The Convergence of Chinese Guanxi and Western Networking

Abstract

Recent years have seen a shift in emphasis in marketing from a transaction-based perspective to a relational perspective. The Chinese custom of guanxi, as practiced in business, has previously received much criticism from the West, since in some of its forms it may resemble bribery, nepotism or other forms of unethical practice.

However, this study contends that guanxi is not a monolithic concept. The new emphasis on relationship in Western marketing, as expressed in network theory, brings Western and Chinese practice closer together and provides an opportunity for the re-evaluation of guanxi. This study posits that there is a new form of guanxi emerging within the modern climate of international business. The new form, contemporary business guanxi, resembles networking not only in its emphasis on relationships, which was also present in traditional guanxi, but in a mode of practice that is closer to Western practice in possessing the characteristics of utilitarianism, rationalism and ethics.

The study therefore aims to delineate the cultural evolution of guanxi and to examine its usage and performance within the contemporary business arena. It has four main objectives:

1) To elucidate both the unique cultural characteristics of guanxi, and its mutability.

2) To illustrate that guanxi has moved away from its Confucian origins and towards a practice that is closer to Western networking, thereby introducing the concept of contemporary business guanxi.

3) To demonstrate the resemblance of guanxi to Western networking by establishing its value to business as a resource.

4) To determine whether the practice of guanxi is ethical and rational using a survey on the practice of three hundred Chinese managers in the cities of Hong Kong, Taipei and Shanghai.

The results of the survey suggest that there are indeed various forms of guanxi practice, and indicates the highest use of a form corresponding to contemporary business guanxi in Hong Kong. The results tend to support the idea that guanxi is practiced in a utilitarian and rational manner in all three cities. They suggest, however, that the practice of guanxi is less ethical in Taipei and Shanghai than in Hong Kong, though this finding must be qualified by with the statement that the definition of ethical practice is problematical, since cultural modes of ethics differ in China and in the West.

CONTENTS

PAGE

CHAPTER ONE: INTRODUCTION
1.1 Guanxi and Networking
1.2 Research Background
1.2.1 The Emergence of Relational Approaches in Western Marketing Studies
1.2.2 A Brief Review of Guanxi Studies and Relational Networking
1.2.3 The Significance of Relationships in Business in Chinese and Western Contexts.
1.3 Research Objectives
1.3.1 The Scope of the Study
1.4 Research Boundaries
1.5 Justifications for this Research
1.6 Methodology

CHAPTER TWO: LITERATURE REVIEW
2.1 Traditional Guanxi
2.1.1 Socio-Culture Context 2.1.2 What is Guanxi 2.1.2.1 Face
2.1.2.2 Favour
2.1.2.3 Familism
2.1.2.4 Affective
2.1.3 Guanxi Activities
2.2 Western Models of Relationship
2.2.1 Transaction cost Economics
2.2.2 Relational Marketing
2.2.3 The Interaction Approach
2.2.4 Network Theory
2.3 Comparison between Western Relational Models and CONTEMPORARY BUSINESS Guanxi
2.3.1 Western Trust vs Chinese Trust
2.3.2 Face and Favour vs Reciprocity
2.3.3 Familism/Group-based Orientation vs Individualism
2.3.4Hierarchy vs Equality
2.3.5 Harmony vs Open Confrontation
2.4 FROM TRADITIONAL GUANXI TO CONTEMPORARY BUSINESS GUANXI
2.4.1 Transitional Guanxi is Evident in Three Chinese Cities
2.4.2 Guanxi Performance
2.4.2.1 The Utilitarian Nature of Guanxi
2.4.2.2 The Rational Nature of Guanxi 2.4.2.3 The Ethical Nature of Guanxi
2.4.2.4 Familism is Evident in Business Today
2.4.3 Research Gap

CHAPTER THREE: RESEACH DESIGN AND METHODOLOGY
3.1 Framework and Hypotheses
3.1.1 Framework: Identifications of Key Propositions
3.1.1.1 The Usage of Guanxi in Business Practice
3.1.1.2 The Perceived Resemblance of Guanxi with Networking
3.1.1.3 The Perceived Impacts of Using Practice
3.1.1.4 The Utilitarian Nature of Contemporary Guanxi Practice
3.1.1.5 The Rational Nature of Contemporary Guanxi Practice 3.1.1.6 The Ethical Nature of Contemporary Guanxi Practice
3.1.2 Framework and the Derivation of Key Propositions 3.1.2.1 Situating the Framework in the Three Cities 3.1.2.2 Locating on Managers 3.1.2.3 Key Hypotheses
3.2 Research Method
3.2.1 Method
3.2.2 Instrument
3.2.3 Sampling Procedures
3.2.4 Samples
CHAPTER FOUR : FINDINGS AND ANALYSIS
CHAPTER FIVE : DISCUSSION, IMPLICATIONS, LIMITATIONS AND CONCLUSION
5.1 Discussion
5.2 Implications
5.3 Limitations
APPENDICES
APPENDIX A: Characteristics of Traditional Guanxi, Relational Exchange, and contemporary Business Guanxi
APPENDIX B: Characteristics of Confucian Guanxi and Contemporary Business Guanxi
APPENDIX C: Proposition Framework
APPENDIX D: Definition of Key Concept
APPENDIX E: Questionnaire
APPENDIX F: Demographic Profile of Sample
APPENDIX G Firm Type of Sample
APPENDIX H Findings Tables
BIBLIOGRAPHY

CHAPTER 1: INTRODUCTION

1.1 Guanxi and Networking

With the emergence of relational approaches to marketing in the West, the Chinese concept of guanxi, which can be loosely translated as ‘personal connections’, has attracted increasing attention in management studies. Western relational approaches represent a paradigm shift in the approach to economic exchanges from a product-based transactional approach to a resource-based relational approach (Grönroos, 1996). This shift brings Western business operation closer to Chinese business operation in both theory and practice.

While the relational approaches, which include network theory, the interaction approach, and relationship marketing, represent a recent trend in the West, guanxi has been practiced in Chinese society for thousands of years. Guanxi refers to particularistic ties and the concept and practice of drawing on personal connections in order to secure favours (Luo, 1997b). It carries implications of mutual obligation and assurance, and guanxi partners are committed to each other by an unspoken code of reciprocity (Luo, 1997a). The roots of guanxi can be traced to Confucianism, and it is the Confucian theory of social hierarchy, or wu-lun, which defines the moral code that continues to influence Chinese societies today.

Guanxi has several unique characteristics, which include face, favour, familism, hierarchy, harmony, and affective [affectivity or affective or affection.], which are derived from the above concept of wu-lun. Since guanxi is not a static concept, its practice changes as society evolves, and many of these characteristics are diminishing. From the Western perspective, guanxi has often appeared in a negative light because of its resemblance in some cases to what would, in Western practice, be corruption. Perhaps the most obvious example of this is the resemblance of favours to bribery. However, the practice of guanxi in today’s business sector is becoming increasingly instrumental and is seen as a means of improving the company’s performance. Managers use guanxi without succumbing to those negative aspects, such as face and favour, which might not be in the company’s interest.

This study argues that contemporary guanxi practiced in business is distinct from traditional guanxi and contains the positive properties of rationality, utilitarianism and trust that are also found in Western relational management. On the other hand, despite the similarities between contemporary business guanxi and the Western relational approaches, this study also argues that institutional differences such as the economic and legal systems have brought about different modes/appearances of relational networking in Chinese and Western business cultures.

By tracing the evolution of guanxi and comparing the characteristics of contemporary business guanxi with Western relational networking, this study aims to construct a systematic framework for the development of guanxi and its relationship to business performance in the complex Chinese business environment.

1.2 Research Background

1.2.1 The Emergence of Relational Approaches in Western Marketing Studies.

The field of marketing has largely been based on the study of exchanges, but an alternative approach that focuses on relationships has been emerging from Europe since the 1970s (Gronroos, 1996). The relational approaches focus on the establishment and management of relationships. They view marketing as building on relationships rather than transactions, and as more a management issue than a business function.

Network theory conceptualises networks as a long-term and purposeful mode of organisation. It sees each company’s network position as an outcome of past relationships and a resource for future relationship strategy (Turnball, Ford and Cunningham, 1996). It looks at activities within the interaction between relational partners in the context of each of their networks and examines how that interaction affects their network positions and their competitive advantages (Ford et al, 1996). For example, armed with knowledge gained from customising a product for a buyer, a seller may no longer approach other customers in the same way as before. Or a seller who plans ahead with a buyer may request his supplier to make special arrangements to ensure that he will receive a steady supply of materials according to the forecast drawn up by the buyer.

The interaction approach is part of the network theory and sees relationships as the primary assets of the company. It focuses on the development process of the relationship between buyers and sellers and sees exchanges between the buyers and the sellers in the context of their relationship. Each exchange is influenced by previous exchanges and the history of the relationship between the two parties as well as the anticipated exchanges that will occur in the future. Buyers and sellers work together in cooperation as well as competition as each tries to achieve their goals.

Relationship marketing is also part of the network theory, emerging as the latest development in marketing studies in the 1980s. Relationship marketing defines marketing as the establishment and maintenance of trusting relationships through the exchange and fulfilment of promises (Grönroos, 1996). In management studies, the concept of trust has emerged to play a key role in business relationships (Ambler and Styles, 1995; Morgan and Hunt, 1994; Barney and Hensen, 1994). Trust is seen not only as the glue that binds relationships, but also as bringing many advantages of its own. It can reduce risks, facilitate cooperation, communication (Child, 2001), and the transfer of tacit knowledge (Uzzi, 1997), as well as increase flexibility (Barney and Hansen, 1994). The relational approaches see a strong, trusting relationship as a competitive advantage (Barney and Hansen, 1994), and the absence of trust as the ‘quintessential cause of transactional costs’ (Jarillo, 1988).

The approaches outlined above affect a wide range of marketing activities from customer services to relationships with supplies In essence, as the term ‘relational’ implies, they shift the nature of/in business relationships from transaction-based to relational-based.

1.2.1 A Brief Review of Guanxi Studies and Relational Networking

While relational approaches have emerged in Western management studies, they have also been paralleled by increased attention being paid to the study of quanxi in the Chinese business arena. This parallel is a result of the fact that guanxi practice shares many characteristics with the relational-based approaches.

Research on the concept of guanxi started in the late 1970s. Among the studies that have emerged since then are Brunner and Taoka (1977), Jacobs (1980), Lee and Lo (1988), Tse et al (1988), Hwang (1987), and Brunner et al. (1988). Of these early studies, many focus on the various aspects of traditional guanxi. In 1988, Brunner and Koh studied a sample of American and Chinese negotiations and examined the impact on guanxi in China with the opening of its door to foreign trade in 1979. In 1987, Hwang studied how face, favour and guanxi interact with each other in Chinese relationships.

More recently, an increasing number of studies have been conducted on the concept of guanxi, including Bian & Ang (1997), Tsui and Farh (1997) and Tsang (1998). Other studies focusing on the practice of guanxi in the workplace include Tung and Worm (2001), Fock and Woo (1998), Bjorkman and Kock (1995), Park and Luo (2001) and Li (2001).

In the realm of business, the current practice of guanxi is a cultural orientation that enables Chinese managers to use personal relationships effectively. It is a form of social capital that facilitates the transfer of information and knowledge (Hitt et al, 2002), enhances employees’ commitment (Wong, Ngo and Wong, 2003), and promotes the sharing of resources (Su, Sirgy & Mitchell, 2002, cited in Su, Sirgy & Littlefield, 2003). It also forms a distinctive principle for organising economic activities that is not easily replicated by other societies without a similar endowment (Fukuyama, 1995). In a Chinese business setting, the trustworthiness of an individual also translates as his credit rating. Therefore, where contemporary business guanxi diverges from traditional guanxi, it could be said simultaneously to converge with Western relationship marketing, particularly in its emphasis on trust.

1.2.3 The Significance of Relationships in Business in Chinese and Western Contexts

As a result of its recent economic reforms and open-door policy, the People’s Republic of China (PRC) has begun to develop into a major economic entity. With a huge population that constitutes one-fifth of the world ‘s consumers, the PRC makes a great potential market for foreign trade. At the same time, the economic recession in Europe in the early 1990s has encouraged Western companies to search for new market opportunities in China. However, due to their lack of understanding of Chinese business culture as characterised by the practice of guanxi, foreign firms have always experienced difficulty and frustration in trying to penetrate the Chinese market.

1.3 Research Objectives

This study attempts to trace the cultural roots of guanxi and to examine its usage and performance in the business arena today. It has four main objectives:

• It aims to highlight the unique characteristics of Confucius-based guanxi and its changing nature.

• It aims to illustrate that guanxi has moved from its Confucian base to take on a closer resemblance to Western-based relationships, i.e. to introduce a new concept/definition that is distinct from traditional

• It aims to demonstrate the res anxi: guanxi –based business business (contemporary business) guanxi. emblance between contemporary business guanxi and Western relational approaches through illustration of the usefulness of guanxi in business practices.

• It aims to examine whether the practice of guanxi is ethical and rational, through a survey on the decision-making behaviour of Chinese managers both in terms of their perception and their practice of guanxi.

1.3.1 The Scope of the Study

Many studies have already been conducted on guanxi (Hwang, 1987; Alston, 1989; Tsui and Farh, 1997; Bian & Ang, 1997; Tsang, 1998) and its practice in the workplace (Bjorkman and Kock, 1995; Fock and Woo, 1998; Tung and Worm, 2001; Park and Luo, 2001; Li, 2001). The practice of guanxi changes as society evolves, yet few studies have examined this changing nature or the utilitarian mode of practice it has engendered, which brings it close to Western relational approaches. In order to go some way towards filling the gap, this study introduces the concept of contemporary/business guanxi as distinct from traditional/Confucian guanxi.

The existing academic literature has provided two established frameworks of relationship networking, i.e. Confucian guanxi and Western relational management. This study has constructed a third framework of contemporary business guanxi which is derived from Confucian guanxi and, at the same time, shares many similarities with the latter.

Within the new framework, this study has been conducted via various perspectives. Major perspectives include cross-cultural management, model comparison, business ethics and economic analysis. As well as making use of the above perspectives, which are commonly found in Western academic literature, this study has also attempted to identify the functional aspects of guanxi through a perspective of performance analysis.

The analysis of cross-cultural management is based on the Chinese and Western relational management models, with Chinese cultural characteristics providing a background to illustrate the concept of guanxi. At the same time, the analysis addresses the phenomenon of shifting values of traditional Confucianism], noting that the influence of the major guanxi elements such as face, favour, family, hierarchy, harmony, and affective are diminishing in today’s Chinese business culture.

In this study, a three-city comparison has been employed to examine the practice of guanxi in business management. The three Chinese cities chosen are Shanghai, Taipei, and Hong Kong. They are of different political and socio-economic backgrounds and are at different stages of development, and therefore, each exhibits a unique and new way of practicing business guanxi, shaped by different institutional structures and market environments. Hong Kong is a former British colony with a Westernised political and economic structure. Here business guanxi is seen to be practiced positively, with institutional constraints and in a way that is closer to the model of Western relational management. On the other hand, the practice of guanxi is more common in Taiwan and Shanghai, and Chinese managers in these cities perceive its practice as the norm.

The second perspective focuses on identifying the common characteristics of business guanxi and Western relational models. The comparative analysis of these models serves to meet one of the major research objectives of this study, which aims to examine the changing nature of guanxi, which is to say, its emerging utilitarian and rational nature, which brings contemporary business guanxi close to Western relational approaches. It is argued that the two models are similar in that both contain the elements of rationality, utilitarianism and trust.

The key concern of the analysis on business ethics is to distinguish the characteristics of the current practice of guanxi from that of traditional practice, and to examine whether the current practice is ethical and rational. In the survey on Chinese managers’ practice of guanxi and their perception of its practice, it is shown how and to what extent guanxi affects these managers in their decision-making process both in relation to their work approach and their business transactions. The findings of the case questions show that Chinese managers in these cities are not totally beholden to guanxi and tend to strike a balance between guanxi and company benefit.

Finally, the perspective of economic analysis regards the cultivation of guanxi as the development of trust between potential business players with the objective of reducing transaction costs and improving the efficiency of a market economy by sharing resources and information. This study has placed emphasis on the performance of guanxi, illustrating that guanxi benefits economic exchanges in terms of resource building and the lowering of transaction costs. To give balance to the study, performance analysis has been applied in examining both the positive and negative sides of guanxi in Chinese business practice. Transferability, sustainability and profitability are the distinctive benefits of business guanxi. Apart from its function in conflict resolution, long-term cooperation and negotiation, guanxi can also serve as relational capital, a knowledge network, and as shared resources. On the other hand, the negative side of guanxi includes path dependence and the providing of opportunities for bribery.

1.4 Research Boundaries

Guanxi is not a static concept. Its practice changes as society evolves and varies in different environments. Traditional guanxi has transformed into its contemporary form and continues to evolve. Therefore, in order to address the dynamic nature of contemporary business guanxi, the varied environments of Hong Kong, Taipei, and Shanghai have been selected as the target areas for this study. Despite their common cultural heritage, these three Chinese cities offer examples of how different political and socio-economic factors have given rise to different institutional environments in which guanxi practices have had to adapt. Other Asian countries such as Japan and Korea are also used to make comparisons in relevant areas.

One of the environmental factors to be considered in the development of contemporary guanxi is that of the presence or absence of formal constraints. North (1990) formulated the concept that the institutional framework comprises both formal constraints, which include political, judicial and economic rules and contracts, and informal constraints, which include codes of conduct, norms of behaviour and cultural conventions (North, 1990; Powell, 1990; Zucker, 1987). When formal constraints are lacking, informal constraints come into play. A comparative study of the three cities can illustrate, amongst other things, how guanxi, as an informal constraint, adapts itself to compensate for inadequacies in the formal constraints.

The PRC is seen as a communist country that is groping for its own blend of capitalism after a prolonged experiment with central economic planning. Though economic reform has been implemented since 1978, a well-established institutional environment has yet to emerge to fully support market transactions (Boisot, and Child, 1996). Given the PRC’s immature formal constraints, firms rely heavily on guanxi in their exchange relationships to manage the high level of uncertainty in the environment (c.f. Pfeffer & Salancik, 1978; Powell, 1990).

In contrast to the PRC, Hong Kong, as a former British colony, enjoys a set of well-established formal constraints (North, 1990). Laissez-faire policy has made Hong Kong one of the most open economies in the world and it has a sound legal system that is trusted not only by its people (Wong, 1991), but also internationally. The presence of a robust anti-corruption agency has wiped out corruption in the territory, making it one of the cleanest cities in Asia. As an international centre of finance, Hong Kong has also gained extensive exposure to Western business practices, giving rise to a practice of guanxi that closely resembles Western networking.

Whereas the development paths of the PRC and Hong Kong have been influenced by communism and colonialism respectively, Taiwan, in contrast, represents a continuation of Chinese tradition and values with comparatively little external influence. This continuation of Chinese tradition is compounded by the Nationalists’ conscious creation, following their withdrawal from the mainland, of a government based on the Confucian model (Hamilton and Biggart, 1992). Despite the establishment of a modern legal and banking system, many of the formal constraints in Taiwan fail to meet the needs of the business community. In pursuit of political stability, the government has largely left the private sector to develop on its own. This policy gives rise to the proliferation of small family firms that rely extensively on guanxi networks to meet the demands of their business, precipitating an economy of ‘guanxi capitalism’ (Hamilton, 1997).

1.5 Justifications for this Research

This study is valuable for several reasons. In light of the rising economic power of Chinese business communities, both on the mainland and overseas, a deeper understanding of Chinese business practices is important for both Chinese and non-Chinese executives.

This study may serve to redress an unbalanced assessment of Chinese business practices, which have, in the past, received much criticism from the West. Guanxi is commonly viewed as synonymous with corruption, and the Chinese family firm as an impediment to economic development and an obstruction to the rise of modern corporations (Whyte, 1996). In the late seventies, however, Kahn (1979) put forward the hypothesis that the rapid development of the Asian economic dragons, namely, Hong Kong, Singapore, Taiwan, Japan and Korea, is a result of their Confucian values. A survey of Chinese values conducted in the eighties uncovered a cultural dimension associated with Confucian values on which all the Asian economic dragons ranked top (Chinese Culture Connection, 1987), lending empirical support to Kahn’s hypothesis. The findings of this survey suggest that Chinese business practice deserves closer scrutiny.

This study may also provide new information on the development of guanxi for any with a specific interest in the subject, either academic or otherwise. The evolution of guanxi is shaped by the social and institutional environment in which it is practiced. A comparative study of guanxi in the three Chinese cities named can illustrate how guanxi adapts to different institutional environments and modernisation. It can also shed light on how it serves as a substitute for formal constraints and how formal and informal constraints shape business practices.

Finally, managers inevitably face relationships every day, and the only choices available to them are those concerned with precisely how to manage such relationships. Guanxi has been practiced in Chinese society for thousands of years, and this study of contemporary guanxi has practical implications for executives regardless of whether or not they work in or with Chinese business communities. Indications that Western relational approaches are converging with guanxi practice suggest that Chinese and Western executives have much to learn from each other. This study, with its use of Western networks as a benchmark, can contribute to the knowledge of both Chinese and Western executives, and to their mutual understanding.

1.6 Methodology

It is commonplace for both employers and employees to bring their personal guanxi to their organisations, whether in the form of a potential customer or supplier, and managerial decisions that involve their guanxi partners may be influenced by their guanxi relationship. Guanxi relationships vary in strength and depth; this study focuses on the use of guanxi among managers in order to minimise the pitfall of treating different types of guanxi as a monolithic concept. Unlike business owners, who have ultimate decision-making power, especially in small firms such as the ones covered by this study, managers are restrained, to some extent, by corporate guidelines and policies as well as the monitoring of their peers, in how to handle guanxi relationships. Naturally, they are similarly restrained from benefiting personally from their guanxi relationships at the expense of their organisations.

This study adopted semi-structured interviews using standardized questionnaires to study how middle-level sales and marketing managers of firms with less than 50 employees perceive and practice guanxi in Shanghai, Taipei and Hong Kong. In order to examine, the interviewees selected for this study have all been chosen from amongst those subjected to Western influence. They are either Western trained or have worked for Western firms or in joint ventures with Western corporations.

The study is divided into two parts which address six areas altogether for examination:

1) The usage of guanxi in business practice

2) Perceptions of the resemblance of guanxi to networking

3) Perceptions of the impacts of guanxi

4) The utilitarian nature of guanxi

5) The rational nature of guanxi

6) The ethical nature of guanxi

The first to fourth areas compose to be the first part of the study which explores how managers in the three cities use and perceive Contemporary Business Guanxi in their work and business activities. The first area of examination probes the extensiveness of guanxi usage amongst the respondents. The second and the third areas address the perceptions on the part of respondents to the practice of guanxi, with the former addressing the perceived resemblance of guanxi to networking, and the latter addressing the perceived impacts of guanxi to the business.

Western management studies see networks as an organisational asset that can be turned to a firm’s competitive advantage. In other words, their value, rareness and inimitability enable the organisation to deliver superior value to its customers than its competitors (Barney, 1986). The fourth area of examination in the first part of the study is designed to explore whether guanxi too can serve as a competitive advantage in the practicing.

Guanxi has adverse effects as well as benefits. While guanxi is a considerably more refined and complex phenomenon than corruption (Tung and Worm, 2001), it can easily lead to corruption because many malfeasant activities, such as kickbacks and bribery, occur most easily in close relationships with a high level of trust (Granovetter, 1985). Given these adverse effects of guanxi, it has to be ultimately profitable in order to serve to an organistion’s competitive advantage.

In the relational approaches to marketing, the objective of relationships is business; personal relationships are more a consequence of business relationships (Arias, 1998). Guanxi, on the other hand, refers to personal relationships that grow into business relationships. Since guanxi is rooted in a personal relationship, the manager who brings his guanxi to his organisation is equally capable of taking it with him when he leaves. In order for guanxi to serve to an organisation’s competitive advantage, it has to be transferable from the individual to the organisation, so that the relationship stays with the organisation after the manager departs. In addition, the organisation has to be able to maintain the guanxi following its transferal so that it can be put to use.

The fifth and the sixth areas of examination compose the second part of the study that aim to uncover the rational and ethical natures of decision-making behaviour of Chinese managers in situations where guanxi is involved. It is comprised of three scenarios that Chinese managers are likely to encounter at work and probes how they weigh the benefits and pitfalls of guanxi in their decision-making. Qualitative responses were elicited following-up interview after the administering of the questionnaire to throw light on this subtle process. The three case scenarios used in this part of the study include the awarding of contracts, the securing of contracts and the hiring of staff.

The viability of guanxi as a strategic business tool rests on the premise that it does not involve activities such as bribery and corruption. In other words, the activities which are involved have to be accepted as legitimate in the society. In order study the extent to which the form of guanxi practicing in the three scenarios are accepted, the second part of the study also probes the perceived prevalence of the practice of guanxi in the three case scenarios in their cities.

1.7 Conclusion

As the economic power of China is growing and the relationship marketing becomes popular in the West, the concept of guanxi and its practice in business becomes an important subject in relational management studies.

Since late 1970s, researches on the concept of gunaxi and its practice in business have been started, but few have examined its changing nature of the utilitarian mode of practice. Through a survey on the managers’ of three selected Chinese cities—Hong Kong, Taipei, and Shanghai, this study attempts to examine the different faces of guanxi in different market environments and its usage and performance in the business arena.

In addition to the two existing frameworks of Confucian guanxi and Western relational management, respectively, a third framework is introduced to identify the new concept of contemporary business guanxi, which is evolved from Confucian guanxi and is similar to Western relational management. The shared characteristics of contemporary business guanxi and relational management are rationality, utilitarianism and trust, contrasting the conventional view on guanxi that it is synonymous with corruption.

In concluding this introduction it might be apposite to state that this study was not undertaken with the intention of showing any one paradigm to be superior to another. All paradigms are the product of time and place and will naturally be more applicable in some situations than others. The trust is that, in the course of business, managers will work in ways that resemble more than one paradigm. Quite probably, most of this will be unconscious. Indeed, it is likely that there are still other marketing paradigms that, practiced unconsciously or not at all, are waiting to be made consciously by theoreticians.

In business there is usually little time for theorising. However, on occasion it is advantageous, even necessary, to make the paradigms by which one works conscious, to take time to examine them, and to re-assess one’s position. Such a process may be beneficial if an old paradigm is no longer applicable in a new situation, or simply as a stimulus to innovation.

CHAPTER TWO: LITERATURE REVIEW

This chapter provides a literature review on both Chinese guanxi and Western models of relationship, in an attempt to demonstrate that contemporary business guanxi shares many similarities with Western relational management. The first part of this study gives an account of the origin of traditional guanxi and its major characteristics in the socio-cultural context, which is colored by Confucianism. The second part examines the academic literature on Western models of relationships, describing the shift of study focus from transaction-based to relationship-based management. Part Three makes a comparison between the characteristics of Western relational models and contemporary business guanxi, where trust is a common feature of both. Part Four discusses the transformation of guanxi from its traditional form to the contemporary form that is practiced in the business sector. Mainland China, Taiwan, and Hong Kong are selected to illustrate the different faces of guanxi shaped in accordance to different market environments.

2.1 Tradition Guanxi

2.1.1 Socio-Cultural Context

Confucianism has wielded a strong influence over Chinese society for thousands of years, promoting hierarchical human relationships and role compliance. It has dictated both social practices and individual conduct and given rise to a culture of familism and an insider-outsider dichotomy.

Confucius, an intellectual who lived between 551 B.C. and 479 B.C., saw man as a social being (Moore, 1967) whose highest achievement is ren, or benevolence, which can be achieved through moral cultivation (King, 1991). Central to the Confucian tenets were his moral prescriptions of wu-lun, or the five cardinal relationships, which laid the groundwork for a hierarchical society with a strong sense of vertical order. The five cardinal relationships, in their order of importance, are comprised of the relationship between father and son, husband and wife, elder brother and younger brother, ruler and subject, and that between friends (Yang, 1993).

Wu-lun was a vehicle for maintaining social order and stability through the dictation of behaviour (Jacobs, 1958: 85). The differentiated roles set out in wu-lun are accompanied by detailed rules that laid down the mutual, though asymmetrical, obligations and duties of each party in the relationship and individuals are required to adhere to and perform their roles regardless of their thoughts or feelings. Aside from the relationship between friends, all the relationships in wu-lun are superior-subordinate relationships, and their orientation is “hierarchical, formal and dyadic” (Silin, 1976: 36). Given the strong emphasis on role compliance, individuals occupying the inferior position in each set of wu-lun relationships are expected to obey, defer to and comply with those in the superior position (Westwood, 1997). At the same time, they are protected from abuse because those in the superior position are bounded by moral obligations that accompany their particular position, such as compassion, righteousness and a paternalistic concern for their subordinates (Redding, 1990: 61).

In congruence with the fact that China was an agrarian state, the legacy of Confucius and his teachings had contributed to the importance of the family, which served as the basic building block of Chinese society (Cheng, 1994). With most people leading a subsistent living, the family was their only defence against uncertainty and natural disasters (Bond and Hwang, 1991: 215). But rather than as an administrative unit, the importance of the family lies in its ability to socialize individuals into a filial and loyal being.

Confucius also placed strong emphasis on social harmony and his philosophy achieves this aim through compliance rather than active participation (Ho, 1968; Nakamura, 1964: 264). Chinese culture places little emphasis on the emotional/affective aspects of interpersonal relations. There is an avoidance of unstructured relationships or situations in which the forms of proper behaviour is unclear. There is no coherent principle for organizing relationships outside of kinship in Confucianism, and family relationships, which are stabilized by wu-lun, provide the base for the organization of society.

The Confucian emphasis on the family was further reinforced by the Chinese tradition of inheritance. The transfer of authority, which involved both the claim to the family title and the command of respect and obedience from other family members, placed strong emphasis on bloodline succession and the continuation of the lineage. Authority was transferred to the eldest son upon succession and the family property was equally divided among the sons. As a result, the training of the heir also revolved around the cultivation of filial piety, and all sons were instilled with a sense of loyalty and filial piety directed not only towards the father but also the whole lineage, resulting in an authoritarian family structure. Children learnt from a young age onwards that if they did something wrong, they brought shame not only to the family but also to the whole lineage. This socialization prepared them to sacrifice their personal desires for the family interests as they grew up (Pye, 1985). At the same time, the importance placed upon filial piety gave rise to an omnipotent and paternalistic father figure who is a superior being looking after the interests of the whole family.

The Chinese family considers all those who are not related by blood as outsiders, since their loyalty cannot be guaranteed. The family can place qualified trust in outsiders only when relationships that are somewhat analogous to family relationships can be cultivated with them (Pye, 1985: 71). On a larger scale, the sharp boundary drawn between family and non-family members gives rise to an insider-outsider dichotomy (Lin, 1988: 90) and a low trust society (Fukuyama, 1995). Lin (1988) noted that the Chinese individual uses the family as a reference point for the self, and becomes totally self-centered once outside of the family. This can explain how the Chinese can be so group-conscious within the family and yet also act so selfishly where strangers are concerned. As Weber (1951:244) noted, “The Confucian gentleman, striving simply for dignified bearing, distrusted others as generally as he believed others distrusted him.”

Regarding this intense familism, modern Chinese writer Lin Yu-tang compared Chinese society to a tray of loose sand, with each grain representing a family, in contrast to Japanese society, which he described as a slab of granite. Whereas villages in other societies such as Japan and many parts of Europe created solidarity through cooperation and the sharing of tasks, Chinese villages were comprised of atomized households that were located close to each other but shared little sense of community (Moore, 1996: 208). Anthropologist Victor Nee had hoped to find the individualism of the atomized Chinese peasant households transformed by the experience of collective farming after China implemented economic reform in the late seventies, only to discover that the social bonds created by communism were merely transitory (Nee, 1985, 1990).

The state’s participation in commerce was limited largely to the provision of an infrastructure, such as roads and the Grand Canal (Redding, 1993). Chinese merchants found little support in the form of legal, financial or commercial institutions, or even a reliable currency. In the absence of a supportive environment, merchants did not reinvest their profits.

