David Wolf over at The Silicon Hutong blog is just out with a post riffing on the meaning of guanxi. It’s superb. The post is entitled, A Few Notes on Guanxi, and what it does better than anything I have seen to date, is accurately and concisely define guanxi. It is so good and so important, I feel I have no choice but to post it wholesale and suggest you read it at least twice:

First, to translate “guaxi” as simply “relationships” is a dangerous oversimplification, particularly when proffered to someone unfamiliar with Chinese culture. First, guanxi are tiered, based on a Confucian hierarchy: familial relationships, long-term friends, classmates, and schoolmates are the nearest ranks, and to those no stranger — Chinese or foreign — will ever have access. At best we [foreigners] are relegated to outer rings like colleague, in-law, business partner, or acquaintance. There are exceptions, like Sidney Rittenberg, but he is the rara avis that proves the rule.

Second, guanxi are personal and non-transferable, they are not enterprise. There is no way to hire someone and have him hand over his guanxi to the company. You want the guanxi, you keep the employee. That’s why China’s princelings, the offspring of senior Party cadres, have sinecure. Consultants who hawk guanxi are simply renting their relationships, they know it, and from such realities are retainers made.

Third, guanxi involve mutual obligation. If you use someone in your company with guanxi to get assistance from an official, there is an implicit quid pro-quo, hence … concerns about the coziness of guanxi and corruption. Further, few westerners understand that there are complex social obligations involved in such relationships, your average Chinese executive would sooner burn his employer than his close connections.

Fourth, guanxi die. Or get sacked. Or retire. Or get transferred. Or quit and go into business. They are ethereal, fleeting, and in constant need of regeneration, repair, and re-creation. They are not forever.

Fifth is the hammer-nail problem: the people your employee or partner knows may not be the exact right people to get things done, but that’s who they know, so that’s who they use. When that happens, watch the oversold connection drop the ball, or get smacked. I have watched it happen, and it is not pretty.

Or they may just limit you. I know of a western media company with no special unique advantage in the market that is doing well in exactly one province: the place they have guanxi. They’re happy with how they’re doing in that one province, but they have been utterly unable to scale their business: they’ve been hemmed in by their relationships.

Finally, it is worthwhile noting that guanxi today are of declining importance for most businesses. The scope of industries in which it is necessary to cultivate exclusive ties at a high level is declining over time.

Business fundamentals first, second, and third. Special relationships only to the extent necessary.

This is not a comprehensive discussion of guanxi, and I’ve simplified it with the sole goal of underscoring how misunderstood the concept is in the west. But it gives you an idea of why misunderstandings around guanxi are so common as to make the whole issue a litmus test of an individual’s level of understanding of Chinese business.

One nota bene that must be emphasized. While guanxi is taking a back seat to market fundamentals in many industries, and policy changes are drawing away the value even the best connections in others, there are some businesses in which it is absolutely essential to hire, retain, or otherwise acquire high-level influence. On that list I would include banking, investment banking, and infrastructure.

What do you think? 

UPDATE: China quality control guru, Renaud Anjoran, over at his Quality Inspection blog, has done a post on the value (or lack therof) of guanxi in the sourcing and QC arena. The post is entitled, “Why you should ignore guanxi in China,” and, according to Anjoran, those sourcing from China should focus more on “face” than guanxi. I agree.

UPDATE: China product sourcing guru, David Dayton, has joined the discussion with his post, “Guanxi, Tradeshows, Free Stuff and the China Law Blog. Dayton posits there being three types of guanxi and all are fine, so unless “used in a context where the legality of relationship comes into question.”

 

 

  • Tracey

    I am glad you took the whole thing. It is amazing.

  • Ringo Ma

    As a native Chinese, I must give a hand to the author because it is very insightful and made me do some criticial thinkings of guanxi.
    I am doing business around the globe now and have found guanxi is important everywhere, and in China maybe it is becoming less and less important but it will NEVER disapear from business success formula.
    Guanxi is know-who. The secret is balancing it with know-how.

  • Twofish

    Total non-sense.
    I hear that people in the West have familial relationships, long-term friends, classmates, and schoolmates. I fact I’ve heard rumors that people in the West sometimes actually have familial relationships, long-term friends, classmates, and schoolmates that are Chinese, and vice versa. Imagine that.
    Wolf: Further, few westerners understand that there are complex social obligations involved in such relationships, your average Chinese executive would sooner burn his employer than his close connections.
    And a good number of Western executives would rather burn their employer than do something that destroys their marriage, their relationship with their parents, or kills a friendship with someone that they’ve known for decades. Again, using the term “guanxi” just makes something that is really pretty basic and universal, something mysterious and foreign.
    Yes there are complex social relationships involved, but they aren’t any different from the complex social relationships that people have in the West. Tell me about your relationship with your mother in one sentence. You can’t.
    Wolf: While guanxi is taking a back seat to market fundamentals in many industries, and policy changes are drawing away the value even the best connections in others, there are some businesses in which it is absolutely essential to hire, retain, or otherwise acquire high-level influence. On that list I would include banking, investment banking, and infrastructure.
    And curiously enough those are exactly the businesses in the West where you are totally dead if you don’t have good relationships with people at high levels. Why do you think Dick Cheney become head of Halliburton? Why Kissinger Associates makes a huge amount of money, or why Tony Blair is a special adviser for various investment banks?
    One other thing. American != Western. One thing that I find about Americans is that they, more likely than another other nationality, are willing to label everyone as a “friend.” On the other hand, even among Americans, people to make distinctions between people that you’ve known for decades, and people that you just met a month ago.

