Organisational Guanxi and State Owned Enterprises in South … · Organisational Guanxi and State Owned Enterprises in South-west China by Stephen John Grainger. Declaration I hereby

Organisational Guanxi and State Owned Enterprises in South-west China

by

Stephen John Grainger.

Declaration

I hereby certify that, except where cited in the text, this work is the result of

research carried out by the author. It contains, as its main content, work which

has not previously been submitted for a degree at any other tertiary institution.

___________________________________________________________

Stephen Grainger

July 2005

This thesis submitted in fulfilment of the requirements of the Degree of Doctor

of Philosophy in Asian Studies at the University of Western Australia.

i

for

my father

who has been a constant inspiration throughout my life

and

for

my two daughters Ella and Joni

who are blessings from above.

ii

Abstract

Stephen Grainger

This thesis investigates the phenomenon of organisational guanxi in business in

the SOE hotel environment in south-west China. A general aim is to give the

reader a sense of how organisational guanxi operates in this environment. It

identifies the characteristics and roots of organizational guanxi and discusses the

significance of its operation in this environment. This thesis also analyses the

implications of the continued practice of organizational guanxi and the prospects

of its future as the Chinese economy continues to evolve toward a more market

orientation.

In Chapter One, the phenomena of guanxi, mainzi and renqing are defined and

the importance of their role in conducting business in mainland China proposed.

In addition, the objectives of this research are defined and the structure of the

thesis summarised.

Part One, The Roots of Organisational Guanxi, comprised of Chapters Two,

Three and Four, investigates the roots and evolution of organisational guanxi and

surveys the development of the socialist market economy, the development of

the State Owned Enterprises (SOE), and the important role played by the danwei

(work unit) in this process.

Specifically Chapter Two, From Planned to Market Economy, provides a

historical overview of China’s economic development since 1949 and a firm

basis from which to compare the later development of business practices in rural

and coastal China.

Chapter Three, The Development of Organisational Guanxi in State Owned

Enterprises, covers the development of the SOE and identifies the SOE as the

home of organisational guanxi. Here the researcher argues that organisational

guanxi was born and began to evolve in the military danwei that supported

Mao’s followers during the Long March and the establishment of rebel

controlled regions in the north-west of China. After the Chinese Communist

iii

Party assumed power, the development of the SOE provided the right

environment in which to further enhance the development of organisational

guanxi. As many of the post-1949 SOE managers were Mao’s cadres before he

took control, it was a natural progression for them to use the same style of

organisational guanxi management methods. In fact most of the chapter is about

the reform period and the difficulties facing SOEs during this time.

Chapter Four, Danwei: the Roots of Organisational Guanxi, summarises the

origins, emergence, and history of the danwei; examines the characteristics of

the danwei; and argues how the original military danwei practices during the

1930s and 1940s and danwei practices post-1949 have contributed to the

development and enhancement of modern organisational guanxi. In this chapter

the research and discussion focuses on the period from the pre-1949 danwei

through to when guanxi practices almost ceased during the Cultural Revolution.

This chapter highlights the critical role the danwei has played in the

development of the characteristics of organisational guanxi.

Having investigated the roots and consolidation of organisational guanxi in Part

One, in Part Two the researcher examines organisational guanxi in operation in

south-west China. This is covered in Chapters Five, Six, Seven and Eight.

Chapter Five, Organisational Guanxi in China’s Hotel Sector, defines

organisational guanxi and the distinctive characteristics that differentiate it from

other types of guanxi. Expanding on the long list of guanxi types identified by

Kipnis (1997), the researcher proposes the existence of organisational guanxi in

south-west China’s hotel sector and provides evidence based on the findings of

research conducted at the Roaring Dragon Hotel in south-west China. In this

chapter examples of traditional and new forms of guanxi are provided. In

addition, the implications of organisational guanxi for business entities in China,

how guanxi is accepted by south-west China’s emerging educated youth, and the

effect guanxi has on organisational outcomes for managers working in south-

west China, are discussed.

Chapter Six, Guanxi neglect at the Roaring Dragon Hotel in South-west China:

iv

The Demise of an International Management Contract, is a detailed case study. It

introduces and defines the concept of ‘guanxi neglect’ through the description of

the takeover of a former SOE Chinese-managed hotel by a western-based,

international management organisation. Specifically, the study focuses on the

cultural conflict that occurred among Chinese managers and employees trying to

adapt from the former Chinese relationship-based methods of hotel management

to the western market-oriented methods of the organisation that took control of

management of the Hotel. The conclusions that are drawn highlight cultural

characteristics and issues that companies taking over or approaching joint-

ventures with SOE in south-west China may encounter and should consider. This

case highlights the role guanxi can play in hindering or enhancing the changing

dynamics and operations of a large Chinese service organisation as it embraces

the onset of globalisation and the socialist market economy.

Chapter Seven, Differentiating between Intra-organisational and Inter-

organisational Guanxi, answers the question: do the characteristics of guanxi in

operation between organisations differ from those that operate internally within

organisations? This question is answered by examining and comparing survey

results collected from trade executives based in Hong Kong (Fock and Woo,

1998) with new data collected from employees from the Roaring Dragon Hotel

in the south-west of mainland China. Direct comparisons are made between

results of these two surveys to uncover the characteristics that distinguish and

differentiate the types of guanxi found in inter-organisational and intra-

organisational environments.

Chapter Eight, Guanxi decay in China: Is it really happening? compares the

speed of development of the socialist market economy in the eastern and western

regions of China and asks does the speed of reform enhance the decay in the

significance of guanxi practice? In particular, the research is focused on

Guthrie’s (1998, 2002) claims and Wang’s (2002) rebuttal to the proposition that

the significance of guanxi is in decline in the Shanghai business district. These

views are compared and a proposal formulated claiming that the decay in the

significance of guanxi is much less and is occurring at a much slower rate in

south-west regions. In this chapter the researcher compares the economic

v

development of the coastal and inland regions of China and argues that they

really are two very different regions operating within the same country. Guthrie

states, the power of guanxi may be in decline as Shanghai goes through an

economic transition. However, the researcher argues that it is still too early to

draw such a conclusion across all of China and especially in the south-west.

Conclusions differ regarding the importance, development, maintenance and

decay of guanxi in these two differing regions and environments. To further

counter Guthrie’s findings, it is argued that the economically developed societies

of Singapore, Taiwan, and Hong Kong have shown that the establishment of a

modern economy, supported by institutional law, does not necessarily displace

the reliance on guanxi connections (Yeung and Tung, 1996: 64).

The findings of this new research in south-west China provide conclusive

evidence that in this region the guanxi network remains the lifeblood of the

business community (Kao, 1993). In addition, this research throws up some

conclusions that are not aligned with that of Guthrie’s (2002) Shanghai-based

findings.

In Chapter Nine, The Conclusion, the major findings of this thesis are revisited

and include the acknowledgement and definition of organisational guanxi, the

exploration of the roots of organisational guanxi inside the danwei, the

differentiation of intra-organisational guanxi from inter-organisational guanxi,

the definition of the concept of guanxi neglect, and a comparison of the decay in

the strength and usage of guanxi in south-west China with that in the Shanghai

region.

vi

Acknowledgements

This thesis is dedicated to my father who has been a mountain of encouragement

and integrity and a fine example throughout my life. Without his inspiration,

wisdom and love this thesis would not exist.

My supervisors Dr Lyn Parker and Dr Gary Sigley have been my academic

inspiration and I thank them for their time, constant revision, patience, energy

and guidance. They have read every chapter many times and have fostered the

slow and gradual improvement of this thesis.

My wife Regina has been a constant support to me throughout this journey and

without her encouragement, translation skills and patience the finishing line

would still be far off.

Dr. Yang Song provided my first experience of guanxi and his connections in

gaining me a position as a lecturer in Kunming were critical in allowing me to

start my research from a solid base and importantly as an insider. This beginning

saved time and opened many research doors.

My own personal guanxi in mainland China has been a critical factor in my

completion of this thesis. In particular I would like to acknowledge the

assistance of Matthew Zhang, Dickens and his father, Wen Naxun, Cai Yong,

Xiong Mei, the CCP Secretary, and Can Hong. Their thoughts, wisdom, laughter

and invitations to numerous banquets have made the journey even more

enjoyable.

At the Roaring Dragon Hotel (RDH) I owe a tremendous debt of support to the

Head of the Training Department. He remains an old friend whose guanxi has

and continues to open many research doors for me in China. Also from the RDH,

I wish to acknowledge the help and friendship I have received from all of the

managers and employees who allowed me to interview them.

vii

Special thanks to the General Manager from the Nothill Hotel who gave me

permission to conduct interviews and a number of surveys of the staff of the

Roaring Dragon Hotel during his tenure as General Manager of the RDH.

Without his approval this would not have been possible. I also wish to thank the

Head of the Nothill Food and Beverage Department..

My father-in-law, Low Nam Fatt in Singapore, has been a strong supporter with

whom I have been able discus my ideas and approach. His willingness to read

my work and provide constructive criticism has been inspirational.

My sister Jenny, although she has had no direct input to this thesis, still remains

one of my soul mates as I travel through life and it would be remiss of me to fail

to recognize and thank her for her love and inspiration, two vital conditions that

any successful Doctor of Philosophy candidate needs in abundance.

Finally, my two daughters Ella (4) and Joni (2) have asked me on so many

occasions ‘what is this stuff about Dad?’ and ‘can I come to China too?’ They

have helped me remember that life should be full of fun and that one must

maintain perspective on where one’s priorities must lie.

viii

Table of Contents

Declaration i Dedication ii Abstract iii Acknowledgements vii Table of Contents ix List of Tables xii Notes xiv Introduction Chapter 1 What is Guanxi? 1

i Defining Guanxi 6 ii Core Principles of Building and Maintaining Guanxi 10 iii Why Has Guanxi Developed? 14 iv Renqing 18 v Mianzi (Face) 21 vi Guanxi as a Necessity for Doing Business in China 23 vii Thesis Questions/Objectives 29 viii Thesis Structure 32

Part One - The Roots of Organisational Guanxi Chapter 2 From Mao to Deng: Adapting From Planned to

Market Economy 39

i Mao’s Rule and the Development of the Planned Economy 39

ii Deng’s Reign and the Beginnings of Reform 51 iii A New Economic Focus 54 iv The Importance of this Period in the Development of

Organisational Guanxi 59 Chapter 3 The Development of Organisational Guanxi in

State Owned Enterprises 61

i State Owned Enterprise Structure 64 ii Reform Difficulties for SOE 67 iii What Must China do to Effectively Reform SOE? 88 iv Summary 93

ix

Chapter 4 The Role of the Danwei 100 i What is the Danwei? 101 ii Characteristics of the Danwei 105 iii Historical Overview 111 iv Summary 120

Part Two - Organisational Guanxi in Operation Chapter 5 Organisational Guanxi in China’s Hotel Sector 124

i Organisational Guanxi 127 ii Problems 145 iii Guanxi and the Attitudes of the Young 147 iv Conclusions 149

Chapter 6 Guanxi Neglect at the Roaring Dragon in South-west China:

The Demise of an International Management Contract 155 i Methodology 156 ii The Roaring Dragon Hotel 156 iii Reflection on a 1993 Experience 158 iv The 1998 Story 160 v Nothill and Mr. Harvey’s arrival 163 vi Erhi T 166 vii The Provincial Government 167 viii April 1999 168 ix July 175 xi Using Guanxi to Transfer Out 179 xii Agencies and Competition 181 xiii August 182 xiv September 184 xv October 187 xvi November 190 xvii The Four Mondays 191 xviii December 198 xix Discussion 204 xx March 2000 214 xxi Conclusion 216

Chapter 7 Differentiating between Intra-organisational and Inter-organisational Guanxi 221

i The Roaring Dragon Hotel Environment 222 ii Part A: Perceptions of the Characteristics of Guanxi

Recorded by Employees of the Roaring Dragon Hotel in South-west China in 1999 226

x

iii Part B: Perceptions of the Characteristics of Guanxi 230 iv Hypothesis 232 v Results 234 vi Discussion 237 vii Conclusions 247

Chapter 8 Guanxi Decay in South-west China:

Is it Really Happening? 251

i Part 1 251 ii Speed of Reform 262 iii Discussion 271 iv Part 2 275 v Methodology 275 vi Results 277 vii Discussion 292 viii Conclusions 299

Chapter Nine Conclusion 304 The Future? 307 Bibliography 313 List of Interviews 334 Appendix 1 Mean Rating Formula and Variable Definition 338 Appendix 2 Comparison of Mean Ratings of the Importance of guanxi

and the Characteristics for Sub-groups at the Roaring Dragon Hotel, 1999 339

Appendix 3 Standard Deviations of the Relative Importance of

guanxi Characteristics Recorded by Employees at the Roaring Dragon Hotel in South-west China Compared to those of Hong Kong Trade Executives 340

Appendix 4 Provincial Statistics Comprising Provincial per Capita GDP as Percentage of National Average (1994), Provincial per Capita GDP as Percentage of National Average (1994), Annual Growth Rate per Real per Capita GDP (1978-94), Number of Counties in Province (1992), Number of Counties in Poverty (1992). 341

Appendix 5 Table of Statistics including Savings Rates of Labour

Force in Provinces (1994), Investment Rates of Labour Force in Provinces (1994), Openness of Provinces (1994), Exports as Percentage of Provincial GDP, Access to Information (1994) and Education Levels. 343

Glossary 346

xi

List of Tables

Table 7.1 (pg 229): Perceptions of the Characteristics of Guanxi of Employees of the Roaring Dragon Hotel, 1999. Table 7.2 (pg 233): Comparison of Perceptions of Guanxi by Employees of the Roaring Dragon Hotel, 1999, and Hong Kong Trade Executives, 1996. Table 7.3 (pg 236): Comparison of the Importance of Guanxi Characteristics Recorded by Employees of the Roaring Dragon Hotel, 1999, and Hong Kong Trade Executives 1996. Table 7.4 (pg 247): Level of Importance of Guanxi Characteristics Identified by Employees of the Roaring Dragon Hotel, 1999, and Hong Kong Trade Executives, 1996. Table 8.1: (pg 264): Per Capita Gross Domestic Product 1978 and 1994, Annual Growth Rates and the Number of Provinces in Poverty 1992. Table 8.2 (pg 265): Savings Rates, Investment Rates and Exports as a Percentage of Provincial Gross Domestic Product. Table 8.3a (pg 267): Communication Mechanisms, 1994. Table 8.3b (pg 268): Communication Mechanisms (as a percentage of scores recorded in eastern provinces) 1994. Table 8.4 (pg 269): Illiteracy Rates, Mean Number of School Years 1994. Table 8.5 (pg 270): Comparison of Urban Development, Gross Domestic Product and Percentage of Foreign Investment of China’s Three Regions (1995) Table 8.6 (pg 277): ‘Guanxi’ is still an important part of China’s culture. Table 8.7 (pg 278): ‘Guanxi’ will continue to operate in China for a long time into the future. Table 8.8 (pg 279): In Chinese organisations the use of ‘guanxi’ is in decline. Table 8.9 (pg 286): In 20 years time, guanxi will be of no advantage. Table 8.10 (pg 287): In 20 years time, guanxi will be just a memory of China’s past. Table 8.11 (pg 288): The young people of China today place less importance on guanxi than former generations Table 8.12 (pg 289): In your everyday life, how often do you see guanxi used?

xii

Table 8.13 (pg 291): In your job, how often do you see guanxi used? Table 8.14 (pg 292): Guanxi Use Observed in Life and in the Workplace.

xiii

Notes

1. In accordance with Human Research Ethics Committee commitments, I have

used pseudonyms for people, places and institutions.

2. In the text of this thesis interviews are referenced in brackets immediately

following the in-text quotation and include the number for the interview conducted

(eg Int # 63).

xiv

Organisational Guanxi and State Owned Enterprises in south-west China

1

Introduction

Chapter One

What is Guanxi?

Despite having a 20 year contract, the US fast food giant, McDonald’s, was

evicted from its prime commercial site in the heart of Beijing’s premier

shopping district after only two years. The businessman who wanted to build on

the site, and who was able to engineer McDonald’s eviction, was Mr. Li

Kashing, one of Hong Kong’s wealthiest businessmen. Mr. Li had a plan to

develop a US $2 billion project, the Oriental Plaza in central Beijing. In 1994,

the development of his project hit an obstacle when McDonald’s refused to

move from the site Li had earmarked for the vast compound. To overcome this

difficulty Li used his guanxi with the Chinese authorities to secure McDonald’s

eviction. In 1996, the city authorities re-negotiated their contracts with the US

fast food giant, granting it better concessions and the right to open more

restaurants in Beijing. Of course this was in return for moving out of the

Oriental Plaza site. With McDonald’s gone, Li gained permission to develop his


2

vast shopping complex. Mr. Li had strong guanxi with city officials, whereas, by

contrast, McDonalds’ had not kept its guanxi in good condition (Ambler, 1995a;

Luo, 1997a).

Throughout Li’s business career he ‘produced’ guanxi (Kipnis, 1997) by

developing long-term relationships with those in power. His business guanxi or

favours granted to connections (Yeung and Tung, 1996), resulted in him gaining

a distinct advantage in developing his business initiatives. An example was

when former President Jiang Zemin visited Hong Kong for the hand-over from

British to Chinese rule in 1997, and for the opening of the Chek Lap Kok

Airport in 1998. On both occasions he stayed in Mr. Li’s hotel. To complement

the powerful relationship he enjoyed with the Chinese President, Li’s partner in

developing Beijing’s newest commercial complex was his personal friend and

Chief Executive of Hong Kong Mr. Tung Chee-Wah. Not many could boast the

same influential connections in China as Mr. Li. The success of his negotiations

in developing the Oriental Plaza in Beijing confirmed his reputation as the

Territory’s premier tycoon and a recognised master of guanxi (Source: Polin,

2000).

In a scenario from 1986, Ms. Zhou, formerly a train conductor with the Tianjin

Railway Bureau, used her guanxi to gain a position as an accountant for a motor


3

cycle repair shop, a difficult move that required several months of guanxi work.

She wanted to change because her situation had become very difficult. She had a

baby that could no longer travel with her on the train in her position as a train

conductor. Her mother-in-law could not take care of her baby while she went to

work, and she did not have any guanxi with those who could help to enroll the

baby in the overnight nursery. Her guanxi work required sensitivity. The

Director of the Labour Bureau was the elder brother of an ‘old friend’ of her

respected uncle. This was where she produced guanxi. When the Director heard

about Ms. Zhou’s situation through her uncle, he used his power to intervene to

give Ms. Zhou the official documentation granting her permission to search for a

new job. This would have been almost impossible without this assistance from a

higher authority. To gain her new position at the motor cycle repair shop near

her home also required guanxi. The daughter of the Director of the motor cycle

shop was an old high school friend for whom Ms. Zhou had once purchased

some clothing in Shanghai. The Director returned the favour by giving Ms.

Zhou a position in his shop and maintaining his guanxi (Source: Bian and Ang,

1997).

At the village level, a young man named Wang from a small provincial village

in China saw a new type of cap advertised on television and saw an opportunity

to sell these caps in his own province. This being his first business venture his


4

personal capital was only 200 Yuan (~US$25). His priority was how to generate

enough additional support to finance the first purchase of caps from the

distributor in Shanghai. He canvassed the problem among his guanxi hu

(Ambler, 1995b; Luo, 1997a) being his guanxi family or network (Source: Park

and Luo, 2001). They collectively contributed a further 700 Yuan to his starting

sum and this was enough for Wang to begin operating. Wang’s family and

friends contributed to his start-up capital because of the trust they had in him

through their guanxi. Some had not even asked what business the money would

be used for.

With his start-up capital secure, Wang went to Shanghai to collect and pay for

his first consignment of caps. Upon his return to the village he began to sell the

caps through his friends and on the street. Although he was excited by his new-

found entrepreneurial success, he and his friends had to keep a low profile

because peddling on the streets in his town was considered illegal. If he were

caught by the police in this situation those friends and family who had supported

him would lose face or mianzi and be embarrassed to know him.

Even outside mainland China the advantages of good guanxi can be found at all

levels in the Chinese Commonwealth (Kao, 1993). The term Chinese

Commonwealth is used by Kao to describe the networks of Chinese people


5

based in Singapore, Taiwan, Hong Kong, the USA as well as the many millions

of Chinese nationals that have settled outside of these countries. An example

from this context was experienced by an Australian lecturer who took a special

interest in a Chinese student in his class in Perth, Western Australia (Source:

Interview with Lecturer). He was aware of the difficulties of mainland Chinese

students and their parents in terms of language and financing the expense of

their overseas studies in Australia. The lecturer had visited China on several

occasions and took time to help the student after class with his English. From

time to time he invited the student home for dinner with his family. On another

occasion he took the student out to enjoy a day on his friend’s boat and

generally he kept a watchful eye out for his situation so as to ensure his welfare.

After several months, the lecturer mentioned to the student in passing that he

was going to Beijing to speak at a conference. This news immediately sparked

the student’s interest and he said that he would contact his father to let him

know. The lecturer did not expect this reaction and was a little puzzled as to

why the student would want to notify his father. Later he found out the reason

for this sudden interest. The student’s father was a senior pilot and airlines

official in Beijing who, upon hearing of the lecturer’s visit, arranged a free

return flight, five star accommodation, and provision of a chauffeur-driven

limousine for the lecturer’s personal use whilst in Beijing. The lecturer was


6

pleasantly surprised and whilst in Beijing was invited to join several banquets

with the student and his father as a result of this relationship. These acts of

kindness reflected the sincere appreciation of the student’s father for the special

attention the lecturer had given to his son whilst studying in Australia. The

behaviour of the student’s father was his opportunity to repay the favour he had

received through the guanxi of another (Int # 63).

Although from vastly different environments, these four examples highlight the

diversity and variety of guanxi arenas, the people, relationships, and activities

involved in the spectrum of real life interactions that are rooted in guanxi. In the

business sense, many wise Chinese have turned the art of guanxi into a carefully

calculated science and there are even people who live entirely on their guanxi

(Butterfield 1983: 80).

In reference to this phenomenon of guanxi, this research aims to study the

intriguing phenomenon of guanxi in business, and specifically in State Owned

Organizations, in south-west China.

Defining Guanxi

Defining guanxi is a challenge for researchers. This phenomenon exists in many


7

different situations, develops in many different ways, and each guanxi

relationship carries its own connotations and history. As we shall see below,

almost every researcher comes up with a slightly different account of what

constitutes guanxi.

The word guanxi is of recent origin and comprises the character representing

guan originally meaning a door, with the extended meaning ‘to close up’

(Ambler, 1995b: 27; Luo 1997a: 44) or establish a ‘gate pass’ (Yeung and Tung,

1996: 55), and xi which means ‘to tie up’ (Ambler, 1995b: 27; Luo 1997a: 44)

or ‘to connect’ (Yeung and Tung, 1996: 55). Ambler (1995a) used the analogy

of a sand bar at a harbour entrance to describe guanxi. Inside the sand bar you

are one of us, but outside the bar your existence is barely recognised. Kipnis

(1997: 184) listed ‘urban guanxi, rural guanxi, business guanxi, all - female

guanxi, owner/tenant guanxi, marriage guanxi, comrade guanxi, husband/wife

guanxi, mother in law/daughter-in-law guanxi, and classmate guanxi’ as

varieties that he had identified. He concluding that ‘no unchanging single form

of guanxi exists’ (Kipnis, 1997: 184).

In general, guanxi refers to the establishment of a connection between two

individuals to enable a bilateral flow of personal favours or social transactions

(Yeung and Tung, 1996; Luo, 1997a). The Chinese both consciously and


8

unconsciously use guanxi to guide daily activities and it is so deeply rooted in

Chinese society that it is reasonable to expect that a person brought up in a

Chinese community would have been subtly exposed to and inculcated with the

concept of guanxi (Brunner and Taoka, 1977; Yang, 1986). In China, ‘guanxi is

all pervasive and affects all situations’ (Polsa, 1998: 35).

Pye (1992) described guanxi as ‘friendship with continued exchange of favours’,

Tsui and Farh (1997) concluded that ‘relationships based on common ground’ is

the essence of guanxi while a study by Fock and Woo (1998) found that most

respondents agreed on the personal nature of guanxi. Guanxi relationships are

not simple, and to have good guanxi implies having a successful history of

working together, providing favours, and building up trust between one another

over time.

Yeung and Tung (1996: 64) defined guanxi as a ‘connection’ and dubbed it the

‘Chinese art of reciprocal back–scratching’. Tsui and Farh, (1998) concluded the

essence of guanxi to be relationships based on common ground whilst Jacobs

(1979) and Redding, Norman and Shandler (1993) identified guanxi as being

particularistic ties between two or more individuals. King (1991) described

guanxi is a network of personally defined reciprocal bonds and Hwang (1987)

concluded that although guanxi literally means ‘relationship or relation’, its


9

essence is a set of interpersonal connections that facilitate exchange or favours

between people.

Bian and Ang (1997: 981-1006) stated that a basic characteristic of guanxi is

familiarity or intimacy and that for any two individuals to develop good guanxi

they must know a good deal about each other and share a good deal with each

other. They noted that guanxi is not merely a relationship but a tie through

which parties exchange valued materials or sentiments.

Luo (1997b: 64) described guanxi as being a complex, long-rooted and nebulous

term that refers to the context of drawing on connections or networks in order to

secure favours in personal or business relations.

From this array of descriptions and definitions, it appears reasonable to conclude

that in the Chinese context, the meaning of guanxi is very general (Tsui and

Farh, 1997). In defining what role guanxi plays, Iacobucci and Ostrom (1996)

found that guanxi performs different roles and has different implications in

different situations. Guanxi has multiple meanings and the field is so broad that

it cannot be restricted to only certain aspects of human behaviour or among

certain groups of people (Tung and Worm, 2001).


10

Core Principles of Building and Maintaining Guanxi

Although a variety of types of guanxi exist in different situations, there are some

core principles which seem to run through this variety of definitions. A core

component of two people enjoying a guanxi relationship is that they are

consciously committed to each other and undertake to exchange favours in spite

of there sometimes being official policies against such practices (Chen, 1995;

Kipnis, 1997; Park and Luo, 2001). Guanxi building is the transformation

process whereby two discreet individuals construct a basis of familiarity to

enable the subsequent development of relationships (Yeung and Tung, 1996: 61;

Yang, 1994). Those who have guanxi with another are tied together through an

invisible and unwritten code of reciprocity and equity. Failure to respect this

commitment hurts one’s reputation, leading to a humiliating loss of prestige,

face or mianzi.(Luo, 1997a)

To be able to develop guanxi between two or more people, the first thing needed

is a guanxi base. A guanxi base may be geographical, teacher-student, kinship,

co-worker, workplace supervisor-subordinate, political, class mate, friendship or

sworn brotherhood relationship (Brunner, Chen, Sun and Zhou, 1989; Jacobs,

1979). The base is the point from which a relationship can begin and also

remains a tie that binds those with guanxi together. In some scenarios, having a


11

guanxi base does not automatically ensure two people have renqing or a degree

or level of emotional connection in their relationship. For instance the guanxi

base for two people may have arisen purely because both are alumni of the same

university. But if one had already graduated before the other entered the

university, the guanxi between the two would be weak or very distant. To

strengthen the guanxi both would have to invest time to cultivate an emotional

bond.

Depending on the basis of guanxi, an interpersonal relationship can vary in the

degree of closeness, ‘hardness’ or strength (Hwang, 1987; Kipnis, 1997). For

example, a person’s guanxi relationship with a co-worker who was also a

college classmate would be stronger than with one who had not been a

classmate. The strength or ‘hardness’ of the guanxi relationship determines the

weight of demands that can be imposed.

Although guanxi may enhance interaction and exchange, guanxi may also act as

a mechanism to erect invisible barriers between those who will be granted

favours or benefits and those who will not. The strength and depth of the

relationship differs depending on one’s guanxi base and status as an insider or

outsider. Chinese people appear friendly in their graciousness and will make you

feel you have been well received. However, this may only be true for one meal


12

or one business trip, not for more serious welcoming into the community of

friendships that constitutes guanxi (Marcoux, 2002). In the business context, if a

person enjoys guanxi and is an insider, deals become very easy and, as in the

case of Li Kashing, successful business relationships can be established. In

contrast, the outsider can find it difficult, time consuming and sometimes

impossible to make progress (Brunner and Taoka, 1988; Marcoux, 2002).

Yeung and Tung (1996: 62) identified that there are essentially four strategies

for maintaining guanxi relationships: tendering favours, nurturing long-term

mutual benefits, cultivating personal relationships and cultivating trust. For

guanxi to grow and last, both parties in the relationship also need to maintain

contact and keep regular tabs on the state of their relationship (Ambler, 1995a).

In the opening example this is a crucial requirement that McDonald’s

overlooked in Beijing and which cost them their position at the Oriental Plaza.

The long-term viability of guanxi depends on each member’s commitment to

one another and the amount of further action taken to maintain the quality of

their relationship.

In terms of acceptable guanxi behaviour, one will find that associated with each

relationship is a set of role requirements and prescriptions from which deviation

is not expected by a moral person (Ambler, 1995b: 27; Jacobs, 1982; Luo,


13

1997a). Guanxi is reciprocal in nature and a person is viewed as being

untrustworthy if he/she refuses to return a favour or follow the rules of

reciprocity (Alston, 1989). If one denies one’s obligations, one might pay the

price by losing connections (Bian and Ang, 1997). Guanxi is seen as the fabric

of Chinese society and fulfilling one’s obligations to one’s relatives is culturally

expected by both the Confucian tradition and in the ethics of contemporary

China (Fried, 1953, Yang, 1994; Hwang, 1987; Luo, 1997a).

Another dynamic characteristic is that guanxi can be transferable between

parties (i.e. A and C) if they have a common connection in the middle (i.e. B).

However, the extent of transferability depends on the strength of the ties which

A and C have with B (Park and Luo, 2001; Yeung and Tung, 1996). These

guanxi relations are between individuals so organisational difficulties may occur

when a person, a successful sales person for example, with ‘strong’ guanxi

leaves the organisation and with them goes their guanxi connections or goodwill

and the resultant income stream (Yeung and Tung, 1996: 61). To transfer guanxi

successfully, an intermediary is necessary because such a connecting person is

needed to provide the familiarity, trust and obligation needed to help tie the

seeker and the potential helper (Bian and Ang, 1997). This alter-casting results

in the establishment of guanxi between two individuals who have no prescribed

commonality. This transferability is always problematic and attempting to


14

transfer strong guanxi takes time and the development of a new field of trust.

The objective is to rearrange a person’s social network in such a way as to

involve the individual who wishes to be included in it (Yeung and Tung, 1996:

61). Trust remains a core component of guanxi and individuals are encouraged

to develop relationships of respect and responsibility and not to use others as

instruments towards objects of desire (Bell, 2000; Bian and Ang, 1997).

Guanxi exchange is distinctive in that it usually links people across different

ranks, often with a weaker party who is calling for special favours and not

having the resources to provide a favour of equal value in return. As in the case

of Ms Zhou, the former train conductor, guanxi often favours the weaker

member and when guanxi links two persons of unequal rank or social status, the

weaker side usually expects more help than he or she can reciprocate (Alston,

1989: 28). In China, guanxi favours are often unequal in value or cost and many

times require some form of approval from higher officialdom that is not always

easily available.

Why Has Guanxi Developed?

The Chinese people have at times needed to survive under uncertain, violent and

catastrophic economic, political and climatic conditions. Many have


15

experienced and had to endure extreme difficulties, famine and starvation in

such recent campaigns as the Great Leap Forward and the Cultural Revolution.

This hardship, combined with the Confucian tradition and the non-existence of a

reliable rule of law, has made trust in family members a crucial necessity for

survival in China. The need to survive under these uncertain conditions brought

Chinese families closer together and the need to survive often produced an

exchange of resources and favours between family and extended family

members. Reliance on family in this situation strengthened ties and made guanxi

a core element of Chinese family life. Most Chinese place primary trust in

family members (Kao, 1993: 26 - 27; Chu and Ju, 1993; Yeung and Tung,

1996) and often the exchange of resources and favours between family members

is rendered largely without anticipation of reciprocity (Tsui and Farh, 1997).

The offer of reciprocity is needed if one is to be successful in guanxi practice.

Although this reciprocity between family members is not necessarily expected,

it often occurs and contributes to the strength of guanxi.

Guanxi is a very important aspect of Chinese societies. To understand why it is

important one must understand China’s Confucian legacy, wherein an individual

is treated as a fundamentally social or relational being (Farh, Tsui, Xin and

Cheng, 1998). Confucianism is a social philosophy, rather than a religion. Its

main concern is to establish harmony in a complex society of contentious human


16

beings through a strong and orderly hierarchy (Park and Luo, 2001: 456).

The Confucian tradition defines individuals in relational terms and Chinese

society has been functioning as a clan-like network since Confucius codified

societal rules, values, and the hierarchical structures of authority during the sixth

century BC (Yang 1994). Since then his philosophy has promoted the

importance of each actor performing their role in a manner that is acceptable to

all (Yang 1986). Confucian belief defines five cardinal role relations (wu-lun):

emperor - subject, father - child, husband - wife, elder - younger siblings, and

friend - friend. The five relationships of wu-lun give order and stability to the

social system and offer the role contexts in which self-examination and self-

development can be judged and interpreted (Hui and Graen, 1997; Bell, 2000).

The majority of Chinese people perceive that one’s existence in society is

largely influenced by relationships with others and the main underlying theme in

society is establishing harmony through a strong orderly hierarchy (Park and

Luo, 2001; Luo, 1997a: 45; Brunner, Chen, Sun and Zhou, 1989). Social order

and stability depend on properly differentiated role relationships between

particular individuals (King, 1991; Yeung and Tung, 1996) and these Confucian

relationships are a core component that contributes to the strong presence of

guanxi in Chinese society.


17

Although guanxi is primarily family based, at times reliance on one’s family

favours may not be sufficient to succeed in achieving one’s goal and in this

scenario an extension of familial forms of guanxi support is sought through

other relationships such as membership in a village, work group, class mates, or

kin group. Individuals having other forms of particularistic ties such as with a

distant relative, former class-mate, and those coming from the same home town

can also use their guanxi to enjoy success. It is important to note that outside the

family a different set of exchange principles may apply and rarely will these

generate the same quality of relationship as with those with a family member

(Farh, Tsui, Xin and Cheng, 1998).

Deeply embedded in Chinese culture, guanxi operates in concentric circles, with

close family members as the core and with distant relatives, classmates, friends

and acquaintances arranged on the periphery according to the strength, distance

and the degree of trust in the relationships (Yang, 1986; Park and Luo, 2001;

Luo, 1997a).

A person’s position in an individual’s guanxi network determines how the

person is treated and the depth of favour the person may be able to request.

Ambler (1995b) defined the whole guanxi network as being a guanxiwang

(Ambler, 1995b; Luo, 1997a) or a chain of interconnected persons. In the guanxi


18

business context, membership and status in such a network is likely to be

determined by one’s potential to grant favours.

Renqing

Renqing underlies guanxi and refers to the social norms by which one has to

abide in establishing smooth and harmonious interpersonal relationships in

Chinese social life (Hwang, 1987; Luo, 1997a). Like guanxi, renqing can be

fostered by reciprocal invitations to dinner and exchanging gifts, greetings or

visitations; sympathizing with and offering help to a member of one’s social

network who is in need; on receiving favour, always remembering to return the

favour in due time; and remembering to grant favours to family and friends

requesting help (Hwang 1987; King, 1989).

The experience of sharing and interaction through living, working or studying

together are prerequisites to establishing or sustaining the relationship among

friends (Hwang, 1987; King, 1989; Tsang, 1998). Tsui and Farh (1997)

concluded that in essence, reciprocity - an implicit ideal of the guanxi network –

originates from renqing. Coleman (1990) argues that the rules of reciprocity in

guanxi establish a structural constraint that curtails self-seeking opportunism

and preserves social capital within the existing network structure. When one


19

disregards this reciprocal obligation, he/she loses face, hurts related parties (i.e.

friends and family) feelings, and eventually jeopardizes the guanxi network

(Park and Luo, 2001: 457). In the business context, the strength of one’s renqing

provides leverage in interpersonal exchanges of favours (Yang, 1986; Hwang

1987; Luo and Chen, 1997).

When Chinese people weave their guanxi network, they also weave a web of

renqing obligations (Ambler, 1995a; Kipnis, 1997; Brunner, Chen, Sun, Zhou,

1989; Luo, 1997a). Like guanxi, renqing varies in warmth and intensity and may

be referred to as ‘strong’ or ‘weak’. The strength of renqing alludes to depth of

emotional feeling and willingness to sacrifice one’s personal interest in assisting

another (Ambler, 1995a; Kipnis, 1997; Brunner, Chen, Sun, Zhou, 1989). While

one enjoys the benefits of a connection network, one also incurs the burdens of

obligations which must be taken care of in the future (Chen, 1995: 56). This

expectation is a form of social capital that provides leverage in interpersonal

exchanges of favours (Yang, 1994). It represents an informal social obligation to

another party as a result of a guanxi relationship (Park and Luo, 2001: 457).

Jacobs (1979) referred to renqing as the measure of the emotional commitment

between the parties involved. If an individual is well equipped with empathy and

can understand other people’s emotional responses to various circumstances of


20

life, feeling happy or sad when others do, or even catering for their tastes and

avoiding or evading whatever they resent, then such a person is said to know

renqing. In contrast, if one is not sympathetic to other people’s feelings or ready

to help them when they are in great need, then such indifference to people’s

emotional responses will certainly foster a reputation of not knowing renqing.

The expectation that someone will return a favour is connected to their depth of

emotional commitment to their guanxi partner. When one has a happy occasion

or difficulties, good acquaintances are expected to offer or render some

assistance. Those who do not follow this social norm are condemned to be

ignorant of renqing. Thus renqing stresses the social responsibility of

individuals to be aware of and behave according to certain prescribed rules of

behaviour (Bell, 2000; 133). When one does something to help one’s guanxi,

one improves one’s reputation as having renqing (or ganging) and wins trust

and face (mianzi) from others (Bain and Ang, 1997). In doing so, one puts one’s

debt on the beneficiary, who in return is obligated to return a favour when

requested (Hwang, 1987).

In the operation of guanxi, the expected reciprocity factor can result in favours

being banked to be repaid when the time is right (Yeung and Tung, 1996).

‘There is no hurry to use up guanxi. Like insurance, one hopes not to need it, but

its existence is reassuring’ (Ambler, 1995b: 27). Being aware of the reciprocal


21

exchange of favours is essential in cultivating and sustaining guanxi (Redding

and Ng, 1982; Luo, 1997a).

Mianzi (Face)

‘Face’ is another key component in the dynamics of guanxi (Yeung and Tung,

1996: 57; Chen, 1995; Redding and Ng, 1982). Chen (1995: 54) identified two

dimensions of face: lian and mianzi. The former is associated with appropriate

personal behaviour such as respect to elders or helping a family member,

whereas the latter is something valuable that can be achieved like status or a

reputation for success. Chinese people are socially criticised if they have no lian

and are deemed unsuccessful and low in status if they have no mianzi. Park and

Luo (2001) identified that lian philosophically differentiates while mainzi

socially differentiates one from others in society. Mianzi is an intangible form of

social currency and personal status, which is affected by one’s social position

and material wealth (Park and Luo, 2001: 457). A person’s mianzi is often

determined by his or her post, credibility, honesty, reputation, power, income, or

network. If one does not have mianzi, one is very restricted and limited in the

social resources at one’s disposal to use in cultivating and developing one’s

guanxi network. This is even more so in business. With mianzi it is easier to

build one’s own network and this advantage enters more into everyday


22

transactions as a form of social currency (Redding and Ng 1982: 207).

Giving an associate face is a form of showing or maintaining the respect to

one’s guanxi partner or connection. To maintain guanxi, care must be taken in

the acquisition and maintenance of face (Yeung and Tung, 1996) and social

interactions should be conducted so that nobody loses face (Hofstede and Bond

1988:8). Face is so important in Chinese society that if a Chinese person loses

face, it is as if a great shame has been placed on them. The Chinese have

traditionally compared losing face to the physical mutilation of an eye, the nose

or mouth. Yeung and Tung (1996: 57) drew the analogy that face is like the bark

of a tree: without its bark, the tree dies. Those who have lost face in Confucian

society are more than social outcasts and a loss of face brings shame not only to

the individuals but also to related family members (Bell, 2000). The

maintenance of face is important and the Chinese interact with each other to

protect, save, add, give, exchange or even borrow face.

Face can be given when due respect is paid to someone else (Hofstede and

Bond, 1988). It can be enhanced by offering a gift to celebrate an occasion

however such a gift needs to be chosen carefully. The gift must be appropriate

or the recipient will lose face and the giver will not have face. The occasion for

the gift giving must also be appropriate in order to avoid embarrassment or


23

rejection of the gift (Brunner and Koh, 1988: 39).

Gifts are an important method of building guanxi and are sometimes associated

with seeking favour. In building the correct environment to request a favour, it is

important that these gifts are also not directly associated with the favour being

requested, that they are offered well in advance and that they are presented in

private and not given in the presence of others in order to avoid embarrassment

for the receiver (Kipnis, 1997; Brunner, Chen, Sun and Zhou, 1989; Yang

1986). Chinese officials do not usually like to accept gifts due to the links to

corruption. However the right gift at the right time can always be accepted if

done discreetly.

