Guanxi: Personal Connections in Chinese Society

J Bioecon DOI 10.1007/s10818-011-9118-9

Guanxi: Personal connections in Chinese society

Bingyuan Hsiung

Abstract Guanxi is known to be an important feature of Chinese society, and while studies of the subject are voluminous, the present study attempts to explore two critical aspects that tend to be neglected. First, previous studies have mostly dealt with guanxi in business activities, but we analyze the meanings of guanxi in the context of ordinary people. More importantly, even though guanxi has routinely been attributed to Confu- cianism, it begs the more fundamental question of why Chinese society has developed Confucianism and why the latter has become the dominant ideology over the centuries. We provide a plausible account of this important question from both sociological and economic perspectives. Secondly, we illustrate the general implications of guanxi in Chinese society, in particular relating guanxi to the development of democracy and of the rule of law. Consequently, its significance in Chinese society is actually more important than what has been suggested in the literature. Finally, we present some preliminary empirical evidence, based on survey results, of the importance of guanxi in contemporary Chinese society.

Keywords Guanxi · Tools · Familial relations-guanxi nexus · Five cardinal virtues

JEL Classiﬁcation O53 · O29 · P49

B. Hsiung (B) School of Business Management, China University of Technology, Taipei, Taiwan e-mail: [email protected]

B. Hsiung Zhejiang University, Zhejiang, People’s Republic of China 123 B. Hsiung

1 Introduction

Guanxi is known to be an important feature of Chinese society and it has many fac- ets.1 One important feature of guanxi is that it is closely related to family. A popular Chinese idiom captures its spirit vividly: “Count on your parents while at home, and count on your friends while away from home.” This suggests clearly that guanxi is intimately related to family, kinship, ethnic and other personalistic relations, as all of these interpersonal relations involve trust and cooperation beneficial to the individuals involved. Since familial relations have an important biological ingredient and guanxi, as will be argued below, is an extension of familial relations, guanxi has an important biological ingredient at its roots as well. The present study, however, will not take a biological approach to guanxi, at least not directly. Instead, the aim of the present inquiry is to explore its cultural aspects by employing the analytical perspectives of both economics and sociology. The intellectual interest of such an inquiry needs elaboration. To begin with, both sociology and economics are behavioral sciences, and both study human behavior and social phenomena. The two disciplines, however, have very different conceptions of human beings, the basic unit of analysis for both disciplines. For economists, the homo economicus is a physical and biological unit, defined by the flesh and blood of the creature. By contrast, for sociologists, human beings are to a very large extent defined by social relations. This means that in economics human beings are a physical/biological construction; but in sociology, human beings are a social construction. The two very different conceptions evidently lead to different analyses of social phenomena, and needless to say each has its own strengths and weaknesses. Concerning the focus of the present study, guanxi in the Chinese society, the two conceptions will provide different perspectives, based on the conceptions of homo economicus and the social person, and the contrast is likely to illuminate not only the subject matter but also the characteristics of economics and sociology, methodological and otherwise. Moreover, the subject of guanxi is challenging and interesting in itself. As China (the People’s Republic of China, PRC) has become the second largest single economy in the world, studies of Chinese society are important both theoretically and practically. As it happens, the major communities within Chinese society, i.e., China, Hong Kong, and Taiwan, have been on different trajectories over the past few decades.2 They are now situated in different stages of economic, social, political and legal development, and assume different configurations, so to speak. Guanxi is universally known to be an important feature of the Chinese society,3 and an in-depth inquiry into this feature will

1 Luo (1997, p. 43) begins his article by stating that, “Guanxi is one of the major dynamics in the Chinese society, where business behavior revolves around guanxi.” 2 There are other Chinese communities such as the overseas Chinese in Southeast Asia and elsewhere, and guanxi is important to all of these Chinese communities. But China, Hong Kong, and Taiwan are three entities with different political and legal institutions and as this Chinese triangle is more relevant to the issues of democracy and rule of law, the discussion will focus on these three Chinese communities. See the analysis below. 3 Guanxi has many implications, and Fan (2002) suggested a detailed classification of various defini- tions and interpretations. Concerning the origin of guanxi, however, it was only mentioned in passing that, 123 Guanxi help one to understand Chinese society in general and the different Chinese communities in particular. A few issues suffice to show the potential relevance. For instance, does guanxi have the same importance in China, Hong Kong, and Taiwan? Or is it different in these three Chinese regions?4 What is the impact of economic development onguanxi, in terms of both economic activities and the lives of ordinary people? Will the impact be different for business activities and the lives of ordinary people? Moreover, among Chinese social scientists, it has been suggested that Chinese society is different from the West; therefore, to study Chinese society a separate, indigenous set of analytical frameworks and concepts is needed.5 The appropriateness of this view is beyond the scope of the present paper; the present paper employs generally accepted analytical tools of mainstream economics and sociology (of the West) to analyze the subject of guanxi within Chinese society. If the inquiry turns out to be unsatisfactory, then it may suggest that the current mainstream (Western) theories are wanting and may even help pinpoint their blind spots when analyzing Asian society and economy. Finally, previous studies of guanxi in Chinese society are voluminous, but the present study attempts to explore two neglected aspects of the subject. First, previous studies on guanxi have mostly dealt with guanxi in the context of business activities,6 but the present paper will analyze the meanings of guanxi in the context of ordinary people. More importantly, while previous studies have routinely attributed the origin ofguanxi to Confucianism, it begs the more fundamental question of why the Chinese society has developed Confucianism in the first place and why the latter has become the dominant ideology that has influenced the Chinese people over the centuries.7 Interestingly and curiously, this important issue seems to have mostly escaped the attention of previous studies. Secondly and equally important, the present paper will try to derive the general implications of guanxi in the Chinese society; in particular, relating guanxi to the development of democracy as well as the rule of law. That is, by analyzing the issue of guanxi in Chinese society, the present study will argue that guanxi is actually more important than has been suggested in the literature. In analyzing guanxi the present study will focus on three simple questions: What is guanxi in Chinese society? Why has guanxi become so important in Chinese society? What will guanxi become in the Chinese society of the future? The three questions