  • Twofish

    Also one reason I think it’s important for people to realize that guanxi is just relationships is that people have a lot of intuition and experience about how to deal with complex social relationships, and giving it a special name means that you throw all of it away when you go to China.
    One important thing about relationships is that you need to know when to use a relationship and when *not* to use it. If you have a “friend” and you keep asking favors from that “friend” without providing anything in return, pretty soon your friend is not going to be your friend. Also if you ask for a favor, you’ll have to return the favor, and if it is something you aren’t willing or able to do, then don’t ask for a favor.

  • lucane

    Twofish, sometimes I feel like you will disagree with anything anyone says about China.
    “And a good number of Western executives would rather burn their employer than do something that destroys their marriage, their relationship with their parents, or kills a friendship with someone that they’ve known for decades. Again, using the term “guanxi” just makes something that is really pretty basic and universal, something mysterious and foreign.”
    I do not think David Wolf was talking about how guanxi will cause a Chinese employee to quit in order to save his marriage. I think he was more likely talking about how a Chinese employee would use business secrets and give them to his friend who is a competitor in the industry. But to pre-empt what I assume you will do – go ahead and post your stories about American employees burning their employers in a similar fashion, and thus state that China is no different from others.
    I think it is amusing that you brush off things as if everything in China was just like it is in the rest of the world. I am not saying one is better than the other, but rather just that things are indeed different. Perhaps there is indeed some odd aura around “guanxi”, but that is because networks are subtly different here. Bringing differences like this to light can help outsiders avoid making the most common mistake – making assumptions.

  • Twofish, you would be amazed at the number of otherwise intelligent businesspeople who show up in China figuring that if they go out drinking with a guy after a meeting that he now has “guanxi” with him.
    You might also be amazed at how many so-called “China Business Consultants” make a comfy living first talking up how important “guanxi” are, and then collecting vast sums of money for arranging meetings and/or drinking sessions that supposedly give the client “guanxi.”
    You might even be surprised to hear of foreign executives who actually think that if they hire a guy who knows the dude that walks Wen Jiabao’s dog that the company now has a high-level connection that they are entitled to own.
    And you’d obviously be incredulous at how many people think that by getting someone’s business card or “friending” them on Facebook that they are now in a relationship with them.
    Let me clarify, as I obviously was not clear enough in my post, those points foreigners need to remember as the (in my experience) so often forget:
    1. Guanxi ain’t just knowing a guy.
    2. There are some guanxi a foreigner or any outsider can never forge.
    3. Companies don’t have guanxi. People do.
    4. If a friend does one of your employees a favor, a favor will be expected in return. If the favor is for the company, the company will be expected to pay it back. (Amazing how many people forget that.)
    5. If you define your problems in terms of your relationships, you are limiting your business.
    6. Relationships are not as important to the conduct of business as they were 10 years ago.
    7. Business fundamentals are more important than relationships.
    At no place in my post did I suggest that in the west (or America or wherever) relationships are not important. Of course they are. The problem is that the term “relationship” has been so overused in the west as to begin to render out much of its meaning for a lot of people.
    We agree on one point: the “China is different” thing is way overplayed. It is not so different that you should leave your common sense behind when coming to China. Unfortunately, China Business Consultants like to inflate the differences in order to bamboozle clients and to make their services appear more valuable.
    However, I disagree when you imply that there is no difference at all between relationships in western cultures and in China. With respect, that’s hogwash. The differences may be small and subtle, but they’re there. You don’t need a consultant to figure them out and adjust accordingly: you just need a measure of sensitivity and empathy.

  • Twofish

    Wolf: Twofish, you would be amazed at the number of otherwise intelligent businesspeople who show up in China figuring that if they go out drinking with a guy after a meeting that he now has “guanxi” with him.
    Which is why I think that describing things as “relationships” is a good thing. No Western business people would go out for a drink with someone in the United States and believe that they are friends for life. The other examples that you give *are* things that would be totally absurd if you tried to do them in the United States, and thinking of “guanxi” as something foreign and exotic makes people miss how absurd they are.
    Wolf: However, I disagree when you imply that there is no difference at all between relationships in western cultures and in China. With respect, that’s hogwash.
    I think that thinking in terms of “Western versus Chinese” is rarely the right way of thinking about it, since the differences between different cultures in the West and the difference between different cultures in China pretty much swamp any sort of systematic differences between them. Also I’ve found that the differences between individual Chinese and individual Westerners are usually the important thing that you need to be aware of.

