1. Executive Summary
Negotiation can be seen as a process of compromise involving parties with different sets of values and objectives which are based on their different vested interests. Effective negotiators recognise these different values, objectives and interests, then work towards achieving a win-win situation in the longer term.
One of the most rapidly developing economies is that of the People's Republic of China (PRC). Approximately one-fifth of the world's consumers reside there and the country is currently undertaking vast infrastructure projects with a continued commitment to market-based reform. These factors contribute to the increasing attention from Western business. Imports to China, Hong Kong, Singapore and Taiwan have exceeded US$336 billion in 1993 (Buttery & Leung, 1996).
The paper highlights the significance of the Chinese ethnic market to Western business, and recognizes the major cultural differences between Chinese and Westerners, followed by a consideration as to how culture impacts on preferred Western and Chinese style negotiations. The paper also illustrates the importance of the Guanxi, the problem of dealing with Chinese bureaucracy and the need to defer to seniority which can often slow down the finalisation of a business deal as Chinese negotiators need to seek the authority of their immediate bosses.
It is noted that different cultures have different interests, values, ethical principles, attitudes, behaviour and linguistic styles which could affect the process and outcome of any negotiation (Ferraro, 2002).
It is recommended that foreign negotiators in China should adopt a collaborative style of negotiation, understand and adopt the Chinese concepts of Guanxi, Mianzi and Renging in order to achieve a win-win outcome. It is also important to understand that while the Chinese are willing to sign contracts, they do not perceive them as the end of the negotiations rather as the formal motivation to do business, which necessitates further negotiations. In China, relationships are currently much more important than transactions and they pay little store to formal contracts, relying rather more on friendship and trust as the basis for doing business. This leads to a lengthy negotiation process which encompasses social as well as business parameters (Buttery & Leung, 1996).
2. Terms of Reference
We are Otobo International Limited, a consulting firm based in London, United Kingdom.
Our Client is Justconn Group Plc, a construction company whose headquarters is located in London, with branches in various parts of Europe.
Justconn has just approached our company because it is about to send some of its staff to China to carry out a business negotiation on a project which they are very much interested in undertaking.
This will be the first time Justcon will be carrying out any form of business transactions outside Europe and their top management recognise the need to train their employees in the right way of negotiating with the Chinese as they know that cultural differences will play a major role in the outcome of the negotiation.
This Briefing paper tries to outline the key facts to note when carrying out negotiations in the Chinese style in order to achieve a win-win outcome.
3. Overview of Current Situation
It is important to note that no matter how simple or complex the marketing system, negotiations between buyers and sellers occur. When buying decisions are complex, and especially when overseas negotiations are involved, negotiation techniques can play a major role in the successful conclusion of a business deal. It is unrealistic to assume that one negotiation style fits all cultures (Buttery & Leung, 1996).
One of the most rapidly developing economies is the Peoples Republic of China (PRC). Approximately one-fifth of the world's consumers reside there. The country is currently undertaking vast infrastructure projects and there is a continued commitment to market-based reform. These factors contribute to the increasing attention from Western business. Imports to China, Hong Kong, Singapore and Taiwan have exceeded US$336 billion in 1993 (Buttery & Leung, 1996).
“Guanxi”, which literally means “relationships”, stands for any type of relationship. In the Chinese business world it is understood as the network of relationships among various parties that cooperate together and support one another. The Chinese businessman mentality is one of “you scratch my back, I'll scratch yours.” In essence, Guanxi involves exchange of favours done regularly and voluntarily. It is an important concept to understand if one is to function effectively in the Chinese society. In China it is the right “Guanxi” that makes all the difference in guaranteeing that business will be successful. Close attention should be paid to one's immediate Chinese network, and effort should be made to establish good “Guanxi” with them. They can indirectly create links to new acquaintances and information resources, thus helping to develop other right “Guanxi” (Lo, 2004).
