Long-Term Orientation in Chinese Business Markets - Literature review Example

? Literature Review Article: Guanxi, Trust, and Long-Term Orientation in Chinese Business Markets ‘Guanxi’ is a Chinese word that means “to overcome the hurdle; to get connected.” In the business world, guanxi describes interpersonal relationships between two transacting parties that include even social connections. Its importance in China is immense whether it is politics or commerce. Lee and Dawes (2005) explore why guanxi is so important for business firms in China and how buyer firm’s trust on salesperson of the selling firm can play a pivotal role in business transactions. Although much has been mentioned about guanxi in the last two decades yet no one has attempted to measure guanxi in its several dimensions to understand its real impact on business transactions. The authors have tried to fulfill, perhaps for the first time, this gap through their systematised research effort. According to the authors, guanxi behaviour consists of three elements: affect (emotions), reciprocal favour, face preserving. In Chinese culture, trust is an outcome of guanxi behaviour. The authors emphasise that in China, affection and business go together unlike the UK or USA. Affect denotes human feelings or emotional commitments that are central to intimate social bonding in several kinds of relationships such as between teachers and students, parents and children, or between close friends. In Chinese culture, the reciprocal favour stems from certain social behaviour evoking emotional responses and feeling by one of the group member to another. As such, reciprocity is a universal behaviour that can be traced even to animal kingdom. Similarly, the importance of face preserving for any Chinese in personal and professional life is tremendous. Face preserving behaviour plays a crucial role in constructing interpersonal relationships. It is important to note that in the Chinese culture, any disloyal person in the group is a faceless person. Society associates a great value when members of the group go to any extent to honour their obligations. Thus, it can be said that guanxi is a fulcrum of most activities in China that fall into the purview of political, economic and social order. However, to gain more clarity, researchers interviewed over a dozen sales managers in China and Hong Kong to find out how they view guanxi in the business world. As replied by the sales managers, guanxi is the first step of a salesperson to establish his or her intention to do the business; however, guanxi behaviour takes considerable time to develop to the point where unfamiliarity with the buyer ceases to exist. According to the sales managers interviewed, most Chinese firms respect guanxi style of relationships while doing any business transactions. That means the higher the salesperson interacts with a buyer, the greater the trust the buyer reposes in the salesperson. Surprisingly, business transactions are done on the basis of trust at personal level rather than at the organisational level. That is why many transactions with overseas firms are done on the basis of personal contacts. People are more loyal to their superiors rather than their organisation. A buying firm's trust on the salesperson is due to his or her expertise on the subject and ability to deliver. Similarly, the higher the status or position of the salesperson, the higher the trust the buying firm will repose on the selling firm. This is so because higher status of the salesperson signifies greater control on the firm's resources to fulfil agreed obligations. The researchers formulated various hypotheses to understand how a buying firm develops trust on the seller firm including the factors such as salesperson expertise and his or her status responsible for generating this trust. In the process to measure all the three elements of guanxi as mentioned above, the authors served the questionnaire to 250 respondents; however, only 51.2% respondents returned the questionnaire. Those who responded were in their current positions for last 4 years and in relationship with the seller organisation for at least last 2.9 years. The authors used the partial least square (PLS) model to complete the measurement assessment for the elements responsible for guanxi. The finding of the researchers is summarised in the following paragraphs. The authors discover that reciprocal favour and face do not have significant influence on developing salesperson trust; however, affect does generate strong salesperson trust. It is important to note that affect is the expressive or emotional part of guanxi. Much of the literatures too endorse these findings. The three-factor (face, affect and reciprocal favour) analysis indicates that all loadings are above .7 meaning all are statistically significant (Table 2). Furthermore, it is also discovered that the three dimensions of guanxi – face-favour, face-affect, and favour-affect are highly correlated (Table 4). The study also reveals that salesperson expertise scores above status in earning the buyer firm's trust. This matches with findings of the other scholars that salesperson expertise is a necessary condition for winning buyer firm's trust. The finding is significant, especially in the field of industrial marketing where numerous buying-selling transactions take place through personal interactions. The finding establishes that developing a personal relationship is extremely crucial for doing business in China. Not only this but also several business related activities such as government approval, channel management, logistics, and people management can be accomplished successfully through guanxi knowledge. The study is unique because it attempts to measure the guanxi relationship between a buying and selling firm and its influences on business outcomes. Salesperson trust is crucial from perspective of the selling firm because that eventually transforms into organisational level trust between two transacting firms. Salesperson’s increasing interaction with a buying firm such as furnishing more business-related information and expertise enhances the buying firm's trust on the salesperson; however, that interaction should be restricted to only business aspects rather than extending it to social aspects. The findings also reveal that though reciprocal favour is an established practice in Chinese culture yet the salesperson should not resort to reciprocity because that may unnecessarily create a situation where the buyer firm's management becomes suspicious towards its own personnel. The authors’ findings lead to some important implications for selling firms. For example, a buyer firm's decision to interact with the seller firm will largely depend upon the trust that salesperson of the selling firm has been able to generate. Additionally, the degree to which the salesperson has been able to transform his or her trust at the organisational level is equally crucial because at the end that becomes a deciding factor for the buying firm to take a long-term buying decision in favour of the selling firm. There is no doubt that guanxi is the most widely discussed phenomenon that lies at the centre of China's business and social order. The study clearly shows that