Laws in most of China’s history were essentially writs issued by the emperor and interpreted by the mandarins. In the absence of codified commercial laws, conflicts were dealt with idiosyncratically by the mandarins who, on the one hand, considered themselves to be morally superior in the Confucian sense and looked down upon the merchants, and who, on the other hand, extracted a share of the latter’s profit.

In ancient Chinese feudal society, power was concentrated in the hands of a few key figures; who one knew was often more important than what one knew. Under such circumstances, personalism, or the tendency to allow personal relationships to enter into decision-making, became an underlying feature of society. Keeping appropriate contacts and building allegiances formed the basis of successful organizational life (Redding, 1993).

For businessmen, the hostile environment, in which they received no concessions, gave rise to a sense of insecurity and defensiveness leading them to seek safety within the family and build personal networks of trusted individuals in conducting their activities.

2.1.2 What is Guanxi?

The Chinese character guan means ‘gateway’ or ‘to close’, as in closing a door. It also means ‘to show concern for’. Words containing the character guan include guanxin, which means ‘to show loving care’ and guanzhao, which means ‘to look after’. The character xi means ‘linkage’ or ‘a system of links’. It is found in lianxi, which means ‘to connect with’, and shixi, which refers to one’s genealogy and connections with kin. When the two characters are combined, they form guanxi, which refers to ties between two or more parties who can either open or close themselves off to this system of connections.

The term guanxi is very vague and has a wide range of applications in Chinese. Different scholars have defined guanxi in different ways. Jacobs (1979, 1982) describes guanxi as particularistic ties between two or more individuals. Ambler (1995) describes it as the developing of a relationship for special reasons, while Luo (1997a) refers to guanxi as the concept of drawing on connections or networks to secure favors in personal relations.

Guanxi carries implications of mutual obligation, assurance and understanding, and guanxi partners are committed to each other by an unspoken code of reciprocity and equity (Luo, 1997a). The reciprocal obligations of the parties involved give guanxi an instrumental value in the acquisition of resources; Chinese people cultivate their guanxi with ingenuity, creativity and flexibility to ensure help at times of need (Leung and Yeung, 1995; Chiao, 1982). Guanxi permeates all spheres of Chinese life and it is essential ‘stock knowledge’ for Chinese adults in their everyday interactions (King, 1991).

Guanxi arises out of the social-cultural context of Chinese society and its roots can be traced back to Confucianism (King, 1991), a cultural force that continues to govern the motivation and practice of guanxi today (Fock and Woo, 1998). Ever since Confucius codified the rules of daily conduct and the hierarchical structures of authority, Chinese society has been built around clan-like networks with close family members at the core and distant relatives, friends and acquaintances extending outwards from that core in accordance with the closeness of their relationship (Luo, 1997) [earlier paper]. King (1991: 68) argues that Confucianism provides the “theoretical thrust for developing a person into a [guanxi]-oriented (relation-oriented) individual” because its human-centred philosophy sees man as a social being rather than an isolated entity.

The Confucian ideal of ren, which can be translated as benevolence (King, 1991), or humanism (Huang, 2000), is realized through one’s moral cultivation of the self in the context of human relationships (King, 1991). Though Confucianism designates the family as the primary social unit and prescribes tightly-defined roles for individuals within the family, it does not restrict the individual in the construction of relationships, leaving him free to pursue or ignore the possibility of relationships within his environment outside of the family (King, 1991).

But the boundary of the Chinese family is relative and elastic, and can be expanded and contracted at the will of the individual as he constructs his social, or guanxi, network (Fei, 1992). The Chinese individual extends his relations outside of the family by constructing pseudo-family relationships upon fictive kinship bases (Lin, 2001). It is a common practice for Chinese individuals to address each other by fictive kinship names, such as laoxing, which means older brother, dajie, which means older sister, and ah-yi, which means aunty, as the relationship develops.

Fei (1992: 61-62, 68) describes the Chinese social structure as cha xu ge ju, which means a “differential mode of association”, contrasting it with the Western “organizational mode of association”, which he compares to haystacks. Individuals in Western societies form relationships through participation in organizations in which clear demarcations exist to separate members from non-members Guanxi base refers to the commonality or shared identification existing between two individuals (Jacobs, 1979) that provides a starting point for the establishment of their guanxi. Guanxi bases can be either ascribed or achieved. An ascriptive guanxi base relates to one’s native or socioeconomic origin and background, such as one’s family, relatives, clan members or people who speak the same dialect. An achieved guanxi base would be one of a number of relationships that arise from social interaction and shared experience, such as that between school mates, colleagues and so on. Scholars have studied different types of guanxi base, which refer to the shared identification between individuals that enable them to start a relationship (Jacobs, 1982).

Other scholars have attempted to clarify the concept of guanxi through identifying its different components. Yang (1995) divides guanxi into two components: ascribed guanxi and interactive guanxi. Ascribed guanxi refers to the ascribed attributes shared by the two parties, while interactive guanxi refers to the accumulation of experience between the two parties through their interaction. She further identifies two dimensions to interactive guanxi, i.e. “affectiveness” and “instrumentality”, echoing Hwang’s (1987) work on the different types of ties in Chinese relationships.

In his study of Chinese relationships based on the social exchange framework, Hwang (1987: 949-953) divides relationships into three categories: expressive, instrumental and mixed ties. Expressive ties usually occur among members of a primary group, such as family or close friends. These ties, which are very personalized and constitute an end in themselves, are generally permanent, stable, and limited in scope and involve one’s feelings of affection, security and attachment. Social exchange within the expressive tie is ruled by the norm of needs, and benefits are distributed to satisfy the recipients’ needs regardless of their contribution.

Instrumental ties are relationships, often between strangers, that exist only to serve a particular purpose. They are impersonal, utilitarian, and dictated by the norm of equity. Rewards are given based on the individual’s contribution alone regardless of their needs. Hwang posits that in the collectivist Chinese society, an individual’s social needs can, to a large extent, be satisfied within the family and other established groups. While they are bounded by obligations to assist those who are in their ingroup, they tend to be more concerned with fairness when engaging with strangers and employ the equity rule instead. If they find the exchange with the stranger not to be equitable, and if, furthermore this situation can not be remedied, they will not hesitate to break off the relationship.

The third type of relationship into which guanxi falls is the mixed, or the particularistic, tie (Jacobs, 1979). Mixed ties contain both an expressive and an instrumental component. The expressive component refers to the genuine feelings, or ganqing, that the individuals invest into the relationship. It is this that differentiates the mixed tie from the instrumental. At the same time, the instrumentality of a mixed tie is never so remote that the individuals engaged in the relationship feel at liberty to be entirely authentic. In reality, the expressive and instrumental components of mixed ties are not only intertwined, but also strengthen each other (Yue, 1993; Cheng, 1995; Zhang, 1998). As Kipnis (1997:23) notes in his study of the Chinese village of Fengjia, guanxi “simultaneously creates human feeling and material obligation… In guanxi, feeling and instrumentality are a totality.”

In the rules Confucius drew up for wu-lun, the sentiments governing the five mutual and asymmetrical relationships are materially manifested through rituals. The five cardinal relationships combine both the expressive and the instrumental components, providing the abstract and concrete foundation by which guanxi operates in Chinese society (Lo & Otis, 2003; Hutchings & Murray, 2002). In this connection, Hwang (1987) notes that there is a self-conscious element to the negotiation of guanxi that is stronger in Chinese culture than in the West. Perhaps this might explain the ambivalence many Westerners feel towards guanxi.

2.1.2.1 Face

Mianzi, or face, is a universal human characteristic, but the significance in Chinese society is unique. Face is intimately related with guanxi, as it can be used to develop and expand one’s networks.

In modern terms, face is an individual’s assessment of how others see him, as opposed to his self-esteem, which refers to an individual’s view of himself. Face tends to be more important in collectivist than in individualist cultures (Redding and Ng, 1982). It is what other people recognize and extend to bestow on the individual, and it reflects his location in a social system (Ho, 1976). It describes a relationship between an individual and his social environment that is as important as and comparable to his literal face (Hofstede, 1991). Face is defined subject to situation and varies with each social group to which an individual belongs (Ho, 1976).

The significance of face among Chinese people can be understood from the point of view of a relational society in which social contexts are of the utmost importance (Hofstede, 1991). Collectivist cultures judge an individual by the success of his relationships with others and the extent to which he meets the expectations of the group, in contrast with individualist cultures, which judge a person by his actions. Words with meanings comparable to the concept of mianzi can be found in the languages of other collectivist cultures.

Given that face is defined by others rather than the self, and is intimately related with one’s social standing, there are many things that can happen with face. To give someone face is to perform an act that gives power to the person or makes him feel socially elevated (Jia, 2001). An individual loses face when he, or someone close to him, fails to live up to his social role, or when others fail to treat him or others close to him according to his expectations (Ho, 1976). An individual who has face therefore has power to influence people around him, but his face also constrains him to act honourably and not to cause others to lose face.

Face is the medium through which Chinese people conduct their relationships and social life (Yi, 1996), and an individual can gain neither the trust nor respect of society without it (Yan, 1995). It also acts as a restraining force on all the parties involved in a network, inducing them, for the most part, to live up to other people’s expectations instead of acting on their own wishes (Ho, 1976). The social control mechanism of shame, which generates feelings of dependency and anxieties about self-esteem, together with Chinese society’s emphasis on social harmony, explains the lengths to which Chinese people go to save face. As face is intimately bound up with an individual’s personal worth, losing face is a serious business. An individual’s face has both quantitative and positional aspects (Hwang, 1982). How much face an individual possesses depends on his own efforts, as face can be gained through hard work, superior knowledge, integrity, accumulation of wealth, and the cultivation of reputation (Brunner et al., 1989; Leung and Chan, 2003). The face status of an individual is determined by his social connections (Hwang, 1982). The wider and more powerful an individual’s social network, the more face he possesses.

2.1.2.2 Favour

Guanxi is cultivated through the exchange of favours, or renging, but one who performs a favour does not know the date or nature of the repayment he will receive. According to Lin (2001: 157-8), what motivates him to grant the favour is the knowledge that the person who seeks the favour will spread the word about his generosity, thus enhancing his face and reputation. This enhancement of face and reputation is the real payback, and not the return of the favour at a later date. As for the favour seeker, spreading the word about the good deed of his benefactor also enhances his own face, since it shows that he has access to valuable relationships and resources, thus raising his social standing. Furthermore, as guanxi relationships tend to be embedded in networks, words about face gained by both parties are likely to spread, enhancing their capital for more guanxi building activities in the future.

Renqing involves not only sentiment, but also concrete expression of sentiment through action. In Chinese society, people show their renqing by offering gifts on happy occasions and assistance in times of difficulty (Yang, 1957; Hwang, 1987). Hence, renqing is a resource that one can offer to another person in the course of social exchange (Hwang, 1987). In traditional Chinese communities, the mutual indebtedness of renqing helps to build solidarity and maintain cooperation between people (Fei, 1948). In the course of social interaction, one party will try to manoeuvre the other party into owing a renqing debt; the second party – the recipient of renqing – will have to find an opportunity to repay the favour, whereupon a renqing debt will in turn be incurred by the first party.

The exchange of renqing is an intricate dance. An individual is obliged to accept a renqing when he is offered one because acting otherwise would disrupt social harmony and signal to the other party that he does not want to engage in a relationship (King, 1980). A similar signal would be sent if he returns the renqing debt too quickly, as it would indicate his reluctance to remain in debt to the other person. Chinese people avoid a precise calculation of renqing accounts because clearing the accounts would mean the end of a relationship. The best way to maintain a relationship is to wait for the appropriate time, when the other party is in need, to return the renqing. As renqing involves not only material goods but also sentiment, renqing persists even after the debt incurred by material goods received has been discharged. In order to discharge this debt, the receiver of renqing tends to repay his debt with a renqing of even higher value, leading to a propensity for renqing to escalate.

Though renqing cements relationships through obligating the parties involved to reciprocate in meeting each other’s needs, it also distances people from each other because it binds them with the calculation involved in endless obligations. Studies have shown that Chinese people are reluctant to seek help from third parties for their friends even when they are willing to help their friends themselves, because they want to avoid renqing debt (Chang and Holt, 1994); reliance on those outside one’s kinship group creates anxiety because it involves the unspecified repayment of renqing (Eberhard, 1971) In traditional China, merchants left their hometown to do business in order to avoid renqing entanglements, and officials were not allowed to hold positions in their hometowns for fear that renqing pressure might influence their administration.

Renqing plays an important role in the development of guanxi because the obligation of reciprocity inherent within it enables it to be used as a social exchange mechanism for acquiring desirable resources (Hwang, 1987). The giving, taking and repayment of renqing serve as a process for the two parties to ascertain the ability of each other to deliver on their obligations and to build trust. King (1980, 1989) sees obligation as the departure point of Chinese social ethics and renqing as a social fact (Durkheim, 1964) that is central to exchange in Chinese society just as money is central to economic exchanges.

Reciprocity is a universal social agreement (Gouldner, 1961) that enables a society to function predictably (Malinowski, 1926; Levi-Strauss, 1963). In Chinese culture, reciprocity, or pao, reflects the Confucian concept of treating others as one would like to be treated, and the notion of a moral universe that punishes evil and rewards virtue (Chang and Holt, 1994). In everyday life, pao takes the form of reciprocating help one receives, or returning renqing.

The reciprocation of renqing in Chinese society involves not only morality and social norms, but also one’s reputation and face. Repaying a renqing generously is highly praised (Wen, 1989), and the failure to return a renqing can damage one’s reputation, leading to the loss of face. Today, because of such complications, Chinese people who are in power will do their utmost to avoid being entangled in renqing, and many employ different rules for different areas of interaction to avoid renqing entanglements (Hwang, 1987). They may, for instance, apply the equity norm in interacting with people in general and employ renqing only in their personal life.

2.1.2.3 Familism

Familism, which refers to developing close relationships within a family, is a complex cultural value that can be found in both Western and Asian countries. Familism is characterized by the beliefs that everything revolves around the family and the collective needs of the family take precedence over individual needs.

Chinese familism is rooted from the concept of wu-lun of Confucianism serving as a foundation ideology and value of Chinese people for thousands of years. Chinese culture places strong emphasis on the family, which served as the basic building block of Chinese society (Redding, 1993; Cheng, 1994). This emphasis gives rise to an intense distrust of non-family members, leading to familism and an insider-outsider dichotomy.

Chinese individuals see that one’s family is an automatic unit apart from the rest of society. Everyone is born to a family, is brought up in a family, and live one’s life inseparably from the family. The importance of family lies in its ability to socialize individuals into filial and loyal beings and Chinese familism requires that children obey parents and individual feelings be subordinate to the family’s feelings.

In today’s Chinese societies, familism is an essence of Chinese economic organizations (Wong 1993). Wong distinguishes three aspects of Chinese economic familism: nepotism, paternalism, and family ownership. Although these three aspects of Chinese economic familism often coexist, they are not inherently tied to one another. That is, a paternalistic enterprise may not be nepotistic in its appointment policy, and it is possible for a family-owned firm to be impersonal and universalistic in its internal administration (Wong, 1993).

2.1.2.4 Affective

In a mixed tie, the expressive component of the relationship is measured by ganqing, which can be translated as affection. Ganqing is a measure of the closeness or intimacy of the relationship and the emotional commitment of the two parties involved (Luo, 2000; Tsang, 1998). It is also a measure of the usefulness of the guanxi since it reflects the reliability of the parties involved in assisting their guanxi partner at their own expense (Brunner et al, 1989). As ganqing is not static, it has to be continuously maintained and renewed.

Ganqing is an affective component of guanxi, but it also serves an instrumental purpose. In the words of Jacobs: “Of course one can use ganqing. If ganqing can’t be used, it isn’t ganqing.” (Jacobs, 1980) Hwang (1987) postulates that the affective component in relationships among Chinese people serves the instrumental function of striving for needed resources; when Chinese people weave their networks of guanxi, they are also weaving a web of renqing obligations that must be “repaid” in the future.

2.1.3 Guanxi Activities

Guanxi bases are dynamic and elastic, and, in the absence of any ascribed or achieved base, guanxi can be established through an intermediary. The transfer of an intermediary’s own guanxi can help one move from the outgroup to the ingroup. For example, if A shares guanxi with B and B shares guanxi with C, then B can use his credibility with both A and C to introduce one to another, moving A from an outsider status to an insider status with B. The transfer of guanxi through an intermediary plays an important role in Chinese business life because the intermediary can vouch for the behaviour of the newcomer, providing a base of trust upon which the two parties may establish guanxi.

Guanxi is frequently cultivated through the hosting banquets and the giving of gifts. Gifts must be chosen with care to meet with the needs or status of the receiver, or else must be something of scarcity and be presented with an eye to timing and situation. If such precautions are not observed, both parties will lose face (Brunner and Koh, 1988). Skilful practitioners of guanxi also know that gifts or favours are not to be repaid immediately (Yang, 1994). Instead, it is advisable to enhance the openness of the guanxi (Wank, 1996) by waiting so that the other party can cash in the favour when they need it.

While gift-giving and favours can open doors during the process of initiating guanxi, the guanxi has to be strengthened with the cultivation of ganqing. This is effected through social interaction and the mutual exchange of obligations. Chinese people develop close guanxi by going beyond the quid pro quo exchange to find out the other party’s unarticulated needs and offer help in that area (Zhang, 1998). While gifts produce a feeling of gratitude, such favours involve genuine feelings of ganqing and care (Wank, 1996). For example, a Chinese executive who has experience of that area can offer advice about Western universities and Western customs to an officer who is planning to send his son or daughter to study abroad, or he can offer lifts to officials to visit another town. The extending of such favours enables the two parties to build trust and to enter the each other’s ingroup overtime.

2.2 Western models of relationship

Marketing studies has focused mainly on the concept of exchange (Hunt, 1983; Bagozzi, 1975), but the relationship between buyer and seller in which exchanges are embedded was relatively overlooked until the emergence of frameworks such as relationship marketing, interaction approach and network theory. The transaction approach posits transaction costs as the deciding factor in the creation of governance structures, giving rise to the dichotomy of market and hierarchy. Transaction costs, founded upon the problems of opportunism, bounded rationality and related factors, are the pivot upon which governance structure hinges; governance switches strictly between market and hierarchy according to the relative balance of internal and external transaction costs. By shifting the focus from the transaction itself to the relationship implicit in the transaction, the new relational frameworks are able to address the underlying problems of bounded rationality and opportunism in a new way, offering a view of governance that moves beyond the strict dichotomy of market and hierarchy. The ways in which this shift of focus occurs will be discussed below.

2.2.1 Transaction Costs Economics

Transaction cost economics explains different governance structures in terms of the costs that arise from the administration of exchanges (Williamson, 1975). These are costs arising from the administration of exchanges. Such administration covers a variety of different activities, such as the search for information on price and quality, and the search for potential buyers and sellers and for information on their behaviour. Transaction costs also cover the cost of bargaining, in which two parties establish a price through negotiation. Bargaining further involves the drawing up of contracts or agreements with an exchange partner, the monitoring of contracts to ensure that the other party respects the terms and conditions, the enforcement of contracts where necessary, the collection of damages should the contract be breached, and the protection of property rights against third party encroachment (Eggertsson, 1990: 15).

Under Williamson’s transaction cost approach, there are two structural alternatives for economic organization: market and hierarchy (Williamson, 1975). Which alternative is the most viable will depend upon the transaction costs described above. Williamson (1975) proposes five factors that influence whether the market or hierarchy would be adopted as a governance structure: opportunism, bounded rationality, small numbers bargaining, uncertainty, and information impactedness, or the cost incurred by interested parties in the pursuit of information.

Of the factors proposed by Williamson, bounded rationality refers to the fact that, because it is impossible to specify the exact conditions in which exchanges will take place in the future, there is no such thing as a perfect contract. Opportunism is precisely what contracts are there to guard against, and refers to the possibility that one partner in an exchange may act in “self-interest with guile” (Williamson, 1985) at the expense of the other party; it is difficult to determine beforehand whether a partner is trustworthy or not. Small-numbers bargaining situations occur when the asset specificity of the transaction is high and both the buyer and the seller have limited options in terms of a replacement for the other, thus reducing the bargaining power of each. Bounded rationality and opportunism make contracts costly, giving rise to the transaction costs associated with negotiation, communication, the screening of potential partners, and the monitoring and enforcement of contracts. This is especially true where small-numbers bargaining is involved. So we may see that, underlying market transactions are contractual relations, which necessarily give rise to problems of bounded rationality (Simon, 1947) and opportunism (Williamson, 1975) since most transactions involve long-term obligations.

Hierarchies – the second form of governance structure – arise when the cost of conducting transactions internally is lower than that of market-mediated transactions. This occurs when a market becomes inefficient because of bounded rationality, uncertainty, opportunism or small-numbers bargaining. Hierarchies thus arise to internalize transactions at a lower cost, governing transactions through legitimate authority, guided by explicit rules that emerge out of the social agreement among their members.

Contributing to the transaction cost perspective, Ouchi (1981) later put forward another alternative mode of governance, the ‘clan’, which is a group with common goals governed by legitimate authority, reciprocity, and common values and traditions.

2.2.2 Relational Marketing

Relationship marketing emerges from the studies of service marketing, which originates with the Nordic School of Services in Scandinavia and Finland. Relationship marketing has been described as a “paradigm shift” from the traditional 4P model that focuses on product, price, place and promotion, to one that focuses on relationships (Grönroos, 1994). It is defined as efforts “to establish, maintain, and enhance relationships with customers and other partners, at a profit, so that the objectives of all the parties involved are met.” This is achieved by “mutual exchange and the fulfillment of promises” (Grönroos, 1994). Elsewhere, it has been defined as a marketing approach based on “relationship, interaction and networks” (Gummesson, 1996). Relationship marketing is an interactive process within a social context that aims to create results in the long term through trusting, enduring and profitable relationships (Grönroos, 1990, 1996). The shift in emphasis that it represents – from products and firms to people, organizations and the social processes involved in ongoing relationships (Webster, 1992) – emerges partially out of the realization that trade is an infinite game in which economic actors engage not necessarily in order to win, but simply to continue playing (Ambler and Styles, 2000: 503). Exchange, which has been the foundation of marketing for a long time, plays a relatively unimportant role in relationship marketing. It is assumed that if a trusting relationship between two or more business partners exists, exchanges will occur inevitably from time to time (Grönroos, 1996).

It has been shown that customers frequently see services as provided by the people who perform the service rather than by the company itself (Hocuff, 1998). This is where the value of interpersonal relationships to a company first arises. If a customer is satisfied with his or her service provider then a close and long-term relationship may be formed, leading to continuing exchanges that lower the marketing cost per customer (Gronroos, 1990).

By placing emphasis on such relationships, relationship marketing creates values for customers or partners on top of the core product/service provided, and leads to tighter ties with customers and partners over time. It emphasizes the offering of a total service that shifts from the product-based transaction cost approach in traditional marketing to a competencies-based or resource-based relational approach (Gonroos, 1990). Instead of a product, what the company offers is a package of resources, including personnel, technology, knowledge and time, this package being shaped by the needs and requirements of each customer. Because there may be elements missing from this total service that – due to technological or cost restrictions – the company cannot offer in-house, it engages in horizontal and vertical partnerships in the supply chain in order to fill the gap (Grönroos, 1990). In this way a network of relationships, in which participants interact with each other through a flow of goods, services, information, financial and other resources, and through social exchanges, begins to take form.

2.2.3 The Interaction Approach

The interaction approach originates from the Industrial Marketing and Purchasing (IMP) Group in Northern Europe and represents the application of relationship marketing in business-to-business markets. Its emphasis differs from that of relationship marketing in that it focuses on the dyadic buyer-seller relationship. It arises out of the realization that suppliers and customers in business markets are engaged in close, complex, cooperative and long-term relationships to enhance competitiveness (Turnbull et al, 1996). These relationships involve multiple contacts between members of each company and evolve over time with increasing adaptation and commitment from both parties. Unlike the anonymous consumer in mass product markets, customers in business markets frequently require products that are tailored to their specific needs or packages that include advice and service in addition to the product, while, on the other side of the transaction, suppliers select customers based on a complex set of criteria (Ford, 1988). In other words, unlike the earlier 4P marketing mix approach that accords the utmost importance to the seller, the interaction approach involves a type of “reverse marketing” (Blenkhorn and Banting, 1991), with the buyer trying to persuade the supplier of its needs as much as the seller tries to persuade the buyer of the value of its product and services.

The interaction approach takes the relationship as its unit of analysis rather than the individual transaction, and takes into consideration the attitudes and behaviour of the interacting parties (Turnbull et al, 1996). It sees the interaction between the buyer and seller within the context of the relationship between companies, involving the reaction to each other’s actions and the meeting of the other party’s expectations. Relationships, as examined in the interaction approach, necessarily involve adaptation and a partial loss of control. They are comprised of learned codes and norms of behaviour that emerge organically from the relationships themselves and which provide the atmosphere in which various exchanges, ranging from negotiations, payments and deliveries to social contact, all take place. Each exchange is affected by past exchanges and will, in turn, affect exchanges in the future (Newcomb, Turner and Converse, 1952). Hence, a buyer does not only have to assess the seller’s performance, but also whether the relationship has met the expectations of both parties (Ford, 1988). For example, Motorola conducts quarterly surveys of major suppliers to ensure that it is providing benefits to its exchange partners and ensuring thereby the maintenance of their relationship (Moody, 1992).

With the added dimension of time that relationship brings, the interaction approach represents a separation of ways from the short-term profit-orientation of buyers and sellers in many business exchanges. As an example of this short-term orientation, many sellers raise prices on the initial sales in order to maximize profits, focusing on acquiring new customers rather than maintaining existing ones. Buyers are also prone to similar attitudes of profit-maximizing. For example, a major European car producer persuaded its suppliers to invest in product development with the prospect of future business, but when the product was developed, the producer told the suppliers to bid for orders on a lowest cost basis (Ford, 1988). Cynics might be reminded of the story of the frog who allows the scorpion to ride on his back when crossing a river. The scorpion asks for a ride, promising not to sting the frog if he grants this favour. Halfway to the other side of the river, however, the scorpion stings the frog. As they both sink, the frog asks the scorpion, “Why did you do it?” The scorpion replies, “What did you expect? It’s my nature.”

Under a relationship-oriented approach, however, a company must learn to work with its partners, manoeuvring through both conflict and cooperation for the realization of joint and individual goals (Ford, 1988). When the goals and the interpretation of events of the two parties overlap, then neither will experience the relationship as a burden (Håkansson and Snehota, 1988).

How such co-operation works in practice may be observed in the example of just-in-time systems. Within such systems, the increased frequency of delivery, with short delivery schedules, leads to complex communication and interaction arrangements between buyers and sellers (O’Neal, 1989a). Suppliers are limited to a select few and both buyers and sellers choose their partners carefully. Their relationships are characterized by mutual cooperation, trust and loyalty, long-term orientation, interdependence, closeness, openness in communication, and the provision of critical support to each other (O’Neal, 1989b). This arrangement leads to a win-win situation that encourages both parties to continue investment for improvements and develop their relationship.

While the interaction approach may highlight the benefits to a company of relationships, it is also true that relationships have a downside. Like personal relationships, business relationships can get messy. A close relationship does not guarantee a positive outcome, but simply magnifies the scope for both positive and negative consequences (Hakansson and Snehota, 1988). For example, when one party wants to exit a relationship, the other party, in view of the investments he has made in the relationship, may feel abandoned. He may also decide to use whatever power he has over the other party to make things difficult. In relationships, a participant gets involved not only with his partner but also all his partner’s other relationships.

A defining characteristic of the interaction approach is that it is dynamic, dealing, as it does, with the evolution of buyer-seller relationships, which it sees as the primary assets of a company. Concerning this evolution, Dwyer, Schurr and Oh (1987) developed a conceptual model of business relationships by drawing on exchange theory, marital theory, bargaining theory and power theory. Their model, which is rooted in interpersonal relations, divided the relationship development process into five stages: awareness, exploration, expansion, commitment and dissolution.

Awareness is a pre-exchange stage in which there is only unilateral action. One party becomes attracted to another party as a potential exchange partner, and positions himself in such a way as to enhance his own attractiveness to the other party.

Mutual attraction will precipitate the exploration stage, in which the two parties engage in one or repeated trial exchanges that enable them to learn about each other’s ability and willingness to deliver satisfaction (Blau, 1964). Satisfaction may include such elements as monetary rewards, information, services, legitimacy, status, or social satisfaction. Investment is minimal at this stage and the association, based on exchanges, can be easily terminated at any time. Essentially, this stage is a period of testing to gauge each other’s competency, integrity, and compatibility through a number of sub-processes, namely, communication and bargaining, power and justice, and the development of norms and expectations.

In the process of interaction described above, the two parties engage in a bilateral exchange of information about their needs, wants, priorities, concerns and issues. This reciprocated disclosure of information will move the relationship forward, and, as the partners come to understand each other’s needs and concerns, they enter into a bargaining process that requires each party to rearrange their obligations and desired benefits. The willingness to bargain is the index of the attraction of each party to the other, since effort is required to adjust to the other party instead of searching for alternative partners; this effort reflects the mutual investment that the two parties are putting into the relationship. Bargaining involves power; if power is exercised justly and both parties are satisfied with the outcome of the exchanges, then norms of behaviour and conduct will emerge spontaneously to form the ground rules for future exchanges.

If the two parties continue to find the outcome of exchange satisfactory (Blau, 1964), motivation to maintain the relationship will increase and alternative exchange partners will no longer appear so attractive (Thibaut and Kelley, 1959. At this stage, partners interact and reward each other beyond the strict requirements of obligation and become increasingly interdependent. With this continuous increase in benefits and interdependence, the relationship enters into the third stage: expansion. The processes of attraction, communication and bargaining, the exercise of power, and the development of norms and expectations continue, but at the expansion stage these processes are underlied by trust. The parties in the exchange also begin to engage increasingly in joint risk-taking, such as market penetration and product development, which leads to mutual benefits.

When a high-level of goal congruence emerges and exchange partners cease to subject each other to “constant and frenetic testing” (Scanzoni, 1979), mutual satisfaction of the high quality exchange outcomes finally eliminates the need for alternative exchange partners, and the relationship enters the commitment stage. Dwyer and his associates (1987) define commitment as an implicit or explicit pledge of relational continuity between exchange partners. It can be measured by the levels of input, consistency and durability (Scazoni, 1979).

A committed relationship requires high levels of input from both parties. This input may take the form of anything from economic resources and communication to emotional resources. As the two parties are now maintaining the relationship purposefully, the input has to be consistent to ensure that exchange outcomes are predictable for the other party. Without active maintenance, the relationship will weaken and tend towards dissolution. Lastly, a committed relationship implies durability, since relational partners share belief in the effectiveness of future exchanges (Macneil, 1980: 95).

Committed partners adapt to each other in the face of conflicts, sustaining their interdependence with contractual mechanisms or shared goals and value systems. Adaptation is of great importance in business markets, since it is often necessary to make considerable non-transferable investments in order for the supplier to be able to serve the buyer (Hallen et al, 1991). One of the most common forms that adaptation takes is product development or customization, but adaptation can also occur in logistics, administrative procedure, or finances. Adaptation in business markets is often symbiotic. A seller may, for example, change his delivery schedule to meet the requirements of a buyer who in turn changes his payment methods to adjust to the seller. Buyers and sellers also adapt to each other in their attitudes, knowledge and ways of thinking, in a process that leads to mutual orientation (Johanson and Mattsson, 1987). To a large extent, such adaptation occurs through the day-to-day interaction of individual parties.

