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  • Dec 20, 2014
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CommentInsight & Opinion

The end of irresponsible business practices by multinationals in China

Simon Zadek says Beijing's crackdown on misconduct by foreign multinationals signals an end to the days of irresponsible business practices in China. And that can only be good for Chinese consumers and firms

PUBLISHED : Thursday, 22 August, 2013, 12:00am
UPDATED : Thursday, 22 August, 2013, 1:31am

Multinational corporations are under siege in China. In recent months, the government has levelled a series of allegations of corporate misconduct - ranging from food-product contamination to price rigging, bribery and environmental shortfalls - against foreign-owned companies, with important implications for the development of China's business environment.

Does the government's behaviour reflect a commitment to strengthening business ethics, marking the start of a long-overdue regulatory catch-up process? Is it intended merely to create a convenient populist distraction from China's current economic woes? Or are these revelations of often long-known corporate misdemeanours part of a complex power play involving competing Chinese interests?

The answer is probably a combination of these factors. But whatever the motivation, the message is clear: the age of irresponsible business in China is over.

The authorities' new regulatory activism is late in coming, but it will ultimately benefit Chinese consumers and firms. The targeting of multinationals - which have long received preferential treatment, including subsidies and regulatory incentives, while profiteering from Chinese consumers' distrust of locally made products' quality and safety - portends the creation of a more level playing field.

China’s ‘corporate responsibility’ agenda is shaped more by national interests than by public good

Given that booming sales of imported baby-food products have exemplified the problem of profiteering, the 668.7 million yuan (HK$841 million) in fines recently incurred by half a dozen international baby-formula producers over anti-competitive behaviour and price fixing sent a particularly strong message.

Hardly a day goes by without China's government thrusting another global brand into the limelight. Last month, China's environment ministry rejected an application from BMW Brilliance, the German carmaker's Chinese joint venture, to expand one of its plants, citing inadequate waste-water analysis and failure to meet official pollution-reduction targets. Less than a week later, an electrical fault forced the company to recall more than 140,000 vehicles, further undermining BMW's reputation for high production standards and sterling environmental credentials.

Similarly, Apple - a company famed for its customer-oriented approach - recently came under fire from state-backed media for offering substandard iPhone warranty services in China. And the British pharmaceutical giant GlaxoSmithKline, long positioned as a beacon of virtue in a sector known for its ethically dubious behaviour, has been accused of bribery, price fixing and improper research practices.

To be sure, not only multinationals are being caught out; Chinese business leaders often face far more serious punishments. Li Peiying, the head of a state-owned firm that controlled several airports, and Zeng Chengjie , a prominent real-estate developer, were just two of the Chinese executives executed in recent years for white-collar crimes such as fraud and embezzlement.

But, considering that Transparency International ranked China 80th out of 176 countries and territories in its 2012 Corruption Perceptions Index, the conviction rate among Chinese businesspeople and public officials remains disproportionately low.

Multinationals are certainly not blameless victims: many of the accusations levelled against them have proved to be true. But the timing and type of allegations against multinationals have so effectively damaged their brands that one might ask whether there is a deeper logic to the government's actions. Exposing foreigners' ethical failings and ruthless business practices sends the message that China must remain vigilant, while reinforcing the legitimacy of a powerful, interventionist state, including state-owned enterprises, which have come under increasing fire in recent years.

Multinationals are enmeshed in China's complex political economy - and entangled in the patronage system that underpins it. Credible, responsible business practices are becoming increasingly important rules of the game, as citizens use tools like social media to challenge their leaders to take action against hazardous products.

This shift is reflected in the proliferation of rankings, indexes and high-profile awards. Following international practice, companies are responding with advertising campaigns, strategic philanthropy, public sustainability reporting and even stakeholder dialogues.

But China's "corporate responsibility" agenda is shaped more by national interests than by principled notions of the public good. In this environment, adopting business practices that advance China's interests is essential for companies to secure official support, public trust and, ultimately, continued access to the world's largest consumer market.

Today, high-profile philanthropy counts for little, while demonstrable environmental compliance, previously less important, is essential. Technology-rich companies are expected to pursue continuous technology transfer and, increasingly, to localise their research and development capacity. At the same time, firms must work diligently to uphold ethical practices in a corruption-riddled system in which state actors are often would-be partners in crime.

A new era of corporate responsibility has begun in China, and not a moment too soon. As with other aspects of China's transformation, it draws pragmatically on international practice, but is defined by its Chinese characteristics. Global business leaders should take note.

Simon Zadek, currently visiting scholar at the Tsinghua School of Economics and Management, is senior fellow of the Global Green Growth Institute and the International Institute for Sustainable Development. Copyright: Project Syndicate


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This article is now closed to comments

