ARTICLE IN PRESS

Int. J. Production Economics 106 (2007) 450–467

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The role of Guanxi in supply management practices

Peter K.C. Leea,, Paul K. Humphreysb
a
Department of Logistics, The Hong Kong Polytechnic University, 11 Yuk Choi Road, Hung Hom Kowloon, Hong Kong SAR, China
b
School of Business Organisation and Management, University of Ulster, UK
Accepted 12 July 2006
Available online 20 October 2006

Abstract

Guanxi has been identified as having an important influence on business behavior. This paper investigates the influence
of guanxi on three elements of supply chain management: strategic purchasing, outsourcing, and supplier development.
Survey data was collected from 175 companies in the electronics sector of Hong Kong. The results indicate that guanxi
has a significant influence on these three supply management constructs. The managerial implications are examined
from a relationship perspective and in terms of transaction cost economic theory. The failure to appropriately assess the
impact of guanxi-based supply management practices can have a detrimental effect on organizations attempting to enter
the Chinese market.
r 2006 Elsevier B.V. All rights reserved.

Keywords: Guanxi; Supply Management; Strategic Purchasing; Outsourcing; Supplier Development.

1. Introduction rely on trust-based personal relationships as a

With the economic ascendancy of China, much
has been made of its future economic prospects. The
movement to a market economy and high growth
rates has encouraged significant foreign investment.
Many investors were drawn initially by the attrac-
tion of China as a low-cost manufacturing base and
more recently as a market for consumer and
industrial goods in its own right. One of the
main concerns facing investors is the lack of a
stable legal and regulatory system and the need to
Corresponding author. Tel.: +852 2766 7415;
fax: +852 2330 2704.
E-mail addresses: lgtplee@polyu.edu.hk (P.K.C. Lee),
pk.Humphreys@ulster.ac.uk (P.K. Humphreys).
means of obtaining resources (Fan, 2002).
In the literature, China is often described as being a
relational society, where concepts such as guanxi
(relationships or connections) have a major influence
on both social and business norms (Tseng et al., 1995).
Guanxi, in many respects, is analogous to the concept
of supply management, involving mutual obligations,
assurance and understanding, a long-term perspective
and cooperative behavior (Arias, 1998).
However, foreign investors often experience
highly transactional behavior, with the focus being
on the short-term and the immediate benefits
emanating from it, which seem to dominate business
dealings (Styles et al., 2000). Thus, within the
Chinese business context there is this ambiguity
between elements of the long-term business relation-
ship and the short-term transaction.

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doi:10.1016/j.ijpe.2006.07.007
 ARTICLE IN PRESS
P.K.C. Lee, P.K. Humphreys / Int. J. Production Economics 106 (2007) 450–467
It is therefore important for foreign investors to
understand the implications of guanxi. The devel-
opment of an effective guanxi network has an
important role in helping to gain a commercial
foothold. Foreign investors most often establish
business linkages through a joint venture or wholly
owned subsidiary. Under either option, they must
be able to gain access to the appropriate guanxi
webs, through their Chinese partners, in order to
facilitate quick acceptance of the investor.
In regard to supply management, while suppliers
have been widely considered as one of the effective
sources of competitive advantage in the past decade
(e.g., McCutcheon and Stuart, 2000; Dyer and
Ouchi, 1993), a number of studies have estimated
the failure rate of adopting closer or partnering
inter-firm relationships to be around 30–50%
(Anderson and Jap, 2005). This implies that a firm’s
decision to adopt supply management practices
must proceed with extreme caution. Consequently,
considering the wide prevalence of guanxi culture in
China, a study investigating how guanxi impacts on
the adoption of supply management should offer
useful insights to managers. Nonetheless, studies
exploring the association between guanxi and
supply management are limited in the literature.
This paper investigates the relationship between
guanxi and supply management practices. It is
divided into a number of sections. Firstly, the
literature is presented with the term guanxi being
defined and its linkages to supply management
practices. Secondly, a conceptual framework is
developed and a number of hypotheses are pro-
posed linking strategic purchasing, outsourcing, and
supplier development to the guanxi concept. The
study concludes with the need for organizations to
take into consideration both a short-and long-term
orientation in developing supply chain relationships
with firms in China.
2. Conceptual background
2.1. Defining Guanxi
Together with other East Asian countries such as
Japan and Korea, the culture of China is deeply
affected by Confucianism. With a history of more
than 2500 years, Confucianism has exerted a
fundamental influence on the Chinese and East
Asian modes of thinking and ways of behaving. One
of the key values of Confucianism is its strong
emphasis on inter-personal relationships and
451
conducts (Ghauri and Fang, 2001). Confucianism
suggests that human relationships are dictated by
the five cardinal relationships (Wulun), which is, the
relationships between the ruler and subject, father
and son, spouse and spouse, elder and younger
brothers, and senior and junior friends. This social
philosophy encourages the development of social
harmony, order and stability by appropriate beha-
viours—the seniors must be loving and benevolent
to gain the respect and loyalty from the juniors, and
vice versa. Guanxi (the Chinese term for relation-
ships, connections, or contacts) which stems from
the strong emphasis on personal relationships, has
been suggested as relationships or social connec-
tions based on mutual interests and benefits (Yang,
1994).
Guanxi is deeply embedded in the mindset of
Chinese and in every aspect of their personal and
organizational interactions (Park and Luo, 2001). In
the Chinese business world, it is also understood as
a special form of relationship that ties the business
partners by reciprocal exchanges of favors and
obligations regularly and voluntarily (Alston, 1989;
Luo, 1997). Within the literature of management,
the performance impact of guanxi in Chinese