Guanxi as a Necessity for Doing Business in China

The importance of guanxi in achieving success in business has been confirmed

in studies by Standifird and Marshall, 2000; Lovett, Simmons and Kali, 1999;

Tsang, 1998; Wong, 1998; Luo, 1997a; Luo, 1997b; Luo and Chen, 1997; Xin

and Pearce, 1996; Pye, 1992; Blackman, 1997; and Davies et al, 1995. Guanxi

has been shown to affect financial outcomes (Luo and Chen, 1996), market

benefits (Davies et al, 1995), and competitive advantages (Tsang, 1998; Yeung

and Tung, 1996). Guanxi relationships have also been seen to be moderated by


24

organisational form (Xin and Pearce, 1996), relational demography (Farh et al,

1998), and social processes (Redding and Ng, 1982).

Chinese society has long been known for its emphasis on guanxi as a guiding

principle of economic and social organisation (Bian, 1994; Fried, 1953; Hwang,

1987; Walder, 1986; Marcoux, 2002) and guanxi has been pervasive for

centuries in every aspect of Chinese social and organisational culture (Park and

Luo 2001). Yeung and Tung (1996) found that from a list of eleven factors,

Chinese executives chose only guanxi as a key to achieving long-term business

success. Although dated, this result is significant yet simplistic in nature. Clearly

having guanxi is of vital importance if one is to conduct successful business in

China however care must be taken to remember that guanxi does not ensure

success and one must know how to effectively use guanxi in order to take

advantage. In their study, Yeung and Tung (1996) confirmed that the mere

existence of guanxi was not enough to ensure success. They drew the analogy

between guanxi and a piece of wood thrown to a drowning swimmer. The wood

does not have inherent magical properties that will automatically rescue the

swimmer, but the swimmer can save them self if they know how to utilise the

wood effectively. It is clear that guanxi cannot be viewed as a panacea even in a

network-based Chinese society; its effective utilisation depends on its fit with

institutional, strategic, and organisational attributes (Park and Luo, 2001)


25

Doing business in China without guanxi is difficult. In contrast, if one has

guanxi one can create an advantage in business such that anything seems

possible. (Davies et al, 1995; Brunner et al, 1989). Guanxi remains the lubricant

for the Chinese to get through life and scarce resources have been allocated

according to the power of the guanxi rather than being based on bureaucratic

rules (Park and Luo, 2001: 460). For example in the business domain there is a

recognised degree of utilising one’s guanxi network for accomplishing one’s

interests (Luo, 1997a). Guanxi is a powerful mechanism by which Chinese

executives have been known to secure or obtain resources, information,

approval for contracts, joint agreements, the supply of public services such as

electricity and water, raw materials and equipment, better prices and technical

assistance. Organisations may rely on guanxi with government officials to get

things done and as a mechanism by which to successfully facilitate economic

exchanges and overcome administrative interventions with the local, provincial

and national governments (Ambler, 1995a; Brunner et al, 1989; Farh et al, 1998;

Park and Luo 2001: 459). Often government officials maintain the power to

ratify projects, allocate resources and materials, arrange financing and

distribution, and provide access to infrastructure. In this environment, the guanxi

network substitutes for government-instituted, formal channels of resource

allocation and dispersal (Park and Luo, 2001: 461). Guanxi is also a valuable


26

entrepreneurial tool to bridge gaps in information and resource flows between

unlinked firms and between firms and important outside stakeholders (Park and

Luo, 2001: 457).

Developing real and meaningful guanxi in business takes time and guanxi

business relationships are not simple (Marcoux, 2002). Reconfirming an earlier

point, good guanxi implies having a successful history of working together,

providing favours, and building up trust between one another over time (Jacobs

1979; Brunner et al, 1989). The length of time a guanxi relationship has existed

and been in operation directly correlates with the strength one can find in such

guanxi.

For business executives, having guanxi with those that one is dealing with is

critical to the level of success one can achieve. Business associates with such

ties are usually trusted more that those without (Jacobs, 1979). The network of

connections (based on guanxi) of a general manager or chief executive officer

and how he or she uses them does have important implications for the success of

the organisation he or she works for (Luo, 1997b; Farh et al, 1998). Despite the

enactment of new legislation since reform commenced, Chinese business laws

remain vague and business people operate in an unstable regulatory

environment. In this context, the absence of explicit guidelines, directives and


27

policies are open to interpretation by those who occupy positions of power

(Yeung and Tung, 1996: 59) and in this scenario, guanxi remains an important

component that contributes significantly to the lifeblood of the Chinese business

community.

Given the developing legal and regulatory environment and the uncertainty in

China’s transition economy, the recent debate over whether or not guanxi

connections are critical to managers and organisations in China in facilitating

interpersonal activities has grown (Alston, 1989; Guthrie, 1998; Yang, 2002;

Park and Luo, 2001). Some argue that the higher level of uncertainty in the

transition economy further induces market-oriented firms to seek guanxi to deal

with competitive forces in the environment and with government officials.

These market-oriented firms can minimise uncertainties and secure necessary

inputs through a guanxi network (Park and Luo, 2001).

Institutional uncertainty encourages private firms to nurture a long term

reciprocal relationship with local governments through various formal and

informal ties. Guanxi with local governments helps firms settle negotiation deals

(Pye, 1995). To compensate for institutional uncertainty, firms more eagerly

turn to guanxi networks, thus decreasing external dependency on acquiring key

resources. In this scenario guanxi is an efficient mechanism to overcome or


28

minimise the effect of administrative interventions by the Chinese government

(Park and Luo, 2001).

From the large number of similar definitions used in describing guanxi it is

reasonable to conclude that guanxi refers to the establishment of a connection

between two individuals that enable a bilateral flow of personal favours or social

transactions between them (Yeung and Tung, 1996; Pye, 1992).

In summary, a variety of business domains, writers and researchers have

documented the significance of guanxi in attaining business success in modern

day China. Today debate continues whether or not Chinese firms still utilise

guanxi to some degree to create a competitive advantage, manage organisational

interdependence and to mitigate institutional disadvantage, structural

weaknesses and other environmental threats (Park and Luo, 2001). Furthermore,

scholars question if the advent of the socialist market economy in China is

resulting in the decay in the importance and usage of guanxi in business

(Guthrie, 1998). Even though parts of China are changing at differing speeds to

others, modern Chinese society still operates within the realms of countless

social and business guanxi networks. The researcher argues that it remains

critical for businesses in China to understand and properly utilise guanxi.


29

Thesis Questions/Objectives

This thesis was first inspired by Mayfair Yang’s Gifts, Favours and Banquets:

The Art of Social Relationships in China. Yang concluded that guanxi is perhaps

the most important mechanism in social interaction and that the manufacturing

of obligation and debt is the ‘primary binding power of personal relationships’

in contemporary China (Yang 1994: 6). Yang’s descriptions attracted the

researcher at a time when the Chinese government had commenced the major

challenge in shifting economic management from a planned economy toward a

socialist market economy with Chinese characteristics. As a result the changes

taking place in China’s economy may have begun to change the way in which

guanxi is being utilised and this was acknowledged in Yang’s (1994) conclusion

that market forces had begun to change the dynamics of guanxi.

By 2002, Guthrie (1998; 2002) had claimed that the importance of guanxi in

business in Shanghai was deteriorating and in recent years the debate on the

survival of guanxi and whether or not the opening up of China has eroded or

strengthened the power of guanxi has grown. The inspiration for this thesis has

been in determining whether or not the level and quality of change in the

importance of guanxi or guanxi practice is uniform across China or is it

dependent on the regions distance from the source from which the reformation is


30

being driven. In addition, the questions of determining whether there are in fact

two or more quite distinctly different business environments in China (the

coastal and the inland) and does the strength, survival and characteristics of

guanxi in each of these locations differ are investigated.

Both Yang (1986) and Guthrie (2002) focused their research on environments

on China’s eastern seaboard where the business culture is more exposed to

reformation and global forces and where the characteristics and importance of

guanxi maybe changing (Guthrie, 2002). The research presented in this thesis

has been collected from south-west China and in this region the reform process

has been quite different from that being experienced in coastal environments.

The effect it is having on the phenomenon of guanxi also appears to be different.

People in this region are less exposed to international forces and market

economy practices, the push for reform is not as strong, economic conditions are

changing much more slowly and the practices of guanxi are remaining more

entrenched.

In addition, there has been a paucity of research into guanxi at the management

and organisational level in the south-west of China and this thesis presents new

findings and implications for business managers, joint ventures and those with

organisational alliances operating or planning to operate in this region of the


31

People’s Republic of China.

Primarily this thesis investigates how guanxi operates internally within a large

organisation in south-west China and provides an insight into the effect that the

new market economy and globalisation are having on guanxi in this region of

China.

The fieldwork for this research was based at the Roaring Dragon Hotel site in

the south-west of China between May 1st, 1999 and December 24th, 1999, June

3rd and July 15th 2001, November 11th and December 22nd 2002, and

December 7 to 23rd, 2004. During this period, observations and interviews

confirmed that the practices of guanxi, renqing, and mianzi remained prominent

in business life in this environment. In south-west China, the changes in

business characteristics due to the introduction of the market economy are

progressing more slowly in comparison to the changes occurring in coastal

regions and in China’s Special Economic Zones (Grainger 2003; Grainger,

2004; Guthrie, 2002).

At the Roaring Dragon Hotel research site, data were collected through a written

survey that was completed by 437 Hotel employees, and through single and

multiple interviews conducted with 45 employees, supervisors, middle and


32

senior managers. Additional interviews were conducted with a group of 22

officials, academics, and businessmen operating within this region. Written

notes were taken during each interview and a transcript of each recording

completed later. All respondents were asked for permission to be recorded and

only two contributors who were interviewed did not want their interview

recorded. Some interviews were conducted with the assistance of an interpreter

and translator.

Thesis Structure

Part One, The Roots of Organisational guanxi, comprising Chapters, 1, 2 and 3,

investigates the roots and evolution of organisational guanxi and includes the

development of the socialist market economy, the development of the SOE, and

the important role played by the danwei in this process.

Chapter Two - From Planned to Market Economy - provides a history of

China’s economic development since 1949 and a firm basis on which to

compare the development of business practices in rural and coastal China.

Chapter Three covers the development of the State Owned Enterprises (SOE)


33

and identifies the SOE as the home of organisational guanxi. Here I argue that

the basic influence of Confucian belief provided the core element from which

organisational guanxi was re-born in the military danwei that supported Mao’s

followers during the period of pre-1949. Events such as the Long March and the

establishment of rebel controlled regions in the north-west of China

strengthened the power of these provinces and after Mao assumed power, the

development of the SOE provided the right environment in which to incubate

organisational guanxi. As many of the SOE managers were members of Mao’s

cadres before he took control it was a natural progression for these cadre to use

the same style of work methods pre- and post- 1949.

Chapter Four – ‘Danwei: the roots of organisational guanxi’ - summarises the

origins, emergence, and history of the danwei; examines the characteristics of

the danwei; and argues how the original military danwei practices during the

1930s and 1940s have contributed to the development of modern organisational

guanxi.

In this Chapter the research and discussion focuses on the period from pre-1949

danwei through to when guanxi practices ceased during the Cultural Revolution

(Yang, 1994; Yeung and Tung, 1996: 58). This chapter highlights the critical

role the danwei has played in the development of the characteristics of


34

organisational guanxi.


One, in Part Two we examine organisational guanxi in operation in south-west

China.

Chapter Five – ‘Organisational Guanxi in China’s Hotel Sector’ - defines

organisational guanxi and the distinctive characteristics that differentiate it from

other types of guanxi. Expanding on the long list of guanxi types provided by

Kipnis (1997), the researcher proposes the existence of organisational guanxi in

south-west China’s hotel sector and provides evidence based on the findings of

the research conducted at the Roaring Dragon Hotel in south-west China. In this

chapter, examples of traditional and new forms of guanxi are provided. It

discusses the implications of organisational guanxi for business entities in south-

west China, how guanxi is accepted by south-west China’s emerging educated

youth, and the effect guanxi has on organisational outcomes for managers

working in south-west China.

Chapter Six is the case study - Guanxi neglect at the Roaring Dragon in South-

west China: The Demise of an International Management Contract. This case

study introduces and defines the concept of guanxi neglect through the


35

description of the takeover of a formerly Chinese managed hotel by a western-

based, international management company. Specifically, the study focuses on

the cultural conflict that occurred among employees trying to adapt from the

former Chinese relationship (guanxi)-based methods of hotel management to

those of the more Western market-oriented management. The conclusions that

are drawn highlight cultural characteristics and issues that companies taking

over or approaching joint-ventures with SOE in south-west China may

encounter and should consider. This case highlights the role guanxi can play in

hindering or enhancing the changing dynamics and operations of a large service

organisation as it embraces the onset of globalisation and the socialist market

economy.

Chapter Seven – ‘Differentiating between Intra-organisational and Inter-

organisational guanxi’ investigates the question: do the characteristics of guanxi

in operation between organisations differ from those that operate internally

within organisations? This question is answered by examining and comparing

survey results collected from trade executives based in Hong Kong (Fock and

Woo, 1998) with new data collected from employees from the Roaring Dragon

Hotel in the south-west of mainland China. Direct comparisons are made

between results of these two surveys to uncover the characteristics that

distinguish and differentiate the guanxi found in inter-organisational and intra -


36

organisational environments.

Chapter Eight - ‘Guanxi decay in China: Is it really happening?’ - compares the

speed of development of the socialist market economy in the eastern and

western regions of China and asks does the speed of reform enhance the decay

in the significance of guanxi practice in each respective region? In particular

examination is given to Guthrie’s (2002) claims and Wang’s (2002) rebuttal to

the proposition that the significance of guanxi is in decline in the Shanghai

business district. These views are compared and a proposal is formulated

claiming that the decay in the significance of guanxi is much less and is

occurring much slower in south-west regions.

In this chapter the researcher compares the economic development of the coastal

and inland regions of China and argues that they really are two very different

regions operating within the same country. The power of guanxi may be in

decline as Shanghai goes through an economic transition; however it may still

be too early to draw such a conclusion across all of China and especially in the

south-west. Conclusions differ regarding the importance, development,

maintenance and decay of guanxi in these environments. To further counter

Guthrie’s findings, it is argued that the economically developed Confucian

societies of Singapore, Taiwan, and Hong Kong have shown that the


37

establishment of a modern economy, supported by institutional law, does not

necessarily displace the reliance on guanxi connections (Yeung and Tung, 1996:

64).

The findings of this new research in south-west China provide conclusive

evidence that the guanxi network remains the lifeblood of the business

community (Kao, 1993). In addition, this research throws up some conclusions

that are not aligned with that of Guthrie’s (2002) Shanghai-based findings.

The major findings of this thesis include the acknowledgement and definition of

organisational guanxi, the exploration of the roots of organisational guanxi

inside the danwei, the differentiation of intra- organisational guanxi from inter-

organisational guanxi, the definition of the concept of guanxi neglect, and a

comparison of the decay in the strength and usage of guanxi in south-west China

with that in the Shanghai region.


38

Part One

The Roots of Organisational Guanxi

In building the pallet from which to deliver the new findings on organisational

guanxi, one must first focus on the economic conditions and types of decision-

making that took place during the Mao and Deng eras as the adjustment was

made first to a planned economy and later to a socialist market economy. This is

covered in Chapter Two – From Mao to Deng: Adapting from Planned to

Market Economy. Chapter Three focuses on the structure, power and politics of

the State Owned Enterprises, how this has contributed to the survival and

strength of organisational guanxi and how they are changing with the evolution

of the socialist market economy. Chapter Four identifies the critical role the

danwei played in the evolution of organisational guanxi.

So what is organisational guanxi and where do the roots of this phenomenon lie?

With China’s colourful and at times catastrophic past one must ponder as to how

such behaviours and characteristics have evolved. Primarily one must focus on

the state owned enterprises if one is to examine the phenomenon of

organisational guanxi in operation and this investigation is documented in the

following chapters.


39

Chapter Two

From Mao to Deng: Adapting from Planned to Market Economy.

One cannot approach a contemporary study of guanxi in the Chinese business

community without assessing the effects that the change from planned to

socialist market economy created in this business environment.

Mao’s Rule and the Development of the Planned Economy

Covering 9.6 million square kilometres, the People’s Republic of China is the

third largest country in the world with 31 provinces, autonomous regions, and

municipalities directly under control of the central state government (Zhu, 1999:

5). It is also the most populated country in the world with 1.3 billion people

comprised of the Han majority and a further 55 ethnic minorities. In 1999, 30

percent of the population lived in the cities and 70 percent in rural areas (Sabath,

1999). Since then there has been a steady migration of people moving from rural

to urban locations.

In 1949, the Chinese Communist Party (CCP) defeated the ruling Kuomintang

in China’s civil war and assumed power under the leadership of Chairman Mao


40

Zedong. It was the first time the Chinese people had been unified under one

leader since the nineteenth century. After its long history of humiliation and

exploitation by imperialist powers, China aimed to become self-reliant in the

face of international isolation and regain strength in the world. From this time

through to 1976, the Communist Party led by Mao sought to re-engineer

Chinese society (BCAS, 1983) and pursue the twin goals of establishing a

socialist state and again making China rich and powerful (fuqiang).

Industrially, the CCP inherited an extremely lopsided economy. Prior to the

takeover in 1949, coastal provinces accounted for only 11 percent of the land

area but were the source of 78 percent of China’s total industrial output (TIO).

The rest of the country produced only 22.4 percent and even though the west of

China accounted for over half the country’s territory, only 8 percent of TIO

originated from this region (Wang and Hu, 1999). From the beginning of Mao’s

rule, the CCP pledged to achieve a more balanced distribution of productive

capacity and income, especially in inland regions (Shapiro, 2001).

Self-induced migration began almost immediately after the 1949 victory, when

politically progressive Chinese were asked to volunteer to leave their homes and

settle ethnic minority areas along and within China’s vast frontiers (zhibian).

Those migrating provided the required labour to build the infrastructure able to


41

facilitate the transportation of rich natural resources from internal regions to the

more developed coastal areas (Friedman, Pickowicz and Selden, 1991). The

resettlement of these people to inland domains served two purposes: to dilute

local populations that were often comprised totally of minorities and to suppress

opposition to the Han Chinese and the Chinese Communist Party rule.

After establishing control, the Mao government closed the door on contact with

nations outside of China and the mainland population experienced a period of

almost complete isolation from the outside world (Suka, 2001). The CCP and

Mao believed the closed-door policy would be good for China’s development

and progress. In reality, this closure forfeited China of its ability to advance with

the times and prevented the Chinese people from keeping pace with global

development (Crane, 1999).

From the early 1950s, Soviet-style plans for rapid development of heavy

industry began to develop (BCAS, 1983). To structure this new direction, the

CCP took the new path of drawing up 5-year plans to guide and direct the

Chinese economy. The first Five-Year Plan (1953–1957) of the People’s

Republic of China gave high priority to the development of industrial bases in

north, north-west and central China.


42

In the summer of 1957, less than a decade after the 1949 Communist victory, a

major change in Mao’s policies took place. In a decisive turnaround, hundreds

of thousands of China’s most distinguished academics and leaders became

targets and were suddenly criticised, harshly punished, ostracised, and silenced

in an ‘anti-rightist movement’. This shift in policy had a negative effect on

China’s economic development. By eliminating the input of the Chinese

intellectuals who traditionally had the confidence and duty to speak out, China

deprived itself of the input from the authoritative voices that may have helped

caution against the poor planning that was to follow (Shapiro, 2001; Friedman,

Pickowicz and Selden, 1991). The way the CCP system treated these scholars

became a trademark of the Mao era during which there was a broad repression

of intellectuals. Hundreds of thousands of lesser known thinkers, leaders, and

ordinary Chinese were silenced for daring to disagree with the Maoist

orthodoxy, or thought better of airing their views when they saw more

prominent thinkers come under attack.

Another concern was that by the mid 1950s, although not yet apparent to most

observers at the time, China’s population was growing at an alarming rate.

Demographers who were worried about this population growth were persecuted

even though it now is clear to see that Mao’s campaign of promoting the

strategy of the bigger the population the better was an error (Bannister, 1998).


43

By the time the government had realised it was too late. Overpopulation had

become China’s greatest problem with serious implications for every aspect of

the country’s development.

For the second five year plan between 1958 and 1962, the spread of the Chinese

Communist Party’s socialist thinking led to the start of the campaign entitled the

Great Leap Forward and the movement to establish people’s communes. This

period of economic management is remembered as being quite farcical with

such initiatives as encouraging the people to build ‘back yard’ furnaces, so as to

melt all the metal objects they could find in an effort to help the country produce

steel. Such furnaces appeared everywhere. However due to the poor quality of

steel produced, this program was a tremendous waste of time, energy and

resources. Mao and his followers all too often fell into the trap of believing that

because they declared something possible or true, it would happen (BACS,

1983). Often it did not and this was a good example.

During the Great Leap Forward, ill considered and poorly executed policy was

common. Some notable errors included interference with river courses and big

dams being built hastily. Qualified engineers met their political demise because

they opposed the Chinese Communist Party’s construction of big dams. One of

these hastily constructed dams at Zhumadian in Henan Province broke


44

catastrophically in August 1975. The number of resultant deaths ranged between

86,000 (the official CCP figure) and 230,000 (estimate proposed by opponents

of big dams). This was not an isolated case and in Henan Province alone, more

than 110 dams were built. By 1966 half of these dams had collapsed as many

had been built only with earth and or designed by untrained peasants when

realistically this should have been a role for the banished intellectuals (Shapiro,

2001; Friedman, Pickowicz and Selden, 1991).

The urgency of the Great Leap Forward, the obsession with producing industrial

output at all costs, combined with the 1960’s withdrawal of Soviet aid and

advisers, all contributed to the collapse of the Chinese agriculture-based

ecosystems on which people depended for food. Within months of the beginning

of the campaign, China was in the grip of the greatest human-created famine in

history. While many of the population starved, coffers full of grain stood locked

and local leaders launched campaigns of terror to ferret out any more grain that

may have been hidden. Dissenters were harshly punished and desire, hope and

fear were used to generate widespread acquiescence in a number of ill-

conceived schemes (Shapiro, 2001). The defining characteristics of this

campaign were the mass mobilisation of labour, the speed and urgency with

which society was re-organised, the emphasis on raising agricultural yields, and

again such dubious campaigns as ridding China of pests.


45

The Great Leap Forward was a disaster and the Chinese people suffered as

industrial and agricultural output dropped. Famine and depression resulted and

began to generate some political opposition and falling morale among the

population. The peoples’ enthusiasm was greatly dampened with many not

having enough to eat (Deng1, 1994a; Friedman, Pickowicz and Selden, 1991).

During this period, the confused leaders neglected the laws governing economic

development and a disastrous drop in production resulted. At the end of the

Great Leap campaign the Three Years of Re-adjustment were required before

the national economy recovered and resumed its development.

Soviet Leader Khrushchev recalled meeting Mao during this time and how it

had been hard for Khrushchev to accept how willing Mao was to sacrifice his

own people in order to achieve his goals.

It was not until the Great Leap campaign, when millions of Chinese began

dying during the famine, that I became fully aware of how much Mao

resembled the ruthless emperors he so admired. Mao knew that the people

were dying by the millions but did not care (Soviet Leader Khrushchev

recalling a meeting with Mao in November 1957, cited in Shapiro, 2001)


46

Between 1966 and 1976 came the Cultural Revolution that was aimed at

revolutionising the regime. This campaign was characterised by further coercion

and chaos. More economic mistakes were made, resulting in renewed economic

chaos (Deng2, 1994b). In reflection, rarely has there been such a historical

moment in the history of humankind in which political repression, misguided

ideals, poor vision and incorrect methods coincided to achieve such

environmental destruction and human suffering.

As part of the chaos and coercion, another transformation was taking place. In

an attempt to balance the volume of production between coastal and regional

areas, workers and entire factories were uprooted and sent inland. Regional

indigenous ethnic minorities faced an influx of people and policies that

threatened and destroyed traditional ways of life. From 1964 to mid-1971, 380

factories were moved inland. This policy was not well thought out and during

the Cultural Revolution, China failed to develop or industrialise its interior in a

responsible and sustainable fashion (Shapiro, 2001; Friedman, Pickowicz and

Selden, 1991).

1 Deng speech - Reform is the Only Way for China to Develop its Productive Forces, Aug 28, 1985 2 Deng speech - To Build Socialist We Must First Develop the Productive Forces, April-May, 1980


47

In an effort to make the coastal and inland areas more equal, Mao preached self-

reliance. This resulted in each Chinese provincial government or large city

owning its own facilities such as a steel mill, power plant, chemical plant, and

brewery. This resulted in a huge duplication of bureaucracy, manufacturing, and

distribution (Tanzer, 2001). With this strategy of self-reliance, efficiency was

not important and by 1966

duplication had become so prevalent that China had 300 auto factories, 115 TV

plants, and 800 economic development zones (Liu, 1997). To ensure the

survival of these provincial organisations, access to markets outside of each

respective province was made difficult and was usually non-existent. This

restriction limited the size to which any organisation could grow and remains

the main reason why large companies are only today beginning to develop in

China.

During the period of the Cultural Revolution the schools were closed and

millions of youth were sent to work in the countryside whilst China remained

closed to the outside world. The state displaced millions of people: business

people, academics and power brokers were stripped of their powers and forced

to go to live in the countryside to learn more about the peasants’ way of life.

This resulted in China’s youth at that time having limited exposure to

educational opportunities, international issues or any idea of the fundamentals of


48

modern economic systems (Suka, 2001). Young urban Chinese had to scrape out

a harsh existence far from home and although many credit the hardships they

endured during this period with teaching them independence, social skills, self-

reliance, and values that extend beyond material things, overall they feel

resentment and sorrow that their education was interrupted (Int # 62). The

relocation of millions of volunteers to foreign parts of China during this period

resulted in enormous social dislocation and the struggle by millions of these

people to get permission to return home (BACS, 1983). The failure of the

Cultural Revolution to deliver on its promises, and Mao’s misuse of his vast

reservoirs of popular support, left generations of Chinese with a deep sense of

betrayal and cynicism. Today those who were affected are still generally

reluctant to talk about these events due to their bad experiences during this

period (Int # 66, Int # 58, Int # 74).

During this campaign the policies of the Party were aimed at breaking up the

traditional Confucian family structure and at creating a ‘new socialist man’. It

was part of an effort to use mass mobilisation efficiently to overcome China’s

poverty and backwardness and to motivate the people through the real and

imaginary internal and external threats to China’s security. Mao continued to

promote his view among the people through repression, indoctrination, utopian

promises and censorship. To maintain full control, Mao established repression


49

of expression and other intellectual freedoms, and urged the suppression of local

traditions (Shapiro, 2001). In this environment, levels of trust were very low and

the network of guanxi relationships became inoperative. Disruptions to the

guanxi connections in Chinese society during this period exacted an enduring

toll.

Government-appointed central planners controlled China’s economic system

and were responsible for determining the utilisation and allocation of resources.

Under this system, they determined all inputs and outputs and there were no free

market forces present in the economy. Prices of products were set by the central

planners and were neither derived from interactions between demand and

supply, nor used to guide allocation (Zhu, 1999).

After the Cultural Revolution and toward the end of Mao’s rule, the people and

workers had limited official control and eroding loyalty. In many parts of China,

clan-based village institutions began to develop the internal networks and

confidence to provide the foundation for a complex and personalised range of

local and regional power centres that sometimes promoted and sometimes

resisted the dictates of the centre. The model of a top-down relationship between

the centre of government and periphery started to yield to one characterised by

interaction and influence among numerous political actors at many levels, with


50

developing centres of power throughout the bureaucratic hierarchy. Policies and

campaigns were distorted and re-written in the service of rivals and alliances

and modified according to local conditions. The trend to ignore Mao’s policy

grew as locals concern about dependents and those within the local community

began to develop. After an absence during the Cultural Revolution, the

practices of trust and guanxi began to slowly re-emerge. The central Party-state

was no longer the only centre of power and government bureaucracies at various

levels began to implement, interpret and sometimes distort policies in order to

further their own personal goals (Shapiro, 2001).

Although central planners were making all of the planning decisions, provincial

leaders began taking steps to protect their local industries from competition

through imposing tight state control over distribution and establishing

prohibitive cross-border tariffs. This had the result of maximising provincial

employment and tax revenue. Under the Chinese Communist Party rule, all of

the large organisations that existed in China were now owned by the state.

Tariffs and restrictions that made inter-provincial trade difficult confined SOE

to provincial operations and restricted them from developing into much larger

national, international or multi-national enterprises.

In brief, the Chinese operated under Mao’s closed planned system for thirty


51

years and economic stagnation, poor educational development and the isolation

of the country from outside contact and influence resulted.

During the same period of closure, outside China globalisation was gaining

momentum. International deregulation was providing new opportunities and

new threats for business and the competition for market share was becoming

less restricted to national boundaries. Business managers were developing new

strategies to counter the growth in international and global competition (Wee,

2001). In contrast, in the closed-off economic cell that was China, managers had

no experience or knowledge of the forces of globalisation that were developing

internationally. In contrast, the period under Mao’s rule was the prime time

when organisational guanxi was developing in state owned enterprises.

Deng’s Reign and the Beginnings of Reform

Mao died in 1976 at the age of 83 and in the summer of 1977 Deng Xiaoping

returned from political exile to supplant Mao’s hand-picked successor, Hua

Guofeng, at the Third Plenum of the Eleventh Central Committee in December

1978.


52

Deng had been in political disgrace since the start of the Cultural Revolution

when his emphasis on economic results rather than ideology had put him at

cross-purposes with Mao (Zhu, 1999). He became China’s leader from 1978 and

began the process of instituting the economic reforms that continue today.

Reforming such a massive economy meant changing the lives and work patterns

of more than one billion people and this remains a tremendous challenge.

Deng’s new group of leaders commenced the process of de-collectivising the

people’s communes, opening up China to the outside world, and re-elevating

China’s long-suffering intellectuals from society’s most distrusted status to

again become active participants in the reformation and modernisation effort.

China’s youth were allowed to return to their home cities and universities

entrance exams were re-instated.

Deng realised that China could not rebuild itself behind closed doors nor

develop in isolation from the rest of the world. He insisted on ‘openness’ to the

rest of the world and maintained that without it China would remain

underdeveloped and not be a truly modern nation (Crane, 1999). Following

Mao’s disastrous and checkered history of economic management, the challenge

for the new leader was to reform both rural and urban parts of the nation so as to

invigorate the domestic economy and to prepare China for the opening to the


53

outside world.

Reforming the economy became a priority and Deng’s government introduced

policies aimed at positioning China to rise in prosperity and stability (Wireman,

2003). The goal to develop the national economy was endorsed by the Fifth

National People’s Congress in March 1978 and a social transformation

spearheaded by economic reforms was launched aimed at realising the grand

dream of national advancement (Zhu, 1999). In initiating reform, the

government encouraged the development of agriculture, industry, defense, and

science and technology through a campaign called the four modernisations (Zhu,

1999; Wireman, 2003; Ogutcu and Taube, 2002). The Chinese were encouraged

to aim high and were reminded that exposure to international business was a key

ingredient that was necessary if China were to successfully implement this

campaign. The initial objective was to quadruple economic production by the

end of the century and to produce a better standard of living for the Chinese

people. Deng aimed to gradually and systematically reform everything in the

existing economic structure that was seen to be impeding China’s progress and

development. Preparing China to become more open to the outside world was

one of the priorities. In his words –

We cannot keep the door closed on the outside world. Now things are


54

vastly different; there has been a qualitative change that can be seen in

every field. We have to be determined about opening up to the outside

world, because there are many obstacles in our way (Remarks by Deng

during an inspection tour of Shanghai, 1991. Source: Selected Works of

Deng Xiaoping, Volume III, 1975 – 1982).

A New Economic Focus

The decision to change from a planned to a socialist market economy with

Chinese characteristics became China’s first step towards modernisation and

global integration. The new policy of opening up called for a shift from Mao’s

closed self-reliance to China becoming a participant in the world market.

Deng’s government aimed at evolving China from being an inward looking,

self-sufficient production economy to an outward-looking country trading in the

context of globalisation. Momentum for this strategy increased as the

government explored ways to help the economy develop more rapidly.

The speed of development was tempered by a number of factors. Deng had long

watched the mistakes of Mao. From 1978 he and his experts began

internationalising the country with extreme caution so as not to disrupt the new

domestic power balance that was forming. China chose ‘to cross the river by


55

feeling the stones’ and to change gradually (Rawski, 1997; Suka, 2001).

Looking cautiously outside the Chinese border became more acceptable.

However, after such a long period of closure and at such an early stage of

reform, a totally open-door policy to the west was avoided as the new

government did not want to increase nervousness and insecurity among the

people and the power brokers. Deng and his government were aware that the

Chinese people needed to be given time to understand and become more

familiar with ‘openness’ and economic reform (Suka, 2001).

The go-slow, softly-softly approach was seen as being responsible. However,

such gradualism also allowed opponents and conservative forces to organise

blocking coalitions which restricted the speed of reform (Rawski, 1997).

Although China’s officials heard Deng’s enthusiasm, many leaders were slow

and reluctant to learn how to operate in a socialist market economy. As a result,

when the pressure was on them to make economic decisions they tended to

resort to the old methods in an attempt to solve economic problems. This was

another factor that restricted the speed and quality of the reform process (Tian,

1997; Parker and Wendel, 1997).

With the poor educational systems that had evolved under Mao, the need for a

better system gathered momentum and with it the realisation that China could


56

not succeed without skilled human resources and knowledge. The lack of

expertise and trained personnel available at the end of Mao’s reign was directly

attributable to the educational void produced by the Cultural Revolution, the

resultant closure of China’s schools and the suppression of intellectuals.

From 1979 changes began to take place in the business sector. China enacted a

law enabling the establishment of joint enterprises with companies from outside

the mainland as well as establishing trade incentives in certain coastal locations.

The leaders of Guangdong Province proposed that Special Economic Zones

(SEZ) be established to provide the Chinese with access and exposure to the

international market forces and to attract foreign direct investment (Park, Li and

Tse, 1997). These SEZ were the first comprehensive experiment to test the

feasibility of China’s economic liberation. In these regions, Chinese businesses

and managers were exposed to the international market in a controlled and

protected way without running the risk of opening the whole country and

economy to deregulation (Suka, 2001; Zhu, 1999; Rawski, 1997). In August

1979, the first two SEZ were established near the coast at Shenzhen and Zhuhai

in Guangdong Province and two months later a further two were established in

Shantou and Xiamen in Guangdong and Fujian Provinces respectively. All of


57

the SEZs were located near the coast so as to allow the easy import and export

of goods.

These coastal SEZ became the first to develop the infrastructure required to

accommodate foreign entrepreneurs through improvements in the quality of raw

materials, energy, labour and communications equipment (Zhu, 1999; Lin, Cai

and Li 1997). These Special Economic Zones offered various benefits including

low-cost labour, tax exemptions and duty free importation of raw materials and

technology. Infrastructure support and investment incentives in these areas

allowed for lower operating risks, improved efficiency and returns. As centres of

market-oriented growth and strong competitive incentives, the SEZs became

attractive host locations for foreign firms (Park and Luo, 2001). The gradual

exposure of China to global market forces through their SEZs protected the

Chinese market from opening too fast and provided Chinese managers with

some time to adjust to the strong competition of international companies.

After being out of the world business environment for so long, China confronted

some difficulties in implementing such a major change in economic direction,

operations and conditions.

Deng’s central government was determined to enhance the performance of the


58

national economy. However, their reforms lacked both operational targets and

well prepared plans. This failure to have any realistic and specific economic

objectives restricted the effectiveness of the reform campaign. Initially, reform

was aimed at improving economic performance by a gradual approach and

through tinkering with the socialist system. However, it became apparent that no

clear goals existed and policy announcements from the centre of control

remained partial and tentative. Rather than being a fully coordinated national

program, the reform program exhibited varying degrees of success under more

of a trial and error mentality. Even the ‘open door’ strategy of enhancing

China’s participation in the world economy only focused on expanding trade

and investment in a few provinces and SEZs along China’s south-east coast

(Zhu, 1999; Rawski, 1997).

By the mid-1980s, even though the reform process had not been perfect, China’s

main coastal cities had successfully established the infrastructure and tangible

plans to cater for investment from abroad and the opening of the SEZs had

introduced market economics to over 200 million Chinese people (Wireman,

2003; Suka, 2001).

At the National Conference of the Communist Party of China in September,

1985, the leaders celebrated the fact that reform had stimulated the development


59

of the productive forces and had resulted in a series of profound changes in

economic life, social life, people’s work style and mentality. The beginnings of

the socialist market economy had been established. Since then China’s

economic and industrial growth has averaged seven to ten percent per annum

and remains one of the most significant economic developments in modern

world history (Weil, 1996). Even though massive economic change was taking

place, any similar change in state owned enterprises was still far off. They were

still operating under the old practices where guanxi remained important and any

organisational changes taking place were minor and proceeding slowly.

The Importance of this Period in the Development of Organisational

Guanxi

The era from 1949 to the end of the reign of Deng Xiaoping was an important

period in the development of organisational guanxi within and between SOE.

This was an era in which the operations of SOE were not well monitored or

controlled and the environment was conducive to producing a hiatus in the

fostering of organisational guanxi within and between SOE.

Mao’s reign was broadly characterised by some very unpredictable, counter

productive and disastrous decision-making, poor monitoring, inconsistency and


60

the erosion of the trust in government. These policies fostered certain types of

behaviour in SOE and were crucial in the development of organisational guanxi.

Later Deng’s important influence towards the survival of organisational guanxi

was in the fact that he failed to make any serious effort and directed no urgency

to reforming SOE during most of his period of governance.


61

Chapter Three

The Development of Organisational Guanxi in State Owned Enterprises

(SOE)

Organisational guanxi was born and began to evolve in the military danwei that

supported Mao’s followers during the period of the Long March (October 16,

1934 - October 19, 1935) and the establishment of rebel-controlled regions in

the north-west of China. After Mao gained control of China and took power in

1949, the SOE provided the right conditions in which organisational guanxi

could develop and grow. Many of the cadres before 1949 later became SOE

managers so it was natural for them to use the same style of management in their

roles in SOE post-1949.

After Mao’s forces gained power, the central government replaced the existing

market economy with a planned structure and took control of allocating the

many goods and resources that were in shortage. In establishing control,

important industries were nationalised to become SOE and profitability ceased

to be a measure of the performance of these firms. Private ownership of

enterprises was eliminated and the government, backed by the CCP, took control

of the ownership of all property.


62

The government became responsible for all SOE managerial appointments,

assigned all compulsory tasks and exercised direct control of the SOE through

central planning. Trustworthy guanxi relationships became the prime criteria on

which to base human resource selection, and in the appointment of managers to

operate SOE. As a result, many SOE ended up being managed by untrained

Communist party cadres who had limited management skills but who enjoyed

good relationships with powerful connections. This translated into SOE being

managed mostly by uneducated ex-military personnel. Their styles of

management, learnt by trial and error, prohibited the development of more

structured and ethical business practices. Initially the philosophy of the post-

1949 planned economy system was no longer to maximise profits or minimise

costs but to care more for the social welfare of the people (Zhao, 1997).

Politically, the SOE played an important role in China’s social welfare and

initially they were promoted by government as being owned by the people (Hu,

1997). Mao and the Communist Party promoted the concept that workers were

the masters of the social enterprise, the owners of the factories, and that they

were working for themselves (Zhao, 1997). To complement the new planned

structure, a policy of egalitarianism in income allocation was instituted in SOE

aimed at motivating employees to work. Those employed by SOE were also


63

members of each respective danwei and so these people enjoyed a range of

advantages including employment, social status, health care, favours and

benefits that were not available to those outside the SOE. The SOE became the

core of Chinese enterprise and the foundation of the Chinese economy.

Under the planned system, all SOE revenues were paid to the central

government which was then responsible for paying all SOE costs. This resulted

in there being no pressure on SOE to generate profits or develop any marketing

campaigns (Suka, 2001; Lin, Cai and Li, 1997; Chang, 1997). Demand became

irrelevant and with the central planners determining all organisational inputs and

outputs, large inventories of worthless items were often produced and stored

(Suka, 2001).

The control of SOE was also very complex and unclear. The SOE model

illustrates the complexity of SOE governance (Hu, 1997).


64

State Owned Enterprise Structure

The People (the original principle)

I

The Communist Party of China (the original – agent)

I

The Government (the Para-principle)

I

The Bureau of State Assets (the upstream agent)

I

The SOE Board of Directors (the first downstream agent)

I

The SOE Managers (the second downstream agent)

I

The Workers (the ultimate agents)

(Source: Wen and Xu, 1997)

This model illustrates the long communication network through which decisions

needed to travel to become officially approved and/or be implemented. To


65

further complicate matters, complex chains of command existed at each level

with each principal’s responsibilities, rights and benefits often being blurred by

what Hu (1997:181) called incentives, ‘information blocks’ and ‘moral hazards’.

Despite the apparent structure, the long chain of command was not clearly

defined resulting in it often being difficult and costly to make official changes,

gain absolute approvals or get information. In addition, the lack of any clear

mechanism connecting each link in the chain provided the environment that

motivated opportunism. Officials who enjoyed discretionary control over state

assets as principal-agents appeared to have little incentive to care for the state-

owned assets under their control and these conditions sometimes resulted in

officials, managers and bureaucrats being tempted to develop corrupt practices

within the SOE power chain (Hu, 1997).

Due to the complexities of these connections and institutions, the reform of SOE

post-Mao was to take longer than expected and proved to be a challenging

process. Of the changes inspired by Deng, the SOE were the slowest

organisations to promote and develop change. Their complex structure and the

complexity of relationships involved in their management resulted in them being

exposed to limited pressure to reform for almost two decades after Deng had

taken control.


