Accounting Students' Perceptions of Guanxi and Their

Journal of Business Ethics Education 9: 27-50. © 2012 NeilsonJournals Publishing.

Accounting Students’ Perceptions of Guanxi and Their Ethical Judgments Ying Han Fan, Gordon Woodbine, Glennda Scully, and Ross Taplin Curtin University, Australia

Abstract. A cross sectional study of a sample of Australian accounting students during 2011 is used to test whether the relationship concept of guanxi is accepted as a social networking concept across cultures. While favour-seeking guanxi appears to be equally important across cultural groups (as a universal set of values), its negative variant, rent-seeking guanxi continues to be sanctioned to a greater extent by students holding temporary visas from Mainland China. Contrary to the findings of Fan, Woodbine, and Scully (2012) involving Chinese auditors, this study of Australian and Chinese students did not identify favour-seeking guanxi as a factor influencing ethical judgment, whereas rent-seeking guanxi was strongly significant as a predictor of judgment making for Australian students. Major concerns are expressed about the need to sensitize Chinese students to make them more aware of unethical practices prevalent in their home country. These findings have significant implications for educators delivering ethics courses to cohorts that include international students as well as the professional bodies involved in designing development programs. Keyworks: guanxi, culture, ethical judgment, accounting students.

1. Introduction Guanxi describes the basic dynamic in personalised networks of influence in Chinese society (Fan 2002). The pinyin form of the term is quickly becoming part of the western vernacular and has been interpreted as interpersonal connections (Xin and Pearce 1996), personal relationships (Luo 1997) and interpersonal relationships (Su and Littlefield 2001, Chen and Chen 2004). One of the major issues in studying guanxi is how it is viewed within a moral context. Many in the West believe that guanxi is associated with unethical behaviours such as corruption and bribery (Chan et al. 2002, Snell 1999). For example, some researchers report that the practice of guanxi is negatively correlated to beliefs about corporate ethics and social responsibility (Ang and Leong 2000) and has a negative impact on auditors’ ethical judgments in auditclient conflict situations (Au and Wong 2000). From a cultural perspective however, Chinese people perceive guanxi as being morally acceptable (Lovett et al. 1999). For example, other researchers report that guanxi improves business performance (Davies et al. 1995), increases efficiency and growth (Luo and Chen 1997, Chan et al. 2002), and provides certain transaction cost advantages (Standifird and Marshall 2000). Subscribers are granted a licence to make 1 copy of the paper for personal use only. Apart from this licenced copy, none of the material protected by the copyright notice can be reproduced or used in any form either electronic or mechanical, including photocopying, recording or by any other information recording or retrieval system, without prior written permission from the owner(s) of the copyright. For multiple copy orders and Generated forPublishing EBSCO inc.Editor, 2013/7/9 © 2013 Philosophy Documentation Center http://www.pdcnet.org reprint permissions contact the JBEE [email protected]. All rights reserved. © 2012 NeilsonJournals Publishing.

