In China, Clearing the Guanxi Hurdle

For outsiders seeking entry into Chinese markets, understanding how social network ties – known as guanxi – govern the art of business in China is essential. While guanxi can be exceedingly difficult to master, two Queen’s School of Business researchers provide clues to how ties differ if you are dealing with other business managers versus government officials.

The practice of guanxi is often touted as the key to unlocking business success in China. Past research has found that it can lead to greater sales growth, expanded markets, and higher organizational performance. When it comes to guanxi development, however, subtle differences distinguish business-to-business (B2B) relationships and business-to-government (B2G) relationships.

“[This research] is important because it actually quantifies the issue,” says Bu. “It gives you a sense of how often Chinese managers are interacting with each other, what the venues of their interaction are, and how they maintain equity in a guanxi relationship.”

Differences Between B2B and B2G Guanxi Ties

B2B guanxi ties in China are becoming more similar to networking practices in Western societies, the researchers note. With the growth of the market economy in China, a sturdy network helps firms contract suppliers, reduce costs, and reap market intelligence and investment opportunities.

The need for guanxi ties between managers and government officials is equally strong, if not more so. Regulations governing businesses in China remain opaque, ambiguous, and uncertain. “There’s really an institutional void in China, which is why government officials there are so powerful,” says Roy. “The regulatory environment is weak, so officials have the power to interpret regulations and enforce them based on their discretion.”

Traditionally, guanxi relationships sprung mainly from pre-existing kith or kin ties, as relationships among family and close friends are highly valued in China and foster a deep level of trust. Nowadays, thanks to China’s growing free market, B2B ties have branched out, forming more frequently among work colleagues — including suppliers, customers, and investors across firms.

Nearly 64 percent of B2G ties still come from pre-existing relationships, nearly 20 percent higher than B2B ties

In contrast, 63.5 percent of B2G ties still come from pre-existing relationships, nearly 20 percent higher than B2B ties, according to research by Bu and Roy. This is likely due to two reasons. First, firms operate in local territories for administrative purposes, such as taxation and land leasing, which makes it easier to draw from a pre-existing group. And second, since confidential information is often shared in B2G guanxi relationships, it is essential to have the high level of trust already inherent in Chinese kith or kin relationships.

Since B2B relationships are not as often formed from these pre-existing relationships, there is a need to actively build trust and rapport. Indeed, Bu and Roy found that managers in B2B ties tend to discuss personal matters more frequently than those in B2G relationships.

On the other hand, their study showed that business managers discuss confidential work information with government officials to a much greater extent than they do with their business counterparts. This typically consists of privileged policy information on the officials’ end and sensitive corporate information on the managers’ side. In B2B ties, information exchanged between managers can be highly instrumental in their own and their companies’ success but is not necessarily confidential.

The Care and Feeding of Guanxi

Business-to-business ties also spend more time together, with 97 percent of them meeting at least monthly to discuss routine information, frequently at either manager’s workplace or at a restaurant or café. By contrast, 80 percent of B2G ties meet at least monthly, but they are relatively less likely to do so at work, opting instead to meet at the official’s home – which is a sign of respect for the higher-ranking individual – or at a dining establishment.

Avoiding workplaces can also keep B2G guanxi ties and their discussions of confidential information less public. Chinese managers are sensitive to the potential negative perception and ramifications of their government guanxi, the researchers say. The Chinese are “resentful of the fact that individuals are treated differently by their government depending on the reach of their guanxi circle,” says Bu. “And the use of guanxi with government officials in certain circumstances can face censure by the authorities. So those who do use government guanxi can feel uneasy.”  

Since many government officials can offer favours that business managers are not able to match, managers in B2G guanxi ties often reciprocate with gifts

Managers tend to call on guanxi ties when facing tough challenges, which works to both solve the issue at hand and strengthen the relationship. Members of strong guanxi do their best to assist one another and reciprocate past favours in kind; remaining “in debt” to a guanxi partner without even a gesture of repayment is considered shameful. To help maintain equity in a guanxi relationship, tie members who have received a favour will either reciprocate in kind or repay with an act of respect and honour, such as paying a home visit or offering a gesture of gratitude, such as a gift.

Since many government officials can offer favours that business managers are not able to match, managers in B2G guanxi ties often reciprocate with gifts. In contrast, managers in B2B guanxi ties usually hold equal power and can match one another’s favours more easily. This could explain why managers exchanged gifts 25 percent less often in B2B ties than in B2G ties, according to the Queen’s School of Business researchers.

Lessons for Foreign Managers

Bu and Roy hope their research helps foreign managers better understand the nuances of how Chinese managers navigate guanxi relationships. The Chinese generally do not want to work with people they do not have guanxi with, they say, which makes establishing a relationship highly important in a Chinese business setting.

One area particularly challenging for foreign managers is in establishing B2G guanxi because they lack pre-existing kin or kith ties. “This is an area where your local employees can be particularly valuable,” says Roy. “Localization is very important, and often when multinational firms go to China, they’ll form ventures with local firms, partly because local firms tend to have better B2G relationships.”

The researchers also point out that kin or kith relationships do not have to be close or direct. A Chinese friend’s distant relative could be a government official, which could be enough to initiate a relationship. The message for outsiders, therefore, is to continue expanding relationships in the Chinese community; one never knows where they may lead.

— Kenza Moller