From a social exchange perspective, adaptations can be explained in terms of two factors: trust and power dependence (Blau, 1964; Emerson, 1962). Power in social exchanges is derived from one party’s command of resources that are needed by another party (Emerson, 1962). Thus firms adapt to each other to the extent that they are dependent on each other’s resources (Pfeffer and Salancik, 1978). The power dependence of a relationship sets its tone, reflecting the state of conflict or cooperation, the closeness or distance of the relationship, and the expectations of both parties (Ford, 1988). However, as well as being part of a power struggle, adaptation is also a trust-building process of social exchange in which the parties involved demonstrate their commitment and trustworthiness to each other through their actions (Hallen et al, 1991). Adaptations may be made unilaterally or bilaterally. When they are made unilaterally it is sometimes because of power imbalance and sometimes as a reciprocal demonstration of trust in and commitment to the relationship. (Hallen et al, 1991). Bilateral adaptations, however, tend to be made as part of the reciprocal trust-building process.

Unilateral adaptations are often costly, but this can be justified by their value as investments. Such investments will pay off in the long run because they strengthen the bonds between firms, creating an increasing mutual orientation (Hallen et al, 1991). Inter-firm adaptations are likely to vary over the life of the relationship. At the initial stage, adaptation tends to focus on the building of trust and the nurturing of the relationship. It moves on to practical support and business expansion at a more mature stage (Hallen et al, 1991; Wilson, 1995).

Well-managed relational exchanges can foster competitive advantage because they lead to differentiated products (Day and Wensely, 1983) thus creating a disincentive to switch to a new partner for both buyer and seller. Adaptations can also make significant impact on a firm’s competitiveness. If, for example, a supplier introduces quality control management in order to serve one particular customer, the benefits derived from such an implementation will also be felt in relations with other customers.

Not every relationship is successful, however. Failure of a relationship leads to the final stage, dissolution, which can be traumatic, especially when the relational partners have reached a state of high interdependence and significant transaction-specific investments are involved.

Duck (1982) describes relationship dissolution as an extended process that involves the dismembership from a relationship. Within the field of management studies, research on this final stage of the relationship has been scant. Baxter (1985), however, has identified two strategies for exiting a relationship. The party who wishes to exit can adopt a direct strategy, informing the other party of his wish, or he can adopt an indirect strategy, such as fading out, to avoid hurting the other party in the breakup (Baxter, 1985).

2.2.4 Network Theory

The term ‘network’ is adopted from exchange theory and refers to sets of two or more connected exchange relations (Hakansson, 1987). Network theory looks at multiple sets, or portfolios, of relationships as opposed to the dyadic buyer-seller relationship, which is the focus of the interaction approach. Relationships are built through inter-firm interactions that involve adaptation and investment, and a firm may gain competitive advantage by positioning itself strategically within the network. Unlike a financial portfolio, which remains the property of the owner even if it loses some of its value, a relationship portfolio is considerably more perishable because a seller does not own a buyer, and vice versa (Ford, 1988). Relationship portfolios are also much more inter-connected, and changes in product, service or process, such as product design, terms of payment and delivery conditions within one relationship, may alter other relationships, because the company will no longer interact with the other parties in the same way as before. Hence, given the importance of relationship building between buyers and sellers, management of inter-organizational relationships becomes a strategic priority.

Early studies of network focus on informal interpersonal ties that function in the shadows of formal organizations, but more recently, networks are examined as a formal and legitimate form of governance structure (Achrol & Kotler, 1999). Williamson (1975) posits markets and hierarchies as two alternative modes of organizing economic activities. As previously discussed, hierarchies arise when markets fail and the cost of internalized exchanges is lower than the transaction cost of conducting those exchanges in the market. Hierarchies do not eliminate transaction costs, but they can come close to this aim if they achieve a “congruence of goals” within the hierarchy, giving rise to a “clan” (Ouchi, 1980).

Networks, on the other hand, lower transaction costs by building a clan-like atmosphere among organizations (Jarillo, 1988). Thus the distinction between network theory and Williamson’s market/hierarchy dichotomy lies in the externalization of clan-like values. Markets rely on price as a control mechanism, hierarchical structures on administrative authority, clans on legitimate authority and shared social values and traditions, and networks on a combination of trust, reciprocity, collaboration, personal relationships, mutual orientation and interdependence. Network exchanges are administered through a form of social control that emerges from the network itself (Larson, 1992), echoing Macaulay’s observation (1963) that contracts can be relatively unimportant in economic exchanges. Networks can give superior performance because they are glued together by trust, the absence of which is the essential cause of transactional costs (Jarillo, 1988). Compared with vertically integrated hierarchical structures, networks enjoy the advantage of having to engage no intricate administrative coordination or control mechanism (Larson, 1992). They also challenges Williamson’s (1991) assumption that exchange partners will engage in opportunistic behavior in an environment of small number bargaining.

As a value chain of activities, networks are effective because they enable firms to capture the economy of scale via other network members while focusing on their own distinct competency. This is achieved by farming out other activities to those network members who can carry them out more efficiently (Jarillo, 1988). Networks are efficient because they give superior performance and because the benefits are shared fairly among the members (Jarillo, 1988). Networks enhance members’ flexibility and adaptability because they reduce the need for idiosyncratic investments in fixed assets and technology (Achrol & Kotler, 1999). They are especially beneficial for firms that engage in fast-moving industries with short production cycles, as they enable such firms to adapt to market conditions and reposition their products quickly (Powell, 1990). They also reduce environmental disturbances because these are diffused throughout the network with each network member focusing on one component of the disturbance (Achrol & Kotler, 1999). At the same time, network members are free to trade with other partners if they are offered better terms, a condition that acts as a cost discipline to the network as a whole.

However, networks also have their disadvantages. Building a network is a strategic market investment that requires time, money and executive talents, and such investments can lead to path dependence. Networks also involve opportunity costs because they create boundaries (Hitt et al, 2002); network members may not be able to see the opportunities and resources available outside these boundaries. Constraints on resources within the network can also lead to political behaviour when firms compete for resources instead of acting cooperatively (Hitt et al, 2002).

2.3 Comparison between western relational models and contemporary business guanxi

The previous sections illustrate relational approaches to marketing in the West and the network paradigm that has emerged from them, which supersedes, to some extent, the transactional perspective and the market/hierarchy dichotomy inherent within it (Appendix A). In this section, a comparative study of guanxi is made and we examine how guanxi works within a business environment through the use of the network paradigm.

One of the most important shared characteristics between guanxi and the Western relational approaches is trust. Both guanxi and the relational approaches involve a relational development process in which trust gradually deepens as the two parties engaged in the relationship get to know each other. Major differences between guanxi and networking arise from fundamental differences in cultural values between China and the West. In fact, it could be said that one salient difference between networking and guanxi is the very fact that guanxi is a cultural construct that has had currency for thousands of years, whereas networking, relationship marketing and so on, are recently formulated and rational perspectives designed to increase the efficiency of management within a business organization.

2.3.1 Western Trust vs Chinese Trust

Trust may be defined as the confidence that no party in an exchange will exploit the other party’s vulnerabilities (Sabel, 1993: 1133). The literature has identified different types of trust that represent different levels of trust in the business arena, such as calculative, cognitive (Lane,1998) and affect-based trust (McAllister, 1995). Calculative trust is based on cost-benefit analysis and the knowledge that the other party will do as they say, because the cost of violation is greater than its gains (Lewicki and Bunker, 1996). It is an “on-going, market-oriented, economic calculation whose value is derived by determining the outcomes resulting from creating and sustaining the relationship relative to the costs of maintaining or severing it” (Lewicki and Bunker, 1996: 120).

Cognitive trust refers to trust based on cognitive sharing, such as common ways of thinking. It is underlain by knowledge-based trust, which refers to trust that arises from knowing the other party. Knowledge-based trust allows parties who are engaged with one another to predict each other’s behaviour. Cognitive sharing contributes to calculative trust because it does not only allow people to gauge the action of the other party, but also provides a base for common expectations to emerge, further increasing the predictability of the actions of the other party. Unlike calculative trust, however, knowledge-based trust is built on information rather than deterrence and is grounded in the predictability of the other individual.

Business relationships are underlain by different levels of trust. Low trust cooperation is largely based on calculation and control (Child, 1998). Each party will leverage its strengths to reduce its dependence on the other party. Since each party tries to protect its resources and comparative advantages in low-trust cooperation, there is little genuine sharing of information and the two parties may never get to know each other well enough to develop cognitive trust. This failure to establish cognitive trust makes it very difficult for the relationship to deepen. Many business relationships are stuck at the level of calculative trust and never move to the level of cognitive trust.

Though high trust cooperation also begins with calculation, efforts to deepen the relationship and establish more trust differentiates it from low trust cooperation. When two cooperating parties can meet each other’s expectations at the calculus stage, then efforts to move the relationship to a higher level are likely to be successful. A willingness to engage in open communication and to share knowledge and information allows cognitive trust to develop as the two parties get to know each other better, moving from mutual suspicion to mutual adaptation and concern, and eventually towards the development of affective trust.

Affective trust is established on emotional bonds (McAllister, 1995: 26). It reflects a genuine concern for the welfare of the other party and there is a feeling that the relationship has intrinsic value and that, moreover, these feelings are reciprocated. Affect-based trust is likely to develop through intense relating between two people over time. It is enhanced by the ability to communicate and to avoid or resolve misunderstandings, so mutual knowledge and the sharing of information between the people concerned are essential conditions.

Parties who engage in exchanges are vulnerable because their exchange partners may act opportunistically, and different kinds of exchanges require different types of trust. These different types of trust reflect the different reasons that parties engaged in an exchange are confidence that their vulnerabilities will not be exploited (Barney and Hansen, 1994). In exchanges that involve only weak form trust, trust emerges between the two parties because there are limited opportunities for opportunistic behaviour, and so the exchange parties do not have to erect elaborate governance structures to safeguard the exchange. The buyer does not know for sure that the seller will not cheat him, but he can afford the loss even if the seller takes the money and runs. Weak-form trust generally applies when the cost for evaluating the exchange is low and little transaction-specific investment is required (Barney and Hansen, 1994). The economic value of weak form trust lies in its cost advantage, as it does not require any governance structure nor does it involve the elaborate search for the right partner. Through engaging in repeated interaction in the form of arm’s length transactions over a period of time, the two parties develop a relationship. As the relationship deepens, they can engage in transactions that involve greater vulnerabilities.

Semi-strong trust occurs in exchanges when there are significant vulnerabilities involved, but the exchange parties use governance devices to make opportunistic behaviour unprofitable and reduce their vulnerabilities (Barney and Hansen, 1994). This form of trust governs most economic exchanges. Governance devices can include different types of contractual mechanisms, such as contingency claim contracts, or hierarchical governance, which explicitly attach a cost to opportunistic behaviour. Governance devices may also impose social costs instead of economic costs, examples being damage to reputation and threats of expulsion from an exchange or a network (Jarillo, 1988, Klein et al, 1978; Granovetter, 1985).

Strong form trust emerges in exchange relationships when the internalized values or principles of the exchange parties prevent them to the face of significant vulnerabilities when the internalized principles and the values of the economic actors involved bar them from engaging in opportunistic behaviour. [Re-write]

The ways of producing trust are various. Zucker (1986) has identified three modes of trust production in economic exchange, namely, characteristic-based trust, process-based trust, and institutional-based trust. They correspond to trust at the individual, relational and social level respectively. Characteristic-based trust is tied to the characteristics of a person, such as family background or ethnicity. Process-based trust is tied to a past or expected exchange, and might be based upon reputation, brands, or gift-exchange. Institutional-based trust, which is a kind of system trust, is tied to formal structures. Such formal structures can depend on individual or firm-specific attributes, such as professional certification of competencies, as in a Certified Professional Accountant; or intermediary mechanisms, such as the use of escrow accounts, a code of ethics or legal system. Institutional trust facilitates exchanges between strangers who have few other means to ascertain the trustworthiness of their potential exchange partners.

Zucker (1986) studied the rise of institutional trust in the United States between the late 18th and early 19th century and found that a large influx of immigrants with different lingual and cultural backgrounds, an increasingly mobile population, and the expansion of the national market, led to an increased volume of exchanges between strangers between whom there was no characteristic-based trust. These social changes disrupted process-based trust and the interpersonal understanding that emerges out of personal interaction between people, leading to the rise of institutional trust.

By providing a base of trust for strangers to transact with each other, institutional-based trust plays an important role in supporting market activities. The emergence of Western relational approaches to economic exchanges signals a return to an emphasis on process-based trust and closer co-operation in exchange relationships. The relationship development process (Dwyer, et al, 1987) in Western relational models bears a considerable resemblance to the guanxi cultivation process.

There has been little institutional-based trust to support economic activities throughout most of Chinese history. The Chinese state, founded on Confucian philosophy, relied upon role compliance and social control to maintain order in society. Confucius emphasises self-cultivation as the fundamental solution to human wrongdoing and sees the legal system as merely a deterrent to such acts.

The absence of institutional support for commercial activities, coupled with the cultural emphasis on the family, means that Chinese businessmen rely on characteristic-based and process-based trust in their business dealings. When they have to do business with strangers, they first try to build guanxi with them to ascertain their trustworthiness. In the Chinese business setting, one’s trustworthiness translates into one’s xinyong, or credit rating.

Though process-based trust is personalized and particular to the parties engaged in the relationship, Hamilton (1997: 282) argues that process-based trust in the Chinese context is also a type of system trust. Guanxi involves the assessment of whether people will abide by social norms and how they will act in the context of the relationship. Therefore, it is a type of system trust that is based on normative and inter-subjective rules that have no legalistic but only a sociological foundation:

“Chinese traditionally rely heavily on characteristic-based trust, using common attributes such as kinship, locality or native dialect as a base for building trust. In the absence of a common ascribed base, they look for an achieved guanxi base, such as attendance of the same school, or experience of working together. If no common ascribed or achieved base exists, then the party interested in initiating a guanxi relationship may try to find an intermediary who can introduce him to the target party.”

The process through which trust is cultivated in a guanxi relationship bears significant resemblance to the cultivation of trust in the Western model. As the relationship deepens, the status of the guanxi partner moves from that of the outsider, who is little trusted, to that of the insider, with whom genuine affection and emotions are invested in the relationship. The trust cultivation process is very similar to the process in which a relationship moves from calculative trust to affective trust in the Western model. Process-based trust developed through guanxi reduces risks and becomes increasingly important as social life becomes less close-knit and people more mobile, making it more difficult to rely on characteristic-trust in business activities. On the other hand, the increased volume of market transactions between strangers has also changed the nature of guanxi. Guanxi today has become “generalized particularism” in the business arena, and familial terms such as “older brother” are invoked tactically to shorten social distances when Chinese businessmen try to build relationships with one another or with government officials (Lo and Otis, 2003).

2.3.2 Face and Favour vs Reciprocity

Some of the major differences between guanxi and the Western relational approaches arise from differences in cultural values between Chinese and Western societies. Renqing, an essential component of guanxi, reflects the practice of reciprocity in a collectivist – as opposed to an individualistic – society (Gudykunst & Ting-Toomey, 1988: 65). In individualistic cultures, reciprocity tends to be voluntary, arising out of the free will of an individual. It tends also to be short-termed. Renqing, on the other hand, is obligatory, group-oriented and aimed towards the long-term. Whereas reciprocity emphasizes behaviour and is short-termed because repayment allows an individual to discharge his obligations, renqing is long-termed because it carries an affective component that makes it difficult to measure and repay (Zhang, 1998). This quality renqing has of resisting accounting often results in a receiver trying to repay a renqing with a bigger favour, thereby putting the other party into debt (King, 1980), and a propensity for the exchange of renqing to escalate between two parties as each tries to clear the accounts.

The norm of reciprocity is a universal law for social exchange that is independent of the relationship between donor and receiver. Renqing, on the other hand, is particularistic and shaped by the social relationship that forms its context (Hwang, 1987). Prior to engaging in an exchange, an individual will consider how much it will cost him to grant a renqing, the extent to which he will be repaid, and how onlookers will view the exchange. Since individuals cannot ascertain when and how they will be repaid in the future, the social status of the prospective receiver takes on importance; the reputation, power and resources possessed by the prospective receiver can serve to indicate the likely nature and extent of his repayment (Hwang, 1987).

2.3.3 Familism/Group-based Orientation vs Individualism

Like most high power distance cultures, Chinese culture is also a collectivist culture, with the group taking precedence over the individual (Hofstede, 1991: 49-78). The Chinese emphasis on guanxi can be understood in light of these underlying cultural values.

In collectivist cultures, individuals are strongly integrated into their ingroups, which, from the day they are born, are comprised of their immediate and, most likely, their extended families. The individual draws his identity from the ingroup, which shares resources and provides him with protection as long as he remains loyal (Hofstede, 1983). Many individuals in collectivist cultures continue to live with their families when they grow up, which leads many sons to share their father’s occupation. Children are not encouraged to develop their own opinion and confrontation is considered rude. Education places a strong emphasis on tradition and aims to instill the skills and values necessary to be part of the group. An individual’s completion of his studies speaks not only for himself but also brings honour to his ingroup. The completion of studies is viewed as a ticket to social acceptance enabling the individual to associate with a higher status group.

By comparison, in individualist cultures, ties between individuals are loose and individual interests prevail over that of the group. Children are typically born into a nuclear rather than an extended family, and are identified by individual characteristics rather than by group membership. As they grow up, they think of themselves as distinct individuals and are expected to look after themselves. Even as children, they are encouraged to be independent. Many work from an early age to earn their own pocket money. In the Netherlands, for instance, young adults are considered independent economic players from age 18 onwards. Government subsidies for students, which once took the form of an allowance to parents, are now given directly to students in acknowledgement of their independence.

Collectivism has considerable implications in the work place. Earley (1989) found that Chinese participants in a study performed best when operating anonymously towards a group goal and worst when operating individually with their name marked on their results (Hofstede, 1991: 65). Employers in collectivist cultures are more likely to hire relatives as a way to reduce risks, in contrast with those in individualist cultures who refrain from hiring relatives in order to avoid nepotism or conflicts of interest. In collectivist cultures, the workplace can become an ingroup, resembling a family, and superiors are expected to provide protection. Managers who fail to treat their employees as ingroup members will have difficulties in gaining their loyalty (Hofstede, 1991: 65).

In Japan, which scores halfway on Hofstede’s (1991) individualism-collectivism scale, poor performance from those who are considered permanent employees will not lead to dismissal but merely an adjustment in assignments. By comparison, relations between employer and employees in individualist cultures are seen as a business transaction, and employees who do not perform well are not tolerated.

In social life, the collectivist mentality gives rise to particularistic thinking and, here too, an insider-outsider dichotomy. Strangers with whom one has no relationship are treated with indifference; Chinese in general do not feel any obligations towards those with whom they have no relationships. This attitude also makes interaction with strangers fraught with potential dangers (Redding, 1990:66). Since the Chinese feel more comfortable working with those they know – loyalty to the in-group being paralleled by a deep distrust of outsiders – they turn first to their social networks when a business undertaking has gone beyond the capacity of the individual. Doing business with a stranger is possible only after a person is brought from the outgroup to the ingroup through a relationship of trust.

The collectivism of Chinese society arises partially from the Confucian emphasis on familism. Nonetheless, Chinese familism is changing as society changes. Lau (1978) found that familism in Hong Kong has shifted to a “utilitarian familism” in which non-kin members are incorporated into the family as pseudo-family members because of their ability to serve an instrumental purpose.

2.3.4 Hierarchy vs Equality

The Confucian principles of wu-lun give rise to relationships with a strong sense of hierarchy. As a result, Chinese society is one of high power distance, in which the less powerful members of its organizations and institutions tend to accept their place in the social hierarchy, expressing a strong sense of vertical order (Hofstede, 1991). This sense of hierarchy permeates all spheres of Chinese social life and children are socialized into this vertical order from a young age, first in the family and then at school.

In societies with high power distance, children are expected to be obedient within the family. Independence is rarely encouraged. Respect for parents and elders continues into adulthood and is considered a virtue (Hofstede, 1991: 32). In school, the learning process is centred around the teacher, who represents the ultimate authority on learning (Redding, 1991: 59). This contrasts sharply with cultures characterized by low power distance, in which children are treated as equals. In low power distance cultures, children are given their say in their own affairs and are allowed to contradict their parents and elders. When they grow up, their relationship with their parents is that of independent equals (Hofstede, 1991). Students are also treated as equals by teachers in school. The education process is student-centred, and students can disagree and debate with their teachers as they find their own intellectual paths. The process is more impersonal, with what is transferred comprising of facts or information that is independent of the teacher’s authority (Hofstede, 1991).

In organizational life, high power distance gives a built-in legitimacy to the authority in control, and decision-making rights are not disputed. Leadership is expected and, for the most part, followed; subordinates rarely challenge their superiors openly, though leadership carries a moral and ethical dimension. In the late Ch’ing dynasty, professional capacity without moral superiority was considered not only useless, but potentially dangerous (Wright, 1966: 199).

High power distance also influences supervisor-subordinate relationships at the workplace. In high power distance cultures, subordinates tend to be dependent on bosses. Subordinates either prefer such dependence or, in the case of counter-dependence, reject it totally. In both cases, the emotional distance between managers and subordinates tends to be large. Subordinates are unlikely to voice dissenting opinions to their bosses directly.

Nonetheless, cultural characteristics are not static and an increase in national wealth and a number of related factors can reduce the power distance of a society

2.3.5 Harmony vs Open Confrontation

In a group-oriented society where people are in continuous and close social contact with each other, harmony becomes a core value that extends to all spheres of social life (Hofstede, 1991: 59). Direct confrontation in Chinese society is by and large unacceptable, and people seldom say ‘no’ in an open and straightforward manner. Westerners are frequently frustrated to find Chinese saying “I will think about it” instead of a straight out “no,” which is what they really mean. In comparison, honesty and a straight answer are appreciated in individualist cultures, and individuals learn to deal with conflicts and confrontation openly from a young age.

Whereas members of individualist cultures seek self-fulfillment, the primary goal of an individual in a collectivist culture is to seek face and to fulfill obligations to the ingroup. The distinction between face and self-fulfillment corresponds to the distinction between cultures of shame and guilt (Benedict, 1947). Shame is social in nature, a reaction to other people’s criticism that relies on external sanctions. Guilt, on the other hand, is internal, working within the individual regardless of whether his misdeed is known to others or not. Face tends to be more important in collectivist cultures because of the high level of awareness of social context (Hofstede, 1991: 61). Rejection or direct confrontation in a collectivist culture can lead a person to lose face, which can seriously jeopardize the relationship in which this takes place.

2.4 From Traditional Guanxi to Comtemporary Business Guanxi

2.4.1 Transitional Guanxi Evident in Three Chinese Cities

Guanxi has been practiced in Chinese society for thousands of years. Nonetheless, guanxi is not static; it adapts and transforms itself to different environments. This study looks at how guanxi is practiced in three Chinese societies – namely, China, Taiwan and Hong Kong – that have undergone different paths of development, and at how the unique Chinese characteristics of traditional guanxi diminishes in the guanxi-practice of these different environments.

Guanxi has a long history in China, though its usage waned when the Communist Party came to power and directed the people’s energy towards the creation of a communist society. The Communist Party also tried to eradicate guanxi because they saw it as one of the Confucian vices obstructing the modernization of China (Yang, 1986). But with the social breakdown that accompanied the Cultural Revolution, people reverted to the use of guanxi to try and prevent their children from being sent to remote areas of the countryside. Later, towards the end of the Cultural Revolution, guanxi was made use of to find positions for youths returning from the countryside to urban areas. Guanxi was also used to acquire daily necessities, such as housing and goods that were in scarce supply, and, because of the archaic communication system and the inefficient bureaucratic maze, it was useful in ensuring the completion of all manner of practical chores. Private guanxi networks of mutual obligation and indebtedness provided some form of certainty and independence against a state that penetrated into all areas of people’s lives and yet failed to provide them with the most basic necessities for survival.

After the Cultural Revolution, guanxixue, or the art of guanxi, emerged as a social phenomenon when people began to use guanxi to pursue their own social or economic interests. With reform in the late seventies and the emergence of a commodity economy, guanxi came to be used even more extensively. Today, guanxixue refers mainly to the use of one’s social and business relationships for the purpose of achieving specific objectives, and it involves the subtle calculation of both costs and benefits (Brunner et al, 1989).

In Boisot’s (1986) cultural space framework, the extent to which information can be diffused in a population is dependent on the extent to which the information can be codified. Information on price and quantity is more readily diffused than contextually rich information about individual transactions. The codification of transaction-related information facilitates the rise of bureaucracies, and the diffusion of this information determines the extent of decentralisation towards markets.

Though the Chinese government has enacted hundreds of company and contractual laws and regulations since it implemented economic reform, unclear rules and lack of information left firms to make their own interpretations and to bear the cost of their mistakes. Local authorities were also left to make arbitrary interpretations of laws and regulations. Chinese managers have reported the state’s regulatory regime to be one of the most influential, most complex and least predictable environmental factors they face in doing business (Tan and Litschert, 1994). Moreover, firms frequently find themselves at the mercy of local authorities that make personalised and arbitrary interpretations of laws and regulations to their own advantage (Boisot and Child, 1996).

The absence of a universalistic and stable legal framework and, consequently, of well-defined property rights, has obstructed the emergence of a stable institutional order and raised transaction costs. In order to reduce risks in their exchanges and compensate for institutional uncertainty, enterprises turn to the informal constraints that pre-dated the economic transition (Peng and Heath, 1996) and rely on a ‘boundary blurring’ (Peng, 1997) process by utilizing their guanxi connections with other economic actors in the network. In the process, the country gravitates back to its traditional mode of social organisation (Gernet, 1982) with an orientation towards particularistic relationships rather than impersonal rule, leading to a vicious circle that Boisot and Child (1996) describe as the “iron law of fiefs.”

The Chinese economy under transition is highly complex. Three types of business system with varying levels of marketisation dominate the economy, namely, state-owned enterprises (SOEs), collectives and private enterprises. It should be noted that ownership types are in flux in China’s transitional economy and ownership type does not always prescribe the behaviour of an enterprise.

Prior to the economic reform of 1978, the Chinese government devised a central plan every five years and broke down the plan into specific output targets for the SOEs. The main objectives of these SOEs were to meet these output targets. Faced with soft budget constraints (Kornai, 1980), the SOEs had little motivation to perform financially, since their debts were automatically written off by the government. Nor were they concerned about the growth of the enterprise, as such decisions were made by a multitude of administrative bodies, regulatory agencies and, in some cases, by local government (Child and Lu, 1996).

With the coming of economic reform, SOEs were given more managerial autonomy and were held financially accountable. China’s transitional economy represents a genuine transformation of business in that it changes fundamental assumptions about managers’ decision making (Tan and Litschert 1994:3), and firms are forced to “strategize” in order to respond to this changing environment (Oliver, 1991).

The organisational reforms in the eighties led to the transformation of collective enterprises into hybrid entities, or ‘marketised firms’ (Nee, 1992). These marketised firms work under hard budget constraints and face stiff market competition as they receive little support from the state. Nonetheless, their ties with local government, such as village committees and town governments have not been severed, and they rely on connections with local government to secure the resources they need.

The growth of collectives is usually handicapped by their small scale, weak capital base, lack of access to state-controlled factor markets, and an institutional vulnerability that arises out of ill-defined property rights. Ownership of many collective enterprises is ambiguous, since many village and township governments lease collective enterprises to private entrepreneurs (Nee, 1992), and private companies register themselves as collectives to avoid exploitation from the state (Peng, 1997). In the absence of a well-defined structure of property rights, hybrids lack effective autonomy (Stark, 1989), and have to rely extensively on guanxi to ensure that the terms of transactions are met (Carroll, Goodstein and Gyenes, 1988).

Financing is difficult for small and medium-sized enterprises in China. Under the planned economy, banks existed mainly to serve state-owned enterprises. It has been easier for SMEs to get bank loans since the mid-1990s, though the situation still varies from region to region (Hsueh et al, 2001). In provinces such as Zhejiang, Jiangsu and Fujian, where economic development was led largely by non-state owned enterprises and SMEs, more than half of the loans made by banks were to SMEs.

Up till the early 1990s, success or failure for SME managers depended largely on their connections with government officials, especially those who had the power to make decisions in production factors such as land and capital (Hsueh et al, 2001).

While managerial ties are used for securing orders, marketing information or credit in developed market economies, China’s unstable institutional environment and inconsistent policies put private firms in an unsafe position, leading private business owners to actively cultivate guanxi with local government officials (Xin and Pearce, 1996) using their family ties or other personal connections as intermediaries.

Though the number of private enterprises in China has grown rapidly from a handful in the 1970s to almost one million in 1998 (Weekly Economic Report, 1996), economic power has not been fully decentralised to the private sector and private enterprises operate in an environment of high uncertainty. Land and buildings, control over key resources, permission to engage directly in foreign trade and new imported technology, are all areas dominated by state and party officials (Tan, 196). Laws, regulations and information concerning government policies are unclear and unpredictable, and such laws, regulations and policies are also subject to the capricious interpretation of the officials who enforce them (Tsang, 1994; Clark, 1991; Tan, 1996).

This uncertain environment leads private enterprises to cultivate ties with both executives of other firms and government officials as a way of managing uncertainty. Private entrepreneurs work under the constraints of hard budgets, and many of their incentive structures are tied to the performance of the firm (Peng and Luo, 2000). Research shows that executives from private firms are more likely to give non-reciprocated gifts to their business connections than their counterparts from SOEs or collective-hybrid companies (Xin and Pearce, 1996). Executives from private firms have also reported their business connections to be characterised by a higher degree of trust and to be more important to their success.

Private enterprises in China frequently involve senior local government officials in their organisations in order to gain political protection as well as preferential treatment. For example, it is common practice among private entrepreneurs in Wenzhou to give senior cadres shares in their firms (Liu, 1992). In other cases, private enterprises offer positions to cadres or the relatives of cadres in order to improve their standing with the government (Ahlstrom & Bruton, 2001) and to gain access to different government officials.

Despite their vitality, private firms are often small and undercapitalised because they receive only limited support from intermediaries such as banks, which remain government agencies and frequently put political considerations before economic ones in loan decisions. Private and informal sources of credit, too, remain limited. Private firms also find it difficult to compete with state and collective enterprises for raw materials in a shortage economy.

In 1946, the Nationalist forces withdrew from mainland China to Taiwan and, as it became clear that an imminent return to the mainland was unlikely, Generalissimo Chiang Kai-shek set about creating a long-term and stable government in Taiwan. This government was to be based on the Confucian model. Hamilton and Biggart (1992: 206) describe Chiang’s efforts as follows:

“He actively promoted an updated Confucian state based on the model of the late imperial system. Unlike the more legalistic model of the Confucian state developed in Korea, Chiang attempted to make the state an exemplary institution and its leader a benevolent ruler: a state that upholds moral principles (dedao), that explicitly allows no corruption and unfair wealth, and that ‘leaves the people at rest’. In this role, the state supervises internal moral order and takes care of foreign affairs.”

The government’s decision to compensate landowners with government bonds in its land reform programme gave rise to an entrepreneurial class as former landlords used their government bonds to finance business ventures (Pye, 1985: 228-246). As Taiwan’s export sector took off, the economic power they gained gave Taiwanese entrepreneurs increasing independence, while the officers and officials of the Nationalist forces were stuck in government positions. The Nationalist government was intent on riding itself of the image of corruption that was associated with it during its rule on the mainland, and, as a result, party officers and officials who held positions in the government could not get involved in the private sector. Meanwhile, the common soldiers who arrived with the Nationalist forces in Taiwan intermarried with indigenous Taiwanese women, closing the social gap between the two groups and leaving politics as the only arena in which the mainlanders and Taiwanese contended their differences.

Though the Taiwanese state was actively involved in the economic development of the island, the need to legitimise power has led the government to leave the private sector to develop largely on its own (Hamilton and Biggart, 1992). The Nationalists had caused much resentment among the indigenous Taiwanese by treating them like second-class citizens and clamping down on the slightest sign of political stirrings when it arrived in Taiwan (Pye, 1985). When it became clear that a return to the mainland was unlikely, it changed direction and adopted a non-favouritist policy towards the different groups in society in order to achieve stability, restricting its own role in the private sector in the process (Hamilton and Biggart, 1992).

