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An examination of the influence of guanxi and xinyong (utilization of personal trust)on negotiation outcome in China: An old friend approach☆

T.K.P. Leung a,⁎, Ricky Yee-Kwong Chan a,1, Kee-hung Lai b,2, Eric W.T. Ngai a,3

a Department of Management and Marketing, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kongb Department of Logistics & Maritime Studies, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong

a b s t r a c ta r t i c l e i n f o

Article history:Received 15 September 2009Received in revised form 8 December 2010Accepted 16 December 2010Available online 28 January 2011

Keywords:RenqingGangingGiftsMianziXinyong

Managers of multi-national enterprises (MNEs) are at a disadvantage in negotiating outcomes with theirChinese counterparts when compared to local competitors. The reasons include: local competitors are moreflexible in handling business terms and conditions; local Chinese managers prefer to negotiate with their oldfriends or insiders in the same guanxi network; and MNE managers perceive that cultural practices such asgift-giving and guanxi are problematic. This study advances our understanding of negotiation by using amodel developed for the reference of MNEs to establish an “old friend” relational status with their localChinese counterparts. This approach emphasizes cultural adaptation for MNE managers to achieve satisfyingnegotiation outcomes in China.The study reveals the following unique issues: 1) in addition to their problem-solving attitude, MNEmanagersshould practice mianzi and gift-giving to build renqing with their Chinese counterparts at a new friend stage;2) the reciprocity dynamics of renqing should enable these managers to accumulate ganqing and to becomeold friends of their Chinese counterparts; 3) the establishment of ganqing between MNE managers and theirChinese counterparts should enable the development of xinyong between the two exchange parties; and4) desirable negotiation outcomes can be built on xinyong.

© 2010 Elsevier Inc. All rights reserved.

1. Introduction

The rapid economic growth in the People's Republic of China (PRC)has attracted multinational enterprises (MNEs) to enter the world'slargest emerging economy. Negotiation of business ventures has becomean essential task for MNE managers seeking to penetrate the Chinesemarket, in which business activities have been epitomized by guanxi(Park& Luo, 2001). They assume the responsibility to negotiate outcomeswith their local Chinese counterparts (DiMaggio & Powell, 1983).

However, MNE managers are in a disadvantageous position(compared to local Chinese competitors) when negotiating ventureswith their Chinese counterparts in both state-owned enterprises(SOEs) and private enterprise. First, local Chinese competitors arerelatively more flexible in handling business terms and conditions(Williamson & Zeng, 2004). Second, the affection of local Chinese

managers for negotiating with insiders or their old friends in the sameguanxi network simultaneously portrays MNE managers as outsiders,thereby intensifying their difficulty to negotiate with local Chinesemanagers. The use of an old friend approach has been proven to becrucial in some countries including India, Pakistan, and China (Wong& Ellis, 2002). Third, these MNE managers also perceive culturalpractices such as gift-giving and guanxi to be problematic (Millington,Eberhardt, & Wilkinson, 2005). The above evidence suggests that amodel for the reference of MNE managers to assist them achieve an“old friend” relational status with their domestic Chinese counter-parts, and to subsequently achieve satisfying negotiation outcomes, isimminent (Kirkbride, Tang, & Westwood, 1991).

The genesis of the relationship dilemma is rooted in the differentelucidation of governance mechanisms and negotiation outcomes byMNEs andChinese companies (Alder, Brahm,&Graham, 1992). Kirkbrideet al. (1991) recognized that MNE managers aim for a linear approachthat involves establishing business first and relationship later with theirChinese counterparts. The legal practices in their home countriesmotivate the MNE managers to build trust by specifying details inwritten contracts whereas their Chinese counterparts ascribe promisesand commitments to human relationship bonds that heavily rely onguanxi and xinyong (utilization of personal trust) (Luo, 2007; Wang,2007). Also, MNE managers' desire to quantify negotiation outcome interms of profits is contradictory to Chinese companies' emphasis onfuture cooperation as part of the negotiation outcome (Clopton, 1984). As

Industrial Marketing Management 40 (2011) 1193–1205

☆ The authors would like to thank three anonymous reviewers and the journalEditor-in-Chief Prof. Peter LaPlaca for their helpful comments. This research wassupported by a research grant from the Hong Kong Polytechnic University.⁎ Corresponding author. Hong Kong Polytechnic University, Hong Kong. Tel.: +852

2766 7106; fax: +852 2765 0611.E-mail addresses: [email protected] (T.K.P. Leung), [email protected]

(R.Y.-K. Chan), [email protected] (K. Lai), [email protected] (E.W.T. Ngai).1 Tel.: +852 2766 7110; fax: +852 2765 0611.2 Tel.: +852 2766 7920.3 Tel.: +852 2766 7296; fax: +852 2765 0611.

0019-8501/$ – see front matter © 2010 Elsevier Inc. All rights reserved.doi:10.1016/j.indmarman.2010.12.020

Contents lists available at ScienceDirect

Industrial Marketing Management


such, it is important to address anunresolved issuewhile establishing ourmodel: how should MNE managers negotiate with their domesticChinese counterparts to obtain a desirable outcome while attemptingto comply with the legal requirements of their home countries as well asthose of China?

The nurturing of guanxi and xinyong requires the establishment offace work (Hwang, 1987) and gift-giving (Yang, 1994) in addition to awell established construct problem-solving approach (PSA) which hasbeen confirmed as a major constituent of successful negotiation(Alder et al., 1992; Graham, Kim, Lin, & Robinson, 1988). Whencompared to their domestic Chinese competitors, MNEmanagers maybe ethically more restrictive in performing these cultural norms. Gift-giving must be cautiously interpreted because it underpins thepractice of face work which helps establish guanxi (Hwang, 1987),and because gifting may easily be conceived as bribery (Steidlmeier,1999). The recent arrest of an Australian Chinese, Mr. Stern Hu, whowas the Head of China iron ore operations of the Anglo-Australianmegaminer Rio Tinto indicates the potential danger when negotiatingbusiness in China (Anonymous author, 2009, A15). Indeed, China is ahigh-context culture (Hofstede, 1991) in which the practices of gift-giving and face work are generically necessary. These conflicting viewsgenerate another unresolved issue: how should MNE managerspractice face work to build guanxi under restrictive gift policies?

2. Objectives

This paper proposes amodel to explain howMNEmanagers negotiatewith their Chinese counterparts to achieve effective outcomes under theuniqueChinese cultural environment. It addresses twounresolved issues:to conceive how MNE managers manage the governance mechanism ofguanxi and xinyong, and to establishhow theyperceive thepractice of facework under different ethical restrictions of gift-giving. Specifically, thepaper responds to the call ofWang, Siu, and Barns (2008) to develop a setof antecedent variables for guanxi and xinyong.Based on an analysis of theextant literature, propositions are introduced. Answers to the unresolvedissues are provided and recommendations offered that contribute toindustrial marketing knowledge concerning negotiation in China.

3. Literature review and development of model

Our proposed model that guides this study is depicted in Fig. 1,reference to which should be made during our intellectual discussion.

3.1. Negotiation outcome

We define negotiation outcome as the yield of a satisfactorynegotiation result between a seller and a buyer in a cooperativemannerwhich captures the sumof the seller's profit and the buyer's savings thatcan possibly be extended on a long-term basis (Dwyer &Walker, 1981;Graham, Mintu, & Rodgers, 1994).

Social psychologists perceive negotiation outcome as a symmetricrepresentation of mutual gain between a seller and a buyer (Conlon &Hunt, 2002). Negotiators of both sides are considered rational and theoutcome is focused on a settlement price that is influenced by internaland external reference points. The former include initial offer,reservation price point, and aspiration price point, whereas the lattercontain market value and previously paid price information distributedtobothparties prior to negotiation.Undernormal circumstances, a buyeraims to achieve the lowest price (aspiration price)whereas he refuses topay a particular high price (reservation or resistance point) (White,Valley, Bazerman, Neale, & Peck, 1994). Conversely, a seller attempts tooffer the product at the highest possible price (aspiration price) butdeclines to sell it at a particular lowprice (reservation or resistant point).If the buyer deciphers that the seller's initial offer is attractive andperceives it as a gain rather than a loss, the number of offers/counteroffers could be substantially reduced and the negotiation outcome couldbe settled more quickly (Kristensen & Garling, 1997). Indeed, anattractive initial offer motivates a buyer to negotiate and the use ofreference points significantly moderates the final settlement price,whichnormally falls between the twoextremes and represents “the sumof the seller's profit and the buyer's savings” (Clopton, 1984: 47).

