Op-Eds


Business in China: What Does "Playing by the Rules" Mean?

By Stanley Lubman, The Wall Street Journal

As part of our ongoing series of insight and analysis from leading experts in their respective fields, Stanley Lubman, a long-time specialist on Chinese law, offers his suggestions for how to navigate in Chinese society, where business ethics can be an oxymoron. Mr. Lubman teaches at the University of California, Berkeley, School of Law and is the author of “Bird in a Cage: Legal Reform in China After Mao,” (Stanford University Press, 1999).

Can foreigners do business in China without violating the law? A recent article in the New Yorker on foreigners doing business in China quotes one English victim of fraud that undid the joint venture for which he worked as saying that “if you played by the rules, you were finished.” (Tim Clissold, author of Mr. China, cited by Evan Osnos, “Letter from China” The New Yorker,” Nov. 23, 2009.) The article also cites a very different view, that of Don St. Pierre, Jr., who with his father, a veteran of business in China, operates a successful wine importing business: “…If you are engaged in business you are subject to the same rules as everybody else.”

The first point of view seems obvious enough if Clissold meant simply adhering to laws as they are written, rather than in practice. Or is it? If it means you have to violate Chinese laws and regulations in order to succeed, you are obviously asking for trouble, and that seems like a dangerous course of action. But what does the alternative view mean when it refers to the conduct of “everybody else” in an economy and society in which the rules are often hard to find, opaque when you find them, and subject to varying interpretations or neglect in different parts of China according to the extraordinarily wide discretion of bureaucrats?

Suppose, for example, that the general manager of the joint venture in which you have invested is asked to find a job at the venture for the son of a provincial official who has some regulatory powers over it. Or suppose your Chinese partner suggests that a group of engineers ought to be sent to the U.S for training, but proposes an itinerary that indicates the group will spend more time in Las Vegas than anywhere else? Chinese laws and regulations, as well as Communist Party rules, prohibit officials from using their positions to extract benefits, including, for example, tourism. The U.S. Foreign Corrupt Practices Act prohibits giving “anything of value” to a “foreign official” with the “corrupt purpose” of obtaining business. It also permits, however, “reasonable and bona fide expenditures, such as travel and lodging expenses…of a foreign official…directly related” to promotion of products or “the execution or performance of a contract.”

Chinese society is a ferment of conflicting values, and the concept of business ethics is an oxymoron. Without trying to set forth anything like a comprehensive analysis, here are some basic guidelines to navigate in the midst of current uncertainty:

First, it is a cliché, for good reason, that foreigners must be aware that personal relationships seem even more important in business in China than in the West. This includes relationships between businesses and the officials who regulate them. It does not mean, however, that foreign businesses should bribe, attempt to bribe, or otherwise engage in obviously corrupt relationships. At the same time, it is certainly possible to form relationships with officials whose decisions are significant for business. So, for instance, it is useful for businesspersons or their lawyers or other advisors to know officials who are superior in rank to the ones they normally deal with, or in the ministry in Beijing that is at the top of the relevant hierarchy. But the line between what is appropriate and what isn’t is often blurred, and companies and their employees must constantly assess the propriety of their actions.

Second, although the concept of guanxi, or relationships, is important in Chinese culture, it is entirely personal to the persons in that relationship, whether it be social or business-related. Because it is personal, businesses should not become dependent on a relationship with a single person to assist them, who may be suddenly removed from his position or prove to be unreliable.

Third, it is crucial to recall that there is not one China, but many. Despite the official definition of China as a unitary state, Chinese authoritarianism has rightly been called “fragmented.” Local governments may simply apply national or local laws in ways that conflict with laws issued at higher governmental levels, including the central government in Beijing, and not disclose their departure from rules that they are theoretically bound to follow. When a foreign business encounters such local capriciousness, they should point out the contradiction and insist on an explanation.

It is difficult to offer more specific advice on what rules are being followed by “everybody else” because the situations in which foreign business find themselves are too varied, and values are still diverse and changing in China’s evolving business environment. What can be said, though, is that even as they must adapt to the local environment, foreign businesses must retain their own values. In the hypothetical case mentioned above in which an official seeks a job for his son, you could inquire about his qualifications and decide whether he could be placed in a part of the venture that was unrelated to the father’s reach over the venture. Underwriting a gambling junket, however, would be unacceptable. American businesses should keep in mind that enforcement of the Foreign Corrupt Practices Act has been more vigorous recently. An American law firm blog commented in July, 2009, on “ the recent explosion of FCPA enforcement activity,” adding that “ the number of ongoing investigations suggests that this trend will not soon subside.”

One astute observer, James McGregor, notes an important variable: the size of your business. If you are a “large multinational” and your deals are large, you can “operate above the muck” of corruption. What about businesses that are not “large multinationals”? Many companies, observe McGregor, “insist on strict ethical standards” and develop “higher-level methods and relationships.” But, he adds, “once you get below the level of big multinationals doing large deals, China becomes a swamp.” (James McGregor, One Billion Customers, 2005, p.119).

In an era when the Chinese market is increasingly important to many global businesses, some over-eager participants may be tempted to bend the rules for fear of being “left out” or missing a good opportunity. They should resist the temptation, and heed McGregor (p. 122), who notes that many foreign companies “have policies of zero tolerance for corruption in China, and still do good business because their products are the best and in demand.”

12/22/2009