Starting and operating a business in China can be a challenging, and even exhausting, undertaking. Obviously a multitude of individuals and multinational corporations feel the rewards of reaching this huge market outweigh the negatives. Still, how do businesses get by in a regulatory environment that is often likened to a maze? How important are Chinese language skills and relationships with natives to a business’ operations? How pervasive is corruption, and what should expatriates do when they feel they have no choice but to pay off officials? These are questions on many an entrepreneur’s mind, and this article aims to sort out some of the numerous misconceptions surrounding the Chinese business environment.

 

When I askedBill Dodson, Director of Strategic Analysis at TrendsAsia Ltd. (http://trendsasia.asia/) and author of China Inside Out: 10 Irreversible Trends Re-shaping China and its Relationship with the World, what he thought about China’s regulatory system and the challenges it presents foreign businesses, he had this to say, “I must have visited a hundred economic development zones… [yet] there is no single person in any of these zones who knows the entire system”. “It’s impossible”. He went on to remark that there is no way a single person can get a bird’s eye view of all the approvals, procedures, documentation, licenses, and other paperwork that will mean the difference between profitability for their company, or abject failure. So, what does one do if it’s impossible to understand all the myriad risks involved in one’s industry? “Transparency and control are paramount,” Dodson stated. Before you set up your company, learn everything you can as well as you can. Get as much in writing and signed by authorities as possible. Retain control over every process, and research every regulatory demand on your company to its most detailed level.

This detailed planning includes researching where you want to set up your company. Dodson recommends finding what zone fits your business and investment, rather than the other way around. While small and medium enterprises (SMEs) will only get extra government attention away from the east coast (developed areas will mostly likely blow them off), that attention cuts both ways. While the company might be able to get more concessions on things like services and tax rates, Dodson describes a “feeding frenzy” where various bureaus in the hinterland all try to get a piece of this new investment. The net result may be greater expenses than the initial savings were worth, so it’s important to learn the local environment before jumping in.

In my own travails of trying to work with (and sometimes around) China’s regulatory system, I found the need to find answers to questions whose existence I wasn’t even aware of. It’s like Donald Rumsfeld’s confusing quote, “There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we now know we don’t know. But there are also unknown unknowns. These are things we do not know we don’t know.” It’s these unknown unknowns in the murky world of China law that haunt entrepreneurs. The only way to get around them, unsurprisingly, is to ask hypothetical questions based on hypothetical events that might hurt your business. For instance, when promised that you’ll have no problem getting a certain permit, ask what happens if you’re unable to get it? A common source of problems is delays; ask officials what might happen if you can’t get approved for a certain license by a given deadline. Insulate yourself from risks you don’t know exist by thinking outside of the box.

In terms of risk, no part of setting up a business can be quite as risky as including a local Chinese partner. In terms of overcoming many of the obstacles described above, help in the form of relationships with well-connected or powerful business leaders and/or officials is a life-saver. Still, one should be careful about the terms with which one receives help from a Chinese partner. Tales of Chinese partners stealing a business out from under other parties aren’t just reserved for English language publications; they happen between natives all the time. Even consultants and advisors can end up with more control over your business than you imagined if you don’t check the fine print.

That brings us to one of the things most closely associated with foreigners doing business in China: corruption and bribes. While it’s easy to lambaste China as a whole over high-profile stories about Western businesses making payoffs just to stay in “the game” over here, no country is completely free of graft. To get a more objective opinion on the matter, I checked out Transparency International (http://www.transparency.org/), a non-profit site committed to fighting corruption all over the word. On their 2009 Corruption Perceptions Index (CPI), a compilation of the results of several studies on businesses and their opinions on corruption, Transparency International ranked China at 79 out of 180 countries. While it’s disappointing, to say the least, to find the world’s number two economy matched with Burkina Faso, and just behind the likes of Colombia and Cuba, China outranks India, Thailand, Indonesia and other developing nations around the world. In other words, it’s in the middle of the survey. In that context, it’s realistic to say that while corruption is perceived to be a large part of overall business here, not every single company feels pressured to make payouts to keep their operations running. Like many other parts of working within the regulatory framework well, avoiding corrupt officials also takes good planning, so that contracts and documents entitle you to services that would otherwise be acquired through bribes.

The challenges to foreign entrepreneurs and workers alike in China are numerous and vast. The legal environment in China is in many ways in its infancy, and local bureaucrats are notorious for being ignorant of regulations that govern their respective spheres of influence. Still, as with every other obstacle in China, many find it worth the hassle of dealing with this hectic environment in order to get to the prize: the massive market concealed behind the countless doors of regulation. If you’re persistent, tenacious, and enjoy building relationships with locals that will pay dividends in the future, China may just be for you!

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