Essay on Capitalism and Good Guanxi

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Guanxi – “The Ties that Bind”

This case provides an excellent example of globalization – i.e. a business icon of the West, McDonald’s, opens a restaurant in center of Beijing a little over decade since China’s economic reformation. McDonald’s is later required to yield its prime location prematurely when the Chinese government revokes McDonald’s lease to grant a prominent, indigenous Chinese business, Li Ka-shing the prized location. The reason given by the Chinese government is that the Western business lacked Guanxi (i.e. the connections).

“Guanxi – Ties that Bind” certainly provides a cautionary warning to eager multinationals in that they will need to consider unique business culture issues when dealing with China. Additionally the following questions can be inferred from the case:

• Is guanxi bribery and/or part of a larger overall pattern of corruption? • How does guanxi fit into China’s transitioning economy? • Is the need for guanxi still prevalent in the Chinese economy?

China was the leading recipient of FDI in 2005.[i] The allure for foreign multinationals to establish operations within China is well known and continues to grow. Benefits include access to cheap labor for manufacturing and an entrance into the enormous marketplace associated with the emerging Chinese economy. Additionally several other companies are striving to incorporate China into their supply chains and access “the factory that serves the world.”[ii]

Is guanxi bribery and/or part of a larger overall pattern of corruption?

Perhaps a typical, view of guanxi from the US is espoused by Daniel Joseph, a China Business consultant, “Guanxi, means ‘relationship.’ To have good guanxi is to know people in high places. It is often said that guanxi is the key to success in China and in many other developing markets, particularly in Asia. As with those other false promises, my advice to you would be this-don't bet on it.” [iii]
From these negative connotations, guanxi may be equated to bribery and point to larger over all corruption issues within China. Per Hongying Wang, a political scientist from Syracuse University she notes that guanxi is not a bribe but a proxy for a legal infrastructure,” guanxi is used to complement the weak and ambiguous legal structure, and to compensate for the otherwise high risks of investing in China. Lacking a strong judiciary, China uses guanxi as a vital mechanism for preventing and resolving conflicts or disputes. Bribery is something different, a short-term transaction for a specific exchange of favors. But guanxi is a long-term affair building on pre-existing relationship.”[iv]
Nicholas R. Lardy, a China expert at the Institute for International Economics, has commented specifically on the McDonald’s issue in Beijing. He did not cite direct corruption in the McDonald’s case but notes that there are overall issues with the system – referring to the indigenous consulting firms, as noted in the case, set up by family members of government officials. Lardy cites,” the lease agreement with McDonald's was not a lease of non-recourse, and McDonald's was fully compensated to their satisfaction. The true corruption is when the ‘princelings’, sons and daughters of persons high in government, use their position to line their pockets."[v]

How does guanxi fit into China’s transitioning economy?

When assessing the concept of guanxi presented in the case, there are rudimentary factors that need to be considered. China’s economy is transitioning from a state run centralized economy into a free market economy in some areas. China’s legal and political infrastructures are markedly different than Western countries and are adapting during this economic transition. In addressing these differences Boisot and Child have espoused the concept of “network capitalism” that has emerged since the economic reform of 1979, “China's rapid economic development is being accomplished through a system of
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