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China Corruption. We Ain’t Seeing It.

Posted in China Business, Legal News

Got a very interesting comment today on our post On The Demise Of China Manufacturing….Kidding. Part II. In that post, I talked about my conversations with various people in Tokyo regarding where manufacturing was going to move due to China’s increased labor costs. The answer was that it is probably not going to move at all.

The post very briefly summarized the reasons why other countries were not going to win over very many factories from China. The reason given for a number of the countries was corruption.  

The interesting comment was from a reader named “NM” and it was as follows:   

Dan – fascinating post as always. Keep up the good work! One striking claim your clients seem to be making is that they perceive China as Less corrupt than a number of other lower-middle income countries (Indonesia, Philippines, Mexico, etc.). Given China’s generally abysmal rankings in Transparency International’s Corruption Perception Indexes, that is very interesting. You may well have posted on this already, but it would be very interesting to get your sense of how much corruption there actually is in Cn these days, how this might differ from earlier days you’ve experienced, and in what kinds of contexts corruption shows up, and in which it doesn’t.

NM raises an excellent point, to which I think I have a couple of answers. The first answer is that China’s level of corruption is, in fact, better than most of the countries mentioned, as can be seen by the following Transparency International corruption rankings:  

Malaysia 56

China  79

India   84

Thailand 84

Mexico 89

Indonesia 111

Vietnam 120

Philipines 139

Laos and Cambodia 158

The second, and probably more important thing is that where things really matter for foreign companies, China is actually much better even than the above rankings indicate.

Let me explain.

China’s government is actually relatively corruption free for foreign companies seeking to do the basics. For example, for such things as registering a company or a trademark, there is virtually no corruption. If you follow the rules and pay the applicable fees, you are pretty certain to get your company and your trademark. You are also pretty certain not to get hit up for any “extra” fees either. I do not believe this is as true in many of these other countries.

Lawyers who deal with India, for example, tell me that you very likely will get hit up by a bureaucrat trying to convince you to pay more to get “priority” service and that if you do not pay this extra fee, your application may languish for a very very long time. In Malaysia, foreign companies absolutely hate how you pretty much must have Malays on your team (as opposed to people from Malaysia’s other ethnic groups) if you want to have any chance of success. I had a Korean client who told me that 20% of their employees were Malays who they had to keep employed, even though they did pretty much no work at all. Technically, this is not corruption, but if you are a foreign business, it certainly feels as though you have just been held up.

I really think what distinguishes China from these other countries though (Vietnam is a bit like China in this respect) is the much stronger prohibition on corruption against foreign entities as compared to domestic entities.

All this means China just is not that bad for a company that actually follows China’s rules. Now before anyone calls me naïve, please really read this post and note that it says nothing regarding overall corruption in China; it deals just with government corruption that impacts foreign companies. 

What are you seeing out there?

  • http://chinayouren.com/en Julen

    I agree. I always had the impression that China is relatively corruption free except at the top levels of local/provincial power. And this is not only for foreigners, but also for locals. I have worked in other countries like Egypt or Kazakhstan, and in each case you can see corruption directly affecting the people: even if they are locals, the cars get stopped by police to get a 1$ “fine”, business people ask openly for their bite, their boss is likely to buy a Mercedes right the day after signing a new project…. etc. It’s really in your face!
    But in China, after almost 4 years doing business I haven’t hardly encountered any of this. There is of course corruption in the large investment projects, tied to top power levels (like everywhere), and in a country with so much investment, there’s bound to be a lot of cases. But in terms of “corruption per capita” I am certain China is much cleaner than almost any other developing country. This goes a long way to explain the Chinese economic miracle.
    The problem in China is high level corruption of some top cadres who are too well connected in the party/army to be touched. But this is a different story, and it doesn’t destroy the society as much as street level corruption, because it doesn’t touch the people directly in their life and business.
    See for example another high level corruption country that works really well: Singapore. The top families do whatever they want, and in exchange they ensure the rest of the country is clean. Morally objectionable, for sure, but it works!

  • Ted Baker

    Er…naive?

