Why Guanxi Matters in Business Relationships with China

By Bang Nguyen and David De Cremer

Business relationships between China and Europe have existed for quite some time and with the a renewed focus on the Silk Road Economic Belt and the 21st Century Maritime Silk Road initiatives, this relationship is likely to flourish even more. As such guanxi is an integral part of both personal relationships and business conduct in China and societies influenced by the Chinese around the world.

 

guanxi_featuredimageIn light of this development – the renewed focus on the Silk Road Economic Belt and the 21st Century Maritime Silk Road initiatives – it is crucial to understand what makes business tick in China. Specifically, engaging in business in China, like everywhere else, knowing the right people and building relationships with them will get you ahead. One important peculiarity in the Chinese context is that a personal connection between two individuals will be bounded by an implicit psychological contract to follow the social and cultural norm of guanxi.

Guanxi is the informal obligation that everyone is expected to follow in China, regardless of their cultural background or nationality, because it relates to the social standard when building and maintaining a relationship or social network with the Chinese. As such guanxi is an integral part of both personal relationships and business conduct in China and societies influenced by the Chinese around the world.

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Guanxi stems from Confucianism and is a cultural-specific notion that comes from aspects of collectivism and the relational culture. It is characterised as the close-knit ties between individuals (and among networks of actors) that are established through social interactions and resource exchanges. The practice of guanxi manifests itself in the networks of relations and is commonly conceptualised as interpersonal ties built around mutual commitment, loyalty, and obligation. Between the contact of two parties and through numerous interactions, quality guanxi involves self-disclosure, dynamic reciprocity, and long-term equity principles, which result in mutual trust and closer bonds.

Guanxi stems from Confucianism and is a cultural-specific notion that comes from aspects of collectivism and the relational culture.

 

In business conduct, guanxi represents a firm’s interactions with the broader environment including the norm and social characteristic in which individuals, firms, and governments draw on a web of connections to secure favours in personal and organisational relations. Guanxi has implications for firm performance in China, in that it affects the flow of resources from key stakeholders, such as the government. It is widely recognised that western firms need to understand and engage in guanxi in order to develop and improve their business relationships with the Chinese counterparts.

Although business and academic synergies have devoted great efforts to understand guanxi due to its growing importance in business over recent decades, with especially the academic crowd witnessing an explosion of research, guanxi is often considered as one concept and not expressed as a notion that involves multiple aspects. Unless guanxi is seen as a multidimensional concept, understanding and embodying it will become more and more difficult for businesses. For example, few actually know that when it comes to business relationships guanxi consists of several individual guanxi dimensions, such as ganqing (emotional attachment), renqing (reciprocal favour exchange), and xinren (interpersonal trust).

 

The Basic Principles of Guanxi

Several underlying principles characterise the notion of guanxi:

Reciprocity. Guanxi is often established and nurtured through a reciprocal exchange of favours. Individuals practicing guanxi are tied together through an unwritten code of reciprocity and equity in which the exchanges of giving and receiving further strengthen the guanxi ties. An individual would be seen as untrustworthy if s/he refused to return a previously granted favour. Failure to respect such a reciprocal commitment substantially hurts their reputation and will lead to a humiliating loss of prestige or face as well as exclusion from further guanxi exchanges.

Trust. Guanxi ties firmly depend on a foundation of mutual trust that is established between the involved actors. This means that guanxi takes time to advance and often requires several episodes of interactions and exchanges since trust cannot be easily judged based on shallow observations. Over time, and over longer-term evaluations, guanxi is established. Typically, guanxi that is developed over longer periods of time is seen as more secure and reliable. In such cases, an individual is dependent on and can be called upon when needed.

Middle man. In the early stages of a relationship, when trust is not yet present, a middle man may establish guanxi on behalf of two parties. That is, new guanxi may still come in useful for some, if the involved parties are introduced through a common ground (a middle man), who acts as the transferable medium that links all parties together. Understanding the middle man’s role may help alleviate the concern that many western firms have when they mistakenly believe that the middle man is taking advantage of their position.

Friendship. Although guanxi has a strong utilitarian perspective based on the social exchange of benefits, it still involves a large element of friendship and affection that is preserved through the giving and receiving of favours. Therefore, conflict and personal disagreement between individuals is generally frowned upon due to Chinese’s cultural preference for a more harmonious atmosphere during interaction, and bonding via friendship is an integral part of guanxi.

 

Three Binding Guanxi Philosophies

According to the research of Dr. Dorothy Yen, a professor at Brunel University, guanxi should be divided into individual aspects that involve the philosophies of ganqing, xinren and renqing. For many these aspects remain little known:

