Global Economics

China Rolls Up the Welcome Mat


For the past two decades, China has largely welcomed foreign businesses. The easiest way to kick-start the country's plodding socialist economy, the leadership believed, was to bring in technology and knowhow from abroad. And the foreigners came in droves.

Lately, though, that attitude has started to change. Non-Chinese companies today are increasingly seen as intruders wanting to suck profits out of the mainland without giving enough in return. China seems to be saying that it has absorbed sufficient technology, thank you, and that it's time to return to China's earlier habit of expecting foreigners to pay tribute.

Chinese papers and blogs show many signs of resentment of foreign businesspeople and how they're changing China. Complaints include attacks on monopolies in general, then single out foreign companies as examples of those that dominate a sector. Recent articles in newspapers have denounced the sale of shares in Chinese banks to overseas financial institutions, and complain that Chinese brands disappear when bought by foreigners.

Worse, the government apparently supports these views. The Chinese People's Consultative Congress reacted negatively to the rumored purchase by Caterpillar (CAT) of a Chinese company. In mid-May press reports said the State Council was planning to bar foreigners from owning a majority stake in certain Chinese machinery manufacturers. After decades of provincial governors approaching multinationals while brandishing brochures and CDs about the advantages of investing in their locales, this is a new tack.

ANNOYED BY DOUBLE-DEALING. All these are symptoms of a growing antipathy toward foreign investors and a feeling that the country no longer needs outside assistance (or interference) in its development. There is something to this view. The U.S. and Europe criticize the Chinese for bilateral trade imbalances, yet the mainland only produces 40% to 50% of the content of exported goods. Most foreign manufacturers tend to import their high-tech parts from Japan, Taiwan, or South Korea; then in China they add casings and castings made out of imported raw materials -- and export the results.

From Beijing's point of view, this is a stranglehold: The foreigners use inexpensive Chinese labor and pollute the Chinese environment, while importing raw materials such as oil and copper and using excessive amounts of energy. And then, instead of appreciating China's contribution, the world castigates the mainland for being dirty, finessing its exchange rate, and producing too much cheap stuff. It's not difficult to understand the resentment.

At the same time, Chinese companies feel the pinch of competition and are trying to build global organizations. Describing the tensions facing Chinese executives as they look abroad, Mansour Javidan and I predicted the increase in nationalistic behavior in the Harvard Business Review last December. In a multination survey, Chinese executives were the only ones to respond that being "worldy" was a negative trait for a manager.

BORN-AGAIN HARDLINERS. For them, "worldly" carries the connotation of being tainted by outsiders, and so raises the question of whether such a person is still true to his Chinese heritage. For decades, multinationals have hired Chinese who lived in the West to manage operations in China, assuming that the shared cultural background would ensure success. On the contrary, such returnees are often viewed with suspicion by locals, who believe these managers are "no longer really Chinese."

Mainlanders even have mixed feelings when their own executives circulate on the world stage. On the one hand, they feel it is only proper that China be heralded at the World Economic Forum in Davos, Switzerland, or take center stage at international events. China belongs among the leaders, they feel.

But on the other hand, CEOs who spend too much time with foreigners are suspected of betraying their countrymen, of becoming too different. As a result, we see these internationally polished top executives returning home, refusing to be seen in China with foreign peers, and taking particularly hard-nosed stands against companies, policies, and moves from outside the country. They almost outdo the conservatives to "prove" that they are indeed still truly Chinese.

DRAGON AWAKES. The administration of President Hu Jintao seems to support this tendency. Unlike earlier governments, Hu and his top deputies have spent little time abroad; their roots are in the poorer regions of China and, indeed, their attention has been focused on domestic issues and on improving living standards in the countryside. They rarely meet foreign business delegations and they encourage resentment of monopolies, which they equate with foreign industry.

The resentment flows the other way, too. In the U.S. and Europe, despite ample evidence to the contrary, the broad population and some governments see Asia as the reason for local job losses. The European Union is slapping tariffs on Chinese shoes and textiles, and the U.S. government has barred Lenovo-IBM PCs from the government network. It is not a pretty picture anywhere.

But the Chinese add a twist that easily turns their resentment to arrogance. They see their rise as a historical inevitability, with the past 200 years of poverty being a blip of bad luck on the historical screen. According to an Organization for Economic Cooperation & Development study by Angus Maddison, China in 1820 produced a third of the world's gross domestic product. In 1950 it was 5%. But by 2025 it's projected to grow back to 25%. Against this background it's easy to understand the Chinese feeling that Western companies that want access to the mainland can increasingly be ignored.

WALL GOING UP? What do these changes mean for multinationals? U.S. and European investors face tougher negotiations with state-owned enterprises when they seek to start or expand joint operations. Even those that have long histories with a particular partner are surprised at the lack of openness. Increasingly, multinational corporations that had planned on expanding operations in the mainland have quietly reduced the importance China plays in their global strategies, and are looking at other Asian countries instead.

Will this matter to China? In domains such as high tech and research and development, foreign investment will continue to bring knowledge that the Chinese lack. But increasingly, the lessons from two decades of massive investment of capital, technology, and management have already been learned. Whether Chinese organizations will apply those lessons successfully, or perhaps develop a different model, is another question.

Are we returning to a Qing Dynasty-like assumption that China does not need Western technology and could close itself to international commerce? It seems that developments have gone too far for that, but the screws are tightening, and foreign companies investing in China may find they need to spend more time studying the political tea leaves.


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