The Lure of China and Economic Activism

I wonder what do you think about Google’s decision to confront China’s censorship by pulling out of the country entirely despite a potential lost of profit for not doing its business with now the second largest economy in the word? A Google's engineer that I talked to over the weekend seemed to struggle in making up his mind about pros and cons of the decision. From a business standpoint, Google’s behavior appears to go against the conscience of self-interest business practice. Even the Economist this week reminds us “the only thing more dangerous than dealing with China is not dealing with it.” Be that as it may, should the world be blindly consumed and guided by corporate profits? In its article, the Economist prescribed two clear rules in doing business with China

The first is that companies need to show an almost exaggerated respect for China’s traditions: the Chinese are simultaneously immensely proud of their history and highly suspicious of foreigners who, in their view, have repeatedly mistreated them. This means making a long-term bet on the country. P&G took three years to become profitable in China. L’Oreal took nine. KFC spent ten years perfecting its business model before becoming the powerhouse that it now is, with restaurants in 450 cities. It also means investing heavily in politicking. Stanley Wong, head of Standard Chartered’s Chinese operations, reckons that multinationals’ senior representatives in China must spend 30-40% of their time buttering up officials and regulators.

The second rule is that companies should never abandon their principles for short-term gains. Freedom of information is so central to Google’s identity that it was right to declare it sacrosanct and repudiate its previous willingness to negotiate it away for commercial advantage. Although the Chinese government may not accept such intransigence, as in Google’s case, the odds are better if firms slavishly follow the first rule.

That is a price worth paying. There is growing evidence that the Chinese market is living up to its promise...

The author seems as confused as the rest of the world in dealing with China.  I found the recommendation circular and deficient with unclear direction. As to the first advice, it is fundamentally flawed on both economic and governance standpoints.

With the lure of China, increased market competition would naturally result in amounting investment risk. With time, probability of larger returns of profit for latecomers is less likely as domestic market matures. If it took 10 years for KFC to make a profit in China, it would have taken other fast food chains much longer to penetrate and be successful in Chinese fast food market given the presence of successful first comers such as a big multinational fast-food giant like KFC. In a complex market as China, embedded in investment risks are ambiguous rule of law, widespread corruption and unspoken customary business practices. At the result, increase of competition among foreign investors in the long term could subsequently equate with higher risk of failure, not success. The fact that some first comers had succeeded in the past makes it less likely to replicate. Certainly, business diversification is also a part of many investor’s business model, but a guarantee of a long-term investment is almost nonexistent, counter to want the article hinted, and potential long-term financial loss is just as readily at hand.

Furthermore, at the current rapid speed of technology and copyrights infringement in China, unconditional acceptance of the Chinese Inc.’s policies could hardly benefit foreign investment in the long term. Don’t get me wrong, I do not deny that acquisitions of new advanced technology is vital for Chinese development particularly in the context of a transitional economy. However, from a perspective of a foreign investors who potentially will provide China with financial, management and technological resources, blindfold compliance of such uncontrollable infringement (intentional or not) not only hurts foreign investors in the short term but also risks long-term profits as foreign resources are diffused to local entrepreneurs. The trade off between the providence of advanced technology and economic benefits must happen at the government level so that the benefits would be guaranteed instead of be estimated with vague speculation. For the time being, such trade offs appears grossly inadequate.

The Economist’s advice is also flawed on the level of global governance. Under the veil of diplomacy, economic exchange is the main driver of international relations.  Therefore, analysts and consumers should be mindful that what is benefiting multinationals sometimes does not align with what is best for global economy and international stability. An over-evaluation of China’s potentials, which subsequently justifies Chinese business practices, as the Economist argued, is inconsistent with our goal of maintaining global balance and promoting economic growth.

It is ill-advised to tolerate a country that is being treated at equal with the rich world for its economic power, and yet lacks governmental providence of non-corrupted, non-infringed, equal and fair business practice. Such disparity fails to warrant political and legal stability necessary for both business success and global balance.

China will stay a demanding business partner if foreign investors bow to its power and maintain absolute acceptance of the Middle Kingdom’s governing policies. Economic activism should not stop at organization and corporate level. In the face of an increasingly integrated global economy, economic activism must encompass countries and their political alignments to ensure fundamental rights and business equality are acknowledged and protected.

Edit: as this post is being written, the Financial Times today provides further insights into foreign investor’s frustration over China's new protectionist measures.

--Image by the Economist

 

Comments

[PeterD]

Google wasn't dominating the Chinese market, and likely wasn't making much of a profit, so their change of tact may not be that much of a risk after all. They reduce their potential upside by going against the government, but perhaps they didn't see it is a large upside after all.

[Christine Ngo]

Hi Peter,

I take that Google's decision is a symbolic act. The CEO of the company in an interview explained that Chinese government’s requirement that Google had had to sensor itself before information was given to Chinese consumer was inconsistent with the mission of the company. In fact, Google had been heavily criticized with its compliance in the past.

I suspect it would only take a small change in event such as some changes in the legal environment or another re-settlement with the Chinese government for the company to re-enter into Chinese market again. At this point, I wouldn't assume that Google is out of China for good.

This leads me to conclude that Google's decision to contest's Chinese government's censorship an important act of economic activism.

I hope you're well. Congrats on the new business venture!

Christine

[Dan Hull]

Travis, et al. When are you guys going to rev this little gem back up? It has/had class. I miss it.