This booklet is a compilation of my lecture notes and may serve as an easy-to-understand reading for students and ordinary readers after reorganizing. It is, so to speak, a summary of my research efforts in the management field over the past sixteen years. This book answers the following questions with a sketchy conceptual framework.

When it comes to leadership, why do Chinese always emphasize that the best leader is the leader who does nothing against nature?

When it comes to management, why do we often say that ethical mind is the base for successful business?

When it comes to governance, why do we say that one can govern the whole world if he understands part of Lunyu (also known as the Analects of Confucius)?

Why do Chinese generally believe that people should seek to be sincere in their thoughts, rectify their hearts, polish their characters and regulate their families before they can order well their states (or they can manage well their organizations)?

Why do Chinese believe that the ideal governance is ―myriad things run together without interfering and grow together without harming‖?

Why has China always been in a vicious cycle – loosened control leads to prosperity; prosperity brings chaos; chaos results in tightened control; tightened control leads to recession; and recession is followed by a new round of loosened control?

Why is it a common phenomenon in China that one prefers being a leader in a small organization to being led in a big one?

Why is it common in Chinese enterprises that within an organization, there is generally a bureaucracy to control a network of comparatively independent subunits? There are different forms of self-organized units within an enterprise, such as affiliated subsidiaries or self-directed teams, contracted out business units, independent local branches, profit-center departments or internal startup teams.

Why do Chinese enterprises always network with each other to realize an all-win situation? There are regional business groups such as the one of Wenzhou-based enterprises①, small

① WenZhou is a county in which most people are businessmen and form various business groups to run business all over the world.

1 enterprise networks such as the one built on the Yiwu Model①, platform-based models such as MediaTek② providing technology platforms to cottage mobile phones manufacturers and Taobao

providing service platforms to online stores, network consolidators such as Li & Fung, and industry networks characterized by one town focusing on a single industry. Outside an organization, there is generally a network of cooperative partners.

The above-mentioned structures –the independent subunits within and networks of cooperative partners outside an organization– are extraordinarily competitive in China. In contrast, large Chinese enterprises that consolidate the whole value chain generally operate inefficiently with exception to labor-intensive ―blood and sweat‖ factories.

Why are there always cliques within Chinese enterprises, together with countermeasures to undo policies from higher levels and, collectively, circumvent bureaucratic management?

How to explain all those common local organizational phenomena in China? I have been carrying out research and teaching for eighteen years, during which I do research mostly by means of participatory observation in enterprises. I ate and lived with entrepreneurs. I have also served as a consultant for some enterprises and been engaged in organizing e-commerce companies and non-profit organizations. All those experiences urge me to think about the above-mentioned local organizational phenomena.

It all started with a surprise in 1996. A Japanese student who studied his doctoral degree in

U.K. wanted to research high-tech industry clusters and invited me for cooperation. With assistance from an industry magnate, I obtained an opportunity for entering this field and started researching the governance of outsourcing-service in China's high-tech manufacturing industry with my student. We visited 44 related enterprises before making in-depth field study on two world-leading high-tech products manufacturers, one in Dong Guan, Guangdong Province, and the other in Suzhou, Jiangsu Province. Our researchers usually spent three to nine months observing operations in their factories. Also, before gathering information on the general network within a company, I tended to require the researchers to carry out observation in the company so as to make necessary localized modifications to the questionnaire introduced from the west. That is how I have gradually accumulated qualitative and quantitative management research information over the past eighteen years.

It is through the above-mentioned qualitative research that I have seen a multitude of differences between organizational behavior and managerial practices of Chinese and what is written in the management textbooks coming from the Western managerial research results. For

① YiWu is also a county in which many small factories generally run their own small stores so as to form a large network of value-chains.

② MediaTek is a Taiwanese firm providing IC technology solutions for all kinds of cheap mobile phones. example, A managerial practice derived from the Western social-network research results always encourages companies to conduct job rotations, because rotations promote more interrelations, establish bridges between departments, and increase communication channels. Human-resource (HR) management practices also advocate job rotations, because they add challenges and fun while diversifying employees' job skills. Nonetheless, such managerial practices are questioned by the owners of some medium-sized Chinese enterprises. They dare only to conduct job rotations within a limited scope while preventing employees, in a planned manner, from familiarizing themselves with all the departments lest they open similar companies and compete with former employers after mastering all the technical details and customer relationships. In a worse possible scenario, a group of employees rather than a single one resign so that the company suddenly loses a large number of excellent employees, who then all become its competitors.

How to solve such managerial problems? And what are the causes? We often say that Chinese prefer being a leader in a small organization to being led in a big one. Such a national character has obviously been baffling SME owners. Moreover, since Chinese like joining a small group or clique, it is not uncommon that a group of persons rather than a single one resign and start their own business. How to explain this phenomenon? How to solve these managerial problems facing by business owners?