Pursuing mutual gains aside, management theorists propose theimportance of information exchange and the establishment offriendship between negotiators (Fisher, Ury, & Patton, 1991). Priorto negotiation, a negotiator determines the other side's profits orsavings through information exchange concerning service costs,desired service levels, volume needs, equipment availability, liability,and claim options (Rinehart & Page, 1992). Negotiators' cross-analyses of information help establish their initial positions, startthe negotiation, make the concessions, and reach the compromise thatintends to distribute an outcome in term of resources between thetwo parties (Tinsley & Pillutla, 1998). The final negotiation outcome isindeed a trade-off comprising the seller's profit, the buyer's savings,and possible friendly cooperation in the future. The importance of thelatter in Chinese negotiation has been repeatedly emphasized(Graham & Lam, 2003; Luo, 2007). Meanwhile, a win–win situationis established because a negotiator obtains something of greater value

Mianzi

Gifting

P S A

Renqing Xinyong Negotiation

Outcome

NEW FRIEND: Relational

Antecedents

OLD FRIEND: Chinese relational governance mechanism

CONSEQUENCES: Positive

negotiation outcome

P1 P4

P5

P6

Ganqing

Instrumental and emotional component of Guanxi

P3 P2

P7

P8

Fig. 1. An “old friend” relational exchange model showing distinctive cultural traits with respect to achieving negotiation outcome between MNEs and Chinese counterparts.

1194 T.K.P. Leung et al. / Industrial Marketing Management 40 (2011) 1193–1205


from another party in exchange for something on which he places alower relative value. Fisher et al. (1991) introduced the notion of BestAlternative to a Negotiated Agreement (BATNA) and argued that anagreement may not be regarded as a totally satisfactory negotiationoutcome if it does not improve the reservation prices of both parties.Therefore, observing the other party's satisfaction level is viewed asan important indicator of a successful negotiation outcome (Grahamet al., 1994).

Another outcome factor is the importance of finishing the negoti-ation process in a specific time frame. Time has long been recognized asa hidden dimension in strategic planning and as a silent language inbusiness (Hall, 1959).Das (1991) realized that timeflows linearly and atthe same pace, and organizations link time horizons to their strategicannual plans in terms of sales, production, marketing activities, andprofits. Indeed, timemanagement is goal- and performance-directed. Asales manager is required to negotiate contracts with his buyers withrespect to an explicit temporal dimension, i.e. a monthly, quarterly, oryearly sales budget.

Time standard is universal but its implicit meanings acrosscultures vary (Hall, 1959). Chinese perceive time as polychronic,non-linear, recurrent, and associated with events whereas westernersperceive it as monochronic, sequential, absolute, and prompt(Redding, 1980). Graham and Lam (2003) recognized that Americannegotiators are impatient and follow a specific time schedule whereasChinese negotiators are enduring to explore diverse aspects ofbusiness deals and to emphasize long-term cooperative relationships(Luo, 2002). The different notions about the timeliness of events andabout progress represent a potential source of conflict betweenforeign and Chinese negotiators. The Chinese may fail to follow aspecific schedule and foreign negotiators may not be able to identifyany distinctive sequence. MNE negotiators may become confused andfrustrated at the apparent insensitivity of Chinese negotiatorsregarding time, schedule, and deadline, and also at the Chinesehabit of negotiating several issues concurrently (Kirkbride et al.,1991).

3.2. Xinyong (utilization of personal trust)

Mayer, Davis, and Schoorman (1995) defined trust as “thewillingness of a party to be vulnerable to the actions of anotherparty based on the expectation that the other will perform a particularaction important to the trustor, irrespective of the ability to monitoror control the party” (p. 712). Being vulnerable implies that there issomething of importance to be lost (Boss, 1978). Trust is not takingrisk per se, but rather is a willingness to take risk (Mayer et al., 1995).Over time a cooperative behavioral pattern engenders trust between atrustor and a trustee (McAllister, 1995). A trustor develops a generalexpectancy with respect to a trustee's trustworthiness such asconsistency, fairness, responsibility, helpfulness, and benevolence(Jeffries & Reed, 2000; Ring & Van de Ven, 1994). The trustingrelationship creates a substantial barrier to external competition(Gundlach & Murphy, 1993) and motivates a trustor to put less effortinto verifying a trustee's behavior, which reduces informationexchange, and subsequently lowers transaction costs (Chiles &McMackin, 1996).

Lewicki, McAllister, and Bies (1998) proposed the concept ofdistrust in terms of “confident negative expectations” regardinganother's conduct, which means a fear of, a propensity to attributesinister intentions to, and a desire to buffer oneself from, the effectsof another's conduct and implies “expectations of things feared”(p. 439). It serves the purpose of enabling greater trust in a socialsystem. Luhmann (1988, p. 102) posited that “participation in afunctional system like an economy is no longer a matter of personalrelations. It requires confidence, but no trust.” Williamson (1996: 97)bluntly pointed out that the term trust is misleading “becausecommercial relations are invariably calculative, the concept of

calculated risk should be used to describe commercial transactions.”The emergence of distrust rationalizes inter-organizational coopera-tion and confidence through ‘system trust’, whereby a “system isfunctioning and trust is in place in this system, not in people orspecific individuals” (Luhmann, 1979: 50). Distrust motivates orga-nizations to align their mutual interests on an underlying economicguiding principle of rules and legality (Williamson & Craswell, 1993).

Exchangemanagers generate a psychological payoff table associatedwith individual risk and trust level (Williamson & Craswell, 1993),analyze costs and benefits, and establish complementary linkagesthereafter through asset specificity (Rindfleisch & Heide, 1997) underthe assumptions of fairness and openness to suppress opportunism(Heide, Wathne, & Rokkan, 2007). These active agents of system trustorganize working schedules, standards of expertise, rules, and proce-dures (Giddens, 1990). Distrust institutionalizes organization trustthrough system trust andextends the legitimacyof economic exchanges(Lane & Bachmann, 1996). In fact, Luhmann (1979) and Giddens's(1990) idea of system trust is comparable to Zucker's (1986) notion ofinstitutional-based trust by using contracts to consolidate all necessarymeasures and to reduce risk in inter-organizational exchanges. Hence,Steffel and Ellis's (2009) claim that organizational trust motivatescooperation and contributes to a long-term commitment relationship isconfusing. Indeed, inter-organizational cooperation and long-termcommitment should be based on a distrust perspective and systemtrust is a surrogate of distrust which makes personal guarantees orinterpersonal trust more dispensable and influences communication,feedback, and problem-solving (Gundlach & Murphy, 1993) in waysthat producemore favorable attitudes toward bilateral loyalty (Schurr &Ozanne, 1985) and long-term relationships (Moorman, Zaltman, &Deshpande, 1992). Nevertheless, high levels of uncertainty in acontinuous exchange render contracting more hazardous (Williamson,1985), and encourage the formation of a more complex contract andultimately increase transaction costs (Poppo & Zenger, 2002). A moreexplicit contract implicitly encourages opportunism surroundingactions that cannot be specified in a contract (Bernheim & Whinston,1998). Hence, relying purely on contracting lowers the chance of futurecooperation. Indeed, the stiffness of transaction cost and system trusttheory affords too small a role to the social influences on decision-making choices (Kramer, 1999). These critiques motivate the concep-tualization of relational governance based on social contract (Heideet al., 2007).

The realism of a contract has a “letter” and a “social” content(Fuller, 1941, p. 799). A “letter” associated with the idea of systemtrust and concerns the terms and conditions written explicitly in acontract (Fortgang, Lax, & Sebenius, 2003, p. 66) whereas a “socialcontract” is “a binding, though unwritten, agreement that establishesthe norms” (Dunfee, Smith, & Ross, 1999, p. 18), “the spirit”(Gundlach & Murphy, 1993, p. 41), the “expectations about behavior”(Heide, 1992, p. 34) or “understanding” (Boyle, 1993, p. 374) sharedby interacting managers. The relationship between exchange actorscan be characterized in terms of the strength of their social ties, andthe extent to which they share common processes and values,whereby a common identity and collective interpretations of realityare formed (Cohen & Prusak, 2001). These norms involve theenforcement of obligations, promises, and expectations that promoteflexibility, solidarity, and information exchange. Social contract andsystem trust are complementary in generating higher levels ofsatisfaction in a relational exchange (Poppo & Zenger, 2002). A socialcontract serves to suppress opportunism and to encourage ethicalbehavior (Heide et al., 2007).

