Governance International Firm

1. Governance & the International Firm 325325 UniMelb 1 Governance & International Firm Week 8: Networks and Patronage

2. Governance & the International Firm 325325 UniMelb 2 Learning Objectives What is guanxi and networking (Social Capital)? What makes guanxi to have a bad reputation in business? The difference between network and nepotism/patronage/clientelism

3. Governance & the International Firm 325325 UniMelb 3 Networks or Nepotism?

4. Governance & the International Firm 325325 UniMelb 4 Networks Network or bonding refer to a natural human tendency to relate to one another �Bamboo� networks or social ties are used to speed up or to facilitate (local and cross-border) commercial transactions or investments Confucian duties versus HOBBES� rights Networks and relationships are a way to survive in (traditional) communities

5. Governance & the International Firm 325325 UniMelb 5 Networks & Nepotism Gifts � i.e. open, disclosed and non secret �presents� - can be distinguished from bribes which are almost always secret and manipulative Gifts, while �interested�, must appear not to be so if they are to have the intended effect The use of gifts could and would lead to personal (or corporate) advantages: this is socially and morally accepted as long as it is contained within (social and moral) boundaries

6. Governance & the International Firm 325325 UniMelb 6 Networks & Nepotism Guanxi practices imply gifts as an expression of respect for the other, bound by specific public rituals [li - Mandarin] or socially proper conduct Gifts in guanxi relationships nurture relationships, and strengthen trust, commitment and reciprocity Similarly, nepotism misuses the relationships of appropriate networks between parties for private instrumental gain. Ethical guanxi networks can be distinguished from unethical manipulative nepotistic guanxi relationships

7. Governance & the International Firm 325325 UniMelb 7 Networks & Nepotism Expressive ties (family/kin) are different from Instrumental ties. However, in both cases, the family/kin relationship predominates as the primary focus and the (gift) exchanges, useful though they may be, are treated as secondary One needs to treat the other person with (moral) feelings and relate those human sentiments of empathy � [renqing] � which create moral obligations and possibly emotional attachments Guanxi practices can be described as lobbying and network & relationship building // [arisan/Malay-Indonesia]

8. Governance & the International Firm 325325 UniMelb 8 Networks & Nepotism The informal network of guanxi may be seen as a substitute for the rule of law (since in those countries the rule of law was weak or poorly enforced). Lee Kuan Yew (Singapore): the Chinese use of guanxi is �to make up for the lack of the rule of law and transparency in rules and regulations�. Guanxi navigates opaque bureaucracies; it copes with the absence of a rule of law; it accesses reliable information, resources and infrastructure, and it recruits trustworthy, i.e. well connected, employees.

9. Governance & the International Firm 325325 UniMelb 9 Networks & Nepotism A guanxi practice is ethical only if it causes no harm to a 3rd party or to society as a whole. CONFUCIUS: one should put moral concerns before the pursuit of business interests. Confucian emphasis on [wah] - social harmony Nepotistic guanxi: a process of commodification enters the relationship bad connotation

10. Governance & the International Firm 325325 UniMelb 10 Nepotism

11. Governance & the International Firm 325325 UniMelb 11 The �darker side of Social Capital� = Nepotism Social Capital = the social and economic importance of building relationships Social Capital as any relationship implies obligations of reciprocity [bao] Social Capital = guanxi aiming at amassing symbolic capital (={face} or reputation in Asian culture) which can be turned into economic profit In Nepotistic guanxi relationships, the exchange value becomes more important than the use value (Karl MARX).

12. Governance & the International Firm 325325 UniMelb 12 The importance of Social and Political Capital Social Capital is important to establish relationships between the organization you work in and other individuals or organizations Political Capital is the goodwill you have earned as a manager within your organization A good leader will use their social and political capital very carefully as an investment with the aim to maximize the return, taking into account all those who may be affected (i.e. # stakeholders) and don�t try to be a hero.

