The Role of Social Networks In China's Economic Development - Coursework Example

Introduction One might have heard a word guanxi1 frequently stuffed by many Chinese experts or “old Chinese hands”. Guanxi, literally implies “relationships”, means any sort of relation or association with others. In China, however, it is also known as the set-up of interactions among various parties that help and assist each other. The Chinese entrepreneurs’ mind-set is greatly one of “You scratch my back, and then I’ll scratch in return”. In effect, this boils down to swapping special treatments, which are likely to be made over and over again in a society. When China first began its economic reforms in the late seventies, since there was no market-driven approach to direct the economic flows, and since most transactional bodies were nationalized, business was principally started by the Guanxi system. No matter which business practices in motherland, in China it is exactly Guanxi that makes all the differentiation in guaranteeing that business will be prosperous. By having this choice Guanxi, the organization lessens the possibilities of risks, dissatisfactions, and distresses while conducting business in China. Often it is getting the Guanxi system with the related establishment that will resolve the cutthroat repute of a business or company in due course in China. And what is more, the predictable risks, hurdles, and complexions one meet in China will be reduced when the Guanxi set-up functions well. Thus the right Guanxi is so imperative to any flourishing ‘business strategy’ in China. This paper is presented to explain the concept of guanxi as a means of economical development of China. Business Strategies (Guanxi-based) Although rising and cherishing, the guanxi in China is very demanding in a timely manner and capital, the time and money needed to set up a powerful set-up is well worth the investment. What one’s business could have in response from the supports of his/her allies are often more much more helpful, particularly in due course, and when one is in need of it. Even household businesses in China institute widely set-ups with their retailers, sellers, suppliers, banks, and local administrators. It’s very general for persons of a firm to visit the houses of their associates and allies from other firms, and give presents or gifts like wine, cigarettes, etc. While these practices may look like meddling, as one use extra time studying the Chinese society and culture, it will be self-explanatory and participate in these practices that is so essential to booming Chinese marketable activity (Gallego and VanRyzin, 1994, pg. 999). Since China began its economic reform, and opened the gate towards the outsider world in 1979, guanxi role has become even more crucial. Today, ‘guanxi hu’ is a daily word used when speaking of business firms that keep extensive guanxi with each other and give each other private treatment. The eventual realization of guanxi potential relies on the application and process of several business patches in which guanxi is implanted. In strategic management, various business strategy variables are observed to impact firm performance. The most generally analyzed business policy variables include business size (Hall & Weiss, 1967, pg. 319-331), pricing (Gallego and VanRyzin, 1994, pg. 999-1020), advertising (Chauvin and Hirschey, 1993, pg. 128-140), and R&D intensity (Hoskinsson and Johnson, 1984, pg. 1207). Among these variables, though, business size and R&D intensity are judged not regarding guanxi, because they signify the business economy of scale or product differentiation and do no hinge on assistance from other groups (guanzi hu) or people outside the business. In a similar stratum, advertising and pricing are also not possible to be firmly and considerably linked with guanxi, since the result of these two variables is mainly resolved by the organization’s own policies. In contrast, Chinese management studies have examined that ‘sales force marketing’ and ‘credit liberalization’ are significant handy business determinants (Luo and Chen, 1996, pg. 293-316). A main reason for the significance of sales force marketing and credit liberalization to the firm’s presentation exists in the latent association between these two variables and guainxi. Sales force marketing, an activity heavily reliant on guainxi and typically hinging on associated organizations (guanxi hu), has become an ever more trendy and successful marketing means. With the record economic development and the renovation which is happening in lots of Chinese societies – most apparently on the mainland China – guanxi is under rising pressure to adjust and get used to it. Progressively, Chinese will have to settle their guanxi systems with the inevitable dictates of market wisdom (Chen, 1994, pg. 40-43). As well, Chinese management often attracts ideas from West and Japan’s management perception and attitudes. This inclusion has been predominantly apparent since 1979. Economic Reform Since China’s economic reform started in 1979, they began to establish the private businesses, and the rate of development of the private sector is beyond