  • Twofish

    lucane: I think it is amusing that you brush off things as if everything in China was just like it is in the rest of the world. I am not saying one is better than the other, but rather just that things are indeed different.
    I’m not saying that. Shanghai is quite different from NYC, Mexico City, and Berlin. But Shanghai is also quite different from Hong Kong. And NYC is quite different from Berlin or from Buenos Aries.
    I’ve found that Chinese/Westerner is rarely the most important difference. Differences in profession, education, wealth, urban/rural differences, regional differences, religion, and corporate culture usually totally swamp supposed national differences. My experience is that the difference in cultures between MBA’s and computer scientists are much more relevant and sharp than those between “Chinese” and “Westerners”. My background is technical, and if you put me with computer programmers from Kenya or Yugoslavia, I can sense some sort of common culture. If you put me in a room full of people from sales and marketing, this is a totally, totally different culture and a salesperson that has the same ethnic background can be much more foreign than a computer programmer from Kenya.
    Also corporate culture can be a lot more important than national culture. I once saw a merger and it was really obvious who came from what company. The Chinese and Western people from one company were loud, and the Chinese and Western people from the other company were quiet. Bridging the two cultures was a challenge.
    lucane: Bringing differences like this to light can help outsiders avoid making the most common mistake – making assumptions.
    When dealing with someone from a foreign culture, you can assume that they have a mother and a father and they they have families. You can also assume that they have some sort of human relationships, and if you are talking to them about money, you can also safely assume that they have to deal with the same sorts of problems that are inherent in business relationships. If you think of things in those terms, I’ve found that you tend to get a better idea of what is going on.
    One other thing is that I’ve found that talking about the differences between Chinese and Western cultures tends to be totally, totally useless for the business situations that I find myself in. You talk about the difference between Chinese and Westerners, and then you find that someone on the team happens to be from India, and then someone else is from Peru, and then some else is from Brazil. You have one team with people from five different countries trying to reach a business deal with another team of people from five different countries. Under these situations talking about “national cultures” tends to be useless. Also talking about “insiders” and “outsiders” in national terms also tends to be rather useless.
    One other issue is “who is Chinese?” and “who is a Westerner?” Am I Chinese, or am I an American? Both? Neither? Am I an insider? Am I an outsider? It turns out that I have a very complex life story that defies pretty easy categorization, but I’m hardly unique in this.

  • Twofish

    I suppose one reason that I don’t see the Chinese/Western division as very sharp, is that in most of the social and business situations that I end up in, it’s not clear what is Chinese and what is Western. I work for a large multinational, and I spent a lot of my time crossing the Pacific, and even when I’m not crossing the Pacific, I’m constantly chatting via e-mail to people all over the world. It’s very common for me to have three or four conversations going with people in three continents at the same time.
    Also all of the teams that I’ve worked with are extremely multinational. I don’t think that I’ve ever worked with any teams which were mono-national. So I’ve been on projects in North America in when you had a large fraction of the team was born in China (along with people from Russia, India, Mexico, and every other country you can think of). I’ve been on projects in China in which most of the people were born in the “West” (however you define it). In these sorts of situation, it’s really hard to define *who* is Chinese and *who* is Western. You can have someone who was born in China but is living in New York City and hasn’t gone back in 20 years talking with someone that was born in Australia that has lived in Hong Kong for 20 years and speaks fluent Mandarin and Cantonese.
    So in the world that I live in, I think of national boundaries a lot like most people in the United States think of state boundaries. Yes Texas is quite different than New York, and people in Texas *do* think quite differently than people in New York City, but to treat this as some sort of weird exotic trait seems absurd to me. And to imply that someone that was born and raised in NYC will forever be some sort of outsider that will never understand or be accepted as a “true Texan” seems quite silly. In the world that I live in, Shanghai, NYC, London, Hong Kong, Singapore and every other city in the world are just 250 milliseconds from each other.
    And it suits me fine. I have an incredibly complex personal life story, so I don’t really know if I’m a “real Chinese” or a “real American,” and I’m not quite sure what a “real Chinese” person or “real American” is supposed to look or act like. But the fact that I have this mix of background suits my employer just fine because being this mix means that I’ve figured out what the cultural rules are and can adapt pretty quickly to different situation, and it helps that most of the people that I work with are “mongrels” just like me.

  • Jorge

    @Twofish,
    Of course everyone is an individual, be they in China or in the United States or wherever. But just as you sometimes find it useful to generalize about tech people, it is also sometimes useful to generalize about a culture. Generalizing does not provide the answers about everyone in a culture, but it can go a long way towards explaining most people and in that it is useful and necessary, at least until you know the person.

  • David Oliver

    John Garnaut did an interesting story about investment banks targeting princelings for ‘relationship hires’. As David Wolf points out guanxi does matter in some industries. It stinks in my opinion but that is how things work here (and in many other countries no doubt).
    http://www.smh.com.au/business/macquaries-getting-well-connected-in-china-20101001-1616u.html