A Chinese term that approximates the meaning of trust is xinyong.It consists of two words, i.e., xin (verbal trust) and yong (utilization).Xin can be further decomposed into two characters, i.e. ren (human)and yan (word). The embedded meaning of xinyong is that one's ownverbal promise must be honored when interacting with others to earnpersonal social credits for business transactions. Academic knowledge

1195T.K.P. Leung et al. / Industrial Marketing Management 40 (2011) 1193–1205


of xinyong is scare. Wang et al. (2008) have specifically called for ameasurement scale for xinyong owing to its unique role in establishinga trusting relationship. An individual's xinyong reflects the high levelof ethical integrity, credibility, trustworthiness, and reputation, andmeans that his verbal commitment can be trusted and transacted(Tong & Yong, 1998). Xinyong is hierarchically structured, i.e., thesocial credit premium of xinyong attached to an individual increaseswhen he moves up the hierarchy whereas interpersonal trustconsiders human relationships on a horizontal basis. Xinyong attachesan individual's social credit evaluation to his social status and by-passes a third agency. Risks are borne by individuals and not absorbedby an external agency such as a bank; neither is the contract betweenthe individuals bound by an external body such as a legal institution.

Chinese prefer dealing with old friends who have xinyong in theirsocial network, and to avoid individuals outside their social network,whose xinyong level is unknown, to prevent losses. The institutional-ization of xinyong is a compensatory mechanism for the lack ofconfidence in the Chinese legal system, and businessmen have cometo rely on it to finish transactions because Chinese laws are oftenuncertain in their implementation and subject to political considera-tions (Child & Mollering, 2003; Leung, Lai, Chan, & Wong, 2005). Theunderlying principle of xinyong grants thosewho apply it a higher senseofmoral superiority because it is basedupon thehonesty and integrity ofindividuals, referred to variously as a ‘gentleman's word’ (Tong & Yong,1998: 88), a ‘personal guarantee’ (Low, 2001: 201), or an ‘obligation ofpaying debts of gratitude’ (Wang, 2007: 83), rather than being a legalbond. If one individual perceives another individual as having xinyong,hewill pass favorable ethical judgment on that person. Likewise, a buyerwould be stronglymotivated to establish a partnershipwith a supplier ifthat supplier is perceived as having xinyong.

The notion of xinyong is tacitly embedded in the Chinese legalideology. The Uniform Contract Law of the People's Republic of Chinaenacted in 1999 states that contracts can be in written, oral, or otherforms, except for those required by law to be written (Article 10).Written forms include letters, telegrams, telexes, faxes, electronic data

exchanges, and e-mail (Article 11). Even for contracts that arerequired by law to be written, there is an exception: If one party hasbegun the performance of the contract's essential obligations withouta written contract, and the other party accepts the performance, thenthe contract is legally enforceable (Article 36) (Zhao, 2000).

Xinyong and trust have similarities and differences as revealed inTable 1. At a personal level, both concepts reflect an individual'sethical qualities and they are important mechanisms for resistingoutsiders. Nevertheless, an individual's xinyong increases when hemoves up the social hierarchy, but whether the trust of an individualincreases together with an increase in his social status in the West isunclear. At an organizational level, xinyong becomes an exchangeplatform between two old friends in China, and risks are borne bythe two parties that make a third party agency such as a bankunnecessary. A contract provides guidance to the course of inter-firm cooperation while wholehearted cooperation between oldfriends overcomes the adaptive limits of a contract. Trust betweenmanagers, in contrast, acts as an important motivation to start inter-firm co-operation which is based on distrust or system mechanismssuch as cost and benefit analyses and rules and legalities. Thesemechanisms become the foundation of a structural bond in termsof investments in technology and adaptation to make inter-firm co-operation a long-term commitment. Institutionalization througha contract is the basis of system trust. The letter of the contractspecifies all the terms and conditions needed for the exchangeand the social contract attends to the social relationship whichis omitted by the letter of the contract. However, whether theenforcement of obligations, promises, and expectations exhibitedthrough social contracting upgrades the personal relationshipbetween Chinese and MNE managers to an old friend status attractsfurther investigation.

To our knowledge, no previous research has been performed onthe relationship between xinyong and negotiation outcome. Author-ities have suggested that a business exchange in China should not onlybe “term specific” but also concern “contingency adaptability” (Luo,

Table 1Xinyong vs trust at personal and organizational level.

Relationship type Xinyong Trust

Personal level •Xinyong is reserved for old friends within the same socialnetwork.

•Trust is developed through interactions.

•Outsiders are excluded from this social network because theirxinyong is unknown.

•An individual (a trustor) has a general expectation on anotherindividual (a trustee) because this trustee has the personal qualitiesof integrity, consistency, fairness, responsibility, helpfulness, andbenevolence.

•An individual's high level of ethical integrity, credibility,trustworthiness, and social reputation are capitalized as asocial asset, i.e., xinyong.

•This trusting relationship further establishes shared norms andvalues.

•An individual's level of xinyong in the network increases whenhe moves up the social hierarchy.

•A buyer (the trustor) is willing to take risk to rely on the seller (thetrustee) to perform certain activities that are important to the buyer'sdaily operation.•The trusting relationship resists external competition.

Organizational Level •An individual's xinyong can be carried over to an inter-organizational context.

•Trust is an important factor to start cooperation.

•Transactions can be based on xinyong and friendship betweentwo old friends.

•Fundamental business principles apply, transactions are calculativein terms of costs and benefits.

•Exchange is largely based on personal guarantee and risk-bearing by a third party (such as a bank) is unnecessarybecause the Chinese legal system is unstable.

•Exchange is further based on an underlying guiding principle of rulesand legality.

•Obligation of paying debts of gratitude in the future. •A structural bond needs to be established in addition to trust for aninter-organizational exchange.•Recognize the realism of social ties.

Contract •A contract provides guidance to the course of inter-firmcooperation while wholehearted cooperation overcomes theadaptive limits of a contract.

•Institutionalize through system trust according to an explicit “letter”of contract to bind two exchange parties together with terms andconditions.•Advocate the use of a “social” contract to establish the norms, spirit,expectations, and understanding to guide the relationship betweenexchange parties.



2002: 916) and “contextual confidence” (Child &Mollering, 2003: 70),because persistent Chinese values support some business practicesthat make both transactional and relational exchange feasible(Buckley, Clegg, & Tan, 2006). When conflicts emerge, a morehumanistic approach, rather than a legalistic one, would representan ideal resolution strategy for most Chinese businessmen (Wanget al., 2008). Thus, our first proposition is:

P1. Xinyong positively influences negotiation outcome.

3.3. Guanxi (personal relationship)

Guanxi is defined as the personal relationship networks of informalsocial bonds in which individuals carry expectations and obligationsto facilitate favor exchanges (Davies, Leung, Luk, & Wong, 1995). Thecharacter ‘guan’ means a gate or a hurdle, and ‘xi’ refers to a tie, arelationship, or a connection. Therefore, guanxi literally means “passthe gate and get connected” (Lee & Dawes, 2005: 29). The existence ofguanxi or personal network is universal but its ubiquitous naturemakes it unique and distinctive in China (Gu, Hung, & Tse, 2008). It is asocial capital and a salient governance mechanism upon whichbusinessmen can rely on when formal institutions and resources areunavailable (Hwang, 1987). Guanxi is transferable and expandable(Standifird & Marshall, 2000). If person A wants to make a request ofperson C with whom A has no guanxi, A may seek out a member of hisguanxi network, person B, who has guanxi with C. Given B provides Athe introduction to C, a guanxi relationship may be establishedbetween A and C (Tsang, 1998).

Many have attempted to portray guanxi practices as trust-basedexchange (e.g., Hill, 1995). However, Standifird and Marshall (2000)argued that trust plays little role in guanxi whereas assurance, “anexpectation of benign behavior for reasons other than goodwill of theother partner”, is crucial (Yamagishi & Yamagishi, 1994: 132). Trust isbased on the inference of the partner's personal traits and integrity,whereas assurance is based on knowledge management of theincentive structure surrounding the relationship, i.e., an initiative ofmanaging favor/benefit exchange, information, social activities, andmutual cooperation (Fock & Woo, 1998). Assurance exists where oneparty will not act opportunistically due to external constraints and theexpectation of future exchange (Standifird &Marshall, 2000). It makesa guanxi network exclusive to its members who are committed to oneanother on a long-term basis by a hidden norm of reciprocity thatconcerns balancing the exchange of favors (Hwang, 1987).

Fei (1992) conceived guanxi as a psychological network space inwhich the host (A) is situated at the center and his connectedmembers (B and C) are concentrically positioned surrounding A. If Aperceives that B is positioned closer than C, the psychic distancebetween A and B is reduced and the relationship between A and Bwill be better than that between A and C. This scenario implies thatthe distance in a psychological network space can be measured. Pastresearch suggests that it is possible for an MNE manager to use aRelationship Quotient (RQ) to capture and affix his friendshiprelationship status with his Chinese counterpart at different stages.Lee, Pae, and Wong (2001) extended this measurement concept toa Sino-Hong Kong business context and found that a close relation-ship is a barometer of a quality relationship which generates a strongbusiness performance. Bersheid et al. (1989) and Baron-Cohenand Wheelwright (2003) have also developed a relationship close-ness inventory scale and a friendship and relationship inventoryscale, respectively, to measure the relationship status between twoindividuals.