13. Governance & the International Firm 325325 UniMelb 13 The �darker side of Social Capital� = Nepotism Negative effects of Social Capital (and Guanxi): The same forces that enhance bounded solidarity, restrict those effects for outsiders Cozy intergroup relations of the kind found in high solidarity communities can give rise to a gigantic free-riding problem Demands for conformity and privacy and autonomy of individuals were reduced accordingly Embeddedness in social structures can be turned into less than socially desirable ends (e.g. Gangs etc) Reinforce existing cleavages in communities and lead to social cartels prone to corruption

14. Governance & the International Firm 325325 UniMelb 14

15. Governance & the International Firm 325325 UniMelb 15 The �darker side of Social Capital� = Nepotism [liwu] = gift Wu = the ritual gift Li = appropriate behavior based on reciprocity in social intercourse. CONFUCIUS emphasizes ritual propriety [li] which dictates to an individual how to behave towards his/her father, family, friends, superior and others in society. The focus is not on the individual but on society. A wu without li is merely a thing or item, not a gift.

16. Governance & the International Firm 325325 UniMelb 16 The �darker side of Social Capital� = Nepotism In Confucian China, moral learning through role modeling was preferred to penal law. The notion of a civil society characterized by institutional checks, balances and accountability remain(ed) underdeveloped Instrumentalization of gift giving: the political introduction of an institutionalized monopoly has been a contributing factor to induce gift exchanges to become predominantly instrumental

17. Governance & the International Firm 325325 UniMelb 17 The �darker side of Social Capital� = Nepotism Ambiguity and subtlety are the essence in guanxi relationships: the question is not whether one is allowed to instrumentally use personal or social relationships for personal gain, but when guanxi becomes purely instrumental and thus nepotistic Networks of guanxi characterized by �general� or �positive� reciprocity Nepotism is characterized by pure mutuality or instrumental reciprocity (commercial exchange) or even �negative� reciprocity

18. Governance & the International Firm 325325 UniMelb 18 Demarcation criteria 5 main demarcation criteria which distinguish �legitimate� networks from �inappropriate� nepotistic corruption: Embeddedness in norms Time horizon The nature of the relationship Cultural legitimacy Transferability

19. Governance & the International Firm 325325 UniMelb 19 Guanxi relevance for business Guanxi can be interpreted as an entry barrier that can sustain competitive advantage for those who have a �good face�, a good reputation (= symbolic capital) or have strong relationships in the business community Guanxi // Trust, Relationship Marketing based on Reputation building, Virtual Marketing (DELL computers), enduring long-term relationship The danger of non-merit

20. Governance & the International Firm 325325 UniMelb 20 Guanxi relevance for business Despite its perceived importance, a recent survey indicated that business people in China (both local and international) named branding, quality and distribution channels rather than guanxi as the most important factors in achieving marketing or financial goals

21. Governance & the International Firm 325325 UniMelb 21 Guanxi in the future? Despite its dominant importance in Chinese networks, there are two thoughts on the future of guanxi: Some believe that the role of guanxi may slowly decline in the face of international market forces and one will need to be able to compete on a level playing field based on arm�s length transactions Others believe that despite enormous economic advances, guanxi will remain entrenched in the Confucian culture and will continue to influence business practices

22. Governance & the International Firm 325325 UniMelb 22 Guanxi & Relational Morality in the workplace (TAN & SNELL)

23. Governance & the International Firm 325325 UniMelb 23 Decision-Making Process Decision-making processes mainly embedded within the Western contractualist approach where absolute individual autonomy is a basic premise versus �Connectedness� of Confucian and Asian individuals within their respective societies. Emphasis on virtuous personal qualities by CONFUCIUS (//ARISTOTLE) required in performing roles; obligations are particularistic and relation & role-based

24. Governance & the International Firm 325325 UniMelb 24 Confucian Decision-Making Process Particularistic ties based on the 5 cardinal Confucian virtues: Benevolence [ren] Filial conduct [xiao] Trustworthiness [xin] Loyalty [zhong] Righteousness [yi] Applied in interactions with particular others in a highly defined hierarchical social order Discovery of the self is largely built around a network of roles and relationships. There is no self outside the others.