business environments has been well documented
(e.g., Park and Luo, 2001; Tsang, 1998; Yeung and
Tung, 1996). Hence, although guanxi is in general
considered as an important element of the national
culture of China, it can also become an asset and a
corporate culture at the firm level as personal
relationships are dedicated to and used by the firm.
In this study, we focus on firm-level guanxi which
emphasizes the use of personal relationships in
facilitating operations or problem solving in busi-
ness transactions. More specifically, we define
guanxi as a corporate culture that has a strong
emphasis on the relationships between business
partners for achieving mutual benefits and involves
the use of personal and/or inter-firm connections to
secure favors in the long run.
Guanxi is important in a Chinese business context
in that when a situation arises which is beyond an
organization’s or individual’s capacity, the guanxi
network could be called upon to achieve the desired
results (Redding and Ng, 1982). In the literature, an
empirical study conducted by Davies et al. (1995)
suggests that there are three major benefits resulting
from the establishment of guanxi. First, when the
information on domestic markets is limited for
foreign investors, the guanxi network may be an
important source of information on market trends
 ARTICLE IN PRESS
452 P.K.C. Lee, P.K. Humphreys / Int. J. Production Economics 106 (2007) 450–467
as well as on both present and potential opportu-
nities and threats. Second, guanxi facilitates access
to labor and physical resources as well as relations
with local governments. Finally, guanxi provides
benefits to a wide range of other issues, encompass-
ing product transport and distribution to the
building of organizational image and reputation.
More recently, Lee et al. (2001) found that guanxi
has positive effects on organizational performance
and offers ‘‘ygood means of facilitating transac-
tion by allowing access to limited resource/informa-
tion, preferential treatment in business dealings, and
protection from external threats.’’ In addition, Park
and Luo (2001) stressed the importance of guanxi by
suggesting that while a relationship follows success-
ful transactions in the West, transactions often
follow successful guanxi in China. They further
assert that given the uncertainty and confusion in
China’s transition economy, firms can use guanxi as
an entrepreneurial tool to bridge gaps in informa-
tion and resource flows between unlinked firms and
between firms and important outside stakeholders.
Indeed, nurturing and managing relationships at
both the personal- or firm-level is hardly new. Many
firms rely on friends and connections to do business.
In the literature, Walder (1986) has noted that the
concept of guanxi is by no means culturally unique
to China. For instance, the term blat in Russia and
pratik in Haiti refer to the same type of instru-
mental-personal connections. Thus, it is evident that
while the forms of guanxi in different nations are
unlikely to be identical, the use of relationships to
facilitate business transactions occurs not only in
China, but also in other nations, in particular, when
the business environment is uncertain and an
adequate legal system is not available.
According to the definition of guanxi in this
study, it is concerned with a strong emphasis on the
relationships between business partners. Thus, it
should have an important role to play with regard
to the management of the relationships between a
buying firm and its suppliers. In recent years,
purchasing and supply management has been widely
recognized as an effective source of competitive
advantage for firms (e.g., Carr and Smeltzer, 2000).
Therefore, an investigation into the relationships
between guanxi and how firms manage the relation-
ships and interactions with key suppliers should
yield important insights from a theoretical and
practical perspective. Nonetheless, to the knowledge
of the authors, studies exploring the association
between guanxi and supply management have been
lacking in the literature. In the following sections,
supply management and three of its major practices
(i.e., strategic purchasing, outsourcing, and supplier
development) will be discussed.
2.2. Supply management
Managing the interactions with suppliers can be
examined from a number of management perspec-
tives, such as, relationship marketing (Ravald and
Grönroos, 1996), industrial marketing (Brennan
and Turnbull, 1999), purchasing management (Carr
and Smeltzer, 2000), and supply chain management
(SCM) (Tan, 2001), etc. However, its rising strategic
importance in recent years has largely resulted from
the popularity of SCM for many researchers and
practitioners in the field of production and opera-
tions management (Tan, 2001). According to Lee
and Billington (1992), SCM is concerned with
strategically managing and coordinating activities
of networks of manufacturing and distribution sites
that procure raw materials, transform them into
intermediate and finished products, and distribute
the finished products to customers. Nonetheless,
while this concept is theoretically sound, a supply
chain may be technically too complex to achieve a
full integration. The full integration here is not only
about a single closer inter-firm relationship but
entails a much broader scope defined in terms of an
integrated network, within which all parties along a
supply chain, from raw material providers to
retailers, are brought together to work for an end
goal that is shared by all the participating parties
(Monczka et al., 2005; Lee and Billington, 1992). As
pointed out by Handfield and Nichols (1998), the
concept of SCM is so complicated that there are in
practice few examples of truly integrated supply
chains. Some researchers therefore propose a
narrower but more practical perspective which
focuses on strategically important suppliers in the
value chain (Tan et al., 1998; Tan, 2001). This
approach for improving supply chain performance
is commonly termed supply management (e.g.,
Monczka et al., 2005) and its profound impact on
firm competitiveness has been well documented in
the literature (e.g., Chen et al., 2004; Kale et al.,
2000).
Supply management practices are closely related
to managing closer supplier relationships such as
supplier alliances or partnerships. Yoshino and
Rangan (1995) proposed an effective framework
(see Fig. 1) to present the characteristics of five
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P.K.C. Lee, P.K. Humphreys / Int. J. Production Economics 106 (2007) 450–467 453

