Guanxi – Ties That Bind

Synopsis McDonald, a multi national company, whose sales was surprising all expectation within two years of establishment in a heart of Chinese Capital Beijing was ordered to leave the location by the Chinese government in favor of a Chinese Construction Company. McDonald, who had 18 years of lease left for the location, filed the case against the government decision , however it lost the case and had to leave the location. Many people believed that McDonald lost the case because it didn’t have influencing power that was needed to win the legal battle in Chinese environment.

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The Chinese construction company had that power or relationship popularly known as Guanxi that has the ability to even influence the decision of the court, that is something unthinkable in western world. Doing business in China requires Guanxi as the Chinese culture is deeply rooted with confucial philosophy of valuing social hierarchy and reciprocal obligations. The Chinese communist ruling the country for more than half a century had done nothing significant to change this. Guanxi of late has become a commodity for sale especially to the foreigners.

If one is able to influence the son or daughter of high-ranking officials, then the chance of influencing the Chinese bureaucracy is high. As the western companies have come to understand guanxi, they have also started to build guanxi Many companies have started hiring son or daughter of high ranking officials in order to win contracts, bid etc. Many consider the hiring of the son or daughter of high ranking officials as a good business practice in Chinese context, however other view that as unethical practice and is equivalent to the bribing someone.

Legal Environment of China for Doing Business After reading the case, it is evident that there exists a legal system in China but it is influenced by the power or relationship. Anyone with power or the ability to influence the bureaucracy will have distinct advantage over the others without such relationships. Piracy and other unethical practices are also rampant in China. Much of Chinese legal environment is influenced by the culture that values confucial philosophy of social hierarchy and reciprocal obligations.

Confucian stresses on relationship and it is based on the ideology that people are not equal. Chinese justice system is more of arbitrary nature. Hence, the ability to influence the legal system or judges is needed to in order to get the upper hand in the legal battles. So anyone wishing to do business in China needs to have a very good relationship or guanxi with the high ranking officials or their family members. If a company enjoys a very good guanxi, then there is every possibility that the company will do well. Justice is an integral part of any legal system.

However, there is no guarantee in China that you will get the justice. McDonald’s mistake while doing market research McDonald, being a multinational company with presence in so many countries must have done thorough feasibility study before opening up its chain in Beijing. They must have carried out market research, environment research and legal research. They saw that there exists all the required laws that would allow them to run their business smoothly. However, what they didn’t do research is on whether the laws are enforceable in proper manner or not.

They also made a mistake in not doing enough study on culture that the Chinese business is operating and more importantly guanxi affect. They believed that the laws that are in place in China can be easily enforceable as in the west. However, the Chinese culture is deeply rooted with the nepotism and unethical practices in legal systems, McDonald failed to realize that the arbitrary nature of the Chinese law. McDonald’s mistake in tackling the legal issue in China McDonald decided to move into the court in order to enforce the lease contract that was still valid for next 18 years.

McDonald thought that they have the upper hand against the Chinese contractor as the lease contract was there in place and contract law would provide them the justice. However, what they failed to understand is the arbitrary nature of Chinese justice system. In China, more often than not, party with guanxi affect wins the legal battle. Anyone having power or relationship with the high ranking officials or to their family stands with a greater chance of succeeding in legal battle. This is where McDonald made the mistake.

During their successful two years operation in China, McDonald did not try to build guanxi or relationships with the high ranking officials or to their families. Without guanxi affect, it was very difficult for McDonald to win the case even after having proper supporting documents in place. Decision to whether do business or not after being aware of Chinese culture Legal system is one of the most important factors of business environment. China does not have the best of the legal system and does not always favor the foreign investors. However, in doing business there are lots of other considerations that need to be taken into account.

I would be interested in investing in China even after being aware of Chinese legal system and culture because China has so many other things in favor of doing business. Had it not been the case, then China would not have risen as one of the fastest growing and the most powerful and dominant economy in the world. First of all China has the resources needed to do the business. China has one of the cheapest labors around. China also has huge resources for raw materials and other ancillary materials. China possesses robust infrastructure that supports industries and businesses. Conclusion

This case tries to give us an insight into the legal system and culture in Chinese business environment. How the Chinese legal system works and how to tackle it. In spite of being the power house of modern economy, China still has a lot to do in the implementation of legal system. The case teaches us that while investing in foreign countries, it is very important to understand each and every aspect of business environment in details in order to avoid trouble in future. And as they say, when you are in Rome , behave like a Roman is very true in the case. One needs to be aware of the local culture and laws and try to adapt to that.

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