Q&A with Steven P. Feldman
In today’s global economy, multinational companies must do business in China. In his recent interview with The World Financial Review, Steven P. Feldman, author of Trouble in the Middle: American-Chinese Business Relations, Culture, Conflict, and Ethics, discusses the challenges of corruption, the role of the middleman, the importance of ethical norms and the realities of business in China.
What are the major historical and cultural factors that shape Chinese-American business relationships?
I’ll list a few. One is the rule of law. Americans habitually settle conflicts in court. The courts are over-used in the U.S. In China, it’s the opposite: The courts are dominated by the government. One might not get an impartial, fair, or even unambiguous hearing in China. Two, Americans have an individualistic culture, the Chinese a collective culture. The Chinese are plenty individualistic too, as can be seen in their entrepreneurship, but they tend to do things through informal networks. Family relations are dominant in many aspects of Chinese business. Americans use networks too, of course, but to a lesser extent. They rely more on legal code and general norms. Family and “friends” play less of a role. Three, in China the two great institutions are family and government. There is not much in between except for these family-anchored networks. In the U.S., civil society plays a great role. Business between strangers is more accessible. Business between strangers in China is high risk. Unfortunately, the great middle in American society is weakening as excessive individualism and sub-group inflexibility undermine general bonds of trust.
Can you discuss the ethical and cultural assumptions both American and Chinese business cultures bring to business relationships in China?
One is the relations to time. Big American companies have long-range strategic plans. They certainly take serious a three to five year planning horizon and often five to ten years. Most Chinese companies want to make money fast. They do not have confidence that the business environment will remain stable and their assets can be protected. They want to be highly flexible. They want to make money today and be able to pick up stakes fast. The Americans are not used to this level of government predation or this extent of no-holds-barred competition.
What cultural challenges do American executives face in China, and how are they responding to these challenges?
A few Americans I interviewed do not like the Chinese. That’s a problem. The majority seem to accept the business environment, but most live in gated Western communities. That’s a problem too. It’s also a tradition going back to the 19th century. This isolation is not a good way to understand the Chinese.
What are the main features of the guanxi system in Chinese institutions?
The core of guaxi is reciprocity. You help me and I help you because we are “friends.” In fact, we are such good friends we will have great meals and drink a lot of alcohol together. This will make us even better “friends”. If we share blood lines, village ties, or organisational experience it will be even better. In China, “friends” are indispensable; strangers are a nightmare. Without “friends” the world is a cold, dangerous place.
Can you discuss the main disadvantages Western businesspeople face in the guanxi system?
Well they are not usually Chinese. So they immediately belong to a different category. Even though many Westerners develop close friendships with Chinese, it’s a different kind of friendship. Western individualism makes most Westerners poorly equipped to truly develop gaunxi relations. Chinese identity is built around relationships. The personality is web-like you might say, the fibers attaching to significant others is the personality. The American is the spider, traveling along the fibers for his own purposes.
Can you talk further about the conflict between guanxi and universal rights?
Guanxi is based on personal relationships, the opposite of universal principles in theory. Chinese society is traditionally a hierarchical society; it is not based on individualism and equality as is the West. Hierarchical relations stem from both Confucianism and political organisation. Hierarchical organisation and the system of ritual that supports it, give Chinese society an inflexibility that is unworkable. This is where guanxi comes in. Guanxi is the safety hatch, where what cannot be done is done, “through the backdoor” so to say. Universal rights in the West raise the individual out of this hierarchical system, claiming her individual dignity in the face of another. Both societies still have plenty of conflict, though in the U.S. it is often resolved in court, while in China it is often resolved through third-party mediation. Both systems are now under pressure from excessive individualism and collectivism (both in both countries). Civil society in the West and traditional society in China have long been battered.
Can you talk about hierarchy and collectivism in the Chinese business environment?