With little guidance or direction forthcoming from the government, the people began to organise their own activities and continued the commercial practices that were dominant during late imperial China (Hamilton & Biggart, 1997). The end result was a proliferation of family firms linked together by networks of personal relationships similar to those found in Chinese communities throughout Southeast Asia.

The Nationalists drew up a legal system based on German codes and statutes while they were still on the mainland and this system was enacted after it withdrew in Taiwan. Nonetheless, the formal adherence of a legal code to a Western model that failed to take into account the social environment to which it was applied (Winn, 1994), in combination with Taiwan’s rapid industrialisation (Kao, 1991), created a gap between the legal system and the business world. For example, unregulated underground investment companies that invested customers’ money deposits in the real estate or stock markets and offered a high interest rate in return were widespread in Taiwan, but there was little the courts could do when such underground investment companies ran into financial difficulties and ceased to pay their customers their ‘bonuses’, because they were established outside of the legal system (Kao, 1991).

The inability of the law to accommodate social reality gives officials ample opportunities to apply the law at their discretion (Winn, 1994). Legal professionals are in acute shortage, and, according to some estimates, two-thirds of all lawyers in Taiwan have been admitted to the bar because of their personal connections or because they meet political criteria. Allegations of corruption among judges and prosecutors are widespread, and government officials often turn a blind eye to blatant violations unless they receive complaints. For example, it has been estimated that about U.S. $8.5 million were invested in underground investment companies in the eighties until their collapse in 1989. These investment companies were registered as ordinary companies when they actually operated as banking or financing agencies, receiving deposits from customers and paying them a high rate of interest (Kao, 1991).

The banking system plays a major role in developing economies by investing in new markets and industries and thereby helping them to achieve growth objectives that are too risky for private enterprises to undertake by themselves (Whitley, 1991). In Taiwan, the state dominated the banking sector through the ownership of banks that had moved from the mainland and the confiscation of majority shares in the local banks owned by Japanese. The state also restricted the establishment of non-banking financial institutions out of fear that they would challenge the power of banks and lead to instability (Wade, 1988; Dessus et al, 1995).

While the state adopted a hands-off policy towards the private sector, the banks were conservative and bureaucratic towards private businesses. They were commonly referred to as ‘pawnshops’ because their requirements for heavy collateral from private firms were so high – higher than both Japan and Korea (Wade, 1988: 138). In addition, loans made by the state banks were seen as government assets, and permission had to be obtained from the government branch to write off bad debts, making banks managers vulnerable to default debts (Dessus et al, 1995). As a result, bank managers were reluctant to take risks for fear that it would jeopardize their careers, and most bank credits were rationed to state-party enterprises (Kao, 1991). The fact that many Taiwanese businessmen kept two sets of accounting books, one set for outsiders and one set for the trusted inner circle, did not help, either. Unable to evaluate a loan project objectively, bank managers reverted to personal relationships in making loan decisions.

Unable to secure loans from regulated institutions, small businesses, which were the mainstay of the Taiwanese economy, sought investment capital from friends and families or from the informal market, which was comprised of savings clubs and mutual aid associations (Hamilton, 1996). These clubs and associations are formed of relatives, friends, neighbours or colleagues bound together by personal trust and are not overseen by any formal laws or administrative agencies (Lin, 1991).

There is also a flourishing curb market, unregulated and semi-illegal, that lends money at an uncontrolled interest rate in response to the government’s rigid fiscal policy, which includes high interest rates to control inflation, preference towards short-term loans, and a non-supportive attitude towards equity capital (Hamilton and Biggart, 1997). The informal market plays such an important role in Taiwan’s economy that it made up about 20% of the money flow for the entire island in 1986 (Lee, 1990) and it has become an institutionalised source of capital. The Bank of Taiwan even publishes the prevailing interest rates for three types of informal money markets, namely, loans against post dated cheques, unsecured loans and deposits with firms (Lee, 1990).

The lack of a comprehensive and functioning legal system and the shortage of financial capital leads to a strong use of guanxi and the prevalence of family enterprises in Taiwan, whether they be small, single firms or business groups (Hamilton and Kao, 1990). Even after liberalisation, loans were reserved mostly for big businesses and those made to smaller businesses were at a higher interest rate (Biggs, 1989).

Trusted investment networks enable Taiwanese entrepreneurs to obtain investment capital quickly when market opportunities emerge. Pack (1992) argued that these trusted investment networks have played an important role in Taiwan’s rapid rise in productivity, and they remain one of the most important sources of investment capital for entrepreneurs on the island state.

The centrality of family and friends in the social fabric has allowed Taiwanese businessmen to stay away from the state as much as possible. The situation is also compounded by the fact that in Taiwan, the private sector has been dominated by the indigenous Taiwanese population, who have little loyalty to the political elite and who prefer to remain independent from the rest of the system as much as possible (Orru, 1997).

The former British government of Hong Kong adopted a policy of non-direct control and, for the most part, the colonial government left the business sector to develop on its own (Vertinsky et al., 1995). As a result, it has no tariffs, quotas or other trade barriers and capital can move freely in and out of the economy. It has widely been seen as one of the most successful examples of laissez-faire economic policy and its light-touch regulatory system has been described as the best example of a minimalist non-intervention government in the world (Friedman and Friedman, 1980).

The mid 1940s to 1950s saw a huge influx of refugees because of the Communist takeover of Mainland China and the end of the Japanese occupation. As a result, Hong Kong saw a dramatic increase in population from 600,000 in 1945, to more than 2,000,000 in 1951 (Podmore, 1971). The strain on the economy was further exacerbated in 1951 when the United Nations imposed a trade embargo on the export of strategic materials to China and the United States imposed a total embargo on exports from China.

Shanghai cotton spinners who fled from the mainland in 1949 played an important role in the recovery of the economy following the influx of refugees. These industrialists represented the elite of Shanghai – China’s leading urban industrial centre and most metropolitan city (Wong, 1988). They brought with them expertise, entrepreneurship, financial capital and machinery. It was they who launched the spinning industry of Hong Kong, taking advantage of the local trading firms that had flourished when Hong Kong relied on entrepot trade to export their products to the world market, and thereby helping the territory to recover from its difficulties in the early fifties.

Hong Kong’s competitive edge in serving the international market lay in the flexibility of its manufacturing sector and its competitive prices, made possible by relatively cheap labour costs. Though the government adopted a non-interventionist attitude, Castells and his associates (1992) argued that the government, through a series of social subsidies, had played a significant role in Hong Kong’s competitiveness, enabling it to compete in the international market.

Among the social subsidies that the government provided, the most important was public housing. Public housing formed the core component of social wages in Hong Kong, equating to 70% of the household income for manufacturing workers (Yu and Li, 1985) and reducing the pressure on firms to raise wages. These social subsidies, in combination, amounted to more than half of the blue-collared household expenditure in 1973-4 (Castells et al, 1990).

Castells and his associates (1990) argue that the colonial government’s social programmes, taken together, not only allowed workers to survive on low wages, but also provided a safety net for entrepreneurs to take risks. As in Taiwan, Hong Kong workers constantly leave their jobs to start their own firms, despite the challenges faced by small firms competing in the world market and their high failure rate in Hong Kong. A 1984 study found that less than 60% of the manufacturing firms in the sample had been in existence for more than four years (Yip, 1986). Nonetheless, Hong Kong workers continue to throw all their life savings into launching new ventures, pursuing them until they succeed or founder. In this sense, the presence of the social safety net provided by the colonial government has been critical not only in keeping wages low and the prices of Hong Kong manufactured goods competitive in the international market, but also in promoting entrepreneurial activities.

Though the colonial government steered clear of economic planning, subsidisation for industries and protectionist policies, it was proactive in developing foreign markets for local industries and upholding the colony’s reputation in order to attract foreign investors and trade (Vertinsky et al, 1995). It also played an important role in industrial development through decisive bargaining in international trade agreements to ensure that goods manufactured in Hong Kong would not face barriers in the international marketplace (Johnson, 1994).

In many Chinese communities, such as Shanghai and Taipei, guanxi is a crucial factor for success in business. However, although the majority of its population is Chinese, the picture in Hong Kong is different. Many Chinese in Hong Kong, similar to their counterparts in Taipei and Shanghai, also prefer to do business with people they know and trust in order to reduce risks. However, the practice of guanxi here is not as predominant as it is on the mainland and in Taiwan, where the use of guanxi sometimes leads to negative results, such as corruption. One of the reasons for this is that Hong Kong has a relatively well-established legal system with comprehensive business and related laws that ensure personal and corporate rights, provide remedies for their infringement, and prevent corruption.

The legal system in Hong Kong is based on the rule of law and an independent judiciary. The rule of law is vital in respect of Hong Kong’s business environment and its status as a major international financial and trading centre; it ensures a level playing-field and a free, competitive environment in which business interests can be pursued (Lee, 2002). Without the rule of law, there would be no protection against corruption, influence, favouritism, nepotism and other illegal or unethical behaviour.

The Judiciary in Hong Kong is independent of the executive and legislative branches of the government. It has a reputation for effectively enforcing contract terms, resolving disputes and protecting the rights of signatories to a contract (Tripp, 2000). Judges are not political appointees and their decisions are independent of government policy or popular feeling. They make decisions in the court of law based upon law (Carver, 1991).

A survey by Wong (1996) shows that there is a high level of system trust in Hong Kong, particularly in connection with the institutions of justice and power. In the social indicators survey conducted in 1988, “popular faith in the local judicial system was gauged”, with 66% of respondents believing that “[the] Hong Kong legal system in general [is] fair”, and the majority of the respondents “perceiv[ing] the effectiveness of legal action in conflict resolution”. Wong (1996) noted that little is known about how important system trust in law is for the Hong Kong Chinese entrepreneurs in conducting their business, but the availability of legal justice as a last resort is needed in upholding business contracts.

In addition, Wong (1996) also pointed out that popular trust in the judiciary is matched by strong faith in the political system in Hong Kong. The survey shows that nearly half of the respondents “expressed a high level of trust in the Hong Kong government in spite of its colonial nature”. Wong (1996) explained that political trust in the Hong Kong government is built on faith in the civil service bureaucracy, or the government officials as a group, and not in any particular political leader. Wong (1996) concluded that the people of Hong Kong in general, and the entrepreneurs in particular, appeared to trust the government to exercise restraint and not meddle in the economy. They were even inclined to urge the government to adopt a more active role in the economic sphere.

One of the most significant parts of the Hong Kong legal system is the Independent Commission Against Corruption. Established in 1974, the ICAC is independent of the civil service and has special powers to conduct searches of premises and to investigate suspects and any persons who may have relevant information concerning an alleged corruption offence.

Corruption was rife in Hong Kong before the creation of the Independent Commission Against Corruption (ICACA) in 1974. Such was its extent that it was described as a second taxation for people doing business. A number of social factors contributed to this widespread corruption (Lo, 2001). Firstly, the influx of refugees from the mid-forties to the early sixties placed a severe strain on social services, such as housing and healthcare, and, as a result, bribing officials to get things done became an accepted way of life. Secondly, corruption was also rife in China under the Nationalist government on the mainland, and the refugees who came to Hong Kong saw no reason to expect the colonial government to be any different. Most importantly, the anti-corruption body of the time was part of the Royal Hong Kong Police Force, which was corrupted “beyond repair from within” (Rooke and Wiehen, 1999). The absence of an independent anti-corruption body made fighting corruption almost impossible. Frequent interaction between police officers and the public gave the former plenty of opportunities to take bribes, and the public was afraid of retaliation if they reported cases of corruption to the police.

During the early seventies, the government severed the anti-corruption body from the Royal Hong Kong Police Force, leading to the establishment of the ICAC, which reports directly to the chief executive and possesses broad powers for the execution of its duties. At the same time, an elaborate system of checks and balances has been put in pace to ensure that it does not abuse these powers.

The ICAC adopted a three-pronged program represented by the three divisions within the agency: operations, corruption prevention, and community relations. The operations division, which is the investigative arm of the agency, enjoys an impressive range of powers in its investigations, such as arrest without warrant, detention, search, bail and seizure.

The prevention unit of the ICAC focuses on reducing corruption in the government and public bodies and also in the private sector. A series of recommendations by the ICAC – improvement in the status and pay of the civil service, disclosure of conflicts of business or financial interests for those sitting on public bodies and a more transparent system – were adopted by the government and have helped to eradicate under-the-table activities among public officials. The prevention unit also found that delay in government services was a major cause of corruption, and it recommended that government departments increase transparency, publish the timeframe and waiting lists for their social services and set up appeal divisions to address public complaints.

The Community Relations unit of the ICAC is responsible for educating the public about the evils of corruption. It targets different segments of the community from the business sector, youths and students to newly-arrived immigrants from the Mainland, raising public consciousness on the subject of corruption.

The three units of the ICAC have worked together to deliver an effective program that has wiped out, to a large extent, corruption in Hong Kong. It is now recognised as one of the world’s leading anti-corruption agencies. In 2003, Hong Kong was rated as the 14th cleanest society out of a total of 133 countries on the Transparency International Corruption Perception Index (Transparency International, 2003), and it has been consistently rated as one of the most corruption-free cities in Asia.

Hong Kong’s success as a financial centre lies in its flexibility compounded by the absence of exchange controls and an advanced global communications network (Castells et al., 1990). It functions mainly as an off-shore banking centre with many foreign banks, on behalf of their headquarters, engaging in investments in the Euro-dollar and Asia-dollar markets for short-term profit.

Hong Kong began to develop as a financial centre in the early 1970s and today 74 of the 100 largest banks in the world have a presence in the territory (Yim, 2001). Hong Kong’s banking industry is sound and strong, well managed and well supervised, despite the relaxed control of the government. It also has a well-developed banking structure in which the scope of activities of different types of financial institutions is clearly defined.

The territory’s banking industry operates under a three-tier system of deposit-taking institutions, namely, licensed banks, restricted license banks and deposit-taking companies. Banking regulations are enforced and adhered to under the auspices of the Hong Kong Monetary Authority, which is also the licensing authority for all the three different types of institutions (Hong Kong Government Information Services website; Hong Kong Institute of Bankers, 1998).

Hong Kong’s banking industry was started by British investors, including the Hongkong and Shanghai Banking Corporation, which has since become the principal bank of Hong Kong (Yuen, 1998). The industry remained unregulated until the government passed the first Banking Ordinance in 1948 in response to the increased demand for banking services caused by the influx of refugees from the mainland. The government introduced a second Banking Ordinance in 1964 to regulate the banking industry, but it came too late to prevent the banking crisis the following year, when a number of banks meet with difficulties because of serious liquidity problems and illegal practices in bank lending (Hong Kong Institute of Bankers, 1998; Yuen 1998).

Today, banks in Hong Kong have clear guidelines for making loans. They usually apply the “canons of good lending” to evaluate the credit risks of clients rather than making decisions on the basis of trust and relationships with the borrower (Hong Kong Institute of Bankers, 1998). The banks also make credit risk assessments in order to determine the credit worthiness of potential customers. They may also require the borrower to provide collateral or security so that they will have some form of assurance if things go wrong. It is regarded as another source of recovery to minimise credit losses.

2.4.2 Guanxi Performance

2.4.2.1 The Utilitarian Nature of Guanxi

Past research has identified many benefits of guanxi in the business arena. In China’s transitional economy, guanxi helps to obtain information on government policies, market trends and opportunities, and also to reduce uncertainty through access to information (Fock and Woo, 1998). Guanxi helps to improve communication, ease payment flow and daily operational activities, and smooth transportation in China’s complicated distribution system (Leung, Wong, Syson, 1996). It enhances Chinese partners’ perceptions of relationship quality, which in turn contribute to future business opportunities and marketing efficiencies and effectiveness (Sheth and Parvatiyar, 1995).

In an economy in which the institutional environment and business infrastructure is not well developed, guanxi with suppliers enables firms to acquire quality materials, good services, timely delivery and to reduce purchasing costs (Luo, 2000). The more uncertain the environment is, the more likely that a firm will rely on managerial ties when entering exchange relationships (Pfeffer & Salancik, 1978; Powell, 1990; Peng and Luo, 2000).

Knowledge networks are especially important for the transmission of inimitable and tacit knowledge. Transactional exchanges may involve the transfer of hard data, but relationships give rise to an exchange of information that is more proprietary, such as profit margins and strategy, and also more tacit, such as hard-to-transfer experiential knowledge (Uzzi, 1997). Firms that need to exchange difficult-to-codify and knowledge-intensive skills are especially liable to benefit from engaging in networks, since networks facilitate the transmission of this type of knowledge.

New knowledge is often created through social interaction and activities, and teamwork plays an important role in the creation, transfer and development of fine-grained collective knowledge (Zucker, Darby, Brewer, and Peng, 1996). It facilitates the negotiation of meaning and the coordination of action in the course of social interaction, which in turn create new and unique opportunities for the firm (Nahapiet and Ghoshal, 1998; Penrose, 1959). In relation to the development of knowledge networks and social relationships among firms, guanxi is a form of social capital and carries dimensions such as long-term orientation, trust, norms and obligations that facilitate the development of intellectual capital (Nahapiet and Ghoshal; 1998).

Guanxi plays an important role not only in the external relationships of an organization, but also in its internal relations. Many scholars (Hwang, 1987; King, 1985; Wall, 1990) have stressed the influence of guanxi in the working lives of Chinese people. Building guanxi in the workplace is natural for Chinese people because it underlies their social life. In the individualist cultures of the West, employees seek self-fulfillment and personal growth through their work. They look for challenging jobs that allow them to gain a sense of achievement and enhance their self-image through the exercise of their knowledge, skills and ability. If their jobs can satisfy these needs and they can align their personal values with organisational values, organisational commitment arises and they are likely to stay with the company.

Research has shown that Chinese managers favour organisations that nurture friendships among the employees (Beamer, 1998), and it is not uncommon for Chinese employees to stay with an organisation because of the social ties they have developed there (Wong and Law, 1999). The importance of relationship in the workplace is also reflected in the fact that the ability to maintain harmonious relationships forms part of performance appraisals (Easterby-Smith et al, 1995).

From a human resource management perspective, good guanxi with employees helps to cultivate organisational commitment (Wong, Ngo and Wong, 2003). Organisational commitment refers to the strength of an individuals’ identification and involvement with his or her organisation (Mowday et al, 1982: 27); it is the linkage between an employee and an organisation.

Wank (1996) gives a clear account of how different types of guanxi are put to use in the business sector in his study of patron-client ties in Xiamen in Fujian province. He identifies two types of ascribed guanxi that were commonly held by entrepreneurs in Xiamen. Some entrepreneurs came from business families that were persecuted during the Cultural Revolution, but whose members had since risen to high positions in different government bureaux, giving the entrepreneurs good connections to the bureaucracy. In fact, some such family members resigned in order to use their connections with government officials in a more open manner on behalf of their family’s entrepreneurs. Other entrepreneurs had fathers who had served in the 31st People’s Liberation Army, which re-captured Xiamen from the Nationalist troops in 1949, and had since been appointed to the city government. The connections of the fathers were used to help their entrepreneurial children to engage in business with government units.

Entrepreneurs who were not blessed with such ascribed ties had to revert to their guanxi capital savings and investments and build their own networks for conducting business. One way was to enter business partnerships with entrepreneurs who came from a cadre family. Wank notes that many private enterprises established in the mid eighties were founded by the pairing of childhood friends together with a third partner who had political connections. Such partnerships were unstable and the partner with political connections was often squeezed out of the game once the other partners built their own connections using his guanxi endowment.

Achieved guanxi bases commonly engaged in Xiamen for business activities included ties between youths sent to rural areas for re-education during the Cultural Revolution and the local residents of the villages where they served camp, and ties between schoolmates. When the labour market was under the control of the state, the latter assigned high school graduates jobs in the public sector. As a result, many high school friends of entrepreneurs provided valuable connections for them, especially in light of the fact that Xiamen had a high school at which many cadre children attended and were assigned important positions upon their graduation. Such ties were extremely useful for straightening out administrative matters. Another type of tie came in the shape of former working relations.

Many entrepreneurs in Xiamen were former public purchasing agents and were able to leverage their extensive ties with public unit purchasing departments in the course of their public careers. Nonetheless, the affective element could only get entrepreneurs to a certain point with these achieved ties, whether they involved a relative or a friend. Incentives had to be given to ensure active support from these guanxi partners. Hence, entrepreneurs frequently engaged their guanxi partners to work for their companies periodically on the basis of a generous commission, recruited them into the company as paid advisors or consultants, put them on the board of directors, or made them shareholders. Such direct connections with the company ensured that powerful guanxi partners would actively look after their interests.

In an example from Wank (1996), one large private firm in Xiamen was founded as a grocery store during the early years of the reform (Wank, 1996). Its founder became familiar with officials from the Industry & Commerce Bureau through his active involvement in the local branch of the Individual Labourers Association, and they later recommended him to open a co-operative sponsored by the district-level Labour Service Company. The move allowed him to establish many guanxi connections with district level officials, whose support enabled him to become the largest shareholder in the district savings and loan co-operative. His share in the cooperative enabled him to acquire loans to engage in an imported car parts business. He next developed guanxi with city government officials, who helped him join the Young Factory Director and Manager Association, which eventually nominated him as a national model for young entrepreneurs. The nomination gave him national connections that eventually enabled him to engage in inter-regional trade in China with products such as high quality cable. Thus, while guanxi may take an ascribed base as its starting point, the direct interaction between the two parties plays an important role in the development of the relationship (Yang, 1995).

Social interaction, gift giving, entertainment and banquets, etc, are all ways to build guanxi and improve ganqing. The exchange of gifts is an investment in the relationship and is therefore not considered bribery in Chinese society, since the emphasis is on the relationship being built (Hwang, 1987; Yang, 1994). Wank (1996) notes that Xiamen entrepreneurs actively built up relational capital by encouraging repeated exchange that would allow trust to be established between the two parties. For example, one entrepreneur gave presents of clothes to a repeated buyer from a Shanghai department store to ensure that he would not buy from competitors, and he later had the buyer introduce him to the store manager and set up a joint venture boutique with the department store.

2.4.2.2 The Rational Nature of Guanxi

Guanxi being what Hwang (1987: 949-953) describes as a ‘mixed tie’, it is both affective and utilitarian. According to Hwang’s model, there are three kind of relationships. Expressive ties, which are essentially affective, occur amongst family and friends. These are governed by needs. Instrumental ties, are, obviously utilitarian, and are based on the rule of equity. Mixed ties, naturally, are a mixture of both. This mixture can be seen in guanxi in the form of renqing, and it is renqing that keeps the guanxi relationship alive.

“Renqing” may be translated as “human feeling”. Such a translation corresponds to the expressive, or affective, component of the mixed tie. However, renqing not only refers to feelings, but to their concrete expression in the form of favours. This still might be considered affective, except that in the exchange of renqing favours there also lurks an instrumental element. Renqing is a resource that may be offered or accessed during social exchange (Hwang, 1987). As we know, renqing creates an endless cycle of incalculable debt upon which the guanxi relationship is predicated. By putting each other in debt with the exchange of renqing, guanxi partners are committing themselves to the relationship. They are also storing up a valuable resource that they may draw upon in a future time of need. And it is largely in this storing up – the calculation of how best to acquire the resources one needs – that gives renqing its instrumental aspect.

In its affective component, guanxi is also seen to stand in opposition to Western ways of doing business, which are described as rational. However, it is true that trust is key to both rational Western business perspectives, such as relationship marketing, and guanxi. Guanxi acts as a ‘starting mechanism’ for social exchange by generating trust; the social norms that are inherent in guanxi, such as the giving of face and reciprocal obligations, provide the minimal guarantee for the party who makes the first move. Acting as a form of social sanction, it also discourages opportunistic behaviour, allowing an individual to take the risk of making the first move in an exchange with reasonable confidence.

However, whilst the form of trust prevalent in the West and underlying Western business transactions is institutional-based, guanxi, in keeping with its affective component, is traditionally characteristic-based, basing trust upon common attributes such as kinship, locality or native dialect.

While this is true of traditional forms of guanxi, as Chinese people become increasingly mobile, guanxi is becoming increasingly process-based and shared characteristics between two parties merely serve as a starting point for the cultivation of a relationship.

Continuation of the relationship depends on each party’s satisfaction with the relationship, the choice and quality of alternative relationships available, and the investment made in the relationship. Continuation of the relationship over time leads to the development of closeness and affection.

The emergence of institutional trust in different Chinese societies, particularly in Hong Kong, renders both the characteristic and the process-based trust of guanxi less important. The non-rational elements of guanxi and renqing can be seen to be diminishing with these changes and the increasing involvement of Chinese communities in the international market.

However, the unique Chinese characteristics of guanxi have not totally disappeared in contemporary guanxi, even though they are diminishing. The giving of face, reciprocation of favours, and the emphasis on harmony continue to manifest in guanxi relationships, though managers are less likely to allow such guanxi characteristics to affect their business performance.

2.4.2.3 The Ethical Nature of Guanxi

The affective component of guanxi also has implications for its ethical nature.

Kohlberg gives a model of socio-moral development as follows (Snell and Choo, 2001):

1. Punishment and obedience orientation.

2. Instrumental relativism.

3. Interpersonally normative morality.

4. Social system morality.

5. Human rights and social welfare morality.

The stages might be briefly described as follows. The first two stages are ‘pre-conventional’ in that they display no cognitive awareness of the values or norms of ‘wider’ society. The first level is unquestioning obedience to the authority immediately above the individual on the basis of dread of punishment for ‘doing wrong’. The second level describes an orientation of calculation. The level two individual sees all people as using morals or ethics in their own interests, and uses morals in this manner himself.

Stages 3 and 4 are conventional. The individual at this level is aware of the norms and values of wider society, but accepts them uncritically. In the case of stage 3, this means a desire to conform with the expectations of the particular social groups to which the individual belongs. In stage 4 it means, instead, an awareness of slightly more abstract and transcendent moral reference points, such as a system of law, or the moral codes of religion, and a belief that adherence to such codes is ultimately for the good of all.

Stage 5 is post-conventional, and the individual at this stage has the ability to reflect upon the principles underlying the abstract moral codes of stage 4 and to question their validity.

According to Kohlberg (Snell and Choo, 2001), many managers are at stage 4 in their development. However, Kohlberg’s studies have tended to focus on societies dominated by highly developed rational-legal infrastructures of the kind that lead to institutional-based trust and rational business practice.

In their 2001 study, Snell and Choo first regarded guanxi as ‘capped’ at stage 3 of development, because of its affective and particularistic nature. Everything in guanxi depends upon the shifting web of the social environment, and therefore no stable, abstract code of morality is at first apparent.

However, Dien, in her 1982 study (Snell and Choo, 2001), argues that Kohlbergian standards cannot be applied in the case of guanxi, because the custom of guanxi obtains in a culture different to the rational-legal West and which ‘emphasizes harmony, reconciliation, collective decision-making, and cultivation of human sensitivity to the balancing forces in human affairs’ (Snell and Choo, 2001).

Whereas, under rational-legal moral governance, fairly clear distinctions can be made, for instance, between bribery and gifts, under guanxi moral governance, such a distinction would depend on the context of the action, and its place in a whole chain of actions and reactions. Whether it was ethical or not would be calculated not by an abstract and absolute principle, but by the ultimate outcome of the act. In this sense, guanxi itself can be thought of as representing, or being part of a moral system that, whilst differing from a legal system, yet parallels it in the sense of having some abstract, transcendent quality, such as that to which individuals at Kohlberg’s stage 5 might adhere.

Snell and Choo (2001) express the difference in rational-legal moral governance and guanxi governance in terms of ‘gray area’. Even in rational-legal moral governance, gray area – cases where the distinction between ethical and unethical is in doubt – exists. In guanxi moral governance, the difference is that the gray area is wider.

Bearing all this in mind, it seems that the measurement of the ethical nature of guanxi is problematic, although, as Snell and Choo (2001) suggest, it is possible that guanxi may be practiced according to a rational, that is, an abstract system of ethics or morality, the stages of socio-moral development might need broadening in order to give a fairer picture of the place guanxi practice has in the model. In the case of contemporary guanxi, however, such measurement is made easier by the institutional-based trust that increasingly forms its background.

2.4.2.4 Familism is Evident in Business Today

Wong (1993) notes that family firms have been prevalent in Chinese commerce and industry operating on capitalistic principles. In a study of Chinese county town in the late 1940s, Fried (1953) found three distinct types of financial organisation: they are nuclear family enterprises, extended family stores, and partnerships, respectively. The first and third were the most popular forms. Family ownership can be regarded as individual ownership, since the head of the family generally operates the store as if it were his alone (Fried, 1953). In his study in 1979 on the extent of family ownership in the cotton spinning industry in Hong Kong, Wong found that over 90 percent of these enterprises were small concerns, which constituted the modern, large-scale sector of the economy, and half of the thirty-two spinning mills existing in 1978 had the majority of their stock held by single families (Wong, 1993). Wong added that the number might be underestimated, as eleven of the mills were public companies whose shareholders could remain anonymous. According to cited examples, Wong (1993) concluded that the family firm as a major form of Chinese business organisation is not restricted to a particular locale or a special line of economic endeavor.

It is commonly viewed that the family firm is limited both in scale and life span (Wong, 1993). The family enterprise is seen to be intrinsically conservative in its financial policy, as it is particularly wary of external interference or takeover. For the Chinese family enterprises, this is apparently the case. As Wong (1993) is cited as saying: “They seldom last beyond three generations.” The traditional practice of equal inheritance among the sons may be a key reason for the emergence of prodigal sons, making it difficult to sustain capital accumulation and to provide the entrepreneurial drive.

However, it is not hard to find exceptions to this generalisation (Wong, 1993). Examples are the Rong family, which controlled nine spinning mills in China in the 1930s with over one-fifth of the entire spindleage of Chinese-owned mills (Wong, 1979); the Guo (Kwok) family in Hong Kong, which holds the Wong On group of companies with the department store business valued at over HK$3 million in 1979. Besides, Chinese family firms, like other forms of entrepreneurship, also make use of external capital supplies, such as bank loans, to finance expansion when necessary. Wong (1993) concluded that the issues involved have been oversimplified because family enterprises may appear to be large or small, vigorous or enervated depending on their point in the developmental cycle.

With reference to his study on family ownership in Taiwan’s business groups, Fukuyama (1995) argues that under Chinese familism, entrepreneurs trust only family members and close kin and are unwilling to recruit external capital. According to Chung (2003), some culturalists hold that family control in family firms persists even when environments change (Chung, 2003). However, Chung (2003) points out in his study on the managerial structure of Taiwanese business groups, that changes have occurred in the composition of the top management team as a result of the economic liberalisation and political democratisation of Taiwan between 1987 and 1993, and family members were no longer the dominant group within the managerial population.

Chung (2003) analyzes the inner circle of Taiwan’s top 100 business groups in a three time comparison of 1973, 1986 and 1994, and categorizes the core leaders into four groups: first, the core leaders that compose the inner circle playing the pivotal role in the management of the whole group; second, family members, including parents, parents’ brothers or sisters, spouses, brothers, sisters, and so on; third, business partners who are co-investors, entrepreneurial partners, and business associates; and fourth, long-term employees, who are non-family members. Chung (2003) finds that the number of family members accounted for around 60 percent of the inner circle in 1973 and 1986, and it decreased to 53 percent in 1994. Chung (2003) concludes that family members have not controlled the whole decision-making process of business groups from the early years, and their significance further decreased after 1986. Furthermore, there is a decreasing trend in business partners and a significant increase in the number of long-term employees in later years, especially in 1994. This reveals the effects of the institutional environment on organisations.

According to Chung (2003), the inner circle leaders in this transition period displayed the following characteristics: entrepreneurs tended to recruit younger family members such as younger brothers and sons into their enterprises and fathers or father’s brothers seldom worked as partners or subordinates in their sons’ corporations. Only about 3 percent of the inner circle leaders were females among the 1,010 cases, and most of them were either the spouse or daughter of the key person. The role of females in Taiwan’s business world depended upon their husbands or fathers and very few of them worked independently as the key person, business associates, or as long-term employees.

