Upload
others
View
1
Download
0
Embed Size (px)
Citation preview
Declaration
I hereby certify that, except where cited in the text, this work is the result of
research carried out by the author. It contains, as its main content, work which
has not previously been submitted for a degree at any other tertiary institution.
___________________________________________________________
Stephen Grainger
July 2005
This thesis submitted in fulfilment of the requirements of the Degree of Doctor
of Philosophy in Asian Studies at the University of Western Australia.
i
for
my father
who has been a constant inspiration throughout my life
and
for
my two daughters Ella and Joni
who are blessings from above.
ii
Abstract
Stephen Grainger
This thesis investigates the phenomenon of organisational guanxi in business in
the SOE hotel environment in south-west China. A general aim is to give the
reader a sense of how organisational guanxi operates in this environment. It
identifies the characteristics and roots of organizational guanxi and discusses the
significance of its operation in this environment. This thesis also analyses the
implications of the continued practice of organizational guanxi and the prospects
of its future as the Chinese economy continues to evolve toward a more market
orientation.
In Chapter One, the phenomena of guanxi, mainzi and renqing are defined and
the importance of their role in conducting business in mainland China proposed.
In addition, the objectives of this research are defined and the structure of the
thesis summarised.
Part One, The Roots of Organisational Guanxi, comprised of Chapters Two,
Three and Four, investigates the roots and evolution of organisational guanxi and
surveys the development of the socialist market economy, the development of
the State Owned Enterprises (SOE), and the important role played by the danwei
(work unit) in this process.
Specifically Chapter Two, From Planned to Market Economy, provides a
historical overview of China’s economic development since 1949 and a firm
basis from which to compare the later development of business practices in rural
and coastal China.
Chapter Three, The Development of Organisational Guanxi in State Owned
Enterprises, covers the development of the SOE and identifies the SOE as the
home of organisational guanxi. Here the researcher argues that organisational
guanxi was born and began to evolve in the military danwei that supported
Mao’s followers during the Long March and the establishment of rebel
controlled regions in the north-west of China. After the Chinese Communist
iii
Party assumed power, the development of the SOE provided the right
environment in which to further enhance the development of organisational
guanxi. As many of the post-1949 SOE managers were Mao’s cadres before he
took control, it was a natural progression for them to use the same style of
organisational guanxi management methods. In fact most of the chapter is about
the reform period and the difficulties facing SOEs during this time.
Chapter Four, Danwei: the Roots of Organisational Guanxi, summarises the
origins, emergence, and history of the danwei; examines the characteristics of
the danwei; and argues how the original military danwei practices during the
1930s and 1940s and danwei practices post-1949 have contributed to the
development and enhancement of modern organisational guanxi. In this chapter
the research and discussion focuses on the period from the pre-1949 danwei
through to when guanxi practices almost ceased during the Cultural Revolution.
This chapter highlights the critical role the danwei has played in the
development of the characteristics of organisational guanxi.
Having investigated the roots and consolidation of organisational guanxi in Part
One, in Part Two the researcher examines organisational guanxi in operation in
south-west China. This is covered in Chapters Five, Six, Seven and Eight.
Chapter Five, Organisational Guanxi in China’s Hotel Sector, defines
organisational guanxi and the distinctive characteristics that differentiate it from
other types of guanxi. Expanding on the long list of guanxi types identified by
Kipnis (1997), the researcher proposes the existence of organisational guanxi in
south-west China’s hotel sector and provides evidence based on the findings of
research conducted at the Roaring Dragon Hotel in south-west China. In this
chapter examples of traditional and new forms of guanxi are provided. In
addition, the implications of organisational guanxi for business entities in China,
how guanxi is accepted by south-west China’s emerging educated youth, and the
effect guanxi has on organisational outcomes for managers working in south-
west China, are discussed.
Chapter Six, Guanxi neglect at the Roaring Dragon Hotel in South-west China:
iv
The Demise of an International Management Contract, is a detailed case study. It
introduces and defines the concept of ‘guanxi neglect’ through the description of
the takeover of a former SOE Chinese-managed hotel by a western-based,
international management organisation. Specifically, the study focuses on the
cultural conflict that occurred among Chinese managers and employees trying to
adapt from the former Chinese relationship-based methods of hotel management
to the western market-oriented methods of the organisation that took control of
management of the Hotel. The conclusions that are drawn highlight cultural
characteristics and issues that companies taking over or approaching joint-
ventures with SOE in south-west China may encounter and should consider. This
case highlights the role guanxi can play in hindering or enhancing the changing
dynamics and operations of a large Chinese service organisation as it embraces
the onset of globalisation and the socialist market economy.
Chapter Seven, Differentiating between Intra-organisational and Inter-
organisational Guanxi, answers the question: do the characteristics of guanxi in
operation between organisations differ from those that operate internally within
organisations? This question is answered by examining and comparing survey
results collected from trade executives based in Hong Kong (Fock and Woo,
1998) with new data collected from employees from the Roaring Dragon Hotel
in the south-west of mainland China. Direct comparisons are made between
results of these two surveys to uncover the characteristics that distinguish and
differentiate the types of guanxi found in inter-organisational and intra-
organisational environments.
Chapter Eight, Guanxi decay in China: Is it really happening? compares the
speed of development of the socialist market economy in the eastern and western
regions of China and asks does the speed of reform enhance the decay in the
significance of guanxi practice? In particular, the research is focused on
Guthrie’s (1998, 2002) claims and Wang’s (2002) rebuttal to the proposition that
the significance of guanxi is in decline in the Shanghai business district. These
views are compared and a proposal formulated claiming that the decay in the
significance of guanxi is much less and is occurring at a much slower rate in
south-west regions. In this chapter the researcher compares the economic
v
development of the coastal and inland regions of China and argues that they
really are two very different regions operating within the same country. Guthrie
states, the power of guanxi may be in decline as Shanghai goes through an
economic transition. However, the researcher argues that it is still too early to
draw such a conclusion across all of China and especially in the south-west.
Conclusions differ regarding the importance, development, maintenance and
decay of guanxi in these two differing regions and environments. To further
counter Guthrie’s findings, it is argued that the economically developed societies
of Singapore, Taiwan, and Hong Kong have shown that the establishment of a
modern economy, supported by institutional law, does not necessarily displace
the reliance on guanxi connections (Yeung and Tung, 1996: 64).
The findings of this new research in south-west China provide conclusive
evidence that in this region the guanxi network remains the lifeblood of the
business community (Kao, 1993). In addition, this research throws up some
conclusions that are not aligned with that of Guthrie’s (2002) Shanghai-based
findings.
In Chapter Nine, The Conclusion, the major findings of this thesis are revisited
and include the acknowledgement and definition of organisational guanxi, the
exploration of the roots of organisational guanxi inside the danwei, the
differentiation of intra-organisational guanxi from inter-organisational guanxi,
the definition of the concept of guanxi neglect, and a comparison of the decay in
the strength and usage of guanxi in south-west China with that in the Shanghai
region.
vi
Acknowledgements
This thesis is dedicated to my father who has been a mountain of encouragement
and integrity and a fine example throughout my life. Without his inspiration,
wisdom and love this thesis would not exist.
My supervisors Dr Lyn Parker and Dr Gary Sigley have been my academic
inspiration and I thank them for their time, constant revision, patience, energy
and guidance. They have read every chapter many times and have fostered the
slow and gradual improvement of this thesis.
My wife Regina has been a constant support to me throughout this journey and
without her encouragement, translation skills and patience the finishing line
would still be far off.
Dr. Yang Song provided my first experience of guanxi and his connections in
gaining me a position as a lecturer in Kunming were critical in allowing me to
start my research from a solid base and importantly as an insider. This beginning
saved time and opened many research doors.
My own personal guanxi in mainland China has been a critical factor in my
completion of this thesis. In particular I would like to acknowledge the
assistance of Matthew Zhang, Dickens and his father, Wen Naxun, Cai Yong,
Xiong Mei, the CCP Secretary, and Can Hong. Their thoughts, wisdom, laughter
and invitations to numerous banquets have made the journey even more
enjoyable.
At the Roaring Dragon Hotel (RDH) I owe a tremendous debt of support to the
Head of the Training Department. He remains an old friend whose guanxi has
and continues to open many research doors for me in China. Also from the RDH,
I wish to acknowledge the help and friendship I have received from all of the
managers and employees who allowed me to interview them.
vii
Special thanks to the General Manager from the Nothill Hotel who gave me
permission to conduct interviews and a number of surveys of the staff of the
Roaring Dragon Hotel during his tenure as General Manager of the RDH.
Without his approval this would not have been possible. I also wish to thank the
Head of the Nothill Food and Beverage Department..
My father-in-law, Low Nam Fatt in Singapore, has been a strong supporter with
whom I have been able discus my ideas and approach. His willingness to read
my work and provide constructive criticism has been inspirational.
My sister Jenny, although she has had no direct input to this thesis, still remains
one of my soul mates as I travel through life and it would be remiss of me to fail
to recognize and thank her for her love and inspiration, two vital conditions that
any successful Doctor of Philosophy candidate needs in abundance.
Finally, my two daughters Ella (4) and Joni (2) have asked me on so many
occasions ‘what is this stuff about Dad?’ and ‘can I come to China too?’ They
have helped me remember that life should be full of fun and that one must
maintain perspective on where one’s priorities must lie.
viii
Table of Contents
Declaration i Dedication ii Abstract iii Acknowledgements vii Table of Contents ix List of Tables xii Notes xiv Introduction Chapter 1 What is Guanxi? 1
i Defining Guanxi 6 ii Core Principles of Building and Maintaining Guanxi 10 iii Why Has Guanxi Developed? 14 iv Renqing 18 v Mianzi (Face) 21 vi Guanxi as a Necessity for Doing Business in China 23 vii Thesis Questions/Objectives 29 viii Thesis Structure 32
Part One - The Roots of Organisational Guanxi Chapter 2 From Mao to Deng: Adapting From Planned to
Market Economy 39
i Mao’s Rule and the Development of the Planned Economy 39
ii Deng’s Reign and the Beginnings of Reform 51 iii A New Economic Focus 54 iv The Importance of this Period in the Development of
Organisational Guanxi 59 Chapter 3 The Development of Organisational Guanxi in
State Owned Enterprises 61
i State Owned Enterprise Structure 64 ii Reform Difficulties for SOE 67 iii What Must China do to Effectively Reform SOE? 88 iv Summary 93
ix
Chapter 4 The Role of the Danwei 100 i What is the Danwei? 101 ii Characteristics of the Danwei 105 iii Historical Overview 111 iv Summary 120
Part Two - Organisational Guanxi in Operation Chapter 5 Organisational Guanxi in China’s Hotel Sector 124
i Organisational Guanxi 127 ii Problems 145 iii Guanxi and the Attitudes of the Young 147 iv Conclusions 149
Chapter 6 Guanxi Neglect at the Roaring Dragon in South-west China:
The Demise of an International Management Contract 155 i Methodology 156 ii The Roaring Dragon Hotel 156 iii Reflection on a 1993 Experience 158 iv The 1998 Story 160 v Nothill and Mr. Harvey’s arrival 163 vi Erhi T 166 vii The Provincial Government 167 viii April 1999 168 ix July 175 xi Using Guanxi to Transfer Out 179 xii Agencies and Competition 181 xiii August 182 xiv September 184 xv October 187 xvi November 190 xvii The Four Mondays 191 xviii December 198 xix Discussion 204 xx March 2000 214 xxi Conclusion 216
Chapter 7 Differentiating between Intra-organisational and Inter-organisational Guanxi 221
i The Roaring Dragon Hotel Environment 222 ii Part A: Perceptions of the Characteristics of Guanxi
Recorded by Employees of the Roaring Dragon Hotel in South-west China in 1999 226
x
iii Part B: Perceptions of the Characteristics of Guanxi 230 iv Hypothesis 232 v Results 234 vi Discussion 237 vii Conclusions 247
Chapter 8 Guanxi Decay in South-west China:
Is it Really Happening? 251
i Part 1 251 ii Speed of Reform 262 iii Discussion 271 iv Part 2 275 v Methodology 275 vi Results 277 vii Discussion 292 viii Conclusions 299
Chapter Nine Conclusion 304 The Future? 307 Bibliography 313 List of Interviews 334 Appendix 1 Mean Rating Formula and Variable Definition 338 Appendix 2 Comparison of Mean Ratings of the Importance of guanxi
and the Characteristics for Sub-groups at the Roaring Dragon Hotel, 1999 339
Appendix 3 Standard Deviations of the Relative Importance of
guanxi Characteristics Recorded by Employees at the Roaring Dragon Hotel in South-west China Compared to those of Hong Kong Trade Executives 340
Appendix 4 Provincial Statistics Comprising Provincial per Capita GDP as Percentage of National Average (1994), Provincial per Capita GDP as Percentage of National Average (1994), Annual Growth Rate per Real per Capita GDP (1978-94), Number of Counties in Province (1992), Number of Counties in Poverty (1992). 341
Appendix 5 Table of Statistics including Savings Rates of Labour
Force in Provinces (1994), Investment Rates of Labour Force in Provinces (1994), Openness of Provinces (1994), Exports as Percentage of Provincial GDP, Access to Information (1994) and Education Levels. 343
Glossary 346
xi
List of Tables
Table 7.1 (pg 229): Perceptions of the Characteristics of Guanxi of Employees of the Roaring Dragon Hotel, 1999. Table 7.2 (pg 233): Comparison of Perceptions of Guanxi by Employees of the Roaring Dragon Hotel, 1999, and Hong Kong Trade Executives, 1996. Table 7.3 (pg 236): Comparison of the Importance of Guanxi Characteristics Recorded by Employees of the Roaring Dragon Hotel, 1999, and Hong Kong Trade Executives 1996. Table 7.4 (pg 247): Level of Importance of Guanxi Characteristics Identified by Employees of the Roaring Dragon Hotel, 1999, and Hong Kong Trade Executives, 1996. Table 8.1: (pg 264): Per Capita Gross Domestic Product 1978 and 1994, Annual Growth Rates and the Number of Provinces in Poverty 1992. Table 8.2 (pg 265): Savings Rates, Investment Rates and Exports as a Percentage of Provincial Gross Domestic Product. Table 8.3a (pg 267): Communication Mechanisms, 1994. Table 8.3b (pg 268): Communication Mechanisms (as a percentage of scores recorded in eastern provinces) 1994. Table 8.4 (pg 269): Illiteracy Rates, Mean Number of School Years 1994. Table 8.5 (pg 270): Comparison of Urban Development, Gross Domestic Product and Percentage of Foreign Investment of China’s Three Regions (1995) Table 8.6 (pg 277): ‘Guanxi’ is still an important part of China’s culture. Table 8.7 (pg 278): ‘Guanxi’ will continue to operate in China for a long time into the future. Table 8.8 (pg 279): In Chinese organisations the use of ‘guanxi’ is in decline. Table 8.9 (pg 286): In 20 years time, guanxi will be of no advantage. Table 8.10 (pg 287): In 20 years time, guanxi will be just a memory of China’s past. Table 8.11 (pg 288): The young people of China today place less importance on guanxi than former generations Table 8.12 (pg 289): In your everyday life, how often do you see guanxi used?
xii
Table 8.13 (pg 291): In your job, how often do you see guanxi used? Table 8.14 (pg 292): Guanxi Use Observed in Life and in the Workplace.
xiii
Notes
1. In accordance with Human Research Ethics Committee commitments, I have
used pseudonyms for people, places and institutions.
2. In the text of this thesis interviews are referenced in brackets immediately
following the in-text quotation and include the number for the interview conducted
(eg Int # 63).
xiv
Organisational Guanxi and State Owned Enterprises in south-west China
1
Introduction
Chapter One
What is Guanxi?
Despite having a 20 year contract, the US fast food giant, McDonald’s, was
evicted from its prime commercial site in the heart of Beijing’s premier
shopping district after only two years. The businessman who wanted to build on
the site, and who was able to engineer McDonald’s eviction, was Mr. Li
Kashing, one of Hong Kong’s wealthiest businessmen. Mr. Li had a plan to
develop a US $2 billion project, the Oriental Plaza in central Beijing. In 1994,
the development of his project hit an obstacle when McDonald’s refused to
move from the site Li had earmarked for the vast compound. To overcome this
difficulty Li used his guanxi with the Chinese authorities to secure McDonald’s
eviction. In 1996, the city authorities re-negotiated their contracts with the US
fast food giant, granting it better concessions and the right to open more
restaurants in Beijing. Of course this was in return for moving out of the
Oriental Plaza site. With McDonald’s gone, Li gained permission to develop his
Organisational Guanxi and State Owned Enterprises in south-west China
2
vast shopping complex. Mr. Li had strong guanxi with city officials, whereas, by
contrast, McDonalds’ had not kept its guanxi in good condition (Ambler, 1995a;
Luo, 1997a).
Throughout Li’s business career he ‘produced’ guanxi (Kipnis, 1997) by
developing long-term relationships with those in power. His business guanxi or
favours granted to connections (Yeung and Tung, 1996), resulted in him gaining
a distinct advantage in developing his business initiatives. An example was
when former President Jiang Zemin visited Hong Kong for the hand-over from
British to Chinese rule in 1997, and for the opening of the Chek Lap Kok
Airport in 1998. On both occasions he stayed in Mr. Li’s hotel. To complement
the powerful relationship he enjoyed with the Chinese President, Li’s partner in
developing Beijing’s newest commercial complex was his personal friend and
Chief Executive of Hong Kong Mr. Tung Chee-Wah. Not many could boast the
same influential connections in China as Mr. Li. The success of his negotiations
in developing the Oriental Plaza in Beijing confirmed his reputation as the
Territory’s premier tycoon and a recognised master of guanxi (Source: Polin,
2000).
In a scenario from 1986, Ms. Zhou, formerly a train conductor with the Tianjin
Railway Bureau, used her guanxi to gain a position as an accountant for a motor
Organisational Guanxi and State Owned Enterprises in south-west China
3
cycle repair shop, a difficult move that required several months of guanxi work.
She wanted to change because her situation had become very difficult. She had a
baby that could no longer travel with her on the train in her position as a train
conductor. Her mother-in-law could not take care of her baby while she went to
work, and she did not have any guanxi with those who could help to enroll the
baby in the overnight nursery. Her guanxi work required sensitivity. The
Director of the Labour Bureau was the elder brother of an ‘old friend’ of her
respected uncle. This was where she produced guanxi. When the Director heard
about Ms. Zhou’s situation through her uncle, he used his power to intervene to
give Ms. Zhou the official documentation granting her permission to search for a
new job. This would have been almost impossible without this assistance from a
higher authority. To gain her new position at the motor cycle repair shop near
her home also required guanxi. The daughter of the Director of the motor cycle
shop was an old high school friend for whom Ms. Zhou had once purchased
some clothing in Shanghai. The Director returned the favour by giving Ms.
Zhou a position in his shop and maintaining his guanxi (Source: Bian and Ang,
1997).
At the village level, a young man named Wang from a small provincial village
in China saw a new type of cap advertised on television and saw an opportunity
to sell these caps in his own province. This being his first business venture his
Organisational Guanxi and State Owned Enterprises in south-west China
4
personal capital was only 200 Yuan (~US$25). His priority was how to generate
enough additional support to finance the first purchase of caps from the
distributor in Shanghai. He canvassed the problem among his guanxi hu
(Ambler, 1995b; Luo, 1997a) being his guanxi family or network (Source: Park
and Luo, 2001). They collectively contributed a further 700 Yuan to his starting
sum and this was enough for Wang to begin operating. Wang’s family and
friends contributed to his start-up capital because of the trust they had in him
through their guanxi. Some had not even asked what business the money would
be used for.
With his start-up capital secure, Wang went to Shanghai to collect and pay for
his first consignment of caps. Upon his return to the village he began to sell the
caps through his friends and on the street. Although he was excited by his new-
found entrepreneurial success, he and his friends had to keep a low profile
because peddling on the streets in his town was considered illegal. If he were
caught by the police in this situation those friends and family who had supported
him would lose face or mianzi and be embarrassed to know him.
Even outside mainland China the advantages of good guanxi can be found at all
levels in the Chinese Commonwealth (Kao, 1993). The term Chinese
Commonwealth is used by Kao to describe the networks of Chinese people
Organisational Guanxi and State Owned Enterprises in south-west China
5
based in Singapore, Taiwan, Hong Kong, the USA as well as the many millions
of Chinese nationals that have settled outside of these countries. An example
from this context was experienced by an Australian lecturer who took a special
interest in a Chinese student in his class in Perth, Western Australia (Source:
Interview with Lecturer). He was aware of the difficulties of mainland Chinese
students and their parents in terms of language and financing the expense of
their overseas studies in Australia. The lecturer had visited China on several
occasions and took time to help the student after class with his English. From
time to time he invited the student home for dinner with his family. On another
occasion he took the student out to enjoy a day on his friend’s boat and
generally he kept a watchful eye out for his situation so as to ensure his welfare.
After several months, the lecturer mentioned to the student in passing that he
was going to Beijing to speak at a conference. This news immediately sparked
the student’s interest and he said that he would contact his father to let him
know. The lecturer did not expect this reaction and was a little puzzled as to
why the student would want to notify his father. Later he found out the reason
for this sudden interest. The student’s father was a senior pilot and airlines
official in Beijing who, upon hearing of the lecturer’s visit, arranged a free
return flight, five star accommodation, and provision of a chauffeur-driven
limousine for the lecturer’s personal use whilst in Beijing. The lecturer was
Organisational Guanxi and State Owned Enterprises in south-west China
6
pleasantly surprised and whilst in Beijing was invited to join several banquets
with the student and his father as a result of this relationship. These acts of
kindness reflected the sincere appreciation of the student’s father for the special
attention the lecturer had given to his son whilst studying in Australia. The
behaviour of the student’s father was his opportunity to repay the favour he had
received through the guanxi of another (Int # 63).
Although from vastly different environments, these four examples highlight the
diversity and variety of guanxi arenas, the people, relationships, and activities
involved in the spectrum of real life interactions that are rooted in guanxi. In the
business sense, many wise Chinese have turned the art of guanxi into a carefully
calculated science and there are even people who live entirely on their guanxi
(Butterfield 1983: 80).
In reference to this phenomenon of guanxi, this research aims to study the
intriguing phenomenon of guanxi in business, and specifically in State Owned
Organizations, in south-west China.
Defining Guanxi
Defining guanxi is a challenge for researchers. This phenomenon exists in many
Organisational Guanxi and State Owned Enterprises in south-west China
7
different situations, develops in many different ways, and each guanxi
relationship carries its own connotations and history. As we shall see below,
almost every researcher comes up with a slightly different account of what
constitutes guanxi.
The word guanxi is of recent origin and comprises the character representing
guan originally meaning a door, with the extended meaning ‘to close up’
(Ambler, 1995b: 27; Luo 1997a: 44) or establish a ‘gate pass’ (Yeung and Tung,
1996: 55), and xi which means ‘to tie up’ (Ambler, 1995b: 27; Luo 1997a: 44)
or ‘to connect’ (Yeung and Tung, 1996: 55). Ambler (1995a) used the analogy
of a sand bar at a harbour entrance to describe guanxi. Inside the sand bar you
are one of us, but outside the bar your existence is barely recognised. Kipnis
(1997: 184) listed ‘urban guanxi, rural guanxi, business guanxi, all - female
guanxi, owner/tenant guanxi, marriage guanxi, comrade guanxi, husband/wife
guanxi, mother in law/daughter-in-law guanxi, and classmate guanxi’ as
varieties that he had identified. He concluding that ‘no unchanging single form
of guanxi exists’ (Kipnis, 1997: 184).
In general, guanxi refers to the establishment of a connection between two
individuals to enable a bilateral flow of personal favours or social transactions
(Yeung and Tung, 1996; Luo, 1997a). The Chinese both consciously and
Organisational Guanxi and State Owned Enterprises in south-west China
8
unconsciously use guanxi to guide daily activities and it is so deeply rooted in
Chinese society that it is reasonable to expect that a person brought up in a
Chinese community would have been subtly exposed to and inculcated with the
concept of guanxi (Brunner and Taoka, 1977; Yang, 1986). In China, ‘guanxi is
all pervasive and affects all situations’ (Polsa, 1998: 35).
Pye (1992) described guanxi as ‘friendship with continued exchange of favours’,
Tsui and Farh (1997) concluded that ‘relationships based on common ground’ is
the essence of guanxi while a study by Fock and Woo (1998) found that most
respondents agreed on the personal nature of guanxi. Guanxi relationships are
not simple, and to have good guanxi implies having a successful history of
working together, providing favours, and building up trust between one another
over time.
Yeung and Tung (1996: 64) defined guanxi as a ‘connection’ and dubbed it the
‘Chinese art of reciprocal back–scratching’. Tsui and Farh, (1998) concluded the
essence of guanxi to be relationships based on common ground whilst Jacobs
(1979) and Redding, Norman and Shandler (1993) identified guanxi as being
particularistic ties between two or more individuals. King (1991) described
guanxi is a network of personally defined reciprocal bonds and Hwang (1987)
concluded that although guanxi literally means ‘relationship or relation’, its
Organisational Guanxi and State Owned Enterprises in south-west China
9
essence is a set of interpersonal connections that facilitate exchange or favours
between people.
Bian and Ang (1997: 981-1006) stated that a basic characteristic of guanxi is
familiarity or intimacy and that for any two individuals to develop good guanxi
they must know a good deal about each other and share a good deal with each
other. They noted that guanxi is not merely a relationship but a tie through
which parties exchange valued materials or sentiments.
Luo (1997b: 64) described guanxi as being a complex, long-rooted and nebulous
term that refers to the context of drawing on connections or networks in order to
secure favours in personal or business relations.
From this array of descriptions and definitions, it appears reasonable to conclude
that in the Chinese context, the meaning of guanxi is very general (Tsui and
Farh, 1997). In defining what role guanxi plays, Iacobucci and Ostrom (1996)
found that guanxi performs different roles and has different implications in
different situations. Guanxi has multiple meanings and the field is so broad that
it cannot be restricted to only certain aspects of human behaviour or among
certain groups of people (Tung and Worm, 2001).
Organisational Guanxi and State Owned Enterprises in south-west China
10
Core Principles of Building and Maintaining Guanxi
Although a variety of types of guanxi exist in different situations, there are some
core principles which seem to run through this variety of definitions. A core
component of two people enjoying a guanxi relationship is that they are
consciously committed to each other and undertake to exchange favours in spite
of there sometimes being official policies against such practices (Chen, 1995;
Kipnis, 1997; Park and Luo, 2001). Guanxi building is the transformation
process whereby two discreet individuals construct a basis of familiarity to
enable the subsequent development of relationships (Yeung and Tung, 1996: 61;
Yang, 1994). Those who have guanxi with another are tied together through an
invisible and unwritten code of reciprocity and equity. Failure to respect this
commitment hurts one’s reputation, leading to a humiliating loss of prestige,
face or mianzi.(Luo, 1997a)
To be able to develop guanxi between two or more people, the first thing needed
is a guanxi base. A guanxi base may be geographical, teacher-student, kinship,
co-worker, workplace supervisor-subordinate, political, class mate, friendship or
sworn brotherhood relationship (Brunner, Chen, Sun and Zhou, 1989; Jacobs,
1979). The base is the point from which a relationship can begin and also
remains a tie that binds those with guanxi together. In some scenarios, having a
Organisational Guanxi and State Owned Enterprises in south-west China
11
guanxi base does not automatically ensure two people have renqing or a degree
or level of emotional connection in their relationship. For instance the guanxi
base for two people may have arisen purely because both are alumni of the same
university. But if one had already graduated before the other entered the
university, the guanxi between the two would be weak or very distant. To
strengthen the guanxi both would have to invest time to cultivate an emotional
bond.
Depending on the basis of guanxi, an interpersonal relationship can vary in the
degree of closeness, ‘hardness’ or strength (Hwang, 1987; Kipnis, 1997). For
example, a person’s guanxi relationship with a co-worker who was also a
college classmate would be stronger than with one who had not been a
classmate. The strength or ‘hardness’ of the guanxi relationship determines the
weight of demands that can be imposed.
Although guanxi may enhance interaction and exchange, guanxi may also act as
a mechanism to erect invisible barriers between those who will be granted
favours or benefits and those who will not. The strength and depth of the
relationship differs depending on one’s guanxi base and status as an insider or
outsider. Chinese people appear friendly in their graciousness and will make you
feel you have been well received. However, this may only be true for one meal
Organisational Guanxi and State Owned Enterprises in south-west China
12
or one business trip, not for more serious welcoming into the community of
friendships that constitutes guanxi (Marcoux, 2002). In the business context, if a
person enjoys guanxi and is an insider, deals become very easy and, as in the
case of Li Kashing, successful business relationships can be established. In
contrast, the outsider can find it difficult, time consuming and sometimes
impossible to make progress (Brunner and Taoka, 1988; Marcoux, 2002).
Yeung and Tung (1996: 62) identified that there are essentially four strategies
for maintaining guanxi relationships: tendering favours, nurturing long-term
mutual benefits, cultivating personal relationships and cultivating trust. For
guanxi to grow and last, both parties in the relationship also need to maintain
contact and keep regular tabs on the state of their relationship (Ambler, 1995a).
In the opening example this is a crucial requirement that McDonald’s
overlooked in Beijing and which cost them their position at the Oriental Plaza.
The long-term viability of guanxi depends on each member’s commitment to
one another and the amount of further action taken to maintain the quality of
their relationship.
In terms of acceptable guanxi behaviour, one will find that associated with each
relationship is a set of role requirements and prescriptions from which deviation
is not expected by a moral person (Ambler, 1995b: 27; Jacobs, 1982; Luo,
Organisational Guanxi and State Owned Enterprises in south-west China
13
1997a). Guanxi is reciprocal in nature and a person is viewed as being
untrustworthy if he/she refuses to return a favour or follow the rules of
reciprocity (Alston, 1989). If one denies one’s obligations, one might pay the
price by losing connections (Bian and Ang, 1997). Guanxi is seen as the fabric
of Chinese society and fulfilling one’s obligations to one’s relatives is culturally
expected by both the Confucian tradition and in the ethics of contemporary
China (Fried, 1953, Yang, 1994; Hwang, 1987; Luo, 1997a).
Another dynamic characteristic is that guanxi can be transferable between
parties (i.e. A and C) if they have a common connection in the middle (i.e. B).
However, the extent of transferability depends on the strength of the ties which
A and C have with B (Park and Luo, 2001; Yeung and Tung, 1996). These
guanxi relations are between individuals so organisational difficulties may occur
when a person, a successful sales person for example, with ‘strong’ guanxi
leaves the organisation and with them goes their guanxi connections or goodwill
and the resultant income stream (Yeung and Tung, 1996: 61). To transfer guanxi
successfully, an intermediary is necessary because such a connecting person is
needed to provide the familiarity, trust and obligation needed to help tie the
seeker and the potential helper (Bian and Ang, 1997). This alter-casting results
in the establishment of guanxi between two individuals who have no prescribed
commonality. This transferability is always problematic and attempting to
Organisational Guanxi and State Owned Enterprises in south-west China
14
transfer strong guanxi takes time and the development of a new field of trust.
The objective is to rearrange a person’s social network in such a way as to
involve the individual who wishes to be included in it (Yeung and Tung, 1996:
61). Trust remains a core component of guanxi and individuals are encouraged
to develop relationships of respect and responsibility and not to use others as
instruments towards objects of desire (Bell, 2000; Bian and Ang, 1997).
Guanxi exchange is distinctive in that it usually links people across different
ranks, often with a weaker party who is calling for special favours and not
having the resources to provide a favour of equal value in return. As in the case
of Ms Zhou, the former train conductor, guanxi often favours the weaker
member and when guanxi links two persons of unequal rank or social status, the
weaker side usually expects more help than he or she can reciprocate (Alston,
1989: 28). In China, guanxi favours are often unequal in value or cost and many
times require some form of approval from higher officialdom that is not always
easily available.
Why Has Guanxi Developed?
The Chinese people have at times needed to survive under uncertain, violent and
catastrophic economic, political and climatic conditions. Many have
Organisational Guanxi and State Owned Enterprises in south-west China
15
experienced and had to endure extreme difficulties, famine and starvation in
such recent campaigns as the Great Leap Forward and the Cultural Revolution.
This hardship, combined with the Confucian tradition and the non-existence of a
reliable rule of law, has made trust in family members a crucial necessity for
survival in China. The need to survive under these uncertain conditions brought
Chinese families closer together and the need to survive often produced an
exchange of resources and favours between family and extended family
members. Reliance on family in this situation strengthened ties and made guanxi
a core element of Chinese family life. Most Chinese place primary trust in
family members (Kao, 1993: 26 - 27; Chu and Ju, 1993; Yeung and Tung,
1996) and often the exchange of resources and favours between family members
is rendered largely without anticipation of reciprocity (Tsui and Farh, 1997).
The offer of reciprocity is needed if one is to be successful in guanxi practice.
Although this reciprocity between family members is not necessarily expected,
it often occurs and contributes to the strength of guanxi.
Guanxi is a very important aspect of Chinese societies. To understand why it is
important one must understand China’s Confucian legacy, wherein an individual
is treated as a fundamentally social or relational being (Farh, Tsui, Xin and
Cheng, 1998). Confucianism is a social philosophy, rather than a religion. Its
main concern is to establish harmony in a complex society of contentious human
Organisational Guanxi and State Owned Enterprises in south-west China
16
beings through a strong and orderly hierarchy (Park and Luo, 2001: 456).
The Confucian tradition defines individuals in relational terms and Chinese
society has been functioning as a clan-like network since Confucius codified
societal rules, values, and the hierarchical structures of authority during the sixth
century BC (Yang 1994). Since then his philosophy has promoted the
importance of each actor performing their role in a manner that is acceptable to
all (Yang 1986). Confucian belief defines five cardinal role relations (wu-lun):
emperor - subject, father - child, husband - wife, elder - younger siblings, and
friend - friend. The five relationships of wu-lun give order and stability to the
social system and offer the role contexts in which self-examination and self-
development can be judged and interpreted (Hui and Graen, 1997; Bell, 2000).
The majority of Chinese people perceive that one’s existence in society is
largely influenced by relationships with others and the main underlying theme in
society is establishing harmony through a strong orderly hierarchy (Park and
Luo, 2001; Luo, 1997a: 45; Brunner, Chen, Sun and Zhou, 1989). Social order
and stability depend on properly differentiated role relationships between
particular individuals (King, 1991; Yeung and Tung, 1996) and these Confucian
relationships are a core component that contributes to the strong presence of
guanxi in Chinese society.
Organisational Guanxi and State Owned Enterprises in south-west China
17
Although guanxi is primarily family based, at times reliance on one’s family
favours may not be sufficient to succeed in achieving one’s goal and in this
scenario an extension of familial forms of guanxi support is sought through
other relationships such as membership in a village, work group, class mates, or
kin group. Individuals having other forms of particularistic ties such as with a
distant relative, former class-mate, and those coming from the same home town
can also use their guanxi to enjoy success. It is important to note that outside the
family a different set of exchange principles may apply and rarely will these
generate the same quality of relationship as with those with a family member
(Farh, Tsui, Xin and Cheng, 1998).
Deeply embedded in Chinese culture, guanxi operates in concentric circles, with
close family members as the core and with distant relatives, classmates, friends
and acquaintances arranged on the periphery according to the strength, distance
and the degree of trust in the relationships (Yang, 1986; Park and Luo, 2001;
Luo, 1997a).
A person’s position in an individual’s guanxi network determines how the
person is treated and the depth of favour the person may be able to request.
Ambler (1995b) defined the whole guanxi network as being a guanxiwang
(Ambler, 1995b; Luo, 1997a) or a chain of interconnected persons. In the guanxi
Organisational Guanxi and State Owned Enterprises in south-west China
18
business context, membership and status in such a network is likely to be
determined by one’s potential to grant favours.
Renqing
Renqing underlies guanxi and refers to the social norms by which one has to
abide in establishing smooth and harmonious interpersonal relationships in
Chinese social life (Hwang, 1987; Luo, 1997a). Like guanxi, renqing can be
fostered by reciprocal invitations to dinner and exchanging gifts, greetings or
visitations; sympathizing with and offering help to a member of one’s social
network who is in need; on receiving favour, always remembering to return the
favour in due time; and remembering to grant favours to family and friends
requesting help (Hwang 1987; King, 1989).
The experience of sharing and interaction through living, working or studying
together are prerequisites to establishing or sustaining the relationship among
friends (Hwang, 1987; King, 1989; Tsang, 1998). Tsui and Farh (1997)
concluded that in essence, reciprocity - an implicit ideal of the guanxi network –
originates from renqing. Coleman (1990) argues that the rules of reciprocity in
guanxi establish a structural constraint that curtails self-seeking opportunism
and preserves social capital within the existing network structure. When one
Organisational Guanxi and State Owned Enterprises in south-west China
19
disregards this reciprocal obligation, he/she loses face, hurts related parties (i.e.
friends and family) feelings, and eventually jeopardizes the guanxi network
(Park and Luo, 2001: 457). In the business context, the strength of one’s renqing
provides leverage in interpersonal exchanges of favours (Yang, 1986; Hwang
1987; Luo and Chen, 1997).
When Chinese people weave their guanxi network, they also weave a web of
renqing obligations (Ambler, 1995a; Kipnis, 1997; Brunner, Chen, Sun, Zhou,
1989; Luo, 1997a). Like guanxi, renqing varies in warmth and intensity and may
be referred to as ‘strong’ or ‘weak’. The strength of renqing alludes to depth of
emotional feeling and willingness to sacrifice one’s personal interest in assisting
another (Ambler, 1995a; Kipnis, 1997; Brunner, Chen, Sun, Zhou, 1989). While
one enjoys the benefits of a connection network, one also incurs the burdens of
obligations which must be taken care of in the future (Chen, 1995: 56). This
expectation is a form of social capital that provides leverage in interpersonal
exchanges of favours (Yang, 1994). It represents an informal social obligation to
another party as a result of a guanxi relationship (Park and Luo, 2001: 457).
Jacobs (1979) referred to renqing as the measure of the emotional commitment
between the parties involved. If an individual is well equipped with empathy and
can understand other people’s emotional responses to various circumstances of
Organisational Guanxi and State Owned Enterprises in south-west China
20
life, feeling happy or sad when others do, or even catering for their tastes and
avoiding or evading whatever they resent, then such a person is said to know
renqing. In contrast, if one is not sympathetic to other people’s feelings or ready
to help them when they are in great need, then such indifference to people’s
emotional responses will certainly foster a reputation of not knowing renqing.
The expectation that someone will return a favour is connected to their depth of
emotional commitment to their guanxi partner. When one has a happy occasion
or difficulties, good acquaintances are expected to offer or render some
assistance. Those who do not follow this social norm are condemned to be
ignorant of renqing. Thus renqing stresses the social responsibility of
individuals to be aware of and behave according to certain prescribed rules of
behaviour (Bell, 2000; 133). When one does something to help one’s guanxi,
one improves one’s reputation as having renqing (or ganging) and wins trust
and face (mianzi) from others (Bain and Ang, 1997). In doing so, one puts one’s
debt on the beneficiary, who in return is obligated to return a favour when
requested (Hwang, 1987).
In the operation of guanxi, the expected reciprocity factor can result in favours
being banked to be repaid when the time is right (Yeung and Tung, 1996).
‘There is no hurry to use up guanxi. Like insurance, one hopes not to need it, but
its existence is reassuring’ (Ambler, 1995b: 27). Being aware of the reciprocal
Organisational Guanxi and State Owned Enterprises in south-west China
21
exchange of favours is essential in cultivating and sustaining guanxi (Redding
and Ng, 1982; Luo, 1997a).
Mianzi (Face)
‘Face’ is another key component in the dynamics of guanxi (Yeung and Tung,
1996: 57; Chen, 1995; Redding and Ng, 1982). Chen (1995: 54) identified two
dimensions of face: lian and mianzi. The former is associated with appropriate
personal behaviour such as respect to elders or helping a family member,
whereas the latter is something valuable that can be achieved like status or a
reputation for success. Chinese people are socially criticised if they have no lian
and are deemed unsuccessful and low in status if they have no mianzi. Park and
Luo (2001) identified that lian philosophically differentiates while mainzi
socially differentiates one from others in society. Mianzi is an intangible form of
social currency and personal status, which is affected by one’s social position
and material wealth (Park and Luo, 2001: 457). A person’s mianzi is often
determined by his or her post, credibility, honesty, reputation, power, income, or
network. If one does not have mianzi, one is very restricted and limited in the
social resources at one’s disposal to use in cultivating and developing one’s
guanxi network. This is even more so in business. With mianzi it is easier to
build one’s own network and this advantage enters more into everyday
Organisational Guanxi and State Owned Enterprises in south-west China
22
transactions as a form of social currency (Redding and Ng 1982: 207).
Giving an associate face is a form of showing or maintaining the respect to
one’s guanxi partner or connection. To maintain guanxi, care must be taken in
the acquisition and maintenance of face (Yeung and Tung, 1996) and social
interactions should be conducted so that nobody loses face (Hofstede and Bond
1988:8). Face is so important in Chinese society that if a Chinese person loses
face, it is as if a great shame has been placed on them. The Chinese have
traditionally compared losing face to the physical mutilation of an eye, the nose
or mouth. Yeung and Tung (1996: 57) drew the analogy that face is like the bark
of a tree: without its bark, the tree dies. Those who have lost face in Confucian
society are more than social outcasts and a loss of face brings shame not only to
the individuals but also to related family members (Bell, 2000). The
maintenance of face is important and the Chinese interact with each other to
protect, save, add, give, exchange or even borrow face.
Face can be given when due respect is paid to someone else (Hofstede and
Bond, 1988). It can be enhanced by offering a gift to celebrate an occasion
however such a gift needs to be chosen carefully. The gift must be appropriate
or the recipient will lose face and the giver will not have face. The occasion for
the gift giving must also be appropriate in order to avoid embarrassment or
Organisational Guanxi and State Owned Enterprises in south-west China
23
rejection of the gift (Brunner and Koh, 1988: 39).
Gifts are an important method of building guanxi and are sometimes associated
with seeking favour. In building the correct environment to request a favour, it is
important that these gifts are also not directly associated with the favour being
requested, that they are offered well in advance and that they are presented in
private and not given in the presence of others in order to avoid embarrassment
for the receiver (Kipnis, 1997; Brunner, Chen, Sun and Zhou, 1989; Yang
1986). Chinese officials do not usually like to accept gifts due to the links to
corruption. However the right gift at the right time can always be accepted if
done discreetly.
Guanxi as a Necessity for Doing Business in China
The importance of guanxi in achieving success in business has been confirmed
in studies by Standifird and Marshall, 2000; Lovett, Simmons and Kali, 1999;
Tsang, 1998; Wong, 1998; Luo, 1997a; Luo, 1997b; Luo and Chen, 1997; Xin
and Pearce, 1996; Pye, 1992; Blackman, 1997; and Davies et al, 1995. Guanxi
has been shown to affect financial outcomes (Luo and Chen, 1996), market
benefits (Davies et al, 1995), and competitive advantages (Tsang, 1998; Yeung
and Tung, 1996). Guanxi relationships have also been seen to be moderated by
Organisational Guanxi and State Owned Enterprises in south-west China
24
organisational form (Xin and Pearce, 1996), relational demography (Farh et al,
1998), and social processes (Redding and Ng, 1982).
Chinese society has long been known for its emphasis on guanxi as a guiding
principle of economic and social organisation (Bian, 1994; Fried, 1953; Hwang,
1987; Walder, 1986; Marcoux, 2002) and guanxi has been pervasive for
centuries in every aspect of Chinese social and organisational culture (Park and
Luo 2001). Yeung and Tung (1996) found that from a list of eleven factors,
Chinese executives chose only guanxi as a key to achieving long-term business
success. Although dated, this result is significant yet simplistic in nature. Clearly
having guanxi is of vital importance if one is to conduct successful business in
China however care must be taken to remember that guanxi does not ensure
success and one must know how to effectively use guanxi in order to take
advantage. In their study, Yeung and Tung (1996) confirmed that the mere
existence of guanxi was not enough to ensure success. They drew the analogy
between guanxi and a piece of wood thrown to a drowning swimmer. The wood
does not have inherent magical properties that will automatically rescue the
swimmer, but the swimmer can save them self if they know how to utilise the
wood effectively. It is clear that guanxi cannot be viewed as a panacea even in a
network-based Chinese society; its effective utilisation depends on its fit with
institutional, strategic, and organisational attributes (Park and Luo, 2001)
Organisational Guanxi and State Owned Enterprises in south-west China
25
Doing business in China without guanxi is difficult. In contrast, if one has
guanxi one can create an advantage in business such that anything seems
possible. (Davies et al, 1995; Brunner et al, 1989). Guanxi remains the lubricant
for the Chinese to get through life and scarce resources have been allocated
according to the power of the guanxi rather than being based on bureaucratic
rules (Park and Luo, 2001: 460). For example in the business domain there is a
recognised degree of utilising one’s guanxi network for accomplishing one’s
interests (Luo, 1997a). Guanxi is a powerful mechanism by which Chinese
executives have been known to secure or obtain resources, information,
approval for contracts, joint agreements, the supply of public services such as
electricity and water, raw materials and equipment, better prices and technical
assistance. Organisations may rely on guanxi with government officials to get
things done and as a mechanism by which to successfully facilitate economic
exchanges and overcome administrative interventions with the local, provincial
and national governments (Ambler, 1995a; Brunner et al, 1989; Farh et al, 1998;
Park and Luo 2001: 459). Often government officials maintain the power to
ratify projects, allocate resources and materials, arrange financing and
distribution, and provide access to infrastructure. In this environment, the guanxi
network substitutes for government-instituted, formal channels of resource
allocation and dispersal (Park and Luo, 2001: 461). Guanxi is also a valuable
Organisational Guanxi and State Owned Enterprises in south-west China
26
entrepreneurial tool to bridge gaps in information and resource flows between
unlinked firms and between firms and important outside stakeholders (Park and
Luo, 2001: 457).
Developing real and meaningful guanxi in business takes time and guanxi
business relationships are not simple (Marcoux, 2002). Reconfirming an earlier
point, good guanxi implies having a successful history of working together,
providing favours, and building up trust between one another over time (Jacobs
1979; Brunner et al, 1989). The length of time a guanxi relationship has existed
and been in operation directly correlates with the strength one can find in such
guanxi.
For business executives, having guanxi with those that one is dealing with is
critical to the level of success one can achieve. Business associates with such
ties are usually trusted more that those without (Jacobs, 1979). The network of
connections (based on guanxi) of a general manager or chief executive officer
and how he or she uses them does have important implications for the success of
the organisation he or she works for (Luo, 1997b; Farh et al, 1998). Despite the
enactment of new legislation since reform commenced, Chinese business laws
remain vague and business people operate in an unstable regulatory
environment. In this context, the absence of explicit guidelines, directives and
Organisational Guanxi and State Owned Enterprises in south-west China
27
policies are open to interpretation by those who occupy positions of power
(Yeung and Tung, 1996: 59) and in this scenario, guanxi remains an important
component that contributes significantly to the lifeblood of the Chinese business
community.
Given the developing legal and regulatory environment and the uncertainty in
China’s transition economy, the recent debate over whether or not guanxi
connections are critical to managers and organisations in China in facilitating
interpersonal activities has grown (Alston, 1989; Guthrie, 1998; Yang, 2002;
Park and Luo, 2001). Some argue that the higher level of uncertainty in the
transition economy further induces market-oriented firms to seek guanxi to deal
with competitive forces in the environment and with government officials.
These market-oriented firms can minimise uncertainties and secure necessary
inputs through a guanxi network (Park and Luo, 2001).
