Lecture 4 Dynamics of Guanxi

The first idea I want to discuss in this lecture is that China is a guanxi society, where the basic structure of its social behaviors contains elements, such as networking based on family-ethics, differential modes of association, grouping in the form of ego-centered circle and thinking of dynamic balance, that remain changeless in a very long period of Chinese history. However, Chinese gradually change what is included in their family-ethics based relations and the way how to develop these relations, following the trend of an evolving and increasingly mobile society as well as expanding cities, thereby adapting to the ever-changing society. This evolution is actually about things other than the essential elements in China.

The basic structure of governance also remains changeless in Chinese society. The Chinese old saying says: ―the emperor's power is as far as the heaven‖; that means, there is a large room for self-organization in the gross-root society which is out of bureaucratic control. Self-organization comes from the phenomenon of guanxi circles among Chinese, and circles result from relationship networks in the differential mode of association, with their norms including a set of principles of favor exchanges; and this set of principles in turn derive from family ethics. And all these have become the code of conduct for Chinese thanks to the omnipresent philosophy of Confucianism. In contrast with the changeless underlying structure of these relationships in Chinese society, their contents are changeable, that is, who will be regarded as familiar or even pseudo-family ties?

Historical Changes in the Contents of Relationships

China was known as ―ten thousand domains‖ in the far ancient times, when a phratry could become a small domain. The kings of Zhou Dynasty were known as ―the common king of the world‖, that is, a large number of small domains submitted to the same king, but actually they were independent from the common king. During the early Spring and Autumn period (BC. 770-476), there were still over three thousand domains in China. These domains were gradually merged during fighting with each other till they turned into seven major states in the Warring States period. The Qin Dynasty went further to unify China into a single whole. In this process, the meanings and scopes of ―family‖ and ―state‖ kept changing. In the early Western Han Dynasty (BC. 202-AD. 9), a relationship system based on the Confucian family ethics was established under the theory of a great scholar, Dong Zhongshu. It was in this period that order

45 based on ―three principles‖ (in Chinese, three-Gong, i.e. three basic types of relations) and ―Let the ruler be a ruler, minister be a minister, father be a father, son be a son‖ was initially established; a minister served his king just like a son served his father. These changes indeed included the minister-king, or subordinate-supervisor, relationship into family ties.

The phenomenon of blood brothers emerged in the late Eastern Han Dynasty (AD. 25-220).

The ―three blood brothers (i.e., Liu Bei, Guan Yu and Zhang Fei) in the peach orchard‖ has since become a well-known legend. The phenomenon of family ties resulting from blood brothers became increasingly obvious till it reached the highest level in the Jin dynasties (AD. 265-420), when main clans were so powerful that important appointments made by the emperor of the Eastern Jin Dynasty (the second half of Jin Dynasty) could not become valid until they were consented to by those clans. In addition to monopoly on the appointment of government officials, the clans were running a large-scale estate economy in which they adopted homeless persons, who then became tenant farmers working for the clans. Intellectuals from poor families could establish relationships with the clans by submitting visiting cards. Thus, the adoption system and a new type of pseudo-family ties emerged in this period.

The adoption system became best developed in the Tang Dynasty. An Lushan, a general who rebelled against the Tang Dynasty, claimed to have three thousand adopted sons, who were all orphans from nomadic peoples in northern and western China and later on became the most loyal part of An's rebellion army. Another well-known example about the adoption system was Li Keyong, a Shatuo (a Turkic tribe) military governor during the late Tang Dynasty, and thirteen warriors. These warriors were actually adopted sons of Li Keyong, to whom they were very loyal and ultimately helped his natural son Li Cunxu found Later Tang Dynasty. Prevailing in the Tang Dynasty, the adoption tradition can still be seen in today's Japan, where lots of family businesses have a habit of appointing the adopted sons of their leaders to leading positions.

The greatest changes in the meaning of ―Guanxi‖ in China occurred in the Spring and Autumn period and the Song Dynasty (AD. 960-1276). Chinese society changed greatly in the Song Dynasty, when commerce and trading were well developed and business taxes exceeded agricultural ones for the first time in Chinese history. The highly developed commerce and trading led to a greater society and, hence, had a significant impact on traditional family and societal forms. It was under this background that Fan Zhongyan, a prominent politician and literary figure in the Song Dynasty, created donated farmland system so as to make clans cohesive again. The donated farmland (including the fields, mountains and woods owned by a clan) was an asset of the entire clan and was typically bought by the richest family in this clan. To protect the clan's farmland from being privatized, it was usually required that the farmland be cultivated not by people of the clan's surname but by employed tenant farmers of other names, and that the levied land tax be for use by the clan. Nonetheless, the membership of a clan gradually changed with time, as what used to be a large clan could decline into a very small one. In the meantime, the number of tenant farmers gradually increased till they became an integral part of the village. And the meaning of clan changed in this context. The families of different surnames, which lived together, might look for their common ancestry and merged into a single clan that worshiped their ancestry in the sample temple. Anthropologist Zhang Xiaojun referred to this phenomenon as ―self-created clans.‖ It was in this situation that the meaning of clan changed to include more than groups of people with real blood relationships. And that was how egocentric guanxi networks, especially the rings of family and familiar ties, further expanded in China. This constituted the base for townsmen in the later process of commerce development. Geo-relationship became critical.