66

By 1990, it was estimated that China’s whole apparatus of state control had

grown such that it comprised 83,700 SOE that employed more than 74 million

people. During their long period of almost uninterrupted development, the SOE

had developed and enjoyed tremendous advantages in the economy including

access to state funds for investment and research, choice of the best college

graduates, access to foreign exchange and the use of scarce materials (Perkins,

1991).

As the number of SOE grew, the monitoring costs of central control became

high and the central government no longer had the capacity to manage or

supervise each individual SOE. This poor monitoring allowed organisational

guanxi practices to blossom and a situation to develop whereby the interests of

the managing staff and the workers often contradicted that of the state (Lin, Cai

and Li, 1997; Grainger, 2003). Profits were taken by the individuals and groups

within the SOE and these practices were able to be hidden through China’s

questionable accounting system and cumbersome levels of bureaucracy (Hu,

1997; Fang, 1997). Reducing the size of the official profit reported to the central

government became a common practice and was done through overstating

enterprise costs and under-reporting outputs. In some cases, officials monitoring

SOE even hinted to managers that they should modify their numbers in their


67

favour (Int # 20). By hiding their real economic statistics, SOE management

were allowed to further abuse their position by applying for greater subsidies

from the state (Liu, 1997: 26).

Reform Difficulties for SOE

Attempts at reforming SOE only really gained momentum in the late 1980s and

then the changes were very slow. Overall, reforming so many different types of

SOE in many differing situations was not an easy task. Misguided attempts at

reform were common and the lack of any conviction created the following

problems, many of which remain today.

Newfound Freedom for SOE Managers

From the late 1980s, a major reform came in the policy shift allowing the

provincial governments and SOE managers to retain more of the money their

respective SOE earned (Suka, 2001). Importantly, economic authority was

devolved to local governments and a reward system established whereby local

government authorities gained Communist Party rank on the basis of local

economic growth, employment, social stability, and tax revenues (Tanzer,

2001). These first cautious steps in reforming SOE removed the central


68

decision-makers’ power to control each SOE, and allowed SOE managers to

make their own decisions in terms of what they made and to whom they sold it.

With this new freedom came the added pressure that if they did not improve

performance they would be closed down. As a direct result of giving more

power to the enterprise and raising the proportion of profit retained from the

enterprise, SOE efficiency improved significantly (Lin, Cai and Li, 1997).

However, SOE managers were not well prepared for their newfound freedom.

Many undertook ill-advised investment sprees, buying the best equipment for

their SOE operations without really understanding issues of compatibility,

servicing, training or the infrastructure and skills required to support such new

equipment or technology. As a result, ‘many resources were mismatched and

wasted and it was not uncommon to see factories that stored expensive idle

state-of-the-art equipment’ (Int # 67). The Chinese managers’ desire for the best

often resulted in poor use of resources and this, combined with the limited

direction and overall planning, contributed to China’s initial disjointed attempt

to modernise.

Overstaffing

During the early stages of economic reform little attention was given to the


69

increasing population of SOE employees and the growing number of retirees

that were dependent upon each respective SOE.

Although many policies of reform were adopted and forcibly implemented, the

number of SOE and associated staff continued to balloon well after the reform

began (Liu, 1997). Between 1978 and 1994 the number of new employees in

SOE increased by more than 40 million resulting in overstaffing in SOE

becoming a major problem. It was not until the second decade of reform that any

planned and committed attempt was made to control the number of employees

in SOE (Lardy, 1998). One example of a bureaucratic state monopoly was the

over-loaded rail system.

After years of reform, the railways remained overstaffed, presented a

questionable quality of service to customers and exhibited little awareness of

what is a market driven economy (Tanzer, 2001: 74).

After 1994, employment levels stabilised, some SOE employees actually left

their jobs, some redundancy programs commenced and the number of state

employees actually appeared to fall absolutely for the first time in China’s

history. Nevertheless, these redundancy programs within SOE have been slow

and even today many SOE remain significantly over-staffed (Lawrence, 2003,


70

Leggett, 2002; Grainger, 2003; Gang, 1997; Zhao, 1997). This environment has

meant that usually workers stayed with their SOE as long as their earnings were

higher than a better alternative. As many had few skills and little training, such

alternatives in many cases did not exist (Zhao, 1997).

Even though many SOE remained in financial trouble, further downsizing and

redundancies remained sensitive issues, especially when considering that China

had a population of 1.3 billion and at that time a conservative estimated

unemployment rate of approximately ten percent (Tian, 1997; Liu, 1997;

Leggett, 2002). In attempting to continue to make SOE more profitable, the

government cautiously released some employees through redundancy; however,

social stability continued to be of paramount importance (Xu, Xi and Feng,

1997). The CCP viewed significant redundancies from SOE as an ever-growing

threat to the nation’s social stability especially as they put significantly more

pressure on low income families (Lawrence, 2003; Parker and Wendel, 1997;

Chang, 1997).

A growing unemployment problem is one that the Chinese government did not

want as displaced workers had the potential to cause problems. In 1996, Chen

Qinghai (Chinese Vice-Minister of Trade) said that to enhance the reform

agenda the government believed that the number of employees in SOE needed


71

to be reduced by about one-fifth if SOE were to become competitive. However,

the impact of such a reduction on social stability was extremely problematic

(Parker and Wendell, 1997; Zhao, 1997). Up until now, SOE closures have

created a restless and occasionally violent army of unemployed workers in their

wake, many without pensions promised to them by the government (Dickie and

McGregor, 2003). In reality, the government does not want to have to pay large

annual subsidies to non-profitable SOE; however there is a hesitation to make

the redundancy program more aggressive due to the growing social implications

of increasing numbers of redundancies. The time needed to reform all of the

SOE, whilst compensating and saving face of all those made redundant, may

take a generation (Fang, 1997).

At the managerial level, downsizing or redundancies also create problems.

Firing workers is an act that does not come easily to Chinese managers and each

SOE worker believes that as a member of the work unit or danwei they retain

the right to remain employed there (Grainger, 2004). Legally, managers can

only fire workers in the face of serious violations of company rules. Even in

such cases, managers are often harassed by the dismissed workers, and

pressured by the workers’ unions and party branches not to do so (Zhao, 1997:

307). Managers do not want to be the ‘bad man’ responsible for such

redundancies and the social disconnection that results for the employees


72

(Grainger, 2003). This fear could often result in restrictions inhibiting SOE from

hiring better-skilled and better-trained workers and this remains a serious

obstacle to further improvement in SOE efficiencies. Without being able to hire

and fire workers as needed, further improvement in SOE management can only

achieve limited results (Zhao, 1997: 309).

Investment Absorption

Under the conditions of China’s former planned economy, aimless, misguided

and wasteful investment in and by SOE was unlimited and cost the state and the

people significantly (Yang, 1997; Liu, 1997). Despite the recent commencement

of serious reform in SOE, during the 1990s the large and bureaucratic structure

of SOE meant that they have continued to absorb a large percentage of the

government’s available investment resources (Gang, 1997; Yang, 1997).

Before 1994, expansion of employment and fixed assets in the SOE sector

proved to be a burden that inhibited and contradicted the process of reform. The

government needed to keep loss-making SOE in operation to avoid large-scale

social disharmony. This situation resulted in the continual absorption of

significant amounts of the government’s financial resources. From the beginning

of the reform process the cost for inactive employees alone, mainly made up the


73

expenses of retirees, increased almost exponentially from 4.01 billion yuan in

1980 to 56.32 billion in 1992. These amounts continued to grow due to the

increasing cumulative costs of retirement pensions, medical expenses and living

subsidies for an ageing population (Lin, Cai and Li, 1997; Parker and Wendel,

1997). By 1993, at least one-third of the SOE were running at a loss and by

1998 this had increased to one in every two with many of the notionally

profitable SOE really only breaking even (Li and Li, 1997; Wei and Wang,

1997). More than 16,000 SOE suffered losses in the first half of 1994, 15.5%

more than the previous year, with the total percentage suffering losses

increasing to 46.3%. The cost to government to cover these SOE losses grew

from an estimated 31 billion yuan in 1992 to 60 billion yuan in 1993 and to

make matters worse, profits from SOE fell from almost seven percent of gross

domestic product in 1987 to only two percent in 1994 (Huang, 1994, cited in

Lardy 1998). The combination of increases in costs and reduced profits resulted

in substantial declines in government revenue to such an extent that by 1994,

losses due to SOE had grown to become seven times larger than in 1985 (Lin,

Cai and Li, 1997; Li and Li, 1997; Parker and Wendel, 1997; Tian, 1997: 222).

Conditions for the employees of many poorly run SOE also deteriorated to

become below the poverty line. They were being paid only a very low ‘basic


74

wage’ and many of them sometimes received only 60% of that (Tian, 1997: 223;

Parker and Wendel, 1997).

Increasing costs and decreasing profits have been major obstacles that have

prevented government from being able to successfully reform SOE. Overall, the

cheapest option for the Chinese government would be to close or sell off all of

the loss-making SOE; however the government could ill afford the social

backlash that such extremism would create.

In an efficiently operating market system, unprofitable firms shrink or go out of

business and profitable firms expand with entrepreneurs creating new strategies

to exploit emerging opportunities (Liu, 1997; Lardy, 1998). Organisations

respond to market pressure by implementing strategies such as restructuring

operations, re-thinking marketing campaigns and cutting costs to survive and if

an investment performs poorly and makes a loss or causes bankruptcy it will not

be repeated (Rawski, 1997). In the mid-1990s, after nearly 20 years of reform

under China’s socialist market conditions, the creation of such a vibrant,

reactive, competitive environment among SOE, especially in south-west China,

still did not exist. This was due mainly to the fact that the Chinese economy had

not reached the required state of openness.


75

The Introduction of Competition

The legacy of the planned economy meant that Chinese SOE managers had no

habit of linking the factory to the customer or little knowledge as to how to

market their products. Few realised that in the market system the products and

services they were producing needed to meet market demand. Under the planned

economy those producing items seldom thought about who would use their

product.

One SOE made motors for hydroelectric power plants. Instead of asking for

design specifications from each specific customer, the factory simply

manufactured motors according to their own drawings with the expectation that

customers would fit their power plants around the motors (Int # 86).

Clearly in a developing market economy this type of business ignorance would

soon cause failure. With reform came the introduction and growth of non-state

businesses in the Chinese economy and SOE began to feel the pressures of

competition and the urgent need to become more responsive to market

conditions (Lin, Cai and Li 1997). From 1993, the policy of economic reform

for SOE directly encouraged SOE managers to act more like profit-maximising


76

firms3. These reforms focused on forcing the SOE into market competition by

reducing state interference and eliminating artificial pricing. Prior to this, the

majority of SOE depended heavily on the government for both assistance and

direction and had become accustomed to relying on the state to survive. Such

assistance was required for SOE to avoid free markets and continue to produce

unwanted products on a scale unwarranted by economic conditions (Stapanek,

1991 cited in Parker and Wendel, 1997).

As reform gained momentum, financial support for SOE was discontinued or

began to erode as the government no longer fully compensated them for the

losses they incurred. This, combined with the increased levels of competition,

resulted in many SOE experiencing serious financial difficulties. Historically,

the normal action to take in this situation had been for each respective SOE that

experienced financial difficulties to make a request to government for relief to

help fund their losses and costly social obligations. From 1994 onwards, these

requests began to be met with limited or declining support and sometimes

brought only fresh increments of deregulation from government and stronger

competition that resulted in the additional erosion of profits (Rawski, 1997). The

majority of SOE were unprepared for this and

many were caught between rising costs and a fall in incomes (Weil, 1996: 64).

3 Announced at 3rd Plenum, 14th Central Committee of the CCP. Reported Jingji Ribao, Nov 15, 1993.


77

Making matters worse, China’s inflation rate had increased from less than 2.5

percent between 1978 and 1984 to more than 18 percent by 1998 (Yang, 1997).

As if to multiply the problems at this critical time, SOE labour costs grew

significantly faster than productivity (Parker and Wendel, 1997).

As the competition in the market economy developed the number of non-

competitive SOE grew. The result was that the market share of SOE fell as

competition with new more adaptable, competitive, private firms grew (Parker

and Wendel, 1997). SOE tax revenues diminished correspondingly and further

weakened the state’s capacity to support and protect SOE from the consequence

of high cost, poor quality, neglect of customers, and other legacies of the

planned economy (Rawski, 1997: 195; Parker and Wendel, 1997). In today’s

environment, SOE compete with organisations that have all types of ownership.

This added pressure has increased the efficiency of SOE (Chow 2002; So, 2000)

even though their general standard of product quality has remained lower than

that of non-SOE (Tian, 1997; Parker and Wendel, 1997). Although the losses of

industrial SOE increased drastically in the late 1980s and continued to rise

through 1997, profits rose in both 1999 and 2000 while losses fell suggesting a

more recent improvement in the financial performance (So, 2000).

In March 1998, Premier Zhu Rongji announced that the SOE restructuring


78

should be completed in three years. His main objectives were to make profitable

the majority of the fifty largest SOE that were operating at a loss and to speed

up reform. By January 2001, the government reported that two-thirds of the

6,600 largest SOE had surrendered to the state net profits totaling 230 billion

yuan. However, the government later admitted that some of those officially

reporting to the authorities may have been under pressure to falsify their

accounts (Chow, 2002).

The Social Burdens of the SOE

Following the Communist doctrine, accommodation and space were provided to

house all SOE employees and their families in a closed-off area known as the

danwei. This was a space where employees lived that was usually adjacent to

the SOE where they worked. SOE and their families housed in their associated

danwei enjoyed significant advantages over those who were outside (Walder,

1986). These advantages included having secure jobs for life, affordable

housing, subsidies for transportation and nutrition requirements, generous

retirement pensions, and cradle-to-grave welfare provisions (Walder, 1986: 16;

Zhang and Messner, 1999). The SOE shouldered the substantial costs for the

education of SOE employees and their children by formally operating more than

18,000 schools with 6.1 million students and employing more than 600,000


79

teachers and support staff. Providing affordable health care was also important

with hospitals that were built and run by SOE accounting for one-third of all the

hospital beds in China. Membership of a danwei guaranteed employees of SOE

such as schools, factories, hospitals, government agencies and the like with a

variety of securities that were denied to outsiders and peasants in the

countryside (Bernstein and Munro, 1997 cited in Lardy 1998; Lin, Cai and Li

97; Xu, Xi and Feng 1997).

Chen (1997) classified the social benefits enjoyed by all employees of SOE into

three major categories.

1. Social insurance (shehui baoxian daiyu): including costs covered for

childbirth and maternity benefits, retirement pensions, medical service provision

injury, disability insurance and unemployment compensation.

2. Employee welfare (zhigong fuli) including the material welfare facilities

(wuzhi shenghuo fuli sheshi) of housing, cafeteria, day-care, convalescent

hospitals and spiritual welfare facilities (jingshen shenghou fuli sheshi) such as

access to a cultural place, club, library and sports facilities.


80

3. Other social obligations including road building, construction of schools,

sponsorship and donations of various kinds, conscription, family planning, and

obligations to place persons reformed through labour or imprisonment.

Overall the employees of SOE and their families enjoyed a vast number of

advantages over those who were not SOE employees. The corresponding costs

of these social burdens that were established in the planned economy era have

been recognised as one of the major stumbling blocks to the post-Mao

restructuring of SOE (Chen, 1997).

Banking and the Financial Sector

The reform of the SOE in the banking sector has occurred very slowly. The

banks have played a critical role in the survival of many unprofitable SOE.

When SOE were losing money they had a history of lobbying banks and

government for subsidised loans, rescheduling of overdue loans or even outright

transfers of funds to compensate for losses (Kornai, 1992; Zhao, 1997, Chang,

1997; Chow, 2002). Between the banking sector and SOE, many non-market

practices developed and became entrenched over time. Under the conditions of a

planned economy, many SOE did not expect to be required to meet the full

repayment of bank loans nor believed that their credit conditions would be


81

strictly enforced. Initially, as loans or credit were easily obtainable, SOE

management seemed to care little about the profitability of their investments,

and when there were no feasible investment projects available, SOE managers

used the credit to pay additional bonuses and other benefits to their managers

and workers. At times, even employees that were working in SOE that were

incurring financial losses still found their bonuses rose (Int # 8).

Under the former planned economy conditions, the SOE had no incentive to

improve efficiency nor were they worried about their survival (Wei and Wang,

1997; Chang, 1997). As profits declined or losses increased, SOE would request

more funds from the banks and the banking sector would grant SOE absolute

priority when making lending decisions (Zhao, 1997). In return for this

assistance from the banks, SOE stakeholders would lobby the government for

preservation of the status quo in the banking system resulting in the system

becoming self-perpetuating (Wei and Wang, 1997). As a result, the majority

(70.6 percent) of the SOE surveyed in 1994 owned less than 10 percent of their

working capital (State Statistical Bureau, 1994). Although many factors

contributed to the poor performance of the SOE, easy credit supply, poor

monitoring and lack of working capital were the major reasons for their poor

economic situation (Chang, 1997).


82

Today the struggle to make China’s banking practices more efficient is ongoing,

with President Hu and Premier Mr. Wen highlighting the importance of

deepening the reform of financial enterprises and adjustment mechanisms in

finance. Progress with this reform is slow and economic sources in Beijing

report that President Wu’s cabinet had reservations about any bold measures.

The party and government leadership remain extremely cautious about banking

reforms and the changes to the banking sector will remain slow and be ongoing

(Lam, 2003; Chow, 2002; So, 2000).

Separating the Government from the State Owned Enterprise

Important strategic reform came with the policy of promoting the separation of

the management of SOE from government and political forces (Liu, 1997; Yang,

D.L., 1997; Parker and Wendel, 1997). This separation (zheng qi fenkai) was

another change that took some time to evolve however the government realised

that to establish a socialist market economy, a key was to separate the

government from the enterprise and to make the management more professional

(Liu, 1997; Fang, 1997).

The problem with this reform was that it failed to motivate responses from large

and middle-sized SOE. As an opposing force, local protectionism was


83

consolidated which opposed the spirit of reform, eliminating the opportunity to

create a unified market, and consolidating the problem of an economy made up

of many independent markets or zhohou jingli (Liu, 1997). This prevented the

development of one unified national market and meant that the pressure on

many SOE to become more efficient remained artificial.

Furthermore, as the SOE management gained greater control, some managers

took the opportunity to deviate from the wealth-maximising objectives of the

SOE to pursue their own interests. Monitoring this problem in a market

economy is relatively easy with a developed stock market, prices reflective of

the long-term profitability of a firm, and the existence of a board of directors

assigned by the owners for governance (Zhao, 1997). Under the planned system,

the monitoring of SOE remained costly and inefficient and with government

bureaucrats who supervise SOE having little incentive to conduct effective

monitoring, there existed no deterrent devices that were aimed at eliminating

corruption in this environment (Zhao, 1997). These were also the right

conditions in which organisational guanxi could continue to grow.

The Party and SOE Managers


84

Communist Party officials have a history of interfering at all levels of day-to-

day business operations in SOE and there is little doubt that members of the

Party restricted the quality of the adjustments required by SOE to adapt

successfully to the socialist market economy (Liu, 1997; Xu, Xi and Feng, 1997;

Chow, 2002).

The opportunities to interfere in SOE operations were enhanced by the fact that

SOE managers were usually appointed from within the Party and that within

each SOE there were CCP ‘cells’ able to overrule each SOE manager (Int # 11).

The inconsistent or sometimes non-existent monitoring of SOE by appointed

CCP members or government officials provided bureaucrats at all levels from

CCP cadres to prefectural, provincial or central government – with the

opportunity to siphon off illicit resources from the SOE. Members of the CCP

or provincial governments were able to generate illegal funds by setting up a

plethora of arbitrary taxes on each SOE under their control or jurisdiction.

Alternatively, individual SOE managers set up layers of illegal subsidiaries

underneath each SOE (Int # 16). To be successful, these subsidiaries had to be

managed by the actual manager of the SOE themselves, by family members, or

by reliable business associates who then paid stakeholders for dubious services

to the SOE holding company. Alternatively, extra fines and charges, forced


85

contributions and purchases of unneeded goods were common methods used by

authorities to extract funds from the SOE under their control (Weil, 1996: 72;

Chow, 2002; Int # 39). Decisions regarding resource allocation, distribution

quotas and approval of new investments were some of the numerous

opportunities available to government representatives, including the military and

police, to enjoy corrupt practices.

Some CCP cadres have been tempted by bribery and corruption and some have

paid little attention to creating an environment of fair competition. They have

instead immersed themselves in the economic activities of SOE so as to reap the

illegitimate rewards (Liu, 1997; Xu, Xi and Feng, 1997; Grainger, 2003; Parker

and Wendel, 1997: Zhao, 1997). These activities prohibited and restricted the

speed and effectiveness of reform. To begin to eliminate this problem Deng

identified that China’s leaders would have to continue efforts to improve party

conduct, correct bad tendencies and crack down on crime. He admitted that ‘this

is going to be a long-term task to be fulfilled throughout the period of the reform

and eliminating these practices is the only way to insure the correct

implementation of our policies’ (Deng4 1994b).

At one time, during Mao’s reign, the presence of the CCP had been so intense


86

that the Party had a department in every sizeable SOE. In recent years this

presence has diminished and the role of these representatives has changed. In

past decades, CCP representatives promoted or supported government or Party

campaigns, whilst in contemporary times they now play a more conciliatory and

supportive role for SOE workers (Int # 18). Despite the major anti-corruptions

drives, including the use of the death penalty against serious offenders, major

cases of corruption still exist. There is little doubt that SOE will survive longer

and generate better returns if closer regulation of Party members and

government ministries are undertaken to eliminate their interference in day-to-

day SOE business operations. However it is not easy to dismantle practices and

networks that have evolved over such a long period of time. The benefits to be

gained by insiders mean that it is difficult to persuade the cadres or bureaucrats

in these positions to relinquish such powers. In reality, removing levels of the

hierarchical bureaucracy in the future may continue to be a painful process and a

challenging priority (Crane, 1999).

Strategies Aimed at Reducing the Burden of Unprofitable SOE

As reform has gathered pace, the proportion of China’s GDP produced by SOE

has continued to decline with the non-state-owned sector becoming the main

4 Deng speech - Help the People Understand the Importance of the Rule of Law, June 28, 1986


87

engine of productivity and growth (Tian, 1997). As China continues its

transition to a socialist market-based system, the role of the SOE is shrinking

(Parker and Wendel, 1997; So, 2000; Chow, 2002). However the social and

political costs of closing unprofitable SOE and the problems created by the large

number of unemployed that will be created will secure SOE survival, at least in

the short- to mid-term. To avoid large-scale social unrest, the task of keeping the

SOE in operation remains important.

To reduce the costs of loss-making SOE, the government has introduced a

policy to limit the bonuses and wages being extracted from the SOE (Parker and

Wendel, 1997). In addition they have tried to encourage a range of foreign

investments or takeovers of failing plants. Some SOE have been leased to

private agents or merged with larger profit-making SOE and investments

continue to be encouraged from large private enterprises and institutions (Chow,

2002; Weir, 1996; Rawski 1997). In an attempt to reduce the government’s

burden, some SOE have been listed on the stock market. This strategy has been

designed to allow free trade of shares and to provide opportunities for powerful

non-government shareholders to take control and ownership of these SOE. In

some instances the government has provided opportunities for capitalist-style

takeovers (Parker and Wendel, 1997: 282).


88

Some SOE have been allowed to go into bankruptcy, often having their assets

sold at greatly reduced prices and leaving their workers stranded, or with only

small and temporary subsidies. Even large-scale firings have not been sufficient

to salvage the position of some unprofitable SOE (Weil, 1996: 65). This has

placed an unforeseen burden on those who may have worked for 30 years or

more under conditions that they thought would support them in retirement and is

an adverse social effect directly resulting from SOE closure or downsizing.

SOE have also reduced their responsibility for housing employees by selling

some employees’ housing and apartments at subsidised rates and introducing

private ownership of existing housing stock. The government has encouraged

people to buy their existing apartments by offering them for sale to current

tenants at below market prices, whilst at the same time raising existing rents. To

encourage sales, potential buyers have been made to clearly understand that the

prices for sale of housing stock at below market prices would only exist for a

certain length of time (Int # 62).

What Must China do to Effectively Reform SOE?

Once the pressure of reform began to affect SOE, the changes were very slow.

Consideration as to how to reform the SOE sector of the economy, how to make


89

it more competitive and what process to follow were just a few of the questions

that have faced the Chinese government. In 1997, Tian (1997: 224) proposed

that three stages of development were needed if SOE reform was to be effective

and I have compared them to what has actually resulted.

As Stage One, Tian suggested the creation of competition between enterprises,

providing SOE with new options for private ownership and encouraging the

growth and rapid development of the non-state sector. This growth would

guarantee the development of the economy and provide the material base for

reform in the later stages. Socially and politically it was expected that such

growth would raise the people’s sense of participation and win their support.

This real change in policy inspired the advent of the non-state owned enterprise.

Since economic reform started in 1978, the number of non-SOE including

township-village enterprises (TVE), individually-owned enterprises (private

enterprises), joint venture enterprises and foreign owned enterprises have

flourished and grown rapidly. These organisations have been more competitive,

efficient and effective than existing SOE and as a result, the existing share of the

TIO provided by SOE since reform began had shrunk by 50% by as early as

1994 (Chang, 1997).


90

In Stage Two, Tian believed that developing continual competition among

enterprises of all types and the introduction and development of the socialist

market system would result in a reduction in the number of SOE. This has

occurred to some extent; however even after two decades of reform, the exit of

unprofitable and inefficient SOE through bankruptcy or merger remains

infrequent, even though the share of SOE incurring financial losses has

increased (Liu, 1997; Lardy, 1998: 4; Xu, Xi and Feng, 1997; Int # 31, Int # 53).

In spite of the Party’s assertion of its intention to keep SOE alive, sales of a

minority of loss-making small and medium sized SOE have been quietly carried

out from as early as 1996 in some provinces (CND, 1998).

The main continued avenue of reform of SOE has been to change them to

shareholding companies. For large SOE, restructuring takes a variety of forms,

but mostly the form of a shareholding corporation. In this scenario, shares of a

minority of SOE which are qualified according to their financial performance

can be traded in stock exchanges according to the regulations of the exchanges.

Various levels of government retain controlling shares for the very large and

important state enterprises and others have been sold to overseas Chinese and

other foreign investors (Chow 2002).

In Stage Three, Tian (1997: 224) predicted that SOE would face large-scale


91

bankruptcy and privatisation. This stage appears to be currently in progress and

has generated new problems for the government to deal with. The marketability

of some of these SOE has declined due to the non-existence of social security

and unemployment relief systems to support employees affected by such

potentially large-scale bankruptcy. In many situations poor performance,

considerable debt and other problems have made large numbers of redundancies

unworkable. With such a large number of employees in the state-owned sector,

there was no way for the government to finance the burden of the

unemployment costs of the workers. The SOE traditionally provided the ‘iron

rice bowl’ and the security of employment in the organisational environment,

and to remove these provisions is not an easy process. Tian’s Stage 3 remains

incomplete and the future of SOE remains debatable. Tian (1997: 234) argued

that SOE would continue to play a vital social security role for those unable to

find their way into the non-SOE system. Employees who are unable to find new

positions outside could remain in their SOE and this safety net remains

important if China is to maintain its level of social harmony.

In terms of the successful long-term transformation of SOE, Fang (1997: 248)

proposed a different strategy that includes two simultaneous steps. First, the

central government should transfer the majority of SOE to the control of

provincial governments. This would place the monitoring government closer to


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the SOE resulting in it being better able to control them and respond to their

needs. In many cases this has been done; however, questions remain as to

whether monitoring could be effective, especially if one contemplates the

problems encountered with corruption and also the distance of the SOE from the

centre of power. From the SOE past record, the opportunity for officials to

develop illicit practices may restrict the quality of success experienced in

achieving reform under this method.

Secondly Fang believed that the central government needed to work harder at

creating a level playing field for different ownership companies in order to

foster the growth of competition. To do this, SOE must find politically and

socially acceptable ways to reduce the costs of meeting employee social

provisions that include the costs of health, education, and retirement. This is a

time consuming and difficult burden that remains on-going.

In more recent times Chow (2002) made the following observations appraising

the success of the effort to restructure state enterprises in China. Firstly,

restructuring efforts in the early 2000s are a continuation of a series of attempts

beginning in the 1990s to reform the SOE to make then financially independent,

efficient, and profitable. He noted ‘that it is an evolutionary process and

dramatic results should not be expected in the short-term’ (Chow, 2002: 70).


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Secondly, there is a tendency for the managers of SOE to hold onto their power

and resist change. The ability and resourcefulness of the SOE managers and

workers, the particular industry involved and the level of competition are all

factors that effect levels of success. The government is proceeding at a

deliberate speed to make sure that not too many workers are laid off in any one

period and that workers who are laid-off are given some compensation and are

provided with some training to re-enter the job market.

After more than 25 years since Deng initiated a process of reform, it is

reasonable to conclude that the SOE reform process is gradual, steady and

ongoing.

Summary

The SOE contribution to China’s GDP has declined from 75 percent in the late

1970s to only 28 percent by 2000 and this decline is ongoing. Despite this

decline, the employment places provided by SOE remain a critical issue as SOE

provide jobs for a significant percentage of the Chinese population (Lin, Cai and

Li, 1997; Int #89).


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Even though some SOE have been able to successfully disconnect themselves

from government and party control networks and have succeeded in

transforming themselves into semi-private firms, the task of transforming the

large and cumbersome state-owned sector continues to experience varying

degrees of success (Liu, 1997; Wei and Wang, 1997). With such a wide variety

of SOE in operation the challenge of implementing reform is a large one. With

SOE differing in size, with some belonging to the central government and some

to provincial governments, some being profitable and some not, in different

industries in different sectors, it is difficult to treat or reform them all in the

same manner or using the same method (Gang, 1997; Liu, 1997, Int # 89).

Withdrawing all SOE subsidies, although economically sensible, threatens rising

unemployment and social unrest (Parker and Wendel, 1997; Int # 60, Int # 61).

Some reductions are necessary and should continue to be implemented gradually

so as to provide the remaining SOE with time to adapt to the market conditions.

The target of reducing the costly burdens of providing accommodation,

education and the health services for SOE employees and their families is a

further challenge. A continual gradual reduction in support will allow time for

the private sector to develop the infrastructure and gain the momentum needed

to begin to provide increased government revenue and new opportunities in the

non-government sector for those employees searching for employment. As


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China continues to develop a socialist market economy with Chinese

characteristics, SOE will still face the two challenges of maximising profits

whilst continuing their responsibility for providing uneconomic social services.

From a human resource management perspective, appointment of SOE

managers in the past has primarily been nepotistic. In the future, professional

managers are needed to take over the management of SOE if they are to have a

realistic opportunity of surviving. For SOE to become competitive, employing

trained managers who are paid at market rates appears to be a priority (Fang,

1997, Int # 89). There is little doubt that removing the old cadre networks, that

for a long time have controlled the power in the SOE, continues to be a difficult

and time consuming process. Developing better business practice and

competencies to compete with private companies and non-state companies

makes employing qualified managers to take over control of SOE a priority.

Improving the quality of management, reducing the illicit activities of SOE

power brokers and making better use of resources are some of the obvious

transformations that can make a difference.

SOE continue to crowd out China’s small but energetic private sector from the

capital market and they still remain liable for an estimated 80 percent of the

country’s bad bank loans. The problem of the large amount of investment


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absorption by SOE still exists and they still consume more than their share.

Heavy fiscal spending continues to support SOE - albeit at a slower rate -

especially in inland provinces (Murphy, 2003). This poor use of government

funds will only significantly dissipate as the number of unprofitable SOE is

reduced.

Overstaffing in some large SOE remains a problem and the feared dislocation of

employees as a result of downsizing or redundancies still brings political

hesitation. This has solidified the government’s support for the policy not to

eliminate SOE. At the Third Plenary session of the 16th Central Committee in

Beijing on October 14, 2003, the CCP policy was that SOE remained sacrosanct.

The Party identified its own survival with the challenge of re-inventing SOE as

more entrepreneurial and market-driven institutions, but without surrendering

them to private ownership – a process which would divest itself of all but the

most profitable core businesses. This is 25 years after the Deng-inspired reforms

began.

In the absence of clear lines of disposal and operational rights, the management

of state-owned assets has been generally ineffective. It remains a leading cause

of losses to the state in fraudulent transfers, with detrimental knock-on effects to

the stability of the banking sector. SOE are still dominant and protected in some


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sectors and economically the country could still undermine its future by failing

to steadily commercialise its inefficient SOE. Rawski (1997: 190) illustrated that

China’s transition to a market economy was incomplete by identifying SOE in

the industrial sector and banking system that sheltered an army of redundant but

tenured workers. It appears likely that the most useless and loss-making SOE

will be the one’s not to be privatized, and that the very workers who are least

likely to be deployed elsewhere or retrained are probably those with the least

capacity to develop themselves. So these employees will always be the hopeless

ones that the state will have to carry.

There is no doubt that the role and significance of the SOE is in decline. Will it

disappear altogether or will those profitable SOE survive in some hybrid form?

Efforts to continue the reform will maintain and perhaps increase China’s rapid

pace of institutional change. The result promises to contain as many surprises as

have emerged during the last two and a half decades.

Collectively, these strategies and solutions to these problems are likely to have

two significant outcomes. They will result in more effective monitoring of SOE

and also promote an increase in profit maximising behaviours, including

successfully reducing or eliminating overstaffing, and providing proper returns

on investment (Zhao, 1997).


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In the Chinese business environment, market conditions remain lop-sided, with

new non-SOE competitors escaping the costly social baggage of employees and

retirees of SOE and enjoying government incentives to aid in their development.

This further complicates the survival of SOE and realistically only when they

are free of the social burdens will they compete on a level playing field. SOE are

here to stay for the foreseeable future even though they may play more of a

safety net role and end up in some hybridised form (Fang, 1997).

If the SOE was to disappear in the short term there may be a dramatic reduction

in China’s growth. Currently, as the government’s largest source of tax revenue,

any surplus from SOE is expected to support a large work force (including

millions of redundant workers) and to satisfying the housing, educational, health

and pension costs of tens of millions of dependents and retirees. In addition,

existing SOE must attempt to supply the capital for restructuring and technical

development (Rawski, 1997: 205). The financial burden of these responsibilities

is a heavy one and the position of the government concerning SOE remains

tenuous. A reduction in social expenses must be paralleled by an improvement

in SOE management. In the long term, SOE need to be further pushed into the

market and be made responsible only to the market (Chang, 1997). The SOE

days may be numbered; however, in the long term it seems they will survive in


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some form as the Chinese socialist market economy continues to develop.


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Chapter Four

The Role of the Danwei

The role and practices of the danwei, or work unit, have changed in recent years

with the government attempting to reform many of the old danwei practices and

responsibilities. In this chapter I will cover some of them and focus on the

important period of time in danwei history regarding the development of

organisational guanxi. This period was the time leading up to and following the

beginning of the rule of Chairman Mao Zedong.

The importance of the danwei and its relationship to the emergence and

consolidation of organisational guanxi cannot be over-emphasized. The danwei

historically has been a source of employment, housing, and material support for

the many urban resident’s in China. It organizes, regulates, polices, trains,

educates and protects them; it provides members with identity and status; and it

forms integrated communities through which urban residents derive their sense

of place and social belonging (Bray, R. 2001: 4).


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The danwei was once so important to daily life in urban China that people

would say ‘one could be without a job, but not without a danwei’ (Yi Zhongtian,

1996: 188). Not only was the danwei one’s rice bowl, individuals without an

official danwei or work place were often considered ‘suspicious characters,

dangerous persons or unemployed idlers’ (Yi Zhongtian, 1996: 188). In the

danwei environment the importance of trust, insider-outsider status, and many

other organisational guanxi characteristics evolved.

The danwei is second only to the family in being the most basic level of social

organisation in urban China. Often viewed as the place where state and society

met, in Mao’s China the danwei served as the backbone of the social security

system and as a centre of social and political control (Guthrie, 1999).

What is the Danwei?

Although there is great diversity in danwei type and operations, the physical

location of the danwei is usually fixed and situated within an urban or non-

agricultural environment (Wen - hsin Yeh, 1997), hence most of this discussion

pertains to living and working conditions in urban rather than rural China.

Throughout Mao’s period of reign and in the early years of Deng Xioaping’s

leadership ‘everyone called the social organisation in which they are employed -


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whether it be a factory, shop, school, hospital, research institute, cultural troupe

or party organ - by the generic term danwei. (Lu Feng, 1989: 71, translated in

thesis by Anon, 2001). It was common under China’s former planned economic

system for every danwei or work unit to build residential buildings for its staff

and their families and members. Millions of government-subsidized residential

buildings were constructed and each building and associated work area

contributed to the general make-up of the danwei. The living quarters provide

almost everything for its staff members, including housing and dormitories,

eateries, kindergartens, medical centres and department stores (Li Shuqin,

1999). The accommodation and work facilities of each work unit were usually

constructed adjacent to each other and usually the whole danwei site was

enclosed and sealed off from the general public. The danwei buildings often

included communal facilities such as residential housing, dining hall, health

clinic, fleet of cars, and other basic service facilities which were not available to

those outside the danwei (Chen Yun, 1991; Walder, 1986: 16).

With such a wide variety of danwei or work units, like guanxi and renqing, the

danwei is not easily defined. Some have looked past the physical aspect of the

danwei and read it as embodying a ‘feudal’ or ‘traditional’ mode of social

relationship (Henderson and Cohen, 1984: 140), that is, one in which a


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paternalistic form of government holds sway. Others have defined it as a generic

term denoting the Chinese socialist work place (Anonymous, 2001: 1).

Throughout China’s recent history many of these original urban danwei have

evolved to become SOE and I argue that this has been the conduit through

which the characteristics of the early danwei have been translated to become

organisational guanxi characteristics in SOE.

Logistically, the danwei produced advantages for the government and enterprise

by having the SOE employees live in close proximity. This helped maintain

order, convenience, ease of management and communication, unity as a group,

and uniformity in thinking. This close proximity also provided the environment

and opportunity for cliques to develop. Inside these compounds were the places

where internal organisational relationships were formed, networks established

and solidified. The danwei provided its members with a steady supply of life’s

provisions and confidence that the harmony within the work place could be

relied upon.

There are three type of danwei recognized by Lu and Perry (1997). The first, the

Qiye danwei, are profit making. The second, the Shiye danwei, are non-

production, non-profit making work units such as scientific research units,


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educational institutions, and government-sanctioned social and professional

organisations. The third type, the Xingzheng danwei, or administrative unit, is

often confused with Shiye danwei as these administrative units have the

common characteristics of being non-productive or non-profit entities.

Since reforms commenced in 1979, the attempt to convert many government

funded, non-profit, Shiye danwei into self-supporting, profit-earning Qiye

danwei has enjoyed mixed success (Lu and Perry, 1997). In parallel with the

SOE experience of being initially neglected and then being slowly exposed to

some reform practices, a slow change is also taking place in the danwei that has

resulted in some banks, post offices, railroads, and research institutions being

successfully converted into self-funding organisations. However, other non-

production units are experiencing difficulty. (Anon, 2001). As one senior

official commented ‘the problems we are encountering with this reformation are

very difficult’ (Int # 38). Before the fiscal reforms of the 1980s, the budgets of

these units were allocated by the State Ministry of Finance. However, since the

reforms have begun the Ministry of Finance no longer provides budgetary funds

to these local units (Anon, 2001). This has created increased pressure on the

survival of the danwei.


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Characteristics of the Danwei

Because there are variations in the type of danwei from city to city and from

industry to industry, it is difficult to make generalisations that apply to all of the

danwei in urban China (Wang, 1990). However, most danwei share the

following common range of functions and characteristics.

Primarily the danwei, or work unit, is a functional agency of the Chinese

Government. It performs tasks that are directed by the government and is not an

independent economic or social body. Its operation is largely controlled and

directed by the government. Thus, the relationship between workers and their

work units reflects an association between the government and individuals

(Zhang and Messner, 1999).

Politically, the danwei is a place where party control is firm (Wen-hsin Yeh,

1997:71; Chen Yun, 1991). The social and economic benefits available to

members of the danwei are conditional on their correct behaviour. In the

danwei, work place party branches closely monitored employees’ public and

personal activities and wielded an assortment of rewards and sanctions to

encourage politically acceptable behaviour. Such incentives contributed to a


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relatively high level of urban social order (Lu and Perry, 1997: Solinger, D, J.

1997: 203; Zhang and Messner, 1999).

Each danwei is conferred a ranking from higher authorities which grants the

members of the danwei particular privileges and treatment. This ranking is

important as units that enjoy high administrative rank or are affiliated with a

higher government bureau fare better than those of lower rank (Int # 40). For the

individual, gaining admission into a high ranking danwei was a way of securing

one’s future (Int # 43) and the danwei bestows upon its members rights, social

identity, and political status (Int # 41).

In the management of human resources, the danwei has the right to fire, hire,

and arrange transfers of employees. For each individual within the work unit the

danwei maintains and controls a dossier, or dang’an, on personal matters, which

plays a key role in personnel-related matters. The dang’an represents the

individual in the state bureaucratic system and the organisation where the

dang’an is lodged is where the person legally belongs. The danwei in that sense

owns the individual through its possession and control of their dang’an (Davis

and Vogel, 1990 cited in Lu and Perry, 1997).