personal relationships nurture trust that, in turn, leads to successful business transactions in China. This understanding will certainly help all those companies who want to enter into China for marketing their goods and services. Article: A Case Study on Chinalco and Rio Tinto Over the last few years, China’s large state-owned enterprises (SOEs) appear to be fairly aggressive in acquiring foreign assets that cannot be explained by existing international business or investment theories. During 2008, Chinalco, the Chinese SOE, made extensive efforts to control Australian miner Rio Tento though it is a different matter that efforts did not fructify. Much of the western media and experts call Chinalco bid a big Chinese debacle; however, the authors do not agree with them fully. As per the theoretical propositions offered by the authors, the Chinalco takeover bid needs to be seen as the part of an ambitious national power-building globalisation strategy spearheaded by the State. The authors argue that despite the failed bid of Chinalco, China will continue to make forceful and tactical efforts to garner foreign assets in the years ahead. China is flush with foreign-exchange funds and the on-going global financial crisis provides ample opportunities to SOEs for raising their stakes in the areas of strategic importance. These acquisition sprees will have backing of China’s state-owned banks in terms of soft credits that cannot be availed by their rivals in the western world. In the current economic order, mergers and acquisitions are reality to retaining and increasing global market share. Such mergers and acquisitions develop synergy in operations, increase operational efficiency, and reduce overall cost. For most transnational companies, mergers and acquisitions are the proven ways to gain competitive advantage in the marketplace and fulfill their corporate objectives including profit maximisation. China's large SOEs have joined this bandwagon because the Chinese leadership wants to see China as the formidable economic power in the international arena. The authors argue that the Chinalco bid must be seen in the above perspective. Between 1995 and 2006, the metals and mining industries have witnessed 17 mergers globally. The estimated value of takeovers in mining business across the world has been $199 billion in just first five months of 2008. The largest consolidation across the world has taken place in the field of copper and iron ore – the area of operations that is most crucial to China for acquiring leadership position across the world. Chinalco invested in Rio Tinto in February 2008 when metal markets were booming but with the advent of financial crisis soon thereafter, its investment in Rio Tinto got eroded by almost 70 percent; nevertheless, Chinalco did not relent but decided to invest additional $19.5 billion in Rio Tinto. Foreign direct investment is considered beneficial for host and investing economies. Host economies are benefitted from new technologies and management skills apart from gaining access to international markets. At the same time, investing economies are benefitted through market penetration, local cheap resources in terms of skilled and unskilled labourers and the scale of economies. Moreover, most economists agree that FDI flows tend to increase GDP of the host country. Between 1978 and 2004, FDI flows in China have been responsible for over 33 percent of the total economic growth. Rising FDI flows also tend to decrease income disparity among the nations too. However, the fact remains that many of the Chinese corporations that appear large at the national level are far short in terms of management skills, technology, marketing and human resources in comparison to several transnational companies in the western world. Existing international business theories argue that firms and countries having advantage in technology, brand equity, management skills tend to invest in host country. The objectives are profit maximisation and improving international competitiveness. Surprisingly, Chinalco does not seem to have any discerning strength justifying huge investment in Rio Tinto and that is the most puzzling question for international business theorists. The authors have put forward their own prepositions on Chinalco’s Rio Tinto bid and the same can be elaborated in the ensuing paragraphs. Large Chinese corporations involved into OFDI are supposed to fulfill two important objectives: national security and world-power building. Authors specify two utility functions that serve the purpose: State utility function (Us) and the company utility function (Up). State function is essentially aimed at gaining power in the world economy (WP) that, in turn, will increase the national security (NS). The company function will primarily increase the profit of the company (?) and global market share (MS). In mathematical terms, both the utility functions are: Us = f (WP, NS) Up = f (?, MS) Assuming, ? and ?Up/?OFDI are the marginal returns per unit of investment in the domestic and the overseas market respectively then state support is needed when, (?Up/?OFDI) < µ Taking this argument further, the authors argue that the Chianlco's intended second investment in Rio Tinto to the tune of $19.5 billion is a matter of scrutiny. If the state proposes to finance this additional sum of $19.5 billion at 3% interest to Chinalco then it amounts to providing subsidy of $585 million per annum. This is in addition to the guarantee furnished by State for sum of $19.5 billion extended to Chinalco. The authors assert that the benefits to the State are difficult to quantify in this bid; however, due to the fact that the state-owned banks have extended this loan, total benefit to the State has to be greater than the quantum of implied subsidies. The moot question is that what are those benefits? The authors argue that with the strategic control on Rio Tinto, China will be able to import iron ore at much competitive price. China imported iron ore worth $60 billion in 2008. Even if China gets price benefit of just one percent, it is likely to save them $600 million a year and this saving justifies the interest subsidy of $585 million. Finally, the authors conclude that China is ready to forfeit some short-term benefits or suffer certain losses in a bid to garner international respect and enhance its global market share. The authors are of the view that the state-owned Chinese banks will continue to support more overseas acquisitions because China's major goal is to convert its burgeoning foreign exchange reserves into hard assets. The key objective is to secure national interest by controlling the natural resources such as oil, ore and other minerals of strategic importance. The authors strongly maintain that Chinese SOEs will continue to get support from State and the state-owned banks in the years ahead so as to establish China as a formidable economic power globally. References Lee, D. Y., and Dawes, P. L. (2005). “Guanxi, Trust, and Long-Term Orientation in Chinese Business Markets”. Journal of International Marketing, 13 (2), 28-56. Yao, S., Sutherland, D., and Chen, J. (2010). “A Case Study on Chinalco and Rio Tinto”. Asia-Pacific Journal of Accounting & Economics, 17, 313–326. Read More