First published in Convergence Journal, Vol 6 no 4 (South Africa), November 2005, www.axius.co.za
It has been nearly 10 years since Francis Fukuyama published his work ‚Trust‛ discussing the possibility that high levels of social trust, especially the kind of social trust that comes out of Confucian societies, will be requisite to prosper economically in the 21st century. After reading Fukuyama’s work, one can’t help but speculate that he was in large part trying to prepare his audience for the economic culture that is currently propelling many parts of East Asia to economic success. Social trust based on familial ties and kinship is nothing new, yet, the method with which Confucian societies are finding success by making use of those ties is certainly surprising, and at times inspiring. Confucian culture that is dominant in many parts of East Asia is teaching the world something about economic success and the way in which relationships can be utilized to bolster that success.

In China, the importance of relationship building in daily life cannot be overstated and this surely has its effects on the highly charged economic environment in China. This economic environment has been buttressed by an important cultural phenomena popularly known as guanxi 关系 (relation, membership). Because interpersonal relationships in China affect all aspects of social and economic life, relationship building and creating trust is best cultivated through understanding culture, networking, and utilizing social capital that typifies network societies. In China, better understanding guanxi makes it clear how the value of culture, fostering relationships, and building strong networks will create the sort of trust that is required for economic success. The ‚business‛ of business for the Chinese is not to rely solely on ‚hard‛ or ‚technical‛ skills, but requires strong interpersonal skills and relationships in the form of guanxi.
In a highly networked ‚connection economy‛ like China’s, one’s ability to build healthy relationships is a determining factor for any kind of success, be it economic, political, or social. This ‚connection economy‛ is not typified by power or positional authority but by a more intimate and relationship-based savvy that champions trust and high emotional intelligence. Cultural understanding, patience, flexibility, relationship building, negotiation skills, social capital, high EQ (emotional quotient), and understanding social networks are the focus as business in China is largely integrated with its unique guanxi culture.
Confucianism, Democracy, and Capitalism
Popularly, discussion surrounds China’s increase in privatization and the movement towards a market-driven economy that potentially will shove political orientation and decision-making towards a more democratic China. This is questionable if one takes to heart Samuel P. Huntington’s (1996) clash of civilizations delineating allegedly incompatible and disparate groups based on cultural considerations rather than geographical boundaries. Therefore, a legitimate question persists whether or not Confucian sensibilities can bring about and sustain democracy (Weller 1998:80-81,Tu, Hejtmanek, and Wachman 1992:74-90, Fukuyama 1995b:20-33), or whether China even wants to move towards a democratic system at all. The socialist nature of Confucianism, along with the low status of merchants in traditional Confucian society, is cause for concern as masses of Chinese citizens begin to become successful private entrepreneurs.
The little dragons (Taiwan, Singapore, Hong Kong, and South Korea) have seemingly done quite well integrating Confucian societies with capitalist successes, and at times, have created a superior hybrid political system of authoritarianism and capitalism. Fareed Zakaria’s (1994) interview with Lee Kuan Yew in Foreign Affairs, suggests that Singapore has used Confucian values to promote economic growth and provide some authoritarian power that capitalist countries lack. Supposing that we can assume China will continue riding the wave of economic and political success its smaller predecessors have enjoyed, it may be argued that Confucianism is not incompatible with entrepreneurship and democratic values.
The ideas that are generally associated with entrepreneurship and democratic values involve individualism and self-interest that exist under Western philosophical and political systems that suppose transcendent law standing above community and social relationships. Entrepreneurship in a democratic, capitalist atmosphere appeals to notions of transcendent rights and competition, feeding off of the conflicts of ideas and groups. To show why Confucianism doesn’t merge well with this system Fukuyama (1995a:24-25) points out that ‚Confucian societies lacked a tradition of rights against the state.‛ Harmony and cooperation were preferred over disagreement and competition. Order and respect were central values, while the conflict of ideas and groups were viewed as dangerous and illegitimate. Because of this, merchants in Confucian society resided at the bottom. Those who sought profit were regarded as self-interested and did not represent the communitarian values that embody Confucianism’s regard for society and authority. One, under this reading, can safely assert that private entrepreneurship did not bode well in the Confucian world.
Tu Wei-ming (Tu, Hejtmanek, and Wachman 1992:74) discusses Confucianism in terms of ‚a particular type of economy, namely, an agricultural-based economy with a family-centered social structure and a polity with a paternalistic central bureaucracy as its salient feature.‛ Because of the filial nature of Confucianism, one can understand the self as an extension of the state and vice-versa where group interest is self interest. Confucianism provided the basis with which to join together state and society. As an example it has been shown that in pre-1949 China, private entrepreneurs performed civic duties to eschew negative sentiments towards merchants and entrepreneurs (see Dickson 2003:118).