The aforementioned studies suggested that Chinese put differentpsychological boundaries on their social networks. Yang (1993)concurred that Chinese categorize human beings in terms ofrelationship closeness: (1) family members (jiaren); (2) outsiders ornew friends (sheng ren); and (3) insiders or old friends (shou ren)

e.g., former classmates, former colleagues, and hometown fellows.These respective categories subsequently lead to the development ofthree guanxi ties, i.e., expressive ties, instrumental ties, and mixedties (Hwang, 1987). Expressive ties between family members arecharacterized as personal, involuntary, affective, permanent, andstable (Lee et al., 2001). Exchange of information, obligation,commitment, and sentiment among family members are expressiveand extremely close, and favor exchanges are often consideredunconditional and moral (Tsui & Farth, 1997). Zhang and Zhang(2006) noted that a son is obligated to manage the family businessbecause he is the onemost trusted by his father. Also, the family assetswill be maintained by an intimate family member after the father diedand will not be released to any outsider. Instrumental ties betweennew friends are voluntary, unstable, and temporary. Exchanges areimpersonal and are based on the norm of equity in resource allocationand contribution (Lee et al., 2001). A transaction is conducted at arm'slength and each party perceives the other as an outsider with littleexchange in information, obligation, or sentiment once they finish thetransaction (Dwyer, Schurr, & Oh, 1987). Favor exchange is non-existent. Mixed ties between old friends are blended with expressiveand instrumental traits that are more personal, more permanent,affective, and stable (Lee et al., 2001). Mixed ties are semi-close, withmoderate degrees of information exchange, obligation, and sentimentbeing cultivated through social and pragmatic favor exchange (Chen,Chen, & Xin, 2004). The norms of reciprocity and favor exchangeprevail. Without pedigree, an MNE manager cannot build expressiveguanxi ties with his Chinese counterpart. A Chinese counterpart willonly consider him as a new friend and a close relationship cannot beestablished. If he wants to upgrade the new friend status to an oldfriend scenario, he needs to adapt a mixed ties approach, tostrategically move close enough on the psychological network spaceto become an old friend of his Chinese business partner, and tofacilitate wholehearted exchanges.

Luk, Fullgrabe, and Li (1999) acknowledged that renqing andganqing are two important factors in managing guanxi in Chinesesociety. Renqing can be physical or non-physical social favors that areexchanged in the form of money, goods, information, status, andaffection implicitly that involve reciprocity of courteous rituals andresources (Hwang, 1987). For instance, when a Chinese individual (A)goes to a wedding party, he will bring a red envelope containing anamount of money or renqing in it with the names of the marriedcouples and his own written on the outside. The quantity of renqing isdetermined according to the perceived cost of the wedding party. Ifthe estimated cost per person is roughly HK$500, Awill put HK$500 inthe red envelope and present it to the host (B) with applause. Thisrenqing is an important tool or entry ticket for A to share B'shappiness, anxiety, and cost in hosting his son's marriage. If A's songets married in the future, B will perform exactly the same ritual for A.In this example, financial resource is used as a renqing to implementan emotional help. The norm of reciprocity is instrumental, and mustbe carefully observed, otherwise the guanxi between A and B will beseverely damaged.

Similarly, purely an emotional expression of help without anyphysical substance can be a kind of renqing. Zhang and Zhang (2006)acknowledged that person A is implicitly expected to repay the favorto B if A has received a renqing based on humanitarian ideology fromB. Amust consciously reciprocate to avoid both the feeling of guilt andany damage to his own social prestige (Su & Littilefield, 2001).Reciprocations of renqing may not be immediate, or else they becomeutilitarian transactions. Renqing must be skillfully seeded so that itbecomes a “burden” (Zhang & Zhang, 2006, p. 382) or an “indebted-ness” (Standifird & Marshall, 2000, p. 21) to be reciprocated in futureto facilitate further exchanges between guanxi members.

If an MNE manager accumulates renqing over a considerable periodof time, a psychological feeling of inner emotional attachment or anexpressive tie, which is aroused by the closest connection of human ties



(ganqing), emerges (Guo, 2001). Yang (1994) viewed ganqing as a deeppsychological commitment between guanxi members, emphasizingmutual empathetic understanding, affection, sharing of happiness, andemotional identification rather than duty, loyalty, or obligation, whichencourages entrepreneurs to elevate their bonding to a particularisticfriendship tie, i.e., old friend (Leung,Wong, & Tam, 1995). The better theganqing between two parties, the closer theywill lie in a network space.Chinese practice cronyism with their old friends, and favor exchangeand business deals become easier because differences in businesspractices can easily be resolved (Khatri, Tsang, & Begley, 2006). Two oldfriends aremore likely to handle the terms of a transactionmoreflexiblyand are less likely to formally legalize all the terms and conditions(Batjargal & Liu, 2004).

Should renqing happen before ganqing or vice versa? A mothergenuinely develops an emotional bondor ganqingwith her newborn sonwhen she seeshimatfirst sight (Klaus, Kennell, &Klaus, 1995). Temporaldevelopment of ganqing between the son and his parents, especially themother, is natural. The son will repay his parents by achieving hisparents' expectations such as graduating from a reputable university. Atypical Chinese son will reciprocate part of his monthly income to hisparents to show his emotional appreciation which may last until theydie. Ganqing established on pedigree and lineage is extremely tight andunbreakable. Renqing does not, indeed, have a place in a lineagerelationship (Leung, Heung, & Wong, 2008). However, such a relation-ship will not exist between “new friends”, and an MNE manager mustinitially practice renqing to generate ganqing with his Chinese counter-parts. It is under this insider perspective that an exchange can be carriedout. Thus, we propose:

P2. Renqing positively influences ganqing.

The above discussions suggest that renqing is an effective socialtechnique for anMNEmanager to establish an instrumental tie with hisChinese counterpart and that qanging is an expressive tie emerging froman accumulation of renqing through numerous human interactions. Thissubtle relationship generates anassurance for guanximembers that theycan obtain support in terms of friendships and advice from one another.In such a situation, a Chinese hostwill havemore confidence that his oldfriend in this guanxi network will behave properly and will not renegeon agreements, and therefore will trust himmore (Luo, 2005). Thus, wepropose:

P3. Ganqing positively influences xinyong.

3.4. Face work

Face is the respect, pride, and dignity that an individual possessesin Chinese society (Goffman, 1972). The uneven power distributionputs individuals in different positions within a social hierarchy(Buttery & Leung, 1998). Every individual has two “faces”, i.e., “lien”and “mianzi” (King, 1993). Through the process of socialization, hedevelops a norm of shame that is subsequently transformed to anintimate virtue or an internal face, i.e., lien. Its importance is capturedby a Chinese saying: a tree has its bark and an individual wants tohave his lien (Brunner, Chan, Sun, & Zhou, 1989). Lien cannot begained but can be lost, and a sense of guilt is produced in the absenceof an audience to discern the transgression through misconduct. Itrepresents the integrity of an individual's moral character; anindividual cannot maintain his relationship with others if he loseslien because the individual feels guilty (Yau, 1988). In contrast,mianziis the external face and represents an individual's prestige in society: areputation achieved through getting on in life, through achievingsuccess, and through ostentation (Brunner et al., 1989). An indivi-dual's possession of mianzi requires visible social success in matchingwell-established expectations. He will have more mianzi when he

moves up the social hierarchy (Goffman, 1972).Mianzi is a social assetand can be banked and exchanged for favors at times.

King (1993) noted that face work is the art of manipulating apackage of social techniques to “maintain one's mianzi and themianziof others” (Goffman, 1972; p. 40). It has a horizontal and a verticaldynamics (Hwang, 1987). Horizontal face work involves the practiceof giving face, saving face, and avoiding losing the face of others. Indoing so, the rules of self-respect and considerateness must beobserved (Goffman, 1972). Maintaining one's mianzi is not anindividual's sole responsibility, but is influenced by the actions ofthose with whom he closely associates, and how he is perceived anddealt with by others. The emphasis is upon the reciprocity ofobligations, dependence, and the protection of esteem of thoseinvolved. Unlike horizontal face work, vertical face work is self-generated and involves the self-image projection and impressionmanagement (Leung&Chan, 2003). An individual's goal is to constructa favorable image onto a resource allocator's mind about his personalqualities such as integrity, honesty, and reputation. Vertical face worksuch as face enhancement is important to elevate one's ownmianzi andto show off one's power, and to influence an allocator's decision todistribute resources to one's benefit.

