governance & the international firm 325325 unimelb 1 governance & international firm week 8:...

Governance & the International Firm 325325 UniMelb

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Governance & Governance & International FirmInternational Firm

Week 8:Week 8: Networks and Networks and PatronagePatronage


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Learning Objectives Learning Objectives

What is guanxi and networking (Social What is guanxi and networking (Social Capital)?Capital)?

What makes guanxi to have a bad What makes guanxi to have a bad reputation in business?reputation in business?

The difference between network and The difference between network and nepotism/patronage/clientelismnepotism/patronage/clientelism


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NetworksNetworks

Network or bonding refer to a Network or bonding refer to a natural natural human tendencyhuman tendency to relate to one another to relate to one another

‘‘Bamboo’ networks or social ties are used Bamboo’ networks or social ties are used to to speed upspeed up or to or to facilitatefacilitate (local and (local and cross-border) cross-border) commercial transactions or commercial transactions or investmentsinvestments

Confucian Confucian dutiesduties versus HOBBES’ versus HOBBES’ rightsrights Networks and relationships are Networks and relationships are a way to a way to

survive in (traditional) communitiessurvive in (traditional) communities


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Networks & NepotismNetworks & Nepotism

GiftsGifts – i.e. – i.e. open, disclosed and non secret open, disclosed and non secret ‘presents’‘presents’ - can be distinguished from - can be distinguished from bribes bribes which are almost always which are almost always secret and secret and manipulativemanipulative

Gifts, while ‘interested’, must appear not to Gifts, while ‘interested’, must appear not to be so if they are to have the intended effectbe so if they are to have the intended effect

The use of gifts could and would lead to The use of gifts could and would lead to personal (or corporate) advantages: this is personal (or corporate) advantages: this is socially and morally accepted as long as it is socially and morally accepted as long as it is contained within (social and moral) contained within (social and moral) boundaries boundaries


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GuanxiGuanxi practices imply gifts as an expression of practices imply gifts as an expression of respect for the other, bound by specific public respect for the other, bound by specific public rituals [rituals [li li - Mandarin- Mandarin] or ] or socially proper conductsocially proper conduct

Gifts in guanxi relationships nurture relationships, Gifts in guanxi relationships nurture relationships, and strengthen trust, and strengthen trust, commitment and reciprocitycommitment and reciprocity

Similarly, Similarly, nepotism nepotism misuses the relationships of misuses the relationships of appropriate networks between parties for appropriate networks between parties for private private instrumental gaininstrumental gain..

Ethical guanxi networksEthical guanxi networks can be distinguished can be distinguished from from unethical manipulative nepotistic unethical manipulative nepotistic guanxiguanxi relationships relationships


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Expressive tiesExpressive ties (family/kin) are different from (family/kin) are different from Instrumental tiesInstrumental ties. However, in both cases, the . However, in both cases, the family/kin relationship predominates as the family/kin relationship predominates as the primary focus and the (gift) exchanges, useful primary focus and the (gift) exchanges, useful though they may be, are treated as secondarythough they may be, are treated as secondary

One needs to treat the other person with One needs to treat the other person with (moral) feelings and relate those human (moral) feelings and relate those human sentiments of empathy – [sentiments of empathy – [renqingrenqing] – which ] – which create moral obligations and possibly emotional create moral obligations and possibly emotional attachmentsattachments

Guanxi practices can be described as lobbying Guanxi practices can be described as lobbying and network & relationship building // and network & relationship building // [[arisanarisan//Malay-Indonesia]Malay-Indonesia]


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The informal network of guanxi may be seen as The informal network of guanxi may be seen as a a substitute for the rule of lawsubstitute for the rule of law (since in those (since in those countries the rule of law was weak or poorly countries the rule of law was weak or poorly enforced).enforced).

Lee Kuan Yew (Singapore): the Chinese use of Lee Kuan Yew (Singapore): the Chinese use of guanxi is “to make up for the lack of the rule of guanxi is “to make up for the lack of the rule of law and transparency in rules and regulations”.law and transparency in rules and regulations”.

Guanxi navigates opaque bureaucracies; it Guanxi navigates opaque bureaucracies; it copes with the absence of a rule of law; it copes with the absence of a rule of law; it accesses reliable information, resources and accesses reliable information, resources and infrastructure, and it recruits trustworthy, i.e. infrastructure, and it recruits trustworthy, i.e. well connected, employees.well connected, employees.


