Guanxi as a dynamic capability being built, maintained and reduced in intimacy in wholly-owned foreign enterprises in China

Since China launched the Open Door Policy in 1978, the number of inward foreign direct investments (FDIs) has soared. Pioneer FDIs were immersed in Confucian culture within which guanxi is the most idiosyncratic feature. While the economy was booming, uncertainties stemming from waves of political unrest and lack of formal institutions affected enterprises. Mis-handling of guanxi is problematic. Toward the close of the 20th century, scholars reminded managers/owners that they should audit their guanxi portfolios to avoid risks and maintain them at an optimal level for enterprises in China. This study argues that guanxi should be viewed as a dynamic capability that FDIs should possess to maintain optimal guanxi portfolios, and that an optimal guanxi portfolio is partly achieved through reduction of intimacy (RI), the Chinese way of exiting a relationship. It postulates a model with which managers/owners can maintain an optimal guanxi portfolio. The model uses Rusbult’s (1983) Investment Model to examine the commitment of the firm to guanxi. Guanxi audits identify unwanted guanxi for reducing intimacy. This positivist research was augmented by 20 semi-structured interviews with the managers/owners of wholly-owned foreign enterprises (WOFEs) in developing the reduction of intimacy construct. The sampling frame was the membership list of www.alibaba.com.cn. Five thousand WOFEs were randomly selected. After three rounds of reminders, 287 fully completed questionnaires were collected online. Structural Equation Modelling was applied in analysis. It was found that resources expended in maintaining guanxi positively influence: the perceived quality of alternatives of guanxi; perceived rewards from guanxi; the awareness of investments involved in guanxi; and the perceived business risks associated with guanxi. However, perceived rewards are not the only factor. Investments specifically expended are a consideration. Reduction of intimacy positively influences the value of a firm’s guanxi portfolio. In guanxi audits, managers/owners, when expend more resources to maintain guanxi portfolio, should consider higher quality alternatives of guanxi, higher perceived rewards, higher investment in guanxi, and higher perceived business risk involved. These factors help to delineate the wanted guanxi from the unwanted. Furthermore, avoiding investment specific to guanxi is necessary, otherwise reduction of intimacy is difficult, even as not generating enough rewards. The idea of a guanxi audit remains conceptual. This study fills the gap in knowledge by empirically verifying the proposed model for guanxi audits and reduction of intimacy through which a firm’s guanxi portfolio can be maintained. Furthermore, this study augments Rusbult’s (1983) Investment Model by providing an understanding of the risk factors involved when firms consider whether to exit guanxi in China