AKF Partners

Abbott, Keeven & Fisher PartnersPartners In Hyper Growth

The Ethical Concerns of Operating in China

Google's recent issues with operations in China shines a light on an important question for all Western businesses: How do we protect our long term operating interests when confronted with state sponsored theft of intellectual property?

The recent consideration by Google on whether to pull up its tent stakes in China is no big surprise.  Simply perform an online search for china intellectual property and you will find news articles and blogs rich with stories of intellectual property theft.  Walk down the streets of Shanghai and you will see Chinese police browsing through collections of pirated DVDs for sale.   On one hand, the Chinese government is concerned about controlling information to the population through censorship, but on the other they encourage (at the very least through a lack of action) or engage in theft to transfer intellectual property to state or Chinese business hands.  Is there really any doubt that the attacks on Google’s mail was sponsored by the Chinese government?  The real question, I argue, is what are the responsibilities of a Western company operating in China?

As stewards of companies, our fiduciary obligations are to our shareholders and stakeholders of the company.  One argument obviously is that Google has the obligation to maximize shareholder wealth and in order to do that they need to operate within China for maximum possible advertising revenue.  But operation in China carries certain operational risk as seen by the recent breach of corporate infrastructure and resulting theft of mail associated with Chinese “activists”.  This calls into question a company’s obligation to protect the interests of the data and information that makes the company money.  Theft of intellectual property can easily reduce a company’s competitive advantage relative to its competitors not just in China, but worldwide.  What if software or other products had been stolen?  What is the risk/reward of operation in the light of potential state sponsored theft versus the revenue and profit upside of those operations?

It is difficult for companies to take on governments, especially when those companies have little recourse within the country given their foreign status.  It is more difficult when the country in question takes, sponsors or allows actions against those foreign entities for the purposes of technology or information transfer.  Given the degree to which the deck is stacked against Google, and other Western companies, why would one subject themselves to the risk and potential loss?  The obvious answer as discussed above is growth and profit.  But the question remains – can a Western company truly be successful long term in China?  Will the Chinese government ever crack down on intellectual property theft and anti-competitive behaviors (rather than sponsoring them)?

Unfortunately today it appears that the Chinese government allows foreign competitors into the country in order to more quickly transfer intellectual property through state protected theft.