Entrepreneurship does not occlude social and community life. If entrepreneurs have a sense of community rather than radical individual gain, there may be an inclination to include the larger community in personal success. It can be argued that entrepreneurs in China are not seeking autonomy from the state so that they can in turn challenge the state, but are working to embed themselves in the state to link themselves strongly with state interests (see Dickson 2003:84-85). The Confucian tradition remains one of flexibility and adaptability, and because of this, entrepreneurship can successfully be integrated into the existing system.
The attempt to make sense of contemporary China under this reading helps one to envisage how private entrepreneurship could flourish in a Confucian society. The success of the little dragons is indicative of the mutual existence of capitalism and Confucianism. Because of this one can question the traditional view that Confucian and capitalist values and practices cannot find synergy. If one takes Confucianism on its own terms, capitalist practices such as entrepreneurship can flourish under the Confucian model. The coexistence of Confucianism and private entrepreneurship can occur for two reasons; first, self-interest of the unique individual plays a positive role in Confucian China, and secondly the context specific nature of the Chinese tradition in general provides the adaptability of Chinese society to new social, economic, and political conditions. Further, these two points are practiced through important social connections, or guanxi, that binds state and society. (For an excellent review of guanxi see Gold, Guthrie, and Wank’s (2002) Social Connections in China. Additionally, Bruce J. Dickson’s (2003) Red Capitalists in China thoroughly discusses CCP ties to private entrepreneurs.)
guanxi and Entrepreneurship
Conceptualizing guanxi as a developmental institutionalized mechanism in China’s growing economy, one can begin to vision how entrepreneurship takes shape in a Confucian society. Originally functioning as a survival mechanism during China’s Cultural Revolution, guanxi has now become, and will continue to be, a developmental mechanism for economic and social advancement in China’s changing future. guanxi can be nurtured in business and the ‚urban-industrial‛ sphere to engage private entrepreneurs and managers with the remaining state economy as well as act as a mechanism for existing organizations to improve business to business interaction.
As a form of social capital, guanxi can potentially create novel methods of governance. guanxi acts as a gel that provides opportunity for transactional fluidity. This can translate into more expedient and lower-cost transactions that might not be possible within large centralized institutions and corporations. Mayfair Mei-hui Yang (2002:468) has labeled this ‚guanxi capitalism.‛ It is characterized by small firms that base transactions on personal networks that have the flexibility to easily interact with and gain access to new markets and supplies.
Social networks can be utilized for economic purposes in response to weak state and economic institutions. The purpose of this is to create stronger relationships between state institutions and their officials and businessmen and entrepreneurs. In the case of China, as the state releases its grip on enterprises both locally and nationally, strong social networks can complement the opening up of markets and institutions. ‚Enterprises require networks to supply what the weak state and economic institutions cannot provide: security, trust, business procedures, conflict resolution, but also, more broadly, access to non-tradable input, such as assets, finance, know-how, personnel, and business opportunities‛ (Heidrischke 2004:98). For China, these social networks, in the form of guanxi, prove resilient and take on new functions that form economically motivated mutual empowerment. guanxi becomes more than a Confucian informed survival mechanism, and becomes a force for economic development.
‚guanxi capitalism‛ can exist when many small firms fluidly interact because of guanxi ties. ‚Chinese capitalism is shown to differ qualitatively from Western capitalism in that it emerges from a Chinese cultural tradition of small family firms based on paternal authority and personal trust rather than a legal system, and the importance of interpersonal and kinship relations rather than individual rights‛ (Yang 2002:467). This is in contrast to larger hierarchically integrated corporations. This form of capitalism that stretches throughout the Chinese Diaspora is a unique social feature and may even provide competitive advantage. ‚Overseas Chinese small family firms are of simple structure and ephemeral nature, whereas the personal networks between firms and their suppliers and buyers often outlast the existence of individual firms as firms open and close, merge and change their operations at will, with the help of a stable enduring network‛ (Yang 2002:467).
For example, enterprises that are small and flexible with access to vast networks that are trusted can provide avenues to venture capital not available through commercial banks. These trusted networks can also assist in locating technical expertise as well as transferring technical knowledge to private entrepreneurs. These networks do not have to be exclusive to one function and they can provide exploratory options when new needs arise. This allows the networks a resilience that keeps them alive as markets and needs change and new development occurs. Strategic capital is important in private enterprises, especially start-up enterprises. In China relationships with politically powerful sources of capital can make or break newly forming enterprises.