I would just add to what I have already said that the prototype for Chinese organisation is the family. Private businesses in China, mostly family owned, are designed around the father-emperor. There is much less delegation and autonomy separate from the domination of the owner than in the West. Employees are expected to be loyal and obedient, and expect to receive benevolence and security in exchange. This does not make for an innovative organisation, outside the creativity of the owner. Since family members usually dominate the upper levels of the organisation, a disincentive for hard work is created among non-family members. Hierarchy breaks down. In larger organisations, there is much stealing by the outer rings of employees.
Can you discuss the importance of the rule of three in the guanxi network?
The “rule of three” is central to Chinese collectivism. In a collective system, social status and even personal identity are determined to a considerable extent by one’s relationships. “Face”, one’s status and identity within one’s systems of relationships, determines one’s power and influence as well as one’s feelings of self-esteem. So conflicts are often mediated by third parties to maintain collective harmony and to resolve conflicts before insults to face can exaggerate them. Confucius says if there are three people there is always a teacher.
Can you talk about the historical importance of the middleman?
As I say, the middleman or third party is fundamental to Chinese social structure. When foreigners started arriving in large numbers in the 19th century, the role of the middleman expanded to connect foreigners with the Chinese. China had been insular for a long time and its language and culture are quite different than the West. Importantly, Chinese social organisation is built around networks. Given that middleman roles already existed in Chinese society, it was only natural that they expanded to work with foreigners. The Japanese used middleman to run the economy after they invaded in 1937. From the beginning and until this day, it is nearly impossible to sell and distribute goods without the assistance of middlemen. Middlemen do many things from communications, negotiations, monitoring, bribe paying, market analysis, etc., and the list is still expanding. Over time the middleman tends to get squeezed as foreign firms develop their own relationships in the market. But as of yet, they are still indispensable in China.
Can you explain the importance of Chinese middlemen to a Western firm?
Western firms need Chinese middlemen for many reasons. China is a decentralised market. Middlemen are needed for distribution. It is not easy to sell into the China market without middlemen making introductions. Distrust is wide-spread in China and is getting worse. Firms need to know their counter-parties to build trust. Middlemen make these introductions and help build a relationship. Middlemen can also help firms know what suppliers, customers, and partners are good investments and which ones are high risks. To a considerable extent, the China market is opaque. Middlemen help pierce the veil. They are also relevant for relations with the Chinese government. Not much happens in China that the government is not in some way involved. This relation can be more difficult or less difficult. Middlemen can help make it the latter.
Can you talk about the ethics of intellectual property in China?
This is an interesting and complex topic. First of all, all developing countries violate IPR up to a point where they need to protect their own. This even applies to the United States in its early history. Though now it insists it has the highest IP standards in the world, which it should, given its preeminence in advanced technology. So the question is will China eventually outgrow its IP violations and join the group of IPR abiding nations , as did Taiwan, Singapore, Japan, etc. Well maybe it will, but it is unclear to me when that will happen. For one thing, Chinese culture has long made copying the work of others an acceptable practice. For another, the court system in China would have to enforce IP law; it is far from doing that consistently. And there are deep rooted reasons for this starting with the fact that the role of law itself is not deeply rooted in Chinese civilisation. Perhaps even more important is the size of the population and the number of poor. For many, counterfeiting is one of the few ways to make a living. So when will all this get sorted out? Not soon.
You suggest that one area for Westerners doing business in China of particular importance is that of ethical norms. Can you talk about this further?
The Chinese like to give gifts. It is a way of developing relationships. American companies have rules against accepting gifts from business people unless they are trivial. The Chinese think the more important the person the more expensive should be the gift. So there are two different ethical systems at play here. My opinion is that when doing business in China, Americans should compromise their standards to some extent. I do not think Americans should ignore Chinese values in China. On the other hand, this does not mean bribery is ok. Bribery is not ok. Some American companies set up review procedures to give and accept gifts, making sure no core company values are violated in China. I think this is a good way to proceed.
One theme in the book is how American executives in China typically encounter difficulties in communication. Can you talk about the challenges of communication for Western businesspeople in China?
