China Law Blog

To say who is right requires knowing the goal of the organization.

If the goal is to be established long term, then register, pay taxes, be nice to your employees, and don't misrepresent your products.

If the goal is to be an opportunist for only as long as the "gettin is good", and make a run for the border the minute the ""gettin ain't so good", then by all means.. do nothing more than exploit, extract, and deceive your way through the market "like a local".

Of course, any personal investments made will be lost, employees will be out of a job (perhaps arrested), and the company will never be able to return to the country ... but why should that stop any firm from shucking open that oyster which is rightfully theirs for the taking?

I believe that you are right.

What behaviour does he advocate to American companies operating in America?
I presume he believes that they should follow the law.

What constitutes an emerging economy?
Does he believe that only 'emerged economies' have laws that should be respected?

It's very simple, if you want to do business in a country follow the laws of that country; whatever your opinion of them or the country.

And if you don't like that idea, do business somewhere with laws you do like!

If you are going to play like the locals, do it behind a local facade. It will allow you to play on an even field in that country, and if the operation is well disconnected from your real firm it will avoid problems down the road.

Better use/create some kind of mercenary/corsair firma for the task.

Tough issue for businesses to tackle, particularly in a place like China. In my opinion, if you're going to conduct business in another country, it is best to follow the laws of both that country as well as those established by your own country. While this may limit chances for financial gain in the initial stages- particularly in places where bribes are often the price of entry to a deal- it is just not worth the personal and professional risk over the long-term. When is a "successful" transaction worth jail time, a tarnished reputation and/or lifelong unemployment? Dan, you also point out a very important factor: foreign companies are going to be more susceptible to being targeted overseas. This is becoming more and more true- companies being investigated for FCPA violations this year exceeded those in 2008 by about 20 percent last I checked (probably higher now?) As we know, China has issued a major crackdown on corruption activities and it's pretty safe to bet that Chinese companies aren't going to be the only ones making headlines. I say suck it up, follow the rules, and lead by example. If an individual or company chooses not to, they should be prepared to face potential unpleasant repercussions. But then again, greed tends to triumph over reason.

Dan -

Good post, and not an uncommon debate. As you know, nothing involving China, nor most other developing economies is Absolute or Black and White.

My views come from my experiences as a Western company operator in China in several different businesses. It is definitely important for Western companies to obey local law, but it is also important to realize that many laws are contradictory, they are evolving and changing continuously, and as you have noted enforcement is largely discretionary. Due to the complexities of local law, you must realize that even if you go out of your way to follow the letter of every law, if the PRC or local district authorities want to get you on something, they will. It is for this reason important to realize that the most important thing is GuanXi and maintaining very good relationships with your local government authorities. This does not mean bribing them, but it means showing them the utmost respect and spending time getting to know them in a non-business setting and helping them to understand what is important for your company and trying to understand the directions and desires of their agencies so that you can be helpful however possible.

If you are friendly and respectful with your local authorities and do your best to obey the laws, they will help you understand which areas of local regulations have flexibility or interpretation opportunities which can be mutually beneficial for both parties.

Yes, you will probably also have a local competitor who stretches the regulations farther than you, gaining some perceived competitive advantage. But you don't really want to compete at that level, do you? It's entirely possible to be a legal, competitive entity in China if you pay attention to relationships and regulations and be proactive with the local authorities.

best,

@JeffreyJDavis
President & COO, AGY

It is too much to the extreme, "Bribe Everyone, Pay No Taxes, Break the Law" but have to agree with you... to certain extend. Do you know any where else in this world which is working differently? I am all ears...

I thought from the title you were going to talk about American financial firms.

Has he done business in "places like China" or has he done any business in China?

If his business experience is in Mexico, Indonesia, and Russia and never set foot in China, I don't see why any of his beliefs should be applicable at all. One reason that US businesses like doing business in China is that for an emerging market, it has a very strong and efficient legal system, and attitudes toward foreign businesses in China can be very different from attitudes in places like the Middle East or Latin America.

One thing that gives US companies a very strong advantage in China as opposed to the Middle East and Latin America, is that Chinese tend to have very favorable opinions of US multinationals. I have a strong sense that if you ask college educated Chinese to agree/disagree with the statement "US multinationals are clean and uncorrupt and are a positive economic force" you'll find many more people agreeing with the statement in China than in Mexico.

I think the issue here is that "places like China" aren't very much like China at all.

A foreign business cannot compete like a local business, because a foreign business simply is not a local business. Even *if* being local gives you a business advantage, you have to worry about things like the FCPA and the US press.

Ironically, I think the answer here is "go local." And local in China is very different from local in Mexico, or local in the Philiphines.

If you are living in China and starting a small, cottage business, then go local. You'll be regarded as a chump otherwise, and you'll be far less likely to succeed. Once you attain a certain size and level of success, you can adjust to a more "straight laced" way of doing things.

But if you're an established firm who is moving into China, then I'd agree that you are better off if you stay within all applicable laws.

