Guanxi Networks

Table of contents
1. Introduction……………………………………………………………………………….
2. What is guanxi network?………………………………………………………………….
3. Guanxi and Chinese Business…………………………………………………………….
4. Future of guanxi networks………………………………………………………………...
5. The Role and Functions of Guanxi………………………………………………………..
6. Ethical side of guanxi networks…………………………………………………………...
7. Conclusion………………………………………………………………………………...

China went through the period of rapid economic development during last several years. Economists try to find different ways to explain this growth. To get a better idea about the economic structure of China it is necessary to take into account guanxi networks as they have extremely important influence on the social, political and cultural life of the country. In my paper I will try to distinguish the role guanxi networks play in China and future trends of their development. Some specialists say that guanxi is one of the factors that influences the rapid economic growth. Guanxi relations get together millions of Chinese firms and institutes into one network. We must remember about historical and cultural background of these networks. Guanxi networks make an important part of the past of the country and they are rooted into Confucian Chinese tradition. Literally, main principle of guanxi can be literally described as “I scratch your back; you scratch mine”. It is a principle of reciprocity, which means that when one participant of the group does not return an obligation, all the members of the network lose their prestige and should be responsible for this failure.
The necessity of network represented by multiple relationships in China is obvious. Constant political changes, sources of authority in governing and the necessity of close ties between people in business are the main reasons of guanxi popularity. History of China and mentality of Chinese people prove that the network is an important component of Chinese history and is necessary for the further development of the country. In China social relations mean much more than in Western countries. Multiple relations define individuals in China. The person is treated with more respect if he is involved in the network. Popular scientific literature points that guanxi is the guarantee of China’s success. There is an opposing point of view on this subject. Some researches state that guanxi network has negative impact on the development of economy of the country.
What is guanxi network?
Network assumes the dependence of people but at the same time it gives political and institutional autonomy and business efficiency. Indebtedness is one of the main principles of guanxi networks. By indebtedness we understand close connections inside one group and dependable relations between the members of this group. Indebtedness means great responsibility and undertaken obligations. People who helped you to reach your goal are very important and you must keep in mind that social connections assume corresponding obligations. It is even more important to know more about your potential partners than about the bargain because it will help you to protect your business from being involved in the web. Chinese businessmen believe that such a strategy allows them to get as much profit as possible and to predict result of the bargain.
The word “guanxi” is rather new in China and some centuries ago it did not exist at all but now it is widely spread and known by the Chinese and the foreigners. Here it is necessary to note that though the term itself is comparatively the type of relations have been peculiar to China for many centuries. Very often by guanxi we understand “social capital”. Literally the word can be translated as “connections”. The term can be difficult to understand for Europeans as it has no analogies outside the Asian countries. The word ‘guanxi’ can have both - positive and negative connotations and is used in mass media and literature in different ways. Negative shade of meaning implies corruption, remnants of the feudal society and obstacles in reaching economic success. Those, who use the word “guanxi” in positive meaning, think about close relations, humanity and sincerity in the sphere of life where guanxi connections appear. There is also an argument about the importance of guanxi networks in the Chinese society. Some regard it as global phenomenon, which has major impact in all spheres of life; and others regard it as usual phenomenon, which exists in most of the counties in the form of social, political or cultural networks. Brass (1992) defines guanxi or social networks as “a set of actors (individuals or organizations) and a set of linkages between these actors.” Xin and Pearce (1996) define guanxi as “dyadic personal connection in a Chinese context.” Guanxi influences different spheres of life. It can be subdivided into family guanxi, guanxi with friends, business guanxi and government and political guanxi. A person can be involved in one or several networks simultaneously.