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Although the danwei is a very important part of Chinese society it does not

incorporate all Chinese people but privileges only members of large SOE

(Walder, 1986: 40). Those who had a position within a danwei or who called a

danwei home enjoyed a raft of social and workplace advantages. Danwei

employees of schools, factories, hospitals, government agencies and the like

enjoyed a variety of securities denied to outsiders and peasants in the

countryside. These including secure jobs, affordable housing and medical care, a

range of subsidies for transportation and nutrition requirements, generous

retirement pensions, and cradle-to-grave welfare provisions (Chen Yun, 1991;

Walder, 1986: 16; Zhang and Messner, 1999). SOE employees as members of

these danwei were also provided with lifetime employment and an impressive

array of benefits unavailable to collective workers (Walder 1986: 44).

Prior to the modern reform taking place in the danwei, a Chinese citizen

required a letter of introduction from their danwei if they wanted to pursue such

activities as to go to another danwei on business, buy an airline ticket or stay in

a hotel. When danwei members were requested for identification at any point

along their trip, this letter provided them with an official temporary status that

allowed them to pass and continue their journey uninterrupted (Solinger, 1997;

Yi, 1996). Although the frequency of these occurrences has dwindled in recent


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years these examples show the past importance of the danwei status to the

individual.

The community inside the danwei was physically separated from the rest of

society by brick walls. This isolation was matched by an invisible segregation as

well (Wen - hsin Yeh, 1997: 71). A clear distinction is usually developed

between ‘insiders’ (who enjoy the privileges available only to regular workers)

and outsiders (e.g. temporary labourers or others who were denied access to

quality housing, food and the other provisions) (Walder, 1986). This insider -

outsider foundation of the danwei also offered opportunities for nepotism to take

place. As insiders become aware of the jobs that are becoming available,

through their personal relationships with those who will be making the

recruitment decisions, they were able to gain advantages for any potential

applicants they may have relations with. This access to employment information

in the danwei provides a nepotistic advantage to family members or insiders

and, as we shall see in the following chapters, is a core characteristic of


The presence of the Party also erodes the level of privacy an individual enjoys in

the danwei. The danwei revolves around a dense, sometimes suffocating

network of complex and familiar relations between human beings where nothing


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remains secret for long. A former mainland cadre reflected on the change he had

experienced after he went to work in Hong Kong in the early 1980’s:

In my work place in Hong Kong I was surprised to discover that nobody

paid any attention to my private circumstances. In China, if there’s a

newcomer in any unit, before long everybody knows his background,

history, wage grade, political behaviour, whether there are any black

marks on his record, what sports he’s good at, and with whom he does

or doesn’t get along. A whole range of matters must go through public

evaluation, such as wages, bonuses, designation as a progressive

worker, being sent out to study, promotions and punishments, allocation

of housing and other benefits. At a critical moment, just a word in the

wrong place can do great harm, so people have to sound out everybody

else carefully. Rumours, gossip and nasty remarks are common and this

leads to pointless quarrels, making the relationships between people

complicated and tense (Ding Yang, 1983; cited in Lu and Perry, 1997:

181).

Such limited privacy requires members of the danwei to be very secretive in

sharing information. This results in danwei members being very careful to only

share information with those with whom they share a trusting personal


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relationship. This secrecy and the guarding of information translate to be

characteristic of the Chinese work unit. The importance of this secret

information is magnified when it is used by connections in order to gain some

advantage against some opponent, to enhance the allocation of benefits to clique

members, or to promote some campaign. The quality of information available to

the person is directly related to their position in the hierarchy and the power of

their connections in the guanxi network (Int # 11, Int # 18, Int # 70).

In the past, the danwei was also characterised by the limited mobility of its

members in the labour market (Zhang and Messner, 1999). Switching jobs in

China is difficult for an individual who does not have guanxi with those in

power to facilitate such a transfer. As in the case in the introduction, Ms. Zhou,

formerly a train conductor with the Tianjin Railway Bureau, used her guanxi to

gain a position as an Accountant for a motor cycle repair shop. It was a difficult

move that required several months of guanxi work. Those who do not have such

a connection or relationship are usually destined to stay in the same work unit or

danwei for life. Under the former danwei rules, approximately one or two

percent per year of the danwei labour force could change jobs in their lifetime

(Davis and Vogel, 1990; Bain 1994: 116; Walder 1992: 526). This virtual

immobility promotes a high degree of dependence on relationships inside the


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danwei in addition to encouraging the development of strong internal cliques,

communication and supply networks.

Those who do not have the guanxi to facilitate employment transfer must remain

in the same danwei. They are still able to enjoy the benefits and advantages the

danwei still holds for insiders over outsiders and through this the danwei

provides some compensation for those who do not enjoy job mobility. The

development of cliques, patronage networks, and the practice of favouritism

have been core characteristics of organisational guanxi. The importance of

guanxi connections inside the danwei means that informal interactions have

come to play a much more prominent role in decision making processes in this

environment than formal procedures (Wen-hsin Yeh, 1997: 61). I argue that

these networks, cliques, secrecy and the importance of informal interactions

have developed from the danwei to become important characteristics of

organisational guanxi in the SOE.

Historical Overview

Lu (1997: 23) attributes the origins of the danwei to conditions that existed well

before the Communist takeover in 1949. He proposed that the danwei developed

as a necessity to help cover the shortage created for the Communist Party due to


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a combination of the Japanese blockade of the Communist regions and a lack of

material support from the Nationalist government during the military struggle in

the 1930’s.

During the years that included the Long March, the Communist army had to rely

on gathering provisions from supportive peasants and from the supplies gained

from the overthrow of rich properties or by other illegal mechanisms (Smedley,

1972; Snow, 1973). Due to the shortages that were occurring in 1938, some

Communist army units began experimenting with production activities such as

planting vegetables, raising pigs and making shoes, mainly to improve their

soldiers’ daily lives.

By 1939, the Communists’ financial situation had worsened due both to the

decreasing supplies from the Nationalists and to the increased number of

supporters they needed to provide for. In January 1939, Mao formally advocated

letting the army produce supplies for itself (Lu, 1997).

A large scale production movement was launched in early 1940 by the Central

Military Committee of the Communists which called on all military units to

participate in production of all kinds of supplies for survival and for commercial

purposes. Initially only army officers were mobilized to engage in production


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activities in order to be self-sufficient, but soon other non-military units, such as

government agencies, public schools, and hospitals, all participated in

production activities. Initially all such produce and revenues produced by units

had to be submitted to the Communist Party central stores.

The characteristics of organisational guanxi in the danwei began to evolve from

these beginnings, and following this initial success the central party leadership

encouraged units to more actively engage in ‘self reliant production’. With this

development they also approved of allowing danwei to retain a portion of their

revenue as collective assets for re-investing in new production and as funds to

improve the livelihood of their members (Lu, 1997). Relationships remained

important in this scenario in terms of negotiation, reporting discrepancies and

using the funds for socialist causes.

The production campaign helped improve the quality of life for the Communists

in their base regions as well as having the important side benefit of reducing the

supply and financial burdens on supportive local peasants. It played an

instrumental part in the survival of the Communist troops and the base area

government (Smedley, 1972; Snow, 1973). The campaign also trained hundreds

of cadres in economic and commercial management practices many of whom

later became the core of the economic and managerial elite when the


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Communists took power in 1949 (Lu and Perry, 1997). This was a major conduit

through which the characteristics of organisational guanxi operating in the

danwei were passed on to evolve in the SOE.

In the Military danwei, cadres developed and managed their own production and

many had no experience of the required skills in planning. Their methods of

success or failure were often learnt by trial and error. Learning the skills and

processes of negotiation, allocation, adaptation, and facilitation combined with

the self-production activities that occurred prior to the 1949 takeover were

critical in preparing the cadres to take control of the SOE management

responsibilities post 1949. I argue that this period of cadres developing

management skills or training by trial and error in this environment was the birth

place of organisational guanxi. Guanxi relationships developed during this

period were consolidated to become the organisational guanxi characteristics of

State Owned Enterprises. This translation would have occurred naturally as

many of the PPC cadre assumed management roles in SOE.

With encouragement from the Party-leadership, the self reliant production

concept soon took on a permanent character and from this danwei structure

emerged the self-production, distribution and supply mechanisms of the danwei

system (Zhongzhengzhibu, 1989). Although at that time it did solve the Party’s


115

problem of supply shortages, it also planted the seed of the country’s problems

of corruption that have become common in China since then.

Throughout Mao’s reign, the discrepancy in benefits between rich and poor

danwei also generated resentment between units and encouraged the

development of further means - including smuggling, tax evasion, and dumping

- by which units tried to enrich themselves (Lu, 1997: 30). Insider secrecy and

reliable internal networks were essential to successfully facilitate such activities.

The development of cliques, secrecy and networks have survived and been

consolidated to become cornerstones of modern day organisational guanxi in

SOE.

As danwei production grew, the Communist leadership’s ambiguous and

undisciplined attitude towards the distribution of the supplies and benefits

encouraged the danwei management to under report production revenue and

collective assets and develop other forms of creating benefits for workers. This

became a common characteristic of SOE for the next two generations as the

position of SOE remained somewhat sacrosanct in the eyes of the government

and the Party. Since the 1950’s, the under - reporting of revenues and over -

reporting of expenses has been a constant challenge to the country’s centralised

financial system. Funds have been accumulated and retained in secret accounts

(in violation of official financial and budgetary regulations) by state agencies,


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enterprises and other work units and were often used to improve the welfare of

their unit’s employees (Int # 39). These savings accounts were usually kept in

the names of individuals, eluding regular control mechanisms and further

enhancing the importance of secrecy, insider/outsider orientations and cliques

(Int # 70, Int # 38).

The environmental conditions that heightened the advantages of membership of

the danwei recurred several times between 1950 and the 1990’s. During the

Great Leap Forward (1958 - 60), food production collapsed, and mass starvation

and hunger further fuelled self-production within the danwei. To help overcome

these conditions, units produced consumer goods in order to sell them or

distribute free of charge to employees.

In order to overcome grain, foodstuffs, and produce shortages, some danwei

acquired land and other production materials free of charge from local villages

to establish farms that could regularly grow vegetables or grain to supplement

the needs of the unit members. Similar phenomena occurred in many provinces

(Lu, 1997: 35). Although the practice by non - production units of taking land

and other materials from villages was later banned, as late as 1962 many units

still had these properties in their possession and continued to produce their own

supplies for consumption or sale for profit. From time to time the Central Party


117

control would criticize these arrangements during crackdowns on profiteering

and the black market. However the authorities did not specifically or officially

endorse or prohibit such practices unless they seriously affected consumer prices

in the market (Lu, 1997). The weak and inconsistent style of monitoring,

policing and government control allowed corrupt processes to develop, continue

and become more secretive.

Under the rule of Chairman Mao, movement of employees between danwei was

tightly restricted; residence controls were strictly enforced; housing and

consumer goods were in extremely short supply; and common consumer items

and even basic foodstuffs were rationed through the workplace. This

environment again encouraged and reinforced secret private production, under-

reporting of revenues, insider benefits, secrecy and the development of cliques

within the danwei.

As the Chinese people worked their way through such catastrophe, shortages

and controls have eased and the pattern of dependence has returned toward less

severe norms. During such periods of hardship there is little doubt that these

danwei practices have been strengthened ensuring their survival (Walder, 1986:

17).


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During the catastrophe of the Great Leap, millions of people left agricultural

work and crowded into existing factories and hurriedly erected new plants. This

sudden human flood into the factories was churned up by the social euphoria

created by the Great Leap campaign and the corresponding interest and

aspirations of individual migrants to improve their living standards by gaining a

factory job and urban residence. With this government approved shift of

millions of workers from agricultural to industrial occupations, the food balance

swung inevitably into deficit, food production collapsed, and mass starvation

and hunger inevitably resulted. This further fuelled the need for self-production

to cater for and protect members of the danwei and again toughened the survival

skills of the danwei members.

A second major outbreak of the development of independent bases and work

sites occurred again in the early 1970’s, when the Soviet - Sino conflict reached

its peak. During this period many government agencies and schools surrounding

Beijing set up ‘rear base’ facilities in mountainous areas. The idea was that the

danwei could retreat to these bases in case of invasion or bomb attack. After the

threat had passed, the ‘rear base’ facilities were not closed down but developed

further, resulting in units benefiting materially from the close ties they were able

to develop with local villages. Guanxi relationships were very important in this

scenario.


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From the mid-1960’s through to the end of the 1970’s, state industrial workers

produced a total ‘surplus’ (profit and tax) equal to four times their total wage of

which a significant share was retained by the danwei. After the end of Mao’s

rule, the economic efficiency of the danwei began to decline due to the lack of

incentives in the wages system. Despite the government’s attempts in the 1980’s

and early 1990’s to institute a merit-based labour market, levels of production

continued to decline (Chan, 1997). By 1993 the surplus produced had declined,

on average, to only one and one half times the annual wage (Naughton, 1997).

Most SOE had a resulting decrease in the volume of surpluses they had at their

disposal to be used for members of the danwei.

The death of Mao and resultant reform of the Chinese Communist Party resulted

in Deng’s industrial reforms commencing in earnest in the mid-1980s. The

economic system was decentralized; social controls were relaxed; and socialist

practices became less important in favour of economic success (Chan, 1997:

100). Relaxation of controls on enterprises and resultant increases in danwei

resources inevitably strengthened the tie between enterprises and worker and

thus indirectly the whole danwei system (Chan, 1997). However, as reform

gained momentum workers at SOE struggled to hold onto their prerogatives in


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the face of new market pressures that threatened the integrity of the danwei

(Walder, 1986).

In 1986, a new Labor Law decreed that all long-term danwei workers should

become contract workers by the end of 1996 (Chan, 1997). This removed the

‘jobs for life’ security of employees and increased the number of state workers

‘taking the plunge’ into the private sector during the resulting economic boom

of the late 1980’s and 1990’s. The influence of this change on the operations and

membership of the danwei is still evolving.

Summary

The first Five Year Plan (1953 - 1957), the Great Leap Forward (1958 - 1960),

the period of readjustment (1961-1965), the decade of the Cultural Revolution

(1966 - 1976), and the period of restoration and reform after Mao’s death have

each brought significant changes and produced the environmental conditions

that have allowed organisational guanxi processes to develop in the danwei.

I argue that the core characteristics of the military danwei in the Communist

Base Camps prior to 1940 have evolved through the evolution of the post-1949

danwei to become the core characteristics of organisational guanxi in SOE.


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These characteristics include the importance of insider relationships and the

activities and benefits that flow from such; under reporting of production

revenue and collective assets; the importance of trust and secrecy regarding the

dissemination of information between members of danwei cliques; the

importance of mutual cooperation and informal networks in achieving

outcomes; and the provision of benefits to danwei members from time to time

that are not available to non - danwei members.

Since the reform process has gathered pace, properties have been sold to SOE

employees at reduced prices or at subsidized rates and the danwei no longer has

the role of providing accommodation for those that have purchased these

apartments. The dang’an still exists as more of an administration and training

document rather than its former record of employees’ behaviours.

The period from pre-1949 was central in the development of organisational

guanxi in the military danwei. Overall the roles played since then by Mao and

Deng in China’s economic development, combined with the complex structure

of SOE, the key role of the danwei and China’s socialist philosophy have all

been critical construction blocks that have influenced the development of



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The danwei was a place where the opportunities existed to develop connections.

Often people who worked together lived in the near vicinity of each other and

this enhanced their opportunities to develop trusting guanxi relationships.

During the period from pre 1949 through to the years of Deng’s reform the

practice of organisational guanxi evolved. The recent introduction of

privatization and the socialist market economy in China as resulted in the

danwei currently being in flux.


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Part Two

Organisational Guanxi in Operation


One in Part Two we look at organisational guanxi in operation in south-west

China.

In her study of the early Yunnanese Jade Trade, Wen-Chin Chang (2004: 498)

found the Yunnanese people kept close affiliations among ‘laoxiang’, meaning

people from the same county or better still the same village. When two

Yunnanese meeting for the first time learn that they or their fathers or

grandfathers are from the same region, the immediately feel close to each other

and try to identify common friends and relatives. Networks of guanxi quickly

develop, and ordinary requests for help are quickly fulfilled. Chang went further

to conclude that guanxi cannot only be confined to actions between persons;

they include relationships of people to other individuals and to groups, and

between groups as well. These are the characteristics of organisational guanxi in

the south-west of China.


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Chapter Five

Organisational Guanxi in China’s Hotel Sector5

As mentioned above, defining guanxi is a challenge for researchers as this

phenomenon exists in many different situations, develops in many different

ways, and each guanxi relationship carries its own connotations and history.

Kipnis (1997: 184) concludes that ‘no unchanging, single form of guanxi exists’

and lists the following forms of guanxi: ‘urban guanxi, rural guanxi, business

guanxi, owner/tenant guanxi, marriage guanxi, classmate guanxi’ and more. In

defining what role guanxi plays, Iacobucci and Ostrom (1996) found that guanxi

performs different roles and has different implications for managers in different

market situations. Thus the meaning of guanxi is very general (Tsui and Farh,

1997).

Pye (1992) described guanxi as ‘friendship with continued exchange of favours’,

while Tsui and Farh (1997) concluded that relationships based on common

ground’ is the essence of guanxi. Yeung and Tung (1996) defined guanxi as a

5 Published in Chinese Culture, Organisational Behaviour and International Business Management (2003) edited by Ilan Alon, Praeger Publishers, Westport CT.


125

‘connection’, while a study by Fock and Woo (1998) found that most

respondents agreed on the personal nature of guanxi.

Guanxi relationships are not simple, and to have good guanxi implies having a

successful history of working together, providing favours, and building up trust

between one another over time.

As defined previously, renqing refers to the social norms to which one has to

abide in establishing smooth and harmonious interpersonal relationships in

Chinese social life (Hwang, 1987). Common examples of renqing include: a)

keeping in contact through reciprocal invitations to dinner and exchange of gifts,

greetings, or visitations; b) sympathizing with and offering help to a member of

one’s social network who is in need; c) on receiving a favour, always

remembering to return the favour in due time; d) granting favours to friends

requesting help. Cultivating renqing is a prerequisite to establishing or

sustaining relationships among friends and connections (Hwang, 1987). When

Chinese people weave their guanxi network, they also weave a web of renqing

obligations (Luo and Chen, 1997).

In terms of the control and monitoring of Chinese SOE one important reason for

the pervasiveness of guanxi in China is the relative lack of a reliable legal


126

system. In a nation that has traditionally depended little on laws, personal power

has always been the key to getting things accomplished (Seligman, 1999). From

a Western perspective, this lack of a reliable legal system sometimes makes it

difficult to identify the difference between what the Chinese view as guanxi and

bribery. Yang (1994) provides three distinctions between guanxi and bribery.

First, the gain and loss calculation that dominates the act of bribery plays a

much weaker role in guanxi. Second, a guanxi obligation is long-term and

diffuse, while bribery is immediate and specific in purpose. Third, some level of

emotional content or affection is a part of guanxi, but not bribery. The central

difference is that guanxi means relationship building, while bribery is an illicit

transaction (Lovett, Simmons, and Kali, 1999).

Luo and Chen (1997; 15) recognised the need to examine the effect of guanxi on

business and management from a social, organisational, or human behaviour

perspective. This recognition, combined with the paucity of publications on such

subjects, inspired this research into how guanxi operates within and between

larger SOE, and the implications this holds for businesses operating in the

southwest of the People’s Republic of China.

My objective in this chapter is to identify the behaviours and characteristics of

organisational guanxi operating within and between organisations/departments


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at the Roaring Dragon Hotel in south-west China. From May to December 1999,

research into the modus operandi of guanxi was carried out at a four-star hotel

with more than 600 employees (referred to here as the Roaring Dragon Hotel),

and with personnel from businesses interacting with and supporting the Hotel.

Interviews were conducted with 35 middle and senior managers from the Hotel

and a group of 11 officials, academics, and businessmen from this environment.

This constitutes a sub-set of the total data-set used elsewhere in this thesis.

Unattributed direct quotes throughout this chapter are taken from verbal

transcripts of interviews with these interviewees.

Organisational Guanxi

Employment Nepotism

In 1999, the recruitment process at the Roaring Dragon Hotel was primarily

based on guanxi. Although the Hotel’s Head of Training told of a Hotel

regulation that stated that ‘staff relatives are not permitted to work in the same

hotel’, he admitted that it was common for a manager or supervisor to find a

daughter, son or other relative a job at the Hotel (Int #9). The Manager of the

Food-and-Beverage Department described how,


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at one time there were 32 families working in the hotel, with sometimes three

or four people from one family working in the same department. Some had no

work skills, but because they had the right relationships, they could still get a

good job (Int # 15).

Family members had tight bonds, and family guanxi was an important tool in

finding employment (Fried, 1953; Yau et al, 2000).

The Roaring Dragon Hotel incumbent Manager of the Human Resource

Department had occupied her position for ten years and had approved all staff

appointments during that time. Managers and supervisors described how they

used their guanxi with her to gain positions for their friends or members of their

family. At appropriate times, they would approach her in an effort to arrange

for a suitable time to introduce the ‘candidate’ for whom they wished to gain a

position at the Hotel. It was a matter of ‘face’ (mianzi) as to whether or not the

Manager would respond to this request. Denying such a request would result in

a loss of ‘face’ for those unsuccessfully requesting this favour. Conversely, a

manager was given ‘face’ when each newly requested appointment was

approved. With each favour granted, there would accrue renqing and the

potential requirement for a return favour at sometime in the future.


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When recruiting, the number of new employees taken on would sometimes

become excessive due to the number of favours requested by important connec-

tions, government officials or department heads. When the Human Resource

Manager assessed a list of applications for a position, there would sometimes

be attached to an application a note from a senior official saying, ‘Could you

pay special attention to this person?’ or from the General Manager saying, ‘take

care of this person’. The Human Resource Manager explained how.

Recommendations from important officials have to be taken care of

because of the importance of the relationship. You cannot refuse their

requests because there would be trouble. If we didn’t get this notice

about such a candidate, then maybe this candidate would not be

employed by the Hotel (Int # 10).

If the applicant’s parents were important members of society, it was important

to find their ‘connection’ a position. The Human Resource Manager admitted

that, ‘if they have no skill we just give them a very easy job. We must take care

of this relationship by finding these people work in this hotel no matter what

their ability’ (Int # 16).


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Many relationships and connections were also nurtured between hotels. If for

some reason it was difficult to arrange a position at the Hotel for a family

member, then requests could be exchanged between hotels. The training

manager described how.

If my nephew hopes to get a job in the hotel business and we have no

positions, I usually make contact with other hotels’ personnel and say, I

have a nephew, would you please accept him. If they accept him then

the next time the other hotel has a relative who is hoping to get a job, I

will accept him in return for the earlier favour (Int # 9).

Another example of the working dynamics of guanxi could be seen in the

appointment of the Hotel’s General Manager. His father had once been the

mayor of the city, and this was the reason he had gained such an important

position. Although he had only limited training, he was vested with the

authority to make important decisions. In his early years as General Manager

any minor mistakes he made were tolerated because of the powerful

connections behind him.

To gain a promotion within the Hotel, a relationship with the General Manager

or someone from the Provincial Governor’s office was the critical connection


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and was, according to the bar manager, “more important than a university

qualification” (Int # 13). This further confirms evidence that jobs in China

often have not gone to the best qualified, but rather to the best connected

(Seligman, 1999).

From an organisational perspective, the potential improvements in

effectiveness and efficiency to be gained by dismantling the system of

nepotism and choosing the best candidate for each job are significant.

However, dismantling this cultural system, which has developed over a long

period, will be difficult. Managers of converted SOE, takeovers, and

international joint ventures will need to be aware of this phenomenon when

developing the effective human resources to improve the results of their

organisations as they embrace the socialist market economy in south-west

China.

Occupational Advantages and Disadvantages

If an employee enjoyed good guanxi with their manager, there were advantages

from which to benefit. They could start a little late, have no shift-work, have

weekends off, get a job that required little work, earn more money and achieve

their goals easily. A relationship with a high government official or manager


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meant they could even choose where they would work. Those with powerful

connections chose the front office, the reservations desk, sales or marketing,

where they were not required to serve guests or do any cleaning.

A senior manager told the comical story of how a young man whose uncle was

the Hotel’s General Manager came to work at the hotel. Without knowing this

young man’s relationship with the General Manager, the supervisor arranged a

job for him cleaning the toilets in the lobby. When the General Manager heard

about this, he called the supervisor, saying, ‘You cannot do this. You must

arrange a better position for him’ (Int # 29). The young man was promoted to

cleaning rooms. However, cleaning rooms in the public area was still a low

position, so the General Manager called the supervisor again to instruct him not

to let his nephew work in a public area, insisting that ‘he must do something

higher’. As the employee had limited skills, after the public area, he went to a

position in housekeeping.

On occasions, opportunities would come to reward hardworking staff. One such

occasion arose when ten hardworking Hotel staff were to be chosen to go on a

trip to the United States to visit hotels. There was great excitement among

employees who thought they stood a chance of being selected. However, when

the lucky candidates were finalised, most of the ten staff selected from the


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Hotel were less than hard working and had been chosen because they had

guanxi with someone in power.

Annual Managers’ Conference

Relationships developed and grew stronger every year at the annual conference

where general managers and deputies from the family of SOE hotels within the

region would meet to discuss issues. These conferences provided the hub

required for managers to network and consolidate relationships and would

always generate invitations between managers to visit each other’s hotels.

Strong inter-hotel relations developed that resulted in transport,

accommodation and consumer benefits for these managers and the staff from

their hotels. Guanxi between these hotel general managers meant that their

employees often would later benefit from free or discounted accommodation

and assistance with other matters when traveling throughout China.

The Roaring Dragon Hotel’s General Manager used such relationships to

enhance the Hotel’s training program. When his employees had completed

internal training programs, he would send them off on tours of other hotels

throughout southern China for two to four weeks at a time. Employees on these

tours told how ‘we would always stay in a hotel where our senior managers had


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a relationship with their senior managers and as a result, pay nothing for food

or accommodation’ (Int # 8).

This hotel network has developed over time and may be in decay as

privatisation and other market forces disconnect hotels from this chain of

former SOE. The burden of bearing the cost of future conferences and the

increasing competitive pressures on Chinese businesses to make a profit may

be factors that hasten this decay.

Luo and Chen (1997: 3) wrote that ‘guanxi primarily relates to personal, not

corporate, relations, and exchanges that take place amongst the members of the

guanxi network are not solely commercial, but also social’. I agree that in the

vast majority of cases this appears to be true; however, these management

conferences appear to contain some hints of a more corporate nature. Those

benefiting from the relationships generated and developed at such conferences

were usually employees who did not attend the conference but still enjoyed

touring and learning experiences as representatives of the Hotel. Although this

type of organisational guanxi does begin with two individuals, in this scenario

it nonetheless has group connotations.

Departmental Cliques


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Each departmental manager had their own internal clique, or ‘in-group’

composed of a small number of members from each department who made

decisions on how to gain or use resources to the clique’s advantage (Chow,

2000). The cliques were very internally focused, competed with other

departments for resources, and expressed only limited concern for the

betterment of the Hotel. There was only minimal communication between these

cliques.

Members of the Hotel cliques shared trust, secrecy and fringe benefits. Clique

solidarity brought with it stability in relations, security of position, survival of

the in-group and protection enabling members to conduct their own business

outside the Hotel. With in-group trust came the development of a deep mistrust

of out-group members (Yau et al, 2000) and a type of ‘crony capitalism’

whereby in-group members were selected strictly on the basis of specific

attachments or kinship, without regard for ability (Lovett, Simmons, and Kali,

1999). If anyone outside a clique tried to change anything, the members of the

clique would ‘get in the way’, and it was claimed that ‘to break up such a

departmental clique, one needed the support of the General Manager’ (Int #

14).


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The clique leader would always exercise strict control. The bell captain would

tell his bell boys to ‘Listen to me first. I am your supervisor’. His control of the

clique was very strict and if a bell boy was not obedient, he would be severely

scolded or fired immediately. The assistant manager of the front office told

how he had wanted these bell boys to complete duties for him. Although he

was their senior, they would not respond to his authority or work for him. He

would ask them to collect a group’s luggage, but they would not follow his

instruction without the bell captain’s approval. He could write a misconduct

form, but ‘it was of no use as nobody would take any notice’ (Int # 21). Clique

members who exposed any ‘secret’ information to anyone outside the clique

would be immediately expelled. These cliques ensured that scarce resources

were mainly allocated through guanxi rather than through bureaucratic rules

(Luo and Chen, 1997).

Clique members in the security, housekeeping and engineering departments did

little work and enjoyed many favours. These included housekeeping

supervisors letting people use rooms free of charge; supervisors working on the

night shift clocking in, going out and returning later to clock out; rooms being

listed as out of order so that captains could go and watch television, sleep or

play cards; and members leaving the Hotel during working hours to conduct

private business.


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Upper-management cliques were very strong and secretive, and members

would take advantage of their positions doing business for the Hotel. One

senior manager revealed,

If the Hotel requires some necessities, a clique member would be asked

to make the purchase. The more expensive the advertised price of the

item, the better it would be for the purchaser. Why? The higher the

price, the greater the discount the buyer could negotiate with the seller,

who was often a member of his guanxi network. When returning

purchase receipts for the item to the Hotel accounts department, the

clique member would claim back the full advertised price and support

this with a false receipt. Although he would spend 100 RMB for some

item, his receipt would claim 300 RMB. The Hotel would reimburse

him 300 RMB, resulting in a 200 RMB profit from his purchase. The

General Manager would approve it. When you looked through the

Hotel’s accounting records you would not see any evidence of the

discount (Int # 21).

Caution was required when dealing with senior staff, as many of those in the

Hotel had guanxi with powerful officials. Such protection meant that


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departmental managers were able to conduct their own private business while

working for the Hotel, and this appeared to be accepted as an organisational

norm. They liked to ‘work for themselves and think about how to put money

into their own pockets’ (Int # 30). Managers were not well paid, so to

supplement their income they often used their power to generate financial and

non-financial favours.

Employees also were always careful to avoid harsh or hasty actions against

nonproductive individuals at the Hotel since one did not know to which high

official they may be related. Guanxi with the powerful did offer protection

(Seligman, 1999).

Recruiting from the Tourism School

The managers of the human resource and housekeeping departments had each

given the Hotel more than 30 years of service and during this time they had

developed their own guanxi networks, one of which included the manager at

the local tourism school. When looking for new employees, they would always

visit this school first and interview students there. The Hotel’s Head Chef had

gone to the school with them on several recruiting trips and told of how he had

‘chosen some candidates that I thought were talented and had what it would


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take to work well at the Hotel’ (Int # 3). A few days later, when those chosen

reported to work at the Hotel, he was mystified when only a few he had chosen

were in the final group and the others were from ‘who knows where’. Those

chosen were not the best available and, as he later found out, had been selected

because of their connections with important officials.

On another occasion, six new employees had reported for work in his

department unannounced. He had not requested them, and after questioning the

newcomers he found that they all had come from the tourism school. None had

been selected on merit, but all had connections in the right places. Sometimes

new graduates from the tourism school were appointed whether or not the

economic position of the Hotel justified hiring new staff. The better the

working conditions were for the job, the stronger was the guanxi required to

gain such a position.

Transfers

The system of work placement in China meant that some husbands and wives

worked in different parts of the country and did not live together. Movement of

workers from villages to cities was difficult as such a move had to be approved

by the public security bureau and the provincial government. Separated couples


140

in this situation found that guanxi was the most useful and sometimes the only

tool to gain a transfer to work in the same location as their spouse.

Three chefs had begun working at the Hotel while their wives still lived in the

villages. These chefs had catered for many government banquets at the hotel

and had developed their own guanxi through their interactions with government

officials attending such celebrations. The development of these relationships

with those in power enabled them to gain the approval required for their wives

to transfer from the villages to positions in the laundry or housekeeping

departments at the Hotel. For these separated couples, the strength of their

guanxi with high officials very often determined whether or not they lived and

worked in the same locality. Those without guanxi often remained separated.

Apartment Allocation

In 1999, the Hotel commenced construction of new apartments for staff

accommodation. Allocating these apartments to Hotel employees was a

complicated process that depended on the strength of an individual’s guanxi. At

the commencement of the process, the person in charge of allocation was a

former classmate of the training manager, and their guanxi was good. The

training manager felt happy, as he had been confirmed as number seven on the


141

list to be allocated a new apartment out of the sixteen available. He felt

confident and was making plans to pack up his old apartment so he would be

ready to move.

Prior to the completion of the apartments, an unexpected change occurred at

short notice. Another manager, who had good guanxi with powerful officials,

was placed in charge of the apartment allocation process and, as a result, the

priorities on the allocation list changed significantly. The training manager was

demoted to number thirty-two on the list, as he had no specific relationship or

connection with the new manager. This meant that he would no longer be one

of those allocated a new apartment, whereas those who had guanxi with the

new manager would be. While his former school friend had been in charge, he

had enjoyed a high position on the list, but the change in management meant

his connection was gone.

This change resulted in a significant financial advantage for those who were

allocated apartments. The head of training at the Hotel noted that after a year,

‘employees allocated apartments would be allowed to buy them at just a quarter

of the recommended price’ (Int # 12). This was at a time when the government

was encouraging personal ownership so as to eventually replace the employee

accommodation being provided under the arrangements of the hotel danwei.


142

This appeared to be one of the first cautious steps toward increasing private

ownership in south-west China, and guanxi was playing a role in this change.

Tour Agents

Government tour agents distributed the majority of bookings for tourists

requiring hotel accommodation in the city. In 1999, several new four-star hotels

were constructed in the city. As a result the booking agents’ business

environment changed from having the choice of only one hotel at the four-star

level and no bargaining power to an oversupply of four-star hotel

accommodation. This situation suddenly gave them immense bargaining power.

As a result, the quality of the relationships between hotel sales personnel and

tour agents became more critical to any hotel’s ability to attract business.

Pressure was on hotel sales staff to develop and maintain their guanxi with tour

agents. To do so, they would visit agents regularly and

‘invite them to their hotel for dinner, tea, and coffee; give them gifts

such as moon cakes and birthday cakes when appropriate; help them

solve problems; invite them to stay at their hotel during important

festivals; give them preferential pricing; arrange for them to visit the


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nightclub without charge; and provide complimentary rooms and

meals for their important government guests’ (Int # 44).

These activities were aimed at developing guanxi, to which agents would

reciprocate by sending the Hotel customers.

Managing relationships with these agents had become the biggest concern of

the sales department of each hotel. Any neglect of these agents would cause

their business to decline. Consequently, competition was intense, and

competing hotels would offer such incentives as advertising their group room

rate at U.S.$35 per night to the agent, but charging them only U.S.$30 per night

and allowing each individual agent to pocket the surplus U.S.$5 per night as a

bonus. This cash incentive strengthened organisational guanxi, renqing, trust,

and secrecy. In return, agents would direct tours and guests to the hotel that

offered them the most attractive discount rate, giving them the highest return.

Other hotels offered agents complimentary use of a car, a 40 percent discount

on meals, a 20 percent discount on drinks in the hotel’s bars, and a 30 percent

discount on room rates. Again, these favours were reciprocated by agents

making hotel bookings, which reflected positively on the hotel’s occupancy

rate.


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With hotels in southwest China developing their own direct booking systems,

the environment is changing again and agents face an uncertain future. Guests

seeking hotel accommodation were previously required to book through

government agents and stay in appointed hotels; however, this is no longer

necessary, and direct marketing is beginning to erode the agents’ market share.

Banquets

The dining table is important for Chinese business, as it provides an

environment in which relationships can be initiated and business deals

negotiated and closed (Pearce and Robinson, 2000; Yang, 1994). Invitations to

attend these banquets complemented the limited incomes of many employees

and officials. The lifestyle of the Chinese people is usually very humble at

home, so entertaining at the company’s expense by extending an invitation to

attend a company banquet is a method of fulfillment (Chu, 1988; Yang, 1994).

The Roaring Dragon Hotel has a rich history of being used to accommodate

large banquets. One evening, the Head of the Human Resource Department

arranged a banquet at the Hotel for members of the local government bureau

who were responsible for employee dang’an. The dang’an was an individual’s

official record of work. When an unemployed person found a job, they were


145

required to move their dang’an from the bureau and lodge it in the security of

their new employer. Conversely, when an employee resigned, retired, or was

laid off from a job and became unemployed, their dang’an had to be returned to

be held by the bureau.

Normally, the bureau would only accept the return of a maximum of ten such

dang’an in each given month. At this time, the Hotel had an excess of dang’an

they wished to return; however this was unacceptable to the bureau. The

banquet was called by the Hotel’s Human Resource Manager as a show of

respect toward members of the bureau and to discuss the bureau accepting the

extra number of dang’an. Inviting members of the bureau to the banquet was a

way of giving mianzi or ‘face’ to them. In return, the bureau accepted the larger

number of dang’an and the problem was solved. The Hotel’s Human Resource

Manager had strong guanxi with the local government and used her

connections to bypass their bureaucratic channels (Pearce and Robinson, 2000).

Problems

The existence of in-groups at the Hotel meant that there were two classes of

employees; those with guanxi with Hotel Manager’s with power and those

without. Descriptions of the work habits of those who had gained their position


146

at the hotel through ‘pulling’ guanxi included: ‘very lazy’, ‘rarely did a good

job’ (Int # 24), ‘has a poor work attitude’ (Int # 15), ‘may not have much work

to do,’, and ‘they choose to do no work’ (Int # 25). A young chef told of how

‘these employees come to work, read the newspaper, talk, or boast for eight

hours and then go home’ (Int # 19). If one had good guanxi with management

or senior officials, one could do practically whatever one liked, while those

who had gained their position on their own merit had to work much harder to

keep their job and had little choice of their appointed position.

If an unproductive worker had gained their position through guanxi, it was

difficult to have them removed due to the trouble their connections might bring

and the loss of ‘face’ it would cause. To avoid such difficulties and

embarrassment, managers of departments would let the employee remain in the

job without having to do any work and keep such information ‘quiet and within

the department’ (Int # 56).

As the market economy begins to take effect, the pressure to change is

beginning to have an impact on private-sector organisations in south-west

China, especially in regard to such issues as unproductive employees and the

awarding of jobs through guanxi. Several private-business managers said they

could ‘no longer employ unproductive employees except in situations where


147

such an appointment could facilitate significant economic gains for the

organisation’ (Int # 61). There was a definite contrast between human resource

selection processes taking place in the emerging private sector and those at the

old SOE Hotel, where changes were slow and guanxi connections still held

power.

Guanxi and the Attitudes of the Young

Young employees agree that, ‘if guanxi is used to solve a problem, its okay to

use it sparingly, but if guanxi is used to further a personal gain, then it is

wrong’. A young assistant manager in food-and-beverage vented his frustration

in this statement:

Cultivating guanxi is very tiring. You have to spend time and energy to

cultivate relationships with this person and that person. If you do not

cultivate guanxi carefully and mess it up, a lot of people might not like

you and you might be unhappy in your job. These people may say,

“how come you are pulling guanxi with him and not pulling guanxi with

me?” You might end up having more trouble as a result (Int # 32).

A young female university graduate told of an incident when she started work


148

at the Hotel with a group made up of university graduates and one non-graduate

who knew the General Manager:

We all had better training than the non-graduate, yet he was given first

choice of position, and chose the computing department of the front

office. He obtained a position that was easy and very comfortable

because he had a relationship with the General Manager. Although I had

a degree, I had no guanxi and ended up in the housekeeping department,

and my work was much harder, with morning, afternoon and night

shifts (Int # 28).

During the research period, several young educated employees resigned to take

up positions in one of the new hotels because they could not see any

opportunities for promotion within the old Hotel. They cited ‘in-group control’,

‘guanxi favours’ (Int # 35) and the ‘unfair practices of their superiors’ (Int #

38) among the reasons for their resignation. The favours and advantages given

to select staff consolidated many hardworking young employees’ dislike of

guanxi and contributed to their lack of motivation in the workplace.

Young and educated employees also disliked the fact that if a person with

guanxi did not like their job, they could go to a superior and ask to be moved to


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another position. Those without guanxi had to accept whatever conditions of

employment were offered.

Conclusions

Typically, the findings revealed that organisational guanxi was operating within

all departments of the Roaring Dragon Hotel and in interactions between

members of the Hotel staff and the supporting business community. Familiar

styles of organisational guanxi emerged in the areas of employment nepotism,

staff promotion, banquets and transfers. However, in comparison to those forms

of guanxi summarised in Kipnis’s (1997: 184) descriptions of village life, this

research uncovered new forms of organisational guanxi operating in inter- and

intra-hotel interaction, hotel-agency interaction, and departmental cliques.

Organisational guanxi first operates on an individual basis and can then be

promulgated to benefit the members of a clique, department, or an entire

organisation. When the organisation and/or the individuals working for these

organisations benefit organisational guanxi occurs. Examples of this could be

seen in the relationship between the Hotel’s sales department, management, and

tour agencies. Originally, one member of an organisation made contact with


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one member of another organisation and over time their organisational guanxi

developed, resulting in favourable outcomes for other members of both the tour

agency and the Hotel. Luo and Chen’s (1997) conclusion that guanxi has no

group connotation and that the bonds are personal, may be extended to include

inter-group or inter-organisational dimensions. This research provides evidence

that group and inter-group activities are part of inter-organisational guanxi and

intra-organisational guanxi.

For hotel general managers in this scenario, contacts and trust developed over

years of annual SOE conference interactions had developed to eventually

provide associated employees with good accommodation packages and advice

for their travel all over China. This is an example of organisational guanxi in its

purest form. Organisational guanxi also exists within the cliques in

organisations, which are able to provide perks, job security, and flexibility in

working conditions for internal members.

