The Guanxi Hierarchy - Family Ties and Finance in China's SMEs

In his seminal work, From the Soil, Xiao-tong Fei found that solidarity in social ties fades with distance from primary group relations. Thus the power of guanxi (i.e., connections or relationships) would differ according to it’s source. Most powerful would be guanxi based on kinship, with the power of such connections fading as one moved down the scale from kinship, to regional location, thirdly to school ties, and finally to business ties.

Fei’s early work has returned to prominence in analyses of group ties in private enterprise, following market reforms over the past four decades. For instance, Yu-sheng Peng (2004) highlighted the economic benefit of kinship networks in China’s rural industrialization programs. He found that kin solidarity played an important role in protecting the property rights of private entrepreneurs. In the absence of credible market institutions or a legal order protecting property rights, kinship ties reduced transaction costs during the early stages of market reform.

Yan-jie Bian (2009) broadened the thesis, arguing that the emergence of private firms can be traced back to guanxi networks. However, He and Jia (2005) discovered a reverse hierarchy in the strength of guanxi ties. They found business-based guanxi gaining prominence more recently in the management and operation of domestic private firms.

I look then to the pattern of guanxi ties, and relevant hierarchy in the strength and significance of such ties among owners of private enterprise. Data were drawn from about a thousand SMEs between October 2008 and March 2009. I found that strong kinship network ties were correlated with positive effects on the financial support provided for private rural enterprise. At least regards investment, the original hierarchy dominated by kinship-based guanxi appears to remain at the center of most enterprise.

References:

Anne S. Tsui, Yan-jie Bian (Editor), 2006, China's Domestic Private Firms