Guanxi and Chinese Business
“Guanxi networks enable Chinese companies to transact business efficiently and to minimize the potential dangers of operating in high-risk environments. In fact, the strength of guanxi ties is generally recognized as it is a key determinant of business success in China. Studies have shown that companies gain a competitive edge by building and maintaining a strong guanxi network.”(Yeung, Tung, 1996). Guanxi networks are especially important for small firms because they usually help them to survive and avoid bankruptcy. A lot of Chinese companies exist under the threat of political pressure and social instability. Chinese companies are not located in China only. There is a great number of them in Southeast Asia and some other countries. Chinese population is very small there, but it controls a great share of the economy of the country. Of course, this fact can provoke negative reaction from the native population. It is the guanxi network that helps Chinese companies to survive and act in hostile conditions. Guanxi also helps companies to raise capital and it is very important for Chinese firms in foreign countries where the Chinese are not native inhabitants and can be discriminated. So, networks mitigate political and economic risk. In addition, it helps to get rid of bureaucracies. Government of every country has a number of rules and regulations unknown to public and so Chinese companies and firms can be confronted with these difficulties. Guanxi networks are able to help these companies to be aquatinted with such “secrets” and so avoid possible problems. They also help to solve problems between the government and the particular company when they appear.
Guanxi network is especially useful in countries where judicial and political systems are not stable, as it helps to make business transformations. Now China is the member of the World Trade Organization and its legal system is on a much higher level than it used to be just a couple of decades ago but it does not mean that laws there are perfect. Discrepancies between the government and companies are a usual thing and “rather than depending on an abstract notion of impartial justice, Chinese people traditionally preferred to rely on their contacts with those in power to get things done.” (Luo, 1997, p. 54). It seems that Chinese people prefer to interpret laws with the help of networks. Guanxi networks simplify the work of companies, especially of small ones as they help to solve problems with shortages of food, transport, communication. Fighting the bureaucratic system networks help companies with necessary resources and information. In some cases effective work of the company can be impossible without the guanxi help. Guanxi networks are also important as they can predict the market changes. The field of influence of Chinese networks is much wider than of any company or firm and it does not have national borders. Information about any changes of conditions or demands of the market is spread inside the network very quickly, which enables the companies to make necessary changes.
Chinese companies usually hire workers using guanxi networks. When Chinese employers hire a worker with the help of guanxi networks they understand that this worker may be not the great professional but they can be 100% sure in his loyalty and commitment. Chinese history proves that such workers justify hopes of employers and such method of hiring can be rather effective. This system of hiring exists for a long period of time and influences both financial and legal marketing spheres of business same as the personal sphere.

Future of guanxi networks
Great changes in the Chinese society have caused hot debates about the future of the social network. There are two confronting sides who express opposing opinions on the subject. Some specialists state that the role of guanxi in post-reform China will gradually decline (Gunthrie, 19). “They argue that this role will continue to expand leading to an economic system that is substantially different from the rational-legal systems that define Western market economics” (Guthrie, Wank, 2002). Another group of researches predicts the enforcement of the social network influence (Bian, 1994).
They also predict the increase of guanxi influence on the labor-market. The belief that guanxi can help to solve all the problems and that person can achieve nothing without its help is still very strong in the minds of people. Guanxi is still regarded as a very influential social phenomenon which can not be neglected. Fast-changing economical situation creates new challenges and new opportunities and can have great influence on all spheres of social, economical and political life. At the present moment social network takes an important place in the process of employment, together with such channels as hierarchy channel and market one. In his research, taken in different cities of China during 2003 - 2004 Huang Xianbi comes to a conclusion that “it is clear that social networks (e.g., guanxi networks) are pervasive and powerful, which are conducive to solving the barriers or gain edge in the job competition” (Xianbi, 2005). He also states that the influence of guanxi networks is especially strong in popular working areas, such as banking industry or insurance. Popular job areas can vary during different periods of time and in different parts of the country. Social networks are still very important in achieving high social positions. At the same time, there are spheres that require special skills and knowledge, where guanxi networks do not work. Technical sector can be a good example of such a sphere.
Starting from the 1978 general changes in the economical course of the country, adopting new perspectives of capitalist development and opening the country to the global market have changed the role of guanxi and its influence. “The Chinese government has already made progress in diminishing the role of guanxi. Banking reform is getting rid of relationship banking, smuggling crackdown is getting rid of relationship trading, the separation of the army from business is ending relationship business”(Li, 2003). A lot of effort was made to turn country to legislative way or problem solving but despite all the efforts latest researches show the growth of guanxi influence (Ghertman, 1997). It can be partially explained by the transitional period from feudal economic structure to capitalism. From the other side there is more pessimistic view and some researches believe that guanxi will not lose its influence with the flow of time (Pitman, 1999). It becomes evident that the influence of guanxi was not demolished by the economical changes and even vice versa, it becomes stronger and grows with the flow of time.
Despite great influence of guanxi networks, there are areas, like coastal cities, for example, where other channels of job acquisition become more and more important. In the mentioned above coastal cities market channel becomes more and more important in the process of job acquisition. It can be explained by the fact that these sphere require special skills and exact knowledge of the subject more than any kind of protection given by the guanxi network.

