Guanxi as a Source of company Competitive Advantage

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Guanxi In Bussines 9

Guanxi as a Source of company Competitive Advantage

Guanxi as a Source of Company Competitive Advantage

The concept Guanxi is borrowed from Chinese society, which is used to infer the interconnectedness between individuals. In the idea of business, it is defined as a relationship between the person who requires a product and a person who is capable of providing it (Zou and Gao 2007). Many scholars have explored the concept in relation to business and consequences of it in western countries. The focus in the western nations has been directed to the aspects of marketing. However, in China, myriads of researches have been conducted, and the universal agreement is that guanxi is one of the critical factors that determine the success of enterprises in China (Carney 2005). Many scholars have regarded it as a source of competitive ability of business, but others are skeptical of its role. Different scholars have different views regarding the concept of business success in the market (Feng, Sun and Zhang 2010).

Historical Background

Guanxi, as seen in the definition, is purely a Chinese social concept employed to describe the nature of connections between two or more individuals in business (Feng, Sun and Zhang 2010). Luo (2008) argues that in a broad cultural and social environment it significantly reflects many aspects of Confucian tradition with roots in China. The culture has an origin in the Chinese society for many millenniums. In the modern society in the country, it is one of the most essential fundamental social blocks in Chinese society.

According to Luo (2008) over time, it has been applied in business enterprises to mean the social process of sourcing solution. This happens because the resources are getting more scarce resources and it is through the personal connection the problem can be reduced. Ramasamy and Yeung (2006) explain that a perfect Guanxi is a necessary element in the success of the business and its competitiveness in China. On the other hand, it is a sure and secure way of scaling scarce resources bypassing bureaucratic maze in obtaining relevant information.

The necessity of Guanxi

China is undergoing significant structural adjustment regarding government policy and people’s way of conducting business. In the recent decades, the emergence of small and medium enterprises has been witnessed. These activities also known as SMEs are critical to the growth of the Chinese economy, and this reduces employment pressure. In return, it leads to market prosperity and massive social development. However, these small enterprises are facing insurmountable pressures because the country is not a rule economy but relationship driven (Carlisle and Flynn 2005)

Moreover, the government is the most dominant organization, and this causes limited resources to operate and grow their businesses. An example of such sector in a dilemma is the construction and others. As such, these enterprises lack a competitive edge, which forces them to adopt the principle of (Guanxi Yang and Wang 2011). These business networks work to help them gain a resource edge to compete with foreign and local rivals. In this sense, it is utilized as a mean of gathering and exchanging the information as well as the source of resources for growth. Therefore, no company especially the SMEs can afford to ignore the power of Guanxi (Lee and Dawes 2005).

As seen, Guanxi is a translation of good connections between individuals with common goals. Some argue that guanxi is a credible source of business effectiveness and following competitive advantage over others. There is a belief that it works well especially when competing with foreign organizations doing venturing in China. Despite the enormous attention, there is no theoretical confirmation of the view. In cases where there are advantages, it is hard to sustain the same. The justification for such is its vulnerability to simple movement by a staff or a product (Ramasamy and Yeung 2006).

Business guanxi is described as a unique phenomenon in the Chinese society, and this makes it part of socio-economic and political and systems. Many scholars have discussed the essence of it and the benefits brought. The cause of disagreement is how guanxi is associated with company performance and which kind is more important. It is hard to understand the working of a guanxi relationship because the interactions are shrouded in secrecy. Further, there is no sharing of information with an outsider (Ramasamy and Yeung 2006).

One of the reasons why it is viewed as a source of productive competitiveness in the organization is its abilities (Zou and Gao 2007). For example, it makes it possible to obtain policy information regarding public policy, business opportunities, and business trends in the country. It is also capable of improving efficiency because it reduces the cost incurred during the transaction. However, some scholars show the contrary because of the intricacies of developing guanxi relationship. In some cases, it is a time-consuming activity characterized by other disadvantages (Luo, 2008).

Luo (2008) argues that guanxi relationship is important in the efficiency of credit collection in both public and private organizations. However, some companies have failed miserably in these thus causing dangerous predicaments of acute debts. According to Zhang and Zhang (2006), the prevailing market environment in the country makes the relationship more efficient and the best option. Some view it as the only avenue to make things happen. This, however, is in the long-term effect on the business and the economy.

Scholars have overlooked a paramount aspect of guanxi. This includes the nature of guanxi transaction, which took the time to be delivered, and no particular time set for delivery. This is because it is informal and mostly involves more than two parties and processes. This is where the paradox of guanxi lies because it increases the level of uncertainty. In the context of an organization, there are significant financial and managerial resources for those who rely on the principle. At the end of it, the cost and the possible risks involve can likely outweigh the benefits of such (Zhang and Zhang 2006).