In the Ming Dynasty, there were a growing number of regional groups of businesses based on geo-relationships. Friendship spanning two or more generations – if two persons are good friends, then their children may marry each other and their brotherhood will be passed down to the subsequent generations – also became increasingly important, and Chinese entered another era. If a person in such friendship was unable to repay a debt, then he could be exempted from the debt by kneeling down and bowing so low as to have his head knock the ground several times before the creditor. This movement signified that ―I will remember this favor forever.‖

Friendship between blood brothers became increasingly important as industry and commerce were well developed and life in cities became better in the period since the Song and Ming dynasties. The Chinese population topped one hundred million persons in the Song Dynasty and reached two hundred persons in the Ming Dynasty, before hitting the mark of four hundred million in the mid-Qing Dynasty. There were no major breakthroughs in production technologies in this period, but changes in management techniques brought a great increase in productivity. This is what Mark Elvin referred to as ―economic growth without technological progress.‖ The innovation in management techniques specifically refer to the mode in which big suppliers dealt with vendors who in turn sold goods to family workshops, in which men did farming while women did weaving, and in which the workshop was immediately behind the storefront. This mode led to today's network-like structure dominant in Chinese enterprises. Urbanization was also a characteristic of this period, but it differed from the current urbanizations in that, instead of big cities at present, there were then a large number of prosperous small towns, which became the hubs of vendors. A mobile population and urbanization both made friendship increasingly important; emphasis on Yi (i.e., brotherhood or reciprocity) and Guan Yu (the symbol of Yi; he is a general serving under the warlord Liu Bei in the legend of three blood brothers in the peach orchard ) worship also began to prevail from this period onward. It is in the present period that another round of major relationship changes has occurred in the process of Chinese modernization. This was what I gradually felt when I was doing field study on governance over outsourcing services. I compared Taiwan-based traditional companies (in the textile industry) with high-tech ones (in PC manufacturing) in terms of network form of organization, before I found obvious differences between them. Firstly, the sources of outsourcing relationships in the PC industry are no longer originated from expressive ties, as relationships are now mostly established with partners invited in an open manner in the market. Secondly, trust no longer derives from favor exchanges or daily social interactions, but is from long-term cooperation and the resulting tacit understanding. With regard to relationship development, therefore, everything ranging from control mechanism and daily management to relationship review is made in an institution-based manner. However, when partnership was built, Chinese tend to add expressive elements in to strengthen it.

When it comes to relationships among Chinese, a big difference between the present and the past is that relationships are more likely from friendship than from family, townsmen or clans; and partnership is more likely developed from strangers with common friends than from townsmen or multi-generation friendship. Outsourcing service providers are from two main sources. Firstly, the classmates or peers of leading designers in the company usually know relevant persons and hence are able to recommend outsourcing service providers. Accordingly, connections in your profession, industry and school become crucial. Secondly, relationships are established through formal plus informal institutions. First of all, you learn about the service quality and the reputation of relevant outsourcing service providers from your friends in various associations, such as ball game clubs, the federation of industry and commerce and the Taiwanese merchant association in Mainland China. And you ask your friends for recommendations. After that, you send an assessor team to assess the service quality and reliability of the recommended outsourcing service provider, before ultimately deciding whether to partner with him or not. Briefly, this is a process where governance is carried out with formal institutions plus favor exchanges.

And although the two parties to an outsourcing service are not familiar with each other at the beginning, they will gradually work together more often as long as they think that the other party is trustworthy. On the one hand, if the buyer finds a less expensive outsourcing service provider during cooperation with the current one, he usually will not replace the latter immediately. Instead, he will negotiate with the current outsourcing service provider and, whenever necessary, help the latter reduce the costs to enable him to lower the price, thereby maintaining the current partnership whenever possible. On the other hand, the outsourcing service provider typically will receive a growing number of orders and represent an increasing share of the total business contracted out by the buyer as long as the provider behaves in a trustworthy manner. Along with the upgrade of partnership, private friendship generally grows. And the buyer usually will give the provider more personal advises. As a result, the provider may be able to expand the cooperation from products such as casings to others and even form a regional group of businesses to make investment together. Such is the case often seen in many Chinese enterprises, such as Taiwan- and Wenzhou-based businesses.

As a result of this phenomenon, a company tends to have a bureaucracy to control a network of comparatively independent subunits, or alternatively, form numerous networks of outsourcing service providers around it (or both, for a lot of companies), after it reaches a certain size. And outsourcing service providers sometimes also contact each other to carry out parallel outsourcing services in order to rapidly respond to changeable needs. They may ultimately form a regional group of businesses to make investment together or even engage in the politics of lobbying.

As a second result, Chinese pay increasing attention to establishing ties with strangers on the basis of their trustworthy behavior, before becoming closer with them. Since transactions in the hi-tech industry are made in an increasingly frequent manner together with higher professional requirements, it is very difficult for people to find partners from townsmen, multi-generation friendship and extended kinship relations. As they become closer with strangers, the latter ones will develop into acquaintance ties with whom they will make a growing number of favor exchanges and transactions, before developing further into familiar ties and members of their circles. This will obviate the selection of partners from among a very small number of candidates. Westerners are inclined to segment a chain of complex transactions into increasingly fine granularity so as to turn them, as many as possible, into short-term, less complex, more certain transactions that ultimately will be made in a market-oriented manner. By comparison, Chinese are inclined, once trust is built, to make bilateral cooperation increasingly complex and diverse in terms of contents and modes, in addition to making them longer, before ultimately carrying it out on the basis of friendship networks.

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