Guanxi and doing business in China

In the west there is a general perception that one must be corrupt in order to do business in Asia. USA and UK in the guideline for their national to do business in Asia particularly Bangladesh mention that administration is corrupt in these countries and compliance rules won’t work over there.

A foreign company wanted to enter the Chinese market and in order to obtain the license required a meeting with an important high-level cadre from the ministry in charge was necessary. Now in China someone can’t just call the ministry and let them put through to the person in charge and arrange a meeting. This simply doesn’t work. So first thing of course would be to check your guanxi: Whom do you know who could know somebody related to the relevant person or ministry? They need someone with this guanxi, a Chinese person you can trust or – better – a foreigner, because most people tend to trust somebody from their own culture more. So a lot of guanxi might be necessary, some small presents might be involved, perhaps a dinner followed by Karaoke, but of course nothing illegal. Dinner used to be in a very nice restaurant, sometimes even a very, very nice place. This is what many restaurants and other places for entertainment have been making their living on for years. This is difficult now.

Corruption is illegal even in China, might lead to the death penalty, and of course all of you should not bribe a policeman or customs officer. But doing favors for friends, enhancing friendship through small gifts, introducing friends to other friends – this is Guanxi which is a relationship but not corruption. Non-Chinese often confuse the two and see corruption everywhere in China or refrain from keeping in touch with their Chinese counterparts because either they can’t differentiate between corruption and guanxi or, worse even.

To maintain guanxi they must invest so much time to develop guanxi with the Chinese friends, when they do not even know now whether they might need someone one day. But when you need someone in China, when you don’t get your business license in time, when your containers are not being cleared by the customs office, then guanxi might be the only way to miraculously smoothen the way. Not by bribing the guy in charge, but by asking a friend who has a grandmother playing cards with a lady whose son-in-law has a brother who is married to a woman who knows the relevant guy at the customs office. No money is needed, just a call. So now someone is obliged to someone else, and this favor surely will be recalled one day. But your problem has been solved, and this is what really counts.

Of the several Chinese cultural concepts that have been investigated for their significance in business relationships – mianzi (‘face’), renqing (reciprocity), xinyong (trust) and guanxi (personal connections) – it is guanxi that is probably the aspect of Chinese culture that is best known to all other nations. Although there is no single definition of guanxi, it is typically translated into English as ‘personal connections’ and more importantly ‘the quality of a personal relationship outside an individual’s immediate family’.

Guanxi is often translated as “connections”, “relationships” or “networks”. However, none of these terms do justice to the fundamental and complex concept of guanxi and its central role in Chinese culture. In terms of doing business in China, it means having, as part of your guanxi network, an influential person in an organisation or more often in a government position (Buttery and Leung, 1998). The concept of guanxi is not unique to China; other asian countries have corresponding types of personal connections e.g. Japan (Kankei) and Korea (Kwankye).

Firstly, a web of personal connections, relationships and obligations that businesspeople can use to obtain resources and advantages, and, secondly, the exchange of favours or the purchase of influence (Abrahamson and Ai, 1997). For foreigners seeking to do business in China it means that they must strive to cultivate personal connections, to establish a personal guanxi network. This involves identifying and seeking to establish a personal relationship with one or more influential people in an organisation with whom one is trying to develop an inter-firm relationship, and often involves seeking connections with influential government officials.

One study suggests that guanxi is better considered as a tactical rather than a strategic aspect of relationship management, because it is a personal asset owned by an individual, making guanxi difficult to sustain at the corporate level. However, guanxi has also been viewed as a strategic aspect of relationship management because it plays a crucial, ongoing role in business transactions, and a company with good guanxi can enjoy a competitive advantage. The line drawn between ethical and unethical mutual obligations in the framework of Guanxi corruption is still very much unclear. The fate of Guanxi- the descendant of a two and a half millennium old social philosophical concept – is ambiguous.

General knowledge of China - Relationships can be aided and built by some general knowledge of China and its culture. This can assist to establish an immediate connection to a new Chinese contact.

Formal introduction - Because Chinese people prefer to do business with people they have a personal connection with, it can help if others are introduced to a prospective business associate through an intermediary. The higher the social status that someone’s connection has, the more successful you are likely to be at being introduced to the right people and key decision-makers.

Conscious effort - Relationships in China are more trust-oriented and personal than relationships elsewhere, therefore a conscious and continued effort is required to develop and maintain them. It will require frequent visits, almost daily communication (preferably CEO/company director to CEO) and plenty of socialising.

Gifts - Giving gifts is an important aspect of doing business and building relationships in China. Overseas businesses should provide at least some overly gifts from their own country to show the sincerity to the Chinese friends. Gifts that have your company emblem will also be well received.

Dining and entertainment - Once you have established relationships in China, you are likely to be invited to dinners and other forms of entertainment including golf, nightclubbing or karaoke. If someone is invited for dinner at a business contact’s house (which is generally a reserved honour) – arrive on time, remove shoes before entering and take a gift. Dining is commonly used to gently probe positions without any formal commitment.

Europeans keep track of a few close friends and many more not-so-close acquaintances, but just as well lose contact with them and forget about them, the Chinese traditionally and typically would keep a record stating who owns a favor to whom and who is next in giving a present to somebody else and so on. And then, one day, when you need a Guanxi – not a friend – you make the call. Sometimes gifts help. Not too big, as it works reciprocally and is not intended to be considered a bribe. That’s not Guanxi. We’ll come to that later. Guanxi and gifts mean: I have not forgotten you. You can call me, and I will definitely call you. Even years later.

It’s important to note that the Guanxi system doesn’t only work with friends or people you at least like (which normally is the case in our culture), but solely depends on the mutual understanding that one day we might be in need of somebody else.

During the late 1990’s some researchers acknowledged the importance of guanxi when doing business in China, but also argued that with increasing exposure to Western business practices and attempts to crack down on corruption and unethical conduct, businesses’ reliance on guanxi may gradually decline highlighted a changing attitude in China. It had acknowledged that guanxi remains important in China, but wondered whether the economic and structural conditions are changing so that guanxi is not as prevalent as it once was.

Several authors now echo the view by suggesting that the importance placed on guanxi is likely to diminish. As China has opened its economy to the rest of the world, guanxi has become

known as ‘social capital’ and has been seen in the West as an important element in serving commercial contracts between corporations. As China continues to experience rapid legal, social and economic development, there is an element of doubt among some researchers concerning whether guanxi will continue to matter.

The writer is Non-Government Adviser, Bangladesh Competition Commission. He can be contacted at [email protected]