The role of Guanxi in buyer-seller relationships in China

Abstract

Keywords: Social capital, guanxi networks, vegetable supply chains, buyer-seller relationships, channel performance, China Guanxi is ubiquitous in China and significantly influences people's behaviour in social life and in business. Guanxi refers to personal relationships or connections and is widely recognised as a Chinese form of social capital. This book focuses on the questions, if, and if so, how small-scale producers, together with processors and exporters, can be more successfully integrated into high-value supply chains (i.e., processors, supermarkets and international markets). In particular, our focus is on how Chinese vegetable farmers can use their guanxi networks to be integrated into these modern supply chains and can improve their market performance. We study the effectiveness of both formal (contracts) and relational ( guanxi ) governance mechanisms to improve the integration of buyer-seller relationships and ultimately, to enhance chain performance. We apply various theoretical approaches, supply chain management, social capital theory and transaction cost economics, to develop propositions regarding the interrelation of support from guanxi networks (what guanxi can do for you), buyer-seller relationships (interpersonal trust, transaction specific investments and contractual governance) and market performance (compliance with delivery/quality requirements, efficiency, quality/price satisfaction, and profitability). We combine case study with survey analysis and use structural equation modelling techniques to test the propositions. Background analysis of the Chinese vegetable sector indicates that small-scale farmers usually fail to integrate into high-value market outlets. This is because these farmers face several constraints, such as small production scale, less possibilities to implement quality standards, low negotiation power, and information asymmetry. However, empirical analysis based on three different buyer-seller relationships, including farmers, processors and exporters/supermarkets, shows that support from guanxi networks and integration of buyer-seller relationships significantly contribute to market performance (especially with downstream partners). The effects of guanxi networks differ between primary producers, processors and exporters/supermarkets, and across marketing channels. Vegetable farmers and their buyers show an idiosyncratic way to rely on their guanxi networks in doing business. Furthermore, vegetable farmers and their buyers follow different approaches to achieve market performance. Interpersonal trust and compliance with delivery requirements are important factors for all parties in supply chains to achieve superior performance. Particularly, in relationships with downstream partners, the sellers tend to rely on their guanxi networks when conducting transactions. In relationships with upstream partners, guanxi networks and contractual governance are less often used. This study shows that the combination of formal (contract) and informal ( guanxi ) governance mechanisms seems to be the best way to improve chain performance in vegetable supply chains in China . Policy should be directed to improve farmers' capacity to participate in modern high-value markets as well as to enhance the prospects for China 's vegetables in the world.