Circulation Economics

Seminar
Literature review on the effects of Mianzi
and Guanxi on firms networks and
financial performances.

Academic Year : 2015-2016

Professors: Yang Chen & Jing Zhu

Abstract
The purpose of this literature review is to grasp a good understanding of two of
the main Chinese values: Mianzi and Guanxi. In this paper, I will firstly define the two
concepts based on previous literature and focus on their interrelationships or how
Mianzi affects Guanxi. Then I will try to analyze both concepts by contrasting what
previous research and studies have found out about them. In addition to that, I will
focus on the impact that both have on doing business in China and as a result their
influence on firm performance. We will see that a Guanxi network can have positive
effects on reducing costs but that it has to be managed with caution since this type of
connections can induce high external costs that may outbalance the gains. In the last
section I will debate and criticize the findings as well as the methodologies employed
in some of the main papers analyzed and I will conclude with a short summary and an
opinion of mine.

Introduction
In the last 30 years, thanks to smart economic policies, China has steadily
become one of the most important market place in the world. This has left many
foreign companies the desire to do business with Chinese. However, China being a
highly cultural country in which these values play major roles, not only on a daily
basis but also in doing business, foreign companies had to adapt to these values and
obviously started at a competitive disadvantage compared to the well established
Chinese companies (Calhoun, 2002). In the recent years, because of the increasing
importance of learning how to do business in China, many studies have been carried
out on the effects of two of the main Chinese social values: the Guanxi and the Mianzi.
Both are deeply rooted in the Chinese culture and are an inseparable part of the
Chinese business environment (Buckley & al, 2006). It has thus become critical to
understand, respect and apply them while negotiating or doing business in China. But
what does the respect of these values actually mean for a company? How can these
two concepts have an impact on a firms organization and on the companys financial
performance? In this paper I will summarize the findings of previous studies on the
matter and I will then discuss and contrast these results in order to better understand
the implications these concepts have for corporations.
To begin this literature review, I will start by reviewing the definitions of both
Mianzi and Guanxi. While Guanxi is better left without an English translation, Mianzi
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can be understood as the concept of Face. According to Lee et al. (2001), Mianzi is a
symbol representing respectability, reputation and pride. Mianzi is a form of social
currency to protect, give, add, exchange or even borrow Face (Gilbert and Tsao,
2001). The importance of Mianzi lies behind the idea that one must have a certain level
of prestige if he desires to cultivate or develop a viable network of Guanxi (Yeung and
Tung, 1996). Indeed as Hwang (1987) explained, Guanxi dynamics emphasize the
enjoyment of prestige without the loss of face and the saving of others face. All in all,
this means that Mianzi can thus be seen as the root of Guanxi and failure to respect
the commitment substantially hurts ones reputation leading to loss of face (Park &
Luo, 2001). It is essential to understand that Mianzi is a form of social currency and
can be earned through honesty, income, power and so on. Mianzi can also be given or
received by complementing someone in public or stress a persons ability. On the other
hand, Mianzi can also be lost by insulting, criticizing others in public, seeking for
conflict or creating embarrassing situations. The loss of face is disastrous for dealing
with Chinese and will end up in a loss of respect and cease cooperation from the
person wronged and his network; in some cases it can also cause retaliation. As
Buckley, Clegg & Tan (2006) mention, saving Mianzi has to go hand in hand with
nurturing Guanxi and all parties of a business relationship must show respect to, and
save Mianzi for each other. Now that the concept has been explained and established
we will simply refer to Mianzi as The recognition by others of an individuals social
standing and position. (Buckley, Clegg & Tan, 2006; Lockett, 1988). In short, this
simple quote from Sherriff et al.(1999) sums up accurately the interrelationships
between the values : Mianzi is a key component in the dynamics of Guanxi.
Mianzi inevitably leads us to the definition of Guanxi. Now many definitions
have been attributed to Guanxi, some basic ones simply perceive it as A special
relationships two persons have with each other (Alston, 1989) while many authors
prefer a more comprehensive definition such as The establishment of a connection
between two independent individuals to enable a bilateral flow of personal or social
transactions (Yeung and Tung, 1996). However, it can be argued that while
relationships have been existing since the apparition of the human, discussions about
the concept of Guanxi only appeared for the first time in Chinese newspapers around
1978 (Yang, 1994). As a result, in an effort to explain the differences between Guanxi
and a classical relationship, some studies like Fan (2002), Yang (1992) or Hwang
(1987) have even divided Guanxi in multiple categories to avoid any confusion. While
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this approach is interesting and very thorough and I highly suggest the reader to refer
to it, the focus of this study is not about the exact definition and hence we will stick
with a definition from Ahmed and Li (1996) describing Guanxi as The relationship
between people or organizations which implicitly indicates assurance, understanding
and mutual obligation. Nonetheless, the concept of Guanxi cannot exist alone and is
closely related to the concept of Mianzi explained previously.
After having explained both values and their interrelationships, in the following
chapters we will focus on the impacts that the implementations of these concepts have
on a companys way of doing business, on its structure and the final influence they
have on financial performance.

