Guanxi (pronounced as gwan-shee) implies social relationships and is an important element to conducting business activities in China. It represents the totality of relationship (mainly of utilitarian nature) between two business partners. It is primarily a way of economic organization without any law or formal rules. Guanxi is personal in nature and between people.
Chinese businesses typically do not begin a relationship with someone they do not know. If one business party has guanxi with another there is reciprocation of social exchanges and favours. Gifts are used to maintain the balance in/strengthen the relationship. Businesses entering the Chinese market are generally advised to go with a local partner.
Mcdonald’s lack of Guanxi
In the ealy 90s, McDonald’s had a 20 year land-use agreement for a huge restaurant in Beijing. However, within two years it had to vacate the location for a businessman from Hong Kong (Li Ka-shing) who had the required Guanxi with him. Mcdonald’s lost the trial. Li Ka-shing’s Guanxi was outstanding as he had financed Chinese schools, universities, hospitals etc from his profits in China.
Microsoft – Guanxi instead of a legal battle
In June 2002, Microsoft dropped its legal battle with the Chinese Government and decided to build guanxi instead as it was determined to stay in China. This was in spite of its continued losses in the immediate and medium future. Bill Gates, CEO at the time even signed an agreement with the Chinese Government giving it restricted access to the source code of its Windows OS.