Footnote 3 continued “Guanxi is considered as a unique Chinese construct (The Economist, 8/4/2000) and a product of Confucian values and the contemporary political and social-economic systems” (p. 553). 4 Fan (2002, p. 556) states that, “There is no B2G guanxi network that is not tinted by corruption and no corruption without using guanxi.” B2G means business to government. Alternatively, Davies et al. (1995, p. 210) argued that, “They [Hong Kong Chinese business executives] almost unanimously (98%) confirmed that ‘personal connections with local Chinese organizations’ were a highly rated factor in their business life.” Alon (2003) contains many relevant discussions. 5 For instance, Hwang (2005) analyzed the debate concerning the development of indigenous psychology. See Nathan (1993) for a related discussion concerning the methodological issues involved. 6 See, for example, Chung and Hamilton (2001) discussing how the logic governing personal relations is extended to business relations; Davies et al. (2003) analyzing how guanxi is related to business practices in the PRC; Grainger (2003) exploring guanxi in the PRC’s hotel sector; Lee (2003) studying how business opportunity is related to guanxi in the PRC. 7 Fei’s work was first published in Chinese in 1948 and hence unavailable to the readers in the West. The influential book was later translated into English by Gary Hamilton and Wang Zheng, published in 1992. 123 B. Hsiung will be dealt with to different degrees in the following analysis, and as will become clear, while some of the arguments are intuitively clear and logically persuasive, they are more like reasoned conjectures. Empirical work will be the focus of subsequent research, and possible directions of such endeavors will be suggested in the following analysis. Some preliminary results will be presented to support the analysis that follows.

2 Guanxi and the ﬁve cardinal virtues

In analyzing guanxi in the Chinese society, three questions have been raised: What is it? Why is it? What is it going to become? This section will address the first question, namely what is guanxi in the Chinese society? As is commonly understood, guanxi refers to personal connections or to special bonds in interpersonal networks. In addition, it often refers to social relations outside of the family. Studies on guanxi are numerous. For instance, in a series of essays written in the first half of the twentieth century the well-known sociologist Fei (1948/1992) suggested that the Chinese interpersonal networks constitute a “differential structure,” with each individual situated at the center of a series of concentric circles.8 The dis- tances from the center are like ripples outward from a stone thrown into a lake and thus define different relations such as kin and social ties of the person at the center. Recently, Lin (2001, p. 159) provides a clear conceptual account of guanxi and summarizes the properties of guanxi as “enduring, sentimentally based instrumental relations that invoke private transactions of favors and public recognition of asym- metric exchanges.” In addition, Luo (1997) specifies that guanxi has the following properties: transferable, reciprocal, intangible, personal; it operates on the individual level and it is utilitarian rather than emotional. As such, guanxi has been approached from different angles, sometimes seemingly contradictory ones. However, it seems to be generally agreed that guanxi has three traits: first, it refers to social relations outside the family; secondly, it is based on emotions of trust and particularistic care; third, it is used for both emotional well-being and utilitarian purposes like facilitating business transactions. Separately, in analyzing the characteristics of Chinese interpersonal relations, psychologist Hwang (1987, 1999, 2000, 2003) has explored the related concepts of face and favor, filial piety and loyalty, etc. in the Chinese society and has identified Confucian thought as the origin. Finally, in the introductory chapter of a book on guanxi in China, Gold et al. (2002) had a comprehensive review of the literature and the methodological issues involved.9 By contrast, the present paper will approach guanxi from a different direction. In particular, this inquiry into guanxi will start with an analysis of the five cardinal virtues, something that seems to have been neglected in the guanxi literature but provides a straightforward basis for a theoretical analysis of guanxi, and the reasons for such an approach will become evident once the five cardinal virtues are explained.

8 Separately, Khan and Jomo (2000) have tried to integrate the idea of guanxi with rent seeking, a promising expansion of the rent seeking literature as represented in Tollison and Congleton (1995). 9 Ibid. 123 Guanxi

The five cardinal virtues are important behavioral guidelines within traditional Chinese society,10 and specifically they refer to the behavioral norms implicit in the following five bilateral relations: emperor–subject, father–son, husband–wife, elder brother–younger brother, and friend–friend. The five cardinal virtues share two important characteristics: First, for each and every relation, there is a senior–junior, leader– follower, and upper status–lower status structure beneath the relationship. The one on the lower end is to be deferential and obedient to the one on the higher end, in attitude as well as use of resources, etc. This means that according to the five cardinal virtues, interpersonal relations are not equal for the individuals involved, and even for friends (friend–friend) the two individuals will immediately identify themselves, according to age or other personal characteristics, as the senior and the junior, and the senior will be addressed by the junior literally as elder brother, e.g., Elder Brother John. In so doing, the friend–friend relationship means that the relation between unrelated individuals is subtly converted into a pseudo elder brother–younger brother relationship. Secondly, among the five cardinal virtues, there is also an ordering, with the emperor–subject being obviously of the highest rank and the other four in descending order. Given the structure of the five cardinal virtues, its general implications need elaboration. As it is clear that in the daily lives of the ordinary people, the chance of invoking the emperor–subject relation and its accompanying behavioral norms is extremely rare; therefore for ordinary people the emperor–subject relation and its behavioral implications are only indirectly invoked in their being deferential to the bureaucratic system and the bureaucrats. The core of the five cardinal virtues lies with the family, namely the father–son, husband–wife, and elder brother–younger brother relations. Based on this trio, kinship ties and ethnic relations can be developed and expanded. The friend–friend relation is best seen not as an independent relation but an extension of the familial relations. Moreover, in meeting the friends of the parents, children are routinely told by their parents to address these adults as uncles and aunts, e.g., Uncle Sam and Aunt Anne, and to conduct themselves accordingly. Furthermore, the God Father and God Mother in the West have religion as the basis of the relationship; by contrast, the Pseudo Father and Pseudo Mother in the Chinese society, termed Dry Father and Dry Mother in Chinese, have family as the basis of the relationship.11 Consequently, interpersonal relations in Chinese society can be grouped into two categories: relations within the family, the familial relations; and relations outside of the family, the guanxi. The familial relations are the core, and various guanxis are modifications, extensions, and simulations of the familial relations. Interpersonal relations in general are perceived with the familial relations as the basis as well as the reference framework. For a Chinese emperor, the concept of “Family-ize the world” means that he should see the empire as his own family and treat the subjects as his family members. For the ordinary people, the phrase implies that one is to perceive the world from the perspective of the family. And to cultivate the five cardinal virtues,

10 Alternatively termed five cardinal values or five relations, all of the terms refer to both the relations and the norms governing the relations. It is generally agreed that the five cardinal virtues constitute the core ingredients of Confucian thoughts. See Hwang (2000), Farh et al. (1997)andKing (1991) for relevant discussions and the references cited therein. 11 Lin (2001) also emphasized that various guanxi resemble family relations. 123 B. Hsiung the Chinese society has developed the all important concept of filial piety—the importance of which is amply reflected by popular idioms such as “All virtues stem from filial piety” and “The parents are never in the wrong!” Similarly, to cultivate guanxi, concepts related to loyalty, reciprocity, dedication, trust, etc. have been similarly developed.12 The cardinal virtues guiding intra-family relations, when at work, would bring resources to the individuals concerned, material and otherwise; the cardinal virtues guiding non-familial relations, of which guanxi is one, will similarly bring resources to the individuals concerned, directly and otherwise. In short, interpersonal relations in Chinese society can be summarized as follows. First, there are two kinds of interpersonal relations: those within the family are familial relations, and those outside are guanxi. Both familial relations and guanxi are supported by behavioral norms. Secondly, guanxi is an extension and simulation of familial relations. The unique two-tier structure can be expressed by a familial relations-guanxi nexus. As is obvious, for the familial relations-guanxi nexus to be functional, supporting concepts and mentality have to be developed accordingly and compatibly.