Interfirm Links

Contractual Contracts Equity Arrangements

Traditional Contracts Nontraditional Contracts No New Entity Creation of Equity Dissolution of Equity

Arm's-length Joint R&D

Nonsubsidiary Joint Ventures Mergers and
Buy/Sell
Joint Product Joint Ventures Subsidiaries of Acquisitions
Contracts
Development Minority Equity MNC
Franchising Investments
Long-term Sourcing
Arrangements Fifty-fifty Joint
Licensing Venture
Joint
Equity Swaps
Manufacturing
Unequal Equity
Cross-licensing Joint Marketing Joint Ventures

Shared Distribution/
Service

Standards Setting/
Research Consortia

Strategic Supplier Alliances

Strategic Alliances

Fig. 1. Classification of inter-firm relationships (Yoshino and Rangan, 1995).

major forms of inter-firm relationships. It can be
inferred that modern supply management should be
related to the management of suppliers under the
category of ‘‘Non-traditional Contracts’’. Unlike
the adversarial nature of suppliers with ‘‘Traditional
Contracts’’, ‘‘Non-traditional Contract’’ suppliers
represent a more integrated relationship with the
buying firm in that interactions between the buyer
and the supplier involve joint R&D, joint product
development, long-term sourcing agreements, and
shared distribution service, etc. The management of
such ‘‘Non-traditional Contract’’ suppliers and the
related joint activities has increasingly been con-
sidered as strategically important in many manu-
facturing firms because closer supplier integrations
(e.g., strategic supplier alliances) are widely touted
as importance competitive advantages in the litera-
ture (e.g., McCutcheon and Stuart, 2000). Without
a purchasing function with modern supply manage-
ment practices adopted, such supplier inte-
gration and joint activities would not be managed
effectively.
In this study, supply management is concerned
with the close integration with suppliers and
emphasizes that purchasing or the management of
suppliers is a basic strategically important function
to support the overall business strategy. Three
major practices of supply management, namely,
strategic purchasing, outsourcing, and supplier
development, which can reflect the strategic level
of the purchasing function and the commitment of
the buying firm towards supplier integration, will be
discussed below.
2.3. Strategic purchasing
Strategic purchasing means a supply function
with purchasing plans and activities that are
strategically managed for meeting corporate goals.
As the framework of Yoshino and Rangan (1995)
depicts, supply management is likely to involve
managing a number of different joint activities (e.g.,
joint R&D, joint product development, etc.)
between the buying firm and selected suppliers.
 ARTICLE IN PRESS
454 P.K.C. Lee, P.K. Humphreys / Int. J. Production Economics 106 (2007) 450–467
Unless the purchasing and supply function of a firm
is regarded as strategically important, the function
may not have the necessary resources and skills to
implement such joint activities effectively, indicating
that strategic management is a critical supply
management practice. Within the literature, the
study of Carr and Pearson (1999) suggests that there
is a direct linkage between strategic purchasing and
a close and long-term buyer–supplier relationship.
Chen et al. (2004) found that strategic purchasing is
positively related to supplier communication, long-
term orientation, and a small supply base, implying
the association between strategic purchasing and a
closer supplier relationship. These results imply that
when the purchasing function of a firm is of
strategic level, there should be a recognition
concerning the importance of the relationships and
interactions with key suppliers. As defined earlier in
this review, guanxi is a corporate culture that
pertains to the use of relationships in facilitating
operations or problem solving in business transac-
tions. It therefore can be inferred that because of the
strong relational concern of guanxi, it may have
a motivational effect on the adoption of strat-
egic purchasing in a buying firm. Consequently, we
posit that,
H1. Guanxi has a positive effect on strategic
purchasing.
2.4. Outsourcing
Outsourcing pertains to the purchase of a
substantial amount of components, assemblies, or
services from suppliers to replace internal produc-
tion. With this definition, a high level of outsourcing
adoption means that the products of the firm would
be jointly produced by its own processes and those
of the selected suppliers and that such an arrange-
ment is likely to be a strategic and long-term one.
The framework of Yoshino and Rangan (1995)
offers insights to show that supply management
may need to manage joint manufacturing and long-
term sourcing arrangements, implying that out-
sourcing is very likely to be considered as one of the
major practices adopted within a modern supply
management approach. In the literature, McIvor
(1998) proposed that outsourcing should be im-
plemented strategically and integrated into the
overall corporate strategy. Parker and Russell
(2004) explored the outsourcing of information
technology services and found that power and trust
are highly significant managerial issues in the
success or failure of an outsourcing strategy.
Although there is a paucity in the literature
concerning how outsourcing is linked with other
supply management practices or corporate culture,
it is reasonable to assume that such linkages exist
for two reasons. Firstly, since the implementation of
outsourcing entails closer relationships with key
suppliers, guanxi culture, which has a strong
emphasis on the relationships with business part-
ners, may be one important factor leading to
outsourcing adoption. Secondly, outsourcing may
also be affected by the strategic impact of the
purchasing function. When purchasing is viewed
as being of strategic importance, a firm should
be more likely to recognize the critical role of
suppliers and to rely on them to produce important
parts or components. Consequently, the more
strategic the purchasing function is perceived, the
more likely a firm would be to adopt outsourcing.
The discussion leads to the following two hypoth-
eses to be tested:
H2. Guanxi has a positive effect on outsourcing.
H3. Strategic purchasing has a positive effect on
outsourcing.
2.5. Supplier development
Supplier development is defined as any activity
undertaken by a buying company to improve either
supplier performance, supplier capabilities, or both,
so as to meet the buying company’s short- and long-
term supply needs (Krause et al., 2000). As
discussed earlier, supply management may involve
the management of different joint activities with
selected suppliers, ranging from joint R&D to joint
marketing (see Fig. 1), implying that a high level of
interdependence between the buyer and seller may
result from supply management adoption. Because
of such high interdependence, buying firms are very
likely to employ supplier development to ensure
their short- and long-term supply needs can be
fulfilled adequately, indicating the importance of
supplier development as a major element of supply
management. Krause et al. (1998a, b) have asserted
that supplier development can be a strategic weapon
for the buying company. Also, the study of Lee and
Mak (2005) reveals that supplier development is
perceived as a means to meet long-term needs
by Hong Kong manufacturers. The work of
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P.K.C. Lee, P.K. Humphreys / Int. J. Production Economics 106 (2007) 450–467
Humphreys et al. (2004) indicates that transaction-
specific supplier development is associated with the
buyer–supplier performance outcomes. Despite the
important role of supplier development in meeting
the organization’s long-term needs and financial
goals, its relationship with the cultural orientation
of a firm has not been explored in the literature.
According to the definition, supplier development
involves investments in developing the capabilities
of key suppliers voluntarily, and it can be inferred
that such investments cannot be reused when
the business relationships are terminated. On the
other hand, guanxi is concerned with exchanging
favors with partners, and such favors are expected
to be done regularly and voluntarily. Thus, it
would be interesting to examine if supplier devel-
opment activities are perceived as some form of
‘‘favors’’ between Chinese buying firms and their
suppliers. If this is true, there should be a direct
empirical link between guanxi and supplier devel-
opment. Therefore, we propose the following
hypothesis:
H4. Guanxi has a positive effect on supplier
