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Guanxi or关系: one word, many interpretations

Posted by Chad O'Connor  September 27, 2012 11:00 AM

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Roy Chua, Harvard Business School
While there is no shortage of U.S. companies building successful business relationships in China, the dynamic and roadmap to do so continue to evolve. Roy Y.J. Chua, assistant professor of business administration at Harvard Business School, discusses the role of trust in building intercultural business relationships, specifically two types of trust: cognitive trust and affective trust. Chua’s recent contribution to MIT Sloan Management Review, “Building Effective Business Relationships in China,” provides depth and detail on his theories and observations. The following is based on a conversation with Chua about this article, and recommendations for Western businesses developing Chinese relationships.

Chinese companies have become more Western in their approach to business, but that doesn’t mean long-standing cultural expectations have disappeared. Western executives heavily study the concept of guanxi but the concept often proves to be one that education, books and articles cannot truly capture. Guanxi, according to Wikipedia, “describes the basic dynamic in personalized networks of influence, and is a central idea in Chinese society.” This deeply embedded cultural facet informs both business and personal relationships in China.

The Boston business community may loosely interpret guanxi as networking – something Bostonians are quite good at – but it goes much deeper, encompassing a system of personal connections, expectations of action relative to those connections, and trust within the network. However, while Chinese businesses still practice guanxi deeply, including in their relationships with Western businesses, it is no longer the primary driver of a successful business relationship. Chua describes the Chinese business environment as one that now relies upon “trust from the head and from the heart.” While guanxi and networking share many similarities, there are systematic differences across cultures, especially in the way interpersonal trust is built.

Cognitive trust, a recognition and acceptance of a counterpart’s skills, expertise and reliability is coupled with affective trust which is built upon empathy, rapport and a personal connection. These two types of trust move Chinese business beyond a traditional view of guanxi which focuses on “who you know” and should serve as a new path for Western businesses to approach their Chinese partners. “People all around the world rely on networks and relationships to get things done; this isn’t specific to China. But guanxi is different in that it tightly intertwines cognitive and affective trust,” Chua explained.

Boston-area companies have much to offer in terms of cognitive trust. According to Chua, our world-class education institutions and technology expertise, along with recognition for our medical device and pharma industries lend credibility when approaching prospective Chinese partners. Boston is a known entity within China, possibly easing entry into business relationships there.

“There’s a lot that American, and specifically Boston, businesses can offer to China in terms of competence. In Boston especially there is technology and R&D that a Chinese counterpart would value,” said Chua. Generally speaking, Chua suggests that businesses going into China should identify a clear business need that the Chinese company has – for example, knowledge/intellectual capital, specific technology or research capabilities.

Of course, cognitive trust is only half the equation. Chua lists three critical steps to implement in order to improve the value proposition for a Chinese counterpart.

• Form a personal connection - this ability is vital to building a long-term relationship. A key to these relationships is building affective trust. Here, ethnicity is important and continues to play a role in cross-cultural relationships. A study of Chinese CEOs that Chua and his colleagues conducted found that these senior executives place more affective trust in other Chinese than non-Chinese overseas partners. To cut across boundaries, Chua suggests there is value in including employees of Chinese descent, or identifying native Chinese business liaisons, to play a role in establishing affective trust.

• Have an accurate sense of China – its culture, business environment and the value of relationships. Misperceptions of China abound, Chua believes. Inaccurate, incomplete or exaggerated media portrayals of the country create a biased view of China. Chua recommends businesses spend time in China to get a truer sense of its culture ahead of attempting to strike a business relationship.

• Know the language - it's critical for the point person or team to speak the language of their Chinese peers. Beyond building affective trust, it simply brings teams closer. Chua states: “Awareness and exposure to the Chinese language helps you to build a better relationship.”

Guanxi: One Word, Many Interpretations
Elements of the Eastern and Western business worlds have started to come together. Chinese businesses have adopted Western practices – employees attend networking events, the country gradually offers greater transparency and an evolved legal system, and companies focus more on business value in their relationships. Chua believes this transition eases entry into China for Western companies. But he also feels Western companies should become more culturally sensitive in their approach. “While China is evolving, if you want to do business there, you can’t be successful without respecting and practicing local Chinese business traditions.”

It’s not a matter of a U.S. company forgoing its own culture, Chua says, because that is part of what makes a Western company an attractive partner to a Chinese company. Blending both cultures creates a sense of empathy and respect that makes doing business easier. “Relying solely on relationships just doesn’t work anymore. Chinese companies are looking for a real value-add,” Chua shared.

There are challenges and discrepancies within the business cultures of each that create issues though. One of these is an occasional mandate by Chinese companies to “work off the meter,” as Chua phrases it. This concept, usually called free consulting in the U.S., is part of the trust-building process in China. “Businesses may need to give something to build relationships,” said Chua. “And American businesses need to determine when to draw the line.”

Chua’s article references several examples of businesses that invested vast time and resources developing sample plans, ideas and roadmaps for prospective Chinese partners. Sometimes this investment succeeded and other times it failed, reinforcing that the adage “there are no guarantees” cuts across both cultures.

China is on its way to becoming the world’s largest economy. Whether or not a business plans to forge relationships in China, the buying power of the country and the importance of the Chinese consumer will be critical to almost all businesses inside or outside the country. For North American companies hoping to create meaningful, profitable relationships in China, guanxi is critical. Trust remains key to all effective business relationships – understanding guanxi, practicing it, and establishing both affective and cognitive trust will help business relationships with Chinese companies evolve more powerfully.

Mark O'Toole, managing director of public relations & content marketing at HB Agency, helps clients in high tech, clean tech and medical tech tell their stories and engage with their audiences using words, images, video and search.

This blog is not written or edited by Boston.com or the Boston Globe.
The author is solely responsible for the content.

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