3 The questions

The previous section described interpersonal relations within Chinese society and suggested a familial relations-guanxi nexus to illustrate the structure. Moreover, it was argued that family is the core as well as the basis of all interpersonal relations. The description basically answered the question of “What is it?” In this section a series of practical questions will be raised, as the ﬁrst step to address the question of “Why is it?” Answers to the series of questions will be the focus of subsequent analysis.

3.1 Question 1: Why would the Chinese society develop a familial relations-guanxi nexus to structure interpersonal relations?

This question leads to several sub-questions: Why does family occupy such an all important position in the Chinese society? What is the relation between filial piety and the cardinal virtues related to family? Why is guanxi an extension and simulation of the familial relations? The meanings of these questions can be illustrated with a reference. In The Chry- santhemum and the Sword, now a classic, Benedict (1946) indicated that loyalty is a unique and important feature of the Japanese character. A person is to be loyal to the Emperor and to his lord, i.e., his landlord, warlord, or a combination of both. By contrast, in the Chinese society filial piety is much more important than loyalty—That is why there is an idiom that in case one is called upon to defend the empire, one is to “Replace filial piety with loyalty (to the emperor).” But why is it that Japanese society values loyalty above filial piety while the Chinese society values filial piety over loyalty? Both economic and sociological theories should be able to address these fundamental questions and come up with plausible explanations.

12 For a fuller explanation of these terms see Lin (2001)andFan (2002). 123 Guanxi

3.2 Question 2: What are the major forces that have shaped the familial relations-guanxi nexus? And what are the supporting conditions for the nexus?

If the familial relations-guanxi nexus is seen as an equilibrium, a stable state that repeats itself, then two questions immediately follow. First, Chinese society has been in existence for at least three thousand years, and over this long process what have been the major forces that have crystallized the familial relations-guanxi nexus? Secondly, once the nexus has been in place and become a dominant cultural trait, what have been the factors that have sustained the nexus? Alternatively put, what has been the process in reaching the equilibrium? What are the properties of the equilibrium and what have been the supporting conditions of the equilibrium?

3.3 Question 3: Would technological advances and/or economic development affect the familial relations-guanxi nexus?

It is clear that since the Industrial Revolution that took place in the eighteenth century, technological advances and economic development have been two important driving forces behind social change.13 In what way would these two forces influence the familial relations-guanxi nexus of an old civilization? What have been the directions of change? To analyze the change with respect to an equilibrium is to conduct a comparative static analysis in economics. In addition, this question about the change has a subtle and abstract implication. Namely, in the face of the same driving forces, would the world’s major civilizations converge over time, or would they stay on their different tracks, as suggested by people like the Singapore statesman Lee Kwan Yew? More specifically, technological advances and economic development result in urbanization and the expansion of the market economy. If these changes in turn affect the familial relations-guanxi nexus such that the Chinese society moves in the direction of the West, then even though the final outcome is difficult to predict, some common- ality among the civilizations would seem to exist. Consequently, the future of the Chinese society is arguably more predictable, since the past experiences of the West would serve as a useful reference.14

3.4 Question 4: Can the sixth cardinal virtue be developed from the ﬁve cardinal virtues?

The sixth cardinal virtue was ﬁrst suggested by a technocrat in Taiwan, K.T. Lee, in the 1980s (Sun 1984, p. 121). He argued that the traditional ﬁve cardinal virtues all imply superior–subordinate, upper–lower, and leader–follower connotations. In a modern society, however, interpersonal relations are ones based on individuals having equal positions, for, generally speaking, members of a modern society are not structured by

13 With a series of case studies from Japanese history, Ramseyer (1997) argued forcefully that economic development has had an important impact on the relations between parents and children. 14 Kuran (2004) provides a fascinating account of how the choice of legal measures in the Islamic world by minorities has had a long-term impact on their economic welfare. 123 B. Hsiung superior–subordinate, etc., relationships. Moreover, he believed that the five cardinal virtues as well as guanxi are personal relations, and that in a modern society interpersonal relations are mostly impersonal relations and contractual relations. The contrast between the buyer–seller relation in a modern 7-Eleven and that in a small traditional grocery store around the corner is a good example. On the basis of the traditional five cardinal virtues and given the rapid economic progress as well as the development of legal institutions, can the Chinese society gradually cultivate both the sixth cardinal virtue, termed the groupÐindividual relation, and the accompanying norms governing interaction between individuals on an equal level? That is, will guanxi gradually decrease in importance and be replaced by impersonal and contractual relations, given that formal legal institutions have been gradually developing? The question is not only intellectually interesting but practically important, and the reason is straightforward. A modern society is composed of, and structured by, individuals that are equal to each other, but a civil society supported by the sixth cardinal virtue is in direct conflict with a traditional society such as the Chinese society that has been supported by the five cardinal virtues. Whether the Chinese society, Mainland China (PRC) in particular, can nurture democracy will depend on whether a generally accepted and healthy sixth cardinal virtue can be developed. The issue is evidently of critical importance, but it seems to have mostly escaped the attention of scholars studying guanxi in Chinese society.15

3.5 Question 5: What is the relationship between the ﬁve cardinal virtues and the rule of law?

The fourth question explored the connection between interpersonal relations and democracy in Chinese society and the fifth question is to inquire further whether the traditional interpersonal relations can support an independent rule of law. It was mentioned previously that the idea to “family-ize the empire” is the guiding principle for the ruler in Chinese history. Based on this principle, the executive system is the dominant branch and is at the discretion of the emperor’s personal will; the judicial system is attached to the executive branch, and is not an independent institution. By contrast, the judicial system in a modern democracy is an independent branch, dealing mostly with impersonal relations. This is again in direct conflict with the five cardinal virtues and guanxi in traditional Chinese society. In fact, an important function of guanxi in Chinese society is to develop informal channels that can work to one’s advantage in the grey area, in the shadow of the law.16 “Shadow rules,” a phrase made popular recently in China, indicates that there are two sets of rules, one

15 Putnam et al. (1993) is a classic in analyzing how cultural traditions affect subsequent democratic development. 16 Potter (2002) analyzed how guanxi delicately affects the functioning of the legal system in China (PRC). Landa (1981; 1998, pp. 416–418) argued that as economic development proceeds, and markets increase in number and in size, the need to rely on guanxi to deal with the enforcement aspect of transactions would decrease, but increasingly traders would find it more efficient to rely on a nation-wide contract for the enforcement of contracts. 123 Guanxi formal and the other informal. The informal set of rules works beneath the formal, thus supporting and complementary to the normal functioning of the formal rules. Whether the five cardinal virtues will give birth to an impersonal and independent judicial system can be seen as an ultimate challenge to Chinese society. And the source of the challenge lies in the nature of interpersonal relations as well as the mentality held in dealing with these relations.