Institutional uncertainty encourages private firms to nurture a long term
reciprocal relationship with local governments through various formal and
informal ties. Guanxi with local governments helps firms settle negotiation deals
(Pye, 1995). To compensate for institutional uncertainty, firms more eagerly
turn to guanxi networks, thus decreasing external dependency on acquiring key
resources. In this scenario guanxi is an efficient mechanism to overcome or
Organisational Guanxi and State Owned Enterprises in south-west China
28
minimise the effect of administrative interventions by the Chinese government
(Park and Luo, 2001).
From the large number of similar definitions used in describing guanxi it is
reasonable to conclude that guanxi refers to the establishment of a connection
between two individuals that enable a bilateral flow of personal favours or social
transactions between them (Yeung and Tung, 1996; Pye, 1992).
In summary, a variety of business domains, writers and researchers have
documented the significance of guanxi in attaining business success in modern
day China. Today debate continues whether or not Chinese firms still utilise
guanxi to some degree to create a competitive advantage, manage organisational
interdependence and to mitigate institutional disadvantage, structural
weaknesses and other environmental threats (Park and Luo, 2001). Furthermore,
scholars question if the advent of the socialist market economy in China is
resulting in the decay in the importance and usage of guanxi in business
(Guthrie, 1998). Even though parts of China are changing at differing speeds to
others, modern Chinese society still operates within the realms of countless
social and business guanxi networks. The researcher argues that it remains
critical for businesses in China to understand and properly utilise guanxi.
Organisational Guanxi and State Owned Enterprises in south-west China
29
Thesis Questions/Objectives
This thesis was first inspired by Mayfair Yang’s Gifts, Favours and Banquets:
The Art of Social Relationships in China. Yang concluded that guanxi is perhaps
the most important mechanism in social interaction and that the manufacturing
of obligation and debt is the ‘primary binding power of personal relationships’
in contemporary China (Yang 1994: 6). Yang’s descriptions attracted the
researcher at a time when the Chinese government had commenced the major
challenge in shifting economic management from a planned economy toward a
socialist market economy with Chinese characteristics. As a result the changes
taking place in China’s economy may have begun to change the way in which
guanxi is being utilised and this was acknowledged in Yang’s (1994) conclusion
that market forces had begun to change the dynamics of guanxi.
By 2002, Guthrie (1998; 2002) had claimed that the importance of guanxi in
business in Shanghai was deteriorating and in recent years the debate on the
survival of guanxi and whether or not the opening up of China has eroded or
strengthened the power of guanxi has grown. The inspiration for this thesis has
been in determining whether or not the level and quality of change in the
importance of guanxi or guanxi practice is uniform across China or is it
dependent on the regions distance from the source from which the reformation is
Organisational Guanxi and State Owned Enterprises in south-west China
30
being driven. In addition, the questions of determining whether there are in fact
two or more quite distinctly different business environments in China (the
coastal and the inland) and does the strength, survival and characteristics of
guanxi in each of these locations differ are investigated.
Both Yang (1986) and Guthrie (2002) focused their research on environments
on China’s eastern seaboard where the business culture is more exposed to
reformation and global forces and where the characteristics and importance of
guanxi maybe changing (Guthrie, 2002). The research presented in this thesis
has been collected from south-west China and in this region the reform process
has been quite different from that being experienced in coastal environments.
The effect it is having on the phenomenon of guanxi also appears to be different.
People in this region are less exposed to international forces and market
economy practices, the push for reform is not as strong, economic conditions are
changing much more slowly and the practices of guanxi are remaining more
entrenched.
In addition, there has been a paucity of research into guanxi at the management
and organisational level in the south-west of China and this thesis presents new
findings and implications for business managers, joint ventures and those with
organisational alliances operating or planning to operate in this region of the
Organisational Guanxi and State Owned Enterprises in south-west China
31
People’s Republic of China.
Primarily this thesis investigates how guanxi operates internally within a large
organisation in south-west China and provides an insight into the effect that the
new market economy and globalisation are having on guanxi in this region of
China.
The fieldwork for this research was based at the Roaring Dragon Hotel site in
the south-west of China between May 1st, 1999 and December 24th, 1999, June
3rd and July 15th 2001, November 11th and December 22nd 2002, and
December 7 to 23rd, 2004. During this period, observations and interviews
confirmed that the practices of guanxi, renqing, and mianzi remained prominent
in business life in this environment. In south-west China, the changes in
business characteristics due to the introduction of the market economy are
progressing more slowly in comparison to the changes occurring in coastal
regions and in China’s Special Economic Zones (Grainger 2003; Grainger,
2004; Guthrie, 2002).
At the Roaring Dragon Hotel research site, data were collected through a written
survey that was completed by 437 Hotel employees, and through single and
multiple interviews conducted with 45 employees, supervisors, middle and
Organisational Guanxi and State Owned Enterprises in south-west China
32
senior managers. Additional interviews were conducted with a group of 22
officials, academics, and businessmen operating within this region. Written
notes were taken during each interview and a transcript of each recording
completed later. All respondents were asked for permission to be recorded and
only two contributors who were interviewed did not want their interview
recorded. Some interviews were conducted with the assistance of an interpreter
and translator.
Thesis Structure
Part One, The Roots of Organisational guanxi, comprising Chapters, 1, 2 and 3,
investigates the roots and evolution of organisational guanxi and includes the
development of the socialist market economy, the development of the SOE, and
the important role played by the danwei in this process.
Chapter Two - From Planned to Market Economy - provides a history of
China’s economic development since 1949 and a firm basis on which to
compare the development of business practices in rural and coastal China.
Chapter Three covers the development of the State Owned Enterprises (SOE)
Organisational Guanxi and State Owned Enterprises in south-west China
33
and identifies the SOE as the home of organisational guanxi. Here I argue that
the basic influence of Confucian belief provided the core element from which
organisational guanxi was re-born in the military danwei that supported Mao’s
followers during the period of pre-1949. Events such as the Long March and the
establishment of rebel controlled regions in the north-west of China
strengthened the power of these provinces and after Mao assumed power, the
development of the SOE provided the right environment in which to incubate
organisational guanxi. As many of the SOE managers were members of Mao’s
cadres before he took control it was a natural progression for these cadre to use
the same style of work methods pre- and post- 1949.
Chapter Four – ‘Danwei: the roots of organisational guanxi’ - summarises the
origins, emergence, and history of the danwei; examines the characteristics of
the danwei; and argues how the original military danwei practices during the
1930s and 1940s have contributed to the development of modern organisational
guanxi.
In this Chapter the research and discussion focuses on the period from pre-1949
danwei through to when guanxi practices ceased during the Cultural Revolution
(Yang, 1994; Yeung and Tung, 1996: 58). This chapter highlights the critical
role the danwei has played in the development of the characteristics of
Organisational Guanxi and State Owned Enterprises in south-west China
34
organisational guanxi.
Having investigated the roots and consolidation of organisational guanxi in Part
One, in Part Two we examine organisational guanxi in operation in south-west
China.
Chapter Five – ‘Organisational Guanxi in China’s Hotel Sector’ - defines
organisational guanxi and the distinctive characteristics that differentiate it from
other types of guanxi. Expanding on the long list of guanxi types provided by
Kipnis (1997), the researcher proposes the existence of organisational guanxi in
south-west China’s hotel sector and provides evidence based on the findings of
the research conducted at the Roaring Dragon Hotel in south-west China. In this
chapter, examples of traditional and new forms of guanxi are provided. It
discusses the implications of organisational guanxi for business entities in south-
west China, how guanxi is accepted by south-west China’s emerging educated
youth, and the effect guanxi has on organisational outcomes for managers
working in south-west China.
Chapter Six is the case study - Guanxi neglect at the Roaring Dragon in South-
west China: The Demise of an International Management Contract. This case
study introduces and defines the concept of guanxi neglect through the
Organisational Guanxi and State Owned Enterprises in south-west China
35
description of the takeover of a formerly Chinese managed hotel by a western-
based, international management company. Specifically, the study focuses on
the cultural conflict that occurred among employees trying to adapt from the
former Chinese relationship (guanxi)-based methods of hotel management to
those of the more Western market-oriented management. The conclusions that
are drawn highlight cultural characteristics and issues that companies taking
over or approaching joint-ventures with SOE in south-west China may
encounter and should consider. This case highlights the role guanxi can play in
hindering or enhancing the changing dynamics and operations of a large service
organisation as it embraces the onset of globalisation and the socialist market
economy.
Chapter Seven – ‘Differentiating between Intra-organisational and Inter-
organisational guanxi’ investigates the question: do the characteristics of guanxi
in operation between organisations differ from those that operate internally
within organisations? This question is answered by examining and comparing
survey results collected from trade executives based in Hong Kong (Fock and
Woo, 1998) with new data collected from employees from the Roaring Dragon
Hotel in the south-west of mainland China. Direct comparisons are made
between results of these two surveys to uncover the characteristics that
distinguish and differentiate the guanxi found in inter-organisational and intra -
Organisational Guanxi and State Owned Enterprises in south-west China
36
organisational environments.
Chapter Eight - ‘Guanxi decay in China: Is it really happening?’ - compares the
speed of development of the socialist market economy in the eastern and
western regions of China and asks does the speed of reform enhance the decay
in the significance of guanxi practice in each respective region? In particular
examination is given to Guthrie’s (2002) claims and Wang’s (2002) rebuttal to
the proposition that the significance of guanxi is in decline in the Shanghai
business district. These views are compared and a proposal is formulated
claiming that the decay in the significance of guanxi is much less and is
occurring much slower in south-west regions.
In this chapter the researcher compares the economic development of the coastal
and inland regions of China and argues that they really are two very different
regions operating within the same country. The power of guanxi may be in
decline as Shanghai goes through an economic transition; however it may still
be too early to draw such a conclusion across all of China and especially in the
south-west. Conclusions differ regarding the importance, development,
maintenance and decay of guanxi in these environments. To further counter
Guthrie’s findings, it is argued that the economically developed Confucian
societies of Singapore, Taiwan, and Hong Kong have shown that the
Organisational Guanxi and State Owned Enterprises in south-west China
37
establishment of a modern economy, supported by institutional law, does not
necessarily displace the reliance on guanxi connections (Yeung and Tung, 1996:
64).
The findings of this new research in south-west China provide conclusive
evidence that the guanxi network remains the lifeblood of the business
community (Kao, 1993). In addition, this research throws up some conclusions
that are not aligned with that of Guthrie’s (2002) Shanghai-based findings.
The major findings of this thesis include the acknowledgement and definition of
organisational guanxi, the exploration of the roots of organisational guanxi
inside the danwei, the differentiation of intra- organisational guanxi from inter-
organisational guanxi, the definition of the concept of guanxi neglect, and a
comparison of the decay in the strength and usage of guanxi in south-west China
with that in the Shanghai region.
Organisational Guanxi and State Owned Enterprises in south-west China
38
Part One
The Roots of Organisational Guanxi
In building the pallet from which to deliver the new findings on organisational
guanxi, one must first focus on the economic conditions and types of decision-
making that took place during the Mao and Deng eras as the adjustment was
made first to a planned economy and later to a socialist market economy. This is
covered in Chapter Two – From Mao to Deng: Adapting from Planned to
Market Economy. Chapter Three focuses on the structure, power and politics of
the State Owned Enterprises, how this has contributed to the survival and
strength of organisational guanxi and how they are changing with the evolution
of the socialist market economy. Chapter Four identifies the critical role the
danwei played in the evolution of organisational guanxi.
So what is organisational guanxi and where do the roots of this phenomenon lie?
With China’s colourful and at times catastrophic past one must ponder as to how
such behaviours and characteristics have evolved. Primarily one must focus on
the state owned enterprises if one is to examine the phenomenon of
organisational guanxi in operation and this investigation is documented in the
following chapters.
Organisational Guanxi and State Owned Enterprises in south-west China
39
Chapter Two
From Mao to Deng: Adapting from Planned to Market Economy.
One cannot approach a contemporary study of guanxi in the Chinese business
community without assessing the effects that the change from planned to
socialist market economy created in this business environment.
Mao’s Rule and the Development of the Planned Economy
Covering 9.6 million square kilometres, the People’s Republic of China is the
third largest country in the world with 31 provinces, autonomous regions, and
municipalities directly under control of the central state government (Zhu, 1999:
5). It is also the most populated country in the world with 1.3 billion people
comprised of the Han majority and a further 55 ethnic minorities. In 1999, 30
percent of the population lived in the cities and 70 percent in rural areas (Sabath,
1999). Since then there has been a steady migration of people moving from rural
to urban locations.
In 1949, the Chinese Communist Party (CCP) defeated the ruling Kuomintang
in China’s civil war and assumed power under the leadership of Chairman Mao
Organisational Guanxi and State Owned Enterprises in south-west China
40
Zedong. It was the first time the Chinese people had been unified under one
leader since the nineteenth century. After its long history of humiliation and
exploitation by imperialist powers, China aimed to become self-reliant in the
face of international isolation and regain strength in the world. From this time
through to 1976, the Communist Party led by Mao sought to re-engineer
Chinese society (BCAS, 1983) and pursue the twin goals of establishing a
socialist state and again making China rich and powerful (fuqiang).
Industrially, the CCP inherited an extremely lopsided economy. Prior to the
takeover in 1949, coastal provinces accounted for only 11 percent of the land
area but were the source of 78 percent of China’s total industrial output (TIO).
The rest of the country produced only 22.4 percent and even though the west of
China accounted for over half the country’s territory, only 8 percent of TIO
originated from this region (Wang and Hu, 1999). From the beginning of Mao’s
rule, the CCP pledged to achieve a more balanced distribution of productive
capacity and income, especially in inland regions (Shapiro, 2001).
Self-induced migration began almost immediately after the 1949 victory, when
politically progressive Chinese were asked to volunteer to leave their homes and
settle ethnic minority areas along and within China’s vast frontiers (zhibian).
Those migrating provided the required labour to build the infrastructure able to
Organisational Guanxi and State Owned Enterprises in south-west China
41
facilitate the transportation of rich natural resources from internal regions to the
more developed coastal areas (Friedman, Pickowicz and Selden, 1991). The
resettlement of these people to inland domains served two purposes: to dilute
local populations that were often comprised totally of minorities and to suppress
opposition to the Han Chinese and the Chinese Communist Party rule.
After establishing control, the Mao government closed the door on contact with
nations outside of China and the mainland population experienced a period of
almost complete isolation from the outside world (Suka, 2001). The CCP and
Mao believed the closed-door policy would be good for China’s development
and progress. In reality, this closure forfeited China of its ability to advance with
the times and prevented the Chinese people from keeping pace with global
development (Crane, 1999).
From the early 1950s, Soviet-style plans for rapid development of heavy
industry began to develop (BCAS, 1983). To structure this new direction, the
CCP took the new path of drawing up 5-year plans to guide and direct the
Chinese economy. The first Five-Year Plan (1953–1957) of the People’s
Republic of China gave high priority to the development of industrial bases in
north, north-west and central China.
Organisational Guanxi and State Owned Enterprises in south-west China
42
In the summer of 1957, less than a decade after the 1949 Communist victory, a
major change in Mao’s policies took place. In a decisive turnaround, hundreds
of thousands of China’s most distinguished academics and leaders became
targets and were suddenly criticised, harshly punished, ostracised, and silenced
in an ‘anti-rightist movement’. This shift in policy had a negative effect on
China’s economic development. By eliminating the input of the Chinese
intellectuals who traditionally had the confidence and duty to speak out, China
deprived itself of the input from the authoritative voices that may have helped
caution against the poor planning that was to follow (Shapiro, 2001; Friedman,
Pickowicz and Selden, 1991). The way the CCP system treated these scholars
became a trademark of the Mao era during which there was a broad repression
of intellectuals. Hundreds of thousands of lesser known thinkers, leaders, and
ordinary Chinese were silenced for daring to disagree with the Maoist
orthodoxy, or thought better of airing their views when they saw more
prominent thinkers come under attack.
Another concern was that by the mid 1950s, although not yet apparent to most
observers at the time, China’s population was growing at an alarming rate.
Demographers who were worried about this population growth were persecuted
even though it now is clear to see that Mao’s campaign of promoting the
strategy of the bigger the population the better was an error (Bannister, 1998).
Organisational Guanxi and State Owned Enterprises in south-west China
43
By the time the government had realised it was too late. Overpopulation had
become China’s greatest problem with serious implications for every aspect of
the country’s development.
For the second five year plan between 1958 and 1962, the spread of the Chinese
Communist Party’s socialist thinking led to the start of the campaign entitled the
Great Leap Forward and the movement to establish people’s communes. This
period of economic management is remembered as being quite farcical with
such initiatives as encouraging the people to build ‘back yard’ furnaces, so as to
melt all the metal objects they could find in an effort to help the country produce
steel. Such furnaces appeared everywhere. However due to the poor quality of
steel produced, this program was a tremendous waste of time, energy and
resources. Mao and his followers all too often fell into the trap of believing that
because they declared something possible or true, it would happen (BACS,
1983). Often it did not and this was a good example.
During the Great Leap Forward, ill considered and poorly executed policy was
common. Some notable errors included interference with river courses and big
dams being built hastily. Qualified engineers met their political demise because
they opposed the Chinese Communist Party’s construction of big dams. One of
these hastily constructed dams at Zhumadian in Henan Province broke
Organisational Guanxi and State Owned Enterprises in south-west China
44
catastrophically in August 1975. The number of resultant deaths ranged between
86,000 (the official CCP figure) and 230,000 (estimate proposed by opponents
of big dams). This was not an isolated case and in Henan Province alone, more
than 110 dams were built. By 1966 half of these dams had collapsed as many
had been built only with earth and or designed by untrained peasants when
realistically this should have been a role for the banished intellectuals (Shapiro,
2001; Friedman, Pickowicz and Selden, 1991).
The urgency of the Great Leap Forward, the obsession with producing industrial
output at all costs, combined with the 1960’s withdrawal of Soviet aid and
advisers, all contributed to the collapse of the Chinese agriculture-based
ecosystems on which people depended for food. Within months of the beginning
of the campaign, China was in the grip of the greatest human-created famine in
history. While many of the population starved, coffers full of grain stood locked
and local leaders launched campaigns of terror to ferret out any more grain that
may have been hidden. Dissenters were harshly punished and desire, hope and
fear were used to generate widespread acquiescence in a number of ill-
conceived schemes (Shapiro, 2001). The defining characteristics of this
campaign were the mass mobilisation of labour, the speed and urgency with
which society was re-organised, the emphasis on raising agricultural yields, and
again such dubious campaigns as ridding China of pests.
Organisational Guanxi and State Owned Enterprises in south-west China
45
The Great Leap Forward was a disaster and the Chinese people suffered as
industrial and agricultural output dropped. Famine and depression resulted and
began to generate some political opposition and falling morale among the
population. The peoples’ enthusiasm was greatly dampened with many not
having enough to eat (Deng1, 1994a; Friedman, Pickowicz and Selden, 1991).
During this period, the confused leaders neglected the laws governing economic
development and a disastrous drop in production resulted. At the end of the
Great Leap campaign the Three Years of Re-adjustment were required before
the national economy recovered and resumed its development.
Soviet Leader Khrushchev recalled meeting Mao during this time and how it
had been hard for Khrushchev to accept how willing Mao was to sacrifice his
own people in order to achieve his goals.
It was not until the Great Leap campaign, when millions of Chinese began
dying during the famine, that I became fully aware of how much Mao
resembled the ruthless emperors he so admired. Mao knew that the people
were dying by the millions but did not care (Soviet Leader Khrushchev
recalling a meeting with Mao in November 1957, cited in Shapiro, 2001)
Organisational Guanxi and State Owned Enterprises in south-west China
46
Between 1966 and 1976 came the Cultural Revolution that was aimed at
revolutionising the regime. This campaign was characterised by further coercion
and chaos. More economic mistakes were made, resulting in renewed economic
chaos (Deng2, 1994b). In reflection, rarely has there been such a historical
moment in the history of humankind in which political repression, misguided
ideals, poor vision and incorrect methods coincided to achieve such
environmental destruction and human suffering.
As part of the chaos and coercion, another transformation was taking place. In
an attempt to balance the volume of production between coastal and regional
areas, workers and entire factories were uprooted and sent inland. Regional
indigenous ethnic minorities faced an influx of people and policies that
threatened and destroyed traditional ways of life. From 1964 to mid-1971, 380
factories were moved inland. This policy was not well thought out and during
the Cultural Revolution, China failed to develop or industrialise its interior in a
responsible and sustainable fashion (Shapiro, 2001; Friedman, Pickowicz and
Selden, 1991).
1 Deng speech - Reform is the Only Way for China to Develop its Productive Forces, Aug 28, 1985 2 Deng speech - To Build Socialist We Must First Develop the Productive Forces, April-May, 1980
Organisational Guanxi and State Owned Enterprises in south-west China
47
In an effort to make the coastal and inland areas more equal, Mao preached self-
reliance. This resulted in each Chinese provincial government or large city
owning its own facilities such as a steel mill, power plant, chemical plant, and
brewery. This resulted in a huge duplication of bureaucracy, manufacturing, and
distribution (Tanzer, 2001). With this strategy of self-reliance, efficiency was
not important and by 1966
duplication had become so prevalent that China had 300 auto factories, 115 TV
plants, and 800 economic development zones (Liu, 1997). To ensure the
survival of these provincial organisations, access to markets outside of each
respective province was made difficult and was usually non-existent. This
restriction limited the size to which any organisation could grow and remains
the main reason why large companies are only today beginning to develop in
China.
During the period of the Cultural Revolution the schools were closed and
millions of youth were sent to work in the countryside whilst China remained
closed to the outside world. The state displaced millions of people: business
people, academics and power brokers were stripped of their powers and forced
to go to live in the countryside to learn more about the peasants’ way of life.
This resulted in China’s youth at that time having limited exposure to
educational opportunities, international issues or any idea of the fundamentals of
Organisational Guanxi and State Owned Enterprises in south-west China
48
modern economic systems (Suka, 2001). Young urban Chinese had to scrape out
a harsh existence far from home and although many credit the hardships they
endured during this period with teaching them independence, social skills, self-
reliance, and values that extend beyond material things, overall they feel
resentment and sorrow that their education was interrupted (Int # 62). The
relocation of millions of volunteers to foreign parts of China during this period
resulted in enormous social dislocation and the struggle by millions of these
people to get permission to return home (BACS, 1983). The failure of the
Cultural Revolution to deliver on its promises, and Mao’s misuse of his vast
reservoirs of popular support, left generations of Chinese with a deep sense of
betrayal and cynicism. Today those who were affected are still generally
reluctant to talk about these events due to their bad experiences during this
period (Int # 66, Int # 58, Int # 74).
During this campaign the policies of the Party were aimed at breaking up the
traditional Confucian family structure and at creating a ‘new socialist man’. It
was part of an effort to use mass mobilisation efficiently to overcome China’s
poverty and backwardness and to motivate the people through the real and
imaginary internal and external threats to China’s security. Mao continued to
promote his view among the people through repression, indoctrination, utopian
promises and censorship. To maintain full control, Mao established repression
Organisational Guanxi and State Owned Enterprises in south-west China
49
of expression and other intellectual freedoms, and urged the suppression of local
traditions (Shapiro, 2001). In this environment, levels of trust were very low and
the network of guanxi relationships became inoperative. Disruptions to the
guanxi connections in Chinese society during this period exacted an enduring
toll.
Government-appointed central planners controlled China’s economic system
and were responsible for determining the utilisation and allocation of resources.
Under this system, they determined all inputs and outputs and there were no free
market forces present in the economy. Prices of products were set by the central
planners and were neither derived from interactions between demand and
supply, nor used to guide allocation (Zhu, 1999).
After the Cultural Revolution and toward the end of Mao’s rule, the people and
workers had limited official control and eroding loyalty. In many parts of China,
clan-based village institutions began to develop the internal networks and
confidence to provide the foundation for a complex and personalised range of
local and regional power centres that sometimes promoted and sometimes
resisted the dictates of the centre. The model of a top-down relationship between
the centre of government and periphery started to yield to one characterised by
interaction and influence among numerous political actors at many levels, with
Organisational Guanxi and State Owned Enterprises in south-west China
50
developing centres of power throughout the bureaucratic hierarchy. Policies and
campaigns were distorted and re-written in the service of rivals and alliances
and modified according to local conditions. The trend to ignore Mao’s policy
grew as locals concern about dependents and those within the local community
began to develop. After an absence during the Cultural Revolution, the
practices of trust and guanxi began to slowly re-emerge. The central Party-state
was no longer the only centre of power and government bureaucracies at various
levels began to implement, interpret and sometimes distort policies in order to
further their own personal goals (Shapiro, 2001).
Although central planners were making all of the planning decisions, provincial
leaders began taking steps to protect their local industries from competition
through imposing tight state control over distribution and establishing
prohibitive cross-border tariffs. This had the result of maximising provincial
employment and tax revenue. Under the Chinese Communist Party rule, all of
the large organisations that existed in China were now owned by the state.
Tariffs and restrictions that made inter-provincial trade difficult confined SOE
to provincial operations and restricted them from developing into much larger
national, international or multi-national enterprises.
In brief, the Chinese operated under Mao’s closed planned system for thirty
Organisational Guanxi and State Owned Enterprises in south-west China
51
years and economic stagnation, poor educational development and the isolation
of the country from outside contact and influence resulted.
During the same period of closure, outside China globalisation was gaining
momentum. International deregulation was providing new opportunities and
new threats for business and the competition for market share was becoming
less restricted to national boundaries. Business managers were developing new
strategies to counter the growth in international and global competition (Wee,
2001). In contrast, in the closed-off economic cell that was China, managers had
no experience or knowledge of the forces of globalisation that were developing
internationally. In contrast, the period under Mao’s rule was the prime time
when organisational guanxi was developing in state owned enterprises.
Deng’s Reign and the Beginnings of Reform
Mao died in 1976 at the age of 83 and in the summer of 1977 Deng Xiaoping
returned from political exile to supplant Mao’s hand-picked successor, Hua
Guofeng, at the Third Plenum of the Eleventh Central Committee in December
1978.
Organisational Guanxi and State Owned Enterprises in south-west China
52
Deng had been in political disgrace since the start of the Cultural Revolution
when his emphasis on economic results rather than ideology had put him at
cross-purposes with Mao (Zhu, 1999). He became China’s leader from 1978 and
began the process of instituting the economic reforms that continue today.
Reforming such a massive economy meant changing the lives and work patterns
of more than one billion people and this remains a tremendous challenge.
Deng’s new group of leaders commenced the process of de-collectivising the
people’s communes, opening up China to the outside world, and re-elevating
China’s long-suffering intellectuals from society’s most distrusted status to
again become active participants in the reformation and modernisation effort.
China’s youth were allowed to return to their home cities and universities
entrance exams were re-instated.
Deng realised that China could not rebuild itself behind closed doors nor
develop in isolation from the rest of the world. He insisted on ‘openness’ to the
rest of the world and maintained that without it China would remain
underdeveloped and not be a truly modern nation (Crane, 1999). Following
Mao’s disastrous and checkered history of economic management, the challenge
for the new leader was to reform both rural and urban parts of the nation so as to
invigorate the domestic economy and to prepare China for the opening to the
Organisational Guanxi and State Owned Enterprises in south-west China
53
outside world.
Reforming the economy became a priority and Deng’s government introduced
policies aimed at positioning China to rise in prosperity and stability (Wireman,
2003). The goal to develop the national economy was endorsed by the Fifth
National People’s Congress in March 1978 and a social transformation
spearheaded by economic reforms was launched aimed at realising the grand
dream of national advancement (Zhu, 1999). In initiating reform, the
government encouraged the development of agriculture, industry, defense, and
science and technology through a campaign called the four modernisations (Zhu,
1999; Wireman, 2003; Ogutcu and Taube, 2002). The Chinese were encouraged
to aim high and were reminded that exposure to international business was a key
ingredient that was necessary if China were to successfully implement this
campaign. The initial objective was to quadruple economic production by the
end of the century and to produce a better standard of living for the Chinese
people. Deng aimed to gradually and systematically reform everything in the
existing economic structure that was seen to be impeding China’s progress and
development. Preparing China to become more open to the outside world was
one of the priorities. In his words –
We cannot keep the door closed on the outside world. Now things are
Organisational Guanxi and State Owned Enterprises in south-west China
54
vastly different; there has been a qualitative change that can be seen in
every field. We have to be determined about opening up to the outside
world, because there are many obstacles in our way (Remarks by Deng
during an inspection tour of Shanghai, 1991. Source: Selected Works of
Deng Xiaoping, Volume III, 1975 – 1982).
A New Economic Focus
The decision to change from a planned to a socialist market economy with
Chinese characteristics became China’s first step towards modernisation and
global integration. The new policy of opening up called for a shift from Mao’s
closed self-reliance to China becoming a participant in the world market.
Deng’s government aimed at evolving China from being an inward looking,
self-sufficient production economy to an outward-looking country trading in the
context of globalisation. Momentum for this strategy increased as the
government explored ways to help the economy develop more rapidly.
The speed of development was tempered by a number of factors. Deng had long
watched the mistakes of Mao. From 1978 he and his experts began
internationalising the country with extreme caution so as not to disrupt the new
domestic power balance that was forming. China chose ‘to cross the river by
Organisational Guanxi and State Owned Enterprises in south-west China
55
feeling the stones’ and to change gradually (Rawski, 1997; Suka, 2001).
Looking cautiously outside the Chinese border became more acceptable.
However, after such a long period of closure and at such an early stage of
reform, a totally open-door policy to the west was avoided as the new
government did not want to increase nervousness and insecurity among the
people and the power brokers. Deng and his government were aware that the
Chinese people needed to be given time to understand and become more
familiar with ‘openness’ and economic reform (Suka, 2001).
The go-slow, softly-softly approach was seen as being responsible. However,
such gradualism also allowed opponents and conservative forces to organise
blocking coalitions which restricted the speed of reform (Rawski, 1997).
Although China’s officials heard Deng’s enthusiasm, many leaders were slow
and reluctant to learn how to operate in a socialist market economy. As a result,
when the pressure was on them to make economic decisions they tended to
resort to the old methods in an attempt to solve economic problems. This was
another factor that restricted the speed and quality of the reform process (Tian,
1997; Parker and Wendel, 1997).
With the poor educational systems that had evolved under Mao, the need for a
better system gathered momentum and with it the realisation that China could
Organisational Guanxi and State Owned Enterprises in south-west China
56
not succeed without skilled human resources and knowledge. The lack of
expertise and trained personnel available at the end of Mao’s reign was directly
attributable to the educational void produced by the Cultural Revolution, the
resultant closure of China’s schools and the suppression of intellectuals.
From 1979 changes began to take place in the business sector. China enacted a
law enabling the establishment of joint enterprises with companies from outside
the mainland as well as establishing trade incentives in certain coastal locations.
The leaders of Guangdong Province proposed that Special Economic Zones
(SEZ) be established to provide the Chinese with access and exposure to the
international market forces and to attract foreign direct investment (Park, Li and
Tse, 1997). These SEZ were the first comprehensive experiment to test the
feasibility of China’s economic liberation. In these regions, Chinese businesses
and managers were exposed to the international market in a controlled and
protected way without running the risk of opening the whole country and
economy to deregulation (Suka, 2001; Zhu, 1999; Rawski, 1997). In August
1979, the first two SEZ were established near the coast at Shenzhen and Zhuhai
in Guangdong Province and two months later a further two were established in
Shantou and Xiamen in Guangdong and Fujian Provinces respectively. All of
Organisational Guanxi and State Owned Enterprises in south-west China
57
the SEZs were located near the coast so as to allow the easy import and export
of goods.
These coastal SEZ became the first to develop the infrastructure required to
accommodate foreign entrepreneurs through improvements in the quality of raw
materials, energy, labour and communications equipment (Zhu, 1999; Lin, Cai
and Li 1997). These Special Economic Zones offered various benefits including
low-cost labour, tax exemptions and duty free importation of raw materials and
technology. Infrastructure support and investment incentives in these areas
allowed for lower operating risks, improved efficiency and returns. As centres of
market-oriented growth and strong competitive incentives, the SEZs became
attractive host locations for foreign firms (Park and Luo, 2001). The gradual
exposure of China to global market forces through their SEZs protected the
Chinese market from opening too fast and provided Chinese managers with
some time to adjust to the strong competition of international companies.
After being out of the world business environment for so long, China confronted
some difficulties in implementing such a major change in economic direction,
operations and conditions.
Deng’s central government was determined to enhance the performance of the
Organisational Guanxi and State Owned Enterprises in south-west China
58
national economy. However, their reforms lacked both operational targets and
well prepared plans. This failure to have any realistic and specific economic
objectives restricted the effectiveness of the reform campaign. Initially, reform
was aimed at improving economic performance by a gradual approach and
through tinkering with the socialist system. However, it became apparent that no
clear goals existed and policy announcements from the centre of control
remained partial and tentative. Rather than being a fully coordinated national
program, the reform program exhibited varying degrees of success under more
of a trial and error mentality. Even the ‘open door’ strategy of enhancing
China’s participation in the world economy only focused on expanding trade
and investment in a few provinces and SEZs along China’s south-east coast
(Zhu, 1999; Rawski, 1997).
By the mid-1980s, even though the reform process had not been perfect, China’s
main coastal cities had successfully established the infrastructure and tangible
plans to cater for investment from abroad and the opening of the SEZs had
introduced market economics to over 200 million Chinese people (Wireman,
2003; Suka, 2001).
At the National Conference of the Communist Party of China in September,
1985, the leaders celebrated the fact that reform had stimulated the development
Organisational Guanxi and State Owned Enterprises in south-west China
59
of the productive forces and had resulted in a series of profound changes in
economic life, social life, people’s work style and mentality. The beginnings of
the socialist market economy had been established. Since then China’s
economic and industrial growth has averaged seven to ten percent per annum
and remains one of the most significant economic developments in modern
world history (Weil, 1996). Even though massive economic change was taking
place, any similar change in state owned enterprises was still far off. They were
still operating under the old practices where guanxi remained important and any
organisational changes taking place were minor and proceeding slowly.
The Importance of this Period in the Development of Organisational
Guanxi
The era from 1949 to the end of the reign of Deng Xiaoping was an important
period in the development of organisational guanxi within and between SOE.
This was an era in which the operations of SOE were not well monitored or
controlled and the environment was conducive to producing a hiatus in the
fostering of organisational guanxi within and between SOE.
Mao’s reign was broadly characterised by some very unpredictable, counter
productive and disastrous decision-making, poor monitoring, inconsistency and
Organisational Guanxi and State Owned Enterprises in south-west China
60
the erosion of the trust in government. These policies fostered certain types of
behaviour in SOE and were crucial in the development of organisational guanxi.
Later Deng’s important influence towards the survival of organisational guanxi
was in the fact that he failed to make any serious effort and directed no urgency
to reforming SOE during most of his period of governance.
Organisational Guanxi and State Owned Enterprises in south-west China
61
Chapter Three
The Development of Organisational Guanxi in State Owned Enterprises
(SOE)
Organisational guanxi was born and began to evolve in the military danwei that
supported Mao’s followers during the period of the Long March (October 16,
1934 - October 19, 1935) and the establishment of rebel-controlled regions in
the north-west of China. After Mao gained control of China and took power in
1949, the SOE provided the right conditions in which organisational guanxi
could develop and grow. Many of the cadres before 1949 later became SOE
managers so it was natural for them to use the same style of management in their
roles in SOE post-1949.
After Mao’s forces gained power, the central government replaced the existing
market economy with a planned structure and took control of allocating the
many goods and resources that were in shortage. In establishing control,
important industries were nationalised to become SOE and profitability ceased
to be a measure of the performance of these firms. Private ownership of
enterprises was eliminated and the government, backed by the CCP, took control
of the ownership of all property.
Organisational Guanxi and State Owned Enterprises in south-west China
62
The government became responsible for all SOE managerial appointments,
assigned all compulsory tasks and exercised direct control of the SOE through
central planning. Trustworthy guanxi relationships became the prime criteria on
which to base human resource selection, and in the appointment of managers to
operate SOE. As a result, many SOE ended up being managed by untrained
Communist party cadres who had limited management skills but who enjoyed
good relationships with powerful connections. This translated into SOE being
managed mostly by uneducated ex-military personnel. Their styles of
management, learnt by trial and error, prohibited the development of more
structured and ethical business practices. Initially the philosophy of the post-
1949 planned economy system was no longer to maximise profits or minimise
costs but to care more for the social welfare of the people (Zhao, 1997).
Politically, the SOE played an important role in China’s social welfare and
initially they were promoted by government as being owned by the people (Hu,
1997). Mao and the Communist Party promoted the concept that workers were
the masters of the social enterprise, the owners of the factories, and that they
were working for themselves (Zhao, 1997). To complement the new planned
structure, a policy of egalitarianism in income allocation was instituted in SOE
aimed at motivating employees to work. Those employed by SOE were also
Organisational Guanxi and State Owned Enterprises in south-west China
63
members of each respective danwei and so these people enjoyed a range of
advantages including employment, social status, health care, favours and
benefits that were not available to those outside the SOE. The SOE became the
core of Chinese enterprise and the foundation of the Chinese economy.
Under the planned system, all SOE revenues were paid to the central
government which was then responsible for paying all SOE costs. This resulted
in there being no pressure on SOE to generate profits or develop any marketing
campaigns (Suka, 2001; Lin, Cai and Li, 1997; Chang, 1997). Demand became
irrelevant and with the central planners determining all organisational inputs and
outputs, large inventories of worthless items were often produced and stored
(Suka, 2001).
The control of SOE was also very complex and unclear. The SOE model
illustrates the complexity of SOE governance (Hu, 1997).
Organisational Guanxi and State Owned Enterprises in south-west China
64
State Owned Enterprise Structure
The People (the original principle)
I
The Communist Party of China (the original – agent)
I
The Government (the Para-principle)
I
The Bureau of State Assets (the upstream agent)
I
The SOE Board of Directors (the first downstream agent)
I
The SOE Managers (the second downstream agent)
I
The Workers (the ultimate agents)
(Source: Wen and Xu, 1997)
This model illustrates the long communication network through which decisions
needed to travel to become officially approved and/or be implemented. To
Organisational Guanxi and State Owned Enterprises in south-west China
65
further complicate matters, complex chains of command existed at each level
with each principal’s responsibilities, rights and benefits often being blurred by
what Hu (1997:181) called incentives, ‘information blocks’ and ‘moral hazards’.
Despite the apparent structure, the long chain of command was not clearly
defined resulting in it often being difficult and costly to make official changes,
gain absolute approvals or get information. In addition, the lack of any clear
mechanism connecting each link in the chain provided the environment that
motivated opportunism. Officials who enjoyed discretionary control over state
assets as principal-agents appeared to have little incentive to care for the state-
owned assets under their control and these conditions sometimes resulted in
officials, managers and bureaucrats being tempted to develop corrupt practices
within the SOE power chain (Hu, 1997).
Due to the complexities of these connections and institutions, the reform of SOE
post-Mao was to take longer than expected and proved to be a challenging
process. Of the changes inspired by Deng, the SOE were the slowest
organisations to promote and develop change. Their complex structure and the
complexity of relationships involved in their management resulted in them being
exposed to limited pressure to reform for almost two decades after Deng had
taken control.
Organisational Guanxi and State Owned Enterprises in south-west China
66
By 1990, it was estimated that China’s whole apparatus of state control had
grown such that it comprised 83,700 SOE that employed more than 74 million
people. During their long period of almost uninterrupted development, the SOE
had developed and enjoyed tremendous advantages in the economy including
access to state funds for investment and research, choice of the best college
graduates, access to foreign exchange and the use of scarce materials (Perkins,
1991).
As the number of SOE grew, the monitoring costs of central control became
high and the central government no longer had the capacity to manage or
supervise each individual SOE. This poor monitoring allowed organisational
guanxi practices to blossom and a situation to develop whereby the interests of
the managing staff and the workers often contradicted that of the state (Lin, Cai
and Li, 1997; Grainger, 2003). Profits were taken by the individuals and groups
within the SOE and these practices were able to be hidden through China’s
questionable accounting system and cumbersome levels of bureaucracy (Hu,
1997; Fang, 1997). Reducing the size of the official profit reported to the central
government became a common practice and was done through overstating
enterprise costs and under-reporting outputs. In some cases, officials monitoring
SOE even hinted to managers that they should modify their numbers in their
Organisational Guanxi and State Owned Enterprises in south-west China
67
favour (Int # 20). By hiding their real economic statistics, SOE management
were allowed to further abuse their position by applying for greater subsidies
from the state (Liu, 1997: 26).
Reform Difficulties for SOE
Attempts at reforming SOE only really gained momentum in the late 1980s and
then the changes were very slow. Overall, reforming so many different types of
SOE in many differing situations was not an easy task. Misguided attempts at
reform were common and the lack of any conviction created the following
problems, many of which remain today.
Newfound Freedom for SOE Managers
From the late 1980s, a major reform came in the policy shift allowing the
provincial governments and SOE managers to retain more of the money their
respective SOE earned (Suka, 2001). Importantly, economic authority was
devolved to local governments and a reward system established whereby local
government authorities gained Communist Party rank on the basis of local
economic growth, employment, social stability, and tax revenues (Tanzer,
2001). These first cautious steps in reforming SOE removed the central
Organisational Guanxi and State Owned Enterprises in south-west China
68
decision-makers’ power to control each SOE, and allowed SOE managers to
make their own decisions in terms of what they made and to whom they sold it.
With this new freedom came the added pressure that if they did not improve
performance they would be closed down. As a direct result of giving more
power to the enterprise and raising the proportion of profit retained from the
enterprise, SOE efficiency improved significantly (Lin, Cai and Li, 1997).
However, SOE managers were not well prepared for their newfound freedom.
Many undertook ill-advised investment sprees, buying the best equipment for
their SOE operations without really understanding issues of compatibility,
servicing, training or the infrastructure and skills required to support such new
equipment or technology. As a result, ‘many resources were mismatched and
wasted and it was not uncommon to see factories that stored expensive idle
state-of-the-art equipment’ (Int # 67). The Chinese managers’ desire for the best
often resulted in poor use of resources and this, combined with the limited
direction and overall planning, contributed to China’s initial disjointed attempt
to modernise.
Overstaffing
During the early stages of economic reform little attention was given to the
Organisational Guanxi and State Owned Enterprises in south-west China
69
increasing population of SOE employees and the growing number of retirees
that were dependent upon each respective SOE.
Although many policies of reform were adopted and forcibly implemented, the
number of SOE and associated staff continued to balloon well after the reform
began (Liu, 1997). Between 1978 and 1994 the number of new employees in
SOE increased by more than 40 million resulting in overstaffing in SOE
becoming a major problem. It was not until the second decade of reform that any
planned and committed attempt was made to control the number of employees
in SOE (Lardy, 1998). One example of a bureaucratic state monopoly was the
over-loaded rail system.
After years of reform, the railways remained overstaffed, presented a
questionable quality of service to customers and exhibited little awareness of
what is a market driven economy (Tanzer, 2001: 74).
After 1994, employment levels stabilised, some SOE employees actually left
their jobs, some redundancy programs commenced and the number of state
employees actually appeared to fall absolutely for the first time in China’s
history. Nevertheless, these redundancy programs within SOE have been slow
and even today many SOE remain significantly over-staffed (Lawrence, 2003,
Organisational Guanxi and State Owned Enterprises in south-west China
70
Leggett, 2002; Grainger, 2003; Gang, 1997; Zhao, 1997). This environment has
meant that usually workers stayed with their SOE as long as their earnings were
higher than a better alternative. As many had few skills and little training, such
alternatives in many cases did not exist (Zhao, 1997).
Even though many SOE remained in financial trouble, further downsizing and
redundancies remained sensitive issues, especially when considering that China
had a population of 1.3 billion and at that time a conservative estimated
unemployment rate of approximately ten percent (Tian, 1997; Liu, 1997;
Leggett, 2002). In attempting to continue to make SOE more profitable, the
government cautiously released some employees through redundancy; however,
social stability continued to be of paramount importance (Xu, Xi and Feng,
1997). The CCP viewed significant redundancies from SOE as an ever-growing
threat to the nation’s social stability especially as they put significantly more
pressure on low income families (Lawrence, 2003; Parker and Wendel, 1997;
Chang, 1997).
A growing unemployment problem is one that the Chinese government did not
want as displaced workers had the potential to cause problems. In 1996, Chen
Qinghai (Chinese Vice-Minister of Trade) said that to enhance the reform
agenda the government believed that the number of employees in SOE needed
Organisational Guanxi and State Owned Enterprises in south-west China
71
to be reduced by about one-fifth if SOE were to become competitive. However,
the impact of such a reduction on social stability was extremely problematic
(Parker and Wendell, 1997; Zhao, 1997). Up until now, SOE closures have
created a restless and occasionally violent army of unemployed workers in their
wake, many without pensions promised to them by the government (Dickie and
McGregor, 2003). In reality, the government does not want to have to pay large
annual subsidies to non-profitable SOE; however there is a hesitation to make
the redundancy program more aggressive due to the growing social implications
of increasing numbers of redundancies. The time needed to reform all of the
SOE, whilst compensating and saving face of all those made redundant, may
take a generation (Fang, 1997).
At the managerial level, downsizing or redundancies also create problems.
Firing workers is an act that does not come easily to Chinese managers and each
SOE worker believes that as a member of the work unit or danwei they retain
the right to remain employed there (Grainger, 2004). Legally, managers can
only fire workers in the face of serious violations of company rules. Even in
such cases, managers are often harassed by the dismissed workers, and
pressured by the workers’ unions and party branches not to do so (Zhao, 1997:
307). Managers do not want to be the ‘bad man’ responsible for such
redundancies and the social disconnection that results for the employees
Organisational Guanxi and State Owned Enterprises in south-west China
72
(Grainger, 2003). This fear could often result in restrictions inhibiting SOE from
hiring better-skilled and better-trained workers and this remains a serious
obstacle to further improvement in SOE efficiencies. Without being able to hire
and fire workers as needed, further improvement in SOE management can only
achieve limited results (Zhao, 1997: 309).
Investment Absorption
Under the conditions of China’s former planned economy, aimless, misguided
and wasteful investment in and by SOE was unlimited and cost the state and the
people significantly (Yang, 1997; Liu, 1997). Despite the recent commencement
of serious reform in SOE, during the 1990s the large and bureaucratic structure
of SOE meant that they have continued to absorb a large percentage of the
government’s available investment resources (Gang, 1997; Yang, 1997).
Before 1994, expansion of employment and fixed assets in the SOE sector
proved to be a burden that inhibited and contradicted the process of reform. The
government needed to keep loss-making SOE in operation to avoid large-scale
social disharmony. This situation resulted in the continual absorption of
significant amounts of the government’s financial resources. From the beginning
of the reform process the cost for inactive employees alone, mainly made up the
Organisational Guanxi and State Owned Enterprises in south-west China
73
expenses of retirees, increased almost exponentially from 4.01 billion yuan in
1980 to 56.32 billion in 1992. These amounts continued to grow due to the
increasing cumulative costs of retirement pensions, medical expenses and living
subsidies for an ageing population (Lin, Cai and Li, 1997; Parker and Wendel,
1997). By 1993, at least one-third of the SOE were running at a loss and by
1998 this had increased to one in every two with many of the notionally
profitable SOE really only breaking even (Li and Li, 1997; Wei and Wang,
1997). More than 16,000 SOE suffered losses in the first half of 1994, 15.5%
more than the previous year, with the total percentage suffering losses
increasing to 46.3%. The cost to government to cover these SOE losses grew
from an estimated 31 billion yuan in 1992 to 60 billion yuan in 1993 and to
make matters worse, profits from SOE fell from almost seven percent of gross
domestic product in 1987 to only two percent in 1994 (Huang, 1994, cited in
Lardy 1998). The combination of increases in costs and reduced profits resulted
in substantial declines in government revenue to such an extent that by 1994,
losses due to SOE had grown to become seven times larger than in 1985 (Lin,
Cai and Li, 1997; Li and Li, 1997; Parker and Wendel, 1997; Tian, 1997: 222).
