Having worked in China in the past, I was vaguely familiar with guanxi, but this article sums up the dilemma it produces for Western companies better than any other I’ve read.

Western company standards, and the codes of conduct in which these standards are codified, hold that the interests of the company come first. When a person becomes an employee of a company, he accepts an ethical obligation to put the company’s interests first. Because of this, an employee who uses his position to have his company purchase goods from the employee’s friend that are slightly higher in price or inferior in quality would be regarded as unethical, even blatantly corrupt. Though such things do indeed happen in the West, few would regard this type of action as ethical. When such incidents are discovered, the offenders often are dealt with quickly and harshly by the company hierarchy, and they frequently are even reported to the legal system.

Chinese business ethics, however, are built on the basis of guanxi, which places relationships above other considerations, including an employer’s code of conduct and even the law. The idea that taking a job with a company, particularly a non-Chinese company, cancels obligations toward people with whom someone has long-term relationships and to whom one owes much guanxi is seen not only as alien but also as the essence of immorality. Perhaps even more confounding to Western businesses, the obligations of guanxi can bridge time and distance, sometimes being invoked even when two people have not seen one another for many years.

This is a tricky issue, as guanxi is a knife that cuts both ways. If your employees have lots of guanxi, then they are more likely to be highly effective. If they do not, then the opposite is probably true. Either way, the increased costs or decreased quality must be viewed as a cost of doing business which must be accepted so long as it does not cross the lines of something like the Foreign and Corrupt Practices Act.

So what’s a manager at a Western firm to do? Basically, be realistic about the practice and simply provide some boundaries around it.

Before entering into any negotiation, they state clearly and up front the legal parameters within which they can act, already laid in stone by their superiors. This shapes their foreign counterparts’ expectations of what they can squeeze out of the negotiations and keeps them from overstepping Western legal boundaries in their demands. This does not always work, but it is increasingly being used and returning results.

And lastly, guanxi may not go by the same name in Western business, but anyone who thinks the practice doesn’t exist is sorely deluded. Sure, we like to think we have a more transparent transaction structure, but more often than not, that’s to prevent the parties from defrauding each other after the relationships have determined who gets a piece of the transaction or a seat at the table.