25. Governance & the International Firm 325325 UniMelb 25 The 4 Cardinal virtues (Aristotle) cf. The 5 major virtues (Confucius) Justice Courage (Fortitude) Temperance (moderation � the �golden� mean) (Propriety) Prudence (Wisdom) // Collectivist Confucian value

26. Governance & the International Firm 325325 UniMelb 26 Confucian Decision-Making Process Confucian particularistic guanxi relationships need to be distinguished from Western interpersonal relationships. Both are based on human compassion though

27. Governance & the International Firm 325325 UniMelb 27 Research performed in Singapore: Categorization and coding of justifications: Guanxi or relationship factors (role focused) Principle based category (deontological) Rule-oriented (legally and formally enforceable behavioral norms) Organizational duties and obligations (org. codes, prescriptions, obligations Individualistic considerations (personal responsibilities & self-interest)

28. Governance & the International Firm 325325 UniMelb 28 Confucian Decision-Making Process? Not really in Singapore From the 4 ethical situations surveyed, the Chinese showed a stronger propensity than the expatriates for trust and loyalty. Both scored similarly for benevolence and filial conduct. The most cited justification for ethical behavior (the 4 virtues) within organizations was Organizational-driven morality or duty indicating formalized job-role obligations and responsibilities through job descriptions and written codes of conduct modernist morality based on �universal� standards and principles & formal organizational duties

29. Governance & the International Firm 325325 UniMelb 29 Confucian Decision-Making Process? Still in Hong Kong and China Guanxi relationships are considered important for business and stability in HK and China Distinction between [quanli guanxi] or corrupted bureaucratic form of rent-seeking officials and [qinyou guanxi] or traditional long lasting webs of allegiance, serving to unite and strengthen the powerless

30. Governance & the International Firm 325325 UniMelb 30 Business Integrity in China (M. PEDERSEN) & The art of Guanxi (ARVIS & BERENBEIM)

31. Governance & the International Firm 325325 UniMelb 31 Confucian Decision-Making Process? Still in Hong Kong and China Guanxi and its gift practices are still important in China. However, because of the influx of foreign companies and the return of Chinese educated abroad, business practices have been improved in the last 10-15 years Guanxi is losing some of its influence because of dynamic work force who moves from one place to another; Governmental transparency and accountability have increased so the importance of guanxi with public officials may slowly fade

32. Governance & the International Firm 325325 UniMelb 32 Why is guanxi important in business? Mitigating external political and socioeconomic risk Navigating opaque bureaucracies Coping with the absence of Rule of Law Accessing reliable information, resources and infrastructure Recruiting trustworthy employees

33. Governance & the International Firm 325325 UniMelb 33 Business Integrity in China Successful measures include: Top management demonstrating commitment to discover, prevent and combat corruption Establish clear rules with clear sanctions Providing continuous training

34. Governance & the International Firm 325325 UniMelb 34 US Anticorruption laws Foreign Corrupt Practices Act - FCPA (1977) Forbids any US person to bribe any foreign official Facilitating or expediting payments are allowed as long as they are bona fide and directly related Sarbanes-Oxley Act � SOX (2002) rushed through Congress in June 2002 in response to collapse of Enron (December 2001) rules based, very prescriptive

35. Governance & the International Firm 325325 UniMelb 35 Sarbanes-Oxley Act Provision 401. Section 401 (a). Disclosures in Periodic Reports: The SEC* shall issue rules providing that proforma financial information must be presented so as not to contain an untrue statement or omit to state a material fact necessary in order to make the pro forma financial information not misleading�. [emphasis added]. * Securities and Exchange Commission.