Conducting Trade with Chinese Family Businesses

Conducting Trade with Chinese Family Businesses
By
Kenneth L.Wall1
Joanne C. Preston, PhD2
Runtong Zhang, Ph.D3
1. Institute for Advanced Studies, Colorado Technical University, Colorado Springs, CO 80907
Tel (H): 719-531-0755 Tel (O) 303-883-4106 Fax: 303-320-3689 e-mail: kwall@coloradotech.edu
2. Institute for Advanced Studies, Colorado Technical University, Dean of Management, Colorado Springs, CO 80907
Tel (H): 504-723-6192 Tel (O) 719-590-0200 Fax: 719-598-3740 e-mail: jpreston@coloradotech.edu
3. School of Economics and Management, Beijing Jiaotong University, Beijing 100044,P.R. China
Tel: (H) (86) 13801399206 Tel: (O) (86) 1051683651 e-mail: rtzhang@bjtu.edu.cn
September 2007

ABSTRACT
Starting in 1978, family businesses changed significantly as a result of Chinese economic reform
from a planned to a market economy. Opportunities now exist for Western companies to
conduct business directly with these family businesses with significant favorable profitability
prospects for all parties concerned. The Chinese culture and family business functions are
undergoing major change with emphasis being placed on practices to increase wealth, which
often encourages expanding trade with the West. To conduct business successfully in China, it is
critical to understand the culture of this Asian society and the unique operating paradigm in
family businesses.

KEYWORDS: Family Business, China, Culture, Economic Reform

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Family businesses are changing as a result of the economic reforms in China. In 1978,
the communist government commenced experiments with a limited number of market economic
practices in the agricultural sector. Expansion into a market economy with Chinese socialism
has been dramatically achieved over these past 25 to 30 years. International trading
opportunities now exist with thousands of Chinese family businesses desiring expansion into
Western markets and Western companies looking to potentially taking advantage of trading with
the 1.3 billion Chinese consumers. As a result of the demise of a totally planned economy, a new
Chinese culture is evolving and Chinese family businesses have undergone major changes in
commercial functions and practices. When conducting dealings with family businesses,
consideration must be given to the changing culture and these changing practices in order to
ensure relationships are developed for successful negotiations.

The authors have conducted business in China for many years had considerable business
experience in dealing with Chinese family businesses. Many of the observations included in this
article without specific references are based on the experience of the authors either living in
China or through international consulting.

We commence the article with an examination of the family business functions and
practices, describing changes that are occurring as a result of the Chinese economic reforms.
Forms of ownership, management functions and leadership amongst other business aspects and
the evolving Chinese culture are reviewed with the implications for Western businesses
identified. Finally, a summary of some of the most important aspects of dealing with family
businesses is provided. We first look at the changing family business functions and practices.

Chinese family businesses are undergoing major change with the transition from a
planned to a market economy, which commenced in 1978. The authors examined selected

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business functions and the differences in practice between Chinese and Western small family
businesses and they specifically include: forms of ownership, planning, controlling, leading, and
organizing, employee relations, marketing-promotion, financing, ethics, and legal.

Ownership. Family business ownership in China is dominated by sole proprietorships.
Family owned and operated businesses are common in both urban and rural settings. It is
especially common in the rural areas where life is often harsh (Kristof, 1994) and a family
owned plot is managed by the father and is cultivated by the wife and children. Succession is
clear in this culture because when the parents become unable to manage, the eldest son assumes
the responsibility (Yan & Sorenson, 2006). The Communist government attempted to manage
the agricultural sector until the late 1970s (Shenggen, 2002). Upon allowing private ownership
of the plots, production increased dramatically. Jinglian Wu, a well known Chinese economist
stated the increase in rural output growth was 48.6% from 1978 to 1984 (Wu, 2005). The
family, not the collective, reaped the benefits. These dramatic increases were due in part to
profit incentives and from the desire of the farmers to take care of the family. Family is
powerful in Confucianism (Y. P. M., 1986) and taking care of one’s family and subsequently
taking care of elderly parents becomes paramount (filial piety). Ownership of urban retail and
small factory businesses are also dominated by sole proprietorships(Wu, 2005). Generally the
father is the top manager and the children work their way up through the company to be the chief
accountants, production managers and/or marketing managers. It is common for young factory
workers to migrate to the urban areas, to live frugally, and send money home to take care of the
family, especially when the remaining family members come from poor rural areas (Saxon,
2007). As some of the businesses grow, occasionally partnerships may be formed. The authors
have observed that these partnerships are sometimes only handshakes, with guanxi being the

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basis for the relationship with no formal documentation ever being developed. Guanxi is the
term meaning relationships or connections and is explained further later. Family businesses are
generally sole proprietorships and are rarely converted to partnerships or small business
corporations, as is often the case in the United States. These sole proprietorships conduct the
classic management functions with their own Chinese variations.

