The environment for foreign companies in China has been getting steadily tougher since 2006, when the nation came to the end of a five-year schedule of market-opening measures it pledged as the price of admission to the World Trade Organization. Soon after the WTO-mandated reforms concluded, foreign firms began to complain of an increase in discriminatory practices, more difficulty in getting licences and approvals, and a generally less friendly attitude from officialdom.
These problems persist, and pretty much every year brings some high-profile tale of woe from an MNC in the Middle Kingdom: Coca-Cola’s thwarted effort to take over local champion Huiyuan Juice in 2009; the arrest of Rio Tinto executive Stern Hu in Shanghai in 2009 in a iron-ore pricing corruption scandal; Google’s acrimonious exit from the market in 2010 amid allegations of government hacking; the arrest of several Wal-mart employees over the mislabeling of pork products in 2011; Caterpillar’s epic loss of $580 million in 2012 after it acquired a Chinese construction equipment company that had fraudulently inflated its revenues; and this year the burgeoning bribery case involving GlaxoSmithKline. It’s easy to get the impression that China is no longer open for business.
But the headlines are deceiving. Data and company surveys both show that China continues to be a magnet for foreign firms. Greenfield foreign direct investment, according to the Ministry of Commerce, has held steady at US$105-115 billion a year since 2010, well above the pre-crisis level. Inflows in June exceeded $14 billion, the highest monthly total since 1997. Broader data from the central bank, which include reinvested earnings, show that foreign companies committed a quarter of a trillion dollars to China in 2012.
Member surveys by foreign chambers of commerce consistently reveal that despite their discontent, foreign companies in China are still quite profitable and generally want to increase their investments. A walk down any Chinese high street will quickly confirm these numbers: foreign brands occupy a far larger and more visible slice of the market in China than in most other Asian countries, including Japan, Korea and India. And big cities are filled with tens of thousands of young foreign entrepreneurs who find it easier to start a new business in China than in their home countries.
How to square the dire headlines with the cheery reality? I think several factors are at work. First, China is “normalizing.” In the late 1990s and early 2000s, China was desperate for foreign cash, and rolled out the red carpet for big foreign companies. CEOs of multinationals routinely enjoyed visits with high-level government officials, right up to the Premier. Now China is a cash-rich economy and it doesn’t need to flatter foreign egos to keep growing.
Second, the economy is slowing and restructuring, and yesterday’s winners are having trouble adjusting. Lots of big foreign firms (such as Caterpillar) profited from China's investment boom, but as the boom fades their prospects do too. Yet Chinese companies face this problem too, and some MNCs may be better placed to weather the downturn than their local competitors, because of superior efficiency and cost control.
Third, the bigger the firm, the bigger the obstacles. Big companies often operate in capital-intensive sectors (like petrochemicals) where government licensing requirements are highest. And because they are big, their difficulties easily capture headlines. Smaller firms operating successfully in less regulated sectors just don't grab the media's eye. Another problem with bigness is that when the government starts a crackdown, it often picks a foreign company as its first target. This may be why Glaxo was singled out amidst the rampant corruption of China's prescription drugs market.
Finally, there’s no question that China is a bit of a Wild West economy, where sharp dealing and favor-buying reign, and lax regulation is the norm. When foreign firms can exploit these conditions to their benefit, they keep quiet. When they get bitten, they complain. On the whole, though, the evidence shows that foreign companies win quite a bit more than they lose.