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Monday, November 10, 2003

On the Durability of Guanxi

I'm really ripping of this post that I just made over at Living in China. I'm up to my eyes in admin, and even I can't keep up.

Firstly I'd like to congratulate the team at ChinaBiz on the 'facelift' they've recently carried out. I find the result much more attractive. Secondly, I'd like to inform you all that I'm expanding the team quite rapidy on the Business and Economy Section at Living in China, and that in the days and weeks to come a number of new faces should be arriving there. This is partly in the interests of diversity, of both opinions and origins. There is no editorial 'line' in the section, we're going to try and cover the whole gamit of opinion. It is also partly due to the limitations in my own skills. Full disclosure: I am much more an economics than a business person. Still I am trying to learn.

Which is why today I'm bringing you something from ChinaBiz which I found extraordinarily interesting. It concerns the future of Guanxi, or informal trust. This topic is fascinating, and familiar to me more in its Southern European form than it's Chinese one. Bill Fraser is rightly skeptical about the breezy disappearance of this phenomenon. The studies I am aware of in Europe refer to the role of informal trust in the packaging machinery and textile manufacturing industries in Northern Italy, where, as is probably well known, outsourcing into small efficient units has been both speedy and effective. The curious detail is that Italy is the European society that regularly gets the lowest score when it comes to general confidence in the public administration. The interpretation that has normally been put on this is that such micro social informal trust networks normally blossom in precisely these circumstances. Which is why it is we may well find that the concept of Guanxi has a long and healthy life ahead of it in China.

The Premature Death of Guanxi
Lausanne - By Bill Fischer

After several thousand years, guanxi, or the Chinese reliance on trust and partnership within a web of relationships in order to achieve advantages, has finally met its end. Professionalism has triumphed. Merit is king. Performance is now preferred over referrals. Or so I was told last week in Shanghai by several observers of the Chinese managerial scene. As an artifact of modernization, the "new" Chinese manager is apparently much more attuned to merit and objective performance than to kinship, referrals and shared-experiences as a means for judging personnel. As the "Rule of Law" displaces the "Rule of Man," the sorts of favoritism that are characteristic of guanxi will be diminished; maybe even disappear. That is the story that is being told. I hear this, but I do not believe; at least not entirely. If, I ask, guanxi is truly dead, then why do I also hear so much about the children of past and present leaders when new investments are being mentioned?

Respect for guanxi is one of the first things that a foreigner learns about "how to do business in China." In fact, Amazon.com's new "search-inside" feature yielded 504 books when queried about guanxi, most of them describing the utility of relationships in China. Historian Albert Feuerwerker [122 Amazon-associations] considered guanxi to be one of the "five large aspects of doing business in China... whose characteristics tend[ed] to prevail" over a three-century time span1. Such longevity would suggest it considerably unlikely, if not naive, to assume that guanxi could pass from the scene so effortlessly, if ever.

There are excellent and enduring cultural reasons why we should expect guanxi to be around for a long-time to come. Francis Fukuyama has cogently argued that in societies where people cannot trust "the system" for fairness, they put their trust into relationships that they know they can depend upon2. This is as true for my wife's family in Sicily as it is for business people in China. Nisbett, has recently described the absurdity of the very idea of existing in isolation in an Asian society, and the corresponding centrality of relationships as a result3. Reliance on guanxi would appear obvious and natural.

What, then, should the aspiring businessperson know about guanxi? First, it can provide enormous advantages. Guanxi is an entry-way into Chinese society that no other form of "introduction" can rival. During the early-20th century, when the Chinese market was also opening to international competition, some foreign competitors were, in fact, able to use the guanxi of their Chinese partners to build fast and reliable distribution networks of considerable scope. On the other hand, the same studies also show that guanxi could be a formidable constraint to geographic expansion if relationships ran-out before market space did4. Furthermore, because relationships are innately personal, guanxi only gets you so far: guanxi does not globalize easily, nor is it readily transferable. It is not "owned" by the organization, but by the individual and, consequently, its influence can be quite particularistic.

1 Albert Feuerwerker, "Doing Business in China Over Three Centuries," in Gardella, Leonard and McElderry, [eds.] Chinese Business History, Armonk, NY: M.E. Sharpe, 1998.

2 Francis Fukuyama, Trust, New York: The Free Press, 1995.

3 Richard E. Nisbett, The Geography of Thought, New York: The Free Press, 2003.

4 Sherman Cochran, Encountering Chinese Networks, Berkeley: The University of California Press, 2000.

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