3.6 Summary

Given the familial relations-guanxi nexus identified in the previous section, this section raised five questions. The five questions are different in nature and in scope, and in the following analysis the questions will be explored to various degrees. Two observations can be made at this point. First, the major components of a society are linked together like a set of simultaneous equations, with the components being both causes and the effects with respect to each other. To understand the past, present, and future of Chinese society, interpersonal relations are evidently an important component. Secondly, in the traditional Chinese society, family is both the source and core of social structure. As the wheels of technological advance and economic development came rolling along, the familial relations-guanxi nexus may undergo fundamental changes. The changes are likely to have long-term impact not only on the old institution of the family but also on the progress of democracy as well as the rule of law. As such, in exploring the issues of democracy and the rule of law in Chinese society, in particular the PRC, an understanding of the structure and nature of interpersonal relations is both critical and indispensable.

4 Theoretical framework

The familial relations-guanxi nexus and its related issues are best explored from both sociological and economic perspectives. In this section a theoretical framework and relevant analytical concepts will be reviewed; in the next section the framework as well as the analytical concepts will be used to answer the ﬁve questions raised previously. Afterwards, measures to empirically verify the theoretical considerations will be suggested and preliminary results presented.

4.1 Macro and micro

The familial relations-guanxi nexus of the Chinese society contains ingredients at both the macro level and the micro level. The framework introduced in sociologist Coleman (1990, Chap. 1) provides a useful analytical device. A short explanation of the framework is in order. The axis of time on the top identiﬁes different points in time; the macro and micro levels on the left indicate the difference between the system (macro) and the entities (micro) that constitute the system. Coleman argued that in t1 period a system has accumulated certain experiences from the past and exhibits various characteristics such as traditions, customs, 123 B. Hsiung

Fig. 1 Interaction between macro and micro factors

abc d

ABCD

(a) micro level phenomena(b) macro level phenomena Fig. 2 Top-down and bottom-up institutions, ideologies, etc. These characteristics at the macro level will affect behaviors of the entities at the micro level at t2 period, as indicated in Fig. 1 by arrow (a). Subsequently, aggregation of the entities’ behaviors will become the phenomenon at the macro level in t3 period, as indicated by arrow (b). Here the macro does not have to be a society and can be other systems. Thus, the framework is useful even in analyzing a small system like a family. Moreover, Coleman argued that an explanation of social phenomena should be a dynamic one, taking into account both the macro-to-micro part and the micro-to-macro part. Alternatively, Coleman’s framework helps illustrate the contrast between sociology and economics. In particular, as sociology emphasizes how society inﬂuences individuals, the discipline focuses on issues concerning the (a) part. By contrast, economics emphasizes individual behavior and the aggregate outcome, therefore the discipline concentrates on issues related to the (b) part. In this sense part (a) and part (b) echo per- fectly Duesenberry’s famous quip: “Economics is all about how people make choices; sociology is all about how they don’t have any choices to make” (quoted in Granovetter 1985, p. 485). It bears repeating that the concepts of macro and micro refer not neces- sarily to society and individuals respectively; they capture in essence the link between a system and its constituting entities. An enlargement of part (a) and part (b) yields Fig. 2. Part (a) on the left corresponds to arrow (a) in Fig. 1: System (macro) factors affect entities’ (micro) behaviors. Part (b) on the right corresponds to arrow (b) in Fig. 1: Aggregating the entities’ (micro) behaviors would give system (macro) conﬁgurations. 123 Guanxi

When the whole structure reaches equilibrium, then both the system and the entities will repeat themselves, respectively. In this scenario both part (a) and part (b) of Fig. 2 can be employed to analyze respectively how the system has reached the equilibrium, i.e., part (a), and once reached, how the equilibrium is sustained by the supporting conditions, i.e., part (b).

4.2 Theory of the ﬁrm and inter-ﬁrm relations: transaction costs approach

The classic paper of Coase (1937) introduces the concept of transaction costs into economics and helps in launching the field of New Institutional Economics. Specifically, the issue Coase dealt with in the article is fairly simple. In utilizing resources, there are two measures for an entrepreneur to choose from: one is to rely on the market, and the other is to form a firm. As such, relying on the market and forming a firm can be seen as employing two different institutional arrangements, based on the entrepreneur’s subjective and objective evaluations of which arrangement is more efficient in reduc- ing transaction costs.17 Coase argues that organizing a firm is more efficient compared to utilizing the market when it is necessary to contract with many independent input suppliers/firms. Landa (1981) extends Coase’s theory of the firm to inter-firm transactions, in which inter-firm relations are embedded in inter-personal relations of trust. Specifically, she first analyzed a particular form of guanxi in the Chinese business community in South- east Asia. She found that the overseas Chinese would form Ethnically Homogeneous Chinese Middleman Group (EHMG) in business dealings, based on kinship, ethnic and other personalistic relations, and that transactions between members of the EHMG are very different from those that involved non-members, e.g. providing credit for transactions with members but demanding cash for non-members. The idea is that when the legal institutions are weak and thus contract uncertainty is high, it is efficient (read rational) for individuals to particularize their exchange relations, to form personalized exchange networks or EHMG, a low cost club-like institutional arrangement, a tool, to serve as an alternative to formal legal institutions such as contract law. Following this logic, it is straightforward to interpret guanxi from the same perspective as a club-like institutional arrangement developed in the Chinese society to deal with problems of contract-uncertainty. Moreover, since China (PRC) has implemented Contract Law in 1982 so that the formal legal institutions are gradually becoming more effective, it is of interest to see whether guanxi will decrease in importance, an issue that will be taken up in the following analysis.18 Sociologist Granovetter (1985) in his “embeddedness” paper, developed a theory of trust embedded in inter-personal relations that reduce “malfeasance”, a theory very similar to Landa (1981), with the exception that Granovetter not only does not use

17 Xin and Pearce (1996, p. 1642) argue that, “Guanxi [can be seen] as a substitute for formal institutional support.” For a discussion of Coase’s analytical style, see Hsiung (2001). 18 See Landa (1998) for an analysis of the impact of China’s contract law on economic activities in China. Also, Peerenboom (2006) has a detailed discussion about the issues involved in the progress of the rule of law in China (PRC), including how administrative laws have affected both the legal institutions and the administrative branches. 123 B. Hsiung transaction costs approach, he also rejects the use of rational choice theory. Hence Granovetter cannot explain how these inter-personal networks emerge (see Landa 2001). In Granovetter (1973, 1983, 2005), he argued that in activities such as looking for jobs, seeking loans, and searching for houses, individuals reach out through the net for information and advice, and then take actions accordingly. Moreover, the ideas of the strength of weak ties and the weakness of strong ties argued by Granovetter further illuminate certain unique properties of interpersonal relations.

