Good Guanxi Starts with Hiring

What foreign firms can teach state-owned enterprises

By Zhang Yanlong

The importance of a strong social network, or guanxi, in Chinese business may seem overemphasized or even cliché now. In fact, as the Chinese economy and financial system undergo far-reaching reforms, it's assumed that the importance of personal relationships will eventually be overshadowed by market mechanisms. 

However, this is not the case. As economic reform proceeds in China, the importance of guanxi will only increase and human resource management will have to adjust accordingly.

The reason for the increased reliance on social capital is that the Chinese economy has experienced unbalanced institutional development. Compared to the fast growth of market competition, institutions that support the market have developed more slowly. Poorly specified property rights are one example. In this way, employees' social capital has become an important consideration for state-owned, private-owned and foreign-invested enterprises alike in China. 

I recently researched the importance of social capital as it pertains to the evolving environment of Chinese business, and how foreign firms specifically might treat social capital differently than Chinese firms. The research explored questions of how state-owned enterprises (SOEs), privately-owned enterprises (POEs) and foreign-invested enterprises (FIEs) utilize employees' social capital and how the move toward a market-based economy is affecting the utilization of social capital. 
By conducting a survey of 147 firms – evenly distributed across SOEs, POEs and FIEs – from across China and a variety of sectors, my research team and I measured how market competition affected the degree of employee social capital, the degree of person-job fit and employee performance. 

We found that the implications of social capital are not equal across businesses operating in China. Additionally, foreign firms, as compared to Chinese SOEs, set a higher standard in the hiring process, and they outperform other firms in matching an employee to a position that requires his/her social capital. This becomes important, and an area of warning for state-owned enterprises, when considering that these matches eventually lead to a more positive employee performance. 

So why are foreign companies outperforming SOEs in utilization of social capital and guanxi? One reason is that foreign enterprises have to compensate for a presumed lack of government relations and for their inherent "foreignness" while establishing legitimacy in the new market. Another reason is that foreign firms tend to have more comprehensive and functional human resource management systems than Chinese SOEs or POEs. 

These two factors lead us to believe that adjustments may be necessary across human resources and hiring personnel in China. As marketization increases, the need for social capital increases, thereby suggesting that foreign firms may be in a more secure position than SOEs in terms of hiring practices and overall employee satisfaction.

From our research, I can make several recommendations for companies in China. To start, managers should consider assessing the social capital of job candidates. One way to accomplish this is by eliciting the social networks of job applicants during the selection process. This could be done directly through the administration of an egocentric social network instrument or through less-intrusive methods such as assessing publicly available online network profiles. I should stress that the measures firms use to collect social capital information during the selection process should be legally and culturally acceptable to candidates.

Another means for highlighting social capital capacity is for human resources professionals to explicitly include the importance of social capital in the description of each position in the firm. This will serve to highlight the salience of social capital for certain positions and ensure a proper fit. 

Finally, human resources practitioners could consider including social networking as a foundational competency in the competency models within their firm. This could highlight the fact that social capital, rather than being merely a personal resource, actually provides an important resource for the organization.   

Zhang Yanlong is an Assistant Professor of Organizational Management at Peking University's Guanghua School of Management.