Allroads,

Agree on all counts.

UK Visa,

Of course, I agree with you. This lawyer is in a country that I see as more corrupt than China in the way it deals with foreign business.

ecodelta,

How can a foreign company even hope to truly play like a local?

Aimee,

You raise a good point about how foreign companies need to consider the laws (and even their reputation) in their home country as well.

In my experience it is greed that causes the corner cutting, but also, in my experience, those who cut corners almost always end up making less than they actually would have had they done things the right way from inception.

JeffreyJDavis,

I concur. Acting legally does not mean doing one's best to maintain good relations with the authorities. In fact, it is important that one do so BEFORE problems arise. If the authorities know you and know your business and know your business is good for the area and good for China, you have accomplished a lot.

Jessie Luo,

I put countries on a continuum on these things and I actually think China is not all that bad. It is not as "smooth" as the United States or Germany or even Spain, but it is a lot "smoother" than many countries of which I am familiar.

Pete,

And one in particular, right?

Dan, another useful and challenging post. In reality, China is not a difficult place to operate within the law. As a Legal Rep of our companies enterprises in China for 10 years, I've never paid or authorised a bribe, secret commission of anything of that ilk.

The distinction between 'localising' and obeying the law is not that absolute. Chinese enterprises are also under great pressure to comply with a raft of taxation, labour, environmental and other laws. Localising is an inevitable trend for all enterprises looking for success in the PRC market. That requires employing and developing local talent, getting rid of the expat overhead, bringing your operations closer to market and so on. It does not involve bribery of Govt officials or secret commissions to business partners staff.

Yes the tax and social insurance load for compliant enterprises is indeed very heavy in China. For enterprises the lessons from this are either to avoid tax and labour obligations or to achieve the efficiences and return on investment from every staff member to ensure the business can pay for all this and remain profitable and growing. I prefer the latter and it offers a genuine long term prospect of growth and success.

Legalising our China operations in all respects has been exhausting, difficult and expensive. However, along the way, we have more than tripled our China business, can relax about potential labour issues as we are HR compliant, and can sleep well at night. We can also genuinely focus on strategies for growth and new businesses. Our competitors are, no doubt, constantly worried that their next step may trigger unwanted and dangerous scrutiny from authorities.

TwoFish,

He has actually done a fair amount of business in China, but he is like everyone in that he goes into a country heavily biased by modes of operation from within his own.

You are right though that China is actually quite good in its treatment of foreign companies (much, much better than some other countries in which I have "operated"). My firm have done hundreds of registrations in China(of companies, of licenses, of IP, etc.) without ONCE being asked for anything. Not once. And that certainly is NOT true of many other countries, including many other countries where we have done fewer registrations.

US and EU companies are fully capable of the worst kinds of corruption. Of course, we've seen the results throughout the late 60s to the mid 80s (as well as the entire 1800s to the early 1900s).

The results were authoritarian corporate puppets who ran their countries into the ground so their families and friends could enjoy the good life.

Though it is probably true that you can't help but get a bit dirty in these kinds of countries, it is better to use the Chinese strategy of "the borrowed sword". Team up with a local company and let them do the dirty work. You can't be held responsible for locals acting locally. Though you may be held up as a scapegoat ie the infamous Haagen Daaz subcontracted ice cream incident.

But I would also say that foreign companies will always be held to a higher standard than the locals and by acting in a law abiding manner, will attract the admiration of most for respecting domestic laws and not being an "ugly foreigner".

Susan,

I might have agreed with you if I had not seen so many companies fail to switch from illegal to legal in time. My firm has been contacted by many companies after they were caught and in most of those instances, we were either too late to fix things or it took a heckuva lot of time and money to do so.

Also, just this year, the Chinese government has really stepped up its tax enforcement, particularly against foreign companies and particularly against foreign companies not operating on the up and up. In light of that, I think the strategy you espouse has become even more dangerous. Just a week or so ago, someone I know got caught and had to leave China because of it. How did I know this person? Because he had been "thinking" about going legal for quite some time and had spoken with me about doing so.

I believe you are right. It is true that enforcing laws in China nowadays is very difficult. It is true that many local companies and corporations in China try to find ways to get by the laws. However, this does not give excuses to American companies not to obey the laws set up by the government. China is going through a period sort like the 1900s in America when companies tried to get by the laws when doing business. It takes time to change. Most importantly, the Chinese government sticks to reform and rule of law. Give them time and we will see changes.

Chris,

In other words, you did in China what I presume you do or would do in your home country, which is build up an enterprise that is at virtually no risk of being shut down with one knock on the door. I love how you describe it, from how difficult it was to how good it feels.

You have my kudos.

Greg,

I agree with your advice generally, but oftentimes companies have very good reasons for wanting to go into China without any truly local partners.

You are absolutely right about how foreign companies are held to a higher standard. I think that is true just about everywhere.

Sir,

Regarding this passage:

I might have agreed with you if I had not seen so many companies fail to switch from illegal to legal in time.

