Photo: flickr: pa*kr
The Chinese-born founder of a well-known technology company recently made a distinction between Western and Chinese business cultures. In the West, he said, the focus was on “covering your arse”; risk and liability are top of mind and Western businesses spend a lot hiring lawyers and designing contracts to control risks. In China, it was all about “giving face”; getting your counterparty on your side so as to avoid confrontation and lawsuits. He made it clear that he regarded the Chinese culture as inherently superior.Is he right? A giving face culture looks on conflict resolution as a problem in relationship management while Western approach leaves the resolution of conflict to interpretations of law. Are we really ready to accept, along with this Chinese entrepreneur, that relationship management is a better culture than the rule of law?
The underlying question here is about the balance of transaction cost and transaction scope. In a human relationship culture the explicit transaction costs of a business deal can be low, but they presuppose certain preconditions: 1) the parties to a deal already know each other, 2) they have emotional ties, and 3) they have mutual trust based on those ties. In other words, transacting parties should either be friends going into the deal (including relatives, fellow townsmen, classmates, and colleagues) or build trusting friendships through series of ceremonial processes (banquets, drinking sessions, sending gifts, etc.).
There are some problems with this. People are limited in their sets of friends and they have only a certain amount of time available to make new ones. Outside the scope of their pre-existing trustworthy networks, the costs of a human relationship business start to rise rapidly, and the dangers of exploitation rise. Viewed through this lens, the advantages of a rule by law culture become clearer. Rule-based decisions may impose certain costs on deals within the friendship networks of the decision-maker but they also make it possible to contain the costs of deals outside the network.
The transaction cost frame here is also helpful when thinking about the problem of corruption, which many teachers try to avoid dealing with in executive programs in China. Often, when the issue is raised, students quite hotly push back on what they perceive as a holier-than-thou and hypocritical Western prejudice. What’s the difference, they ask, between paying off a couple of Government bigwigs and paying possibly far larger amounts in legal fees to U.S. lobbyists? Isn’t the former at least a bit more straightforward and potentially more cost-effective?
I had just such an experience in a classroom the other day. I happened to praise the “no bribery” policy put in place by Wang Shi, CEO of the big Shanghai property developer Shenzhen Vanke. The students erupted. Vanke, they argued, was no cleaner than any other property company; it was just cleverer than most about the way it bribed so that it could look clean. It was naïve, therefore, to imagine that such a company was not in the business of bribing officials, let alone that no bribery was a feasible policy.
There was, however, one dissenter. If there’s one crab in a basket, this student explained, it can easily crawl out of the basket. But if there are lots of crabs in the basket, none of them can get out because the moment one on the top tries to climb out the rest will just pull it back. Vanke is like the crab on top. As long as business people believe that relationship management is a natural and superior way of doing business Vanke will never climb out of the basket. And Chinese businesses everywhere will have to rely on personal networks or compete to make friends with key decision-makers, escalating the costs of business for everyone.
The rule of law is surely a better way of doing business than that. But if we’re to get there then we need to work on the attitudes of people in the system.
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