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January 2017:

Understanding China: Opportunities, Challenges for Maryland Businesses

By Jason Zhang

January 3, 2017

Posted in: News

After many years’ growth, the Chinese economy is now second only to that of the United States. To understand the size of the Chinese economy, the following comparison offers an interesting perspective: In 2015, the size of Russia’s economy, measured by gross domestic product, was equivalent to that of one Chinese province, namely Guangdong Province, according to the World Bank and National Bureau of Statistics of China. Although varying in economic size, there are a total of 34 provinces and special districts in China.

As a major economic force, China is critically relevant to numerous Maryland-based institutions. Firms such as Baltimore Aircoil, McCormick & Co., Under Armour and Stanley Black & Decker sell products to China, and at the same time, source or manufacture products there to supply other markets. And financial services like T. Rowe Price and Legg Mason manage or advise many China investment funds.

Even nonprofit organizations, such as Johns Hopkins and the University of Maryland, now recruit a large number of Chinese students and scholars. In fact, the Maryland Department of Commerce sponsors an office, Maryland Center, in Shanghai to represent the state’s expanding interests in China. These are but a few examples that reflect a nationwide trend in which businesses and organizations increasingly view China as a strategic force — a market, a business partner and a competitor.

In order to successfully interact with Chinese businesses and customers, business executives need to understand China and its people. While recurring topics in the media often touch on themes such as “The Ten Principles for Doing Business in China,” in Forbes, or “10 Subtle Cultural Mistakes You May Make Doing Business in China,” in Bloomberg News, for example, they often leave a more fundamental question unanswered: What are the historical, cultural and social foundations that underlie these practices?

Business Practices

Confucianism, the foundation of Chinese culture and society, teaches that an ideal life can be attained in an interpersonal relationship when each individual occupies his or her proper place and fulfills the obligations. Confucianism emphasizes, in this essentially hierarchical structure, that all individuals exist in relationship to one another. As such, social status and identity are determined largely by one’s relationships, which in turn determine his or her power and influence, as well as his or her feelings of self-esteem and sense of security.

A recent example may highlight this aspect of Chinese culture. In 2016, Chinese insurance company Anbang, which previously acquired the Waldorf-Astoria hotel in Manhattan, bid $14 billion to purchase Starwood Hotels & Resorts, the owner of Westin and Sheraton. In business negotiations, whenever the Anbang CEO was present, his entire negotiation team — legal, banking and negotiation advisers, mostly trained in the U.S. — would stay completely silent without offering opinions.

This unusual approach might be a shock for Americans, but it is fairly common for the Chinese who learned to respect and submit to authority in public.

Prove Yourself

The harmony of interpersonal relationships is a key to understanding the concept of “guanxi,” which literally means a relationship, connection or network. “Guanxi” enables people to accomplish a common interest through the exchange of favors between trusted individuals.

In business, building a close friendship is a prerequisite for discussing business. A potential partner needs to prove himself or herself trustworthy and truthful and to demonstrate that s/he is willing to take time and effort to gain the trust of others before embarking on a business venture. Shared meals, drinks and exchanges of gifts are meant to build that trust. In this ritual, a gift is not exchanged to procure a particular favor. Rather, it is a way of developing positive feelings to initiate a relationship.

“Guanxi” is building trust “from head and heart.” Trust from the head emanates from the confidence one has in a person’s accomplishments, skills and reliability. However, trust from the heart arises from feelings of emotional closeness, empathy and rapport. In general, Western executives draw a fairly clear line between trust from the head and trust from the heart in business relationships. They consider mixing the two as an unprofessional behavior. Among Chinese executives, however, there is a much stronger interplay between trust from the head and from the heart.

For example, during a business banquet, a Chinese manager may ask personal questions about his or her counterpart (e.g., age) as a gesture of courtesy (e.g., old age is usually associated with elevated social status and position, thus being an important fact for the Chinese to properly arrange seating at the table), which would be considered intrusive in the West.

What to Do

The Chinese culture is anchored in living in harmony with nature and other people. This cultural root provides critical insights into the Chinese consumer and business behaviors and decisions, which can help guide Americans doing business with Chinese professionals.

Americans must remember that competence matters in business relationships, but willingness to build personal connections can be equally important. The focus, oftentimes, is more on a long-term relationship and its benefits and less on a particular transaction and the resulting one-time gain or loss.

Within this context, Chinese entrepreneurs tend to find comfort in the presence of personal trust (social or psychological contracts), whereas their Western counterparts likely seek security in legal contracts. Time building “guanxi,” in other words, is a critical investment for Americans doing business in China.

Jason Zhang is an associate professor of marketing at Loyola University Maryland’s Sellinger School of Business, which has a campus in Columbia. He can be contacted at 410-617-5837 and at jzhang1@loyola.edu.

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