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Harry Cassin
Publisher and Editor

Andy Spalding
Senior Editor

Jessica Tillipman
Senior Editor

Bill Steinman
Senior Editor

Richard L. Cassin
Editor at Large

Elizabeth K. Spahn
Editor Emeritus

Cody Worthington
Contributing Editor

Julie DiMauro
Contributing Editor

Thomas Fox
Contributing Editor

Marc Alain Bohn
Contributing Editor

Bill Waite
Contributing Editor

Shruti J. Shah
Contributing Editor

Russell A. Stamets
Contributing Editor

Richard Bistrong
Contributing Editor

Eric Carlson
Contributing Editor

Another Look At China

Yesterday we talked about a recent story in the Chinese press blaming foreign companies for more than half of the PRC’s corruption, and singling out U.S. companies that violated the Foreign Corrupt Practices Act in China. On reflection, we may have been unduly skeptical about China’s motives for publishing the story. So today we want to set the record straight.

To be clear, the PRC’s economic policies and the results they’ve produced are phenomenal. Last year the country attracted nearly $75 billion in foreign direct investment. Total FDI has topped $700 billion. There are now some 120,000 foreign-invested enterprises in the PRC, double the number from just 2002. The economy is still growing at over 11% a year, and in a country of more than 1.3 billion people, per capita income has reached around $5,500. Foreign businesses in China are getting bigger. McDonald’s this week said it plans to open 125 more outlets there in 2008, and Dunkin’ Donuts wants 100 new locations in Shanghai alone over the next 10 years. What’s the growth look like at street level? Our first visit to China was in 1993. Crossing main roads in Beijing was nearly impossible because of the streaming bicycles pedaled by factory workers wearing black Mao suits. The same blocks now make up some of the world’s fanciest neighborhoods — upscale condos and cafes filled with world-class fashionistas, and streets flowing with BMWs and Audis, Lamborghinis and more.

With such a staggering level of foreign activity in the economy, it’s logical that a lot of the corruption over the past ten years can be traced to foreign companies. We thought 64% — the amount noted in the aforementioned story — sounded too high. But it could be close to the mark after all. For sure, the number of Foreign Corrupt Practices Act enforcement actions and investigations related to China has ballooned over the past few years. Among the companies involved are Lucent Technologies Inc., Faro Technologies, Inc., York International Corporation, Paradigm B.V., Schnitzer Steel Industries Inc., InVision Technologies, Inc., Diagnostics Products Corporation, Alltel Corporation, BearingPoint Inc. and UTStarcom Inc. Siemens may have FCPA issues in China, and there could be others. That’s a long list in the rather limited FCPA universe. So what gives?

We’ve wondered before if some companies go into certain countries — China, Nigeria and Indonesia come to mind — expecting to find a corrupt environment. And once there — no matter what they find — they lower their compliance standards instead of raising them. Some pundits in Nigeria have talked about this syndrome and how it victimizes the local economy and the people in it. Perhaps the Chinese press is now sensitive to the same thing.

So in the spirit of the approaching Lunar New Year — the beautiful character above means “rat,” the sign next up on the Chinese calendar — we acknowledge that ten years ago China put out the welcome mat to the world’s entrepreneurs on a scale never seen before. Since then people by the billions have enjoyed the fruits, both in China and around the globe. At the same time, the Chinese government has struggled with public corruption — as most developing economies do. It has fought against it using all available weapons. [Sometimes we cringe to read about executions for bribe-taking there.] Now China is telling the international community that a big part of its corruption problem is imported from overseas — even from the United States. It’s a good reminder to foreign companies — especially those required to comply with the FCPA — that instead of being part of the problem they should be part of the solution.

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  1. Pointing fingers at Western companies is a very common tactic used by the PRC to deflect public anger away from purely domestic concerns. Witness the sudden need to publicly lambaste McDonalds over supposed labor violations and to demand establishment of a “union” at Walmart just at a time when there were some widespread worker protests in several regions of China.

    As far as corruption goes, it does not surprise me that many foreign companies are found in violation in China. In fact, if the rules were interpreted very strictly, I suspect they would just about all be in violation. However, it is typically the local staff who are the initiators while the expatriate management remain blissfully unaware until there is a problem. In fact, corruption is probably easier in many foreign companies in China than it is in domestic Chinese ones because of the lack of understanding of Chinese business and lack of controls that foreign management typically have.

    In my experience corruption in China typically takes one of the following forms:
    1) Done by local staff without the knowledge of management for their own, or more typically their relatives, gain.
    2) Done by local staff with the approval of management because the local staff have convinced management that the company is under threat if they don’t do this
    3) Done by Overseas Chinese (for instance American Born Chinese) who are often hired to manage foreign operations in China. Many times these people will have relatives in the Chinese government or business who will put enormous pressure on them to help them out. In truth, these American born Chinese don’t know much more about how business in China works than any other expat and given the strong family pressure they cave in.
    4) Foreign expats that get involved in corruption related activity at the behest of their local girlfriends / mistresses

  2. Wondering what is the impact of the increasing activity of private equity firms coming into China? Are the partners of a fund which takes a controlling stake in a Chinese company (but maybe not 100%) exposed to FCPA because of the actions of employees of that company? How about the directors that the PE fund appoints to the investee company’s board?

  3. Good questions. Yes, private equity funds and their partners are exposed in different ways. A huge amount of ongoing compliance activity in the PRC is now originating from PE activity. The partners and managers of most funds are very sophisticated when it comes to the FCPA and aren’t taking any unnecessary risks — like serving as board members on companies that might have compliance problems (whether or not the funds control the companies or are minority investors).

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