Conditions for the employees of many poorly run SOE also deteriorated to
become below the poverty line. They were being paid only a very low ‘basic
Organisational Guanxi and State Owned Enterprises in south-west China
74
wage’ and many of them sometimes received only 60% of that (Tian, 1997: 223;
Parker and Wendel, 1997).
Increasing costs and decreasing profits have been major obstacles that have
prevented government from being able to successfully reform SOE. Overall, the
cheapest option for the Chinese government would be to close or sell off all of
the loss-making SOE; however the government could ill afford the social
backlash that such extremism would create.
In an efficiently operating market system, unprofitable firms shrink or go out of
business and profitable firms expand with entrepreneurs creating new strategies
to exploit emerging opportunities (Liu, 1997; Lardy, 1998). Organisations
respond to market pressure by implementing strategies such as restructuring
operations, re-thinking marketing campaigns and cutting costs to survive and if
an investment performs poorly and makes a loss or causes bankruptcy it will not
be repeated (Rawski, 1997). In the mid-1990s, after nearly 20 years of reform
under China’s socialist market conditions, the creation of such a vibrant,
reactive, competitive environment among SOE, especially in south-west China,
still did not exist. This was due mainly to the fact that the Chinese economy had
not reached the required state of openness.
Organisational Guanxi and State Owned Enterprises in south-west China
75
The Introduction of Competition
The legacy of the planned economy meant that Chinese SOE managers had no
habit of linking the factory to the customer or little knowledge as to how to
market their products. Few realised that in the market system the products and
services they were producing needed to meet market demand. Under the planned
economy those producing items seldom thought about who would use their
product.
One SOE made motors for hydroelectric power plants. Instead of asking for
design specifications from each specific customer, the factory simply
manufactured motors according to their own drawings with the expectation that
customers would fit their power plants around the motors (Int # 86).
Clearly in a developing market economy this type of business ignorance would
soon cause failure. With reform came the introduction and growth of non-state
businesses in the Chinese economy and SOE began to feel the pressures of
competition and the urgent need to become more responsive to market
conditions (Lin, Cai and Li 1997). From 1993, the policy of economic reform
for SOE directly encouraged SOE managers to act more like profit-maximising
Organisational Guanxi and State Owned Enterprises in south-west China
76
firms3. These reforms focused on forcing the SOE into market competition by
reducing state interference and eliminating artificial pricing. Prior to this, the
majority of SOE depended heavily on the government for both assistance and
direction and had become accustomed to relying on the state to survive. Such
assistance was required for SOE to avoid free markets and continue to produce
unwanted products on a scale unwarranted by economic conditions (Stapanek,
1991 cited in Parker and Wendel, 1997).
As reform gained momentum, financial support for SOE was discontinued or
began to erode as the government no longer fully compensated them for the
losses they incurred. This, combined with the increased levels of competition,
resulted in many SOE experiencing serious financial difficulties. Historically,
the normal action to take in this situation had been for each respective SOE that
experienced financial difficulties to make a request to government for relief to
help fund their losses and costly social obligations. From 1994 onwards, these
requests began to be met with limited or declining support and sometimes
brought only fresh increments of deregulation from government and stronger
competition that resulted in the additional erosion of profits (Rawski, 1997). The
majority of SOE were unprepared for this and
many were caught between rising costs and a fall in incomes (Weil, 1996: 64).
3 Announced at 3rd Plenum, 14th Central Committee of the CCP. Reported Jingji Ribao, Nov 15, 1993.
Organisational Guanxi and State Owned Enterprises in south-west China
77
Making matters worse, China’s inflation rate had increased from less than 2.5
percent between 1978 and 1984 to more than 18 percent by 1998 (Yang, 1997).
As if to multiply the problems at this critical time, SOE labour costs grew
significantly faster than productivity (Parker and Wendel, 1997).
As the competition in the market economy developed the number of non-
competitive SOE grew. The result was that the market share of SOE fell as
competition with new more adaptable, competitive, private firms grew (Parker
and Wendel, 1997). SOE tax revenues diminished correspondingly and further
weakened the state’s capacity to support and protect SOE from the consequence
of high cost, poor quality, neglect of customers, and other legacies of the
planned economy (Rawski, 1997: 195; Parker and Wendel, 1997). In today’s
environment, SOE compete with organisations that have all types of ownership.
This added pressure has increased the efficiency of SOE (Chow 2002; So, 2000)
even though their general standard of product quality has remained lower than
that of non-SOE (Tian, 1997; Parker and Wendel, 1997). Although the losses of
industrial SOE increased drastically in the late 1980s and continued to rise
through 1997, profits rose in both 1999 and 2000 while losses fell suggesting a
more recent improvement in the financial performance (So, 2000).
In March 1998, Premier Zhu Rongji announced that the SOE restructuring
Organisational Guanxi and State Owned Enterprises in south-west China
78
should be completed in three years. His main objectives were to make profitable
the majority of the fifty largest SOE that were operating at a loss and to speed
up reform. By January 2001, the government reported that two-thirds of the
6,600 largest SOE had surrendered to the state net profits totaling 230 billion
yuan. However, the government later admitted that some of those officially
reporting to the authorities may have been under pressure to falsify their
accounts (Chow, 2002).
The Social Burdens of the SOE
Following the Communist doctrine, accommodation and space were provided to
house all SOE employees and their families in a closed-off area known as the
danwei. This was a space where employees lived that was usually adjacent to
the SOE where they worked. SOE and their families housed in their associated
danwei enjoyed significant advantages over those who were outside (Walder,
1986). These advantages included having secure jobs for life, affordable
housing, subsidies for transportation and nutrition requirements, generous
retirement pensions, and cradle-to-grave welfare provisions (Walder, 1986: 16;
Zhang and Messner, 1999). The SOE shouldered the substantial costs for the
education of SOE employees and their children by formally operating more than
18,000 schools with 6.1 million students and employing more than 600,000
Organisational Guanxi and State Owned Enterprises in south-west China
79
teachers and support staff. Providing affordable health care was also important
with hospitals that were built and run by SOE accounting for one-third of all the
hospital beds in China. Membership of a danwei guaranteed employees of SOE
such as schools, factories, hospitals, government agencies and the like with a
variety of securities that were denied to outsiders and peasants in the
countryside (Bernstein and Munro, 1997 cited in Lardy 1998; Lin, Cai and Li
97; Xu, Xi and Feng 1997).
Chen (1997) classified the social benefits enjoyed by all employees of SOE into
three major categories.
1. Social insurance (shehui baoxian daiyu): including costs covered for
childbirth and maternity benefits, retirement pensions, medical service provision
injury, disability insurance and unemployment compensation.
2. Employee welfare (zhigong fuli) including the material welfare facilities
(wuzhi shenghuo fuli sheshi) of housing, cafeteria, day-care, convalescent
hospitals and spiritual welfare facilities (jingshen shenghou fuli sheshi) such as
access to a cultural place, club, library and sports facilities.
Organisational Guanxi and State Owned Enterprises in south-west China
80
3. Other social obligations including road building, construction of schools,
sponsorship and donations of various kinds, conscription, family planning, and
obligations to place persons reformed through labour or imprisonment.
Overall the employees of SOE and their families enjoyed a vast number of
advantages over those who were not SOE employees. The corresponding costs
of these social burdens that were established in the planned economy era have
been recognised as one of the major stumbling blocks to the post-Mao
restructuring of SOE (Chen, 1997).
Banking and the Financial Sector
The reform of the SOE in the banking sector has occurred very slowly. The
banks have played a critical role in the survival of many unprofitable SOE.
When SOE were losing money they had a history of lobbying banks and
government for subsidised loans, rescheduling of overdue loans or even outright
transfers of funds to compensate for losses (Kornai, 1992; Zhao, 1997, Chang,
1997; Chow, 2002). Between the banking sector and SOE, many non-market
practices developed and became entrenched over time. Under the conditions of a
planned economy, many SOE did not expect to be required to meet the full
repayment of bank loans nor believed that their credit conditions would be
Organisational Guanxi and State Owned Enterprises in south-west China
81
strictly enforced. Initially, as loans or credit were easily obtainable, SOE
management seemed to care little about the profitability of their investments,
and when there were no feasible investment projects available, SOE managers
used the credit to pay additional bonuses and other benefits to their managers
and workers. At times, even employees that were working in SOE that were
incurring financial losses still found their bonuses rose (Int # 8).
Under the former planned economy conditions, the SOE had no incentive to
improve efficiency nor were they worried about their survival (Wei and Wang,
1997; Chang, 1997). As profits declined or losses increased, SOE would request
more funds from the banks and the banking sector would grant SOE absolute
priority when making lending decisions (Zhao, 1997). In return for this
assistance from the banks, SOE stakeholders would lobby the government for
preservation of the status quo in the banking system resulting in the system
becoming self-perpetuating (Wei and Wang, 1997). As a result, the majority
(70.6 percent) of the SOE surveyed in 1994 owned less than 10 percent of their
working capital (State Statistical Bureau, 1994). Although many factors
contributed to the poor performance of the SOE, easy credit supply, poor
monitoring and lack of working capital were the major reasons for their poor
economic situation (Chang, 1997).
Organisational Guanxi and State Owned Enterprises in south-west China
82
Today the struggle to make China’s banking practices more efficient is ongoing,
with President Hu and Premier Mr. Wen highlighting the importance of
deepening the reform of financial enterprises and adjustment mechanisms in
finance. Progress with this reform is slow and economic sources in Beijing
report that President Wu’s cabinet had reservations about any bold measures.
The party and government leadership remain extremely cautious about banking
reforms and the changes to the banking sector will remain slow and be ongoing
(Lam, 2003; Chow, 2002; So, 2000).
Separating the Government from the State Owned Enterprise
Important strategic reform came with the policy of promoting the separation of
the management of SOE from government and political forces (Liu, 1997; Yang,
D.L., 1997; Parker and Wendel, 1997). This separation (zheng qi fenkai) was
another change that took some time to evolve however the government realised
that to establish a socialist market economy, a key was to separate the
government from the enterprise and to make the management more professional
(Liu, 1997; Fang, 1997).
The problem with this reform was that it failed to motivate responses from large
and middle-sized SOE. As an opposing force, local protectionism was
Organisational Guanxi and State Owned Enterprises in south-west China
83
consolidated which opposed the spirit of reform, eliminating the opportunity to
create a unified market, and consolidating the problem of an economy made up
of many independent markets or zhohou jingli (Liu, 1997). This prevented the
development of one unified national market and meant that the pressure on
many SOE to become more efficient remained artificial.
Furthermore, as the SOE management gained greater control, some managers
took the opportunity to deviate from the wealth-maximising objectives of the
SOE to pursue their own interests. Monitoring this problem in a market
economy is relatively easy with a developed stock market, prices reflective of
the long-term profitability of a firm, and the existence of a board of directors
assigned by the owners for governance (Zhao, 1997). Under the planned system,
the monitoring of SOE remained costly and inefficient and with government
bureaucrats who supervise SOE having little incentive to conduct effective
monitoring, there existed no deterrent devices that were aimed at eliminating
corruption in this environment (Zhao, 1997). These were also the right
conditions in which organisational guanxi could continue to grow.
The Party and SOE Managers
Organisational Guanxi and State Owned Enterprises in south-west China
84
Communist Party officials have a history of interfering at all levels of day-to-
day business operations in SOE and there is little doubt that members of the
Party restricted the quality of the adjustments required by SOE to adapt
successfully to the socialist market economy (Liu, 1997; Xu, Xi and Feng, 1997;
Chow, 2002).
The opportunities to interfere in SOE operations were enhanced by the fact that
SOE managers were usually appointed from within the Party and that within
each SOE there were CCP ‘cells’ able to overrule each SOE manager (Int # 11).
The inconsistent or sometimes non-existent monitoring of SOE by appointed
CCP members or government officials provided bureaucrats at all levels from
CCP cadres to prefectural, provincial or central government – with the
opportunity to siphon off illicit resources from the SOE. Members of the CCP
or provincial governments were able to generate illegal funds by setting up a
plethora of arbitrary taxes on each SOE under their control or jurisdiction.
Alternatively, individual SOE managers set up layers of illegal subsidiaries
underneath each SOE (Int # 16). To be successful, these subsidiaries had to be
managed by the actual manager of the SOE themselves, by family members, or
by reliable business associates who then paid stakeholders for dubious services
to the SOE holding company. Alternatively, extra fines and charges, forced
Organisational Guanxi and State Owned Enterprises in south-west China
85
contributions and purchases of unneeded goods were common methods used by
authorities to extract funds from the SOE under their control (Weil, 1996: 72;
Chow, 2002; Int # 39). Decisions regarding resource allocation, distribution
quotas and approval of new investments were some of the numerous
opportunities available to government representatives, including the military and
police, to enjoy corrupt practices.
Some CCP cadres have been tempted by bribery and corruption and some have
paid little attention to creating an environment of fair competition. They have
instead immersed themselves in the economic activities of SOE so as to reap the
illegitimate rewards (Liu, 1997; Xu, Xi and Feng, 1997; Grainger, 2003; Parker
and Wendel, 1997: Zhao, 1997). These activities prohibited and restricted the
speed and effectiveness of reform. To begin to eliminate this problem Deng
identified that China’s leaders would have to continue efforts to improve party
conduct, correct bad tendencies and crack down on crime. He admitted that ‘this
is going to be a long-term task to be fulfilled throughout the period of the reform
and eliminating these practices is the only way to insure the correct
implementation of our policies’ (Deng4 1994b).
At one time, during Mao’s reign, the presence of the CCP had been so intense
Organisational Guanxi and State Owned Enterprises in south-west China
86
that the Party had a department in every sizeable SOE. In recent years this
presence has diminished and the role of these representatives has changed. In
past decades, CCP representatives promoted or supported government or Party
campaigns, whilst in contemporary times they now play a more conciliatory and
supportive role for SOE workers (Int # 18). Despite the major anti-corruptions
drives, including the use of the death penalty against serious offenders, major
cases of corruption still exist. There is little doubt that SOE will survive longer
and generate better returns if closer regulation of Party members and
government ministries are undertaken to eliminate their interference in day-to-
day SOE business operations. However it is not easy to dismantle practices and
networks that have evolved over such a long period of time. The benefits to be
gained by insiders mean that it is difficult to persuade the cadres or bureaucrats
in these positions to relinquish such powers. In reality, removing levels of the
hierarchical bureaucracy in the future may continue to be a painful process and a
challenging priority (Crane, 1999).
Strategies Aimed at Reducing the Burden of Unprofitable SOE
As reform has gathered pace, the proportion of China’s GDP produced by SOE
has continued to decline with the non-state-owned sector becoming the main
4 Deng speech - Help the People Understand the Importance of the Rule of Law, June 28, 1986
Organisational Guanxi and State Owned Enterprises in south-west China
87
engine of productivity and growth (Tian, 1997). As China continues its
transition to a socialist market-based system, the role of the SOE is shrinking
(Parker and Wendel, 1997; So, 2000; Chow, 2002). However the social and
political costs of closing unprofitable SOE and the problems created by the large
number of unemployed that will be created will secure SOE survival, at least in
the short- to mid-term. To avoid large-scale social unrest, the task of keeping the
SOE in operation remains important.
To reduce the costs of loss-making SOE, the government has introduced a
policy to limit the bonuses and wages being extracted from the SOE (Parker and
Wendel, 1997). In addition they have tried to encourage a range of foreign
investments or takeovers of failing plants. Some SOE have been leased to
private agents or merged with larger profit-making SOE and investments
continue to be encouraged from large private enterprises and institutions (Chow,
2002; Weir, 1996; Rawski 1997). In an attempt to reduce the government’s
burden, some SOE have been listed on the stock market. This strategy has been
designed to allow free trade of shares and to provide opportunities for powerful
non-government shareholders to take control and ownership of these SOE. In
some instances the government has provided opportunities for capitalist-style
takeovers (Parker and Wendel, 1997: 282).
Organisational Guanxi and State Owned Enterprises in south-west China
88
Some SOE have been allowed to go into bankruptcy, often having their assets
sold at greatly reduced prices and leaving their workers stranded, or with only
small and temporary subsidies. Even large-scale firings have not been sufficient
to salvage the position of some unprofitable SOE (Weil, 1996: 65). This has
placed an unforeseen burden on those who may have worked for 30 years or
more under conditions that they thought would support them in retirement and is
an adverse social effect directly resulting from SOE closure or downsizing.
SOE have also reduced their responsibility for housing employees by selling
some employees’ housing and apartments at subsidised rates and introducing
private ownership of existing housing stock. The government has encouraged
people to buy their existing apartments by offering them for sale to current
tenants at below market prices, whilst at the same time raising existing rents. To
encourage sales, potential buyers have been made to clearly understand that the
prices for sale of housing stock at below market prices would only exist for a
certain length of time (Int # 62).
What Must China do to Effectively Reform SOE?
Once the pressure of reform began to affect SOE, the changes were very slow.
Consideration as to how to reform the SOE sector of the economy, how to make
Organisational Guanxi and State Owned Enterprises in south-west China
89
it more competitive and what process to follow were just a few of the questions
that have faced the Chinese government. In 1997, Tian (1997: 224) proposed
that three stages of development were needed if SOE reform was to be effective
and I have compared them to what has actually resulted.
As Stage One, Tian suggested the creation of competition between enterprises,
providing SOE with new options for private ownership and encouraging the
growth and rapid development of the non-state sector. This growth would
guarantee the development of the economy and provide the material base for
reform in the later stages. Socially and politically it was expected that such
growth would raise the people’s sense of participation and win their support.
This real change in policy inspired the advent of the non-state owned enterprise.
Since economic reform started in 1978, the number of non-SOE including
township-village enterprises (TVE), individually-owned enterprises (private
enterprises), joint venture enterprises and foreign owned enterprises have
flourished and grown rapidly. These organisations have been more competitive,
efficient and effective than existing SOE and as a result, the existing share of the
TIO provided by SOE since reform began had shrunk by 50% by as early as
1994 (Chang, 1997).
Organisational Guanxi and State Owned Enterprises in south-west China
90
In Stage Two, Tian believed that developing continual competition among
enterprises of all types and the introduction and development of the socialist
market system would result in a reduction in the number of SOE. This has
occurred to some extent; however even after two decades of reform, the exit of
unprofitable and inefficient SOE through bankruptcy or merger remains
infrequent, even though the share of SOE incurring financial losses has
increased (Liu, 1997; Lardy, 1998: 4; Xu, Xi and Feng, 1997; Int # 31, Int # 53).
In spite of the Party’s assertion of its intention to keep SOE alive, sales of a
minority of loss-making small and medium sized SOE have been quietly carried
out from as early as 1996 in some provinces (CND, 1998).
The main continued avenue of reform of SOE has been to change them to
shareholding companies. For large SOE, restructuring takes a variety of forms,
but mostly the form of a shareholding corporation. In this scenario, shares of a
minority of SOE which are qualified according to their financial performance
can be traded in stock exchanges according to the regulations of the exchanges.
Various levels of government retain controlling shares for the very large and
important state enterprises and others have been sold to overseas Chinese and
other foreign investors (Chow 2002).
In Stage Three, Tian (1997: 224) predicted that SOE would face large-scale
Organisational Guanxi and State Owned Enterprises in south-west China
91
bankruptcy and privatisation. This stage appears to be currently in progress and
has generated new problems for the government to deal with. The marketability
of some of these SOE has declined due to the non-existence of social security
and unemployment relief systems to support employees affected by such
potentially large-scale bankruptcy. In many situations poor performance,
considerable debt and other problems have made large numbers of redundancies
unworkable. With such a large number of employees in the state-owned sector,
there was no way for the government to finance the burden of the
unemployment costs of the workers. The SOE traditionally provided the ‘iron
rice bowl’ and the security of employment in the organisational environment,
and to remove these provisions is not an easy process. Tian’s Stage 3 remains
incomplete and the future of SOE remains debatable. Tian (1997: 234) argued
that SOE would continue to play a vital social security role for those unable to
find their way into the non-SOE system. Employees who are unable to find new
positions outside could remain in their SOE and this safety net remains
important if China is to maintain its level of social harmony.
In terms of the successful long-term transformation of SOE, Fang (1997: 248)
proposed a different strategy that includes two simultaneous steps. First, the
central government should transfer the majority of SOE to the control of
provincial governments. This would place the monitoring government closer to
Organisational Guanxi and State Owned Enterprises in south-west China
92
the SOE resulting in it being better able to control them and respond to their
needs. In many cases this has been done; however, questions remain as to
whether monitoring could be effective, especially if one contemplates the
problems encountered with corruption and also the distance of the SOE from the
centre of power. From the SOE past record, the opportunity for officials to
develop illicit practices may restrict the quality of success experienced in
achieving reform under this method.
Secondly Fang believed that the central government needed to work harder at
creating a level playing field for different ownership companies in order to
foster the growth of competition. To do this, SOE must find politically and
socially acceptable ways to reduce the costs of meeting employee social
provisions that include the costs of health, education, and retirement. This is a
time consuming and difficult burden that remains on-going.
In more recent times Chow (2002) made the following observations appraising
the success of the effort to restructure state enterprises in China. Firstly,
restructuring efforts in the early 2000s are a continuation of a series of attempts
beginning in the 1990s to reform the SOE to make then financially independent,
efficient, and profitable. He noted ‘that it is an evolutionary process and
dramatic results should not be expected in the short-term’ (Chow, 2002: 70).
Organisational Guanxi and State Owned Enterprises in south-west China
93
Secondly, there is a tendency for the managers of SOE to hold onto their power
and resist change. The ability and resourcefulness of the SOE managers and
workers, the particular industry involved and the level of competition are all
factors that effect levels of success. The government is proceeding at a
deliberate speed to make sure that not too many workers are laid off in any one
period and that workers who are laid-off are given some compensation and are
provided with some training to re-enter the job market.
After more than 25 years since Deng initiated a process of reform, it is
reasonable to conclude that the SOE reform process is gradual, steady and
ongoing.
Summary
The SOE contribution to China’s GDP has declined from 75 percent in the late
1970s to only 28 percent by 2000 and this decline is ongoing. Despite this
decline, the employment places provided by SOE remain a critical issue as SOE
provide jobs for a significant percentage of the Chinese population (Lin, Cai and
Li, 1997; Int #89).
Organisational Guanxi and State Owned Enterprises in south-west China
94
Even though some SOE have been able to successfully disconnect themselves
from government and party control networks and have succeeded in
transforming themselves into semi-private firms, the task of transforming the
large and cumbersome state-owned sector continues to experience varying
degrees of success (Liu, 1997; Wei and Wang, 1997). With such a wide variety
of SOE in operation the challenge of implementing reform is a large one. With
SOE differing in size, with some belonging to the central government and some
to provincial governments, some being profitable and some not, in different
industries in different sectors, it is difficult to treat or reform them all in the
same manner or using the same method (Gang, 1997; Liu, 1997, Int # 89).
Withdrawing all SOE subsidies, although economically sensible, threatens rising
unemployment and social unrest (Parker and Wendel, 1997; Int # 60, Int # 61).
Some reductions are necessary and should continue to be implemented gradually
so as to provide the remaining SOE with time to adapt to the market conditions.
The target of reducing the costly burdens of providing accommodation,
education and the health services for SOE employees and their families is a
further challenge. A continual gradual reduction in support will allow time for
the private sector to develop the infrastructure and gain the momentum needed
to begin to provide increased government revenue and new opportunities in the
non-government sector for those employees searching for employment. As
Organisational Guanxi and State Owned Enterprises in south-west China
95
China continues to develop a socialist market economy with Chinese
characteristics, SOE will still face the two challenges of maximising profits
whilst continuing their responsibility for providing uneconomic social services.
From a human resource management perspective, appointment of SOE
managers in the past has primarily been nepotistic. In the future, professional
managers are needed to take over the management of SOE if they are to have a
realistic opportunity of surviving. For SOE to become competitive, employing
trained managers who are paid at market rates appears to be a priority (Fang,
1997, Int # 89). There is little doubt that removing the old cadre networks, that
for a long time have controlled the power in the SOE, continues to be a difficult
and time consuming process. Developing better business practice and
competencies to compete with private companies and non-state companies
makes employing qualified managers to take over control of SOE a priority.
Improving the quality of management, reducing the illicit activities of SOE
power brokers and making better use of resources are some of the obvious
transformations that can make a difference.
SOE continue to crowd out China’s small but energetic private sector from the
capital market and they still remain liable for an estimated 80 percent of the
country’s bad bank loans. The problem of the large amount of investment
Organisational Guanxi and State Owned Enterprises in south-west China
96
absorption by SOE still exists and they still consume more than their share.
Heavy fiscal spending continues to support SOE - albeit at a slower rate -
especially in inland provinces (Murphy, 2003). This poor use of government
funds will only significantly dissipate as the number of unprofitable SOE is
reduced.
Overstaffing in some large SOE remains a problem and the feared dislocation of
employees as a result of downsizing or redundancies still brings political
hesitation. This has solidified the government’s support for the policy not to
eliminate SOE. At the Third Plenary session of the 16th Central Committee in
Beijing on October 14, 2003, the CCP policy was that SOE remained sacrosanct.
The Party identified its own survival with the challenge of re-inventing SOE as
more entrepreneurial and market-driven institutions, but without surrendering
them to private ownership – a process which would divest itself of all but the
most profitable core businesses. This is 25 years after the Deng-inspired reforms
began.
In the absence of clear lines of disposal and operational rights, the management
of state-owned assets has been generally ineffective. It remains a leading cause
of losses to the state in fraudulent transfers, with detrimental knock-on effects to
the stability of the banking sector. SOE are still dominant and protected in some
Organisational Guanxi and State Owned Enterprises in south-west China
97
sectors and economically the country could still undermine its future by failing
to steadily commercialise its inefficient SOE. Rawski (1997: 190) illustrated that
China’s transition to a market economy was incomplete by identifying SOE in
the industrial sector and banking system that sheltered an army of redundant but
tenured workers. It appears likely that the most useless and loss-making SOE
will be the one’s not to be privatized, and that the very workers who are least
likely to be deployed elsewhere or retrained are probably those with the least
capacity to develop themselves. So these employees will always be the hopeless
ones that the state will have to carry.
There is no doubt that the role and significance of the SOE is in decline. Will it
disappear altogether or will those profitable SOE survive in some hybrid form?
Efforts to continue the reform will maintain and perhaps increase China’s rapid
pace of institutional change. The result promises to contain as many surprises as
have emerged during the last two and a half decades.
Collectively, these strategies and solutions to these problems are likely to have
two significant outcomes. They will result in more effective monitoring of SOE
and also promote an increase in profit maximising behaviours, including
successfully reducing or eliminating overstaffing, and providing proper returns
on investment (Zhao, 1997).
Organisational Guanxi and State Owned Enterprises in south-west China
98
In the Chinese business environment, market conditions remain lop-sided, with
new non-SOE competitors escaping the costly social baggage of employees and
retirees of SOE and enjoying government incentives to aid in their development.
This further complicates the survival of SOE and realistically only when they
are free of the social burdens will they compete on a level playing field. SOE are
here to stay for the foreseeable future even though they may play more of a
safety net role and end up in some hybridised form (Fang, 1997).
If the SOE was to disappear in the short term there may be a dramatic reduction
in China’s growth. Currently, as the government’s largest source of tax revenue,
any surplus from SOE is expected to support a large work force (including
millions of redundant workers) and to satisfying the housing, educational, health
and pension costs of tens of millions of dependents and retirees. In addition,
existing SOE must attempt to supply the capital for restructuring and technical
development (Rawski, 1997: 205). The financial burden of these responsibilities
is a heavy one and the position of the government concerning SOE remains
tenuous. A reduction in social expenses must be paralleled by an improvement
in SOE management. In the long term, SOE need to be further pushed into the
market and be made responsible only to the market (Chang, 1997). The SOE
days may be numbered; however, in the long term it seems they will survive in
Organisational Guanxi and State Owned Enterprises in south-west China
99
some form as the Chinese socialist market economy continues to develop.
Organisational Guanxi and State Owned Enterprises in south-west China
100
Chapter Four
The Role of the Danwei
The role and practices of the danwei, or work unit, have changed in recent years
with the government attempting to reform many of the old danwei practices and
responsibilities. In this chapter I will cover some of them and focus on the
important period of time in danwei history regarding the development of
organisational guanxi. This period was the time leading up to and following the
beginning of the rule of Chairman Mao Zedong.
The importance of the danwei and its relationship to the emergence and
consolidation of organisational guanxi cannot be over-emphasized. The danwei
historically has been a source of employment, housing, and material support for
the many urban resident’s in China. It organizes, regulates, polices, trains,
educates and protects them; it provides members with identity and status; and it
forms integrated communities through which urban residents derive their sense
of place and social belonging (Bray, R. 2001: 4).
Organisational Guanxi and State Owned Enterprises in south-west China
101
The danwei was once so important to daily life in urban China that people
would say ‘one could be without a job, but not without a danwei’ (Yi Zhongtian,
1996: 188). Not only was the danwei one’s rice bowl, individuals without an
official danwei or work place were often considered ‘suspicious characters,
dangerous persons or unemployed idlers’ (Yi Zhongtian, 1996: 188). In the
danwei environment the importance of trust, insider-outsider status, and many
other organisational guanxi characteristics evolved.
The danwei is second only to the family in being the most basic level of social
organisation in urban China. Often viewed as the place where state and society
met, in Mao’s China the danwei served as the backbone of the social security
system and as a centre of social and political control (Guthrie, 1999).
What is the Danwei?
Although there is great diversity in danwei type and operations, the physical
location of the danwei is usually fixed and situated within an urban or non-
agricultural environment (Wen - hsin Yeh, 1997), hence most of this discussion
pertains to living and working conditions in urban rather than rural China.
Throughout Mao’s period of reign and in the early years of Deng Xioaping’s
leadership ‘everyone called the social organisation in which they are employed -
Organisational Guanxi and State Owned Enterprises in south-west China
102
whether it be a factory, shop, school, hospital, research institute, cultural troupe
or party organ - by the generic term danwei. (Lu Feng, 1989: 71, translated in
thesis by Anon, 2001). It was common under China’s former planned economic
system for every danwei or work unit to build residential buildings for its staff
and their families and members. Millions of government-subsidized residential
buildings were constructed and each building and associated work area
contributed to the general make-up of the danwei. The living quarters provide
almost everything for its staff members, including housing and dormitories,
eateries, kindergartens, medical centres and department stores (Li Shuqin,
1999). The accommodation and work facilities of each work unit were usually
constructed adjacent to each other and usually the whole danwei site was
enclosed and sealed off from the general public. The danwei buildings often
included communal facilities such as residential housing, dining hall, health
clinic, fleet of cars, and other basic service facilities which were not available to
those outside the danwei (Chen Yun, 1991; Walder, 1986: 16).
With such a wide variety of danwei or work units, like guanxi and renqing, the
danwei is not easily defined. Some have looked past the physical aspect of the
danwei and read it as embodying a ‘feudal’ or ‘traditional’ mode of social
relationship (Henderson and Cohen, 1984: 140), that is, one in which a
Organisational Guanxi and State Owned Enterprises in south-west China
103
paternalistic form of government holds sway. Others have defined it as a generic
term denoting the Chinese socialist work place (Anonymous, 2001: 1).
Throughout China’s recent history many of these original urban danwei have
evolved to become SOE and I argue that this has been the conduit through
which the characteristics of the early danwei have been translated to become
organisational guanxi characteristics in SOE.
Logistically, the danwei produced advantages for the government and enterprise
by having the SOE employees live in close proximity. This helped maintain
order, convenience, ease of management and communication, unity as a group,
and uniformity in thinking. This close proximity also provided the environment
and opportunity for cliques to develop. Inside these compounds were the places
where internal organisational relationships were formed, networks established
and solidified. The danwei provided its members with a steady supply of life’s
provisions and confidence that the harmony within the work place could be
relied upon.
There are three type of danwei recognized by Lu and Perry (1997). The first, the
Qiye danwei, are profit making. The second, the Shiye danwei, are non-
production, non-profit making work units such as scientific research units,
Organisational Guanxi and State Owned Enterprises in south-west China
104
educational institutions, and government-sanctioned social and professional
organisations. The third type, the Xingzheng danwei, or administrative unit, is
often confused with Shiye danwei as these administrative units have the
common characteristics of being non-productive or non-profit entities.
Since reforms commenced in 1979, the attempt to convert many government
funded, non-profit, Shiye danwei into self-supporting, profit-earning Qiye
danwei has enjoyed mixed success (Lu and Perry, 1997). In parallel with the
SOE experience of being initially neglected and then being slowly exposed to
some reform practices, a slow change is also taking place in the danwei that has
resulted in some banks, post offices, railroads, and research institutions being
successfully converted into self-funding organisations. However, other non-
production units are experiencing difficulty. (Anon, 2001). As one senior
official commented ‘the problems we are encountering with this reformation are
very difficult’ (Int # 38). Before the fiscal reforms of the 1980s, the budgets of
these units were allocated by the State Ministry of Finance. However, since the
reforms have begun the Ministry of Finance no longer provides budgetary funds
to these local units (Anon, 2001). This has created increased pressure on the
survival of the danwei.
Organisational Guanxi and State Owned Enterprises in south-west China
105
Characteristics of the Danwei
Because there are variations in the type of danwei from city to city and from
industry to industry, it is difficult to make generalisations that apply to all of the
danwei in urban China (Wang, 1990). However, most danwei share the
following common range of functions and characteristics.
Primarily the danwei, or work unit, is a functional agency of the Chinese
Government. It performs tasks that are directed by the government and is not an
independent economic or social body. Its operation is largely controlled and
directed by the government. Thus, the relationship between workers and their
work units reflects an association between the government and individuals
(Zhang and Messner, 1999).
Politically, the danwei is a place where party control is firm (Wen-hsin Yeh,
1997:71; Chen Yun, 1991). The social and economic benefits available to
members of the danwei are conditional on their correct behaviour. In the
danwei, work place party branches closely monitored employees’ public and
personal activities and wielded an assortment of rewards and sanctions to
encourage politically acceptable behaviour. Such incentives contributed to a
Organisational Guanxi and State Owned Enterprises in south-west China
106
relatively high level of urban social order (Lu and Perry, 1997: Solinger, D, J.
1997: 203; Zhang and Messner, 1999).
Each danwei is conferred a ranking from higher authorities which grants the
members of the danwei particular privileges and treatment. This ranking is
important as units that enjoy high administrative rank or are affiliated with a
higher government bureau fare better than those of lower rank (Int # 40). For the
individual, gaining admission into a high ranking danwei was a way of securing
one’s future (Int # 43) and the danwei bestows upon its members rights, social
identity, and political status (Int # 41).
In the management of human resources, the danwei has the right to fire, hire,
and arrange transfers of employees. For each individual within the work unit the
danwei maintains and controls a dossier, or dang’an, on personal matters, which
plays a key role in personnel-related matters. The dang’an represents the
individual in the state bureaucratic system and the organisation where the
dang’an is lodged is where the person legally belongs. The danwei in that sense
owns the individual through its possession and control of their dang’an (Davis
and Vogel, 1990 cited in Lu and Perry, 1997).
Organisational Guanxi and State Owned Enterprises in south-west China
107
Although the danwei is a very important part of Chinese society it does not
incorporate all Chinese people but privileges only members of large SOE
(Walder, 1986: 40). Those who had a position within a danwei or who called a
danwei home enjoyed a raft of social and workplace advantages. Danwei
employees of schools, factories, hospitals, government agencies and the like
enjoyed a variety of securities denied to outsiders and peasants in the
countryside. These including secure jobs, affordable housing and medical care, a
range of subsidies for transportation and nutrition requirements, generous
retirement pensions, and cradle-to-grave welfare provisions (Chen Yun, 1991;
Walder, 1986: 16; Zhang and Messner, 1999). SOE employees as members of
these danwei were also provided with lifetime employment and an impressive
array of benefits unavailable to collective workers (Walder 1986: 44).
Prior to the modern reform taking place in the danwei, a Chinese citizen
required a letter of introduction from their danwei if they wanted to pursue such
activities as to go to another danwei on business, buy an airline ticket or stay in
a hotel. When danwei members were requested for identification at any point
along their trip, this letter provided them with an official temporary status that
allowed them to pass and continue their journey uninterrupted (Solinger, 1997;
Yi, 1996). Although the frequency of these occurrences has dwindled in recent
Organisational Guanxi and State Owned Enterprises in south-west China
108
years these examples show the past importance of the danwei status to the
individual.
The community inside the danwei was physically separated from the rest of
society by brick walls. This isolation was matched by an invisible segregation as
well (Wen - hsin Yeh, 1997: 71). A clear distinction is usually developed
between ‘insiders’ (who enjoy the privileges available only to regular workers)
and outsiders (e.g. temporary labourers or others who were denied access to
quality housing, food and the other provisions) (Walder, 1986). This insider -
outsider foundation of the danwei also offered opportunities for nepotism to take
place. As insiders become aware of the jobs that are becoming available,
through their personal relationships with those who will be making the
recruitment decisions, they were able to gain advantages for any potential
applicants they may have relations with. This access to employment information
in the danwei provides a nepotistic advantage to family members or insiders
and, as we shall see in the following chapters, is a core characteristic of
organisational guanxi.
The presence of the Party also erodes the level of privacy an individual enjoys in
the danwei. The danwei revolves around a dense, sometimes suffocating
network of complex and familiar relations between human beings where nothing
Organisational Guanxi and State Owned Enterprises in south-west China
109
remains secret for long. A former mainland cadre reflected on the change he had
experienced after he went to work in Hong Kong in the early 1980’s:
In my work place in Hong Kong I was surprised to discover that nobody
paid any attention to my private circumstances. In China, if there’s a
newcomer in any unit, before long everybody knows his background,
history, wage grade, political behaviour, whether there are any black
marks on his record, what sports he’s good at, and with whom he does
or doesn’t get along. A whole range of matters must go through public
evaluation, such as wages, bonuses, designation as a progressive
worker, being sent out to study, promotions and punishments, allocation
of housing and other benefits. At a critical moment, just a word in the
wrong place can do great harm, so people have to sound out everybody
else carefully. Rumours, gossip and nasty remarks are common and this
leads to pointless quarrels, making the relationships between people
complicated and tense (Ding Yang, 1983; cited in Lu and Perry, 1997:
181).
Such limited privacy requires members of the danwei to be very secretive in
sharing information. This results in danwei members being very careful to only
share information with those with whom they share a trusting personal
Organisational Guanxi and State Owned Enterprises in south-west China
110
relationship. This secrecy and the guarding of information translate to be
characteristic of the Chinese work unit. The importance of this secret
information is magnified when it is used by connections in order to gain some
advantage against some opponent, to enhance the allocation of benefits to clique
members, or to promote some campaign. The quality of information available to
the person is directly related to their position in the hierarchy and the power of
their connections in the guanxi network (Int # 11, Int # 18, Int # 70).
In the past, the danwei was also characterised by the limited mobility of its
members in the labour market (Zhang and Messner, 1999). Switching jobs in
China is difficult for an individual who does not have guanxi with those in
power to facilitate such a transfer. As in the case in the introduction, Ms. Zhou,
formerly a train conductor with the Tianjin Railway Bureau, used her guanxi to
gain a position as an Accountant for a motor cycle repair shop. It was a difficult
move that required several months of guanxi work. Those who do not have such
a connection or relationship are usually destined to stay in the same work unit or
danwei for life. Under the former danwei rules, approximately one or two
percent per year of the danwei labour force could change jobs in their lifetime
(Davis and Vogel, 1990; Bain 1994: 116; Walder 1992: 526). This virtual
immobility promotes a high degree of dependence on relationships inside the
Organisational Guanxi and State Owned Enterprises in south-west China
111
danwei in addition to encouraging the development of strong internal cliques,
communication and supply networks.
Those who do not have the guanxi to facilitate employment transfer must remain
in the same danwei. They are still able to enjoy the benefits and advantages the
danwei still holds for insiders over outsiders and through this the danwei
provides some compensation for those who do not enjoy job mobility. The
development of cliques, patronage networks, and the practice of favouritism
have been core characteristics of organisational guanxi. The importance of
guanxi connections inside the danwei means that informal interactions have
come to play a much more prominent role in decision making processes in this
environment than formal procedures (Wen-hsin Yeh, 1997: 61). I argue that
these networks, cliques, secrecy and the importance of informal interactions
have developed from the danwei to become important characteristics of
organisational guanxi in the SOE.
Historical Overview
Lu (1997: 23) attributes the origins of the danwei to conditions that existed well
before the Communist takeover in 1949. He proposed that the danwei developed
as a necessity to help cover the shortage created for the Communist Party due to
Organisational Guanxi and State Owned Enterprises in south-west China
112
a combination of the Japanese blockade of the Communist regions and a lack of
material support from the Nationalist government during the military struggle in
the 1930’s.
During the years that included the Long March, the Communist army had to rely
on gathering provisions from supportive peasants and from the supplies gained
from the overthrow of rich properties or by other illegal mechanisms (Smedley,
1972; Snow, 1973). Due to the shortages that were occurring in 1938, some
Communist army units began experimenting with production activities such as
planting vegetables, raising pigs and making shoes, mainly to improve their
soldiers’ daily lives.
By 1939, the Communists’ financial situation had worsened due both to the
decreasing supplies from the Nationalists and to the increased number of
supporters they needed to provide for. In January 1939, Mao formally advocated
letting the army produce supplies for itself (Lu, 1997).
A large scale production movement was launched in early 1940 by the Central
Military Committee of the Communists which called on all military units to
participate in production of all kinds of supplies for survival and for commercial
purposes. Initially only army officers were mobilized to engage in production
Organisational Guanxi and State Owned Enterprises in south-west China
113
activities in order to be self-sufficient, but soon other non-military units, such as
government agencies, public schools, and hospitals, all participated in
production activities. Initially all such produce and revenues produced by units
had to be submitted to the Communist Party central stores.
The characteristics of organisational guanxi in the danwei began to evolve from
these beginnings, and following this initial success the central party leadership
encouraged units to more actively engage in ‘self reliant production’. With this
development they also approved of allowing danwei to retain a portion of their
revenue as collective assets for re-investing in new production and as funds to
improve the livelihood of their members (Lu, 1997). Relationships remained
important in this scenario in terms of negotiation, reporting discrepancies and
using the funds for socialist causes.
The production campaign helped improve the quality of life for the Communists
in their base regions as well as having the important side benefit of reducing the
supply and financial burdens on supportive local peasants. It played an
instrumental part in the survival of the Communist troops and the base area
government (Smedley, 1972; Snow, 1973). The campaign also trained hundreds
of cadres in economic and commercial management practices many of whom
later became the core of the economic and managerial elite when the
Organisational Guanxi and State Owned Enterprises in south-west China
114
Communists took power in 1949 (Lu and Perry, 1997). This was a major conduit
through which the characteristics of organisational guanxi operating in the
danwei were passed on to evolve in the SOE.
In the Military danwei, cadres developed and managed their own production and
many had no experience of the required skills in planning. Their methods of
success or failure were often learnt by trial and error. Learning the skills and
processes of negotiation, allocation, adaptation, and facilitation combined with
the self-production activities that occurred prior to the 1949 takeover were
critical in preparing the cadres to take control of the SOE management
responsibilities post 1949. I argue that this period of cadres developing
management skills or training by trial and error in this environment was the birth
place of organisational guanxi. Guanxi relationships developed during this
period were consolidated to become the organisational guanxi characteristics of
State Owned Enterprises. This translation would have occurred naturally as
many of the PPC cadre assumed management roles in SOE.
With encouragement from the Party-leadership, the self reliant production
concept soon took on a permanent character and from this danwei structure
emerged the self-production, distribution and supply mechanisms of the danwei
system (Zhongzhengzhibu, 1989). Although at that time it did solve the Party’s
Organisational Guanxi and State Owned Enterprises in south-west China
115
problem of supply shortages, it also planted the seed of the country’s problems
of corruption that have become common in China since then.
Throughout Mao’s reign, the discrepancy in benefits between rich and poor
danwei also generated resentment between units and encouraged the
development of further means - including smuggling, tax evasion, and dumping
- by which units tried to enrich themselves (Lu, 1997: 30). Insider secrecy and
reliable internal networks were essential to successfully facilitate such activities.
The development of cliques, secrecy and networks have survived and been
consolidated to become cornerstones of modern day organisational guanxi in
SOE.
As danwei production grew, the Communist leadership’s ambiguous and
undisciplined attitude towards the distribution of the supplies and benefits
encouraged the danwei management to under report production revenue and
collective assets and develop other forms of creating benefits for workers. This
became a common characteristic of SOE for the next two generations as the
position of SOE remained somewhat sacrosanct in the eyes of the government
and the Party. Since the 1950’s, the under - reporting of revenues and over -
reporting of expenses has been a constant challenge to the country’s centralised
financial system. Funds have been accumulated and retained in secret accounts
(in violation of official financial and budgetary regulations) by state agencies,
Organisational Guanxi and State Owned Enterprises in south-west China
116
enterprises and other work units and were often used to improve the welfare of
their unit’s employees (Int # 39). These savings accounts were usually kept in
the names of individuals, eluding regular control mechanisms and further
enhancing the importance of secrecy, insider/outsider orientations and cliques
(Int # 70, Int # 38).
The environmental conditions that heightened the advantages of membership of
the danwei recurred several times between 1950 and the 1990’s. During the
Great Leap Forward (1958 - 60), food production collapsed, and mass starvation
and hunger further fuelled self-production within the danwei. To help overcome
these conditions, units produced consumer goods in order to sell them or
distribute free of charge to employees.
In order to overcome grain, foodstuffs, and produce shortages, some danwei
acquired land and other production materials free of charge from local villages
to establish farms that could regularly grow vegetables or grain to supplement
the needs of the unit members. Similar phenomena occurred in many provinces
(Lu, 1997: 35). Although the practice by non - production units of taking land
and other materials from villages was later banned, as late as 1962 many units
still had these properties in their possession and continued to produce their own
supplies for consumption or sale for profit. From time to time the Central Party
Organisational Guanxi and State Owned Enterprises in south-west China
117
control would criticize these arrangements during crackdowns on profiteering
and the black market. However the authorities did not specifically or officially
endorse or prohibit such practices unless they seriously affected consumer prices
in the market (Lu, 1997). The weak and inconsistent style of monitoring,
policing and government control allowed corrupt processes to develop, continue
and become more secretive.
Under the rule of Chairman Mao, movement of employees between danwei was
tightly restricted; residence controls were strictly enforced; housing and
consumer goods were in extremely short supply; and common consumer items
and even basic foodstuffs were rationed through the workplace. This
environment again encouraged and reinforced secret private production, under-
reporting of revenues, insider benefits, secrecy and the development of cliques
within the danwei.
As the Chinese people worked their way through such catastrophe, shortages
and controls have eased and the pattern of dependence has returned toward less
severe norms. During such periods of hardship there is little doubt that these
danwei practices have been strengthened ensuring their survival (Walder, 1986:
17).
Organisational Guanxi and State Owned Enterprises in south-west China
118
During the catastrophe of the Great Leap, millions of people left agricultural
work and crowded into existing factories and hurriedly erected new plants. This
sudden human flood into the factories was churned up by the social euphoria
created by the Great Leap campaign and the corresponding interest and
aspirations of individual migrants to improve their living standards by gaining a
factory job and urban residence. With this government approved shift of
millions of workers from agricultural to industrial occupations, the food balance
swung inevitably into deficit, food production collapsed, and mass starvation
and hunger inevitably resulted. This further fuelled the need for self-production
to cater for and protect members of the danwei and again toughened the survival
skills of the danwei members.
A second major outbreak of the development of independent bases and work
sites occurred again in the early 1970’s, when the Soviet - Sino conflict reached
its peak. During this period many government agencies and schools surrounding
Beijing set up ‘rear base’ facilities in mountainous areas. The idea was that the
danwei could retreat to these bases in case of invasion or bomb attack. After the
threat had passed, the ‘rear base’ facilities were not closed down but developed
further, resulting in units benefiting materially from the close ties they were able
to develop with local villages. Guanxi relationships were very important in this
scenario.