Management Functions-planning, controlling, leading. organizing. The planning in
family businesses is often haphazard or non-existent, which has been noted by the authors. This
is not unlike many Western businesses, but it is the norm in China. The matriarch or patriarch
responds to what needs to be done and does whatever is necessary to ensure the business
survives and hopefully prospers. It is common for the business owner to mainly perform short-
term cash flow planning with little evidence of formal long-term considerations. Most control
mechanisms in family businesses are held tightly by the owner/manager. As in Western
business, the owner/manager is constantly present on the premises and remains in control of all
of the functions of the business. It is expected by the employees that the matriarch or patriarch
will monitor virtually all activities of the business. Closely associated with control is the
leadership function.
Most leadership in Chinese business is dictatorial and the owner is the boss (McGregor,
2005). The owner/manager is responsible for motivating, assigning, explaining, and clarifying
policies for the employees. The authors found Douglas McGregor’s Theory X leadership style to
be common and the employees respect the leader when they are successful. Leaders motivate the
workers more by the threat of loss of jobs than by perks, however, labor shortages in the cities
has ameliorated these threats to some degree (Wiseman, 2005). The leader assigns, explains
routines, and dictates policy. Teams are formed in some business and their groups are influenced

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by Chinese culture (Hofstede, 1991). Proper management of those teams is imperative as Qu
(2005)suggested. More senior managers or top management provide training for leaders, which
tends to be toward quantitative business functions, rather than developing personal relationships
(Ellis, 2004). Communications are from top down with reprisal for negative feedback inhibiting
upward communication. This is not to suggest that the leaders are malevolent; on the contrary
they are interested, as in the West, in obtaining and keeping the best employees. As a result of
economic reform, motivation is provided primarily through salaries, which has substantially
increased for good employees.
Important and not so important decisions in family business are reserved for the top
leader/manager (micro-management abounds) as observed by the authors. As businesses grow,
delegation of authority trickles down very slowly. Two major factors apply. The top manager is
looked upon as all knowing and acts accordingly as a mother/father figure. Thus decisions are
made at the top level. Mid level managers are reluctant to take responsibility as they often have
not been trained in management and do not want to be blamed for a bad decision. It is easier to
pass the question/problem up to the boss. Make it clear to managers that they must adhere to
company policies, as there are some tendencies to ignore rules that may not be completely
understood. Since family businesses often operate without any written policies, employees may
take advantage of the situation if the matriarch or patriarch is not vigilant.
Family business organizations are vastly different from the State Owned Enterprises
(SOEs) which are typified by numerous levels of hierarchy (Benson, 1999). The authors have
noted that small family businesses are flatly organized with staff positions often occupied by
family members. It has been observed that small business leaders may have 15 to 20 direct
reports and with an “auntie” acting as an assistant manager. There is little need for many levels

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of decision makers when most decisions are made at the top, which is often the matriarch or
patriarch.

Employee Relations. It is noted by the authors that employees work in Maslow’s
(1969)hierarchy of needs at the physiological and safety levels and to some extent the social
level. Rarely would employees work at any higher level. Higher status (face) is important and is
accomplished through promotions. Work goals among managers are different from the West
(Ronen, 1987). Bonuses are sometimes more important to Chinese employees than to American
employees in the information technology field (Bu, 2005). When the company provides
adequate wages to maintain the welfare of the workers’ family, fear of unemployment has been a
paramount concern. Terminating employees is often problematic and local authorities or a trade
union may become involved. The Communist Party substantially controls trade unions (Warner,
1991) with few trade unions found in family businesses. Chinese workers tend to be more
capable of performing monotonous activities than American workers. Small family businesses
sometimes grow, as they are specially suited for providing these types of jobs.

Marketing. Many marketing promotions are conducted through the same basic media as
Western businesses in newspapers, magazines and television advertising. Care must be taken to
ensure culture is taken into consideration. Nike has learned a lesson in what not to do ("Nike
faces china ire over 'fear' ad." 2004). General Motors has learned to take advantage of cultural
differences in their advertising (Wentz, 2003). Other companies such as KFC and McDonald’s
are advertising and selling products that meet cultural expectations (Jianghong, 2004). Small
Chinese family businesses have not generally adopted a customer service orientation. Be
prepared for complaints to go unheeded.

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Chinese are often thought of as being exceedingly patient in their negotiations (Saxon,
2007). While Americans tend to think in an either/or framework, the Chinese tend to think in
ideas of both sides winning or losing. Today, the younger business operators are not so inclined,
however, in conducting trade, be prepared for the haggling type negotiations. Avoid getting your
Chinese counterpart in a situation that establishes a fixed price for a product or service that
would cause them to lose face if they backed off their position. Leave room in your opening
proposal for less important items to be conceded for face saving purposes.