4.3 Summary

In this section relevant theories in economics and sociology were brieﬂy reviewed. Coleman’s macro–micro–macro framework offers a system perspective while Coase’s, Landa’s and Granovetter’s theories provide descriptive and analytical accounts of individual’s (micro level) behavior. As will become clear shortly, in analyzing guanxi in the Chinese society, both macro-level and micro-level theories will prove helpful.

5 Theoretical explanations

Based on the theories reviewed in the previous section, this section will try to answer the ﬁve questions posed previously. As a few of the questions are related to long-term processes of a society, some of the proposed answers are best seen as reasoned conjectures or plausible hypotheses. Measures to empirically examine the questions will be suggested and preliminary results presented in the next section.

5.1 Macro factors: China’s geographic and political landscape

Geographically speaking, the mainland of China covers a wide but integrated area that is relatively flat, especially the central and eastern parts. To the south of mainland China, there are sharp mountains and deep valleys that separate the mainland from Thailand, Vietnam, etc. Therefore, in its written history of over three thousand years, China has never faced an invasion launched by forces from the south. To the west of mainland China, there are large areas of deserts, constituting natural barriers for potential enemies. Groups of merchants and determined monks might pass through the deserts to reach the mainland, but military maneuvers of a large scale are beyond question. To the east is ocean; and before the arrival of long-range vessels made possible by the technological advances brought about by the Industrial Revolution of the eighteenth century, no enemies would come from this direction. What is left, clearly, is the north. Invaders have come from the north more than once, and the construction of the Great Walls in the north speaks for itself. This means that if potential invaders from the north can be deterred, then the mainland is a large, self-supporting, and unified area. Given this unique geographical characteristic, it seems natural that once transportation is technologically advanced to a sufficient degree, the vast unified area will 123 Guanxi be likely occupied and ruled by a single political power.19 Moreover, the idea of a unified empire will gradually become a generally accepted world view for the people living in this unified area. Dynasties over the centuries in Chinese history have all considered themselves the Central Kingdom, and the emperors saw themselves as Sons of Heaven. This means that the characteristics of the mainland have two important implications. First, geographical features combined with advances in transportation would lead to a single political authority, centralization of power, and the ideology of great unification. Secondly, due to concerns with potential threats of revolution and sole occupation of power, the central government would purposefully suppress local powers. Self-governing and civil society with independent political powers are concepts rarely prevalent in the Chinese civilization, as there have never been conditions conducive or compatible to such ideas.20

5.2 Micro factors: mutual assistance and the development of guanxi

At the micro level, the dominant feature of Chinese society through the centuries is that it has been an agricultural society. Most people, in most places and most times, lived a self-sufficient life by cultivating and growing crops on their land. While the imperial power might be far away, droughts, disease, and other natural disasters are always nearby. Measures to deal with these have to be developed. Moreover, in agriculture, manpower is always needed, and to deal with the ebbs and flows of life it is better that mutual assistance is available. As such, large families, several generations living under the same roof, extensive kinships and extended families, are all measures that imply mutual help and self-insurance. That is, in an agricultural society with low mobility, most people are living on and attached to land; agriculture and not commerce has been the main activity. Consequently, in production, consumption, saving as well as insurance, family has become a multi-purpose organization that helps serve all the functions minimally if not satisfactorily. And to strengthen the family institution, the ideology of filial piety has gradually become a generally accepted belief system. Once internalized as a core element of the value system, filial piety helps sustain and support the family organization. Seen in this light, filial piety is morality on the surface, but in essence it is an instrumental tool shaped by cost–benefit considerations over a long evolutionary process. Alternatively, since outside of the family there are no familial relations to count on, it is only natural that one will develop a similar measure. Consequently, guanxi is an extension and simulation of familial relations. Both the cardinal virtues of familial relations as well as guanxi are tool-like constructions that serve functional purposes [Question 1]. This also implies that while the idea of embeddedness is a factual description of interpersonal relations, guanxi in the Chinese society is instrumental and functionally oriented. When facing the eternal challenges of nature—to survive and to

19 Olson (1993, p. 575, fn. 10) cited the observation of the anthropologist Carneiro (1970) that the earliest states in history emerged mainly in so-called ‘environmentally circumscribed’ areas, i.e., “areas of arable land surrounded by deserts, mountains, or coasts.” 20 For an analysis that supports the arguments advanced here, see Landes (1998). 123 B. Hsiung procreate—human beings, the smart animals in the words of Posner (2003), develop various tools. Guanxi in Chinese society is one such tool; it is a social construction, a product of the socialization process, and a mechanism developed and employed by the Chinese people to pursue self-interest. In economic activities and especially in an environment that is lacking well developed legal institutions that protect property and contracts, as well as lacking modern infrastructure such as banking, insurance, etc., guanxi has served as a handy tool for Chinese to advance their interests such as to help enforce contracts, to obtain needed capital, and to provide mutual insurance, etc.21

5.3 Combination

Macro considerations are the (a) part in both Figs. 1 and 2, indicating how factors at the macro level would affect entities at the micro level. Micro considerations are the (b) part in both Figs. 1 and 2, illustrating how individual behaviors at the micro level would aggregate to become macro phenomena. By combining both part (a) and part (b) a complete story can be told. Specifically, in an integrated, unified large geographical area such as mainland China, it is easy to have a single political power to come to dominate. Centraliza- tion of power in turn surpasses local and regional powers. However, to rule a vast geographical area with a large population is not an easy task. Confronted with such a difficult challenge the central authority finds it problematic to administer the society using a set of detailed rules. Such a set of rules is operationally infeasible facing a large population scattered over a wide area and having many drastically different local customs and traditions. A better approach is to develop a simple set of ideas that are easy to understand, flexible in interpretation, and accommodating to regional/local differences. Moral principles are ideal for such purposes. Confucianism was first adopted as official dictates by the dynasties, and then it was employed to run the bureaucratic system and to regulate the general public. In form, Confucian thoughts provide guidelines to run the bureaucratic system, but in reality the Confucian teachings/ideas are very flexible in interpretation as well as in implementation. The final outcome hinges delicately on the persons who interpret and implement the Confucian ideals. This flexibility is not all bad. In particular, the five cardinal virtues are in perfect harmony with the central government’s relying on moral principles to rule. For the central government, the cardinal virtue of the emperor–subject relation vindicates its own legitimacy and cultivates generations of docile subjects. For the ordinary people, relying on the family is economically sound and politically safe; no public domain will be contemplated and thus no potential threats to the central authority will come into existence. Idioms such as “Work at sunrise, rest at sunset; what has the emperor to do [with me]” and “The sky is high and the emperor is far away” capture the general sentiments of the ordinary people. The teachings of the five cardinal virtues on the one

