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Mar 17, 2008

Lining the pockets

McGregor defines Chinese society as "a system of organized dependency...China is not a place where individuals function alone...Your network of family and personal relationships are more important than the rules of the road. Your network keeps you secure in the absence of a fair and unbiased legal system." The fabric of which their society is based is fundamentally interwoven without a beginning or end. This, in turn, creates mutual dependency between commerce and government. The existing connection between government and business is in some ways reminiscent of the system of dynasties past. So while corruption is frowned upon and can be viciously punished, the very nature of the system is corrupt. Merchants depend on officials to speed through various measures of red tape and in return the officials expect "perks". The compensation of what appear to be "corrupt officials", however, is so inadequate that taking kick backs is merely a way to make ends meet. Of course, there are those who cheat the system whole heartedly and are much more malicious in their intent. The CCP provides a through system of checks within the system but does not have the balances to make an honest system. Raising wage rates of officials would help to bring their wages in line with their private sector counterparts. However, such a response would likely bankrupt the country.

The extent of corruption is usually indirectly proportional to the size of a firm. Large, multinational companies typically are dealing with senior officials and are engaging in highly visible deals. Consequently, the transparency of the transaction is greater and overt corruption would result in Chinese and American partners facing legal consequences. Even in lower profile business dealings, however, most Chinese are aware of the Foreign Corrupt Practices Act (FCPA). The FCPA prohibits the bribery of foreign officials and requires transparency in the accounting practices of public firms. Bribery is to be avoided at all costs for all firms.
An important reminder is self-interest is at the core of most dealings in China. Mutually beneficial, long term relationships are the foundation for success. While these foundations are based on "guanxi", it is important to develop several of these relationships. Relying on one individual for access to officials is a precarious strategy resulting in a unreliable future. The use of "guanxi" has been forced to evolve over the past 3 decades as well. As China has become a more mobile society, the opportunities to move within and to move up (inside a company, industry) have grown exponentially. Individuals are no longer "lifers" at one firm; the same shift has occurred in the US as well. Contacts transfer departments, get promoted, and leave companies. If the only basis of a connection is linked to a particular contact, then all of one's negotiation power is stripped away. One possible solution is the creation of contracts between functional units as described in Pedersen's Business Integrity in China. By establishing these types of relationships, companies are not dependent on individuals but rather formal units. Formal, contractual relationships can, therefore, be carried over regardless of who comes and goes resulting in a long term commitment.