Organisational Guanxi and State Owned Enterprises in south-west China
119
From the mid-1960’s through to the end of the 1970’s, state industrial workers
produced a total ‘surplus’ (profit and tax) equal to four times their total wage of
which a significant share was retained by the danwei. After the end of Mao’s
rule, the economic efficiency of the danwei began to decline due to the lack of
incentives in the wages system. Despite the government’s attempts in the 1980’s
and early 1990’s to institute a merit-based labour market, levels of production
continued to decline (Chan, 1997). By 1993 the surplus produced had declined,
on average, to only one and one half times the annual wage (Naughton, 1997).
Most SOE had a resulting decrease in the volume of surpluses they had at their
disposal to be used for members of the danwei.
The death of Mao and resultant reform of the Chinese Communist Party resulted
in Deng’s industrial reforms commencing in earnest in the mid-1980s. The
economic system was decentralized; social controls were relaxed; and socialist
practices became less important in favour of economic success (Chan, 1997:
100). Relaxation of controls on enterprises and resultant increases in danwei
resources inevitably strengthened the tie between enterprises and worker and
thus indirectly the whole danwei system (Chan, 1997). However, as reform
gained momentum workers at SOE struggled to hold onto their prerogatives in
Organisational Guanxi and State Owned Enterprises in south-west China
120
the face of new market pressures that threatened the integrity of the danwei
(Walder, 1986).
In 1986, a new Labor Law decreed that all long-term danwei workers should
become contract workers by the end of 1996 (Chan, 1997). This removed the
‘jobs for life’ security of employees and increased the number of state workers
‘taking the plunge’ into the private sector during the resulting economic boom
of the late 1980’s and 1990’s. The influence of this change on the operations and
membership of the danwei is still evolving.
Summary
The first Five Year Plan (1953 - 1957), the Great Leap Forward (1958 - 1960),
the period of readjustment (1961-1965), the decade of the Cultural Revolution
(1966 - 1976), and the period of restoration and reform after Mao’s death have
each brought significant changes and produced the environmental conditions
that have allowed organisational guanxi processes to develop in the danwei.
I argue that the core characteristics of the military danwei in the Communist
Base Camps prior to 1940 have evolved through the evolution of the post-1949
danwei to become the core characteristics of organisational guanxi in SOE.
Organisational Guanxi and State Owned Enterprises in south-west China
121
These characteristics include the importance of insider relationships and the
activities and benefits that flow from such; under reporting of production
revenue and collective assets; the importance of trust and secrecy regarding the
dissemination of information between members of danwei cliques; the
importance of mutual cooperation and informal networks in achieving
outcomes; and the provision of benefits to danwei members from time to time
that are not available to non - danwei members.
Since the reform process has gathered pace, properties have been sold to SOE
employees at reduced prices or at subsidized rates and the danwei no longer has
the role of providing accommodation for those that have purchased these
apartments. The dang’an still exists as more of an administration and training
document rather than its former record of employees’ behaviours.
The period from pre-1949 was central in the development of organisational
guanxi in the military danwei. Overall the roles played since then by Mao and
Deng in China’s economic development, combined with the complex structure
of SOE, the key role of the danwei and China’s socialist philosophy have all
been critical construction blocks that have influenced the development of
organisational guanxi.
Organisational Guanxi and State Owned Enterprises in south-west China
122
The danwei was a place where the opportunities existed to develop connections.
Often people who worked together lived in the near vicinity of each other and
this enhanced their opportunities to develop trusting guanxi relationships.
During the period from pre 1949 through to the years of Deng’s reform the
practice of organisational guanxi evolved. The recent introduction of
privatization and the socialist market economy in China as resulted in the
danwei currently being in flux.
Organisational Guanxi and State Owned Enterprises in south-west China
123
Part Two
Organisational Guanxi in Operation
Having investigated the roots and consolidation of organisational guanxi in Part
One in Part Two we look at organisational guanxi in operation in south-west
China.
In her study of the early Yunnanese Jade Trade, Wen-Chin Chang (2004: 498)
found the Yunnanese people kept close affiliations among ‘laoxiang’, meaning
people from the same county or better still the same village. When two
Yunnanese meeting for the first time learn that they or their fathers or
grandfathers are from the same region, the immediately feel close to each other
and try to identify common friends and relatives. Networks of guanxi quickly
develop, and ordinary requests for help are quickly fulfilled. Chang went further
to conclude that guanxi cannot only be confined to actions between persons;
they include relationships of people to other individuals and to groups, and
between groups as well. These are the characteristics of organisational guanxi in
the south-west of China.
Organisational Guanxi and State Owned Enterprises in south-west China
124
Chapter Five
Organisational Guanxi in China’s Hotel Sector5
As mentioned above, defining guanxi is a challenge for researchers as this
phenomenon exists in many different situations, develops in many different
ways, and each guanxi relationship carries its own connotations and history.
Kipnis (1997: 184) concludes that ‘no unchanging, single form of guanxi exists’
and lists the following forms of guanxi: ‘urban guanxi, rural guanxi, business
guanxi, owner/tenant guanxi, marriage guanxi, classmate guanxi’ and more. In
defining what role guanxi plays, Iacobucci and Ostrom (1996) found that guanxi
performs different roles and has different implications for managers in different
market situations. Thus the meaning of guanxi is very general (Tsui and Farh,
1997).
Pye (1992) described guanxi as ‘friendship with continued exchange of favours’,
while Tsui and Farh (1997) concluded that relationships based on common
ground’ is the essence of guanxi. Yeung and Tung (1996) defined guanxi as a
5 Published in Chinese Culture, Organisational Behaviour and International Business Management (2003) edited by Ilan Alon, Praeger Publishers, Westport CT.
Organisational Guanxi and State Owned Enterprises in south-west China
125
‘connection’, while a study by Fock and Woo (1998) found that most
respondents agreed on the personal nature of guanxi.
Guanxi relationships are not simple, and to have good guanxi implies having a
successful history of working together, providing favours, and building up trust
between one another over time.
As defined previously, renqing refers to the social norms to which one has to
abide in establishing smooth and harmonious interpersonal relationships in
Chinese social life (Hwang, 1987). Common examples of renqing include: a)
keeping in contact through reciprocal invitations to dinner and exchange of gifts,
greetings, or visitations; b) sympathizing with and offering help to a member of
one’s social network who is in need; c) on receiving a favour, always
remembering to return the favour in due time; d) granting favours to friends
requesting help. Cultivating renqing is a prerequisite to establishing or
sustaining relationships among friends and connections (Hwang, 1987). When
Chinese people weave their guanxi network, they also weave a web of renqing
obligations (Luo and Chen, 1997).
In terms of the control and monitoring of Chinese SOE one important reason for
the pervasiveness of guanxi in China is the relative lack of a reliable legal
Organisational Guanxi and State Owned Enterprises in south-west China
126
system. In a nation that has traditionally depended little on laws, personal power
has always been the key to getting things accomplished (Seligman, 1999). From
a Western perspective, this lack of a reliable legal system sometimes makes it
difficult to identify the difference between what the Chinese view as guanxi and
bribery. Yang (1994) provides three distinctions between guanxi and bribery.
First, the gain and loss calculation that dominates the act of bribery plays a
much weaker role in guanxi. Second, a guanxi obligation is long-term and
diffuse, while bribery is immediate and specific in purpose. Third, some level of
emotional content or affection is a part of guanxi, but not bribery. The central
difference is that guanxi means relationship building, while bribery is an illicit
transaction (Lovett, Simmons, and Kali, 1999).
Luo and Chen (1997; 15) recognised the need to examine the effect of guanxi on
business and management from a social, organisational, or human behaviour
perspective. This recognition, combined with the paucity of publications on such
subjects, inspired this research into how guanxi operates within and between
larger SOE, and the implications this holds for businesses operating in the
southwest of the People’s Republic of China.
My objective in this chapter is to identify the behaviours and characteristics of
organisational guanxi operating within and between organisations/departments
Organisational Guanxi and State Owned Enterprises in south-west China
127
at the Roaring Dragon Hotel in south-west China. From May to December 1999,
research into the modus operandi of guanxi was carried out at a four-star hotel
with more than 600 employees (referred to here as the Roaring Dragon Hotel),
and with personnel from businesses interacting with and supporting the Hotel.
Interviews were conducted with 35 middle and senior managers from the Hotel
and a group of 11 officials, academics, and businessmen from this environment.
This constitutes a sub-set of the total data-set used elsewhere in this thesis.
Unattributed direct quotes throughout this chapter are taken from verbal
transcripts of interviews with these interviewees.
Organisational Guanxi
Employment Nepotism
In 1999, the recruitment process at the Roaring Dragon Hotel was primarily
based on guanxi. Although the Hotel’s Head of Training told of a Hotel
regulation that stated that ‘staff relatives are not permitted to work in the same
hotel’, he admitted that it was common for a manager or supervisor to find a
daughter, son or other relative a job at the Hotel (Int #9). The Manager of the
Food-and-Beverage Department described how,
Organisational Guanxi and State Owned Enterprises in south-west China
128
at one time there were 32 families working in the hotel, with sometimes three
or four people from one family working in the same department. Some had no
work skills, but because they had the right relationships, they could still get a
good job (Int # 15).
Family members had tight bonds, and family guanxi was an important tool in
finding employment (Fried, 1953; Yau et al, 2000).
The Roaring Dragon Hotel incumbent Manager of the Human Resource
Department had occupied her position for ten years and had approved all staff
appointments during that time. Managers and supervisors described how they
used their guanxi with her to gain positions for their friends or members of their
family. At appropriate times, they would approach her in an effort to arrange
for a suitable time to introduce the ‘candidate’ for whom they wished to gain a
position at the Hotel. It was a matter of ‘face’ (mianzi) as to whether or not the
Manager would respond to this request. Denying such a request would result in
a loss of ‘face’ for those unsuccessfully requesting this favour. Conversely, a
manager was given ‘face’ when each newly requested appointment was
approved. With each favour granted, there would accrue renqing and the
potential requirement for a return favour at sometime in the future.
Organisational Guanxi and State Owned Enterprises in south-west China
129
When recruiting, the number of new employees taken on would sometimes
become excessive due to the number of favours requested by important connec-
tions, government officials or department heads. When the Human Resource
Manager assessed a list of applications for a position, there would sometimes
be attached to an application a note from a senior official saying, ‘Could you
pay special attention to this person?’ or from the General Manager saying, ‘take
care of this person’. The Human Resource Manager explained how.
Recommendations from important officials have to be taken care of
because of the importance of the relationship. You cannot refuse their
requests because there would be trouble. If we didn’t get this notice
about such a candidate, then maybe this candidate would not be
employed by the Hotel (Int # 10).
If the applicant’s parents were important members of society, it was important
to find their ‘connection’ a position. The Human Resource Manager admitted
that, ‘if they have no skill we just give them a very easy job. We must take care
of this relationship by finding these people work in this hotel no matter what
their ability’ (Int # 16).
Organisational Guanxi and State Owned Enterprises in south-west China
130
Many relationships and connections were also nurtured between hotels. If for
some reason it was difficult to arrange a position at the Hotel for a family
member, then requests could be exchanged between hotels. The training
manager described how.
If my nephew hopes to get a job in the hotel business and we have no
positions, I usually make contact with other hotels’ personnel and say, I
have a nephew, would you please accept him. If they accept him then
the next time the other hotel has a relative who is hoping to get a job, I
will accept him in return for the earlier favour (Int # 9).
Another example of the working dynamics of guanxi could be seen in the
appointment of the Hotel’s General Manager. His father had once been the
mayor of the city, and this was the reason he had gained such an important
position. Although he had only limited training, he was vested with the
authority to make important decisions. In his early years as General Manager
any minor mistakes he made were tolerated because of the powerful
connections behind him.
To gain a promotion within the Hotel, a relationship with the General Manager
or someone from the Provincial Governor’s office was the critical connection
Organisational Guanxi and State Owned Enterprises in south-west China
131
and was, according to the bar manager, “more important than a university
qualification” (Int # 13). This further confirms evidence that jobs in China
often have not gone to the best qualified, but rather to the best connected
(Seligman, 1999).
From an organisational perspective, the potential improvements in
effectiveness and efficiency to be gained by dismantling the system of
nepotism and choosing the best candidate for each job are significant.
However, dismantling this cultural system, which has developed over a long
period, will be difficult. Managers of converted SOE, takeovers, and
international joint ventures will need to be aware of this phenomenon when
developing the effective human resources to improve the results of their
organisations as they embrace the socialist market economy in south-west
China.
Occupational Advantages and Disadvantages
If an employee enjoyed good guanxi with their manager, there were advantages
from which to benefit. They could start a little late, have no shift-work, have
weekends off, get a job that required little work, earn more money and achieve
their goals easily. A relationship with a high government official or manager
Organisational Guanxi and State Owned Enterprises in south-west China
132
meant they could even choose where they would work. Those with powerful
connections chose the front office, the reservations desk, sales or marketing,
where they were not required to serve guests or do any cleaning.
A senior manager told the comical story of how a young man whose uncle was
the Hotel’s General Manager came to work at the hotel. Without knowing this
young man’s relationship with the General Manager, the supervisor arranged a
job for him cleaning the toilets in the lobby. When the General Manager heard
about this, he called the supervisor, saying, ‘You cannot do this. You must
arrange a better position for him’ (Int # 29). The young man was promoted to
cleaning rooms. However, cleaning rooms in the public area was still a low
position, so the General Manager called the supervisor again to instruct him not
to let his nephew work in a public area, insisting that ‘he must do something
higher’. As the employee had limited skills, after the public area, he went to a
position in housekeeping.
On occasions, opportunities would come to reward hardworking staff. One such
occasion arose when ten hardworking Hotel staff were to be chosen to go on a
trip to the United States to visit hotels. There was great excitement among
employees who thought they stood a chance of being selected. However, when
the lucky candidates were finalised, most of the ten staff selected from the
Organisational Guanxi and State Owned Enterprises in south-west China
133
Hotel were less than hard working and had been chosen because they had
guanxi with someone in power.
Annual Managers’ Conference
Relationships developed and grew stronger every year at the annual conference
where general managers and deputies from the family of SOE hotels within the
region would meet to discuss issues. These conferences provided the hub
required for managers to network and consolidate relationships and would
always generate invitations between managers to visit each other’s hotels.
Strong inter-hotel relations developed that resulted in transport,
accommodation and consumer benefits for these managers and the staff from
their hotels. Guanxi between these hotel general managers meant that their
employees often would later benefit from free or discounted accommodation
and assistance with other matters when traveling throughout China.
The Roaring Dragon Hotel’s General Manager used such relationships to
enhance the Hotel’s training program. When his employees had completed
internal training programs, he would send them off on tours of other hotels
throughout southern China for two to four weeks at a time. Employees on these
tours told how ‘we would always stay in a hotel where our senior managers had
Organisational Guanxi and State Owned Enterprises in south-west China
134
a relationship with their senior managers and as a result, pay nothing for food
or accommodation’ (Int # 8).
This hotel network has developed over time and may be in decay as
privatisation and other market forces disconnect hotels from this chain of
former SOE. The burden of bearing the cost of future conferences and the
increasing competitive pressures on Chinese businesses to make a profit may
be factors that hasten this decay.
Luo and Chen (1997: 3) wrote that ‘guanxi primarily relates to personal, not
corporate, relations, and exchanges that take place amongst the members of the
guanxi network are not solely commercial, but also social’. I agree that in the
vast majority of cases this appears to be true; however, these management
conferences appear to contain some hints of a more corporate nature. Those
benefiting from the relationships generated and developed at such conferences
were usually employees who did not attend the conference but still enjoyed
touring and learning experiences as representatives of the Hotel. Although this
type of organisational guanxi does begin with two individuals, in this scenario
it nonetheless has group connotations.
Departmental Cliques
Organisational Guanxi and State Owned Enterprises in south-west China
135
Each departmental manager had their own internal clique, or ‘in-group’
composed of a small number of members from each department who made
decisions on how to gain or use resources to the clique’s advantage (Chow,
2000). The cliques were very internally focused, competed with other
departments for resources, and expressed only limited concern for the
betterment of the Hotel. There was only minimal communication between these
cliques.
Members of the Hotel cliques shared trust, secrecy and fringe benefits. Clique
solidarity brought with it stability in relations, security of position, survival of
the in-group and protection enabling members to conduct their own business
outside the Hotel. With in-group trust came the development of a deep mistrust
of out-group members (Yau et al, 2000) and a type of ‘crony capitalism’
whereby in-group members were selected strictly on the basis of specific
attachments or kinship, without regard for ability (Lovett, Simmons, and Kali,
1999). If anyone outside a clique tried to change anything, the members of the
clique would ‘get in the way’, and it was claimed that ‘to break up such a
departmental clique, one needed the support of the General Manager’ (Int #
14).
Organisational Guanxi and State Owned Enterprises in south-west China
136
The clique leader would always exercise strict control. The bell captain would
tell his bell boys to ‘Listen to me first. I am your supervisor’. His control of the
clique was very strict and if a bell boy was not obedient, he would be severely
scolded or fired immediately. The assistant manager of the front office told
how he had wanted these bell boys to complete duties for him. Although he
was their senior, they would not respond to his authority or work for him. He
would ask them to collect a group’s luggage, but they would not follow his
instruction without the bell captain’s approval. He could write a misconduct
form, but ‘it was of no use as nobody would take any notice’ (Int # 21). Clique
members who exposed any ‘secret’ information to anyone outside the clique
would be immediately expelled. These cliques ensured that scarce resources
were mainly allocated through guanxi rather than through bureaucratic rules
(Luo and Chen, 1997).
Clique members in the security, housekeeping and engineering departments did
little work and enjoyed many favours. These included housekeeping
supervisors letting people use rooms free of charge; supervisors working on the
night shift clocking in, going out and returning later to clock out; rooms being
listed as out of order so that captains could go and watch television, sleep or
play cards; and members leaving the Hotel during working hours to conduct
private business.
Organisational Guanxi and State Owned Enterprises in south-west China
137
Upper-management cliques were very strong and secretive, and members
would take advantage of their positions doing business for the Hotel. One
senior manager revealed,
If the Hotel requires some necessities, a clique member would be asked
to make the purchase. The more expensive the advertised price of the
item, the better it would be for the purchaser. Why? The higher the
price, the greater the discount the buyer could negotiate with the seller,
who was often a member of his guanxi network. When returning
purchase receipts for the item to the Hotel accounts department, the
clique member would claim back the full advertised price and support
this with a false receipt. Although he would spend 100 RMB for some
item, his receipt would claim 300 RMB. The Hotel would reimburse
him 300 RMB, resulting in a 200 RMB profit from his purchase. The
General Manager would approve it. When you looked through the
Hotel’s accounting records you would not see any evidence of the
discount (Int # 21).
Caution was required when dealing with senior staff, as many of those in the
Hotel had guanxi with powerful officials. Such protection meant that
Organisational Guanxi and State Owned Enterprises in south-west China
138
departmental managers were able to conduct their own private business while
working for the Hotel, and this appeared to be accepted as an organisational
norm. They liked to ‘work for themselves and think about how to put money
into their own pockets’ (Int # 30). Managers were not well paid, so to
supplement their income they often used their power to generate financial and
non-financial favours.
Employees also were always careful to avoid harsh or hasty actions against
nonproductive individuals at the Hotel since one did not know to which high
official they may be related. Guanxi with the powerful did offer protection
(Seligman, 1999).
Recruiting from the Tourism School
The managers of the human resource and housekeeping departments had each
given the Hotel more than 30 years of service and during this time they had
developed their own guanxi networks, one of which included the manager at
the local tourism school. When looking for new employees, they would always
visit this school first and interview students there. The Hotel’s Head Chef had
gone to the school with them on several recruiting trips and told of how he had
‘chosen some candidates that I thought were talented and had what it would
Organisational Guanxi and State Owned Enterprises in south-west China
139
take to work well at the Hotel’ (Int # 3). A few days later, when those chosen
reported to work at the Hotel, he was mystified when only a few he had chosen
were in the final group and the others were from ‘who knows where’. Those
chosen were not the best available and, as he later found out, had been selected
because of their connections with important officials.
On another occasion, six new employees had reported for work in his
department unannounced. He had not requested them, and after questioning the
newcomers he found that they all had come from the tourism school. None had
been selected on merit, but all had connections in the right places. Sometimes
new graduates from the tourism school were appointed whether or not the
economic position of the Hotel justified hiring new staff. The better the
working conditions were for the job, the stronger was the guanxi required to
gain such a position.
Transfers
The system of work placement in China meant that some husbands and wives
worked in different parts of the country and did not live together. Movement of
workers from villages to cities was difficult as such a move had to be approved
by the public security bureau and the provincial government. Separated couples
Organisational Guanxi and State Owned Enterprises in south-west China
140
in this situation found that guanxi was the most useful and sometimes the only
tool to gain a transfer to work in the same location as their spouse.
Three chefs had begun working at the Hotel while their wives still lived in the
villages. These chefs had catered for many government banquets at the hotel
and had developed their own guanxi through their interactions with government
officials attending such celebrations. The development of these relationships
with those in power enabled them to gain the approval required for their wives
to transfer from the villages to positions in the laundry or housekeeping
departments at the Hotel. For these separated couples, the strength of their
guanxi with high officials very often determined whether or not they lived and
worked in the same locality. Those without guanxi often remained separated.
Apartment Allocation
In 1999, the Hotel commenced construction of new apartments for staff
accommodation. Allocating these apartments to Hotel employees was a
complicated process that depended on the strength of an individual’s guanxi. At
the commencement of the process, the person in charge of allocation was a
former classmate of the training manager, and their guanxi was good. The
training manager felt happy, as he had been confirmed as number seven on the
Organisational Guanxi and State Owned Enterprises in south-west China
141
list to be allocated a new apartment out of the sixteen available. He felt
confident and was making plans to pack up his old apartment so he would be
ready to move.
Prior to the completion of the apartments, an unexpected change occurred at
short notice. Another manager, who had good guanxi with powerful officials,
was placed in charge of the apartment allocation process and, as a result, the
priorities on the allocation list changed significantly. The training manager was
demoted to number thirty-two on the list, as he had no specific relationship or
connection with the new manager. This meant that he would no longer be one
of those allocated a new apartment, whereas those who had guanxi with the
new manager would be. While his former school friend had been in charge, he
had enjoyed a high position on the list, but the change in management meant
his connection was gone.
This change resulted in a significant financial advantage for those who were
allocated apartments. The head of training at the Hotel noted that after a year,
‘employees allocated apartments would be allowed to buy them at just a quarter
of the recommended price’ (Int # 12). This was at a time when the government
was encouraging personal ownership so as to eventually replace the employee
accommodation being provided under the arrangements of the hotel danwei.
Organisational Guanxi and State Owned Enterprises in south-west China
142
This appeared to be one of the first cautious steps toward increasing private
ownership in south-west China, and guanxi was playing a role in this change.
Tour Agents
Government tour agents distributed the majority of bookings for tourists
requiring hotel accommodation in the city. In 1999, several new four-star hotels
were constructed in the city. As a result the booking agents’ business
environment changed from having the choice of only one hotel at the four-star
level and no bargaining power to an oversupply of four-star hotel
accommodation. This situation suddenly gave them immense bargaining power.
As a result, the quality of the relationships between hotel sales personnel and
tour agents became more critical to any hotel’s ability to attract business.
Pressure was on hotel sales staff to develop and maintain their guanxi with tour
agents. To do so, they would visit agents regularly and
‘invite them to their hotel for dinner, tea, and coffee; give them gifts
such as moon cakes and birthday cakes when appropriate; help them
solve problems; invite them to stay at their hotel during important
festivals; give them preferential pricing; arrange for them to visit the
Organisational Guanxi and State Owned Enterprises in south-west China
143
nightclub without charge; and provide complimentary rooms and
meals for their important government guests’ (Int # 44).
These activities were aimed at developing guanxi, to which agents would
reciprocate by sending the Hotel customers.
Managing relationships with these agents had become the biggest concern of
the sales department of each hotel. Any neglect of these agents would cause
their business to decline. Consequently, competition was intense, and
competing hotels would offer such incentives as advertising their group room
rate at U.S.$35 per night to the agent, but charging them only U.S.$30 per night
and allowing each individual agent to pocket the surplus U.S.$5 per night as a
bonus. This cash incentive strengthened organisational guanxi, renqing, trust,
and secrecy. In return, agents would direct tours and guests to the hotel that
offered them the most attractive discount rate, giving them the highest return.
Other hotels offered agents complimentary use of a car, a 40 percent discount
on meals, a 20 percent discount on drinks in the hotel’s bars, and a 30 percent
discount on room rates. Again, these favours were reciprocated by agents
making hotel bookings, which reflected positively on the hotel’s occupancy
rate.
Organisational Guanxi and State Owned Enterprises in south-west China
144
With hotels in southwest China developing their own direct booking systems,
the environment is changing again and agents face an uncertain future. Guests
seeking hotel accommodation were previously required to book through
government agents and stay in appointed hotels; however, this is no longer
necessary, and direct marketing is beginning to erode the agents’ market share.
Banquets
The dining table is important for Chinese business, as it provides an
environment in which relationships can be initiated and business deals
negotiated and closed (Pearce and Robinson, 2000; Yang, 1994). Invitations to
attend these banquets complemented the limited incomes of many employees
and officials. The lifestyle of the Chinese people is usually very humble at
home, so entertaining at the company’s expense by extending an invitation to
attend a company banquet is a method of fulfillment (Chu, 1988; Yang, 1994).
The Roaring Dragon Hotel has a rich history of being used to accommodate
large banquets. One evening, the Head of the Human Resource Department
arranged a banquet at the Hotel for members of the local government bureau
who were responsible for employee dang’an. The dang’an was an individual’s
official record of work. When an unemployed person found a job, they were
Organisational Guanxi and State Owned Enterprises in south-west China
145
required to move their dang’an from the bureau and lodge it in the security of
their new employer. Conversely, when an employee resigned, retired, or was
laid off from a job and became unemployed, their dang’an had to be returned to
be held by the bureau.
Normally, the bureau would only accept the return of a maximum of ten such
dang’an in each given month. At this time, the Hotel had an excess of dang’an
they wished to return; however this was unacceptable to the bureau. The
banquet was called by the Hotel’s Human Resource Manager as a show of
respect toward members of the bureau and to discuss the bureau accepting the
extra number of dang’an. Inviting members of the bureau to the banquet was a
way of giving mianzi or ‘face’ to them. In return, the bureau accepted the larger
number of dang’an and the problem was solved. The Hotel’s Human Resource
Manager had strong guanxi with the local government and used her
connections to bypass their bureaucratic channels (Pearce and Robinson, 2000).
Problems
The existence of in-groups at the Hotel meant that there were two classes of
employees; those with guanxi with Hotel Manager’s with power and those
without. Descriptions of the work habits of those who had gained their position
Organisational Guanxi and State Owned Enterprises in south-west China
146
at the hotel through ‘pulling’ guanxi included: ‘very lazy’, ‘rarely did a good
job’ (Int # 24), ‘has a poor work attitude’ (Int # 15), ‘may not have much work
to do,’, and ‘they choose to do no work’ (Int # 25). A young chef told of how
‘these employees come to work, read the newspaper, talk, or boast for eight
hours and then go home’ (Int # 19). If one had good guanxi with management
or senior officials, one could do practically whatever one liked, while those
who had gained their position on their own merit had to work much harder to
keep their job and had little choice of their appointed position.
If an unproductive worker had gained their position through guanxi, it was
difficult to have them removed due to the trouble their connections might bring
and the loss of ‘face’ it would cause. To avoid such difficulties and
embarrassment, managers of departments would let the employee remain in the
job without having to do any work and keep such information ‘quiet and within
the department’ (Int # 56).
As the market economy begins to take effect, the pressure to change is
beginning to have an impact on private-sector organisations in south-west
China, especially in regard to such issues as unproductive employees and the
awarding of jobs through guanxi. Several private-business managers said they
could ‘no longer employ unproductive employees except in situations where
Organisational Guanxi and State Owned Enterprises in south-west China
147
such an appointment could facilitate significant economic gains for the
organisation’ (Int # 61). There was a definite contrast between human resource
selection processes taking place in the emerging private sector and those at the
old SOE Hotel, where changes were slow and guanxi connections still held
power.
Guanxi and the Attitudes of the Young
Young employees agree that, ‘if guanxi is used to solve a problem, its okay to
use it sparingly, but if guanxi is used to further a personal gain, then it is
wrong’. A young assistant manager in food-and-beverage vented his frustration
in this statement:
Cultivating guanxi is very tiring. You have to spend time and energy to
cultivate relationships with this person and that person. If you do not
cultivate guanxi carefully and mess it up, a lot of people might not like
you and you might be unhappy in your job. These people may say,
“how come you are pulling guanxi with him and not pulling guanxi with
me?” You might end up having more trouble as a result (Int # 32).
A young female university graduate told of an incident when she started work
Organisational Guanxi and State Owned Enterprises in south-west China
148
at the Hotel with a group made up of university graduates and one non-graduate
who knew the General Manager:
We all had better training than the non-graduate, yet he was given first
choice of position, and chose the computing department of the front
office. He obtained a position that was easy and very comfortable
because he had a relationship with the General Manager. Although I had
a degree, I had no guanxi and ended up in the housekeeping department,
and my work was much harder, with morning, afternoon and night
shifts (Int # 28).
During the research period, several young educated employees resigned to take
up positions in one of the new hotels because they could not see any
opportunities for promotion within the old Hotel. They cited ‘in-group control’,
‘guanxi favours’ (Int # 35) and the ‘unfair practices of their superiors’ (Int #
38) among the reasons for their resignation. The favours and advantages given
to select staff consolidated many hardworking young employees’ dislike of
guanxi and contributed to their lack of motivation in the workplace.
Young and educated employees also disliked the fact that if a person with
guanxi did not like their job, they could go to a superior and ask to be moved to
Organisational Guanxi and State Owned Enterprises in south-west China
149
another position. Those without guanxi had to accept whatever conditions of
employment were offered.
Conclusions
Typically, the findings revealed that organisational guanxi was operating within
all departments of the Roaring Dragon Hotel and in interactions between
members of the Hotel staff and the supporting business community. Familiar
styles of organisational guanxi emerged in the areas of employment nepotism,
staff promotion, banquets and transfers. However, in comparison to those forms
of guanxi summarised in Kipnis’s (1997: 184) descriptions of village life, this
research uncovered new forms of organisational guanxi operating in inter- and
intra-hotel interaction, hotel-agency interaction, and departmental cliques.
Organisational guanxi first operates on an individual basis and can then be
promulgated to benefit the members of a clique, department, or an entire
organisation. When the organisation and/or the individuals working for these
organisations benefit organisational guanxi occurs. Examples of this could be
seen in the relationship between the Hotel’s sales department, management, and
tour agencies. Originally, one member of an organisation made contact with
Organisational Guanxi and State Owned Enterprises in south-west China
150
one member of another organisation and over time their organisational guanxi
developed, resulting in favourable outcomes for other members of both the tour
agency and the Hotel. Luo and Chen’s (1997) conclusion that guanxi has no
group connotation and that the bonds are personal, may be extended to include
inter-group or inter-organisational dimensions. This research provides evidence
that group and inter-group activities are part of inter-organisational guanxi and
intra-organisational guanxi.
For hotel general managers in this scenario, contacts and trust developed over
years of annual SOE conference interactions had developed to eventually
provide associated employees with good accommodation packages and advice
for their travel all over China. This is an example of organisational guanxi in its
purest form. Organisational guanxi also exists within the cliques in
organisations, which are able to provide perks, job security, and flexibility in
working conditions for internal members.
Organisational guanxi does have a number of environmental conditions under
which it thrives. First, an organisation needs to be large enough to have a
number of distinct and separate departments to promote competition for
resources between them as well as opportunities for organisational favours to
be easily granted. Medium to large hotels are prime examples of such an
Organisational Guanxi and State Owned Enterprises in south-west China
151
environment, as managers are able to grant favours such as free rooms, free
meals and entertainment options. If the organisation operates at more than one
location, the opportunities for the development of organisational guanxi are
enhanced and organisational guanxi may also exist between organisations
within the same industry.
Awarding jobs to members of one’s guanxiwang (Ambler, 1995a) and the
phenomenon of discounting do appear, at times, to be difficult to differentiate
from nepotism and bribery. In these scenarios, Pye’s (1992) definition of
guanxi as ‘friendship with continued exchange of favours’ is being satisfied
and the existence of emotional content and a long-term obligation can be
identified to distinguish these organisational relationships from nepotism
(Yang, 1994). Discounting and conducting private business during working
hours are commonly accepted practices and are difficult to define as being
legal.
The findings regarding nepotism, cliques, discounting and favours are of
concern for international managers operating in China. From a Western
perspective, these types of favours imply unfair or even fraudulent practices.
To effectively manage joint ventures or foreign-owned operations in this
environment, managers will need to be contingent, highly flexible and able to
Organisational Guanxi and State Owned Enterprises in south-west China
152
adapt their management style to manage a diverse workforce (Chow, 2000).
As the Chinese socialist market economy develops and spreads westward,
organisations in south west China face the challenge of making the workforce
more productive. Pressure on employees to perform rather than to rely on the
promotional processes of the ‘old style’ organisations is growing (Guthrie,
1998). Managers will increasingly find themselves pressured by market forces
and the improving legal infrastructure to distance themselves from the
‘crooked’ ways of guanxi practice (Yi and Ellis, 2000). In the SOE hotel sector
in southwest China, these forces are yet to have any serious effects on
organisational guanxi practices for old organisations. Future research is needed
to record the possible decline or hybridisation of organisational guanxi under
these conditions as China embraces the market economy.
The attitudes of the young toward guanxi provide further pressure to change. At
the Roaring Dragon Hotel, new graduates were frustrated to find that their
educational qualifications drew only limited respect from the older generations
of managers. In the past, the promotion of those with guanxi rather than ability
had resulted in unqualified personnel occupying decision-making positions, and
issues of concern such as poor management, waste and low productivity and
nepotism arose, significantly influencing performance outcomes. Some
Organisational Guanxi and State Owned Enterprises in south-west China
153
managers appointed to senior positions through guanxi connections did not
possess the knowledge or ability to operate effectively in such a position, or to
train and motivate young employees. At the Roaring Dragon Hotel, it was clear
that many young people resented guanxi favours and because of this had lost
their initial motivation to work hard. Well-trained young staff had been lost to
other new hotels or other organisations with more modern management
methods, usually because they could see only limited opportunities for
promotion within the old-style organisation. As China’s educated generation
gradually penetrates management positions, the future of such nepotism
appears limited.
Private-sector managers told of how they could no longer employ those with
guanxi unless such guanxi appointments generated attractive returns as
compensation. Those interviewed told of how they could no longer appoint
those who were ineffective. Guanxi favouritism will restrict the rate at which
China’s most talented graduates and potential managers reach decision-making
positions. Will this restrict the SOE rate of development in realising their full
potential and their ability to compete successfully in the socialist market
economy? More research is required into youth attitudes toward guanxi, as the
next generation has the potential to promote and increase the speed of change
in China.
Organisational Guanxi and State Owned Enterprises in south-west China
154
If China adheres to its program of phased-in commitments as a new member of
the World Trade Organisation, Chinese society will continue to undergo deep
changes. Companies will be forced to get in shape and adopt international
standards of governance or lose out to rivals that do.
As China adapts to a market economy, it is likely to be in the port city of
Shanghai that the results will first become evident (Reyes, 2001; Guthrie,
1998). Far inland, away from the international ports and trade centers of China,
this change may be slower and more gradual. In the old SOE hotels in
southwest China, favouritism still exists in most business transactions, and
dealings are still being conducted within different sets of economic, legal,
ethical, social and political parameters than those used in the West. The guanxi
game, in which connections often count more than merit, will persist until
China develops modern institutions and a consistent application of the rule of
law (Gang, 2001). Breaking down the organisational guanxi networks will not
be easy, but this may become a requirement for Chinese SOE to maximise
effectiveness and efficiency and realise their full potential.
Organisational Guanxi and State Owned Enterprises in south-west China
155
Chapter Six
Guanxi Neglect at the Roaring Dragon in South-west China:
The Demise of an International Management Contract6
In recent years, the hotel business environment in south-west China has
undergone significant changes. China’s opening-up has encouraged an outbreak
of new hotel construction and property speculation as companies and investors
hope to cash in on the domestic and international exposure of the unique
region. Prospects for growth in the number of tourists and investors visiting the
region in the future appear good.
The Roaring Dragon Hotel, an old Chinese SOE, celebrated its fiftieth birthday
in 2005. In the second half of 1999 an international management company set
about transforming the culture of the Hotel from being a relationship-based
management style to a modern market-oriented method. In 1999 the Hotel
employed more than 670 people and by 2004 this had been reduced to 300 due
the shift in management culture and a vigorous redundancy program.
6 Published in China in the New Era, Coates. B., Brooks, R., Fraser, I., and Xu, L. (Ed) (2003).
Organisational Guanxi and State Owned Enterprises in south-west China
156
The following case describes this SOE organisational experience in attempting
the transition from planned to socialist market economy conditions.
Methodology
Interviews were recorded with 35 middle and senior managers from the hotel
and a group of 11 officials, academics, and businessmen from this environment.
15 participants were interviewed on more than one occasion across three
research periods in 1999, 2001 and 2002. Un-attributed, direct quotes used
throughout this manuscript are taken from verbal transcripts of these
interviewees.
In addition, a written survey was conducted with hotel staff the week before the
takeover and some findings from this survey are acknowledged in the
following.
The Roaring Dragon Hotel
The Roaring Dragon Hotel had been the first four star hotel in the city and
since the early 1950s had enjoyed a reputation as the most famous
accommodation-provider in the region. Being a SOE with a long and colourful
Organisational Guanxi and State Owned Enterprises in south-west China
157
history, it was the region’s premium guesthouse for visiting government
officials, dignitaries and guests.
To staff the Hotel, employees had been transferred in from other SOE and
government departments primarily on the strength of their guanxi or
connections. Having gained a position to work for the Hotel, Roaring Dragon
employees felt ‘excited’ and ‘very proud’ (Int # 31). Some recalled ‘if your
relatives or your friends knew that you were working in Roaring Dragon, you
would be admired’ (Int # 29), ‘it was a good work unit’, and ‘you were lucky if
you worked there’ (Int # 33).
The original Hotel was a four-storey, rectangular, grey structure constructed in
1955 in a Russian style. By 1993, the provincial government had funded a new
extension and the Hotel now consisted of two parts: the old four-storey section
now complemented by a modern sixteen-storey extension perched on a hill
behind the old Russian-style building. There was a contrast in the standard of
accommodation between the old and the new. Room rates were cheaper in the
old section and so it attracted Chinese visitors and travelers searching for
quality economy accommodation. High profile visiting government officials
and higher-end customers felt more comfortable in the newer, more expensive
section. There were two guarded entrances to the Hotel, one on each level. A
Organisational Guanxi and State Owned Enterprises in south-west China
158
series of stairways, elevators and a warren of banquet rooms, hallways, storage
areas, offices, cafeterias and a laundry untidily connected the two buildings.
Reflection on a 1993 Experience
The Roaring Dragon was a Chinese-managed SOE Hotel until the opening of
the new modern extension in 1993 when the provincial government decided to
contract an international company to manage the Hotel. The objective was to
improve the quality of customer service and generate more income. The KYZ
Corporation was identified as a suitable international management organisation
and was contracted to manage the Hotel. Their representative, Mr. Meyer, a
Mandarin-speaking German, became the Hotel’s new General Manager (GM)
with the former Chinese GM, Mr. Wen, becoming second-in-command.
After a short time under the new market-oriented management style, former
General Manager Mr. Wen began complaining that he had lost his privileges.
He could ‘no longer enjoy practices such as inviting someone to the Hotel for a
complimentary dinner or reap other benefits without first gaining approval from
Meyer, the KYZ GM’ (Int # 44). For Mr. Wen and his former management
staff, the change of management was an issue of great concern as most of the
privileges they had previously enjoyed had been discontinued. This loss of
Organisational Guanxi and State Owned Enterprises in south-west China
159
benefits resulted in the Chinese managers being reluctant to embrace new
management practices. ‘In their hearts the Chinese employees did not want to
be managed by Meyer or the KYZ Corporation’ (Int # 54). In terms of
incentive or financial reward, there were few, if any, reasons for the Chinese
employees to be happy with the new arrangement and to make it work.
‘Employee salaries had not changed’ (Int # 31) and ‘the foreign management
did not know the Chinese way’ (Int # 33).
From the time KYZ took over the management of the Hotel in 1993, business
gradually declined. After three months, occupancy was very low and the new
modern extension was only in operation above the seventh floor.
Finally, after a year of poor performance, the Chinese provincial government
told KYZ that they were not performing well and that they wanted to end the
contract. KYZ did not receive this notification well and commenced
proceedings to claim damages in the courts from the provincial government for
breaking the contract. The provincial government had provided the
documentation and invitation to KYZ at the beginning of the contract and so
they were liable. Their guanxi with the local judges made them confident the
damages would be minimal. After a year of apparent non-cooperation and
Organisational Guanxi and State Owned Enterprises in south-west China
160
turmoil, the KYZ management left in November 1994 and Mr. Wen, the former
Chinese General Manager, resumed control.
With Chinese General Manager Mr. Wen’s reinstatement came the resumption
of the former organisational culture including the practices of nepotism and
favouritism. Guanxi cliques in the Hotel resumed operation and the re-
establishment of relationships with the local tourist agents resulted in the
occupancy levels returning to their former steady but low levels.
The Roaring Dragon Hotel was eventually required to fund the resulting
lawsuit compensation to KYZ. To General Manager Mr. Wen and the
employees it did not matter as ‘the provincial government would pay the
damages’ (Int # 47).
The 1998 Story
By 1998, the provincial government had again become dissatisfied that the
potential of this SOE was not being realised especially as the Roaring Dragon
was the highest rated hotel in the city and was situated in a famous tourist
location. Since the Chinese management’s resumption of control in 1994 after
the demise of KYZ, the financial performance and vacancy rates were still
Organisational Guanxi and State Owned Enterprises in south-west China
161
below potential. At times, the Hotel was losing money and the provincial
government ‘was not happy with the way it was being managed’ (Int # 37).
Under Mr. Wen, management practices remained outdated and ‘the staff were
not developing or expanding the Hotel business’ (Int # 36). Among the
employees, there was an atmosphere of little concern as their salaries, although
ordinary, were secure and they were content in the knowledge that the
provincial government would cover any of the Hotel’s losses. The Hotel
danwei was highly ranked which meant that the working conditions and
benefits were good when compared with those of the rest of the population
(Walder, 1986). The ‘580 Yuan per month paid to a barman’ (Int # 7) or the
‘1500 Yuan per month paid to a manager’ (Int # 44), combined with the easy
work, neat and tidy uniforms, complimentary meals, accommodation and fringe
benefits made the Hotel an attractive and respectable place of work.
The organisational culture was very relaxed with many employees finding time
to read newspapers and enjoy a green tea during working hours. For some
managers, conducting private business was easy and from time to time they
could be seen leaving the premises for a few hours to attend to other business.
One example was the Hotel’s Head of Training who had a restaurant just a few
blocks away. In the afternoons, he would make visits to ensure operations and
Organisational Guanxi and State Owned Enterprises in south-west China
162
supplies at his restaurant were flowing smoothly. It was easy as the Hotel was
overstaffed and under the conditions of the danwei all jobs were secure, and
besides, no Chinese manager wanted to be responsible for firing potentially
well connected, lazy or unproductive employees.
As Rofel (1999) identified, this was the type of SOE work culture that still
operated largely under the shadow of the Cultural Revolution and carried
employees who did not have commitment or a sincere working attitude. The
Roaring Dragon Hotel employees did not want to work hard and were not
concerned about the Hotel’s steady decline in popularity and income. China’s
new market economy demanded that organisations become profitable, yet the
Roaring Dragon’s old and experienced Chinese management showed little
concern for generating profit and basically did not comply. During the same
period, competition arrived as new hotels opened their doors and as this
competition grew, the financial fortunes of the Roaring Dragon Hotel declined
even further.
As a result, in 1998, the provincial government was again tempted to contract
an international management company to arrest the declining fortunes of the
Roaring Dragon Hotel. They identified the Nothill Hotel Management
Company as an organisation with the right international reputation, credentials
Organisational Guanxi and State Owned Enterprises in south-west China
163
and brand name to take up the management contract. They felt confident that
under Nothill’s management, the Roaring Dragon Hotel’s potential would be
realised.
In March 1998, negotiations commenced with the globally respected Nothill to
take over management of the Roaring Dragon Hotel. By mid-1998, it was
agreed in principle that Nothill would take control of the management of the
Roaring Dragon and, to save face, the incumbent Chinese GM, Mr. Wen,
would be installed as the GM ‘of a new company, the Roaring Dragon
Limited’. The role of Roaring Dragon Limited would be to oversee the
activities of Nothill and ‘act as a conduit through which Nothill communicated
with the Hotel’s Board’ (Int # 26).
Would Nothill’s experience at the Roaring Dragon Hotel in 1998 be more
successful than KYZ’s five years earlier?
Nothill and Mr. Harvey’s arrival
To negotiate the finer points in the contract and help prepare the Roaring
Dragon for a complete management takeover, Nothill sent one of their
Australian Managers, Mr. Harvey, to complete the negotiations and initially co-
Organisational Guanxi and State Owned Enterprises in south-west China
164
manage the Hotel with former Chinese General Manager, Mr. Wen, from May
1998. It did not take Mr. Harvey long to realise that a management takeover
would involve changes in the Roaring Dragon’s organisational culture.
Entrenched guanxi practices, the poor quality of customer service and at times
significant annual losses had to be converted into more accountable, quality
service practices with employees who were prepared to strive for excellence.
Mr. Harvey’s mandate included identifying efficient and effective staff that
would be able to help develop the Nothill standard of excellence at the Hotel.
He realised that this might not be easy as many of the existing staff had been
employed there for fifteen years or more. During that time the majority of them
had experienced little or no training, and had developed only a limited
understanding of the concepts of western professionalism or efficiency. Mr.
Harvey faced the challenge of transforming a large group of relaxed family-
based employees, working under an ad-hoc management style into a
professional group of employees operating under a structured international
commercial business culture.
From the time of his arrival, Mr. Harvey ‘mixed easily with the Chinese people
and regularly attended important functions, giving presentations and speeches,
Organisational Guanxi and State Owned Enterprises in south-west China
165
playing tennis with the Governor, and sometimes even chatting at the nearby
English Corner’ (Int # 1).
Nothill’s Austrian-born Head Chef, Mr. Werner Thomason, arrived five months
after Mr. Harvey to take charge of the Roaring Dragon’s Food and Beverage
Department. Notified of his appointment in England, Mr. Thomason had flown
into China without a visa and was met at the airport by a provincial government
representative. After a few questions were asked, he ‘was given a 24 hour
temporary visa for 100 Yuan’. The next morning, ‘a government official took
his passport and secured him a long term visa’. He encountered a ‘similar
process with his Immigration Health Certificate’ (Int # 3). The ease with which
the two events were taken care of highlighted the advantages of having
powerful guanxi within the provincial government.
A few months after Mr. Harvey arrived, problems began to surface. Although
officially Nothill’s representative, Mr. Harvey could not make any major
decisions in the negotiations without the approval of Nothill’s Regional
President in Singapore and the Corporation’s Vice President in Beijing. Even
though Mr. Harvey had negotiated most of the details of the Nothill takeover
contract, he was never really in control. As one Chinese manager commented,
‘all the important decisions were made in Singapore and Beijing’ (Int # 45).
