Smoke, Mirrors and Bureaucrats: Corporate Research in China

Many multinational companies that are interested in China enter via either Hong Kong or Singapore, where they have a presence, and try to leverage off of this experience. But, Short says, most of them don't have the capacity or experience to thoroughly research the background of, for example, a joint venture partner. In addition, though it might be surprising given the abundant media attention devoted to business and investment in China, most multinationals are starting with very limited knowledge about how business in China works.

A good business example of myth and reality in China is guanxi, the overused and often misunderstood concept that to many entails making the right business connections, using money to form and cement relationships and bypassing the "official" rules and regulations that can make entering into a joint venture a lengthy and tiresome process. On one hand, there are elements of reality behind the concept, with a personal connection or relationship helping to smooth and expedite the tangled and confused bureaucratic approval process for a local level project. Contradictions or inconsistencies between local and national laws and the considerable administrative discretion given to both law making authorities and local officials in interpreting legislation means, for an outsider trying to figure out whether investing in China is a good opportunity or a mistake, that a helping hand is often gladly seized.

On the other hand, as Short points out, investors should always be wary of claims that a local party or foreign advisor has the "right" connections to make their business a success. This self-serving flattery, after all, is how intermediaries make money; by taking advantage of ignorance and introducing the trump card of guanxi and the need to understand the "culture" of work in China.

"Guanxi doesn't actually mean anything that isn't implicit in business relationships elsewhere in the world," Short says. Neither is it an all-encompassing method for doing business in China.

Short offers the hypothetical example of a multinational that wants to set up a manufacturing plant in China. The foreign party has tentatively organized a plant in a particular locality. The local authorities, however, have their own ideas about the plant's contribution to the local economy and their own pockets. Presenting the authorities with a list of needs, including vehicles for transportation and sundry equipment, the investor is told procurement won't be a problem and the total cost is given. When asked for a receipt for tax and accounting purposes, however, the local authorities declare that receipts are either not necessary, not possible, or both. They try to impress on the foreign party the validity of the transaction, the ease with which they (the authorities) can form business relationships for the foreign party, and the fact that the whole process is "normal" and part of working in China.

Almost always, the foreign party can decline to enter the locality and seek out a different place to establish itself. Whatever the case, however, entering into an agreement with slightly suspicious authorities, or with "honest", by-the-rules authorities, a sort of guanxi functions, and the cooperation and support of the local authorities is crucial for the foreign investor to be on a secure footing, at least initially. What happens thereafter could differ widely, depending on the choice of location and the attitude of the authorities.

When asked if particular industries are more prone to the influence of "shady" partners and associated corruption, Short sees unpredictable and irregular business practices more in terms of geography than industries. Indeed, one of the biggest questions and challenges that China faces now that it must comply with international trade agreements as part of its WTO membership is overcoming local protectionism and blockades, which form stiff obstacles to foreign participation in local economies in China. Generally speaking, as with professionalism in the courts and among lawyers, predictable and "legal" practices are most prevalent in those coastal areas that are accustomed to foreign participation across wide sections of the economy, for example in Shanghai. Economies and political structures in inland areas that are only recently emerging from decades of Party and state control and don't have much exposure to international business tend to be the worst for irregularities and requested "gifts" or favours.

Until reforms began in the late 1970s, state production quotas and development plans dominated local economies. Thereafter, with the devolution of economic decision-making power to local authorities, many areas saw the growth of spheres of control, in which the local government or local Party officials, or both, organized and invested in monopoly businesses.

It is a peculiarity of China's rapid social and economic change of the past two decades that while local economic independence has grown and local economies have diversified and allowed for entrepreneurial initiatives to take root, legal safeguards that govern market activities in other countries have been largely absent. Credit, personal privacy and private property laws haven't grown apace with economic change. The result? An enormous bureaucracy, a legacy of the statist period, continues to generate thousands of pages of personal information on PRC citizens and companies.

"Most (company) information is legally available with the right approach," Short says. Company records, capital contributions to a business, shareholders information and financial statements are all in China's public domain and can all be obtained without much trouble.

Bureaucracies aren't very exciting, unless you're a social scientist. Using official channels, aside from being the best way to obtain information, obviates the need for more colourful and attention-grabbing approaches to corporate or personal background research in China. But for each crop of newcomers to China, myth debunking, including the belief that parting with large amounts of cash is necessary to "do business" in China, pose obstacles that are only overcome through experience.

Post-WTO China, though creating previously impossible investment opportunities for foreigners, will still be dominated by problems and challenges that people in Short's business have seen in the past. How do you select a JV partner? Once we've gotten the official records, what else do we need to know? What type of relationship does the local partner have with his backers?

Recourse in potential problems encountered with partners or associates in China generally depends on the level of backing that the Chinese party has in state-owned enterprises or local governments that are actively protecting their assets and perceived "turf".

In Short's experience, even if background research reveals nothing extraordinary on an individual (like a criminal record), still if problems arise, the foreign party is often at the mercy of situations and relationships beyond their control. If a Chinese partner has his own ideas about control of assets or ownership in a foreign-invested venture, for example, and he has strong ties to the local government or administration, it can be practically impossible for the foreign party to find redress.

Such a problem will continue to be a challenge in post-WTO China. As Short notes: "The post-WTO period is not the first wave of foreign investment in China. People were stung in the first wave (in the early 1980s), and similar problems arising from unfamiliarity with China will continue." Proper research into the background of a potential business partner in China can greatly reduce the possibility of unpleasant surprises further down the road, and will help improve the likelihood that the investment will reflect a successful partnership.