The end of irresponsible business practices by multinationals in China

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.

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