Organisational Guanxi and State Owned Enterprises in south-west China
166
After ten months, Mr. Harvey returned to Australia. There was speculation that
he had left because the ‘weather was not good for his health’, but many
employees believed that ‘he was fed up with the frustration of nothing
happening’ (Int # 10). Others believed that ‘the Roaring Dragon Hotel board
was against him from day one and that was the reason why his management
lasted less than one year’ (Int # 5).
Erhi T
Erhi T was the largest SOE in the Province and had accumulated significant
wealth in the region through its tobacco production. To help eliminate the
Roaring Dragon‘s seemingly ever-growing debt, the provincial government
‘told the Board of Erhi T to buy the Roaring Dragon Hotel’ (Int # 39). The
resulting funds would be used to repay and reduce the growing debt. This
request was made soon after Nothill’s contract to manage the Hotel was signed.
Reliable sources claimed that ‘the Erhi T board was reluctant to make the
purchase’ (Int # 39) and this was reflected in their delays in signing the
contract. As a result ‘eighty points in the original agreement had to be re-
negotiated’ (Int # 6) between the Roaring Dragon and Nothill after Erhi T had
become officially involved.
Organisational Guanxi and State Owned Enterprises in south-west China
167
By March 1999, after difficult negotiations, Erhi T had ‘purchased sixty
percent of the Roaring Dragon Hotel for an estimated twenty million yuan’ (Int
# 30)7. The final contract stated that Nothill would manage the Hotel and
Roaring Dragon Limited would continue as the Chinese management arm. This
was the first official agreement between the three parties and it had proven a
cumbersome task.
At the first meeting between the new Chinese shareholders and the Hotel
employees, an Erhi T manager made the comment that they ‘did not really want
to buy the Hotel’ (Int # 38). That seemed to signal an inauspicious beginning
and was perhaps, an indicator of the troubles to follow.
The Provincial Government
As the former guesthouse for government officials, the Roaring Dragon Hotel’s
relationship with the provincial government was very important. To nurture
government relationships, Hotel managers would regularly invite officials to
the Hotel for dinner and present them with flowers, tobacco and gifts such as
glasses displaying the Roaring Dragon logo. In addition they would arrange
7 Trusted informants in the Red Dragon Accounts Department indicated that this figure was correct.
Organisational Guanxi and State Owned Enterprises in south-west China
168
meetings with them to drink tea and offer to assist them in resolving any
problems they might have.
From the Hotel’s beginning, government officials had been the only people
who could afford accommodation at the Roaring Dragon. As the only four-star
hotel in the city for more than forty years there had never been a problem as far
as low occupancy was concerned. However, that began to change from late
1998 when the number of hotels with the capacity to receive government and
accommodate four-star guests increased from one to three, with a further two
more four star hotels under construction. Government officials and those who
could afford it now had the choice of staying at a hotel that could offer them
more modern facilities and services at a competitive price.
April 1999
Mr. Fortune arrives
Following Mr. Harvey’s departure, Nothill searched for a new General
Manager and found their candidate in their African operations. Mr. Paul
Fortune arrived in April 1999, two months after Mr. Harvey had left, to finalise
the contract and resume preparations for the Roaring Dragon to complete its
transition from co-management by Nothill and the Roaring Dragon Limited to
Organisational Guanxi and State Owned Enterprises in south-west China
169
full management by Nothill. This was contracted to begin from the first day of
August 1999.
Almost immediately Mr. Fortune established a pre-opening budget with the
Roaring Dragon which ‘covered Nothill’s expatriate pay roll with effect from
August 1’. He also identified that ‘cash flow was going to be the main issue
confronting the Roaring Dragon’. Erhi T may have to come up with working
capital for at least the first two or three months before the newly managed
Roaring Dragon could generate enough income to operate independently’ (Int #
2).
With the contract finalised, the Hotel’s Chinese Board of management
suddenly expanded from four to twenty members. Among the new additions
were ‘the local Communist Party Chief, the Chief Secretary, the Union
representative, and eleven Erhi T representatives’. Mr. Fortune believed
‘everyone was trying to get a seat on the Board to keep an eye on Nothill’ (Int #
2). As was the norm in Chinese management situations, ‘connections and
relationships’ had played a key role in deciding all the positions on the Board.
Mr. Fortune soon realised that it was ‘politically correct to include the Hotel
Workers Union and to pay respect to them so as to minimise any problems they
may cause’ (Int # 2). In a push for information and to stamp its authority, ‘the
Organisational Guanxi and State Owned Enterprises in south-west China
170
Board proposed Nothill supply them with a copy of the Roaring Dragon’s
accounts every week’. Mr. Fortune politely refused and eventually agreed on
providing monthly reports.
Mr. Fortune and Nothill’s real concerns were ‘whether all the negotiated
contractual agreements were going to be met’ (Int # 2) by the Hotel Board and
the Provincial Government. The Nothill board intended to ensure that as an
internationally branded company with a healthy reputation, their ‘brand name
would not be brought in and thrown on the building’ (Int # 2) with all other
contractual agreements falling by the wayside or encountering delays. As
insurance, it was stipulated in the contract that Nothill would take over the
management of the Hotel from August 1st. However, the Roaring Dragon
would not be re-named as a Nothill hotel until such time as significant progress
had been made towards improving the quality of service, and when
construction was complete on a proposed new five-star wing in place of the old
building.
Once the old Russian style section of the Hotel had been demolished,
and the service quality in the modern extension brought up to Nothill’s
international standard, the Hotel would then be re-branded the Nothill
Roaring Dragon Hotel (Int # 2).
Organisational Guanxi and State Owned Enterprises in south-west China
171
The demolition of the old section of the Hotel was to begin by January 1, 2000
and so it was planned that the new five-star accommodation wing and function
centre would be completed ready for opening in late 2002. Mr. Fortune felt
‘confident that in two years, his team would be able to develop the local
Chinese employees to a level whereby they could reproduce Nothill’s world
class standard of service’ (Int # 6).
The old section of the Hotel was closed and stripped for demolition and all that
remained open for guests was the modern, more expensive sixteen-storey
section of the Hotel. Left with a smaller number of rooms to service,
redundancy was going to be an issue that Nothill was going to have to deal
with. The remaining 675 employees were well in excess of the 350 employees
Nothill estimated that would be required to run the reduced number of rooms at
capacity. Many staff would need to be re-employed elsewhere or have their
redundancy paid out. In contrast Nothill ‘planned to bring in eight expatriate
professionals to manage the takeover’ and later, when the time was right,
‘expand their management team to include pastry chefs, an executive chef,
Food and Beverage managers, and a much stronger professional team’ (Int # 2).
Organisational Guanxi and State Owned Enterprises in south-west China
172
In preparation for the changes that would commence from August 1st, Mr.
Fortune publicly announced that from that date all employees would undergo a
two month training period following which employees would be chosen to be
retained by Nothill based on their attitude and ability. In the human resource
selection process, previously valued guanxi networks would supposedly
become irrelevant and powerless. Erhi T or the former Chinese GM would have
no control over the selection process and ‘Erhi T would resolve any redundancy
issues by paying out existing employee contracts or finding them positions
elsewhere’ (Int # 2). There was excitement among the young staff, who saw the
opportunity of working with a professional international hotel, and concern
among the older staff regarding the uncertainty for the security of their
positions. As none of the employees had ever experienced a redundancy
program before, many were unsure as to how this exercise would be
undertaken. Mr. Fortune quietly suspected that ‘when the redundancy lists were
decided, Nothill would see guanxi connections come out of the woodwork’ (Int
# 2) in an attempt to save some unproductive yet well connected employees
from losing their jobs and face.
Emerging Competition
Meanwhile in the local cityscape, two new four star hotels were nearing
completion to commence operations that would be in direct competition with
Organisational Guanxi and State Owned Enterprises in south-west China
173
the Roaring Dragon. These hotels were operated by international management
corporations and enjoyed the advantage of recruiting their employees based on
qualifications, appearance, efficiency and ability with no concern for guanxi
relationships. The new competitors had hired international recruiting firms to
sort through the hundreds of applicants who had applied for positions as they
wanted to identify the best recruits.
In contrast, Nothill had inherited an untrained staff, a high percentage of whom
had gained their positions through connections. Those with good guanxi with
the HR Manager were usually able to find sons, daughters, relations and
members of their guanxiwang (Ambler, 1995a) positions without much trouble.
An introduction or a recommendation to the recruiting staff always gave their
‘candidate’ the added advantage. Most of the existing employees had been
introduced to the HR Manager at the Roaring Dragon and this introduction had
usually resulted in them securing a position. Another reason given was that
‘when a parent retired or passed away their son or daughter legally had the right
to secure a position as their replacement in the SOE’ (Int # 9).
Historically, the Roaring Dragon’s recruitment policy has been very relaxed.
Under former planned economy conditions, there was little need to consider
generating a profit, as ‘all costs were financed by the provincial government’
Organisational Guanxi and State Owned Enterprises in south-west China
174
(Int # 39). Hence on a regular basis, more employees were hired than were
needed and oversupply resulted.
Mr. Fortune realised that the Roaring Dragon’s nepotistic history had the
potential to be one of Nothill’s obstacles in trying to choose the best employees
to remain at the Hotel. At one time or another there had been as many as 32
families with more than one family member working at the Hotel. The kitchen
had more than 70 chefs, many of whom did very little productive work.
Departmental workloads were unbalanced, with young employees stationed at
the Front Desk and in the Restaurants working harder than older employees
who worked ‘behind the scenes’. After older, more experienced, employees had
finished their work duties on any given day they would ‘talk, play cards, read
the paper and complete a few extra minor tasks during working hours’ (Int #
22). Nothill had to change some deeply entrenched behaviour.
Nothill had inherited the Roaring Dragon’s staff and it was proving to be a very
different game to choosing a totally new staff from the beginning. Mr. Fortune
admitted that Nothill would ‘have to make the best of the given situation’ (Int #
2).
Organisational Guanxi and State Owned Enterprises in south-west China
175
July
In early February 1999, Nothill and the Roaring Dragon had agreed to a freeze
on the recruitment of any new employees. However the hiring of new
employees by the Chinese HR Department continued even after the agreement
was struck, as the managers wanted to provide opportunities for the younger
members of their guanxiwang to work for the ‘world famous Nothill Hotel’.
During the time between Mr. Harvey’s departure and Mr. Fortune’s arrival,
Nothill did not have a General Manager on site. The Chinese managers took
advantage of the situation by hiring some extra young employees with the
thought that it would go unnoticed. Fifteen new employees chosen during this
period were told they ‘would start work in July 1999, after completing their
schooling’ (Int #12). These new appointments faced ‘no evaluation or interview
process’ and a training manager’s comment was ’maybe we will just ask a few
questions’ (Int #12). Mr. Thomason, Nothill’s Manager of Food and Beverage,
remained the only Nothill employee at the Hotel during that period. He noticed
some new faces in his department one day and was told ‘these are your new
employees’. He was a little angry that this had been done behind his back as ‘he
had no control over who was chosen, their caliber, education or ability’ (Int #
4). After this had been discovered Mr. Fortune registered his complaint with the
Chinese managers and Erhi T.
Organisational Guanxi and State Owned Enterprises in south-west China
176
In late July, Nothill’s international managers arrived to take charge of the Front
Office, Accounts, Housekeeping and Supply Departments. Mr. Fortune
confirmed that between August 1st and October 31st, ‘employees would be
assessed on their ability and their quality of service. Nothill management would
be working with them day in and out to assess their performance under strict,
demanding conditions and to determine whose eyes were sparkling and who
comprehended and were adapting well to the new system’ (Int #2). Any
employee who failed to meet the new higher standards would be asked to leave.
When Nothill’s international HR Manager arrived, she was surprised to
discover that the Hotel had kept ‘very limited records on employees’ personal
details, schooling, and experience’ (Int # 14). Her immediate task was to set up
and develop accurate files on every employee. This illuminated the difference
in standards of professionalism between the old and the new methods of HR
management of the Roaring Dragon Hotel.
The take-over from August 1st caught the imagination of the younger
employees as they glimpsed the prestige that they would gain from working for
an international hotel. Recalling the KYZ experience of 1993, older employees
agreed that ‘Nothill was more famous’ but cautioned as they ‘were unsure of
Organisational Guanxi and State Owned Enterprises in south-west China
177
what the new management would be like’, ‘who would be laid off’ (Int #21)
and what future those made redundant would face. Redundancy was a new
concept in south-west China and one Chinese HR manager explained that ‘it
would be difficult to ask someone to leave their job without a good reason or
explanation’ (Int #5). Preserving the face of employees made redundant was an
issue that would need to be addressed.
A significant event occurred in the same month. NuFu Travel was an agency
that had in the past provided many accommodation and banquet customers to
the Roaring Dragon. In late July, they offered the Hotel a touring Japanese
group that required a small banquet at the Hotel as part of their tour package.
Nothill Head Chef, Mr. Thomason, arrogantly told NuFu Travel that their
package price ‘was too cheap’ and refused to accept their offer stating that he
‘wanted a higher price’. Upon learning of this the former Chinese Head of Food
and Beverage, Madame Fang, advised him that ‘if he refused the offer he
would effectively be excluding Nothill from any future bookings from NuFu’
(Int #16). Mr. Thomason refused to agree on the cheaper price package and as a
result, NuFu retaliated by canceling all future tours booked to stay at the Hotel.
Madame Fang complained that Mr. Thomason‘s ‘management was not Chinese
and he does not understand’ (Int #16). The relationship fires she had kindled
with these tour agents over many years were extinguished in one telling blow
Organisational Guanxi and State Owned Enterprises in south-west China
178
by his refusal. In a disappointed tone, she claimed ‘we are in China and must
respect the Chinese way’ (Int #16). The guanxi she had developed between the
Roaring Dragon and the NuFu agents was seriously damaged as a consequence
of Mr. Thomason’s lack of understanding of guanxi and his guanxi neglect.
This resulted in the loss of all business coming from the NuFu at a critical time
in the Roaring Dragon’s transition in management. This was also at a time
when hotel competition in the region was growing. The relationship between
the Roaring Dragon and NuFu had been tarnished which meant that NuFu
would now send their customers elsewhere.
With the opening of new competitive four-star hotels, agents now had more
quality accommodation to choose from, with cost reductions and fringe benefits
being offered by competitors that were equal to or better than those offered by
the Roaring Dragon. It had become a buyers’ market and hotel sales
departments now vied with each other to offer the best package deal to NuFu
and other agents in order to attract their business.
Aside from Madame Fang, the long-serving top Chinese Chef of the Roaring
Dragon Mr. Wang was also unhappy with Mr. Thomason’s management and
complained directly to Mr. Wen, now the General Manager of the Roaring
Dragon Limited. Mr. Thomason’s questionable ‘people to people’ skills were
Organisational Guanxi and State Owned Enterprises in south-west China
179
feared by everyone who worked in the Food and Beverage Department
especially when he would ‘stare and yell’ (Int #22). The Chef in Charge
resigned after Mr. Thomason transferred him from the Chinese Kitchen to the
Western Restaurant against his wishes and Mr. Thomason’s personal secretary
‘could not stand his bad temper’ (Int #22) and resigned soon after.
Using Guanxi to Transfer Out
After a short time under Nothill’s co-management, employees realised that they
would now have to work much harder. Those who had strong guanxi with Mr.
Wen and who ‘did not like to work hard’, ‘to work for Nothill’ or who ‘were
likely to be laid off’ (Int #12) used their relationship with him to transfer to the
Roaring Dragon Limited. For these transferees, working under Mr. Wen would
be much easier and their employment would be secure. As a result, those who
enjoyed good guanxi with Mr. Wen, with senior management in the Roaring
Dragon Limited hierarchy or with high-ranking government officials were able
to transfer out of the Nothill-managed part of the Roaring Dragon Hotel and
into the Chinese-managed Roaring Dragon Limited. Mr. Wen was able to find
new positions with lighter workloads for these members of his guanxiwang.
Other unhappy staff used their guanxi to gain transfers to new positions with
either Erhi T or other associated companies. Not everyone had strong enough
Organisational Guanxi and State Owned Enterprises in south-west China
180
guanxi to transfer to another organisation. Those able to ‘pull’ guanxi and
transfer to Mr. Wen’s management at the Roaring Dragon Hotel Limited now
worked under very little pressure in an air-conditioned office on the seventh
floor of the building adjacent to the Hotel. In contrast, those remaining under
Nothill’s management were working under greater demands and pressure and
the fear of redundancy for employees was beginning to grow. Just prior to
Nothill’s takeover, ten employees had transferred from the Roaring Dragon
Hotel to the Roaring Dragon Limited and in the month that followed, another
seventeen transfers took place.
Although Nothill was glad to see staff leaving the Hotel voluntarily, there was a
down side. Those who left took with them their critical industry contacts and
guanxi connections. Guanxi is difficult to transfer and usually the connection
with an organisation ends with an individual’s departure. As Nothill
consolidated further, one of the oldest members of the Chinese management
team, the former Head of the Food and Beverage Department, Madame Fang,
decided to leave, taking with her a large percentage of the guaranteed income-
generating contacts for the Hotel. After witnessing for herself Mr. Thomason’s
style of management, she had decided on a transfer to the Roaring Dragon
Hotel Limited. Whether Nothill was aware or not, it had allowed the number
Organisational Guanxi and State Owned Enterprises in south-west China
181
one guanxi holder to leave and this proved to be a costly example of guanxi
neglect.
Agencies and Competition
To generate occupancy in the new and much more competitive market, the
Roaring Dragon Hotel’s sales staff now had to work much harder to develop
and maintain good relations with their travel agents. The record of poor
treatment of NuFu by Mr. Thomason, combined with Nothill’s refusal to offer
any discounts, meant that it was proving much harder for the sales team to
develop any new business. As competition grew tougher, competitive pricing
became the number one priority. Nothill, somewhat arrogantly, banked on its
international reputation to attract bookings and refused to partake in any
discounting. Nothill’s Marketing Manager would instruct the Roaring Dragon
sales team to offer agents ‘rooms for US$32 per night for group bookings
whilst competitors could provide the same for as low as US$20’ (Int # 44). The
reality was that in south-west China, Nothill’s global reputation was of no
importance to booking agents when they were searching for the most
competitive price. Developing supportive guanxi links with tour agents had
become critical to business survival and the newly opened hotels were
performing this task better than the Roaring Dragon.
Organisational Guanxi and State Owned Enterprises in south-west China
182
By the end of July, the combination of in-house rumours and the tougher work
standards set by Nothill had taken effect. The level of job security felt by
employees had begun to deteriorate. In a survey of Roaring Dragon employees
conducted a week before the full Nothill takeover, only 41 out of 437 (9.4%)
respondents believed their position to be ‘secure’. Uncertainty existed, as
employees knew little about their new expatriate managers or Nothill’s
objectives and wondered if their standard of work and past record of
employment would guarantee their job security.
August
On the first day of Nothill’s takeover on August 1st, all employees were issued
with a short-term contractual agreement guaranteeing ‘they would retain their
position for three months, two months of which would be spent on training
followed by a month on probation’ (Int #2). During that time, each employee’s
ability, attitude and approach would be evaluated in preparation for ‘the
number of Hotel employees being reduced from the existing 685 employees to
a total number of 350 employees’ (Int #2).
Organisational Guanxi and State Owned Enterprises in south-west China
183
Nothill estimated that 320 employees with long-term contracts would need to
be made redundant. Employees were told ‘this reduction was necessary because
the old Russian part of the Hotel was being demolished and the number of
rooms requiring service would be significantly reduced’ (Int #16). In a few
years, once the old building had been demolished and the new Hotel building
completed, Nothill planned to recruit new employees. However, there were no
obligations on them to re-hire any of the old employees.
The old section of the Roaring Dragon Hotel sat stripped of assets in readiness
for demolition. From that time onwards, the Roaring Dragon had no conference
hall or Chinese Banquet restaurant to service even their faithful long-time
customers. In the past the Roaring Dragon had enjoyed good relationships with
government departments and agencies such as the NuFu and the Foreign
Tourist Company (FTC). Both had regularly booked large buffets, banquets and
events in the old banquet room. The closure of the old building meant large
meetings and banquets were no longer available to government or guests. The
empty building echoed the Roaring Dragon’s witness to many famous meetings
and banquets.
The remaining modern restaurant in the new wing did not have a Chinese
ambience and agencies were reluctant to hold their banquets there. Mr. Fortune
Organisational Guanxi and State Owned Enterprises in south-west China
184
believed business would only start to recover from 2002 onwards after the
completion of the new wing. Demolition was already behind schedule and the
relationships between management from Erhi T, the Roaring Dragon Limited,
the provincial government and Nothill were not developing well.
As part of the changes in organisational culture and conditions at the Roaring
Dragon, all managers and supervisors now had to work an eight-hour day and
the opportunity to take long tea breaks or conduct private business during
normal working hours was eliminated. Leaving the Hotel site was no longer
easy as Nothill managers made sure that everyone was constantly occupied
whilst they were being assessed. This change in policy and procedures at the
Hotel caused upheavals in organisational culture. The Roaring Dragon’s
method of service delivery and style of administration were changing beyond
recognition. There was fear among many of ‘the old staff that they would not
be able to adapt to Nothill’s new management style’ (Int #1).
September
At the beginning of September, the group of fifteen young employees who had
been illegally recruited by the Chinese managers, after the agreed freeze on
hiring, became the first redundancies. In order that they did not lose face, they
Organisational Guanxi and State Owned Enterprises in south-west China
185
were told they were being ‘given the opportunity to resume their studies’ (Int
#10). There were tears among these young employees and they were not
entitled to any redundancy payouts due to their short period of service.
For the contracted employees with less than five years service, a voluntary
redundancy package was drawn up offering them 1000 yuan for each year of
completed service. Retrenching younger employees was seen as a more
attractive option as the redundancy cost for those with only a few years service
was significantly less than the larger sums needed to pay-out long serving staff,
some of whom had given more than thirty years service. Nothill re-confirmed
that there was to be no new hiring for some time and seventeen employees
accepted the redundancy package on offer as they did not like the new system.
The challenge for Nothill was to transform a relaxed, Chinese organisational
culture that was not focused on quality, into one capable of achieving as a norm
Nothill’s dynamic, international standard of excellence. Employees needed to
become sharper, brighter and more receptive in order to survive whilst the
culture and chemistry of the organisation began to change. Employees who
used to ‘sit around smoking and reading the papers’ in May, were now busy all
the time or, if an opportunity arose, they were ‘relaxing out of sight’ (Int #4).
As new management practices were introduced, several observers wondered if
Organisational Guanxi and State Owned Enterprises in south-west China
186
this situation could continue. Would the growing dissatisfaction among
employees work against Nothill in the long term?
Chinese managers agreed that ‘the tables, chairs, windows and appearance of
the Roaring Dragon had changed but in the hearts and minds of the employees
there had been little change’ (Int #18). A skilled bar tender was still paid only
580 yuan (~US $75) per month for a 40-hour week with no annual holidays.
Although now under Nothill management, the Roaring Dragon remained
Chinese in most other aspects. Old practices survived but had gone
‘underground’. Captains still ‘hid in out of order guest rooms to watch TV,
sleep or play cards’ (Int #46). One change that had evolved was that someone
was now on watch outside the door at all times. If one was caught not working
by Nothill managers it meant immediate dismissal.
With the onset of the winter months, the number of tourists dwindled. With the
peak season over, hotels now relied heavily on their relationships with agents
and the discount rates they were prepared to offer them to provide their hotel
with a steady trickle of customers up until the beginning of the spring festival
tourist period.
Organisational Guanxi and State Owned Enterprises in south-west China
187
Several of the managers with important guanxi retired or moved on as the news
spread regarding the Hotel’s forthcoming downsizing. Members of the
provincial government were still scrutinizing Nothill’s performance closely
whilst the rumblings of discontent were beginning to increase in volume.
October
Preceding Nothill’s arrival, government officials wishing to enjoy the finest
local cuisine, negotiate some agreement or impress some important clients,
would always take guests to the Roaring Dragon to visit a trade fair or enjoy a
banquet. Now government representatives had to hold their banquets and
entertainment activities elsewhere and a sense of emptiness and gloom
pervaded the once grand old section of the Hotel. The old Russian style wing
still lay empty and idle - stripped, gutted, and ready for demolition. However, if
one took a closer look, some businesses were still operating offices on the
ground floor under ‘private arrangements’. There was still no confirmation
from Erhi T that money would be made available to begin the demolition of the
old building and construction of the new building in 2000.
From the human resource perspective, the number of voluntary redundancies
continued to trickle in. This had taken a negative turn for Nothill when five
Organisational Guanxi and State Owned Enterprises in south-west China
188
talented young staff from the Front Office and Food and Beverage departments
gave notice in October to seek better opportunities elsewhere. Some had
secured positions in other Chinese hotels or at a foreign-managed hotel where
‘guanxi connections did not hold all of the power’ (Int #12).
Nothill’s managers maintained the increased pressure on employees to perform.
The new standard of work being demanded meant that some employees were
unable to cope with the faster and more demanding pace of the job. Many old
staff with no education and simple backgrounds had difficulty relating to the
concept of five-star service and working under managers who ‘speak a different
language’ (Int #8).
Due to Nothill’s new dinner roster, the employees from some departments who
previously would to go to the cafeteria for lunch or dinner with one of their
work associates now ate alone or with someone from another department. The
atmosphere that now prevailed in the cafeteria contrasted markedly with that of
previous years. Employees who had shared lunch with their fellow workers for
more than ten years had difficulty understanding why they now had to eat
alone.
Organisational Guanxi and State Owned Enterprises in south-west China
189
Mr. Fortune had begun to receive some interesting telephone calls about future
downsizing and enquiries about who would be asked to leave. All the
employees who wanted to go of their own free will had now departed. The next
phase of the downsizing was ‘to release about sixty workers per week from the
beginning of November’. Mr. Fortune said ‘it would be done as quietly as
possible with a few from each department being made redundant each week’
(Int #6). A few existing staff had been told their positions were secure.
Although there were few guests at the Hotel, employees who wanted to
maintain their positions continued to train hard.
As part of Nothill’s strategy to improve its limited facilities, the Hotel disco
was re-named, re-staffed, re-furbished, and re-opened. It was still unable to
attract more than a few customers on any given night. The new Chinese
restaurant, tentatively planned to be open in a month, was scheduled for fitting
out. However, employees doubted this deadline would be met as ‘suppliers
were rarely on time’ (Int #26). Before work on the restaurant could begin,
contractors first had to build a bridge as well as fill a large hole in the external
wall. This would take time also. For Nothill, keeping to their tight schedule was
at times difficult as the quality of the relationship between them and the service
provider would often determine the timeliness of the work provided.
Organisational Guanxi and State Owned Enterprises in south-west China
190
November
With limited guests and with only two restaurants open, business for the Food
and Beverage Department was slow. No further bookings for accommodation
came from the NuFu agency. Other agents were also looking elsewhere and the
Chinese customers did not like the restaurants in the modern section of the
Hotel. ‘They were too open to the public and offered little privacy for banquets
or meetings’ (Int #29). Business was very quiet and for eight days, the only
people who ate at the Hotel’s Western restaurant were Nothill managers as part
of their contractual agreements.
In an attempt to stimulate business, Nothill managers began notifying other
Nothill hotels in the region of the Roaring Dragon’s facilities. Whilst several of
the expatriate managers attended a four-day training program in Nanjing,
Nothill hosted a conference for marketing managers from other Nothill hotels
in Asia. In spite of these strategies, the flow on was very limited and the
occupancy level of the Hotel remained low.
Organisational Guanxi and State Owned Enterprises in south-west China
191
The Four Mondays
Following the completion of the three-month training program, the schedule of
redundancies began. On the first Monday in November, a group of workers was
given their redundancy payouts late in the afternoon. There was no prior
warning given to these employees, as Nothill feared that if given advanced
notice, some of them ‘may damage or steal equipment before they left’ (Int #6).
Employees made redundant were told to proceed to the salaries department to
collect their pay out, leave the building, and not report for work again. For
those who had given many years of service to the Hotel, it was a loss of face
and seemed a very sad, sudden and disrespectful ending.
No official reason was offered as to why these employees were no longer
required nor were they thanked for their years of service. In the locker room
where they handed in their uniform for the last time, many murmured and
voiced their complaints. Several senior managers commented that ‘if the
Chinese managers had been in charge of the redundancy process, they would
have handled it differently’ (Int #29). What transpired was a market-driven
action by Nothill. However, it contrasted significantly to the ‘Chinese’ way of
dealing with people.
Organisational Guanxi and State Owned Enterprises in south-west China
192
Many of the employees made redundant had hoped to continue working at the
Hotel for a long time. Suddenly their dream had been taken away, there was ‘no
job tomorrow’ and there was the serious issue of their loss of face to contend.
Would their families ask ‘why will you not go to work tomorrow?’ ‘What did
you do to be asked to leave?’ What would families and friends think of this
redundancy?
As downsizing continued, more negative information about the Hotel
redundancies and Nothill’s management filtered out and reached the Provincial
Labour Bureau (PBL). The PBL was responsible for holding the employment
documents or dang’an of all unemployed citizens. They started receiving large
numbers of dang’an from the Roaring Dragon and had heard rumours that more
would arrive later in November. Immediately, the PBL refused to receive any
more of the dang’an of those made redundant. This situation needed to be
managed with sensitivity, as the Roaring Dragon needed the PBL to accept all
of the dang’an of the employees being made redundant. To placate the PBL,
Human Resource Manager Madame Zen and some other senior Hotel staff
invited sixteen members of the Labour Bureau to enjoy a banquet at the
Roaring Dragon. This gesture restored the guanxi between the PBL and the
Roaring Dragon and the workbooks waiting to be cleared were accepted.
Organisational Guanxi and State Owned Enterprises in south-west China
193
On each Monday in November the redundancies continued. There were tears,
sadness, surprise and anger at the ‘pay-out window’. With the onset of the
redundancy process and the change in organisation culture, the work
atmosphere became very uncertain. Employees began to think ‘if I can get paid
out, why not take it?’ (Int #22). They had lost confidence in the Hotel and some
who had given many years of service no longer feared redundancy. Others
looked at their payout as a chance to make a new beginning. The employees
had been warned of the possibility of redundancy when Nothill took over and
some were prepared for any outcome. Upon receiving their payout, some
commented that the Roaring Dragon’s ‘once friendly and supportive
atmosphere no longer existed’ (Int # 20) and with many employees leaving the
Hotel, the work environment had become very sad. Few said that that they
‘would go back to working in the hotel industry’ (Int # 22). As more employees
were made redundant, the level of respect between Nothill and Chinese
employees began to fall. One manager summarised by observing that each
employee now ‘wore’ two faces, a ‘fake’ smile for the international managers
and a ‘worried frown’ in reality.
Occupancy levels continued to decline. The Roaring Dragon was a large Hotel
with 300 rooms in total and on one night there was only one paying customer
staying in the entire Hotel. By late-November, concern was growing that the
Organisational Guanxi and State Owned Enterprises in south-west China
194
Hotel did not have sufficient funds remaining to pay operating expenses, let
alone wages. All advanced tour group-booking contracts had expired and no
future bookings were confirmed. The tourism industry in this city had now had
time to assess Nothill and from the Chinese perspective, their conclusion was
not very good.
By the end of November, many of the Hotel’s young workers had been made
redundant whilst older staff remained as some of their redundancies were worth
up to thirty five thousand yuan each. Erhi T was directly accountable for
financing redundancies and understandably the Board, the government and the
Party were not happy.
Limited progress continued with the construction of the new Chinese
restaurant. Although the grand opening was planned for the last week in
December, Nothill were not prepared to sign off on developmental stages of the
new Chinese restaurant until work was completed to specification. Contractors
would do such things as ‘order new doors but not new locks’ (Int #36). The
karaoke rooms on the second floor had no doors and Nothill had to request the
installation of automatic doors to seal off the rooms as the major function
centre downstairs was in direct sound range. There were problems between
Organisational Guanxi and State Owned Enterprises in south-west China
195
Nothill and the company in charge of construction and getting tasks completed
became slow and cumbersome.
Still no agreement had been reached between Nothill and Erhi T regarding the
funding of the demolition of the old-Russian section of the Hotel, leaving the
old building still sitting empty and idle.
Paying for the purchase and installment of the new computing system was
causing some problems, with both Nothill and the Roaring Dragon Hotel Board
expecting the other to pay. Nothill wanted to install a modern, near state of the
art IBM system but Erhi T was reluctant. Erhi T argued that Nothill should pay
for the cost of the system. Nothill blatantly refused and negotiations dragged
on. The proposed time of installation had passed seven weeks earlier and still
there was no sign of progress. Nothill’s computer-training team, who had
planned to arrive at the Hotel at the beginning of October for training purposes,
now postponed their arrival indefinitely. After a ten week delay, it was finally
agreed that Erhi T would pay for the new computing system. Mr. Fortune
admitted that ‘every day is a struggle but we are making progress’ (Int #27). It
was planned that by the end of December, all of the old employees who were
no longer required would have been released and their contracts paid out.
Organisational Guanxi and State Owned Enterprises in south-west China
196
A potential guanxi conflict concerning downsizing was looming. Mr. Fortune
expected to take to the Board the final list of old employees who were to be
made redundant and expected complaints and some negotiating to take place.
They were a lot of well connected, inefficient and ineffective staff who did not
fit the Nothill mould but who had the connections on the Board to protect their
positions. Mr. Fortune admitted that he was ‘prepared to make a few changes to
his list but did not want to end up with a lot of useless staff’ (Int #27).
The Roaring Dragon continued to have a very low occupancy rate and was
losing money. Nothill had an Accounting Manager, a Marketing Manager, a
House Keeping Manager, two Food and Beverage Managers and a Reception
Manager working full time at the Hotel being paid international rates. Erhi T
did not like to have to meet the cost of having these ‘foreigners working in their
empty Hotel’ (Int #38). The original objectives of improving the quality of
service and occupancy at the Roaring Dragon were fading and the disgruntled
voices among the Board members were growing louder.
The majority of remaining Roaring Dragon employees had now lost their
motivation to work or attend training classes. Some of the remaining employees
likened the empty Hotel to a ‘morgue’. Under the former Chinese management,
the more affordable three-star old-Russian section had attracted a lot of guests
Organisational Guanxi and State Owned Enterprises in south-west China
197
seeking economy room rates and there had normally been a busy atmosphere in
this part of the Hotel. The three star segment of the market could no longer be
accommodated at the Roaring Dragon. In the past this type of guest had
generated a small yet reliable profit. Now with the old building closed, the
number of customers prepared to pay higher room rates in the new modern
building was very small. Nothill’s rate of 800 yuan per night for a double room
was not competitive.
Nothill’s Marketing Manager visited Beijing, Shanghai and Taipei in another
attempt to generate a flow-on of tourists from other Nothill hotels in the region.
These expensive and unsuccessful journeys further fuelled the frustration of the
Board. The small cash reserve, which had been accumulated by the Roaring
Dragon over the last decade, was rapidly being used up and rumours began to
circulate that for the next pay period, the Hotel did not have the money to pay
employees’ wages.
Since Nothill’s arrival, a previously happy, polite, well-mannered work force
had by now lost its initiative, sparkle and morale due to the lack of customers,
the demanding Nothill management, the redundancy schedule and the negative
work environment. Fear prevailed and some employees in private even showed
their anger. A couple of minor incidents had occurred in the disco after some
Organisational Guanxi and State Owned Enterprises in south-west China
198
employees had stayed at work after their dismissal, but Mr. Fortune commented
that ‘generally everything was proceeding steadily’ (Int #27).
Some of the remaining employees were now being told that their jobs were
secure yet there was still an air of depression in the work place. Mr. Fortune
left for Hong Kong for discussions with regional Nothill Managers regarding
their company’s China strategy for the next five years. At the Roaring Dragon,
occupancy was now averaging just six percent with most other competing
hotels in the vicinity enjoying twenty percent occupancy rates.
December
The Hotel’s reserve fund was now exhausted and there was insufficient money
left to fund the payroll without extra funding being supplied by Erhi T.
Nothill’s Training Manager and the second in charge of the Food and Beverage
Department both went to collect their wages at the end of the month and were
told that there were no funds left to pay them. At this point in time, the Board
realised that to complete all of the transition plans Erhi T were being asked to
spend over one hundred million yuan. This was to finance the construction of a
new five-star wing, fund the wages of more than 350 employees, pay the
redundancies of more than 300 employees, and cover the salaries and expenses
Organisational Guanxi and State Owned Enterprises in south-west China
199
of 9 expatriate Nothill managers. Income generation at the Hotel was low and
the Erhi T did not like being saddled with these unwanted expenses. The
provincial government held the power and Erhi T was their largest SOE. The
easiest option for the provisional government was to use Erhi T’s financial
resources to support the ailing Roaring Dragon Hotel.
Development projects planned by Nothill were now stalled as the flow of
money from Erhi T dried up. The new computers had been installed but were
not yet paid for. There was fear that ‘employees would not get their December
wages’ (Int #16) and it was rumoured that ‘employees may have to take a pay
cut’ (Int #16). An increase in workload had become the norm for all employees.
A Chinese manager felt that ‘one employee now was doing the work of three
employed under the former Chinese management’ (Int #29). The remaining
young employees could still see guanxi networks providing protection and
allowing employees to retain their positions due to their connections and not
the quality of service they were able to provide. It appeared that good guanxi
with those in power remained the most important criteria to insure the positions
of such employees.
In late December, the Erhi T Directors and provincial government officials held
a critical meeting to discuss the Roaring Dragon’s and Nothill’s future. By
Organisational Guanxi and State Owned Enterprises in south-west China
200
originally inviting Nothill to manage the Roaring Dragon, the provincial
government had felt that they had made the right decision and expected to see
improvements in the number of customers coming through the door. Some
expected the tap to be ‘turned on’ (Int #27) and the Hotel to be ‘full of guests’
(Int #27). After five months of observation of Nothill’s management and the
development of the Roaring Dragon’s financial crisis, both Erhi T and the
provincial government wanted to end their association with Nothill. Politically,
the Roaring Dragon Hotel needed to survive as the provincial government
could not be allowed to lose face on this issue.
The Hotel had stopped paying its debts, bringing a flood of suppliers to former
General Manager Mr. Wen’s door pleading to be paid for their goods and
services. Erhi T injected half-a-million yuan into the Roaring Dragon account
and it was used in a week to cover operating expenses, accounts payable and
basic four-star Hotel requirements such as air conditioning and power. Two of
the three passenger lifts had been taken out of use and the air conditioning was
turned off in the evenings.
Before leaving for Christmas in Europe, Mr. Fortune met with the Chairman of
the Erhi T Board to arrange for more funds to be released to finance the Hotel
improvements planned for 2000 and beyond. Following his mandate, Mr.
Organisational Guanxi and State Owned Enterprises in south-west China
201
Fortune had embarked on a costly ‘long term program to develop the Roaring
Dragon into a five-star hotel’ (Int #27) whilst Erhi T had ‘expected the Hotel to
be self-funding much sooner’ (Int #38). They did not expect to face the need to
provide such a large amount of extra funds to maintain basic operations and
had become reluctant to continue injecting more money into the Hotel’s
operations. From early September they had even refused to accommodate their
own visiting guests at the Hotel.
The Erhi T Board was not happy with having to pay large redundancies to long-
serving staff that had only come under their responsibility six months earlier.
The provincial government and the Erhi T-dominated Board waited for Mr.
Fortune to depart to Europe for Christmas and immediately ordered the delay of
the planned redundancies of the final 30 long-term employees.
Reflecting on the 1993 experience, the provincial government’s experiment
with KYZ had cost nine million yuan in one year and it was estimated that in
1999 under Nothill’s management the Roaring Dragon Hotel had lost more
than ten million yuan in their first four months. With the excitement at the
beginning of both the KYZ takeover in 1993 and the Nothill takeover in 1999 it
would have been difficult for the provincial government to imagine such poor
outcomes on either occasion. Some commented that the lack of respect for
Organisational Guanxi and State Owned Enterprises in south-west China
202
guanxi and mianzi shown by both KYZ and Nothill were just two of the
incompatibilities that could have been better managed.
From the moment Nothill had taken over, former General Manager Mr. Wen
had watched from the sideline. As General Manager of the Roaring Dragon
Limited, he had been installed in an executive suite on the top floor of the
administration building adjacent to the Hotel and used it as the office for his
employees. The Roaring Dragon Hotel accounts were contracted to cover the
costs for these facilities and by now more than 30 personnel had used their
guanxi connections to gain transfers from the Roaring Dragon Hotel to the
Roaring Dragon Limited. Mr. Fortune commented how they ‘had a staff of 30
when they really only needed 6’ (Int #27).
With Nothill’s rumoured departure, some Chinese managers began to conduct
their private business again. As if to admit the inevitable, Nothill’s expatriate
managers began taking extended lunches. Communication between the Roaring
Dragon employees and Nothill’s managers decreased to become minimal. The
futures of the Nothill expatriate managers had been decided. Nothill’s
Accountant was now only present for just one week out of three as he serviced
Nothill’s other hotels in China. The Nothill Front Office Manager was leaving
to take a new position in Europe and the assistant Food and Beverage Manager
Organisational Guanxi and State Owned Enterprises in south-west China
203
had been appointed to a position for Nothill Dalian. Mr. Thomason had plans to
marry a local Chinese girl and had accepted a position at the Nothill Singapore.
Nothill’s management contract in south-west China was over.
In mid-January 2000, Nothill’s Board of Directors in Europe received official
notification from the local Chinese Provincial Government that they wanted to
conclude the contract. It appeared on the surface that Nothill had only made a
few mistakes, however these were critical. Apart from their misunderstanding
of the importance of face and relationships, they had pursued their goal of
transforming the Hotel’s culture and organisational capacity with unabated
vigour. Some employees claimed that Nothill was never serious about making
the Roaring Dragon Hotel their own or never wanted to use their brand name
on the Hotel; however, many acknowledged the Hotel’s improved standards of
facilities and service. Speculation emerged that Nothill had used the Roaring
Dragon as a training ground to familiarise their managers with the Chinese
organisational and cultural environment before setting them up in Nothill’s
growing chain across China. Were they using the Roaring Dragon to prepare
their international managers to staff Nothill’s new hotels elsewhere in China or
to train employees to take with them to their new operations in China?
Whatever the reasons, Nothill’s management had lasted just six months.
Organisational Guanxi and State Owned Enterprises in south-west China
204
Discussion
Although Nothill had inherited much inefficiency at the Roaring Dragon, could
they have planned for and managed the transition more effectively and
smoothly? The main negative effect of their downsizing policy had been the
loss of almost all the Hotel’s young, talented, and educated employees. Nothill
did re-employ a few young staff at their other hotels in Asia however there
were few other realistic options.
When making decisions about downsizing, the related social and workplace
upheavals that occur must be a common problem faced by managers reforming
SOE in China. At the Roaring Dragon Hotel, this situation was made worse as a
consequence of the illegal late recruitment drive undertaken by the former
Chinese managed HR Department. This illegal and secretive hiring eventually
resulted in those fifteen new recruits being the first targets of retrenchment.
From a Chinese perspective was this nepotism, corruption or a culturally
accepted norm?
A large number of the redundancies were among young employees with only a
few years of service. By retaining the old staff, Nothill reduced the youthful
vibrancy within the Hotel. If the reduction in the number of older staff had
Organisational Guanxi and State Owned Enterprises in south-west China
205
commenced at the beginning of August, Nothill would have been compensated
for some of the extra cost of these early redundancies through having to pay the
younger employees significantly lower salaries. Overall, such a strategy would
have helped maintain a more dynamic and youthful employee population.
Job-sharing may have been an additional socially acceptable method of
reducing the excessive size of the Roaring Dragon’s work force. As job-sharing
in SOE does not exist in south-west China, the introduction of this concept
would require a shift in traditional Chinese thinking and management practice.
If job sharing could be accepted into the context of downsizing in this part of
Chinese economy, it would help to maintain community harmony and reduce
the number of unemployed. Two beneficial outcomes of job-sharing at the
Roaring Dragon would have been Chinese employees preserving their mianzi,
and, more importantly, being able to maintain their employment status.
Economically, having their hours reduced would have eased the burden of the
potential total loss of income for each employee’s family. The extra time off
would also have provided employees with the time needed to legally conduct
their own private business outside of working hours. For any management
venture in China, a strong policy must be developed aimed at outlawing illegal
activities that take place during working hours. This was one objective that
Nothill did succeed in achieving.
Organisational Guanxi and State Owned Enterprises in south-west China
206
Nothill’s method of terminating employees showed little respect. Each Monday
in November at 4pm, employees who were told to proceed to the payout
window. In the queue they would joke nervously and laugh among themselves
as they waited for their pay envelope. One could sense the uncertainty.
Employees whose jobs were secure would glimpse those made redundant as if
another class of the unemployed had been created. Among those saying
goodbye there were tears, the loss of dreams and more acutely, the loss of face.
Any respect or status those employees had enjoyed within the Roaring Dragon
organisational culture was suddenly gone. In its place was the realisation that
for many, uncertainty lay ahead. One ponders could Nothill have planned and
conducted this process in a more sensitive and private way?
The fact that Nothill expatriate managers had only been there for such a short
time before the redundancy process began meant they had not had the time to
develop strong working relationships with employees. For the Chinese
managers this had been an advantage in that the Nothill’s managers bore the
full brunt of responsibility for any redundancy decisions taken. When they left
the Nothill Managers could take the blame with them. If the Chinese
organisation, under Mr. Wen, had been asked to carry out the downsizing, the
damage this would have done to the Chinese managers would have been greater
Organisational Guanxi and State Owned Enterprises in south-west China
207
and with long-lasting repercussions. None of the Chinese managers ‘wanted to
be the bad man who made fellow employees redundant’ (Int #30).
After the commencement of the downsizing, any form of training in progress
became ineffective. Nothill’s Front Office Manager showed her frustration in
having to ‘train a young staff member for a week and then having to say
goodbye on the following Monday’ (Int #71). A better long-term policy may
have been to retain the younger employees and continue the training program
for them and gradually reduce the number of older employees through
redundancy.
Care needed to be taken when making decisions concerning redundancy. The
loss of senior staff members with significant guanxi, in particular with agents
and government officials, could have been handled more effectively. Nothill’s
sudden introduction of western operational methods to replace the long-
practised Chinese methods meant that many strong guanxi relationships that
contributed financially to the Hotel’s bottom line were rudely interrupted,
weakened or dissolved. I argue that when a foreign company commences any
form of joint project with a mainland Chinese SOE, extensive research needs to
be undertaken to identity the important people within the SOE. If respect were
given towards the existing guanxi networks at the Roaring Dragon, greater
Organisational Guanxi and State Owned Enterprises in south-west China
208
assistance from external sources, a higher occupancy rate and better financial
performance would have easily been achieved. By allowing Madame Fang and
several other members of her influential guanxiwang to transfer to the Roaring
Dragon Hotel Limited, Nothill had effectively removed a significant percentage
of their income-generating personnel. Nothill management should have taken
time to develop stronger relationships and a better understanding of their
Chinese employees, especially managers and their communication systems.
This would have enhanced their level of acceptance, especially when
employees were being asked to try to learn new operational methods. Nothill’s
introduction of new work methods on more of a gradual step by step basis may
have minimised the damage from the collision between Nothill’s international
and the Roaring Dragon’s domestic organisational cultures. This strategy would
have taken longer to produce positive results, however the corresponding
respect and trust established between management and employees would have
preserved the social and organisational harmony at the Roaring Dragon Hotel,
and produced a more profitable long-term outcome.
One particular scenario in question was the Nothill Food and Beverage
Department's policy on banquet bookings. Better preparation and research by
management would have told them that it might have been wiser during the
first few months after their takeover to maintain the status quo and accept all
Organisational Guanxi and State Owned Enterprises in south-west China
209
the banquet offers from local agents. Mr. Thomason’s early refusal to take a
small banquet set the tone for the relationship with NuFu. Accepting the offer
and taking the time to get to know the agents better may have helped to
establish more supportive relationships and produce better financial results in
the long-term.
