Trouble in the Middle: American-Chinese Business Relations, Culture, Conflict, and Ethics

By Steven P. Feldman

Western businesspeople face a dilemma. China’s growing role in international business means it is nearly impossible not to do business in China. Below, Steven P. Feldman considers the importance of the Chinese middleman, explores ethical conflict, and suggests that when comparing Western and Chinese cultures there is much to respect in both.

It is an interesting irony that guanxi, the socially intense system of informal relationships that undercuts and reverses formal Chinese institutions, is itself a subcategory of the central principle of Chinese culture, hierarchy. Guanxi, in a word networking, connects the individual to a social network of “friends” who can be called upon for favors when needed. These social networks, however, pay tribute to the status of their members. The social status of each member in the broader community is respected within the social network. Yet the exact purpose and function of guanxi is to bypass formal hierarchical systems, institutions, and demands for obedience in the broader society. These intense obligations of respect, required and mapped out in detail in innumerable interpersonal rituals and mannerisms, make efficient action difficult. Guanxi addresses this problem by enabling relationships to develop new types of bonds based on trust and mutual advantage and thus new channels for action. Guanxi, then, is an outgrowth of hierarchy that simultaneously turns back against it, undermining its directives while maintaining its integrity. It maintains its integrity by both respecting hierarchical status within guanxi networks and contributing efficiency to rigid hierarchal structures.

The purpose and function of guanxi is to bypass formal hierarchical systems for obedience in the broader society.

Western businesspeople walking into this system find it difficult to master because they see only two opposite extremes. Many times they experience only chaos. On one hand, the Confucian principle of hierarchy is nowhere more observable than in the government-society relationship. The government is authoritarian and makes extensive if not enormous demands on business, some portion of which can be classified as abuse of power. On the other hand, every rule the government passes, every demand it makes, can be gotten around with the right connections. So simultaneous with the enormous power of the state is a system of relationships that regularly ignores state edicts. Indeed, state officials are right at the center of this system, playing both sides as loyal bureaucrats, “friends,” and rent-seeking individuals.

Western Businesses and Chinese Middlemen

Some of the main disadvantages Westerners face in this situation are their language, culture, and outsider status, leaving them less than expert players in the guanxi system, which, for all practical purposes, is an escape hatch in a hierarchical society. Here enters the third party, the Chinese middleman. Westerners, especially big companies that can put steep incentives into play, work with Chinese middlemen, utilizing their already developed networks. So, for example, if an SOE is not paying its bills, a Western firm can ask its middleman “friend” to contact his friend in the provincial ministry to put pressure on the SOE to pay its bills. If the minister sees the Western firm as potentially helpful to his own goals, all the better. In this way, the Western firm, through the middleman, has entered a guanxi network. Without the middleman this would have been nearly impossible. The fact that the Western firm is able to utilize the guanxi network shows the utilitarian aspect of guanxi. It is not all bonding, brotherhood, and obligation.

Perhaps the most important aspect of this situation is the rule of three. There is the Western firm, the middleman, and the government official. The dyad, a direct relationship between the Western firm and the official, is highly unlikely. An essential aspect of guanxi is that for A to win a favor from B, many times a third party, C, is needed. This need for a third party demonstrates the intense personalization and informalization of collective action in China; it also highlights the lack of trust and fear of dishonesty.

The rule of three grows out of the collectivist nature of Chinese society. Individuals attach themselves to groups and work through groups. This is a corollary to the guanxi principle. The hierarchical nature of Chinese society strongly limits individualism in the Western sense, instead channeling individual effort informally into groups and networks. Both hierarchy and its resistant child, guanxi, are forms of collectivism. The difference is that hierarchy, in pursuing collective goals as decided upon by top leaders, gives rise to informal, secretive guanxi networks to accommodate individual and out-group interests, though these networks still operate collectively and hierarchically.

It cannot be otherwise because all Chinese cultural forms emanate from the principle of hierarchy, even guanxi, which directly challenges it. Hierarchy infiltrates guanxi through the principle of face. Face is the status one has in the network. It is extremely important in regulating interpersonal relations. A person of a certain status has expectations for how he should be treated. If these expectations are not met, conflict will result.

This is why the rule of three is so important in Chinese culture. A third party can enter into a dyadic relationship, separating the two parties and damping down the emotions, helping to manage and safeguard delicate and sensitive issues of face. Face is the blood of collectivism, infusing and enforcing hierarchical status throughout the social body. The middleman too is thus part of the hierarchical and collectivist system, ensuring its smooth functioning by creating distance and indirectness, social forms badly needed in the rigid and conflict-prone nature of hierarchy.

For Westerners, profoundly dependent on the use of middlemen in Chinese business, middlemen do more than offer connections and translations, they also manage issues of face to avoid an escalation of conflict between Westerners and Chinese. Westerners are typically ill equipped to be sensitive to the face needs and expectations of Chinese executives. The middleman can take the intention of the Westerner and formulate it such that it is acceptable to the Chinese, in terms of not just economic value but also social form. Western culture and Chinese culture are so different that both sides are typically made anxious by the ambiguity and foreignness of the other. The middleman, speaking both languages and having familiarity with both cultures, reduces this vulnerability to miscommunication and stress.

