Guanxi has its advantages, but be wary of the UK Bribery Act

By Robert Sawhney, Managing Director, SRC Associates

Most western firms in Asia will be familiar with the term guanxi – essentially a system of personal connections and relationships that carry long-term social obligations within the Chinese context. The ability to build such relationships plays an important part in developing business in China (as well as in other Chinese societies).

Trust is certainly a key variable in building and maintaining relationships and has been the study of much empirical research. Research by Oliver Yau et al¹ indicates that the Chinese seek to determine whether another party can be trusted and, if favours are received, they are morally bound to return these favours. Such reciprocity may be long term and firms should not act in a manner that shows them to expect quick reciprocal acts but be patient in building social bonds.

In collectivist cultures like those in many Asian countries, building networks of contacts and taking the time to develop trusted relationships can be very beneficial, since buyers rely heavily on word-of-mouth recommendations and tend to be more loyal once they are in satisfying exchange relationships.

In the Chinese context, one must attempt to develop a relationship first before attempting to develop a transaction, which is often what occurs in the western context. Informal discussions and not just business-related discussions are key. If one can reach this deeper level of relationship, it can be beneficial in developing complex service strategies.

Sharing information is also a common occurrence in the Chinese context and helps to widen the network of firms. Sharing information is a sign of bonding and trust and not collusion, as viewed from a western perspective.

Part of building trust and long-term relationships involves reciprocity, gift giving and favours. For many western law firms, the norms associated with such behaviour are different to what they are used to, and there is legitimate concern for UK firms regarding whether they would be engaging in unethical or even illegal behaviour in light of the UK Bribery Act 2010.

Illicit practices

In my view, there is a clear distinction between gift giving which is intended to build stronger relationships and that which is designed to induce illicit behaviour. However, there are avenues within guanxi that can lead to corrupt practices.

Gift giving that is designed to induce the recipient to engage in behaviour that is at odds with the objectives of the employer (and the deal at hand) is clearly an act of bribery, whereas favours that are intended to show respect and strengthen a relationship are not.

Nick Gall, a partner at Gall in Hong Kong, notes that UK firms will need to keep a watchful eye on how their overseas offices foster guanxi with mainland businesses.

“The regular and extravagant costs of entertaining Chinese clients, which people accept as the normal cost of doing business in the region, could be regarded as systemic payments caught under the new legislation and might put those located at head office at risk,” he says.

However, I don’t believe UK law firms are at a disadvantage by the new Bribery Act in the context of guanxi, since favours which entice recipients to act illicitly have always been subject to scrutiny.

A study by Andrew Millington et al² examined the experiences of UK companies in China in relation to guanxi and gift giving and found that, although UK firms had struggled with illicit practices in China, behaviours associated with guanxi networking did not fall into this category.

Law firms can take direct steps to ensure gift giving in the context of guanxi is both ethical and legal. Formal structures (i.e. instituting joint responsibilities) and education are important elements in reducing the chances of illicit behaviour.

There is also some degree of consensus that, as China continues to open up and its regulatory frameworks and enforcement levels strengthen, the role of guanxi may diminish in terms of relationship marketing.

Whether this is the case or not remains to be seen but, for now, there is little doubt that western law firms must understand the unique nature of relationship marketing in the Chinese context and apply the idea of guanxi carefully.

Endnotes

1. See ‘Relationship Marketing the Chinese Way’, Oliver HM Yau et al, Business Horizons, Vol. 43 Issue 1, Elsevier, 2000

2. See ‘Gift Giving, Guanxi and Illicit Payments in Buyer-Supplier Relations in China: Analysing the Experience of UK Companies’, Andrew Millington et al, Journal of Business Ethics, Vol. 57 No. 3, Springer, 2005