When Does Guanxi Matter? Issues of Capitalization and Its Dark Sides

Abstract

When Does Guanxi Matter? Issues of Capitalization and Its Dark SidesGuanxi refers to the durable social connections and networks a firm uses to exchange favors for organizational purposes. This study examines how and when guanxi operates as a governance mechanism that influences firm marketing competence and performance in the transitional economy of China. Drawing on social capital theory, the authors propose an integrative framework that unbundles the benefits and risks of guanxi and delineates the organizational processes to internalize guanxi as a corporate core competence. The authors surveyed senior executives in 282 firms in China's consumer products industries. The findings confirm guanxi's direct effects on market performance and its indirect effects mediated through channel capability and responsive capability. The authors also confirm that technological turbulence and competition intensity can be effective structure-loosening forces, thus reducing the governance effects of guanxi. The findings suggest that firms can improve market access and growth through guanxi networks, but managers need to capitalize on them from the personal to the corporate level. In addition, managers should be aware of guanxi's dark sides, which include reciprocal obligations and collective blindness. This study shows that personal networks are popular universally, but in China, they have unique, distinct ways of operation.

Leaders’ social ties, knowledge acquisition capability and firm competitive advantage

“…A well-documented phenomenon in China is called guanxi, including diversified relationships. Guanxi is best described as a trust-building system of social capital and interpersonal connections (Gu et al, 2008) that acts as a lubricant to business activities (Ramasamy, Goh, & Yeung, 2006). It has been suggested that guanxi has even begun to supplant the role of traditional Chinese families (Chow & Ng, 2004).…”

“…Second, government ties provide firms with exclusive access to information related to the country's changing policies, industrial development plans, and governments' policy intents (Sheng et al, 2011). As Gu et al (2008) noted, guanxi with government officials helps managers to gain valuable information about the environments such as policy shifts and industry reforms, increasing firms' responsiveness to changing environments. Finally, leaders' government ties can increase the legitimacy of a firm-the extent to which the firm's actions are perceived as trustable and desirable by stakeholders.…”

“…The extant literature on social ties or guanxi has identified various contingent factors for the effectiveness of managers' network including industry growth and business sector (Peng & Luo, 2000), location (Park & Luo, 2001), competitive intensity (Gu et al, 2008), technological turbulence (Chen & Wu, 2011;Gu et al, 2008), and formal contract (Li et al, 2010). Yet little research has examined the contingency effect of firm capabilities on the relationship between social ties and firm competitive advantage.…”

“…However, leadership scholars have not yet examined the effectiveness of leaders' social network in Asian contexts such as China where interpersonal ties (guanxi) are greatly emphasized. Top managers cultivate two different types of relations in China: relations with business communities (i.e., business ties) and relations with government authorities (i.e., government ties) (Gu, Hung, & Tse, 2008;Peng & Luo, 2000). Due to their distinct characteristics, the two relations might have differential impacts on firm competitive advantage.…”

“…Thus, it is important to investigate how these two relations of leaders might affect firm competitive advantage through different mechanisms in nonWestern contexts. Moreover, researchers in marketing and management have noted that the effectiveness of ties is subject to various constraints such as environmental factors and firm characteristics (Gu et al, 2008;Peng & Luo, 2000). But, to our knowledge, no studies investigate the interplay between leaders' ties and firm's internal capability.…”