A conception of guanxi that gives it significant weight in the economic sphere helps one to understand how entrepreneurship and capitalism can flourish in China. Yang (2002:475) writes that ‚when guanxi is adapted to capitalism, money loses its independence because money itself must be mediated by symbolic capital, which is only gained through generosity.‛ This is to say that in ‚guanxi capitalism‛ money is not the only source of power. Individuals become interested in relational virtuosity to satisfy desires. The locus of power is not centered on monetary sources but balances out with relationality as its equalizer. This is not to say that guanxi makes the world a humane place, but, in contrast to Western business practices (as seen in recent actions by large US corporations) it does emphasize relational virtuosity as well as the accumulation of wealth.
The role of business transactions based on trust and the institutionally uncertain environment of China have caused some hesitancy in foreign investment. guanxi tends to frown upon formal contracts and sees this practice as constraining. This is not the case in traditional Western practices. To draw interest and create investor confidence, between 1979 and 1985, focus in China’s legal system turned towards foreign law to assist China in building its formal law and legal infrastructure. China needed foreign capital to function on the open market and foreign investors were wary about protection. The choice then was to import Western law practices to give China a seat at the table of international business and attract foreign investment. While this may have initially been helpful to encourage transaction with China, we now see that certain practices such as guanxi were not seen as cooperative with the imported legal systems. These practices, which are entirely important to the Chinese tradition, have been labeled as corruption under the orchestration of Western law and Western institutional structures.
Pitman Potter (2003) has done extensive study on the PRC legal system and guanxi. ‚In the context of the effort to build a legal system in China, guanxi relations and formal institutional relations can be seen to work together. The traditional guanxi system retains its importance, but must operate alongside an increasingly formal set of largely imported rules and processes made necessary by the increased complexity of social, economic, and political relations. Thus, guanxi becomes an asset, which can be banked or deployed as needed to serve the interests of the holder in the context of a larger institutional system‛ (Potter 2003:para. 3). There is evidence that formal legal structures and practices as well as informal mechanisms of performance and enforcement are used and accepted.
Conclusion
Whether one is a local Chinese citizen, a politician, or a foreign business-person, possessing guanxi is a key factor to doing business in China. What this means is that if you want to do business or politics in China, possessing relationships where you can trust your partners are essential to having success. Helping people outside of a Confucian system understand this phenomenon will only increase the ability for one to have political and economic success as China continues to open up and confront the world. Building strong networks and trusting partners is how one can best navigate network societies and guanxi cultures such as China’s.
Works Cited

    Dickson, Bruce J. 2003. Red Capitalists in China. Cambridge: Cambridge University Press.
    Fukuyama, Francis. 1995a. ‘Confucianism and Democracy.’ Journal of Democracy 6.2. Baltimore: John Hopkins University Press.
    ______. 1995b. Trust: The Social Virtues and the Creation of Prosperity. New York: Free Press Paperbacks.
    Heidrischke, Hans. 2004. ‘The Role of Social Capital Networks and Property Rights in China’s Privatization Process’ in China’s Rational Entrepreneurs: The Development of the New Private Business Sector. London: Routledge.
    Huntington, Samuel P. 1996. The Clash of Civilizations and the Remaking of World Order. New York: Touchstone.
    Potter, Pitman B. 2003. ‘guanxi and the PRC Legal System: From Contradiction to Complimentary.’ 7 October. http://www.chinaonline.com/commentary_analysis/legal/currentnews/secure/C00021599Wilson-S.asp
    Tu, Weiming, Milan Hejtmanek, and Alan Wachman (eds). 1992. The Confucian World Observed: A Contemporary Discussion of Confucian Humanism in East Asia. Honolulu: East-West Center.
    Yang, Mayfair Mei-hui. 2002. ‘The Resilience of guanxi and its New Deployments: A Critique of Some New guanxi Scholarship.’ The China Quarterly number 170 June. Cambridge: Cambridge University Press.
    Zakaria, Fareed. 1994. ‘Culture is Destiny: A Conversation with Lee Kuan Yew.’ Foreign Affairs Volume 73 No. 2. Edited by Fareed Zakaria. New York: Council on Foreign Affairs.

Eric Hanson is the Asia-Pacific director of the futurist consultancy, TomorrowToday.biz. He has spent most of his professional career in the Asia-Pacific region teaching in China and the United States. After completing undergraduate work in Michigan in both Philosophy and Finance, Eric spent time as a business consultant in China as well as teaching Public Speaking and Philosophy at the university level in Shanghai. Eric currently teaches leadership at the East-West Center in Honolulu, Hawaii and holds a graduate degree in Asian Studies where he focused on international relations and contemporary China’s political, social, and economic development. In addition Eric is the founder of EQ International Inc. (http://www.eqinet.com) a consulting company that acts as a cultural intermediary and trade consultant for companies and individuals interested in doing business with China. Eric speaks both English and Mandarin. He has traveled extensively throughout Asia and now lives in Honolulu, Hawaii where he enjoys surfing, golfing, and running. He can be contacted at eric@tomorrowtoday.biz.

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