development.
In addition to guanxi, supplier development may
also be influenced by other supply management
practices. In firms with a strategic purchasing
department, top management are more likely to
regard suppliers as important business partners and
are more willing to invest their resources in
developing supplier capabilities. Hence, strate-
gic purchasing may have a positive association
with the adoption of supplier development. The
other supply management practice that may
affect supplier development is outsourcing. In this
study, outsourcing represents the purchase of a
substantial amount of components, assemblies, or
services from suppliers to replace internal produc-
tion. This implies that the operations as well as the
performance of the buying firm are highly depen-
dent on those of the suppliers. Considering the
critical role of suppliers, buying firms that adopt a
high level of outsourcing should be more likely to
develop the capabilities of the suppliers. The
influences of strategic purchasing and outsourcing
on supplier development are stated in the following
hypotheses:
H5. Strategic purchasing has a positive effect on
supplier development.
455
H5
Strategic
H1 Purchasing
Supplier
Guanxi
Development
H4
H3
H2
H6
Out-sourcing
Fig. 2. Conceptual model.
H6. Outsourcing has a positive effect on supplier
development.
Fig. 2 presents the conceptual model of this study
that summarizes the hypotheses postulated above.
The model shows that guanxi could have direct and
indirect effects on the supply management practices.
It can be observed that guanxi has a direct effect on
strategic purchasing, outsourcing, and supplier
development. In addition, the associations between
the supply management practices suggest that
guanxi also influences supplier development indir-
ectly through strategic purchasing and outsourcing.
3. Research methodology
3.1. Research context
The research hypotheses were tested using em-
pirical data gathered in a mail survey of electronics
manufacturers in Hong Kong. The electronics
industry is the second largest manufacturing in-
dustry in terms of domestic exports in Hong Kong.
In 2004, the domestic exports of the industry were
HK$10.6 billion (USD 1.36 billion) (Hong Kong
Trade and Industry Department, 2004). It focuses
primarily on producing electronics products for
foreign customers by performing its product devel-
opment, marketing, design and other high-value-
added activities in Hong Kong and locating the
sizable majority of the production works in Main-
land China or other South-East Asian countries.
The Hong Kong electronics industry is export
oriented with the United States as the major market
(Hong Kong Industry Department, 2000). Since the
firms in the industry have to compete with interna-
tional competitors in the global market, they are
 ARTICLE IN PRESS
456 P.K.C. Lee, P.K. Humphreys / Int. J. Production Economics 106 (2007) 450–467
likely to experience a high degree of pressure to
adopt more modern or innovative management
practices in order to maintain their competitiveness.
Moreover, they are predominately managed or
owned by local Chinese of Hong Kong origin. As
a result, the electronics industry of Hong Kong
should be an appropriate context to provide insights
into the role of guanxi in the adoption of modern
supply management practices.
3.2. Questionnaire development and pilot testing
Based on a review of the literature relating to
guanxi and supply management, a preliminary
version of the questionnaire was developed. All
items of the constructs of this study were measured
on a 7-point Likert scale (1, strongly disagree, to 7,
strongly agree). The development and the relevant
sources of all construct items are outlined below:
 Guanxi: Although guanxi has been prevalent for
thousands of years in China and is deeply
embedded in the mindset of Chinese, a widely
accepted and used scale is not available in the
literature, implying the need to develop a new scale.
Since the definition of guanxi in this study is
pertinent to a form of corporate culture, we
developed an item pertinent to the perceived
importance of guanxi in doing business in respon-
dents’ firms. In addition, considering guanxi’s
strong emphasis on relationships, we also developed
items concerning long-term and cooperative rela-
tionships with suppliers. Example items are ‘‘Main-
taining a long-term relationship with this supplier is
important to us.’’ and ‘‘Requests from our com-
pany have often been responded to cooperatively.’’
 Supplier development: The scales describe
whether the buying firm would improve the
performance of the supplier by using a formal
performance evaluation procedure, visiting the
plant of the supplier, and inviting the personnel
of the supplier to visit its own plant. The items
are based on those developed by Krause (1999).
 Strategic purchasing: The strategic level of the
purchasing function describes if the firm would
change purchasing strategy regularly according
to the strategic needs of the firm and if the
function is considered as highly important from
the perspective of top management. The items
used were developed on the basis of previous
literature related to the work of Carr and
Smeltzer (1997) and Stuart (1997).
 Outsourcing: These measures relate to the adop-
tion level of outsourcing by measuring whether a
company would retain its production capability
simple by outsourcing non-core activities. The
items used here were adapted from McAleer et al.
(2000).
This draft questionnaire was pilot-tested with
eight supply management practitioners and three
experienced researchers. All participants of the
pilot-test were Chinese and based in Hong Kong.
They were provided with the definitions of the
constructs and asked to fill in the questionnaire and
comment on whether the items could measure what
they were intended to measure and whether ques-
tions were phrased succinctly to avoid ambiguity.
According to the expert opinions obtained, items
regarding long-term or cooperative relationships
should be considered as separate constructs and not
form part of the guanxi concept. The respondents
unanimously indicated that guanxi was a widely
known concept which would be clearly understood
by Chinese respondents—they felt that if it was
broken down into a number of constituent items, its
meaning might become ambiguous and diluted.
Consequently, they felt it might be better to have
one item to measure guanxi. They commented that
the item regarding the importance of guanxi in
doing business and items related to the three-supply
management practices can reflect what they are
intended to measure.
The participants also offered ideas to improve the
readability of some items. In addition, short inter-
views were conducted with the participants with
regard to the proposed cause-effect relationships of
the path model and if there were any major concerns
in terms of the adoption of the supply management
practices. Some of the findings from these interviews
are reported in the discussion section of this paper
to supplement the survey results of this study. The
resultant item of guanxi and those of the supply
management practices are presented in Appendix A.
The development and sources of all construct items
of this study, including both the retained and
eliminated ones, was also documented in the work
of Lee (2004).
The results of the pilot-test suggest that the
guanxi variable of this study will be a single-item
construct. Although some researchers may question
the use of single-item construct, its use in the present
study can be deemed acceptable. First, respondents
of this study should be able to understand the
 ARTICLE IN PRESS
P.K.C. Lee, P.K. Humphreys / Int. J. Production Economics 106 (2007) 450–467
concept of guanxi consistently. Guanxi is not a
modern management practice that managers would
have varying interpretation about it. Instead, guanxi
is a culture that has been a key element of the value
systems of Chinese for thousands of years. Chinese
grow up and live under this culture. As argued by
Park and Luo (2001), guanxi is deeply embedded in
the mindset of Chinese and in every aspect of their
personal and organizational interactions. Some
researchers even assert that guanxi is the lifeblood
of Chinese business communities (e.g., Alston, 1989;
Hall and Xu, 1990; Yang, 1994). Second, the use of
single-item measures has been supported by some
researchers because it has certain merits over multi-
item measures. Drolet and Morrison (2001) contend
that single-item measures can avoid many disad-
vantages of multi-item measures; for instance,
