When companies from the industrialized West conduct business in the dynamic, developing Chinese economy, they often experience a clash in business cultures that may appear to force them to choose between the different styles of doing business. But a forthcoming paper in the Journal of International Management finds such conflicts needn't exist. Rather, there is a middle ground for overseas businesses to use both styles, because each set of practices serves a discrete function.
“Mitigating Liabilities of Foreignness: Defensive vs. Offensive Approaches” contrasts approaches to doing business in developing nations, particularly in China. The paper categorizes strategies for overcoming the uncertainties of operating globally as either “offensive,” meaning they help to localize the company to the foreign environment, or “defensive,” meaning they protect corporate interests and reduce uncertainty and complexity.
The prototypical offensive strategy is networking, a style of doing business that resonates well in Asian cultures. Indeed, China-watchers often stress personal networking, or guanxi, as the most important factor to business success in China. Guanxi is a bit different from the cocktail mixers thought of as “networking” in the West; it is more personal and often entails an escalating reciprocity of favors and acts. Other methods to reduce a company's “foreignness” to the local business community include investing in the local community and increasing the use of host country resources for raw materials, suppliers, facilities and staff.
A classic defensive strategy, on the other hand, is the Western emphasis on contracts. Developmental economists argue that the legal protections of developed nations differentiate their business environments from those of developing nations. The legal and regulatory framework reduces many uncertainties in doing business in another country. Thus, when multinationals enter new markets, they often use rigid contracts to codify terms and minimize uncertainties. Multinationals can also insulate themselves by vertically integrating overseas operations or by directly supplying services such as financing.
Should a company play offense or defense? Both, say the authors. The most successful companies among their study's sample of 92 manufacturing subsidiaries and joint ventures were those that used both contracts and guanxi. “They complement each other,” says co-author Oded Shenkar, Ford Motor Company Designated Chair in Global Business Management and professor of management and human resources at Ohio State University's Fisher College of Business. “If you want to be successful in that kind of environment, you have to use both.”
That's because the two mechanisms have different effects.