Social Capital and Guanxi-- Analysis of the Book “In Good Company”

I. Introduction

In this paper, we analyze a landmark book on social capital, In Good Company, which was written in 2001 by Don Cohen and Laurence Prusak, two American leading knowledge management experts. As one of the first English books that examine the critical role that social capital plays in organizational success, this book rests on the premise that social capital may be a new concept and unrecognized in many organizations. But, according to Hitt, Lee & Yucel (2002), social capital had been extensively studied and described in the culture, economic and political literatures in China long before it became an important concept in recent western management literature. Greatly influenced by Confucianism, which stresses that individuals are not isolated entities but a part of a larger system of interdependent relationships, Chinese organizations have been practicing and developing social capital for many centuries. Chinese culture emphasizes relationships, the major component of social capital, much more strongly than western cultures. In China, business dealings are mainly based on relationships, and contrarily, in western world, they are largely based on the concept of transactions. The concept of guanxi, which stresses the importance of relationship building, represents one of the oldest and complicated forms of social capitals in China. Guanxi is the art of relationships that includes ethics, tactics, and etiquette (Yang, 1994). It is developed with creativity and ingenuity, supplementing by flexibility (Leung & Yeung, 1995). So, social capital in China is longer established, more complex, and more multi-faceted than it is described by the authors. In the following sections, we analyze the how social capital described in the book can be applied to Chinese context and examine its negative effects more deeply based on Chinese culture.

II. How can social capital described in the book be applied in China?

Generally, most of what Cohen and Prusak mention in their book is quite true based on my own experience and observations. Some notions and strategies they suggest can be applied to Chinese context successfully. I strongly agree with Cohen and Prusak that high social capital does not guarantee success, yet it is a vital component for organizations (Cohen & Prusak, 2001). This point supports Tsang’s (1999) notion that it is appropriate to treat a good guanxi network as a necessary, but not sufficient, condition for business success in China. Guanxi, the effective use of social capital to advance business relations, is widely seen as crucial to business transactions in China, where important business are rarely conducted between strangers. Guanxi possessed by members of an organization not only generates greater commitment, knowledge sharing and collaboration inside the organization (Cohen & Prusak, 2001), but also contributes greatly to the development of business networks outside the organization. In some sense, it provides the framework for business transactions and operations in China. Using survey data from Chinese transition economy, Peng and Luo (2000) demonstrated that managers’ ties with government officials and with managers at other organizations improve the performance of Chinese companies. For example, many Chinese industries, including the information industries, are heavily regulated, or at least dependent on state-run companies. Guanxi with special government officials can help players understand policy debates and how certain policies might impact potential investments. Specifically, in the telecommunications market, fund managers have been able to use guanxi to anticipate government regulations on new telecommunication services, thereby avoiding possible losses. Therefore, the ability to build and manage social capital is an essential managerial capability of Chinese corporations.
Since the book is based on western cultures, some perspectives may not suitable to Chinese context. For example, the authors argue that “social capital is mainly created and strengthened (and sometimes damaged) in the context of real work” (Cohen & Prusak, 2001, p.22). They do not believe that activities apart from daily work do much to enhance social capital (Cohen & Prusak, 2001). However, in Chinese culture, the mere existence of a working relationship does not insure the accumulation of social capital. The traditional Chinese manner of relationship building is typically conducted through spending time with each other in a variety of settings outside of work. For instance, to encourage employees to spend time together and build good relationships, the company where I ever worked provides a big cafeteria and free delicious lunch for its employees so that they can chat, exchange ideas, tell stories, and understand each other during lunch hours. The company also has a play area with pingpang table and video games, and its HR department holds many kind of entertainment activities after work frequently, such as “wine and dine”，picnic, bowling, golfing, singing and dancing. Those kinds of pastimes encourage natural building of intimate social networks and foster mutual trust between managers and employees. Though we seldom talk about work-related issues during those activities, social capital that can empower the whole company is built through eating together and playing together. Furthermore, treating and giving gifts are essential components of guanxi in China. By showing that the relationship is valued, they are natural dynamic of any relationship. This relationship is a reciprocal social relationship that becomes a way to make deals by creating economically functioning networks.

