Doing Business in China

      Doing business in China

-What is guanxi?

In china, this permeates into business dealings, encompassing social and economic contracts. Social capital and relationships. Fundamentally guanxi is about building a network of mutually beneficial relationships which can be used for personal and business purposes. However, in China, guanxi plays a far more important role than it does in the West.

-When to use?

Lack of free market mechanimsms in trading, lack of openness and transparency in trading, the market structure of an industry is not competitive. There are certain sectors or industry highly restricted or protected by the government. Certain materials or resources are not available in the market.

-Guanxi in china

  Guanxi is one of the most significant factors for success in China due to the Confucian principles embedded in China’s culture. Chinese people needed to build a relationship to assure trust amongst themselves in personal and business affairs. Furthermore, over the past years, China has turned into a major player in world trade and has been attracting considerable foreign investment. Therefore, Chinese entrepreneurs utilize guanxi to obtain the necessary resources for company development. This essay objective is to investigate the role of guanxi in Chinese business. Then analyze the reason why foreign investors adjust their business practices in order to conduct business in China.

  A transitional economy, markets are imperfect, information is highly imperfect, enforcement of contracts is uncertain. Role of PRC business group networks: access resources horizontally from other firms and vertically from government agencies. Business groups comprise of organized guanxi, as an informal institution to reduce transaction costs. The role of guanxi is to reduce uncertainty and increase the flow of information. When uncertainty is high, decision-makers turn to those with whom they have dealt successfully in the past to avoid malfeasance and opportunism. Target firms with whom their partners are connected because it is easier to assess potential partners. Use prior connections, allowing partners to learn about others abilities and capacities and set up an infrastructure of relatinships.

  The right guanxi can make all the difference in ensuring that business will be successful. With this, an organization can minimize risk, frustration and disappointment when doing business, such as Walmart.

  MNEs need to deal with guanxi at all levels. Not just focusing on the central government or local government. Guanxi networks can change: newbridge capital. Keys to success: extensive connections, also being a member of one of the top advisory bodies consulted by the central government.

What Guanxi is not

While guanxi is an important part of doing business in China it is not the be-all and end-all of it. Having strong relationships alone will not ensure that you will be able to achieve your business goals in China. Your company will still need to have a strong overall business operation in order to be successful. You should also treat with scepticism those who claim that guanxi alone can enable your company to succeed in China. While these connections can help you open doors and find new opportunities, your company will still need all of the other components of your business to be strong if you want to grow in China.  

Why Guanxi is Important in China and for Your Business 

Guanxi‘s importance in China has developed as a result of the cultural implications of the rule of law and the concept of face. For millennia, China has lacked a strong rule of law. Because the law has not often been able to provide the legal protections which it does in the west, Chinese people needed to develop another means of ensuring trust amongst themselves in personal and business matters. Maintaining face, or reputation, among people within one’s own network is also an important characteristic of Chinese culture. Because of the importance of maintaining face, Chinese people will usually not take advantage of a person with whom they have guanxi. This is true because if they develop guanxi with them and they were to take advantage of them, all of the people in their network would know what they had done and they would lose face with this network. By losing face they would also lose the respect of others in the group and potentially lose their connection with their network. Therefore guanxi has become a means of building trust that law cannot always provide for Chinese people in personal and business matters.

For these reasons, a Chinese company will feel far more comfortable doing business with a company which they have strong guanxi because they believe it will make it far easier for them to trust their business counterpart. It is equally important for foreign companies to develop strong guanxi with Chinese companies and government organisations. This guanxi will help your company in case you run into problems doing business in China. In addition, Chinese companies will feel more comfortable doing business with you if they have strong guanxi with your either because you have built a strong relationship with them or you were introduced to them by someone in their network.

 Introduction:

The challenges associated with building relationships and trust with local business partners, clients and customers, and with government officials can be a challenging aspect of doing business in China. While establishing a business presence in China has become more straightforward in recent years the problems associated with identifying key contacts in partner, client and government organisations, establishing mutually beneficial and trustful working relationships with them, and developing meaningful channels of communication have now become more pronounced.

Building relationships is by some distance the best way to overcome many of the obstacles to doing business in China. In a highly competitive business environment, it is more important than ever for us to understand the business culture of our target markets. Understanding business culture helps us understand, anticipate and respond to unexpected behaviour. It also enables us to behave in an acceptable way and avoid misunderstandings. As the Chinese saying goes: ru jing sui su – “When you enter a region, follow its customs”. In business, guanxi must be regarded as a two-way relationship. We are all familiar with the expression “You scratch my back, and I’ll scratch yours”. But in guanxi, the obligation does not cease with the second scratch, and the other side will have expectations that the relationship will continue. It is not about making fair-weather friends. If you expect guanxi to deliver, relationships must be maintained through regular contact.