It is the need to base negotiations on the format of Chinese culture which requires knowledge of Guanxi, Renqing (performing of favours), Mianzi (Chinese concept of “giving face”) and an understanding of why negotiations could be slow. Foreigners need to understand that while the Chinese are willing to sign contracts, they do not see them as the end of the negotiations rather as the formal willingness to do business which necessitates further negotiations (Buttery & Leung, 1996).
Maddux stated that negotiation is an exchange process between parties to obtain resources or benefits from another party when resources are under the “sellers” control. In a successful negotiation, a negotiator obtains something of greater value in exchange for something on which he or she see as having a lower relative value.
Maddux (1988) developed a six-step negotiation process:
- Getting to know one another.
- Statement of goals and objectives.
- Starting the process.
- Expressions of disagreement and conflict are not a test of power but an opportunity to reveal what people need.
- Reassessment and compromise.
- Agreement in principle or settlement.
These steps can be executed during the negotiation in order to achieve a win-win outcome.
It should also be noted that while the Chinese are classified as Holistic negotiators i.e. they deal with issues collectively as a whole and make concessions only at the end of a negotiation, Westerners are classified as Sequential negotiators i.e. they split complex negotiations into separate issues and make concessions on individual issues. Sequential negotiators find it challenging to deal with Holistic negotiator, thus consideration has to be made during the negotiation and one has to be patient with the Chinese style in order to achieve a win-win outcome (Lapwood, 2009).
4. Analysis of Situation
4.1 Political Factors
The People's Republic of China was founded by the Communist Party of China, the leader of the Chinese people. The socialist system is the fundamental system of the People's Republic of China. The people manage the state, economy, culture and other social affairs through various means and forms. The basic task and goals of the state is to concentrate on the socialist modernization drive with the aim of building socialism with Chinese characteristics; to adhere to the socialist road, persist in the reform and opening up program, improve the socialist system in all aspects, develop the market economy, improve the rule of law; to be self-reliant and work hard to gradually realize the modernization of the industry, agriculture, national defence, science and technology so as to build China into a strong and democratic socialist country with a high degree of cultural development (www.china.org.cn).
Foreign trade is controlled by Customs, the Ministry of Commerce, and the Bank of China which controls access to the foreign currency required for imports. Since limitations on foreign trade were reduced, there have been more opportunities for individual enterprises to take part in business with foreign firms without much involvement from official agencies. Although private sector companies still lead small and medium sized businesses, the government still plays a big part in the bigger industries. The fact that over a third of the Chinese economy is state owned proves this (www.china.org.cn).
Thus, the Chinese government encourages business associations and investment from western companies and companies from other parts of the world.
4.2 Economical Factors
The economy of the People's Republic of China is an influential and rapidly developing and market economy. In China, there has been privatisation of most of the state owned enterprises which has led to the opening up to western countries. China is the third largest economy in the world after the U.S. and Japan with a nominal GDP of US$4.4 trillion (2008) in exchange-rate terms is the second largest in the world after that of the United States with a GDP of $7.8 trillion (2008) on a purchasing power parity basis. China has had the fastest-growing major economy for the past 30 years with an average annual GDP growth rate above 10%. China's per capita income has increased at an average annual rate of more than 8% over the last three decades.
Foreign trade is supervised by the Ministry of Commerce, customs, and the Bank of China, the foreign exchange arm of the Chinese banking system, which manages access to the foreign currency required for imports. Since restrictions on foreign trade were cut down, broad opportunities for individual enterprises to engage in exchanges with foreign firms has been in place without much intervention from official agencies.
In the early 1980s, China restricted foreign investments to export-based operations and insisted foreign investors to form joint-venture partnerships with Chinese firms. Foreign-invested enterprises are responsible for about 58-60% of China's imports and exports. Since the early 1990s, the government has authorized foreign investors to manufacture and trade a wide range of goods in the domestic market. The government also removed time restrictions on the establishment of joint ventures, allowed foreign partners to become chairs of joint venture boards, provided some guarantee against nationalization, and approved the establishment of wholly foreign-owned enterprises. Foreign investment remains a major element in China's rapid expansion in world trade and has been a significant factor in the growth of urban jobs. In 1998, foreign-invested enterprises created about 40% of China's exports, and foreign exchange reserves summed up to about $145 billion. Foreign-invested enterprises today manufacture about half of China's exports (www.china.org.cn).
