The transaction cost advantage of guanxi-based business practices

Abstract

The purpose of this paper is to provide a theoretical explanation of the perpetuation of China’s guanxi-based business practices. As a complement to the social embeddedness- and resource-based explanations, we seek to demonstrate the perseverance and relevance of guanxi in terms of the transaction cost advantages it offers. Specifically, we argue that guanxi-based business practices offer certain transaction cost advantages over existing structural alternatives identified in transaction cost theory. Where the guanxi network is well developed, the transaction cost advantages of guanxi-based exchange are sufficient to warrant the integration of guanxi- and market-based exchange mechanisms.