across-item error term correlations, and the parti-
cipant fatigue, boredom and inattention. Further,
the meta-analysis performed by Wanous et al.
(1997) reveals that when a construct is widely
known (e.g., job satisfaction) among research
subjects, a single-item measure could yield adequate
convergent validity and reliability. Indeed, single-
item measures have been employed by a number of
rigorous studies in the literature of operations
management, organizational behavior, and market-
ing (e.g., Miller and Roth, 1994; Frohlich and
Dixon, 2001; Safizadeh et al., 2000; Verma and
Young, 2000; Trevor, 2001; Cronin and Taylor,
1992). With respect to studies relating to guanxi, we
find support for works that also measure the
concept with a single item (Si and Bruton, 2004;
Wang and Huang, 2006), indicating that it is not
uncommon to use a single-item to reflect guanxi in
the literature. Consequently, it is reasonable to
believe that the single-item developed for guanxi in
the current study should be an acceptable one.
3.3. Data collection
After completing the pilot test, a large-scale
survey was conducted to collect data for testing
the research hypotheses. In the survey, 900 compa-
nies were randomly selected from The Hong Kong
Electronic Industries Association Limited (1999) for
telephone contact. This initial contact served to
confirm that the target firms were available and
identify the key informant who was responsible for
looking after the purchasing function and/or the
manufacturing function. The calls to the 900
companies found that 758 of them were in business
457
and had at least one manufacturing plant in Hong
Kong or overseas. Of these 758 companies, 618 of
them were successfully invited to participate in the
survey. These 618 companies were then mailed a
package that included a covering letter, a ques-
tionnaire, and a postage-paid envelope. Two days
after the initial mailing, a phone call was made to
each of them to confirm receipt of the package and
to remind the respondents to complete the ques-
tionnaires within 2 weeks. Ten days after the initial
mailing, another phone call was made to non-
respondents to advise them that their completed
questionnaire had not yet been received and to re-
emphasize the importance of their participation in
the survey. Twenty days after the initial mailing,
reminder postcards were mailed to non-respondents,
and 30 days after the initial mailing, another follow-
up phone call was made to non-respondents.
With regard to filling in the questionnaire, the key
informant of each firm was requested to oversee the
completion of the questionnaire. This individual
completed those parts of the questionnaire relevant
to their area of expertise and identified other
colleagues who had the appropriate knowledge to
complete the rest of the questionnaire. For instance,
the key informant was normally a senior operations
or purchasing manager. This person may be familiar
with the corporate culture and purchasing strategy
but not the detailed interactions with suppliers. The
key informant therefore had to fill in items
regarding guanxi and strategic purchasing, and
identify a colleague, for example a senior purchas-
ing office or an assistant purchasing manager, to fill
in such items as those related to supplier develop-
ment and outsourcing. Using such an approach, the
data collected should not be significantly affected by
common method bias. Additionally, Harman’s
single-factor test (Podsakoff and Organ, 1986) was
performed. If common method bias exists in the
data, one general factor that accounts for most of
the variance would result from a factor analysis of
the questionnaire items. The results indicate that
three factors with eigenvalues greater than one were
extracted from the measures of the multi-item
constructs of this study (i.e., strategic purchasing,
outsourcing, and supplier development), and they in
total accounted for 84.8% of the variance. The first
factor only accounted for 31.6% of the variance.
These results offer further evidence to support that
the likelihood of common method bias is low.
In addition, when completing the questions
concerning guanxi, strategic purchasing, and
 ARTICLE IN PRESS
458 P.K.C. Lee, P.K. Humphreys / Int. J. Production Economics 106 (2007) 450–467
outsourcing, respondents were asked to consider
their corporate culture and general supply manage-
ment practices. When filling in questions concerning
supplier development, respondents were asked to
focus on the one supplier that they considered to be
the most crucial to their company performance.
At the end of the survey, a total of 175 useable
questionnaires were collected, resulting in a re-
sponse rate of 23.1% (i.e. 175/758), using the
number of companies invited to join the survey as
the base. Although somewhat low, this response
rate compares favorably with similar empirical
studies conducted in a manufacturing environment
(e.g., Shin et al., 2000).
The possibility of non-response bias was assessed
by comparing the first and last waves of response.
According to Armstrong and Overton (1977), if the
data from early respondents does not display a
statistically significant difference from that of late
respondents, the impact from non-response bias is
not significant to the data. In this study, the first 30
and the last 30 questionnaires were selected as the
first and last waves of response, respectively.
Twenty-five questions were next randomly selected
from the questionnaire for carrying out independent
sample t-tests to examine the differences in the
answers between the two waves of response. The
significance values of all t-tests performed exceed
0.05, indicating that the results of the survey are
unlikely to be significantly affected by the non-
response bias.
With respect to the profiles of the respondents
and sample firms, the telephone contacts with
respondents revealed that all respondents were
Chinese, and there was no problem concerning the
ability of the respondents in understanding the
meaning of guanxi. All sample firms of this study
were Hong Kong-based electronics manufacturers
with management teams based in Hong Kong. The
results of the survey indicate that of the 175 sample
firms, 137 (78.3%) of them were indigenous Hong
Kong firms or had parent firms from Mainland
China. The results also indicate that 169 (96.6%) of
the sample firms had manufacturing plants located
in Hong Kong or Mainland China. Such results
indicate that sample firms of this study in general
were managed by Chinese managers. Even in firms
that had a foreign parent firm, the locations of their
management teams and/or manufacturing plants
suggest that their management were very likely to be
localized and influenced by Chinese culture con-
siderably. The profiles of the sample firms offer
additional evidence to support that the context of
this study is appropriate to examine the role of
guanxi in supply management practices. It should be
noted that firms with a foreign parent firm should
not be eliminated. The presence of such firms
creates more diversity in the sample and hence
allows for the measurement of varying levels of
guanxi culture. Guanxi is a variable in this study,
meaning that sample firms should have different
scores on this construct. Thus, it is necessary to have
sample firms comprising both Chinese-owned and
foreign-invested firms in order to allow an examina-
tion on how the changes in the scores of guanxi are
associated with those of the supply management
practices.
4. Data analysis and results
4.1. Validation
Since all instrument items were developed based
on the comments from participants of a pilot-test,
the content validity of all items can be deemed
acceptable. The rest of this section will focus on
validating the multi-item constructs of this study
(i.e., strategic purchasing, outsourcing, and supplier
development). The reliability of the constructs was
assessed initially by the Cronbach a coefficient. The
results show that all a values, ranging from 0.91 to
0.94, are above the benchmark level of 0.7 suggested
by Litwin (1995). Confirmatory factor analysis
(CFA) was subsequently employed to assess the
validity of the constructs. When performing CFA,
over-identification is a desired state because it
means that the information in the data matrix is
sufficient for all the parameters in the model to be
estimated (Hair et al., 1998). In order to achieve
over-identification, supplier development and out-
sourcing were grouped together in the analysis, and
strategic purchasing was analyzed individually.
These two measurement models were tested using
an SEM package, AMOS (Arbuckle and Werner,
