China FAQ

Q1: How Stable is China economically and politically?
Q2: How can I protect my intellectual property in China?
Q3: I have heard that bribery and corruption in China are difficult to avoid. Is this true, and what advice do you have for the American person doing business there?
Q4: What hurdles do American businesswomen face in doing business with the Chinese?
Q5: How can I recruit and keep qualified Chinese staff at our facility in China? I have heard that it is very difficult.
Q6: What is the best type of investment in China: joint venture, wholly-owned subsidiary, or other?

Question 1:
How Stable is China economically and politically?

This is a difficult question to answer. On the one hand China has an impressive track record for overall economic development, averaging roughly 9% annual Gross Domestic Product ( GDP ) growth for over a decade. In the key regional markets of China – the Pearl River Delta, the Yangtze River Delta (greater Shanghai area), and the Beijing/Tianjin area – per capita income has soared 10% – 15% per year since 1980. On the other hand, this economic growth is uneven. Much of China’s peasant farming population is losing economic ground, and feels increasingly disenfranchised. Because peasant farmers number about 700-800 million people, this presents a formidable challenge to China’s central and regional policy makers. The next five years will likely demonstrate how serious the Chinese government is about paying more attention to the needs of this unhappy and impoverished majority.

For the moment, China appears relatively stable politically. In September of 2004 Jiang Zemin resigned his post as Chairman of the Chinese Military Commission, allowing Hu Jin Tao to further consolidate power. Beijing remains committed to economic liberalization and to implementing WTO reforms. But while the political picture in Beijing is gradually becoming less murky, the provincial and municipal governments are growing more independent.

Section I of our Inside Chinese Business course, Chinese Business Culture, covers this topic in greater detail with specific strategies and advice for American firms.

Question 2:
How can I protect my intellectual property in China?

Protection for intellectual property (IP) in China is weak by international standards. Counterfeiting is rampant. Ionis International clients have shared many stories of products being flagrantly copied in China: everything from motor oil to tractor parts to baby bathtubs. First of all, China is a developing country with little of its own intellectual property to protect, and therefore has less incentive to vigorously enforce international IP standards than do more developed nations. Secondly, China is a socialist nation, where collective ownership has been the standard for decades. The concept that a firm can own an idea is foreign and illogical to many Chinese. Third, China lacks a mature legal system; laws and regulations are open to interpretation by local authorities, many of whom will personally benefit from corruption of the system. Although we know of Western firms operating in China who have successfully prosecuted counterfeiters, the process is slow and expensive. In many cases, the perpetrators are government-owned companies ad so the government courts may not be helpful. A potentially more successful strategy is to co-opt the counterfeiter by pressuring the firm to license the technology from you, and thereby legalize their business. Other firms try to protect technology by establishing wholly-owned operations for manufacturing, rather than a joint-venture with a Chinese firm (this is not possible in all sectors of the economy). This strategy provides more control over intellectual property. The best advice is: don't be naive. You should anticipate that your product or technology will be copied illegally, and therefore need to be very careful with patents and copyrights.

A related concern is industrial espionage. We know of many, many cases where Western business people have had data stolen from laptop computers, had phone calls and faxes monitored, and had hotel rooms and luggage searched. The problem seems to be worse in high-tech businesses. You should sanitize all computers and documents before they are carried into China, and assume all phone and fax communication is monitored. As a 'countermeasure', establish codes to use when communicating with the U.S. during negotiations with Chinese organizations. We know this sounds extreme, but it is better to be safe than sorry.

Section II of our Inside Chinese Business course, on The Chinese Company, covers this topic in greater detail with specific strategies and advice for American firms.

Question 3:
I have heard that bribery and corruption in China are difficult to avoid. Is this true, and what advice do you have for the American person doing business there?

