Recently I came across an interesting academic paper titled Mitigation of supply chain relational risk caused by cultural differences between China and the West, written by Fu Jia and Christine Rutherford from Cranfield University and published in the International Journal of Logistics Management, who claim that the Chinese concept of Guanxi may be to blame for the failure of many Chinese-Western joint ventures. The basic contention is that the Chinese establish and groom their business relationships different from what is the norm in Western countries, but is it really so?
The authors start with lamenting that much of the existing literature on supply chain risk is focused on the sources and mitigation of performance risks, like Peck (2006), while only very few have touched on the mitigation of relational risk, like Das and Teng (2001). That is why this paper focuses on a neglected area of supply chain risk, which they call supply chain relational risk (SCRR) and its mitigation. Jia and Rutherford define Supply Chain Relational Risk as
The risk to the supply chain of either party in a buyer-supplier relationship not fully committing to joint efforts due to either problems associated with cooperation or problems associated with opportunistic behaviour.
I think the key phrase here is not fully committing to joint efforts, as a supply chain can only work effectively if all members or parties are fully dedicated to making it work. What then is it that makes Chinese or Western businesses not fully commit?
Oversimplified, the basic cultural difference in managing supplier-buyer relationships between China and the West can be summarized by this: contracts (rules) versus connections (ties and networks) or “Guanxi”, as it is termed in Chinese. Guanxi is hard to explain and can best be described as
a special type of relationship that bonds the exchange partners through reciprocal exchange of favours and mutual obligations
Guanxi is a the root of all business transactions in China, something that is perhaps overlooked by many Westerners, beliveing that once a relationship has been established (with the help of a little Guanxi, or maybe not), it can then be governed by conventional contracts. Not so.
The authors go on to describe the cultural differences between China and the West in more detail:
Collectivists, such as the Chinese, place group goals and collective action ahead of self-interest and gain satisfaction and feelings of accomplishment from group outcomes. In Chinese society, it is specifically the interests of the family that is put before individual interest. In the West, self-interest is more often than not put higher than group interest.
The Guanxi network or extended family network is probably the most important informal institution in the Chinese-speaking world. Respect for age, authority and social norms stem from the Confucian concept of li, which refers to rite and propriety in maintaining a person’sposition in the social hierarchy. Another major characteristic of Chinese culture is the maintenance of internal harmony, which is most likely to be achieved by compromising individual interests and choosing social conformity, non-offensive strategies and submission to social expectations. In the context of management, the Confucian li principle favours organizational hierarchy and centralized decision making, which means that the Chinese are more willing to recognize and accept a hierarchy of authority than their Western counterparts, as well as depending on the decision of their supervisors without question. In the West, people are governed by multiple institutions such as laws, regulations and procedures rather than hierarchy.
Models that describe relationship building in a Western context are similar in that they define the sequential stages of an evolutionary process from initial partner contact through to commitment/dissolution. Chinese society places great stock on the importance of face (mianzi), which is an intangible form of social currency and personal status affected by one’s social position and material wealth, while renqing is first a set of social norms by which one has to abide in order to get along well with others in Chinese society; and second a resource that an individual can present to another as a gift in the course of social exchange. Relationship building in China is dominated by the forces of Guanxi and as such is informal, has a long-term orientation and is based on the interplay of face and renqing, i.e. it occurs at a personal level. In the West, the process of building a relationship has a short-term orientation, is more formal and based on the interplay of competition and cooperation, i.e. it occurs at a corporate rather than personal level.
Much of the article is based on Fu Jia's PhD thesis with the same topic, Cultural adaptation between Western buyers and Chinese suppliers, available for download from the University of Cranfield, so I assume there is some solid research behind the contentions.
Or is this simply not true? My original posting on Guanxi was picked up by the China Law Blog, where the comments ranged from discarding Guanxi as "utter nonsense", to "it does matter", so I'm left a bit confused here. What is your take on Guanxi? Is it really something that must be considered?