Because of its horizontal and vertical aspects, the practice of facework is strategic because it strongly influences business decisions(Buckley et al., 2006). King (1993) suggested that a humble gentlemanobserves the “doctrine of the mean” (Yau, 1988: 55). This “mean” doesnot carry any connotation of being average or mediocre, or of notdistinguishing oneself (Sun, 2008: 11). It simply indicates that anindividual ascertain the most appropriate position in a given situation,and it is not necessarily the midway between the two extremes. If anMNE manager follows this principle, he should be cognizant of theinterpersonal dynamics at play, and of the possible effect of one'sdecision on people within the same social system. He should alwayschoose a course of action with the view of maintaining social harmony(Sun, 2008).

Leung and Chan (2003: 1591) identified three face work clusters,i.e., the “cruel”, the “smoother”, and the “impresser”. The “cruel” hasan absolute business-only style, i.e., he establishes his initialposition and develops an ego that drives him to reconcile futureactions in order to arrive at a pre-determined company target(Fisher et al., 1991). He gives begrudging respect to his Chinesecounterparts, neglects their responses and facial expressions, andignores the dynamics of reciprocity. The “smoother” works hard tobuild his reputation but meantime gives excessive respect to seekreciprocity from his Chinese counterparts. An “impresser” mayexhibit more than average respect, but he does not excessively pleadfor reciprocity. He is responsive to his Chinese counterparts, ishumble, and is modest in projecting his reputation. The “cruel” isperceived as an outsider and cannot generate good guanxi with hisChinese counterparts. The “smoother” is viewed as being tooflattering and is considered dangerous to conduct business with(Leung & Chan, 2003). The humility embedded in an “impresser”reveals the “doctrine of the mean”, and is cherished in a traditionalChinese society (King, 1993).

No study has examined the inter-relationships among the face andguanxi components, i.e.mianzi and renqing.However, Hwang's (1987)seminal work proposed a positive influence of face work on renqing.Thus, this study proposes:

P4. Mianzi positively influences renqing.

The relationship between face work and negotiation outcome hasnot been investigated in any previous study. Some related studies,however, suggest that MNEmanagers may be endowed to cronyism ifappropriate face work, i.e., mianzi, is practiced during an encounterwith a new friend (Leung et al., 2008). Following the same logic, weadvocate the following proposition:



P5. Mianzi positively influences negotiation outcome.

3.5. Gifting

Social exchange theorists (Befu, 1977; Blau, 1964; Emerson, 1976)posited that social behaviors are rational and exchanges are createdthrough a subjective cost-benefit analysis. Individuals tend tomaximize social gains with the greatest rewards after conductingcomparisons of available alternatives. Two interpersonal traits mustexist in a social exchange: interdependence and social obligation(Befu, 1977). The former involves mutual and complementaryarrangements whereas the latter motivates reciprocity betweenactors (Molm, 1994). Unlike an economic exchange (Bagozzi, 1975),however, this social obligation is “unspecified” and the “nature of thereturn cannot be bargained” (Blau, 1964. p. 93). Reciprocity is auniversally accepted norm: individuals who givemuch to others try toobtain much from them, and people who get much from others areunder pressure to reciprocate much to those others (Emerson, 1976).It tends to balance out (Homans, 1958), whereas economic and socio-emotional resources are likely to be exchanged on a temporaldimension rather than aiming at an immediate return (Cropanzano& Mitchell, 2005). The former constitutes some physical rewards andthe latter may consist of some social psychological benefits such asrespect, caring, and social approval (Eisenberger, Cummings, Armeli,& Lynch, 1997). Americans are more humanistic and assign socio-emotional resources equally to all employees, but economic benefitsare distributed in proportion to the employees' performance (Chen,1995).

Sherry (1983) andothers (Belk&Coon, 1993; Cheal, 1988; Joy, 2001)have conceived gifting as an appropriate aggregate of dyadic obligatorysocial exchange rituals. Giesler (2006) argued that gifting is morecomplex than just an aggregate of dyadic interaction rituals. Lowrey,Otnes, and Ruth (2004) shows that givers strategically incorporate, orallow themselves to be influenced by third parties when selectingChristmas gifts for recipients. Also, givers' motivations for incorporatingthese influences change over time. Thus, seemingly personal gifts torecipients actually reflect givers' relationships with others in a socialnetwork.

Presenting a gift is aimed at generating a social-emotional coherencebetween the buyer and the seller so as to create a favorable atmospherein which business discussions can commence and hopefully furtherbusiness opportunities can be reciprocated in a cyclical pattern(Beltramini, 1992). Evidence showed that sales professionals considera non-physical gift such as entertainment as more important than aphysical gift with respect to building a relationship with their buyers(Hite & Bellizzi, 1987). Appropriate gift-giving creates an enduringsocial relationship, and most likely trust is a promising outcome of thatexchange (Dirks & Ferrin, 2002).

The MNE international gifting practices are simultaneouslygoverned by the Foreign Corrupt Practices Act (FCPA) which wasenacted in the U.S. in 1977 and their internal company policies. FCPAhas gained its impetus after The Organization of Economic Co-operation and Development (OECD) Anti-Bribery Convention hasadopted it as an international legal standard to combat corruption inthe late 1990s.4 Its anti-bribery provisions prohibit “any person” tocorruptly influence a “foreign official” or foreign political party orcandidate, in order to obtain or retain business (Cleveland, Favo,Frecka, & Owens, 2009, p. 204). Cuervo-Cazurra (2008) noted thatcoordination of FCPA across OECD countries has effectively put MNEs

from these countries on fair competition so that no MNE willbe disadvantaged when operating in developing countries where“grease”money is commonly used (p. 637). The term “foreign official”must also be carefully interpreted as well. For instance, the U.S.government considers employees of state-owned enterprises(“SOEs”) to be “foreign officials” and naturally interactions withsuch personnel will be scrutinized (Anonymous author, www.asiale-galtech.com/blog/tag/state-owned-enterprises/).

MNEs are also confined by their company gift policies. Browningand Zabriskie (1983) found that gift-giving activities are basicallyethical andmanagers have a high level of ethical behavior. However, acompany-wide enforcement of gift policies irritates marketingprofessionals because of the perception that they are framed bysuch policies while others are not (Bird, 1989). The formation of thisperception is mainly due to MNEs' inconsistent domestic andinternational policies. For instance, General Motors does not permitits employees to receive gifts from its local suppliers (General Motors,2008). Gift-giving to domestic clients, however, is allowed withlegitimate reasons. Also, following gift-giving customs in othermarkets is acceptable with the assumption that such an act does notinfluence a recipient's purchasing decision. These inconsistent policiesare problematic to MNE managers: under what circumstances do theaccepting/giving of a gift from/to their business counterpart influencetheir business decisions (Preuss, 2000)? Fisher (2007) proposed thatmanagers should distinguish organizational gifts from personal gifts.Unethical practices are those that result in a conflict of interest for thegift recipients.

By contrast, gifting is an important social etiquette in China thathas been used to show the value of a relationship, and is a means ofexpressing respect and honor to the gift recipients (Tian, 2008; Yan,1996a,b). Chen (1995) argued that Chinese managers invokedifferential preferences by allocating economic and socio-emotionalbenefits in proportion to performance. Gifting is very personal and hasdifferent business implications concerning psychological closenessand reciprocity depending on whether party A presents a gift either toparty B (an old friend) or to Party C (a new friend) (Joy, 2001). Party Anormally presents an expensive or elegant gift to his old friend (PartyB) for a special event such as a birthday or a ceremonial occasion (e.g.,Chinese New Year) to show the extent of his caring and expects apositive emotional response. If Party B does not exhibit the desiredreaction, Party A may feel shameful or guilty with the impression thatthe value of his gift may not be sufficient to reflect the ganqingbetween the two parties. The situation is different when Party Aprovides a gift to a new friend (Party C). Essentially, he wants to usethe gift to build a social relationship. Party A will present the gift (e.g.,a souvenir) to Party C at a special occasion such as returning from anoverseas trip. Party A may not expect a particularistic or emotionalreaction but he will feel a loss of face if Party C rejects his gift. In bothcases, future reciprocation is expected. Yang (1994) interprets suchrelationship dynamics in terms of obligation and indebtedness.

Gift practices express goodwill and are considered a form of “socialcontracting” (Steidlmeier, 1999: 124). Gift-giving is especiallyimportant when attempting to make connection with a new friend,and its symbolic value is an important signal of closeness. For instance,Liu andMurphy (2007) noted that an individual drinks cheaper winesat home but present expensive foreign red wines as gifts to his friendsin social meetings. The value of the redwine also increaseswhenmoreguests are present because he wants to give moremianzi to his friend.Xin and Pearce (1996) perceived gift activities as social investmentsand structural supports. Chinese managers of private enterprisesextensively use gifts to build guanxiwith their counterparts to protectthemselves from the risks inherent in China's uncertain legalenvironment. Xin and Pearce (1996) specifically used the term“non-reciprocate” gifts to highlight these managers' anticipation of afuture rather than an immediate return (p. 1646). However, whenMNE negotiators attempt to practice gift-gifting in the Chinese

4 In June 2010, there were 38 country members in the OECD Anti-BriberyConvention including major China's trading partners such as the U.S., U.K., Japan,France, Germany and Australia. For a complete listing, please refer to “Working Groupon Bribery Data on Enforcement of the Anti-Bribery Convention” accessed throughhttp://www.oecd.org/dataoecd/11/15/45450341.pdf.



context specifically relating to laws on giving and receiving gifts, theymay face two difficult issues similar to the Rio Tinto case asmentioned: 1) Will the Chinese government use such laws to punisha company that upsets their plan? 2) Do these Chinese laws workagainst the presentation of gifts to state employees?