28

Accounting Students’ Perceptions of Guanxi and Their Ethical Judgments

Such inconsistencies demonstrate that further work is needed to unpack guanxi and review its relationship with ethical decision making. Fan, Woodbine, and Scully (2012) argue that the problem lies in not properly distinguishing between two aspects of guanxi, namely favour-seeking guanxi and rent-seeking guanxi. Other researchers also apply different methods for assessing guanxi. Su and Littlefield (2001) identified conceptual differences between favour-seeking and rent-seeking guanxi, while Fan (2002) classified guanxi into two categorical forms, B2B (business person to business person) and B2G (business person to government official) based on the parties involved in relationships. Fan et al. (2012) were the first to develop a two-dimensional guanxi scale, which encompasses favour-seeking and rent-seeking guanxi. Their study suggests that favour-seeking guanxi is not necessarily unethical but that rent-seeking guanxi contains undesirable elements and negatively impacts the ethical judgments of Chinese auditors. Due to the exploratory nature of that study, the authors believe more evidence is needed to determine whether its impact on ethical judgments can be clearly differentiated. Guanxi is rooted in Chinese culture and generally regarded as a product of its national identity (Davies et al. 1995). However, a number of authors have suggested that its equivalent exists within other non-Asian regions. For example, the concept is similar to Blat in Russia (Michailova and Worm 2003), “Good Ol’boy” networks in the United States, and “Old boy” network in the United Kingdom (Ledeneva 1998). Luo (1997) asserts that both guanxi and western networking share common features, and Hammond and Glenn (2004) argue that the Chinese concept of guanxi and western Social Network Theory (SNT) overlap. Redfern and Ho (2009) also support Luo’s assertion while their empirical research was directed to Chinese managers. Little or no equivalent empirical research appears to have examined non-Chinese individuals’ perceptions of guanxi. The aim of this study is to survey the guanxi orientations of accounting students and in this context, the following questions are addressed: 1. Is there any difference among Chinese and Australian accounting students in terms of their attitudes towards guanxi? 2. How do these differences in attitudes influence ethical judgments? The study is applied to final year undergraduate and postgraduate students enrolled in accounting courses at Curtin University, Perth, Western Australia as relevant proxies for future business professionals. The programs encourage many international enrolments providing a good mix of cultural backgrounds.

Generated for EBSCO inc. 2013/7/9 © 2013 Philosophy Documentation Center http://www.pdcnet.org

Journal of Business Ethics Education 9

29

2. Literature Review and Hypotheses Development 2.1. Guanxi and Western Social Network Theory The term guanxi consists of two Chinese words, guan and xi. Guan means…“a door and its extended meaning is to close up” (Luo 1997, p. 44). Xi means to…“tie up and extend into relationships” (Luo 1997, p. 44). Guanxi therefore means…“past the gate and get connected” (Lee and Dawes 2005, p. 29). Guanxi can be emotionally driven based on obligations and affection, and is exchanged based on rules of reciprocity and a utilitarian impetus that considers personal and mutual benefits (Fan 2002, Yang 1993). Thus mianzi (face in society or social status) and renqing (social or humanised obligation) (Luo 1997) are two major mechanisms for Chinese people to develop and maintain guanxi with each other (Su and Littlefield 2001). It is commonly experienced between persons sharing a common bond or relationship e.g., family, ethnic origin, religious background, school membership, etc. (Lovett et al. 1999, Steidlmeier 1999) as well as acquaintances or even strangers sharing a common experience or challenge (Yang 1993). This classification is similar to Fan’s (2002) three types of guanxi: family, helper, and business. The major purpose of guanxi is to exchange information and facilitate humanised relationships and businesses. A social network is defined as a structure made up of individuals or organisations who are tied by one or more specific types of interdependency, such as friendship, kinship, common interest, financial exchange etc. (www.wikipedia). According to Streeter and Gillespie (1993) it has three important elements. The first social network element concerns boundaries, which determine membership in the network and the terms of cooperative effort (Streeter and Gillespie 1993). The concept of boundary in a western social networks context is similar to the concept of gate or door for guanxi i.e., a person inside the door is regarded as one of the group who merits acceptance whereas a person outside the door is regarded as a stranger and is not to be trusted (Luo 1997). Hammond and Glenn (2004) also suggest that the insider and outsider guanxi relationships are similar to the social networking concepts of strong ties and weak ties governing associations. They maintain (p. 26) that “strong ties are the clusters of people with whom we have regular and direct contact” but “weak ties are the nodes in our social network that reach out beyond immediate friends and family”. Both guanxi relationships and western social networks have insider and outsider components in common but guanxi focuses more on trusted insiders while western social networks treat weak ties as new information and opportunities (Hammond and Glenn 2004). These arguments are somewhat consistent with Hofstede’s (1980, 1991) culture theory, which posits that Chinese have stronger uncertainty avoidance tendencies and a long-term view or orientation. People strong in uncertainty avoidance are concerned about security


