For days now, I have been planning to write a “moderate” post on the state of FDI in China. By moderate, I mean one between the “sky is falling down everyone flee now” lines being pitched by some (mostly those who are actually not involved in China) and those who are writing that everything is great, there are no problems, come one come all (mostly by those whose livelihoods either depend on foreign companies coming to China or on the CCP). My overarching theme was going to be that whatever you want to say about Google and Rio Tinto, the reality is that neither of them have much meaning for foreign direct investment (FDI) in China.
But David Wolf of Silicon Hutong has beaten me to it and, to add “insult” to injury, he did so by quoting my co-blogger, Steve Dickinson, in his post, entitled, “Some Overdue Balance on China and FDI“:

There has been of late no shortage of hand-wringing abuout the changing business climate in China, and some of that angst has targeted the matter of how and where the authorities are allowing foreign companies to invest.
The investment climate is changing, as we should expect as China’s economy and it’s relative position in the world evolves. It also means, as some commentators are apt to forget, that America’s door to Chinese FDI is not as open as we would like to think.
Steve Dickinson sums up the situation with dispassionate equanimity:

While potential investors may claim that China’s inward FDI policies are unfair, Steve Dickinson, an international lawyer working in China, argues that these are simply China’s laws and policies, which it has always been very clear on. It is just that these laws do not “fit with [the complainers’] idea of how China should be.”

He’s right, like it or not.

And that is the point. Google and Rio Tinto do NOT signal any change in China, they just highlight how things are, and they are not even all that instructive for that.
Let me explain.
When the Google thing started coming down, I started asking my people (including Steve) and my firm’s clients about Google. I asked whether they were talking about it in the context of their businesses and what impact they thought it would have on their businesses. Literally without exception, they told me they had not once talked about Google in the context of their own business. Some (surprisingly few, actually) had talked about it because they found it interesting, but they had not done so for business reasons. When I asked Steve about this, it was a few hours after speaking with a reporter who made it seem as though my downplaying Google’s impact on foreign business was to avoid having to talk on the record regarding Google. Steve threw it all back to me and said, something along the lines of, “come on, do you really think Boeing’s Board of Directors has just gotten together and said “in light of Google, should we be pulling out of China or do you think they are meeting to try to sell more into China?”
Rich Brubaker of All Roads Lead to China also did a great post on the state of foreign investment in China, entitled, “What is China’s Obligation to Make Firms Feel Comfortable?” Here are Richard’s money quotes:

[I]f you were to read the western press, one would think that it is the right of every global firm to enter China’s energy, food, information and resources markets on a “fair playing field” without thought or consideration of why China may or may not have a problem with such openness. Secondary to that, and regardless of whether or not one would believe China would have some sort of right to determine the level of openness and transparency around a market (or set of markets), I find it equally interesting that firms who enter those markets, and fail to crack them, feel little responsibility for owning up to their own failed strategy to try and penetrate a market that was so clearly being protected.
The fact is that, since 1979, China has had a very clear trajectory that it wished to follow, and that trajectory was not to open itself up in a manner that would wipe out domestic industries. Even if that is exactly what should have happened, and would have resulted in China”s best long term outcome, and that goes double for a number of core industries (defense, energy, food, etc). It was always a game where JV arrangements would be allowed so that the domestic partner could access the technology of the foreign party, and it was always the hope that through these relationships domestic enterprises would develop – even if that technology was 3rd generation. In many cases, and after a significant JV incubation period, the market would be opened, but again.. China was hoping that domestic competition would have developed to such a point where an all out routing would be avoided, and if possible, the domestic middle/ lower markets could be held (Chinese firms typically believed those to the be the best long term markets anyway)… and everyone in China knew this game was being played.

In other words, Google and Rio Tinto do not signal a change in China and if Google surprises you, then you simply were not looking hard enough (or at all). I completely agree, and so does Jess Conover in his post, “Why The Negativity?” [link no longer exists] over at Taikongron’s Advice Blog:

When has Chinese regulation been consistant? When have the judicial system of China worked well? Right now, China’s law system is more advanced than ever in China’s history. As fair and effective as in the United States? Does that question have to be asked?
The barriers have always been here [in China] and mostly they were worse in the past. Even the big issue… Google … is not about new regulation, despite what NYT and mainstream Western media says. Google was self-censoring for five years. There was no change in its environmental conditions during that time; only (maybe ) a change in Google’s expectations.
Yes, Western companies must achieve higher performance when it comes to EHS/EPA and labor relations issues. But, is that not a good thing? Is this not a reason for pride? Will this not grant a longer-term benefit?
Reports (including the Amcham survey) are saying US companies are feeling pressured to have local (China) IP in their offering, and/or transfer IP to China. Wow. Those Chinese bastards! I would be so appalled by this… if I didn’t know this has been the policy of China since the 1980s. Read Beijing Jeep, published in 1989, about that issue. Anyway, this is not such a big issue. Most companies only transfer their lowest-end IP to China, and in return they get big tax savings.
So…in my not-so-humble opinion, I believe the real issues are:
-That Chinese companies, in some industries, are almost as good as foreign counterparts…maybe even better. Chinese industrial customers are starting to understand that there is little premium value in having a circuit-breaker made by Siemens when a Chinese brand selling at lower price will do just fine.
-Some parts of the Chinese market are maturing; its not good enough just to be a foreign brand, a foreign company, a foreign manufacturer. And people know this..
-Many companies do very stupid things in China. Google is an example. Many of my customers are also examples. Well…nowadays, you can’t be stupid and survive in this market.
-The tax incentives given to foreign companies…which gave those companies an unfair advantage over locals… are ending.
And the biggest not-real issue? The narrative told by Western leaders and Western media about China. BTW, Rich Brubaker, at All Roads Lead To China, wrote a great post about this, asking, “[is it] China’s obligation to make firms feel comfortable across the board, or if it should have the right to hold up a flag that indicates a line that should not be crossed.. just as several US senators have done themselves.”

And where does Rio Tinto even fit into all this? It doesn’t.
Rio Tinto is NOT a “China is changing” issue. Rio Tinto is not a it is tougher to do business in China issue. Rio Tinto is not even a business issue. It is a criminal law issue relating to paying bribes. The takeaway from Rio Tinto is that you should not pay bribes and you should not pay bribes no matter who tells you that you should.
My take (and that of everyone who does business in China with whom I have talked on the issue — always me bringing it up) is that some employees of Rio Tinto are or were being charged bribery involving millions of dollars. Is that legal? Does anyone think that is legal? Now if you (like the hosts did to me when I went on Power Lunch the other day) are going to say either that “everyone does it” or that one “has” to do it to survive in China, I am going to respond by saying that virtually nobody does that and yet foreign companies are (for the most part) thriving in China. And then I am going to tell you (which is exactly what I tell my clients) that if you need to pay bribes to make money in China or take bribes to do business in China, then you really better think about whether it is worth it to you to risk going to jail for that. For more on that, check out the following:
The Foreign Corrupt Practices Act (FCPA) Wants You. Even If You Are In China.
Understanding China FCPA Risks. Who Is A Foreign Official?
The FCPA And China. Do I Need To Get All Loud On You?
The Foreign Corrupt Practices Act. Can You Say China Relevant?
China’s Anti-Bribery Laws Rising
Avoiding Chinese Jails. I’m Talkin’ To You.
What is happening in China is not so much new laws against foreigners or even an increase in the bias against foreigners (though I am not going to dispute that there has been an increase in the later, particularly in the areas of government procurement). What is happening in China is that China is stepping up enforcement of its laws, most of which are really quite sensible. I called this back in my beginning of the year post, entitled, “China’s Top 5 Business Law Trends For 2010” where the overall theme was stepped up law enforcement against foreign businesses. For more on how China is less interested in foreign business in China, check out “With China’s New Standing Come New Errors” [link no longer exists] and this just published, must-read, Business Week article, “China: Closing for Business?” (h/t China Challenges)
Google and Rio Tinto are huge issues and I do not mean to in any way downplay them, but they are not huge business issues for those doing business in China. Google and Rio Tinto will impact foreign businesses in and planning to go to China to the extent they will serve as reality checks for those who believed operating in China is no different from operating in Kansas. They do not signal some massive shift in Chinese government thinking regarding foreign investment.
FDI in China? It’s rising.
What do you think?
UPDATE: Just came across this great Evan Osnos quote from his Letters from China blog and his post, “Life Without Google” (h/t Jottings From The Granite Studio):

There is, however, a deeper, more troubling sensation. As Americans living in China at this moment in its history, many of us have fashioned an image of a country that is moving–in its own shambling pattern of fits and starts–toward something better for itself and the world. Sure, it thrashes around a lot along the way, but on many days it seems to end up a fraction of an inch closer to a better, healthier, more humane way of life. But this is not one of those days. A superpower that is willing to jettison a tool so central to life as a global citizen begins to look less like a calculatingly pragmatic steward of its people’s interests and more like an addled Goliath.

I am one of those who does believe China is moving forward, with a whole lot of ebbing and flowing, to a better, more humane, more rule of law centered, way of life. But with ebbs and flows, come ebbs and flows, and it is simply unrealistic to expect smooth sailing from China (or from any other country for that matter).

  • Dan, this is a very sound assessment.
    I have no doubt your views are shared by lots of people who want to do business in an honest way. Thanks for your valuable contribution.