Organisational guanxi does have a number of environmental conditions under

which it thrives. First, an organisation needs to be large enough to have a

number of distinct and separate departments to promote competition for

resources between them as well as opportunities for organisational favours to

be easily granted. Medium to large hotels are prime examples of such an


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environment, as managers are able to grant favours such as free rooms, free

meals and entertainment options. If the organisation operates at more than one

location, the opportunities for the development of organisational guanxi are

enhanced and organisational guanxi may also exist between organisations

within the same industry.

Awarding jobs to members of one’s guanxiwang (Ambler, 1995a) and the

phenomenon of discounting do appear, at times, to be difficult to differentiate

from nepotism and bribery. In these scenarios, Pye’s (1992) definition of

guanxi as ‘friendship with continued exchange of favours’ is being satisfied

and the existence of emotional content and a long-term obligation can be

identified to distinguish these organisational relationships from nepotism

(Yang, 1994). Discounting and conducting private business during working

hours are commonly accepted practices and are difficult to define as being

legal.

The findings regarding nepotism, cliques, discounting and favours are of

concern for international managers operating in China. From a Western

perspective, these types of favours imply unfair or even fraudulent practices.

To effectively manage joint ventures or foreign-owned operations in this

environment, managers will need to be contingent, highly flexible and able to


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adapt their management style to manage a diverse workforce (Chow, 2000).

As the Chinese socialist market economy develops and spreads westward,

organisations in south west China face the challenge of making the workforce

more productive. Pressure on employees to perform rather than to rely on the

promotional processes of the ‘old style’ organisations is growing (Guthrie,

1998). Managers will increasingly find themselves pressured by market forces

and the improving legal infrastructure to distance themselves from the

‘crooked’ ways of guanxi practice (Yi and Ellis, 2000). In the SOE hotel sector

in southwest China, these forces are yet to have any serious effects on

organisational guanxi practices for old organisations. Future research is needed

to record the possible decline or hybridisation of organisational guanxi under

these conditions as China embraces the market economy.

The attitudes of the young toward guanxi provide further pressure to change. At

the Roaring Dragon Hotel, new graduates were frustrated to find that their

educational qualifications drew only limited respect from the older generations

of managers. In the past, the promotion of those with guanxi rather than ability

had resulted in unqualified personnel occupying decision-making positions, and

issues of concern such as poor management, waste and low productivity and

nepotism arose, significantly influencing performance outcomes. Some


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managers appointed to senior positions through guanxi connections did not

possess the knowledge or ability to operate effectively in such a position, or to

train and motivate young employees. At the Roaring Dragon Hotel, it was clear

that many young people resented guanxi favours and because of this had lost

their initial motivation to work hard. Well-trained young staff had been lost to

other new hotels or other organisations with more modern management

methods, usually because they could see only limited opportunities for

promotion within the old-style organisation. As China’s educated generation

gradually penetrates management positions, the future of such nepotism

appears limited.

Private-sector managers told of how they could no longer employ those with

guanxi unless such guanxi appointments generated attractive returns as

compensation. Those interviewed told of how they could no longer appoint

those who were ineffective. Guanxi favouritism will restrict the rate at which

China’s most talented graduates and potential managers reach decision-making

positions. Will this restrict the SOE rate of development in realising their full

potential and their ability to compete successfully in the socialist market

economy? More research is required into youth attitudes toward guanxi, as the

next generation has the potential to promote and increase the speed of change

in China.


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If China adheres to its program of phased-in commitments as a new member of

the World Trade Organisation, Chinese society will continue to undergo deep

changes. Companies will be forced to get in shape and adopt international

standards of governance or lose out to rivals that do.

As China adapts to a market economy, it is likely to be in the port city of

Shanghai that the results will first become evident (Reyes, 2001; Guthrie,

1998). Far inland, away from the international ports and trade centers of China,

this change may be slower and more gradual. In the old SOE hotels in

southwest China, favouritism still exists in most business transactions, and

dealings are still being conducted within different sets of economic, legal,

ethical, social and political parameters than those used in the West. The guanxi

game, in which connections often count more than merit, will persist until

China develops modern institutions and a consistent application of the rule of

law (Gang, 2001). Breaking down the organisational guanxi networks will not

be easy, but this may become a requirement for Chinese SOE to maximise

effectiveness and efficiency and realise their full potential.


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Chapter Six

Guanxi Neglect at the Roaring Dragon in South-west China:

The Demise of an International Management Contract6

In recent years, the hotel business environment in south-west China has

undergone significant changes. China’s opening-up has encouraged an outbreak

of new hotel construction and property speculation as companies and investors

hope to cash in on the domestic and international exposure of the unique

region. Prospects for growth in the number of tourists and investors visiting the

region in the future appear good.

The Roaring Dragon Hotel, an old Chinese SOE, celebrated its fiftieth birthday

in 2005. In the second half of 1999 an international management company set

about transforming the culture of the Hotel from being a relationship-based

management style to a modern market-oriented method. In 1999 the Hotel

employed more than 670 people and by 2004 this had been reduced to 300 due

the shift in management culture and a vigorous redundancy program.

6 Published in China in the New Era, Coates. B., Brooks, R., Fraser, I., and Xu, L. (Ed) (2003).


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The following case describes this SOE organisational experience in attempting

the transition from planned to socialist market economy conditions.

Methodology

Interviews were recorded with 35 middle and senior managers from the hotel

and a group of 11 officials, academics, and businessmen from this environment.

15 participants were interviewed on more than one occasion across three

research periods in 1999, 2001 and 2002. Un-attributed, direct quotes used

throughout this manuscript are taken from verbal transcripts of these

interviewees.

In addition, a written survey was conducted with hotel staff the week before the

takeover and some findings from this survey are acknowledged in the

following.

The Roaring Dragon Hotel

The Roaring Dragon Hotel had been the first four star hotel in the city and

since the early 1950s had enjoyed a reputation as the most famous

accommodation-provider in the region. Being a SOE with a long and colourful


157

history, it was the region’s premium guesthouse for visiting government

officials, dignitaries and guests.

To staff the Hotel, employees had been transferred in from other SOE and

government departments primarily on the strength of their guanxi or

connections. Having gained a position to work for the Hotel, Roaring Dragon

employees felt ‘excited’ and ‘very proud’ (Int # 31). Some recalled ‘if your

relatives or your friends knew that you were working in Roaring Dragon, you

would be admired’ (Int # 29), ‘it was a good work unit’, and ‘you were lucky if

you worked there’ (Int # 33).

The original Hotel was a four-storey, rectangular, grey structure constructed in

1955 in a Russian style. By 1993, the provincial government had funded a new

extension and the Hotel now consisted of two parts: the old four-storey section

now complemented by a modern sixteen-storey extension perched on a hill

behind the old Russian-style building. There was a contrast in the standard of

accommodation between the old and the new. Room rates were cheaper in the

old section and so it attracted Chinese visitors and travelers searching for

quality economy accommodation. High profile visiting government officials

and higher-end customers felt more comfortable in the newer, more expensive

section. There were two guarded entrances to the Hotel, one on each level. A


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series of stairways, elevators and a warren of banquet rooms, hallways, storage

areas, offices, cafeterias and a laundry untidily connected the two buildings.

Reflection on a 1993 Experience

The Roaring Dragon was a Chinese-managed SOE Hotel until the opening of

the new modern extension in 1993 when the provincial government decided to

contract an international company to manage the Hotel. The objective was to

improve the quality of customer service and generate more income. The KYZ

Corporation was identified as a suitable international management organisation

and was contracted to manage the Hotel. Their representative, Mr. Meyer, a

Mandarin-speaking German, became the Hotel’s new General Manager (GM)

with the former Chinese GM, Mr. Wen, becoming second-in-command.

After a short time under the new market-oriented management style, former

General Manager Mr. Wen began complaining that he had lost his privileges.

He could ‘no longer enjoy practices such as inviting someone to the Hotel for a

complimentary dinner or reap other benefits without first gaining approval from

Meyer, the KYZ GM’ (Int # 44). For Mr. Wen and his former management

staff, the change of management was an issue of great concern as most of the

privileges they had previously enjoyed had been discontinued. This loss of


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benefits resulted in the Chinese managers being reluctant to embrace new

management practices. ‘In their hearts the Chinese employees did not want to

be managed by Meyer or the KYZ Corporation’ (Int # 54). In terms of

incentive or financial reward, there were few, if any, reasons for the Chinese

employees to be happy with the new arrangement and to make it work.

‘Employee salaries had not changed’ (Int # 31) and ‘the foreign management

did not know the Chinese way’ (Int # 33).

From the time KYZ took over the management of the Hotel in 1993, business

gradually declined. After three months, occupancy was very low and the new

modern extension was only in operation above the seventh floor.

Finally, after a year of poor performance, the Chinese provincial government

told KYZ that they were not performing well and that they wanted to end the

contract. KYZ did not receive this notification well and commenced

proceedings to claim damages in the courts from the provincial government for

breaking the contract. The provincial government had provided the

documentation and invitation to KYZ at the beginning of the contract and so

they were liable. Their guanxi with the local judges made them confident the

damages would be minimal. After a year of apparent non-cooperation and


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turmoil, the KYZ management left in November 1994 and Mr. Wen, the former

Chinese General Manager, resumed control.

With Chinese General Manager Mr. Wen’s reinstatement came the resumption

of the former organisational culture including the practices of nepotism and

favouritism. Guanxi cliques in the Hotel resumed operation and the re-

establishment of relationships with the local tourist agents resulted in the

occupancy levels returning to their former steady but low levels.

The Roaring Dragon Hotel was eventually required to fund the resulting

lawsuit compensation to KYZ. To General Manager Mr. Wen and the

employees it did not matter as ‘the provincial government would pay the

damages’ (Int # 47).

The 1998 Story

By 1998, the provincial government had again become dissatisfied that the

potential of this SOE was not being realised especially as the Roaring Dragon

was the highest rated hotel in the city and was situated in a famous tourist

location. Since the Chinese management’s resumption of control in 1994 after

the demise of KYZ, the financial performance and vacancy rates were still


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below potential. At times, the Hotel was losing money and the provincial

government ‘was not happy with the way it was being managed’ (Int # 37).

Under Mr. Wen, management practices remained outdated and ‘the staff were

not developing or expanding the Hotel business’ (Int # 36). Among the

employees, there was an atmosphere of little concern as their salaries, although

ordinary, were secure and they were content in the knowledge that the

provincial government would cover any of the Hotel’s losses. The Hotel

danwei was highly ranked which meant that the working conditions and

benefits were good when compared with those of the rest of the population

(Walder, 1986). The ‘580 Yuan per month paid to a barman’ (Int # 7) or the

‘1500 Yuan per month paid to a manager’ (Int # 44), combined with the easy

work, neat and tidy uniforms, complimentary meals, accommodation and fringe

benefits made the Hotel an attractive and respectable place of work.

The organisational culture was very relaxed with many employees finding time

to read newspapers and enjoy a green tea during working hours. For some

managers, conducting private business was easy and from time to time they

could be seen leaving the premises for a few hours to attend to other business.

One example was the Hotel’s Head of Training who had a restaurant just a few

blocks away. In the afternoons, he would make visits to ensure operations and


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supplies at his restaurant were flowing smoothly. It was easy as the Hotel was

overstaffed and under the conditions of the danwei all jobs were secure, and

besides, no Chinese manager wanted to be responsible for firing potentially

well connected, lazy or unproductive employees.

As Rofel (1999) identified, this was the type of SOE work culture that still

operated largely under the shadow of the Cultural Revolution and carried

employees who did not have commitment or a sincere working attitude. The

Roaring Dragon Hotel employees did not want to work hard and were not

concerned about the Hotel’s steady decline in popularity and income. China’s

new market economy demanded that organisations become profitable, yet the

Roaring Dragon’s old and experienced Chinese management showed little

concern for generating profit and basically did not comply. During the same

period, competition arrived as new hotels opened their doors and as this

competition grew, the financial fortunes of the Roaring Dragon Hotel declined

even further.

As a result, in 1998, the provincial government was again tempted to contract

an international management company to arrest the declining fortunes of the

Roaring Dragon Hotel. They identified the Nothill Hotel Management

Company as an organisation with the right international reputation, credentials


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and brand name to take up the management contract. They felt confident that

under Nothill’s management, the Roaring Dragon Hotel’s potential would be

realised.

In March 1998, negotiations commenced with the globally respected Nothill to

take over management of the Roaring Dragon Hotel. By mid-1998, it was

agreed in principle that Nothill would take control of the management of the

Roaring Dragon and, to save face, the incumbent Chinese GM, Mr. Wen,

would be installed as the GM ‘of a new company, the Roaring Dragon

Limited’. The role of Roaring Dragon Limited would be to oversee the

activities of Nothill and ‘act as a conduit through which Nothill communicated

with the Hotel’s Board’ (Int # 26).

Would Nothill’s experience at the Roaring Dragon Hotel in 1998 be more

successful than KYZ’s five years earlier?

Nothill and Mr. Harvey’s arrival

To negotiate the finer points in the contract and help prepare the Roaring

Dragon for a complete management takeover, Nothill sent one of their

Australian Managers, Mr. Harvey, to complete the negotiations and initially co-


164

manage the Hotel with former Chinese General Manager, Mr. Wen, from May

1998. It did not take Mr. Harvey long to realise that a management takeover

would involve changes in the Roaring Dragon’s organisational culture.

Entrenched guanxi practices, the poor quality of customer service and at times

significant annual losses had to be converted into more accountable, quality

service practices with employees who were prepared to strive for excellence.

Mr. Harvey’s mandate included identifying efficient and effective staff that

would be able to help develop the Nothill standard of excellence at the Hotel.

He realised that this might not be easy as many of the existing staff had been

employed there for fifteen years or more. During that time the majority of them

had experienced little or no training, and had developed only a limited

understanding of the concepts of western professionalism or efficiency. Mr.

Harvey faced the challenge of transforming a large group of relaxed family-

based employees, working under an ad-hoc management style into a

professional group of employees operating under a structured international

commercial business culture.

From the time of his arrival, Mr. Harvey ‘mixed easily with the Chinese people

and regularly attended important functions, giving presentations and speeches,


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playing tennis with the Governor, and sometimes even chatting at the nearby

English Corner’ (Int # 1).

Nothill’s Austrian-born Head Chef, Mr. Werner Thomason, arrived five months

after Mr. Harvey to take charge of the Roaring Dragon’s Food and Beverage

Department. Notified of his appointment in England, Mr. Thomason had flown

into China without a visa and was met at the airport by a provincial government

representative. After a few questions were asked, he ‘was given a 24 hour

temporary visa for 100 Yuan’. The next morning, ‘a government official took

his passport and secured him a long term visa’. He encountered a ‘similar

process with his Immigration Health Certificate’ (Int # 3). The ease with which

the two events were taken care of highlighted the advantages of having

powerful guanxi within the provincial government.

A few months after Mr. Harvey arrived, problems began to surface. Although

officially Nothill’s representative, Mr. Harvey could not make any major

decisions in the negotiations without the approval of Nothill’s Regional

President in Singapore and the Corporation’s Vice President in Beijing. Even

though Mr. Harvey had negotiated most of the details of the Nothill takeover

contract, he was never really in control. As one Chinese manager commented,

‘all the important decisions were made in Singapore and Beijing’ (Int # 45).


166

After ten months, Mr. Harvey returned to Australia. There was speculation that

he had left because the ‘weather was not good for his health’, but many

employees believed that ‘he was fed up with the frustration of nothing

happening’ (Int # 10). Others believed that ‘the Roaring Dragon Hotel board

was against him from day one and that was the reason why his management

lasted less than one year’ (Int # 5).

Erhi T

Erhi T was the largest SOE in the Province and had accumulated significant

wealth in the region through its tobacco production. To help eliminate the

Roaring Dragon‘s seemingly ever-growing debt, the provincial government

‘told the Board of Erhi T to buy the Roaring Dragon Hotel’ (Int # 39). The

resulting funds would be used to repay and reduce the growing debt. This

request was made soon after Nothill’s contract to manage the Hotel was signed.

Reliable sources claimed that ‘the Erhi T board was reluctant to make the

purchase’ (Int # 39) and this was reflected in their delays in signing the

contract. As a result ‘eighty points in the original agreement had to be re-

negotiated’ (Int # 6) between the Roaring Dragon and Nothill after Erhi T had

become officially involved.


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By March 1999, after difficult negotiations, Erhi T had ‘purchased sixty

percent of the Roaring Dragon Hotel for an estimated twenty million yuan’ (Int

# 30)7. The final contract stated that Nothill would manage the Hotel and

Roaring Dragon Limited would continue as the Chinese management arm. This

was the first official agreement between the three parties and it had proven a

cumbersome task.

At the first meeting between the new Chinese shareholders and the Hotel

employees, an Erhi T manager made the comment that they ‘did not really want

to buy the Hotel’ (Int # 38). That seemed to signal an inauspicious beginning

and was perhaps, an indicator of the troubles to follow.

The Provincial Government

As the former guesthouse for government officials, the Roaring Dragon Hotel’s

relationship with the provincial government was very important. To nurture

government relationships, Hotel managers would regularly invite officials to

the Hotel for dinner and present them with flowers, tobacco and gifts such as

glasses displaying the Roaring Dragon logo. In addition they would arrange

7 Trusted informants in the Red Dragon Accounts Department indicated that this figure was correct.


168

meetings with them to drink tea and offer to assist them in resolving any

problems they might have.

From the Hotel’s beginning, government officials had been the only people

who could afford accommodation at the Roaring Dragon. As the only four-star

hotel in the city for more than forty years there had never been a problem as far

as low occupancy was concerned. However, that began to change from late

1998 when the number of hotels with the capacity to receive government and

accommodate four-star guests increased from one to three, with a further two

more four star hotels under construction. Government officials and those who

could afford it now had the choice of staying at a hotel that could offer them

more modern facilities and services at a competitive price.

April 1999

Mr. Fortune arrives

Following Mr. Harvey’s departure, Nothill searched for a new General

Manager and found their candidate in their African operations. Mr. Paul

Fortune arrived in April 1999, two months after Mr. Harvey had left, to finalise

the contract and resume preparations for the Roaring Dragon to complete its

transition from co-management by Nothill and the Roaring Dragon Limited to


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full management by Nothill. This was contracted to begin from the first day of

August 1999.

Almost immediately Mr. Fortune established a pre-opening budget with the

Roaring Dragon which ‘covered Nothill’s expatriate pay roll with effect from

August 1’. He also identified that ‘cash flow was going to be the main issue

confronting the Roaring Dragon’. Erhi T may have to come up with working

capital for at least the first two or three months before the newly managed

Roaring Dragon could generate enough income to operate independently’ (Int #

2).

With the contract finalised, the Hotel’s Chinese Board of management

suddenly expanded from four to twenty members. Among the new additions

were ‘the local Communist Party Chief, the Chief Secretary, the Union

representative, and eleven Erhi T representatives’. Mr. Fortune believed

‘everyone was trying to get a seat on the Board to keep an eye on Nothill’ (Int #

2). As was the norm in Chinese management situations, ‘connections and

relationships’ had played a key role in deciding all the positions on the Board.

Mr. Fortune soon realised that it was ‘politically correct to include the Hotel

Workers Union and to pay respect to them so as to minimise any problems they

may cause’ (Int # 2). In a push for information and to stamp its authority, ‘the


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Board proposed Nothill supply them with a copy of the Roaring Dragon’s

accounts every week’. Mr. Fortune politely refused and eventually agreed on

providing monthly reports.

Mr. Fortune and Nothill’s real concerns were ‘whether all the negotiated

contractual agreements were going to be met’ (Int # 2) by the Hotel Board and

the Provincial Government. The Nothill board intended to ensure that as an

internationally branded company with a healthy reputation, their ‘brand name

would not be brought in and thrown on the building’ (Int # 2) with all other

contractual agreements falling by the wayside or encountering delays. As

insurance, it was stipulated in the contract that Nothill would take over the

management of the Hotel from August 1st. However, the Roaring Dragon

would not be re-named as a Nothill hotel until such time as significant progress

had been made towards improving the quality of service, and when

construction was complete on a proposed new five-star wing in place of the old

building.

Once the old Russian style section of the Hotel had been demolished,

and the service quality in the modern extension brought up to Nothill’s

international standard, the Hotel would then be re-branded the Nothill

Roaring Dragon Hotel (Int # 2).


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The demolition of the old section of the Hotel was to begin by January 1, 2000

and so it was planned that the new five-star accommodation wing and function

centre would be completed ready for opening in late 2002. Mr. Fortune felt

‘confident that in two years, his team would be able to develop the local

Chinese employees to a level whereby they could reproduce Nothill’s world

class standard of service’ (Int # 6).

The old section of the Hotel was closed and stripped for demolition and all that

remained open for guests was the modern, more expensive sixteen-storey

section of the Hotel. Left with a smaller number of rooms to service,

redundancy was going to be an issue that Nothill was going to have to deal

with. The remaining 675 employees were well in excess of the 350 employees

Nothill estimated that would be required to run the reduced number of rooms at

capacity. Many staff would need to be re-employed elsewhere or have their

redundancy paid out. In contrast Nothill ‘planned to bring in eight expatriate

professionals to manage the takeover’ and later, when the time was right,

‘expand their management team to include pastry chefs, an executive chef,

Food and Beverage managers, and a much stronger professional team’ (Int # 2).


172

In preparation for the changes that would commence from August 1st, Mr.

Fortune publicly announced that from that date all employees would undergo a

two month training period following which employees would be chosen to be

retained by Nothill based on their attitude and ability. In the human resource

selection process, previously valued guanxi networks would supposedly

become irrelevant and powerless. Erhi T or the former Chinese GM would have

no control over the selection process and ‘Erhi T would resolve any redundancy

issues by paying out existing employee contracts or finding them positions

elsewhere’ (Int # 2). There was excitement among the young staff, who saw the

opportunity of working with a professional international hotel, and concern

among the older staff regarding the uncertainty for the security of their

positions. As none of the employees had ever experienced a redundancy

program before, many were unsure as to how this exercise would be

undertaken. Mr. Fortune quietly suspected that ‘when the redundancy lists were

decided, Nothill would see guanxi connections come out of the woodwork’ (Int

# 2) in an attempt to save some unproductive yet well connected employees

from losing their jobs and face.

Emerging Competition

Meanwhile in the local cityscape, two new four star hotels were nearing

completion to commence operations that would be in direct competition with


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the Roaring Dragon. These hotels were operated by international management

corporations and enjoyed the advantage of recruiting their employees based on

qualifications, appearance, efficiency and ability with no concern for guanxi

relationships. The new competitors had hired international recruiting firms to

sort through the hundreds of applicants who had applied for positions as they

wanted to identify the best recruits.

In contrast, Nothill had inherited an untrained staff, a high percentage of whom

had gained their positions through connections. Those with good guanxi with

the HR Manager were usually able to find sons, daughters, relations and

members of their guanxiwang (Ambler, 1995a) positions without much trouble.

An introduction or a recommendation to the recruiting staff always gave their

‘candidate’ the added advantage. Most of the existing employees had been

introduced to the HR Manager at the Roaring Dragon and this introduction had

usually resulted in them securing a position. Another reason given was that

‘when a parent retired or passed away their son or daughter legally had the right

to secure a position as their replacement in the SOE’ (Int # 9).

Historically, the Roaring Dragon’s recruitment policy has been very relaxed.

Under former planned economy conditions, there was little need to consider

generating a profit, as ‘all costs were financed by the provincial government’


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(Int # 39). Hence on a regular basis, more employees were hired than were

needed and oversupply resulted.

Mr. Fortune realised that the Roaring Dragon’s nepotistic history had the

potential to be one of Nothill’s obstacles in trying to choose the best employees

to remain at the Hotel. At one time or another there had been as many as 32

families with more than one family member working at the Hotel. The kitchen

had more than 70 chefs, many of whom did very little productive work.

Departmental workloads were unbalanced, with young employees stationed at

the Front Desk and in the Restaurants working harder than older employees

who worked ‘behind the scenes’. After older, more experienced, employees had

finished their work duties on any given day they would ‘talk, play cards, read

the paper and complete a few extra minor tasks during working hours’ (Int #

22). Nothill had to change some deeply entrenched behaviour.

Nothill had inherited the Roaring Dragon’s staff and it was proving to be a very

different game to choosing a totally new staff from the beginning. Mr. Fortune

admitted that Nothill would ‘have to make the best of the given situation’ (Int #

2).


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July

In early February 1999, Nothill and the Roaring Dragon had agreed to a freeze

on the recruitment of any new employees. However the hiring of new

employees by the Chinese HR Department continued even after the agreement

was struck, as the managers wanted to provide opportunities for the younger

members of their guanxiwang to work for the ‘world famous Nothill Hotel’.

During the time between Mr. Harvey’s departure and Mr. Fortune’s arrival,

Nothill did not have a General Manager on site. The Chinese managers took

advantage of the situation by hiring some extra young employees with the

thought that it would go unnoticed. Fifteen new employees chosen during this

period were told they ‘would start work in July 1999, after completing their

schooling’ (Int #12). These new appointments faced ‘no evaluation or interview

process’ and a training manager’s comment was ’maybe we will just ask a few

questions’ (Int #12). Mr. Thomason, Nothill’s Manager of Food and Beverage,

remained the only Nothill employee at the Hotel during that period. He noticed

some new faces in his department one day and was told ‘these are your new

employees’. He was a little angry that this had been done behind his back as ‘he

had no control over who was chosen, their caliber, education or ability’ (Int #

4). After this had been discovered Mr. Fortune registered his complaint with the

Chinese managers and Erhi T.


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In late July, Nothill’s international managers arrived to take charge of the Front

Office, Accounts, Housekeeping and Supply Departments. Mr. Fortune

confirmed that between August 1st and October 31st, ‘employees would be

assessed on their ability and their quality of service. Nothill management would

be working with them day in and out to assess their performance under strict,

demanding conditions and to determine whose eyes were sparkling and who

comprehended and were adapting well to the new system’ (Int #2). Any

employee who failed to meet the new higher standards would be asked to leave.

When Nothill’s international HR Manager arrived, she was surprised to

discover that the Hotel had kept ‘very limited records on employees’ personal

details, schooling, and experience’ (Int # 14). Her immediate task was to set up

and develop accurate files on every employee. This illuminated the difference

in standards of professionalism between the old and the new methods of HR

management of the Roaring Dragon Hotel.

The take-over from August 1st caught the imagination of the younger

employees as they glimpsed the prestige that they would gain from working for

an international hotel. Recalling the KYZ experience of 1993, older employees

agreed that ‘Nothill was more famous’ but cautioned as they ‘were unsure of


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what the new management would be like’, ‘who would be laid off’ (Int #21)

and what future those made redundant would face. Redundancy was a new

concept in south-west China and one Chinese HR manager explained that ‘it

would be difficult to ask someone to leave their job without a good reason or

explanation’ (Int #5). Preserving the face of employees made redundant was an

issue that would need to be addressed.

A significant event occurred in the same month. NuFu Travel was an agency

that had in the past provided many accommodation and banquet customers to

the Roaring Dragon. In late July, they offered the Hotel a touring Japanese

group that required a small banquet at the Hotel as part of their tour package.

Nothill Head Chef, Mr. Thomason, arrogantly told NuFu Travel that their

package price ‘was too cheap’ and refused to accept their offer stating that he

‘wanted a higher price’. Upon learning of this the former Chinese Head of Food

and Beverage, Madame Fang, advised him that ‘if he refused the offer he

would effectively be excluding Nothill from any future bookings from NuFu’

(Int #16). Mr. Thomason refused to agree on the cheaper price package and as a

result, NuFu retaliated by canceling all future tours booked to stay at the Hotel.

Madame Fang complained that Mr. Thomason‘s ‘management was not Chinese

and he does not understand’ (Int #16). The relationship fires she had kindled

with these tour agents over many years were extinguished in one telling blow


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by his refusal. In a disappointed tone, she claimed ‘we are in China and must

respect the Chinese way’ (Int #16). The guanxi she had developed between the

Roaring Dragon and the NuFu agents was seriously damaged as a consequence

of Mr. Thomason’s lack of understanding of guanxi and his guanxi neglect.

This resulted in the loss of all business coming from the NuFu at a critical time

in the Roaring Dragon’s transition in management. This was also at a time

when hotel competition in the region was growing. The relationship between

the Roaring Dragon and NuFu had been tarnished which meant that NuFu

would now send their customers elsewhere.

With the opening of new competitive four-star hotels, agents now had more

quality accommodation to choose from, with cost reductions and fringe benefits

being offered by competitors that were equal to or better than those offered by

the Roaring Dragon. It had become a buyers’ market and hotel sales

departments now vied with each other to offer the best package deal to NuFu

and other agents in order to attract their business.

Aside from Madame Fang, the long-serving top Chinese Chef of the Roaring

Dragon Mr. Wang was also unhappy with Mr. Thomason’s management and

complained directly to Mr. Wen, now the General Manager of the Roaring

Dragon Limited. Mr. Thomason’s questionable ‘people to people’ skills were


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feared by everyone who worked in the Food and Beverage Department

especially when he would ‘stare and yell’ (Int #22). The Chef in Charge

resigned after Mr. Thomason transferred him from the Chinese Kitchen to the

Western Restaurant against his wishes and Mr. Thomason’s personal secretary

‘could not stand his bad temper’ (Int #22) and resigned soon after.

Using Guanxi to Transfer Out

After a short time under Nothill’s co-management, employees realised that they

would now have to work much harder. Those who had strong guanxi with Mr.

Wen and who ‘did not like to work hard’, ‘to work for Nothill’ or who ‘were

likely to be laid off’ (Int #12) used their relationship with him to transfer to the

Roaring Dragon Limited. For these transferees, working under Mr. Wen would

be much easier and their employment would be secure. As a result, those who

enjoyed good guanxi with Mr. Wen, with senior management in the Roaring

Dragon Limited hierarchy or with high-ranking government officials were able

to transfer out of the Nothill-managed part of the Roaring Dragon Hotel and

into the Chinese-managed Roaring Dragon Limited. Mr. Wen was able to find

new positions with lighter workloads for these members of his guanxiwang.

Other unhappy staff used their guanxi to gain transfers to new positions with

either Erhi T or other associated companies. Not everyone had strong enough


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guanxi to transfer to another organisation. Those able to ‘pull’ guanxi and

transfer to Mr. Wen’s management at the Roaring Dragon Hotel Limited now

worked under very little pressure in an air-conditioned office on the seventh

floor of the building adjacent to the Hotel. In contrast, those remaining under

Nothill’s management were working under greater demands and pressure and

the fear of redundancy for employees was beginning to grow. Just prior to

Nothill’s takeover, ten employees had transferred from the Roaring Dragon

Hotel to the Roaring Dragon Limited and in the month that followed, another

seventeen transfers took place.

Although Nothill was glad to see staff leaving the Hotel voluntarily, there was a

down side. Those who left took with them their critical industry contacts and

guanxi connections. Guanxi is difficult to transfer and usually the connection

with an organisation ends with an individual’s departure. As Nothill

consolidated further, one of the oldest members of the Chinese management

team, the former Head of the Food and Beverage Department, Madame Fang,

decided to leave, taking with her a large percentage of the guaranteed income-

generating contacts for the Hotel. After witnessing for herself Mr. Thomason’s

style of management, she had decided on a transfer to the Roaring Dragon

Hotel Limited. Whether Nothill was aware or not, it had allowed the number


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one guanxi holder to leave and this proved to be a costly example of guanxi

neglect.

Agencies and Competition

To generate occupancy in the new and much more competitive market, the

Roaring Dragon Hotel’s sales staff now had to work much harder to develop

and maintain good relations with their travel agents. The record of poor

treatment of NuFu by Mr. Thomason, combined with Nothill’s refusal to offer

any discounts, meant that it was proving much harder for the sales team to

develop any new business. As competition grew tougher, competitive pricing

became the number one priority. Nothill, somewhat arrogantly, banked on its

international reputation to attract bookings and refused to partake in any

discounting. Nothill’s Marketing Manager would instruct the Roaring Dragon

sales team to offer agents ‘rooms for US$32 per night for group bookings

whilst competitors could provide the same for as low as US$20’ (Int # 44). The

reality was that in south-west China, Nothill’s global reputation was of no

importance to booking agents when they were searching for the most

competitive price. Developing supportive guanxi links with tour agents had

become critical to business survival and the newly opened hotels were

performing this task better than the Roaring Dragon.


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By the end of July, the combination of in-house rumours and the tougher work

standards set by Nothill had taken effect. The level of job security felt by

employees had begun to deteriorate. In a survey of Roaring Dragon employees

conducted a week before the full Nothill takeover, only 41 out of 437 (9.4%)

respondents believed their position to be ‘secure’. Uncertainty existed, as

employees knew little about their new expatriate managers or Nothill’s

objectives and wondered if their standard of work and past record of

employment would guarantee their job security.

August

On the first day of Nothill’s takeover on August 1st, all employees were issued

with a short-term contractual agreement guaranteeing ‘they would retain their

position for three months, two months of which would be spent on training

followed by a month on probation’ (Int #2). During that time, each employee’s

ability, attitude and approach would be evaluated in preparation for ‘the

number of Hotel employees being reduced from the existing 685 employees to

a total number of 350 employees’ (Int #2).


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Nothill estimated that 320 employees with long-term contracts would need to

be made redundant. Employees were told ‘this reduction was necessary because

the old Russian part of the Hotel was being demolished and the number of

rooms requiring service would be significantly reduced’ (Int #16). In a few

years, once the old building had been demolished and the new Hotel building

completed, Nothill planned to recruit new employees. However, there were no

obligations on them to re-hire any of the old employees.

The old section of the Roaring Dragon Hotel sat stripped of assets in readiness

for demolition. From that time onwards, the Roaring Dragon had no conference

hall or Chinese Banquet restaurant to service even their faithful long-time

customers. In the past the Roaring Dragon had enjoyed good relationships with

government departments and agencies such as the NuFu and the Foreign

Tourist Company (FTC). Both had regularly booked large buffets, banquets and

events in the old banquet room. The closure of the old building meant large

meetings and banquets were no longer available to government or guests. The

empty building echoed the Roaring Dragon’s witness to many famous meetings

and banquets.

The remaining modern restaurant in the new wing did not have a Chinese

ambience and agencies were reluctant to hold their banquets there. Mr. Fortune


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believed business would only start to recover from 2002 onwards after the

completion of the new wing. Demolition was already behind schedule and the

relationships between management from Erhi T, the Roaring Dragon Limited,

the provincial government and Nothill were not developing well.

As part of the changes in organisational culture and conditions at the Roaring

Dragon, all managers and supervisors now had to work an eight-hour day and

the opportunity to take long tea breaks or conduct private business during

normal working hours was eliminated. Leaving the Hotel site was no longer

easy as Nothill managers made sure that everyone was constantly occupied

whilst they were being assessed. This change in policy and procedures at the

Hotel caused upheavals in organisational culture. The Roaring Dragon’s

method of service delivery and style of administration were changing beyond

recognition. There was fear among many of ‘the old staff that they would not

be able to adapt to Nothill’s new management style’ (Int #1).

September

At the beginning of September, the group of fifteen young employees who had

been illegally recruited by the Chinese managers, after the agreed freeze on

hiring, became the first redundancies. In order that they did not lose face, they


185

were told they were being ‘given the opportunity to resume their studies’ (Int

#10). There were tears among these young employees and they were not

entitled to any redundancy payouts due to their short period of service.

For the contracted employees with less than five years service, a voluntary

redundancy package was drawn up offering them 1000 yuan for each year of

completed service. Retrenching younger employees was seen as a more

attractive option as the redundancy cost for those with only a few years service

was significantly less than the larger sums needed to pay-out long serving staff,

some of whom had given more than thirty years service. Nothill re-confirmed

that there was to be no new hiring for some time and seventeen employees

accepted the redundancy package on offer as they did not like the new system.

The challenge for Nothill was to transform a relaxed, Chinese organisational

culture that was not focused on quality, into one capable of achieving as a norm

Nothill’s dynamic, international standard of excellence. Employees needed to

become sharper, brighter and more receptive in order to survive whilst the

culture and chemistry of the organisation began to change. Employees who

used to ‘sit around smoking and reading the papers’ in May, were now busy all

the time or, if an opportunity arose, they were ‘relaxing out of sight’ (Int #4).

As new management practices were introduced, several observers wondered if


186

this situation could continue. Would the growing dissatisfaction among

employees work against Nothill in the long term?

Chinese managers agreed that ‘the tables, chairs, windows and appearance of

the Roaring Dragon had changed but in the hearts and minds of the employees

there had been little change’ (Int #18). A skilled bar tender was still paid only

580 yuan (~US $75) per month for a 40-hour week with no annual holidays.

Although now under Nothill management, the Roaring Dragon remained

Chinese in most other aspects. Old practices survived but had gone

‘underground’. Captains still ‘hid in out of order guest rooms to watch TV,

sleep or play cards’ (Int #46). One change that had evolved was that someone

was now on watch outside the door at all times. If one was caught not working

by Nothill managers it meant immediate dismissal.

With the onset of the winter months, the number of tourists dwindled. With the

peak season over, hotels now relied heavily on their relationships with agents

and the discount rates they were prepared to offer them to provide their hotel

with a steady trickle of customers up until the beginning of the spring festival

tourist period.


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Several of the managers with important guanxi retired or moved on as the news

spread regarding the Hotel’s forthcoming downsizing. Members of the

provincial government were still scrutinizing Nothill’s performance closely

whilst the rumblings of discontent were beginning to increase in volume.

October

Preceding Nothill’s arrival, government officials wishing to enjoy the finest

local cuisine, negotiate some agreement or impress some important clients,

would always take guests to the Roaring Dragon to visit a trade fair or enjoy a

banquet. Now government representatives had to hold their banquets and

entertainment activities elsewhere and a sense of emptiness and gloom

pervaded the once grand old section of the Hotel. The old Russian style wing

still lay empty and idle - stripped, gutted, and ready for demolition. However, if

one took a closer look, some businesses were still operating offices on the

ground floor under ‘private arrangements’. There was still no confirmation

from Erhi T that money would be made available to begin the demolition of the

old building and construction of the new building in 2000.

From the human resource perspective, the number of voluntary redundancies

continued to trickle in. This had taken a negative turn for Nothill when five


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talented young staff from the Front Office and Food and Beverage departments

gave notice in October to seek better opportunities elsewhere. Some had

secured positions in other Chinese hotels or at a foreign-managed hotel where

‘guanxi connections did not hold all of the power’ (Int #12).

Nothill’s managers maintained the increased pressure on employees to perform.

The new standard of work being demanded meant that some employees were

unable to cope with the faster and more demanding pace of the job. Many old

staff with no education and simple backgrounds had difficulty relating to the

concept of five-star service and working under managers who ‘speak a different

language’ (Int #8).

Due to Nothill’s new dinner roster, the employees from some departments who

previously would to go to the cafeteria for lunch or dinner with one of their

work associates now ate alone or with someone from another department. The

atmosphere that now prevailed in the cafeteria contrasted markedly with that of

previous years. Employees who had shared lunch with their fellow workers for

more than ten years had difficulty understanding why they now had to eat

alone.


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Mr. Fortune had begun to receive some interesting telephone calls about future

downsizing and enquiries about who would be asked to leave. All the

employees who wanted to go of their own free will had now departed. The next

phase of the downsizing was ‘to release about sixty workers per week from the

beginning of November’. Mr. Fortune said ‘it would be done as quietly as

possible with a few from each department being made redundant each week’

(Int #6). A few existing staff had been told their positions were secure.

Although there were few guests at the Hotel, employees who wanted to

maintain their positions continued to train hard.

As part of Nothill’s strategy to improve its limited facilities, the Hotel disco

was re-named, re-staffed, re-furbished, and re-opened. It was still unable to

attract more than a few customers on any given night. The new Chinese

restaurant, tentatively planned to be open in a month, was scheduled for fitting

out. However, employees doubted this deadline would be met as ‘suppliers

were rarely on time’ (Int #26). Before work on the restaurant could begin,

contractors first had to build a bridge as well as fill a large hole in the external

wall. This would take time also. For Nothill, keeping to their tight schedule was

at times difficult as the quality of the relationship between them and the service

provider would often determine the timeliness of the work provided.


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November

With limited guests and with only two restaurants open, business for the Food

and Beverage Department was slow. No further bookings for accommodation

came from the NuFu agency. Other agents were also looking elsewhere and the

Chinese customers did not like the restaurants in the modern section of the

Hotel. ‘They were too open to the public and offered little privacy for banquets

or meetings’ (Int #29). Business was very quiet and for eight days, the only

people who ate at the Hotel’s Western restaurant were Nothill managers as part

of their contractual agreements.

In an attempt to stimulate business, Nothill managers began notifying other

Nothill hotels in the region of the Roaring Dragon’s facilities. Whilst several of

the expatriate managers attended a four-day training program in Nanjing,

Nothill hosted a conference for marketing managers from other Nothill hotels

in Asia. In spite of these strategies, the flow on was very limited and the

occupancy level of the Hotel remained low.


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The Four Mondays

Following the completion of the three-month training program, the schedule of

redundancies began. On the first Monday in November, a group of workers was

given their redundancy payouts late in the afternoon. There was no prior

warning given to these employees, as Nothill feared that if given advanced

notice, some of them ‘may damage or steal equipment before they left’ (Int #6).