Had the provincial government had an ambitiously high expectation of the
projected number of four- or five-star tourists who would visit this developing
region? By issuing four new licenses to build four- or five-star hotels, they had
created a surplus of rooms that could never be filled in the short term by the
expected number of tourists. Some form of market correction would occur in
future, as some of these hotels would be forced to diversify or close down.
Serious discounting of hotel rates already existed in this segment of the market
and this trend looked likely to continue.
Historically, both the KYZ and Nothill management groups had made the
mistake of not building strong and trustworthy relationships with Mr. Wen or
any of the Chinese Roaring Dragon Hotel managers. This lack of any close
personal relationships and the fact that the Nothill managers and Chinese
employees had no common language combined to create a communication void
across which it was sometimes difficult for information to pass. In Nothill’s
Organisational Guanxi and State Owned Enterprises in south-west China
210
situation, the Chinese managers who were multi-lingual were ‘gatekeepers’ to
what information crossed the void between international management and local
employees. As well as being responsible for interpreting the message from the
sender, the Chinese Managers had to decide how each communication should
be presented and interpreted. Consequently, local Chinese managers played a
critical role as go-betweens. To be effective in China, foreign executives must
be able to speak Mandarin with a degree of fluency, have an understanding of
Chinese cultural nuances, and have trustworthy English-speaking Chinese
nationals working in their confidence. In Nothill’s case, none of these
conditions existed. The establishment of effective relationships would have
ensured that any information was accurately and easily disseminated enabling
many organisational changes to be better interpreted, accepted and
implemented. The ability of managers to speak the local language and
understand the nuances and body language of this culture will provide greater
meaning to all communications. In this case, the employment of a minimum of
two multi-lingual Nothill Managers capable of understanding both cultures and
languages would have enhanced managerial cross-cultural communications
significantly. As none of the Nothill managers could speak Mandarin and few
of the Chinese managers wanted to speak English, the situation was not ideal.
Organisational Guanxi and State Owned Enterprises in south-west China
211
Although former General Manager Wen and Nothill General Manager Fortune
worked in adjacent buildings, they rarely consulted each other. They spoke
different languages and their relationship would have been more productive and
profitable if they had used multi-lingual go-betweens. Mr. Wen should have
been the first person with whom both KYZ and Nothill established a supportive
relationship as he was aware of the problems and solutions to the difficulties
both KYZ and Nothill were experiencing in running the Hotel. Changing his
level of acceptance, outlook and contribution would have produced better
outcomes.
Some Hotel staff had strong guanxi ties with top government officials who
protected their position in the Hotel. At times, these employees’ behaviour
before the takeover could be quite arrogant. Mr. Fortune commented how they
‘often disregarded the policies of the Hotel’ but added ‘what can you do with
them? You can’t terminate their services because there would be serious
trouble from the power brokers’ (Int #6). In these situations in China, those in
government and the Party play a critical role and must be treated with care.
Challenge lies in eliminating the practice of officials and department heads
generating personal profits from using SOE time and resources. Those
interviewed at the Roaring Dragon told stories of corruption and confirmed that
Organisational Guanxi and State Owned Enterprises in south-west China
212
there existed practices which advantaged and protected members of Mr. Wen’s
inner clique whilst they profited at the Hotel’s expense. To dismantle and to
remove the departmental cliques is a challenge requiring hotel General
Managers to develop ethical structures and effective systems of supervision.
In Nothill’s redundancy schedule, the criteria of saving money came ahead of
considering employees’ abilities whilst relationships were not considered at all.
This guanxi neglect and poor relationship management at such an early phase
of the transition contributed significantly toward both the KYZ and Nothill
ventures being unable to generate any significant support from their Chinese
government, managers and employees.
What could Nothill have done better? In this instance, the work environment
was dominated by Chinese culture and for Nothill to be successful they may
have researched more effectively to understand this culture and initially adapt
their methods to match the environment. Given relationships are the primary
determinant of one’s level of success in Chinese business, basic strategies
needed to be undertaken to develop closer relationships and a better
understanding of the Roaring Dragon employees, management and board
members. For instance, inviting agents, board members and government
officials to spend some time together with Nothill’s new management team
Organisational Guanxi and State Owned Enterprises in south-west China
213
would have undoubtedly aided in facilitating a much more successful long-term
outcome for Nothill.
Allowing the Hotel’s sales and marketing team greater flexibility in offering
competitive rates to tour agents might have contradicted Nothill’s global
strategy, however in this situation, it would have worked in Nothill’s favour.
With Nothill needing to establish and consolidate relationships with agents,
such flexibility would have aided in a smoother transition and more long-term
business from agents. As the standard of their service improved then they
would have a reasonable argument to have increased prices.
In changing from the planned economy style of management to that undertaken
under market economy conditions, I argue that it would have been beneficial to
offer some form of incentive to employees to reward their quality of new
service delivery. This investment would have provided a positive incentive that
would have produced rapid improvement in the quality of service provided by
employees whilst aiding the speed of organisational transition. Before Nothill’s
arrival, many of the sales team would just sit in the office and answer the
telephone as there was little incentive to be active in trying to generate
business. Motivational incentives would have encouraged sales staff to be in
closer contact with the market place and in developing business relationships
Organisational Guanxi and State Owned Enterprises in south-west China
214
with agents. Several sales employees told of occasions when the telephone rang
with someone requesting rooms and sales employees would respond by saying
‘I’m sorry, we are completely full’ (Int #72), when in reality the Hotel had only
a twenty or thirty percent occupancy. This situation had arisen because the
sales employees wages were low and ‘the number of rooms they sold made no
difference to their earnings’ (Int # 72). A simple incentive would have
encouraged them to work harder contributing to the long-term generation of a
higher occupancy rate for the Hotel.
It appeared that the provincial government had learnt little from their
unsuccessful 1993 experience. After KYZ’s demise in 1993, the former
Chinese General Manager Mr. Wen resumed his position and once again
guanxi practices re-emerged. Following Nothill’s similar demise in 2000, Mr.
Wen again resumed the position of General Manager of the Roaring Dragon
Hotel.
March 2000
Mr. Fortune, although no longer the Hotel’s General Manager, remained at the
Roaring Dragon waiting to finalise the contract and recover Nothill's
Organisational Guanxi and State Owned Enterprises in south-west China
215
outstanding debt. In a scenario similar to that of KYZ in 1993, Nothill and Erhi
T were contemplating potential legal action.
Both parties hoped to conclude their association legally by signing a
‘Termination of the Management Agreement’ on the last Friday in March. An
international accounting firm had completed the final audit and all the new
computers and software programs that had been installed were disconnected
and sent back. Apart from Mr. Fortune, all of Nothill’s expatriates had left.
Following the departure of Nothill and the reinstatement of Mr. Wen as
General Manager there was a revival in the importance given to guanxi and, as
in 1993, there was an immediate improvement in Hotel occupancy levels. Some
employees were re-hired and regained their position via their guanxi
connections. By the beginning of June 2000, sixty of those who had been laid
off had been re-employed. From a Chinese perspective, everything was getting
back to normal. It seemed as if the Roaring Dragon had once again avoided the
forces of the market economy. However, could they be avoided for much
longer?
Organisational Guanxi and State Owned Enterprises in south-west China
216
Conclusion
One must be careful to define the context in which these conclusions apply.
This study was conducted in an existing SOE in the hotel sector in the south-
west region of China. This environment had characteristics that were far
removed from the most rapidly developing markets of Shanghai and
Guangzhou (Guthrie, 1999). The amount of change and reform that has
occurred in south-west China has been significantly less than that experienced
in coastal regions. It is in this context that these conclusions apply.
In addition to conducting a normal preliminary business analysis, I argue that
any company that is contemplating taking over or going into a joint venture
with an existing SOE in China will undoubtedly profit from conducting an in-
depth investigation into the guanxi networks that exist in the organisation being
considered. This investigation should uncover the strength and power of the
existing guanxi network, especially those of senior management, and the
possible advantages and disadvantages in allowing such networks to remain in
place. Accessing this information may not at first be easy. However from day
one of the process relationship-building practices need to be implemented with
major guanxi holders, stakeholders and government representatives. This
strategy is aimed at gaining a clearer understanding of the respective SOE and
Organisational Guanxi and State Owned Enterprises in south-west China
217
its operating environment. This research will also help to limit the amount of
business lost as a result of guanxi neglect that may occur after operations begin.
These considerations will enhance the likelihood of success in business.
Communication with the existing Chinese senior management of the
organisation needs to be open and ongoing.
Employees being made redundant should be notified in a one-on-one
environment in a manner that preserves their face and minimizes the immediate
exposure of these employees to their peers and other employees. In considering
which employees to make redundant, the strength and power of the guanxi
connections of those being considered need to be thoroughly investigated prior
to any such action.
Consideration needs to be given to the age of those being made redundant.
Even though retaining long-serving employees may prove the most cost
effective in the short term, retaining young employees will enhance the
vibrancy of any organisation and its ability to change further in the future.
Retaining younger employees is likely to increase the level of education of the
organisation population and is also likely to enhance the success of any future
training programs. From a Human Resource management perspective, I argue
job-sharing is an option that organisations should consider in making the
Organisational Guanxi and State Owned Enterprises in south-west China
218
redundancy process less socially and economically devastating. More research
is required in this area of study.
Changes in organisational methods and processes need to be implemented in
stages so as to allow employees to adjust. This strategy will also reduce fear
and enhance acceptance of change. Especially in early days of a takeover or JV,
companies need to consider the Deng Xiaoping philosophy ‘to cross the river
by feeling the stones’ and to change SOE practices gradually (Rawski, 1997,
Guthrie, 1999).
Corrupt and unethical practices need to be uncovered, discussed with those
involved and explained as to why they can no longer exist. To commence the
process the resultant penalties that will occur if these practices continue in any
form need to be clearly communicated and applied. To assist in the elimination
of such practices, incentives need to be considered to enhance the development
of new and more ethical practices. Guanxi practices that are involved in the
organisation’s income-generating processes need to be investigated and clearly
understood before any changes are made.
Trustworthy, multi-lingual translators need to be identified in both the target
and takeover organisations to ensure and monitor whether management
Organisational Guanxi and State Owned Enterprises in south-west China
219
instructions are being clearly understood by employees. Those in this role will
enhance the quality of feedback on how directions are received and interpreted.
These employees need to be positioned strategically within the organisation to
ensure that change processes are implemented effectively, monitored and
supported.
During the negotiation process and prior to signing the contract, Chinese
managers who are involved in any change or contractual processes need to be
identified and well informed of the expectation that they will support the
contract without deviation. A confidential, reporting mechanism inside the
organisation needs to be established so as to allow senior managers and
individual's anonymity in making management aware of any breeches that may
occur.
Finally, the organisation that is taking over needs to promote a long-term
perspective to give confidence to stakeholders and employees and to reduce the
amount of resistance to change that they may encounter.
It is said that in China, ‘if you want to do any business you must first develop a
strong relationship with the stakeholders’. Through guanxi neglect, Nothill’s
management had ignored the importance of guanxi, mianzi and the
Organisational Guanxi and State Owned Enterprises in south-west China
220
development of relationships. At this time in south-west China the Roaring
Dragon Hotel was not ready for such developments.
Organisational Guanxi and State Owned Enterprises in south-west China
221
Chapter Seven
Differentiating Between Intra-organisational and Inter-organisational
Guanxi
Until now most guanxi research in the business environment has focused on
operations in the public domain or between personnel representing individual
organisations i.e. inter-organisational guanxi (Kao, 1993; Luo, 1997a; Park and
Luo, 2001; Tung and Worm, 2001; Yeung and Tung, 1996; Fock and Woo,
1998; Guthrie, 1999). Whilst the volume of research on inter-organisational
guanxi has grown, research directed towards how guanxi operates internally
within organisations, intra-organisational guanxi, has been more limited (Yang,
1994; Walder, 1996; Tsui and Farh, 1997; Grainger, 2003).
The objective of this chapter is to explore the characteristics of intra-
organisational guanxi and compare them with those of inter-organisational
guanxi. Survey data collected from employees of the four-star Roaring Dragon
Hotel in south-west China in 1999 are matched against comparable data
collected from Hong Kong trade executives in 1996 (Fock and Woo, 1998). By
comparing the results of the Fock and Woo study with this new data, the aim of
determining whether or not the two different types of work places in the two
Organisational Guanxi and State Owned Enterprises in south-west China
222
different countries generated different employee perceptions of guanxi was
realised.
Uncovering the characteristics of intra-organisational guanxi in mainland China
holds importance for researchers, consultants and managers who are faced with
the challenge of reforming large SOE. A better understanding of how guanxi
operates in the intra-organisational environment will contribute toward
developing improved management methods for motivating, controlling and
harnessing the capabilities of the work force as China’s SOE continue to adjust
from a planned to market economy.
The Roaring Dragon Hotel Environment
Members of both samples were connected to organisations in some manner,
however, the characteristics of the working environments of the south-west
Chinese Hotel employees and Hong Kong trade executives differed
significantly.
The employees from the Roaring Dragon Hotel enjoyed a good working
environment when compared to the average quality of working conditions to be
found in SOE in China. The Hotel had a four-star rating and there was generous
Organisational Guanxi and State Owned Enterprises in south-west China
223
overstaffing. Reflecting the employees’ easy workload was the fact that the
Hotel rarely attracted more than fifty-percent occupancy. Although this Hotel
boasted a four-star rating, the provision of high quality service to guests was
not a priority.
Although many had come from inland origins, all of the SOE employees were
accommodated in the same city as they worked, the majority residing in the
near vicinity of their work place at the Roaring Dragon Hotel. Results of the
survey conducted there are presented in Part A. This study focused on the intra-
organisation environment measuring the Hotel employees’ perception of what
they thought were the important characteristics of guanxi.
As investigated in Part One of this thesis, the evolution of the danwei since the
1930’s combined with the planned central strategies of the Chinese Communist
Party since 1949 have played an important role in the evolution of China’s SOE
(Lu and Perry, 1997). Such influences have often resulted in poor work
practices, unsystematic production systems, backward technology and a reward
system unrelated to performance (Blackman, 1997; Chen, 1995; Lu and Perry,
1997). During their evolution many SOE were managed by untrained Party
cadres whose position and power in the SOE usually correlated with either their
positions within the hierarchy of the party, or in the strength of their
Organisational Guanxi and State Owned Enterprises in south-west China
224
connections with high party officials (Blackman, 1997; Chen, 2004; Pye,
1992).
Relationship-based management practices combined with China being a self-
contained Communist society from 1949 to the late 1970s have resulted in
Chinese SOE developing their own characteristics that differentiate them
markedly from those developed and fashioned in market economies. Under
planned economy conditions, quotas regarding inputs, outputs and quality of
work produced by SOE were all determined or influenced by a central
committee (Blackman, 1997; Chen, 2004). There was little flexibility for
organisations to vary these quotas once they had been set. As a result,
employees and managers had no ownership of business decisions that affected
them and this resulted in limited organisational loyalty and poor motivation
among workers. In the Roaring Dragon Hotel work place, sitting idle was
common and free time was often abundant. The lack of a consistent demand on
employees to be actively involved in organisational planning and operation,
combined with the relationship-based style of management, provided the
opportunities and fertile environment for internal networks, cliques and intra-
organisational guanxi to develop and blossom among Hotel employees at all
levels (Grainger, 2003).
Organisational Guanxi and State Owned Enterprises in south-west China
225
Several of those interviewed in this study revealed how ‘managers and
employees secretly adjourned to vacant rooms in the hotel to play cards, sleep,
talk to their friends or read during periods of low demand’ (Int #13). Although
this is not good work practice, under the conditions of the danwei, these under-
employed workers could not be fired or made redundant. They were retained by
the organisation on low wages even though they were only occupied on average
for three out of the six working days per week.
At the Roaring Dragon Hotel, the pressure on employees with guanxi to
perform was very minimal and little change was evident by late 2002 as a result
of reform. In this environment it was important to take the time to maintain the
important relationships required to secure internal supplies, keep workloads
low and maintain nepotistic advantages (Walder, 1986; Yeung and Tung, 1996;
Seligman, 1999). A group of experienced, old chefs and housekeeping staff, as
if frozen in the era of the planned economy, were regularly viewed entertaining
themselves by playing cards, engaging in idle chatter for long periods, with
some even leaving the work place to conduct private business.
By late 2002, some of the Hotel’s inefficiencies had begun to be reduced and
the concept of actively building market share for the Hotel was gaining
momentum.
Organisational Guanxi and State Owned Enterprises in south-west China
226
Part A:
Perceptions of the Characteristics of Guanxi Recorded by Employees of
the Roaring Dragon Hotel in South-west China in 1999.
The research instrument used in this study was developed by Fock and Woo
(1998) to test the importance of eight proposed characteristics of guanxi. The
eight characteristics of guanxi tested were:
• mutual co-operation;
• trust;
• social activities and entertainment;
• exchange of information;
• personal relationships;
• commitment;
• exchange of favours/benefits; and
• giving face.
As in the Fock and Woo study, the respondents at the Roaring Dragon Hotel
were asked to respond to the statement that ‘each respective characteristic was
Organisational Guanxi and State Owned Enterprises in south-west China
227
an important characteristic of guanxi’ on a scale from 1 to 5 (1 = strongly
disagree, 2 = disagree, 3 = have no opinion, 4 = agree, and 5 = strongly agree)
In preparation for the Roaring Dragon Hotel study, published terms (Fock and
Woo, 1998) were translated from English to Mandarin by English language
academics from the Yunnan Institute of Finance and Economics. The Mandarin
text was then back-translated by post-graduates from the University of Western
Australia to ensure the comparable accuracy of the meaning of the translations.
Two minor changes were required.
The written survey format was tested on a small group of business students
from a local Chinese tertiary institution and several employees from a different
SOE in south-west China to ensure that the meanings of the English and
Mandarin questionnaires were the same.
On the written survey document, employees from the Roaring Dragon Hotel
were asked to state only their age, gender, position (as employee, supervisor or
manager) and their number of years of service at the Hotel. To preserve their
anonymity, respondents were instructed not to put their name on their survey.
Due to the sensitivity required in conducting written surveys on guanxi, the
request for only minimal identification was designed to make respondents feel
Organisational Guanxi and State Owned Enterprises in south-west China
228
that they would not be identified and to encourage honest responses.
Participants
Of the 685 employees at the hotel, 438 responded to the survey. A final group
of 379 survey responses was accepted as being valid and these 379
questionnaire responses were included in the analysis presented below. This
sample comprised 80.2% employees, 13.9% supervisors, and 4.2% managers
representing a valid cross-section of this intra-organisational population. Of
those respondents, 51.3% were female and 48.7% were male, with ages ranging
from 17 to 56 years. Their years of service with the Hotel ranged from 0.1 to
36.0 years (M = 7.2, SD = 7.42). Incomplete surveys were not included in the
analysis.
Results: Perceptions of the Characteristics of Guanxi
The mean ratings (M) and standard deviations (SD) for each of the eight
respective guanxi characteristics are presented below8.
8 The statistics were derived using SPSS software. For mean rating calculatations see Appendix 1.
Organisational Guanxi and State Owned Enterprises in south-west China
229
Table 7.1: Perceptions of the Characteristics of Guanxi of Employees of
the Roaring Dragon Hotel, 1999.
Guanxi Characteristic Mean Std. Dev
Mutual Cooperation 3.85 0.89
Trust 3.51 1.14
Social Activities and Entertainment 3.51 0.95
Exchange of Information 3.42 0.97
Personal Relationships 2.98 1.17
Commitment 2.73 0.97
Exchange of Favours/Benefits 2.50 1.24
Giving Face (Respect) 2.49 1.08
Organisational Guanxi and State Owned Enterprises in south-west China
230
Part B:
Perceptions of the Characteristics of Guanxi
Comparison of results from a survey of employees of the Roaring Dragon Hotel
in south-west China (1999) with those from an identical survey recorded by
Hong Kong Trade Executives (1996).
The descriptive statistics of mean ratings and standard deviations from the
Roaring Dragon Hotel population data were compared with the same statistics
derived from the survey data of 128 Hong Kong trade executives (Fock and
Woo, 1998).
In comparison to working in the Hotel in south-west China, the Hong Kong
trade executives’ task involved generating sales between their home
organisation based in Hong Kong and other external organisations located in
mainland China. In this market economy environment it is reasonable to
assume that the quality of service given to customers was an important priority
and that some percentage of travel would have been a requirement for
executives in these positions. The trade executive study focused on the inter-
organisation environment measuring these salesmen’s perception of what they
Organisational Guanxi and State Owned Enterprises in south-west China
231
thought were the important characteristics of guanxi.
The Fock and Woo sample were respondents from an original sample of 1000
executives selected randomly from directories of trade associations and
chambers of commerce in Hong Kong. Of the 128 respondents, almost all were
men between the ages of 21 and 40. Most of them had been active in trading
within the PRC for between two and ten years and about a quarter of the
respondents worked for large companies employing over 700 staff, though the
majority worked for companies with fewer than 200 staff.
The two samples differed in their balance in gender as the Hong Kong trade
executives were mostly males whilst the employees of the hotel in south-west
China were 51.3% female and 48.7% male. A further difference was in the
spread of ages recorded by respondents in each of the two samples. The trade
executives from the Hong Kong population were mostly aged between 21 and
40 years whilst the age of the employees at the Roaring Dragon Hotel in south-
west China ranged between 17 and 56 years.
The education levels of the two samples differed markedly. The Roaring
Dragon Hotel employees were respondents from a population in which many of
the employees had received only minimal educational opportunities or had
Organisational Guanxi and State Owned Enterprises in south-west China
232
grown up in a period when the schools in China were closed during to the
Cultural Revolution. In comparison to the limited education background of the
Roaring Dragon Hotel employees, the Hong Kong trade executives had all
completed a minimum level of secondary schooling.
Another difference was the fact that the Roaring Dragon Hotel employees were
resident in one city and worked at the same work place every day, while in
contrast the Hong Kong Executives were based in Hong Kong but were
required to travel to visit their customers and perhaps at times stay in a foreign
location on the mainland.
Hypothesis
Using the t test for unrelated samples (Cramer, 1998: 108) the following
hypotheses were tested to see if the two populations perceived the eight
characteristics of guanxi as having the same level of importance.
Ho - the mean rating for importance given to each characteristic of guanxi was
equal for the Roaring Dragon Hotel population and the Hong Kong Trade
Executive population.
Organisational Guanxi and State Owned Enterprises in south-west China
233
H1 - the mean rating for importance given to each characteristic of guanxi for
the Roaring Dragon Hotel population was greater or less than that given by the
Hong Kong Trade Executive population.
Organisational Guanxi and State Owned Enterprises in south-west China
234
Results
Table 7.2 Comparison of Perceptions of Guanxi by Employees of the
Roaring Dragon Hotel, 1999, and Hong Kong Trade Executives, 1996.
Roaring Dragon Hong Kong
Hotel Employees Executives
n = 379 n = 128
Guanxi Characteristic Mean S. D. Mean S.D. t(df=505)
Mutual Cooperation* 3.85 0.89 3.44 0.96 2.29
Trust 3.51 1.14 3.22 2.00 1.56
Social Activities and Entertainment** 3.51 0.95 2.16 1.82 8.03
Exchange of Information* 3.42 0.97 3.00 2.01 2.28
Personal Relationships** 2.98 1.17 4.09 1.68 6.93
Commitment* 2.73 0.97 2.06 1.78 4.06
Exchange of Favours/Benefits* 2.50 1.24 3.09 2.01 3.13
Giving Face (Respect)* 2.49 1.08 2.94 2.01 2.42
* Means for the two samples significantly different at the 0.05 level. P < 0.05
** Means for the two samples significantly different at the 0.01 level. P < 0.01
Sources: Survey of employees from the Roaring Dragon Hotel in south-west China, 1999
(N=379) and Survey of Hong Kong Trade Executives in Hong Kong 1996 (N=128).
Organisational Guanxi and State Owned Enterprises in south-west China
235
Fock and Woo (1998) used mean ratings greater than 3 as indicative of
characteristics of guanxi being considered important, mean ratings of
approximately 3 as being neutral and mean ratings less than 3 as indicative of
them receiving little support. Using the same criteria for the Roaring Dragon
Hotel population, the eight characteristics were placed into three groups (Table
7.3) indicating the level of support they received as being an important
characteristic of guanxi.
Organisational Guanxi and State Owned Enterprises in south-west China
236
Table 7.3 Comparison of the Importance of Guanxi Characteristics
Recorded by Employees of the Roaring Dragon Hotel, 1999, and Hong
Kong Trade Executives 1996.
Roaring Dragon Hotel Employees
Mean Rating > 3 Strong support for being an important characteristic of guanxi
Hong Kong Trade Executives
3.85 Mutual Cooperation 4.09 Personal Relationship
3.51 Trust 3.44 Mutual Cooperation
3.51 Social Activities &Ent 3.22 Trust
3.42 Exchange of Information
Mean Rating ~ 3 Neutral support for being animportant characteristic of guanxi
2.98 Personal Relationship 3.09 Exchange Favours/Ben
3.00 Exchange of Information
Mean Rating < 3 No support for being an important characteristic of guanxi
2.73 Commitment 2.94 Giving Face (Respect)
2.50 Exchange of Favours/Ben 2.16 Social Activities & Ent
2.49 Giving Face (Respect) 2.06 Commitment
Organisational Guanxi and State Owned Enterprises in south-west China
237
Discussion
These results provide evidence to support the proposition that the level of
importance given to the characteristics of guanxi in the intra-organisational
environment differ from those in the inter-organisational environment.
When comparing the two studies, differences in mean rating at the minimum
0.05 level of significance were recorded for seven of the eight characteristics of
guanxi tested, with two of those differing at the 0.01 level of significance.
Trust was the only characteristic given a statistically equivalent mean rating by
the two populations and both populations recorded ‘trust’ as being an important
characteristic of guanxi. Other studies have found that trust is essential in long-
term guanxi maintenance (Yeung and Tung, 1996: 64; Kao, 1993: 25; Tsui and
Farh, 1997) and this research supports the argument that trust is the basis on
which any good guanxi relationship is built.
Both populations agreed that mutual cooperation is an important characteristic
of guanxi (Redding, Normal, and Shandler, 1993; Yeung and Tung; 1996; Bell,
2000: 133). The reciprocal nature of guanxi means that there is the likelihood
of someone who has enjoyed the benefits of guanxi being requested to provide
Organisational Guanxi and State Owned Enterprises in south-west China
238
a return favour at sometime in the future. Each guanxi favour generates some
degree of renqing or the quality of the emotional component of guanxi (Hwang
1987; Yang, 1986; Ambler, 1995). Renqing applies to the multitude of
differing types of guanxi relationships and is primarily the reciprocal obligation
and strength of personal closeness one feels toward the person with whom one
has guanxi. For the Roaring Dragon Hotel population, both renqing and the
reciprocal nature of guanxi would have contributed to mutual cooperation being
recognised as an important characteristic.
Trust and mutual cooperation were recorded as being important characteristics
of guanxi by both populations. Statistically the Roaring Dragon Hotel
population gave a significantly higher rating (M = 3.85) for mutual cooperation
being an important characteristic of guanxi than the Hong Kong executive
population (M = 3.44). These results differed at the 0.05 level of significance.
For many of the employees who had worked at the Hotel for a long period of
time and for those who enjoyed good guanxi with their manager, there were
advantages from which to benefit. They could start work a little late, have no
shift work, have weekends off, be given a task that required little effort,
sometimes earn more money, and achieve their goals easily. In several
interviews with respondents at the Hotel, the terms ‘clique’ or ‘small exclusive
Organisational Guanxi and State Owned Enterprises in south-west China
239
group' were used to describe such groups of relationships. One manager told
the story of the cliques in the upper echelons of the Hotel and how they were
profiting from such clique membership. The security and protection provided
by the clique were repaid through loyalty, secrecy and the commitment to work
toward mutual benefits. In this environment mutual cooperation and trust were
priorities (Child, 1994).
The most significant difference found in the results of these two surveys lies in
the level of importance given to ‘personal relationships’ as being an important
characteristic of guanxi. The Hong Kong trade executives rated personal
relationships as being the most important characteristic of guanxi and this
conclusion is well supported in the literature (Pye, 1992; Tsui and Farh, 1997;
Jacobs, 1979; King, 1991; Luo, 1997a; Kao, 1993). Experts agree that in the
public and inter-organisational domain we can define the essence of guanxi as
being personal relationships based on common ground that involves the
reciprocal exchange of favours.
However, the results from the survey data recorded by employees from the
Roaring Dragon Hotel challenge this conclusion. The Hotel population gave no
support (M = 2.98) to personal relationships being an important characteristic
of guanxi. For a survey population of 379, the lack of support for personal
Organisational Guanxi and State Owned Enterprises in south-west China
240
relationships being an important characteristic of guanxi inside this SOE is one
of the significant findings that one may argue differentiates intra-organisational
from inter-organisational guanxi. This unexpected outcome challenges whether
the definition of guanxi supported by Fock and Woo (1998), Pye (1992), Tsui
and Farh (1997), Jacobs (1979) or King (1991) reflects the true characteristics
of guanxi in the intra-organisational SOE hotel environment.
This research provides evidence that the important characteristics of guanxi in
the SOE hotel intra-organisational environment are trust, mutual cooperation,
entertainment and social activities and exchange of information. No importance
was placed on personal relationships. This finding supports the claim that ‘with
the growing emphasis on material gains in China, the importance of personal
relationships may have dwindled, whilst trust and reciprocity may have
increased in importance’ (Yeung and Tung, 1996: 63).
In interviews recorded between August 1999 and December 2004 with
members of the Roaring Dragon Hotel population, two topics that continually
arose were the role played by the danwei or work unit and that played by the
internal cliques operating within the Hotel environment. Under danwei
conditions, employees live in close proximity with their co-workers. Therefore
developing relationships with co-workers in the work place was likely to be
Organisational Guanxi and State Owned Enterprises in south-west China
241
much easier for SOE employees than between the Hong Kong Executives and
their mainland customers. Hotel respondents gave the impression that some
kind of relationship was assumed through established networks inside the
danwei and/or within the internal networks or cliques within the Hotel.
Employees commented that the internal in-groups or cliques in the Hotel were
very strong and usually comprised a small number of controlling members who
made decisions on how to gain or use resources to their clique’s advantage
(Chow, 2000; Grainger, 2004). These ‘cliques’ were very internally focused,
often competing with others for resources within the Hotel. As a result there
was only limited communication between departments and with other cliques.
Members of the Hotel cliques shared mutual cooperation, trust, secrecy and the
resultant fringe benefits as well as having a deep mistrust of out-group
members (Yau et al, 2000). Clique members or insiders who exposed any
‘secret’ information to anyone outside the clique would be immediately
expelled. This would result in the loss of benefits including access to
information, invitations to banquets and social activities, and other synergies
that would accrue through mutual cooperation (Grainger, 2004).
The researcher proposes that the reason for the significant difference in the
mean rating given to ‘personal relationship’ among the two sample populations
is the difference in the two environments where the respondents operate. In
Organisational Guanxi and State Owned Enterprises in south-west China
242
comparison to the Hotel employees’ living and working environment in south-
west China, the Hong Kong trade executives were likely to have been living in
a detached environment away from their office and their customers. In their
sales at work, many of their business communications were likely to have been
done by telephone, fax or e-mail. The possibility of face-to-face interaction
would only occur when traveling and/or visiting in a professional capacity. In
contrast, if the Roaring Dragon Hotel employees needed some help they often
communicated directly with those involved. As one Hotel manager stated,
‘when a favour was needed, face-to-face contact was the most common and
successful method that could be used’ (Int #28) and in this situation some form
of relationship was perceived as being a given.
Though Hong Kong is now a part of China, Hong Kong trade executives doing
business with those on the mainland are still likely to be perceived initially as
being outsiders by the mainland population. For a person with outsider status in
this situation, establishing a personal relationship with the representative of the
organisation they were hoping to do business with would have been of primary
concern.
In comparison to the significant distances between the Hong Kong executives
and their clients, the majority of the Roaring Dragon Hotel population was
Organisational Guanxi and State Owned Enterprises in south-west China
243
living in the near vicinity of their co-workers. In the Roaring Dragon Hotel
environment, comparatively minimal effort had to be put into establishing and
maintaining some form of face-to-face relationship. Employees’ close
proximity meant that they assumed that some kind of relationship existed with
all of their co-workers and so they looked past personal relationships to
perceive the important characteristics of intra-organisational guanxi as being
mutual cooperation, trust, social activities and entertainment and exchange of
information. Other respondents suggested that employees did not want to admit
that personal relationships were an important characteristic of guanxi as this
implied they had gained their position at the Hotel through their connections
rather than through their own natural ability or experience. This is an
interesting perspective that requires further research.
Statistically, the Roaring Dragon Hotel employees’ mean rating for social
activities and entertainment (M = 3.51) being an important characteristic of
guanxi was significantly higher (at the 0.01 level of significance) than that
recorded by the trade executives (M = 2.16). ‘Social activities and
entertainment’ (M = 3.51) was equivalent to ‘trust’ (M = 3.51) in being the
Hotel populations second most important characteristic of guanxi. In this
environment, employees would regularly see and/or assist in producing
government banquets or events at the Hotel. Presenting important officials with
Organisational Guanxi and State Owned Enterprises in south-west China
244
gifts was common on such occasions and allowing important government
officials to enjoy the facilities of the Hotel free of charge occurred regularly.
Many Roaring Dragon Hotel employees were involved in producing such
events and often viewed these social activities and entertainment being used by
stakeholders to gain favour among friends and officials (Yang, 1986; Yang,
1994).
From time to time, Hotel employees were invited to participate in banquets as a
way that their senior management rewarded them for their loyalty and/or
supplemented their minimal incomes. The high mean rating of (M = 3.51)
given to social activities and entertainment as being an important characteristic
of guanxi reflected the opportunities the restaurant and function amenities of
the Hotel naturally provided to produce organisational guanxi. In comparison,
the trade executives disagreed with the statement that social activities and
entertainment were an important characteristic (M = 2.16). This supports the
argument that the Hong Kong Executives physical detachment from their
customers’ living and business environment limited their amount of face-to-
face personal and social interaction resulting in such activities not being an
important characteristic of their guanxi. Their mean rating for social activities
and entertainment was the second lowest recorded by the Hong Kong
executives and reflected their disagreement with the statement that banquets or
Organisational Guanxi and State Owned Enterprises in south-west China
245
social activities are an important characteristic of guanxi.
The Roaring Dragon Hotel employees recorded the mean rating for exchange
of information (M = 3.42) significantly higher than that of the Hong Kong trade
executives (M = 3.00). Contributing factors for this mean rating being
significantly higher for the Hotel employees may have been the complex maze
of approvals an individual, family, or group require from official government
sources to get things done in south-west China. Information is not always easy
to acquire in this environment and so it is valued more by people there in
comparison to those from the more transparent environment found in Hong
Kong. The researcher cites the following somewhat extreme personal
experience as an example of the value given to information. One of the Hotel
chefs, to whom he was little more than an acquaintance, one day, passed him in
the corridor. The researcher stopped the Chef and casually asked him if he was
interested in a western magazine that had some recipes in it. The Chef’s eyes lit
up with excitement and he quickly took the magazine and rushed off to secretly
store it in the safety of his locker.
The Hotel employees saw the provision of information as important in
activities associated with acquiring positions, transfers, achieving goals, and
gaining knowledge of how approvals could be gained. For outsiders in this
Organisational Guanxi and State Owned Enterprises in south-west China
246
environment, accessing information was more difficult. In Hong Kong,
information is more readily available in the public domain and clearly guanxi is
not necessarily a requirement needed to access information.
There were differences in the age groups and gender balance of the two
populations. The analysis of results comparing the age groups across the
intervals of 21-25 years, 26-30 years, 31-35 years and so on within the Hotel
population provided no clear evidence that the mean rating for the importance
given to the eight characteristics of guanxi differed across these sub-groupings.
Comparing results between males and females from the Roaring Dragon
environment also uncovered no significant differences (see Appendix 2).
The standard deviations of responses recorded by the trade executive
population in the Hong Kong were all greater that those recorded by the Hotel
employees in south-west China. This indicates that the members of the intra-
organisational population at the Roaring Dragon Hotel were more uniform in
their beliefs in the importance of these guanxi characteristics than those in the
inter-organisational environment of the Hong Kong executives (see Appendix
3).
Organisational Guanxi and State Owned Enterprises in south-west China
247
Conclusions
Results from this research support the conclusion that the important
characteristics of intra-organisational guanxi for SOE employees in south-west
China differ from those of Hong Kong executives operating in an inter-
organisational environment in the People’s Republic of China.
Table 7.4 Level of Importance of Guanxi Characteristics Identified by
Employees of the Roaring Dragon Hotel, 1999, and Hong Kong Trade
Executives, 1996.
Roaring Dragon Hotel Employees
Mean Rating > 3 Strong support for being an important characteristic of guanxi
Hong Kong Trade
Executives
3.85 Mutual Cooperation 4.09 Personal Relationship
3.51 Trust 3.44 Mutual Cooperation
3.51 Social Activities &Ent 3.22 Trust
3.42 Exchange of Info
The results confirm that in both the intra-organisational and inter-organisational
environments, mutual cooperation and trust are important characteristics of
guanxi.
Organisational Guanxi and State Owned Enterprises in south-west China
248
Respondents from the Roaring Dragon Hotel in south-west China were neutral
as to whether personal relationships were an important characteristic of guanxi
whilst, in comparison, the Hong Kong trade executives supported personal
relationships as being the most important characteristic of guanxi.
Evidence indicated that for the Hotel population the ‘exchange of information’,
and ‘social activities and entertainment’ are important characteristics of intra -
organisational guanxi’. However these conclusions were not supported by the
Hong Kong trade executives operating in the inter-organisational work
environment.
In the Roaring Dragon Hotel environment, the researcher argues that the
minimal access to information in the SOE, the work place culture and activities
in the danwei contributed to the higher level of importance given to the guanxi
characteristic of exchange of information. Similarly the entertainment
activities, operations and facilities at the Hotel contributed to the higher level of
importance given to the guanxi characteristic of social activities and
entertainment.
Bian and Ang (1997: 981-1006) stated that a basic characteristic of guanxi is
familiarity or intimacy and that for any two individuals to develop good guanxi
Organisational Guanxi and State Owned Enterprises in south-west China
249
they must know a good deal about each other and share a good deal with each
other. They noted that guanxi is not merely a relationship but a tie through
which parties exchange valued materials or sentiments. For the Roaring Dragon
Hotel population this familiarity or intimacy helped to differentiate their
perceptions if the important characteristic of guanxi from those of the Hong
Kong executive population.
The findings support the proposal that social activities and entertainment,
exchange of information, and personal relationships are the three characteristics
that differentiate intra-organisational guanxi in the Chinese SOE hotel
environment from inter-organisational guanxi for the Hong Kong Executives
doing business in mainland China.
From a broader perspective, these results support the conclusion that the
characteristics and hence implications of guanxi do differ between workers in
mainland China and other parts of the Chinese Commonwealth (Kao, 1993).
Questions remain regarding whether the results of guanxi surveys in one
Chinese environment are applicable in other Chinese locations. Furthermore,
new research is required to test if the important characteristics of guanxi are to
some extent culturally and regionally specific.
Organisational Guanxi and State Owned Enterprises in south-west China
250
The researcher argues that in south-west China, region-specific and cultural
factors play a role in modifying the perceptions of what are important
characteristics of guanxi. In order to truly appreciate the nature and validity of
the empirical results reported here, future research is required to investigate the
characteristics of intra-organisational guanxi in Hong Kong and in other
regions and industries in the Chinese Commonwealth.
From an organisational perspective, the potential improvements in
effectiveness and efficiency to be gained by understanding intra-organisational
guanxi are significant. Those studying and managing the conversion of state
owned enterprises (SOE) in south-west and other parts of China may note these
intra-organisational guanxi findings. These conclusions may assist when
planning or adopting effective human resources practices to motivate workers
and to enhance organisational performance as SOE in China continue to
embrace the socialist market economy.
Organisational Guanxi and State Owned Enterprises in south-west China
251
Chapter Eight
Guanxi Decay in South-west China: Is it Really Happening?
Part 1
This chapter compares the development of the market economy in the eastern
and western regions of China and asks if the speed of reform enhances the
decay in the significance of guanxi practice in the two different regions. In
particular I examine Guthrie’s (1998) claims that the significance of guanxi is
in decline in the Shanghai business district. Here I present new research that
supports the proposal that the decay in the significance of guanxi is much
slower and less significant in south-western China.
China is like a sleeping giant. Let her sleep on, for when she awakes, she will
rock the world’ (attributed to Napoleon cited in Wee, Lee and Hidajat 1991)
There is no doubt that in China an economic giant has awoken. However are
there are in fact two or even three different giants experiencing different rates
of growth? The giant that continues to grow in the major coastal business
Organisational Guanxi and State Owned Enterprises in south-west China
252
centres is clearly awake and running but what about the central inland giant and
the one situated in the far west of China? Are they still in comparative slumber?
In response to Guthrie’s (1998) claim that guanxi is in decay in the rapidly
developing coastal business district of Shanghai, I argue that guanxi and guanxi
xue9 remain significant in the business community in south-west China and
their importance is decaying at a much slower pace than in coastal regions. In
the following two parts of this chapter I first look at the comparatives rates of
development in the three different regions and secondly I examine some of the
responses from businessmen operating in south-west China to investigate if
they believe their region is developing at the same rate and if they are
experiencing the same level of decay in the use and importance of guanxi as in
coastal regions.
The inequality and difference between the business environments found in
eastern, central, and western regions has in the past prompted concern by those
in power. The first Five-Year Plan (1953 – 1958) of the People’s Republic of
China gave high priority to the development of industrial bases in north, north-
west and central China. In Mao’s famous 1956 speech, On Ten Major
9 guanxi xue describes the art of establishing and maintaining guanxi (Yeung and Tung, 1996).
Organisational Guanxi and State Owned Enterprises in south-west China
253
Relationships, he dwelt on the relations between coastal regions and the
interior. In his view it was both irrational and politically unacceptable to
maintain 70 percent of the industries in the coastal areas whilst leaving the rest
of the country more or less untouched. In an attempt to balance the level of
development of these regions the investment policy during the Mao period
clearly favoured peripheral and backward regions. While more developed
provinces and cities such as Shanghai experienced substantial outflows of
revenues, less developed provinces received enormous infusions of funds for
infrastructure and industrial developments. This policy resulted in greater
equality in income and consumption between eastern, central and western
regions (Wang and Hu, 1999).
However, in following this strategy, capital was not invested wisely in the most
profitable projects or regions in China and industrial development in inland
regions was not realistically planned on the basis of a region’s needs and
structure, technological or human resource capacity. These misdirected
investments resulted in poorly coordinated production, many isolated factories
and the waste of capital (Liu, 1997). Rather than being a fully coordinated
national program, the policy exhibited varying degrees of success across China
and generally its speed was more gradual as one traveled further away from the
coastal cities (Rawski, 1997).
Organisational Guanxi and State Owned Enterprises in south-west China
254
After Deng assumed leadership control in 1978, the focus changed, especially
in relation to the south-west and north-west regions. Reform in the countryside
had been uneven, with some rural areas becoming better developed than others.
The arid areas in the north-west and some areas in the south-west needed much
work to lift them out of poverty. Deng supported the new policy of letting some
regions develop faster and some people prosper before others, with the long
term perspective of them helping to bring along the backward regions at a later
date. He promoted the policy that the advanced regions should develop at their
own speed and have the obligation to help the backward. For China to achieve
a marked improvement in economic performance, reformers had to abandon
Mao’s ideological policy of eliminating regional inequality (Howell, 1993).
Rather than following the former policy of sending a shared proportion of
investment to develop inland and central regions, it was now directed to be
used in the most effective and demanding programs which usually meant the
majority ended up in Special Economic Zones or in coastal regions. By the time
the reform process had begun to gain any momentum in the south-west, the
region’s speed and quality of change were already trailing significantly behind
that being experienced in coastal and eastern regions. In the south-west, the
people and businesses were so far from the central decision-makers that in the
early years these inland residents ignored the reform. Eventually, ‘when they
Organisational Guanxi and State Owned Enterprises in south-west China
255
saw that things were getting better in areas where the reform had been carried
out, they began to follow’ (Int # 45).
The Deng-inspired ‘open door’ strategy was concentrated on expanding trade
and investment in a few provinces and special zones along China’s south-east
coast (Rawski, 1997). Deng’s post-1978 government realised that the greatest
potential for China trade lay in the eastern and coastal locations and these
regions needed to be given priority as a part of China’s ‘opening up’. As Gu
Mu (a state councilor closely involved with the Open Policy), speaking at the
Sixth National People’s Congress Standing Committee in January 1985,
summarised
It is sensible to develop the eastern economies as these coastal regions
have easier access to foreign markets, better communications with the
outside world, a certain industrial foundation and more specialised
personnel and management experience (cited in Howell, 1999: 20).
As a result, by the mid-1980s, China’s main coastal towns had begun to
successfully attract investment from abroad (Suka, 2001).
The contrasting differential in the speed of reform and development in eastern,
Organisational Guanxi and State Owned Enterprises in south-west China
256
central and western regions continued. By 1993, China had become the world’s
number one recipient of foreign direct investment (FDI). However, the uneven
spread of investment meant that the performance varied markedly among the
regions and led to an uneven speed of development. This contributed to a
marked difference in the speed and quality of reform occurring in inland
provinces in comparison to the more internationally exposed coastal areas
(Wang and Hu, 1999).
There is little doubt that China’s pursuit of a policy of opening to the outside
world has continued, with improvements in productivity and in living standards
being shared benefits of the new economic policy (Crane, 1999). This change
continues to gather pace. However, I argue that it is still proceeding at a
significantly slower rate in south-west China than in coastal regions. The
process of reform that the people in the south-western provinces of China have
experienced has been slower due to other government priorities, poor
infrastructure and the region’s distance from the centre of government and the
international trading zones.
Operations near the coast (excluding in the vicinity of Taiwan) have been
exposed to greater international competition that has induced in them the need
to reform quickly to compete successfully (Gang, 1997). Opening of the
Organisational Guanxi and State Owned Enterprises in south-west China
257
Special Economic Zones had introduced market economics to over 200 million
Chinese, mostly in coastal locations (Wireman, 2003). As a result, businesses
in coastal regions, especially in the south-east, have needed to adapt much
faster to growing international competition.
There is little doubt that since the beginning of reform, China’s growth has
been unevenly spread. Of the US $400 billion China received in new
investment between 1983 and 2001, the central region still attracted only 9
percent of investment and the western region little more than 3 percent (Ogutcu
and Taube, 2002). The south-west received an even smaller fraction of this 3
percent and a corresponding minimal amount of exposure to international
business practice.
As early as 1993, a major program was undertaken by the government. It aimed
at redressing the growing gap between the booming southern and coastal
provinces and those left behind in northern and interior regions (Weil, 1996). In
a further attempt to stimulate business in the west the government developed
the Great Western Development Strategy to steer state investment, outside
expertise, foreign loans and private investment into these regions (Ogutcu and
Taube, 2002). As yet this program in south-west China appears to have enjoyed
only limited success. There is a challenge for government to find how to make
Organisational Guanxi and State Owned Enterprises in south-west China
258
the inland investment environment more attractive whilst raising the standard
of living of the estimated 800 million Chinese who live in the western
provinces (Wireman, 2003). It remains a tough challenge and it is hard to see
how to attract investment to these areas and away from the faster growing and
more lucrative coastal regions (Liu, 1997).
It is clear that economic reforms have generally been skewed in favour of the
eastern regions with vast sections of the inland being handicapped by their
limited accessibility to the coastal and world markets (Liu, 1997; Int #53; Int
#59). Businesses that exist in these inland regions and their number of outlets
sometimes confine them to servicing comparatively poor local markets and
having to deal with ragged and faltering SOE.