21 As indicated in the text, the EHMG analyzed in Landa (1981) is a good example showing the instrumental aspect of guanxi for the Chinese in dealing with potential problems in a particular environment. Hsiao (2003) analyzed the slow adoption of e-marketplace software in China. In addition to technological barriers, Hsiao argued that a major factor is that e-marketplace lacks the channels to develop interpersonal relations such as guanxi to help deal with the enforcement problems in internet transactions. 123 Guanxi hand and the moral principles preached and relied upon by the central authority on the other hand are compatible and in perfect harmony with each other [Question 4].22 In addition, for the society as a whole the emperor and the central government are the single authority at the top, and at the bottom are subjects not connected by any political organization. As the saying goes, the subjects are just like “a plate of loose sand.” The public domain that supposedly should exist between the top and the bottom hardly exists; it is more like a vacuum. As such, Chinese society has not been a soil that would grow ideas or institutions such as checks and balances or “no taxation without representation.” Revolutions did take place but they have happened only when the dynasty in power was plagued by widespread corruption and faced natural disasters. Once the old dynasty is overthrown, a new dynasty is born and a new emperor assumes power. But that is it, as single authority, the ﬁve cardinal virtues, and rule through moral principles all continue functioning under the new dynasty. That the Chinese civilization lacks democracy, an independent judicial system, and the thoughts that support these institutions is arguably a natural result of this long evolutionary process [Question 5]. Consequently, shaped by both the macro and micro factors, Chinese society has crystallized the familial relations-guanxi nexus. Moreover, moral principles such as ﬁlial piety and Confucian thought have been developed to help support the nexus, resulting in an equilibrium. As long as the basic structure of an agricultural society remains the same, the equilibrium will persist.

6 Empirical considerations

Analysis in the previous section was an attempt to address the questions raised in Sect. 3. While the analysis led to some plausible explanations, it has two potential weaknesses. First, the questions raised as well the analysis suggested are somewhat abstract, as both are wide in coverage and deep in scope. Secondly, both the questions and the analysis involve a very long process, and the causal relations suggested tend to be vague and not directly veriﬁable. As such, the previous analysis is more like reasoned conjectures. To be persuasive, more detailed historical evidence is obviously needed. This section will propose an alternative approach to address the questions raised previously. In particular, by shifting from the backward looking approach, i.e., rea- soning in the context of geographical structure and history, to a forward looking approach, hopefully additional lights will be cast on the questions. Specifically, empirical evidence from contemporary Chinese society would provide materials relevant to the questions raised. As pointed out above, Chinese society now consists mainly of China, Hong Kong, and Taiwan, and they are different along two axes. First, considering the degree of economic development, Hong Kong is the most advanced, followed by Taiwan and China in that order. In 2008, per capita income was USD$30,900 for Hong Kong, $17,500 for Taiwan, and $3,300 for China. Sec-

22 North (1990) argued that the mental construct, i.e., the world view, of the general public would determine the economic performance of a society in the long run. 123 B. Hsiung ondly, considering democracy and the rule of law, Hong Kong has the strongest rule of law, Taiwan is more advanced in democratic development, and China has the largest population but is closest in social structure to the traditional Chinese society. As such, a survey of these three communities will have both cross-sectional and longitudinal ingredients. It will be cross-sectional because all three communities are standing at the same point in time at the beginning of the twenty-ﬁrst century; it will be longitudinal because the communities are different in their economic, political, and social development, essentially being situated at different points in time.

6.1 Questionnaire and survey

An empirical study could be conducted by a survey within the three communities. By asking adult respondents questions about how they deal with various situations in their daily lives, one can obtain the conﬁgurations of guanxi in these three regions and do a comparative analysis. The questionnaire could contain the following questions:

• If a family member or close relative is to be hospitalized, then would you call up friends to help in ﬁnding a hospital and getting a bed in the hospital? • If you get a ticket while driving, would you use guanxi to cancel the ticket? • During the most recent Chinese Lunar New Year, did you give gifts to your business or social superiors? • When you were studying in high school, was guanxi sought and used concerning your schooling and class arrangements? • In the past month, did you see strangers quarreling with and/or shouting at each other in public places (e.g., in the subway, on the streets, or in parks)? • If you need capital to start a small business and cannot get it from the banks, would you call up relatives and friends for a loan?

Some of the survey questions are designed to test directly how respondents in the three regions employ guanxi to perceive problems in their daily lives and to deal with them accordingly. Others could be used to indirectly capture the conﬁgurations of guanxi in these communities. Given the theoretical discussions and the differences between the three regions along the two axes, a few testable hypotheses suggest themselves.

Hypothesis 1 That guanxi is important holds true for all three regions.

Even though the survey is not conducted concurrently in other areas such as Japan or the US, respondents in China, Hong Kong, and Taiwan are likely to consider guanxi important in their daily lives. It is an important feature of Chinese society that does not seem to have been affected in a fundamental way by economic or democratic development. 123 Guanxi

Hypothesis 2 Guanxi is likely to be of decreasing importance in China, Taiwan, and Hong Kong, in that order.

The order is the inverse of the order of income levels in these areas. Roughly speaking, economic development would decrease the reliance on guanxi for the general public.

Hypothesis 3 As far as guanxi is concerned, China and Taiwan are closer to each other than to Hong Kong.

If this hypothesis is supported by the data from the survey, then a major contributing factor would be the rule of law in Hong Kong. After having been ruled by the British for close to a century, Hong Kong has now a well respected, independent judicial system. People in Hong Kong have less need to rely on guanxi as compared with people in China and Taiwan.

Hypothesis 4 Within the three regions, factors such as education, occupation, and income do not account for the differences in the use of guanxi.