  • Two fish:
    To take a phrase from the original genesis of what David entered into, from yours truly:
    “When you continue to call it “Guanxi” and not relationships, you are not merely using the Chinese translation, you are inferring extra qualities and warranties that are somehow tangible, realisable and needed to operate.
    The former half of that sentence is true – that is what “guanxi” means in the vernacular. The latter is the result of twisted snake oil salesmen trying to invent value in their “consulting services” where non exists. ”
    And
    “The world is full of relationships. When you state that a new comer must cultivate “guanxi” you are not referring to lobbying or business relationship or any other form of social engagement which is uniform the world over.
    You are positioning it as some form of additional or targeted gear oil that is above/beyond and separate to what people would do normally anywhere in the world – have healthy relationships.
    I never said that guanxi was corruption. It was tacitly implied by yourself in your previous post that I was “hurt by guanxi” in the past.”
    And
    “Indeed – foreigners can form great and close ties. They are a natural flow on of doing business. Happens all over the world everyday.
    If a Dutchman set out to do business in Norway – he wouldn’t seek out a consultant or guanxi to start his business. He would seek out a good lawyer and accountancy firm.
    The same goes for China. Doing business here is no different than a Swiss doing business in Australia, or an African doing business in Russia. People keep trying to obscure that point and make China into something weird and different. It is no more different than any other country is different to any other…well country. ”
    If you persist to call or refer to guanxi – you are loading the concept up. Guanxi does not equal relationships. It may translate to that – but it means a whole lot more. And it is this definition which is opaque to most people that the snake oil salesmen set their targets for their game of “lets fool the gullible foreigner”.

  • Twofish

    Jorge: Generalizing does not provide the answers about everyone in a culture, but it can go a long way towards explaining most people and in that it is useful and necessary, at least until you know the person.
    Maybe useful for you. Totally useless for me.
    Depends on the situation, but for the social and business situations that I typically face, generalizing about a national culture is worse than useless. For example, suppose I know someone that is ethnic Chinese born in Malaysia, went to school in Britain, then graduate school in Germany before moving to New York City before being transferred to Hong Kong. His wife happens to be Italian, and his kids go to an international school and speak fluent English, Mandarin, and a little French.
    There is no way that I can begin to explain his behavior using national culture, because I ain’t got a clue what national culture to use, and that person is pretty typical of the people that are in my social circle and the people that I work with. Even if I *wanted* to explain his behavior with national traits, what traits do I use? Is he Chinese, Malaysian, British, German, American, or Hong Kongese? Once you run into people like this on a daily basis, you just give up and say “well he is just Frank.”
    The other issue is that suppose I have a new person on my team, and let’s suppose he happens to be Turkish. I can’t explain his behavior using the fact that he is Turkish, I don’t have any preconceptions of Turkish culture, and I don’t even have any stereotypes of what a Turkish person is suppose to behave like, and then I find out that I thought he was Turkish because of his name. Turns out that he grew up in Germany, has never visited Turkey, doesn’t speak a word of Turkish, and gets moderately offended if you don’t think of him as German.
    It’s in fact *dangerous* to make assumptions about people in a business context. You enter a room with two people you never met. One is blonde hair and blue eyed. The other one looks oriental. If you start having a conversation in Mandarin assuming that that the blonde hair person doesn’t understand Mandarin and the oriental person does, you are setting yourself up for a big mess. It turns out that the blonde hair person was born and raised in Shanghai, and the oriental person was born and raised in Pittsburgh. This sort of thing happens every day in my world.
    One reason that I do meet a lot of people with extremely mixed identities is that people have mixed identities have been able to successful adapt to new cultural situations, and that trait is extremely useful for MNC’s. If we need to open an office in Kenya, said person may not know anything about Kenya, but sense they’ve been able to adapt to five or six cultures and so they can adapt to whatever life is like in Kenya. Also once we start hiring people in Kenya, it really doesn’t matter much what the local culture is like since, we’ll be looking for people that can fit into the general corporate culture.
    Finally let’s suppose I do see a cultural difference. In general, I’m not going to ascribe it to a Chinese/Western difference but rather to something else Suppose I find that the local companies behave differently than our multinational. OK there is a cultural difference, but I’m more likely to call it a local company versus multinational company difference rather than a Chinese versus Western difference, because our company hires as many Chinese as the local company, and people that aren’t Chinese in our company may also not be “Western” (i.e. there are Koreans, Japanese, and Indians here too). Also increasingly the local Chinese company is internationalizing itself, so the person that you find across the table is not Chinese but German.
    Also there may be cultural commonalities that are unexpected. For example, I have a “complex identity” so I tend to find it easier to interact with other people with “complex identities.” If I meet someone that was born in Brazil, but then moved to Germany at age five, and then to India at age 15, I’m going to have share some “common culture” with that person more so than with someone that has lived all their life in the same country, ***no matter what the country is***. With the first person, I know that at least, we’ve both spent a lot of time in airports, waiting in customs, and trying to figure out how to get a visa, open a bank account, and learn enough survival language to buy apples. You were annoyed at waiting in line in Buenos Aries airport. I was annoyed at waiting in line at Lou Wu station in Shenzhen. Different parts of the world, same experience.
    Those experiences are likely totally alien to some that has always lived in the same country ***no matter what the country is***, and so there is a big cultural difference but it’s not a national culture one.

  • Ringo Ma

    Twofish: I suppose one reason that I don’t see the Chinese/Western division as very sharp, is that in most of the social and business situations that I end up in, it’s not clear what is Chinese and what is Western.
    Ringo: Totally agree. Stressing “this is China” is an excuse as lame as “this is America” for not being able to get things done. Rather than spending much time trying to figure out which is what, take a step up, be polite, pay attention, listen, express yourself and differ the RIGHT way from the WRONG way. I find this approaches works for me everywhere around the globe.