4.3 Sociological Factors
The PRC appears to be a challenging environment in which to conduct negotiations, a factor shared with other Chinese-based economies such as Hong Kong, Singapore and Taiwan. China is a high context culture in which people are intensely involved with others and information is widely shared (Hall, 1976). The cultural variable has been explained by Guanxi, yet Guanxi would is a dependent variable gotten from the cultural and pragmatic requirements of Chinese society. Research to explain cultural differences between countries was carried out by Hofstede (1991) who identified five dimensions of culture:
- Power distance (measured from small to large)
- Collectivism versus individualism
- Femininity versus masculinity
- Uncertainty avoidance (from weak to strong)
- Long-term Orientation
Hofstede's work makes comparisons between Western-based cultures, such as Great Britain and USA, to Chinese cultures such as Hong Kong and Taiwan. Hofstede's (1991) work for the Chinese and Western countries are summarised in the Table below.
Power distance is a measure of the extent to which the less powerful members of institutions and organisations within a country expect and accept that power is distributed unequally. This indicates that people in the Chinese countries accept the fact that power is unevenly distributed in society and business.
Individualism stands for a society in which the ties between individuals are loose. It is obvious from the table that Chinese countries record much lower average scores compared to Western countries which show relatively high scores. This indicates that human ties leading to group, rather than individual, effort in business are more common in the Chinese based countries than in Western countries. The Chinese countries tend to be group-based economies and have a clearer hierarchical structure in their decision process whereas their Western counterparts are more individualistic and loosely organised. The Chinese too are patient but persistent in their pursuits and willing to renegotiate contracts to achieve their long-term objectives. These characteristics pose a challenge to Western negotiations as they need to understand the Chinese group dynamics, their hierarchical structures and their long-term orientation all of which are a clue to their motives in business negotiations. The fact that Chinese negotiators prefer to consult and act collectively may explain why Guanxi is a phenomenon found in Chinese countries.
Femininity versus masculinity is a measure of how distinct gender roles are in society. The difference between the Chinese and Western countries is not as marked as in the other dimensions. This could be due to the rapid economic growth in these countries and the fact that management style has been subjected to Western influences and because in Chinese society as well as Western society there are opportunities for nurturing, as well as assertive roles.
The uncertainty avoidance index, a measure of the extent to which members of a culture feel threatened by uncertain and unknown situations.
With regard to long-term orientation, the Western countries reflect a much lower average score than the Chinese countries. The “long-term” orientation reflects the way in which Chinese cultures incorporate, in their values, the teachings of Confucius and in particular the importance of perseverance and thrift.
It can be seen that the most significant Sino-Western cultural differences occur in terms of individualism, power distance and long-term orientation. These three dimensions are likely to impact on the way each side chooses to conduct their negotiations.
There is also recognition that the negotiator's role is controlled by factors such as the communication context within his or her culture, especially in situations with high context culture. Hall (1976) defines high context cultures as those in which information is widely shared and communication with deep meaning is transmitted freely. Western countries are low context in nature and so are not likely to be inhibited so much by cultural considerations. This may be due to the existence of individualism in these countries and the strong mobility from one place to another.
It is assumed that during negotiation, both parties adjust their expectations during the resolution of conflict which implies that one side does not have absolute power over the other side. It is believed that Chinese culture influences the way negotiations proceed and are structured, which makes dealing with the Chinese unique. In considering the way the Chinese enter into negotiations, Guanxi, Mianzi and Renqing are explored as part of this process.
Guanxi is driven by deep rooted cultural beliefs stemming from the teachings of Confucius, and from the pragmatic demands of living in fairly self-supporting communities
Mianzi is the Chinese concept of giving “face”. This means giving respect and recognising the status and moral reputation of the Chinese negotiator in society. It is important to protect one's “face” but it is even more important to give “face” to others. It involves a reciprocal relationship of respect and courtesy to and from your counterparts. To “give face” means to praise someone's reputation in a society and to “lose face” is to denounce status and reputation. It also indicates a loss of confidence and a lack of trust (Buttery and Leung, 1996). In business situations, aggressive behaviour from either party can spoil the face of the other party.