Concerning thefirst issue, a provision of Rio Tinto case information isinstructive. To support China's huge domestic demand, the largest State-owned Aluminum Corporation of China (Chinalco) acquired 9.3% of theworld's third-largest Anglo-Australianmega-miner Rio Tinto's ordinaryshare in February 2008 and has become its single largest stakeholderand the largest customer (Leggatt, DeGeer, & Makin, 2009). Meantime,the anxiety that China is a threat to Australia's national interest hasignited a hot political debate (ChinaStakes, http://www.chinastakes.-com/2009/2/chinalco-eyes-assets-and-board-seats-in-rio-tinto-deal.html). Just before a February 6, 2009deadline for theworld's largestalso Anglo-Australianmega-miner BHP to firm up a take-over bid of thefinancially-ill Rio, Chinalco teamed up with U.S. largest aluminumproducer Alcoa (China/U.S.: 91.45% and 8.55%) to establish a US$ 19.5billion agreementwithRio tobuy a9%stake and to simultaneously blockBHP's take-over action (China Daily, http://www.chinadaily.com.cn/china/2009-06/05/content_8252601.htm). This agreement would haveallowed Chinalco to satisfy China's iron ore demand for the next twodecades andmeantime increase its equity inRio to18%. In June2009, Riounexpectedly signed a joint venture agreement valued at US$ 5.8 billionwithBHP to jointly exploit themine inWesternAustralia, andmeantimescrapped Chinalco's offer with a break fee of US$ 195 million. Thealliance between the two mega-miners substantially worsened thealready weak bargaining power of major Chinese steel and aluminummakers (BBC News, http://news.bbc.co.uk/2/hi/business/7229516.stm).

While the price negotiation of iron ore was on the edge of collapse,China had detained Rio's Head of China iron ore operations, anAustralian-Chinese executive, Mr. Stern Hu, and his three Chinesesubordinates. They were suspected of spying and of stealing statesecrets concerning pricing information of Chinese steel producerswith which to formulate Rio's negotiation strategies with these steelproducers (Barboza, 2009a). After weeks of pressure from theAustralian government and the international community, Chineseofficials had decided to replace the charges with much lighter chargesof suspicion of commercial bribery and trade secrets infringement(Barboza, 2009b). The four Rio Tinto employees were subsequentlyconvicted on charges of receiving bribes and obtaining commercialsecrets (Rio Tinto Media Releases, 2010). They admitted that they hadaccepted bribes from the Chinese steel makers in order to guaranteethat the latter had sufficient iron ore supplied in 2008 (Hong KongEconomic Times, 30/3/2010).

Because of internal political pressure, the Australian Foreign Invest-ment Review Board (AFIRB) was unlikely to approve Chinalco'sinvestment in Rio. The alliance between two mega miners sensiblyavoidedAFIRB's interventionbutmeantime representedanact of betrayalto Rio's old friend Chinalco and also caused Chinalco to lose itsmianzi inthe Chinese political scene. “Causing the Chinese business partner … tolosemianzi is nomere faux pas; it's a disaster” (Graham& Lam, 2003, p9).Also, Beijing was enraged about Rio's unfriendly actions of using the playwith Chinalco to eventually dance with BHP. To conclude, China's statesecrets lawwas vague (Cohen &Daum, 2009) and has often been used topunish political opponents or those whom Beijing considered a threat toits national interests. The Chinese government will use relevant laws topunish a company that upset their plan in response to a betrayal from anold friend and a collapse of a long-term relationship.

Concerning the second issue, the Chinese government has its ownand very stringent regulations regarding gifting activities. According tothe Regulations of the State Council of the People's Republic of China onGiving andReceiving Gift inOfficial Functions Involving Foreigners 1993, nostate employee shall give or receive gifts in terms of cash or negotiablesecurities without authorization, nor shall he solicit gifts from foreignfirms either explicitly or implicitly (Articles 2 and 8) (China Legislative

Information Network System, 1993). Also, according to the Supplemen-tary provisions of the Standing Committee of the National People's Congressconcerning the punishment of the crimes of Embezzlement and Bribery1988 (Order 63), whoever conspires with state personnel, withpersonnel of collective economic organizations, orwith other personnelin public service to accept bribes shall be punished as an accomplice inthe crime (Article 4) (http://www.lawinfochina.com.ezproxy.lb.po-lyu.edu.hk/law/). Finally, the State Administration for Industry andCommerce (SAIC) specifically issued the Provisional Regulations onProhibition of Commercial BriberyActions in 1996 to set outmoredetailedprovisions implementing the Commercial bribery section of the Anti-Unfair Competitive Law (AUCL) promulgated in 1993. The AUCLprohibits all business operators in China, regardless whether theoperator is local or foreign, from providing bribes, for the purpose ofselling or purchasing goods or services, or obtaining other competitiveadvantages (Griffith & Wang, 2010, p. 1). In this context, the Chineselaws, indeed, work against a foreign company's giving and receiving giftactivities. Normally, a small When the gifting activities or “culture ofcorruption” (Xin & Pearce, 1996, p. 1655) reach an unbearable limit, astheChinese say, the Chinese governmentmay “kill a chicken to scare themonkeys” (Nicholas, 2009, p. 19). The arrests of the four Rio employeeswere a classic showcase.

The analysis of the Rio Tinto case provides some guidelines for Sino-foreignnegotiation and gift-giving activities. Insteadof strictly followingthe letter of contract, foreign companies should embrace the spirit (thesocial contract), an “understanding” (Fortgang et al., 2003, p.66) and asa“guiding principle” of a long-term relationship exchange (Gundlach &Murphy, 1993, p.41). The social contract of maintaining a long-termrelationship between Rio Tinto and Chinalco should have beencommunicated either formally or informally. Instead of just filing abreak fee to Chinalco, Rio should have simultaneously offered analternative to cooperate with Chinalco to maintain the social contract(Gundlach & Murphy, 1993).

As mentioned, gift-giving is a social contract and a reciprocalactivity to give mianzi and generate renqing (Steidlmeier, 1999; Yang,1994). A foreign company may not function properly if it does notfollow this business custom (Chan, Denton, & Tsang, 2003). In fact,there is no single set of ethical principles that can be applied to allcultures. Leung et al. (2008) proposed that an MNE should operatewithin a zone of ethical tolerance (ET) in order to address theimportant issue of gifting. Based on the works of Donaldson (1996),Gundlach and Murphy (1993), and Chan et al. (2003), this ET zoneshould be confined by the home and host countries' legal require-ments on top of the Chinese cultural norms and theMNE's own ethicalstandards. Motorola's ethical code exemplifies this ET zone concept:“Employees of Motorola will respect the laws, customs, and traditionsof each country in which they operate, but will at the same time,engage in no course of conduct which, even if legal, customary, andaccepted in such country, could be deemed to be in violation of theaccepted business ethics of Motorola or the laws of the United statesrelating to business ethics” (Donaldson, 1996, p. 56). Clearly, therelevant Chinese laws as aforementioned, and the Foreign CorruptPractice enacted in America, are two important sources of an ethicalframework for an American MNE to operate in the Chinese market(Gundlach & Murphy, 1993). The MNE code of ethics and the Chineseculture norms become a fine tuning ethical mechanism.Within this ETzone, gift-giving must not take the form of cash because itscondemnation is clearly stated in the relevant laws in both countriesand the use of cash will surely attract the attentions of the supervisoryorgans of both legal systems. AnMNE should keep track of its own andits associated companies' gifting activities where there is anemployer/employee relationship because its company managers areconsidered to be legal representatives and are liable for what theiremployees are doing. Gifting of cash aside, there are other possible giftitems to replace a cash gift including entertaining Chinese clients at arestaurant, giving free samples, playing golf with them, entertaining



them at home, offering them consultancy and overseas trainingprograms to Chinese counterparts (Steidlmeier, 1999).

The aforementioned discussions suggest that gift-giving activitiesmust be handled carefully because they constitute an important tool forgivingmianzi and for generating renqingwith Chinese counterparts. Xinand Pearce (1996) also confirmed that executives of private enterprisesare significantly more likely to use gift-giving to generate guanxi withtheir counterparts in China. Thus we make the following propositions:

P6. Appropriate gift-giving activity positively enhances mianzi.

