Introduction

Ch 1: Getting Started: Understanding the Business Environment and Dealing with the Chinese Government

Ch 2: Setting Up Shop (I): Obtaining a Business License and Choosing the Right Legal Form

Ch 3: Setting Up Shop (II): Finding the Money and Choosing the Right Local Business Partners

Ch 4: Finding the Right Customers … and Getting Paid

Ch 5: Human Resource Challenges

Ch 6: Ethics and Corruption

Ch 7: Business Negotiations

Ch 8: Living in China: A Survival Kit

Ch 9: Are You Ready for China? Necessary Traits and Expertise

Epilogue

Appendix: China and Its Trade Partners: Interviews with nine country representatives in China

“In China, there is an absence of religion. The moral concept is much weaker. In my mind, when a Chinese comes to a crossroad, the decision-making is about ‘What is the benefit for me?’ I’m not saying that the society is without moral education. I’m not saying that there is no cheating in India, either. What I am saying is that, on average, the Chinese tend to think about their benefits first.”

—Prakash Menon (India), President of NIIT (China)

“I have seen so many foreign companies in which the foreigners had no idea what was going on in their own company, underneath the Chinese surface. Many of these expats get cheated on several levels and have no idea what’s happened to them. There are lots of them….”

For foreign entrepreneurs in China, the “c” word—corruption—is often one of their most serious concerns when preparing to invest in a business. On one hand, rumors abound about China’s guanxi (or relationships) system, in which backdoor connections to both government and private sources are necessary in order to operate a successful business. There is the widespread feeling that if you don’t use backdoor shortcuts to getting business done, your competitors will. On the other hand, foreign-invested businesses are subject to the tough anti-corruption laws of their home countries, such as the Sarbanes-Oxley Act regulating accounting for US companies worldwide. This situation can make for an uncomfortable double-edged squeeze for foreign-invested startups in China.

While the importance of China’s well-known guanxi system is often exaggerated in the foreign media, our interviewees did confirm that working in hazy legal “gray zones” is a fact of life in this country (see Chapter 2). In addition, as foreign-invested startup companies, they describe a clear disadvantage in comparison with large multinationals; at least to some degree, Fortune 500 firms in China are protected against the threat of corruption by their big name, high profile, and global standards and corporate processes.

This chapter covers seven main topics:

1. Putting corruption into context

2. Government guanxi

3. B2B corruption

4. Unethical employees

5. Strategies for avoiding government corruption

6. Strategies for avoiding B2B corruption

7. Strategies for fighting internal corruption

One aspect of running a business in China that all our interviewees agreed upon was that managing ethics—and guarding against corrupt business practices—is a continuous struggle. The organization Transparency International, in its 2007 annual Corruption Perceptions Index, placed China in the 73rd position among the 180 countries included in the index. (In 2006, China ranked 71st among 163 countries.)

But while some of the 40 entrepreneurs we interviewed had experienced difficulties regarding corruption, none of them had given up on their dream of operating in China. In the end, each was able to launch a successful, legally operating business in China—an achievement that several said would have been more complicated in other countries in which they had previous experience. Construction entrepreneur Phillip Branham compares China to other areas in which he operates: “In Kazakhstan, corruption is even worse. In China, most of the things are under the table at least. In Kazakhstan, they are upfront, on the table.” He adds that he has had to turn down business opportunities in Kazakhstan in order to avoid engaging in corruption—a situation he, and his company, encounters far less commonly in China.

Others among our entrepreneurs commented that China is significantly less corrupt than other emerging economies markets. Says furniture entrepreneur Simon Lichtenberg, “Other countries are much worse than China. In the timber industry in Thailand and Malaysia, for example, they have a list of under-the-table rates for different services. The rates are official,” he says. Lichtenberg adds that, while corruption is sometimes highly sophisticated in China—including operations via offshore accounts—and even occasionally lead to violence, “the overall system in China is improving.” Italian consultant Ruggero Jenna agrees that China isn’t at the “high” end of the corruption spectrum in the Asian region. “I don’t think China is very different from other countries. There are some countries in Southeast Asia and Africa that are much worse in this respect.”

American consultant Gene Slusiewicz agrees that corruption elsewhere in Southeast Asia is worse than in China. “A friend of mine in Indonesia got pulled over [by bribe-seeking traffic police] for ‘traffic violations’ many times, usually just before lunch or dinner and certain holidays. Ten thousand Indonesian rupiahs [US$1] was a common amount paid for ‘traffic violations,’ real or contrived,” he says.

Spanish consultant Josep Giro believes that China compares favorably with, say, India in terms of corruption. “In China, corruption is useful—you use corruption to get what you want to get. Here you pay the customs officer and you clear the good—I like this kind of corruption. But in India, you pay bribes and do favors, but you never get your tasks done. That’s the problem.”

The first step in managing corruption in China is to understand it. Our interviewees commented that the country’s tendencies toward corruption are rooted in cultural, historical, and economic factors.

The first trigger for corruption in China is the nation’s social norms built upon guanxi. Our interviewees explained that Chinese businesspeople today continue to follow the tradition of using social contacts, or guanxi, in both private and business contexts. Also, they report a general blurring of business life and professional life in China. At best, these social norms create a warmer, more “human” business environment than is the norm in developed nations; while at worst, the system leads to corruption. Another point is that corrupt guanxi is generally being phased out of the larger, more internationalized cities that now have a tradition of attracting foreign direct investment. As exporter Oto Petrovski says, operating in Shanghai or Beijing is becoming more straightforward. “[However,] once you go into the other areas [of China], you still find in power the traditional guanxi system. That means: if you know people in the village, you can do everything. If you don’t know people in the village, you cannot do anything.”