Guanxi as a network and its impacts on financial performance

No matter the time or the place, if they are to survive in the long run companies
have to pay attention to two broad things: costs and profits. In this part we will focus
on the cost point of view and we will discuss what impacts can Guanxi and Mianzi
have on a companys financial performance by analyzing their impact on costs through
the organizational-level and the network of the firm.
First of all, according to Wank (1996) in order for Guanxi to play a major role
in a companys organizational-level, the value needs to be strongly implemented
among key managers. The value comes into play when a company needs to share or
exchange resources with another one. Because of the multiple risks that may occur
when doing so, every company will have to use a network to overcome the uncertainty
and distrust that plague economic transactions (Galaskiewicz and Wasserman, 1989).
According to Thorelli (1986) networking is crucial because it can enhance a
companys competitive position and bridge the gap between businesspeople of
different nations and cultures, stimulating trade that might not otherwise take at all.
Networks provide this advantage by allowing a company to access resources of the
other members of the network. In that regard, a Guanxi network expands information
and resource access by widening the sweep of environmental scanning of an
organization and by linking complementary assets in other organizations (Park and
Luo, 2001). As Davies, Leung, Luk and Wong (1995) have pointed out, the main
advantages of establishing a good Guanxi network is that this will smoothen the
running of business operations and secure administrative approvals which would
overall reduce internal costs. Such findings are supported by Wellman, Chen & Dong
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(2002) who claim that Guanxi-based business practices can reduce uncertainty, lower
search and other transaction costs, provide usable resources and a sense of
connectedness. Furthermore, Guanxi also opens dialogues, builds trust, and
facilitates exchanges of favors for organizational purposes as Hoskisson et al. (2002)
claimed. And as we will see later in the text, even some studies that have analyzed the
negative effects of Guanxi such as Park & Luo (2001) or Luo (2003) still recognize
that Guanxi enables firms to overcome institutional barriers and instability in the face
of regulatory changes. As we can notice, a Guanxi network, albeit being a necessity
for doing business in China, undoubtedly has its benefits for the company. A study
conducted by Zhuang et al. (2010) empirically proves that Guanxi can establish
emotional closeness within the companies of the networks and thus lowers the risk of
retailers exercising coercive power, lowers the risk of conflicts between managers and
at the same time increases cooperation amongst the participants.
Nonetheless many studies highlight the risks of Guanxi which include that
Guanxi alone cannot eliminate threats and competition (Fock & Woo, 1998). In
addition to that, the findings inducing that Guanxi network would lower costs are
strongly disputed by Park and Luo (2001) who claim that even though Guanxi
contributes to firm growth in terms of market expansion and although it can facilitate
the implementation of business strategies, it has nothing to do in improving a
companys net profit. Again according to them, they argue that Guanxi is certainly
useful in developing strong relationships with stakeholders but that it has nothing to do
in improving internal operations. What is more, Park and Luo (2001) go even further
and hypothesize as a conclusion that cultivating and maintaining Guanxi might even be
in the long term expensive for the company and in some cases offset the benefits from
market expansion, such as through operational inefficiencies. To finish their argument
they even add that the cost of returning favors through gifts or whatsoever contributes
to their analysis. These assertions are supported by Luo (2003) who affirms that
remaining inside the Guanxi network demands that firms return the favors of or
exchange favors with other firms and Walder (1995) to add and to local
governments. In addition to these negative effects, some studies point out other
problems induced by staying in a Guanxi network such as collective blindness when
the market environment changes (Wellman, 1988) or even a domino effect when
firms within the Guanxi network fail (Uzzi, 1997) and finally according to
Vanhonacker (2004) it is possible that Guanxi enhances personal indebtedness
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amongst executives. All of these concerns as well as the potential positive effects of
Guanxi are analyzed in a comprehensive study by Gu et al. (2008) in which the authors
firstly find that Guanxi networks exert direct impacts on brand performance in
Chinas least regulated consumer product markets and as a result that the effects of
Guanxi on brand sales growth and brand share performance cannot be ignored. By
testing their hypotheses, the authors assert that Guanxi can be a strong point in
developing responsive strategies and can lead to firm capabilities in managing
channels. What is more, the managers can also reduce information costs thanks to the
Guanxi network. Yet, despite agreeing on the positive consequences of Guanxi, Gu et
al. (2008) contrast these findings and meet Park & Luo (2001) in their idea that a long
term relationship can destabilize and destruct the relationship from within. The study
confirms again through the testing of hypotheses that an intense competition as well as
an important technological turbulence seriously dampens the positive effects of Guanxi
on a firms performance.
In conclusion every author agrees on the fact that establishing Guanxi is an
absolute necessity when doing business in China, simply because such connections
are critical to managers and organizations in China to facilitate impersonal business
activities(Alston, 1989). On one hand, we have seen that some of them (Luk and
Wong, 1995) highlight the advantages of such network, while other studies (Gu et
al.,2008; Park and Luo,2001) have tested both the positive and negative aspects of
implementing a Guanxi network. These comprehensive studies, including Seabright et
al.(1992), argue that the benefits gained from the establishment of a Guanxi network,
including the gain of market share and the collaboration with stakeholders, might not
be sufficient enough to cover the expenses related to maintaining such network.
Instead, Park and Luo (2001) advice that Guanxi utilization should be inherent to each
firm according to their strategy and organizational settings.