Ethical Norms

One area of particular importance and especially liable to conflict is that of ethical norms. The middleman is hired to take the Western firm into a guanxi network that exists exactly for the purpose of avoiding rules, laws, taxes, and regulations. The legally minded Westerners are disinclined to enter the Chinese no-rule-unbent universe directly for several reasons, not least of which is liability to prosecution under the Foreign Corrupt Practices Act. Bribery, the central form of corruption in China, is handed off to the middleman so American executives can wash their hands of it.

The middleman, then, is a bit of a magician. He can involve American firms in business transactions that require bribery even though the American firms have specific laws and policies against paying bribes. The expectations of Chinese officials or managers are met even though they directly and fully contradict the requirements of the Americans. The middleman operates between two cultures and, in a sense, in no culture. His specialty is having no cultural allegiance while participating in two different cultures. Thus American and Chinese business cultures are paradoxically connected and remote. From the American side, the paradox makes apparent the breakdown of American ethics, because at the end of the day the bribes are paid. The “magical” middleman in the “middle” transforms American business values into Chinese business practices. In reality, he creates a social conduit through which money flows but the law does not follow.

Thus when American firms utilize the rule of three, which they regularly do, they are participating deeply in Chinese culture. This is evidence, contrary to the view of Guthrie for example, that Western firms in China are more influenced by Chinese business culture than the reverse. This is an empirical question that requires more research and also time to answer. In any case, the rule of three has Western firms adapting to and participating in Chinese business culture. Using middlemen is accepting a teacher, someone who instructs and educates Western firms on how to do business in China. Using a middleman is not merely an impersonal transaction. It is a dependent, appreciative, and many times long-term relationship. In other words, it involves social and psychological elements of Chinese culture.

If ascribed guanxi, relations based on goodwill and compassion, and achieved guanxi, relations based in calculation and self-interest, are seen as two ideal end points by which to evaluate informal business relationships, Western relations with middlemen usually will mark out closer to the achieved pole. Given that guanxi relations are often used to avoid formal rules or change them, it is difficult to see how achieved guanxi can be morally justified. Indeed, Snell and Tseng lament that the large increase in achieved guanxi during the “privatization” process in the 1990s was dishonorable—that is, based merely on self-interest while hurting the broader society.1 Unlike ascribed guanxi, which builds community by bringing moral values like benevolence, reciprocity, and caring into the relationship, achieved guanxi does not have any such moral counterweight to offset its self-interested, antigovernment, and anticommunity intentions. Western involvement in guanxi relations, since they are seldom of the ascribed guanxi sort, therefore raises moral questions.

and Universal Rights

But even if Westerners were to develop ascribed guanxi relations, can these relationships really be morally justified given that they operate only on the subgroup level? In the West, core values—freedom of speech, equal opportunity, the right to vote, privacy, equality before the law, and so on—are considered “human” rights and thus are considered morally universal. Guanxi, on the contrary, is exactly designed to give insiders more rights than others. Thus, guanxi and universal rights are incompatible. Hence even ascribed guanxi cannot be morally justified according to the principle of universalization.

In practice, however, the principle of universalization does not work perfectly even in the West. Clearly, people with money or power have better opportunities in the marketplace or better chances in court, for example. Is there really such a big difference between guanxi and “human rights” as they are practiced in the West? Yes, there is. In the West, failures to honor human rights are continually debated and efforts are made to improve them; in the guanxi system, honoring relationship over principle is the nature of the system.

Neither a culture developed around the core category of individualism or one developed around the core category of collectivism is superior to the other. Indeed, all cultures must have both categories. In this regard, both China and the United States can learn from each other.

This is the difference between a democratic culture and a hierarchical one. The individualism inherent in a democratic culture pushes toward universal rights; this tendency is missing in a hierarchical society, which puts a much stronger emphasis on the whole. The problem is that guanxi, hierarchy’s other half, undercuts and hurts the whole in favor of the subgroup. Though guanxi can lead to the development of strong bonds, bonds often missing in the West as individualism becomes an end in itself (narcissism) and leads to impersonalization and selfishness, the cost of guanxi is high, as is evident in widespread corruption and damage to public goods such as water and air in China. Even though guanxi addresses the evils of unchecked power, it merges with power and creates its own abuses.

Western Values and Chinese Values

It has often been noted that individualism too is prone to abuse, but, unlike hierarchal society, a democratic society is hedged around with checks and balances so that both public and private action are more subject to public, political, and legal review. In a hierarchical society, all processes of review are subordinate to one, the political. Hence, Western businesses operating in hierarchical societies cannot morally justify full participation in hierarchical culture without violating their own values. When they enter into guanxi relations, they may easily be entering into unethical activities according to their own beliefs.