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A guanxi practice is ethical only if it causes no A guanxi practice is ethical only if it causes no harm to a 3harm to a 3rdrd party or to society as a whole. party or to society as a whole.

CONFUCIUS: one should put moral concerns CONFUCIUS: one should put moral concerns before the pursuit of business interests. before the pursuit of business interests.

Confucian emphasis on [Confucian emphasis on [wahwah] - social harmony] - social harmony Nepotistic guanxiNepotistic guanxi: a process of commodification : a process of commodification

enters the relationshipenters the relationship

bad connotationbad connotation


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The “darker side of Social The “darker side of Social Capital” = NepotismCapital” = Nepotism

Social CapitalSocial Capital = the social and economic = the social and economic importance of building relationshipsimportance of building relationships

Social Capital as any relationship implies Social Capital as any relationship implies obligations of reciprocity obligations of reciprocity [[baobao]]

Social Capital = guanxi aiming at amassing Social Capital = guanxi aiming at amassing symbolic capital (={symbolic capital (={faceface} or } or reputationreputation in Asian in Asian culture) which can be turned into economic profitculture) which can be turned into economic profit

In Nepotistic guanxi relationships, the In Nepotistic guanxi relationships, the exchange exchange valuevalue becomes more important than the becomes more important than the use use valuevalue (Karl MARX). (Karl MARX).


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The importance of Social and The importance of Social and Political CapitalPolitical Capital

Social CapitalSocial Capital is important to establish is important to establish relationships between the organization you relationships between the organization you work in and other individuals or organizationswork in and other individuals or organizations

Political Capital is the goodwill you have earned Political Capital is the goodwill you have earned as a manager within your organization as a manager within your organization

A good leader will use their social and political A good leader will use their social and political capital very carefully as an investment with the capital very carefully as an investment with the aim to maximize the return, taking into account aim to maximize the return, taking into account all those who may be affected (i.e. # all those who may be affected (i.e. # stakeholders) and don’t try to be a hero. stakeholders) and don’t try to be a hero.


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The “darker side of Social The “darker side of Social Capital” = NepotismCapital” = Nepotism

[liwu] [liwu] = gift= gift– WuWu = the ritual gift = the ritual gift– LiLi = appropriate behavior based on = appropriate behavior based on

reciprocity in social intercourse. reciprocity in social intercourse. – CONFUCIUS emphasizes ritual propriety [li] CONFUCIUS emphasizes ritual propriety [li]

which dictates to an individual how to behave which dictates to an individual how to behave towards his/her father, family, friends, towards his/her father, family, friends, superior and others in society. The focus is superior and others in society. The focus is not on the individual but on society.not on the individual but on society.

A A wuwu without without li li is merely a thing or item, is merely a thing or item, not a giftnot a gift..


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Demarcation criteriaDemarcation criteria

5 main demarcation criteria which 5 main demarcation criteria which distinguish ‘legitimate’ networks from distinguish ‘legitimate’ networks from ‘inappropriate’ nepotistic corruption:‘inappropriate’ nepotistic corruption:– Embeddedness in normsEmbeddedness in norms– Time horizonTime horizon– The nature of the relationshipThe nature of the relationship– Cultural legitimacyCultural legitimacy– TransferabilityTransferability


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Guanxi relevance for businessGuanxi relevance for business

Guanxi can be interpreted as an Guanxi can be interpreted as an entry entry barrierbarrier that can sustain that can sustain competitive competitive advantageadvantage for those who have a ‘ for those who have a ‘good good faceface’, a good ’, a good reputationreputation (= (= symbolic symbolic capitalcapital) or have strong relationships in ) or have strong relationships in the business communitythe business community

Guanxi // Trust, Guanxi // Trust, Relationship Relationship MarketingMarketing based on Reputation building, based on Reputation building, Virtual MarketingVirtual Marketing (DELL computers), (DELL computers), enduring long-term relationshipenduring long-term relationship

The danger of non-meritThe danger of non-merit


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Guanxi relevance for businessGuanxi relevance for business

Despite its perceived importance, a Despite its perceived importance, a recent survey indicated that business recent survey indicated that business people in China (both local and people in China (both local and international) named branding, quality international) named branding, quality and distribution channels rather than and distribution channels rather than guanxi as the most important factors in guanxi as the most important factors in achieving marketing or financial goals achieving marketing or financial goals


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Guanxi in the future?Guanxi in the future?