The Role and Functions of Guanxi
In order to win the job competition, a rational competitor may consider employing social networks, which not only excel in collecting suitable information for the target job, but also serve as a flexible, reliable and low-cost channel to influence job acquisition. (Xianbi, 2005).
In China, guanxi is regarded as “social capital”, or “the aggregate of the actual or potential resources which are linked to possession of a durable network of more or less institutionalized relationships of mutual acquaintance and recognition… which provides each of its members with the backing of the collectivity-owned capital a “credential” which entitle them to credit, in the various senses of the word.”( Bourdieu, 1992, p. 248). So, this social capital can be transferred to economic, political or business capital. Hwang restricts the notion of social capital and talks about the possibility of turning it into “face”, which makes a symbolic capital (Hwang, 1987). Symbolic capital here means the value of the favor done by the person and the prestige of doing him the favor. Thus, quanxi network becomes the basis of “gift economy”, which exists in China. It is a specific type of economy peculiar to this country and to a number of Asian countries. This economy is based on the principle of reciprocal obligation and indebtedness. It is a unique phenomenon hardly perceived by rationalized Western mind. The Chinese themselves stress than guanxi does not possess the instrumental component only but also involves the affective one. It means that actions of people are governed not only by rationality and intention to obtain profit, but also by humane feelings of gratitude and moral obligation. Some Chinese stress on the warmth and enjoyment, which are the parts of guanxi. This unique combination of counting and sentimentalism is often hard to understand for people from the other countries.

Ethical Side of Guanxi Networks
One group of experts believes that Guanxi network is a perfect mechanism that stimulates and develops business but, at the same time, their opponents criticize it and emphasize that guanxi gives the birth to corruption, cronyism and nepotism. So the next step of our work is to analyze the possible negative effect of guanxi.
Very often guanxi is characterized as a kind of corruption, because most people think that tapping relations of networks make them similar with corruption. All in all there is a number of principles that make them different. Corruption is a short-term relationship while guanxi is a long-term one. Corruption is an immoral kind of relations while guanxi networks are accepted by ethic norms of the Chinese society. Guanxi is legal and corruption is illegal and is prosecuted by law. Chinese networks are based mostly on exchanges of favors that are social transactions and the main threat in these relations is to lose your face. Corruption is based on monetary exchanges that are economic transactions and so may have real legal consequences. Corruption is usually an agreement between two persons and network provides long relations where guanxi ties can be transferred to other participants of the organization. All these differences are obvious but sometimes guanxi networks involuntary create such conditions where corruption can develop.
Chinese companies are mostly represented by small family-owned companies and the owners of these companies usually hire people whom they trust. Such phenomenon is called nepotism: more qualified and professional people are rejected because of the lack of close ties with guanxi. Candidate with good guanxi ties is more suitable for the company, which belongs to the same guanxi network. “Since guanxi is primarily rooted in interpersonal relationships, employees bring their guanxi with them when they join a new organization.” (Luo, 2002).
Building guanxi relations is not an easy thing but the results always justify themselves and it is very important to know methods to strengthen these ties. Different kinds of entertainment and gifts are an integral part of the Chinese cultural tradition and they also improve relations inside the guanxi network. They show your respect, goodwill and interest but if your intentions are not sincere and you want to get profit form relationship without emotional involvement, it won’t work. The Chinese are very attentive and always feel your sincerity. Using gifts in an improper way leads to serious consequences and you have a real chance to lose your face forever.
The main principle of guanxi networks is trust. People trust each other inside the social group, they rely on each other and the attitude to person who does not belong to guanxi is cold and even suspicious. Sometimes it is a real disadvantage because businessmen have no trust and respect for parties and companies that are not connected with guanxi. It can have negative impact on business itself. It is obvious that Chinese firms do not operate in absolutely fair environment and so they can not believe all official information that is open for public. Chinese businessmen are sure that public information about the firms can not be accurate and trustworthy and so check it with the help of guanxi networks. It is the main feature that differs European and Asian companies because European ones very often believe public information.

In my paper I tried to describe the phenomenon of guanxi in China and to find if guanxi network is suitable for the further development of China and how it will influence Chinese business in the future. There are two points of view on this question. One school claims that guanxi will continue its influence in social, political and business spheres. The second one insists that despite all the advantages guanxi all in all will lose its influence. My own opinion is that guanxi networks are necessary for the normal economical development of China as they aren’t only based on economic needs of native population but are the part of Chinese culture and traditions. Guanxi networks will peacefully coexist with standardized laws and these two institutions will harmonically control business in China.
Chinese networks are based on indebtedness, interaction and obligation. Aesthetic norms help to control the relations inside the network. Guanxi networks help firms and companies to survive in hostile surrounding and help emigrants in foreign countries to achieve business growth and social recognition. Chinese people know these aesthetic norms and follow them so they can gain correspondent status in the society. They know when and how to use guanxi. This means they know how to get profit with the help of guanxi. Chinese people are sure that guanxi networks guarantee them support and protection.

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