The Deal Cost Benefit of Guanxi Based Business Practices Essay

The Transaction Cost Advantage of Guanxi-Based Business Practices Sophie S. Standifird R. Scott Marshall

The goal of this daily news is to give a theoretical justification of the perpetuation of China's guanxi-based business practices. Being a complement for the social embeddedness- and resource-based explanations, we seek to demonstrate the willpower and significance of guanxi in terms of the transaction cost advantages it gives. Specifically, we argue that guanxi-based business procedures offer particular transaction expense advantages over existing structural alternatives identified in transaction cost theory. Where the guanxi network can be well developed, the transaction expense advantages of guanxi-based exchange are sufficient to warrant the integration of guanxi- and market-based exchange components.

n another quarter of 1996, China and tiawan surpassed Asia as the with the largest U. H. trade discrepancy. On July 1, 1997, China regained control over Hk and in the process gained control of the planet's eighth most significant stock exchange (Barnathan, 1996) plus the world's the majority of proп¬Ѓtable exchange over the last 20 years (T. Rowe Price, 1996). China's elevated assertion on the globe market requirements more attention Stephen H. Standiп¬Ѓrd, College of Business and Economics, Western Wa University, Bellingham, WA 98225-9077, USA. Tel: 360650-7440; Send: 360-650-4844; E-mail: stephen. standiп¬Ѓ[email protected] edu Ur. Scott Marshall, Lundquist College or university of Business, University of Oregon, Eugene, OR 97403-1208, USA. Tel: 541-346-1343; Fernkopie: 541-346-3341 Email: [email protected] uoregon. edu


be given to your different aspects of doing business in China. A single specific aspect that has received attention recently is the practice of guanxi. In short, guanxi involves cultivating personal human relationships through the exchange of favors and items for the purpose of obtaining goods and services, growing networks of mutual dependence, and setting up a sense of obligation and indebtedness (Yang, 1994). The goal of this paper is to offer a theoretical explanation of the perpetuation of guanxi-based business methods. Specifically, our primary thesis is that guanxi-based business procedures offer particular transaction cost advantages more than existing structural alternatives identified in purchase cost theory. Subordinate to the arguGuanxi-Based Business Practices

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ment is the position which the significance of guanxi will not diminish, as being a researchers include suggested (Nee, 1992; Xin & Pearce, 1994; Luo & Chen, 1996) despite the transformation to a even more market-based economy. The long lasting strength of guanxi is based on the executing of relatively asset specific activities including long-term dealer relations pertaining to industrial machinery. These types of exchanges will continue to be performed via the guanxi network whereas less asset specific features, such as products leasing, will probably be performed through market-based exchange. Granovetter (1985) posits that institutional structures such as guanxi maintain continuity due to their profound embeddedness in particular cultures. Encouraging to this argument, Solinger (1989) revealed how transactions, in the Chinese obole Wuhan, had been founded on historical economic relationships between persons within the companies studied. Further, Tsang (1998) asserts that guanxi provides individuals and firms with an imperfectly imitable source that provides a distinct competitive benefit over other folks in modern day China. Like a complement to, rather than a spat against, the social embeddedness- and resource-based explanations, we seek to show the willpower and significance of guanxi in terms of the transaction price advantages it offers. We start out with a detailed discussion of what guanxi is plus more specifically what guanxi is not. All of us then describe the current theoretical explication of transaction cost economics. Following, we present transaction price economics as an argument favoring the continuation of guanxi-based...

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