Guanxi and Organizational Performance: A Cost-Benefit Perspective: An Abstract

Abstract

Conventional wisdom posits that a long-term orientation with important partners such as key suppliers and clients is essential for superior performance. This study critically examines this business tenet by studying the relationship between the duration of partnerships with major suppliers and clients and company performance. The purpose of this study is threefold. First, based on social capital theory, the role guanxi plays in building relationships with key business partners is examined. Second, the relationship between duration of cooperation with alliances and firm performance is scrutinized. Finally, the role R&D may play in relationship management is explored, and this effort will shed light on the intricacies of interfirm partnerships. In this study, guanxi is conceptualized as reciprocal obligations, which are better captured by considering guanxi as an investment. Since time and money are part of the guanxi process, cost must be explicitly accounted for to fully understand the phenomenon. This approach not only has some unique advantages to shed light on the relationship-building process; it also has the potential to explain the heterogeneity of business relationships various companies may have with their partners. Although guanxi is common in China, the extent of its practice in terms of creation, maintenance, and utilization is a business decision for each firm. Thus, this study will emphasize the costs of guanxi and its benefits to the firm. Based on a dataset comprising over 10,000 Chinese manufacturing firms obtained through a probability sampling procedure, results show that relationship duration with major suppliers influences (relationship duration with major clients does not) annual entertainment costs, a proxy for firms’ investment in guanxi, a unique phenomenon in China. Furthermore, the findings from the main quadratic effects model show relationship duration with suppliers has a positive convex association with performance, whereas relationship duration with clients has a negative concave correlation with performance. These two nonlinear relationships are moderated by research and development (R&D). Specifically, relationship age with both suppliers and clients has a positive convex association with performance for manufacturers with a low R&D budget; cooperation duration with both suppliers and clients has a negative concave correlation with performance for firms with a high R&D budget. This is one of the first studies that challenges the doctrine of long-term orientation in relationship management with suppliers and clients. Indeed, a long-term orientation has its dark side.