  • Regular Reader

    “There is no way that I can begin to explain his behavior using national culture, because I ain’t got a clue what national culture to use, and that person is pretty typical of the people that are in my social circle and the people that I work with. Even if I *wanted* to explain his behavior with national traits, what traits do I use? Is he Chinese, Malaysian, British, German, American, or Hong Kongese? Once you run into people like this on a daily basis, you just give up and say “well he is just Frank.”
    The point is not so much to asess someone’s actions after the fact, but to have a better idea of what to expect before the fact. It’s articles like this one that help me do my pre-action figuring.

  • Twofish

    Investment banks do hire princelings in China for relationship hires. It’s very similar to the way that investment banks hire former politicians in the US/UK for more or less the same reasons. (Check out what Tony Blair, Henry Kissinger, and Phil Gramm did after they left politics.)
    But one interesting thing about princelings that end up in business is that if you look at their career history, you tend to find that they go into business after they have it’s clear that they don’t have any future in terms of a career in the Party. There are princelings that do make it into high positions in the Communist Party, but a princeling that has a Party or State position will not openly be allowed to work for a foreign company since that sort of thing is against Party and State rules.
    So if you are pulling in a princeling to work in your company, either they are doing it in violation of Party and state rules *or* you are looking at someone that has actively left politics. Now there are a lot of officials that will do things against the rules, but the problem with doing things against the rules is that you can’t be open about it. Part of the reason you want important person X to be on your board of directors is so that you can go around and tell everyone that you have important person X on your board, but you really can’t do that if it’s an illegal relationship. Even *if* you get away with it in China, you are likely to be in violation of the FCPA and the USDOJ can and will get interested in you.
    Also sometimes you hire a princeling for relationship purposes, and you find (shockingly) that the person you hired is a decent, smart individual, that will explain who to talk to, but is going to tell you that they can’t or won’t pull strings with daddy because daddy really doesn’t do that sort of thing. It’s a shocking but true fact, that there really are honest politicians in China. One problem that you have is that if the princeling isn’t an honest and decent individual, then why are *you* trusting them? I mean, they can take your money and then screw you over, and if they do that then who are you going to complain to?
    One other problem is that there really aren’t that many princelings, and unless you are a Fortune 500 company, it’s likely that you can’t afford one.

  • Twofish

    One other thing that happens in the world of high finance is that you’ll find that there are a lot of rules, both formal and informal, in place to keep things from getting out of hand. For example, investment banks do hire a lot of ex-politicians and ex-regulators as advisors, but there is just no way that a bank will hire a *sitting* politician or regulator.
    A lot of the rules are in place in order to prevent an arms race. It really doesn’t help much for a Fortune 500 company to hire a princeling in China for the simple reason that ever one of its competitors has got their own princelings, and after a while you end up with agreements not to get into bidding wars that really don’t benefit any of the companies.
    There are also valid reasons for people to hire princelings (both in the US and in China). If your father is head of some major government bureau, it’s likely that you grew up understanding politics better than most people, and using that expertise is a valid reason for hiring someone, and you can set up your hiring systems so that someone really does get hired for their expertise.
    One other rule that I’ve found to be generally true. I’ve found that people that really do have large amounts of power and connections tend to be quiet about those power and connections. If you really *do* have the ability to influence the Politburo, then you aren’t going to be bragging about it. Conversely people that try to sell their influence, often really don’t have that much.

  • Albert S.

    Dan,
    Whenever you write about guanxi, it seems there is an undertone that it is used by foreigners as a justification for not following Chinese law. Am I accurate in saying this?

  • Kristi

    I am greatly enjoying the discussion in the comments. Will you please ask Mr. Wolf to come back and comment again. I would appreciate his perspective on the various other comments that have been left.

  • Twofish

    One thing about “relationship hires” is that they do happen in investment banking, but they have to be approved at a very senior level and legal and compliance watches this sort of hiring extremely closely in order to make sure that nothing violates either FCPA or internal policy.
    Also, one should note that a lot of people with relatives in the Chinese bureaucracy do get hiring by financial firms for reasons that have nothing to do with their family connections. If you are the son or daughter of a Party bigwig, it’s likely that you’ve gone to the best schools, so if your resume goes through the standard hiring process, you are likely to do very well.
    The most useful that you get from a relationship hire is information. If you hire the son or daughter of a Party bigwig as a special adviser, then they are likely to have a lot of information about how the Chinese Party-State operates that you won’t find on google. Even knowing that official X likes or hates reports that are long with a lot of technical detail is an important piece of information. Even if they tell you that they *don’t* know anything, that’s extremely useful information.
    In practice, it’s very hard to get a competitive advantage with a relationship hire. The issue is that there ends up being a balance of power, in which every firm has advisers that are princelings, so you aren’t going to be at an advantage if you hire one. Also, people *do* take anti-corruption rules very seriously, and there is a strong self-interest for firms to do so. The problem is that if it turns out that to get a contract you have to send over suitcases of cash, then you get into a bidding war, because your competitors have to send over their suitcases of cash. Having enforceable anti-corruption rules gets rid of that, because if you think that you’ve lost a contract because of under the table payments, you are going to get on the phone to the USDOJ telling them about FCPA violations for your competitor.
    If you can’t compete on corruption, then you might have to just suck it in and compete on cost and quality of service. Imagine that….
    What’s a broader issue is the question of whether or not the financial industry *in general* has too much power, but that’s an issue in both China and the United States, and it’s really not about bribes and petty corruption.
    One reason, I think that China has done well is that there is relatively little corruption around the really, really big decisions. While there are under the table payments for things like construction contracts worth tens of millions, for the really, really big decisions that involve hundreds of billions or trillions of dollars, it’s pretty clean. You might be able to get a local official to grant you a land lease with suitcases of cash, but you are just not going to get the Politburo to change the value of the RMB or issue new banking regulations based on that sort of thing.

