China Business. It Helps To Know The Culture. Part II. Dealing With The Ethical Gray Zone.

I’m sorry, but this pretty much utter and total non-sense. If you go to Hong Kong and Singapore, you’ll find a lack of “relative standards”, whereas if you go to Moscow or Mexico City or the offices of Washington Mutual or most mortgage brokers circa 2005, you’ll find a ton of “relative standards”. You can do something silly like *define* Western to mean having absolute principles, but that’s just silly because it tells you nothing. (Hey!!! These people have principles, they must be Western!!!!)
Dan: Humans throughout the world fall into a simple, yet immensely hard-to-avoid, trap: attributing ill intentions where there may be none.
And people often fall into the opposite trap of not attributing ill-intentions when they really are out to get you.
The problem is that sometimes they really may be out to get you. If you are doing business in a foreign land (and it doesn’t matter whether you are Chinese doing business in the US or an American person doing business in China), there *are* people mean you harm, and you are a particular target because you don’t know what is going on.
Sometimes, you do have to go into business with someone that will stab you in the back if you let them. That’s fine, if you know that this is the situation. At the point the question is, “suppose they stab me in the back” what can I do to them?, and if the answer is “absolutely nothing” you are pretty much hosed. There’s no reason that people in a business relationship have to like each other. I hate you, you hate me. We are in this because we both can make some money, but the moment my back is turned, I know you are going to destroy me, and frankly you should expect the same treatment from me.
Also, sometimes people pretend lack of ill-will for the sake of harmony (and this happens both in the United States and China). Someone tries to stab you in the back, you defend yourself, and rather than embarrass everyone, we all just pretend that it was just a misunderstanding or clerical mistake, when in fact we both know it really wasn’t. Pretending that something was a “misunderstanding” or “cultural difference” can be useful sometimes, but you just have to realize that it’s often not the truth.
FInally, I think that one trap that people fall into is to think that their own intentions are purer than they are. Why are you doing business in China? Because it’s cheap!!!! Are you going to move your business to Vietnam if it is cheaper!!!! Sure thing. What about all those people that end up unemployed in California or Guangdong? Not my problem!!!!! One thing that I’ve found is that you can be much more sensitive about other people taking advantage of you, if you are more honest to yourself about your own motives.
Dan: Complaining about the system will only set you back.
To keep yourself from going insane, you do need to complain about the system. Spouses and priests are good for this sort of thing. Also in some industries, the Chinese government wants foreign expertise specifically so that they do complain.
Dan: Understanding the system will ensure that you’re ready for anything.
And it’s important to understand the system, because people who mean you ill-will will lie about the system. If someone tells you that “this is how it is done in China” they may be telling you a bold-face lie. It’s important to have local knowledge, because then you can respond “Bulls**t, I know how things are done in China, and this isn’t how it’s done” or even “I know this is how things are done in China, but I don’t give a flying flip.”
Dan: Just look at the world economic meltdown. Plenty of experts have claimed — and many Chinese believe — that it’s due in part to ethically shady practices, mostly in the West.
People have claimed that because it’s true. Now it’s also true that sometimes people get caught up in institutionally shady situations. The person that is trying to sell you a subprime mortgage, might be a nice person that just wants to keep their job. What they are doing might be perfectly understandable. But it doesn’t matter. If someone ends up stabbing you in the back, the fact that they are a “nice person” doesn’t help.
I should point out that part of the reason that I think that it’s non-sense to think that people in the West have “absolute standards” and people in China have “relative standards” is because I work in that industry. It turns out that when it came to mortgages, the United States had an extremely loose system which encouraged people to act in ethically questionable ways, whereas China was able to largely avoid the crisis because the government was able to heavily regulate the issuance of mortgages, and avoid the worst abuses.
We need to give some credit where credit is due (pun unintentional). China just had a better and stronger regulatory system for banks than the United States did. Ironically, this was an example of “do what I say, not as I do.” US banks and academics were telling Chinese leaders about the virtues of tight regulation. The Chinese government agreed, and imposed tight standards, but it turns out that those standards weren’t being applied in the US. When it came to banking, it turned out that China was “Western” whereas the United States was “Eastern.”
Dan: Just don’t expect business in China to be absolute. Remember, your degree of willingness to deal with nuances and shades of gray will help make your China venture boom or bust.
Or maybe not. A lot of business boils down to figuring out who you can trust and who you can’t, and I’ve found that ultimately the way you figure out if you can trust someone or not happens to be more or less the same in Beijing or Bangor.
Also a lot depends on the industry. The banking regulators in China do not like this “shades of grey” non-sense. The reason foreign banks got licenses to operate in China at all was that the Chinese regulators wanted foreign banks to change the way that local banks did business. Now that this has blown up, foreign banks are having a hard time.
This also applies to other industries, high technology. In a lot of industries, China wants foreign investment and expertise because Chinese don’t like the way things are done in China, and in that sort of situation, the worst thing that you can do is to “go local.”

