Relation-based governance has helped China to achieve rapid economic growth in its early stage; however, continuing to rely on it may hinder China's further development. The research question is: given China's cultural heritage and other institutional settings, will China be able to transition from relation-based to rule-based governance?
I discuss this question based on theoretical and empirical evidence and conclude that, first, from cost/benefit and social justice perspectives, China must complete the transition; second, cultural heritage is not the main obstacle to the transition, for the main obstacle is the powerful political forces that have been deeply entrenched in and benefited from the relation-based system.
I distinguish between the governance environment at the national level and the governance choice at the organizational and individual levels. The governance environment – the set of dominant political, economic, social, and cultural institutions – facilitates and constrains the choice of the mode of governance (e.g., rule-based versus relation-based).
Chinese government officials must realize the inevitability of the transition and the dire consequences of not completing it and take initiative to pursue the transition peacefully. For businesses, they must realize that the relation-based way may be in decline and must be prepared to embrace the rule-based way.