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International Business: Empty Promises

February 24, 2006
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The check is in the mail. I'll respect you in the morning. This stock is a sure thing. To this list of famous false promises, allow me to add the following: "Mr. VIP is my good friend (or former colleague, classmate or family member), and with his support we can't lose."

In China, it's called guanxiwhich 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 - Asia, in particular. As with those other false promises, my advice to you concerning guanxi would be this: don't bet on it.

I am not saying that guanxi is unimportant; it is often very important. However, guanxi is rarely a guarantee of success. Furthermore, as economies like China's liberalize, guanxi becomes less important. You don't want to stake your future on a factor that is fading into the past.



Keeping guanxi in Context

To understand the importance of guanxi, we must put it into context. As we all know, relationships are important when doing business anywhere, even in the United States. This is primarily because relationships confer trust, and trust saves time and effort that would otherwise be devoted to substantiating the claims of strangers. Of course, in a free market where decisionmakers are held accountable for results, factors such as profit, quality and price serve as a check to personal relationships - i.e., you can do business with friends, but only if your company and shareholders don't get screwed in the process.

In economies that are not free (such as the centrally planned economy of a communist nation), decisionmakers don't have to concern themselves with things like profit, price and quality, and are left to rely exclusively on relationships. In such a market, a person buys from his friend simply because they are friends, or he buys from the guy with whom he has a mutual "back-scratching" agreement. Either way, once profit, price, quality and the like recede into the background, guanxi takes center stage, which is why relationships tend to be more important in state-controlled economies.

Whenever doing business in any overseas market, your first question should be: Is it a free market economy or a state-controlled economy? The answer, in China's case, is both. China is a state-controlled economy that is becoming freer. Furthermore, at any given point in time, some segments of the economy are freer than other segments, which means relationships are more important in some segments of the economy than in others.

In other words, the importance of guanxi is related to the degree of freedom of your market segment. The freer your market (e.g., your competitors and customers are mostly private companies, as opposed to state-owned companies), the less important guanxi will be.

Of course, relationships will never be totally immaterial, just as they are not totally immaterial in free market economies. You will always want to get to know your partners, suppliers and customers the same way as you do domestically.



Developing a Successful Strategy

Whenever I am asked about the importance of guanxi, in addition to explaining the above, I always make the following points. First, there is a tendency for middlemen to overemphasize the importance of relationships. They will tell you that because they are good friends with so-and-so, they can't lose. Never believe this. First of all, so-and-so probably has many friends and many enemies. He can't satisfy everyone, nor win every bureaucratic battle. Furthermore, as I mentioned previously, even in market segments where relationships are important, the relationships themselves never guarantee success. Relationships can sometimes help you overcome a hurdle, but they rarely carry you past the finish line. Once over the hurdle, the rest of the race is up to you.

Second, relationships can backfire. If your greatest asset is your guanxi, and somebody with deeper pockets comes along and steals your guanxi, you can find yourself up a creek without a paddle in no time. With or without guanxi, you'd better make sure your project makes sense economically, and you'd better be able to execute.

Finally, there is one place where guanxi can be particularly helpful. As you might expect, being a country where the government recently controlled everything, China still has a lot of government and a lot of regulations. Those regulations are not always applied evenly, and guanxi can help you get favorable treatment. Sometimes a regulator will show up to levy a fee or impose some other rule, and you might find that other companies have been exempted. To prepare for this, it is a good idea to have some familiarity with the local and provincial governments, as well as with the relevant ministry in Beijing. Normally, these fees, taxes and regulations won't kill you, but they can hurt you, and will surely bother you, so it helps to have someone on your side just in case.

Whenever doing business in China or any other overseas market, you should consider guanxi to be part of your strategy - but only part. You still have to get to know the market, offer a quality product at a competitive price, and manage your business well. Without these things, there is no guanxi on earth that can save you.

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