I used to study statistical methods and quantitative models, which are doubtlessly common and mainstream methods in the field of management. But such methods are built on established grand theories. After seeing that so many local managerial phenomena in China cannot be well explained using Western managerial theories, I could do nothing but return to management field study by making interviews, participatory observations, organizing focus groups and carrying out grounded theory data analysis. It is through qualitative research and participation in an organization's business operations that I have been working to find out an indigenous theoretical direction.

An explanatory framework based on indigenous social sciences and psychology has come to my mind. I believe that all the phenomena discussed above are essentially rooted in

―favor-exchange society‖ or ―guanxi society‖ (―guanxi‖ is the Chinese term for social relations. In its narrow definition, guanxi means only familiar ties. The third chapter will discuss this concept in detail). Chinese workers all know the importance of relationship contexture or, in Chinese, Ren Mai (a Chinese term indicating a focal person's ego-centered social network in which social capital is embedded; in the following, I will use the term ―egocentric guanxi network‖ to indicate this concept). They focus, when at work, on enhancing their relationship contexture, because their future achievements at work will largely dependent on its depth and breadth. The enhancement of the relationship contexture relies on favor exchanges at usual times, and many of the familiar ties created during such exchanges are the very resources available for realizing personal achievement and goals. It is through favor exchanges that Chinese realize their respective dreams. Knowing that it is impossible to build success on personal heroism, Chinese turn to rely on the power of a group of people and know that they should share the resulting profits with these people. It is therefore easy for a group of people to form a small group or

―guanxi circle‖ (a Chinese term indicating a group of people bonded together tightly in order to struggle for resources collectively. Chinese often call it ―small circle‖ or ―circle‖, too. The fifth chapter will discuss this concept in detail) in which they share both profits and losses. The best way to capitalize on the Chinese phenomenon of guanxi circles is to let them self-organize into teams so as to achieve all-win situations in particular fields. Otherwise, guanxi circles in a bureaucratic organization will unavoidably evolve into cliques or, in Chinese, Pai-Xi (a closed clique which often struggles for its self-benefits and hurts the interest of the larger network, just like what organized crime does to the whole society), which fight each other, develop countermeasures to undo policies from higher levels and follow tacit rules, which are, in general, those unspoken norms leading to unethical behaviors.

Self-organization process and self-organized units are the keys to explaining the Chinese organizational behavior. They lead to organizational networks that ally with each other or act as downstream or upstream to each other. That is why Chinese organizations are always mainly in a network structure. Pay sufficient attention to self-organization process, make good use of it, and learn to manage self-organized units– all these are the very things that Chinese managerial wisdom is rooted in.

In addition to having taught organization sociology and relevant courses for teen years, I began teaching management including organizational behavior, relationship management and entrepreneurship in 1997. Gradually, I include my research results into these courses by talking about the characteristics of Chinese leadership – the best leader is the leader who does nothing against nature; differentiated mode of association in Chinese guanxi; kind, authoritative and ethical leadership; as well as dynamic balance in managerial processes; talking about favor exchanges, the phenomenon of guanxi circles, and network-like structure of Chinese organizations in management classes. This set of courses is growing mature thanks to discussions with EMBA students and post-graduates, as well as my own experiences from practices and as a consultant. On one hand, I am preparing for publishing a book by incorporating my past research results into this explanatory framework. On the other hand, I recorded and compiled lectures that I presented for a course that I taught at Xi'an Jiaotong University in 2009. This collection of lectures is easier to understand than academic writings and it is translated into this book. Since this book is only a collection of my lectures, I try to make it easier for general readers and will not use too may academic terms and the format of academic articles.

Since this book is not a precise academic writing, I did not emphasize the logic of the argumentation. Instead, I focused on presenting my research results in a language that is easiest to understand. Since it is not an academic writing, this book will be published in the form of compiled lectures instead of an academic paper. But some necessary citations of academic papers are still included in.

In addition, this book differs from popular readings that I write for students from businesses and popular readers. Specifically, this booklet is more scholarly and refers to a lot of theories, so it can still be used as a textbook for universities. It is somewhat like a popular science book. I hope that this book can guide undergraduates, postgraduates and popular readers who have an interest in theoretical knowledge into the field of Chinese indigenous management, and help them to understand how social sciences look at the management in Chinese culture.

Last but not least, please allow me to express my gratitude to My Ph.D adviser Mark Granovetter, who instructs my readings on the articles related to this study, even in today, 20 years after my graduation from Ph.D program. I also feel appreciate for Professor Meng-Yu Cheng of Feng Chia University. I used in my lectures some cases that I had studied together with him. And my gratitude also goes to Shi Xiaolin, an editor at the Social Sciences Academic Press (China), and the Chinese-to-English translator. It is very difficult to translate speeches, not to mention so many Chinese terms and concepts. But they have done an excellent job to greatly increase the readability of this book.

Luo Jar-Der At home in Tsinghua University, 2010

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