1999). The desired levels for fit measures (Hair et al.,
1998) and the results of the CFA performed are
shown in Table 1. It can be seen that fit measures for
the two measurement models meet the criteria for
absolute fit and incremental fit, suggesting that the
measurement models have a satisfactory model fit
and that all items analyzed are valid in reflecting
their corresponding constructs.
The convergent and discriminant validity of the
multi-item constructs were next assessed. In this
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P.K.C. Lee, P.K. Humphreys / Int. J. Production Economics 106 (2007) 450–467
Table 1
Results of the measurement model analyses
Fit measures Model A (supplier
development and
outsourcing)
Absolute fit
Chi-square value (w2) 8.745
Degrees of freedom 8 2
Significance of w2 0.364
w2/degrees of freedom 1.093
GFI 0.984
RMSEA 0.023
Incremental fit
NFI 0.991
CFI 0.999
AGFI 0.957
analysis, two measures—construct (composite)
reliability and variance extracted—were employed
to assess convergent validity. The values of con-
struct (composite) validity should exceed 0.80 for
evidence of convergent validity (Nunnally and
Bernstein, 1994), and the variance extracted should
exceed 0.50 for a construct with sufficient conver-
gent validity (Hair et al., 1998). The results of the
analysis suggest that the construct (composite)
reliability ranged from 0.91 to 0.94 and that the
variance extracted ranged from 0.73 to 0.83, thus
establishing the convergent validity to indicate that
different items of the same constructs are highly
correlated. With respect to discriminant validity, it
can be examined by fixing the correlation between
various constructs to 1.0 and re-running the analysis
on the constrained model. The presence of dis-
criminant validity is supported if the w2 statistics
between the constrained model and unconstrained
model are significantly different (Fornell and
Larcker, 1981). By constraining the correlations
between constructs of the final structural model to
1, the w2 value increased by 24.175 with an increase
of three degrees of freedom. The difference in the w2
statistics was highly significant at p ¼ 0:001 level,
implying that the discriminant validity of the
constructs is satisfactory, with the items of the
different constructs being distinct enough to be
distinguished from other constructs.
4.2. Hypotheses and model examination
We examined the proposed hypotheses and the
conceptual model of this study by using a path
459
Model B (strategic Criteria
purchasing)
2.453
0.293 X0.05
1.227 p3.0
0.993 X0.90
0.036 p0.05
0.995 X0.90
0.999 X0.90
0.964 X0.90
analytic model analysis (a.k.a. path analysis). This
technique is a multivariate analytical method for
empirically examining sets of hypotheses repre-
sented in the form of a path model (Li, 1975). Its
major benefit is that it provides researchers with
detailed insights by breaking the effect of one
construct on another into direct, indirect, and
spurious effects (Asher, 1983). This enables re-
searchers to better understand the underlying causes
of a significant correlation between two constructs.
When testing the proposed model, two steps of path
analysis—(1) model testing and (2) path decom-
position—were performed (e.g., Flynn et al., 1995).
4.2.1. Model testing
The basic rationale in testing a proposed path
model is to eliminate paths between constructs when
the assumed causal effect is not significant (Asher,
1983). The strength of a posited relationship is
dependent on the value of the path coefficient, i.e.
the standardized partial correlation between the two
constructs. The traditional and simplest method to
estimate path coefficients is to use multiple regres-
sion analysis (Klem, 1997). One multiple regression
analysis is needed for each dependent variable in the
model. Multiple regression analysis is commonly
used to determine the strengths of the relationships
between a dependent variable and a number of
independent variables. When conducting multiple
regression analysis, multicollinearity is an important
concern. The presence of high multicollinearity
between independent variables can substantially
affect the correct estimation of regression coeffi-
cients and their statistical significance (Hair et al.,
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460 P.K.C. Lee, P.K. Humphreys / Int. J. Production Economics 106 (2007) 450–467
1998). Variance inflation factor (VIF) is the measure
commonly used to assess the degree of the multi-
collinearity present in a regression model in that it
tells researchers the degree to which each indepen-
dent variable is explained by other independent
variables in a regression model. A common criterion
is that the VIF values of dependent variables should
be less than 10 (Hair et al., 1998).
In the multiple regression analyses performed in
this study, the default setting was ‘‘stepwise’’, and
no control variables were included as independent
variables. Further, following the approach of
similar studies employing path analysis with data
from manufacturing environments (e.g., Flynn et
al., 1995), interaction effects between independent
variables were not addressed in the analyses. Table 2
presents the results of the analyses performed and
the VIF values of every independent variable in each
of the multiple regression analyses. Note that the
association between guanxi and strategic purchasing
(i.e., H1) was examined by a simple correlation, and
the rest of the paths of the model were assessed by
two multiple regression analyses using outsourcing
and supplier development as the dependent vari-
ables, respectively. Multiple regression analysis was
not employed in testing H1 because there was only
one independent variable (i.e. strategic purchasing)
in the analysis and thus, multiple regression analysis
was not applicable. Results of multiple regression
analyses indicate that all hypotheses were supported
(po0:05). Also, the values of coefficient of determi-
nation (R2) and the F-statistics (po0:001) indicate
that the explanatory power of the independent
variables and the overall fit of the multiple
regression conducted are of adequate level. In
addition, all VIF values are far below the threshold
10, indicating multicollinearity does not have
Table 2
Results of multiple regression analyses performed
Hypothesis Dependent F Probability R2
variable
1 Strategic n/a n/a n/a
purchasing
2 Outsourcing 16.96 0.000 0.17
3 1.02
4 Supplier 37.58 0.000 0.40
development
5 1.13
6 1.20
excessive impact on the multiple regression analyses
performed. Overall, the results indicate that all
proposed paths are significant that they could be
retained in the model.
4.2.2. Path decomposition
In the path decomposition of path analysis, the
effects of one construct on the others are decom-
posed into the three components of direct effects,
indirect effects, and spurious (unexplained) effects
(Asher, 1983; Klem, 1997). Direct effects are
presented in path models by straight arrows from
one variable to another and identical to the path
coefficient between variables. An indirect effect is
present between two constructs when these con-
structs are connected by forward-pointing arrows
and mediated by other construct(s) in between and
can be obtained by multiplying the path coefficients
of paths along the chain of effect. The sum of direct
effects and indirect effects between two variables is
called ‘‘total effect’’. Spurious effect is present
between two constructs when they are directly or
indirectly impacted by one or a set of constructs.
The magnitude of the spurious effect between two
constructs is the product of the coefficients for the
individual paths involved.
According to Flynn et al. (1995), the adequacy of
a path model in reflecting the reality can be assessed
by examining the discrepancies between the empiri-
cal correlation of two constructs and the corre-
sponding sum of effects. Asher (1983) has suggested
that the difference between the sum of effects and
empirical correlation smaller than 0.1 implies the
model is an acceptable one. Table 3 reports the
results of path decomposition for the resultant path
model of this study. Note that every row of the table
presents the direct effect, indirect effect, spurious
VIF Independent Standardized Probability
variable coefficient
(path
coefficient)
n/a Guanxi 0.14 0.032
1.02 Guanxi 0.22 0.002
Strategic purchasing 0.31 0.000
1.08 Guanxi 0.25 0.000
Strategic purchasing 0.22 0.001
Outsourcing 0.40 0.000
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P.K.C. Lee, P.K. Humphreys / Int. J. Production Economics 106 (2007) 450–467 461