  • “There are exceptions, like Sidney Rittenberg, but he is the rara avis that proves the rule.”
    Errr . . . Didn’t Rittenberg do time? Twice? Awesome guanxi . . .

  • Nazerath

    FOARP, Actually, Rittenberg lived in China from 1944 and was caught firstly in the civil war, and then on occasion as a spy at the height of Mao’s revolution. Deng Xiaoping was jailed as well. Rittenberg’s circumstances were nothing to do with contemporary business guanxi and Deng’s “guanxi” saw him become Premier.

  • Inst

    I was going to mention how most articles describing guanxi tend to focus on the inherent pitfalls, but fail to focus on the ways guanxi can be used for advantage. Strategically speaking, from what I’ve read, guanxi cannot be exploited except as cement for an existing relationship. Tactically speaking, on the other hand, guanxi is mainly useful for gathering information (who does what in this sector, what are the personal likes and dislikes of a given individual, considerations about the local terrain, etc…) and for opening doors, provided you have a serious business proposition that can be sold to the guy behind the door.
    You can use guanxi to your advantage in this way, by not expecting too much out of it, and not depending on guanxi to be viable, but still using it to gain short-term advantage in a given scenario.

  • B. Chaudery

    I view guanxi as a nice thing, but never a justification for doing anything.As a foreigner, my guanxi is always going to be tied to my Chinese counterparts and thus it will always be at risk of leaving me.

  • oh my…I love this discussion and I think I love Twofish:) Now this may sound very emotional, but my love is based purely on reason…

  • SW

    Great discussion. Keep it up. I am learning so much.

  • cm202bc

    late to the game, but I have to chime in.
    twofish, I always enjoy reading your input, but I think your personal history and point of view is precisely what is leading you astray here. You are a member of a very small, highly educated, subset of society which is focused almost entirely on sound management principles in order to maximize their business success. The vast majority of us are doing business with people who, regardless of their national affiliation, operate from perceptual sets almost entirely derived from unique cultural aspects.
    Guanxi is real. Foreigners in China are foreign, and as a consequence are excluded from certain aspects of the culture, such as guanxi.
    My fiancé received a masters degree from an elite university, despite failing a requisite class that she blew off for work, precisely because of her family guanxi. Her dullard cousin, despite never attending a university, has a lucrative government job which her peers had to fight tooth and nail for in their home province because of guanxi. Her deeply corrupt father remains an influential government official, and rich rather than imprisoned, because of guanxi. This isn’t my interpretation of guanxi in action, guanxi was the explanation my fiancé gave me for each of these situations. I had quite a lot of difficulty getting her to understand why a student at my alma mater back in the US, who received a degree in the exact same circumstance as my she did, later had the degree revoked when a university official leaked the story to the press, and why the university President was forced to resign. I had more difficulty getting her to understand that, despite our relationship, both her actions and those of her father would have resulted in me informing the relevant authorities had they occurred back home . In fact I am not certain she really understands the ‘why’ even now, I don’t have a simple encompassing term that encapsulates the cultural meaning as guanxi does so I doubt the clarity of my explanation, but she accepts that is how business is done there. She protects me from my naïveté here, I will do the same for her there.
    Misunderstandings based on guanxi are not a one way street. My former boss hired me to deal with his foreign partners, then ignored my advice and tried to influence their behavior with culturally specific practices. Of course, they completely missed the import of his actions, and they did not reciprocate in the way he expected them to at the time he needed them to, which lead to a result which was embarrassing for him, and amusing for me.
    Guanxi is real and meaningful. My experience is that guanxi is only accessible to Chinese because foreigners are classified differently in cultural terms. One of my friends, born in China, made her career in America, and is now citizen of Australia, has two daughters raised in America. She insists the daughters are Chinese, despite the fact the kids themselves have nothing but scorn for that idea and regard themselves as American. Most other Chinese agree with her. If they eventually come to China those daughters will have social networks available which are not available to white, black, or brown people. I have lost count of the number of times mothers with children have pointed at me, and said to their small child “That is a foreigner, can you say foreigner?”, in much the same way I would mention a car or a farm animal to my child. They don’t do it because they abhor or reject what is foreign, most of them are quite friendly when I step forward and talk to the child too, it is just that ‘foreign’ is an immutable classification which is regarded as inherently incompatible with Chinese for the majority of people.
    That culturally driven perceptual set has been overridden among your social circle by exposure and education, over time perhaps it will be the same on a wider scale. But for the time being, for the vast majority of us here, it would be a mistake to overlook the eays in which guanxi affects business.