This is not to say Western values are superior to Chinese values. The Chinese have low trust in impersonal relations and high trust in personal relations, while the West has higher trust in contracts and the ability to enforce them when they fail, and less reliance on personal relations. Is the latter “modern” and the former feudal or less developed? Is universalization the test of development and ethical superiority? Maybe so in the economic sphere, where the single criterion of efficiency can be used as a universal measure to evaluate action. But it is less true in the political sphere, where complex goals involving diverse values make universal (rational) criteria less relevant because continuously shifting contexts and multivalued actions make it impossible to universalize the criteria of evaluation.2 Hence, since the economic and political spheres are interrelated, not to mention the value-laden religious, cultural, esthetic, and personal spheres, it is impossible to judge a social system merely according to its “modernization.” Profound moral choices and trade-offs are involved in any life order, requiring moral evaluation to be multilayered.

The Chinese have low trust in impersonal relations and high trust in personal relations, while the West has higher trust in contracts and the ability to enforce them when they fail.

In addition, it is important to keep in mind, when comparing Western and Chinese cultures, that there is much to respect in both. In hierarchal culture, the emphasis on social harmony and respect for others—especially parents, teachers, leaders, and elders—is noble and has good consequences. But, as was mentioned, hierarchical culture often leads in practice to abuse of power. Western culture relies more on formal structures such as laws and rules, not personal relations, to provide order in society. But just as guanxi can benefit the subgroup at the expense of the community, the expensive and overused legal system in the United States is evidence of a destructive (selfish) individualism that concerns itself little for the good of society. Neither Chinese collectivism nor American individualism lives up to its own ideals of the good society, particularly the need to care for the whole. Each society in its own way evidences an imbalance toward benefiting subgroups and individuals at a cost to others and the whole.

In the West, however, legal competition to address the imbalance works more effectively than does reliance on the good character of leaders in hierarchical culture. Institutionalized checks and balances have proven more reliable than the good graces of absolute power. On the other hand, hierarchical (Confucian) culture has made possible huge and densely populated cities, such as Shanghai and Beijing, where the crime rate is relatively low compared with that of New York, Chicago, or Los Angeles.

In the abstract, neither a culture developed around the core category of individualism or one developed around the core category of collectivism is superior to the other. Indeed, all cultures must have both categories. It is a question of emphasis. In this regard, both China and the United States can learn from each other.

Moral Challenges

This conclusion does not remove the moral challenges faced by Western businessmen working in China. There is widespread corruption on the different levels of Chinese government, and the government represses its own citizens. Western businesspeople cannot morally ignore these facts if they are committed to the democratic values upon which Western societies are based. The argument that it is morally justifiable to do business in China because Western businessmen cannot do anything about the behavior of the Chinese government is not valid. One cannot support unethical activities without sharing some responsibility for them. Western business is, at a minimum, required to express its own values and protest values it finds unethical. One cannot benefit from business activities in China without taking some moral responsibility for them. Otherwise, Western business is caught in a contradiction between its own values and its behavior in China, undermining Western values for itself and others. Considering the risks of protesting is valid, but it is not sufficient. Moral deliberation involves multiple aspects; in addition to risks, responsibilities to and consequences for others must be considered.

Western businesspeople face a dilemma. China’s growing role in international business, and the opportunities for and threats to Western business in China, make it nearly competitively impossible not to do business in China. Yet the moral challenges cannot morally be ignored. Ethics is not just a nice thing we should do if we can afford it. It is part of social reality and has concrete consequences. Ignoring Chinese government transgressions strengthens these transgressions at the same time that it weakens Western ethics. It encourages both the Chinese government and other governments to violate human rights and exercise unrestricted power, which can only contribute to the suffering of its people and a more dangerous world for everyone else. Poisoned food products and medicines coming out of China are not unrelated to government corruption in that they are the model for other types of corruption. Complete resolution of the dilemma is not possible; thus a compromise is called for. It should be worked out both collectively and individually by Western businesses. It should involve, at the least, a statement of principles that expresses Western business values, defines what practices are acceptable and what ones are not, and outlines sanctions for Western businesses that violate these principles.

Reprinted by permission of Routledge. Excerpted from Trouble in the Middle: American-Chinese Business Relations, Culture, Conflict, and Ethics by Steven P. Feldman. Copyright 2013. All rights reserved.

About the Author

Steven P. Feldman is professor of business ethics at Case Western Reserve University, Cleveland, Ohio. He was Fulbright Distinguished Lecturer in business ethics at Shanghai International Studies University in Shanghai, China. His Ph.D is from the Wharton School of Business, University of Pennsylvania. He has held visiting positions at Oxford University, University of Innsbruck, and the University of Minnesota. He has lectured broadly in China on business ethics issues. His previously published books are Memory as a Moral Decision and The Culture of Monopoly Management. He has published broadly in management journals on ethical and cultural issues. Steve specializes in American-Chinese business relations, business ethics, and nonprofit management.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.