Doing Business in China vs Doing Business in Australia: the Impact of Guanxi - Case Study Example

Assignment 2 Name: University: Course Title: Instructor: Date: Table of Contents Table of Contents 2 Introduction 3 Impact of Socio-Cultural Perspectives on Business and Business Relationship: A Theoretical Frame 3 Doing Business in China Vs Doing Business in Australia: The Impact of Guanxi 5 Considerations in relations to Guanxi when negotiating with the Chinese 7 Conclusion 8 References 9 Introduction Owing to the phenomenal growth of People’s Republic of China since 1978 when it opened its door for external world and accession to World Trade Organisation and Internal reorganisation, the country has attracted interest in terms of international trade through foreign direct investment (Rivers, 2009, p.473). One such country that had trade relationship with China through exports, foreign direct investment (FDI) and joint ventures (JV) is Australia (Menzies, Chung & Orr, 2008, p.1 & 3). Doing business in another country is not an easy experience as it is influenced by various cultural value and thereby affecting quality of business and business relationship and hence, ultimately the success of that business organisation. From western perspective, Wilson & Brennan (2010, p.652 & 653) notes that ‘the most widely publicised aspect of Chinese cultural value and its significance to foreign firms doing business in China is guanxi.’ The rationale for this discourse is to establish how guanxi impact on business and business relationships in China compared to doing business in Australia and considerations foreign business people need to take into account with respect to guanxi when negotiating with the Chinese. Impact of Socio-Cultural Perspectives on Business and Business Relationship: A Theoretical Frame While talking of socio-cultural perspective and their impact on business and business relationship, especially at the international trade level the concept of national culture comes into play. Human beings are social animals and are socialized through various social agents to behave in a certain way (Bugental, 1998). Social agents through meaning making process/ stance gives social meaning to various social constructs that are likely to shape the behavior of individuals in a certain so as to give rise to what is referred to us as psycho-social and philosophical mental orientation (Jones, 1983, p.465). Such behavior if cumulatively aggregated give rise to what is known as national culture which dictates issues such as values, norms, roles & behaviours (Young, 2008, p.108). This national culture is likely to impact on the behaviour of a given nationality and thus, likely to impact on relationship quality with other individuals, even in the arena of international trade as exhibited by various aspects such as negation styles as informed by the national culture which is anchored on socialization processes (Ghauri & Fang, 2001, p.307). Therefore, this gives rise to what is known as cultural distance. A cultural distance is the ‘difference between the culture of the parent company’s country and the culture of the host country in which subsidiary company is located’ (Mulok & Ainuddin, 2010, p.27). Numerous literatures have been developed so as conceptualise how societies give psycho-social mental orientation to various elements within the society by ascribing various roles to them, defining norms and cultural values (Young, 2008, p.107). Works by Edward Hall, Geert Hofsteed and Ferdinand Tonnies have developed various frameworks that define a national culture. For instance, Hofsteed formulated a cultural model that employs parameters such as individualism & collectivism, uncertainty avoidance, masculinity & feminism and power distance (Minkov & Hofstede, 2011, p.12; Hofstede, 2001, p. 235; Hofstede, 1984, p. 390). The national culture which is core to our discussion is collectivism. According to Rivers (2009, p.474) collectivism influences loyalty and obligation within the context of in group and out group relationship. One of the important aspects of national cultural values under collectivism that shapes psycho-social paradigm on relationship and thus, impacts on business and business relationship at an international trade level within our context (China) is the social construct known as guanxi (Wilson & Brennan, 2010, p.653). In discussing one of the relationship issues which is the Chinese negotiation style, Ghauri & Fang, 2001, p.307) developed a model known as ‘ping-pong model’. This model has three important elements which influence the Chinese relationship style. These are the PRC conditions, Confucianism and Chinese stratagems. The one critical to our subsequent discussion is the Confucianism, which is a philosophical thinking with massive impact on Chinese mode of thinking and behaviour owing the social meaning it imparts on the recipients and thus a unique cultural value. Confucianism has six fundamental values, however the core of our concern will be on importance of interpersonal relationship as it is the one that gives birth to five cardinal relationship variabilities