Despite its dominant importance in Despite its dominant importance in Chinese networks, there are Chinese networks, there are two thoughtstwo thoughts on the future of guanxi:on the future of guanxi:– Some believe that the Some believe that the role of guanxi may role of guanxi may

slowly decline in the face of international slowly decline in the face of international market forcesmarket forces and one will need to be able to and one will need to be able to compete on a level playing field based on compete on a level playing field based on arm’s length transactionsarm’s length transactions

– Others believe that despite enormous Others believe that despite enormous economic advances, guanxi will economic advances, guanxi will remain remain entrenched in the Confucian cultureentrenched in the Confucian culture and will and will continue to influence business practices continue to influence business practices


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Decision-Making ProcessDecision-Making Process

Decision-making processes mainly embedded within the Western contractualist approachWestern contractualist approach where absolute individual autonomy is a basic premiseversus

““Connectedness” of Confucian and Asian Connectedness” of Confucian and Asian individualsindividuals within their respective societies.

Emphasis on virtuous personal qualities by CONFUCIUS (//ARISTOTLE) required in performing roles; obligations are particularistic and relation & role-based


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Confucian Confucian Decision-Making ProcessDecision-Making Process

Particularistic ties based on the 5 cardinal Confucian virtues:– Benevolence [ren]– Filial conduct [xiao]– Trustworthiness [xin]– Loyalty [zhong]– Righteousness [yi]Applied in interactions with particular others in a highly

defined hierarchical social order Discovery of the self is largely built around a

network of roles and relationships. There is no self outside the others.


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The 4 Cardinal virtues (Aristotle) The 4 Cardinal virtues (Aristotle)

cfcf. The 5 major virtues . The 5 major virtues (Confucius)(Confucius)

Justice Justice Courage (Fortitude)Courage (Fortitude) Temperance (moderation – the ‘golden’ Temperance (moderation – the ‘golden’

mean) mean) (Propriety)(Propriety) Prudence Prudence (Wisdom)(Wisdom)

// // Collectivist Confucian valueCollectivist Confucian value

(Righteousness)(Righteousness)


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Confucian Confucian Decision-Making ProcessDecision-Making Process

Confucian particularistic guanxi relationships need to be distinguished from Western interpersonal relationships.

Both are based on human compassion though


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Confucian Decision-Making Process? Confucian Decision-Making Process? Still in Hong Kong and ChinaStill in Hong Kong and China

Guanxi relationships are considered important for business and stability in HK and China

Distinction between [quanli guanxi] or corrupted bureaucratic form of rent-seeking officials and [qinyou guanxi] or traditional long lasting webs of allegiance, serving to unite and strengthen the powerless


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Confucian Decision-Making Process? Confucian Decision-Making Process? Still in Hong Kong and ChinaStill in Hong Kong and China

Guanxi and its gift practices are still important in China.

However, because of the influx of foreign companies and the return of Chinese educated abroad, business practices have been improved in the last 10-15 years

Guanxi is losing some of its influence because of dynamic work force who moves from one place to another;

Governmental transparency and accountability have increased so the importance of guanxi with public officials may slowly fade


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Why is guanxi important in business?Why is guanxi important in business?

Mitigating external political and Mitigating external political and socioeconomic risksocioeconomic risk

Navigating opaque bureaucraciesNavigating opaque bureaucracies Coping with the absence of Rule of LawCoping with the absence of Rule of Law Accessing reliable information, resources Accessing reliable information, resources

and infrastructureand infrastructure Recruiting trustworthy employeesRecruiting trustworthy employees


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Business Integrity in ChinaBusiness Integrity in China

Successful measures include: Top management demonstrating commitment

to discover, prevent and combat corruption Establish clear rules with clear sanctions Providing continuous training


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US Anticorruption lawsUS Anticorruption laws

Foreign Corrupt Practices Act - FCPAForeign Corrupt Practices Act - FCPA (1977)– Forbids any US person to bribe any foreign official– Facilitating or expediting payments are allowed as

long as they are bona fide and directly related

Sarbanes-Oxley Act – SOXSarbanes-Oxley Act – SOX (2002)– rushed through Congress in June 2002 in response

to collapse of Enron (December 2001)– rules based, very prescriptive

governance & the international firm 325325 unimelb 1 governance & international firm week 8:...

Documents

networks n network

n ethical guanxi networks

n bamboo networks

networks nepotism n

reciprocity n

secondary n

manipulative n gifts

hobbes rights n networks