When the medieval Italian traveller, Marco Polo (1254–1324), returned from China, he shocked Europeans with the news that the Chinese used not metal but paper money; indeed, European resistance to representative money based on paper notes stretched into the nineteenth century (de Soto, 2000, p. 222). While China might have had a few centuries away from the global limelight, it is currently staging the biggest economic boom in the history of the planet. In common with Japan, China runs a substantial trade surplus with the USA and represents an alternative to Anglo-American expectations about liberal individualism and free-market economics. China's 4,000 years of imperial rule, 40 years of Communist Party bureaucracy, and economic reforms that date from the late 1970s do not add up to free-market economics, but instead represent an autocratic route to modernity.
China is the world's most populous nation with over 1.29 billion people. Such a huge quantity of labour, available at a low price, is China's key economic resource. In addition, China's size of 9 million square kilometres allows for a strong agricultural sector (16 per cent of gross domestic product, or GDP), while it also has large mineral reserves and the largest hydro-power potential in the world. It has an increasingly diversified industrial sector, with a shift from heavy (12 per cent of GDP) to light industry and a growth in the manufacturing sector (39 per cent of GDP) of the economy. The Special Administrative region of Hong Kong also means that China has control over one of the largest trade and financial services sectors in the world (32.5 per cent of GDP).
The rising prosperity of the Chinese people has created a middle class of 300 million. This middle class wants to consume and the global costs of pollution caused by this consumption are astounding. Coal provides 70 per cent of energy in China and its car emissions standards are ten years behind those of Europe. Environmental degradation currently underway threatens China's productive capacity and quality of life.
Half of China's workforce now works in the services or industrial sector of the economy, with a shift in the industrial sector from heavy to light industry. Labour mobility has contributed to globalisation with 31.7 per cent of the population being urbanised, while figures suggest that there are still 150 million unproductive employees in the agricultural sector. The sheer scale of changes in China's economy has far-reaching international implications. Economic development in China is reshaping international trade, while foreign investors who are eager to exploit opportunities generated by China's growing prosperity are confronting institutional rules of practice that put outsiders at a disadvantage: doing business in China depends on developing and maintaining appropriate relationships with insiders.
Although Chinese words such as guanxi (relationship) have started to creep into the English language management and business literature (see Saxenian, 2003; Woetzel, 2003; Fu et al., 2004), it is difficult for outsiders to appreciate the practical implications of such terms. For example, in the UK or USA, legally binding written contracts are a cornerstone of business practice. However, in China, a contract is merely one part of a bigger picture – ‘getting things done’ depends on relationships: as Box 3 explains, you have got to have patience with guanxi.
Box 3 China: You've got to have patience with Guanxi!
China's institutional rules of practice privilege implicit obligations to relevant groups over individualism and claims to individual rights of the type that might be taken for granted in the USA and the UK. From the point of view of management and business practice, this has at least two implications.
First, in China, explicit rules can prove to be rather less effective than in the USA, the UK and other liberal Western democracies. Instead, unwritten understandings that are learned implicitly (that is, ‘independently of conscious attempts to learn and largely in the absence of explicit knowledge about what was acquired’ [Reber, 1993, p. 5]) play a fundamental role in mediating the use of power in Chinese contexts. These unwritten understandings routinely ‘overwrite’ formal rules.
Second, the implicit learning necessary to benefit from the level of mutual understanding that is necessary to function effectively in Chinese society takes time: there is no quick-fix solution to building trust (although the trust build-up over years can evaporate instantly, if somebody offends against the implicit code). Implicit learning among people who deal with each other on a regular basis enables them to develop aligned tacit knowing: they ‘read’ signs and events in a similar way. They are able to imagine the intended meaning by reading between the lines and recognising the importance of what is not said. Understanding insider practice depends upon developing the capacity to act and think in the manner of an insider. Requisite trust represents a form of knowing that cannot be explained adequately in terms of information or ‘knowledge capture’. Such knowing relies on direct personal experience: if you have not done it, you cannot know what it is like. Building the trust necessary to experience guanxi requires serious displays of dedicated effort.
Guanxi is a Chinese business-networking concept that contrasts sharply with Western management and business practices. Literally, guanxi means ‘relationship’ and its principles extend to any type of relationship; it is also understood as the network of relationships among various parties who cooperate and are bound together by expectations of mutual support. Notwithstanding China's apparent embrace of practices that have the outward appearance of Western business, ‘getting things done’ in China depends on involvement with the right guanxi.
Of course, China is hardly the only place where dealing with people whom you know and trust is essential to effective business practices. However, the degree of effort required to build requisite trust might surprise many Westerners. Whereas Westerners might rely on expectations about legally enforceable contracts and property rights to overcome the uncertainties involved in dealing with a stranger, the Chinese approach involves getting to know people to the extent where they are no longer strangers. Guanxi is a prerequisite of Chinese practice: without first establishing the necessary guanxi, nothing much can happen. Moreover, building guanxi is not a one-off project: once established, guanxi have to be nurtured and continually refreshed – thereby building deeper trust and making the whole thing easier for insiders to practice, but simultaneously harder for outsiders to penetrate. Unlike assets that are traded on capital markets, guanxi cannot be traded, but guanxi are economically significant in terms of the practices that they facilitate. Much of the knowledge generated in the course of guanxi activities might appear redundant. Yet, it provides a reservoir of shared understanding that surges forth unbidden whenever the time is ripe, thereby smoothing over difficulties and absorbing uncertainties. While guanxi's ostensibly redundant knowledge might constrict Western expectations of efficiency, it underpins considerable flexibility.