III. The negative effects of social capital

Exchange theory suggests that people review and weigh their relationships in terms of costs and rewards (Ho, 2006). Actually, the costs and rewards identified by exchange theory can be related to social capital clearly. Other than the rewards that the authors mention in the book and we identified above, there is no doubt that some costs have to be taken into account. Since the focus of this book is on the importance and positive effects of social capital in organizations, it does not talk much about its negative effects. Although the authors do recognize that there are some negative effects of social capital, including group think, narrow-mindedness, and suspicion of outsiders (Cohen & Prusak, 2001), they do not analyze the underside of social capital deeply and thus miss the bigger picture of social capital. In China, the traditional emphasis on guanxi and hence strong social capital leads to many critical problems as follows:
The first problem is unfairness. People in western society generally believe that social capital should only help if you are competitive. However, the aphorism cited in this book “it’s not what you know but who you know” (Cohen & Prusak 2001) is pretty relevant to how Chinese people look at social capital. Based on social network theory, managers with better interpersonal connections tend to earn more money, get more frequent promotions, and have better careers. There is a clear micro-micro link between their ties and their rewards (Burt, 1997). This is extremely true in China where people who are well connected have more chances to success than those who are well educated or competent. Moreover, “guanxi often makes the press when its obligations take precedence over civic duties, leading to nepotism and cronyism” (Wikipedia, 2006, p1). It can also be vital as a means of influencing business behavior. Once established, it can substitute for and even override institutional or legal guarantees common in the west. It can help those with high levels of social capital to bypass queues and snip through bureaucracy. Consequently, guanxi can greatly damage the notion of “fair play” in the business domain.
The second problem of strong social capital is reducing productivity. As the authors note, investing and fostering social capital can improve productivity (Cohen & Prusak, 2001). However, sometimes, an organization with high social capital can also be unproductive. According to the exchange theory, all relationships require some time and efforts on the part of the parties involved (Ho, 2006). In China, guanxi is viewed as a necessary financial and moral cost requirement of entrepreneurs who attempt to survive as an economic entity (Hamilton, 1996). Except for building ties with their employees, shareholders, customers, suppliers and media, executives in China have to cultivate ties with officials at various levels of the government (Luo and Chen, 1997). Li and Atuaheune-Gina (2001) argue that typical guanxi strategies of lavish entertaining and free shares to government officials may drain organizations of critical financial resources, which are especially critical to small private organizations. In addition, building good relationships takes time, especially in China. Sometimes it can take more than a year to reach the comfort level of guanxi. Given the need to gain access to some important business information or scarce resources, managers have to spend considerable money, time, and energy on cultivating and maintaining guanxi. In such an environment where building guanxi is regarded as a fundamental issue, it is not surprising that nearly every employee in the organization invest in social capital more or less for the good of himself or the whole organization. As a result, the time and money devoted in real work are greatly reduced.
The third problem related to guanxi is corruption. “When a guanxi network violates bureaucratic norms, it can lead to corruption” (Wikipedia, 2006, p1): Guanxi becomes a popular way to solicit favors from the authorities who have considerable power to approve projects and allocate resources (Tsang, 1999). Some officials view social capital as a private good and use their social relations to gain personal benefit. Some businessmen establish guanxi with officials even by giving bribes. Of course, persons or organizations who involved in corruptions will be ostracized by the society.
In short, social capital contains both rewards and costs. When rewards exceed costs, it is positive and will be continued. When costs exceed rewards, it is negative and will likely be terminated (Ho, 2006). Mangers should consider rewards and costs of social capital carefully before they invest in it.

IV. Conclusion

Even though some perspectives may not suitable to the context of China, most of the main notions on social capital in the book can be applied to Chinese organizations smoothly. The target audience for this book consists of organizational managers and employees – indeed anyone who works in an organization. Researchers and students in the field of business, communication and sociology will benefit from this book, and those who want to understand the importance of social capital will find interest in it.

References:

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