This article is republished with permission by China Business Knowledge at Chinese University of Hong Kong Business School. You can access the original article here.
Research finds that traditional guanxi-style connection-building is no longer the main key to success when doing business in China, and a new generation of Chinese entrepreneurs form business ties based on reputation and capabilities
A word that every businessman who has ever done or considered doing business in China knows is guanxi. At its core, it refers to the practice of building a network of mutually beneficial relationships, with the goal of facilitating business transactions. The old Western axiom: “It is not what you know, but who you know that’s important,” sums up the concept well.
Despite its historical and traditional importance to the art of wheeling and dealing in China, a recent study has made the surprising finding that guanxi is no longer the bedrock of business that it used to be, and that Chinese entrepreneurs are now adopting different networking styles when building their business networks.
The study Entrepreneurs’ Networking Styles and Normative Underpinnings during Institutional Transition was co-conducted by David Ahlstrom, Professor in the Department of Management at The Chinese University of Hong Kong (CUHK) Business School, Prof. Wang Tao at Kyoto University and Prof. Zhang Chenjian at the University of Bath in the U.K. The three researchers compared two generations of entrepreneurs in China and were able to identify three networking styles: guanxi-oriented networking, market-based networking, and a mixture of both guanxi and market-based networking.
“Building business networks is important for entrepreneurs because it opens doors for them, in terms of resources and opportunities. In the context of China, it is widely thought that guanxi is everything. But, for a country that has gone through so many changes and with an economy that has been developing so fast, is guanxi still important? Why do people believe in guanxi? Hopefully, our study provided some answers to these questions,” Prof. Ahlstrom says.
Different Generations of Entrepreneurs
China began to reform its economy in 1978, but it was not until the late leader Deng Xiaoping’s tour to southern China in 1992 that the reforms truly accelerated the country’s transition from a planned economy to a socialist market economy. Another major milestone was the year 2001, when China was admitted to the World Trade Organisation with the widespread expectation that this would lead to deepened reform towards a full-fledged market economy. These two key historic events provided the backdrop for the researchers to look at the evolution of how Chinese entrepreneurs formed and made use of their business ties in the changing context.
In a sense, the concept of guanxi is not dissimilar to the widespread good practice in most other countries of developing strong business networks. The difference is that in China, guanxi tends to take simple networking to a whole new level. Elsewhere in the world, it is not uncommon for business deals to be brokered in formal settings. On the other hand, in China practitioners of guanxi-building would devote time and effort outside of the work setting to deepen that relationship, for instance over meals and drinks.
For guanxi ties to form, they also usually necessitate a formal introduction by an intermediary who knows both parties. Once acquainted, both parties may seek to deepen the relationship through reciprocal favours – if one side helps the other out, there is the expectation that they would be repaid at some point in the future.
To go about their study, the researchers collected their data by interviewing Chinese entrepreneurs and transcribed the interviews into over 500 pages of transcript. They selected two generations of entrepreneurs: the older generation who started their businesses in 1992 to 2001 and newer entrepreneurs who began their business ventures between 2002 and 2009.
They found that more than half of the older generation of entrepreneurs maintained the usage of guanxi. In comparison, more than half of the later generation of entrepreneurs established more market-based ties, meaning that they relied on their business reputation and professionalism to generate new business ties from unfamiliar individuals and companies. Interestingly, some entrepreneurs, old and new, used a mixture of both guanxi and a market-based approach in their networking.
“The entrepreneurs who used the mixed approach are perhaps the most pragmatic and flexible businessmen in the group. They know that they are standing at the crossroads of old and new, and they tried to get the best of the two very different networking styles. On the one hand, they didn’t forget their roots by maintaining good guanxi with important figures. On the other, they welcomed the changes brought by the transition into a market economy and they learned to be more professional in doing business and networking,” Prof. Ahlstrom says.
Guanxi, Market-based or Both?
According to the study, practitioners of guanxi consider it as an important tool in securing resources and business opportunities in China. These entrepreneurs believed that maintaining and using their guanxi ties – people with connections to the government, state-owned enterprises and other influential market participants – could provide them with access to key resources and opportunities
On the other hand, advocates of the market-based networking style tended to take advantage of good personal and business reputations to make new business ties. These entrepreneurs would form ties only when they had confirmed that these business connections are capable and beneficial. They usually search for business partners by attending industry symposiums, conferences, alumni and business gatherings. The study notes that these entrepreneurs recognise the benefits of guanxi ties, but prefer to devote their time and effort into enhancing their business products, services and building their business reputation to attract good quality business partners.
The third type of entrepreneurs used a mixture of guanxi ties and market-based networking. These entrepreneurs adopted different networking styles when dealing with different business partners. For instance, when they interacted with international or domestic business partners who value business reputation over personal connections, they would adopt a market-based networking style. They are also easily able to switch back to a guanxi style of networking when needed. These entrepreneurs tend to think of guanxi as a ticket and shortcut in the business world. Once this door is opened, they would then look to build their business reputation and establish business ties through good products and services.
“Guanxi-oriented networking is all about building interpersonal relationship networks, whereas market-based networking values economic instrumentality. In other words, the key is to produce actual economic values and outcomes. A mixed style is about flexibility and making accommodations according to different circumstances. The fact that there are these different networking styles that are being used and co-exist in the modern Chinese business context really sparked our interest, and we wanted to find out their underlying mechanisms,” Prof. Ahlstrom says.
Underlying Mechanisms
First of all, the researchers found that entrepreneurs’ expectations and understanding of the surrounding market environment impacted considerably which networking approach they would choose to take. For instance, when entrepreneurs felt that market development was inconsistent and they were sceptical about the deepening of market reform, then they would maintain and invest in guanxi networking because it provided them with business shortcuts and may help to mitigate risks. On the other hand, entrepreneurs who had more faith in market development would pay less attention to policy and regulation inconsistency. They would focus on building their own capability than relying on guanxi ties to become successful.
The second mechanism is based on past interactions between entrepreneurs and their business partners, and how they expect that to evolve going forward. According to the study, some entrepreneurs would choose to conform to social norms that prioritise familiarity, reciprocity and obligation, and adopt a guanxi-oriented networking style. On the contrary, when entrepreneurs prioritised providing business solutions and creating value over maintaining social ties, they would adopt a market-based networking style.
The third mechanism is linked to entrepreneurs’ identities, specifically as the study points out, whether they identified themselves as “rule-bending actors” or “market builders” in the context of China’s market reform and development. The former type of entrepreneurs tends to stick to relying on guanxi whereas the latter type would commit to a more market-based style of networking.
In addition, the study notes that when entrepreneurs identified with both old cultural traditions and new market reform values, and they realised they need to cater to different expectations of business interactions, they would adopt a mixed networking style.
“Our study offers a good foundation for a deeper understanding of the relationship between entrepreneurs’ networking behaviours and their underlying mechanisms in transition economies. It also offers those who are interested in doing business in China a more enriched view of how Chinese entrepreneurs network and how to effectively build their own business networks,” Prof. Ahlstrom says. “Guanxi is no longer everything, but you may want to be flexible when dealing with the different people in the business world of China.”
The authors of the study also point out that the research was conducted in Shanghai in 2009. There may be regional differences in how entrepreneurs network across China. In addition, there has been political and economic changes after 2009. They hope that this research could lead to future research exploration to better understand entrepreneurs networking in China.
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