  • Good post, Dan, although I think your view of the Rio Tinto issue may be a little too sanguine.
    Something odd about that case is that the initial charges had something to do with “state secrets”. Only after months of dithering did the Chinese finally drop the state secrets allegations and charge the Rio Tinto guys with bribery.
    This also came right on the heels of Rio Tinto basically playing hardball with China and beating them at their own zero-sum game.
    I’m not saying Rio Tinto couldn’t have bribed anyone, nor am I saying it wouldn’t be wrong if they had, but the circumstances surrounding this do less, not more, to support China’s rule-of-law.
    If they did engage in bribery, then China has every right to nail them to the wall. However, it seems to me that China’s new-found enthusiasm for prosecuting bribery is disproportionately weighted toward foreigners.
    On my most recent trip, I watched a business person pass out envelopes full of cash to local government officials over dinner in one of China’s largest cities. And I was almost certainly the only person at the table who thought there was anything wrong with what was going on. These guys were just playing the same game they’ve played for decades.
    That aside, I can only speak from personal experience here, but having lived in China, and traveled there frequently for nearly two decades, (probably not as long as you have), I have begun to notice a change in attitude toward foreigners in general.
    While I don’t miss the nauseating obsequiousness I often encountered in my early days there, I do miss the openness to learning that the Chinese used to have. (I’m speaking in general terms here; there are exceptions.)
    Perhaps it is because they used to hold up the US as a nearly infallible example, and over the past decade we have demonstrated that we are just as human as they are.

  • Dan

    GE,
    I completely agree with EVERYTHING you are saying.
    1. The Rio Tinto thing is a bit weird and I am not for a moment extolling the virtues of China’s criminal justice system. I also do not for a moment doubt that China (like all governments) engages in very selective enforcement of its laws, bribery included. I also have no doubt that the passing out of envelope event game goes on 100 times a day. But, and this is my point as to why Rio Tinto is not signaling anything new, if you are a foreign company engaged in illegal activity in China, you know the risk and you cannot plead ignorance or surprise when something bad happens.
    2. I also completely agree with you regarding the change in attitude towards foreigners and, trust me, we have been seeing that too and one of the ways we have been seeing it (and writing about it) is in the increased time it is taking us to get things done for our clients. Here’s a post we need late last year, entitled, China’s changing worldview is bad for your business: http://is.gd/b3OO0. And again, that’s the point of the article. There’s a lot (always) going on in China that can impact foreign business there and, in the grand scheme of things, Rio Tinto and Google ain’t really it.

  • AT

    This is probably the truest China-related analysis that I’ve read in a long time.
    Do you think the financial crisis has made things worse, or have you seen foreign businesses start to take a more realistic and/or sober approach to how and why they start up in China?
    Also, do you think that Google’s move has actually made it a lot more difficult for the broader foreign business community to address the issues they really care about?

  • Michael Bollen

    I have been doing business in China for over 12 years. My business is simple as I bring in frozen fish from Russia and USA which are thawed, cut into various items , refrozen and then exported to the USA for sale. In addition I buy farmed fish here for sale in USA. I use several local Chinese firms to do the reprocessing that I require. To ensure quality I live in China for about 6 months each year spending 1 month in China and 1 month in USA.
    I have had very little interface with Chinese laws except with Chinese CIQ which is Chinese version of USA FDA. This government department has evolved over the 12 years I have done business here. Basically they seem to be copying regulations from both USA and EU. The biggest problem with this group and it’s regulations is that each city’s department applies the rules from Beijing in a different way and there is no coordination between different areas in applying the laws.
    On the recent comments in this venue that China’s laws are just that – “China’s laws” and that they are just enforcing them more I would say they should look at their own government people for enforcing bribery laws. Many government officals are taking bribes or “under the table money” as it is known here.
    I have watched the tremendous building of apts. here over the last 8 years. I ask who buys all these apts. especially as the price per sq. meter keeps going up every month. The answer is always “government officals from another city”. This comes from real estate agents who should know. I guess if you have “under the table money” it is best to bury it in another city and not where you live.
    In fact the traffic laws are a good example of how China’s laws work. China has all kinds of traffic laws and you must pass a test to get your drivers permit. However, only about 20% of the people obey any traffic law. People just do what they want when driving. They don’t have “highways” in China they have “my ways”. Think China driving when you think about law in China.