Ethics. Business ethics and customs are different from the West. While giving gifts is
appropriate in the West under certain circumstances, giving gifts to Chinese businessmen and
women is common and is considered ethical (Chan, 2003). Western business might consider
such a practice as bribery. It is considered bribery in China when someone tries to persuade
another to perform an illegal act. Gift giving is a custom and part of guanxi ("Cultural advice",
2003). Gifts should be accepted with both hands and will often not be opened until later with
gifts made in America are especially appreciated. The authors have observed small business
owners providing “guanxi” gifts to business associates and officials, which was deemed
appropriate by the giver and the receiver. While the gifts were not overly expensive by Chinese
standards, the owner was showing his respect for the recipient’s importance to him.
Technology based industries are becoming a substantial portion of the Chinese business
and the employees are learning fast (Sheff, 2002). Copying intellectual property (IP) has not
been considered unethical (James, 2004). Many Chinese believe that intellectual property
belongs to society as opposed to the individual. Accordingly, it is prudent to protect company
confidential information to the extent practical and a legal confidentiality agreement may
minimize the likelihood of loss of IP rights. Closely associated with IP, is counterfeiting, which

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is a quite common practice in China. Care must be taken to ensure dealings are with reputable
firms, who may also be fooled by counterfeiters.
Negotiation practices have ethical implications. When negotiating with Chinese business
people, the truth is often elusive (McGregor, 2005). According to Lam (2003), “Chinese think in
terms of the whole while Americans think sequentially and individualistically, breaking up
complex negotiation tasks into a series of smaller issues: price, quantity, warranty, deliver, and
so forth. Chinese negotiators tend to talk about those issues all at once, skipping among them,
and, from the Americans’ point of view, seemingly never settling anything.” (P.88). Chinese
often view agreements as a list of intentions at the beginning of the trade and expect to interpret
items not specifically covered in a contract at a later date. If circumstances change, the Chinese
business, person may believe the contract is no longer valid unless it is clearly spelled out that
the contract remains in effect even when circumstances change. It is prudent to define all
aspects of an agreement as well as possible to preclude surprises later. A simple contract or
letter of intention is adequate for most dealings. Chinese are generally expressionless when
negotiating and Americans tend to show happiness or frustrations in discussions. The Chinese
consider this display of emotions as childish (Saxon, 2007). Understanding the effects of
nationalism is also needed in today’s negotiations (Shi, 2003).
Guanxi, as a major facilitator of doing business, has encouraged corruption, which is a
major problem for the Chinese government and business (Studwell, 2002). Pursuing
relationships with government officials opens doors but may be illegal. Strict government
penalties for corruption have not deterred those who are seeking fortunes. There are indications
that quanxi established with government officials may not be as important as in the past but must
still be considered when doing business in China (McClenahen, 2004). Corruption is rampant in

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China. The government’s Central Disciplinary Inspection Committee reported that the
organization considered 1.6 million possible instances of corruption in one year (Studwell,
2002).
Accounting practices are often deemed unethical by Western standards. It is not
uncommon for a business to have multiple sets of books (Saxon, 2007). One set may be for the
government, another for the bank, another for investors, and another for the business owner. Be
aware of which books you may be reviewing.


Legal. The legal system is vastly different in China from the West. According to
Jinliang Wu, (2005) “China does not have a tradition of the rule of law.”(P.426). It is complex
and is often used by authorities to approve or disapprove business transactions. Meeting of the
minds in the West is concluded through written contracts. In China, meeting of the minds is
achieved through guanxi and verbal agreements. Partnerships agreements, personal loans, and
other agreements have often been unwritten. The government protects Chinese culture through
censorship of the media including advertisements that could appear derogatory to their culture
("Nike faces china ire over 'fear' ad." 2004). China’s acceptance into the World Trade
Organization and the requirements thereof is changing the legal landscape. The Chinese
government has created laws for virtually everything, as do most governments (Sintro, 2001). A
well-defined legal system continues to be developed by the Communist government and the
impact is being felt throughout the business enterprises and society (Guthrie, 1999). Economic
reform has brought on an onslaught of revised rules and regulations, some of which are vague
and sometimes conflicting, which is not a major problem with the ambiguity allowed in Chinese
culture.

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The aforementioned business functions are affected by a changing Chinese culture. We
review in this next section some important aspects of Chinese culture and how they impact
dealings with family businesses. We first review some of the major tenets of Confucianism,
which provides the backdrop to understanding Chinese culture. Then we examine the
importance of guanxi (connections) face, and feng shui, which are cultural phenomenon often
encounter in family businesses. Buddhism, Taoism, I Ching, and other lesser aspects of the
Chinese culture are briefly mentioned for completeness of understanding as they could affect
family business dealings.

Businesses around the world are affected by the traditions and cultures, which surround
them and major changes in the economic structure of China are impacting the culture of this
ancient society. Culture is the customary beliefs and social norms of a group or society. Chinese
culture is an ancient one dating back to more than 4000 years and is evolving as economic
reforms have been instituted over the last 25 years ("Are western festivals undermining chinese
culture?" 2004). The Chinese people are proud of their culture and generally desire to limit
change by Western influence. China is a country slightly smaller than the United States and has
a population of more than 1.3 billion people ("The world factbook", 2007). The culture is far
from homogenous. With 23 provinces, each with its own language, cultural diversity abounds.
However, certain aspects of culture are predominantly Chinese in nature, including
Confucianism, guanxi, face, feng shui, along with Buddhism, Taoism, I Ching, and other cultural
beliefs. We first examine Confucianism, which provides much of the basis for understanding
Chinese thought.
Confucianism is a major Eastern philosophy, dating back to 500 BCE that stresses the
proper relationships in society, such as father/son and subject/ruler. Confucianism permeates the

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