Understanding the Rules of the Game for Doing Business in China


There are significant hurdles to doing business in China. But with a population over 1.4 billion people, the Chinese marketplace is one that rightfully attracts attention from those interested in doing business abroad.

If your business does not quality as a “small entity” at the USPTO, then you absolutely should be doing business in China. But if you own a truly small business or start-up company, you almost certainly do not have the resources necessary to be doing business in China in a proper and responsible way. Where the threshold is between too small for China and too big not to be doing business in China is hard to say, but it is fair to say that all businesses of all sizes should at least investigate the realities of doing business in China and have a China strategy in place.

One of the real challenges for truly small businesses is that in order to do business in China, you really must have an employee in place in China on a permanent basis. Some companies engaging in business in China will place a permanent employee in China, and others will share the responsibility, with an individual employee spending a certain amount of time in the country, to be replaced by another employee when they leave. This would obviously be most workable if there is a rotation between responsible employees. Always having someone new arrive for a “tour” in China would mean that the employee was always working to catch up with local customs and establish business relations. Whatever way you choose to operate, having someone on the ground in China is essential because you have someone in place to handle the inevitable problems that will arise.

Last Fall at a program at the University of Toledo College of Law, Professor Ann Bartow, of Pace Law School, spoke about consumer privacy in China. Bartow was a Fulbright Scholar who spent time teaching at a law school in China. She explained that one of the first things you notice upon arriving in China is just how slow the Internet operates. It isn’t slow due to lack of sophisticated technology, but rather as the result of filtering software. All Internet traffic in China must go through censoring filters. 

On top of filtered Internet and snooping to see what people are accessing on the Internet, Bartow and many others commented on the reality that when you travel to China, you absolutely cannot use your own cell phone. “Phone use is audited,” Bartow explained. “Everyone knows this, but that does present business problems.” On top of that, hackers have been known to access smartphones, placing viruses on those phones, which scrape all kinds of personal information and data, including back account numbers and passwords. Over and over again, speakers explained that you “must have a China only phone,” which you only use to talk on the phone in China and doesn’t contain any personal information.

In addition to privacy concerns, the rules of the game for operating within the Chinese market favor local Chinese companies and disadvantage foreign corporations. For example, for foreign businesses coming into China, the country’s joint venture rule can significantly increase the costs of doing business in the country. For example, the impacts of joint venture rules as they relate to technology transfer from foreign companies to domestic Chinese companies is a significant hurdle that could easily cause real harm. Foreign companies operating in China are forced to operate as 50-50 joint ventures with domestic companies. The transfer of technology is also a part of the price for entering the Chinese market going back to the early 1980s. While the practice of requiring technology transfer runs afoul of the rules and regulations of the World Trade Organization, it is still nevertheless very real.

A recent policy paper published by the Federal Reserve Bank of Minneapolis explains that private firms are dissuaded from speaking out publicly about negotiations while entering the Chinese market and the Chinese government stands to gain by letting the system continue as it has in the past. The paper concludes that the technology transfer requirements have hurt foreign investment from multinational firms. Of course, many predict that as China’s market matures and greater domestic innovation needs to be protected, the laws will change. This is reasonable to assume because it was the U.S. experience over 100 years ago. On this point the paper concludes:

As China becomes richer, and its technology advances, the incentives underlying its existing policies may change. China will then have greater motivation to promote the protection of intellectual property.

Still, in the meantime while we wait for the Chinese marketplace to mature, the joint venture and technology transfer requirements are particularly alarming given the lack of respect paid to American patent rights by Chinese firms. As the MIT Sloan Management Review points out, nearly 80 percent of all IP theft from U.S.-based firms during 2013 were perpetrated by parties based in China. Those thefts represented lost business of about $300 billion thanks to counterfeit products in the market.

The temptation to enter the Chinese market is very high, but businesses of all sizes need to carefully consider the potential consequences and not merely focus on the potential reward. A thoughtful, deliberate and calculated approach to doing business in China is required.

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