Navigating the Web of Guanxi

How do newcomers in the Chinese market navigate within the invisible and intricate web of relationships to their best advantage?

By Fang Ying and Louisa Wah Hansen

Guanxi — a ubiquitous word and almost an unspoken rule for anyone trying to do business and get things done in China. Why does it exist? How does it differ from the Western concept of connections? And how do foreigners navigate within this invisible web of intricate relationships to their best advantage? Researchers at CUHK Business School offer some unique insights on these issues.

Guanxi literally means “relationship” in Chinese. However, its meaning and how it is practiced differs vastly from the Western concept of relationships. It is less straightforward and is heavily loaded with cultural values and norms.

Prof. Wong Chi-sum at the Department of Management of The Chinese University of Hong Kong (CUHK) Business School, has explained the intricate cultural roots of guanxi in his research paper, “Indigenous research on Asia: In search of the emic components of guanxi.”

According to the paper, there are two key elements of the Chinese concept of guanxi. One is obligation, as opposed to interpersonal attraction, emotional attachment or return of benefits. The other is social and ethical norms that determine what obligations should be fulfilled for different levels of closeness within a guanxi net.

Prof. Wong stresses the Chinese society is heavily influenced by the traditional values associated with Confucianism, which emphasizes a strict system of norms and propriety. “Whether we are fulfilling the obligations of guanxi voluntarily or are forced to do so, we are trying to display behavior that is socially accepted, because social pressure would drive people to obey these social norms,” says Prof. Wong.

As such, guanxi extends beyond casual friendship, social and business network, and represents a much stronger tie — a close circle of trust, according to Prof. Wong. When one has entered into such a circle, all parties are morally obligated to do favors and look after one another without explicitly being asked. For example, when a relative or close friend is applying for a job at the company where you are the human resources manager, it would be a more acceptable practice in China if you gave this person a favorable decision than it would in a Western society, where this would be regarded as unfair or even cheating.

“This is not a black-and-white issue,” says Prof. Wong. “Once you’ve established guanxi with someone, both parties will have to fulfill a set of obligations for each other.” Here, we can clearly see how cultural differences define the kinds of behavior that are perceived as suitable and acceptable.

Guanxi is Name of the Game

In the past few decades, China has undergone tremendous social and economic changes. Is guanxi still a central theme and indispensable there, particularly in the business world?

“Despite the sea change that happened in China in the recent decades, the Confucian philosophy still remains prevalent today,” says Prof. Wong. “And guanxi is still central to the Chinese society and heavily influences business life.”

Why is guanxi so valuable in China? Why does it exist at all?

According to Prof. Wong, guanxi was historically important as it was used to uphold social stability through interpersonal obligations. Conflicts in fulfilling such obligations seldom occurred as it was very clear in traditional Chinese culture that the interests of the society at large superseded personal interests in the case of a civil servant — there were no private companies in the form we see today.

However, in today’s business world, conflicts do occur because the traditional value system does not provide any clear-cut guidance and modern management systems are not well established in China. “A moral dilemma could occur because I, the HR manager, am not just obligated to my friend’s son who is applying for the job; I’m also obligated to the company. So who should I be loyal to?” he says.

Answering questions like this isn’t always easy, as it touches on a gray zone where traditional values clash with modern legal standards.

Prof. David Ahlstrom, Department of Management of CUHK Business School, believes that there is nothing wrong in using one’s personal connections in China to facilitate or expedite tasks that would have to be performed anyway. “If we’re not paying people to do things they shouldn’t do, then facilitation payments are okay. Just don’t do anything illegal,” says Prof. Ahlstrom.

Prof. Ahlstrom has studied guanxi in China in depth when he and his coauthors of a paper titled “What do firms from transition economies want from their strategic alliance partners?” interviewed two dozen small- and medium-sized businesses in China and Russia to understand the interplay between personal connections and business.

The study reveals that in transitional economies, people rely heavily on personal connections partly due to the lack of formal institutional protection. As a result, in China, guanxi has been developed and used by the people as an alternative way to ensure trust in personal and business matters.

According to the paper, legal enforcement in modern China has not been very well developed. In spite of numerous official top-down reforms of the courts, the effect has been limited — judgment and its enforcement still tend to be capricious, subject to who is involved and depending on local connections.

Guanxi can help you get things done smoothly in the business world,” says Prof. Ahlstrom. “It’s always good to have connections with your partners.”

Positive Consequences

According to Prof. Ahlstrom’s research, the cultivation of guanxi can be thought of as a form of significant “social capital,” which is formed over time and are based on trust and reciprocity. By having guanxi with domestic Chinese companies, foreign firms stand to gain in the following ways:

• Domestic companies often possess “social capital” with the local authorities. So it is very useful for foreign companies seeking to establish new ventures and to expand within the country to build alliances with them.
• Alliance partners can also help with dispute resolutions by managing problems with government officials, judges and the police.
• Firms can receive privileges and state contracts by cultivating extensive networks through gifts, cash or favors for family members. Managers of indigenous companies can help their foreign business partners achieve these goals.
• Connections with local government officials play a crucial role in conducting business smoothly. As the Chinese saying goes: It is impossible for a powerful dragon to crush the head of a local snake.
• Guanxi can be essential in getting approval for imports, bank loans, favorable taxes, as well as favorable judgments.

The Cost of Guanxi

Guanxi can be valuable, however, it also carries costs and risks. For example, if the government official with whom a company has connections is suddenly out, the next person in power may not be so helpful or may work against the company if he or she happens to be a rival of the previous official, according to the study.

At the same time, negative issues such as corruption are also closely tied with guanxi, which raises an important issue: How can firms circumvent these negative aspects when they try to make use of guanxi?

“Guanxi is an influence technique,“ says Prof. Ahlstrom. “Friendly connections can only get you to a certain point, but not all the way. Generally speaking, firms need to avoid the ethically questionable situations as best as they can and follow the law.”

Making It Work

For firms seeking alliance partners in China to leverage their guanxi with strategic parties, Prof. Ahlstrom and his coauthors have shared some tips:

• Find the right person. It’s best for companies to hire a liaison person, who is experienced in handling guanxi with local government officials and regulators. “Depending on who the regulator is, hire a former city or county official, or a former village head,” suggests Prof. Ahlstrom. “That local person will be able to handle issues like permits, waste removals, taking regulators out for dinners, gift-giving and so on,” he adds. Companies may also want to consider hiring a consultant who has expertise in local as well as cross-border laws.
• Know what you can and cannot offer. Companies should avoid situations where they may be forced to get involved in unethical and illegal practices. “Be honest and specific in identifying what you are and aren’t comfortable with,” he says.
• Perform sufficient due diligence on your partners. It is vital to identify what the collaborators have to offer and to perform due diligence on them and their personnel.
• Watch over the alliance. Once an alliance is formed, monitoring its progress should be on your list of priorities. To prevent frauds carried out by local partners, foreign firms should have managers in residence with control over the joint venture’s finances and property.

Lastly, Prof. Wong believes that to develop a long-term and deep guanxi with anyone in China, one has to go beyond the simple exchange of “I want to get something from you, so I’ll start doing favors for you” as the other party would easily detect your motives. “You need to find out what that person’s value system is,” says Prof. Wong. “Do him a favor only if you also share the same value and if it benefits yourself, too. There has to be a shared value before someone considers you a ‘family member.’ And this is what differentiates guanxi from the Western concept of networking,” he says.