Markets are directed by different systems. Three different systems are treated and compared to each other in the article. The three systems are: the bureaucracy system, the price mechanism system en the guanxi system ( it works like a clan: Markets, Bureaucracies, andClans by Ouchi ). Literally 'guanxi' means: relation or backdoor connection. It's compared to the Russian word 'blat' or the Arabic word 'wasta'. Having a guanxi with someone means that you have a long-term relationship with someone, Guanxi doesn't mean bribery or corruption but it can be used as a basis for corrupt beahaviour: keep someone out of jail, using information for insider trading,....Using your guanxi means asking for a favor from your social network in order to benefit from it: being admitted to a college, getting a job at a firm (even if you're not qualified),.. but later on your social netwerk can ask a favor from you. Guanxi contans obligations and sometimes some emotional elements. Guanxi, blat or wasta is mostly spotted in former communist countries. The guanxi system could develop in those countries because it was the only system that worked for getting things done (the price mechanism system didn't work well). We can compare guanxi more or less with the Western feudal arrangments.
In the last decade, the Chinese economy and social conditions have been improving in a significant way, making China an interesting and profitable place to invest. Western business people have had an influence on local traditions, turning cities into modern metropolises. But on another level, China will always remain mysterious to us outsiders. While in the coastal areas, guanxi is losing its importance, in the inland, its the only way to infiltrate the local economy. Since the country lacks a reliable legal system and bribery is rather outdated, relationships form the foundation for good business. Preventing your business partners from losing face by showing your respect to them, is one of the ways of getting things done in China.
Doing business in China requires a developed guanxi network. When you finally succeeded establishing a guanxi network, you are in a certain way obliged to keep doing business with your guanxi network even if you can get the same services for a lower price at the market. We can explain this phenomenon because of the existence of the transaction costs. When people and firms want to do business, they usually draw up a contract. This formal transaction produces some costs. First of all you have to negotiate, communicate with you partner and coordinate your own business. Secondly its always possible that some unforeseen event takes place and that you cant fulfill your contract. Thirdly you or your partner can be opportunistic and breach the contract. Guanxi-based contracts can deal with unforeseen circumstances because you are able to ask for a favour. You can also get a lot of information from your guanxi network about the history of your business partner and your business partner will be less opportunistic. Opportunistic behaviour across a member will be considered as opportunistic behaviour across the whole network so the guanxi network will exclude you from their network which will lead to a position in which you cant do business. Doing business with your guanxi network lowers the transaction costs and improves thus the competitiveness of the guanxi network versus those of the free market.
Each year many Chinese students graduate and they start looking for a job. The problem is that there are so many educated people for some limited function. Theres a lot of competition so you need to have something extra to increase your chances of being recruited by a company. Most of them start by writing their CV and putting a nice picture to it but this is far from enough. Your chances will rise further if you obtained your degree at a famous university or if you did an internship in a multinational. The most important thing to have according to the Chinese students is guanxi. Knowing someone whos important and has a lot of power is more important than going to university. Thats why it is not strange if CVs are being polished or if you see someone work in a high function that hasnt got a degree while many graduate students cant find a job. We can conclude that guanxi can be abused for personal interest.
Huadon Yang has done research as to which person the Dutch and the Chinese would side with in times of conflict. The following question was asked: "There is conflict between two people in which one person, a friend of yours, is the guilty party; the other person, a stranger to you, is innocent. Who would you side with?" The results were: the Dutch tend to side with the innocent stranger, unlike the Chinese, who are more influenced by guanxi and possible future sanctions. Guanxi is, of course, a system of mutual interaction: returning the favor is usually expected! Conclusion: In China, make friends first, conduct business later.
Guanxi can be approached in three different ways: Kwang-Kuo Hwang, Eric Tsang and Ying Fan. The Kwang-Kuo Hwang consists of three parts. First of all, we have 'the expressive tie', which includes durable relations with family and close friends. Second, 'the instrumental tie' is an unstable relation where you try to obtain fixed assets to achieve your goals. And finally, there is 'the mixed tie'. It is comparable with the 'expressive tie' but the relations are more superficial. The Eric Tsang consists of 'the blood based guanxi' (relations with family, friends and people of the same clan) and the 'social based guanxi' (social interactions). Finally, there is the Ying Fan with three subdivisions: 'the family guanxi' (~expressive ties), 'the helper guanxi' (~instrumental ties) and 'the business guanxi' (oportunistic business relations).
In this article, The Economist, tries to figure out, the role of business networks in todays society. It is known that people with strong connections, can get easier in top business positions. So more specific, the article, compares the influence of online networking websites, for example, LinkedIn, versus traditional business networks, such as, freemasons. The term network, is known in China as Guanxi. But nowadays, our economy spreads further than, e.g. the country boarders. Because of the globalization, a larger international network is needed. Traditional networks will not be enough to fulfill all needed international contacts. Thats why networking websites are growing in popularity. However, it seems to be logic that we will rather help people where there is a personal link, than where theres none. So my conclusion of this text is that, networking websites are not as good as the traditional networks, but the importance of internet networking is certainly not negligible.
This article tries to give a clear definition of what the Chinese term Guanxi exactly means. Guanxi (pronounced: gwan-shee) can be translated as relationships, but the concept is much more than that. Its a strong obligation. If a party has done you a favour, e.g. introducing you to someone, this will automatically create a certain expectation to give something in return. Guanxi can be compared as a sort of currency which can be saved and spent between the two parties. The system is also protected against people who try to make profits on the others. If the other party feels like you have a lot of debts towards him, this can be very harmful to your social network. Harming a guanxi is NOT done. If you cant pay back a little gift is recommended as a symbol that you havent forgotten the favour. In Chinese contacts its all about maintaining a healthy balance towards your networks.
Markets are directed by different systems. Three different systems are treated and compared to each other in the article. 