Even getting products to coastal markets from China’s western regions is
difficult. Inter-regional trade restrictions and distribution problems make it
difficult for operations in China’s inner regions to compete in supplying the
natural resources and labour inputs that eastern-based enterprises often import
from abroad. Transportation, distribution and provincial tariffs remain serious
issues and problems such as provincial barriers continue to seriously affect the
efficiency and effectiveness of business interactions in inland regions (Tanzer,
2001; Ogutcu and Taube, 2002).
Organisational Guanxi and State Owned Enterprises in south-west China
259
As Tanzer (2001) found in an interview with a truck driver, transporting goods
by road remains slow and costly due to the level of bureaucracy, pilfering,
damage and insurance:
If you come to a border with “out of state plates” they may hold your
truck up for days and border checkpoints are still ubiquitous. Some
provinces only allow the trucks to haul one way; others levy steep and
sometimes arbitrary tolls on out of province trucks; some cities regulate
operating hours for visiting trucks; some jurisdictions simply protect
local industry by refusing to licence outside trucks. Truck drivers and
tollgate operators often debate tolls and there is enormous graft (cited in
Tanzer, 2000: 75).
Right now, a license to manufacture in Shanghai means nothing when it comes
to selling in Guangzhou. Every province is like a different country. Everybody
wants you to come to his or her door for approvals (MD of a logistics
consultancy, cited in Tanzer, 2001).
Provinces and municipalities still maintain many of their tariff and non-tariff
barriers to protect businesses in their region. Under WTO guidelines the severe
Organisational Guanxi and State Owned Enterprises in south-west China
260
restrictions on foreign companies’ distribution rights must come down in the
future and this may have some impact on freeing up the internal distribution
mechanisms (Tanzer, 2001). Even if this were to occur, the implementation of
this change would take time and I argue that breaking down the long-
established networks that determine the level and ease of access across these
borders or through provincial walls may be difficult. It remains a serious
challenge as the corruption involved in such operations has become in many
cases, not a consideration but the very way the system works, deeply inbred in
the government itself. If distribution, transport mechanisms and reliance on
government approvals can be improved then the inland provinces will have a
much better chance to compete more effectively.
The tremendous increase in demand being experienced in coastal regions does
not exist to anywhere near the same extent in the south-west and so the pressure
to change or adapt is not nearly as intense. Leggett (2002) argues that these
areas will eventually develop the transport infrastructure and openness that will
be required for them to compete effectively with international imports into their
own country. However a question mark remains against how long such
infrastructure and practices will take to develop.
The pressure to change in inland regions has been much less intense and this is
Organisational Guanxi and State Owned Enterprises in south-west China
261
one of the reasons why the total push for reform has not advanced as quickly in
the south-west as in coastal areas. There is no doubt that the opening up of
China has favoured the development of the coastal areas over inland areas. In
comparison to coastal regions, inland economies have been stagnating and with
the slower speed of reform, income inequality has also risen between coastal
and inland provinces (Howell, 1993; Liu, 1997; Murphy, 2003).
Since 1999, as people have begun to see the results of reform, the speed of
change in inland locations has gained some pace. An international lecturer who
worked at a university in China’s south-west over a four year period described
the following.
In 1999, all of the students and lecturers would have to walk, catch the
bus or scooter to travel around. By 2002, a car park had been built
outside the institute’s new 240-room staff accommodation quarters.
There were already about twenty new cars parked there that were
owned by lecturers and even a few by students from rich families. By
2003, four new multi-storey accommodation buildings and teaching
buildings were under construction. Across many campuses in this city
these new developments are evident. (Int # 73)
Organisational Guanxi and State Owned Enterprises in south-west China
262
Speed of Reform
A number of researchers and publications support the conclusion that the
coastal and inland regions were developing and responding to reform at a
different pace (Howell, 1993; Liu, 1997; Murphy, 2003).
Wang Shaoguang and Hu Angang (1999) presented evidence that compares the
speed of development and reform occurring in the different regions of China.
Their data were collected at the same time that Guthrie collected his data in
Shanghai and so is appropriate for comparison. Wang and Hu’s data were
grouped into three distinctly separate regions defined as eastern (coastal),
central and western (Wang and Hu, 1999).
Table 8.1 presents the per capita gross domestic product, growth rate and level
of poverty occurring in each of these regions, based on Wang and Hu’s data.
Table 8.2 presents data on comparative savings rates, investment rates and
exports. Tables 8.3a and 8.3b present data on comparative newspaper
consumption and telephone accessibility. Table 8.4 presents data on
comparative illiteracy rates, and mean school years and Table 8.5 reflects levels
of urbanisation.
Organisational Guanxi and State Owned Enterprises in south-west China
263
The eastern region comprised data from Beijing, Tianjin, Hebei, Liaoning,
Shanghai, Jiangsu, Zhejiang, Shandong, Guangdong, Guangxi, and Hainan,
with a land area of 1.3 million square kilometres.
The central region consists of Shanxi, Inner Mongolia, Jilin, Heilongjiang,
Anhui. Jiangxi, Henan, Hubei, and Hunan, with a land area of 2.8 million
square kilometres.
The western region includes Sichuan, Chongqing, Guizhou, Yunnan, Tibet,
Shanxi, Gansu, Qinghai, Ningxia, and Xingjiang with a land area of 5.5 million
square kilometres. (Source - GTJCSJDZ, 1996 cited in Zhu, 1999)
The following is presented to illuminate and expose the trends taking place
across these three regions.
By comparing measures in eastern, central and western regions I argue that
collectively this broad cross-section of measures reflects the comparable speed
of change taking place in the three regions and the resultant speed of reform.
Organisational Guanxi and State Owned Enterprises in south-west China
264
Table 8.1: Per Capita Gross Domestic Product 1978 and 1994, Annual
Growth Rates and the Number of Provinces in Poverty 1992.
Region A – Per capita
GDP as % of
National Average
1978
B - Per capita
GDP as % of
National Average
1994
C-Per capita
Annual growth
Rate
1978-1994
D – Number
(%) of
counties in
poverty
1992.
Eastern 232.55 233.49 8.66 61 (12.4%)
Total 492
Central 85.78 80.93 7.94 180 (25.0%)
Total 719
Western 79.09 65.42 7.04 259 (33.6%)
Total 769
Source: Wang and Hu (1999: Table 3.2, p49; Table 3.3, p52; Table 3.7, p66)
This research was conducted at the same time that Guthrie conducted his
research and since then there has been no evidence to suggest a significant
change in these trends occurring in China. I argue that comparing the Per
Capita GDP as percentage of national per capita GDP in addition to examining
the number and percentages of provinces described as in poverty in each region
Organisational Guanxi and State Owned Enterprises in south-west China
265
reflect the income inequality between rural and coastal areas. Wolf (2003)
argues that these differences in income inequality are leading to rural-to-urban
migration, rising urban unemployment and social unrest.
Table 8.2: Savings Rates, Investment Rates and Exports as a Percentage of
Provincial Gross Domestic Product.
Region Savings Rates S
Investment Rates I
Multiplication factor M = S x I
Exports as % of Provincial GDP
Eastern 54.62 53.78 3045.0 34.02
Central 39.27 40.82 1603.0 8.42
Western 34.46 41.96 1445.9 6.00
Source: Wang and Hu (1999: Table 4.2, 87; Table 4.6, 107)
The differences in domestic savings (S) and investment (I) across the three
regions are amplified if we consider the multiplication factor (M). This
multiplication factor indicates the comparative volume of domestic investment
capital available and is almost double in eastern regions (3045) when compared
to either the central (1603) or western regions (1445.9). This indicates a greater
volume of savings and investment and a correspondingly more open investment
mentality as we travel east towards coastal regions.
Organisational Guanxi and State Owned Enterprises in south-west China
266
When these internal savings and investments rates are combined with the huge
difference in volumes of investment that are coming from outside China, the
differences in the size of investments being made between eastern, central and
western regions are further amplified.
This evidence supports the proposal that the western and central regions are
attracting far less investment than the coastal regions and domestic investors
are also far less prepared to invest in south-west regions. I argue that these
comparatively minimal investment levels also contribute to a reduced level of
pressure to change. In south-western China, even though the average standard
of living is improving, the gap between rich and poor continues to grow
(Ogutcu and Taube, 2002. Liu 1997, Int # 74).
Economically these eastern, central and western economic regions differ
significantly. A much greater per capita GDP in eastern provinces, combined
with the majority of domestic investment being in coastal cities, has seen a
strengthening of the eastern economies at the expense of poorer provinces
(Wang and Hu, 1999). It appears reasonable to conclude that industries are
much more developed in eastern regions in comparison to south-western
regions of China and the gaps that were present in 1994 have only grown larger
Organisational Guanxi and State Owned Enterprises in south-west China
267
in recent years (Int #75, Int #81, Int #82, Int #86, Int # 88).
Communications and education are two important services that act as critical
and central conduits in the effective implementation of reforms and these
measures also provide evidence of the level of sophistication of the people
living in each region. The following data compares these two issues across
these regions.
Table 8.3a: Communication Mechanisms, 1994
Region Televisions per 100 households
Newspapers sold per person per year
Telephones per100 people
Eastern 100.00 39.57 5.60
Central 75.85 15.60 1.49
Western 48.22 13.06 1.04
Source: Wang and Hu (1999: Table 4.7, pg 115)
Organisational Guanxi and State Owned Enterprises in south-west China
268
Table 8.3b: Communication Mechanisms (As a Percentage of Scores
Recorded in Eastern Provinces) 1994.
Region Televisions per 100 households
Newspapers sold per person per year
Telephones per100 people
Eastern 100 100 100
Central 75.8 39.42 26.61
Western 48.19 33.00 18.57
Source: Wang and Hu (1999: Table 4.7, pg 115)
If we compare the percentage of communicating mechanisms that existed in
western, central and eastern provinces in 1994 it is clear that there is a serious
reduction in the communication infrastructure as we move further away from
the coast. The number of communication mechanisms that exist inland is only a
small percentage of those that exist in eastern locations. One may confidently
speculate that the outbreak of mobile communication use in recent years
follows the same percentages as presented by Wang and Hu in 1999 and that
the figures for computer access and email are likely to parallels these results.
Organisational Guanxi and State Owned Enterprises in south-west China
269
Table 8.4: Illiteracy Rates, Mean Number of School Years 1994
Province Illiteracy Rates Mean Number of School Years
Eastern 8.71 7.17
Central 14.32 6.24
Western 22.63 4.77
Source: Wang and Hu (1999: Table 4.9, pg 120)
Table 8.4 provides further evidence of the significant differences in education
levels across the three regions. I argue that the higher level of illiteracy in the
west is another factor that would reduce the speed of reform and enhance the
likelihood that the old characteristics and importance of guanxi practices
remain.
Organisational Guanxi and State Owned Enterprises in south-west China
270
Table 8.5: Comparison of Urban Development, Gross Domestic Product
and Percentage of Foreign Investment of China’s Three Regions (1995)
Region Urban Built-up Area as % of Total. M
GDP as % of Total N
Foreign Investment as % of Total O
Eastern 51.8 65 86.8
Central 34.3 23.9 9.3
Western 13.9 11.1 3.9
Source (Wang and Hu, 1999: Table 4.6, pg 107; Fig 4.5, pg 109; Table 3.1, pg
48)
The eastern regions are attracting the vast majority of both domestic and
international investment; it seems reasonable, therefore, to assume that they are
experiencing greater exposure to international business practice. The
development of more western business methods is likely to accompany this
investment, especially investment originating from outside of China, and the
use of guanxi in coastal regions as an important tool in business may be in
decline as a result. In contrast, the 3.9% of total foreign investment reaching
western China is not likely to have much effect on the regions business culture.
Organisational Guanxi and State Owned Enterprises in south-west China
271
Discussion
In 13 of the 15 direct measures presented here, the value of each specific
measure decreased as we moved away from coastal locations. These included
the
- per capita GDP in 1978 compared to national average,
- per capita GDP in 1994 compared to national average
- annual growth rate per capita GDP average
- savings rates
- investment rates
- exports as a percentage of provincial GDP
- the number of televisions per households
- the number of telephones per hundred people
- the number of newspapers sold per person per year
- the population’s mean number of school years
- the urban built-up area as a percentage of total
- GDP as percentage of total and
- foreign investment as percentage of total.
The only values that are increased as we travel from east to central to west
China are the number and percentages of counties defined as being in poverty
Organisational Guanxi and State Owned Enterprises in south-west China
272
and the illiteracy rates. These values further support the hypothesis that China
is comprised of at least two different economic regions where the pressure to
change and adapt are very different.
The central and western regions have attracted a smaller number of new
investments, a much smaller volume of incoming capital and their level of
exposure to international business practice has been much less.
Shanghai, Beijing, Shenzhen and Guangzhou are all rapidly developing global
markets. As one moves further away from these trade centres, evidence
suggests that the speed of reform slackens markedly. Murphy’s (2003) findings
that western China lacks a modern information technology infrastructure and
that the economy there is much smaller and diverse provide further recent
evidence of the existence of a difference in the speed of change, income
development, investment, communication and technology. While coastal
regions boom, the interior rural economy is sagging under falling prices and
declining real incomes.
Another significant factor identified by educators and managers interviewed in
the south-west is the brain drain of skilled and entrepreneurial youth migrating
from the internal regions to the cities of the east coast. ‘They are being attracted
Organisational Guanxi and State Owned Enterprises in south-west China
273
by more opportunities, higher salaries and better living conditions’ (Int # 75).
Those with good connections are likely to stay in the south-west whilst many
with good potential want to find a better situation. Those older employees with
secure positions are more likely to remain in the west, further inhibiting the
speed of reform. Several young employees and graduates interviewed in south-
west China commented that they were tired of the old SOE management
systems. Comments like, ‘my friends have started their own company and so I
want to work with them’ (Int # 76), ‘my Uncle can get me a job in Guangzhou’
(Int # 77) and ‘I want to work in Shanghai’ (Int # 8) reflected their attraction to
more modern and global environments.
Liu (1997) argued that the real barrier to mitigating the gap between the rich
and poor provinces is the backward mentality, low level of effort and
inefficiency in the western regions. Liu believed that these regions need to
speed up reform, separate the government from the enterprises, and open their
economies to the eastern regions to attract capital investment, production
facilities, technology, and human resources so that they might begin to attract
more foreign investment. Here is further evidence that different regions have
reformed faster than others and have experienced correspondingly varying
levels of business success.
Organisational Guanxi and State Owned Enterprises in south-west China
274
The booming economic growth that the outside world is seeing in China is
happening primarily along the coast. A fraction of the population, an estimated
three hundred to four hundred million people, is currently benefiting from the
economic growth we have seen over the last 25 years. Interior China is clearly
not benefiting to the same extent and there is a growing disparity in wealth,
investment and income levels across these regions. Rural poverty is
accompanied by increased income inequality between rural and urban areas, by
rural-to-urban migration, rising urban unemployment and social unrest (Wolf,
2003).
The comparisons of education and communication levels reflect a difference in
the sophistication and access to knowledge among eastern and western
populations. In comparison to those living in the east, people in western China
are not as exposed or influenced by the pressures and opportunities emanating
from globalisation nor are they as far down the path of reform. This
environment is likely to continue changing at a significantly slower rate than
the Shanghai environment from which Guthrie’s (1998) conclusions were
drawn.
To search for more evidence of the differing speeds of reform, Part 2 of this
chapter specifically investigates the changes occurring in the importance of
Organisational Guanxi and State Owned Enterprises in south-west China
275
guanxi.
Part 2
The statistics presented here were compiled from questionnaires administered
to the employees of the Roaring Dragon Hotel in south-west China.
Methodology
A written questionnaire was given to each respondent. The survey document
was aimed directly at assessing each respondent’s attitudes to and beliefs
regarding the phenomenon of guanxi.
Using the scale
Strongly Disagree Disagree Neither Agree/Disagree Agree Strongly Agree
1 2 3 4 5
respondents were asked to respond to the following six statements:
Guanxi is still an important part of China’s culture
Guanxi will continue to operate in China for a long time into the future
In Chinese organisations, the use of guanxi is in decline
Organisational Guanxi and State Owned Enterprises in south-west China
276
In 20 years time, guanxi will be of no advantage
In 20 years time, guanxi will be just a memory of China’s past
The young people of China today place less importance on guanxi than former
generations.
Of the population of 685 staff at the Roaring Dragon Hotel, 438 responded to
the survey. The Hotel respondents were comprised of 80.2% employees, 13.9%
supervisors and 4.2% managers. A final group of 379 survey responses were
accepted as being valid and incomplete surveys were not included in the final
analysis. Of those respondents from the Hotel, 51.3% were female and 48.7%
were male with ages ranging from 17 to 56 years. Their years of service with
the Hotel ranged from 0.1 to 36.0 with a mean of 7.2 years with a standard
deviation of 7.42.
Organisational Guanxi and State Owned Enterprises in south-west China
277
Results
Table 8.6: ‘Guanxi’ is still an important part of China’s culture.
1 2 3 4 5
Strongly Disagree Disagree No Opinion Agree Strongly Agree
Frequency 11 33 81 201 96
Percentage 2.6 7.8 19.2 47.6 22.7
Cum % 2.6 10.4 29.6 77.3 100
Mean 3.8 Median 4 Mode 4 Standard Deviation 1.0
In this population, there is strong support for the statement that guanxi remains
an important part of China’s culture. The median and mode of 4 together with a
mean of 3.8 indicates that the Roaring Dragon Hotel population show support
for the statement that ‘guanxi is still an important part of China’s culture’. It
also provides evidence that the significance of guanxi is not in decline in this
environment with only 10.4% supporting such a proposal. Although this is a
measurement of guanxi and not guanxi practice (guanxi xue) is still indicates
that this cultural phenomenon is still strong in south-west China. If we consider
that Guthrie’s research was collected in 1994 and the new research presented
Organisational Guanxi and State Owned Enterprises in south-west China
278
here was collected in 1999 it is clear that the speeds of eastern and south-
western reform are different.
Table 8.7: ‘Guanxi’ Will Continue to Operate in China for a Long Time
Into the Future.
1 2 3 4 5
Strongly Disagree Disagree No Opinion Agree Strongly Agree
Frequency 19 40 78 213 73
Percentage 4.5 9.5 18.4 50.4 17.3
Cum % 4.5 13.9 32.4 87.7 100
Mean 3.7 Median 4 Mode 4 Standard Deviation 1.0
The strong support for the statement that ‘guanxi will continue to operate in
China for a long time into the future’ indicates that the population at the
Roaring Dragon Hotel see little change occurring in the importance of guanxi.
Only 13.9% of respondents disagreed with this statement whilst 67.6% agreed.
A mean of 3.7, median of 4 and mode of 4 provide confirmation that Roaring
Organisational Guanxi and State Owned Enterprises in south-west China
279
Dragon Hotel respondents believe ‘guanxi’ will continue to operate in south-
west China for a long time into the future.
Table 8.8: In Chinese Organisations the Use of ‘Guanxi’ is in Decline.
1 2 3 4 5
Strongly Disagree Disagree No Opinion Agree Strongly Agree
Frequency 45 146 92 123 16
Percentage 10.7 34.6 21.8 29.1 3.8
Cum % 10.7 45.3 67.1 96.2 100
Mean 2.8 Median 3 Mode 2 Standard Deviation 1.1
Less than 32.9% of respondents support this claim. A mean of 2.8 indicates
mild disagreement; a mode of 2 confirms this outcome. I argue that this is a
measure of guanxi xue or guanxi practice as cited in Guthrie (1998). In contrast
to Guthrie’s (1998) Shanghai based claims, the Roaring Dragon Hotel
respondents disagree with the notion that the use of guanxi practice is in
decline. In a broader context, several businessmen interviewed in south-west
Organisational Guanxi and State Owned Enterprises in south-west China
280
China suggested that guanxi has actually become more important in this region
(Int # 79, Int # 80, Int # 81).
The following excerpts from interviews recorded from businessmen in south-
west China summarise the situation.
A large number of people believe that the role guanxi plays should
decline. From my experience in the first two years in a bank and then in
a hydro-projects development company, I believe the significance of
guanxi is in fact gaining intensity in south-west China, where the local
economy is not so open as in the east. (Int #48)
Many relatives of the banks’ directors still gain jobs in the bank of
communications through guanxi and their performance is not closely
geared to their income. Most of their relatives working in the bank have
comfortable positions as well as having more chances to gain promotion
to the bank’s upper echelons or to take a job or position in some other
financial organisations. (Int #49)
There is one guy in our international banking department who is the
youngest sub-branch dean in the Bank. He was not very competent but
Organisational Guanxi and State Owned Enterprises in south-west China
281
extremely lucky as his fiancée is the daughter of the Chief Dean in the
south-east Branch of the central bank. He also enjoyed many short cuts
when gaining loan approvals. (Int #50)
Concerning bank loans, the interest rate is fixed throughout China and
there is no difference between the loan rates each Bank can offer. The
resultant fierce competition intensifies the use of guanxi and those who
have an influential background and connections find success in terms of
financial support. (Int # 51)
Another respondent stated that
The hydro construction company I am working for is state-owned. I
have seen examples of how management uses guanxi to make decisions
and the resultant low efficiency and waste of funds. When choosing the
successful contractor for a bid, many non-economic factors are taken
into consideration with the most important criteria always being the
relationships involved. We had to offer a contract worth RMB 0.5
billion Reminbi to a company which has thousands of retired workers
and who would have been forced to lay off a lot of employees if they
were unable to win any more contracts. As our current General Manager
Organisational Guanxi and State Owned Enterprises in south-west China
282
was once the past General Manager of this company, he was not
prepared to consider any other offers, some of which were better than
the quality and professionalism of the chosen companies bid. Our
General Managers relationships definitely influenced the final decision.
(Int #82)
‘Many organisations can’t rely on the government any more to take out a loan
for them or bail them out’ if they are making losses (interview with Shanghai
Official cited in Guthrie, 1998: 34). In south-west China the government policy
is actually helping facilitate the importance of guanxi in relationships between
government and managers of companies, especially when it is a matter of
survival. As one businessman replied,
We are a socialist country and this is the way we do things. If we don’t
help them then they will have to close down and many people will
become unemployed. We cannot allow so many people to lose their
jobs. (Int # 69)
In south-west China, a small businessmen also described his experience with
guanxi xue in his environment:
Organisational Guanxi and State Owned Enterprises in south-west China
283
In my small business we were often charged with any possible excuse to
invite local governors to join us for dinner. My partner said we should
invite a local governor into the partnership to gain some more business
through his guanxi. I really did not like the Governor as he was smoking
all the time, drinking a lot of alcohol, exhibiting poor taste and behaving
like a rogue. Still as a result of developing this relationship with him we
now don’t have many unnecessary expenses and enjoy a lot of
protection from competitors. (Int #83)
Another bank accountant described the following:
A section manager in my bank has been working diligently for more
than ten years. He is the backbone in the department and worthy of
much respect. He has most of the responsibilities, yet is paid the same
salary as other managers who have powerful connections and he also
has much less freedom in making decisions.
The daughter of one directorate member of our company works as an
accountant in head quarters. She has no accountancy education
background but through her connections has unlimited professional
training opportunities. It is easy to see that in the future she will take the
Organisational Guanxi and State Owned Enterprises in south-west China
284
position in our company in charge of accountancy. (Int # 53)
A manager of a newly emerging company reported the following:
Guanxi is not declining in our comparatively open market, but is in fact
intensifying. Guanxi is important in the business environment I am
working in and some practices that have been in graveyard for years in
eastern regions still exist here! Although founded in 2001, the
company’s management is quite out of date in spirit. (Int #84)
A Food and Beverages Manager at the Roaring Dragon Hotel had come from
Shanghai a year earlier and made the following comments:
When I first arrived here with my husband a year ago we were shocked
to find how far behind Shanghai this place was in terms of business
practice. The old ways that died years ago in Shanghai were alive and
well here and it took us some time to readjust to these old practices. (Int
#85)
A General Manager of a dam construction project in Guanxi province gave
another interesting view relevant to Guthrie’s (1998) claims re chemical and
Organisational Guanxi and State Owned Enterprises in south-west China
285
industrial organisations.
In China, in industries that require exact science there is no longer any
room for guanxi. In the past many dams had been below standard. We
cannot afford to take any chances in the dam construction industry so
we must have capable people at all times. However I get frustrated in
our business that is more social science-oriented as in these industries
guanxi still plays a major role. For my generation this is frustrating as
the importance of guanxi is perpetuated through the lessons of
Confucianism that we are taught in school and in our social lives. (Int
#67)
A Chinese accountant summarised the attitude to the development of the new
socialist market economy in south-west China:
The government officials encourage us to follow the market economy.
If anything this has made the importance of relationships even greater.
(Int #65)
Organisational Guanxi and State Owned Enterprises in south-west China
286
8.9: In 20 Years Time, ‘Guanxi’ Will Be of No Advantage.
1 2 3 4 5
Strongly Disagree Disagree No Opinion Agree Strongly Agree
Frequency 23 74 127 138 60
Percentage 5.5 17.5 30.1 32.7 14.2
Cum % 5.5 23 53.1 85.8 100
Mean 3.3 Median 3 Mode 4 SD 1.1
Here is the first indication that the survey population believe that the
significance of guanxi will decay at some point in the distant future. 46.9
percent of respondents believe that guanxi will be of no advantage in 20 years
time and only 23 percent disagree with this view.
Guthrie (1998) has shown that the decay in significance of guanxi is already
occurring in Shanghai. The results of this survey from south-west China
support the proposal that the outcome may be the same in south-west China;
however it seems likely to take a considerably longer time in achieving the
same quality of reform in this region.
Organisational Guanxi and State Owned Enterprises in south-west China
287
In the long term the significance of guanxi in south-west China may eventually
follow a path similar to that found by Guthrie in Shanghai. However, in the
survey population at the Roaring Dragon Hotel, the support for this decay is not
strong and I argue that this deterioration will be further diluted by the time
required for international and global business forces to successfully penetrate
into south-west China.
Table 8.10: In 20 Years Time, ‘Guanxi’ Will be Just a Memory of China’s
Past.
1 2 3 4 5
Strongly Disagree Disagree No Opinion Agree Strongly Agree
Frequency 25 94 134 118 52
Percentage 5.9 22.2 31.7 27.9 12.3
Cum % 5.9 28.1 59.8 87.7 100
Mean 3.2 Median 3 Mode 3 Standard Deviation 1.1
Organisational Guanxi and State Owned Enterprises in south-west China
288
This result indicates further weak support from Roaring Dragon Hotel
respondents who perceive that in 20 years time guanxi will continue to decline
in importance.
In an attempt to isolate the sub-group in which this belief was strongest,
respondents were grouped across sub-grouped intervals differentiated by age
and years of service. Evidence showed that respondents followed uniform
trends across the whole group and that there were no significant differences in
the results of each sub-group tested.
8.11: The Young People of China Today Place Less Importance on
‘Guanxi’ Than Former Generations.
1 2 3 4 5
Strongly Disagree Disagree No Opinion Agree Strongly Agree
Frequency 28 163 89 131 14
Percentage 6.6 38.4 20.9 30.8 3.3
Cum % 6.6 44.9 65.9 96.7 100
Mean 2.9 Median 3 Mode 2 Standard Deviation 1.0
Organisational Guanxi and State Owned Enterprises in south-west China
289
The mean of 2.9 indicates mild disagreement with the statement that the young
people of China today place less importance on ‘guanxi’ than former
generations. With 44.9% disagreeing and only 34.1% in agreement, the
majority of respondents maintain that young people still treat guanxi as
important. Only 3.3% indicated strong agreement.
8.12: In Your Everyday Life, How Often Do You See Guanxi Used?
1 2 3 4 5
Never Seldom Sometimes Often Always
Frequency 8 24 105 213 76
Percentage 1.9 5.6 24.6 50 17.8
Cum % 1.9 7.5 32.2 82.2 100
Mean 3.8 Median 4 Mode 4 Standard Deviation 0.9
These results indicate that there is little doubt that guanxi practice in this SOE
environment in south-west China continues to be an important part of the
organisational culture. Only 7.5 percent of the population ‘seldom’ or ‘never’
Organisational Guanxi and State Owned Enterprises in south-west China
290
see guanxi in use whilst 67.8 percent see it in operation ‘often’ or ‘always’.
Cumulatively 92.5 percent see it in use ‘sometimes’, ‘often’ or ‘always’. These
results indicate that guanxi is still very much a part of organisational life in this
SOE community and provides further evidence that guanxi remains an
important and often used phenomenon in south-west China.
An appropriate summary of the importance of guanxi in this region came from
an interview with a small businessman in Kunming.
My son is going to study in the Netherlands and I’m worried that he will
not be able to find a part time job to support his study due to the length
of time it will take for him to develop a relationship with his employer.
(Int # 87)
I explained to him that his son could apply for any job in any Dutch newspaper
anytime after he arrived, without having to know the people who advertised the
position, and that his ability would decide his level of success. Even though I
explained the situation clearly he still seemed surprised and unsure.
Organisational Guanxi and State Owned Enterprises in south-west China
291
8.13: In Your Job, How Often do You See Guanxi Used?
1 2 3 4 5
Never Seldom Sometimes Often Always
Frequency 10 37 129 155 97
Percentage 2.3 8.6 30.1 36.2 22.7
Cum % 2.3 11 41.1 77.3 100
Mean 3.7 Median 4 Mode 4 Standard Deviation 1.0
In this SOE work environment, there is little doubt that the phenomenon of
guanxi practice or guanxi xue remains important. The mean of 3.7 indicates that
the population often saw guanxi in use in their workplace, with 89 percent
seeing it in use ‘sometimes’, ‘often’ or ‘always’. With only 11 percent ‘seldom’
or ‘never’ seeing it in use, I argue that it is still very much a characteristic of
the Roaring Dragon Hotel working environment. Interviews with employees at
the Roaring Dragon Hotel uncovered criticism of management for promoting
inexperienced and unqualified personnel to important management positions
and the resultant poor performance. However, these promotions could not be
openly criticized due to the trouble it would cause and also the mainzi or face
issues involved.
Organisational Guanxi and State Owned Enterprises in south-west China
292
Table 8.14: Guanxi Use Observed in Life and in the Workplace.
Guanxi
Use
Never Seldom Occasionally Often Always
Life % 1.9 5.6 24.6 50 17.8
Job % 2.3 8.6 30.1 36.2 22.7
The results in Tables 8.13 and Table 8.14 provide strong evidence that the use
of guanxi in SOE in south-west China remains strong in contrast to Guthrie’s
findings in Shanghai.
Discussion
There is no doubt that the opening up of China has favoured the development
of the coastal areas over inland areas (Howell, 1993; Int #53; Int #59; Int #87;
Int #89). The sheer distance of the south-west economies from the vibrant
eastern economies results in only minimal exposure of these populations to the
Organisational Guanxi and State Owned Enterprises in south-west China
293
socialist market economy and international forces. In the far west,
administratively they are often under less control resulting in legislative or
constitutional constraints being re-interpreted or ignored to suite the local taste
(Hamer, 1996). Is the reform in SOE in south-west China weaker than in
coastal regions? Is Shanghai further along the path to reform?
I propose that the quality of reform in China weakens as one travels further
away from the coastal regions and centres of government.
The speed and quality of reforms in the south-west of China have been more
gradual and diluted than in coastal regions. Nyberg and Rozella (1999) found
that in western regions, the distance away from the coast and the centre of
Chinese business has delayed the complete removal of the planning legacy and
continuing market interventions by government remain. The transformation in
the business environment in south-western China has also been delayed and is
occurring more slowly. I argue that the decay in the effectiveness and
significance of guanxi and guanxi xue parallels the quality of reform being
experienced in inland regions. That is, it is slow and weak.
Guthrie (1998) identifies that in Shanghai the emergence of a rational-legal
system, at least on an official level, has begun in many fundamental ways. In
Organisational Guanxi and State Owned Enterprises in south-west China
294
addition, the state is implementing broad-based institutional changes that are
moving business success away from personal power and particularistic
relations. In this complex transition, change has needed to be implemented
from the top and this is the environment in which a system of guanxi and
guanxi practice, after more than 2,000 years of history, has become routine in
Chinese society. While the transition between these two systems is and will
continue to be a slow and incremental process, the very existence of a rational-
legal system at the state level is a first step in defining and shaping economic
and social action in China’s future.
In reflecting on Guthrie’s (1998) sample population and outcomes it is
important to remember that his interviews were conducted with managers from
production-oriented industrial units with a minimum of fifty employees that
were located in China’s most international and western-oriented city. He makes
this qualification on a number of occasions. To add perspective to his
conclusions we must remember that China is a huge country and many different
sub-cultures exist (Jackson and Bak, 1998).
With these conclusions in mind, I argue that the transition to a socialist market
economy is much further advanced in coastal regions than in inland regions.
The difference in the speed of development of a more consistent and
Organisational Guanxi and State Owned Enterprises in south-west China
295
transparent legal system combined with the difference in income levels
between those working in inland environments and coastal environments are
measures that illuminate the comparatively slow speed of change in inland
regions. I argue that parallels can be made with the slow speed at which guanxi
significance is in decay in the business context in south-west China.
Guthrie (1998) uncovered that the significance of guanxi was waning in
Shanghai as the international penetration and exposure, savings and buying
power of coastal residents began to grow. In comparison in south-west China,
the change taking place in such criteria and in income levels has been much
slower and this has been another contributing factor to the minimal decay in the
significance of guanxi.
Another difference can be identified in the number of former state-owned
organisations being allowed to close down in the south-west compared to
Shanghai (Guthrie, 1998: 36). In Shanghai the private sector is developing at a
much faster rate and this development provides opportunities for those who
became unemployed through the closure of SOE to gain new positions. In
south-west China the comparable speed of change, increase in the size of the
private sector and resultant new employment opportunities are minimal when
compared to Shanghai. As a result, the local south-west government has to be
Organisational Guanxi and State Owned Enterprises in south-west China
296
more sensitive and cautious in closing SOE so as not to create a critical mass of
unemployed people that may lead to social discontent. These conditions are
also restricting the speed of change.
Guthrie (1998) discovered that the significance of guanxi is in decline in the
Shanghai business environment because of the advanced development of the
market economy combined with the influence of the international forces and
influences. As a result, his conclusions contrast significantly with those found
in south-west China due to this region’s slower speed of reform and limited
exposure to the forces of globalisation.
When told of Guthrie’s findings in an interview one respondent replied, ‘there
may be changes taking place in Shanghai and coastal regions but here nothing
is changing. The situation remains the same’ (Int # 82). This interview,
recorded in south-west China nine years after Guthrie’s research was conducted
in Shanghai, clearly adds weight to the argument that reform is progressing at a
much slower rate in south-west China.
Guthrie was clear in defining that his research was based on the responses from
general managers of industrial organisations in Shanghai and so the new
evidence presented here supports the argument that the change in the
Organisational Guanxi and State Owned Enterprises in south-west China
297
significance of guanxi is not uniform across all provinces in China. South-west
China has a minimal and almost non-existent chemical and industrial sector and
so it is difficult to compare these results directly with those of Guthrie.
Evidence found in this research conducted between 1999 and 2004 suggests
that in the south-west region the use and importance of guanxi in the hotel,
accounting, banking and educational sectors, is deteriorating much more
slowly.
I argue that there is a difference in the decay in the significance of guanxi when
comparing the Shanghai managers with those taken from SOE employees and
managers and businessmen in south-west China.
Another shadow on the validity of Guthrie’s methodology is caste in Mayfair
Yang’s (2002) rebuttal. Yang implies that there may have been some error in
Guthrie’s methods of interviewing business men. Guthrie’s interviews usually
took place in each respondent’s own office, and I argue that in such
environments, respondents would be inclined to recite the organisation’s
official policy. In south-west China, where guanxi is still significant in
business, conducting rich guanxi interviews requires penetrating the code of
secrecy associated with guanxi and the quality of responses gained from
unconnected one-off interviews may be questionable.
Organisational Guanxi and State Owned Enterprises in south-west China
298
In south-west China, the code of secrecy in guanxi remains imperative in
business operations and Guthrie’s method of interviewing Shanghai managers
in their own work place generates questions as to the validity of responses. In
south-west China, it is not unreasonable to expect that any businessmen
interviewed on one’s first meeting in their work place will only recite their
organisation’s official policy. A Chinese manager in south-west China
described it as being like asking Chinese businessmen ‘to tell us all of your
secrets at your first meeting with them’ (Int # 65). It is true that guanxi
outsiders are only told a bare minimum at any one time and one may question
whether or not the responses given in a first time one-off interview were
truthful or accurate.
For guanxi research to be valid, I argue that there is a need for the researcher,
or a trusted associate, to take the time to develop a trusting relationship with the
respondent if one is to generate honest responses. An example I offer is one
case when I interviewed a government official upstairs in a hotel room at a
conference. It was after a banquet and we had never met before. This
uniformed official was happy to speak openly with me only because I had been
introduced by a member of his connected guanxi network with whom he had
strong ties and trust. If I had been a stranger he would never have considered
Organisational Guanxi and State Owned Enterprises in south-west China
299
talking to me about such a sensitive issue as guanxi or if he had agreed would
have only recited the official government policy. My introduction from
someone he trusted was critical in him agreeing to speak with me and in
providing truthful responses to the questions I asked.
Establishing relationships with respondents over a period of time is more likely
to provide more open and richer responses as trust grows. On each of my four
visits to my research sites I have been told more secrets and more insider
information as the respondents trust and relationship with me has grown. In
researching guanxi, one may argue that the validity and quality of the
conclusions drawn will parallel the time spent by the researcher in developing
relationships with respondents who have their trust.
Conclusions
In Guthrie’s (1998) work on the emergence of capitalism in China he does
outline the characteristics that make Shanghai special in China. They are that
Shanghai has secured more foreign contracts and attracted more foreign
investment than any other city, it has the highest rate of consumption, the
highest annual salaries, the legal system is probably more developed than in
any other part of China and is developing faster. Guthrie concludes that
Organisational Guanxi and State Owned Enterprises in south-west China
300
Shanghai is not representative of China and it is easy to see the differences that
exist in the business practices, lives, cultures and ethnic traditions of those in
Shanghai compared to those in the arid areas near Mongolia, in the far west
regions of Urumqi, or those of the south-western regions near the Mekong
river. Great diversity exists within regions of China (Pickles, 2002). In south-
west China alone there are claimed to be 43 different ethnic minorities.
One must be conscious of a different cultural atmosphere in inland rural
communities where the progress and the resultant change due to reform are
much slower with policies at times interpreted differently. It seems reasonable
to propose that there are significant differences between eastern, central and
inland populations and economies in China (Wang and Hu, 1999). Variations
across the state hierarchy also contribute and lead to different rates of growth
and diverse models of enterprise management in the transition economy
(Walder, 1992).
In China, the changes taking place in coastal and eastern regions are occurring
much faster than in the south-west. Reflecting on Guthrie’s (1998) claim that
guanxi practice in Shanghai is losing significance, I argue that in south-west
regions the old ways live on and the decay of the importance of guanxi in
business is much slower. It may be true that Guthrie’s conclusions reflect what
Organisational Guanxi and State Owned Enterprises in south-west China
301
is occurring in the fast changing city of Shanghai; however, in south-west, the
speed of change is much slower.
Guthrie’s conclusions are generated from interviews with businessmen in
China’s fastest developing city that is also among the most exposed to western
influence. This environment differs significantly from the type of business
environment one is likely to find in south-west China. In the south-west there is
less development, more diversification and the pressure to change and adapt
has not been nearly as great as in Shanghai.
Eastern regions are changing faster and opening up to international influence at
a greater rate than for those situated inland. To quote Guthrie (1998: 14):
Although Shanghai may be qualitatively different from several other
areas in terms of institutional structure and change, the difference is
primarily in function of degree rather than kind. Shanghai is simply
further along the process of change.
South-west China will probably one day reach the level of reform and exposure
to international globalisation that Shanghai is experiencing today. However, I
argue that this time is still far off and the business characteristics that existed in
Organisational Guanxi and State Owned Enterprises in south-west China
302
south-west China prior to reform gaining momentum in coastal regions are
changing much more slowly. Businessmen in Kunming, Dali and Lijiang agree
that ‘guanxi remains as important as before reform began’ (Int 58, Int # 65, Int
# 88).
Although there is evidence of more modern business practices, improving
education and living standards in China, there is still a low standard of living in
the south-west region and a significant number of uneducated children and
peasants remain.
Reforms to date have enjoyed various degrees of success in large portions of
the state owned sector and their ultimate success will depend on the willingness
of the Chinese Communist Party to embrace privatisation (Lardy, 1998: 22). In
separate interviews in Kunming with three member of the Communist Party I
asked if they thought ‘that corruption in the Party was decreasing?’ None of
them believed that this was the case and all suggested that the CCP members
who had enjoyed the benefits of their positions before reform began remained
reluctant to give up the advantages they enjoyed even if they were no longer
allowed. This struggle between the stakeholders in the Party and the forces of
reform is ongoing in south-west China and will no doubt continue to be intense
and contribute to the slow change occurring in the level of importance of
Organisational Guanxi and State Owned Enterprises in south-west China
303
guanxi in business in this region.
China’s growth has been unevenly spread. The volume of investment being
made in inland locations is less than five percent of what is being absorbed into
coastal regions so the speed of growth and development is much slower. I re-
confirm my argument that there are now at least two different economies
operating in China: one in the east that is firmly in the globalisation phase, with
rising incomes and standards of living; the other in the west that is experiencing
slower change, more poverty and despair. People in the south-west of China are
gaining comparatively little benefit from the economic success of the coastal
regions (Wireman, 2003). As they see less benefit, they are less attracted to
implementing reform initiatives.
Organisational Guanxi and State Owned Enterprises in south-west China
304
Chapter Nine
Conclusion
The evolution of organisational guanxi in SOE has been influenced by the
development of the former planned economy, the policies of Chairman Mao pre
and post 1949, the slow reform of SOE during Deng’s period of leadership, and
the role played by the danwei in this process. The era from pre-1949 to the end
of the reign of Deng Xiaoping was a historical period in the development of
organisational guanxi within and between state owned enterprises in China.
Conditions in SOE during this period provided the ideal environment for the
incubation, development and production of organisational guanxi.
This thesis is focused on an SOE in the hotel industry in south-west China. This
region has such a wide variety of ethnic groups and SOE in operation and so
caution is required when expanding the conclusions found here to cover
broader regions and industries within China. Guthrie (1998) made it clear that
his conclusions were based on data from the Shanghai region; similarly, it is
important to state here that the conclusions reached here apply for SOE in
south-west China.
Organisational Guanxi and State Owned Enterprises in south-west China
305
The military danwei that supported Mao’s followers and cadre during the Long
March and the establishment of rebel-controlled regions in the north-west of
China pre 1949 provided the right conditions in which to conceive and incubate
the core characteristics of organisational guanxi and to develop methods of
using the organisation to create and/or deliver favours. In this era relationships
determined the quality of life and sometimes survival. This period when cadres
developed management skills by trial and error was the birth place of
organisational guanxi. China’s economic developments since 1949, combined
with the core Confucian belief of the Chinese people, have been catalysts to aid
the evolution of organisational guanxi.
Many SOE managers post-1949 were formerly CCP cadres who were members
of the military danwei, an environment where relationships had been very
important. The importance of relationships in the military danwei in the
Communist Base Camps prior to 1949 evolved through the post-1949 danwei
to become the core characteristics of organisational guanxi in SOE. It was a
natural progression for the former cadres to take the management skills they
had learnt in the rough military danwei environment and develop them into a
more sophisticated style of management in SOE post-1949. It was in the SOE
that the long management chains, poor monitoring of operations and lack of
accountability provided the ideal environment for the fostering of
Organisational Guanxi and State Owned Enterprises in south-west China
306
organisational guanxi.
Organisational guanxi occurs when individuals or groups working for
organisations gain favours for their guanxiwang through membership or usage
of their organisations facilities. Without the organisation, these favours could
not be granted. Organisational guanxi characteristics include the importance of
insider relationships and the activities and benefits that flow from such; under-
reporting of production revenue and collective assets; the importance of trust
and secrecy regarding the dissemination of information between members of
cliques; the importance of mutual cooperation and informal networks in
achieving outcomes; and the provision of benefits to SOE members from time
to time that are not available to non-SOE members. In this case, examples of
the benefits available to insiders were free rooms at the Hotel, invitations to
banquets, easy working conditions, trips to other hotels and opportunities for
nepotism.
The findings regarding nepotism, cliques, discounting, and favours are of
concern for international managers operating in China. This is a topic that
requires deeper investigation and is one I have only begun to investigate here.
Organisational Guanxi and State Owned Enterprises in south-west China
307
The Future?
How guanxi is accepted by south-west China’s emerging educated youth is a
topic for further investigation. At the Roaring Dragon Hotel several talented
young employees had been lost to other new hotels or other organisations with
more modern management methods. They commented that they could see only
limited opportunities for promotion within the old-style organisation (Int #31,
Int #24).
Another unusual situation in SOE is that older, untrained and uneducated
managers are now managing young, trained and educated graduate employees.
This is another scenario through which SOE must evolve. This transition will
also affect the longevity of organisational guanxi. In the next decade this
transition that will be interesting to view and record. At the Roaring Dragon
Hotel, it was clear that many young employees resented the old habits of
guanxi favours, and because of this favouritism had lost their initial motivation
to work hard.
There is little doubt that the emerging educated generation will eventually take
greater control in China. The question remains: as this generation penetrates
deeper into management positions and the socialist market economy gains
Organisational Guanxi and State Owned Enterprises in south-west China
308
momentum in the south-west of China, is the future of organisational guanxi
limited or will a hybridized form evolve?
Guanxi favouritism used in appointing employees to senior decision-making
decisions may restrict the rate at which China’s most talented graduates and
potential managers reach decision-making positions. More research is required
into youth attitudes toward guanxi as the next generation of trained managers
has the potential to strengthen or weaken the importance of guanxi in China’s
SOE.
Guanxi neglect by Nothill at the Roaring Dragon in south-west China
highlights the cultural characteristics and issues that companies taking over or
forming joint-ventures with SOE in south-west China may encounter. The case
highlights the role guanxi can play in hindering or restricting the reform
process in large state owned organisations. I argue through conclusions reached
in this thesis that guanxi forces can and will have a restrictive effect on the
quality of reform that China’s SOE enjoy in adapting to the socialist market
economy, especially in the south west.
The most significant difference found in the comparisons of the Hong Kong
Executive and south-west China SOE employees surveys lies in the level of
Organisational Guanxi and State Owned Enterprises in south-west China
309
importance given to ‘personal relationships’ as being an important
characteristic of guanxi. The Hong Kong trade executives predictably rated
personal relationships as being the most important characteristic of guanxi
(Pye, 1992; Tsui and Farh, 1997; Jacob, 1979; King, 1991; Luo, 1997a; Kao,
1993). In contrast, the Hotel population gave no support (M = 2.98) to personal
relationships being an important characteristic of guanxi. This unexpected
outcome challenges the recognised definition of guanxi as being ‘relationships
with the exchange of favours’ (Pye, 1992), because it suggests it does not apply
in the intra-organisational SOE hotel environment. Because Roaring Dragon
Hotel employees lived and worked in close proximity to one and other, they
assumed that some kind of relationship existed with a high percentage of their
co-workers. They looked past personal relationships to perceive the important
characteristics of organisational guanxi as being mutual cooperation, trust,
social activities and entertainment, and exchange of information.
These research outcomes support the proposal that ‘social activities and
entertainment, exchange of information, and personal relationships’ are the
three characteristics that differentiate intra-organisational guanxi in the Chinese
SOE hotel environment from inter-organisational guanxi for Hong Kong
Executives doing business on the mainland. The researcher argues that in
Organisational Guanxi and State Owned Enterprises in south-west China
310
south-west China, region-specific and cultural factors play a role in modifying
the perceptions of what are important characteristics of guanxi.