Employees made redundant were told to proceed to the salaries department to

collect their pay out, leave the building, and not report for work again. For

those who had given many years of service to the Hotel, it was a loss of face

and seemed a very sad, sudden and disrespectful ending.

No official reason was offered as to why these employees were no longer

required nor were they thanked for their years of service. In the locker room

where they handed in their uniform for the last time, many murmured and

voiced their complaints. Several senior managers commented that ‘if the

Chinese managers had been in charge of the redundancy process, they would

have handled it differently’ (Int #29). What transpired was a market-driven

action by Nothill. However, it contrasted significantly to the ‘Chinese’ way of

dealing with people.


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Many of the employees made redundant had hoped to continue working at the

Hotel for a long time. Suddenly their dream had been taken away, there was ‘no

job tomorrow’ and there was the serious issue of their loss of face to contend.

Would their families ask ‘why will you not go to work tomorrow?’ ‘What did

you do to be asked to leave?’ What would families and friends think of this

redundancy?

As downsizing continued, more negative information about the Hotel

redundancies and Nothill’s management filtered out and reached the Provincial

Labour Bureau (PBL). The PBL was responsible for holding the employment

documents or dang’an of all unemployed citizens. They started receiving large

numbers of dang’an from the Roaring Dragon and had heard rumours that more

would arrive later in November. Immediately, the PBL refused to receive any

more of the dang’an of those made redundant. This situation needed to be

managed with sensitivity, as the Roaring Dragon needed the PBL to accept all

of the dang’an of the employees being made redundant. To placate the PBL,

Human Resource Manager Madame Zen and some other senior Hotel staff

invited sixteen members of the Labour Bureau to enjoy a banquet at the

Roaring Dragon. This gesture restored the guanxi between the PBL and the

Roaring Dragon and the workbooks waiting to be cleared were accepted.


193

On each Monday in November the redundancies continued. There were tears,

sadness, surprise and anger at the ‘pay-out window’. With the onset of the

redundancy process and the change in organisation culture, the work

atmosphere became very uncertain. Employees began to think ‘if I can get paid

out, why not take it?’ (Int #22). They had lost confidence in the Hotel and some

who had given many years of service no longer feared redundancy. Others

looked at their payout as a chance to make a new beginning. The employees

had been warned of the possibility of redundancy when Nothill took over and

some were prepared for any outcome. Upon receiving their payout, some

commented that the Roaring Dragon’s ‘once friendly and supportive

atmosphere no longer existed’ (Int # 20) and with many employees leaving the

Hotel, the work environment had become very sad. Few said that that they

‘would go back to working in the hotel industry’ (Int # 22). As more employees

were made redundant, the level of respect between Nothill and Chinese

employees began to fall. One manager summarised by observing that each

employee now ‘wore’ two faces, a ‘fake’ smile for the international managers

and a ‘worried frown’ in reality.

Occupancy levels continued to decline. The Roaring Dragon was a large Hotel

with 300 rooms in total and on one night there was only one paying customer

staying in the entire Hotel. By late-November, concern was growing that the


194

Hotel did not have sufficient funds remaining to pay operating expenses, let

alone wages. All advanced tour group-booking contracts had expired and no

future bookings were confirmed. The tourism industry in this city had now had

time to assess Nothill and from the Chinese perspective, their conclusion was

not very good.

By the end of November, many of the Hotel’s young workers had been made

redundant whilst older staff remained as some of their redundancies were worth

up to thirty five thousand yuan each. Erhi T was directly accountable for

financing redundancies and understandably the Board, the government and the

Party were not happy.

Limited progress continued with the construction of the new Chinese

restaurant. Although the grand opening was planned for the last week in

December, Nothill were not prepared to sign off on developmental stages of the

new Chinese restaurant until work was completed to specification. Contractors

would do such things as ‘order new doors but not new locks’ (Int #36). The

karaoke rooms on the second floor had no doors and Nothill had to request the

installation of automatic doors to seal off the rooms as the major function

centre downstairs was in direct sound range. There were problems between


195

Nothill and the company in charge of construction and getting tasks completed

became slow and cumbersome.

Still no agreement had been reached between Nothill and Erhi T regarding the

funding of the demolition of the old-Russian section of the Hotel, leaving the

old building still sitting empty and idle.

Paying for the purchase and installment of the new computing system was

causing some problems, with both Nothill and the Roaring Dragon Hotel Board

expecting the other to pay. Nothill wanted to install a modern, near state of the

art IBM system but Erhi T was reluctant. Erhi T argued that Nothill should pay

for the cost of the system. Nothill blatantly refused and negotiations dragged

on. The proposed time of installation had passed seven weeks earlier and still

there was no sign of progress. Nothill’s computer-training team, who had

planned to arrive at the Hotel at the beginning of October for training purposes,

now postponed their arrival indefinitely. After a ten week delay, it was finally

agreed that Erhi T would pay for the new computing system. Mr. Fortune

admitted that ‘every day is a struggle but we are making progress’ (Int #27). It

was planned that by the end of December, all of the old employees who were

no longer required would have been released and their contracts paid out.


196

A potential guanxi conflict concerning downsizing was looming. Mr. Fortune

expected to take to the Board the final list of old employees who were to be

made redundant and expected complaints and some negotiating to take place.

They were a lot of well connected, inefficient and ineffective staff who did not

fit the Nothill mould but who had the connections on the Board to protect their

positions. Mr. Fortune admitted that he was ‘prepared to make a few changes to

his list but did not want to end up with a lot of useless staff’ (Int #27).

The Roaring Dragon continued to have a very low occupancy rate and was

losing money. Nothill had an Accounting Manager, a Marketing Manager, a

House Keeping Manager, two Food and Beverage Managers and a Reception

Manager working full time at the Hotel being paid international rates. Erhi T

did not like to have to meet the cost of having these ‘foreigners working in their

empty Hotel’ (Int #38). The original objectives of improving the quality of

service and occupancy at the Roaring Dragon were fading and the disgruntled

voices among the Board members were growing louder.

The majority of remaining Roaring Dragon employees had now lost their

motivation to work or attend training classes. Some of the remaining employees

likened the empty Hotel to a ‘morgue’. Under the former Chinese management,

the more affordable three-star old-Russian section had attracted a lot of guests


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seeking economy room rates and there had normally been a busy atmosphere in

this part of the Hotel. The three star segment of the market could no longer be

accommodated at the Roaring Dragon. In the past this type of guest had

generated a small yet reliable profit. Now with the old building closed, the

number of customers prepared to pay higher room rates in the new modern

building was very small. Nothill’s rate of 800 yuan per night for a double room

was not competitive.

Nothill’s Marketing Manager visited Beijing, Shanghai and Taipei in another

attempt to generate a flow-on of tourists from other Nothill hotels in the region.

These expensive and unsuccessful journeys further fuelled the frustration of the

Board. The small cash reserve, which had been accumulated by the Roaring

Dragon over the last decade, was rapidly being used up and rumours began to

circulate that for the next pay period, the Hotel did not have the money to pay

employees’ wages.

Since Nothill’s arrival, a previously happy, polite, well-mannered work force

had by now lost its initiative, sparkle and morale due to the lack of customers,

the demanding Nothill management, the redundancy schedule and the negative

work environment. Fear prevailed and some employees in private even showed

their anger. A couple of minor incidents had occurred in the disco after some


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employees had stayed at work after their dismissal, but Mr. Fortune commented

that ‘generally everything was proceeding steadily’ (Int #27).

Some of the remaining employees were now being told that their jobs were

secure yet there was still an air of depression in the work place. Mr. Fortune

left for Hong Kong for discussions with regional Nothill Managers regarding

their company’s China strategy for the next five years. At the Roaring Dragon,

occupancy was now averaging just six percent with most other competing

hotels in the vicinity enjoying twenty percent occupancy rates.

December

The Hotel’s reserve fund was now exhausted and there was insufficient money

left to fund the payroll without extra funding being supplied by Erhi T.

Nothill’s Training Manager and the second in charge of the Food and Beverage

Department both went to collect their wages at the end of the month and were

told that there were no funds left to pay them. At this point in time, the Board

realised that to complete all of the transition plans Erhi T were being asked to

spend over one hundred million yuan. This was to finance the construction of a

new five-star wing, fund the wages of more than 350 employees, pay the

redundancies of more than 300 employees, and cover the salaries and expenses


199

of 9 expatriate Nothill managers. Income generation at the Hotel was low and

the Erhi T did not like being saddled with these unwanted expenses. The

provincial government held the power and Erhi T was their largest SOE. The

easiest option for the provisional government was to use Erhi T’s financial

resources to support the ailing Roaring Dragon Hotel.

Development projects planned by Nothill were now stalled as the flow of

money from Erhi T dried up. The new computers had been installed but were

not yet paid for. There was fear that ‘employees would not get their December

wages’ (Int #16) and it was rumoured that ‘employees may have to take a pay

cut’ (Int #16). An increase in workload had become the norm for all employees.

A Chinese manager felt that ‘one employee now was doing the work of three

employed under the former Chinese management’ (Int #29). The remaining

young employees could still see guanxi networks providing protection and

allowing employees to retain their positions due to their connections and not

the quality of service they were able to provide. It appeared that good guanxi

with those in power remained the most important criteria to insure the positions

of such employees.

In late December, the Erhi T Directors and provincial government officials held

a critical meeting to discuss the Roaring Dragon’s and Nothill’s future. By


200

originally inviting Nothill to manage the Roaring Dragon, the provincial

government had felt that they had made the right decision and expected to see

improvements in the number of customers coming through the door. Some

expected the tap to be ‘turned on’ (Int #27) and the Hotel to be ‘full of guests’

(Int #27). After five months of observation of Nothill’s management and the

development of the Roaring Dragon’s financial crisis, both Erhi T and the

provincial government wanted to end their association with Nothill. Politically,

the Roaring Dragon Hotel needed to survive as the provincial government

could not be allowed to lose face on this issue.

The Hotel had stopped paying its debts, bringing a flood of suppliers to former

General Manager Mr. Wen’s door pleading to be paid for their goods and

services. Erhi T injected half-a-million yuan into the Roaring Dragon account

and it was used in a week to cover operating expenses, accounts payable and

basic four-star Hotel requirements such as air conditioning and power. Two of

the three passenger lifts had been taken out of use and the air conditioning was

turned off in the evenings.

Before leaving for Christmas in Europe, Mr. Fortune met with the Chairman of

the Erhi T Board to arrange for more funds to be released to finance the Hotel

improvements planned for 2000 and beyond. Following his mandate, Mr.


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Fortune had embarked on a costly ‘long term program to develop the Roaring

Dragon into a five-star hotel’ (Int #27) whilst Erhi T had ‘expected the Hotel to

be self-funding much sooner’ (Int #38). They did not expect to face the need to

provide such a large amount of extra funds to maintain basic operations and

had become reluctant to continue injecting more money into the Hotel’s

operations. From early September they had even refused to accommodate their

own visiting guests at the Hotel.

The Erhi T Board was not happy with having to pay large redundancies to long-

serving staff that had only come under their responsibility six months earlier.

The provincial government and the Erhi T-dominated Board waited for Mr.

Fortune to depart to Europe for Christmas and immediately ordered the delay of

the planned redundancies of the final 30 long-term employees.

Reflecting on the 1993 experience, the provincial government’s experiment

with KYZ had cost nine million yuan in one year and it was estimated that in

1999 under Nothill’s management the Roaring Dragon Hotel had lost more

than ten million yuan in their first four months. With the excitement at the

beginning of both the KYZ takeover in 1993 and the Nothill takeover in 1999 it

would have been difficult for the provincial government to imagine such poor

outcomes on either occasion. Some commented that the lack of respect for


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guanxi and mianzi shown by both KYZ and Nothill were just two of the

incompatibilities that could have been better managed.

From the moment Nothill had taken over, former General Manager Mr. Wen

had watched from the sideline. As General Manager of the Roaring Dragon

Limited, he had been installed in an executive suite on the top floor of the

administration building adjacent to the Hotel and used it as the office for his

employees. The Roaring Dragon Hotel accounts were contracted to cover the

costs for these facilities and by now more than 30 personnel had used their

guanxi connections to gain transfers from the Roaring Dragon Hotel to the

Roaring Dragon Limited. Mr. Fortune commented how they ‘had a staff of 30

when they really only needed 6’ (Int #27).

With Nothill’s rumoured departure, some Chinese managers began to conduct

their private business again. As if to admit the inevitable, Nothill’s expatriate

managers began taking extended lunches. Communication between the Roaring

Dragon employees and Nothill’s managers decreased to become minimal. The

futures of the Nothill expatriate managers had been decided. Nothill’s

Accountant was now only present for just one week out of three as he serviced

Nothill’s other hotels in China. The Nothill Front Office Manager was leaving

to take a new position in Europe and the assistant Food and Beverage Manager


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had been appointed to a position for Nothill Dalian. Mr. Thomason had plans to

marry a local Chinese girl and had accepted a position at the Nothill Singapore.

Nothill’s management contract in south-west China was over.

In mid-January 2000, Nothill’s Board of Directors in Europe received official

notification from the local Chinese Provincial Government that they wanted to

conclude the contract. It appeared on the surface that Nothill had only made a

few mistakes, however these were critical. Apart from their misunderstanding

of the importance of face and relationships, they had pursued their goal of

transforming the Hotel’s culture and organisational capacity with unabated

vigour. Some employees claimed that Nothill was never serious about making

the Roaring Dragon Hotel their own or never wanted to use their brand name

on the Hotel; however, many acknowledged the Hotel’s improved standards of

facilities and service. Speculation emerged that Nothill had used the Roaring

Dragon as a training ground to familiarise their managers with the Chinese

organisational and cultural environment before setting them up in Nothill’s

growing chain across China. Were they using the Roaring Dragon to prepare

their international managers to staff Nothill’s new hotels elsewhere in China or

to train employees to take with them to their new operations in China?

Whatever the reasons, Nothill’s management had lasted just six months.


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Discussion

Although Nothill had inherited much inefficiency at the Roaring Dragon, could

they have planned for and managed the transition more effectively and

smoothly? The main negative effect of their downsizing policy had been the

loss of almost all the Hotel’s young, talented, and educated employees. Nothill

did re-employ a few young staff at their other hotels in Asia however there

were few other realistic options.

When making decisions about downsizing, the related social and workplace

upheavals that occur must be a common problem faced by managers reforming

SOE in China. At the Roaring Dragon Hotel, this situation was made worse as a

consequence of the illegal late recruitment drive undertaken by the former

Chinese managed HR Department. This illegal and secretive hiring eventually

resulted in those fifteen new recruits being the first targets of retrenchment.

From a Chinese perspective was this nepotism, corruption or a culturally

accepted norm?

A large number of the redundancies were among young employees with only a

few years of service. By retaining the old staff, Nothill reduced the youthful

vibrancy within the Hotel. If the reduction in the number of older staff had


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commenced at the beginning of August, Nothill would have been compensated

for some of the extra cost of these early redundancies through having to pay the

younger employees significantly lower salaries. Overall, such a strategy would

have helped maintain a more dynamic and youthful employee population.

Job-sharing may have been an additional socially acceptable method of

reducing the excessive size of the Roaring Dragon’s work force. As job-sharing

in SOE does not exist in south-west China, the introduction of this concept

would require a shift in traditional Chinese thinking and management practice.

If job sharing could be accepted into the context of downsizing in this part of

Chinese economy, it would help to maintain community harmony and reduce

the number of unemployed. Two beneficial outcomes of job-sharing at the

Roaring Dragon would have been Chinese employees preserving their mianzi,

and, more importantly, being able to maintain their employment status.

Economically, having their hours reduced would have eased the burden of the

potential total loss of income for each employee’s family. The extra time off

would also have provided employees with the time needed to legally conduct

their own private business outside of working hours. For any management

venture in China, a strong policy must be developed aimed at outlawing illegal

activities that take place during working hours. This was one objective that

Nothill did succeed in achieving.


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Nothill’s method of terminating employees showed little respect. Each Monday

in November at 4pm, employees who were told to proceed to the payout

window. In the queue they would joke nervously and laugh among themselves

as they waited for their pay envelope. One could sense the uncertainty.

Employees whose jobs were secure would glimpse those made redundant as if

another class of the unemployed had been created. Among those saying

goodbye there were tears, the loss of dreams and more acutely, the loss of face.

Any respect or status those employees had enjoyed within the Roaring Dragon

organisational culture was suddenly gone. In its place was the realisation that

for many, uncertainty lay ahead. One ponders could Nothill have planned and

conducted this process in a more sensitive and private way?

The fact that Nothill expatriate managers had only been there for such a short

time before the redundancy process began meant they had not had the time to

develop strong working relationships with employees. For the Chinese

managers this had been an advantage in that the Nothill’s managers bore the

full brunt of responsibility for any redundancy decisions taken. When they left

the Nothill Managers could take the blame with them. If the Chinese

organisation, under Mr. Wen, had been asked to carry out the downsizing, the

damage this would have done to the Chinese managers would have been greater


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and with long-lasting repercussions. None of the Chinese managers ‘wanted to

be the bad man who made fellow employees redundant’ (Int #30).

After the commencement of the downsizing, any form of training in progress

became ineffective. Nothill’s Front Office Manager showed her frustration in

having to ‘train a young staff member for a week and then having to say

goodbye on the following Monday’ (Int #71). A better long-term policy may

have been to retain the younger employees and continue the training program

for them and gradually reduce the number of older employees through

redundancy.

Care needed to be taken when making decisions concerning redundancy. The

loss of senior staff members with significant guanxi, in particular with agents

and government officials, could have been handled more effectively. Nothill’s

sudden introduction of western operational methods to replace the long-

practised Chinese methods meant that many strong guanxi relationships that

contributed financially to the Hotel’s bottom line were rudely interrupted,

weakened or dissolved. I argue that when a foreign company commences any

form of joint project with a mainland Chinese SOE, extensive research needs to

be undertaken to identity the important people within the SOE. If respect were

given towards the existing guanxi networks at the Roaring Dragon, greater


208

assistance from external sources, a higher occupancy rate and better financial

performance would have easily been achieved. By allowing Madame Fang and

several other members of her influential guanxiwang to transfer to the Roaring

Dragon Hotel Limited, Nothill had effectively removed a significant percentage

of their income-generating personnel. Nothill management should have taken

time to develop stronger relationships and a better understanding of their

Chinese employees, especially managers and their communication systems.

This would have enhanced their level of acceptance, especially when

employees were being asked to try to learn new operational methods. Nothill’s

introduction of new work methods on more of a gradual step by step basis may

have minimised the damage from the collision between Nothill’s international

and the Roaring Dragon’s domestic organisational cultures. This strategy would

have taken longer to produce positive results, however the corresponding

respect and trust established between management and employees would have

preserved the social and organisational harmony at the Roaring Dragon Hotel,

and produced a more profitable long-term outcome.

One particular scenario in question was the Nothill Food and Beverage

Department's policy on banquet bookings. Better preparation and research by

management would have told them that it might have been wiser during the

first few months after their takeover to maintain the status quo and accept all


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the banquet offers from local agents. Mr. Thomason’s early refusal to take a

small banquet set the tone for the relationship with NuFu. Accepting the offer

and taking the time to get to know the agents better may have helped to

establish more supportive relationships and produce better financial results in

the long-term.

Had the provincial government had an ambitiously high expectation of the

projected number of four- or five-star tourists who would visit this developing

region? By issuing four new licenses to build four- or five-star hotels, they had

created a surplus of rooms that could never be filled in the short term by the

expected number of tourists. Some form of market correction would occur in

future, as some of these hotels would be forced to diversify or close down.

Serious discounting of hotel rates already existed in this segment of the market

and this trend looked likely to continue.

Historically, both the KYZ and Nothill management groups had made the

mistake of not building strong and trustworthy relationships with Mr. Wen or

any of the Chinese Roaring Dragon Hotel managers. This lack of any close

personal relationships and the fact that the Nothill managers and Chinese

employees had no common language combined to create a communication void

across which it was sometimes difficult for information to pass. In Nothill’s


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situation, the Chinese managers who were multi-lingual were ‘gatekeepers’ to

what information crossed the void between international management and local

employees. As well as being responsible for interpreting the message from the

sender, the Chinese Managers had to decide how each communication should

be presented and interpreted. Consequently, local Chinese managers played a

critical role as go-betweens. To be effective in China, foreign executives must

be able to speak Mandarin with a degree of fluency, have an understanding of

Chinese cultural nuances, and have trustworthy English-speaking Chinese

nationals working in their confidence. In Nothill’s case, none of these

conditions existed. The establishment of effective relationships would have

ensured that any information was accurately and easily disseminated enabling

many organisational changes to be better interpreted, accepted and

implemented. The ability of managers to speak the local language and

understand the nuances and body language of this culture will provide greater

meaning to all communications. In this case, the employment of a minimum of

two multi-lingual Nothill Managers capable of understanding both cultures and

languages would have enhanced managerial cross-cultural communications

significantly. As none of the Nothill managers could speak Mandarin and few

of the Chinese managers wanted to speak English, the situation was not ideal.


211

Although former General Manager Wen and Nothill General Manager Fortune

worked in adjacent buildings, they rarely consulted each other. They spoke

different languages and their relationship would have been more productive and

profitable if they had used multi-lingual go-betweens. Mr. Wen should have

been the first person with whom both KYZ and Nothill established a supportive

relationship as he was aware of the problems and solutions to the difficulties

both KYZ and Nothill were experiencing in running the Hotel. Changing his

level of acceptance, outlook and contribution would have produced better

outcomes.

Some Hotel staff had strong guanxi ties with top government officials who

protected their position in the Hotel. At times, these employees’ behaviour

before the takeover could be quite arrogant. Mr. Fortune commented how they

‘often disregarded the policies of the Hotel’ but added ‘what can you do with

them? You can’t terminate their services because there would be serious

trouble from the power brokers’ (Int #6). In these situations in China, those in

government and the Party play a critical role and must be treated with care.

Challenge lies in eliminating the practice of officials and department heads

generating personal profits from using SOE time and resources. Those

interviewed at the Roaring Dragon told stories of corruption and confirmed that


212

there existed practices which advantaged and protected members of Mr. Wen’s

inner clique whilst they profited at the Hotel’s expense. To dismantle and to

remove the departmental cliques is a challenge requiring hotel General

Managers to develop ethical structures and effective systems of supervision.

In Nothill’s redundancy schedule, the criteria of saving money came ahead of

considering employees’ abilities whilst relationships were not considered at all.

This guanxi neglect and poor relationship management at such an early phase

of the transition contributed significantly toward both the KYZ and Nothill

ventures being unable to generate any significant support from their Chinese

government, managers and employees.

What could Nothill have done better? In this instance, the work environment

was dominated by Chinese culture and for Nothill to be successful they may

have researched more effectively to understand this culture and initially adapt

their methods to match the environment. Given relationships are the primary

determinant of one’s level of success in Chinese business, basic strategies

needed to be undertaken to develop closer relationships and a better

understanding of the Roaring Dragon employees, management and board

members. For instance, inviting agents, board members and government

officials to spend some time together with Nothill’s new management team


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would have undoubtedly aided in facilitating a much more successful long-term

outcome for Nothill.

Allowing the Hotel’s sales and marketing team greater flexibility in offering

competitive rates to tour agents might have contradicted Nothill’s global

strategy, however in this situation, it would have worked in Nothill’s favour.

With Nothill needing to establish and consolidate relationships with agents,

such flexibility would have aided in a smoother transition and more long-term

business from agents. As the standard of their service improved then they

would have a reasonable argument to have increased prices.

In changing from the planned economy style of management to that undertaken

under market economy conditions, I argue that it would have been beneficial to

offer some form of incentive to employees to reward their quality of new

service delivery. This investment would have provided a positive incentive that

would have produced rapid improvement in the quality of service provided by

employees whilst aiding the speed of organisational transition. Before Nothill’s

arrival, many of the sales team would just sit in the office and answer the

telephone as there was little incentive to be active in trying to generate

business. Motivational incentives would have encouraged sales staff to be in

closer contact with the market place and in developing business relationships


214

with agents. Several sales employees told of occasions when the telephone rang

with someone requesting rooms and sales employees would respond by saying

‘I’m sorry, we are completely full’ (Int #72), when in reality the Hotel had only

a twenty or thirty percent occupancy. This situation had arisen because the

sales employees wages were low and ‘the number of rooms they sold made no

difference to their earnings’ (Int # 72). A simple incentive would have

encouraged them to work harder contributing to the long-term generation of a

higher occupancy rate for the Hotel.

It appeared that the provincial government had learnt little from their

unsuccessful 1993 experience. After KYZ’s demise in 1993, the former

Chinese General Manager Mr. Wen resumed his position and once again

guanxi practices re-emerged. Following Nothill’s similar demise in 2000, Mr.

Wen again resumed the position of General Manager of the Roaring Dragon

Hotel.

March 2000

Mr. Fortune, although no longer the Hotel’s General Manager, remained at the

Roaring Dragon waiting to finalise the contract and recover Nothill's


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outstanding debt. In a scenario similar to that of KYZ in 1993, Nothill and Erhi

T were contemplating potential legal action.

Both parties hoped to conclude their association legally by signing a

‘Termination of the Management Agreement’ on the last Friday in March. An

international accounting firm had completed the final audit and all the new

computers and software programs that had been installed were disconnected

and sent back. Apart from Mr. Fortune, all of Nothill’s expatriates had left.

Following the departure of Nothill and the reinstatement of Mr. Wen as

General Manager there was a revival in the importance given to guanxi and, as

in 1993, there was an immediate improvement in Hotel occupancy levels. Some

employees were re-hired and regained their position via their guanxi

connections. By the beginning of June 2000, sixty of those who had been laid

off had been re-employed. From a Chinese perspective, everything was getting

back to normal. It seemed as if the Roaring Dragon had once again avoided the

forces of the market economy. However, could they be avoided for much

longer?


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Conclusion

One must be careful to define the context in which these conclusions apply.

This study was conducted in an existing SOE in the hotel sector in the south-

west region of China. This environment had characteristics that were far

removed from the most rapidly developing markets of Shanghai and

Guangzhou (Guthrie, 1999). The amount of change and reform that has

occurred in south-west China has been significantly less than that experienced

in coastal regions. It is in this context that these conclusions apply.

In addition to conducting a normal preliminary business analysis, I argue that

any company that is contemplating taking over or going into a joint venture

with an existing SOE in China will undoubtedly profit from conducting an in-

depth investigation into the guanxi networks that exist in the organisation being

considered. This investigation should uncover the strength and power of the

existing guanxi network, especially those of senior management, and the

possible advantages and disadvantages in allowing such networks to remain in

place. Accessing this information may not at first be easy. However from day

one of the process relationship-building practices need to be implemented with

major guanxi holders, stakeholders and government representatives. This

strategy is aimed at gaining a clearer understanding of the respective SOE and


217

its operating environment. This research will also help to limit the amount of

business lost as a result of guanxi neglect that may occur after operations begin.

These considerations will enhance the likelihood of success in business.

Communication with the existing Chinese senior management of the

organisation needs to be open and ongoing.

Employees being made redundant should be notified in a one-on-one

environment in a manner that preserves their face and minimizes the immediate

exposure of these employees to their peers and other employees. In considering

which employees to make redundant, the strength and power of the guanxi

connections of those being considered need to be thoroughly investigated prior

to any such action.

Consideration needs to be given to the age of those being made redundant.

Even though retaining long-serving employees may prove the most cost

effective in the short term, retaining young employees will enhance the

vibrancy of any organisation and its ability to change further in the future.

Retaining younger employees is likely to increase the level of education of the

organisation population and is also likely to enhance the success of any future

training programs. From a Human Resource management perspective, I argue

job-sharing is an option that organisations should consider in making the


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redundancy process less socially and economically devastating. More research

is required in this area of study.

Changes in organisational methods and processes need to be implemented in

stages so as to allow employees to adjust. This strategy will also reduce fear

and enhance acceptance of change. Especially in early days of a takeover or JV,

companies need to consider the Deng Xiaoping philosophy ‘to cross the river

by feeling the stones’ and to change SOE practices gradually (Rawski, 1997,

Guthrie, 1999).

Corrupt and unethical practices need to be uncovered, discussed with those

involved and explained as to why they can no longer exist. To commence the

process the resultant penalties that will occur if these practices continue in any

form need to be clearly communicated and applied. To assist in the elimination

of such practices, incentives need to be considered to enhance the development

of new and more ethical practices. Guanxi practices that are involved in the

organisation’s income-generating processes need to be investigated and clearly

understood before any changes are made.

Trustworthy, multi-lingual translators need to be identified in both the target

and takeover organisations to ensure and monitor whether management


219

instructions are being clearly understood by employees. Those in this role will

enhance the quality of feedback on how directions are received and interpreted.

These employees need to be positioned strategically within the organisation to

ensure that change processes are implemented effectively, monitored and

supported.

During the negotiation process and prior to signing the contract, Chinese

managers who are involved in any change or contractual processes need to be

identified and well informed of the expectation that they will support the

contract without deviation. A confidential, reporting mechanism inside the

organisation needs to be established so as to allow senior managers and

individual's anonymity in making management aware of any breeches that may

occur.

Finally, the organisation that is taking over needs to promote a long-term

perspective to give confidence to stakeholders and employees and to reduce the

amount of resistance to change that they may encounter.

It is said that in China, ‘if you want to do any business you must first develop a

strong relationship with the stakeholders’. Through guanxi neglect, Nothill’s

management had ignored the importance of guanxi, mianzi and the


220

development of relationships. At this time in south-west China the Roaring

Dragon Hotel was not ready for such developments.


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Chapter Seven

Differentiating Between Intra-organisational and Inter-organisational

Guanxi

Until now most guanxi research in the business environment has focused on

operations in the public domain or between personnel representing individual

organisations i.e. inter-organisational guanxi (Kao, 1993; Luo, 1997a; Park and

Luo, 2001; Tung and Worm, 2001; Yeung and Tung, 1996; Fock and Woo,

1998; Guthrie, 1999). Whilst the volume of research on inter-organisational

guanxi has grown, research directed towards how guanxi operates internally

within organisations, intra-organisational guanxi, has been more limited (Yang,

1994; Walder, 1996; Tsui and Farh, 1997; Grainger, 2003).

The objective of this chapter is to explore the characteristics of intra-

organisational guanxi and compare them with those of inter-organisational

guanxi. Survey data collected from employees of the four-star Roaring Dragon

Hotel in south-west China in 1999 are matched against comparable data

collected from Hong Kong trade executives in 1996 (Fock and Woo, 1998). By

comparing the results of the Fock and Woo study with this new data, the aim of

determining whether or not the two different types of work places in the two


222

different countries generated different employee perceptions of guanxi was

realised.

Uncovering the characteristics of intra-organisational guanxi in mainland China

holds importance for researchers, consultants and managers who are faced with

the challenge of reforming large SOE. A better understanding of how guanxi

operates in the intra-organisational environment will contribute toward

developing improved management methods for motivating, controlling and

harnessing the capabilities of the work force as China’s SOE continue to adjust

from a planned to market economy.

The Roaring Dragon Hotel Environment

Members of both samples were connected to organisations in some manner,

however, the characteristics of the working environments of the south-west

Chinese Hotel employees and Hong Kong trade executives differed

significantly.

The employees from the Roaring Dragon Hotel enjoyed a good working

environment when compared to the average quality of working conditions to be

found in SOE in China. The Hotel had a four-star rating and there was generous


223

overstaffing. Reflecting the employees’ easy workload was the fact that the

Hotel rarely attracted more than fifty-percent occupancy. Although this Hotel

boasted a four-star rating, the provision of high quality service to guests was

not a priority.

Although many had come from inland origins, all of the SOE employees were

accommodated in the same city as they worked, the majority residing in the

near vicinity of their work place at the Roaring Dragon Hotel. Results of the

survey conducted there are presented in Part A. This study focused on the intra-

organisation environment measuring the Hotel employees’ perception of what

they thought were the important characteristics of guanxi.

As investigated in Part One of this thesis, the evolution of the danwei since the

1930’s combined with the planned central strategies of the Chinese Communist

Party since 1949 have played an important role in the evolution of China’s SOE

(Lu and Perry, 1997). Such influences have often resulted in poor work

practices, unsystematic production systems, backward technology and a reward

system unrelated to performance (Blackman, 1997; Chen, 1995; Lu and Perry,

1997). During their evolution many SOE were managed by untrained Party

cadres whose position and power in the SOE usually correlated with either their

positions within the hierarchy of the party, or in the strength of their


224

connections with high party officials (Blackman, 1997; Chen, 2004; Pye,

1992).

Relationship-based management practices combined with China being a self-

contained Communist society from 1949 to the late 1970s have resulted in

Chinese SOE developing their own characteristics that differentiate them

markedly from those developed and fashioned in market economies. Under

planned economy conditions, quotas regarding inputs, outputs and quality of

work produced by SOE were all determined or influenced by a central

committee (Blackman, 1997; Chen, 2004). There was little flexibility for

organisations to vary these quotas once they had been set. As a result,

employees and managers had no ownership of business decisions that affected

them and this resulted in limited organisational loyalty and poor motivation

among workers. In the Roaring Dragon Hotel work place, sitting idle was

common and free time was often abundant. The lack of a consistent demand on

employees to be actively involved in organisational planning and operation,

combined with the relationship-based style of management, provided the

opportunities and fertile environment for internal networks, cliques and intra-

organisational guanxi to develop and blossom among Hotel employees at all

levels (Grainger, 2003).


225

Several of those interviewed in this study revealed how ‘managers and

employees secretly adjourned to vacant rooms in the hotel to play cards, sleep,

talk to their friends or read during periods of low demand’ (Int #13). Although

this is not good work practice, under the conditions of the danwei, these under-

employed workers could not be fired or made redundant. They were retained by

the organisation on low wages even though they were only occupied on average

for three out of the six working days per week.

At the Roaring Dragon Hotel, the pressure on employees with guanxi to

perform was very minimal and little change was evident by late 2002 as a result

of reform. In this environment it was important to take the time to maintain the

important relationships required to secure internal supplies, keep workloads

low and maintain nepotistic advantages (Walder, 1986; Yeung and Tung, 1996;

Seligman, 1999). A group of experienced, old chefs and housekeeping staff, as

if frozen in the era of the planned economy, were regularly viewed entertaining

themselves by playing cards, engaging in idle chatter for long periods, with

some even leaving the work place to conduct private business.

By late 2002, some of the Hotel’s inefficiencies had begun to be reduced and

the concept of actively building market share for the Hotel was gaining

momentum.


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Part A:

Perceptions of the Characteristics of Guanxi Recorded by Employees of

the Roaring Dragon Hotel in South-west China in 1999.

The research instrument used in this study was developed by Fock and Woo

(1998) to test the importance of eight proposed characteristics of guanxi. The

eight characteristics of guanxi tested were:

• mutual co-operation;

• trust;

• social activities and entertainment;

• exchange of information;

• personal relationships;

• commitment;

• exchange of favours/benefits; and

• giving face.

As in the Fock and Woo study, the respondents at the Roaring Dragon Hotel

were asked to respond to the statement that ‘each respective characteristic was


227

an important characteristic of guanxi’ on a scale from 1 to 5 (1 = strongly

disagree, 2 = disagree, 3 = have no opinion, 4 = agree, and 5 = strongly agree)

In preparation for the Roaring Dragon Hotel study, published terms (Fock and

Woo, 1998) were translated from English to Mandarin by English language

academics from the Yunnan Institute of Finance and Economics. The Mandarin

text was then back-translated by post-graduates from the University of Western

Australia to ensure the comparable accuracy of the meaning of the translations.

Two minor changes were required.

The written survey format was tested on a small group of business students

from a local Chinese tertiary institution and several employees from a different

SOE in south-west China to ensure that the meanings of the English and

Mandarin questionnaires were the same.

On the written survey document, employees from the Roaring Dragon Hotel

were asked to state only their age, gender, position (as employee, supervisor or

manager) and their number of years of service at the Hotel. To preserve their

anonymity, respondents were instructed not to put their name on their survey.

Due to the sensitivity required in conducting written surveys on guanxi, the

request for only minimal identification was designed to make respondents feel


228

that they would not be identified and to encourage honest responses.

Participants

Of the 685 employees at the hotel, 438 responded to the survey. A final group

of 379 survey responses was accepted as being valid and these 379

questionnaire responses were included in the analysis presented below. This

sample comprised 80.2% employees, 13.9% supervisors, and 4.2% managers

representing a valid cross-section of this intra-organisational population. Of

those respondents, 51.3% were female and 48.7% were male, with ages ranging

from 17 to 56 years. Their years of service with the Hotel ranged from 0.1 to

36.0 years (M = 7.2, SD = 7.42). Incomplete surveys were not included in the

analysis.

Results: Perceptions of the Characteristics of Guanxi

The mean ratings (M) and standard deviations (SD) for each of the eight

respective guanxi characteristics are presented below8.

8 The statistics were derived using SPSS software. For mean rating calculatations see Appendix 1.


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Table 7.1: Perceptions of the Characteristics of Guanxi of Employees of

the Roaring Dragon Hotel, 1999.

Guanxi Characteristic Mean Std. Dev

Mutual Cooperation 3.85 0.89

Trust 3.51 1.14

Social Activities and Entertainment 3.51 0.95

Exchange of Information 3.42 0.97

Personal Relationships 2.98 1.17

Commitment 2.73 0.97

Exchange of Favours/Benefits 2.50 1.24

Giving Face (Respect) 2.49 1.08


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Part B:

Perceptions of the Characteristics of Guanxi

Comparison of results from a survey of employees of the Roaring Dragon Hotel

in south-west China (1999) with those from an identical survey recorded by

Hong Kong Trade Executives (1996).

The descriptive statistics of mean ratings and standard deviations from the

Roaring Dragon Hotel population data were compared with the same statistics

derived from the survey data of 128 Hong Kong trade executives (Fock and

Woo, 1998).

In comparison to working in the Hotel in south-west China, the Hong Kong

trade executives’ task involved generating sales between their home

organisation based in Hong Kong and other external organisations located in

mainland China. In this market economy environment it is reasonable to

assume that the quality of service given to customers was an important priority

and that some percentage of travel would have been a requirement for

executives in these positions. The trade executive study focused on the inter-

organisation environment measuring these salesmen’s perception of what they


231

thought were the important characteristics of guanxi.

The Fock and Woo sample were respondents from an original sample of 1000

executives selected randomly from directories of trade associations and

chambers of commerce in Hong Kong. Of the 128 respondents, almost all were

men between the ages of 21 and 40. Most of them had been active in trading

within the PRC for between two and ten years and about a quarter of the

respondents worked for large companies employing over 700 staff, though the

majority worked for companies with fewer than 200 staff.

The two samples differed in their balance in gender as the Hong Kong trade

executives were mostly males whilst the employees of the hotel in south-west

China were 51.3% female and 48.7% male. A further difference was in the

spread of ages recorded by respondents in each of the two samples. The trade

executives from the Hong Kong population were mostly aged between 21 and

40 years whilst the age of the employees at the Roaring Dragon Hotel in south-

west China ranged between 17 and 56 years.

The education levels of the two samples differed markedly. The Roaring

Dragon Hotel employees were respondents from a population in which many of

the employees had received only minimal educational opportunities or had


232

grown up in a period when the schools in China were closed during to the

Cultural Revolution. In comparison to the limited education background of the

Roaring Dragon Hotel employees, the Hong Kong trade executives had all

completed a minimum level of secondary schooling.

Another difference was the fact that the Roaring Dragon Hotel employees were

resident in one city and worked at the same work place every day, while in

contrast the Hong Kong Executives were based in Hong Kong but were

required to travel to visit their customers and perhaps at times stay in a foreign

location on the mainland.

Hypothesis

Using the t test for unrelated samples (Cramer, 1998: 108) the following

hypotheses were tested to see if the two populations perceived the eight

characteristics of guanxi as having the same level of importance.

Ho - the mean rating for importance given to each characteristic of guanxi was

equal for the Roaring Dragon Hotel population and the Hong Kong Trade

Executive population.


233

H1 - the mean rating for importance given to each characteristic of guanxi for

the Roaring Dragon Hotel population was greater or less than that given by the

Hong Kong Trade Executive population.


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Results

Table 7.2 Comparison of Perceptions of Guanxi by Employees of the

Roaring Dragon Hotel, 1999, and Hong Kong Trade Executives, 1996.

Roaring Dragon Hong Kong

Hotel Employees Executives

n = 379 n = 128

Guanxi Characteristic Mean S. D. Mean S.D. t(df=505)

Mutual Cooperation* 3.85 0.89 3.44 0.96 2.29

Trust 3.51 1.14 3.22 2.00 1.56

Social Activities and Entertainment** 3.51 0.95 2.16 1.82 8.03

Exchange of Information* 3.42 0.97 3.00 2.01 2.28

Personal Relationships** 2.98 1.17 4.09 1.68 6.93

Commitment* 2.73 0.97 2.06 1.78 4.06

Exchange of Favours/Benefits* 2.50 1.24 3.09 2.01 3.13

Giving Face (Respect)* 2.49 1.08 2.94 2.01 2.42

* Means for the two samples significantly different at the 0.05 level. P < 0.05

** Means for the two samples significantly different at the 0.01 level. P < 0.01

Sources: Survey of employees from the Roaring Dragon Hotel in south-west China, 1999

(N=379) and Survey of Hong Kong Trade Executives in Hong Kong 1996 (N=128).


235

Fock and Woo (1998) used mean ratings greater than 3 as indicative of

characteristics of guanxi being considered important, mean ratings of

approximately 3 as being neutral and mean ratings less than 3 as indicative of

them receiving little support. Using the same criteria for the Roaring Dragon

Hotel population, the eight characteristics were placed into three groups (Table

7.3) indicating the level of support they received as being an important

characteristic of guanxi.


