What is Guanxi?

Dr BK Mukhopadhyay

(The writer, a noted management economist and an international commentator on business and economic affairs, can be reached at m.bibhas@gmail.com)

Dr Boidurjo Rick Mukhopadhyay

(International Award-Winning Development and Management Economist)

Awareness of cultural factors when it comes to the development of an economic or/ and social relationship in another country can be critical, and especially when the cultural roots vary significantly. This relationship could be with another individual, administration, an organisation and could go a long way if the cultural components are appropriately approached. When firms internationalize, i.e., go global - learning and considering glocal and cultural factors in the host country become one of the most important things to work on.

Understanding Guanxi

Guanxi hails from a Confucian culture that rules social behaviours between people. The core value of Confucianism is Ren, meaning 'treat others well' and 'love others' with a wider goal of the society becoming more tolerant, stable and accommodating. Unlike the strong individualism noted in Western countries, every Chinese is a subordinate to his or her own family and is responsible to the family; in China, the family relationship always takes priority over other social relationships tied through contracts.

Fundamentally, guanxi is derived from two Chinese words, guan (gate or barrier) and xi (connection or link) – so the word suggests 'go through the gate and get a connection. Chinese Authority's dictionary defines it as 'certain properties of contacts or relations among people'. Simply put, for the lack of an accurate English word, Guanxi can be commonly understood as 'personal relationship' or 'social connection'.

Guanxi, as a form of social capital, can be better understood in a business context, it is pertinent to note that before the 90s, the concept was clearly referred to as a 'special' relationship' or 'particular' ties and can be seen differently from other personal relationships. Further modern understanding of the concept as China was more accessible after the mid-90s, guanxi is a social connection based on mutual interests and benefits, which is usually achieved by exchanging favours and giving social status between guanxi partners. Studies have perceived this social concept as an interpersonal utilitarian relationship for reciprocal exchange which is applicable at individual levels and equally at the organizational level.

The concept is also quite implicit within the Guanxi groups, for examples, the Chinese consider that only strangers say sorry or thank you, and so the Chinese respond to 'Thank you (xièxie)', by saying 'Don't be so polite (búkèqì)'. Therefore, saying sorry or thank you to a friend seemingly diminishes guanxi. This is the opposite of the Western custom by which 'I'm sorry, implies openness and vulnerability, while 'thank you' signals acknowledgement and also respect.

Guanxi in a relationship-based society

In contexts where guanxi also helps in shaping the governance and institutional structure, however, it is a means and also social capital in itself which then would lead to advantages in terms of financial performance, marketing access, recruitment sources and favouring of internal candidates (therefore cannot be necessarily termed as 'talent pool') while serving essentially as a relationship marketing in Chinese markets. As an instance, however, to clarify further on the individual or group nature of guanxi, it is not always in the typical form of B2B or C2C, but also could take the shape of B2B2C.

Since guanxi is primarily a favour, reciprocity in benefits-based, i.e., when one party expects favours from another party, if one party cannot always deliver from their end, he or she will ask others (in their network) to fulfil a favour through his or her guanxi networks. This social capital, under a code or a set of social norms as understood by Chinese users of the concept, is a utilitarian relationship based on exchanging favours.

Typically, Guanxi starts from inside the network or family, then ventures (rather slowly) to outside acquaintances, so Chinese people choose to believe insiders (people with whom they share guanxi) over outsiders (outside the range of guanxi, per se). Similarities of kinship being a key resource can be noted in other cultures that have also been significantly influenced and structured by Confucianism: Kankei in Japan andKywankye in Korea, these correspond to similar meanings of Blat in Russia or Tanish Bilish in Uzbekistan.

Moreover, modern contexts and literature investigating various social, economic and anthropological issues would suggest that China is a relationship society in which people rely more on personal relationships than rational laws. Any institution, whether educational, financial or other business and service sectors, are guided by regulations, frameworks and guidelines – and are no different in China than in the rest of the world. However, the need to find guanxi or to establish a guanxi base contains a set of activities that follow Chinese social norms.

Benefits of belonging to a Guanxi network

In the reality of inefficiency and ineffectiveness of Chinese business infrastructure and related institutions, Chinese people depend more on personal guanxi for commercial protection, legal assurance and risk avoidance specifically.

While this may give a sense of security and smoothening of business performance curve (due to information sharing, resource acquirement, cost-saving, negotiation), a fallout within the guanxi network is a major threat that organisations are aware of of of in practice. On the other hand, to secure a less risky operational scenario recruitment is also done only within the networks of guanxi who are then entitled to special privileges that would seem discriminatory in organisations that are specification, enforcement and rule-based rather than social norm-based.

Guanxi may bring benefits to individuals as well as the organizations they represent but these benefits are obtained at the expense of other individuals or firms and are thus detrimental to society.

Information management and faster access to emerging policies and market trends along with newer business opportunities are some of the added benefits of having guanxi with government authorities. In many ways thus, guanxi is viewed to be the basis of sustainable competitive advantage, and more conveniently relationship marketing.

In China, while guanxi may seemingly be an effective and convenient option for personal networks to play and achieve goals, the Hong Kong Independent Commission Against Corruption in a report holds guanxi accounting for up to 5% of total costs in doing business in China.

The empirical understanding of guanxi and the use of the same in modern contexts have different realities in application since the element of 'mobility has changed in societies. Historically, when hukou (living placement and registration of individuals and communities) and danwei (work unit) factors determined job allocation given very few choices available then, this therefore heavily relied on guanxi within limited social circle and reachability in terms of trust-based 'who knows who'.

The downside

This component of localised culture may have barred individuals and communities to reach out beyond their known circles. Clearly, with time, reforms and also less political reliance on command economy, the social scenario and communication reachability have changed. There may be better and higher options available outside one's guanxi zone, this would have a significant impact on any work where such alternatives are available. The sole reliance on one's guanxi network would potentially limit better performance, output and business results in general.

Besides the utilitarian and reciprocity aspects of guanxi, the other components tied with the concept would be transferable and long-term intangible elements of it. While it has been discussed that guanxi creation and maintenance need time and resources, it also holds high risk. Similar to the growth of speed in the quality of guanxi, the fall can be faster as well if one relationship in the chain is negatively affected and consequently affected all connected guanxi in the chain.

Finally, in regards to the long-term personal intangibility of guanxi, it becomes harder to formalise these relationships in the paper when major decisions including financial, recruitment, promotion are based on the concept. Therefore, guanxi based recruitment or talent-hiring could pose a significant risk to scrutiny when staff gets hired without the right background, qualification and experience for a position/role that would otherwise be required from staff applying from the 'out of guanxi' range. When recruitment processes bring in candidates from both guanxi and non-guanxi referred staff, the quality control management and staff appraisal become significantly challenging or some may argue, unfair. And it could also affect the workplace culture.