30


in life and are uncomfortable in unstructured situations (Hofstede 1980). That is, Chinese people tend to embrace guanxi as a way of avoiding these conditions within the conduct of their personal and business dealings. The second key element of social network theory is connectedness (Streeter and Gillespie 1993). It means one must somehow be joined or attached to other members of a network. This element is no different to the guanxi relationship as the latter encourages connectedness and the sharing of information and resources with group members. Luo (1997) claims that guanxi includes all western social networks qualities. Similarly Redfern and Ho (2004) contend that the two concepts share some common networking features such as knowing the right people, maintaining good relationships, developing the right contacts, and socialising. Western social networks may have a more commercial emphasis whereas guanxi also favours an exchange focus (Luo 1997). Thus guanxi may demand greater reciprocity obligations, while western social networks are largely non-reciprocal (Redfern and Ho 2009). This is the reason that one’s face in society and gift giving are so important in Chinese culture. Relationships based on reciprocity are regarded as Chinese characteristics (Luo 1997) while gift giving in business is more often viewed as a form of corruption or questionable inducement by westerners. The third key element of social networks is the social unit (Streeter and Gillespie 1993). This can apply to individuals, local communities or nations in a western context while guanxi is more personal in nature (Luo 1997). In a business context, social networks are “more commercial-based corporate-to-corporate relations” (Luo 1997 p. 47) but guanxi is “the individual’s connection to the whole” (Hammond and Glenn 2004 p. 26). Although guanxi focuses on personal relationship creation, it can also be used by an organisation to build a good network with other organisations (Luo 1997). To this point the guanxi concept has not been identified in its dichotomous form. After China’ economic reform and open-door policy commenced in the 1970s, guanxi has been applied in an opportunistic sense within its business sectors, particularly in B2G relationships (Seligman 1999, Steidlmeier 1999). Fan (2002) used this to classify guanxi into two categories, organisational (B2B) and bureaucratic (B2G) based on the parties involved in a relationship. This classification is similar to Chen and Wu’s (2011) guanxi classifications: business ties guanxi and government ties guanxi. The relationships between Chinese business people and government officials have been found to involve unethical practices such as back door deals and power dependence (Fan 2002, Su and Littlefield 2001). Su and Littlefield (2001) used these insights to classify guanxi into two dimensions: favour-seeking guanxi and rent-seeking guanxi. Favour-seeking guanxi is…“culturally rooted, signifying social contracts and interpersonal exchanges of resources in a collectivistic society” (Su et al. 2003 p. 310). Its purpose “is to share the scarce resources that otherwise are not available”. In this context, the positive cultural aspects associated with guanxi discussed in the opening paragraphs to this section are Generated for EBSCO inc. 2013/7/9 © 2013 Philosophy Documentation Center http://www.pdcnet.org