  • Anderson: Something odd about that case is that the initial charges had something to do with “state secrets”. Only after months of dithering did the Chinese finally drop the state secrets allegations and charge the Rio Tinto guys with bribery.
    What initially happened was that China charged Stern Hu with state secrets at which point foreign businesses got extremely worried since Chinese state secret laws are extremely broad and vague, and Western business people were worried that state secrets could be used against them. After a lot of back and forth discussion, the Chinese government concluded it was not in Chinese interests to charge Hu with state secrets but rather ordinary commercial bribery. At which point, foreign companies were satisfied and dropped their objections. This doesn’t help Stern Hu.
    One problem with paying bribes is that if you do it, you lose a lot of your moral and ethical arguments. OK, it’s true that “everyone does it” and that the government may be picking specifically on you for some reason, but how does that turn into a legal or moral defense? Let’s see. I paid the bribe, but I shouldn’t get picked on, because the Chinese government has a moral and legal duty to treat bribe takers equally, and….
    One thing about this is that the Chinese government has generally been quite willing to discuss and negotiate on these issues, and if you can convince the Chinese government their interests will not be served by a given action, the government will often back down. You saw this with Green Dam and you’ve seen this with encryption regulations in general. Even in the case of Google, once it was clear that Google was going to shut down google,cn, they were still discussing with the government issues related to Android.

  • Steve

    Stern Hu confessed to taking a bribe in excess of 360 times the annual average income of a Chinese citizen living in Beijing. His lawyer says it was an “error in judgment.” I guess so. Business people who consider playing this game should also consider what it will be like to spend some quality time in a Chinese jail. Not Club Med, I can assure you. My view is, without even considering the ethical issues, the consequences are just not worth any possible benefit.

  • Dan,
    Another great post. I looked at the same set of issues last week, but with a backdrop of business conditions generally (not FDI specifically). A link to the post is below.
    While the cases may not signal a change in China’s policy direction, I do think that they (along with several other issues) are having an impact on western companies’ perceptions of risk, especially as they have been so high profile in the western media.
    For the larger companies I suspect that the issue of consular access (as well as the original state secrets charges) in the Rio case, and the more political elements of the Google case, will also have an impact.
    Google, Rio Tinto & The China Business Environment http://www.chinabusinessservices.com/blog/?p=1320.

  • Social comments and analytics for this post

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  • Anthony Powell

    I still don’t understand what the Rio staff are actually supposed to have done. The changing stories from the Chinese authorities leave the suspicion that there only crime was to offend someone important in China. Just because they pleaded guilty doesn’t mean they are guilty – if you have read about Stalin’s prison system you know that in a totalitarian state it is best to plead guilty as early as possible. Has Rio discovered that they did do wrong (not relying on documents forged by the Chinese), or have they abandoned them unfairly?

  • Duncan

    Dan, couple of points:
    1) FDI still rising – this is true, but as Professor Yasheng Huang has pointed out, much FDI from China is just recycled from within China. The headline FDI figure can vary significantly from actual investment by foreign companies.
    2) Rio: the real takeaways from this case are that we don’t know enough to take away anything – i.e. transparency issues. Did they commit bribery? Quite possibly, but we cannot be confident that they have not been pressured into confessions and we have seen little of the evidence. If they did then there are many implications for foreign firms about how they manage the localisation of their China management to ensure that customs that are seen as “normal” are avoided. If they did not then we still need to consider how safe it is for senior executives from firms with which the government has issues to visit. In addition, we have not yet seen any of those accused of bribing the Rio staff brought to justice which as G E Anderson points out leaves a suspicion that foreigners are being unfairly targeted, and justice inconsistently applied.
    3) Google – we’re certainly talking about it in my company, where our research relies heavily on the ability to search via Google (Bing and Baidu just don’t come up to scratch). It’s not an insurmountable issue – VPNs being what they are these days – but it’s certainly another irritant.
    Having said that, I do agree that there is much moaning, but for most firms plans for investment continue on the ground.

  • Mike

    Let’s see…
    First the Rio Tinto people stole state secrets. Then they paid bribes. Finally they plead guilty to accepting bribes.
    However, there is no indication of who they accepted bribes from or that those people are being tried.
    The trial itself was closed and not even diplomatic representatives were allowed to attend.
    There is an obvious suspicion that these people were punished not for any violation of the law but for zealously representing their employer’s interests in price negotiations.
    That should be a major concern for anyone doing high level business in China.

  • Google, Rio Tinto And The State Of Business In China.

    I am trying to see how many posts I can do with Google and Rio Tinto in the title, despite my earlier claims that neither of those matters are terribly relevant to doing business in China. Though the media views those matters as signaling a sea-change …

  • Don Clarke

    Dan, I have to disagree with your view that Rio Tinto is just a criminal law case and raises no business issues. Let’s talk about the charges of theft of commercial secrets. The important question here is, What is the line between normal information gathering and criminal theft of commercial secrets (possibly state secrets if you’re really unlucky)? It seems to me that this is a pretty important business issue.
    Incidentally, another aspect of the case should be cleared up. You state, “The takeaway from Rio Tinto is that you should not pay bribes and you should not pay bribes no matter who tells you that you should.” The Rio Tinto Four were not ultimately charged with paying bribes. After their arrest, they apparently confessed to *taking* bribes. So far, the bribe payers do not seem to have been prosecuted.
    Best wishes,
    Don