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The Economic Benefits of the Use of Guanxi and Business Networks in a Jurisdiction with Strong Formal Institutions: Minimisation of Taxation

eJournal of Tax Research, Vol. 6, No. 1, pp. 45-66, 2008

Posted: 30 Jun 2008  

Nolan Sharkey

University of Western Australia - Faculty of Law

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Abstract

Why rely on informal institutions when conducting business? Because it leads to a greater economic return The current academic status quo on the use of guanxi and business networks by Chinese entrepreneurs in both China, South East Asia and beyond is that it is a response to the weak formal institutional environment. It is argued that weak institutional environments create an economic rationale for the use of guanxi and business networks. From this base, it is further asserted that the use of guanxi and business networks will reduce and disappear with the strengthening of formal institutions in China and other jurisdictions. This paper will challenge this latter assertion by arguing that there are strong economic benefits to those that are able to operate through guanxi and business networks in a jurisdiction with strong formal institutions. The primary benefit that will be examined is the reduction or elimination of business taxation which is a very significant issue in most jurisdictions with strong institutional environments. This paper will demonstrate how guanxi and business networks can be used to avoid taxation in the strong formal institutional environment such as that represented by Australia.

Keywords: taxation, guanxi, business, China

JEL Classification: H26

Suggested Citation

Sharkey, Nolan, The Economic Benefits of the Use of Guanxi and Business Networks in a Jurisdiction with Strong Formal Institutions: Minimisation of Taxation. eJournal of Tax Research, Vol. 6, No. 1, pp. 45-66, 2008. Available at SSRN: https://ssrn.com/abstract=1153167

Nolan Sharkey (Contact Author)

University of Western Australia - Faculty of Law ( email )

M253
35 Stirling Highway
Crawley, Western Australia 6009
Australia

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