Business growth: A matter of connections (ST 29 Sep)

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Sep 29, 2009
ECONOMIC WATCH
Business growth: A matter of connections

By Michael Frese, For The Straits Times

IN CHINA and elsewhere in the world where there are Chinese businessmen, there will be guanxi, or network relationships. Guanxi can be regarded as a network of deliberately pursued personal connections that often involve intermediaries who help by, for example, introducing business owners to the right people.

While not unique to Chinese culture, guanxi is particularly important in China for at least two reasons.

First, the cultural trait of collectivism makes guanxi central in business.

Second, the lack of formal rules and a transparent government implies that one has to compensate by establishing good personal relationships with those who control scarce resources. This is especially true for the less powerful members of Chinese society such as entrepreneurs.

But how do these social networks develop? What factors increase their size? And does the size of the network influence business growth?

We answer these questions through two studies involving Chinese businesses in Beijing and Xunyi county, a rural region in Shaanxi province.

There are at least two types of networks vital to entrepreneurs in China: business and government.

Business networks include relationships with suppliers, customers, competitors, business partners and investors. Good relationships with suppliers may help a company acquire quality materials while ties with competitors may facilitate collaboration and implicit collusion.

Government networks include relations with government officials such as political leaders and personnel in industrial bureaus, regulatory agencies, state-owned banks, police departments and the inspection system. These ties help to reduce red tape.

We found that the size of a social network is influenced by three factors which can be collectively grouped under the term ‘social competency’: social skills, social strategies and perseverance in building relationships.

Social skills refer to the verbal and non-verbal forms of behaviour that entrepreneurs use to influence others – such as being able to perceive the traits, intentions and motives of people, adapting to a wide range of social situations and generating enthusiasm.

Although social skills are necessary for network development, they alone are not sufficient. Entrepreneurs also need to pursue elaborate social strategies. They have to consider issues such as what interactions to make, with whom, in what order and when. They also need to take a long-term view and prepare for future opportunities and problems. A relationship initiated today may become a useful connection tomorrow.

But there may be difficulties in implementing such strategies, so persistence is necessary.

We found that regardless of whether an entrepreneur operates in a city or a rural area, social competency is necessary if he is to establish and build business and government networks. Social competency helps to develop a business as it enables an entrepreneur to form relationships and influence others, both vital when raising capital, seeking new customers and forming alliances.

Our study also indicated that the size of the government network predicts business growth, especially for businesses in rural areas. There are at least three reasons for this.

First, institutions are less developed in rural areas and government officials may be more approachable. Second, the power differential between government and entrepreneur may be higher in rural areas than in cities. Third, the culture of collectivism may be more intense in the countryside than in cosmopolitan cities. These three reasons may explain why government networks are more effective than business networks in enhancing business growth outside the big cities.

Our findings also suggest that the better educated an entrepreneur is and the longer he has owned his business, the larger his government network will be.

Finally, while social competency is needed to develop a social network, trust is necessary to enhance not just its size but also its quality.

The writer is professor of management and organisation, NUS Business School. This article is based on research done in collaboration with Zhao Xiang-yang, Beijing Normal University, and Angelo Giardini, Justus-Liebig-University of Giessen.