In the three decades since the People’s Republic of China began migrating toward a market-based economy, China’s Gross Domestic Product (GDP) has increased by an average of nearly 10 percent a year. In addition, the average income in China has increased by eight percent over the same time period. China’s $3.42 trillion GDP is the third largest in the world, having overtaken Germany just last year. China’s economic liberalization has created dazzling opportunities for American companies looking overseas, but doing business with China is not without peril.

For instance, China’s legal and court systems are still maturing and lack experience and consistency regarding business law. This creates greater risk for companies looking to invest in China. Many U.S. companies are often forced to rely on their own government or the World Trade Organization for legal protection—and even that may not be enough.

Just ask David Ji, founder and CEO of Apex Digital, an American company in southern California, who was detained without charge several years ago while visiting China on business. One of Apex’s Chinese suppliers accused the company of fraud. Rather than resolving such a commercial dispute through ordinary channels, the Chinese company used its government connections to have Ji, an ethnic Chinese, arrested. As U.S. Ambassador Clark T. Randt, Jr. said, when discussing the case of Ji, “Rule of law? That’s a stretch.”

Business risk in China

The overbearing hand of the Chinese government is always a potential obstacle. Because all investments require government approval, U.S. companies often face unexpected delays in closing deals with their Chinese counterparts. The government’s total control over information means American companies may not have access to all the information they require. American businesses must engage China with a clear understanding of what they are getting into, while at the same time having flexible plans. One common mistake is to board a flight for China and assume that a deal will be signed by the return trip. In China—as in many Asian countries—patience is a virtue, and Americans capable of walking away when the terms of an agreement are not to their liking are usually rewarded in future dealings.

Intellectual property theft

Intellectual property theft is also rampant in China: 72 percent of all counterfeit goods seized by U.S. Customs agents in 2006 originated there. While companies have reason to be wary of the specter of pilfered corporate secrets, unlicensed counterfeit merchandize and misrepresented corporate information and services, there are measures they can take to protect themselves. China has comparable trademark laws to the United States. Trademarks can be registered and are usually granted a 10 or 20 year patent (depending on the trademark). These patents are easily renewable and offer protection in the form of royalty fees or legal recourse. In addition, international pressure has forced the Chinese government to regularly crack down on intellectual property theft.

Corruption

The murky waters of corruption in China present another potential roadblock. Because of the personal nature of Chinese business relationships, the line between a friendly gesture and bribery can appear blurred. While China has strict laws covering both commercial and government bribery, so-called “grease payments” are allowed with much more than just a wink and a nod. Grease payments are nominal payments to achieve a non-discretionary goal, such as a remuneration to fast-track a visa. However, many companies forbid their employees from engaging in this practice, because grease payments can quickly escalate into outright bribes. In addition, American companies are governed by the Foreign Corrupt Practices Act (FCPA), a federal law that bars American citizens from bribing foreign officials

Recommendations

Before even considering doing business in China, companies should assemble a negotiating team with a targeted strategy. Patience and understanding of the cultural differences will help companies adjust when deals do not get finished on their preferred timetables. China watchers often suggest creating an internal office to prepare your company for investment in China by educating employees about Chinese culture. Investing in adequate directors and operators (D&O) insurance and sound legal counsel is a necessity. By making the requisite preparations while managing expectations, U.S. companies can gain a leg up on competitors looking to invest and do business in China.

RESOURCES:

  1. “Held Hostage In China.” By Stephane Fitch. Forbes. Nov. 14, 2005.
  2. The U.S. China Business Council: http://www.uschina.org.
  3. The American Chamber of Commerce in the PRC: http://www.amchamchina.org