You're sure it's not selection bias?

Dan,

For arguments sake, if we assume your international lawyer friend is right, that American companies follow government law of a foreign country and the local business in places such as China do not, where is your friend's information coming from? Can he prove that more often than not local companies are evading the law via bribes and payoffs, and that American counterparts follow the law "to the 'T'?"

Pak Ng,

I agree. What I find so interesting is that the companies that are not following the law seem to think the China of today is the China of five years ago and that because they know someone who got away with it a few years ago, they too can get away with it. The reality is that the China of today for foreign business is different even than the China of one year ago. Enforcement, particularly in terms of taxes is way way up.

Inst,

There is selection bias. Without a doubt, my firm is well positioned to hear of companies that get caught. But be that as it may, we hear of a lot of them and that means things are happening. And I would have to say that these shutdowns and raids were increasing at a fairly steady pace, but they really accelerated with the economic downturn and they have not ceased. My sense is that the government feels it has to crack down on illegal foreign business to justify to the populace why it is allowing foreign business at all, in these tough times. Now I know you can say China's economy is thriving right now, and it is, but things did absolutely change in this respect at the downturn.

Zach,

Neither of us can really prove much of anything on this, but what I think he is really talking about is more the paying of taxes (particularly employment taxes) than anything else.

My friend would always complain about taxes in his country, which were, in some cases truly absurdly high. But after taxes were considerably reformed, I asked him if his firm was now going to report all of its income to the tax authorities. His response was that to do so would be silly and he proceeded to tell me that even if the tax authorities would stand by their word and only take the new percentage (without increasing it again a year later), he could not let them know the firm's real income because it would mean other government agencies and "others" would hit them up for more. This is the thinking that goes on in many countries and it will take generations to change.

Another story I always tell is how I represented a company in the United States whose owner was and is a good friend of mine. The case was going on forever and finally the other side agreed we would arbitrate. I told my friend I would do the whole arbitration for a $10,000 flat fee and he jumped at it. The whole point of the arbitration (for my client) was to get some critical documents that were in a US police station (it's a very long story how they got there. Anyway, the police had said that if our case were not resolved within six months, they would give up the documents. So on the morning of the sixth month, I got up super early, put on my best suit and went to the police station and walked out of there with the documents, then shipped them out that very same day via overnight courier to my client. To this day, he is convinced I used the $10,000 to bribe the police because something like this would be inconceivable in his country.

It is hard for anyone to really grasp that things can be so different in a foreign country when they believe these things are the way they are due to human nature and, to a large extent they are right. But that's what law is all about -- to keep us all in check.

Obey the rules...You are right, you are more visible in a foreign country and in China - they don't want you to succeed.

Dan,

Totally agree with your point of view.

I don't think anyone has clearly made the point that foreign companies are expected to play a certain role in China - my feeling is that they are looked upon to set the bar in areas such as product quality, treatment of staff, environmental issues, etc. Foreign companies risk PR disasters when sensitive and hard-to-predict public opinion turns against a company which may be doing its best in a tricky situation, for example the SKII incident in late 2006. Crucially, foreign companies are not judged by Chinese standards, they are judged by international standards.

PR disasters very rapidly become commercial disasters, so I'm with you all the way that a company which is trying to establish a brand and reputation in China needs to not only comply, but on occasion, go beyond what is legally expected of it.

As Twofish points out, paradoxically, that is 'going local', because it is meeting and hopefully exceeding the expectations from the Chinese point of view, in the full knowledge that these expectations are different to those placed on local companies.

Your lawyer friend may make money in China, but is he trusted and respected? Being respected may not matter to him now, but it may make the difference in a situation where all other things are equal. And, it does seem perfectly possible to make money according to the rules, so what is the big incentive to break them?

One other reason that you need to be careful is that there are often extremely local arcane rules for what can be "bent" and what can't be.

People in the US that think nothing about downloading MP3's or paying a nanny under the table would be aghast if you park in a handicapped spot or violate a no smoking ordinance.

Similarly, there appears to be a lot of non-compliance with sales tax, immigration, and social security payments among locally owner-owned restaurants in NYC, but that doesn't mean you can get away with ignoring health code violations.

Also the fact that the Chinatown Chinese restaurant appears to be getting away with immigration and tax non-compliance doesn't mean that a major multinational chain can get away with it. If a multinational chain can't "go local" on Canal Street, then forget about Shanghai.

One thing that makes multinationals vulnerable is that they have deep pockets. If you have a small local business, and the authorities shut you down, you lose your inventory, but you can leave town and set up shop elsewhere. If you have deep pockets and you are stuck, this becomes less of an option.

I don't see what's the difference between what they are doing in here in the US.

http://www.foxnews.com/story/0,2933,575291,00.html

Recently, there was a fight where Pfizer got major tax concessions in New London CT to build their research center there. They even got the city to help them to knock down some houses for them under the 'Eminent Domain' laws so that Pfizer can expand their office. But the recession hit, Pfizer left altogether when the tax concessions expired.