  • Ruben

    Dan,
    I completely agree with you, but I note one thing you ignore. Foreign companies are required to and pretty much do follow every rule, including paying their taxes. Chinese companies seem to ignore (or at least not follow to the letter) every rule,especially the paying of taxes. This makes the cost of doing business much higher for foreign companies than for domestic companies and this is a way in which corruption hurts foreign companies. indirect, yes, but harmful none the less. Do you agree?

  • Terry

    I agree Ruben and this applies to Labor laws and mandatory benefits as well. Another area that corruption can and does impact foreign companies in terms of competition is in the area of selling services or product whereby local competitors are paying money under the table and obtaining advantage.

  • Brad

    Lest people misunderstand your post and think they can let their guard down, corruption is not the same as cheating, lying, stealing and other sundry abuses of relationships. China may be relatively corruption free in corporate laws but things are not so rosy on the street or in the factory. I am not saying these do not occur in other countries mentioned, but China seems to put a rather fine point on them.
    For the down and dirty of doing business in China from a manufacturing-sourcing and living in China viewpoint, David Dayton of Silk Road International (http://silkroadintl.net/blog/), tells it like it is. Be vewy vewy careful out there.

  • James Wu

    How exactly does one truly and objectively measure the levels of corruption in any given country? As somone who has been conducting business in China, Taiwan, and Hong Kong for years, I can say there really is no way to quantify something as obscure as corruption levels. Of course there is corruption in China, as with any other nation with human beings running them. However, unless you are in the specific departments of government, at all levels, and have a.) witnessed it firsthand b.)experienced it as a victim and/or c.) partaken in it, how does one really measure it? Even if you fall into the above 3 categories, how do you really know the extent of the corruption in any given country to give them a “Score”. I would love to see how the US ranks these days with the massive obscure bank bailouts, backdoor bailouts, politician payoffs, etc etc. where hundreds of billions of dollars and even trillions are simply “lost” and never accounted for on a routine basis. I would be willing to bet the “corruption quotient” is on par with China and many other nations Americans love to lambaste for system opaqueness and obscurity.

  • Chris

    Dan
    I agree wholeheartedly… in terms of plain vanilla corruption whereby bribes are required for licensing, permits etc (the topic of the post), China is quite good. In 10 years as the legal representative of our legal entities in China, I’ve never needed to pay or authorise a bribe, a free trip or anything that would violate domestic or foreign anti-bribery laws. For foreign enterprises, the pressure has been to stick within business scope, pay tax and increasingly to address labour law issues.
    China is remarkable in that regard.
    Other commentators point to domestic enterprises that pay bribes to avoid compliance with domestic laws… agree that some do and it can be difficult to compete with them in certain markets. However, the point of the post was the relative corruption-free environment for foreign enterprises.

  • Gan Lu

    China may rank a bit higher than the other Asian countries you list, but perceptions of corruption have a lot to do with where people are coming from – i.e., the U.S. ranks 19th on the list with a CPI of 7.5, just behind Japan and Great Britain (tied for 17th with CPIs of 7.7). With a CPI of just 3.6, China falls far short of the standard that most Americans, British and Japanese have come to expect. It’s no wonder that China has a bad rep – it deserves it.
    As a point of comparison, New Zealand, Denmark and Singapore inhabit the top three spots on the list with CPIs of 9.4, 9.3 and 9.2 respectively.
    http://www.transparency.org/policy_research/surveys_indices/cpi/2009/cpi_2009_table

  • Joel Oppenheimer

    I would very much doubt there is any foreign investor in China that has not had some form of corruption going on in their company at some time ot other. The best corruption is of course the type that doesn’t get noticed. If Dan or the readers here don’t notice it then they’re not looking hard enough.

  • http://blog.sina.com.cn/u/1734449224 psychologist Beijing & Nanjing

    People’s perception of China, or any object is influenced by both the object itself and motives of the perceiver.