including Guanxi (p.308 & 309). Wilson & Brennan (2010, p. 652) indicates that no single definition exists for guanxi. Rivers (2009) see guanxi as a personal bond or connection with two meanings. Under the first instance, it implies relationships and subsets of relationships anchored on reciprocity, benefits, social status and mutual interest. On the other perspective, it implies exploitations of someone’s influence so as to access various favours, economic and political benefits (p.474). Wilson & Brennan (2010, p.652) posits that guanxi entails ‘personal connection’ and in terms of conducting business in China it implies having an influential individual in a position of authority especially government. The impact of guanxi within the context of business and business relationships is deconstructed in the succeeding sections. Doing Business in China Vs Doing Business in Australia: The Impact of Guanxi To contextualise the discourse on the how does guanxi impact on business and business relationship, it is prudent to examine the concept and the underpinning rationales that are likely to impact on the relationship quality outside one’s family network such as within the business frame of multi international corporations (MNCs). Therefore the section assesses the impact of this social construct and then engages in cross international discourse of comparison with Australia as the reference point. One of the impacts of guanxi on business and business relation can be discussed within the context of mode of entry and operation as immortalised in commercial law and inter organisational relationship. In Australia, there are various modes of entry that would guarantee profitability for new business as compared to the one in china. Indeed, in Australia, a new foreign multinational cooperation can opt for wholly owned Greenfield subsidiary, partial acquisition or a joint venture (Youssef, 2007, p.4). Any of these choices is likely to lead to profitability. Indeed, Mulok & Ainuddin (2010, p.27); Kumarasinghe & Hoshino (2009, p.3) affirms this observation by noting that certain section of the research has proved that ‘wholly owned subsidiaries would perform as the best, followed by joint ventures and acquisitions’. On the other hand, he observes that certain faction of research has observed that joint ventures with local firms that have local knowledge is the sure path to success (Kumarasinghe & Hoshino, 2009, p.3). The emerging observation is that in Australia, so long as businesses have met the legal obligations or agreed contracts, it upon them to either utilize the available social capital or go it alone by gradually establishing their reputation. On the other hand, the exact is the opposite in China. For a successful venture in China and Multinational Corporation wishing to venture into Chinese market needs to form a venture with local enterprises. The plausibility of the latter proposition is anchored on the fact that it is difficult to comprehend and internalize the Chinese culture. This scenario is made complex by the fact that it is not easy handling governmental and legal issues in China even for large multinational enterprises. Therefore, owing to the social capital that local corporations are endowed with, they readily act as intermediary to the foreign investors by connecting them to influential individuals in control of power, such as government officials (Wilson & Brennan, 2010, p.653 & 654). The one theme that emerges out of these two contexts (China and Australia), business and business relationship in China within the frame of guanxi is not a strategic aspect, but rather a tactical approach. The justification is rooted on the rationale that guanxi exhibits itself as a personal asset possessed by an individual, therefore making guanxi hard to sustain in corporate level, therefore it is a source of informal control as compared to formal control (Wilson & Brennan, 2010, p.654). If treated from the social capital precinct, guanxi is likely to contribute to voluntary association, increased the potential cost to defectors in individual transactions, strengthens norms of reciprocity and enhances communication and information flow (Siisiainen, 2000, p. 4 & 5). Hence, in china, guanxi creates a compulsory business and business relationship that obliges foreign multinational corporations to have linkages with local ones owing to the cultural distance between China and Australia, but on the other hand (Australia) the principal focus lies in the enforcement of contracts (Gellerstam & Wiesner, 2011, p. 17). From the above realisation, guanxi impact on business and business relationships in China compared to doing business in Australia based on the context that in Australia, commercial law is well entrenched that the basis of engagement is to start with standard contract. This is continually revisited so as to fit emerging scenarios. On the other hand, in commercial law barely existed as commercial law is perceived as an exhibition of bad faith. Therefore, these businesses derive their commitments from relationships and trust derived from guanxi (Gellerstam & Wiesner, 2011, p.18). Clegg et al (2007 cited in Gellerstam & Wiesner, 2011, p. 18) summarizes the impact of guanxi by noting that ‘business transactions in China will possibly involve meeting obligations with individuals who have no direct connection to the matter at hand’. Additionally, So & Walker (2006 cited in Gellerstam & Wiesner, 2011, p.18) affirms the same by indicating that ‘in the collectivistic Chinese culture the decision-maker may be the network as a whole, not just one single person’. Subsequently doing business in china as influenced by guanxi is based on personal relationship/ social capital as opposed to corporation to corporation relationship in Australia. This means that the business and business relationship in China is influenced by interpersonal relationship/ social norms as enshrined in guanxi as opposed to Australia, where commercial law/ rules/ legal contracts defines the business and business relationship. This implies that in China firms place emphasis on initial building of relationship which is then to be followed by good business transactions. On the opposite, in Australia business transactions/ relationship rotates around doing transaction first and the subsequently developing relationship after successful transactions (Heywood, 2008, p.42 & 43). Considerations in relations to Guanxi when negotiating with the Chinese One of the greatest considerations that foreign business owners should put into consideration while negotiating with the Chinese under the context of guanxi is the type of interpersonal relationship they have with the Chinese (Rivers, 2009, p.473). As already seen any business to business relationship is influenced with interpersonal relationship/ networks in China as opposed to commercial law/ rule is in various western countries such as Australia. According to Fang (2006 cited in Rivers, 2009, p.474) “Chinese negotiators can behave either as Confucian gentlemen who pursue integrative strategies and a win-win approach to negotiation, or, following the famous book The Art of War by Sun Tzu, as a Sun Tzu–like strategist who will manipulate the other party and adopt a win-lose approach to negotiation”. It is this informed double standards that foreign negotiators should be aware of. Indeed, this negation style is likely to be influenced by the social network a Chinese have with a foreigner as it informs their perception on foreigners. This is because guanxi as one of the determinants of cultural value of collectivism is impacting on in the group and out group relations and hence it is likely inform Chinese negotiator on whether to adopt a Confucian gentlemen strategy of win-win approach or Tzu, as a Sun Tzu–like strategy of manipulation. This is what is termed as ethically ambiguous negotiation tactics (Rivers, 2009, p.474). Thus, it is upon a foreigner to be aware of the possible philosophical underpinning that is likely to guide a Chinese negotiator such as use of deception as advocated in the thirty-six ancient Chinese stratagems or Confucian that advocates for long term relationship (Ghauri & Fang, 2001, p.308-310). Since Confucianism is more ethical, a foreign negotiator should pay a keen attention, if any, application of The Art of War by Sun Tzu philosophical strategy. A case example is the acquisition of MG rover brand by Roewe which is one of the leading automobile companies. In brief, MG-Rover a British automobile firm was experiencing financial turmoil and everyone expected SAIC to purchase the brand and all associated rights. However, after SAIC sensed desperation in MG-Rover they withdrew from the deal, forcing MG-rover to engage in a hasty deal and sell the rights to NAC at a lower price. Later SAIC and NAC embarked on trading on MG brands. They were later to be forced to merge by the Chinese government. This shows the application of cunning bargaining tactics as opposed to sincerity. Conclusion The aim of this paper was to establish how guanxi impact on business and business relationships in China compared to doing business in Australia and considerations foreign business people need to take into account with respect to guanxi when negotiating with the Chinese. The paper established that guanxi impacts on business to business relationship in the context that in china it encourages interpersonal relationship as opposed to formal rule/ commercial law as envisioned in Australia. Lastly, the paper established that the issue that a foreign negotiator should be aware of is the social relationship that influences perception and negotiation style that can either be mutual or a cunning engagement, References Bugental, D & Grusec, J 1998, Socialization processes. Handbook of child psychology. Gellerstam, M. & Wiesner, J 2011, The impact of guānxì in Chinese business-A study of Swedish SMEs in Beijing. Ghauri, P & Fang, T 2001, Negotiating with the Chinese: A socio-cultural analysis, Journal of World Business, 36(3), p. 303-325. Heywood, P. E 2008, Market research in China: The impact of guanxi on B2B research (Doctoral dissertation, SIMON FRASER UNIVERSITY). 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