An examination of the influence of guanxi and xinyong (utilization of personal trust)on negotiation outcome in China

An examination of the influence of guanxi and xinyong (utilization of personal trust)

on negotiation outcome in China: An old friend approach☆

T.K.P. Leung a,

⁎, Ricky Yee-Kwong Chan a,1

, Kee-hung Lai b,2

, Eric W.T. Ngai a,3

a Department of Management and Marketing, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong

b Department of Logistics & Maritime Studies, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong

article info abstract

Article history:

Received 15 September 2009

Received in revised form 8 December 2010

Accepted 16 December 2010

Available online 28 January 2011

Keywords:

Renqing

Ganging

Gifts

Mianzi

Xinyong

Managers of multi-national enterprises (MNEs) are at a disadvantage in negotiating outcomes with their

Chinese counterparts when compared to local competitors. The reasons include: local competitors are more

flexible in handling business terms and conditions; local Chinese managers prefer to negotiate with their old

friends or insiders in the same guanxi network; and MNE managers perceive that cultural practices such as

gift-giving and guanxi are problematic. This study advances our understanding of negotiation by using a

model developed for the reference of MNEs to establish an “old friend” relational status with their local

Chinese counterparts. This approach emphasizes cultural adaptation for MNE managers to achieve satisfying

negotiation outcomes in China.

The study reveals the following unique issues: 1) in addition to their problem-solving attitude, MNE managers

should practice mianzi and gift-giving to build renqing with their Chinese counterparts at a new friend stage;

2) the reciprocity dynamics of renqing should enable these managers to accumulate ganqing and to become

old friends of their Chinese counterparts; 3) the establishment of ganqing between MNE managers and their

Chinese counterparts should enable the development of xinyong between the two exchange parties; and

4) desirable negotiation outcomes can be built on xinyong.

© 2010 Elsevier Inc. All rights reserved.

1. Introduction

The rapid economic growth in the People's Republic of China (PRC)

has attracted multinational enterprises (MNEs) to enter the world's

largest emerging economy. Negotiation of business ventures has become

an essential task for MNE managers seeking to penetrate the Chinese

market, in which business activities have been epitomized by guanxi

(Park & Luo, 2001). They assume the responsibility to negotiate outcomes

with their local Chinese counterparts (DiMaggio & Powell, 1983).

However, MNE managers are in a disadvantageous position

(compared to local Chinese competitors) when negotiating ventures

with their Chinese counterparts in both state-owned enterprises

(SOEs) and private enterprise. First, local Chinese competitors are

relatively more flexible in handling business terms and conditions

(Williamson & Zeng, 2004). Second, the affection of local Chinese

managers for negotiating with insiders or their old friends in the same

guanxi network simultaneously portrays MNE managers as outsiders,

thereby intensifying their difficulty to negotiate with local Chinese

managers. The use of an old friend approach has been proven to be

crucial in some countries including India, Pakistan, and China (Wong

& Ellis, 2002). Third, these MNE managers also perceive cultural

practices such as gift-giving and guanxi to be problematic (Millington,

Eberhardt, & Wilkinson, 2005). The above evidence suggests that a

model for the reference of MNE managers to assist them achieve an

“old friend” relational status with their domestic Chinese counter￾parts, and to subsequently achieve satisfying negotiation outcomes, is

imminent (Kirkbride, Tang, & Westwood, 1991).

The genesis of the relationship dilemma is rooted in the different

elucidation of governance mechanisms and negotiation outcomes by

MNEs and Chinese companies (Alder, Brahm, & Graham, 1992). Kirkbride

et al. (1991) recognized that MNE managers aim for a linear approach

that involves establishing business first and relationship later with their

Chinese counterparts. The legal practices in their home countries

motivate the MNE managers to build trust by specifying details in

written contracts whereas their Chinese counterparts ascribe promises

and commitments to human relationship bonds that heavily rely on

guanxi and xinyong (utilization of personal trust) (Luo, 2007; Wang,

2007). Also, MNE managers' desire to quantify negotiation outcome in

terms of profits is contradictory to Chinese companies' emphasis on

future cooperation as part of the negotiation outcome (Clopton, 1984). As

Industrial Marketing Management 40 (2011) 1193–1205

☆ The authors would like to thank three anonymous reviewers and the journal

Editor-in-Chief Prof. Peter LaPlaca for their helpful comments. This research was

supported by a research grant from the Hong Kong Polytechnic University.

⁎ Corresponding author. Hong Kong Polytechnic University, Hong Kong. Tel.: +852

2766 7106; fax: +852 2765 0611.

E-mail addresses: [email protected] (T.K.P. Leung), [email protected]

(R.Y.-K. Chan), [email protected] (K. Lai), [email protected] (E.W.T. Ngai). 1 Tel.: +852 2766 7110; fax: +852 2765 0611. 2 Tel.: +852 2766 7920. 3 Tel.: +852 2766 7296; fax: +852 2765 0611.

0019-8501/$ – see front matter © 2010 Elsevier Inc. All rights reserved.

doi:10.1016/j.indmarman.2010.12.020

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