31

applicable within the definition of its favour-seeking variant. The interpersonal relationships associated with this activity are sustained by trust and commitment within the collective or accepted circle of participants (Su and Littlefield 2001). Rent-seeking guanxi on the other hand…“reflects on institutional norms signifying social collusion based on power exchanges in a hybrid Chinese socialist market economy” (Su et al. 2003 p. 310). It is a product of contemporary China’s political and economic systems (Fan 2002). Yang (1993) identified three group-based classifications of guanxi the first two of which include family members and extended relationships, which can include neighbours, classmates and work colleagues. The third aspect of guanxi widens to include acquaintances and strangers, where the associations are more likely superficial, temporary and instrumental. Su and Littlefield (2001) report that since the establishment of the strongly dominant centralised system of government and the delegation of power to provincial and local authorities, there has emerged a form of guanxi that is governed by a different set of relationship rules. Within the business context the characteristics of obligation and reciprocity are replaced by instrumentality and opportunism, fostered mainly by the existence of bureaucratic (emanating from government authority) and monopoly powers that allow particular members contributing to some market place transaction to manipulate the process to better serve self-interest motives at the expense of other participants. Favour-seeking guanxi converts to the negative rent-seeking variant defined by Su et al. (2003) in the previous paragraph. Such practice arises in both local and international contexts, especially those involving outsiders when its application is deemed somewhat non-moral in the minds of the perpetrators. In 1994 McDonald’s had to vacate the location for a wealthy Hong Kong business man wishing to finance the construction of a new commercial complex, despite it holding a 20 year land-use agreement with the government (Seattle Times 1994). It appealed against the decision but lost mainly because of its relatively poor relationship status. In this incident, the government authority was able to exercise its power (bureaucratic privilege) to override its contractual obligations to McDonald’s providing a form rent-seeking gaunxi that benefited some parties at the expense of others. In the minds of outsiders (including western business participants used to the appropriate application of rule of law), rentseeking guanxi is seen as a moral perversion of an otherwise morally acceptable social networking behaviour, wherein related parties cooperate with the object of disadvantaging other parties to a business arrangement. One or more guanxi partners benefit financially at the expense of others. In the first research question posed in the introduction to this paper, the issue about whether guanxi could be identified as occurring within a western context was raised. As has been explained above, it is proposed that this question needs to be adjusted to account for two aspects of guanxi and these need to be addressed separately in the survey of future accountants included in this Australian study.


32


While the literature reports significant similarities between favour-seeking guanxi and accepted western social networking systems, the culturally deviant version (rent-seeking guanxi) identified within the China business environment in recent years may not find ready acceptance within communities that expect business practices to align with moral expectations and associated legal frameworks. In the survey designed for this study the sample of students selected are expected to include a substantial component of Chinese students (holding temporary study visas) and in the context of the research framework and the literature review, the expectation is that Australian students will identify with social relationship based statements that relate closely to those defining favourseeking guanxi. At the same time, however it is anticipated that they will vary significantly from Chinese students in relation to their attitudes towards rentseeking guanxi statements. To this end the following hypotheses are proposed: H1: Australian and Chinese accounting students share similar favour-seeking guanxi orientations. H2: The attitudes of Australian accounting students towards rent-seeking guanxi orientations will differ from their Chinese counterparts. 2.2. Guanxi and Ethical Judgment Ethical decision-making is… “a thought process that leads to one of several possible options” (Baron 1993, p. 35). Hunt and Vitell’s (1986, 1993) ethical decision-making model proposes that individuals’ ethical decision-making is influenced by many factors including personal values and external influences. Personal values play a central role in ethical decision-making (Yates and Lee 1996, Hunt and Vitell 1986). However, no one is born with values; cultural perspectives build and develop as one grows (Smith 1977). Thus culture is recognised as a dominant factor in establishing an individual’s personality and in influencing ethical decision-making (Hunt and Vitell 1986, McCrae et al. 1996, Roxas and Stoneback 1997). Guanxi is rooted in Chinese culture and regarded as a product of its national identity (Davies et al. 1995). Some prior studies have suggested that a person’s guanxi orientations are associated with his/her ethical judgments (Au and Wong 2000, Hwang and Staley 2005, Fan et al. 2012). A principle of normative ethics is whether… “the quality of the ethical decision is determined by universal principles or…by the consequences of the action” (Baker 1999 p. 130). From a universal perspective (certainly within a western context), rent-seeking guanxi works against the principle of fairness and violates the “arm’s length principle” (Fan 2002) and the fiduciary duties rule (Dunfee and Warren 2001). The consequences are… “personal gains at social



