Determinants of effective client entertainment in China: a transaction governance approach

Published date10 December 2018
DOIhttps://doi.org/10.1108/JABS-02-2017-0026
Pages613-632
Date10 December 2018
AuthorFrancis Sun
Subject MatterStrategy,International business
Determinants of effective
client entertainment in China:
a transaction governance approach
Francis Sun
Abstract
Purpose This paper aims to take an economic transaction governance approach to explore the
determinants for the effectiveness of the social practice of client entertainment in facilitating business
relationshipsin China.
Design/methodology/approach The analysis is based on a broader theoretical framework which
posits that exchange relationships are regulated through a combination of market, legal and social
relational mechanisms andclient entertainment plays a governance role by reinforcing social relational
governance to regulatethe behaviors of economic actors. Upon this framework,this study proposes that
the social behavioral features of client entertainment affect the effectiveness of client entertainment in
facilitating exchangerelationships and that time moderates such effects.These hypotheses were tested
on surveydata collected from a sample of Chinese salesmanagers.
Findings Empirical results indicate that the effectiveness of client entertainment in facilitating
exchange relationships is associated with its social behavioral features that could reinforce social
relational governance, including intensity (i.e. value and frequency) and format (i.e. intimacy and
observability)of entertainment activities,and the time factor plays a moderatingrole.
Practical implications This study can potentially help policymakers to regulate client entertainment,
and business practitioners to manage entertainment spending, more effectively and efficiently without
causinglegal and ethical problems.
Originality/value This is the first studythat takes an economic transaction governanceperspective to
directly explore how the social practice of client entertainment plays a constructive role in China’s
economic life and what factors affect its effectiveness in playing such a role. It offers guidelines for
policymakers,business managers and futureresearch to manage and study this practice.
Keywords Effectiveness, Buyer-supplier exchange, Client entertainment, Social relationalgovernance,
Transaction governance
Paper type Research paper
Introduction
Client entertainment, defined as entertainment activities such as dining, wining, golfing
and gift-giving, is a popular business practice in China (Yang, 2002;Zhang, 2001). The
pervasiveness of client entertainment in China is reflected in the annual financial
statements of public firms listed on the Shanghai Stock Exchange which disclosed that in
2007 many firms spent well over 10 per cent of their annual profits on the practice
(Shanghai Stock Exchange, 2009). According to China’s accounting principles,
entertainment spending is an important cost item that firms can claim tax credit in annual
financial reports (China State Administration of Taxation, 2012). How to allocate
entertainment budget to serve business purposes effectively and efficiently on the one
hand, and manage entertainment activities legally and ethically on the other hand, has
been a major challenge to Chinese firms.
Francis Sun is based at
Brock University, St.
Catharines, Canada.
Received 11 February 2017
Revised 14 June 2017
29 November 2017
20 February 2018
Accepted 20 May 2018
DOI 10.1108/JABS-02-2017-0026 VOL. 12 NO. 4 2018, pp. 613-632, ©Emerald Publishing Limited, ISSN 1558-7894 jJOURNAL OF ASIA BUSINESS STUDIES jPAGE 613
Surprisingly, the management literature has rarely addressed the phenomenon in the China
context directly[1]. Rather, research on client entertainment in China is done mainly under
the term of “business guanxi practices” in the context of guanxi, which is actually business
networks and connections that are often built through entertainment activities [see Yang
(1994) for a discussion of the “art of guanxi” and Chang et al. (2014) for a review]. Among
this steam of research, some studies haveperceived guanxi-related entertainment activities
as a social vice that may cause ethical issues (Fan, 2002) and lead to market fragmentation
(Lin and Si, 2010).
In sharp contrast to those negative views on client entertainment, a few studies have
recognized the constructive role of client entertainment in economic life. They have
proposed that entertainment-related guanxi activities can build business connections to
reduce transaction costs (Standifird and Marshall, 2000) and improve firm performance
(Luo et al., 2012). Indeed, cliententertainment plays such a critical role in China’s economic
life that prohibiting normal client entertainment is alleged to have caused the country’s
slowed economic growth (Spegele,2014).
This study aims to extend the positive stream of research on client entertainment by
addressing two major issues in former studies. First, as noted earlier, while acknowledgi ng that
client entertainment may cause ethical problems, some studies have recognized the posit ive
role of client entertainment. Nevertheless, none of them has provided a theoretically grounded
analysis that directly accounts for the major features of this particular business practice. At
society level, most studies have treated client entertainment as a country-specific
phenomenon rooted deeply in guanxi, addressing entertainment-related i ssues indirectly from
the cultural and historical fundamentals of China (Dunfee and Warren, 2001). It remains
unclear as to whether guanxi-related client entertainment activities are a vice of institutions or
an informal supplement of formal institutions. Consequently, at the firm level, we still d o not
know why Chinese firms persistently engage in client entertainment even if facing severe
penalties from the government. Building upon the framework of economic transac tion
governance, which posits that economic transactions are governed through a combi nation of
market, legal and social relational governance mechanisms and that client ente rtainment plays
a governance role through reinforcing social relational governance (S un and Chen, 2017), this
study can explain the function and efficacy issues of client entertainment in China in a
systematic manner.
Second, it still remains unclear in the current literature as for how guanxi-related client
entertainment activities might play a facilitating role in economic exchanges in China. In
addition, previous studies often treated client entertainment as homogeneous practices
without exploring what features or types of entertainment are more effective than others in
facilitating exchange relationships. The transaction governance framework mentioned
above enables this study to identify and analyze the factors that affect the effectiveness of
client entertainment in facilitating exchange relationships.Particularly, this study argues that
the socio-psychological features of client entertainment (i.e. intensity and format) can affect
its effectiveness in reinforcing social relational governance to facilitate exchange
relationships. As noted earlier, previous studies have found evidence supporting the
proposition that entertainment-related activities enhance exchange relationships. Yet, the
question of how to make it more efficient and effective has not been answered. This study
answers the question and can help business practitioners to manage entertainment
budgets efficiently and effectivelyin promoting exchange relationships.
In the next sections, this study first reviews literatures on the mechanisms for economic
transaction governance, particularly the power of social relational governance and the
positive role of client entertainment in reinforcing social relational governance. Next, it
hypothesizes and tests the impact of social behavioral features of client entertainment on its
effectiveness in facilitating exchange relationships. The paper concludes by outlining its
practical and research implications.
PAGE 614 jJOURNAL OF ASIA BUSINESS STUDIES jVOL. 12 NO. 4 2018

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