  • Peter Humphries

    Of course there’s corruption in China, and especially at foreign companies. Otherwise you won’t have all those FCPA regulations rearing their heads and scaring the shit out of US executives responsible for their China operations. I wonder about the readers here and if they’re really involved in China at the ground level or just passing student level comment because the statement “we ain’t seeing it” as was noticed by Ted Baker is naive to the extreme and these comments displaying an ignorance of what remains a major managerial and operational concern.

  • Glenn W.

    I have been doing business in China, Indonesia and the Philipines for the last 20 years and in Vietnam for the last 10 and what you say here is true. I am not sure the level of corruption is much different between those countries in terms of kickbacks and government employees wanting their share when it comes to deals, but there is a huge difference in terms of getting the basics done. We have never had an issue in China in registering our businesses, getting our IP in place or even paying our taxes, none of which I can say has been true of Indonesia or the Philipines, where paying extra is pretty much necessary to get the minimum. Vietnam is an interesting case because it is making a point to learn from China and my sense is that it is starting to realize the importance of carving out a safe zone for foreign companies as well.

  • http://blog.sina.com.cn/u/1734449224 psychologist Beijing & Nanjing

    It reminds me of our experience in taking care of the annual review and renewal of our license for the psychological counseling center this May. We are a 100 percent Chinese entity, with no overseas connections, although we serve expat clients.
    My partner went to the local branch of the XX District Department of Commerce to get the license renewed, but was informed by the official responsible for the matter that we could not use the term “psychological counseling” in the name of our entity any more due to new regulations on qualification. He told my partner that we would need to change our name. My partner went to the level of authorities above them, the headquarter of the District Department of Commerce. They told her that we could still use the term “psychological counseling” and told her to go back to the local branch and talk to that individual, who was new on the job. My partner went back several times, but could not find that individual; he was always somewhere else. It became very frustrating and I started worrying. On the 3rd or 4th trip my partner got hold of that person and got our license renewed. There was no bribe or corruption involved. However, the whole process was stressful. Seeing my partner spending hours and hours in the heat and humidity of the Nanjing summer trying to track down the official was quite disconcerting. The stress mostly came from the lack of competence on the part of the officials. I think lack of competence in the regulators and administrators is the most obvious problem facing businesses in China, at least in big cities like Nanjing. In Nanjing, so far I have experienced little corruption on the part of the authorities.
    Right now I am in the process of resolving an incident of personal injury. To be more specific, I was bitten by a huge dog in the street while walking my dog. The wound was superficial. The offending dog was not on leash (my dog was) at that time and its owner is a jerk. I called police and we all went to the station. I am tremendously unhappy with the way the police tried to “mediate” the situation. I see the main problem as incompetence, and probably indifference, not corruption. The police just wanted the matter to die off and this attitude makes the owner of the offending dog blatant with his jerkiness. I have taken the matter to the authorities who supervise police officers, and probably will take the dog owner to court. It will be an interesting experience. These small matters, if not resolved properly, can greatly harm people’s sense of security and trust in the society. By the way, returning from the US after 12 years, I find the police in Nanjing more accessible and amiable than the police in the US. On the other hand, this could be due to regional diversity in China. My personal experience with police officers in Beijing was a lot less pleasant.