33

cost” (Fan 2002 p. 371). It also reduces social wealth and benefits a few at the expense of the many (Dunfee and Warren 2001). It involves motives of selfinterest that may encourage back door deals, power exchanges, corruption and bribery (Snell 1999, Fan 2002, Su et al. 2003). In a recent study of Chinese auditors, Fan et al. (2012) also found that the rent-seeking guanxi is negatively associated with the ethical judgments they make. However, Lovett et al. (1999) argue from a relativistic standpoint that it is wrong to assume that an action is unethical because it is not based on universal principles, that is, that people should also consider cultural differences and economic efficiency. Favour-seeking guanxi facilitates business activities and its purpose… “is to share the scarce resources that otherwise are not available” (Su et al. 2003 p. 310). These arguments would predicate the existence of favourseeking guanxi. For example, some researchers have found that guanxi improves business performance (Davies et al. 1995), increases efficiency and growth (Luo and Chen 1997, Chen et al. 2002), and provides certain transaction cost advantages (Standifird and Marshall 2000). Su et al. (2003) also suggest that a high favour-seeking guanxi orientation is not necessarily unethical, but simply another way of doing business in China. Fan et al. (2012) reported that favour-seeking guanxi was positively associated with Chinese auditors’ ethical judgments. The instrument devised for that study has never been tested within a western context and this is a major objective of this study to determine whether similar relationships can be identified with Australian students (as future accountants) after allowing for differences in country of origin. At this point it is anticipated that earlier findings relevant to Chinese auditors will be validated and for these reasons the following hypotheses are proposed: H3: Accounting students’ favour-seeking guanxi orientations are positively associated with their ethical judgments. H4: Accounting students’ rent-seeking guanxi orientations are negatively associated with their ethical judgments. Findings that support these assertions will indicate that both forms of guanxi act to predict the ethical judgment making. The more supportive students are towards favour-seeking guanxi statements, the more highly they will rate the ethicality of business positions. The opposite findings are anticipated with respect to rent-seeking guanxi.


34


3. Research Method 3.1. Method and Sampling A survey methodology was used in this study. The instruments include (a) a selfadministered questionnaire and (b) a short auditing ethical case. The selfadministered questionnaire includes demographic information and 12 statements relating to guanxi (refer Table 2). A sample of accounting students including final year undergraduate students and first year postgraduate students was drawn from the 2011 cohort enrolled with the School of Accounting at Curtin University. The recruitment process involved independent instructors who invited students providing a brief introduction to the survey and then distributing an information sheet and questionnaire. Originally, a total of 193 useable survey instruments were collected. The demographics indicate that students came from a variety of different countries and the major country representations were Chinese (n=81) and Australian (n=30) students. For the purposes of this study 111 students from Australia and China are included and details of these respondents’ background information are shown in Table 1. Table 1: Background information on respondents

Gender Education level (Course enrolment)

Work experience

Country of birth

Age (years)

Sample size

%

Male

38

34

Female

73

66

Bachelor degree

57

51

Master degree

54

49

Yes

32

71

No

79

29

China

81

73

Australia

30

27

20-25

89

80

26-30

17

15

31-35

4

4

Above 36

1

1



35

3.2. Measures 3.2.1. Guanxi Orientations Fan et al. (2012) developed a two-dimensional 12 item guanxi scale to measure Chinese auditors’ favour-seeking and rent-seeking guanxi orientations as an extension of Ang and Leong’s (2000) 9 items version. Ang and Leong’s scale was developed to measure Chinese people’s traditional relationships and focuses on favour-seeking guanxi (Su et al. 2003). Fan et al. (2012) argue that rent-seeking guanxi is also a relevant concept and should be included as part of a two dimensional scale. Thus a further three items were included to specifically identify rent-seeking guanxi. These include statements referring to: back-door deals, power exchange and bureaucratic privilege. Responses were reduced using a Principal Components factor analysis including a Direct Oblimin rotation, which generated a two dimensional model with 8 items measuring favour-seeking guanxi and 4 items for measuring rent-seeking guanxi as shown in Table 2. The fourth item, exchange of gifts loaded significantly on the factor rent-seeking guanxi, which is consistent with findings reported by Millington et al. (2005) who associated this practice with illicit payments, corruption and the pursuit of selfinterest. Table 2: Two dimensional guanxi scale* Favour-seeking guanxi

Rent-seeking guanxi

Maintain a good network

Back-door deals

Knowing the right people

Bureaucratic privilege

Developing the right contacts

Dominant parties to a deal (Power exchange)