The challenges to communication are considerable. Americans and Chinese do not understand each other’s body language. They think the other is relaxed when he is tense or tense when relaxed, for example. Often American’s interpret a “yes” as meaning full agreement, when the Chinese are merely saying they understand. Then down the road there are many problems and frustrations. Often when both sides speak the same language, usually English, there are still miscommunications because the meaning behind the words is not fully shared or shared at all. Context is as important as language. Learning another society’s customs and rituals is not a quick study, especially in a society as old as China.
You suggest there is a huge divide between Chinese and American business. What is needed to lessen the divide, and why has this not happened yet?
Trust is needed and it is in short supply. There is a lot of historical baggage in this relationship, a lot of competition, and a great deal of change. Time is needed, but time by itself is not sufficient. Both sides need to want to understand the other, have the capacity to do so, and have tolerance when the situation is frustrating. Competitiveness and aggression are part of human nature. They must be kept within channels that do not make the situation worse. I often wonder why relations between people are not easier. Certainly conflicting interests and different ways of life make relations challenging.
You suggest three options for bridging cultural divides: adoption, rejection and fusion. What will an outcome of fusion depend on?
These are three possible reactions to cultural differences. The primary thing fusion depends on is interest. For example, the Chinese are trying to learn from Western innovation practices. It is in their interest to do so. So we see fusion between their practices and ours. In the area of ethics, however, shared interests are not easily manifested. So, for example, we still see a lot of intellectual property rights violations in China. If Chinese cultural interests move closer to ours, we will see more fusion in the cultural sphere. Alternatively, fusion can be “forced”. Power is a factor. If one side gains a great power differential, that will lead to increased acceptance of the power holder’s values.
You state there is evidence that Western firms in China are more influenced by Chinese business culture than the reverse. What are the implications of this on global business?
My statement was in reference to Western firms using middlemen to pay bribes on their behalf. I would not think this has significant global implications outside of China. The big global question is which economy will record higher levels of growth in the coming decades. If one economy is more robust than the other, it will see its trade preferences and values exert influence worldwide, including on WTO rules and processes.
Can you talk about how executives from China and the United States can learn from each other?
I think the West can learn from Chinese humanism. The Chinese focus on relationships. Western business sometimes becomes too impersonal, as if business is an autonomous system separate from society. This can be seen clearly in the 2008 financial crisis, where too many of our “best and brightest” maximised their own or their company’s profits while damaging the society as a whole. This heartless individualism is destructive. The Chinese can learn from the West the importance of civil society and respect for individual dignity, even of the stranger. The Chinese, nestled too tightly in their primary groups, need to learn from the West how to work with and respect the unknown other. Chinese networks are powerful social mechanisms, but like excessive American individualism, they must integrate more with the community. Both systems can learn from the other, from different positions, how to care a little more for society as a whole – that all too often is an empty abstraction.
You state that Western businesspeople cannot ignore moral challenges if they are committed to the democratic values of Western societies. What steps should be taken to deal with this in the future?
Generation after generation of American businessmen pursue profits where it takes them, including into dictatorial regimes. The Foreign Corrupt Practices Act is an effort to put some limits on doing business with corrupt foreign officials. My sense is American executives fear this Act. Of course the argument is always made that American businesses can influence oppressive regimes towards good ends. The Sullivan Principles instituted in South Africa during Apartheid acknowledged this possibility, but also put limits on what companies could do under its mandate. Importantly it also put a time limit for regime change. Even though the Apartheid regime did fall, it was not because of American business. So I do not find this argument persuasive. It is even more farfetched in China and my data shows that. I think American businesses should support democratic values because these values are their own. If they do not support their own values, then they have no values. This is not to say they should ignore foreign cultures. But in core areas of government corruption, child labor, government censorship, government oppression, and the like, they should draw a line collectively, and enforce it one way or the other through their own associations.
About the Author
Steven P. Feldman is Professor of business strategy and ethics at Case Western Reserve University’s Weatherhead School of Management. His recent book Trouble in the Middle: American-Chinese Business Relations, Culture, Conflict, and Ethics is published by Routledge. He has published broadly in management journals on ethical and cultural issues. He specializes in American-Chinese business relations, business ethics, and nonprofit management.