American firms building business relationships in the People's Republic of China should not be naive about the level of corruption, but should also realize that some practices such as gift-giving, which can seem inappropriate to Americans, may be well within the bounds of ethical business practices in China. For example: an American managing a U.S. subsidiary in China occasionally lends his Jeep to the local customs officials on the weekends. These officials have authority over deciding what the import duty will be on the American firm's industrial machinery. These officials are also personal friends of the American manager, with whom he often goes bowling. Is this corrupt? Maybe. Is this an example of building personal connections (guanxi) that are useful in business? Absolutely. Would this behavior be within your company's policies? This particular case is open for debate perhaps, as are many that you might experience in China, but other situations are not. Often local officials expect, and maybe even request, cash payments for consideration of special favors or to speed approvals. This is clear-cut bribery, and U.S. firms are forbidden from participating by the Foreign Corrupt Practices Act (FCPA). Because many other countries allow (and in some instances even permit tax deductions for ) the payment of bribes, American companies may appear to be at a competitive disadvantage, but it appears that international laws are gradually shifting towards the U.S. position. Our advice is: do not violate the FCPA, but do work to build guanxi with local officials and other business interests in China.

Section II of our Inside Chinese Business course, on The Chinese Company, covers this topic in greater detail with specific strategies and advice for American firms.

Question 4:
What hurdles do American businesswomen face in doing business
with the Chinese?

American firms building business relationships in the People's Republic of China should not be naive about the level of corruption, but should also realize that some practices such as gift-giving, which can seem inappropriate to Americans, may be well within the bounds of ethical business practices in China. For example: an American managing a U.S. subsidiary in China occasionally lends his Jeep to the local customs officials on the weekends. These officials have authority over deciding what the import duty will be on the American firm's industrial machinery. These officials are also personal friends of the American manager, with whom he often goes bowling. Is this corrupt? Maybe. Is this an example of building personal connections (guanxi) that are useful in business? Absolutely. Would this behavior be within your company's policies? This particular case is open for debate, as are many that you might experience in China, but other situations are not. Some local officials expect, and maybe even request, cash payments for consideration of special favors or to speed approvals. This is a clear-cut violation of the Foreign Corrupt Practices Act (FCPA). Our advice is: do not violate the FCPA, but do work to build guanxi with local officials and other business interests in China.

Section II of our Inside Chinese Business course, on The Chinese Company, covers this topic in greater detail with specific strategies and advice for American firms.

Question 5:
How can I recruit and keep qualified Chinese staff at our facility in China? I have heard that it is very difficult.

Developing a stable, competent workforce is one of the critical issues for foreign companies operating in China. Although a huge pool of unskilled and semi-skilled labor is available, skilled labor and professional managers are at a premium. Many technology firms are scrambling to find enough electrical engineers, finance managers, and the like. In the booming coastal provinces, poaching of employees is common and salaries have been spiraling upward. Some successful tactics include: providing on-going training and advancement for local Chinese hires, providing subsidized housing loans that are forgiven after a certain number of years of service, and providing opportunities for overseas training and other perks. For long-term sources of professional employees, companies establish relationships with university professors, and hire a few graduates every year through this channel. Many foreign firms use expatriate managers – often from Singapore, Hong Kong, or Taiwan – who speak Mandarin and understand the culture. Local Chinese hires, however, often resent these overseas Chinese, whose salaries range from ten to thirty times higher than their own.

Section II of our Inside Chinese Business course, on The Chinese Company, covers this topic in greater detail with specific strategies and advice for American firms.

Question 6:
What is the best type of investment in China: joint venture, wholly-owned subsidiary, or other?

The answer depends upon the industry, the size of the enterprise, and how much money you are willing to invest. The most common investment route for Western firms used to be an Equity Joint Venture (EJV) with a Chinese company, usually a State-Owned Enterprise ( SOE ). The advantage of this approach is that your partner can usually provide a building, or a site to build on, manpower, connections for gaining approval, and sometimes capital financing. The disadvantage is that you have less control over manufacturing and technology, and are sometimes stuck if the Chinese partner is not able to perform up to your expectations. In 2004, Wholly Foreign-Owned Enterprises (WFOEs) are the most popular investment choice for foreign firms, but are limited to certain industries. Some large Western firms such as Motorola have successfully launched manufacturing ventures in this manner, and can more easily control technology and quality. Because you are starting from scratch, however, gaining approvals, finding a legal building site, and hiring competent workers can be challenging.

Section I of our Inside Chinese Business course, on The Chinese Company, covers this topic in greater detail with specific strategies and advice for American firms.

 
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