Building and maintaining social relationships Exchange of gifts Being in the “inner” circle Returning favour for favour Maintaining good relationships Frequent cooperation *Source: Fan et al. (2012)

In this current study a confirmatory factor analysis using AMOS was conducted to assess the goodness-of-fit and the validity of the two-factor 12 items model previously derived from Fan et al. (2012). The Tucker-Lewis Index (TLI > .95) (Hu and Bentler 1999) and Comparative Fit Index (CFI > .95) (Bentler 1990) were applied in this study as they are better suited for small samples (Bentler 1990, Du and Tang 2005). Other criteria such as X2 statistics (p > .05) and the root mean square error of approximation (RMSEA < .05) were also used


36


as suggested in the literature (MacCallum and Austin 2000, Vandenberg, and Lance 2000, Cheung and Rensvold 2002). The results (i.e., goodness-of-fit test: X2 = 117.436, df = 53, p = .000, TLI = .749, CFI = .798, and RMSEA = .105), indicate that the present data did not fit in the two-factor 12 items model. Thus, it is suggested that the model respecification is necessary in order to determine a model that better represents the same data. The significant large modification indices (Joreskog and Sorborn 1996) and standardised residual covariances (larger than 2) (Joreskog and Sorborn 1993) were used as criteria to re-specify the model. The analysis suggests the following items, namely social relationships, (membership of) inner circle, (reciprocation) returning favour, frequent cooperation, and gift giving, represent likely misspecifications of the hypothesised model and may be inappropriate for use in this study. Thus these items were deleted from the original 12-item model and a short version produced (see Figure 1 and Appendix 1). The results (i.e., goodnessof-fit test: X2 = 16.192, df = 13, p = .239, TLI = .964, CFI = .977, and RMSEA = .047), suggest that this short version model represents the best fitting model of guanxi structure for Australian and Chinese accounting students. For this reason, this 7-item (two factor) model was used in this study. However, due to a small sample, measurement of the invariance between Australian and Chinese students was not completed. Figure 1: Two factors 7-item guanxi model (standardised estimates)



37

An internal consistency test reveals that the alpha reliabilities for both favourseeking guanxi (4 items) (73%) and rent-seeking guanxi (3 items) (62%) were acceptable given the small number of representative items. 3.2.2. Ethical Judgments The auditing ethical case included in the survey was acquired and modified from the American Accounting Association (1992) (see Roxas and Stoneback 1997) and used to measure accounting students’ ethical judgments (refer to Appendix 2). This case was chosen because it deals with a common ethical dilemma in auditing practice. Finn et al.. (1988 p. 606) claim that… “ethical conflict occurs when people perceive that their duties toward one group are inconsistent with their duties and responsibilities toward some other group (including one self).” In this case study, an ethical conflict or dilemma arises in two opposing auditorclient directions, (1) an auditor accepts a client’s suggestion to inappropriately alter the financial position and (2) an auditor rejects the client’s suggestion and complies with accounting and professional standards. Subjects are required to read the case and then answer four related questions. The questions aim to obtain perspectives on the ethicality of various positions taken by the accounting students (as proxies for future accountants) and measure the extent to which certain actions are ethical or unethical using a seven-point Likert scale. The coefficient of Cronbach’s Alpha for the four questions was an acceptable 0.66. Ethical judgment was then determined by calculating an average for each of the four responses after reverse scoring the last two questions (see Appendix 2). 4. Results 4.1. Review of Guanxi Orientations of Accounting Students The overall mean scores, standard deviations, and the results of one-sample and independent sample t-tests of accounting students’ guanxi orientations are presented in Table 3 below. The results of a one-sample t-test show that favour-seeking guanxi orientations are significantly higher than the mid-point value (5) at a 1% significance level for both Australian and Chinese students. Further, the average rent-seeking guanxi orientations are significantly lower than the mid-point value (5) for both national groupings (p