Critic of design and methodology of previous studies

In this section my goal is to briefly analyze and criticize the methodology
employed in some of the main papers that I referred to in this literature review. I
believe the most exhaustive papers that I found were Park & Luo (2001) and Gu et al.
(2008). These two papers have thoroughly analyzed the good and the bad effects of a
Guanxi network on firm performance. Hence, I will begin by talking about the Park &
Luo (2001) research.
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In this paper, the authors (2001) have decided to use 7 hypotheses describing
the links between Guanxi, business and government authorities. They used a
descriptive statistical approach with Pearson coefficients as well as a regression model
to test the hypotheses. Their model is complex and uses firm-specific factors which
add to the credibility and the validity of the model. Thanks to these factors they are
able to balance their findings on the effects of Guanxi and it allows them to keep a
neutral position by stating that a Guanxi model is inherent to each company and should
be adopted accordingly. These factors include firm attributes, strategies and
organizational factors. Overall, the model and the measurements used in this study are
extremely strong which explains the fact that the study is frequently cited (over 1250
times, making it one of the most cited paper on this subject) and used as a basis for
further research. In conclusion, I decided to refer to this paper a lot as I believed their
results were more than reliable, precise and peer reviewed.
Concerning the second paper by Gu et al.(2008), the authors have come up with
a graphical model detailing the links between their hypotheses and have added
additional effects such as the variables affecting market performance in China as well
as firm demographics. A multiple scale-item was established in addition with scales
from previous studies (Jaworski and Kohli, 1993; Park and Luo, 2001) to measure the
results. Data was collected through interviews with managers, through more than 300
brand-unit surveys and both were compared. The findings were tested with a
regression analysis including the usual t-tests, standard deviations, correlations and so
on. The reason why I decided to trust and base my literature review on this paper is
because of the comprehensiveness of the models, indeed the authors have used several
models and scale-items, giving the results more credibility and validity. In addition to
that, the research is also cited over 300 times and I found interesting the fact that they
relied and retested the findings of Park and Luo (2001). Finally this research was the
most recent that I could get my hands on which made it seem closer to todays Guanxi
reality.
As a final word for this section, I wanted to make clear that I obviously referred
to other papers in my review but all of them were peer-reviewed and I found more
interesting to analyze the most recent and most exhaustive papers as the older ones
might differ a bit from todays business reality.

Discussion and Conclusion

In this last section I will briefly summarize and discuss the findings that
previous research has found out. We have seen that first of all Mianzi is the basis of
Guanxi and that a strong positive Mianzi is mandatory in order to build and develop a
strong Guanxi network. Any loss of face will result in the destruction of this network
and in an immediate stop in business relationships. Because China is such a highly
cultural country, these values are deeply rooted in peoples minds and must therefore
be respected and applied for anyone willing to engage business matters with Chinese.
It is true that some studies (Guthrie, 1998; Law, Tse and Zhou, 2003) have argued that
the role of Guanxi is slowly declining in explaining companys financial performances
in China. However these results are disputed by the findings of many papers such as
Gu et al.(2008), Park and Luo (2001), Buckley et al.(2006) and many others. Guanxi
networks can have a positive impact of a firms performance by cutting down costs but
they can also backfire if not managed properly and can on the other hand produce the
complete opposite by creating higher external costs that would outbalance the gains
created. In conclusion, no matter how Guanxi affects a firms performance, if one
desires to practice business in China, he will have to adopt some sort of Guanxi
network. The only real problem that is to solve is how to adapt it so that the cost gains
resolving from it are higher than the costs Guanxi occurs. If they seek competitive
advantage through Guanxi, every company will have to find a proper implementation
based on their long term objectives, strategies, available resources and every other
factor influenced by the network. An argument subsists that Guanxi is only effective
because of the lack of legal regulations but after all, as Gold, Guthrie and Wank (2002)
so wisely claimed: Guanxi is a socially embedded practice and can be contextualized
to local conditions and thus may be perpetuated. We are therefore not ready to see
Guanxi disappear from the Chinese culture and the best solution is to understand and
adapt to it while paying attention and regulating as much as possible its negative
consequences.

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