P7. Appropriate gift-giving activity positively establishes renqing.

3.6. Problem-solving attitude (PSA)

Problem-solving attitude (PSA) is defined as “a set of negotiationbehaviors that are cooperative, integrative, and information exchange-oriented” (Alder et al., 1992: 451). This attitude concerns a negotiator'sability to probe and to obtain information about the needs andpreferences of his counterpart. A negotiator equipped with PSA tendsto maximize the number of alternative solutions considered, thusallowing negotiators of both sides to optimize negotiation outcomes.

Negotiation experiments conducted in the West suggest that theuse of PSA becomes effective in an open and trusting atmosphere thatis characterized by the following conditions: 1) the power distributionbetween negotiators is equal; 2) interpersonal conflicts between thenegotiators areminimized; and 3) both negotiation parties are seekinga long-term relationship (Alder et al., 1992; Weitz, 1981). Such anatmosphere allows a negotiator to deploy PSA as a tool to generatereciprocity from his counterpart; i.e., when he openly presentsinformation about his needs and preferences to his counterpart, hiscounterpart is likely to reciprocate with an effective informationexchange. Graham and Lin (1986) demonstrated evidence for suchreciprocity in the US and English-speaking Canada. Also, significantrelationships are found between a negotiator's PSA and the counter-part's satisfaction level, whereby a negotiator's individual welfare is

positively related to the counterpart's degree of PSA (Graham, 1986;Rubin & Brown, 1975).

In contrast, Chinesenegotiators perceive PSAas a strategic process toestablish a relationship with their counterparts. Ma et al. (2002) foundthat Chinese negotiators are anxious to maintain a good relationshipthrough problem-solving techniques before they proceed to generateany negotiation outcome, whereas western negotiators do exactly theopposite (Kirkbride et al., 1991). Also, firms rely on PSA instead ofcontinuous formulation of complex contracts in collaborate exchange.For instance, Humphreys, Shiu, and Chan (2001) and Humphreys, Shiu,and Lo (2003) discovered that PSA was the most important strategicfactor perceived by both UK and Hong Kong manufacturers whenestablishing collaborative relationships with their suppliers. Thesestrategies involve “a flexible response in problem solving, adequateexpertise to solve product design and process problem, use valueanalysis in problem solving” (Humphreys et al., 2003, p.238).

To date there has been no empirical research concerning therelationship between PSA and renqing. However, a number of studiesindicate that problem-solving strategies are associated with higherlevels of interpersonal attraction (Alder et al., 1992; Graham et al.,1988); this association involving attraction to a source (like-dislike,friendly feelings, etc.) may subsequently build renqing in a Chinesenegotiation scenario. Chan (2002) found that Hong Kong collegestudents perceive their lecturer as being equipped with renqing if thelecturer possesses a problem-solving attitude when helping studentssolve their daily learning problems. We therefore put forward thefollowing proposition:

P8. PSA positively helps to establish renqing.

4. Recommendations for managers of MNEs

Table 2 presents a protocol which MNE managers should addresswhen they meet their Chinese counterparts in a new friend situationand progress along to the old friend scenario to achieve a satisfactory

Table 2A preparation protocol for MNEs managers to obtain good negotiation outcomes from their Chinese counterparts.

Constructs Source

Negotiation outcomeHow does the negotiation simultaneously produce profits for a seller and savings for a buyer? Clopton (1984)Can bilateral satisfaction with the negotiation be observed? Fisher et al. (1991), Dwyer and Walker (1981),

Graham et al. (1994)Can the timing of negotiation between the two parties be managed effectively? Hall (1959), Redding (1980), Das (1991)Is the relationship built on a long-term cooperation basis? Luo (2002)

XinyongCan the completeness of promises and guarantee of the Chinese counterparts be observed? Low (2001)Does the representative of the Chinese counterparts have a high social credit rating? Tong and Yong (1998)Does the representative of the Chinese counterparts have a high social status? -ditto-Do the Chinese counterparts perceive you as having xinyong? -ditto-

GuanxiDo the buyer and seller aggregate enough renqing to become connected? Wang (2007)Do the buyer and seller accumulate enough ganqing to build emotional bonding? Yang (1994), Leung et al. (1995)Do the buyer and seller have an old friend status? Leung et al. (2008)Can favor of exchange be estimated between the buyer and the seller? -ditto-

Face workHow are the mianzi of the buyer and the seller maintained? Goffman (1972)Is modesty maintained during interaction? King (1993), Yau (1988), Sun (2008)How is impression management of self-image projected? Leung and Chan (2003)

GiftingHow close are the buyer and the seller? Joy (2001)What are the appropriate occasions to reciprocate gifts? Liu and Murphy (2007)How symbolic is the gift? Steidlmeier (1999)

Problem-solving approach (PSA)Is information openly exchanged in a negotiation environment? Alder et al. (1992)Do interactions between the buyer and the seller generate inter-party likeability? Graham et al. (1994)Does information exchange increase mutual understanding? Kirkbride et al. (1991)



negotiation outcome. MNEmanagers are advised to address the itemslisted before negotiating with their Chinese counterparts.

4.1. A new friend scenario

We attempt to generate some actionable solutions to address anissue in this section: how should a manager practice face work to buildguanxi, and specifically the renqing component under the restrictivegift policies of MNEs?

In practicing face work, an MNE manager should note that thedoctrine of the mean (Yau, 1988) prevails. While showing his abilitiesthrough PSA, the manager should be humble on the outside butsagacious on the inside and adapt the face work strategies of animpresser. He has to show reasonable respect instead of generatingexcessive pleas for reciprocity from his Chinese counterparts, whilemaintaining a responsive reaction to their facial expressions.

The principles for conducting business and for developingrelationships in China are distinctive, and differ from the westernrelational concepts (Simmons & Munch, 1996). Indeed, guanxi startswith an exchange of affection or renqing (Hwang, 1987). Gift-giving isimperative and should occur in a context that concurrently enhancesmianzi and generates renqing with a Chinese friend. It is an art thatmust be carefully planned, and social norms should be carefullyobserved.

The first norm with regard to gift-giving is that an MNE managercannot simply offer amonetary gift to a new friendwithout any specificreason, because it simply implies that the target recipient is greedy, andhe will lose his mianzi (Yan, 1996a,b). This is especially essential whenan MNE manager deals with a state employee because gifting activitiesare regulated in the Chinese legal system. Foreign companiesmust havea clear set of ethical rules to guide their managers. Following the localcustoms is a very dangerousmove. “When inRome, follow the laws” is amore sensible guideline (Nicholas, 2009). Also, presenting a gift with acause illustrates the gift-giver's appreciation of the recipient's achieve-ment and the recipient will gain mianzi. The second norm dictates thatthe gift-giver should adopt the level of courtesy appropriate to therecipient's social status, whereby the value of the gift has a positivecorrelation with the recipient's social status. The final norm indicatesthat the situational context of gift-givingmust be carefully scrutinized. Ifthe gift is a personal one, the greeting should bemore personal, andmayinclude, for example, giving positive commentaries if it is the recipient'sbirthday. In a public setting, however, the gift-giver's salutation shouldaddress the recipient's superior work performance. Customizing a giftwith a level of courtesy appropriate to the context can comfortably givemianzi and build renqing with the gift-recipient (Leung et al., 2008).Besides amonetary gift, a non-monetary gift suchasarranging the targetrecipient anoverseas facility inspection tourwhich could easily avoid anethical concern. Also, a gift in cash is not recommended because it mayarouse the Chinese government's attention.

Most experiencedMNEmanagers would agree that doing businessin countries such as Japan and China would be virtually impossiblewithout adapting the gift-giving culture (Chan et al., 2003). Acompany should establish a zone of Ethical Tolerance (ET) accordingto the Chinese cultural norms to guide its gifting activities. Wheneverthe potential practice falls outside the ET zone, managers shouldreplace it by other non-monetary gift practices. For instance, helpingthe Chinese counterpart's child to apply to an overseas university is aviable alternative. Similarly, a company may leverage its pressure ingift-giving by enhancing its corporate image through communitydonations. Such donations will raise a company's reputation andpolitical capital in China. A Chinese organization would rather anchoritself with a community-minded MNE instead of partnering anorganization characterized only by high levels of gift-giving activity,because the association with the former is likely to increase the socialstatus of the Chinese organization. In normal circumstances, the gift-recipient owes the gift-giver a renqing once he receives a gift from the

giver and is likely to reciprocate in future appropriate occasions. Also,the reciprocity of renqing is likely to provide a cultural platform forfuture interactions to improve the ganqing of two parties so that theycan progress to an old friend stage.