The educational credentials of the family members and long-term employees were higher than those of the key persons and business associates (Chung, 1993). This may due to the modern education system in Taiwan becoming more developed than during the period when key persons and business associates were born. It may also be due to the process of professionalisation of family members in Taiwan’s business families. Founding entrepreneurs are inclined to prepare their younger generation by higher education. Even as early as 1973, almost 40 percent of the family members had a college degree. In 1994 about 30 percent of the family members had a graduate degree. A substantial number of them earned MBA degrees in Japan and in the US. Long-term employees were always the best educated among the components. In 1994, 93 percent of them had college or graduate degrees, compared to 75 percent of the family members. Educational credentials became a necessary condition for an ‘external’ employee to be considered as an insider in Taiwan’s business groups.

2.4.3 Research Gap

The utilitarian, functional and ethical aspects of business relationships have been much explored in Western management studies, yet few have examined these aspects in guanxi, which shares many similarities with Western business relationships, in theory and in practice.

Previous research on guanxi covers many aspects, such as its definition, characteristics, social function, historical development and strategies, and reveal many similarities in guanxi with the Western relational approaches to marketing, such as relationship marketing, the interaction approach and network theory. Guanxi and the Western relational models converge in that both are underlain by trust. They also diverge in that the Western relational approaches do not cover unique Chinese characteristics that can be found in guanxi, such as face, favour, familism, hierarchy, harmony and affection. Few studies have contrasted the differences between the Western relational approaches and guanxi in these areas.

Hwang (1987) classifies Chinese relationships into affective, instrumental and mixed ties. Though his classification separates affective ties from instrumental ties, the two kinds are in reality not only intertwined, but also strengthen each other (Cheng, 1995).

Contrary to Hwang’s assertion that instrumental relationships are unstable and temporary, instrumental ties can be long-term and stable. Instrumental ties are utilitarian, rational and ethical. No studies have compared the utilitarian, rational and ethical aspects of guanxi with similar aspects of Western relationships.

Guanxi is not static; it adapts and transforms itself as society evolves. As a result, guanxi is practiced differently in different environments. So far there have been few comparative studies of the practice of guanxi in Hong Kong, Shanghai and Taipei – three cities that have taken very different paths of development. Neither has research been undertaken to examine how Chinese managers weigh the costs and benefits of guanxi in their decision-making process and how they use guanxi in a utilitarian and rational manner in uncertain business environments. (Appendix B). This study is designed to fill the abovementioned gaps.

CHAPTER 3: RESEARCH DESIGN AND METHODOLOGY

This chapter gives an overview of the development of the conceptual framework and the methodology adopted in the present study. The first section introduce the rationales for how the key propositions of the study are identified so to form the areas of study which are to be operationalized in the questionnaire, and then present how the working hypotheses for the study are derived by locating the propositions into the framework for city comparison. The second section gives an overview of the methodology, on the choices of the research methods, the development of the instrument and the sampling issues.

3.1 Framework and Propositions

3.1.1 Framework: Identifications of Key Propositions

3.1.1.1 The Usage of Guanxi in Business Practice

Studies have shown that both Chinese managers and employees rank social needs above ego needs (Redding, 1980; Chau and Chan, 1984; Lui, 1985; Redding and Casey, 1976). Guanxi is part and parcel of this collectivist culture, and for that reason it is not always easy to identify instances of its use. Since guanxi permeates all areas of social interaction in Chinese society, Chinese managers are likely to apply guanxi in their workplace or business transactions without even thinking.

The implications of guanxi’s pervasiveness in the workplace are manifold. Chinese people tend to display favouritism towards those with whom they share particularistic ties (Butterfield, 1983; Li, 1992, 1993), so guanxi plays an important role in smoothing working relationships and helping to solve day-to-day problems; that is, by encouraging trust and flexibility it enables employees to work around formal constraints (Pfeffer, 1992; Xin and Pearce, 1996). For similar reasons, guanxi is also beneficial to an individual’s long-term career success. Research has shown that good guanxi with one’s supervisor can influence administrative decisions, such as bonus allocation, in one’s favour (Law et al., 2000), and sometimes lead to higher performance ratings.

There are, however, more specific and easily observable ways in which guanxi is manifest in business. The use of guanxi in business may be divided into internal, in the workplace; and external, in business transactions. Let us look first at the internal.

Internally, the use to which a manager will put guanxi is manifest mainly in hierarchical ties with employees. In collectivist societies, where people are commonly divided into ingroup and outgroup members, the workplace can become an ingroup in an emotional as well as a purely functional sense and relationships within this ingroup frequently resemble those of a family (Hofstede, 1991: 64).

Research shows that trust in the management and trust in the organisation are almost indistinguishable for Chinese employees (Wong, Ngo and Wong, 2002). This is perhaps due to the personalistic nature of guanxi. Guanxi cultivation is a process of bringing outsiders into the pseudo-family of the ingroup. This is achieved through the personal guanxi between the manager and the employee. Managers who cultivate guanxi with subordinates can more easily secure their loyalty and commitment. Studies have shown that subordinates view managers with whom they share guanxi as more trustworthy and reliable (Wong et al, 2003; Farh et al, 1998). Indeed, guanxi may even be said to be a prerequisite for commitment. If the relationship between manager and employee is seen as analogous to one of the five cardinal relationships outlined in the Confucian tenet of wu-lun, then the employee is in the subordinate position in the relationship. However, just as the superior member of such a relationship in wu-lun is expected to protect the subordinate member, so employees expect a certain amount of protection in return for their loyalty (Hofstede, 1983).¹ In other words, managers who fail to establish guanxi with their subordinates by treating them as ingroup members will find it difficult to gain their loyalty and commitment. Clearly, in order to gain their trust and respect, it is to the managers’ advantage to take time to build guanxi with their subordinates (Movondo and Rodrigo, 2001). This may be achieved through guanxi-cultivation activities such as socialising after work (Wu, 1996) (thesis, xxxx).

It should come as no surprise, therefore, that studies have shown the attitudes of Chinese employees towards, and their behaviour within an organisation, to be affected by their relationships with their supervisors (Chen, Farh & Tsui, 1998; Wong, 2000; Wong & Kung, 1999); their commitment to the organisation is dependent upon their commitment to their supervisors, which also develops faster than that to their organisations. Thus supervisors can play an active role in cultivating organisational commitment through gaining the trust of their subordinates.

Guanxi’s role in the cultivation of employee commitment may be brought into focus by contrasting the pseudo-family atmosphere prevalent in a Chinese organisation to the atmosphere within multi-nationals. The latter have to work especially hard to foster a positive organisational culture in order to reduce the turnover rate of their middle management. The task is made more difficult, perhaps, by a lack of shared cultural background among employees. This positive organisational culture can be achieved, however, through open communication between supervisors and subordinates, cultivated via both work and non-work related activities.

Externally, in the realm of business transactions, the managers’ use of guanxi is perhaps best typified by the personal relation to business relation equation. In the Western relational approaches to marketing, the business relationship in any transaction comes chronologically before the personal relationship, which may develop later as a consequence (Arias, 1998). In guanxi networks, however, personal relationships are the prerequisite for business relationships. This is because, as a result of the particularistic and personalistic nature of Chinese culture, Chinese businessmen are socialised to be more comfortable doing business with people they already know, and thus tend to turn first to their personal networks when doing business. If they cannot find someone in their personal networks with whom to do business, they may seek a business partner through the recommendations or referrals of their guanxi partners. Going through an intermediary helps to ensure that the potential exchange partner is trustworthy, since the intermediary is also putting his own credibility on the line when he makes the recommendation. Such a process also enables Chinese businessmen to gain broad knowledge about the character of the potential exchange partner, and the collective sanction imposed by the guanxi network exerts peer pressure to prevent the potential partner from acting opportunistically.

In general terms, Guanxi is a process for building trust in Chinese society. In Chinese businessmen this manifests itself, as discussed above, in the preference to work with others with whom there are already established ties. Studies suggest that Asians prefer mutual cooperation and long-term personalised relationships as the base for their dealings (Hamzah-Sendut, Madsen, and Thong, 1990). If so, perhaps the long-term orientation is a natural outcome of returning always to established ties. The intensive use of such relationships can be found throughout the newly industrialised economies of the five Asian dragons.

One benefit to be derived from this mode of operating is the lowering of transaction costs. The cost of finding a partner is lowered as described above, by turning to the guanxi network either for a partner or for information on a partner. However, business transactions frequently involve negotiations, and these are another source of transaction costs. Time and effort is required for the exchange parties in a negotiation to reach mutually acceptable agreements. Bounded rationality, uncertainty and information asymmetry arising from imperfect communication, the withholding of information and difficulties in verification, all increase the cost of negotiations. Negotiating parties who share guanxi, however, will find it easier to arrive at a ‘meeting of the minds’ (Zaheer et al, 1998) because guanxi facilitates communication and can help to reduce information asymmetry, providing a platform for negotiating parties to exchange ideas.

From the above we may see that the establishment and maintenance of a relationship is of prime importance in a Chinese business environment. Indeed, in international negotiations that involve Chinese firms, those who pay attention to relationship building are more likely to achieve long-term cooperation (Li and Karakowsky, 1995).

In light of the importance of practicing gaunxi in the Chinese environment, the first area of examination in our study is the usage of guanxi in the business practices, with the first proposition specifying that:

Proposition 1: Chinese managers use guanxi in their work approach and business transactions.

3.1.1.2 The Perceived Resemblance of Guanxi with Networking

This study is founded upon the premise that business guanxi and networking are similar in many ways. Discrete transactions, which form the basis of the transactional approach, may be viewed purely in economic terms; each transaction is a unit of exchange governed by social norms and self-gain. Western networking and guanxi differ from such a perspective and resemble each other because both take a long-term perspective and place more emphasis on the relationship itself than on single transactions [(Alston, 1989; Arias, 1998; Dwyer et al., 1987; Morgan and Hunt, 1994; Xin and Pearce, 1996). As well as the economic dimension, the relationship implies the dimension of time. Social norms and self-gain are not enough to sustain the exchanges over time. This is why the exchanges themselves must become subsidiary to the relationship, which, being orientated towards the long-term, is necessarily based upon trust, reciprocity, cooperation, and mutuality.

Trust, in particular, is a critical component of both guanxi and network relationships (Ambler and Styles, 1995; Morgan and Hunt, 1994; Barney and Hensen, 1994). Trust, along with the other elements mentioned above, enables relational partners to engage in give-and-take with the understanding that any compromise made today will be reciprocated in the future. The absence of trust has been cited as the ‘quintessential cause of transactional costs’ (Jarillo, 1988). Therefore trusting relationships in business are seen as a distinct competitive advantage (Barney and Hansen, 1994).

Reputation also plays an important role in both guanxi and networks, since information on the trustworthiness and credibility of an individual flows quickly through both kinds of structure. Reputation also serves as a base for initiating a relationship both in the practice of guanxi and in the network approach.

However, while it is true that Guanxi and networks share many similarities, guanxi is also imbued with unique Chinese characteristics, such as wu-lun, renqing, face and familism, which are absent in Western networks.

Guanxi’s roots in wu-lun give it a sense of vertical order that is not to be found in network relationships. While network partners relate to each other on an equal basis, guanxi is hierarchical. The person in a superior position in a guanxi relationship is expected to act benevolently towards and to help the person in the inferior position in exchange for that person’s loyalty.

The abovementioned characteristics of face and renqing work in conjunction. In the collectivist Chinese culture, saving face and giving others face is of primary importance, since the loss of face is felt ‘more strongly than physical fear’ (Hsu, 1971).² As a result, there may be occasions when guanxi partners feel obliged to give each other face against the best interests of their organisations. As guanxi involves the reciprocity of renqing, when one party receives a renqing from the other, that party is obliged to pay it back. If the other party decides to cash in the renqing that is owed, the emphasis on harmony within guanxi means that it is difficult for the indebted party to turn the other party down. This is because a failure to return the debt will result in the other party losing face. There are also factors that inhibit the indebted party from discussing the problems that repayment might involve. Whereas the trust in a network relationship enables network partners to discuss problems openly, the Chinese cultural drive for harmony means that Chinese people will tend to employ indirect language, middlemen, face-saving ploys, a long-range view or tacit flexibility to avoid open conflicts. (Chiao, 1981)³

Given the strong sense of vertical order and social hierarchy in Chinese culture, a renqing received is also supposed to be repaid with a bigger renqing. Hence, if a seller shares guanxi with a buyer, he has to extend credit terms for the buyer when the latter runs into cashflow problems to prevent him from losing face (Luo, 1997a). On the other hand, he can expect a bigger order from the buyer as a return of favour after the latter get things straightened out. While a relationship with unequal exchanges is seen as ‘exploitation’ in the West (Goulder, 1960), unequal exchanges in guanxi create obligations on the part of the beneficiary to the benefactor that act as ‘hostages’ to sustain the relationship (Mavondo and Rodrigo, 2001).

It may be worth noting here that a study conducted by Fok and Woo (1998) on Hong Kong executives, most of whom were active in China, found that Hong Kong businessmen are able to circumvent the negative aspects of guanxi and use it instrumentally to increase their firms’ performance. Managers surveyed in the study thought guanxi involved mutual cooperation and trust, but they were neutral on whether it involved giving face and the exchange of information. They also did not find social activities or entertainment to generally characterize guanxi. These findings suggest that the use of guanxi in Hong Kong has moved away from its traditional form. Hong Kong executives may be using guanxi in a form that is closer to the Western concept of networking, which is increasingly seen as a firm’s core competency and competitive advantage. This is evidence of the range of guanxi use; one of the purposes of this study is to highlight just such variations of practice.

So the second area of examination in our study is the perceived resemblance of gaunxi to western networking, with two propositions specifying that:

Proposition 2a: Chinese managers perceive that Western networking shares common characteristics with guanxi in theory.

Proposition 2b: Chinese managers perceive that Western networking differs from guanxi in practice despite their common characteristics.

3.1.1.3 The Perceived Impacts of using practice

.1.1.3.1 Positive Impacts

It has been suggested that guanxi is beneficial in business because it is a form of social capital that facilitates action and creates value (Hitt et al, 2002).

According to Nahapiet and Ghoshal (1998), one of the most important characteristics of social capital is its ability to facilitate the creation of intellectual capital. Intellectual capital may be defined as the knowledge or knowing capacity particular to any group of people. Social capital, such as guanxi, is not only the foundation of intellectual capital, it also determines how efficiently intellectual capital may be used. If intellectual capital is not allowed to circulate then it is unlikely to reach those people who are most able to put it to use, and so its effectiveness is nullified. As social capital, guanxi plays an important role in this process because it enables knowledge to be transferred through the continuous interaction between network members (Ghoshal and Bartlett, 1990; Hitt et al, 2000).

Similarly, Burt (1997) argues that managers add value to their firms through identifying opportunities within the organisation and coordinating the right people to get together at the right time to take advantage of those opportunities. Guanxi enables managers to achieve higher returns on their human capital because it puts them in a better position to identify and develop opportunities of higher value. Outside of the organisation, guanxi plays a similar role in enabling managers to identify opportunities, because it provides access to resources and information.

So we may see that guanxi has a positive impact on business in that it helps in the transfer of information. The kind of information transferred may vary. While strong guanxi ties help to transfer high quality and dependable information, including tacit information (Hitt et al, 2002), weak guanxi ties facilitate the transfer of a greater diversity of information (Granovetter, 1985). Both kinds of information have their own value.

Another area in which guanxi has a positive impact on business is in the cultivation of trust between exchange partners. As noted elsewhere, the absence of trust is the ‘quintessential cause of transactional costs’ (Jarillo, 1988). In both guanxi and relational marketing, trust helps to reduce the transactional costs created by bounded rationality. Guanxi also reduces the costs associated with the search for an exchange partner, since it provides, if not the partner, then information on potential partners. In low-trust societies such as China or Taiwan, where there is a lack of formal constraints, guanxi also lowers costs by providing informal constraints. Opportunistic behaviour is discouraged within the network since it will lead to the perpetrator being barred from future exchanges with other network members. The guanxi network also allows small firms with little capital to function in a similar manner to a Western corporation by enabling them to compete flexibly in the global market. Through guanxi networks, each firm can focus on its own competency while leveraging its partners’ competencies to compensate for its own inadequacies. Guanxi thus enables Chinese firms to enjoy an economy of scale with a minimum of capital investments. Through cooperation and the sharing of resources, the firms involved can achieve a competitive advantage.

3.1.1.3.2 Negative Impacts

On another side, however, guanxi also bring about negative impacts. The cultivation of guanxi requires investment in time, money and effort, and guanxi activities such as gift-giving and entertainment can be costly. Guanxi is a two way street and an individual who receives a favour has to reciprocate the favour, and it is not possible to foresee what favour the other party would request and managers may be put in a position where they are obliged to return guanxi favours that are not to the best of their companies’ interests.

Gift-giving and entertainment are common practice for building business relationships in both the East and the West, but serious consequences can arise when gifts are offered and banquets are hosted to create a quid pro quo relationship (Dunfee & Warren, 2001). Executives may be cornered into obligations in which they are not prepared to fulfill (Vanhonacker, 1997). Knowledge of one’s weaknesses can also lead to extortion when one’s guanxi partner acts opportunistically (Dunfee & Warren, 2001).

Close relationships give rise to occasions for malfeasance, such as embezzlement, kickbacks or bid rigging (Granovetter, 1992), especially in societies where a social sense of the ills of corruption is lacking or there is no existence of a strong anti-corruption body to act as a deterrent.

While guanxi networks provide access to information, resources and opportunities, they also have opportunity costs (Hitt et al, 2002). Guanxi is path dependent (Hitt et al., 2002) and membership in one guanxi network can sometimes bar membership in other networks. When network members are constrained by their existing guanxi and the resources invested into the guanxi to take advantage of more attractive opportunities (Håkansson and Snehota, 1988), then the guanxi becomes an obstacle for the growth of the firm. Guanxi can also constrain an organization’s capacity to grow, diversify or to transform itself internally (Lovett et al, 1999; Hitt et al, 2002) When those who are engaged in guanxi overlook information, resources and opportunities become complacent, overlooking resources and opportunities supplied by their immediate guanxi network, then guanxi wields more negative than positive influence.

Guanxi has an adverse effect when jobs are filled on the basis of kinship or personal relationships instead of merit and qualification (Yadong, 1997; Sensenbrenner and Sensenbrenner, 1994). When guanxi takes precedence over price and quality in purchasing decisions, it leads to inefficient allocation of resources (Tung and Work, 1997; Dunfee & Warren, 2001).

In light of these impacts, the third area of examination in our study is the perceived impacts of gaunxi in business, with two contrasting but co-existing propositions specifying both the positive and negative sides of impact that:

Proposition 3a: Chinese managers perceive that guanxi is beneficial to business performance.

Proposition 3b: Chinese managers perceive that guanxi has a negative impact on business.

3.1.1.4 The Utilitarian Nature of Contemporary Guanxi Practice

3.1.1.4.1 The Profitability of Guanxi

In its contemporary form, within the business arena, gaunxi is typified by a utilitarian mode of practice that brings it in line with the rational business practice of Western networking and relational marketing.

Guanxi is part of a personalistic culture and thus focuses on the relationship between individuals. Western relational marketing, on the other hand, focuses on the relationship between organisations. However, although the level of focus is different – micro in guanxi and macro in relational marketing – both perspectives focus on relationships. In both, relationships are a form of capital that are profitable and help in the generation of business. Key to both is a utilitarian form of trust.

Relational marketing may focus on inter-organisational relationships, but trust has its basis in individuals. Inter-organisational trust represents the extent to which organisational members have a trust orientation towards another organisation. However, this is not the same as saying that organisations trust each other (Zaheer et al, 1998). In other words, trust must first be cultivated at the micro-level of the individual or it will not exist at all. Therefore personal relationships help to shape the structure of an inter-organisational relationship as it evolves (Ring et al, 1994).

The trust generated by guanxi is utilitarian precisely because it has specific benefits for business and is practiced with an eye on such benefits. Broadly speaking, those benefits may be divided into the generation of business, as mentioned above, the lowering of transaction costs and the increased efficiency of the market economy through sharing resources and information.

Although guanxi, like relational marketing, focuses on the relationship rather than on discrete transactions, both also assume that a trusting relationship will inevitably lead to transactions and thus the generation of business (Grönroos, 1996).

This process, whereby trust at the micro-level of the individual generates business, may be seen at work in direct selling, where sales are conducted away from a fixed business location, such as a retail store, through personal contact between the salesperson and the customer. Luk and his associates (1999) found that the purchasing behaviour of Chinese consumers is affected not only by the product itself, but also by the nature of the relationship between the seller and the buyer. Salespeople who engage in direct selling find it easier to sell to relatives and friends because the relationship between the two parties, and the obligations to give face and return favours, facilitate the closing of sales. The social interactions that accompany the relationship provide opportunities for selling and following up on previous sales, as well as for introducing new products. In the competitive cosmetics industry in China, firms that engage in the direct selling method have enjoyed stunning success.

The second area in which the utilitarian aspect of guanxi may be seen is that of transaction costs. These are costs inherent in the administration of exchanges. They cover a variety of different activities, notably the search for information on price, quality, and potential buyers and sellers and the process of bargaining with buyers and sellers once they have been located. The guanxi network naturally lowers such transaction costs because it supplies a reservoir of reliable information and potential exchange partners and personnel. Any recommendations or introductions gained through the guanxi network come with an automatic guarantee, since the party making recommendations will lose face if he or she is providing unreliable information.

Naturally, some of the information obtainable through the guanxi network concerns market opportunities. Foreign companies in China often find it difficult to obtain information about the who, where and when of potential customers and their purchasing decisions or upcoming tenders; guanxi with the right people can provide such vital information (Bjorkman and Kock, 1995).

So, the forth area of examination in our study looks into the reveal of the utilitarian nature in the profitability of guanxi practicing. The forth proposition is divided into two specifying that:

Proposition 4: The practice of guanxi is utilitarian in that

a) Chinese managers are able to use guanxi to generate business performance.

b) Chinese managers find guanxi profitable to business.

3.1.1.4.2 The Transferability and Sustainability of Guanxi

Guanxi is a socially complex resource that can be turned to an organisation’s competitive advantage (Tsang, 1998). In other words, the value, rareness and inimitability of guanxi should enable an organisation to deliver superior value to its customers than its competitors (Barney, 1986). However, guanxi traditionally operates on an interpersonal level. For it to work to an organisation’s competitive advantage, it must first be transferred from a personal to an organisational level.

Strong inter-organisational relationships are ultimately comprised of strong inter-personal relationships between key executives and personnel and their counterparts in partner organisations. Tsang (1998) compares the relationship between interpersonal and organisational guanxi to the relationship between individual and organisational learning. Just as organisations can only learn through their members, organisational guanxi can only be realised through personal guanxi. Since guanxi is traditionally transferable through an intermediary, however, it should be possible to transfer the guanxi from one member of the organisation to others.

In relationship marketing, relationship building with customers is a task that involves the whole organisation. As personnel throughout an organisation interact with customers in activities ranging from reception to billing, they contribute to the maintenance and enhancement of the relationship with the customer as well as to the customer’s perception of the relationship quality.

In a similar manner, an organisation can transfer a guanxi relationship by engaging a number of organisational members in the relationship and educating them to be proactive in its maintenance and enhancement. Since the customer’s guanxi is no longer exclusive to one person within the organisation, this will ensure that the guanxi stays with the organisation even if the person who originally brings it to the organisation departs.

As outlined above, ties between organisations exist at two levels: the level of personal relationships and the level of the organisations that the two parties represent (Seabright et al., 1992). Guanxi is traditionally associated with the former and relational marketing more with the latter. It is precisely the transfer of the former to the latter – which might be described as the convergence of affective guanxi with utilitarian relational marketing – that is required to convert guanxi to competitive advantage. While personal relationships between individual boundary-spanners lead to individual attachment, the formalisation of exchange arrangements, such as the establishment of policies and procedures to govern transactions (Seabright et al., 1992) and the development of routines, leads to organisational attachment. As procedures are developed to coordinate exchange activities originally undertaken over time by an individual boundary-spanner (Van de Ven, 1976), the relationship becomes institutionalised, rendering the interpersonal component of the guanxi less important and making it easier for the guanxi to be transferred from the personal to the organisational level.

Using Tsang’s insight as a departure point, the first part of this study examines whether Chinese managers can transfer their guanxi from an individual to an organisational level when the individual in question departs.

However, even if guanxi is successfully transferred from an individual to an organisation, that does not represent the end of the process. The transferral itself is without value unless the guanxi transferred can be sustained thereafter. The organisation must have the necessary capacity, in the form of its routines and practices, to maintain the guanxi tie.

Individuals come and go. If guanxi is not to come and go with them, institutionalised working routines and practices must provide a context for future relationships, whether interpersonal or inter-organisational, to develop. Such routines and practices codify the relationship that an individual might have with the exchange partner. These routines become part of the organisational structure through repeated execution over time; the structure could therefore be said to be a synthesis of the relationships of individuals codified by routine (Zucker, 1977; Ring and Van de Ven, 1994).

When an individual with a particular guanxi connection leaves an organisation and a new individual is first introduced to the old exchange relationship as boundary-spanner, he or she will be socialised into the institutionalised routines and practices (Zucker, 1997). Of course, some of the spirit of the former exchange relationship is likely to be lacking at the beginning, making exchanges more formal and less flexible or efficient (Ring and Van de Ven, 1994).

Nonetheless, the constancy of the institutionalised processes helps the new boundary-spanner to develop trust with his or her counterpart, hence providing a platform for their relationship to develop (Zaheer et al., 1998). The new boundary-spanner is likely to rely on these processes and his or her role designation until he or she can develop a psychological contract with the other party. This contract is likely to be comprised of the implicit understanding, mutual expectations and assumptions that each set of transacting parties within their respective organisations held in relation to the other (Ring and Van de Ven, 1994). It is this that enables the relationship to be sustained. In this way the two exchange organisations may develop relationship-specific skills, embodied both in individuals and in organisational routines, that will encourage the both sides to stay in the relationship.

The above process may be described in terms of a trust production mechanism. When a trust production mechanism become formalised and institutionalised, then trust becomes a product that can be sold and purchased. The size of the market of trust will determine the amount of trust produced (Zucker, 1996).

So, the utilitarian nature of gaunxi practicing is also reflected by the transferability and sustainability of the guanxi following transfer. The fifth proposition specify that:

Proposition 5: The practice of guanxi is utilitarian in that personal guanxi can be transferred to an organisational level, and the organisation will be able to sustain the guanxi once it is transferred.

3.1.1.5 The Rational Nature of Contemporary Guanxi Practice

Traditional guanxi stands in opposition to relational approaches to marketing in as much as the former has an affective base, while the latter has a rational base. A guanxi relationship is maintained through the exchange of renqing. Renqing might be translated literally as ‘human feelings’ (Yang, 1957). However, renqing does not stop at feeling in the abstract; rather, it is typified by concrete expression in the form of favours. The exchange of such favours builds up a mutual indebtedness that ensures the continuation of the relationship. In traditional Chinese communities, the mutual indebtedness of renqing helps to build solidarity and maintain cooperation between people (Fei, 1948). Renqing debts, as has been noted, have a tendency to escalate. One party might try to manoeuvre the other party into owing a renqing debt; the second party – the recipient of renqing – will have to find an opportunity to repay the favour, whereupon a renqing debt will in turn be incurred by the first party. However, it is not enough to repay the debt; indeed a total repayment of debt is undesirable because it would signal the end of a relationship. Rather, the original sentiment of renqing – the affective component upon which the favour is based – being qualitative and therefore incalculable, is hard or impossible to repay (Chang and Holt, 1994). This is one reason why there is the tendency amongst those in a guanxi relationship to try to repay a renqing with a greater renqing.

The affective component of guanxi may also be viewed in terms of familism. By establishing guanxi with an individual through the exchange of renqing, one effectively brings that individual into the family of the ingroup. The ingroup being the basic focus of collectivism, and therefore socially orientated, face, or mianzi, which corresponds to an individual’s social role and status, plays a crucial part in the exchange of renqing and the cultivation of guanxi. Hwang (1987) notes that face work is the medium through which social obligations are negotiated; the necessity of giving face to one’s guanxi partner makes it possible to manipulate individuals to acquire resources. To turn down the request for a favour is impossible because it would cause the other party to lose face and result in serious damage to the relationship of the two involved. Furthermore, causing another to lose face may also mean loss of face for the one who refused the request, since he or she may be seen as having no renqing.

These properties of traditional guanxi have meant that it can be lacking in rationality, since a renqing debt will be repaid even if it is not in the best interests of the indebted individual, or, perhaps, the company for which that individual works. For instance, Guanxi has an adverse effect when jobs are filled on the basis of kinship or personal relationships instead of merit and qualifications (Yadong, 1997; Sensenbrenner and Sensenbrenner, 1994), or when, by the same token, guanxi takes precedence over price and quality in purchasing decisions, leading to an inefficient allocation of resources (Tung and Work, 1997; Dunfee and Warren, 2001). The exchange of favours inherent in guanxi can also resemble or lead to corruption.

However, there is reason to believe that the practice of guanxi is changing. With changes in the market environment, the affective component of guanxi, which can sometimes lead to negative effects, is lessening. In order to chart this change in the practice of guanxi in detail, this study is based on a three-city comparison. The cities of Hong Kong, Taipei and Shanghai have each followed different paths of socio-economic development, and as such provide rich material for the examination of how guanxi has had to change, and the degree of rationality with which it is practised, in differing environments.

The fifth area of examination is to study if the guanxi practicing in the comtemporary Chinese reveal the rational nature. The sixth proposition is also divided into two with specifying that:

Proposition 6: The practice of guanxi is rational in that

a) Chinese managers choose suppliers on the basis of quality and price.

b) Chinese managers choose employees on the basis of competency for the job.

3.1.1.6 The Ethical Nature of Contemporary Guanxi Practice

From a Western viewpoint, the traditional practice of guanxi can sometimes resemble or be identical to corruption, particularly in the similarity of giving favours and gifts to bribery. In China, under the moral governance of guanxi, whether particular actions are construed as appropriate or inappropriate depends on subtle context-bound interpretations by the parties involved in a given transaction, which in turn depend on the history of the relationship and its location within webs of other relationships. Complex systems of implicit rules and standards provide guidance, but there is considerable room for the natural flow of interpretation. The grey area is wider, as those involved are facing the challenges, opportunities, temptations and disorientation arising with dramatic social change and modernisation (Snell and Choo 2001). In short, there is no clear, universal or legalistic distinction between bribery and the legitimate use of guanxi.

According to the framework of Kohlberg’s cognitive model of moral-stages in socio-moral development and their own representation of ‘grey’ areas in business as reference points, Snell and Choo (2001) compare and contrast the guanxi-based ethical worldview with the rational-legal perspective.

The framework suggests that, with the development, the ethical worldview of guanxi is changing. The sixth area of examination is to study if the guanxi practicing in the comptemporary Chinese reveal the ethical nature. The seventh proposition specify that:

Proposition 7: The Chinese managers are ethical in that they would use more ethical business practices in bidding for work.

3.1.2 Framework and the Derivation of Key Hypothesis

3.1.2.1 Situating the Framework in the Three Cities

North (1990) formulates that the institutional framework comprises both formal constraints, which include political, judicial and economic rules and contracts, and informal constraints, which include codes of conduct, norms of behavior and cultural conventions (North, 1990; Powell, 1990; Zucker, 1987). When formal constraints are lacking, informal constraints come into play. A comparative study of the three cities can illustrate how guanxi, as an informal constraint, adapts itself to compensate inadequacies in the formal constraints.

The three cities selected for this study, Hong Kong, Shanghai, and Taipei, provide the cultural and environmental diversity needed to study the convergence/divergence of guanxi perception and practice. The three cities have different historical and political background. Hong Kong, a former British colony, has a sound financial, economic and legal system and it has received extensive exposure to the West. The three Chinese cities, have different historical and political background.

