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China Legal. It's Just Legal. And The State Of Foreign Direct Investment In China.

By Dan Harris and Steve Dickinson

Yesterday, I wrote a post on how to succeed in China business, the theme of which was that the real keys to business success in China are related far more to do with doing business the right way than they are to anything peculiar to China. I received a great comment to that post from someone ("Chris") whom I do not know, but someone who obviously knows whereof he speaks. That comment was so good and so helpful, I am going to run much of it now:

As someone who has been involved in the evolution of a business in China over 10 years, from entry strategy to maturity, the 5 key areas outlined are spot on. Commitment from HQ is required, great people who are nurtured and developed need to be recruited locally, the market and sales channels need to be understood (what are you selling where and to whom?), key competencies need to be built ?in-house? within your own organisation both in China and overseas (key staff who understand the operating environment, compliance, the market, the challenges etc). Resources need to be committed, modestly at first then scale up as the opportunities mature and the business develops. All of this applies to business development anywhere really. Too many companies choose the staff they enter the China market quite poorly and through weak HR processes. As pointed out above, ?Chinese? or ?China expert expat? does not make someone an expert in your business in China. * * * * All of this is Business 101 for any market in the world. However it is surprising how many businesses overlook this in favour of a ?China is different?, ?relationships are everything? approach that results in them bringing in people utterly unsuited to running their China operation. In any market, employing the best people who are committed professionals in their own area of expertise is key to setting up a successful and sustainable business.

I responded to the above comment, with my own comment, which was as follows: Chris, Hear, hear! Not sure entirely why, but your comment reminds me of a story I often tell. Manufacturing client of mine with about 1500 employees is told by a Fortune 50 company that if it is going to remain as its supplier anywhere, it is going to have to become its supplier in Asia too, and that will mean a plant in China. So my client goes over to China with four very talented execs, with a combined 100 or so years experience in the industry and they meet with 4 or 5 China companies to discuss partnering. They return to the US and we all meet. They tell me about the companies with whom they met and they clearly did not like two of them and they were clearly lukewarm on one of them. They really liked two of them for different reasons. So I listen to all this and then they turn to me and ask me which one I should choose. My first thought was "why in the hell are they asking me." But since the lawyer is supposed to have all the answers, I thought more deeply, and in the most zen-like way I could muster, I told them their choice should be no different than if they were choosing a partner in Peoria. They immediately looked hugely relived, as though I had just told them that maybe their 100 years experience actually applied in China. They ended up deciding to talk further with the two companies, and then ended up partnering with one of them and that partnership has been chugging along nicely for a few years now. The point of this story and of your comment as well (I think) is that business is business and though China is somewhat different than other countries, it is not Mars and business is still business. The same thing holds true in the legal world as well, which has just given me another blog post topic. Which brings us to this post. China's view on foreign investment has changed in the last year and this change has not been for the better. Five years ago, China welcomed foreign investment at about a level 9 out of 10. At that level, China seemed glad to get just about any business into the country and it was quite lax on a lot of things. Immediately preceding the economic downturn, it was welcoming foreign investment at about a level 8. At this level, China would welcome most business with a decent job to pollution ratio. At the beginning of the economic downturn, China moved to a level 9 as its fear of job losses seemed to take precedence. During this period, China seemed to welcome any foreign business action that would contribute to jobs or at least not lead to a decrease in jobs. Now, the attitude we are seeing is that "we are China," "our economy is strong," and "we do not need you." And we are getting comments to back this up. We recently formed a high technology WFOE and it was not easy. A year ago, this company would have been the exact sort of company China would have welcomed with open arms. The company is truly on the cutting edge of technology and it will be creating at least 30 high level tech jobs quickly. Yet the local authorities seemed strangely uninterested and, at one point, when we noted that they were requesting a document from us that they had never previously requested from us in our last ten or so company formations at their office, they flat out told us that things have changed and China is strong now and we comply with their request or the registration stops. We complied and the registration went through. I have ten of these stories, all within the last six months. I mention these changes in China's foreign investment climate because our reaction as lawyers has not been not to change what we have been doing in China on the legal front, but to simply step up what we have been doing all along. In other words, if ten documents are going to be required to accomplish a China legal objective, when nine used to be more than enough, we will produce ten. No different from what lawyers do everywhere in the world. The point is that China legal is the same as China business in that the key is not to change everything because it is China, but rather to rely even more strongly on the core elements of each. What do you think? And if you want to read more on China's always evolving Foreign Direct Investment "standards," check out the following: -- "China FDI: Quality Not Quantity" (12-2007) -- "Foreign Direct Investment In China: It All Just Changed" (3-2008) -- "The Latest On Foreign Direct Investment (FDI) In China" (1-13-2009) -- "Foreign Direct Investment In China. The Times Have Changed. For Good" (4-27-2009) Please don't forget to vote for China Law Blog.

Full post as published by China Law Blog on December 03, 2009 (boomark / email).