  • Twofish

    One interesting thing that I don’t think you’ve noticed, which is that you have “guanxi” that is unavailable to 95% of Chinese people. Most Chinese people don’t have relatives that are rich officials and simply by having a father-in-law that is a rich official, you are going to have more connections than most Chinese people out there, and the reason that you have these connections is precisely because you are foreign.
    Do you think that a migrant peasant or day laborer would have *any* chance at all of marrying the daughter of an official? I don’t. Also, you may or may not be able to convince your father-in-law to do certain things and even if you wanted to have him help you, you may not want him to help you. But that’s the same with Chinese families.
    The other thing that I want to point out is that overt corruption is pretty rare in the United States now, but it took decades of effort to get to this point. If you go back to the 1920’s, you’ll see all sort of things that are happening in China right now. Political corruption and politics that are built on relationships are something that happens in developing societies. Once societies reach a certain level of wealth, then there are strong political pressures to get rid of them. Case in point Hong Kong. Massively corrupt in 1970. Pretty clean in 2010. Still Chinese.
    cm202bc: You are a member of a very small, highly educated, subset of society which is focused almost entirely on sound management principles in order to maximize their business success.
    Yes. It also happens that most of the people in my social group happen to be Chinese. I’m seeing one part of China, but I don’t think that the part I’m seeing is any less “representative” than the parts you are seeing.
    Informal relationships are used in my business, but they are used in a way that reinforces business effectiveness. Just to give an example. It’s very commonly known that a lot of schools in China just stink and will issue degrees to people for nothing. So if we have someone in my social group that gives someone a recommendation for a job, then this matters a lot, because within my social group, you can get an honest opinion as to whether someone is any good or not. If someone recommends a friend and then that person is a disaster at work, then the person who recommend him or her will lose a huge amount of “face”. The reason that happens is that if someone bad gets in the firm, then all of our jobs and bonuses are at risk.
    cm202bc: My experience is that guanxi is only accessible to Chinese because foreigners are classified differently in cultural terms.
    My experience is quite different. There is a lot of “guanxi” among alumni of Qinghua and Beida, and as far as I can tell, the social relationships are pretty much the same as the social relationships that people at Harvard and Stanford have. In fact if you look at the alumni networks that Harvard MBA’s have, that’s a very good example of a cross-cultural guanxi network. If Henry Kissinger called up some people in the Politburo, he’d get someone to return his calls. If I call up the Politburo and ask for Hu Jintao, no one is going to care who I am. That’s guanxi.
    cm202bc: If they eventually come to China those daughters will have social networks available which are not available to white, black, or brown people.
    No they won’t. Other than family networks, which may or may not be close, and there is nothing particularly unusual about those since you see them in Italian and Jewish families.
    Companies have gotten into trouble when they send over some American-born Chinese that is as socially clueless and fish-out-of-water as someone who is blond. I’m extremely unusual as an ABC because I have and can function in Chinese environments. 95% of the ABC’s I know, can’t (not that they really want to).
    Yes, you may have some people insist that American-born Chinese are 100% Chinese. Those same people will also likely insist that Uighurs and Tibetans are 100% Chinese. So what? Unless you know someone personal, having black hair and brown eyes ain’t going to help you get a job.
    cm202bc: They don’t do it because they abhor or reject what is foreign, most of them are quite friendly when I step forward and talk to the child too, it is just that ‘foreign’ is an immutable classification which is regarded as inherently incompatible with Chinese for the majority of people.
    I’ve found that “foreign” versus “local” is very binary among Japanese. Whether someone is “foreign” or not in China is not a “yes” or “no” question. For example, I’m not a complete local, but I’m not a complete foreigner, and sometimes I’ll semi-intentionally act like the loud-mouth, pushy, get things done now stereotypical American when it’s useful. Am I foreign? Am I local? I don’t think the question makes any sense.
    The other thing that you’ll find is that it’s very often the case that Chinese will be foreigners in China. Take your average migrant peasant that has moved to Beijing. They aren’t going to be pulling guanxi, and they may be more “foreign” to the “locals” than you are.

  • Twofish

    cm202bc: In fact I am not certain she really understands the ‘why’ even now, I don’t have a simple encompassing term that encapsulates the cultural meaning as guanxi does so I doubt the clarity of my explanation, but she accepts that is how business is done there. She protects me from my naïveté here, I will do the same for her there.
    There is a great quote from Upton Sinclair.
    — “It is difficult to get a man to understand something, when his salary depends upon his not understanding it!”
    It’s really quite simple. China has a political and economic system that is more corrupt than the United States, and your girlfriend’s family is part of the corruption. Most people that benefit from political and economic corruption don’t see anything wrong with what they are doing, and it’s not hard to come up with justifications for being part of the problem.
    This is “daughter of a rich corrupt official culture”. There’s nothing specific to China. You’ll see this in Mexico, Russia, Dubai and anywhere else, and where there is political and economic corruption in the US, the daughters are likely to behave in the same way.
    There is a simple experiment to show that there really *isn’t* any weird culture stuff going on here. If you talk to someone that financially benefits from corruption, they aren’t going to see anything wrong with it. Find someone that gets screwed over by it, and you’ll find someone that is hopping mad. Most Chinese people don’t like the fact that the political and economic system is as corrupt as it is, it’s just that they can’t do anything about it, and it’s not clear what can be done.
    In the 1990’s, a lot of Chinese wanted to copy the United States, because the US financial system was seen as better and non-corrupt, but that’s dead because of Enron then Madoff. However, Hong Kong and Singapore are both examples of Chinese societies that have successfully eliminated official corruption.
    Also, if you look at the recent history of China, it becomes clear that it’s not some deep cultural issue. What happened was that in 1975, *any* sort of individual profit making was considered corruption. In 1975, Mao had eliminated any concept of the “honest businessmen” since under Maoist thinking, anyone that benefited from profit was a social parasite. The trouble is that this killed the economy, so once Deng relaxed things, there were basically no rules. So you had “honest business” mixed with “dishonest business” because it wasn’t clear what was what. Over the last decades, China has tried to figure out what sort of profit making is “good” and what sort of profit making is “bad”, and overtime, the rules are becoming clearer.
    The other thing that you do have to worry about is this. On the one hand, there are lots of people in the Party-State that benefit from corruption. On the other hand, there is also a lot of popular anger about corruption, and this ultimately corrodes willingness to support the Communist Party which is what the real senior leaders care about. So what does happen is that from time to time, the Party-State will find a human sacrifice. They find some official that may have lost some internal Party struggle or who pushed the line a bit too hard, and through them to the wolves. There are a lot of Party officials whose only protection is the fact that senior officials can muzzle the press. However, if the senior officials decide that a junior official is too much of a liability, they can withdraw their protection, at which point they get thrown to the wolves.

