Blending Cultural Business Styles

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. According to the authors' research, which was conducted from 1999 to 2000, networking helps to enhance revenues but does little to control costs, whereas contracts lower production and marketing costs but don't boost the top line. So companies with stagnant revenues might consider more networking in order to open up new markets. Likewise, if local costs are rising, it may be time to tighten up contracts with suppliers.

Contracts and guanxi are complementary in another sense, points out Yadong Luo, professor of management at the University of Miami (Florida) and paper co-author with Shenkar and Mee-Kau Nyaw, a vice president of Lingnan University in Hong Kong. “You need good contractual codifications, especially with joint ventures. But if you have only contracts, there is no way to ensure your ongoing success. Contracts are an early-stage mechanism. Then you have to adapt your products, policies and employees to local practices.”

It's not as easy as it sounds to use guanxi and contracts. Shenkar emphasizes that using guanxi can involve performing favors that might be frowned upon in the West. “The notion of a personal network is sometimes suspect in the West,” he says. “There is a connotation of foul play, nepotism or corruption.” It could even place multinationals in the awkward position of considering bribery when public officials are involved.

With the use of contracts, enforcement is a key issue, because contracts have little meaning if there is no effective mechanism for arbitration. Shenkar says the record on enforcement is mixed in China. “If you are talking about inter-company relationships, the record is not bad,” he says. But companies that seek arbitration for disputes that take place outside the boundaries of an existing relationship, say to stop a counterfeiter, have not had much success. Luo adds, “There are cultural differences in interpreting the terms in a contract. This compounds the difficulties of enforcement.”

The environment for enforcement, along with standard business practices, has changed since China's acceptance into the World Trade Organization. “Guanxi is getting less important and contracts are becoming more important,” says Jonathan P. Serbin, president of Sinosure Financial Group, a Shanghai-based firm that provides market-entry consulting and investment banking to foreign companies in China. Serbin adds, “As contracts become more enforceable, there is a risk that guanxi can backfire.” Some politicians and businesspeople are bending over backwards to ensure there is no appearance of impropriety in Western eyes. “Guanxi is still important. But I don't think it's a make or break proposition anymore,” says Serbin.

As far as the use of contracts goes, Luo adds, “There is a difference between how people view contracts with foreign businesses and contracts with local people. They know that foreign people are used to contracts and so now they attach greater value to contracts with foreign businesses.” In other words, Chinese companies are also learning to blend different cultural styles of doing business.

For a copy of the paper, contact Yadong Luo at yadong@miami.edu.