At one extreme is Hong Kong, a former British colony with a sound financial, economic, and legal system. Its unique capitalistic culture is a blend of the East and the West. Since the PRC has not developed the internal structures necessary to engage in world commerce, Hong Kong serves as the main link between China and the West. Thus, Hong Kong is a base for overseas companies engaged in Chinese ventures and functions as a conduit for goods to flow from China to the West (Lethbridge, 1984). As such, Hong Kong is constantly in touch with both worlds, environmentally influenced by the West and culturally influenced by the East. Put simply, the culture in Hong Kong is the product of capitalism and Confucianism. Under such circumstances it is conceived that their practice of guanxi resembles to Western networking.

At the other extreme is Shanghai, a society with a socialistic legal and political system that evolves out of communist doctrines (Lan, 1987). Though the PRC has embarked on economic reform since it opened its doors in the late seventies, the sociopolitical and economic infrastructures are far from self-supporting (Chiu, Jao & Wu 1987; Tung 1990). The PRC is a unique blend of socialism and Confucianism culturally and environmentally that stands in contrast to Hong Kong and other developed Western nations. Given that a well-established institutional environment has yet to emerge to fully support market transactions (Boisot, and Child, 1996), as an indication of the market’s immature formal constraints, firms rely heavily on guanxi in their exchange relationships to manage the high level of uncertainty in the environment (c.f. Pfeffer & Salancik, 1978; Powell, 1990).

Taipei reflects a continuation of Chinese tradition and values with comparatively little external influence compared to both Hong Kong and China, which was influenced by colonialism and communism respectively. The Nationalists have tried to create a government based on rationality as well as Confucianism (Hamilton and Biggart, 1992). Despite the establishment of a modern legal and banking system, many of the formal constraints in Taiwan fail to meet the needs of the business community. The government has largely left the private sector to develop on its own in its pursuit of political stability and the small family firms that flourish in the private sector rely extensively on guanxi networks to compete in the export-oriented economy.

Simplistically speaking, the three cities provide a scale with Hong Kong at one end and Shanghai at the other. The former is at the rational end of the spectrum and the latter at the traditional end. This also correlates with the amount of exposure and openness of each to the international market and Western ways of doing business. Perhaps because it is a former British colony, Hong Kong has a sound financial, economic, and legal system. The formal constraints thus established lessen the need for informal constraints and allow the use of guanxi to be more rational. In fact, Hong Kong serves as a bridge between the West and Mainland China (Lethbridge, 1984). This position typifies its unique capitalistic culture, which is a blend of the East and the West.

In some ways representing the extreme traditional end of the spectrum, Shanghai is part of a society only lately emerging from a centrally planned market overseen by a socialistic legal and political system (Lan, 1987). Though the People’s Republic of China has been implementing economic reform since the late seventies, the economic infrastructures is still far from being fully functional (Chiu, Jao & Wu 1987; Tung 1990). Thus the PRC is a unique blend of socialism and Confucianism. Although the socialist half of the equation might be said to represent a departure from Chinese tradition and to comprise a Western influence, nonetheless, it serves to foster a collectivist environment with little legalistic support for business that in turn encourages a more traditional use of guanxi.

Taiwan might be said to reside somewhere between the two, although in some ways it represents a more traditional Chinese culture than the mainland. This is because Taiwan has been able to continue along the path of Chinese tradition with comparatively little external influence. The Nationalists, having fled the mainland after the Communist takeover, have attempted to establish a form of Government blending both the Confucianism of Chinese tradition and the rationality of the capitalist West (Hamilton and Biggart, 1992). However, even after the establishment of a modern legal and banking system, many of the formal constraints in Taiwan are not sufficient to provide a proper infrastructure for the needs of business. The private sector being largely left to its own devices, guanxi networks have come to dominate amongst the small family firms that make up its greater part.

Just as a shift towards the West in terms of trade and influence is most readily observable in Hong Kong, so it is that the new, rational mode of guanxi practice is also most prevalent there. Lau’s (1978) study of familism in Hong Kong makes this trend particularly clear. Lau identified a new form of familism in Hong Kong, which he dubbed ‘utilitarianistic familism’. What this term implies is the deliberate construction and instrumental use of a family unit. Because the boundary of the Chinese family is elastic, with the possibility of outsiders being adopted into the ingroup, the natural, nuclear family can be used, so to speak, as the nucleus of a variable, piecemeal family that may be extended at will for utilitarian purposes.

What this means in concrete terms is that relatives outside of the nuclear family are not automatically included in the ingroup but must undergo a selection and trust building process. Selection in this case is utilitarian, based perhaps on personal merit or other such considerations. Non-kin members may therefore be included in the family on the same basis as kin. In this connection, it may be of relevance to note that among non-kins who are adopted into the group, those who can offer economic or other practical assistance figure most prominently. In this way, the family becomes a group means to further the economic interests of individual members (Lau, 1978: 14).

This cultural shift, concerned as it is with the Chinese family, naturally has implications for the Chinese family firm and the way in which it is managed. It is no longer satisfactory to hire kin members on the basis of guanxi alone. Instead, peripheral kin may be hired on the basis of competence. There is no longer a strong sense of obligation in guanxi ties, and thus it is easier to avoid the more negative aspects that form a part of traditional guanxi.

Other evidence of cultural shifts may be seen in a study by Santoro (2000) who found that managers in China’s foreign sector place greater value of the practice of hiring by merit and prefer to be promoted on the basis of skills rather than political correctness or personal connections. The study suggests that employees at foreign-affiliated firms have learnt to take responsibility and initiative, and appreciate a flatter organisational style. The team building and cross-functional information sharing in competitive foreign invested enterprises have taught Chinese managers to communicate across departments horizontally, and to value the exchange of information, leading to new cooperative behaviour.

Just as Hong Kong represents the most rational practice of guanxi of the three cities surveyed, so it represents the most ethical practice. This is perhaps in part because of the legal framework established by the former colonial government, which was described by Smart & Halkyard (1993) as ‘[t]he most significant contribution made by the government of Hong Kong to the economy’. It is also certainly due in part to the establishment in 1974 of the Independent Commission Against Corruption. From a business perspective, this is one of the most significant parts of the Hong Kong legal system. The ICAC is independent of the civil service. It is provided with special powers to conduct searches of premises, to investigate suspects and to question any persons who may have relevant information concerning an alleged corruption offence. The Prevention of Bribery Ordinance makes bribery a criminal offence. Moreover, the law draws a clear line between guanxi and corruption, giving comprehensive definitions of ‘bribery’, ‘advantage’ and so on (Carver, 1991). Since the establishment of the ICAC, with the implementation in law of the Prevention of Bribery Ordinance, numerous prosecutions have been made and the level of corruption in Hong Kong has been reduced (Price, 1986).

By referring to the framework of Kohlberg’s cognitive model of moral-stages in socio-moral development, Snell and Choo (2001) argue that guanxi ethics and managerial moral reasoning on the Chinese mainland are capped at Kohlberg’s stage 2 and stage 3.

They describe the actions of an individual at a Kohlberg’s stage 2 as based on the calculation of direct and indirect personal pay-offs, rewards and risks; what matters for the stage 2 individual is getting a good deal for himself or herself, and pursuing such transactions as a matter of ‘give and take’ only if they further his or her self-interest.

The stage 3 individual, on the other hand, will try to maintain the ‘face’ of both parties and to expedite the development of good relations by exchanging gifts and favours that will please and not offend the other party.

In cities under rational-legal moral governance, such as Hong Kong, relatively sharp and objective distinctions may be drawn between favouritism and fairness; self-interest and public interest; private property and company resources; business and friendship; bribery and gifts.

Of the three cities surveyed for this study, Hong Kong is the furthest down the road of rational-legal moral governance and an ethical practice of guanxi, but changes in the market environments of Taipei and Shanghai may herald similar developments there.

3.1.2.2 Locating on Managers

The empirical part of research locates on studying the middle-level managers who are mostly sales and marketing managers. It is conceived that job responsibilities and experiences are relevant. Studies (Luo, 1997a;) have shown that guanxi played an important role in sales and marketing. Sales and marketing managers are likely to have a reservoir of experience in dealing with guanxi and, having reached middle management, they should have a reasonable amount of authority to handle customers and suppliers and to make independent decisions. Besides, middle-level managers engage not only in external customer relationships but also in internal employee relations as they have to supervise junior sales and marketing executives. The breadth of their responsibilities enables this study to explore not only the competitiveness of guanxi but also their managerial style.

When considered the identity of managers in a company, managers, unlike business owners, change jobs when they encounter better opportunities. So they are likely to have the experience of taking guanxi with them when they leave a company and bringing guanxi with them to their new company over the course of their career. This makes them suitable targets for studying the transferability and sustainability of guanxi (Tsang 1998).

On another hand, managers, as employees, are constrained by company policies, guidelines and culture, and do not always have the final decision making power on sensitive issues, especially in small companies such as the ones selected for our samples. By comparison, business owners, especially those in small companies, encounter little opposing force should they decide to put personal considerations above their business interests since they are the ultimate decision maker.

3.1.2.3 Key Hypotheses

By integrating the propositions into the framework, in total seven sets of key propositions, together with their working hypotheses, are derived and presented below:

H1: The usage of guanxi at work differs amongst Hong Kong, Taiwan and Shanghai managers.

H2: The perception that guanxi are resemble to networking differs amongst Hong Kong, Taiwan and Shanghai managers.

H2a: The perception that guanxi and networking are the same in theory differs amongst Hong Kong, Taiwan and Shanghai managers.

H2b: The perception that guanxi and networking are different in practice differs amongst Hong Kong, Taiwan and Shanghai managers

H3: The perception to the impacts of guanxi differs amongst Hong Kong, Taiwan and Shanghai managers.

H3a: The awareness of the positive impact of guanxi differs in Hong Kong, Taiwan and Shanghai.

H3b: The awareness of the negative impact of guanxi differs in Hong Kong, Taiwan and Shanghai.

H4: The profitability of guanxi in the guanxi practicing differs amongst Hong Kong, Taiwan and Shanghai managers.

H4a: The ability to use guanxi to generate business differs amongst Hong Kong, Taiwan and Shanghai managers.

H4b: The profitability of contracts generated with guanxi differs amongst Hong Kong, Taiwan and Shanghai managers.

H5: The transferability and sustainability of guanxi in the guanxi practicing differs amongst Hong Kong, Taiwan and Shanghai managers.

H6: The rational nature of the guanxi practicing differs amongst Hong Kong, Taiwan and Shanghai managers.

H6a: The likeliness of awarding a contract based entirely on guanxi differs amongst Hong Kong, Taiwan and Shanghai managers.

H6b: The likeliness of choosing a candidate based entirely on guanxi differs amongst Hong Kong, Taiwan and Shanghai managers.

H6c: The perceived prevalence of awarding a contract and choosing a candidate based entirely on guanxi differs amongst Hong Kong, Taiwan and Shanghai managers

H7: The ethical nature the guanxi practicing differs amongst Hong Kong, Taiwan and Shanghai managers.

H7a: The likeliness of offering personal benefits to secure contracts differs amongst Hong Kong, Taiwan and Shanghai managers.

H7b: The perceived prevalence of offering personal benefits to secure contracts differs amongst Hong Kong, Taiwan and Shanghai managers

3.2 Research Method

3.2.1 Method

The empirical study was conducted on a total of 300 middle-level sales and marketing managers in small companies with less than 50 employees in the three Chinese cities, deploying of semi-structured interviews using a standardized questionnaire to be the data collection method. Following the data collection from the questionnaire, the researcher would engage the respondent to discuss and clarify issues surrounding the perception and practice of guanxi.

Semi-structured interviews using standardized questionnaires was selected over other data-gathering methods because other data-gathering methods, such as a mailed questionnaire, which would not provide the opportunity for clarification or to make sure that the respondents are interpreting the questions the way the questions were intended. In a face-to-face mode, it allow the researcher to clarify any misunderstanding about the survey questions on the spot and helped to ensure that the respondents understand the survey questions and the concepts under consideration, hence ensuring greater motivation and control over the response conditions of the research, even though arranging interviews with business executives was difficult. It also enabled researchers to probe deeper for clarification or elaboration of the responses provided (May, 1993).

In particular, the semi-structured interviews following the fill-out of questionnaire provided the opportunity for qualitative exploration about a given subject. The discussions were conducted informally in private as an extension of the quantitative study. Previous studies (Walder, 1989) noted that managers are considerably more open and honest in private interviews than public (?) and formal ones. The discussion over guanxi practice in business is crucial to this study because they raise reliability in the data and the arguments made based on the statistical analyses, and also shed light on the decision-making process and reveal aspects of guanxi that did not appear in the results of the quantitative study.

3.2.2 Instrument

The data collection chiefly made use of an instrument which was presented in the form of a standardized questionnaire. In developing the questionnaires, a focus group with seven experts was conducted to clarify the concept of definitions of the key concepts. Other concepts that the study touches upon are also defined (See Appendix D). Two pilot studies were conducted, involving ten sales and marketing managers from each city, Hong Kong, Shanghai, and Taipei to try completing the draft questionnaire in an informal interview. The pilot was mainly conducted to test the questionnaire, in terms of the appropriateness of the questionnaire content, the use of wordings, and the ease of understandings by the respondnets and any modifications required.

The questionnaire (See Appendix E) was designed to operationalize the areas to be tested out the hypotheses as derived from the framework and propositions, which address the usage of, the perception to and the nature of guanxi practice in the realm of business in the three Chinese cites.

The usage of guanix was operationalized into the extent to which respondents agreed that they used guanxi on two dimensions, work approach and business transactions. As for the perceived resemblance of Chinese Guanxi with western networking, the perception was operationalized into the extent to which they agreed that guanxi was resemble to networking in theory on one hand and in practice on another. As far as the perceived impact of using guanxi to business is concerned, the perception is also operationized into two dimensions, involving both the perceived beneficiaries on the positive side and the negative impacts on another. In order to study if the practices of guanxi in the contemporary Chinese managers reveal the utilitarian nature of western approach using networking as an organization’s competitive advantage, respondents were asked to rate according to their own experience of guanxi practicing in three propositions, In particular, the first proposition concerned about the transferability of guanxi while the second was about the sustainability of guanxi following transfer. The third one was about the profitability of guanxi in generating business. In addition to this, respondents were asked in another question to compare between the profitability of contracts generated with guanxi and without guanxi. These questions altogether comprise the Part A of the questionnaire which address the usage, perception and the utilitarian nature of the guanxi practicing. Except the one concerning the profitability of the contracts generating form guanxi, respondents are presented with a 5-point scale to indicate the extent to which they agreed with the statements provided in the questionnaires, ranging from “strongly agree” to “strongly disagree”.

With a view to seeing if the practices of guanxi in the contemporary Chinese managers reveal the rational nature of western networking in making business decisions, respondents were presented with two scenarios and asked about the choice they were likely to make under those circumstances. The two scenarios addressed two issues, the awarding of a contract, and a hiring issue. Moreover, in order to understand the perceived norms of whether guanxi is trade-off with business benefits, respondents were also asked about if they perceived that it was common to give prior considerations to guanxi in making business decision in their cities. With a view to seeing if the practices of guanxi in the contemporary Chinese managers reveal the ethical nature with the institutional constraints, respondents were presented with a scenario and asked about the choice they were likely to make in that circumstance. The scenario was about whether or not one would offer benefits to an individual who had the authority to award the contract and give them the business in order to secure a contract. In order to understand the perceived prevalence of such practice, respondents were also asked if they perceived such practice to be common in their cities. These two areas, both addressing the nature of guanxi practicing, comprised the Part B of the questionnaire. They were provided with either the same five-point scale as in the first part of the questionnaire or a five-point scale that ranged from “certainly” to “definitely not.”

Qualitative responses were solicited to throw light on the decision making process and open discussion encouraged as far as possible. The semi-structured interviews loosely framed around the question list were employed. Thirty interviews were conducted in the three cities. A tape recorder was used in all interviews, with permission being granted by interviewees.

Because of the inherent subtlety of the information relating to the personal network issue, participant information sheet on the purpose of the research was attached to each questionnaire (see Appendix X and X). The information sheet stated that the survey was anonymous and only the general responses were of interests to the researcher.

3.2.3 Sampling Procedures

Middle-level sales and marketing managers in small firms with less than 50 who have been exposed to Western influence were selected for this study. The respondents were either Western trained or they have worked in a Western company or a joint venture with a foreign partner for at least three years. Sectors selected for this study include trading, marketing, and contracting.

The sample is based on the researcher’s personal and professional contacts, whereas a purposive sampling was applied to require respondents to satisfy the criteria of being middle-level marketing managers, with the consideration that the seniority of middle-level marketing managers gives them the opportunity to cultivate guanxi relationships, utilize these guanxi, as well the authority to sign contracts.

Twenty-five companies with a sales marketing function in each city were identified through the researcher’s personal network. Request for interviews with their middle-level marketing managers were directed to the chairmen of the company, who informed the researcher of managers who were suitable for the study. The background of the recommended managers was checked to confirm that they indeed fit the sampling criteria. Letters were sent to those who meet the sampling criteria and follow-up calls were made to secure an interview. Some recommended managers also contacted the researcher voluntary to clarify about the purpose and content of the study.

A quota of 100 was applied on each city to ensure an equal representativeness of managers from the three cities. The sample groups in Hong Kong, China and Taiwan were accessed through similar settings and similar approaches to improve the validity of the comparison.

The non-probability snowball sampling method was chosen over a complete probability sampling method for this study due to the absence of a sampling frame and the near-impossible task of adopting and implementing a strict systematic sampling method.

The purposive snowball sampling technique, or chain referral sampling (Biernacki and Warldorf 1981), was deemed the best possible way to gain access to the managers for this study. Anecdotal experience as well as theory (King, 1991) indicated the unreliability of surveys based on questioning strangers. This study used the researcher’s own guanxi network to provide a more reliable set of respondents despite its implicit lack of randomness. Though this sampling method implies some choice of difficulties, it is justified because despite some risks of bias, research in China, and, to lesser extent East Asia presents a choice of difficulties. Nevertheless, the networking of personal, ‘obligated’ contacts to gather research was justified by the context.

Nevertheless, the purposive selection method is particularly suitable when research subjects are difficult to access. It is used widely in China (Shi and Wright, 1999) and was suitable for exploration and development (Arber 1993:72) in this investigative research into the perception and use of guanxi in the Chinese business world. This judgmental method can, as long as no untoward claims of generalizability are made, be used to overcome the traditional difficulties of gathering data in emerging societies.

3.2.4 Samples

As Punnett & Shenkar (1995) pointed out, the disparities of sample demographic characteristics in cross-cultural comparisons can distort the reliability of the findings and confound the interpretation of the results. The cultural differences observed are due to valid cultural differences or to the uncontrolled differences (eg. Education, demographic Characteristics). Therefore, cross-cultural comparative studies are more meaningful if the effects of these relevant background variables are controlled (Van de Vijver & Leung, 1997). In light of this, demographic profile of the samples were somewhat controlled. To evaluate the equivalence of the sample groups in the current study, the demographic profiles and firm types of the participants are summarized in Appendix F and G.

In brief, the samples comprised 100 middle-level marketing managers each from Hong Kong, Taipei and Shanghai for the study. They were all ethnic Chinese managers who had either received a Western tertiary education or had been employed in a managerial post in a Western firm or joint ventures with foreign corporations in the private sector for more than three years.

Among the 100 respondents from Hong Kong, 29% of the them fell between the age range of 25 and 30, 38% between the range of 31 and 40, 30% between the range of 41 and 50 and three percent are over 50. The group comprised 48 males and 52 females.

Of those 100 middle-level marketing managers in Shanghai, two percent were below the age of 24, 26% fell between the age range of 25 and 30, 45% fell between the age range of 31 and 40, 28% fell between the age range of 41 and 50, and one percent were over 51. The group comprised of 60 males and 40 females.

As for the 100 respondents in Taipei, 20% fell between the age range of 25 and 30, 39% fell between the range of 31 and 40, 36% between the range of 41 and 50, and five percent were over 51. The 100 respondents comprised of 59 males and 41 females.

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CHAPTER 4: FINDINGS AND ANALYSIS

As mentioned, this research is based on the study of guanxi practice in three Chinese cities and aims to focus on exploring the resemblance between the contemporary guanxi approach in Chinese business environments and the networking approach in the West. It further aims to depict the changing nature of guanxi by comparing and illustrating its evolving forms of practice in the different institutional environments of the three cities. To this end, the research made use of a structured questionnaire, presented to 300 respondents divided equally between cities. This chapter gives an overview of the survey findings in six sections. The first section will examine the extent to which guanxi has been deployed in the cities surveyed. The second section will study the perception on the part of the respondents as to whether or not guanxi is the same as networking in theory and in practice. The third section will study the perceived impact of using a guanxi approach in business. With regard to the resemblance between a contemporary guanxi approach in Chinese society and the networking approach in the West, the fourth to sixth sections anchor the focus to see if the practice of guanxi used by contemporary Chinese managers reveals the three essential characteristics of the Western networking approach, namely, utilitarianism, rationality and ethics.

Concerning the usage of guanxi, respondents were asked to rate, using a five-point scale ranging from ‘strongly agree’ to ‘strongly disagree’, the degree to which they agreed with the following two statements: ‘I use guanxi in my work approach’ and ‘I use guanxi in my business transactions’.

The results of the survey showed that guanxi was used extensively (Table 1). 64.7% of respondents indicated that they used guanxi in their work approach, and a quarter of them (25.0%) indicated that they sometimes used guanxi in their work approach. Only about ten percent of respondents (10.3%) stated that they did not use guanxi in this area. The use of guanxi in business transactions was even more extensive. Sixty-five percent of respondents (65.3%) agreed that they used guanxi and nearly 30% sometimes used guanxi in business transactions (29.0%). The percentage indicating that they did not use guanxi at all was barely higher than five percent (5.7%). The findings reveal a prevailing use of guanxi in all three contemporary Chinese cities, whether in work approach or in business transactions.

Based on the institutional framework (North1990), the first set of hypotheses states that the usage of guanxi differs in the three cities according to their institutional background. This hypothesis takes into consideration that Hong Kong was subjected to British colonial governance, but enjoyed the most well-established formal constraints amongst the three cities; that Shanghai is a city groping for its own blend of capitalism after being subjected to Soviet Communist influence, and whose formal constraints are yet to mature; and that Taiwan is a city that has been subjected to the least external influence of the three, and whose formal constraints have so far been ineffective for the operation of business. The working hypothesis (H1) and null hypothesis (H0) are:

H1: The usage of guanxi at work differs in Hong Kong, Taiwan and Shanghai.

H0: The usage of guanxi at work is the same in Hong Kong, Taiwan and Shanghai.

A one-way between-groups ANOVA with post-hoc tests was conducted to examine the difference between cities in their use of guanxi in work approach and business transactions⁴(Table 2). Respondents were divided into three groups according to city. Results indicate that there was a statistically significant difference in the use of guanxi amongst cities and therefore H1 was accepted [F(2, 297) = 26.553, p = .000]. The eta squared was 0.15, suggesting a large effect size. Post-hoc comparisons using the Tukey HSD test indicate that the mean score for Taiwan (Mean = 8.03, SD = .810) was significantly higher than for Hong Kong (Mean = 6.72, SD = 1.609) and Shanghai (Mean = 7.10, SD =1.374). However, the mean score for Hong Kong did not differ significantly from Shanghai.

By cross-tabulating the percentage profile of the guanxi usage in the three cities (Table 3 and Table 4), it was found that, of the Taiwanese respondents, up to 95% stated that they used guanxi in their work approach, compared with 94% indicating that they used guanxi in business transactions, yielding the highest proportion of guanxi usage at work. As for the Shanghai respondents, 57.0% of them used guanxi in their work approach, and nearly three quarters (74.0%) used guanxi in business transactions. Of the Hong Kong respondents, there was a substantial percentage indicating a middle response to the effect that they used guanxi sometimes, but the percentage of those regularly using guanxi at work was less than a half, with only 42% stating that they used guanxi in their work approach. The corresponding figure for business transactions was only 28.0%. The findings suggest that, consistent with the institutional framework (North1990), the use of guanxi is most prevalent in Taiwan; Shanghai is second, but the use of guanxi is least frequent in Hong Kong.

When compared, (Table 5), the findings showed that there was a statistically significant mean difference in the guanxi usage between male and female respondents, suggesting that male respondents used guanxi more often than female respondents. When an inter-city comparison was made, it was found that, although there was no significant mean difference in Hong Kong, the mean difference between genders was significant in Taiwan and more so in Shanghai, revealing that gender difference was an issue in these two cities.

In the case of age differences, the findings showed a statistically significant mean difference (Table 6). In particular, the age group between 31 and 40 yielded the highest usage of guanxi, those aged 30 or below yielded the second highest, whereas those aged 41 or higher revealed the lowest usage. Between cities, the same observation held true in Hong Kong and Shanghai. However, in Taiwan, it was found that the younger the age group, the greater the usage of guanxi at work.

Perceptions of respondents on the resemblance of guanxi to networking were tested with two statements: ‘In theory, Western networking and Chinese guanxi approach are the same’ and ‘In practice, Western networking and Chinese guanxi approach are different, although they have similarities’.

The findings reveal variations in respondents’ perceptions (Table 7). Twenty-eight percent agreed with the proposition that networking was the same as guanxi approach in theory, whilst 30.7% held a neutral position, considering that they were sometimes the same; 41.4% disagreed with the proposition. In comparison, the percentage agreeing with the proposition that networking and guanxi are different in practice, was higher. In total, 65.0% of respondents were aware of the difference. Apart from this, there were 26.7% who held a neutral position, and only 8.3% who disagreed. The findings suggest that, when respondents compared the Chinese guanxi approach with the Western networking approach, they were more aware of the differences between them in practice than the similarities between them in theory.

Just as the usage of guanxi itself differs, so the second set of hypotheses predicts that perceptions of the resemblance of guanxi and networking also differ in the three cities. This set of hypotheses is extended into two working hypotheses. The first working hypothesis (H2a) and null hypothesis (H0) are:

H2a: The perception that guanxi and networking are the same in theory differs in Hong Kong, Taiwan and Shanghai.

H0: The perception that guanxi and networking are the same in theory is the same in Hong Kong, Taiwan and Shanghai.

As the mean ranks reveal (Table 8), Hong Kong yielded the most responses in agreement to the proposition; Taiwan was second and Shanghai last. Results gave a Chi-square of 7.390 with a p value of 0.025, suggesting that H2a can be accepted, and that the difference amongst the three cities in this perception was statistically significant.

The second working hypothesis (H2b) and null hypothesis (H0) are:

H2b: The perception that guanxi and networking are different in practice differs in Hong Kong, Taiwan and Shanghai

H0: The perception that guanxi and networking are different in practice is the same in Hong Kong, Taiwan and Shanghai.

This time (Table 9), the mean ranks reveal that Taiwan yielded the highest number of responses in agreement; Shanghai was second and Hong Kong last. Results gave a Chi-square of 7.424 with a p value of 0.024, suggesting that H2b can be accepted; the difference, once again, was statistically significant.

In terms of percentages (Table 10 and Table 11), it was found that, a half of Hong Kong respondents (50%) agreed that the two approaches are the same in theory, compared with not more than twenty percent in both Taiwan (19.0%) and Shanghai (15.0%). On the other hand, the response distribution shows that the opinions on the part of Hong Kong respondents were rather contrasting, with 50% of them agreeing versus 42% disagreeing, reflecting the inevitably disputable nature of the issue. However, respondents in Taiwan and Shanghai were divided between holding a neutral position to this proposition and disagreeing with it entirely. In particular, Shanghai and Taiwan respondents expressed greater reservation in regard to this proposition than did those in Hong Kong, with 40% in Taiwan and 44.0% in Shanghai indicating this reserve. The corresponding figure for Hong Kong was only 8.0%. As for the second proposition concerning the difference in practice, the percentages in Taiwan (71.0%) and Shanghai (68.0%) who gave an agreeing response were both around seventy – significantly higher than the corresponding figure for Hong Kong (56.0%).

The findings show that Hong Kong managers have the highest acceptance of the similarities of guanxi approach and networking on the one hand, coupled with an awareness of their difference in practice on the other. In contrast, Taiwan and Shanghai respondents were more reserved on the similarities between the two approaches.

The gender difference in perceptions (Table 12 and Table 13), was also statistically significant. Male respondents tended to agree more with both propositions on the perception of guanxi and networking than did female respondents. The same observation held true in Taiwan and Shanghai, but there was no significant gender difference in Hong Kong.

With age differences (Table 14 and Table 15), it was found that the younger the age group, the more likely they agreed to the first proposition on the similarity of networking and guanxi. There was also a marked difference between the age group 41 or above and those who were younger. As for the perception that the two approaches are different in practice, the findings also reveal a statistically significant difference between the age group 41 or above and those younger. The differences were found to be significant in all three cities.

To study perceptions of the impact of guanxi on business, those surveyed were presented with the following: ‘Personal guanxi is beneficial to business’, and ‘Guanxi approach has a negative impact on business’.

Given the prevalence of guanxi usage previously indicated, it was not unexpected to find that, in general, guanxi approach was accepted for its benefits rather than rejected for its negative impacts (Table 16). On the one hand, nearly 90% of respondents agreed with the proposition that ‘Personal guanxi is beneficial to business’ (88.7%). The percentage disagreeing was less than one percent (0.7%). On the other hand, it was found that more than a half (56.9%) of respondents disagreed with the proposition ‘guanxi approach has a negative impact on business’, compared with the percentage who agreed with the proposition, which amounted to a little over a third (36.7%). The findings suggest that the respondents valued the benefits brought about by personal guanxi more than they were concerned with the negative impacts, despite an awareness of the latter.

Amongst those who professed to practice guanxi, the perceived benefits of such practice correlated positively with the perceived negative impacts (Spearman’s rho = .351, p = .000). In other words, the more likely that one perceives personal guanxi to be beneficial to business, the more likely that one is aware of the negative impact brought about by guanxi. However, the correlation does not obtain amongst those who did not practice guanxi at work. In this connection, the findings suggest that the positive impact and negative impact of guanxi are two sides of the same coin, with the awareness of both sides being conditioned by its use.

The hypothesis addressing the inter-city differences in perceptions of the impact of the guanxi is extended into two working hypotheses, the first specifying the inter-city difference in perceptions of the positive impact, the second, the negative impact. The first working hypothesis (H3a) and null hypothesis (H0) are:

H3a: The awareness of the positive impact of guanxi differs in Hong Kong, Taiwan and Shanghai.

H0: The awareness of the positive impact of guanxi at work is the same in Hong Kong, Taiwan and Shanghai.

This time (Table 17) Taiwan yielded the highest agreeing responses to the proposition; Shanghai was second and Hong Kong third. Results gave a Chi-square of 3.140 with a p value of 0.208, however, suggesting that the null hypothesis cannot be rejected, and that the difference among the three cities in this regard was statistically non-significant.

The second working hypothesis (H3b) and null hypothesis (H0) are:

H3b: The awareness of the negative impact of guanxi differs in Hong Kong, Taiwan and Shanghai.

H0: The awareness of the negative impact of guanxi at work is the same in Hong Kong, Taiwan and Shanghai.

With H3b (Table 18) Hong Kong yielded the highest agreeing responses; Taiwan was second and Shanghai third. Results gave a Chi-square of 6.326 with a p value of 0.042, suggesting that the proposition can be accepted, and that the difference between cities was statistically significant.

Cross-tabulation produced very similar results (Table 19 and Table 20). Respondents from Taiwan yielded the highest percentage (98.0%) in agreement with the proposition that ‘personal guanxi is beneficial to business’; Shanghai came next (96.0%), and Hong Kong last (72.0%). For the proposition H3b, respondents in Hong Kong gave the highest percentage, thereby showing the strongest awareness of negative impact (45.7%); Taiwan was second (35.0%), and Shanghai last (29.6%). The city ranking in the acceptance of the benefits and the awareness of the negative impact corresponded somewhat to the ranking in guanxi usage itself.