  • cm202bc

    Given the degree to which my fiancé’s parents hate me, I rather doubt those guanxi networks would be particularly open to me in the event I tried to access them. Regardless, I don’t intend to put myself in a position to find out.
    I agree with the idea that the incidence of corruption in China is very similar to that of America during its period of industrialization, and have said the same to many people. I also expect this to change over time as the central government attempts to stamp it out, but the ease with which my Chinese acquaintances talk of guanxi convinces me it is an enduring cultural attribute. My conclusions about the perception of ‘foreign’ in China could easily be wrong, but I don’t have any other framework that makes sense in which to interpret the way in which they use the word and speak among each other about non-Chinese.
    Most of my acquaintances are very much from the non-privileged class, so I assume them to be more representative than any description of comparably wealthy and highly educated people, though frankly I don’t see a terrible amount of variance in their behavior outside of actions attributable to their income level.
    I agree with pretty much everything you have described about China, but I still have to attribute the examples I listed to guanxi rather than corruption because they are situations in which no money has changed hands from the provider of the guanxi service to the recipient. While I assume benefits or consideration will be extended at some point in reciprocation, at no point will those benefits necessarily be monetary. I cannot consider it corruption without money exchanging hands.
    I wish I could agree about the popular rejection of corruption but it seems too optimistic to me. I have seen plenty of netizen outrage and read the news stories about the occasional sacrificial lamb and public demonstrations, but most of my Chinese acquaintances are from the non-privileged class and every one who is in a position to be on the take is on the take, and they are all rather happy to talk about it freely. It seems to be a point of pride as it raises their income and is accepted by all as a positive aspect of their job. If I can ever meet someone who in position to be on the take but is not, I’ll be able to buy the idea that some of those netizens are more than just jealous at their inability to reach a similar position. It’s a big country, I’m sure I’ll find someone eventually.

  • Jeff

    The mistranslation of “Guanxi” to “relationships” is a straw man. “Guanxi” can be grasped quickly by westerners if translated as “connections,” as in, “he has connections.” The concept is not unique to China, nor foreign to the West.

  • Mariah

    This is an important article because there are a large number of foreigners selling their so-called relationships in the guise of consulting. Not sure if I saw this on one of the comments here or somewhere else, but I agree with the person who said that when a foreigner claims to be connected in China and seek money from you for that, you should run, not walk, away.

  • Rafael72

    Comeing here late to the game but just wanted to add that I have been here 12 years and I agree there are no foreigners who can really get things done on the sly, but the other thing is that even the Chinese who can do that is less than it was. Law and rules are slowely but surely taking over.

  • Regular Reader

    No matter what people say, I think it impossible for anyone to understand the meaning of guanxi unless that person is 100% fluent in Mandarin or some other Chinese dialect and has lived in China for at least twenty years. It is that complicated.

  • BW

    Assuming it is not possible for a foreigner to have guanxi, does it still make sense for foreign companies to try to establish a relationship with the local authorities?

  • Thomas

    Very interesting. I am doing a paper on Guanxi in my World Business class and this article and the discussion are great!

  • TW

    I think the whole point here is that there is Guanxi in China, but as a foreigner you are wasting your time in trying to get it and you are dreaming if you think you have it. I agree.

  • Ringo

    In the end, what we as foreigners have in China is not our connections, it is our knowledge of how things should be and can be.

  • TT

    I had a factory in a relatively small Chinese city and for a while I really thought I had guanxi. I thought I had it because I was given free land and everything was going great for me. That is until the same people who gave me the free land took it all away from me because the whole thing was illegal and I just assumed it was all legal. So when they took it away from me and I hired a lawyer he told me there was nothing he could do. So much for guanxi.

  • Elemental

    Guanxi: Gotta have it. Can’t have it. Makes China life pretty tough, doesn’t it?

  • Cory Mathers

    So true. So true.

  • Ronan

    You have the best discussions on here.