Asia-Pacific Business Series - Vol. 5 GUANXI AND BUSINESS 2nd Edition YADONG LUO University of Miami, USA World Scientific NEW JERSEY LONDON SINGAPORE BEIJING SHANGHAI HONG KONG TAIPEI CHENNAI
CONTENTS Preface v 1 Definition, Principles, and Philosophy of Guanxi 1 1.1 Concepts 1 Definition 1 Basis for Guanxi Establishment 4 Modes 7 1.2 Principles 10 1.3 Philosophy 12 1.4 Guanxi in Social Life 20 1.5 Gifts, Bribes, and Guanxi 26 1.6 Importance in the Future 31 1.7 Theoretical Directions 33 1.8 Practical Examples 36 Minicase 1: Guanxi is His Middle Name 36 Minicase 2: A Smuggler with Guanxi 37 2 Economic Perspective of Guanxi 41 2.1 Economic Rationale of Guanxi 41 Social Capital 41 Economic Necessity 43 Economic Idiom 49 2.2 Guanxi versus Western Networks 50 2.3 Guanxi as a Critical Capability 52 2.4 Business Implications 57 2.5 The Use of Guanxi by Overseas Chinese 61 Economic Perspectives 62 ix
x Guanxi and Business Cultural Perspective 66 2.6 Practical Examples 69 Minicase 1: The New China Hong Kong Group on the Mainland 69 Minicase 2: Guanxi: The First Step in Any China Venture 72 Minicase 3: Business Connections by Big Six Accounting Firms 74 Guanxi and Firm Performance 79 3.1 Conceptual Background 79 3.2 Guanxi and Performance 82 Guanxi with Other Businesses 82 Guanxi with Government Officials 84 Market versus Financial Performance 85 Necessary versus Sufficient Condition 86 Empirical Evidence 88 3.3 Managerial Implications 90 3.4 Practical Examples 92 Minicase 1: Acer in China 92 Minicase 2: AgriGlobal in China 95 Minicase 3: Dell Strengthens Guanxi with Its Customers 97 Minicase 4: Chase Capital Uses Guanxi to Expand Its Asian Business 98 Minicase 5: Valuing Connections for Hong Kong's Red Chips 100 Organizational Dynamics and Guanxi 105 4.1 Guanxi as Inter-Organizational Network 105 4.2 Organizational Dynamics and Guanxi 109 Institutional Factors 111 Ownership structure 111 Location 112 Strategic Factor 113 Strategic orientation 113 Organizational Factors 115
Contents xi Organizational size 115 Resources 117 Length of operation 118 4.3 Empirical Evidence 121 4.4 Practical Examples 123 Minicase 1: Does Guanxi Matter in KFC? 123 Operations in China 124 Guanxi relations 124 Minicase 2: Why is Shanghai Volkswagen Successful? 126 Minicase 3: Guanxi, Used by Sony 130 Gwa«;d-Based Business Strategies 135 5.1 Guanxi-based Business Strategies 135 5.2 Impact of Guanxi-based Business Strategies 138 5.3 Managerial Implications 141 5.4 Practical Examples 143 Minicase 1: Sony in China 143 Minicase 2: AST Owes as Much to People Connections as to Electrical Ones 145 Minicase 3: Dell in China 147 Minicase 4: CSI in China 150 Minicase 5: Selling in China 153 Minicase 6: Charoen Pokphand in China 155 Foreign Businesses and Guanxi 159 6.1 Foreign Businesses in China 159 Shifting Environmental Conditions 161 New Competitive Landscape 162 Shift from scant competition to strong competition 162 Shift from niche competition to massive competition 163 Shift from single-market conception to multi-market competition 165 Shift from structural similarity to structural multiplicity 166 New Regulatory Landscape 167 Shift from entrance restriction to operational intervention 167
xii Cuanxi and Business Shift from overt control to covert constraint 168 Shift from separation from to convergence with domestic policies 170 Shift from regulatory rigidity to regulatory elasticity 171 Shifting Dominant Strategies 173 Shift from parent integration to national integration 173 Shift from production relocation to value chain localization 177 Shift from competence transfer to competence building 179 Shift from competition to coopetition with business community 182 Shift from repetition to adaptive diversification 186 Shift from alliance building to alliance restructuring 188 6.2 Guanxi and Foreign Businesses 190 Partner Effect 190 Origin Effect 191 Length Effect 191 Size Effect 192 Empirical Evidence 193 6.3 Implications and Examples 194 Minicase 1: Hewlett-Packard's Initiatives to Build up Guanxi 194 Minicase 2: Toyota in China 199 Minicase 3: NEC in China 202 Minicase 4: Boeing in China 206 7 Guanxi, Corruption, and Governance 211 7.1 Nature of Corruption 211 Definition 211 Differences Between Corruption and Guanxi 215 7.2 Corruption in China 218 Current Situation 218 Types and Reasons 222 7.3 Intertwineability Between Guanxi and Corruption 227
Contents xiii 7.4 Economics of Corruption 230 7.5 Business Implications of Corruption 237 Corruption as an Evolutionary Hazard 238 Corruption as a Strategic Impediment 240 Corruption as a Competitive Disadvantage 241 Corruption as an Organizational Deficiency 242 7.6 Governance and Guanxi 243 Corporate Governance in China 243 Guanxi and Governance 247 7.7 Governance and Corruption 250 7.8 Taxonomy of Corruption 252 7.9 Corruption and Organizational Environment 256 Corruption and Task Environments 257 Corruption and Institutional Environments 260 7.10 Corruption and Organizational Behavior 263 System Malfeasance 264 Procedural Malfeasance 265 Categorical Malfeasance 266 Structural Malfeasance 267 7.11 Corruption and Organizational Architecture 268 Corporate Culture 269 Organizational Structure 270 Compliance System 272 Conduct code 272 Compliance program 275 7.12 Practical Examples 281 Minicase 1: Corruption in Yuxi Cigarette 281 Minicase 2: Bribe with Care 287 Minicase 3: Rough Justice 288 Minicase 4: Zhu's Hatchet Man in Guangdong 291 Minicase 5: Anti-corruption by Shell 294 Winning over hearts and minds 296 Inter-company corruption 298 A worthy fight 299
xiv Guanxi and Business 8 Practical Guidelines to Guanxi Cultivation 301 8.1 Constructing Your Own Guanxi Network 301 8.2 Utilizing Intermediaries 304 8.3 Searching for the Right People 305 8.4 Implanting Individual Guanxi into Organizations 307 8.5 Hiring Locals and Dispatching Ethnic Chinese 307 8.6 Monitoring Guanxi within an Organization 309 8.7 Maintaining Guanxi Relations 310 8.8 Improving Credibility 311 8.9 Practical Examples 313 Minicase 1: GM in Shanghai 313 Minicase 2: Xian-Janssen 317 Minicase 3: Motorola in China 320 Minicase 4: Solving Staffing Problems 323 Minicase 5: Joint-Venture Mode and Guanxi 326 Minicase 6: "Guanxi" Man Smooths Road to China 330 Appendices 1 Summary of Anti-Corruption and Anti-Bribery Laws and Rules in China 331 2 Summary of Anti-Corruption and Anti-Bribery Laws and Rules in the United States 340 3 Transnational Cooperation in Combating Corruption and Bribery 349 4 OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions 360 Bibliography, 371 Index 383 About the Author 397