A statistically significant gender difference was found to obtain in the perceived benefits of guanxi, males being more inclined to agree with the benefits than females. When the differences in the three cities were compared, however, it was found that the gender difference did not exist in Hong Kong or Taiwan, but only in Shanghai, and there significantly (Table 21). As to the proposition that guanxi approach has a negative impact in business, the gender difference was non-significant (Table 22).

Age group differences, too (Table 23), were found to be statistically significant overall, with the age group between 31 to 40 showing the greatest inclination to agree with the benefits of guanxi. The age group 30 or below came next and the age group 41 or higher came last. The same pattern was replicated in Hong Kong. However, in Taiwan, the findings suggest that the younger the age group, the more likely that they agreed with the benefits of guanxi to business. The age group difference was statistically non-significant in Shanghai.

Regarding to the perceived negative impact of guanxi (Table 24), the results again show a statistically significant difference in the age group overall. The age group 30 or below yielded the most responses in agreement. The age group between 31 and 40 was next, while the age group 41 or higher yielded the least responses. The same observation held true in Hong Kong and Taiwan. However, in Shanghai, it was found that the youngest age group yielded the highest agreeing responses, the age group 41 or older yielded the next highest, and the age group between 31 and 40 yielded the fewest.

In order to study if the practice of guanxi among contemporary Chinese managers reveals the utilitarian nature of the Western networking approach, three propositions were put forward. The first concerned the transferability of guanxi, while the second was about the sustainability of guanxi following transfer. The third one was about the profitability of guanxi in generating business. In addition to this, respondents were asked in another question to compare the profitability of contracts generated with and without guanxi.

By and large, of those who indicated that they used guanxi at work⁵, their practice of guanxi could be utilised to an organisation’s competitive advantage (Table 25 and Table 26). More than three quarters of respondents (75.1%) managed to transfer their personal guanxi, which were proved to be beneficial to the business of the company, representing a high transferability. Nearly 40% (38.4%) indicated that after they left a company, it was able to continue the business relationships with the contacts they had originally brought to it. On top of this, 45.5% stated that they ‘sometimes’ had this experience, suggesting that, in their practice, transferred guanxi was sustainable to an extent. The percentage indicating that they had succeeded in using personal guanxi to generate business for the company was close to 80%, revealing the high viability of guanxi for such purposes. In comparing the profits generated from a contract with guanxi and without, more than 40% of respondents indicated that profits from the two sorts were about the same in their expereince. About 20% considered that contracts with guanxi were more profitable (22.4%), compared with more than one third who stated that they were less profitable (35.2%).

It is by profitability that an organisation’s competitiveness in utilising its resources is ultimately calculated. Therefore, in order to test if the utilitarian nature of networking was also revealed in the forms of guanxi practiced in the three cities, hypotheses 4a and 4b focus on profitability in the form of the generation of contracts, as well as the profitability of the contracts themselves. The first working hypothesis (H4a) and null hypothesis (H0) are:

H4a: The ability to use guanxi to generate business differs in Hong Kong, Taiwan and Shanghai.

H0: The ability to use guanxi to generate business is the same in Hong Kong, Taiwan and Shanghai.

The test of inter-city differences (Table 27) reveals that Hong Kong yielded the highest ability to generate business with guanxi, with Shanghai coming second and Taiwan third. However, results gave a Chi-square of 4.352 with a p value of 0.113. Therefore the null hypothesis cannot be rejected, and the difference among the three cities in this area is statistically non-significant.

The second working hypothesis (H4b) and null hypothesis (H0) are:

H4b: The profitability of contracts generated with guanxi differs in Hong Kong, Taiwan and Shanghai.

H0: The profitability of contracts generated with guanxi is the same in Hong Kong, Taiwan and Shanghai.

In this case, too, the mean ranks (Table 28) reveal Hong Kong as yielding the highest profitability of contracts generated with guanxi compared to those generated without; Shanghai was second and Taiwan third. Since results gave a Chi-square of 25.045 with a p value smaller than 0.001, H4b can be accepted, and the difference is statistically significant.

In terms of percentage (Table 29 to Table 30), it was found that Shanghai yielded the highest figure, with up to 91.9% claiming that they had succeeded in using personal guanxi to generate business for their company. The corresponding figure for Hong Kong was ten percent lower (81.0%), and for Taiwan another ten percent lower again (69.5%). On a closer look at the agreeing responses, it was found that Hong Kong yielded the significantly highest proportion, since one-third of the respondents (33.3%) had indicated that they ‘strongly agreed’ compared with only 5.4% in Shanghai.

In comparing the profits generated from a contract with guanxi and without, it was found that Hong Kong yielded the highest percentage stating that the former were more profitable (39.0%). In contrast, Taiwan had the highest percentage stating that contracts generated with guanxi were less profitable (52.6%). Shanghai had the highest percentage stating that the profits generated were about the same, or holding a neutral position on this question (55.4%).

The consideration on which the next set of hypotheses is founded is that sustainability following transfer is an acid test of the strength of guanxi in serving as an organisation’s competitive advantage (Tsang 1988). If it does serve to a competitive advantage through higher transferability and sustainability, it may be considered to be more in the utilitarian nature of Western networking. The working hypothesis (H5) and null hypothesis (H0) are:

H5: The transferability and sustainability of guanxi differ in Hong Kong, Taiwan and Shanghai

H0: The transferability and sustainability of guanxi are the same in Hong Kong, Taiwan and Shanghai.

Examining the inter-city differences⁶ (Table 31), we find that Hong Kong yielded the highest transferability and sustainability. Taiwan was second and Shanghai third. Results gave a Chi-square of 3.364 with a p value of 0.186, however, suggesting that the differences were statistically insignificant.

Cross-tabulating the percentage distribution (Table 32 to Table 33), shows Shanghai to yield the highest percentage stating that, in their experience, personal guanxi was transferable and beneficial (81.1%). Hong Kong was second to Shanghai in this regard (75.0%). The reported transferability in Taiwan (70.5%) was the lowest. As for the sustainability of guanxi following transfer (Table 66), more than a half of respondents (52.4%) in Hong Kong who used guanxi claimed that, in their experience, personal guanxi was sustainable. This was the highest number amongst the three cities, compared with 44.2% in Taiwan and 23.0% in Shanghai.

When comparing the practice of those who used guanxi, different forms of utilization were revealed. Interestingly, despite the fact that respondents in Taiwan yielded the highest usage of personal guanxi at work, in this city the reported transferability and profitability of guanxi were the lowest. However, although the usage of guanxi in Hong Kong was the lowest, the guanxi practice of those who did use guanxi yielded the highest sustainability following transfer and generated the biggest profits in contracts. If one takes into consideration that profitability is the ultimate factor in determining as organisation’s competitive advantage, and sustainability following transfer is the acid test for the strength of guanxi in serving as a competitive advantage (Tsang 1988), the findings suggest that the form of guanxi practiced in Hong Kong demonstrates the highest capability for turning guanxi to an organisation’s competitive advantage.

The gender difference in the profitability of guanxi (Table 34), was found to be statistically significant. Overall, females have a higher tendency to state that they did succeed in using personal guanxi to generate business than males. The same observation was found to hold good in Hong Kong and Taiwan. However, in Shanghai the reverse of this obtained, and males had a higher tendency than females.

In the case of the profitability of the contracts themselves (Table 35), it was found that there was non-significant difference between males and females overall. Taiwan is the exception here, the findings suggesting that Taiwanese females tend to yield a higher profitability in the contracts generated from guanxi.

With transferability and sustainability (Table 36), overall, more males than females found that personal guanxi was transferable and sustainable. This was also the case in Taiwan and in Shanghai, but not in Hong Kong.

Age differences in using guanxi for generating business (Table 37) were found to be significant in all three cities. Overall, significantly more managers from the age group younger than 30 stated that they had succeeded in using personal guanxi to generate business.

In the case of contracts (Table 38), overall, the elder the age group, the more likely that guanxi-generated contracts yielded higher profitability. The difference was found to be significant in Taiwan as well as in Shanghai. However, the difference was non-significant in Hong Kong.

As for transferability and sustainability, it was found that the younger the age group (Table 39), the more likely the guanxi was to be transferable and sustainable. Again, the same overall pattern was replicated in Taiwan and in Shanghai, but not significantly in Hong Kong.

With a view to finding if the practice of guanxi reveals the rational nature of Western networking, respondents were presented with two scenarios⁷ addressing two issues: the awarding of contracts and the hiring of staff. Central to these scenarios is a key question concerning whether guanxi is a trade-off with business benefits. In order to understand the perceived norms in relation to this question, respondents were also asked if they perceived that it was common to give prime consideration to guanxi in making business decisions in their cities.

Amongst those who indicated that they used guanxi, when making a decision on the awarding of contracts (Table 40), over 80% would choose a company which was more qualified and less expensive even if there were no personal guanxi involved. In contrast, only 8.1% stated that they would choose a company with which they had a personal guanxi connection, but whose qualifications were poorer and whose price was more expensive. The findings suggest that, in such a scenario, guanxi is not given prime consideration against business benefits. With hiring decisions, in choosing between a candidate with good qualifications but has no prior guanxi and a candidate with guanxi who is less qualified (Table 41), nearly 90% of respondents stated that they would choose the candidate who is better qualified (87.2%), compared with only 5.2% who stated that they would choose the candidate with prior guanxi instead.

On the question of the perceived prevalence of guanxi in business (Table 42), more than 60% of respondents perceived that it was common for businessmen to give and receive favours in their business practice, and specifically in awarding or granting contracts to their preferred companies based on personal guanxi rather than good price and quality of service or product. However, perceptions on the prevalence of basing hiring decisions on guanxi rather than qualifications and suitability were somewhat varied. 34.1% stated that such practice was common in their cities, compared with 43.2% of respondents who perceived the practice to be uncommon. The findings also suggest that, in such a scenario, guanxi would not be given prime consideration in preference to business benefits in the guanxi practice of the respondents.

The sixth set of hypotheses is comprised of three working hypotheses, specifying the inter-city differences in the awarding of contracts and hiring, and the perceived prevalence of guanxi in such decisions. The first working hypothesis (H6a) and null hypothesis (H0) are:

H6a: The likeliness of awarding a contract basing entirely on guanxi differs in Hong Kong, Taiwan and Shanghai

H0: The likeliness of awarding a contract basing entirely on guanxi is the same in Hong Kong, Taiwan and Shanghai.

According to mean (Table 43), Shanghai yielded the highest likelihood of awarding a contract based entirely on guanxi; Taiwan was the second and Hong Kong third. Results, giving a Chi-square of 34.942, with a p value smaller than 0.001, suggest that the difference in likelihood among the three cities was statistically significant.

Upon cross-tabulating (Table 44), it was found that only respondents from Shanghai stated that they might award contracts on such a basis (Table 68). The percentage was close to a quarter of the Shanghai respondents (23.0%), although more than a half of them (56.8%) stated that they would choose a company with better qualifications and better price instead. The corresponding percentages for making a decision based on qualification and price in Taiwan and Hong Kong were 97.9% and 90.5% respectively.

The second working hypothesis (H6b) and null hypothesis (H0) are:

H6b: The likeliness of choosing a candidate based entirely on guanxi differs in Hong Kong, Taiwan and Shanghai

H0: The likeliness of choosing a candidate based entirely on guanxi is the same in Hong Kong, Taiwan and Shanghai.

With the choosing of candidates (Table 45), the mean ranks reveal, once again, that Shanghai managers were most likely to base their decisions entirely on guanxi, with Taiwan coming second and Hong Kong third. With results giving a Chi-square of 17.310, with a p value smaller than 0.001, H6b can be accepted; the difference among the three cities in this regard was statistically significant.

By cross-tabulating practice in the three cities (Table 46), it was found that, only respondents from Shanghai indicated that they would choose a candidate with guanxi who was less qualified for the position. About fifteen percent of respondents (14.9%) from Shanghai indicated that they would make such decision, although more than 70% stated that they would choose the candidate who was more qualified instead. Whilst in Taiwan (96.8%) and in Hong Kong (92.9%), over 90% of respondents stated that they would choose a candidate with better qualifications. In terms of more definite answers, up to 42.9% of Hong Kong respondents stated that they would definitely choose the candidate with better qualifications, compared with 27.4% in Taiwan.

The third working hypothesis (H6c) and null hypothesis (H0) are:

H6c: The perceived prevalence of awarding a contract and choosing a candidate based entirely on guanxi differs in Hong Kong, Taiwan and Shanghai

H0: The perceived prevalence of awarding a contract and choosing a candidate based entirely on guanxi is the same in Hong Kong, Taiwan and Shanghai.

With the inter-city differences for H6c⁸ (Table 47), the mean ranks reveal, once again, that Shanghai yielded the highest figure stating that it was a common practice in their city to award a contract based on guanxi rather than qualification and price, with Taiwan coming second and Hong Kong third. As results gave a Chi-square of 92.900, with a p value smaller than 0.001, the difference in the perceived prevalence among the three cities in this regard was statistically significant.

In terms of percentages (Table 48 and Table 49), it was found that Shanghai had the highest figure (83.8%). In contrast, respondents from Hong Kong yielded the highest percentage disagreeing that this was common practice in Hong Kong (61.9%). On the question of the perceived prevalence of guanxi practice in hiring, it was found that nearly all respondents in Hong Kong perceived the practice of hiring entirely on the basis of guanxi as uncommon in their city (95.2%). In Taiwan, nearly a half considered that such practice was uncommon (48.4%), compared with 20% who considered it to be common. Respondents from Shanghai yielded the highest percentage stating that the practice was common (71.6%).

When gender differences were compared (Table 50), it was found that males were more likely to award a contract entirely on the basis of guanxi than females. The difference was significant in Shanghai.

Results indicate that there was no significant gender difference in the likelihood of choosing a candidate basing entirely on guanxi overall (Table 51). However, there was a significant difference between genders in Shanghai, with females having a higher tendency to choose a candidate entirely on guanxi.

As for the perceived prevalence of basing business decisions – both the awarding of contracts and the choosing of candidates – on guanxi (Table 52), it was found that overall, males have a greater tendency to perceive such practices as common. The same pattern was replicated in Taiwan and Shanghai. However, in Hong Kong, females were more likely than males to perceive such practices as common.

With age differences in the likeliness of awarding a contract based on guanxi (Table 53), it was found that, overall, the age group younger than 30 showed the least likelihood. The difference was even more significant in Taiwan. In Shanghai, results suggest that the older the age group, the less likely they will award a contract entirely on guanxi.

In hiring decisions (Table 54), it was found that the younger the age group, the less likely they would choose a candidate entirely on guanxi. The same pattern was replicated in Taiwan and Shanghai, but was not significant in Hong Kong.

Age difference in the perceived prevalence of awarding a contract and choosing a candidate based entirely on guanxi (Table 55), was found to be significant overall; the younger the age group, the more likely it was that they perceived such practices as common in their cities. This pattern was replicated in Taiwan and in Shanghai, but, again, was not significant in Hong Kong.

With a view to discovering if the practice of guanxi reveals an ethical nature with institutional constraints, respondents were presented with a scenario and asked about the choice they were likely to make in such circumstances.⁹ The scenario concerned whether, in order to secure a contract, they would offer benefits to an individual who had the authority to award the contract and give them business. In order to understand the perceived prevalence of such practice, respondents were also asked if they perceived such practice to be common in their city.

Concerning the scenario of whether a personal favour would be offered in order to secure a contract in a bidding exercise (Table 56), about 60% of those who practiced guanxi at work would consider offering benefits, compared with less than 20% who claimed that they would not make such an offer. On the question of the perceived prevalence (Table 57), it was found that nearly 50% of respondents considered that it to be common practice to offer benefits. 38.9% of respondents, however, were unsure if the practice was common in their city. The findings suggest that this practice was generally accepted amongst those who had been practicing guanxi at work.

The seventh set of hypotheses is divided into two working hypotheses, specifying the city difference in decision-making related to securing a contract on the one hand, and the perceived prevalence of such a practice on the other. The first working hypothesis (H7a) and null hypothesis (H0) are:

H7a: The likelihood of offering personal benefits to secure contracts differs in Hong Kong, Taiwan and Shanghai.

H0: The likelihood of offering personal benefits to secure contracts is the same in Hong Kong, Taiwan and Shanghai.

An examination of inter-city differences (Table 58) revealed Shanghai to yield the highest likelihood of offering such benefits; Taiwan was second and Hong Kong third. Results gave a Chi-square of 72.340, with a p value smaller than 0.001, suggesting that, in this case, the difference in likelihood among the three cities was statistically significant.

The second working hypothesis (H7b) and null hypothesis (H0) are:

H7b: The perceived prevalence of offering personal benefits to secure contracts differs in Hong Kong, Taiwan and Shanghai

H0: The perceived prevalence of offering personal benefits to secure contracts is the same in Hong Kong, Taiwan and Shanghai.

According to examination by mean (Table 59), Taiwan yielded the highest perceived prevalence of such practice; Shanghai was second and Hong Kong third. Results gave a Chi-square of 38.004, with a p value smaller than 0.001, suggesting that the difference in perception among the three cities was statistically significant.

Cross-tabulation (Table 60) showed that over 70% of respondents from Taiwan (73.7%) and Shanghai (71.6%) stated that they would consider offering benefits. Of the Shanghai respondents, 1.4% even stated that they would certainly offer benefits. However, Hong Kong yielded the highest proportion stating that they would not offer benefits in such a circumstance (60%). Concerning perceived prevalence (Table 61), over a half of the respondents from Taiwan (58.9%) and Shanghai (55.4%) agreed that such practice was common in their cities. In contrast, respondents from Hong Kong had the highest percentage who considered that it was not common practice (45.2%). The findings suggest that such practice is more prevalent and accepted in Taiwan and in Shanghai, but less common and accepted in Hong Kong.

In comparing the gender differences (Table 61), it was found that more males than females would make such offers, overall. The pattern was repeated in Shanghai. However, in Hong Kong, the results suggest that more females would make such an offer than males. The gender difference was non-significant in Taiwan.

In terms of perception (Table 62), it was found that males perceived such practice to be common more than did females. This overall difference was replicated in Taiwan and Shanghai. However, in Hong Kong, results indicated that females were more likely to perceive such practice as common than males.

Examining the age difference in the likeliness of offering personal benefits to secure contracts (Table 63), it was found that, overall, the younger the age group, the more likely they would be to make such offer. This difference was significant in Taiwan and Shanghai. However, the difference was non-significant in Hong Kong.

Age difference with regard to perception gave an identical pattern (Table 64); it was found that the younger the age group, the higher the tendency to perceive such practice to be common. This was also so in Taiwan and Shanghai, and once again, the difference was non-significant in Hong Kong.

Chapter 5: Discussion

Let us now examine the findings of the previous chapter in greater detail with reference to the literature. We will start by determining whether the findings support the general proposition that Chinese managers do indeed practice guanxi, and then proceed to analyse the nature of the guanxi practiced, if any. If the guanxi practiced is found to be utilitarian, rational and ethical, then the findings would tend to support the existence of the posited contemporary business guanxi. If guanxi is found to be both valuable as a resource, and to be transferable and sustainable, then the findings will also support the idea of guanxi as competitive advantage. The findings may also serve to highlight any gaps between the perception of guanxi and its practice.

5.1 Discussion

The results would seem to indicate that the use of guanxi, in one form or another, is still very much a part of business in Chinese communities. Overall, 64.7% said that they used guanxi in their work approach, and a similar figure, 65.3% said they used guanxi in their business transactions. Needless to say, this represents a majority who consciously use guanxi on a regular basis. A further 25% for work approach, and 29% for business transactions, indicated that they use guanxi sometimes. In other words, if we add these figures together, those who claim to use guanxi not at all are a small minority. They are 10.3% and 5.7% for work approach and business transactions respectively.

Since the concept of contemporary business guanxi as formulated in this study is a relatively new concept, it is also conceivable that some respondents did not consider themselves to be using guanxi because their use of it did not conform to the traditional image. Indeed, whether one uses guanxi or not depends upon interpretation. One respondent from Hong Kong expressed the following opinion:

‘I don’t use guanxi in my work. I have a good relationship with my colleagues and I socialise with them after work because we enjoy it. I sometimes spend my weekends with my managers. We are all very professional in our work. We work as a team and we share information and help each other out. But you can’t call this guanxi. We are friends.’

Another person describing the same situation might consider instead that the mix of professionalism, socialisation and sharing of information were exactly the elements that constitute guanxi.

With this qualification, we can say that the findings support the hypothesis; Chinese managers do indeed use guanxi in their work approach and business transactions. Problems of perception here are not too troublesome because they would tend to create lower rather than higher figures. A person conscious of using guanxi most likely is, since its use depends largely on intent. Having established this basic premise we may proceed to the precise ways in which guanxi is used and the benefits and hazards that are found in its use.

Since this study is also a comparison of different environments, let us now look at the findings concerning the differences between the three cities.

Results indicated that there was a statistically significant difference in the use of guanxi amongst the three cities. Of the three, the results suggest that use of guanxi is most prevalent in Taiwan, with 95% and 94% of respondents regularly using guanxi in work approach and business transactions respectively. Shanghai came second with 57% and 74%. Hong Kong came third with 42% and 28%. However, perhaps it should be noted that, in terms of mean scores, Hong Kong did not differ significantly from Shanghai.

It is only to be expected that either Taiwan or Shanghai would score highest on this question (or, to put it another way, that Hong Kong would score lowest, even though in terms of mean scores, its difference to Shanghai was not found to be statistically significant), since Hong Kong is the most Westernised of the three, and the institutional frameworks there in many ways fill the role of formal constraint, making the use of guanxi less necessary than before and allowing it to be more rational. The uncertain market environment in both Taiwan and the PRC necessitates the use of guanxi to provide informal constraints to compensate the absence of formal ones (North, 1990; Powell, 1990; Zucker, 1987). The significance of Taipei’s higher score over Shanghai is debatable, but perhaps it is simply a reflection of the fact that Taiwan has been able to carry on Chinese tradition with relatively little external influence, whereas, in Mainland China, the Communists saw guanxi as part of the decadence of the old system, and even attempted to stamp it out (Yang, 1986).

Another possible explanation is that, although the institutional environment in Taiwan is more established and stable than that in China, since it opened its doors to trade in the late seventies, China has been learning enthusiastically from the West and is quick to adopt Western practices with the attitude that ‘Western knowledge is utility’ (Feuerwerker, 1958). In this connection, one of the main objectives of the Chinese government in encouraging joint-ventures between foreign and local firms is to facilitate the transfer of technology and know how, including Western business practices. Given that all the Shanghai firms covered by the sample are either joint ventures or have managers who are trained in the West, Western influence is likely to have an impact on the use of guanxi among managers there. In addition, China’s strong culture of forming close personal relationships at the workplace (Yg and Huo, 1993) may have led Shanghai respondents to consider the influence that their friendship wields at work as something other than a form of guanxi.

If we ask, instead, why the use of guanxi in Taiwan is high, rather than why its use in Shanghai is relatively low, a simple answer might be the lack of Western influence. Although the Kuomintang attempted to incorporate a Western-style rational economy into their Confucian model of politics (Hamilton and Biggart, 1992), the very fact that they withdrew before the tide of Communism means that Taiwan has escaped much of the Western influence that may be observed in the histories of Hong Kong and the PRC.

Another possible answer might be that the prevalence of guanxi in Taiwan is a consequence of the strong laoban culture. The dream prevalent among employees to become their own bosses makes it a matter of expedience for organisations to cultivate guanxi with them in order to secure their loyalty and commitment. In addition, the findings on the high percentage of Taipei managers who use guanxi in their business transactions is supported by Kao’s (1991) study on personal trust in Taiwan businesses. The failure of Taiwan’s legal system to fully support commercial activities means that Taiwanese businessmen rely more on guanxi than legal contracts in their business dealings.

One respondent from Taiwan expressed the importance of guanxi in the following terms:

‘Of course I use guanxi in my work. Guanxi means everything, especially in business. Guanxi is like your bank savings. The more you have, the better. You never know when you will need it. My boss hired me because of my guanxi.’

It is interesting to contrast the attitude of the above Taiwanese respondent with that of the previously quoted Hong Kong respondent. For the latter, the mixing of professional and social relations could not be called guanxi. For the former, ‘guanxi means everything’.

It is perhaps worth noting that, even in Hong Kong, which scored the lowest for the regular use of guanxi, there was a substantial percentage indicating a middle response to the effect that they used guanxi sometimes. This middle response represented 48% for work approach and 60% for business transactions. Although this still leaves a sizeable minority who indicate that they do not use guanxi at all, the majority may be said to use guanxi at some time. Perhaps the fact that the largest percentage is represented by the middle response in Hong Kong is indicative of a more selective use of guanxi than is prevalent in the other two cities. In other words, Hong Kong managers may be more inclined to use guanxi simply when it is profitable or otherwise beneficial. This, of course, represents a rational use of guanxi, and it is a theory supported by Lau’s (1978) study of family firms in Hong Kong and his formulation of the concept of ‘utilitarianistic familism’, which we will discuss at greater length later in this section.

With the Proposition Two the findings suggest that respondents were more aware of the differences between Western networking and guanxi in practice than they were of similarities between them in theory. Perhaps the implication of this is that the respondents were more likely to define guanxi in terms of its differences to networking – the cultural characteristics of face, favour and familism that give guanxi its unique flavour.

When we examine the findings in terms of inter-city differences we discover the following: calculated by mean, Hong Kong yielded the most responses agreeing to the proposition that ‘In theory, Western networking and Chinese guanxi are the same’; Taiwan came second and Shanghai was third. Results gave a Chi-square of 7.390 with a p value of 0.025, suggesting that the difference amongst the three cities in terms of perceptions of the resemblance of Western networking to Chinese guanxi was statistically significant.

It should perhaps come as no surprise to discover that Hong Kong, which we have previously observed to be the most westernised of the three cities, should now prove to have the highest perception of guanxi as resembling Western networking. It should be observed that even though Hong Kong did yield the highest score in this regard, the figures indicate that opinions was significantly divided even among Hong Kong respondents, with 50% of them agreeing with the proposition versus 42% disagreeing. Such figures undoubtedly reflect the subjective nature of the proposition, with definitions of both guanxi and networking liable to vary from person to person. That notwithstanding, it is also true that, whilst opinion in Hong Kong was divided largely between agreement and disagreement, opinion in Shanghai and Taiwan was divided more between those who were not sure and those who disagreed.

Hong Kong, which practices guanxi least, and might be seen to be least traditional in this regard, had the highest score for perceiving networking and guanxi as similar, now, conversely, Taiwan, which uses guanxi most, yielded the highest number of responses in agreement to the proposition that ‘In practice, Western networking and Chinese guanxi are different, although they have similarities’. Shanghai was second and Hong Kong, not surprisingly, was last. Results gave a Chi-square of 7.424 with a p value of 0.024, suggesting that the difference between the three cities in this regard, too, was statistically significant.

It is interesting to note, perhaps, that the relatively infrequent use of guanxi in Hong Kong does not correspond to a perception of guanxi as something utterly different to Western networking. In other words, the findings do not support the idea that guanxi is used so little in Hong Kong because it is seen as incompatible with Western or international business practice. Nor do they support the idea that managers in Hong Kong have discarded guanxi and therefore have a frozen perception of it. Rather, the findings suggest that the perception of guanxi has changed to some extent with changing practice, and, furthermore, that the relative infrequency of use in Hong Kong is tied to the selective, utilitarian nature of that use, not to a general discarding of guanxi as useless.

Despite the problems sometimes associated with guanxi, a large majority of 88.7%, most Chinese managers perceive guanxi as having a positive impact on business. In contrast, only a minority of respondents, albeit a sizeable one (36.7%), agreed with the second proposition that guanxi has a negative impact on business.

One interesting finding to emerge from this part of the survey was the fact that amongst those who practiced guanxi at work, the perceived benefits of guanxi correlated positively with the perceived negative impact of using guanxi (Spearman’s rho = .351, p = .000). In other words, the more likely that one perceives personal guanxi to be beneficial to business, the more likely that one is aware of the negative impact brought about by the guanxi approach. This correlation, however, does not obtain amongst those who do not practice guanxi. From this we may extrapolate that, not unreasonably, one must practice guanxi to be properly aware of both its negative and positive aspects. But, perhaps more significantly, we may also extrapolate that those who are most aware of guanxi’s negative aspects are those who are least likely to be discouraged from using it – in brief, weighing the positives of guanxi against its negatives, they find its practice to be worthwhile.

Let us turn now to the findings on the inter-city differences on the perceptions of the positive impact of guanxi on business. In keeping with the findings so far, Taiwan yielded the highest responses agreeing to the proposition that ‘personal guanxi is beneficial to business’. Shanghai came second and Hong Kong, again in keeping with the findings so far, came last.

If we look at the findings on the inter-city differences with regard to the second proposition we find that where Hong Kong came last in the perception of guanxi as having a positive impact on business, here it yielded the highest number of responses agreeing to the proposition that ‘the guanxi approach has a negative impact on business’. Taiwan came second and Shanghai was third. Results gave a Chi-square of 6.326 with a p value of 0.042, suggesting that the difference between the three cities in the awareness of the negative impact of guanxi was statistically significant.

In this case a higher awareness of the negative impact of guanxi in Hong Kong may have one of two conceivable outcomes, that those involved in business there will use guanxi less, or that they will adapt its use to eliminate the negative elements. The findings would tend to support a mixture of these two outcomes. In other words, respondents in Hong Kong purport to use guanxi less, but they also report a higher profitability in guanxi when they do use it.

The fourth proposition aims to establish the utilitarian nature of guanxi, those surveyed were asked to give their responses to the following statements: ‘I have succeeded in using my personal guanxi to generate business for the company’, and ‘When I compare the contracts that I generate through guanxi with other contracts, the former bring more profit/ the same profit/less profit’.

On the question of using guanxi to generate business, a large majority of respondents replied in the affirmative. As many as 80% of them had used guanxi to generate business. The idea of guanxi as a competitive advantage. In order to be ultimately profitable and work to a company’s competitive advantage, as a resource, guanxi must first possess value. The generation of business supports the idea that guanxi possesses value – that it is a valuable resource (Barney, 1995; Hitt et al, 2002).

Concerning the differences in ability to generate business through guanxi in the three different cities, when calculated by mean, it was found that Hong Kong had the greatest ability in this regard, with Shanghai coming second and Taiwan third. Although results gave a Chi-square of 4.352 with a p value of 0.113, suggesting that the null hypothesis cannot be rejected, and therefore implying that the difference among the three cities in the ability to use guanxi to generate business is statistically non-significant, it is still interesting to note that the city shown to use guanxi least, Hong Kong, should score highest in the generation of business with guanxi, and conversely, the city shown to use guanxi most, Taipei, should score lowest in the generation of business through guanxi.

When 42.4% of respondents indicate that a contract generated with guanxi and one generated without guanxi are about the same in terms of profitability. This neutral response has the highest percentage. 22.4% indicated that they thought a contract generated with guanxi was more profitable, and 35.2% indicated that they thought it to be less profitable. Clearly such findings cannot be said to support the hypothesis. Those who found contracts generated through guanxi more profitable were perhaps benefiting from the fact that a guanxi partner might be less likely to drive a hard bargain. On the other hand, those claiming that such a contract was less profitable had perhaps suffered from having to expend money and resources on favours in order to secure such a contract. Clearly there are pros and cons, and perhaps, from this point of view, it is only natural that most respondents would end up in the middle where the pros and cons are balanced against each other. If guanxi cannot therefore be said to be more profitable in the contracts it generates, it is at least fairly certain that it is profitable, and therefore utilitarian, in generating the contracts in the first place.

If we now examine the inter-city difference in the profitability of contracts generated with guanxi, we discover an interesting phenomenon. Hong Kong was found to yield the highest score in this regard, according to both mean and percentage, generating the most profitable contracts from its use of guanxi. Shanghai was second and Taipei third. Not only does this finding mirror the inter-city difference in relation to hypothesis 4a, with Hong Kong generating the most contracts, Shanghai the second most, and Taipei the least, but, unlike those findings, these were found to be statistically significant.