Guanxi is a unique feature of Chinese society, and its degree of importance might be different in China, Hong Kong and Taiwan. But within each area, personal characteristics are not likely to affect how guanxi is valued and employed. This means that as far as guanxi is concerned the three regions are likely to be relatively homogenous within each region. In addition to taking a survey in the three regions, a similar survey can be conducted throughout China concurrently. That is, guanxi might be valued to different degrees in metropolitan areas like Peking and Shanghai, as compared with that in second-tier cities like Wu Han and Xi An and in third-tier cities like Yi Chang and Shao Hsing. As income levels and economic development of these cities are different, guanxi may assume different conﬁgurations and it should be interesting to see how respondents in various socio-economic regions respond to the survey [Question 3].

7 Guanxi in contemporary Chinese society: preliminary results

A preliminary survey conducted in Hong Kong and Taiwan has yielded results that are broadly consistent with the hypotheses suggested here. Specifically, a pilot survey was carried out in November, 2007 in both Hong Kong and Taiwan and the ﬁndings are described in this section.

7.1 Respondents

There were 33 respondents in Hong Kong, all of whom were graduate students studying for an MBA, MA or Ph.D. in the Department of Economics and Finance of the City University of Hong Kong. There were 21 males and 9 females, aged 32–54. The sample in Taiwan contained 23 respondents, all EMBA students of the Interna- tional School of Global Leadership and Management of the International East-West 123 B. Hsiung

University (USA). There were 15 males and 8 females, aged 32–59. As can be seen from the age distribution the respondents are not graduate students studying for their advance degrees immediately after university education. They are adult students who have graduated from college for a number of years and thus have had more ﬁrst-hand experience concerning social reality such as guanxi.

7.2 Contents of the survey

In addition to the basic biological data (sex, age, etc.), the questions are separated into two categories. One includes questions concerning the respondent’s personal experience and the other includes questions concerning the respondent’s personal judgment (see below).

7.3 Survey results

The following table lists the questions and the results for the Hong Kong and Taiwan samples (suggested caption: Preliminary Survey Results of Hong Kong and Taiwan Students):

Taiwan sample, % (n = 23) H K sample, % (n = 33) Personal experience 1. If a family member or a relative falls sick and has to be hospitalized, would you use guanxi in finding a hospital and securing a bed? No 17 39 Maybe 30 18 Yes 43 42 Other 9 0 2. If you get a ticket while driving, would you use guanxi to cancel the traffic ticket? No 61 91 Maybe 26 0 Yes 4 9 Other 9 0 3. When you apply for a mortgage in a bank, would you try to find acquaintances to help? No 48 67 Maybe 17 21 Yes 22 12 Other 13 0 4. During the past month, did you see strangers quarreling with or shouting at each other in a public place such as in the subway or on the streets? No 74 39 Yes 26 61 Other 0 0 5. In the most recent Chinese Lunar New Year, did you visit your former teachers or senior acquaintances? No 41 70 Yes 50 27 Other 9 3

123 Guanxi

Taiwan sample, % (n = 23) H K sample, % (n = 33) Personal judgement 6. Generally speaking, how important is guanxi in your judgment Not very important 0 3 Somewhat important 26 39 Very important 70 58 Other 4 0 7. In your judgment, how important is guanxi in promotions in the civil service or government institutions? Not very important 0 3 Somewhat important 26 30 Very important 70 67 Other 4 0 8. In your judgment, how important is guanxi in promotions in private enterprises? Not very important 4 9 Somewhat important 30 27 Very important 61 64 Other 4 0 9. In your judgment, how do people generally feel about the importance of guanxi now as compared to what it was ﬁve years ago? Increasing 91 44 About the same 0 44 Decreasing 4 13 Other 4 0 10. In your judgment, how do people generally feel about the importance of guanxi ﬁve years from now as compared to what it is now? Increasing 52 42 About the same 22 45 Decreasing with an increasing speed 13 6 Decreasing with a similar speed 9 6 Other 4 0

7.4 Summary and analysis

While Hong Kong and Taiwan have been through different historical experiences since the nineteenth century, both are Chinese societies that have been influenced by the Chinese cultural traditions. As such the two societies share many similarities which are reflected in answers to certain questions. From the preliminary survey, a few similarities can be identified:

1. [Question 1] If a family member or a close relative is sick and has to be hospitalized, then would you use guanxi in ﬁnding a hospital and securing a bed? Over half of the respondents answered “yes” or “maybe” in both Hong Kong and Taiwan (Hong Kong 60%, Taiwan 73%). 2. [Question 6] A high percentage of the respondents in both regions considered guanxi to be “very important” (Hong Kong 58%, Taiwan 70%). Those who considered guanxi “very important” or “somewhat important” surpassed 90% in both regions (Hong Kong 97%, Taiwan 96%). 3. [Questions 7 and 8] A large percentage of the respondents considered guanxi “very important” in promotions, for both government institutions and private enterprises. Similarly, respondents in both regions considered guanxi to be more important in 123 B. Hsiung

government institutions than in private enterprises in deciding promotions (Hong Kong 67% > 64%, Taiwan 70% > 61%).

The differences between the two samples are also illuminating:

1. [Question 2] When getting a traffic ticket, almost one-third of the respondents in Taiwan answered “yes” or “maybe” that he or she would try to use guanxi to cancel the ticket (26%), but only about one third of this percentage of the respondents in Hong Kong answered similarly (9%). 2. [Question 3] When applying for a loan in the bank, a higher percentage of respondents in Hong Kong would not try to seek help from acquaintances as compared with that in Taiwan (Hong Kong 67%, Taiwan 48%). 3. [Question 5] Those who visited their former teachers or senior acquaintances during the past Chinese Lunar New Year were significantly fewer in Hong Kong than in Taiwan (Hong Kong 27%, Taiwan 50%). 4. [Question 9] A larger percentage of respondents in Taiwan believed that guanxi is more important now than it was five years ago, as compared with those in Hong Kong (Hong Kong 44%, Taiwan 91%). 5. [Question 10] A sizable percentage of respondents in both Hong Kong and Tai- wan believed that guanxi will become more important five years from now (Hong Kong 42%, Taiwan 52%), but a higher percentage of respondents in Hong Kong believed that the importance would remain the same (Hong Kong 45%, Taiwan 22%). 6. [Question 4] Generally speaking, Hong Kong has a higher degree of the rule of law and professionalism is more developed as compared to Taiwan. As such when people disagree, presumably they are more likely to resolve their disagreement in a peaceful manner. But the preliminary survey shows that a significantly higher percentage of respondents in Hong Kong saw strangers quarrelling with or shouting at each other in public places as compared with that in Taiwan (Hong Kong 61%, Taiwan 26%). This sharp contrast might capture a delicate element of guanxi. Specifically, in Hong Kong there are many new residents from mainland China as well as many foreign laborers working as household helpers. The heterogeneity of the population is high and thus there are strangers who are not within the network of guanxi. Conflict between strangers may thus lead to direct confrontation. By contrast, Taiwan is a relatively homogenous society and people tend to feel that even strangers may be related to each other by a weak guanxi, the emergence of the sixth cardinal virtue that governs the group–individual relation. Therefore there is no need for interpersonal conflict to turn into public confrontation.