236

Table 7.3 Comparison of the Importance of Guanxi Characteristics

Recorded by Employees of the Roaring Dragon Hotel, 1999, and Hong

Kong Trade Executives 1996.

Roaring Dragon Hotel Employees

Mean Rating > 3 Strong support for being an important characteristic of guanxi

Hong Kong Trade Executives

3.85 Mutual Cooperation 4.09 Personal Relationship

3.51 Trust 3.44 Mutual Cooperation

3.51 Social Activities &Ent 3.22 Trust

3.42 Exchange of Information

Mean Rating ~ 3 Neutral support for being animportant characteristic of guanxi

2.98 Personal Relationship 3.09 Exchange Favours/Ben

3.00 Exchange of Information

Mean Rating < 3 No support for being an important characteristic of guanxi

2.73 Commitment 2.94 Giving Face (Respect)

2.50 Exchange of Favours/Ben 2.16 Social Activities & Ent

2.49 Giving Face (Respect) 2.06 Commitment


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Discussion

These results provide evidence to support the proposition that the level of

importance given to the characteristics of guanxi in the intra-organisational

environment differ from those in the inter-organisational environment.

When comparing the two studies, differences in mean rating at the minimum

0.05 level of significance were recorded for seven of the eight characteristics of

guanxi tested, with two of those differing at the 0.01 level of significance.

Trust was the only characteristic given a statistically equivalent mean rating by

the two populations and both populations recorded ‘trust’ as being an important

characteristic of guanxi. Other studies have found that trust is essential in long-

term guanxi maintenance (Yeung and Tung, 1996: 64; Kao, 1993: 25; Tsui and

Farh, 1997) and this research supports the argument that trust is the basis on

which any good guanxi relationship is built.

Both populations agreed that mutual cooperation is an important characteristic

of guanxi (Redding, Normal, and Shandler, 1993; Yeung and Tung; 1996; Bell,

2000: 133). The reciprocal nature of guanxi means that there is the likelihood

of someone who has enjoyed the benefits of guanxi being requested to provide


238

a return favour at sometime in the future. Each guanxi favour generates some

degree of renqing or the quality of the emotional component of guanxi (Hwang

1987; Yang, 1986; Ambler, 1995). Renqing applies to the multitude of

differing types of guanxi relationships and is primarily the reciprocal obligation

and strength of personal closeness one feels toward the person with whom one

has guanxi. For the Roaring Dragon Hotel population, both renqing and the

reciprocal nature of guanxi would have contributed to mutual cooperation being

recognised as an important characteristic.

Trust and mutual cooperation were recorded as being important characteristics

of guanxi by both populations. Statistically the Roaring Dragon Hotel

population gave a significantly higher rating (M = 3.85) for mutual cooperation

being an important characteristic of guanxi than the Hong Kong executive

population (M = 3.44). These results differed at the 0.05 level of significance.

For many of the employees who had worked at the Hotel for a long period of

time and for those who enjoyed good guanxi with their manager, there were

advantages from which to benefit. They could start work a little late, have no

shift work, have weekends off, be given a task that required little effort,

sometimes earn more money, and achieve their goals easily. In several

interviews with respondents at the Hotel, the terms ‘clique’ or ‘small exclusive


239

group' were used to describe such groups of relationships. One manager told

the story of the cliques in the upper echelons of the Hotel and how they were

profiting from such clique membership. The security and protection provided

by the clique were repaid through loyalty, secrecy and the commitment to work

toward mutual benefits. In this environment mutual cooperation and trust were

priorities (Child, 1994).

The most significant difference found in the results of these two surveys lies in

the level of importance given to ‘personal relationships’ as being an important

characteristic of guanxi. The Hong Kong trade executives rated personal

relationships as being the most important characteristic of guanxi and this

conclusion is well supported in the literature (Pye, 1992; Tsui and Farh, 1997;

Jacobs, 1979; King, 1991; Luo, 1997a; Kao, 1993). Experts agree that in the

public and inter-organisational domain we can define the essence of guanxi as

being personal relationships based on common ground that involves the

reciprocal exchange of favours.

However, the results from the survey data recorded by employees from the

Roaring Dragon Hotel challenge this conclusion. The Hotel population gave no

support (M = 2.98) to personal relationships being an important characteristic

of guanxi. For a survey population of 379, the lack of support for personal


240

relationships being an important characteristic of guanxi inside this SOE is one

of the significant findings that one may argue differentiates intra-organisational

from inter-organisational guanxi. This unexpected outcome challenges whether

the definition of guanxi supported by Fock and Woo (1998), Pye (1992), Tsui

and Farh (1997), Jacobs (1979) or King (1991) reflects the true characteristics

of guanxi in the intra-organisational SOE hotel environment.

This research provides evidence that the important characteristics of guanxi in

the SOE hotel intra-organisational environment are trust, mutual cooperation,

entertainment and social activities and exchange of information. No importance

was placed on personal relationships. This finding supports the claim that ‘with

the growing emphasis on material gains in China, the importance of personal

relationships may have dwindled, whilst trust and reciprocity may have

increased in importance’ (Yeung and Tung, 1996: 63).

In interviews recorded between August 1999 and December 2004 with

members of the Roaring Dragon Hotel population, two topics that continually

arose were the role played by the danwei or work unit and that played by the

internal cliques operating within the Hotel environment. Under danwei

conditions, employees live in close proximity with their co-workers. Therefore

developing relationships with co-workers in the work place was likely to be


241

much easier for SOE employees than between the Hong Kong Executives and

their mainland customers. Hotel respondents gave the impression that some

kind of relationship was assumed through established networks inside the

danwei and/or within the internal networks or cliques within the Hotel.

Employees commented that the internal in-groups or cliques in the Hotel were

very strong and usually comprised a small number of controlling members who

made decisions on how to gain or use resources to their clique’s advantage

(Chow, 2000; Grainger, 2004). These ‘cliques’ were very internally focused,

often competing with others for resources within the Hotel. As a result there

was only limited communication between departments and with other cliques.

Members of the Hotel cliques shared mutual cooperation, trust, secrecy and the

resultant fringe benefits as well as having a deep mistrust of out-group

members (Yau et al, 2000). Clique members or insiders who exposed any

‘secret’ information to anyone outside the clique would be immediately

expelled. This would result in the loss of benefits including access to

information, invitations to banquets and social activities, and other synergies

that would accrue through mutual cooperation (Grainger, 2004).

The researcher proposes that the reason for the significant difference in the

mean rating given to ‘personal relationship’ among the two sample populations

is the difference in the two environments where the respondents operate. In


242

comparison to the Hotel employees’ living and working environment in south-

west China, the Hong Kong trade executives were likely to have been living in

a detached environment away from their office and their customers. In their

sales at work, many of their business communications were likely to have been

done by telephone, fax or e-mail. The possibility of face-to-face interaction

would only occur when traveling and/or visiting in a professional capacity. In

contrast, if the Roaring Dragon Hotel employees needed some help they often

communicated directly with those involved. As one Hotel manager stated,

‘when a favour was needed, face-to-face contact was the most common and

successful method that could be used’ (Int #28) and in this situation some form

of relationship was perceived as being a given.

Though Hong Kong is now a part of China, Hong Kong trade executives doing

business with those on the mainland are still likely to be perceived initially as

being outsiders by the mainland population. For a person with outsider status in

this situation, establishing a personal relationship with the representative of the

organisation they were hoping to do business with would have been of primary

concern.

In comparison to the significant distances between the Hong Kong executives

and their clients, the majority of the Roaring Dragon Hotel population was


243

living in the near vicinity of their co-workers. In the Roaring Dragon Hotel

environment, comparatively minimal effort had to be put into establishing and

maintaining some form of face-to-face relationship. Employees’ close

proximity meant that they assumed that some kind of relationship existed with

all of their co-workers and so they looked past personal relationships to

perceive the important characteristics of intra-organisational guanxi as being

mutual cooperation, trust, social activities and entertainment and exchange of

information. Other respondents suggested that employees did not want to admit

that personal relationships were an important characteristic of guanxi as this

implied they had gained their position at the Hotel through their connections

rather than through their own natural ability or experience. This is an

interesting perspective that requires further research.

Statistically, the Roaring Dragon Hotel employees’ mean rating for social

activities and entertainment (M = 3.51) being an important characteristic of

guanxi was significantly higher (at the 0.01 level of significance) than that

recorded by the trade executives (M = 2.16). ‘Social activities and

entertainment’ (M = 3.51) was equivalent to ‘trust’ (M = 3.51) in being the

Hotel populations second most important characteristic of guanxi. In this

environment, employees would regularly see and/or assist in producing

government banquets or events at the Hotel. Presenting important officials with


244

gifts was common on such occasions and allowing important government

officials to enjoy the facilities of the Hotel free of charge occurred regularly.

Many Roaring Dragon Hotel employees were involved in producing such

events and often viewed these social activities and entertainment being used by

stakeholders to gain favour among friends and officials (Yang, 1986; Yang,

1994).

From time to time, Hotel employees were invited to participate in banquets as a

way that their senior management rewarded them for their loyalty and/or

supplemented their minimal incomes. The high mean rating of (M = 3.51)

given to social activities and entertainment as being an important characteristic

of guanxi reflected the opportunities the restaurant and function amenities of

the Hotel naturally provided to produce organisational guanxi. In comparison,

the trade executives disagreed with the statement that social activities and

entertainment were an important characteristic (M = 2.16). This supports the

argument that the Hong Kong Executives physical detachment from their

customers’ living and business environment limited their amount of face-to-

face personal and social interaction resulting in such activities not being an

important characteristic of their guanxi. Their mean rating for social activities

and entertainment was the second lowest recorded by the Hong Kong

executives and reflected their disagreement with the statement that banquets or


245

social activities are an important characteristic of guanxi.

The Roaring Dragon Hotel employees recorded the mean rating for exchange

of information (M = 3.42) significantly higher than that of the Hong Kong trade

executives (M = 3.00). Contributing factors for this mean rating being

significantly higher for the Hotel employees may have been the complex maze

of approvals an individual, family, or group require from official government

sources to get things done in south-west China. Information is not always easy

to acquire in this environment and so it is valued more by people there in

comparison to those from the more transparent environment found in Hong

Kong. The researcher cites the following somewhat extreme personal

experience as an example of the value given to information. One of the Hotel

chefs, to whom he was little more than an acquaintance, one day, passed him in

the corridor. The researcher stopped the Chef and casually asked him if he was

interested in a western magazine that had some recipes in it. The Chef’s eyes lit

up with excitement and he quickly took the magazine and rushed off to secretly

store it in the safety of his locker.

The Hotel employees saw the provision of information as important in

activities associated with acquiring positions, transfers, achieving goals, and

gaining knowledge of how approvals could be gained. For outsiders in this


246

environment, accessing information was more difficult. In Hong Kong,

information is more readily available in the public domain and clearly guanxi is

not necessarily a requirement needed to access information.

There were differences in the age groups and gender balance of the two

populations. The analysis of results comparing the age groups across the

intervals of 21-25 years, 26-30 years, 31-35 years and so on within the Hotel

population provided no clear evidence that the mean rating for the importance

given to the eight characteristics of guanxi differed across these sub-groupings.

Comparing results between males and females from the Roaring Dragon

environment also uncovered no significant differences (see Appendix 2).

The standard deviations of responses recorded by the trade executive

population in the Hong Kong were all greater that those recorded by the Hotel

employees in south-west China. This indicates that the members of the intra-

organisational population at the Roaring Dragon Hotel were more uniform in

their beliefs in the importance of these guanxi characteristics than those in the

inter-organisational environment of the Hong Kong executives (see Appendix

3).


247

Conclusions

Results from this research support the conclusion that the important

characteristics of intra-organisational guanxi for SOE employees in south-west

China differ from those of Hong Kong executives operating in an inter-

organisational environment in the People’s Republic of China.

Table 7.4 Level of Importance of Guanxi Characteristics Identified by

Employees of the Roaring Dragon Hotel, 1999, and Hong Kong Trade

Executives, 1996.

Roaring Dragon Hotel Employees

Mean Rating > 3 Strong support for being an important characteristic of guanxi

Hong Kong Trade

Executives

3.85 Mutual Cooperation 4.09 Personal Relationship

3.51 Trust 3.44 Mutual Cooperation

3.51 Social Activities &Ent 3.22 Trust

3.42 Exchange of Info

The results confirm that in both the intra-organisational and inter-organisational

environments, mutual cooperation and trust are important characteristics of

guanxi.


248

Respondents from the Roaring Dragon Hotel in south-west China were neutral

as to whether personal relationships were an important characteristic of guanxi

whilst, in comparison, the Hong Kong trade executives supported personal

relationships as being the most important characteristic of guanxi.

Evidence indicated that for the Hotel population the ‘exchange of information’,

and ‘social activities and entertainment’ are important characteristics of intra -

organisational guanxi’. However these conclusions were not supported by the

Hong Kong trade executives operating in the inter-organisational work

environment.

In the Roaring Dragon Hotel environment, the researcher argues that the

minimal access to information in the SOE, the work place culture and activities

in the danwei contributed to the higher level of importance given to the guanxi

characteristic of exchange of information. Similarly the entertainment

activities, operations and facilities at the Hotel contributed to the higher level of

importance given to the guanxi characteristic of social activities and

entertainment.

Bian and Ang (1997: 981-1006) stated that a basic characteristic of guanxi is

familiarity or intimacy and that for any two individuals to develop good guanxi


249

they must know a good deal about each other and share a good deal with each

other. They noted that guanxi is not merely a relationship but a tie through

which parties exchange valued materials or sentiments. For the Roaring Dragon

Hotel population this familiarity or intimacy helped to differentiate their

perceptions if the important characteristic of guanxi from those of the Hong

Kong executive population.

The findings support the proposal that social activities and entertainment,

exchange of information, and personal relationships are the three characteristics

that differentiate intra-organisational guanxi in the Chinese SOE hotel

environment from inter-organisational guanxi for the Hong Kong Executives

doing business in mainland China.

From a broader perspective, these results support the conclusion that the

characteristics and hence implications of guanxi do differ between workers in

mainland China and other parts of the Chinese Commonwealth (Kao, 1993).

Questions remain regarding whether the results of guanxi surveys in one

Chinese environment are applicable in other Chinese locations. Furthermore,

new research is required to test if the important characteristics of guanxi are to

some extent culturally and regionally specific.


250

The researcher argues that in south-west China, region-specific and cultural

factors play a role in modifying the perceptions of what are important

characteristics of guanxi. In order to truly appreciate the nature and validity of

the empirical results reported here, future research is required to investigate the

characteristics of intra-organisational guanxi in Hong Kong and in other

regions and industries in the Chinese Commonwealth.

From an organisational perspective, the potential improvements in

effectiveness and efficiency to be gained by understanding intra-organisational

guanxi are significant. Those studying and managing the conversion of state

owned enterprises (SOE) in south-west and other parts of China may note these

intra-organisational guanxi findings. These conclusions may assist when

planning or adopting effective human resources practices to motivate workers

and to enhance organisational performance as SOE in China continue to

embrace the socialist market economy.


251

Chapter Eight

Guanxi Decay in South-west China: Is it Really Happening?

Part 1

This chapter compares the development of the market economy in the eastern

and western regions of China and asks if the speed of reform enhances the

decay in the significance of guanxi practice in the two different regions. In

particular I examine Guthrie’s (1998) claims that the significance of guanxi is

in decline in the Shanghai business district. Here I present new research that

supports the proposal that the decay in the significance of guanxi is much

slower and less significant in south-western China.

China is like a sleeping giant. Let her sleep on, for when she awakes, she will

rock the world’ (attributed to Napoleon cited in Wee, Lee and Hidajat 1991)

There is no doubt that in China an economic giant has awoken. However are

there are in fact two or even three different giants experiencing different rates

of growth? The giant that continues to grow in the major coastal business


252

centres is clearly awake and running but what about the central inland giant and

the one situated in the far west of China? Are they still in comparative slumber?

In response to Guthrie’s (1998) claim that guanxi is in decay in the rapidly

developing coastal business district of Shanghai, I argue that guanxi and guanxi

xue9 remain significant in the business community in south-west China and

their importance is decaying at a much slower pace than in coastal regions. In

the following two parts of this chapter I first look at the comparatives rates of

development in the three different regions and secondly I examine some of the

responses from businessmen operating in south-west China to investigate if

they believe their region is developing at the same rate and if they are

experiencing the same level of decay in the use and importance of guanxi as in

coastal regions.

The inequality and difference between the business environments found in

eastern, central, and western regions has in the past prompted concern by those

in power. The first Five-Year Plan (1953 – 1958) of the People’s Republic of

China gave high priority to the development of industrial bases in north, north-

west and central China. In Mao’s famous 1956 speech, On Ten Major

9 guanxi xue describes the art of establishing and maintaining guanxi (Yeung and Tung, 1996).


253

Relationships, he dwelt on the relations between coastal regions and the

interior. In his view it was both irrational and politically unacceptable to

maintain 70 percent of the industries in the coastal areas whilst leaving the rest

of the country more or less untouched. In an attempt to balance the level of

development of these regions the investment policy during the Mao period

clearly favoured peripheral and backward regions. While more developed

provinces and cities such as Shanghai experienced substantial outflows of

revenues, less developed provinces received enormous infusions of funds for

infrastructure and industrial developments. This policy resulted in greater

equality in income and consumption between eastern, central and western

regions (Wang and Hu, 1999).

However, in following this strategy, capital was not invested wisely in the most

profitable projects or regions in China and industrial development in inland

regions was not realistically planned on the basis of a region’s needs and

structure, technological or human resource capacity. These misdirected

investments resulted in poorly coordinated production, many isolated factories

and the waste of capital (Liu, 1997). Rather than being a fully coordinated

national program, the policy exhibited varying degrees of success across China

and generally its speed was more gradual as one traveled further away from the

coastal cities (Rawski, 1997).


254

After Deng assumed leadership control in 1978, the focus changed, especially

in relation to the south-west and north-west regions. Reform in the countryside

had been uneven, with some rural areas becoming better developed than others.

The arid areas in the north-west and some areas in the south-west needed much

work to lift them out of poverty. Deng supported the new policy of letting some

regions develop faster and some people prosper before others, with the long

term perspective of them helping to bring along the backward regions at a later

date. He promoted the policy that the advanced regions should develop at their

own speed and have the obligation to help the backward. For China to achieve

a marked improvement in economic performance, reformers had to abandon

Mao’s ideological policy of eliminating regional inequality (Howell, 1993).

Rather than following the former policy of sending a shared proportion of

investment to develop inland and central regions, it was now directed to be

used in the most effective and demanding programs which usually meant the

majority ended up in Special Economic Zones or in coastal regions. By the time

the reform process had begun to gain any momentum in the south-west, the

region’s speed and quality of change were already trailing significantly behind

that being experienced in coastal and eastern regions. In the south-west, the

people and businesses were so far from the central decision-makers that in the

early years these inland residents ignored the reform. Eventually, ‘when they


255

saw that things were getting better in areas where the reform had been carried

out, they began to follow’ (Int # 45).

The Deng-inspired ‘open door’ strategy was concentrated on expanding trade

and investment in a few provinces and special zones along China’s south-east

coast (Rawski, 1997). Deng’s post-1978 government realised that the greatest

potential for China trade lay in the eastern and coastal locations and these

regions needed to be given priority as a part of China’s ‘opening up’. As Gu

Mu (a state councilor closely involved with the Open Policy), speaking at the

Sixth National People’s Congress Standing Committee in January 1985,

summarised

It is sensible to develop the eastern economies as these coastal regions

have easier access to foreign markets, better communications with the

outside world, a certain industrial foundation and more specialised

personnel and management experience (cited in Howell, 1999: 20).

As a result, by the mid-1980s, China’s main coastal towns had begun to

successfully attract investment from abroad (Suka, 2001).

The contrasting differential in the speed of reform and development in eastern,


256

central and western regions continued. By 1993, China had become the world’s

number one recipient of foreign direct investment (FDI). However, the uneven

spread of investment meant that the performance varied markedly among the

regions and led to an uneven speed of development. This contributed to a

marked difference in the speed and quality of reform occurring in inland

provinces in comparison to the more internationally exposed coastal areas

(Wang and Hu, 1999).

There is little doubt that China’s pursuit of a policy of opening to the outside

world has continued, with improvements in productivity and in living standards

being shared benefits of the new economic policy (Crane, 1999). This change

continues to gather pace. However, I argue that it is still proceeding at a

significantly slower rate in south-west China than in coastal regions. The

process of reform that the people in the south-western provinces of China have

experienced has been slower due to other government priorities, poor

infrastructure and the region’s distance from the centre of government and the

international trading zones.

Operations near the coast (excluding in the vicinity of Taiwan) have been

exposed to greater international competition that has induced in them the need

to reform quickly to compete successfully (Gang, 1997). Opening of the


257

Special Economic Zones had introduced market economics to over 200 million

Chinese, mostly in coastal locations (Wireman, 2003). As a result, businesses

in coastal regions, especially in the south-east, have needed to adapt much

faster to growing international competition.

There is little doubt that since the beginning of reform, China’s growth has

been unevenly spread. Of the US $400 billion China received in new

investment between 1983 and 2001, the central region still attracted only 9

percent of investment and the western region little more than 3 percent (Ogutcu

and Taube, 2002). The south-west received an even smaller fraction of this 3

percent and a corresponding minimal amount of exposure to international

business practice.

As early as 1993, a major program was undertaken by the government. It aimed

at redressing the growing gap between the booming southern and coastal

provinces and those left behind in northern and interior regions (Weil, 1996). In

a further attempt to stimulate business in the west the government developed

the Great Western Development Strategy to steer state investment, outside

expertise, foreign loans and private investment into these regions (Ogutcu and

Taube, 2002). As yet this program in south-west China appears to have enjoyed

only limited success. There is a challenge for government to find how to make


258

the inland investment environment more attractive whilst raising the standard

of living of the estimated 800 million Chinese who live in the western

provinces (Wireman, 2003). It remains a tough challenge and it is hard to see

how to attract investment to these areas and away from the faster growing and

more lucrative coastal regions (Liu, 1997).

It is clear that economic reforms have generally been skewed in favour of the

eastern regions with vast sections of the inland being handicapped by their

limited accessibility to the coastal and world markets (Liu, 1997; Int #53; Int

#59). Businesses that exist in these inland regions and their number of outlets

sometimes confine them to servicing comparatively poor local markets and

having to deal with ragged and faltering SOE.

Even getting products to coastal markets from China’s western regions is

difficult. Inter-regional trade restrictions and distribution problems make it

difficult for operations in China’s inner regions to compete in supplying the

natural resources and labour inputs that eastern-based enterprises often import

from abroad. Transportation, distribution and provincial tariffs remain serious

issues and problems such as provincial barriers continue to seriously affect the

efficiency and effectiveness of business interactions in inland regions (Tanzer,

2001; Ogutcu and Taube, 2002).


259

As Tanzer (2001) found in an interview with a truck driver, transporting goods

by road remains slow and costly due to the level of bureaucracy, pilfering,

damage and insurance:

If you come to a border with “out of state plates” they may hold your

truck up for days and border checkpoints are still ubiquitous. Some

provinces only allow the trucks to haul one way; others levy steep and

sometimes arbitrary tolls on out of province trucks; some cities regulate

operating hours for visiting trucks; some jurisdictions simply protect

local industry by refusing to licence outside trucks. Truck drivers and

tollgate operators often debate tolls and there is enormous graft (cited in

Tanzer, 2000: 75).

Right now, a license to manufacture in Shanghai means nothing when it comes

to selling in Guangzhou. Every province is like a different country. Everybody

wants you to come to his or her door for approvals (MD of a logistics

consultancy, cited in Tanzer, 2001).

Provinces and municipalities still maintain many of their tariff and non-tariff

barriers to protect businesses in their region. Under WTO guidelines the severe


260

restrictions on foreign companies’ distribution rights must come down in the

future and this may have some impact on freeing up the internal distribution

mechanisms (Tanzer, 2001). Even if this were to occur, the implementation of

this change would take time and I argue that breaking down the long-

established networks that determine the level and ease of access across these

borders or through provincial walls may be difficult. It remains a serious

challenge as the corruption involved in such operations has become in many

cases, not a consideration but the very way the system works, deeply inbred in

the government itself. If distribution, transport mechanisms and reliance on

government approvals can be improved then the inland provinces will have a

much better chance to compete more effectively.

The tremendous increase in demand being experienced in coastal regions does

not exist to anywhere near the same extent in the south-west and so the pressure

to change or adapt is not nearly as intense. Leggett (2002) argues that these

areas will eventually develop the transport infrastructure and openness that will

be required for them to compete effectively with international imports into their

own country. However a question mark remains against how long such

infrastructure and practices will take to develop.

The pressure to change in inland regions has been much less intense and this is


261

one of the reasons why the total push for reform has not advanced as quickly in

the south-west as in coastal areas. There is no doubt that the opening up of

China has favoured the development of the coastal areas over inland areas. In

comparison to coastal regions, inland economies have been stagnating and with

the slower speed of reform, income inequality has also risen between coastal

and inland provinces (Howell, 1993; Liu, 1997; Murphy, 2003).

Since 1999, as people have begun to see the results of reform, the speed of

change in inland locations has gained some pace. An international lecturer who

worked at a university in China’s south-west over a four year period described

the following.

In 1999, all of the students and lecturers would have to walk, catch the

bus or scooter to travel around. By 2002, a car park had been built

outside the institute’s new 240-room staff accommodation quarters.

There were already about twenty new cars parked there that were

owned by lecturers and even a few by students from rich families. By

2003, four new multi-storey accommodation buildings and teaching

buildings were under construction. Across many campuses in this city

these new developments are evident. (Int # 73)


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Speed of Reform

A number of researchers and publications support the conclusion that the

coastal and inland regions were developing and responding to reform at a

different pace (Howell, 1993; Liu, 1997; Murphy, 2003).

Wang Shaoguang and Hu Angang (1999) presented evidence that compares the

speed of development and reform occurring in the different regions of China.

Their data were collected at the same time that Guthrie collected his data in

Shanghai and so is appropriate for comparison. Wang and Hu’s data were

grouped into three distinctly separate regions defined as eastern (coastal),

central and western (Wang and Hu, 1999).

Table 8.1 presents the per capita gross domestic product, growth rate and level

of poverty occurring in each of these regions, based on Wang and Hu’s data.

Table 8.2 presents data on comparative savings rates, investment rates and

exports. Tables 8.3a and 8.3b present data on comparative newspaper

consumption and telephone accessibility. Table 8.4 presents data on

comparative illiteracy rates, and mean school years and Table 8.5 reflects levels

of urbanisation.


263

The eastern region comprised data from Beijing, Tianjin, Hebei, Liaoning,

Shanghai, Jiangsu, Zhejiang, Shandong, Guangdong, Guangxi, and Hainan,

with a land area of 1.3 million square kilometres.

The central region consists of Shanxi, Inner Mongolia, Jilin, Heilongjiang,

Anhui. Jiangxi, Henan, Hubei, and Hunan, with a land area of 2.8 million

square kilometres.

The western region includes Sichuan, Chongqing, Guizhou, Yunnan, Tibet,

Shanxi, Gansu, Qinghai, Ningxia, and Xingjiang with a land area of 5.5 million

square kilometres. (Source - GTJCSJDZ, 1996 cited in Zhu, 1999)

The following is presented to illuminate and expose the trends taking place

across these three regions.

By comparing measures in eastern, central and western regions I argue that

collectively this broad cross-section of measures reflects the comparable speed

of change taking place in the three regions and the resultant speed of reform.


264

Table 8.1: Per Capita Gross Domestic Product 1978 and 1994, Annual

Growth Rates and the Number of Provinces in Poverty 1992.

Region A – Per capita

GDP as % of

National Average

1978

B - Per capita

GDP as % of

National Average

1994

C-Per capita

Annual growth

Rate

1978-1994

D – Number

(%) of

counties in

poverty

1992.

Eastern 232.55 233.49 8.66 61 (12.4%)

Total 492

Central 85.78 80.93 7.94 180 (25.0%)

Total 719

Western 79.09 65.42 7.04 259 (33.6%)

Total 769

Source: Wang and Hu (1999: Table 3.2, p49; Table 3.3, p52; Table 3.7, p66)

This research was conducted at the same time that Guthrie conducted his

research and since then there has been no evidence to suggest a significant

change in these trends occurring in China. I argue that comparing the Per

Capita GDP as percentage of national per capita GDP in addition to examining

the number and percentages of provinces described as in poverty in each region


265

reflect the income inequality between rural and coastal areas. Wolf (2003)

argues that these differences in income inequality are leading to rural-to-urban

migration, rising urban unemployment and social unrest.

Table 8.2: Savings Rates, Investment Rates and Exports as a Percentage of

Provincial Gross Domestic Product.

Region Savings Rates S

Investment Rates I

Multiplication factor M = S x I

Exports as % of Provincial GDP

Eastern 54.62 53.78 3045.0 34.02

Central 39.27 40.82 1603.0 8.42

Western 34.46 41.96 1445.9 6.00

Source: Wang and Hu (1999: Table 4.2, 87; Table 4.6, 107)

The differences in domestic savings (S) and investment (I) across the three

regions are amplified if we consider the multiplication factor (M). This

multiplication factor indicates the comparative volume of domestic investment

capital available and is almost double in eastern regions (3045) when compared

to either the central (1603) or western regions (1445.9). This indicates a greater

volume of savings and investment and a correspondingly more open investment

mentality as we travel east towards coastal regions.


266

When these internal savings and investments rates are combined with the huge

difference in volumes of investment that are coming from outside China, the

differences in the size of investments being made between eastern, central and

western regions are further amplified.

This evidence supports the proposal that the western and central regions are

attracting far less investment than the coastal regions and domestic investors

are also far less prepared to invest in south-west regions. I argue that these

comparatively minimal investment levels also contribute to a reduced level of

pressure to change. In south-western China, even though the average standard

of living is improving, the gap between rich and poor continues to grow

(Ogutcu and Taube, 2002. Liu 1997, Int # 74).

Economically these eastern, central and western economic regions differ

significantly. A much greater per capita GDP in eastern provinces, combined

with the majority of domestic investment being in coastal cities, has seen a

strengthening of the eastern economies at the expense of poorer provinces

(Wang and Hu, 1999). It appears reasonable to conclude that industries are

much more developed in eastern regions in comparison to south-western

regions of China and the gaps that were present in 1994 have only grown larger


267

in recent years (Int #75, Int #81, Int #82, Int #86, Int # 88).

Communications and education are two important services that act as critical

and central conduits in the effective implementation of reforms and these

measures also provide evidence of the level of sophistication of the people

living in each region. The following data compares these two issues across

these regions.

Table 8.3a: Communication Mechanisms, 1994

Region Televisions per 100 households

Newspapers sold per person per year

Telephones per100 people

Eastern 100.00 39.57 5.60

Central 75.85 15.60 1.49

Western 48.22 13.06 1.04

Source: Wang and Hu (1999: Table 4.7, pg 115)


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Table 8.3b: Communication Mechanisms (As a Percentage of Scores

Recorded in Eastern Provinces) 1994.

Region Televisions per 100 households

Newspapers sold per person per year

Telephones per100 people

Eastern 100 100 100

Central 75.8 39.42 26.61

Western 48.19 33.00 18.57


If we compare the percentage of communicating mechanisms that existed in

western, central and eastern provinces in 1994 it is clear that there is a serious

reduction in the communication infrastructure as we move further away from

the coast. The number of communication mechanisms that exist inland is only a

small percentage of those that exist in eastern locations. One may confidently

speculate that the outbreak of mobile communication use in recent years

follows the same percentages as presented by Wang and Hu in 1999 and that

the figures for computer access and email are likely to parallels these results.


269

Table 8.4: Illiteracy Rates, Mean Number of School Years 1994

Province Illiteracy Rates Mean Number of School Years

Eastern 8.71 7.17

Central 14.32 6.24

Western 22.63 4.77


Table 8.4 provides further evidence of the significant differences in education

levels across the three regions. I argue that the higher level of illiteracy in the

west is another factor that would reduce the speed of reform and enhance the

likelihood that the old characteristics and importance of guanxi practices

remain.


270

Table 8.5: Comparison of Urban Development, Gross Domestic Product

and Percentage of Foreign Investment of China’s Three Regions (1995)

Region Urban Built-up Area as % of Total. M

GDP as % of Total N

Foreign Investment as % of Total O

Eastern 51.8 65 86.8

Central 34.3 23.9 9.3

Western 13.9 11.1 3.9

Source (Wang and Hu, 1999: Table 4.6, pg 107; Fig 4.5, pg 109; Table 3.1, pg

48)

The eastern regions are attracting the vast majority of both domestic and

international investment; it seems reasonable, therefore, to assume that they are

experiencing greater exposure to international business practice. The

development of more western business methods is likely to accompany this

investment, especially investment originating from outside of China, and the

use of guanxi in coastal regions as an important tool in business may be in

decline as a result. In contrast, the 3.9% of total foreign investment reaching

western China is not likely to have much effect on the regions business culture.


271

Discussion

In 13 of the 15 direct measures presented here, the value of each specific

measure decreased as we moved away from coastal locations. These included

the

- per capita GDP in 1978 compared to national average,

- per capita GDP in 1994 compared to national average

- annual growth rate per capita GDP average

- savings rates

- investment rates

- exports as a percentage of provincial GDP

- the number of televisions per households

- the number of telephones per hundred people

- the number of newspapers sold per person per year

- the population’s mean number of school years

- the urban built-up area as a percentage of total

- GDP as percentage of total and

- foreign investment as percentage of total.

The only values that are increased as we travel from east to central to west

China are the number and percentages of counties defined as being in poverty


272

and the illiteracy rates. These values further support the hypothesis that China

is comprised of at least two different economic regions where the pressure to

change and adapt are very different.

The central and western regions have attracted a smaller number of new

investments, a much smaller volume of incoming capital and their level of

exposure to international business practice has been much less.

Shanghai, Beijing, Shenzhen and Guangzhou are all rapidly developing global

markets. As one moves further away from these trade centres, evidence

suggests that the speed of reform slackens markedly. Murphy’s (2003) findings

that western China lacks a modern information technology infrastructure and

that the economy there is much smaller and diverse provide further recent

evidence of the existence of a difference in the speed of change, income

development, investment, communication and technology. While coastal

regions boom, the interior rural economy is sagging under falling prices and

declining real incomes.

Another significant factor identified by educators and managers interviewed in

the south-west is the brain drain of skilled and entrepreneurial youth migrating

from the internal regions to the cities of the east coast. ‘They are being attracted


273

by more opportunities, higher salaries and better living conditions’ (Int # 75).

Those with good connections are likely to stay in the south-west whilst many

with good potential want to find a better situation. Those older employees with

secure positions are more likely to remain in the west, further inhibiting the

speed of reform. Several young employees and graduates interviewed in south-

west China commented that they were tired of the old SOE management

systems. Comments like, ‘my friends have started their own company and so I

want to work with them’ (Int # 76), ‘my Uncle can get me a job in Guangzhou’

(Int # 77) and ‘I want to work in Shanghai’ (Int # 8) reflected their attraction to

more modern and global environments.

Liu (1997) argued that the real barrier to mitigating the gap between the rich

and poor provinces is the backward mentality, low level of effort and

inefficiency in the western regions. Liu believed that these regions need to

speed up reform, separate the government from the enterprises, and open their

economies to the eastern regions to attract capital investment, production

facilities, technology, and human resources so that they might begin to attract

more foreign investment. Here is further evidence that different regions have

reformed faster than others and have experienced correspondingly varying

levels of business success.


274

The booming economic growth that the outside world is seeing in China is

happening primarily along the coast. A fraction of the population, an estimated

three hundred to four hundred million people, is currently benefiting from the

economic growth we have seen over the last 25 years. Interior China is clearly

not benefiting to the same extent and there is a growing disparity in wealth,

investment and income levels across these regions. Rural poverty is

accompanied by increased income inequality between rural and urban areas, by

rural-to-urban migration, rising urban unemployment and social unrest (Wolf,

2003).

The comparisons of education and communication levels reflect a difference in

the sophistication and access to knowledge among eastern and western

populations. In comparison to those living in the east, people in western China

are not as exposed or influenced by the pressures and opportunities emanating

from globalisation nor are they as far down the path of reform. This

environment is likely to continue changing at a significantly slower rate than

the Shanghai environment from which Guthrie’s (1998) conclusions were

drawn.

To search for more evidence of the differing speeds of reform, Part 2 of this

chapter specifically investigates the changes occurring in the importance of


275

guanxi.

Part 2

The statistics presented here were compiled from questionnaires administered

to the employees of the Roaring Dragon Hotel in south-west China.

Methodology

A written questionnaire was given to each respondent. The survey document

was aimed directly at assessing each respondent’s attitudes to and beliefs

regarding the phenomenon of guanxi.

Using the scale

Strongly Disagree Disagree Neither Agree/Disagree Agree Strongly Agree

1 2 3 4 5

respondents were asked to respond to the following six statements:

Guanxi is still an important part of China’s culture

Guanxi will continue to operate in China for a long time into the future

In Chinese organisations, the use of guanxi is in decline


276

In 20 years time, guanxi will be of no advantage

In 20 years time, guanxi will be just a memory of China’s past

The young people of China today place less importance on guanxi than former

generations.

Of the population of 685 staff at the Roaring Dragon Hotel, 438 responded to

the survey. The Hotel respondents were comprised of 80.2% employees, 13.9%

supervisors and 4.2% managers. A final group of 379 survey responses were

accepted as being valid and incomplete surveys were not included in the final

analysis. Of those respondents from the Hotel, 51.3% were female and 48.7%

were male with ages ranging from 17 to 56 years. Their years of service with

the Hotel ranged from 0.1 to 36.0 with a mean of 7.2 years with a standard

deviation of 7.42.


277

Results

Table 8.6: ‘Guanxi’ is still an important part of China’s culture.

1 2 3 4 5

Strongly Disagree Disagree No Opinion Agree Strongly Agree

Frequency 11 33 81 201 96

Percentage 2.6 7.8 19.2 47.6 22.7

Cum % 2.6 10.4 29.6 77.3 100

Mean 3.8 Median 4 Mode 4 Standard Deviation 1.0

In this population, there is strong support for the statement that guanxi remains

an important part of China’s culture. The median and mode of 4 together with a

mean of 3.8 indicates that the Roaring Dragon Hotel population show support

for the statement that ‘guanxi is still an important part of China’s culture’. It

also provides evidence that the significance of guanxi is not in decline in this

environment with only 10.4% supporting such a proposal. Although this is a

measurement of guanxi and not guanxi practice (guanxi xue) is still indicates

that this cultural phenomenon is still strong in south-west China. If we consider

that Guthrie’s research was collected in 1994 and the new research presented


278

here was collected in 1999 it is clear that the speeds of eastern and south-

western reform are different.

Table 8.7: ‘Guanxi’ Will Continue to Operate in China for a Long Time

Into the Future.

1 2 3 4 5


Frequency 19 40 78 213 73

Percentage 4.5 9.5 18.4 50.4 17.3

Cum % 4.5 13.9 32.4 87.7 100


The strong support for the statement that ‘guanxi will continue to operate in

China for a long time into the future’ indicates that the population at the

Roaring Dragon Hotel see little change occurring in the importance of guanxi.

Only 13.9% of respondents disagreed with this statement whilst 67.6% agreed.

A mean of 3.7, median of 4 and mode of 4 provide confirmation that Roaring


279

Dragon Hotel respondents believe ‘guanxi’ will continue to operate in south-

west China for a long time into the future.

Table 8.8: In Chinese Organisations the Use of ‘Guanxi’ is in Decline.

1 2 3 4 5


Frequency 45 146 92 123 16

Percentage 10.7 34.6 21.8 29.1 3.8

Cum % 10.7 45.3 67.1 96.2 100


Less than 32.9% of respondents support this claim. A mean of 2.8 indicates

mild disagreement; a mode of 2 confirms this outcome. I argue that this is a

measure of guanxi xue or guanxi practice as cited in Guthrie (1998). In contrast

to Guthrie’s (1998) Shanghai based claims, the Roaring Dragon Hotel

respondents disagree with the notion that the use of guanxi practice is in

decline. In a broader context, several businessmen interviewed in south-west


280

China suggested that guanxi has actually become more important in this region

(Int # 79, Int # 80, Int # 81).

The following excerpts from interviews recorded from businessmen in south-

west China summarise the situation.

A large number of people believe that the role guanxi plays should

decline. From my experience in the first two years in a bank and then in

a hydro-projects development company, I believe the significance of

guanxi is in fact gaining intensity in south-west China, where the local

economy is not so open as in the east. (Int #48)

Many relatives of the banks’ directors still gain jobs in the bank of

communications through guanxi and their performance is not closely

geared to their income. Most of their relatives working in the bank have

comfortable positions as well as having more chances to gain promotion

to the bank’s upper echelons or to take a job or position in some other

financial organisations. (Int #49)

There is one guy in our international banking department who is the

youngest sub-branch dean in the Bank. He was not very competent but


281

extremely lucky as his fiancée is the daughter of the Chief Dean in the

south-east Branch of the central bank. He also enjoyed many short cuts

when gaining loan approvals. (Int #50)

Concerning bank loans, the interest rate is fixed throughout China and

there is no difference between the loan rates each Bank can offer. The

resultant fierce competition intensifies the use of guanxi and those who

have an influential background and connections find success in terms of

financial support. (Int # 51)

Another respondent stated that

The hydro construction company I am working for is state-owned. I

have seen examples of how management uses guanxi to make decisions

and the resultant low efficiency and waste of funds. When choosing the

successful contractor for a bid, many non-economic factors are taken

into consideration with the most important criteria always being the

relationships involved. We had to offer a contract worth RMB 0.5

billion Reminbi to a company which has thousands of retired workers

and who would have been forced to lay off a lot of employees if they

were unable to win any more contracts. As our current General Manager


282

was once the past General Manager of this company, he was not

prepared to consider any other offers, some of which were better than

the quality and professionalism of the chosen companies bid. Our

General Managers relationships definitely influenced the final decision.