The implications of this finding are the same as, or similar to, the implications of the previous finding. If the city that uses guanxi the most, namely Taipei, also uses it least profitably, it seems reasonable to deduce that this is because the use of guanxi there is less discriminating. Since the aspects of guanxi that tend to prevent it from being used efficiently are the affective elements, we might further deduce that the indiscriminate use of guanxi is an affective use, closer to guanxi’s traditional form than is the use made of guanxi in Hong Kong. Conversely, if Taiwan is affective and traditional in its use of guanxi, Hong Kong is utilitarian and rational.

In concrete terms, this may perhaps reflect the fact that Hong Kong businessmen, being in a more Westernised environment, have to spend less on gift-giving and entertainment costs in their business activities. Also, as Hong Kong has a well-established and trusted legal system, business deals may be less subject to guanxi-interference once the deal is sealed with a contract.

If hypothesis four establishes the utilitarian value of guanxi as a resource, at least in its function of generating business, if not in the relative profitability of the contracts thus generated, then hypothesis 5 is designed to determine whether or not that valuable resource can be effectively utilised by the company. Guanxi is traditionally thought of as personalistic and dyadic (Silin, 1976: 36). That is, it operates between linked pairs of individuals. In order for it to be effectively utilised by the company, the guanxi must be transferred from the individual within the company to whom it is originally attached, to the company itself. Not only must it be transferred, but the company must have the capacity to sustain the guanxi after it has been transferred. It is the ability to transfer and sustain guanxi that is the measure of its utilitarian nature.

In general, it seems that the transferability part of the hypothesis was supported by the findings, with more than three quarters of respondents (75.1%) indicating that they managed to transfer their personal guanxi to their company, and that this guanxi, once transferred, proved to be beneficial to the company. This represents a high rate of transferability. The figures for sustainability were not quite as impressive. However, nearly 40% (38.4%) indicated that after they left a company, the old company they worked for was able to continue the business relationship with the contacts they had originally brought to the company; a further 45.5% of respondents stated that they ‘sometimes’ had this experience, suggesting that, in their experience, guanxi was sustainable to an extent after transfer. After all, sustaining something will necessarily be more difficult than simply transferring something, and the figures reflect this fact. Some of the transferred guanxi will inevitably fall on stony ground. Looked at from another angle, only 16.1% of respondents indicated that, in their experience, guanxi was not sustained by their old company after they had transferred it. At the very least, the figures establish the possibility of transferring guanxi from a personal to an organisational level and sustaining it thereafter.

From a respondent in Taiwan we have the following:

‘My boss hired me because of my guanxi, and all my colleagues turn to me for contacts.’

If a boss hires on the basis of an individual having good guanxi connections, that clearly indicates that guanxi is valued as a resource. Guanxi, in such a case, is certainly expected to be transferred, or at least, it will be made conscious use of by the organisation. Whether it will be sustained in the event that the individual leaves is not as certain. At any rate, if the guanxi is also passed on to the colleagues, as the quote suggests, there is a higher likelihood of it being sustained. Also from Taiwan we have the following quote:

‘Our company always has a team working on a key customer or supplier, not so much because we are concerned that an employee will take the guanxi with him when he leaves, but more because it is simply the way we work. Team members have different personalities and they complement each other to service the different needs of the customer. I have never thought about this in terms of transferring the guanxi to the company, I guess it does have that effect.’

This suggests the unconscious transference of guanxi. It is possible that a conscious approach would yield higher rates of both transferral and sustainability.

If we now examine the findings on the inter-city differences with regard to the transferability and sustainability of guanxi we find that, once again, calculated by the mean, Hong Kong respondents yielded the highest score. Taiwan was second and Shanghai third. Results gave a Chi-square of 3.364 with a p value of 0.186, however, suggesting that the null hypothesis cannot be rejected, and therefore implying that the differences between the three cities in this regard were statistically insignificant.

Even though the null hypothesis cannot be rejected in this instance, it seems significant that Hong Kong once again scores highest on a quality that indicates the utilitarian use of guanxi. In terms of percentage, the figures with regard to the transferability and sustainability of guanxi in the three cities break down in the following way: cross-tabulation of the percentage distribution of the transferability and sustainability of guanxi in the three cities revealed that Shanghai was the city yielding the highest percentage of respondents stating that, in their experience, personal guanxi was transferable and beneficial (81.1%). Hong Kong came second (75.0%), with the reported transferability in Taiwan (70.5%) being the lowest amongst the three cities. As for the sustainability of guanxi following the transfer, more than a half of respondents (52.4%) in Hong Kong who used guanxi claimed that, in their experience, personal guanxi was sustainable. This was the highest number amongst the three cities, compared with 44.2% in Taiwan and 23.0% in Shanghai.

Although not conclusive in themselves, these findings echo the findings of the previous dual hypothesis. Hong Kong has, according to the survey, the highest capability of generating business through guanxi, the highest profitability of contracts generated in this manner, and the highest sustainability of guanxi transferred from an individual to a company, as well as the highest combined transferability and sustainability as calculated by mean – all this despite the fact that guanxi is found to be practiced far less generally in Hong Kong than in the other two cities. One might expect guanxi to be practiced more frequently in an environment where it was found to be more profitable. The fact that the opposite is the case suggests that the very restraint in the use of guanxi implied by the findings on Hong Kong is also the factor that makes that guanxi, when used, more profitable. A restrained use is a rational use. A rational use is a utilitarian use. And a utilitarian use is a profitable use.

This is perhaps one of the most significant findings of the survey upon which this study is based, and, indeed, it is supported by the findings of Lau’s (1978) study in Hong Kong. As Lau (1978) discovered, familism in Hong Kong has shifted away from its traditional form to ‘utilitarianistic familism’.

Whether this shift is at the root of the findings of this survey with regard to the different form of guanxi practiced in Hong Kong, or whether Lau’s study and this have simply delineated analogous branches of the same phenomenal tree, is hard to determine. It would seem, however, that they are related in some way and serve to support each other. After all, if familism has become more utilitarian in Hong Kong, it does not take a great leap of the imagination to suppose that guanxi, too, will have become more utilitarian, as, indeed, the findings suggest.

What both Lau’s study and this study show are the adaptability of custom. In Lau’s study, the familism associated with guanxi has been adapted in Hong Kong. In this study, also in Hong Kong, guanxi itself it shown to have adapted. Guanxi, in the case of all three cities, is derived from a common, Confucian source. That its practice differs in Hong Kong therefore necessarily implies adaptation, whether we view that adaptation in terms of history (time) or geography (space). As Confucianism itself has varied in different environments, taking different forms, for instance, in Korea and Japan, so, naturally, has guanxi. Perhaps one salient influence on the recent development of guanxi is the growth of international markets. For instance, the development of the economy in both Hong Kong and Taiwan between the sixties and eighties rode on the international demand for manufactured goods. As different Chinese societies move towards modernisation and a place in the international market, it is only natural that guanxi should have to adapt. That adaptation is contemporary business guanxi.

In most of these findings it appears that Hong Kong is the odd one out, being the closest to the model of contemporary business guanxi. The idea that Hong Kong is in some way apart from Taiwan and Mainland China was expressed by a manager in Taiwan in the following way:

‘I find that we are not that different from the Mainland Chinese. Our business is expanding in China, and I thought I would find it hard to get used to. But now I find it actually okay. It’s not that different from Taiwan. I’ve always thought we were very different from the Mainland Chinese, but actually that’s not true. There are many unspoken things that we share in common. When we look at our product, there’s a big gap if we sell to the international market, but not so if we sell to the China market. Our best-selling products sells well in both Taiwan and China. On the other hand, I feel a greater distance towards Hong Kong.’

In order to test for differences between perception and practice in the two scenarios presented in the questions, respondents were also asked to say what they thought would be common practice in their city in each case.

Responses to the first scenario showed those surveyed to be overwhelmingly rational in their approach. Out of those who had previously indicated that they used guanxi in their work, 82% stated that, when making a decision on the awarding of contracts, they would choose a company on the basis of qualifications and price rather than guanxi. Only 8.1% stated that instead they would choose a company on the basis of guanxi even if their qualifications were poorer and their price was more expensive. The findings suggest that, in such a scenario, guanxi is not given prime consideration over business benefits in the guanxi practice of the respondents, and therefore support hypothesis 6a. With regard to the scenario of hiring decisions, nearly 90% of respondents indicated that they would choose a candidate who is better qualified (87.2%) in preference to one who merely had the advantage of guanxi. In contrast, only 5.2% stated that they would choose a candidate on the basis of guanxi instead. In this case, too, the respondents proved to be overwhelmingly rational, supporting the second of the two hypotheses, 6b.

If we now examine the inter-city differences on the first scenario, we find that, according to mean calculation, Shanghai yielded the highest likelihood of awarding a contract based entirely on guanxi; Taiwan was second and Hong Kong third. Results gave a Chi-square of 34.942, with a p value smaller than 0.001, suggesting that the difference in the likelihood among the three cities was statistically significant. Of course, the fact that Hong Kong managers are found to be least likely to award a contract on the basis of guanxi alone is in keeping with the findings so far, and with the premise that Hong Kong is closest to the rational practice of networking in its guanxi practice. However, it should also be noted that the figures for those likely to award a contract on the basis of guanxi in Taiwan and Shanghai were also very low. Although Shanghai had the highest score in this regard, that still amounted only to 23% of respondents. Moreover, in Taiwan, as in Hong Kong, 0% of respondents stated that they would award a contract on the basis of guanxi alone.

These low figures would seem to indicate that, generally speaking, guanxi is practiced rationally in all three cities with regard to the awarding of contracts, despite the image that traditional guanxi has of being too easily controlled by affective and therefore non-rational factors. The findings suggest that guanxi is shedding some of its negative characteristics. Managers are not bound to return guanxi favours or give face to their guanxi partners at the expense of their organisations’ interests. Our findings are supported by other studies which suggest that market forces rather than emotions drive guanxi relationships and networks (Wang, 1991; Chan et al, 2002).

A correspondent from Hong Kong expressed the matter thus:

‘Face is important. But doing business is very competitive. Most people are intelligent enough to not ask for favours that would affect your business seriously unless they are in a desperate situation. It’s a certain kind of sophistication. But I try to accommodate as much as I can. It is not good not to give other people face.’ (R-HK-59)

When we look at the inter-city differences in connection with the second scenario, we discover that, once again, calculated by mean, Shanghai yielded the highest likelihood of choosing a candidate based entirely on guanxi, with Taiwan coming second and Hong Kong coming, once more, third. Results gave a Chi-square of 17.310, with a p value smaller than 0.001, suggesting that the difference in the likelihood among the three cities in this regard was statistically significant. From this finding we may make similar deductions as those to be made from the previous finding. Practice in Hong Kong is found to be the most rational in the area of hiring as well as that of awarding contracts.

However, once again, all the scores in this scenario were low. Hong Kong and Taiwan both scored 0% for responses to the effect that those surveyed would hire a candidate purely on the basis of guanxi, suggesting that the use of guanxi in those two cities is moving away from its traditional form. As the economy becomes increasingly knowledge-based, human capital becomes one of the most valuable resources for organisations, and managers simply cannot afford to recruit on a basis that is not competitive.

Shanghai represents the only city in which some managers show a willingness to hire on the basis of guanxi rather than merit. This finding reflects a more particularistic use of guanxi in hiring decisions and the historically extensive use of guanxi in job mobility during the first few decades under the communist government.

However, even in Shanghai, only 14.9% of respondents stated they would hire the candidate with guanxi in preference to the one with qualifications. Once again we may infer from this that, in support of hypothesis 6b, guanxi is generally practiced in a rational manner with regard to hiring in all three cities, despite the image guanxi has of being open to control by affective, non-rational factors. In support of this we might cite Guthrie (1999) in his study of government enterprises in the urban industrial sector of Shanghai. He found that within China’s public sector, there are signs that the use of guanxi in hiring practice may be lessening; enterprises that had implemented formal hiring procedures were considerably less likely to allow personal connections to enter into hiring decisions. He argues that as the state bureaucracy recedes, the emergence of a rational-legal bureaucratic structure will alter the use of guanxi in hiring decisions.

It might be prudent to add a word of qualification here. In China, the incomplete codification of laws and regulations makes the business environment highly uncertain and the legal environment does not give adequate support to market transactions. As a consequence, guanxi is used extensively to reduce uncertainty, but the fact that our sample covers either managers working for joint ventures or managers who are Western-trained may mitigate its use to some extent. Our respondents do not work for state-owned enterprises and they have the freedom to exercise rational and calculative decisions in recruitment without interference from higher government levels. The shortage of managers with the necessary skills, knowledge, experience and talents to operate in a rapidly changing market economy, combined with the hard budget constraints that private firms face, makes it difficult for managers to put guanxi obligations above the competitiveness of the firm. Perhaps the following quote, from a manager in Shanghai, may also serve to shed light on the balance of considerations involved in the use of guanxi. Even those who stated they would hire on the basis of guanxi might be expressing a range of different policies, the following being one amongst them:

‘It depends on who is making the recommendation. There are many friends with whom, when they make recommendations, I am happy to try the candidate out. I know my friends and I know what their standards are, so I know what they mean whey they say a candidate is good. They won’t recommend me someone if they don’t think the person is good for the job. But that doesn’t mean I will give a job to someone just because my distant aunt back in Henan asks me to.’

On the other hand, the policy of hiring based on qualifications rather than guanxi may not be as monolithic as the findings suggest, either. These findings, too, may mask a variety of different attitudes. The following quote, from a manager in Hong Kong, is one of them:

‘We look at a whole lot of factors beside the qualifications of the candidate. We look at their personality, whether they can fit in with the team, what they want to do in ten years’ time, to make sure that they can fit in with the company culture. We are a small company and many of our staff can get the best job at the multinationals and climb the corporate ladder if they want to. More than half of our managers have an American MBA. What we are looking for is someone who is committed and who can feel at home here. If not, it doesn’t matter whether they graduate with an MBA from Harvard or Princeton. Because we have an extremely strong and unique company culture, we get a lot of references from people who know our company culture, people who used to work here, friends, the boss’s friends.’

If we turn now to the findings on the perceived use of guanxi in the two scenarios of awarding contracts and hiring staff, we find that more than 60% of respondents perceived that it was common for businessmen to give and receive favours in their business practice, and specifically in the area of the scenario, that is, the awarding or granting of contracts to their preferred companies based on personal guanxi rather than price and quality of service or products. However, on the question of hiring, perceptions on the prevalence of basing decisions entirely on guanxi rather than the candidate’s qualifications were somewhat varied. 34.1% stated that such practice was common in their cities, compared with 43.2% of respondents who perceived the practice to be uncommon. The findings also indicate that, in such a scenario, guanxi would not be given prime consideration over business benefits in the guanxi practice of the respondents.

There is some variance here between the difference in perception with regard to the awarding of contracts and that regarding the hiring of staff. Guanxi is generally seen to be more influential in the former scenario. However, even perceptions of the influence of guanxi in hiring seem to be somewhat out of line with the reality, since few of the respondents themselves would hire on such a basis. The findings therefore suggest that there is a significant gap between perception and reality with regard to the rational practice of guanxi, with guanxi being perceived as less rational than it is.

The findings on the inter-city differences with regard to perceptions on the rational practice of guanxi show that, according to mean calculation, Shanghai yielded the highest perceived prevalence of awarding a contract and choosing a candidate based entirely on guanxi. Taiwan came second and Hong Kong third. Results gave a Chi-square of 92.900, with a p value smaller than 0.001, suggesting that the difference in the perceived prevalence among the three cities in this regard was statistically significant. Once again, the findings seem to support Hong Kong having the most rational form of guanxi practice, though since this particular question concerns perceptions it is not as reliable as the previous questions concerning the respondents’ actual practice.

The proposition 7 studies the ethical conceptual framework. Ethical practice, which is one of the characteristics of Western networking, is important if guanxi is to serve to a company’s competitive advantage, since, however profitable it might otherwise be, its use is not viable if it involves or resembles corruption.

The findings show that, of those who stated that they practiced guanxi at work, 60.2% would consider offering benefits, compared with 18.9% who stated that they would not make such an offer. On the question of the perceived prevalence, it was found that 49.8% of respondents considered it to be common practice in their city to offer benefits in such circumstances. 38.9% of respondents, however, were unsure whether the practice was common in their city. The findings suggest that this practice has general currency amongst the Chinese managers who practiced guanxi at work. A majority of respondents engaged in such a practice, and almost half perceived the practice as common. Interestingly, perhaps, perception here seemed to lag behind reality in a manner opposite to perceptions on the rational nature of guanxi. That is, in this case, guanxi was perceived to be more ethical in its practice than it actually was. Overall, the findings did not support hypothesis 7.

If we now look at the inter-city differences with relation to the ethical practice of guanxi, we find that, according to mean calculation, Shanghai yielded the highest likelihood of offering personal benefits. Taiwan came second and, as we might expect, Hong Kong was third. Results gave a Chi-square of 72.340, with a p value smaller than 0.001, suggesting that the difference in the likelihood among the three cities was statistically significant.

The findings on the inter-city differences with relation to the perception of the ethical practice of guanxi were slightly different in that Taiwan yielded the highest perceived prevalence of such practice. Shanghai came second, but, as with the last finding, Hong Kong was third. Results gave a Chi-square of 38.004, with a p value smaller than 0.001, suggesting that the difference in the perception among the three cities was statistically significant.

Thus, although guanxi cannot be shown by the findings to be practiced ethically overall, we may see that the form of guanxi practiced in Hong Kong is in line with hypothesis 7. A majority of Hong Kong respondents (59.5%) stated that they would not engage in such a practice. Only 9.5% of Hong Kong respondents stated that they would. The remainder (31%) were unsure.

Overall, the findings would seem to support the idea that there are various different forms of guanxi practice. One of these forms is close to Western networking in that it is practiced in a relatively rational, utilitarian and ethical manner. This form of guanxi, though it may in fact represent more of a point on a spectrum than a distinct form, we may call contemporary business guanxi. The findings demonstrate with a fair amount of consistency that, according to the definition given, this form of guanxi is more prevalent in Hong Kong than the other two cities surveyed.

Perhaps one problem with this particular hypothesis, however, is the definition of ‘ethical’, since the concept can vary according to culture. The ethical framework is associated with the rational, since both are in turn associated with a well-regulated market. Although many people see guanxi as synonymous with corruption, our study shows that the use of contemporary guanxi in the business arena is highly rational, a quality that might be expected to go hand in hand with the ethical. The findings suggest, for instance, that managers will not compromise their companies’ interests to meet the expectations of their guanxi partners. However, despite all this, a high percentage of Taipei and Shanghai managers and, to a lesser extent, Hong Kong managers, indicated they would consider offering benefits to the person in charge of awarding contracts to them. The case question did not specify the kinds of benefits offered, but managers may possibly interpret it as an offering of gifts and the hosting of banquets for the other party.

Gift giving and entertainment are used as ways to build business relationships in many societies. Good will, such as the offering of small gifts, can facilitate problem solving and the arriving at an integrative agreement (Carnevale and Isen, 1986). In a relational culture such as that which obtains in Chinese societies, the exchange of gifts and the hosting of banquets are regarded as forms of propriety and gestures of good will. One respondent from Shanghai describes the situation in the following way:

‘Well, it is inevitable. We have entered into cooperation with another company and we are planning to expand our sales coverage through a franchise network into the whole of China. If I am going to be in Wuhan or Chongqing for only two days, I have to establish and maximise guanxi with the managers of shopping centres and departmental stores in the shortest time. In China, that means wining and dining. And if I can establish the relationship quickly by doing them favours, why not? I can’t spend two months there cultivating a relationship with them. I can afford that if we are only selling in Shanghai, but it’s a different story when we want to go national.’

Yang (1994) analysed the differences between guanxi, which is a relationship-building activity, and bribery, which involves illicit transactions, and found that, while guanxi has an affective component, bribery is governed by cost-benefit analysis. In addition, obligations related to guanxi are long-term and diffused, in contrast with the immediate and specific returns of bribery. The findings of this study to the effect that guanxi can be transferred, also have implications for those who see guanxi as synonymous with corruption and bribery. A relationship that is confined to a dyadic pair enables illegal practices (Michailova and Worm, 2003), but the risk of such activities is reduced when a guanxi relationship is shared among different members of an organisation.

Perhaps the affective component, as mentioned by Yang, is precisely what the difference of perception in what is ethical and what is not hinges upon. The affective component of traditional guanxi, after all, is strongly related to those guanxi practices that have drawn criticism from the West and led guanxi to be seen in a negative light. The affective components of Confucianism, for instance, have given rise to familism and the family firm, which have also drawn criticism from the West as a form of nepotism (Fukuyama, 1995; Whyte,1996). Just as it has been observed that the frequent association of guanxi and nepotism distinguishes guanxi from Western networking (Yeung and Tung, 1996), so it might also be said that the affective component is what distinguishes Chinese ethics from Western ethics. In other words, when trying to quantify unethical business practice in China, we are, to some extent, faced with a chicken and egg conundrum. Yang suggests renqing favours are not unethical, since, unlike bribery, they contain an affective component, but to a Western critic, the very presence of the affective component may be objectionable because it leads to a practice that resembles bribery.

It seems that, in order to examine the issue satisfactorily, a great deal of care needs to be taken in defining terms and relative forms of ethics. In this connection, it is perhaps worth remembering Guthrie’s (1998) finding that managers in the urban industrial sector of Shanghai are increasingly differentiating between the use of guanxi to accomplish ‘backdoor’ activities or procedural matters, and the use of guanxi to establish good business connections. The former would fall into the unethical bracket, and the latter into the ethical. Perhaps such distinctions would be a suitable subject for future research.

In Hong Kong, where the law draws a clear line between guanxi and corruption (Carver, 1991), the findings indicate less unethical practice. The legal definitions here are, of course, Western or Western-influenced. They provide businessmen in Hong Kong with the means of avoiding ethical ambiguities in their dealings, and this may way well account for the findings. One Hong Kong respondent expressed the differences between Hong Kong and Mainland China in the following manner:

‘The standard is very clear cut in Hong Kong and I will never offer money to anyone in order to secure a contract. But it is different in China. If you stick to the rules, they think you are rigid and become concerned about whether you would be difficult to work with. It is a culture difference. Bribery is illegal in China, but it is a normal business practice. The government is trying to do something about it but they are too busy going after the big fish to pay attention to the small fish, so there is nothing to stop the small fish.’

5.2 Implications

Guanxi might be described as social capital (Hitt et al, 2002), or as a social resource. Like any resource, it may be used efficiently or inefficiently. In the realm of business, when the resource of guanxi is used efficiently, it may serve to increase the performance of that company. The efficient use of guanxi is reflected in the findings of this study in the fact that there is a correlation in guanxi use in Hong Kong between the generation of business with guanxi, the profitability of contracts thus generated and the transferability and sustainability of guanxi itself. That Hong Kong scored consistently high in all these areas in comparison to the other two cities surveyed suggests that guanxi may indeed be used in different ways, and that managers in Hong Kong tend to use it more efficiently than their counterparts in Taiwan and Shanghai.

The efficient usage of guanxi in this way may be seen as a management issue, in parallel to relational marketing, which views marketing as a management issue. Indeed, this is the angle taken by Burt (1997) in his suggestion that managers may add value to a firm by identifying opportunities latent within an organisation in terms of social capital. By the proper combining of different people with different skills, knowledge and experience, these opportunities may be realised. Guanxi is, in this case, not only the resource to be tapped, since it provides links to knowledge, experience and, in some cases, physical resources, too; it is also the means by which that resource may be tapped, since the knowledge that flows via the guanxi network allows individual members to be more aware of the resources surrounding them and the ways in which they might be combined (Ghoshal and Bartlett, 1990; Hitt et al, 2000). Tsang (1998) argues that organisational guanxi is based on individual guanxi, as all transactions are ultimately based on individual guanxi. If the knowledge of a staff member is not recorded in the organisational memory, then the organisation will lose that knowledge once the staff member departs.

Awareness is a key factor here. For instance, awareness of the value of guanxi might motivate a company to adopt routines and policies that would allow guanxi to be more easily transferred from a personal to an organisational level (Seabright et al., 1992; Van de Ven, 1976). Such policies and routines would involve the proactive cultivation of any valuable guanxi links that an individual employee brings to a company, making sure that the link was not maintained only by the individual who brought it, but by others within the company, too. While an important relationship would involve executives at the top level, less important relationships would engage only staff at the operational level. By varying the degree of participation, an organisation can demonstrate its commitment to the relationship with the guanxi partner.

These are precisely the rational mechanisms that would help to sustain guanxi after its transferral. The findings show that guanxi can be both transferred and sustained. In Hong Kong, where the practice of guanxi is shown to be more rational, the level of guanxi sustained after transferral is relatively higher.

Though guanxi may be seen as a valuable resource, there are also those who criticise the custom. As we have seen, much of that criticism centres on the idea of the family firm. Max Weber (reference), for example, in his study of China, describes the restrictive Chinese family bonds as ‘sib fetters of the economy’. Such criticism usually takes the following form: with the business being seen as the possession of the family rather than a separate entity, owners are reluctant to give up control and there is no separation of management from ownership. Even when non-kin professional managers are employed, key decisions are made only by the inner circle, creating ‘a thick social wall separating the untrustworthy world outside from the reliable circle of family and kin inside’ (Greenhalgh, 1990:86). The exclusion of outsiders limits different and opposing points of view, leading to the ossification of managerial and entrepreneurial thinking. The dichotomy between the inner and outer circle creates a glass ceiling that stunts the aspiration of talented managers. The only alternative available for them is to start their own business or join a multi-national company, leading to a vicious cycle in which family businesses remain enclosed within the confines of their kinship circle.

It is indeed true that there are many small and medium sized companies in Hong Kong, China and Taiwan. Hong Kong and Taiwan in particular are dominated by small-scale family businesses. Because the insider-outsider dichotomy tends to loom large in companies of this size, it is difficult for them to bring in new people. The company structure does not support a large number of staff, and this means that companies of this size are likely to engage in outsourcing, which makes guanxi a valuable tool. In fact, this could be one reason why findings indicated a higher usage of guanxi externally, in business transactions and the securing of contracts, than internally. Yet, the rapid industrialisation of the five Asian dragons has shown that family business does not necessarily impede economic development and guanxi has its merits. For instance, socially-embedded guanxi relationships have enabled small firms to form horizontal linkages to compensate for their deficiencies. The subcontracting network allows them to keep capital investment to a minimum, reduce idle capacity, manufacture goods at a competitive price, and to concentrate on their core competencies while leveraging the capability of their gaunxi partners to provide a total service offering to their customers. These networks are the equivalent of Western corporations, except that they have the additional advantage of greater flexibility. The subcontracting network enables manufacturers to respond quickly to market changes by rearranging their production capacity. And as the wage level in both Hong Kong and Taiwan increases, manufacturers have been able to leverage their guanxi ties and extend their subcontracting network in China.

We might summarise the above by saying that guanxi has value as a resource, but may also contain limiting factors in terms of company growth and so on. If this is so, we may also see that many Chinese companies have been able to navigate through the negative aspects of guanxi to arrive at positive benefits, such as the flexibility and economy of scale achieved by the subcontracting network. Here we may refer to the finding of this study that the perceived benefits of guanxi correlated positively with the perceived negative impact of guanxi amongst those who practiced guanxi. An awareness of the negative aspects of guanxi might perhaps make guanxi more valuable, since it confers on managers, or others using guanxi, the ability to avoid those negative aspects, thereby reaping the benefits of the positive aspects. Those most aware of guanxi’s negative aspects through their own experience of practice, are necessarily more aware of its positive aspects, since they have a greater ability to harness those aspects by avoiding the negative ones.

Guanxi is still widely used, as the findings would tend to indicate. What varies is the way in which it is used. Adaptation to circumstances means that contemporary business guanxi has come to be used more widely, especially in Hong Kong. This adaptability is one of the strengths of guanxi as a resource and might serve to demonstrate the value that people have found in it in different times and situations. The pervasive use of guanxi in a city like Hong Kong, which is considerably more Westernised than both Shanghai and Taipei, suggests both the cultural persistence and the value of guanxi for doing business.

Of course, even though contemporary guanxi, with a relatively weaker affective component, is more rational, it does not mean that traditional guanxi is entirely non-rational. Indeed, if the findings are an indication of the true situation, it would appear that the practice of guanxi in Taiwan and Shanghai too is overwhelming rational, with very few willing to hire or award contracts purely on the basis of guanxi. In fact, the very prevalence of guanxi in Taiwan and Shanghai could be said to be a result of necessity, in other words, to be utilitarian. Just as contemporary business guanxi is an adaptation, so, originally, are other forms of guanxi. For instance, on Mainland China, due to lack of institutional constraints, managers need to navigate their way through the various pitfalls of an uncertain environment (c.f. Pfeffer & Salancik, 1978; Powell, 1990). The ways in which guanxi are used in order to cope with this environment do not necessarily reflect qualities intrinsic to guanxi itself. Rather, they are a reflection of the changing socio-political situation. Some of the phenomena that might be blamed on guanxi are not unique to China, but may also be observed in other developing countries with a similar lack of institutional constraints. In other words, guanxi in such circumstances is used to compensate a lack – when formal constraints are absent, informal ones must be relied upon instead (North, 1990) – and it is perhaps more likely to be the lack that is the source of some of the negative phenomena associated with guanxi, rather than guanxi itself.

In conclusion, guanxi is a resource. Whether or not its effect on business is negative or positive depends upon the way in which it is used, and this is a question of management. As the findings of this study would seem to suggest, the key to an effective utilisation of the social resource of guanxi might lie in awareness. Those who were aware of the negative aspects of guanxi were also aware of the positive, and more able to benefit from the latter.

For the Chinese manager what this might mean is a more purposeful use of a resource which she or he might possibly take for granted. For the Westerner wishing to do business in China, this might mean instead, the viewing of guanxi, not as something to fear or avoid, but as something that is there to be taken advantage of. After all, for foreign companies with no distinctive competencies, marketing experience, or distribution channels, developing their own guanxi network is a way to cultivate a competitive advantage and core competency, thereby improving the firm’s performance (Luo, 1997).

In either case, guanxi, or any similar social resource, may be best utilised in business if the owners or managers actively encourage staff to use this resource to enhance their own job performance, and to pool their resources and share them between departments.

5.3 Limitations

Although we have attempted to cover all angles in our research to establish that a new form of guanxi practice – contemporary business guanxi – is emerging in the business arena, inevitably there are areas which have been left unexamined and may be suitable for the subjects of future studies.

One area left unexamined that is likely to have some bearing on the collected data is the relationship between the manager and the company boss. Those responding to this survey were all mid-level managers, and as such the relationship they have with their superior will have a considerable influence upon the way in which they use guanxi in their work approach and in their business transactions. A manager whose relationship with his or her boss is good, for instance, will be more likely to bring personal guanxi to the company.

This study also leaves unexamined the quality and depth of guanxi relationships of those who responded. These factors have a strong impact on business performance (Lee et al, 2001). One might expect, for instance, that particularly strong guanxi ties are likely to lead to different decisions than weak ones; they will also differ in terms of the probability of transferability and sustainability. One puzzling area of the study that might be elucidated were the quality and depth of guanxi also taken into account might be that of profitability. The findings suggest that the benefits of guanxi outweigh the pitfalls, yet the majority of managers in Shanghai and Taiwan find profits generated by guanxi contracts to be more or less the same as profits generated by contracts without guanxi; moreover, only a low percentage of managers find guanxi profitable in all three cities. High relationship quality enhances intentions of future purchase (Crosby et al, 1990; Ganesan, 1994) and increases transaction efficiency (Sheth and Parvatiyar, 1995). However, it is possible that the relationship has to reach a certain level of quality before transactions generated by the relationship become profitable. For all these reasons the quality and depth of guanxi relationships will have a bearing on the data gathered.

Another variable that we were unable to take into account in this study was the size of the company. Since this study was limited to mid-level sales and marketing managers of small firms, the size of the firms would not have varied a great deal from one respondent to another. However, it is quite conceivable that the use of guanxi differs according to the size of a company and amongst managers of different functions. The examination of such differences has not fallen within the scope of this study.

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