Theoretical Explanation

According to Carney (2005) social capital model, the issue of networking in the business is important as it provides significant value. For example, it allows different actors to harness the available resources for their benefits. These agents or parties to the business have varying levels with a different influence. At an individual level, it is the role of social capital to influence the success of the business. It is also responsible for the creation and development of intellectual capital.

At the firm level, the role of social capital in business performance is to facilitate the exchange of information and aspects of workers innovation. Carney (2005) found that utilization of social capital significantly reduces the costs of doing business. Yang and Wang (2011) further add that it facilitate the formation of new companies, strengthen firm relations and increase the production. The last level, which is national level, affects economic growth and other issues. The focus of the paper is to examine both personal and inter-firm level.

Hwang’s theory of Guanxi formulated in 1987 explains the modes of operation between individuals and forms in Guanxi relationship. Individual A finds individual B who is the allocator willing to provide assistance to the problem. This is also known as a favor, and it helps in solving an issue of resources. However, the allocator accepts to offer support only by evaluating the quality of Guanxi (Yang and Wang 2011). The assessment helps the individual make a decision on whether the offer is accepted or not. To understand the quality of Guanxi one must be conversant with closely related terms such as ganqing, xinren and renqing (Zou and Gao 2007).

How Guanxi Improves Business Performance

Due to expanding and competing interests among scholars and entrepreneurs, the essence of Guanxi in business performance has been demystified. Guanxi is positively associated with business performance in cases of foreign-funded organizations (Zou and Gao 2007). Carlisle and Flynn (2005) regards it as a source of increased competitive edge in China. The reason for such is due to sharply and deeply embedded relationship between firms, which offers various opportunities. These opportunities include reduced cost of the transaction (Lee and Dawes 2005). Scholars view it as the nostrum of running a successful business in China. It is also central to solving huge challenges for conducting business in China.

Similarly, Ramasamy and Yeung (2006) identify the concept of Guanxi as paramount in successful enterprises in the country. This is taken in the context of the transfer of individual Guanxi to the firm in the form of regulation, contract, and others. However, Feng, Sun and Zhang (2010) argue that element such as personal contacts are not an authentic source of business edge. This is because the individual owns it and accessible only at a personal level. For instance, the firm cannot use Guanxi without the consent of the employee willingness. He further argues that the time and cost of maintaining Guanxi are very high and thus significant disadvantages.

Feng, Sun and Zhang (2010) continue to argue that the notion of Guanxi making the company productive and competitive is a fallacy. This is because Guanxi asset owned by the individual and the enterprise may be rendered worthless in case a government official is sacked out of office. In case there are advantages, they are not strategic but temporary and tactical. Besides, it is exclusive and therefore cannot be replicable. Ramasamy and Yeung (2006) argue that the issue of Guanxi become worthless when one loses power is not to a larger degree because the whole network was not reliant on the party.

The power of government official in Guanxi should not be overestimated or underestimated. This is because firms do not necessarily rely on it to solve the entire problem. It is only needed in a particular moment. Therefore, it translated to competitive edge under various strict circumstances. It is also a source of resources and further used to bridge the information gap between businesses. Also, different firms utilize the power of networks to reduce distrust and uncertainty that characterize economic exchanges. In the Chinese context, the concept of Guanxi is viewed to have a significant impact on effectiveness and competitiveness of firms. It also has an impact regarding sales growth, market expansion and other aspects of business (Ramasamy and Yeung 2006).

However, there is no literature on the impact of overall profit. This is an indication of the importance of Guanxi in positioning the company in a competitive position in the market but not in improving internal operations. As seen in the document Guanxi is essential because it provides a space to raise market share, improve the level of competition. This happens courtesy of collaborations with persons in the government authorities (Zou and Gao 2007)

On the other hand, Guanxi relationship between the firm and buyers has an impact on the customer loyalty. Consequently, this lead to the growth of sales because the cost of transactions is significantly lowered (Luo 2008). On the other hand, Guanxi with raw materials or product suppliers improves the quality materials and goods. Besides, the goods are delivered promptly. It facilitates collusion and resource sharing which helps prevent any funds for competition (Feng, Sun, and Zhang 2010).


In conclusion, the competitiveness of the company in the organization depends on the firm existing Guanxi relationship with various stakeholders such as suppliers, consumers, and the managers. There are a variety of factors mostly workers levels of cooperation and the type of organization structure and management affects the company performance in the market. Despite argument of the influence of Guanxi on the enterprise, there is a need for research to assess the correlation between both. Ambiguous factors plague the link, and this makes it hard to explain how it determines the company edge.


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Lee, D.Y. and Dawes, P.L., 2005. Guanxi, trust, and long-term orientation in Chinese business markets. Journal of international marketing13(2), pp.28-56.

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