The Transaction Cost Advantage of Guanxi Based Business Practices

The Transaction Cost Advantage of Guanxi-Based Business Practices
Stephen S. Standifird R. Scott Marshall
The purpose of this paper is to provide a theoretical explanation of the perpetuation of China’s guanxi-based business practices. As a complement to the social embeddedness- and resource-based explanations, we seek to demonstrate the perseverance and relevance of guanxi in terms of the transaction cost advantages it offers. Specifically, we argue that guanxi-based business practices offer certain transaction cost advantages over existing structural alternatives identified in transaction cost theory. Where the guanxi network is well developed, the transaction cost advantages of guanxi-based exchange are sufficient to warrant the integration of guanxi- and market-based exchange mechanisms.

n the third quarter of 1996, China surpassed Japan as the country with the largest U.S. trade imbalance. On July 1, 1997, China regained control over Hong Kong and in the process gained control over the world’s eighth largest stock exchange (Barnathan, 1996) and the world’s most profitable exchange over the last 20 years (T. Rowe Price, 1996). China’s increased assertion in the world market demands more attention
Stephen S. Standifird, College of Business and Economics, Western Washington University, Bellingham, WA 98225-9077, USA. Tel: [phone]; Fax: [phone]; E-mail: stephen. standifi[e-mail] R. Scott Marshall, Lundquist College of Business, University of Oregon, Eugene, OR 97403-1208, USA. Tel: [phone]; Fax: [phone] E-mail: [e-mail]

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be given to the unique aspects of conducting business in China. One specific aspect that has received attention recently is the practice of guanxi. In short, guanxi involves cultivating personal relationships through the exchange of favors and gifts for the purpose of obtaining goods and services, developing networks of mutual dependence, and creating a sense of obligation and indebtedness (Yang, 1994).

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