belief. By 1992 there were 153 million individual or private firms, and 139,000 larger, limited liability private enterprises (Li, 1993; Jiang & Lu, 1997). So the Chinese government established private businesses as an intimate to the strength of the Chinese economy (Chow et al., 1996, pg.11). It became the strategy of administration to promote private business ventures. Laws regulating individual or private business ventures were introduced and in general forced to the Chinese government. Local authorities assigned Economic Zones, and even ‘Communist Party’ cadres were given confidence to “dive into the sea”. Flynn and Xu (2002) have argued that the growth of the private business ventures has occurred in the ‘Peoples Republic of China’ (China or PRC) since 1949 in small incremental phases. Particularly, since 1949, there have been many intentional and unintentional government polices that have faced small private enterprise survival. But, from 1979 so far, a new acceptance by the Politburo has also introduced the renaissance of the individual and private business areas (Flynn, 1996). Ever more, as government strategy grows to be more evident, the manufacturer in China is viewed less-tolerated economic player and more serious dynamic strength for money-making growth of China. The private businesses have experienced a complex history trying to exist in China’s economy. For instance, from 1954 to 1979 private businesses survived only as a small part of the rural community structure. During this period, private firms were considered short-term or provisional. Moreover they would stop to exist in the remote [near] future because they were “odd to the primary stage of socialism” (Yu, 1988, p.79).  Prior to 1979, although state firms in a foreign country had no basis as legal bodies until the course of the Laws of Joint Ventures (1979) and State Enterprises (1988) (Kirby, 1995, pg 43-63). The first explicit strategy to know the guanxi-based sector was established by the ‘Third Plenary Session’ of the ‘Eleventh Central Committee of the Chinese Communist Party’ in 1979 that eliminated many of the limitations on private companies. However, although private enterprises got "legal" justification, they still met with extensive inequity and unjust treatment. The less than legal position of private network is one of the major reasons justifying the complexities and inequity met by businessmen in the institutional setting (Tsang, 1996, pg. 21-30). In particular, the ‘Second Plenum’ of the Ninth National Congress revised the constitution highlighting: “guanxi-based business and any non-nationalized venture shape significant elements of the Marxist-Leninist marketplace economy” (IMC, 1999, p.53). Now, the regulation will offer this sector political and personal standing that lets them to purchase property, and request loans, and protect their land rights (Rosenthal, 1999a, p. A9). Table 1: Urban guanxi-based enterprises' share of employment in main sectors of Chinese economy, 1978, 1980, and 1985-99 (see table below): Wholesale and retail Banking Year Manufacturing trade and and Social catering insurance services Services 1978 21.5% 15.1% 30.3% 33.0% 1980 22.8% 17.2% 26.3% 31.9% 1985 21.7% 31.1% 23.9% 21.7% 1986 21.0% 29.8% 24.3% 19.5% 1987 20.6% 28.0% 24.1% 18.6% 1988 20.2% 26.9% 23.2% 17.6% 1989 20.5% 27.0% 23.9% 17.1% 1990 20.6% 26.8% 23.4% 15.7% 1991 20.2% 26.2% 23.1% 16.2% 1992 19.2% 24.8% 23.0% 14.9% 1993 17.2% 21.5% 20.4% 18.6% 1994 15.8% 18.3% 23.5% 16.3% 1995 14.5% 16.2% 24.3% 13.4% 1996 13.8% 14.8% 25.0% 11.5% 1997 12.9% 13.3% 24.4% 10.7% 1998 8.9% 8.9% 22.6% 7.8% 1999 7.7% 7.3% 21.3% 7.0% (Statistical annual report of China, 2000) Nevertheless, under limitations of continuing obedience to ‘socialism’, the guanxi-based enterprise is separated against, and frequently experienced extortion and blackmail. With parties by any means still having managerial authorities, it will get to be time-consuming to attain market-based cost-cutting measures (IMC, 1999, p.53). However, according to some it gives a good base for such amendment and presents a little assertion for those “carrying out their guanxi-based ventures in a Collectivist State” (Rosenthal, 1999).   Regarding guanxi-based businesses, there are two major types: ‘getihu2’ and ‘private enterprises that is defined as profitable entity3’. In accordance with the set of laws, a getihu is permitted to employ simply one or two supporters and several trainees. They should not go above seven. Though, in commercial economic body that employs no less than eight personnel with its property-owned by private folks (Tsang, 1996, pg. 21-30).   