4.2. The old friend scenario

We attempt to generate some actionable solutions to addressanother issue mentioned in this section: how should themanager of anMNE negotiate with his domestic Chinese counterparts to obtain adesirable outcome, while attempting to comply with the legalrequirements of his home country and China?

MNE Managers need to understand that the key to effectivenegotiation in China is established with respect to an insider or oldfriend perspective. Previous research indicates that guanxi is a defensivemechanismagainst outsiders (Wong&Leung, 2001) andan institutionalsupport for insiders (Xin & Pearce, 1996); and that xinyong is agovernance mechanism for business transactions (Wang et al., 2008).These two relational variables must be cautiously monitored when anMNE manager tries to generate a close relationship with his Chinesecounterpart.

MNEs should design a formal system to generate a RelationshipQuotient (RQ) concerning information about the quality of therelationship with their counterparts in China. Table 2 provides somepreliminary relational items for MNE managers to consider: 1) theirguanxi (renqing and ganqing) with their Chinese counterparts; and2) their perception of the level of xinyong of their Chinese old friendsfor subsequent assessments of the quality of their relationship withtheir Chinese counterparts. The temporal aggregation of RQ should beable to generate a timely assessment of relationship status. Thestronger the RQ, the greater the chance the two parties will achieve aneffective negotiation outcome. Continuous tracking of RQs shouldprovide a good indication to senior management as to whethercultural training is needed.

The Chinese legal system is very different from legal systems in theWest, and therefore the legal protection provided may be insufficientfrom an MNE's perspective. However, the requirement of a verydetailed contract (the letter of contract) may jeopardize the old friendrelationship and make business negotiation difficult. Therefore,managers of MNEs should exercise xinyong (a social contract inChina) with their Chinese counterparts at critical junctures. It shouldbe borne in mind that the Chinese legal system is flexible enough toincorporate the notion of xinyong in the commercial system. An MNEshould keep all documentary evidence for the ultimate resolution ofnegotiation conflicts.

MNE Managers should also recognize that Chinese aim tonegotiate for long-term and mutually beneficial outcomes (Lai, Bao,& Li, 2008). In a buyer and seller scenario, negotiators of both sidesmust compromise in order to produce an outcome that simulta-neously gives profits to a supplier and savings to a buyer. Patience is akey when MNE managers negotiate with their Chinese counterparts,and re-negotiation is always a possibility.

5. Conclusion

This study contributes to the comparison and analysis of Westernand Chinese concepts of gifting, problem-solving attitude (PSA), trust,and xinyong. Together with distinctive Chinese cultural variables, i.e.,faceand guanxi,wehave synthesized andproposed relationships amongthem and advocated a model that specifically caters for generating agood negotiation outcome between MNE managers and their Chinesecounterparts in the world's largest emerging market. In particular,recognition has been given to the significance of gift-giving, and themanagement concepts of the zone of Ethical Tolerance (ET) andRelationship Quotient (RQ), in addition to the importance of mianzi inChina. The studyhas analyzed guanxi in termsof thedynamics of renqing



and ganqing, and addressed the vital role of xinyong. It has responded tothe call of Wang et al. (2008) by developing scale items related toxinyong and renqing, and furthermore has generated theoreticalpropositions to be tested in future research.

We suggest that an MNE manager needs to take an insiderperspective to convert himself from a new friend to an old friend of hisChinese counterparts in order to generate effective negotiationoutcomes. Before negotiating with his Chinese counterparts, anMNEmanager should familiarize himself with Chinese social etiquetteand personality characteristics, i.e., gift-giving and mianzi, in additionto his PSA, in order to start a long-term relationship journey with hisChinese counterparts. Matching the monetary value of a gift to therecipient's social status is strategic and must be carefully managedbecause it simultaneously influences mianzi and establishes renqingwith the Chinese counterparts.

Chinese organizations like to negotiate with their old friends. Assuch, maintaining guanxi and xinyong are extremely important in theChinese business community. MNEs should therefore incorporate theRQ into their management system in order to ensure that they have ahealthy business relational status with their Chinese counterparts andthereby secure a profitable development in China.

6. Limitations and future research directions

This study notes the importance of Chinese culture and limits theroles of other rational business variables such as asset specificity (Dyer,1996), capital structure (Balakrishnan & Fox, 2006), and profits andcosts (Albrecht, Pagano, & Phoocharoon, 1996) when MNE managersnegotiate with their Chinese counterparts. Future empirical studiesshould include both the rational and the Chinese cultural variables andinvestigate their relative influences on negotiation outcome. Thismodeling approach could directly compare the relative importance ofthe rational and Chinese cultural variables to negotiation outcome andindirectly validate the old friend perspective which emphasizes cultureand interpersonal relationships. Also, empirical data are required toconfirm the validity of themodel proposed in this study and the relativestrengths of the constructs proposed. Also, comparing our modelempirically at a private or governmental level could confirm itsgeneralizability or specificity in different business contexts. However,because the model involves movement along a continuum from newfriend to old friend, a quantitative approach with cross-sectional datamay not be appropriate, and a qualitative investigation with alongitudinal research design such as a case study (Yin, 1994) mayprovide a viable alternative strategy for future studies.

Wemay be limited in our understanding of PSAwhen it is applied toa Chinese business context. A review of extant literature reveals thatMNE managers from the West and their counterparts in China havedifferent perceptions of problem solving attitude (PSA). MNEmanagersperceive PSA as a tool to influence their counterparts to reciprocateinformationexchangewhichhopefullymotivatesmore cooperation, butChinese negotiators perceive PSA as a strategic relationship-buildingvariable. Future researchmay need to further explore the definitive roleof this variable from amore balanced viewpoint that combines westernand Chinese perspectives, which would enable a better contextualexchange environment to be generated in Sino-foreign negotiation.

Our model is limited in its ability to respond to changes in theChinese economic, political, and cultural environment. China is asocialisticmarket economywhichhas grown from its particularheritage(Rawski, 1995). The Rio Tinto example demonstrates that Chinesepolitics and the implementation of relevant policy may change overtime to suit its internal business environment. As such, changes ineconomic policy on top of cultural awarenessmay influence the contextof Sino-foreign negotiation. Future research may need to generate amodelwhich includes the Chinese economic, political/legal, and culturalenvironment. This would help MNE managers to effectively appreciate

the complex Chinese environment when they negotiate venture withtheir Chinese counterparts.

The role of inter-personal attraction is a topic of researchinvestigation, especially in the Chinese market. Our study suggeststhat a close inter-personal relationship provides an effective interac-tional platform in Sino-foreign negotiation. Could it be a compositeconstruct to replace unique Chinese constructs such as mianzi, renqing,and qanging? Future research may need to re-visit the role of inter-personal attraction in the Chinese market. In saying that, inter-personalattraction may affect the buyer's perception of a seller's promise in thenegotiation process, which may subsequently influence the buyer'sperception of the seller's xinyong (Liu, Li, Tao, & Wang, 2008).

Future research should also aim at determining the impacts of PSA,gifting, mianzi, guanxi, and xinyong on cronyism (Khatri et al., 2006;Leung et al., 2008) and on negotiation performance (Park & Luo, 2001;Wang et al., 2008). In addition, researchers should also develop scaleitems of the Relational Quotient (RQ) and the zone of EthicalTolerance (ET) because they are important for helping MNEmanagersappreciate the relationship environment in China.

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Dr. Thomas K.P. Leung is an Associate Professor in the Department of Managementand Marketing at the Hong Kong Polytechnic University. Dr. Leung's research interestis in the area of Chinese relationship management with cultural emphases in guanxi,xinyong, face, gift-giving, relationship branding etc. He has published two books andhis journal papers have been widely available in such journals as Industrial MarketingManagement, European Journal of Marketing, Journal of Business Ethics, Journal ofInternational Consumer Marketing and others.

Dr. Ricky Y. K. Chan is an Associate Professor and a legal expert in the Department ofManagement and Marketing at the Hong Kong Polytechnic University. Dr. Chan'sresearch interests lie in ethical and behavioral issues relating to Chinese consumers.His research has been published in such journals as Industrial Marketing Management,European Journal of Marketing, Journal of Business Ethics, Journal of Management Studies,and Journal of World Business, and others.

Dr Kee-hung Lai is an Associate Professor in the Department of Logistics and MaritimeStudies at the Hong Kong Polytechnic University. Dr. Lai's research interests are inlogistics and marketing management. He has published over 60 papers in suchjournals as California Management Review, Communications of the ACM, Journal ofBusiness Logistics, and others.

Prof. Eric W. T. Ngai is a Professor in the Department of Management and Marketingat the Hong Kong Polytechnic University. His current research interests are in the areasof E-Commerce, Electronic Word-of-Mouth and Supply Chain Management. He haspublished papers in numerous international journals including MIS Quarterly, Journalof Operations Management, Industrial Marketing Management, European Journal ofMarketing, Production & Operations Management, and others.


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