In summary, the data from the preliminary survey conducted in Hong Kong and Taiwan show that on the one hand guanxi is important in both of these Chinese communities, but on the other hand it assumes a more important position in Taiwan than in Hong Kong. The results are broadly consistent with the analysis and hypotheses suggested above. 123 Guanxi

8 Discussions

It was argued that the insight in Coase (1937) can be used to interpret guanxi as a tool, and as conditions change the use of this tool will adjust accordingly. For China (PRC), the dominant Chinese community now, what are the factors that would influence the use of this tool? Two obvious factors serve as reference points. Consider first a factor that is not likely to affect the use of guanxi. Specifically, three-generation families have largely given way to nuclear families in China, and the one-child policy has further simplified the family structure. As family structure becomes simplified, interpersonal relations are greatly simplified also, and the demand for guanxi seems to decrease. However, concurrent with these changes is the fact that nuclear families and the one-child policy imply that family resources are more concentrated. The attention paid to the single child (the brat princes and princesses) may very well surpass that in the past.Guanxi for the ordinary people may not become less important, though the types of guanxi needed might evolve gradually.23 Alternatively, as the economy progresses, its impact on guanxi is more compli- cated. Specifically, as Coase (1990) explained there are three kinds of transaction costs: search costs, negotiation costs and enforcement costs, with the former two being incurred before the transactions are made and the latter being incurred after the transactions are made. When the legal institutions are weak, guanxi, e.g., EHMG, is needed to reduce all three kinds of transaction costs. When the legal institutions are more developed, presumably both contract uncertainty and enforcement costs would decrease. This in turn seems to suggest that guanxi will decline in importance, but this may not be the case. Specifically, as contract uncertainty decreases the prospect of profitable activities increases and therefore there is even more need for the use of guanxi to try to deal with the search and negotiation costs. This is especially true as economic activities expand both in space and complexity. As such, there are two forces working in opposite directions as the legal institutions become more developed. It is then of interest to examine in more details which forces are more important, e.g., since PRC launched its Contract Law in 1982, as indicated previously.24 For business people, opportunities often come with guanxi, though its exact nature might change subtly as the scale of operation increases.25 For the general public, however, department stores and supermarkets are part of their daily lives, and in making purchases in these places, guanxi is not only unimportant, it is essentially useless. This is very different from the case in the past where most people did most of their purchases in small neighborhood stores. Therefore, at least in the economic sphere of their lives, more and more people would be dealing with others not with personal relations (guanxi) but with impersonal relations. This predictable development arguably is a replication of the experiences of Taiwan, and it has two significant implications.

23 Yeung and Tung (1996, p. 58) suggested, based on survey data, that in the Shanghai area young people valued guanxi more than older people. 24 Li (2004) suggests that China is gradually changing from a relation-based society to a rule-based society, and that this is a general trend for different societies. 25 See the opposite views expressed by Yeung and Tung (1996)andGuthrie (1998) concerning whether guanxi has become more or less important in business activities in China since 1970. 123 B. Hsiung

First, traditional guanxi decreases in importance; secondly, the awareness of rights obtained from the economic sphere will gradually find its way into the political sphere. Resources accumulated in the economic sphere will become the basis of demanding political rights. In short, the expansion of the economic sphere gradually brings about changes in the five cardinal virtues. The traditional five cardinal virtues would become less important, and the sixth cardinal virtue, the basis of a modern democratic society, is likely to come into existence gradually without fanfare [Question 4].

9 Conclusion

The focus of the present inquiry has been guanxi in Chinese society. In answering the questions of “what is it,” “why is it,” and “what is it going to be,” theoretical framework and analytical concepts in both sociology and economics have been employed. Compared to previous studies on the subject, analysis in this inquiry has covered a wider scope and longer period. Guanxi has been interpreted as a product in the long evolutionary process, a tool-like medium that serves functional purposes. The present inquiry is arguably an initial attempt in analyzing a unique feature of Chinese society from the economic and sociological perspectives. There are a few possible directions for future research. First, this paper argued that guanxi is essentially a tool in dealing with interpersonal interactions. As such, in dealing with the idea of transaction costs, the approach adopted was not to examine the contents of the idea. Rather, in analyzing problems related to transaction costs, the approach taken was to examine what kind of problems have been created by transaction costs, what have been the behavioral responses of the individuals involved, and what are the resulting conﬁgurations. The link between transaction costs, embeddedness and tools on the one hand and guanxi on the other hand is a worthy topic for further analysis, both theoretically and empirically, as can be seen from the discussions of this important issue in Landa (2001). Moreover, the present paper suggested a few arguably imaginative conjectures concerning Chinese history. This discussion merely drew the picture of a landscape with a few broad stokes. Finding more substantive material to verify the arguments needs additional, detailed work. In addition, it seems to be a fruitful endeavor to conduct the empirical survey suggested above every three to fours years, on a regularly basis. In so doing, one would capture not only the changes of guanxi in the Chinese communities but also the direction and the speed of the changes. If the trajectories of China, Hong Kong, and Taiwan converge to a similar endpoint, then the equilibrium eventually reached would constitute a difference (if there is one) between the Chinese society and other major civilizations. If, however, the trajectories of China, Hong Kong, and Taiwan are pointing toward different endpoints, then it would imply that the traditional Chinese culture, in the face of economic, political, and legal progress, has changed fundamentally. That is, even though China, Hong Kong, and Taiwan share the same cultural origin, they have set out upon different and possibly irreversible paths. Evidently, in the Chinese society the issue of guanxi is indeed of great relevance (guanxi)!

123 Guanxi

Acknowledgments I thank Kenneth Chan, Kwang Kuo Hwang, Kant Fang and Yuan Shen for fruitful discussions and Yew Kwang Ng, Janet Landa, Duan Lin, Eden Yu, Steven Kan, Kelly Olds and Tzu-Wen Sung as well as two referees for very detailed and helpful comments. In addition, I am grateful to the Col- lege of Social Sciences, National Taiwan University as well as Y.C. Tang Disciplinary Development Fund, Zhejiang University for research support and to Meya Tseng and Tzu Han Kao for research assistance. Finally, I am much indebted to the founding editor of this journal, Janet Landa, for her editorial advice.

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