Most outstanding and an evenly imperative change has been the materialization of an exciting domestic guanxi-based sector. Accordingly, China has moved from heavy reliance on state-based and cooperative ventures to a miscellaneous structure in which guanxi-based enterprises also play a powerful role. By 1998 the familial guanxi-based sector had developed to about 27 per cent of gross domestic production (GDP), making it second only to the state-owned ventures (Fig. 1). A legitimate change in 1999 officially accepted this change, so allowing the household guanxi-based sector to come out from the shades and play an outstanding role in China's upcoming economic development. (Source: http://www.chinabusinessreview.com/public/0101/gregory.html) Gunxixue There are four different sets of significances of “guanxixue4” that may sometimes be at odds with each other (Yang 1994). Predominantly, three “parlances” of guanxixue are of trendy discourse; the way they communicate (verbal communication) and their attitudes in routine life which one discovers expressed amongst relatives and others. In this, we focus on this type of guanxi, a necessary economic and ethical cost (Hamilton, 1996, pg. 7-20) required of industrialists and other private owners who attempted to survive as an economic unit.   It might be described as the concern that is produced by the framework of social relationships and that can be mustered up to smooth the progress of action – has updated the study of relations, youth behavioral issues, schooling and learning, community health, the public life, democratic system and governance, economic growth, and wide-ranging problems of combined action (Adler & Kwon, 2002, p.17). It confirms to be an influential factor explaining actors' relative accomplishment in several grounds of central concern to executive researchers. It lessens executive closure rates (Pennings, et al., 1998) and it smoothes the progress of private enterprises (Chong & Gibbons, 1997) and the construction of new businesses (Walker, et al., 1997). The breadth of the public capital idea reveals a primeval aspect of social life – specifically, social relations of one sort (e.g., friendship) frequently can be used for various intentions (e.g., ethical and material support) (Adler & Kwon, 2002, p.17). These relations have also been exposed to give explanation how foreign companies become involved in new markets (Ellis, 2002). Notably, guanxi isn’t only a cost to private ventures since state projects and TVEs also make use of guanxi. Perhaps, it’s a cultural relic of China and mannerism of Chinese civilization on the whole. Guanxi can be a more central outlay of being in industry for industrialists and other private ventures of China. On the other hand, this lay out maybe serious to some organizations producing increasing liability of novelty challenging the expected development through the lifetime of corporations. Companies that are “oddly” supported through sponsorship (Flynn, 1993, a & b) develop an inbuilt barrier to continuing survival because of some restrictions of organizational receptiveness in the preliminary life of its development. For instance, some confirmation from the study of the Tian He’s “Special Economic Zone” (SEZ) advised that nearly all companies in the year of 1992, could not be noticed till 1998 (Flynn & Xu, 2000). In keeping with Tan (1996), these individual or private organizations are not much potentially oriented. Therefore, it is to be argued that continued existence is tough for these private possessors and therefore, guanxi is considered a valuable planned means for establishing legitimacy.  Guanxi’s Global Economic Integration With the rapid expansion of economic interface across states and ideological limitations, understanding business processes in different civilizations has turned out to be a key hit factor for practitioners in the international market. The pervasiveness of individual systems, called “guanxi” in China, was accounted to be a prominent facet of the Asian open market that offers the leading challenge to practitioners from the Western countries. Since the open-door strategy was implemented in the late seventies, China has played an ever more imperative role in international economic integration (Luo, & Chen 1997, pg. 1-16). During the period from 1986-1997, the total worth of Sino-foreign trade more than three times from USD73.8 to USD325 billion (China Statistical Yearbook, 1987, 1998). China has developed into the second leading beneficiary of foreign direct investment (FDI) in the entire world since 1993, surpassed only by the U.S. (United Nations Conference on Trade and Development, 1996). By the end of 1997, 235,681 foreign invested business ventures had started their operations in the nation state (China Statistical Yearbook, 1998). As reported by the World Investment Report (UNCTAD, 1994), making a charisma in the growing Chinese market has become only a profit-seeking act but also an essential strategic judgment for corporations participated in today’s international competition. The rising position of China in the international economy has chiefly considerable inferences for New Zealand Companies (Beal & Zhang, 1996). That is to say, as a result of New Zealand’s only one of its kind geographical setting and comparatively small state size, business processes in the nation are worldwide geographically (Ah Chong & Thomas, 1995). In the previous few years, economic support between New Zealand and China has practiced a momentous growth. The trade value between these two nations in 1997 was about US $631.18 million, more than three times the total figure of 1990s. Such quick increase of Sino-New Zealand trade has made China New Zealand's