THE ROLE OF THE GUANXI INSTITUTION IN SKILL ACQUISITION BETWEEN FIRMS: A STUDY OF CHINESE FIRMS SHAOHAN CAI Carleton University ZHILIN YANG City University of Hong Kong The prevalence of personal connections in China, or guanxi, constitutes an institution that governs how people exchange favors. This study explores the effects of the guanxi institution on interfirm relational ties, information sharing, and the acquisition of skills across firms. According to social network theory, the marginal benefit of interfirm relational ties on information sharing should decrease with the strength of ties; accord- ing to information overload theory, information sharing should have an inverted U-shaped effect on the acquisition of skills. Institutional theory further suggests that the links across these three constructs are subject to the influence of the guanxi institution. With data collected from 338 man- ufacturing companies, this study shows that the links differ across envi- ronments that have strong versus weak guanxi institutions. A strong guanxi institution generally promotes information sharing and skill acqui- sition, but it also has a dark side. Keywords: relational ties; acquisition of skills; information sharing; guanxi institu- tion; institutional theory; social network theory INTRODUCTION Guanxi constitutes an important cultural and social element of Chinese society (Park & Luo, 2001). At a personal level, guanxi implies that people can draw on their connections or networks to secure favors in their personal or business relations (Luo, 1997a). Interper- sonal guanxi is so widespread that it forms an institu- tion. An institution is a humanly devised construct that features both formal rules and informal norms to structure human interactions (North, 1990). In China, the guanxi institution often substitutes for support from formal institutions, such as the rule of law (Xin & Pearce, 1996), by defining the rules and norms governing how individuals exchange personal favors. Furthermore, Chinese managers often draw on their personal connections to obtain resources that their firms need (Li, Zhou, & Shao, 2009; Luo, 1997b; Luo, Huang, & Wang, 2011; Park & Luo, 2001; Wong & Chan, 1999). Such behavior is governed by the guanxi institution. In other words, the guanxi institution affects interorganizational relationships by influencing individual behaviors in personal relationships. This article considers the effects of the guanxi institu- tion on one critical element of interorganizational relationships, namely skill acquisition. Business part- ners represent an important source of skills and knowledge for firms (McEvily & Marcus, 2005; Uzzi, 1997). Because obtaining skills from partners often involves acquiring tacit knowledge that is difficult to codify and articulate, it generally demands close rela- tionships and intensive collaboration between partner firms (McEvily & Marcus, 2005). Accordingly, prior studies emphasize the importance of close social link- ages between organizations to promote the transfer of tacit knowledge and competitive capabilities (Borgatti & Li, 2009; Cousins & Menguc, 2006; Dhanaraj, Lyles, Steensma, & Tihanyi, 2004; Uzzi & Lancaster, 2003). Acknowledgments: The authors acknowledge grants from the Research Grant Council of Hong Kong SAR (CityU 152110 & 196513), City University of Hong Kong (9680022, 7008139, & 7002905) and National Science Foundation of China (71172215). October 2014 3