Dai Muff
I am sorry but I find this a little naive. Almost everyone doing business in China, including charities, knows that the entire system is so rotten you begin at an incredible disadvantage if you do not play the game according to their rules. That ranges from business collaborators expecting you never to turn down an offer of a drink, offers of young ladies providing sexual services, climbing into metaphorical bed with disreputable companies, etc. The problem then is that if you do, they have something to hold over your head any time they want to make an example of you. Better not to play the game, but let's not pretend the environment is conducive to honest dealings.
The author writes, "The authorities' new regulatory activism is late in coming, but it will ultimately benefit Chinese consumers and firms," and makes it sound like a good thing. I agree somewhat, but keep in mind a party which cannot be voted out of power lavishes money and favors to its exclusive club of enterprises that are "FOTP" ("Friends of the Party"). Yes, it is nice to know that foreign firms who allegedly have been abusing the market there may now have to play by the rules (whatever those rules are currently, of course). However, Chinese firms have seldom been playing with one hand tied behind their back, starting from joint ventures that have tried to suck intellectual property from their foreign partners to now regulators that tell foreign firms they have to operate in the China market without first-rate lawyers.
Ask yourself: How would it look if the US or UK government brought foreign firms into a room and told them if they hired foreign lawyers to protect them, they could face even bigger fines? It would look terrible in New York and London, as it does in Beijing.
Agreed. Often, from the individual level or the small business level, all the way up, you don't get the job or the business if you can't be compromised in some way. You don't win if you don't play-- and you definitely lose if you play fair.
"A new era of corporate responsibility has begun in China" - what twaddle. This is simply the age-old tactic of attacking the foreigner to benefit Chinese. The foreign multi-nationals would not indulge in corruption if it were not endemic in China's rotten system.
The Western nations should take note of the Chinese method of doing business and treat them as pariahs.
Foreign firms are "profiteering from Chinese consumers' distrust of locally made products' quality and safety"?
So because Chinese firms intentionally poison Chinese consumers and try to cover it up with the help of government officials resulting in increased demand for foreign products, foreign firms are "profiteering" by meeting that demand?
This op-ed is confused. Any thought that these attacks will lead to "a new era of corporate responsibility" among both foreign AND Chinese firms is foolish. It is simply an attempt to discredit foreign firms so that Chinese companies can be the winners of China's shift to a consumption-based economy.
The desired role of foreign companies is as you mentioned: "Technology-rich companies are expected to pursue continuous technology transfer and, increasingly, to localise their research and development capacity" or as I would phrase it: "Invest, export, drop off their technology and leave when they no longer have any use." It is not to sell products in China, which, unfortunately for the government, foreign companies have been doing quite well at lately.
Hope Tsinghua is paying you well
Some people are still naive. Foreign companies and foreigners are not really welcome anymore, except to give away technology, buy Chinese products for exports and kowtow to the government. Then Chinese are surprised about anti-Chinese initiatives in foreign markets. In China Chinese companies are free to have monopolies, fix prices and whatever they want. One day China will get the message that this extortion and blackmail won't work as well as before. I see many expats leaving, for visa reasons but also because they feel there is no more fair business. The big companies remain but now come into the firing line. Are MNC to blame for some of theeir attitudes? Yes, for sure. But clampdowns are always first and often only against foreign companies. The ones that suffer most are foreign SME.
As others have noted, this article is complete rubbish and doesn't address the actual situation in China at all.
Most foreign companies in China were already very careful about how they conduct business in the country - far more careful than they are in other markets. This cautious attitude is due to the capricious nature of government regulation and investigation in China. In this respect, the description in the article of how foreign companies conduct their PRC business is not at all accurate.
You want an example of the quintessential academic essay, short on insight and any research? Here you have it.
Why are the Chinese beating up on the foreigners now? Could be about ginning up the grievance angle. "We're okay, but the foreigners, well you got to watch them." So focus on the Japanese in World War II and don't concern yourself with the much greater damage caused by the Cultural Revolution.
"The targeting of multinationals - which have long received preferential treatment, including subsidies and regulatory incentives, while profiteering from Chinese consumers' distrust of locally made products' quality and safety - portends the creation of a more level playing field." This is truly stupid. Sorry Professor Zadek, foreign companies face many more limitation than incentives from the Chinese government. Many SOEs and government entities work to insure as much procurement is domestic as possible. Many of the subsidies and incentives the author talks about are enjoyed by Chinese companies that masquerade as foreign. As for the Chinese consumers distrust of locally-made products, consumers are acting rationally.
One thing that Zadek probably doesn't realize, but those that know Chinese well do know, is that a great number of Chinese companies adopt foreign sounding names for credibility. Have a look at apparel retailing and see all the foreign sounding brand names that are in fact Chinese. This practice extends far beyond apparel.
It is common knowledge that to do biz in China, one conforms to the common practice of collusion and bribery by paying off through layers of "middlemen" - MNCs or otherwise - hospitals and the health system being prime examples. Why the MNCs are picked out to be "prosecuted" is a mystery as most other offenders are "big biz", government-owned or -related. It seems the country had gone "crazy". Is the crackdown on MNC pharmaceutical companies a prelude to crackdown on the corrupt medical system? If so, it may be too good to be true.
The author was going along fine, actually, until the fourth paragraph where the premise started to fall apart and he started showing his true colors: trying to further cement his guanxi with Tsinghua to guarantee future "visiting scholar" junkets, possibly leading to a high position when Tsinghua eventually opens a cooperative campus with his Global Green Growth Institute and making him a big shot. Academics love this sort of "rock star" status.

But this is actually how these multinationals also do business in their own countries. Its just that people living in "democracies" don't realize the extent of the corruption and the sophisticated methods used to conceal it.
call it by another name, lobbyists but the game is still the same in varying degrees.
Anyone naive to think it not happening in some HK industries?
"demonstrable environmental compliance"? 哥们, pleez.


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