At the Roaring Dragon Hotel, the security and protection provided by
organisational cliques was repaid through loyalty, secrecy, and the commitment
by members to work toward mutual benefits. Members of the Hotel cliques
shared mutual cooperation, trust, secrecy and fringe benefits as well as having a
deep mistrust of outsiders (Yau et al, 2000). Memberships of these
organisational cliques may have influenced the population’s perception that
relationships were not an important characteristic of guanxi. Clique
membership may have been more important in this scenario.
There is no doubt that the role and significance of the SOE is in decline in the
Chinese economy. The continuing costly social baggage of caring for
employees and retirees of SOE complicates their survival and, realistically,
only when SOE are free of their social burdens will they compete on a level
playing field with organisations operating in the private sector. One wonders if
the SOE will eventually disappear altogether, or will those that are profitable
survive in some hybrid form? From a south-west China perspective, I argue
that SOE are here to stay for the foreseeable future even though they may end
up playing more of a safety net role. China’s political leaders and business
Organisational Guanxi and State Owned Enterprises in south-west China
311
managers know that a vast human resource potential in the state-owned sector
remains untapped and making these organisations more productive and
profitable remains a challenge for the Chinese government.
Guthrie (1998) has shown that the use and importance of guanxi is in decline in
Shanghai as this region progresses further along the transition path toward
China’s socialist market economy. Far inland, away from the international ports
and trade centers of China, this change is occurring slower and more gradually.
In the old SOE in south-west China, favouritism still exists in most business
transactions, and dealings are still being conducted within different sets of
economic, legal, ethical, social, and political parameters than those found in
coastal regions. In south-west China, breaking down the guanxi network has
not progressed as far and is continuing at a slower pace. The decay will not
come easily yet may become a requirement if Chinese businesses in this region
are to maximise effectiveness and efficiency and compete successfully. I
confirm my argument that there are now at least two different economies
operating in China: one in the east that is firmly in the globalisation phase, with
rising incomes and standards of living; the other in the west that is experiencing
slower change, more poverty and despair.
Organisational Guanxi and State Owned Enterprises in south-west China
312
The researcher argues that in China, the changes taking place in the importance
and usage of guanxi in coastal and eastern regions are occurring much faster
than in the south-west. In the south-west region the old ways live on and the
decay of the importance of guanxi in business is much slower. South-west
China might one day reach the level of reform and exposure to international
globalisation that Shanghai is experiencing today and the decline in the
importance of guanxi may then mirror what is currently happening there. In
south-west China more time is needed to travel further along the path of reform
towards China’s socialist market economy.
The role of the SOE and the danwei are currently in flux as the socialist market
economy permeates further into the south-west of China. Like the danwei, the
future of organisational guanxi is uncertain.
Organisational Guanxi and State Owned Enterprises in south-west China
313
Bibliography
Ambler, T. (1995a) Reflections in China: Re-orienting Images of Marketing,
Marketing Management, Summer 4(1):22-30.
Ambler, T. (1995b) The Derivation of Guanxi. Marketing Management,
Summer 4(1):27.
Alston, J.P. (1989) Wa, Guanxi and Inhwa: Managerial Principles in Japan,
China and Korea, Business Horizons, (March-April):26-31.
Anonymous (1992) Administration and Management in China, July:36-38,
cited in Lu, Xiaobo and Perry, E. J. (Eds), (1997), Danwei: the Changing
Chinese Workplace in Historical and Comparative Perspective, M.E.Sharpe,
Inc, New York.
Bannister, J. (1998) Population, Public Health and the Environment in China,
China Quarterly, No. 156, December:988.
BCAS - Bulletin of Concerned Asian Scholars (Ed). (1983) China from Mao to
Deng: the Policies and Economics of Socialist Development, ME Sharpe;
London: Zed Press.
Bell, D. (2000) Guanxi: A nesting of groups, Current Anthropology,
Vol(41):132-138.
Bian, Y. (2002) Chinese Social Stratification, Socio-Economic Inequalities, and
Social Mobility, Annual Review of Sociology, 28:91-117.
Organisational Guanxi and State Owned Enterprises in south-west China
314
Bian, Y. (1994) Guanxi and the Allocation of Urban Jobs in China, China
Quarterly, No 140:971-999.
Bian, Y. (1994) Work and Inequality in Urban China, Suny Press, Albany.
New York.
Bian, Y. and Ang, S. (1997) Guanxi Networks and Job Mobility in China and
Singapore, Social Forces, March 75(3):981–1006.
Bian, Y., Logan, J. R., Lu, H., Pan, Y., and Guan, Y. (1997) Work Units and
Housing Reform in Two Chinese Cities, in Lu, Xiaobo and Perry, E. J. (Eds),
Danwei: the Changing Chinese Workplace in Historical and Comparative
Perspective, M.E.Sharpe, Inc, New York:223-250.
Blackman, C. (1997). Negotiating China: Case Studies and Strategies, Allen
and Unwin, St. Leonards, Sydney.
Book of Chinese Economic Events on Reforming and Opening, (1994),
Publishing House of Beijing Industrial University, Beijing, Volume 1.
Bray, R. (2004), Danwei, Melbourne University, Australia.
Brunner, J.A. and Koh, A.C. (1988) Negotiations in the People’s Republic of
China: An Empirical Study of American and Chinese Negotiator’s Perceptions
and Practices, Journal of Global Marketing 2(1):33–65.
Organisational Guanxi and State Owned Enterprises in south-west China
315
Brunner, J.A. and Taoka, G.M. (1977) Marketing and Negotiating in the
People’s Republic of China: Perceptions of American Businessmen Who
Attended the 1975 Canton Trade Fair, Journal of International Business
Studies 8(2):69-82.
Brunner, J.A., Chen, J., Sun, C., and Zhou, N., (1989) The Role of Guanxi in
Negotiations in the Pacific Basin, Journal of Global Marketing, Vol. 3(2):7-23.
Burt, R. L. (1992). Structural Holes, Harvard University Press, Cambridge,
MA
Butterfield, F. (1983) China: Alive in a Bitter Sea, Coronet Books, New York.
Chan, A. (1997) Chinese Danwei Reforms: Convergence with the Japanese
Model? in Lu, Xiaobo and Perry, E. J. (Eds), Danwei: the Changing Chinese
Workplace in Historical and Comparative Perspective, M.E.Sharpe Inc, New
York:91-113.
Chang, G. (1997) Monetary and Financial Policies and SOE Reform in China,
Chapter 19 in Wen, G.J. and Xu, D. (Eds), The Reformability of China’s State
Sector, World Scientific, London:317–326.
Chang, W.C. (2004) Guanxi and Regulation in Networks: The Yunnanese Jade
Trade Between Burma and Thailand, 1962-88, Journal of Southeast Asian
Studies, October 35(3):479-501.
Organisational Guanxi and State Owned Enterprises in south-west China
316
Chen, A. (1997) A Release of Responsibilities of Chinese Enterprises; Urban
Housing Reform and Marketization, Chapter 22 in Wen, G.J. and Xu, D. (Eds),
The Reformability of China’s State Sector, World Scientific, London:365-394.
Chen, M. (2004) Asian Management Systems: Chinese, Japanese and Korean
Styles of Business (2nd Edition), Thomson Business Press, London.
Chen, M. (1995) Asian Management Systems: Chinese, Japanese and Korean
Styles of Business, Thomson Business Press, London.
Child, J. (1994) Management in China during the Age of Reform, Cambridge
University Press, Cambridge, U.K.
Chinese Statistical Yearbook (1995) cited in Lu, X. and Perry, E.J. (Eds),
(1997) Danwei: the Changing Chinese Workplace in Historical and
Comparative Perspective, M.E.Sharpe, Inc. New York.
Chow, G.C. (2002) China’s Economic Transition, Blackwell Publishing,
Oxford.
Chow, G.C. (2000) Managerial Values and Practices Sharing Common Cultural
Heritage: A Comparison of Cultural Values in Hong Kong, Taiwan, and the
People’s Republic of China, Journal of Asia-Pacific Business, 2(4):21-38.
Chu, G.C. and Ju, Y. (1993) The Great Wall in Ruins, State University of New
York, New York.
Chu, C.N. (1988) The Chinese Mind Game: The Best Kept Secret of the East,
Organisational Guanxi and State Owned Enterprises in south-west China
317
AMC Publishing, Beaverton, Oregon.
CND (1998) State-Owned Enterprises for Sale at Bargain Prices, Global News,
No GL 98-133, 30 September.
Coleman J. (1990) Social Capital in the Creation of Human Capital, American
Journal of Sociology 94:95-120.
Cramer, D. (1998) Fundamental Statistics for Social Research, Routledge,
USA/Canada.
Crane, G.T. (1999) Imagining the Economic Nation: Globalization in China,
New Political Economy, July:215-232.
Davies, H., Leung, T., Sherriff, L., and Wong, Y. (1995) The Benefits of
‘Guanxi’. Industrial Marketing Management 24:207-214.
Davis, D and Vogel, E (Eds) (1990), Chinese Society on the Eve of Tiananmen:
The Impact of Reform, Cambridge: Council on East Asian Studies Publications,
Harvard University, cited in Lu, Xiaobo and Perry, E. J. (Eds), (1997) Danwei:
the Changing Chinese Workplace in Historical and Comparative Perspective,
M.E.Sharpe, Inc. New York.
Deng Xiaoping, (1994a), Selected Works of Deng Xiaoping, Volume II, 1975 –
1982, People’s Publishing House, Beijing.
Deng Xiaoping, (1994b), Selected Works of Deng Xiaoping, Volume III, 1975 –
1982, People’s Publishing House, Beijing.
Organisational Guanxi and State Owned Enterprises in south-west China
318
Dickie, M. and McGregor, R., (2003) Reviving China's North -East: China's
Premier Calls for Action to Revitalise the North-East. Financial Times, Aug
6:9.
Ding Yang, cited under reference from ‘Ding Yang, (1983) A Mainland
Cadre’s Impressions of Hong Kong after Three Months, ’Zheng Ming No. 3:
(77): 181; in Naughton, B. (1997) Danwei: The Economic Foundations of
Unique Institution.
Fang, X. (1997) Some Sobering Thoughts on China’s SOE Reform - From the
Experience of Other Countries, Chapter 15 in Wen, G.J. and Xu, D. (Eds) The
Reformability of China’s State Sector, World Scientific, London:241-250.
Farh, JL., Tsui, A.S., Xin, K. and Cheng, B.S. (1998) The Influence of
Relational Demography and Guanxi: The Chinese Case, Organisational
Science, 9(4):471-489.
Fei, X., (1985) Peasant China, Hong Kong: cited in Chen, M. (1995). Asian
Management Systems: Chinese, Japanese and Korean Styles of Business,
Thomson Business Press, London.
Fei, X. (1949) From the Soil, the Foundations of Chinese Society, University of
California Press, California.
Fock, H.K.Y. and Woo, K. (1998) The China Market: Strategic Implications of
Guanxi, Business Strategy Review, 9(3):33-43.
Organisational Guanxi and State Owned Enterprises in south-west China
319
Fried, M.H. (1953) The Fabric of Chinese Society: A Study of Life of a Chinese
Country Seat, Praeger, New York.
Friedman, E., Pickowicz, P.G., and Selden, M. with Kay Ann Johnson, (1991)
Chinese Village, Socialist State, Yale University Press, New Haven.
Gang, F. (2001) All in Good Time: China’s Entry into the WTO is Neither a
Disaster nor a Panacea for its Problems. Asiaweek, March 30-April 6:35.
Gang, F. (1997) State Owned Enterprises Under the Conditions of Gradual
Reform, Chapter 3 in Wen, G.J. and Xu, D. (Eds), The Reformability of China’s
State Sector, World Scientific, London:37-43.
Grainger S. (2003) Organisational Guanxi in China’s Hotel Sector, Chapter 4 in
Alon, I. (Ed.), Chinese Culture, Organisational Behaviour, and International
Business Management, Praeger, Westport, CT:57-71.
Grainger S., (2004) Guanxi Neglect: the Demise of an International
Management Contract, in Coates. B., Brooks, R., Fraser, I., and Xu, L. (Eds),
China in the New Era, RMIT Business Press, Melbourne:148-174.
Guthrie, D. (1999) Dragon in a Three-Piece Suit: The Emergence of
Capitalism in China, Princeton University Press, Princeton, New Jersey.
Guthrie, D. (1999) Danwei: The Changing Chinese Workplace in Historical
and Comparative Perspective, Contemporary Sociology, Washington,
January:56-57.
Organisational Guanxi and State Owned Enterprises in south-west China
320
Guthrie, D. (1998) The Declining Significance of Guanxi in China’s Economic
Transition, The China Quarterly, June:254-281.
Hamer, A. M. (1996) Chinese Urban Land Management Options During the
Move to a Market Economy, in Lee, J.S., Kim, W.B. and Jung, H.N. (Eds), The
Land Reform Process in the Post Communist Countries, Seoul Research
Institute for Human Sentiments:13-73.
He, W. (1997) An Empirical Analysis of Principal-Agency in SOE, Chapter 12
in Wen G J and Xu D (Eds), (1997), The Reformability of China’s State Sector,
World Scientific, London:179-186.
Henderson, G. and Cohen, M. (1984) The Chinese Hospital: A Socialist Work
Unit, Yale University Press, New Haven, 140.
Hofstede, G. and Bond, M.H. (1988) The Confucian Connection: From
Cultural Roots to Economic Growth, Organisational Dynamics, 16(4):5-21.
Howell, J. (1993) China Opens its Doors - The Politics of Economic
Transition, Harvester Wheatsheaf Hempstead GB, Lynne Reinner Publishers,
Inc, Colorado.
Hu, W. (1997) An Empirical Analysis of Principal-Agency in SOE, Chapter 12
in Wen, G.J. and Xu, D. (Eds), The Reformability of China’s State Sector,
World Scientific, London:179–186.
Huang, D. (1994) On Financial and Monetary Reforms’ Caimao Jingji
(Finance and Trade Economics) No. 8, August, cited in Lardy, N.R. (1998)
Organisational Guanxi and State Owned Enterprises in south-west China
321
China’s Unfinished Economic Revolution, Brookings Institute Press,
Washington, D.C.
Hui, C. and Graen, G. (1997) Guanxi and Professional Leadership in
Contemporary Sino-American Joint Ventures in Mainland China, Leadership
Quarterly, 8(4):451-465.
Hwang, K. K. (1987) Face and Favour: The Chinese Power Game. American
Journal of Sociology, 92:944-74.
Iacobucci, D. and Ostrorn, A. (1996) Commercial and Interpersonal
Relationships: Using the Structure of Interpersonal Relationships to Understand
Individual to Individual, Individual to Firm, and Firm to Firm Relationships in
Commerce, International Journal of Research in Marketing, 13:53-72.
Jackson, T. and Bak, M. (1998) Foreign Companies and Chinese Workers:
Employee Motivation in the Peoples’ Republic of China, Journal of
Organisational Change Management, 11(4):282-300.
Jacobs, J.B. (1982) The Concept of Guanxi and Local Politics in a Rural
Chinese Social Interaction in Chinese Society, Praeger, New York.
Jacobs, J.B. (1979) A Preliminary Model of Particularistic Ties in Chinese
Political Alliance: Kan-ching and Kuan-hsi in a Rural Chinese Township,
China Quarterly, 78:237-273.
Kao, J. (1993) The Worldwide Web of Chinese Business, Harvard Business
Review, March-April:24-33.
Organisational Guanxi and State Owned Enterprises in south-west China
322
King Y.A. (1991) Kuan-hsi and Network Building: A Sociological
Interpretation, Daedalus, Spring 120(2):63-85.
Kipnis, A.B. (1997) Producing Guanxi: Sentiment, Self, and Subculture in a
North China Village, Duke University Press, Durham, North Carolina.
Kornai, J. (1992) The Socialist System, Princeton University Press, Princeton.
Lardy, N.R. (1998) China’s Unfinished Economic Revolution, Brookings
Institute Press, Washington, D.C.
Lam, W.W. (2003) CNN Senior Analyst, On-Line, Wednesday, October 15,
Posted: 0829 GMT (4:29 PM HKT)
Lawrence, S.V. (2000) Three Cheers for the Party, Far Eastern Economic
Review, Hong Kong, October 26:32-35.
Lawrence, S.V. (2003) Navigating the Shake-Up, Far Eastern Economic
Review, Hong Kong, February:26-29.
Lee, Y.S. (1988) The Urban Housing Problem in China, China Quarterly, No
115 (September):387-407.
Leggett, K. (2002) Opening the Floodgates: For Decades, Global Companies
Have Imagined the Day When the Chinese Would Start Buying Foreign Goods;
It’s Here, The Wall Street Journal, October 14:R.5.
Organisational Guanxi and State Owned Enterprises in south-west China
323
Li, H. (1993) China’s danwei Phenomenon and the Mechanisms of Conformity
in Urban Communities, Sociology Research, No 5.
Li, L., Li, H., and Wang, F. (1994) China’s Danwei Phenomenon and Structural
reform, Chinese Social Sciences Quarterly, No. 2:5-16.
Li, S. (1999) The Demise of Planned Housing, China Business Information
Network, Dec 2nd.
Li, D.D., and Li, S. (1997) The Corporate Debt Crisis in China: Analysis and
Policy Proposal, Chapter 6 in Wen, G.J. and Xu, D. (Eds), The Reformability of
China’s State Sector, World Scientific, London:79-98.
Lin, J.Y, Cai, F. and Li, Z. (1997) Creating an Environment for Fair
Competition is the Core of Enterprise Reform, Chapter 4 in Wen, G.J. and Xu,
D. (Eds), The Reformability of China’s State Sector, World Scientific,
London:47-66.
Liu, J. (1997) Separating Government and Enterprises, Chapter 2 in Wen, G.J.
and Xu, D. (Eds), The Reformability of China’s State Sector, World Scientific,
London:16-36.
Lovett, S., Simmons, L. and Kali, R. (1999) Guanxi versus the Market: Ethics
and Efficiency. Journal of International Business Studies, 2nd Quarter,
30(2):231-247.
Lowell, D. and Lu, X. (1996) Personal Politics in the Chinese Danwei Under
Reform, Asian Survey, 36(3):250-255.
Organisational Guanxi and State Owned Enterprises in south-west China
324
Lu, F. (1989) The Danwei: A Unique Form of Social Organisation, Chinese
Social Science, No.1:71.
Lu, X. (1997) Minor Public Economy: The Revolutionary Origins of the
Danwei: in Lu, X. and Perry, E.J. (Eds), Danwei: the Changing Chinese
Workplace in Historical and Comparative Perspective, M.E.Sharpe, Inc. New
York:21-41.
Lu, X. and Perry, E. J. (Eds), (1997) Danwei: the Changing Chinese Workplace
in Historical and Comparative Perspective, M.E.Sharpe, Inc. New York.
Luo, Y. (1997a) Guanxi: Principles, Philosophies, and Implications, Human
Systems Management, 16:43-51.
Luo, Y. (1997b) Guanxi and the Performance of Foreign Enterprises in China:
An Empirical Inquiry, Management International Review. 37(1):51-70, First
Quarter.
Luo, Y. and Chen, M. (1997) Does Guanxi Influence Firm Performance? Asia
Pacific Journal of Management, 14(1):1-16.
Luo, Y. and Chen, M. (1996) Managerial Implications of Guanxi Based
Business Strategies, Journal of International Management, 2:193-316.
Luo, Y. and Chen, M. (1995) Financial Performance Comparisons Between
International Joint Ventures and Wholly Foreign-Owned Enterprises in China,
The International Executive, 37(6):599-613.
Organisational Guanxi and State Owned Enterprises in south-west China
325
Marcoux, M. (2002) Rulebook of Red Leadership: Close Personal Connections
Offer Key Model for Business Success in China, Business Weekly, June 11 –
17:20.
Murphy, D., (2003) Consumers Drive Growth, Far Eastern Economic Review,
February 13:44.
Naughton, B. (1997) Danwei: The Economic Foundations of Unique
Institution, in Li, X. and Perry, E. J. (Eds) Danwei: the Changing Chinese
Workplace in Historical and Comparative Perspective, M.E.Sharpe, Inc. New
York:169-194.
Nyberg A and Rozelle S, (1999) Accelerating China’s Rural Transformation,
The World Bank, Washington, DC.
Ogutcu, M. and Taube, M., (2002) Getting China’s Regions Moving,
Organisation of Economic Cooperation and Development, The OECD
Observer, Paris, May:13-15.
Park, S.H., Li, S. and Tse, D. (1997) Determinants of Firm Performance in
China: Institutional Versus Economic Factors. Paper presented at the 1997
AIB Annual Meetings, Mexico.
Park, S.H. and Luo, Y. (2001) Guanxi and Organisational Dynamics:
Organisational Networking in Chinese Firms, Strategic Management Journal,
22:455-477.
Organisational Guanxi and State Owned Enterprises in south-west China
326
Parker, E. and Wendel, J. (1997) Reform of China’s State Owned Sector:
Parallels with the U.S. Regulatory Experience, Chapter 17 in Wen, G.J. and
Xu, D. (Eds), (1997) The Reformability of China’s State Sector, World
Scientific, London:281-300.
Pearce, J. A. and Robinson, R. B. Jr. (2000) Cultivating Guanxi as a Foreign
Investor Strategy. Business Horizons, Jan/Feb, 43(1):31-38.
Perkins, D. H., (1991) Economic Systems Reform in Developing Countries, in
Perkins D. H. and Roemer M (Eds), Reforming Economic Systems in
Developing Countries, Cambridge: Harvard University Press:28-39.
Pickles, M. (2002) Implementing Ecologically Sustainable Development in
China: The Example of Heilongjiang Province, Georgetown International
Environmental Law Review, Washington, Spring:577-592.
Polin, T.H.W. (2000) Master of Guanxi; How Li Wins People - and Deals,
Asiaweek, November 3, cover story.
Polsa, P. (1998) The Distribution of Goods in the People’s Republic of China,
Helsinki Swedish School of Economics and Business Administration Research
Reports, No.43.
Pye, L.W. (1995) Factions and Politics of Guanxi: Paradoxes in Chinese
Administrative and Political Behaviour, China Journal 34:35-53.
Pye, L.W. (1992) Chinese Negotiating Style, Quorum Books, Westport,
Connecticut.
Organisational Guanxi and State Owned Enterprises in south-west China
327
Rawski, T.G.N. (1997) Implications of China’s Reform Experience, Chapter 13
in Wen, G.J. and Xu, D. (Eds), The Reformability of China’s State Sector,
World Scientific, London: 189-219.
Redding, S.G., Norman, A. and Shandler, A. (1993) The Nature of Individual
Attachment to the Organisation: A Review of East Asia Variations. In M. D.
Dunnette and L. M. Hough (Eds), Handbook of Industrial and Organisational
Psychology, Consulting Psychology Press, Palo Alto, CA (4):647-688.
Redding, S.G. (1990) The Spirit of Chinese Capitalism, Walter de Gruyter
Press, New York.
Redding, S.G. and Ng, M., (1982) The Role of Face in the Organisational
Perceptions of Chinese Managers, Organisational Studies 3:204-209.
Reyes, A. (2001) The Next Long March. Asiaweek, March 30-April 6:29-34.
Rofel, L. (1999) Other Modernities, University of California Press, San Francisco.
Sabath, A.M. (1999) International Business Etiquette. Asia and the Pacific
Rim: What You Need to Know to Conduct Business Abroad with Charm and
Savvy, Career Press, Franklin Lakes, NJ.
Seligman, S. D. (1999) Guanxi: Grease the wheels of China. China Business
Review, Sep/Oct, 26(5):34-38.
Shapiro, J. (2001) Mao’s War Against Nature - Politics and the Environment in
Organisational Guanxi and State Owned Enterprises in south-west China
328
Revolutionary China, Cambridge University Press, Cambridge.
Smedley, A. (1972) The Great Road: The Life and Times of Chu Teh, Monthly
Review Press, New York.
Snow, E. (1973) Red Star Over China, Grove Weidenfeld, New York.
So, A. Y., (Ed) (2000) China’s Developmental Miracle – Origins,
Transformations and Challenges, M. E. Sharpe, East Gate Books, London.
Solinger, D. J. (1997) The Impact of the Floating Population on the Danwei:
Shifts in the Pattern of Labor Mobility Control and Entitlement Provision, in
Lu, X. and Perry, E.J. (Eds), Danwei: the Changing Chinese Workplace in
Historical and Comparative Perspective, New York, M.E.Sharpe, Inc:195-222.
Standifird, S and Marshall, R. (2000) The Transaction Cost Advantage of
Guanxi-based Business Practices, Journal of World Business, 35 (1):21-42.
State Statistical Bureau of China (1994), Statistical Yearbook of China, State
Statistical Bureau Press, Beijing.
Steinfeld, E.S. (1998) Forging Reform in China: the Fate of the State Owned
Industry, Cambridge University Press, Cambridge.
Suka, M. (2001) The Many Faces of China’s Globalization, Unitas:20-27.
Tanzer, A. (2001) Chinese Walls, Forbes, Nov 12:74-75.
Organisational Guanxi and State Owned Enterprises in south-west China
329
Tian, G. (1997) State-Owned Enterprise Reform and Smooth Institutional
Transition in China – a Three Stage Economic Reform Method, Chapter 14 in
Wen, G.J. and Xu, D. (Eds), The Reformability of China’s State Sector, World
Scientific, London:220-240.
Tsang, E.W.K. (1998) Can Guanxi be a Source of Sustained Competitive
Advantage for Doing Business in China? Academy of Management Executive,
12(2):64-73.
Tsui, A.S. and Farh, J.L. (1997) Where Guanxi Matters: Relational
Demography and Guanxi in the Chinese Context, Work and Occupations
February 24th (1):56-79.
Tung, R.L., and Worm, V. (2001) Network Capitalism: the Role of Human
Resources in Penetrating the China Market, International Journal of Human
Resource Management, 12(4):517-534.
Wade, R. (1992) East Asia’s Economic Success: Conflicting Perspectives,
Partial Insights, Shaky Evidence, World Politics, January (44):2.
Walder, A. G. (1992) Property Rights and Stratification in Socialist Re-
distributive Economies, American Sociological Review (57):524-539.
Walder, A.G. (1986), Communist Neo-Traditionalism: Work and Authority in
Chinese Industry, University of California Press, Berkeley and Los Angeles.
Wang, S. and Hu, A. (1999) The Political Economy of Uneven Development –
The Case of China, M.E.Sharpe, New York.
Organisational Guanxi and State Owned Enterprises in south-west China
330
Wee, C.H. and Lan, L.L. (1998) The 36 Strategies of the Chinese - Adapting
Ancient Chinese Wisdom to the Business World, Addison Wesley, Singapore.
Wee C.H. (2001) The Inspirations of Tao Zhu-gong - Modern Business Lessons
from an Ancient Past, Prentice Hall, Singapore.
Wee, C.H., Lee K.S., Hidajat, B.W. (1991) Sun Tzu: War and Management:
Application to Strategic Management and Thinking, Addison Wesley,
Singapore.
Wei, S. and Wang, T. (1997) State Owned Banks and State Owned Enterprises
in China, Chapter 11 in Wen, G.J. and Xu, D. (Eds), The Reformability of
China’s State Sector, World Scientific, London:165–178.
Wei, S.J. (2002) Is Globalization Good for the Poor in China? Finance and
Development, September:26-29.
Weil, R. (1996) Red Cat White Cat – China and the Contradictions of ‘Market
Socialism’, Monthly Review Press, New York
Wen-hsin, Yeh. (1997) Republican Origins of the Danwei: The Case of
Shanghai’s Bank of China, in Lu, X. and Perry, E. J, Danwei: the Changing
Chinese Workplace in Historical and Comparative Perspective, M.E.Sharpe,
Inc, New York:60-90.
Wen, G.J. and Xu, D. (Eds), (1997) The Reformability of China’s State Sector,
World Scientific, London
Organisational Guanxi and State Owned Enterprises in south-west China
331
Wireman, B.O. (2003) China’s 21st Century Educational Challenge, Vital
Speeches of the Day, New York, Jan 1:197–199.
Wireman, B.O. (2001) America, China and Russia: Three Epic Struggles that
Will Shape the Twenty First Century, Vital Speeches of the Day, New York,
Jun 1:495-498.
Wolf, C. (2003) Eight Threats to China's Economic Miracle, South China
Morning Post, August 7:11.
Wong, H. (1998) Relationship Marketing in China: The Magic and Myth of
Guanxi. Journal of International Marketing and Management, 23(1):3-14.
Xin, K. and Pearce, J.L. (1996) Guanxi: Connections as Substitutes for Formal
Institutional Support, Academy of Management Journal, 39(6):1641-1658.
Xu, D., Xi , Y. and Feng, G. (1997) Cicada Slough and the Reform of SOE,
Chapter 10 in Wen, G.J. and Xu, D. (Eds), The Reformability of China’s State
Sector, World Scientific, London:156-164.
Yang, D.L. (1997) Guiding Chinese Industry: An Evaluation Of The
Implementation of China’s New Industrial Policies, Chapter 16 in Wen G J and
Xu D (Eds), The Reformability of China’s State Sector, World Scientific,
London:251-280.
Yang, D.T. (1997) The Effects of Institutions on Worker Mobility and Labor
Market Efficiency, Chapter 21 in Wen, G.J. and Xu, D. (Eds), The
Organisational Guanxi and State Owned Enterprises in south-west China
332
Reformability of China’s State Sector, World Scientific, London:347-364.
Yang, M.M. (2002) The Resilience of Guanxi and its New Deployments: A
Critique of Some New Guanxi Scholarship, The China Quarterly, June:459-
476.
Yang, M.M. (1994) Gifts, Favours and Banquets: The Art of Social
Relationships in China, Cornell University Press, New York.
Yang, M.M. (1986) The Art of Social Relationships and Exchange in China.
University of California, Berkeley.
Yau, O.H.M., Lee, J.S.Y., Chow R.P.M., Sin, L.Y.M. and Tse. A.C.B. (2000)
Relationship Marketing the Chinese Way, Business Horizons, Jan/Feb:16-24.
Yeung, I..Y.M., and Tung. R.L.. (1996) Achieving Business Success in
Confucian Societies: The Importance of Guanxi (Connections), Organisational
Dynamics, Autumn:54-65.
Yi Zhongtian, (1996) Casually Talking Chinese, Hualing Publishing House,
Beijing.
Yi, L.M. and Ellis, P. (2000) Insider-Outsider Perspectives of Guanxi, Business
Horizons, 43(1):25-30.
Zhang, L. and Messner, S.F. (1999) Bonds to the Work Unit and Official Status
in Urban China, International Journal of Offender Therapy and Comparative
Criminology, London, September.
Organisational Guanxi and State Owned Enterprises in south-west China
333
Zhao, Y. (1997) The Nature of Chinese State-Owned Enterprises and its
Implications, Chapter 18 in Wen, G.J. and Xu, D. (Eds), The Reformability of
China’s State Sector, World Scientific, London:302-313.
Zhongzhengzhibu, The History of Mass Work in the PLA, Beijing, (1989): 77.
cited in Lu, Xiaobo and Perry, E. J. (Eds), (1997) Danwei: the Changing
Chinese Workplace in Historical and Comparative Perspective, M.E.Sharpe,
Inc. New York.
Zhu, J. (1999) The Transition of China’s Urban Development: From Plan-
Controlled to Market Led, Praeger, Westport, Connecticut, London.
Ziegler, D. (2000) China: Tangled Web, The Economist, London, April 2000:
CS7.
Organisational Guanxi and State Owned Enterprises in south-west China
334
List of Interviews
1 Training Manager Roaring Dragon Hotel (RDH) 15/07/99
2 General Manager Nothill 9/07/99
3 Food and Beverage Manager Nothill 27/07/99
4 Food and Beverage Manager Nothill 28/9/99
5 Front Desk Manager RDH 6/10/99
6 General Manager Nothill 12/10/99
7 Bar Manager RDH 18/10/99
8 Marketing Manager RDH 19/10/99
9 Training Manager RDH 20/10/99
10 Training Manager RDH 21/10/99
11 CCP Representative RDH 21/10/99
12 Training Manager RDH 22/10/99
13 Bar Manager RDH 22/10/99
14 Human Resource Manager Nothill 22/9/99
15 Food and Beverage Manager RDH 3/11/99
16 Human Resource Manager RDH 8/12/99
17 Training Manager RDH 24/11/99
18 Human Resource Manager RDH 24/11/02
19 Young Chef RDH 26/11/99
20 Human Resource Manager RDH 26/11/99
21 Assistant Manager Front Office RDH 29/11/99
22 Chef (made redundant) RDH 30/11/99
23 Accommodation Manager RDH 1/12/99
23 Accounts Manager and two Accountants RDH 2/12/99
24 Bellman and Bell Manager RDH 2/12/99
25 Door Captain RDH 3/12/99
Organisational Guanxi and State Owned Enterprises in south-west China
335
26 Training Manager RDH 7/12/99
27 General Manager Nothill 7/12/99
28 Young House Keeping Supervisor RDH 8/12/99
29 Food and Beverage Manager RDH 9/12/99
30 Accounts Manager RDH 11/12/99
31 Accounts Manager RDH10/12/99
32 Young Assistant Food and Beverage Manager RDH 14/12/99
33 Housekeeping Manager RDH 14/12/99
34 Food and Beverage Manager Nothill 14/12/99
35 Young Employee RDH 15/12/99
36 Food and Beverage Manager Nothill 15/12/99
37 Front Office Manager RDH 17/12/99
38 Young Employee RDH 15/08/99
39 Government Official 15/12/99
40 Government Official 24/09/01
41 Government Official 16/7/02
42 Human Resources Manager RDH 15/10/99
43 Party Representative RDH, 6/07/2001
44 Marketing Manager RDH 12/11/99
45 Food and Beverage Manager RDH 1/12/01
46 Housekeeping Manager RDH, 14/12/04
47 Finance Department Manager RDH 22/11/99
48 Bank Executive 4/08/99
49 Bank Executive 14/07/01
50 Bank Executive 21/12/02
51 Bank Executive 22/6/01
52 Bank Executive 18/12/02
53 Bank Executive 21/12/04
Organisational Guanxi and State Owned Enterprises in south-west China
336
54 Marketing Manager RDH 29/06/02
55 Marketing Executive RDH 2/07/01
56 Supply Manager RDH 12/12/02
57 Marketing Executive RDH 2/12/04
58 Businessman Lijiang 12/12/02
59 Dam Construction Manager 16/12/04
60 Businessman Dali 5/06/99
61 Businessman Kunming 15/06/01
62 Chinese Academic Kunming 12/12/02
63 Australian Academic Kunming 17/12/04
64 Australian Academic Kunming 18/12/04
65 Businessman Kunming 19/12/04
66 Chinese Academic Kunming 12/8/99
67 Dam Site Manager Guanxi Province 6/12/04
68 Retired Dam Site Manager Yunnan Province10/07/01
69 Retired Dam Site Manager Yunnan Province 16/12/02
70 Businessman Kunming 18/7/01
71 Front Office Manager Nothill 23/12/99
72 Sales Manager RDH 19/7/01
73 Australian Lecturer Kunming 20/12/04
74 Chinese Accountant Kunming 12/12/04
75 Chinese Accountant Kunming 18/12/04
76 Tertiary Student Kunming 7/12/04
77 Tertiary Student Kunming 9/12/04
78 Tertiary Student Kunming 10/12/04
79 Businessman Kunming 11/12/04
80 Businessman Kunming 13/12/04
81 Businessman Kunming 15/12/04
Organisational Guanxi and State Owned Enterprises in south-west China
337
82 Dam Construction Manager Mekong River (18/12/04)
83 Small Businessman Kunming 16/12/04
84 Small Businessman Dali 9/12/04
85 Food and Beverages Manager RDH 18/12/04
86 Businessman Beijing, 12/12/01
87 Small Businessman Kunming 22/12/04
88 Businessman Dali 12/12/02
89 General Manager RDH 12/12/04
Organisational Guanxi and State Owned Enterprises in south-west China
338
Appendix 1
The mean rating for each of the eight respective characteristic was calculated on the scale of 1
to 5.
MR = n1X1 + n2X2 + n3X3 + n4X4 + n5X5
379
where
n1 = the number of respondents choosing option 1
n2 = the number of respondents choosing option 2
n3 = the number of respondents choosing option 3
n4 = the number of respondents choosing option 4
n5 = the number of respondents choosing option 5, and
379 was the total number of valid responses received.
Organisational Guanxi and State Owned Enterprises in south-west China
339
Appendix 2
Comparison of Mean Ratings of the importance of guanxi characteristics for sub-groups at
the Roaring Dragon Hotel, 1999.
Code:
MU-CO-OPERATION = MC
TRUST = T
SOCIAL ACTIVITIES + ENT = SAandE
EXCHANGE OF INFORMATION = X INFO
PERSONAL-RELATIONSHIP = PR
COMMITMENT = C
EXCHANGE OF BENEFITS = E BENE
GIVING FACE = GF
POPULATION NUMBER = N
AVERAGE NUMBER OF YEARS OF SERVICE = #Y SERV
AVERAGE AGE = AVE AGE
CRITERIA MC T SAandE EX
Info
PR C EX
BENE
GF N # Y
SERV
AVE
AGE
MALE 3.84 3.51 3.53
3.41 2.91 2.75 2.56 2.52 197 7.46 27.87
FEMALE 3.68 3.51 3.48 3.44 3.05 2.7 2.45 2.44 182 6.18 26.47
MANAGERS
4.22 3.67 3.61 3.83 2.94 2.56 2.56 2.33 18 15.58 37.61
SUPERVISORS
4.31 3.7 3.79 3.68 2.91 3 2.42 2.64 53 9.66 29.96
EMPLOYEES
3.78 3.47 3.45 3.35 2.99 2.69 2.52 2.47 308 5.85 26.12
Organisational Guanxi and State Owned Enterprises in south-west China
340
Appendix 3
Standard deviations of the relative importance of guanxi characteristics recorded by employees of
at the Roaring Dragon Hotel (A) in south-west China compared to those of Hong Kong Trade
Executives (B).
Characteristic A B B/A - % difference
N 379 128
_______________________________________________________________________
Mutual Cooperation 0.89 0.96 107.9 %
Trust 1.14 2.00 175.4 %
Social activities and entertainment 0.95 1.82 191.2 %
Exchange of Information 0.97 2.01 207.2 %
Personal relationship 1.17 1.68 143.6 %
Commitment 0.97 1.78 183.5 %
Exc favours/benefits 1.24 2.01 162.1 %
Giving face (respect) 1.08 2.01 186.1%
Organisational Guanxi and State Owned Enterprises in south-west China
341
Appendix 4
Table of Provincial Statistics comprising:
A - Provincial per Capita GDP as % of national average 1978. Source: Wang
and Hu (1999: Table 3.2, 49)
B - Provincial per Capita GDP as % of national average 1994. . Source: Wang
and Hu (1999: Table 3.2, 49)
C - Annual Growth Rate per real per capita GDP, 1878-94. . Source: Wang and
Hu (1999: Table 3.3, 52)
D - # Counties in Province 1992. Source: Wang and Hu (1999: Table 3.7, 66)
E - # Counties in defined as in Poverty 1992. Source: Wang and Hu (1999:
Table 3.7, 66)
Organisational Guanxi and State Owned Enterprises in south-west China
342
Province A B C D E
Eastern Coastal
Beijing 334.5 306.6 7.7 8 0
Tianjin 306.1 253.9 7 5 0
Hebei, 87.6 94 8.4 139 39
Shanghai 659.1 594.6 7.6 6 0
Liaoning 178.6 157.1 7.4 44 9
Jiangsu 113.5 176 8.7 64 0
Guangdong 97.6 171.6 12.1 78 3
Shandong 83.4 114.1 10.4 95 10
Central Region
Shaanxi 77.6 74 7.1 100 35
Inner Mongolia 83.6 77.4 8.3 84 31
Jilin 100.5 101.2 8.3 41 5
Heilongjiang 148.8 103.9 5.9 68 11
Anhui. 64.4 64.4 8.3 68 17
Jiangxi, 72.8 77.7 8.7 84 18
Henan, 61.2 67.5 8.9 116 28
Hubei 87.6 98 8.8 68 25
Hunan 75.5 64.3 7.2 90 10
Western Region
Sichuan 66.8 70.5 8.6 172 43
Guizhou 46.2 42.6 7.7 80 48
Yunnan 59.4 58.1 8.1 123 73
Tibet 98.9 67.9 5.8 77 5
Shaanxi, 77.6 74 7.1 100 35
Gansu 91.8 76.1 7 75 41
Qinghai 112.9 68.8 5 39 14
Organisational Guanxi and State Owned Enterprises in south-west China
343
Appendix 5
Table of statistics including
A - Savings rates of Labour Force in Provinces 1994. Source: Wang and Hu
(1999: Table 4.2, pg 87).
B: Investment rates of Labour Force in Provinces 1994. Source: Wang and Hu
(1999: Table 4.2, pg 87)
C Openness on Provinces, 1994. Exports as % of provincial GDP. Source:
Wang and Hu (1999: Table 4.6, pg 107)
D – Access to Information, 1994. Televisions sets per 100 rural households.
Source: Wang and Hu (1999: Table 4.7, pg 115)
E - Access to Information, 1994. Newspapers sold in 1994 (copies per person).
Source: Wang and Hu (1999: Table 4.7, pg 115)
F - Access to Information, 1994. Telephones per 100 persons. Source: Wang
and Hu (1999: Table 4.7, pg 115)
G – Education. Source: Wang and Hu (1999: Table 4.9, pg 120) Source: Wang
and Hu (1999: Table 4.7, pg 115)
H – Education. Source: Wang and Hu (1999: Table 4.9, pg 120) Source: Wang
and Hu (1999: Table 4.7, pg 115)
Organisational Guanxi and State Owned Enterprises in south-west China
344
Province A B C D E F G H
Eastern Coastal
Beijing 63.4 83.3 30.6 117.2 110.32 9.4 6.38 8.71
Tianjin 55.4 59.4 35.92 115.34 31.94 6.3 7.17 7.67
Hebei, 52.5 41.2 7.61 95.19 17.73 1.73 9.41 6.18
Shanghai 55.7 58.4 43.4 117.34 79.68 12.18 7 8.38
Liaoning 50.1 42.7 17.2 99.16 16.78 3.88 7.31 7.09
Jiangsu 57.6 49.8 14.77 89.67 25.23 3.2 11.31 6.62
Guangdong 48.5 46.7 108.19 81.13 21.56 6.63 7.81 6.5
Shandong 53.8 48.7 14.47 85.47 13.1 1.51 13.3 6.19
Central Region
Shaanxi 30.4 48.1 11.03 67.57 16.16 1.27 13 6.13
Inner Mongolia 40.3 48.6 6.07 79.29 17.53 1.99 12.26 6.4
Jilin 40.4 40.2 14.73 91.44 15.84 3.46 7.11 7.2
Heilongjiang 37 35 15.4 88.10 14.57 2.99 8.25 6.95
Anhui. 40.7 40.2 5.59 78.04 12.31 1.4 41.09 5.5
Jiangxi, 39.6 41 5.45 73.8 13.84 1.14 12.75 5.66
Henan, 47 40.2 4.26 65.19 11.35 0.99 11.36 6.11
Hubei 4.37 39.8 6.9 77.67 19.52 1.76 12 6
Hunan 34.3 34.3 6.38 61.51 19.23 1.69 11.02 6.17
Western Region
Sichuan 38.8 38.3 4.72 68.04 10.7 0.92 12.81 5.78
Guizhou 25.4 29.7 4.46 33.8 10.6 0.56 20.36 4.96
Yunnan 41.4 44.5 7.8 49.91 15.75 1.19 21.03 4.79
Tibet 28.6 50.3 3.57 7.29 13.55 0.87 40 2.21
Shaanxi, 30.4 48.1 8.36 67.57 16.16 1.27 13 6.13
Gansu 29.3 39.3 5.97 60.26 15.03 1.26 24.28 4.86
Qinghai 33.3 43.5 7.16 50.67 14.63 1.24 26.95 4.63
Organisational Guanxi and State Owned Enterprises in south-west China
345
Average Annual Pay of State Enterprise Employees in 29 Chinese Provinces,
1993 (in Yuan ) Province 1993 Annual Pay
Shanghai
Guangdong
5777
5422
Beijing
Zhejiang
Tianjing
Tibet
Qinghai
4648
4615
4264
4156
4065
Jiangsu
Gansu
Liaoning
Fujian
Guangxi
Shangdong
Hunan
Xingjiang
Hebei
Ningxia
Shanxi
Yunnan
Sichuan
Hubei
Shanxi
Anhui
3892
3620
3590
3501
3432
3410
3324
3286
3272
3264
3253
3253
3143
3140
3077
3076
Neimenggu
Jilin
Guizhou
Heilongjjang
Henan
Jiangxi
2998
2971
2962
2867
2760
2659
Source: State Statistical Bureau of China (1994): Statistical Yearbook of China, Beijing: State Statistical Bureau Press.
Cited in Yang. D. T. (1997).
Organisational Guanxi and State Owned Enterprises in south-west China
346
Glossary
Terminology
The Chinese terminology developed to describe guanxi relationships gives one
a better understanding of the guanxi phenomenon.
To la guanxi (to ‘pull guanxi’) means to get on the good side of someone, to
store political capital with them. It carries no negative overtones (Ambler,
1995b; Luo, 1997a) and from a business perspective is a method of developing
the right climate in preparation to work together.
Guanxiwang (guanxi net) means the whole network of guanxi through which
influence is spread’ (Ambler, 1995b; Luo, 1997a). In China, these networks are
complex webs of trusting relationships.
guanxi hu (guanxi family) means a person, organisation, even government
department, occupying a focal point in one’s guanxi network (Davies, Leung,
Luk, and Wong, 1995; Ambler, 1995b; Park and Luo, 2001; Luo and Chen,
1996; Luo 1997a). It is critical to maintain a good relationship with these
people if one is to enjoy successful business in China.
Organisational Guanxi and State Owned Enterprises in south-west China
347
guanxi xue describes the art of establishing and maintaining guanxi (Yeung and
Tung, 1996). To gua guanxi (to ‘work on guanxi’) means roughly the same
definition with more general, less intensive feeling. It usually carries negative
overtones (Ambler, 1995b; Lou, 1997a).
Meiyou guanxi (without guanxi) has become an idiom meaning it doesn’t
matter (Ambler, 1995b).
Guanxi gao jiang (guanxi made ruined) means the relationship has gone bad,
usually because of lack of flexibility of those involved (Ambler, 1995b; Luo,
1997a).
Li shun guanxi (‘straighten out’ guanxi) means to put a guanxi back into proper
or normal order, often after a period of difficulty or awkwardness (Ambler,
1995b; Luo, 1997a).
You guanxi (to have) means to have a relationship or to have access to needed
influence (Ambler, 1995b)
Youde shi guanxi (what one does have’ or ‘the one thing one does have’ is
Organisational Guanxi and State Owned Enterprises in south-west China
348
guanxi) is sometimes negative, meaning that one has all the guanxi one needs,
but something essential is lacking (Ambler, 1995b).
Shouren or familiar persons in one’s network are insiders who can be relied
upon to get something accomplished (Brunner, Chen, Sun, Zhou, 1989: 75).
Shouren is neither a chia-jen (member of the family) nor a sheng-jen (mere
acquaintance or stranger) but is someone with whom one has a friendship that
may range from superficial to extremely intimate. The relationship with the
shouren (friend) therefore, is a mixture of that with chia-jen and shen-jen and
takes both utilitarian and expressive forms.
Ho-tai means backstage - together with guanxi it refers to individuals, one’s
power base, and the important people who support ones position. The more one
can use influential relationships and big names to support the cause, the easier
one’s path will be (Chu, 1988). Some described Ho-tai as being ‘dependable’
and signifies a depth of commitment. In its extreme, yiqi, signifies a code of
brotherhood or strong personal loyalty and deep sense of personal commitment
(Brunner, Chen, Sun, Zhou, 1989)