Table 3
Results of the path decomposition

Dependent Independent Direct Indirect Total effect Spurious Sum of Implied Absolute
variable variable effect effect effect effects correlation difference

Supplier Strategic 0.22 0.00 0.22 0.04 0.26 0.39 0.14

development purchasing
Guanxi 0.25 0.14 0.39 0.00 0.39 0.39 0.00
Outsourcing 0.40 0.00 0.40 0.12 0.52 0.54 0.02
Outsourcing Strategic 0.31 0.00 0.31 0.03 0.34 0.34 0.00
purchasing
Guanxi 0.22 0.04 0.26 0.00 0.26 0.27 0.01
Strategic Guanxi 0.14 0.00 0.14 0.00 0.14 0.14 0.00
purchasing
Total 0.16

effect, and correlation of every possible pair of

constructs depicted in the path model. Further,
‘‘Total Effect’’ is the sum of the direct effect and
indirect effect of the two constructs, ‘‘Sum of
Effects’’ is the sum of the direct effect, indirect
effect, and spurious effect of the two constructs,
‘‘Implied Correlation’’ is the direct correlation
between the two constructs, and ‘‘Absolute Differ-
ence’’ is the absolute difference between ‘‘Sun of
Effects’’ and ‘‘Implied Correlation’’. The results
indicated that by dividing the total of the ‘‘Absolute
Difference’’ (i.e., 0.16) by the number of the
‘‘Absolute Difference’’ (i.e., 6), the average absolute
difference is 0.0267, indicating that the model can be
deemed highly acceptable (Flynn et al., 1995). The
tested conceptual model with path coefficients
stated is presented in Fig. 2 (Fig. 3).
5. Discussion of results and conclusion
The study found that the independent construct
guanxi has a significant influence on the dependent
constructs of supplier development, strategic pur-
chasing, and outsourcing. These constructs are now
examined with regard to Chinese cultural norms
and there implications for supply management
practices in China. It should be noted that this
discussion only considers the effect of guanxi on key
aspects of supply management and does not look at
the inter-relationship between other constructs.
The initiation and development of long-term
relationships are an important element of the
Chinese core value system related to guanxi. Styles
and Ambler (2003) suggest that Chinese executives
will not trade off short- with long-term considera-
tions but emphasize both a long-term orientation
Strategic 0.22
0.14 Purchasing
Supplier
Guanxi
Development
0.25
0.31
0.22
0.40
Out-sourcing
Fig. 3. Resulting path model.
and short-term (discrete) transactions. This is in
contrast to Western companies who tend to focus
either on a relational or transactional strategy with
a supplier organization. More specifically, in China,
the interaction between buyers and suppliers over
time is viewed as a series of ‘‘transactions’’. Each
one is not an isolated event, but part of a sequence
in terms of developing a wider, inter-connected
web of suppliers (Styles and Ambler, 2003).
The cumulative effect is to enhance the degree of
trust and commitment between the organizations
involved.
In addition, transactions are not restricted to
financial exchanges, but may also include knowl-
edge, gifts, an introduction/access to another net-
work, or an obligation. Transactions can therefore
be considered as financial transactions and/or asset
transactions, with these assets having future mone-
tary or asset earning potential. Hence, within the
Chinese context, emphasis on both the short-term
transaction and the long-term interaction between
 ARTICLE IN PRESS
462 P.K.C. Lee, P.K. Humphreys / Int. J. Production Economics 106 (2007) 450–467
buyers and suppliers co-exist. This apparent ambi-
guity is in evidence when the three supply manage-
ment practices of strategic purchasing, outsourcing
and supplier development are considered within the
context of guanxi.
Strategic purchasing, outsourcing, and supplier
development emphasise a long-term orientation
encompassing such issues as senior management
support, ensuring strategic fit between purchasing
and the overall corporate plans, developing and
maintaining relationships between buyers and sup-
pliers, and a focus on trust, cooperation, commit-
ment and dependence. This is consistent with
Western approaches to supply management. How-
ever, as indicated by Styles and Ambler (2003),
within the Chinese environment, this long-term
approach to supply management is supplemented
and built upon a series of cumulative short-term
transactions.
When considering the role of guanxi in the
adoption of strategic purchasing, the results (see
Fig. 2 and Table 3) indicate that firms with a high
level of guanxi corporate culture are more likely to
adopt strategic purchasing. When guanxi is the
prevailing culture in the buying firm, the relation-
ships and interactions with key suppliers are more
likely to be considered as highly important. Hence,
the department (i.e., purchasing) which is directly
responsible for looking after such relationships and
interactions are also more likely to be considered as
a strategically important function. At the same time,
the strong emphasis of guanxi may lead to the
development of closer and more integrated supplier
relationships. As such, in order to cope with the
resources and skills necessary to manage such
business relationships, a strategic purchasing
department may inevitably be required.
The positive impact of supplier development on
firm performance has been well documented in the
literature (e.g., Krause et al., 2000; Dyer, 1996).
This study offers new insights to the literature and
practitioners by indicating that guanxi culture is a
critical driving force of supplier development.
Specifically, the results reveal that guanxi influences
supplier development not only directly, but also
indirectly through strategic purchasing and out-
sourcing. However, it should be noted that this
supplier development strategy represents transac-
tion-specific investments (Williamson, 1985) in the
supplier by the buying firm as outlined in the
research instrument (see Appendix A). Over the
long run, direct involvement investments may
reduce the buying firms’ transaction costs and the
uncertainty with regard to manufacturing inputs.
However, as Krause et al. (2000) indicate these
investments are nontransferable and the benefits of
the supplier development investment are unrecover-
able for the buying firm if the relationship is
suddenly terminated. Thus, the direct supplier
development activities represent a risk to the buying
firm.
In order to alleviate this risk, it is suggested that
one of two approaches are being adopted within
Chinese companies related to the concept of guanxi.
Such evidence was obtained through interviews with
participating firms during pilot-testing for this
study. Firstly, Chinese buyers place considerable
emphasis on how proactive suppliers are with
regard to the cumulative development of their own
capabilities. In effect, buyers provide assistance to
those suppliers who show a willingness or commit-
ment to develop, on an incremental basis, their
manufacturing and technical capability. It is only
when such a commitment is apparent that buying
firms provide their own resources in developing
suppliers. Such an approach therefore helps to
minimize the investment risk to the buying firm.
This is consistent with the argument proposed by
Stuart (1995), who indicated that only when a
philosophical and strategic match exists between
buyer and supplier management, would the chance
of success in the alliance be enhanced. Krause et al.
(1998a, b) provides further supporting evidence by
suggesting that buying firms adopt a reactive or
strategic approach to dealing with suppliers. The
distinction with the current study is that, from a
Chinese guanxi context, the onus is placed on
suppliers to show that they are being proactive with
regard to their own development activities before
the buying firm is prepared to provide further
investment. In other words, as suppliers invest in
short-term asset specific transactions to improve
performance, this cumulative effect over time
provides justification for the buyer to support
further supplier development activities.
Secondly, minimizing buyer risk may be related
to a perspective that guanxi is viewed as a series of
favor exchanges. Yang (1994) stated that ‘‘Once
guanxi is established between two people, each can
ask a favour of the other with the expectation that
the debt incurred will be repaid sometime in the
future.’’ In other words, in a buyer–supplier
relationship with the presence of a strong guanxi,
a favour performed by one of the parties may be
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P.K.C. Lee, P.K. Humphreys / Int. J. Production Economics 106 (2007) 450–467
perceived as a kind of debt that has to be repaid.
Thus, the strong linkage between supplier develop-
ment and guanxi may be partly due to these
activities being viewed as a form of favour
exchange. Hong Kong electronics manufacturers
may develop their suppliers deliberately in the hope
of receiving a favour in the future. Alternatively,
developing a supplier could be a means of repaying
a ‘debt’ incurred in the past. Without the presence
of guanxi, the firms studied may not be willing to
spend their limited resources on improving the
capabilities of suppliers.
With regard to outsourcing, the drive for greater
efficiencies and cost reductions has forced many
companies to increasingly specialize in a limited
number of key areas. This has led to organizations
increasingly to outsource activities traditionally
carried out in-house. Outsourcing has evolved from
focusing on peripheral activities, to encompass more
critical areas of the business such as design and
manufacturing. Consequently, many organizations
consider outsourcing as a critical element of
their organizational strategy (Kakabadse and
Kakabadse, 2002), with its emphasis on reducing
operating costs and an increased focus on core
competencies. This benefit is consistent with trans-
action cost economics as described by Williamson
(1985), who suggest that companies should out-
source activities if to carry them out internally
would require excessive investment to get the lowest
unit cost.
The process of outsourcing manufacturing to
specialist organizations is now a fairly widespread
phenomenon and in the electronics sector it has
become well established (Keynote report, 2002).
From the qualitative interview data collected from
the participating firms of the pilot-test in this study,
OEMs have been placing considerable emphasis on
integrating suppliers into these activities as a result
of:
 New product development—due to shortening
product life cycles and time-scales there are
major efforts directed towards new product
development. There is significant emphasis on
OEMs and their suppliers working together in
the new product development process to reduce
costs and have formal cost reduction plans for
the future life of new products.