  • Chris

    Peter / Joel et al. Dan’s post specifically identified licensing / permits and being able to set up and operate as a foreign business entity as the post topic. On topic responses specifically addressed those issues and were generally positive about the regulatory environment in China and the relative lack of corruption. Again, I emphasise my experiences as a MNC legal rep over 10 years as very positive in this regard. I am not naive and I speak, read and write a high level of Chinese.
    Where Govt approval processes become difficult, I find it has often been out of concern by authorities about the business’ compliance intentions or record, not bribe seeking behaviour. Good faith meetings to clarify what the business does, our tax record and business scope compliance have generally eased those concerns and resulted in rapid approvals. No bribes, trips or excessive wining or dining involved.
    Off topic responses addressed employee corruption or corruption involved in acquiring Govt business (which is generally the area FCPE breaches have concerned). Those are quite separate issues and are unrelated to the topic issue of the right to set up and operate a foreign owned business in China.
    All businesses need to have robust procedures, HR practices and direct management of sourcing, supplier and external 3rd party business relationships to ensure no corruption / kick backs in these areas. Direct deals with major commercial suppliers, internet bookings & price comparisons and dealing with reputable suppliers help. Constant vigilance and active management of staff helps. Overall, this has not become a major concern for our business.
    Sometimes I think a high level of HQ and expat manager mistrust & paranoia about PRC national staff results in this type of behaviour rather than is a result of it. Believe in your people, create healthy, viable career paths, trust and monitor closely as appropriate. Deal strictly with breaches. Ensure your own personal behaviour and business conduct are of the highest ethical standards. Create a healthy and vibrant corporate culture. It will result in a corporate environment where all PRC staff buy-in to those values and closely monitor each other.
    Likewise, ensuring your own sales staff do not go out and illegally bribe external parties or Govt entities to secure sales is fundamental to securing a corruption free environment. Yes, this may result in lost sales – in some industries a lot of lost sales! However, for foreign businesses here for the long term, securing the trust and respect of customers is key and govt or commercial bribery a fast way to destroy sustainable business relationships. Managers oversee payments, so it is not rocket science to ensure that invoices and payments are clean and remitted only to the accounts of contracted parties. Ensuring that out-goings are free of corruption also key to ensuring your own staff buy-in on a corruption free environment.
    Again, this is not ignorance or naivety. Ethical issues are faced daily by managers in all organisations whether that be in dealings with suppliers, customers or regulatory authorities. China is not an environment in which corrupt business practice is required, necessary or even useful.
    Over time I have exited staff and business relationships, including distributors, customers and suppliers for poor ethical behaviour. Our business is much stronger for it.

  • BRL

    I tend to agree with the post but would like to share some of my experience. I have worked extensively with government projects, with some corruption (typically at the lower levels, engineers and department managers wanting a small cut of the deal to remove an obstacle) but nothing much really. Higher level corruption exists but so it is everywhere in the world. For 5 years now I have specialized in working with MNCs, naively expecting clear cut decision processes and no corruption: I found the opposite. Corruption is rampant is most MNCs, even those who have clear code of conducts etc. Expat managers tend to ignore it (not wanting to make trouble for waiting for the next posting). Reasonings like “this is how it works in China” and “it is even cheaper that way” are common (same reasoning on the corrupt manager’s side: “I get a good price for my company by working with a friend, I make so pocket money, we get better service as we have a deep relationship etc”). This happens a lot with purchasing departments, as well as operation departments (production, IT). Especially true in European companies where managers tend to be “weak” (like to delegate, to have group decisions and whatever bs that goes again local practices), less so with anglosaxon businesses (bad experience with corrupt Australian expats though but thats another topic, let’s focus on China). We are able to conduct our business without bribing (again we have a rather naive ethics and proud of it) but that means working directly at CEO level and then overcoming one by one all the obstacles those managers will put in our way + dealing with unhappy managers later on in the project. Since most expats CEO come and go (while I seem to be here forever), this is a very frustrating experience.

  • Chris

    BRL…. leave the poor Aussies out of it! Expat losers another topic altogether ;-)

  • Mark Cohen

    I am not so sure of your assessment that the IP regime is relatively corruption free.  In the Siemens scandal of a few years ago, I believe there was a disclosure of a bribe to the State Intellectual Property Office.  There was also an FCPA prosecution of bribes by AGA Medical of China’s State Intellectual Property Office. I suspect, however, that this type of overt corruption is less common than Chinese competitors using their “guanxi” or finding other ways to great obtaining rights in advance of or stronger than their competitors.  I had been told that such a situation existed in one instance involving a notorious trademark squatter, and in the 90′s such a situation appeared to be relatively common at the State Food and Drug Administration for regulatory approvals.  This is admittedly anecdotal and scanty. 
    I think, however, most multinationals in China have fairly good programs in place to reduce the incidence of corrupt practices, which may also help reduce the expectation of such practices being expected of foreign companies. The same may not be true of Chinese enterprises or government affiliated organizations.