Guanxi as a governance mechanism in business markets: Its characteristics, relevant theories, and future research directions Zhilin Yang a,1 , Cheng Lu Wang b, ⁎ a School of Management, China University of Mining and Technology, Jiangsu, China; Department of Marketing, City University of Hong Kong, Kowloon, Hong Kong b Department of Management, Marketing and Quantitative Analysis, College of Business, University of New Haven, West Haven, CT 06516, United States abstract article info Available online 11 January 2011 Keywords: Guanxi Governance mechanism Organizational network Guanxi-based governance With a growing interest in doing business in a Confucian society, scholars and managers have given much attention to Guanxi as a governance mechanism. Yet, little has been known the unique aspects and the effectiveness of Guanxi-based governance. To address such gap, we specify three distinct aspects of Guanxi in a business setting. First, Guanxi is a fine balance among three key elements: qing (emotion or feeling), li (reciprocity) and liyi (utilitarian benefits). Second, Guanxi pertains to dynamic, interactive relationships at both individual and organizational levels. Third, Guanxi is unalterably linked to the concept of Guanxi- networking (or more precisely, quanzi). Based on these unique aspects, we argue that industrial marketing scholars can borrow theories from veracious disciplines and call for more effort in the empirical examination of the interactions among the three aspects of Guanxi-based governance, the efficacy of Guanxi-based governance, the developmental process of Guanxi networks, and the interactions of interpersonal Guanxi to organizational Guanxi. © 2010 Elsevier Inc. All rights reserved. 1. Introduction Guanxi as a cultural construct is ubiquitous in all Confucian societies and has been proved valuable when doing business within institutional and economic contexts. With its growing importance in business relationships (Yang, 2002), Guanxi has been studied extensively in the past decade. Much effort has been devoted to examining the antecedents and consequences of Guanxi. For example, Lee, Pae, and Wong (2001) confirm that Guanxi is positively influenced by both decision making uncertainty and perceived similarity; and is negatively affected by opportunism. When exam- ining consequences, Guanxi has been shown to exert a positive effect on relationship quality, interdependence, and sales growth, but has little impact on profit growth (e.g., Park & Luo, 2001). Luo and Chen (1997) also demonstrate that Guanxi improves a firm's accounting and market performance. Few studies, however, have been conducted to investigate Guanxi as a governance mechanism in business markets. To bolster knowledge in this area, we intend to specify three distinct aspects of Guanxi, viewing it as a governance form, examining relevant theories, and suggesting future research directions. 2. Three distinct characteristics Compared to the Western relational marketing concept, Guanxi (1) is more personal than impersonal in that it mainly works on the basis of friendship. and (2) incorporates the notion of ganqing (affective attachment), which is often a measure of the level of emotional commitment and closeness of the parties involved; and (3) is centered more on a particularistic, rather than universalistic, nature in that it is highly network-specific and thus normally does not generalize to members of outside social networks (Wang, 2007). Therefore, the strength of Guanxi is often determined by feelings and emotional bonds among two parties. Indeed, to develop Guanxi is to form the basis for a gradual transition from being considered an outsider, as opposed to an insider, so that a long-term close relationship can be established and developed. Recently, Yen, Barnes and Wang (2011) have developed a scale for measuring Guanxi based on three Chinese relational constructs – ganqing, renqing and xinren. The results offer a useful point of departure in order that business practitioners may assess the nature and quality of their Guanxi and at the same time provide academics with a scale for operationalizing the measurement of Guanxi. From the governance perspective, we posit that Guanxi has three unique aspects. First, a manager needs to keep a fine balance among three key elements: qing ( emotion or feeling), li (reciprocity) and liyi (utilitarian benefits). As a social phenomenon, Guanxi is often defined as personal connections in a general sense. However, in actuality, the fundamental concepts behind Guanxi are somewhat more detailed and consist, broadly speaking, of renqing, mianzi (face), and favor Industrial Marketing Management 40 (2011) 492–495 ⁎ Corresponding author. Tel.: +1 203 932 7209. E-mail addresses: mkzyang@cityu.edu.hk (Z. Yang), cwang@newhaven.edu (C.L. Wang). 1 Tel.: +852 3442 4644; fax: +852 3442 0346. 0019-8501/$ – see front matter © 2010 Elsevier Inc. All rights reserved. doi:10.1016/j.indmarman.2010.12.004 Contents lists available at ScienceDirect Industrial Marketing Management