Also an example of how things are not Western/Eastern, we can take a look at the process of setting up a lemonade stand in Midtown. If you try to set up a lemonade stand in Midtown, you’ll find yourself in all sorts of interesting legal gray areas….
Licensing of food trucks in NYC is a mess (http://www.ediblegeography.com/food-truck-whack-a-mole/), you may get yourself into food truck wars (http://online.wsj.com/article/SB10001424052748704476104575439750424276176.html). You might also find yourself in blatant political corruption (http://www.nj.com/hudson/index.ssf/2009/08/jersey_city_health_officer_jos.html).
I assume that even though you are running a cash business and officials tend to look the other way with these things, that you are following social security, immigration, and sales tax rules. Riiiiiiggghhhhttttt?????? After all, you are a Westerner and people in the West always follow the rules, right??????
You also need to familiarize yourself with the laws regarding lemonade stands…. (http://candychang.com/street-vendor-guide/)

“Just don’t expect business in China to be absolute. Remember, your degree of willingness to deal with nuances and shades of gray will help make your China venture boom or bust.” I’m surprised you lawyer-types let this pass. I thought your job was to reduce “nuances” and draw bright contractual lines through these “shades of grey.” Would this Patent Medicine work in the U.S. (outside Wash D.C)? Silk Road International has documented this better than anyone I know – is he mistaken? Finally, if the CPC were to allow a legal environment to develop all of this “Chinese” cultural way of doing business etc would vanish and the Chinese economy would be much better off.

Patent says: “Who would claim that there aren’t ethical problems in Western business?”
I don’t know anyone who would make this claim. But that doesn’t mean the Chinese are not, on the whole, much more unethical. A quick glance at Transparency International’s corporate corruption index shows China to be pretty far down the list. And a lot of anecdotal evidence from old China hands backs up that perception.
But once Patent gets past the PC disclaimers, I think his point is well taken: It makes sense to understand the ethical framework the Chinese are operating in. I think there is one, but it’s not especially pretty. If I had to boil that framework down to its core, it would have two main tenets:
Tenet 1: Pay lip service to mutual cooperation, while secretly figuring out how to grab as much as possible for one’s own side.
Tenet 2: Temper this impulse if the other party is a blood relative, a relative via marriage, a childhood friend or a school classmate.
When Chinese form business partnerships with other Chinese, both parties understand that there will be a battle of wits to try and gain the upper hand (unless Tenet 2 is in effect). The typical Westerner, I’d argue, is not so wrapped up in questions of blood or personal ties and is also less inclined to view business partnerships as a zero-sum game. Westerners expect more reciprocity and get frustrated and angry when their gestures of good will are not reciprocated.
In short, the Chinese ethical framework is dog-eat-dog, but at least the parties all understand this, and foreigners should too.

Shanghai Ty: The typical Westerner, I’d argue, is not so wrapped up in questions of blood or personal ties and is also less inclined to view business partnerships as a zero-sum game. Westerners expect more reciprocity and get frustrated and angry when their gestures of good will are not reciprocated.
I’d like to meet this “typical Westerner.” In investment banking for example, personal ties are everything, and most financial transactions are close to zero-sum. You might argue that investment bankers are “atypical” but then “who is typical?”
What is the case is that if you are working in a situation with a strong legal context, then you can rely on impersonal third parties for help, but again it’s a mistake to think of this as a Chinese versus Western thing, because there are “Western” situations in which you can’t rely on third party enforcement (i.e. practically anything transnational) and there are “Chinese” situations in which you can (i.e. Hong Kong has an excellent legal system and Shanghai is often “good enough.”)
Shanghai Ty: In short, the Chinese ethical framework is dog-eat-dog, but at least the parties all understand this, and foreigners should too.
I really don’t think that Chinese have much lower or different ethics than Americans. The issue is this. If you are doing business on your home turf, and someone screws you over, then you can pretty easily figure out a way of screwing them over. If you are doing business somewhere else, then if someone messes with you, then you don’t have strong recourse.
If you don’t have a way of fighting back, then you are going to have to depend on your business partners to be “nice” to you. Unfortunately, if you are new babe in the woods, the people that you meet are unlikely to be “nice”.
Part of the issue is that people that tend to have lower ethical standards have an advantage in that they can promise more. If you go to China and you are looking for the rock-bottom lowest price, you are going to get cheated, because honest people can’t quote you lower prices and better terms than dishonest people.

James G: So okay, within Chinese business ethics, is there any currency in discussing what (if anything) that IS uniquely Chinese, good and bad?
As far as international business culture goes, there are at least in my field, relatively few differences between Chinese and Americans. One thing that is relatively unique about Chinese business people is that you have large parts of the Chinese business and political elite that have lived for long periods in the United States and have worked for (or are working for) US multinationals. This is much less true for Japanese business people.
There are many more differences between Chinese and American *companies*. Also you can find a lot of differences between the United States and China, there is relatively little that is “uniquely unique.” For example, China is a developing country whereas the US is a developed country, so there are a lot of differences there, but then if you are a multi-national, you will have done business in Brazil or Indonesia, where you have a lot of the developing country issues.
James G: I seem to remember a post from Dan that talked about how some Chinese businesses used American “Get it Done” spirit to their advantage in negotiations. And when I read that, I thought “wow, great insight, and something that hadn’t really occurred to me”.
Yes, but sometimes you have to realize that even *positive* stereotypes may not be true. For example, from the 1990′s right up until the moment that Lehman Brothers collapsed, Chinese banks and regulators were in awe of how well US financial regulation worked, and how wonderful US banks were at risk management. You had lots of US banks and academics go to China and lecture about how wonderful the US financial system was, what a big mess the Chinese system was, and how China should copy it.
Fortunately for China, what ended up happening was that China copied the *ideal* of a well regulated banking system rather than the US banking system as it actually existed, and after Lehman collapsed (and not a small number of people lost their life savings in Hong Kong), that stereotype no longer exists.
You see the same thing about Americans talking about how wonderful the Chinese school system is, which most Chinese find rather bizarre. Also going back to the 18th century, you had French writers like Voltaire using China to criticize their own political system, without knowing or caring that they were talking about an idealized China that had very little to do with what was actually happening.