  1. Ganqing refers to the emotional side and feeling (affect) of a social exchange between two people or two organisations, and reflects the mood of a social relationship, as well as the level of emotional attachment that exists among parties of a network. Written as 感情 in Chinese, the first character signifies feeling as a verb and the second character refers to affection, emotion, and sentiment. It describes the degree of emotional understanding, connections and the sharing of feelings such as happiness or fears alike. Ganqing develops emotional bonds via communication and the sharing of experience during social interactions. Thus, when people have the chance to gain further understanding of each other, ganqing is developed and perpetuated.
  2. Xinren refers to the trust between individuals and underlines how secure the guanxi is established at the interpersonal level. The word xinren combines two Chinese characters – 信任. The first character acts as a verb, meaning to trust and to believe in, and the second character represents the heavy responsibilities that a person can carry.
    Different from trust in the west, xinren can only be established between individuals, rather than between two organisations. In the guanxi context, a person would only have xinren with another person, when the other party is judged as having good xinyong. This somewhat similar word “xinyong” (信用) implies a person’s trustworthiness and indicates their reliability, credibility and sincerity. Hence, a person should only trust someone who is trustworthy.
  3. Renqing refers to the informal social obligation to exchange favours with the other party and to engage in actions such as lending a helping hand, doing errands, going the extra mile to deliver the necessary outcomes, and so on. Written as 人情, the first character refers to human being and the second character means feeling, affection, and sentiment (the same as the second character of ganqing). Renqing emphasises the obligation to nurture the social exchange relationship in order to develop a guanxi network and to use the network for one’s own advantages. It is a form of social capital that provides leverage in interpersonal exchanges in which reciprocity shapes how favours should be exchanged to perpetuate renqing. When invoking a guanxi relationship, renqing returning is obligatory. Hence, through the act of taking turns to give favours, the action requirement of renqing facilitates the social bonding within the network.

 

The Managerial Relevance of Different Guanxi Aspects

Guanxi creates major benefits for firms as it helps them initiate and develop important connections, such as partnership firms and government offices. Because guanxi operates as a complementary mechanism to circumvent China’s institutional barriers, firms can gain access to ‘insider’ information, decode government policy intents, and open up needed resources that are otherwise and often unavailable.

The long-term viability of guanxi depends on the members’ commitment to reciprocate. However, compared to western networks, where two parties exchange roughly equivalent values to induce fairness, the Chinese guanxi exchanges often consider across ranks. Often times the lower or weaker power party may not get a reciprocal favour of equal value, however, this does not deter them from invoking guanxi and they still choose to continue the guanxi exchange because remaining in the guanxi network enables them to maintain their competitiveness.

Because guanxi operates as a complementary mechanism to circumvent China’s institutional barriers, firms can gain access to ‘insider’ information, decode government policy intents, and open up needed resources that are otherwise and often unavailable.

 

Approaching guanxi from the perspective of its individual dimensions can create a more nuanced and systematic approach to developing a guanxi network. Ganqing, which focusses on emotional attachment and is the affective side of guanxi, raises awareness of the importance of bonding and empathy in business transactions. For example, a company representative should be encouraged to host and participate in social networking activities so they can increase their interaction and bonding with their Chinese counterparts.

Xinren, which emphasises trust in a person’s credibility and reliability and represents the cognitive side of guanxi, highlights that only once a Chinese representative has placed an acceptable level of trust towards the other party can business be conducted. Therefore, the importance of being credible and reliable is of utmost importance. Finally, renqing, which refers to the reciprocal exchange of favours and said to be the conative component of guanxi, stresses the drive of favours. In practice, it calls for the representatives to go the extra mile to lend a hand to initiate and engage in the exchange of favours between the involved parties.

Although the engagement of reciprocal favours is often criticised for being unethical, especially by western standards, the give and take employed in daily negotiations between buyers and sellers in China is a well-established and acceptable practice. However, individuals need also be aware of a company’s regulations as to whether such an act is encouraged and consider how it is perceived from an ethical standpoint.

When operating in China and dealing with Chinese counterparts, interaction gradually increases ganqing. Over time, the opportunity to evaluate a person’s integrity and trustworthiness is possible and xinren can be established. By observing the reciprocal renqing behaviour during various social occasions, the guanxi is successfully invoked. Thus, once emotional bond and personal trust have been placed on a person in the guanxi network, that person accepted to be part of business relationship that is enduring.  

The philosophies of ganqing, xinren, and renqing should give business executives and representatives the knowledge to develop guanxi further.

 

Meanwhile, since guanxi cannot be built over night, for many new firms, the middle man holds great control. The middle man will try to keep this position for as long as possible and care should be taken not to feel the need to move away from the middle man because they are also part of the guanxi network. Hence, the middle man is always around, however frustrating that might be, albeit their role will diminish over time. Nevertheless, due to the Chinese’s concern for face, having a middle man can at times be very useful to smooth any potential issues that may arise during intense business transactions and relationships. Therefore, the bigger picture should be kept in mind.

As China continues its growth and turbulent market developments, guanxi has become even more imperative as a management tool for firms to master in order to gain the resources necessary to increase business performance. The philosophies of ganqing, xinren, and renqing should give business executives and representatives the knowledge to develop guanxi further. Once established, guanxi can reduce market uncertainties and external risks, ensuring greater success and sustainable competitive advantage.

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bangnguyen_webBang Nguyen is Associate Professor of Marketing at the East China University of Science and Technology, Shanghai, China. Prior to moving to China, he was a Marketing Educator at Oxford Brookes University, Oxford, UK. He is the author of the book Ethical and Social Marketing in Asia.

 

daviddecremer_webDavid De Cremer is the KPMG Professor of Management Studies at the Judge Business School, University of Cambridge, UK, and an honorary professor at Wenzhou University, China. Before moving to the UK, he was a Professor of Management at China Europe International Business School in Shanghai. He is the author of the book Pro-active Leadership: How to overcome procrastination and be a bold decision-maker.

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