 On-going cost reduction and re-design—with
OEMs in the electronics sector constantly re-
designing their existing products in order to
463
reduce costs and increase functionality there is a
major impetus to internalize suppliers into the
process.
Within a Western context, transaction cost
economics suggests that outsourcing agreements
require a well-developed system of contract law
through which formal disputes can be resolved.
However, increased documentation and the cost of
litigation can lead to an increase in the cost of the
transaction. Given that the formal legal systems and
proper distribution channels in China are still at a
relatively immature stage (Tsang, 1998), a guanxi
network provides an alternative ‘‘informal’’ efficient
system. The guanxi network does not require
extensive documentation or litigation, thus facilitat-
ing the outsourcing arrangement.
In addition, a form of international subcontract-
ing has developed in Hong Kong that has evolved
around the OEM business in which local manufac-
turers produce according to the requirements of the
orders received from overseas companies. Products
made by Hong Kong manufacturers and their
associated supplier networks, predominantly based
in Mainland China, are sold in overseas markets
under the brand names of foreign companies. OEM
business accounts for a large proportion of total
electronics output in Hong Kong (Hobday, 1995).
A survey conducted in 2000 revealed that 82% of
the Hong Kong companies studied that had
manufacturing activities were completely or partly
engaged in OEM production (Hong Kong Trade
Development Council, 2005). With this figure, it is
reasonable to infer that of the 175 sample firms of
this study, more than 140 of them engage in OEM
production. One consequence of this is that a firm
engaging in OEM business does not need to devote
a high level of resources in marketing and promo-
tions. Instead local producers let the overseas
buyers bear the risk of the finished product. The
implication for the guanxi network of companies
along the supply chain is that overall transaction
costs are reduced.
So far the discussion has been limited to supply
management practices at a strategic level, but there
are also wider implications in terms of the influence
of guanxi on operational issues. With regard to the
implementation of an effective supply chain system,
Fliedner (2003) identifies a series of supply chain
stages, namely: relationship building and joint
planning, forecasting and inventory replenishment.
 ARTICLE IN PRESS
464 P.K.C. Lee, P.K. Humphreys / Int. J. Production Economics 106 (2007) 450–467
With regard to the current study, the question-
naire data highlights the importance of top manage-
ment support and the need for purchasing to have a
strategic role. However, as Burnes and New (1997)
and Cousins (2002) suggest, even though decisions
regarding whom and whom not to enter into a
relationship will tend to be decided at the strategic
level, their success or failure is very dependent on
the operational processes. It is at this level, through
the day-to-day interaction between individuals in
the two organizations, which trust, cooperation and
openness can develop. Thus, in terms of developing
a guanxi culture, it needs to occur not only at the
senior management echelons, but also at lower
levels within the organizational structure.
In terms of forecasting and inventory replenish-
ment, the data from the questionnaire highlighted
the need to continuously monitor the supply base,
through supplier evaluations and site visits. How-
ever, it should be noted that the considerable
majority of sample firms in the current study locate
their manufacturing facilities in China or other
Asian countries and support services in Hong Kong.
Given the geographical dispersion of these compa-
nies good communication channels are of critical
importance to ensure that customer requirements
are satisfied. Increasingly, web-enabled applications
are being used to support the flow of information
and to monitor the supply base. For example,
McIvor et al. (2000) describe the application of an
inter-organizational information system (IOIS)
linking a Hong Kong intermediary with suppliers
in China and major retail outlets in the US. The
IOIS has provided improvements in inter-organiza-
tional efficiency, reduced search-related costs and
enhanced customer service (through accurate in-
ventory forecasts and order lead times), as well as
providing suppliers with product feedback from
customers. However, the successful introduction of
such IOIS systems can represent a significant cost to
a supplier and many customers assist their suppliers
both in making the initial investment and in
providing technical assistance. As described earlier
this is another form of ‘‘debt/favour’’ exchange
found in a guanxi relationship. Suppliers are, in
effect, ‘‘indebted’’ to their customers as a result of
the ‘‘favour’’ or assistance provided. Such ‘‘debt/
favour’’ exchanges help to deepen and strengthen
the relationship thus enhancing the guanxi network.
In conclusion, the Chinese economy is character-
ized by high levels of turbulence and institutions in a
state of transition. The result is that from a supply
chain perspective the rationale for adopting specific
business practices is different when compared to
managers operating in relatively mature western
markets. The failure to appropriately assess the
impact of guanxi-based supplier management prac-
tices can have a detrimental effect on organizations
attempting to enter the Chinese market. Given the
lack of literature which investigates the relationship
between Chinese culture and Operations Manage-
ment issues, this study contributes to both the
literature and practitioners by establishing a clear
linkage between guanxi and supply management
both at a strategic and operational level. The study
offers insights to show that guanxi has a significant
potential to facilitate the building of interfirm
relationships in China’s expanding market-oriented
environment. With such results, the research will
help inform firms from mature economies who are
looking to enter an emerging economy such as
China. For instance, several US and European
companies have established outsourcing arrange-
ments with companies across the region and within
China (Abramson and Ai, 1999). Typically these
firms will form a joint venture with a Chinese
organization and therefore it is important to have
an appreciation of the implications of guanxi and
the influence it can have on the relationship between
the organizations involved. The research should
therefore provide additional evidence for supply
managers to take into consideration local environ-
mental factors relating to culture which impact on
supply management practices.
6. Limitations and future research
Several limitations of this study should be noted.
First, the data of this study were collected from Hong
Kong manufacturers. Hong Kong is a formal colony
of United Kingdom, and the firms here have been
doing business directly with Western firms for many
decades. Hence, the attitude of the Hong Kong
managers in managing the relationships with their
business partners may not be identical to the
managers of other Chinese business communities.
Thus, future research is encouraged to use data
collected from contexts such as Mainland China or
Singapore in order to provide additional information
concerning the role of guanxi in different Chinese
communities. Second, the data of this study were
collected from a single-manufacturing industry. The
generalizability of the findings can be improved if
future research will employ data collected from
 ARTICLE IN PRESS
P.K.C. Lee, P.K. Humphreys / Int. J. Production Economics 106 (2007) 450–467
different manufacturing industries (e.g., automotive
industry, clothing industry, etc.). Third, all instrument
items of this study were validated by data collected
from industrial buying environments. Future research
may test the items by using data from service settings
such as retailing, hotel industry, etc. Fourth, this study
was designed and conducted from the perspective of
the buying firm in a buyer–supplier relationship.
Future research may offer new contributions by using
a dyadic methodology. With the data from both
buyers and suppliers, more detailed insights concern-
ing the role of guanxi in the relations of firms in a
supply chain can be resulted. Fifth, guanxi was
measured by a single indicator in the current study.
Since a multi-item scale should offer better validity
and a widely used scale for guanxi is not available in
the literature, future research should employ the
existing scales as the bases to develop a better multi-
item scale for the concept. Sixth, it should be noted
that supply management is a multi-dimensional
construct; thus, future research may examine more
different practices, such as supplier evaluation, small
supply base, and IT application in purchasing, etc.
Finally, the effects of guanxi on other important issues
of operations management could also be explored.
The findings of this study imply that firms with a
strong guanxi culture may tend to have closer
integration with business partners. Recent key issues
concerning inter-firm integration in operations man-
agement include Customer Relationship Management
(CRM), Electronic Data Interchange (EDI), and
Enterprise Resource Planning (ERP), etc. Future
research investigating the role of guanxi culture in
the implementation of these important issues should
yield new and practically relevant insights to opera-
tions managers.
Appendix
Instrument items
Guanxi
 In our company, we believe relationship/guanxi
( ) is very important in doing business.
Supplier development
 We use established guidelines and procedures
when evaluating this supplier performance.
 We perform site visits to this supplier’s premises
to help improve their performance.
 We invite this supplier’s personnel to our
premises to increase their awareness of how their
product is used.
465
Strategic purchasing
 Purchasing’s long-range plan is reviewed and
adjusted on a regular basis to match the changes
in the company’s strategic plans.
 The top management of my company emphasizes
the purchasing function’s strategic role.
 Purchasing is viewed by the CEO/director as
being equal to other functions (e.g., marketing,
HRM, etc.) in the company.
 Most senior managers in our company consider
ideas and suggestions from our purchasing
department as important.
Outsourcing
 We keep our production process simple by
outsourcing non-core activities.
 Outsourcing is not adopted by our company.
 We prefer investing our resources on our current
production process and outsourcing non-core
activities.
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