Given this background, several questions arise: To what extent does guanxi promote a fair competitive edge for business? Do the honestly gained advantages of guanxi outweigh the potential for abuse or mis- conduct? The business conduct issues raised by guanxi are discussed next.
Corruption
It is important to note that tapping relationships to facilitate business, while sometimes controversial, is not the equivalent of corruption. The Chinese tend to draw a clear line between appropriate use of guanxi and abuse in the form of bribery or corruption.
Guanxi has several characteristics that differentiate it from corruption (Luo 2002: ch. 4):
• Time orientation. Corruption is based on a short-term, transaction-based exchange, whereas guanxi is a long-term relationship. Furthermore, no time limits are expressed for guanxi-related favors; corrupt activities generally have explicit deadlines that must be met.
• Morality. Guanxi is an ethically accepted practice in Chinese society, whereas corruption is considered immoral.
• Legality. Guanxi is legal and admired in Chinese society; corruption is illegal and is widely condemned.
• Nature of transaction. Guanxi involves an exchange of favors, as opposed to a monetary exchange. Moreover, guanxi is inherently a social transaction—the cost of noncompliance is a loss of face.
Corruption, by contrast, is an economic transaction that has legal con- sequences.
• Transferability. Long-term guanxi ties (and obligations) can be trans- ferred to other members of a network, whereas corruption is generally a transaction-based covert relationship between two individuals.
These distinctions notwithstanding, in some instances guanxi helps create conditions in which corruption can take root (see box CS.6).
Cronyism
Two companies are competing for a contract. The company that makes an inferior bid is awarded the deal. The key decisionmakers share close guanxi ties. Is this a clear case of cronyism? While cronyism is a possi- bility, it must also be remembered that the Chinese generally prefer to do business with people they know and trust because this can lead to long-term business benefits and better deals in the future. Although such situations may elicit allegations of cronyism or favoritism, it is not valid to say that such use of guanxi is a de facto case of cronyism.
As with corruption, however, guanxi ties can be used to facilitate Box CS.6. Letting in the Light in a Trade Office
In his memoirs, N. T. Wang, a Harvard-educated economist, recalls that he was offered his first job—in China, after World War II and before the Communist Revolution—through “the Chairman,” with whom he had personal guanxi. He accepted the position without any knowledge of the position or even a discussion of salary. On relocating to China, he learned that he was to become chairman of the Economic Commission for several northeastern provinces and that he would be responsible for all the region’s imports and exports.
Given the lucrative business at stake, both the position and the department were susceptible to corruption. Wang notes that there was no system of checks or balances, nor were there clear lines of authority or oversight. He recounts one occasion when he was offered a six- figure U.S. dollar sum to grant a license to an individual. Although he walked out on the person, he did not feel comfortable taking legal action: he felt that there was insufficient evidence to pursue the case legally, and he was concerned that the person would turn the tables and accuse him of soliciting a bribe. Thus, he saw no benefit to blow- ing the whistle.
Wang describes the policy of “complete transparency” that he fol- lowed to ensure that his department remained free of corruption. He made all policies and procedures public information, posted licenses for public inspection, and invited journalists to ask questions about commission decisions. He found this Western-style “sunlight”
approach effective in combating bribery.
Source: Wang (2001).
cronyism, even though that is viewed as an improper use of guanxi in Chinese culture.
Nepotism in Hiring
The Chinese preference, particularly in smaller family-owned firms, for hiring people who are known and trusted raises concerns about nepo- tism when candidates who are professionally more qualified are rejected in favor of a candidate with good guanxi. In addition, recruit- ment decisions are sometimes influenced by the guanxi that a potential new hire brings to the organization. Since guanxi is primarily rooted in interpersonal relationships, employees bring their guanxi with them when they join a new organization.
Gift Giving and Entertainment
Gift giving and entertainment are important cultural traditions and play a key role in building and cultivating guanxi. Such practices are gener- ally seen as a sign of goodwill and respect and are viewed as legitimate investments in the relationship. It is important to note that the Chinese generally distinguish between genuine guanxi and superficial attempts to influence a relationship by “wine and meat friends.” Similarly, inap- propriately lavish or impersonal gifts may be viewed not as legitimate guanxi building but as improper attempts to influence the outcome of a business decision. This is exemplified by the case of Beijing’s former mayor, Chen Xitong, whose extensive collection of Rolex watches and other luxury gifts was widely publicized on Chinese television and who was sent to prison for corruption.
Lack of Financial Transparency
Just as guanxi centers on bonds of trust, it is also true that those with whom one does not have guanxi are often viewed warily, or at least with a healthy dose of suspicion. Chinese businesses, much like private com- panies elsewhere, are reluctant to share information about their compa- nies with unaffiliated outside parties.
When one considers the often hostile environments within which Chinese firms operate, this reluctance is understandable. Interestingly, it has been noted in the Asian press that an Enron-type massive deception of investors could not happen in Southeast Asia, where investors are much
less likely to assume when they review public information that they are receiving a full and accurate reflection of a company’s financial perfor- mance. Nonetheless, disclosure practices are gradually evolving in the direction of transparency as more Chinese companies go public on inter- national stock markets.
Whistle-Blowing
Whistle-blowing is relatively rare in guanxi-based cultures. This is because delivering on one’s obligations in the relationship generally takes precedence over fulfilling personal and societal perceptions of fairness, integrity, and the public good, lessening the likelihood that a person will make the difficult moral choice of reporting misconduct to outside authorities. In addition, there are sometimes legitimate concerns that the other party will turn the tables and counteraccuse.