(Int #82)

‘Many organisations can’t rely on the government any more to take out a loan

for them or bail them out’ if they are making losses (interview with Shanghai

Official cited in Guthrie, 1998: 34). In south-west China the government policy

is actually helping facilitate the importance of guanxi in relationships between

government and managers of companies, especially when it is a matter of

survival. As one businessman replied,

We are a socialist country and this is the way we do things. If we don’t

help them then they will have to close down and many people will

become unemployed. We cannot allow so many people to lose their

jobs. (Int # 69)

In south-west China, a small businessmen also described his experience with

guanxi xue in his environment:


283

In my small business we were often charged with any possible excuse to

invite local governors to join us for dinner. My partner said we should

invite a local governor into the partnership to gain some more business

through his guanxi. I really did not like the Governor as he was smoking

all the time, drinking a lot of alcohol, exhibiting poor taste and behaving

like a rogue. Still as a result of developing this relationship with him we

now don’t have many unnecessary expenses and enjoy a lot of

protection from competitors. (Int #83)

Another bank accountant described the following:

A section manager in my bank has been working diligently for more

than ten years. He is the backbone in the department and worthy of

much respect. He has most of the responsibilities, yet is paid the same

salary as other managers who have powerful connections and he also

has much less freedom in making decisions.

The daughter of one directorate member of our company works as an

accountant in head quarters. She has no accountancy education

background but through her connections has unlimited professional

training opportunities. It is easy to see that in the future she will take the


284

position in our company in charge of accountancy. (Int # 53)

A manager of a newly emerging company reported the following:

Guanxi is not declining in our comparatively open market, but is in fact

intensifying. Guanxi is important in the business environment I am

working in and some practices that have been in graveyard for years in

eastern regions still exist here! Although founded in 2001, the

company’s management is quite out of date in spirit. (Int #84)

A Food and Beverages Manager at the Roaring Dragon Hotel had come from

Shanghai a year earlier and made the following comments:

When I first arrived here with my husband a year ago we were shocked

to find how far behind Shanghai this place was in terms of business

practice. The old ways that died years ago in Shanghai were alive and

well here and it took us some time to readjust to these old practices. (Int

#85)

A General Manager of a dam construction project in Guanxi province gave

another interesting view relevant to Guthrie’s (1998) claims re chemical and


285

industrial organisations.

In China, in industries that require exact science there is no longer any

room for guanxi. In the past many dams had been below standard. We

cannot afford to take any chances in the dam construction industry so

we must have capable people at all times. However I get frustrated in

our business that is more social science-oriented as in these industries

guanxi still plays a major role. For my generation this is frustrating as

the importance of guanxi is perpetuated through the lessons of

Confucianism that we are taught in school and in our social lives. (Int

#67)

A Chinese accountant summarised the attitude to the development of the new

socialist market economy in south-west China:

The government officials encourage us to follow the market economy.

If anything this has made the importance of relationships even greater.

(Int #65)


286

8.9: In 20 Years Time, ‘Guanxi’ Will Be of No Advantage.

1 2 3 4 5


Frequency 23 74 127 138 60

Percentage 5.5 17.5 30.1 32.7 14.2

Cum % 5.5 23 53.1 85.8 100

Mean 3.3 Median 3 Mode 4 SD 1.1

Here is the first indication that the survey population believe that the

significance of guanxi will decay at some point in the distant future. 46.9

percent of respondents believe that guanxi will be of no advantage in 20 years

time and only 23 percent disagree with this view.

Guthrie (1998) has shown that the decay in significance of guanxi is already

occurring in Shanghai. The results of this survey from south-west China

support the proposal that the outcome may be the same in south-west China;

however it seems likely to take a considerably longer time in achieving the

same quality of reform in this region.


287

In the long term the significance of guanxi in south-west China may eventually

follow a path similar to that found by Guthrie in Shanghai. However, in the

survey population at the Roaring Dragon Hotel, the support for this decay is not

strong and I argue that this deterioration will be further diluted by the time

required for international and global business forces to successfully penetrate

into south-west China.

Table 8.10: In 20 Years Time, ‘Guanxi’ Will be Just a Memory of China’s

Past.

1 2 3 4 5


Frequency 25 94 134 118 52

Percentage 5.9 22.2 31.7 27.9 12.3

Cum % 5.9 28.1 59.8 87.7 100



288

This result indicates further weak support from Roaring Dragon Hotel

respondents who perceive that in 20 years time guanxi will continue to decline

in importance.

In an attempt to isolate the sub-group in which this belief was strongest,

respondents were grouped across sub-grouped intervals differentiated by age

and years of service. Evidence showed that respondents followed uniform

trends across the whole group and that there were no significant differences in

the results of each sub-group tested.

8.11: The Young People of China Today Place Less Importance on

‘Guanxi’ Than Former Generations.

1 2 3 4 5


Frequency 28 163 89 131 14

Percentage 6.6 38.4 20.9 30.8 3.3

Cum % 6.6 44.9 65.9 96.7 100



289

The mean of 2.9 indicates mild disagreement with the statement that the young

people of China today place less importance on ‘guanxi’ than former

generations. With 44.9% disagreeing and only 34.1% in agreement, the

majority of respondents maintain that young people still treat guanxi as

important. Only 3.3% indicated strong agreement.

8.12: In Your Everyday Life, How Often Do You See Guanxi Used?

1 2 3 4 5

Never Seldom Sometimes Often Always

Frequency 8 24 105 213 76

Percentage 1.9 5.6 24.6 50 17.8

Cum % 1.9 7.5 32.2 82.2 100


These results indicate that there is little doubt that guanxi practice in this SOE

environment in south-west China continues to be an important part of the

organisational culture. Only 7.5 percent of the population ‘seldom’ or ‘never’


290

see guanxi in use whilst 67.8 percent see it in operation ‘often’ or ‘always’.

Cumulatively 92.5 percent see it in use ‘sometimes’, ‘often’ or ‘always’. These

results indicate that guanxi is still very much a part of organisational life in this

SOE community and provides further evidence that guanxi remains an

important and often used phenomenon in south-west China.

An appropriate summary of the importance of guanxi in this region came from

an interview with a small businessman in Kunming.

My son is going to study in the Netherlands and I’m worried that he will

not be able to find a part time job to support his study due to the length

of time it will take for him to develop a relationship with his employer.

(Int # 87)

I explained to him that his son could apply for any job in any Dutch newspaper

anytime after he arrived, without having to know the people who advertised the

position, and that his ability would decide his level of success. Even though I

explained the situation clearly he still seemed surprised and unsure.


291

8.13: In Your Job, How Often do You See Guanxi Used?

1 2 3 4 5

Never Seldom Sometimes Often Always

Frequency 10 37 129 155 97

Percentage 2.3 8.6 30.1 36.2 22.7

Cum % 2.3 11 41.1 77.3 100


In this SOE work environment, there is little doubt that the phenomenon of

guanxi practice or guanxi xue remains important. The mean of 3.7 indicates that

the population often saw guanxi in use in their workplace, with 89 percent

seeing it in use ‘sometimes’, ‘often’ or ‘always’. With only 11 percent ‘seldom’

or ‘never’ seeing it in use, I argue that it is still very much a characteristic of

the Roaring Dragon Hotel working environment. Interviews with employees at

the Roaring Dragon Hotel uncovered criticism of management for promoting

inexperienced and unqualified personnel to important management positions

and the resultant poor performance. However, these promotions could not be

openly criticized due to the trouble it would cause and also the mainzi or face

issues involved.


292

Table 8.14: Guanxi Use Observed in Life and in the Workplace.

Guanxi

Use

Never Seldom Occasionally Often Always

Life % 1.9 5.6 24.6 50 17.8

Job % 2.3 8.6 30.1 36.2 22.7

The results in Tables 8.13 and Table 8.14 provide strong evidence that the use

of guanxi in SOE in south-west China remains strong in contrast to Guthrie’s

findings in Shanghai.

Discussion

There is no doubt that the opening up of China has favoured the development

of the coastal areas over inland areas (Howell, 1993; Int #53; Int #59; Int #87;

Int #89). The sheer distance of the south-west economies from the vibrant

eastern economies results in only minimal exposure of these populations to the


293

socialist market economy and international forces. In the far west,

administratively they are often under less control resulting in legislative or

constitutional constraints being re-interpreted or ignored to suite the local taste

(Hamer, 1996). Is the reform in SOE in south-west China weaker than in

coastal regions? Is Shanghai further along the path to reform?

I propose that the quality of reform in China weakens as one travels further

away from the coastal regions and centres of government.

The speed and quality of reforms in the south-west of China have been more

gradual and diluted than in coastal regions. Nyberg and Rozella (1999) found

that in western regions, the distance away from the coast and the centre of

Chinese business has delayed the complete removal of the planning legacy and

continuing market interventions by government remain. The transformation in

the business environment in south-western China has also been delayed and is

occurring more slowly. I argue that the decay in the effectiveness and

significance of guanxi and guanxi xue parallels the quality of reform being

experienced in inland regions. That is, it is slow and weak.

Guthrie (1998) identifies that in Shanghai the emergence of a rational-legal

system, at least on an official level, has begun in many fundamental ways. In


294

addition, the state is implementing broad-based institutional changes that are

moving business success away from personal power and particularistic

relations. In this complex transition, change has needed to be implemented

from the top and this is the environment in which a system of guanxi and

guanxi practice, after more than 2,000 years of history, has become routine in

Chinese society. While the transition between these two systems is and will

continue to be a slow and incremental process, the very existence of a rational-

legal system at the state level is a first step in defining and shaping economic

and social action in China’s future.

In reflecting on Guthrie’s (1998) sample population and outcomes it is

important to remember that his interviews were conducted with managers from

production-oriented industrial units with a minimum of fifty employees that

were located in China’s most international and western-oriented city. He makes

this qualification on a number of occasions. To add perspective to his

conclusions we must remember that China is a huge country and many different

sub-cultures exist (Jackson and Bak, 1998).

With these conclusions in mind, I argue that the transition to a socialist market

economy is much further advanced in coastal regions than in inland regions.

The difference in the speed of development of a more consistent and


295

transparent legal system combined with the difference in income levels

between those working in inland environments and coastal environments are

measures that illuminate the comparatively slow speed of change in inland

regions. I argue that parallels can be made with the slow speed at which guanxi

significance is in decay in the business context in south-west China.

Guthrie (1998) uncovered that the significance of guanxi was waning in

Shanghai as the international penetration and exposure, savings and buying

power of coastal residents began to grow. In comparison in south-west China,

the change taking place in such criteria and in income levels has been much

slower and this has been another contributing factor to the minimal decay in the

significance of guanxi.

Another difference can be identified in the number of former state-owned

organisations being allowed to close down in the south-west compared to

Shanghai (Guthrie, 1998: 36). In Shanghai the private sector is developing at a

much faster rate and this development provides opportunities for those who

became unemployed through the closure of SOE to gain new positions. In

south-west China the comparable speed of change, increase in the size of the

private sector and resultant new employment opportunities are minimal when

compared to Shanghai. As a result, the local south-west government has to be


296

more sensitive and cautious in closing SOE so as not to create a critical mass of

unemployed people that may lead to social discontent. These conditions are

also restricting the speed of change.

Guthrie (1998) discovered that the significance of guanxi is in decline in the

Shanghai business environment because of the advanced development of the

market economy combined with the influence of the international forces and

influences. As a result, his conclusions contrast significantly with those found

in south-west China due to this region’s slower speed of reform and limited

exposure to the forces of globalisation.

When told of Guthrie’s findings in an interview one respondent replied, ‘there

may be changes taking place in Shanghai and coastal regions but here nothing

is changing. The situation remains the same’ (Int # 82). This interview,

recorded in south-west China nine years after Guthrie’s research was conducted

in Shanghai, clearly adds weight to the argument that reform is progressing at a

much slower rate in south-west China.

Guthrie was clear in defining that his research was based on the responses from

general managers of industrial organisations in Shanghai and so the new

evidence presented here supports the argument that the change in the


297

significance of guanxi is not uniform across all provinces in China. South-west

China has a minimal and almost non-existent chemical and industrial sector and

so it is difficult to compare these results directly with those of Guthrie.

Evidence found in this research conducted between 1999 and 2004 suggests

that in the south-west region the use and importance of guanxi in the hotel,

accounting, banking and educational sectors, is deteriorating much more

slowly.

I argue that there is a difference in the decay in the significance of guanxi when

comparing the Shanghai managers with those taken from SOE employees and

managers and businessmen in south-west China.

Another shadow on the validity of Guthrie’s methodology is caste in Mayfair

Yang’s (2002) rebuttal. Yang implies that there may have been some error in

Guthrie’s methods of interviewing business men. Guthrie’s interviews usually

took place in each respondent’s own office, and I argue that in such

environments, respondents would be inclined to recite the organisation’s

official policy. In south-west China, where guanxi is still significant in

business, conducting rich guanxi interviews requires penetrating the code of

secrecy associated with guanxi and the quality of responses gained from

unconnected one-off interviews may be questionable.


298

In south-west China, the code of secrecy in guanxi remains imperative in

business operations and Guthrie’s method of interviewing Shanghai managers

in their own work place generates questions as to the validity of responses. In

south-west China, it is not unreasonable to expect that any businessmen

interviewed on one’s first meeting in their work place will only recite their

organisation’s official policy. A Chinese manager in south-west China

described it as being like asking Chinese businessmen ‘to tell us all of your

secrets at your first meeting with them’ (Int # 65). It is true that guanxi

outsiders are only told a bare minimum at any one time and one may question

whether or not the responses given in a first time one-off interview were

truthful or accurate.

For guanxi research to be valid, I argue that there is a need for the researcher,

or a trusted associate, to take the time to develop a trusting relationship with the

respondent if one is to generate honest responses. An example I offer is one

case when I interviewed a government official upstairs in a hotel room at a

conference. It was after a banquet and we had never met before. This

uniformed official was happy to speak openly with me only because I had been

introduced by a member of his connected guanxi network with whom he had

strong ties and trust. If I had been a stranger he would never have considered


299

talking to me about such a sensitive issue as guanxi or if he had agreed would

have only recited the official government policy. My introduction from

someone he trusted was critical in him agreeing to speak with me and in

providing truthful responses to the questions I asked.

Establishing relationships with respondents over a period of time is more likely

to provide more open and richer responses as trust grows. On each of my four

visits to my research sites I have been told more secrets and more insider

information as the respondents trust and relationship with me has grown. In

researching guanxi, one may argue that the validity and quality of the

conclusions drawn will parallel the time spent by the researcher in developing

relationships with respondents who have their trust.

Conclusions

In Guthrie’s (1998) work on the emergence of capitalism in China he does

outline the characteristics that make Shanghai special in China. They are that

Shanghai has secured more foreign contracts and attracted more foreign

investment than any other city, it has the highest rate of consumption, the

highest annual salaries, the legal system is probably more developed than in

any other part of China and is developing faster. Guthrie concludes that


300

Shanghai is not representative of China and it is easy to see the differences that

exist in the business practices, lives, cultures and ethnic traditions of those in

Shanghai compared to those in the arid areas near Mongolia, in the far west

regions of Urumqi, or those of the south-western regions near the Mekong

river. Great diversity exists within regions of China (Pickles, 2002). In south-

west China alone there are claimed to be 43 different ethnic minorities.

One must be conscious of a different cultural atmosphere in inland rural

communities where the progress and the resultant change due to reform are

much slower with policies at times interpreted differently. It seems reasonable

to propose that there are significant differences between eastern, central and

inland populations and economies in China (Wang and Hu, 1999). Variations

across the state hierarchy also contribute and lead to different rates of growth

and diverse models of enterprise management in the transition economy

(Walder, 1992).

In China, the changes taking place in coastal and eastern regions are occurring

much faster than in the south-west. Reflecting on Guthrie’s (1998) claim that

guanxi practice in Shanghai is losing significance, I argue that in south-west

regions the old ways live on and the decay of the importance of guanxi in

business is much slower. It may be true that Guthrie’s conclusions reflect what


301

is occurring in the fast changing city of Shanghai; however, in south-west, the

speed of change is much slower.

Guthrie’s conclusions are generated from interviews with businessmen in

China’s fastest developing city that is also among the most exposed to western

influence. This environment differs significantly from the type of business

environment one is likely to find in south-west China. In the south-west there is

less development, more diversification and the pressure to change and adapt

has not been nearly as great as in Shanghai.

Eastern regions are changing faster and opening up to international influence at

a greater rate than for those situated inland. To quote Guthrie (1998: 14):

Although Shanghai may be qualitatively different from several other

areas in terms of institutional structure and change, the difference is

primarily in function of degree rather than kind. Shanghai is simply

further along the process of change.

South-west China will probably one day reach the level of reform and exposure

to international globalisation that Shanghai is experiencing today. However, I

argue that this time is still far off and the business characteristics that existed in


302

south-west China prior to reform gaining momentum in coastal regions are

changing much more slowly. Businessmen in Kunming, Dali and Lijiang agree

that ‘guanxi remains as important as before reform began’ (Int 58, Int # 65, Int

# 88).

Although there is evidence of more modern business practices, improving

education and living standards in China, there is still a low standard of living in

the south-west region and a significant number of uneducated children and

peasants remain.

Reforms to date have enjoyed various degrees of success in large portions of

the state owned sector and their ultimate success will depend on the willingness

of the Chinese Communist Party to embrace privatisation (Lardy, 1998: 22). In

separate interviews in Kunming with three member of the Communist Party I

asked if they thought ‘that corruption in the Party was decreasing?’ None of

them believed that this was the case and all suggested that the CCP members

who had enjoyed the benefits of their positions before reform began remained

reluctant to give up the advantages they enjoyed even if they were no longer

allowed. This struggle between the stakeholders in the Party and the forces of

reform is ongoing in south-west China and will no doubt continue to be intense

and contribute to the slow change occurring in the level of importance of


303

guanxi in business in this region.

China’s growth has been unevenly spread. The volume of investment being

made in inland locations is less than five percent of what is being absorbed into

coastal regions so the speed of growth and development is much slower. I re-

confirm my argument that there are now at least two different economies

operating in China: one in the east that is firmly in the globalisation phase, with

rising incomes and standards of living; the other in the west that is experiencing

slower change, more poverty and despair. People in the south-west of China are

gaining comparatively little benefit from the economic success of the coastal

regions (Wireman, 2003). As they see less benefit, they are less attracted to

implementing reform initiatives.


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Chapter Nine

Conclusion

The evolution of organisational guanxi in SOE has been influenced by the

development of the former planned economy, the policies of Chairman Mao pre

and post 1949, the slow reform of SOE during Deng’s period of leadership, and

the role played by the danwei in this process. The era from pre-1949 to the end

of the reign of Deng Xiaoping was a historical period in the development of

organisational guanxi within and between state owned enterprises in China.

Conditions in SOE during this period provided the ideal environment for the

incubation, development and production of organisational guanxi.

This thesis is focused on an SOE in the hotel industry in south-west China. This

region has such a wide variety of ethnic groups and SOE in operation and so

caution is required when expanding the conclusions found here to cover

broader regions and industries within China. Guthrie (1998) made it clear that

his conclusions were based on data from the Shanghai region; similarly, it is

important to state here that the conclusions reached here apply for SOE in

south-west China.


305

The military danwei that supported Mao’s followers and cadre during the Long

March and the establishment of rebel-controlled regions in the north-west of

China pre 1949 provided the right conditions in which to conceive and incubate

the core characteristics of organisational guanxi and to develop methods of

using the organisation to create and/or deliver favours. In this era relationships

determined the quality of life and sometimes survival. This period when cadres

developed management skills by trial and error was the birth place of

organisational guanxi. China’s economic developments since 1949, combined

with the core Confucian belief of the Chinese people, have been catalysts to aid

the evolution of organisational guanxi.

Many SOE managers post-1949 were formerly CCP cadres who were members

of the military danwei, an environment where relationships had been very

important. The importance of relationships in the military danwei in the

Communist Base Camps prior to 1949 evolved through the post-1949 danwei

to become the core characteristics of organisational guanxi in SOE. It was a

natural progression for the former cadres to take the management skills they

had learnt in the rough military danwei environment and develop them into a

more sophisticated style of management in SOE post-1949. It was in the SOE

that the long management chains, poor monitoring of operations and lack of

accountability provided the ideal environment for the fostering of


306


Organisational guanxi occurs when individuals or groups working for

organisations gain favours for their guanxiwang through membership or usage

of their organisations facilities. Without the organisation, these favours could

not be granted. Organisational guanxi characteristics include the importance of

insider relationships and the activities and benefits that flow from such; under-

reporting of production revenue and collective assets; the importance of trust

and secrecy regarding the dissemination of information between members of

cliques; the importance of mutual cooperation and informal networks in

achieving outcomes; and the provision of benefits to SOE members from time

to time that are not available to non-SOE members. In this case, examples of

the benefits available to insiders were free rooms at the Hotel, invitations to

banquets, easy working conditions, trips to other hotels and opportunities for

nepotism.

The findings regarding nepotism, cliques, discounting, and favours are of

concern for international managers operating in China. This is a topic that

requires deeper investigation and is one I have only begun to investigate here.


307

The Future?

How guanxi is accepted by south-west China’s emerging educated youth is a

topic for further investigation. At the Roaring Dragon Hotel several talented

young employees had been lost to other new hotels or other organisations with

more modern management methods. They commented that they could see only

limited opportunities for promotion within the old-style organisation (Int #31,

Int #24).

Another unusual situation in SOE is that older, untrained and uneducated

managers are now managing young, trained and educated graduate employees.

This is another scenario through which SOE must evolve. This transition will

also affect the longevity of organisational guanxi. In the next decade this

transition that will be interesting to view and record. At the Roaring Dragon

Hotel, it was clear that many young employees resented the old habits of

guanxi favours, and because of this favouritism had lost their initial motivation

to work hard.

There is little doubt that the emerging educated generation will eventually take

greater control in China. The question remains: as this generation penetrates

deeper into management positions and the socialist market economy gains


308

momentum in the south-west of China, is the future of organisational guanxi

limited or will a hybridized form evolve?

Guanxi favouritism used in appointing employees to senior decision-making

decisions may restrict the rate at which China’s most talented graduates and

potential managers reach decision-making positions. More research is required

into youth attitudes toward guanxi as the next generation of trained managers

has the potential to strengthen or weaken the importance of guanxi in China’s

SOE.

Guanxi neglect by Nothill at the Roaring Dragon in south-west China

highlights the cultural characteristics and issues that companies taking over or

forming joint-ventures with SOE in south-west China may encounter. The case

highlights the role guanxi can play in hindering or restricting the reform

process in large state owned organisations. I argue through conclusions reached

in this thesis that guanxi forces can and will have a restrictive effect on the

quality of reform that China’s SOE enjoy in adapting to the socialist market

economy, especially in the south west.

The most significant difference found in the comparisons of the Hong Kong

Executive and south-west China SOE employees surveys lies in the level of


309

importance given to ‘personal relationships’ as being an important

characteristic of guanxi. The Hong Kong trade executives predictably rated

personal relationships as being the most important characteristic of guanxi

(Pye, 1992; Tsui and Farh, 1997; Jacob, 1979; King, 1991; Luo, 1997a; Kao,

1993). In contrast, the Hotel population gave no support (M = 2.98) to personal

relationships being an important characteristic of guanxi. This unexpected

outcome challenges the recognised definition of guanxi as being ‘relationships

with the exchange of favours’ (Pye, 1992), because it suggests it does not apply

in the intra-organisational SOE hotel environment. Because Roaring Dragon

Hotel employees lived and worked in close proximity to one and other, they

assumed that some kind of relationship existed with a high percentage of their

co-workers. They looked past personal relationships to perceive the important

characteristics of organisational guanxi as being mutual cooperation, trust,

social activities and entertainment, and exchange of information.

These research outcomes support the proposal that ‘social activities and

entertainment, exchange of information, and personal relationships’ are the

three characteristics that differentiate intra-organisational guanxi in the Chinese

SOE hotel environment from inter-organisational guanxi for Hong Kong

Executives doing business on the mainland. The researcher argues that in


310

south-west China, region-specific and cultural factors play a role in modifying

the perceptions of what are important characteristics of guanxi.

At the Roaring Dragon Hotel, the security and protection provided by

organisational cliques was repaid through loyalty, secrecy, and the commitment

by members to work toward mutual benefits. Members of the Hotel cliques

shared mutual cooperation, trust, secrecy and fringe benefits as well as having a

deep mistrust of outsiders (Yau et al, 2000). Memberships of these

organisational cliques may have influenced the population’s perception that

relationships were not an important characteristic of guanxi. Clique

membership may have been more important in this scenario.

There is no doubt that the role and significance of the SOE is in decline in the

Chinese economy. The continuing costly social baggage of caring for

employees and retirees of SOE complicates their survival and, realistically,

only when SOE are free of their social burdens will they compete on a level

playing field with organisations operating in the private sector. One wonders if

the SOE will eventually disappear altogether, or will those that are profitable

survive in some hybrid form? From a south-west China perspective, I argue

that SOE are here to stay for the foreseeable future even though they may end

up playing more of a safety net role. China’s political leaders and business


311

managers know that a vast human resource potential in the state-owned sector

remains untapped and making these organisations more productive and

profitable remains a challenge for the Chinese government.

Guthrie (1998) has shown that the use and importance of guanxi is in decline in

Shanghai as this region progresses further along the transition path toward

China’s socialist market economy. Far inland, away from the international ports

and trade centers of China, this change is occurring slower and more gradually.

In the old SOE in south-west China, favouritism still exists in most business

transactions, and dealings are still being conducted within different sets of

economic, legal, ethical, social, and political parameters than those found in

coastal regions. In south-west China, breaking down the guanxi network has

not progressed as far and is continuing at a slower pace. The decay will not

come easily yet may become a requirement if Chinese businesses in this region

are to maximise effectiveness and efficiency and compete successfully. I

confirm my argument that there are now at least two different economies

operating in China: one in the east that is firmly in the globalisation phase, with

rising incomes and standards of living; the other in the west that is experiencing

slower change, more poverty and despair.


312

The researcher argues that in China, the changes taking place in the importance

and usage of guanxi in coastal and eastern regions are occurring much faster

than in the south-west. In the south-west region the old ways live on and the

decay of the importance of guanxi in business is much slower. South-west

China might one day reach the level of reform and exposure to international

globalisation that Shanghai is experiencing today and the decline in the

importance of guanxi may then mirror what is currently happening there. In

south-west China more time is needed to travel further along the path of reform

towards China’s socialist market economy.

The role of the SOE and the danwei are currently in flux as the socialist market

economy permeates further into the south-west of China. Like the danwei, the

future of organisational guanxi is uncertain.


313

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List of Interviews

1 Training Manager Roaring Dragon Hotel (RDH) 15/07/99

2 General Manager Nothill 9/07/99

3 Food and Beverage Manager Nothill 27/07/99


5 Front Desk Manager RDH 6/10/99


7 Bar Manager RDH 18/10/99

8 Marketing Manager RDH 19/10/99

9 Training Manager RDH 20/10/99


11 CCP Representative RDH 21/10/99


13 Bar Manager RDH 22/10/99

14 Human Resource Manager Nothill 22/9/99

15 Food and Beverage Manager RDH 3/11/99

16 Human Resource Manager RDH 8/12/99



19 Young Chef RDH 26/11/99


21 Assistant Manager Front Office RDH 29/11/99

22 Chef (made redundant) RDH 30/11/99

23 Accommodation Manager RDH 1/12/99

23 Accounts Manager and two Accountants RDH 2/12/99

24 Bellman and Bell Manager RDH 2/12/99

25 Door Captain RDH 3/12/99


335



28 Young House Keeping Supervisor RDH 8/12/99


30 Accounts Manager RDH 11/12/99

31 Accounts Manager RDH10/12/99

32 Young Assistant Food and Beverage Manager RDH 14/12/99

33 Housekeeping Manager RDH 14/12/99


35 Young Employee RDH 15/12/99


37 Front Office Manager RDH 17/12/99

38 Young Employee RDH 15/08/99

39 Government Official 15/12/99



42 Human Resources Manager RDH 15/10/99

43 Party Representative RDH, 6/07/2001



46 Housekeeping Manager RDH, 14/12/04

47 Finance Department Manager RDH 22/11/99

48 Bank Executive 4/08/99







336


55 Marketing Executive RDH 2/07/01

56 Supply Manager RDH 12/12/02

57 Marketing Executive RDH 2/12/04

58 Businessman Lijiang 12/12/02

59 Dam Construction Manager 16/12/04

60 Businessman Dali 5/06/99

61 Businessman Kunming 15/06/01

62 Chinese Academic Kunming 12/12/02

63 Australian Academic Kunming 17/12/04

64 Australian Academic Kunming 18/12/04


66 Chinese Academic Kunming 12/8/99

67 Dam Site Manager Guanxi Province 6/12/04

68 Retired Dam Site Manager Yunnan Province10/07/01

69 Retired Dam Site Manager Yunnan Province 16/12/02


71 Front Office Manager Nothill 23/12/99

72 Sales Manager RDH 19/7/01

73 Australian Lecturer Kunming 20/12/04

74 Chinese Accountant Kunming 12/12/04

75 Chinese Accountant Kunming 18/12/04

76 Tertiary Student Kunming 7/12/04







337

82 Dam Construction Manager Mekong River (18/12/04)

83 Small Businessman Kunming 16/12/04

84 Small Businessman Dali 9/12/04

85 Food and Beverages Manager RDH 18/12/04

86 Businessman Beijing, 12/12/01

87 Small Businessman Kunming 22/12/04

88 Businessman Dali 12/12/02

89 General Manager RDH 12/12/04


338

Appendix 1

The mean rating for each of the eight respective characteristic was calculated on the scale of 1

to 5.

MR = n1X1 + n2X2 + n3X3 + n4X4 + n5X5

379

where

n1 = the number of respondents choosing option 1




n5 = the number of respondents choosing option 5, and

379 was the total number of valid responses received.


339

Appendix 2

Comparison of Mean Ratings of the importance of guanxi characteristics for sub-groups at

the Roaring Dragon Hotel, 1999.

Code:

MU-CO-OPERATION = MC

TRUST = T

SOCIAL ACTIVITIES + ENT = SAandE

EXCHANGE OF INFORMATION = X INFO

PERSONAL-RELATIONSHIP = PR

COMMITMENT = C

EXCHANGE OF BENEFITS = E BENE

GIVING FACE = GF

POPULATION NUMBER = N

AVERAGE NUMBER OF YEARS OF SERVICE = #Y SERV

AVERAGE AGE = AVE AGE

CRITERIA MC T SAandE EX

Info

PR C EX

BENE

GF N # Y

SERV

AVE

AGE

MALE 3.84 3.51 3.53

3.41 2.91 2.75 2.56 2.52 197 7.46 27.87

FEMALE 3.68 3.51 3.48 3.44 3.05 2.7 2.45 2.44 182 6.18 26.47

MANAGERS

4.22 3.67 3.61 3.83 2.94 2.56 2.56 2.33 18 15.58 37.61

SUPERVISORS

4.31 3.7 3.79 3.68 2.91 3 2.42 2.64 53 9.66 29.96

EMPLOYEES

3.78 3.47 3.45 3.35 2.99 2.69 2.52 2.47 308 5.85 26.12


340

Appendix 3

Standard deviations of the relative importance of guanxi characteristics recorded by employees of

at the Roaring Dragon Hotel (A) in south-west China compared to those of Hong Kong Trade

Executives (B).

Characteristic A B B/A - % difference

N 379 128

_______________________________________________________________________

Mutual Cooperation 0.89 0.96 107.9 %

Trust 1.14 2.00 175.4 %

Social activities and entertainment 0.95 1.82 191.2 %

Exchange of Information 0.97 2.01 207.2 %

Personal relationship 1.17 1.68 143.6 %

Commitment 0.97 1.78 183.5 %

Exc favours/benefits 1.24 2.01 162.1 %

Giving face (respect) 1.08 2.01 186.1%


341

Appendix 4

Table of Provincial Statistics comprising:

A - Provincial per Capita GDP as % of national average 1978. Source: Wang

and Hu (1999: Table 3.2, 49)

B - Provincial per Capita GDP as % of national average 1994. . Source: Wang

and Hu (1999: Table 3.2, 49)

C - Annual Growth Rate per real per capita GDP, 1878-94. . Source: Wang and

Hu (1999: Table 3.3, 52)

D - # Counties in Province 1992. Source: Wang and Hu (1999: Table 3.7, 66)

E - # Counties in defined as in Poverty 1992. Source: Wang and Hu (1999:

Table 3.7, 66)


342

Province A B C D E

Eastern Coastal

Beijing 334.5 306.6 7.7 8 0

Tianjin 306.1 253.9 7 5 0

Hebei, 87.6 94 8.4 139 39

Shanghai 659.1 594.6 7.6 6 0

Liaoning 178.6 157.1 7.4 44 9

Jiangsu 113.5 176 8.7 64 0

Guangdong 97.6 171.6 12.1 78 3

Shandong 83.4 114.1 10.4 95 10

Central Region

Shaanxi 77.6 74 7.1 100 35

Inner Mongolia 83.6 77.4 8.3 84 31

Jilin 100.5 101.2 8.3 41 5

Heilongjiang 148.8 103.9 5.9 68 11

Anhui. 64.4 64.4 8.3 68 17

Jiangxi, 72.8 77.7 8.7 84 18

Henan, 61.2 67.5 8.9 116 28

Hubei 87.6 98 8.8 68 25

Hunan 75.5 64.3 7.2 90 10

Western Region

Sichuan 66.8 70.5 8.6 172 43

Guizhou 46.2 42.6 7.7 80 48

Yunnan 59.4 58.1 8.1 123 73

Tibet 98.9 67.9 5.8 77 5

Shaanxi, 77.6 74 7.1 100 35

Gansu 91.8 76.1 7 75 41

Qinghai 112.9 68.8 5 39 14


343

Appendix 5

Table of statistics including

A - Savings rates of Labour Force in Provinces 1994. Source: Wang and Hu

(1999: Table 4.2, pg 87).

B: Investment rates of Labour Force in Provinces 1994. Source: Wang and Hu

(1999: Table 4.2, pg 87)

C Openness on Provinces, 1994. Exports as % of provincial GDP. Source:

Wang and Hu (1999: Table 4.6, pg 107)

D – Access to Information, 1994. Televisions sets per 100 rural households.


E - Access to Information, 1994. Newspapers sold in 1994 (copies per person).


F - Access to Information, 1994. Telephones per 100 persons. Source: Wang

and Hu (1999: Table 4.7, pg 115)

G – Education. Source: Wang and Hu (1999: Table 4.9, pg 120) Source: Wang

and Hu (1999: Table 4.7, pg 115)

H – Education. Source: Wang and Hu (1999: Table 4.9, pg 120) Source: Wang

and Hu (1999: Table 4.7, pg 115)


344

Province A B C D E F G H

Eastern Coastal

Beijing 63.4 83.3 30.6 117.2 110.32 9.4 6.38 8.71

Tianjin 55.4 59.4 35.92 115.34 31.94 6.3 7.17 7.67

Hebei, 52.5 41.2 7.61 95.19 17.73 1.73 9.41 6.18

Shanghai 55.7 58.4 43.4 117.34 79.68 12.18 7 8.38

Liaoning 50.1 42.7 17.2 99.16 16.78 3.88 7.31 7.09

Jiangsu 57.6 49.8 14.77 89.67 25.23 3.2 11.31 6.62

Guangdong 48.5 46.7 108.19 81.13 21.56 6.63 7.81 6.5

Shandong 53.8 48.7 14.47 85.47 13.1 1.51 13.3 6.19

Central Region

Shaanxi 30.4 48.1 11.03 67.57 16.16 1.27 13 6.13

Inner Mongolia 40.3 48.6 6.07 79.29 17.53 1.99 12.26 6.4

Jilin 40.4 40.2 14.73 91.44 15.84 3.46 7.11 7.2

Heilongjiang 37 35 15.4 88.10 14.57 2.99 8.25 6.95

Anhui. 40.7 40.2 5.59 78.04 12.31 1.4 41.09 5.5

Jiangxi, 39.6 41 5.45 73.8 13.84 1.14 12.75 5.66

Henan, 47 40.2 4.26 65.19 11.35 0.99 11.36 6.11

Hubei 4.37 39.8 6.9 77.67 19.52 1.76 12 6

Hunan 34.3 34.3 6.38 61.51 19.23 1.69 11.02 6.17

Western Region

Sichuan 38.8 38.3 4.72 68.04 10.7 0.92 12.81 5.78

Guizhou 25.4 29.7 4.46 33.8 10.6 0.56 20.36 4.96

Yunnan 41.4 44.5 7.8 49.91 15.75 1.19 21.03 4.79

Tibet 28.6 50.3 3.57 7.29 13.55 0.87 40 2.21

Shaanxi, 30.4 48.1 8.36 67.57 16.16 1.27 13 6.13

Gansu 29.3 39.3 5.97 60.26 15.03 1.26 24.28 4.86

Qinghai 33.3 43.5 7.16 50.67 14.63 1.24 26.95 4.63


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Average Annual Pay of State Enterprise Employees in 29 Chinese Provinces,

1993 (in Yuan ) Province 1993 Annual Pay

Shanghai

Guangdong

5777

5422

Beijing

Zhejiang

Tianjing

Tibet

Qinghai

4648

4615

4264

4156

4065

Jiangsu

Gansu

Liaoning

Fujian

Guangxi

Shangdong

Hunan

Xingjiang

Hebei

Ningxia

Shanxi

Yunnan

Sichuan

Hubei

Shanxi

Anhui

3892

3620

3590

3501

3432

3410

3324

3286

3272

3264

3253

3253

3143

3140

3077

3076

Neimenggu

Jilin

Guizhou

Heilongjjang

Henan

Jiangxi

2998

2971

2962

2867

2760

2659

Source: State Statistical Bureau of China (1994): Statistical Yearbook of China, Beijing: State Statistical Bureau Press.

Cited in Yang. D. T. (1997).


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Glossary

Terminology

The Chinese terminology developed to describe guanxi relationships gives one

a better understanding of the guanxi phenomenon.

To la guanxi (to ‘pull guanxi’) means to get on the good side of someone, to

store political capital with them. It carries no negative overtones (Ambler,

1995b; Luo, 1997a) and from a business perspective is a method of developing

the right climate in preparation to work together.

Guanxiwang (guanxi net) means the whole network of guanxi through which

influence is spread’ (Ambler, 1995b; Luo, 1997a). In China, these networks are

complex webs of trusting relationships.

guanxi hu (guanxi family) means a person, organisation, even government

department, occupying a focal point in one’s guanxi network (Davies, Leung,

Luk, and Wong, 1995; Ambler, 1995b; Park and Luo, 2001; Luo and Chen,

1996; Luo 1997a). It is critical to maintain a good relationship with these

people if one is to enjoy successful business in China.


347

guanxi xue describes the art of establishing and maintaining guanxi (Yeung and

Tung, 1996). To gua guanxi (to ‘work on guanxi’) means roughly the same

definition with more general, less intensive feeling. It usually carries negative

overtones (Ambler, 1995b; Lou, 1997a).

Meiyou guanxi (without guanxi) has become an idiom meaning it doesn’t

matter (Ambler, 1995b).

Guanxi gao jiang (guanxi made ruined) means the relationship has gone bad,

usually because of lack of flexibility of those involved (Ambler, 1995b; Luo,

1997a).

Li shun guanxi (‘straighten out’ guanxi) means to put a guanxi back into proper

or normal order, often after a period of difficulty or awkwardness (Ambler,

1995b; Luo, 1997a).

You guanxi (to have) means to have a relationship or to have access to needed

influence (Ambler, 1995b)

Youde shi guanxi (what one does have’ or ‘the one thing one does have’ is


348

guanxi) is sometimes negative, meaning that one has all the guanxi one needs,

but something essential is lacking (Ambler, 1995b).

Shouren or familiar persons in one’s network are insiders who can be relied

upon to get something accomplished (Brunner, Chen, Sun, Zhou, 1989: 75).

Shouren is neither a chia-jen (member of the family) nor a sheng-jen (mere

acquaintance or stranger) but is someone with whom one has a friendship that

may range from superficial to extremely intimate. The relationship with the

shouren (friend) therefore, is a mixture of that with chia-jen and shen-jen and

takes both utilitarian and expressive forms.

Ho-tai means backstage - together with guanxi it refers to individuals, one’s

power base, and the important people who support ones position. The more one

can use influential relationships and big names to support the cause, the easier

one’s path will be (Chu, 1988). Some described Ho-tai as being ‘dependable’

and signifies a depth of commitment. In its extreme, yiqi, signifies a code of

brotherhood or strong personal loyalty and deep sense of personal commitment

(Brunner, Chen, Sun, Zhou, 1989)

Documents

Organisational Guanxi and State Owned Enterprises in South … · Organisational Guanxi and State Owned Enterprises in South-west China by Stephen John Grainger. Declaration I hereby