Guanxi is a Chinese term, generally translated as “networks” or “connections,” that is increasing discussed in Western business circles and among academics studying such aspects of community as affective networks and social capital.

In China, a country where business relations are highly socially embedded, guanxi plays a pivotal role in the shaping and advancement of daily business operations by allowing inter-business relationships and relationships between businesses and the government to grow as individuals representing these organizations work with one another. Specifically, in a business context, guanxi occurs through individual interactions first before being applied on a corporate level (ex. one member of a business may perform a favor for a member of another business because they have interpersonal ties, which helps to facilitate the relationship between the two businesses involved in this interaction). Guanxi also acts as an essential informal governance mechanism, helping leverage Chinese organizations on social and economic platforms. In places in China where institutions, like the structuring of local governments and government policies, may make business interactions less efficient to facilitate, guanxi can serve as a way for businesses to circumvent such institutions by having their members cultivate their interpersonal ties.

Thus, guanxi is important in two domains: 1) social ties with managers of suppliers, buyers, competitors, and other business intermediaries; and 2) social ties with government officials at various national government-regulated agencies. Given its extensive influential power in the shaping of business operations, many see guanxi as a crucial source of social capital and strategic tool for business success. Through guanxi, businesses receive insider information, raise their awareness regarding specific government policies, and gain exclusive access to resources. Knowing this, some economists have warned that Western countries and others that trade regularly with China should improve their “cultural competency” in regards to practices such as guanxi. In doing so, such countries can avoid financial fallout caused by a lack of awareness regarding the way practices like guanxi operate.

The nature of guanxi, however, can also form the basis of patron–client relations. As a result, it creates challenges for businesses whose members are obligated to repay favors to members of other businesses when they cannot sufficiently do so. In following these obligations, businesses may also be forced to act in ways detrimental to their future, and start to over-rely on each other. Members within a business may also start to more frequently discuss information that all members knew prior, rather than try and discuss information only known by select members. If the ties fail between two businesses within an overall network built through guanxi, the other ties comprising the overall network have a chance of failing as well. A guanxi network may also violate bureaucratic norms, leading to corporate corruption.

Note that the aforementioned organizational flaws guanxi creates can be diminished by having more efficient institutions (like open market systems that are regulated by formal organizational procedures while promoting competition and innovation) in place to help facilitate business interactions more effectually.

In East Asian societies the boundary between business and social lives can sometimes be ambiguous as people tend to rely heavily on their closer relations and friends. This can result in nepotism in the work force being created through guanxi, as it is common for authoritative figures to draw from family and close ties to fill employment opportunities, instead of assessing talent and suitability as is the norm in Western societies. This practice often prevents the most suitably qualified person being employed for the position.However, guanxi only becomes nepotism when individuals start to value their interpersonal relationships as ways to accomplish their goals over the relationships themselves. When interpersonal relationships are seen in this light, then, it is usually the case that individuals are not viewing their cultivation of prospective business relationships without bias. In addition, guanxi and nepotism are distinct in that the former is inherently a social transaction (considering the emphasis on the actual act of building relationships) and not purely based in financial transactions, while the latter is explicitly based in financial transactions and has a higher chance of resulting in legal consequences.

From Wikipedia

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