating in China might reduce with the Chinese market being modern and open and developed within a legal framework. Although, Tian (2007) refutes such claims on how those in power interpret the laws and the regulations within China. This means that those that have particular authority, more so the government officials, could have a major contribution on how business is done in the country.
This forces most of the multinational firms to put more attention of maintaining good relations of Guanxi with them so as to ensure that their business operations succeed. Further, So and Walker (2006) state that aspect of decentralization in which the reform policies result to reduction of the importance of Guanxi with the government officials is common. Despite the fact that the reforms reduces the direct influence of the central government to run the economy and power on local governments, it does not imply that there is reduction on the relationship of Guanxi with the government officials. However, decentralization creates more importance of Guanxi relationships with the government officials as they have more power than earlier on. In regard to the Guanxi to the officials, its significance might reduce to specific extent as the officials have lower effect on the business organization than early on, so generally, the government officials including the ones in central government and the local government are essential in operating in the Chinese market.
This essay has set out a discussion on the impact or importance of Guanxi in doing business in China. It has been shown that Guanxi is a traditional concept that is founded on China’s cultural beliefs. It was found that this concept affects business in many ways including getting information on opportunities to do business in China, getting the required resources from those in power and lowering the risk of losing the relationships in business. Although as discussed, Guanxi encourages corruption and bribery, although with the rise of global competitiveness, such negative aspects of Guanxi are reducing.