Renqing is the performing of favours and giving of gifts in China. For Instance, a businessman may make a donation to the Department of Transport for infra structure provision or a professor could send books to a Chinese University. (Buttery and Leung, 1996).
If a contract is what is required by a foreign negotiator it is also important to realise that there are three distinct stages in the process according to Mente (1992):
- The social aspect.
- The signing of the contract.
- The post-negotiation stage.
The social aspect involves the formation of relationships, trust and understanding the cultural values of both teams of negotiators. Before the contract is signed there are usually two distinct stages: the technical phase, which is detailed and the commercial phase. From the Chinese side, these two phases may be conducted by two separate negotiating teams. It should be noted that the signing of a contract does not indicate the end of the negotiations but only the motivation of the Chinese to commit to the relationship. This means they may continue to negotiate even after the contract has been signed, after all the Chinese continuously emphasise that all agreements are based on friendship and goodwill (Mente, 1992) and so the contract does not indicate the final agreement.
China's leaders have been described as technocrats because of their interests in science and technology. Since the early 1980s scientific and technological modernization has been given high priority. China is equipped with the latest technology and also is currently undertaking vast infrastructure projects in its commitment to market-based reform. These factors contribute to the increasing attention from Western business (Buttery and Leung, 1996).
Thus China has infrastructure that will enable a smooth execution of the construction of the proposed project.
5. Solutions and Recommendations
Western methods seem to follow a process concluding in the signing of a contract. It is a matter of fact operation but trade-offs are made between the purely technical excellence and benefit of a negotiation and knowledge and trust of the other negotiating firm possibly because of past dealings.
It is the need to base negotiations on the format of Chinese culture which requires knowledge of Guanxi, Renqing and Mianzi and an understanding of why negotiations could be slow. Foreigners should also understand that while the Chinese are willing to sign contracts, they do not perceive them as the end of the negotiations rather as the formal motivation to do business which necessitates further negotiations.
The Chinese countries tend to be group-based economies and have a clearer hierarchical structure in their decision process whereas their Western counterparts are more individualistic and loosely organised. The Chinese too are patient but persistent in their pursuits and willing to renegotiate contracts to achieve their long-term objectives. These characteristics pose a challenge to Western negotiations as they need to understand the Chinese group dynamics, their hierarchical structures and their long-term orientation all of which are a clue to their motives in business negotiations.
In China, relationships are currently much more important than transactions and they pay little store to formal contracts, relying more on friendship and trust as the basis for doing business. This leads to a lengthy negotiation process which encompasses social as well as business parameters. Thus, In China it would be misleading to see the negotiation process as a pure economic exchange process, rather it is more of a process of matching both the technical aspects of the product and service to the requirements of the buyer but simultaneously matching the friendship and trust generation aspects of doing business (Buttery & Leung, 1996).
6. Forecasts and Outcomes
It is expected that for a successful negotiation to take place, the negotiator must
- Adopt an appropriate strategy
- Project positive personal and organisational impressions
- Carry out intensive research
- Make relevant enquiries
- Offer and request appropriate and considerate concessions at the right time.
It can be challenging to carry out International negotiations and some of the problems that can be encountered can be due to using a different legal structure, negotiating in a different setting, coping with Government interference and the possibility of new legislations also natural disaster and terrorism. In addition, carrying out negotiations in another country could result in Culture shock, Jetlag and the Host would be at an advantage and might put you under pressure to give away concessions (Lapwood, 2009)
It is anticipated that for a successful negotiation to take place, negotiators should adopt N-2 style and also take the following factors into consideration
- Remain flexible
- Be time conscious
- Be prepared
- Pay good attention (Listen)
- Use Interpreters who understand the culture, not just the language
- Focus on the interests behind the positions
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