fifth major trading partner by the ending of 1997 (OECD, 1999). In the meantime, the total New Zealand asset in China had gotten to be US $53.18 million (Statistical Annual Report of China, 1998), an even more spectacular increase from the commencement of decade. This quick increasing drift and the higher prospective for further development of Sino-New Zealand economic collaboration (Beal & Zhang, 1996) propose that relationships between business communities from these two nations will significantly increase in the near future. However, despite the plentiful openings offered by the Chinese market economy, many forefront practitioners have observed that working in China is more intricate and lengthy than it is required (Rae, 1997). Study has reported that overseas corporations generally experience anxiety and hindrance while doing businesses with their Chinese corresponding persons (e.g. Davies, et al. 1995). In a survey backed by Andersen Consulting and the Economic Intelligent Unit on 70 worldwide companies working in China, 44 per cent of the corporations reported that their overall Chinese processes experienced huge losses. Furthermore, 36 per cent of private or individual business ventures didn’t prove an operating profit. A similar survey carried out by Hong Kong’s Bank of East Asia supported these results – out of the 53 corporations they interrogated, up to 42 per cent were reported not to be money-making (EIU, 1995). The problems causing these ineffective cases might take diverse shapes. However, the significance of guanxi (individual or private relationships), as contrasting to “arms length” transactions, was often declared as an issue that generally remained upset naive beginners in the Chinese marketplace (Davies, et al., 1995). As one of the main active forces in Chinese culture and a “second currency” pervading the economic sphere, guanxi represents a key and a “secret” to economic success in China (Luo, 1997). However, some say business experts have constantly cautioned that overseas organizations are placed at an obvious disadvantage owing to their foreigner position to the guanxi system (Ambler, 1995). As Hofstede (1997) remarked, few Western business ventures in China had capitulated adequate outcome, and there was no assurance that this would occur without a major development in the shared understanding between business associates from diverse sides of the globe. However, China's speedy economic growth has demanded its manufacturing structure to fiddle with the swiftly changing state of affairs, and the ‘alteration’ has not been that much clear-cut. Furthermore, the composition of personnel by category of ownership has altered very much over the reform age. The share of services in publicly owned and shared-owned parts has declined stridently, chiefly in sectors, such as industrialized and employments services, those private and individual businesses get it rather easy to access. Meanwhile, private ventures have grown to be the major job givers for both those already working and those just inflowing the market (see table 3). Part of the aptitude of private ventures to generate employment originates from the labor-intensive skill that those ventures have implemented, which necessitates more personnel and as a result offers more promise of interesting employment. Table 3: share of employment in Chinese economy, main sectors, 1978-2000 Wholesale and retail Banking Year Manufacturing trade and and Social catering insurance services Services 1978 13.3% 2.8% 0.2% 0.4% 1979 13.5% 3.0% .2% .5% 1980 13.9% 3.2% .2% .7% 1981 14.0% 3.4% .2% .7% 1982 14.0% 3.5% .3% .7% 1983 14.0% 3.7% .3% .8% 1984 14.6% 4.1% .3% .9% 1985 14.9% 4.6% .3% .8% 1986 15.6% 4.7% .3% .9% 1987 15.8% 4.9% .3% 1.0% 1988 15.9% 5.1% .4% 1.0% 1989 15.5% 5.0% .4% 1.0% 1990 13.5% 4.4% .3% .9% 1991 13.6% 4.6% .4% .9% 1992 13.9% 4.9% .4% 1.0% 1993 14.0% 5.2% .4% .8% 1994 14.3% 5.8% .4% .9% 1995 14.4% 6.3% .4% 1.0% 1996 14.2% 6.6% .4% 1.1% 1997 13.8% 6.9% .4% 1.2% 1998 11.9% 6.6% .5% 1.2% 1999 11.5% 6.7% .5% 1.3% 2000 11.3% 6.6% .5% 1.3% (Statistical annual report of China, 2000) By summing up, China’s economy developed at an average rate of 10 per cent yearly during the period of 1990-2004, the maximum development rate in the entire world. China’s GDP developed 10.0 per cent in 2003, and even more rapidly, 10.1 per cent, in 2004, and 9.9 per cent in 2005 despite endeavors made by the Chinese management to cool the economy. Conclusion From the above discussion, it can be concluded that guanxi is a cultural artifact that lets businesses and their owners to construct social capital that adds to the huge success in flourishing economic development of China. This creation of the guanxi construct as a strategy used by entrepreneurs to further their continued attempts at achieving legitimacy in a transition economy has been presented conceptually as well as visually through the Threshold of Legitimacy figures. Further, uniquely, social capital is used as the measure of this guanxi initiative. Finally, more analysis is required to resolve if guanxi is at variance across manufacturing businesses. 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