Guanxi: What it is, History, How it Works, FAQ

What Is Guanxi?

Guanxi (pronounced gwan' CHē) is a Chinese term meaning relationships; in business, it commonly refers to the networks or connections used to open doors for new business and facilitate deals. The term refers not just to the existence of relationships but to their nature: to having personal trust and a strong relationship. It can also create moral obligations and require the exchanging of favors. A person who has a great deal of guanxi will be better positioned to generate business than someone who lacks it.

Closely intertwined with the Confucian philosophy that has shaped many Asian cultures, guanxi holds that the self extends to family, friends, and society to create a harmonious community. Guanxi implies an obligation that one has to another. In China, the belief is that the wheels of business are lubricated with guanxi.

Merely saying that guanxi connects to Confucian philosophy does not complete the explanation of the term. Confucian thought dates back more than 2,000 years and continues to be highly influential in China today. Given the importance of Confucian thought, it should be no surprise that its stress on relationships and duty to others should be reflected in the notion of guanxi in Chinese business relationships.

Business comes before the personal in the Western business model, and the two do not often combine. In guanxi, however, the two are closely joined. Indeed, the original Chinese symbols relate to the concept of a gateway to a relationship, a neat and relatively accurate way to think of guanxi. In other words, the exercise of guanxi leads to the connections through which business can happen.

How Guanxi Works

Guanxi is perhaps best understood by the old axiom, "it's not what you know, but who you know that's important." Guanxi in the West comes in many forms—alumni networks, fraternity or sorority memberships, past and present places of employment, clubs, churches, families, and friends.

In social sciences, guanxi is similar to some concepts understood in network theory, such as the idea of information or connection brokerage by well-positioned individuals in a social network or their social capital.

Much of our lives today depends on networking, social networks like Facebook, business networks like LinkedIn. We are all building these intertwined networks of connections to improve our business lives every day.

Understanding Guanxi

The odds of gaining access to a business opportunity and then winning that opportunity are higher when you work your connections. If you are bidding for a contract in competition with others and know someone on the other side of the deal, naturally, you will try to utilize this contact to your advantage.

If you are a Wall Street executive with guanxi in Washington, you will undoubtedly make a few phone calls to make sure lawmakers remain at least neutral and regulators stay off your back. If you are a CEO who wants to make an acquisition, you will tap into your guanxi at the golf club to find a quicker route to your objective.

Special Considerations

Using your guanxi can be innocuous or hazardous depending on where you do business and how aggressive you are. Using connections may be commonly accepted as simply conducting business affairs in the West. Still, you must be careful of conflicts of interest, whether governed by law or a company's code of ethics. You can face severe consequences if your networking abroad violates the Foreign Corrupt Practices Act (FCPA).

In China, where the art of guanxi occurs in high form, calling upon connections is the norm to get things moving. However, even there, one can go too far. Business leaders with guanxi in the government have engaged in illegal activity with dire consequences. Abusing guanxi is a terrible idea virtually everywhere.

The Bottom Line

Understanding guanxi is essential to doing business successfully in China. Only by building social and business networks and contacts can a Western person fit well enough into the guanxi system to succeed.