Technology for Market: A Tricky Balance, or a Fatal Attraction?

Last March, General Electric signed a USD $900 million contract with Beijing to bring high-tech turbines to China and build them. Intel announced in late September it will invest USD $1.5 billion in Chinese mobile chip maker Spreadtrum (1). US chip maker Qualcomm, the largest in the world, dominates foreign investment in China's high-tech industry.

Yet GE anticipates long-term losses for short-term gains: its contract with the Chinese government stipulates technology transfer, a policy requiring foreign companies to share priority information and knowledge about their products. GE is particularly sore about this caveat as it has spent nearly half a billion dollars developing the technology Beijing demanded it give away. And while Intel looks to Qualcomm’s gains in China, it may reconsider its enthusiasm as the latter faces allegations of violating anti-monopoly laws (AML). No court has ever sided in favour of foreign companies in AML cases in China.

A Tricky Balance

Are AMLs and technology transfer demands examples of the CCP’s anti-free market, arbitrary whims, or do they represent justifiable protectionism to help domestic businesses get a leg up on powerful foreign competitors and prioritise domestic growth?

Historically speaking, the Middle Kingdom has few fond memories of the foreign pursuit of capital in its lands. President Xi’s ‘Road to Renewal’ promises to counterbalance China’s ‘100 Years of Humiliation’ with a bright and prosperous future (2). But 19^th century gunboat diplomacy—which forced open Chinese markets, spurred two unsuccessful wars to fend off the foreign devils’ corrupting influence, and salted the wounds by making China foot the exorbitant bills for its defeats—seems to haunt China’s position towards how much autonomy to grant foreign business outfits on home soil.

Today, free market democratic capitalism reigns in place of yesteryear’s colonial exploitation. Yet pending the outcomes of this week’s (Oct. 20 - 23) rule of law-themed party plenum (3), China officially accords to the dictatorship of the proletariat (amounting to CCP authoritarian rule) rather than the rule of law. Government antitrust policies exist to protect Chinese markets from foreign monopolisation. But US-China Business Council president John Frisbie has raised concerns that anti-monopoly laws are leveraged to protect local industry and discriminate against foreign companies (4).

On the one hand, many foreign firms are chomping at the bit to make money in China. On the other, their enthusiasms are tempered by the idiosyncratic costs of doing business here. Technology for market in China is a seemingly lucrative gamble, but the stakes look as high as the rewards look fruitful. What foreign investors stand to gain in such a big market must be held against the loss of proprietary technologies, not to mention potentially expensive legal disputes in opaque, unfair judicial systems beholden to local party lines, should foreign companies come under fire or take to task illegal activities (such as copyright infringement). Some companies are asking themselves (or should be): Do the risks outweigh the benefits? What can be done to appease Beijing?

Fatal Attraction?

Well, let’s not beat around the bush: in China, the CCP will get what it wants. The power structure of the Chinese Communist Party has a practically unfathomable reach. Suffice it to say that the CCP has fingers in the pies of, meaning members present in, every registered firm employing more than 50 staff (5). Despite this unbalanced investment landscape, General Electric, Intel and Qualcomm are hedging their bets on growth.

By doing so, these companies are asserting that gains outweigh loss, that technology transfer is worth the reward of access. On getting dirty with the government, Alibaba’s Jack Ma has advised, “you can fall in love with the government, but don’t marry them” (6). This may be of little solace to foreign investors, however, who have little to no say in the relationship.

Technology transfer has itself been a sensitive issue and long-running theme since before China joined the WTO in 2001; it’s been an integral part business in China almost since Deng Xiaoping’s Open Door Policy kick-started the Chinese market economy at the end of the 1970s. Some, like economists Linda Yueh and John Van Reenen, argue that technology transfer is a core component that has helped fuel and propel the Chinese economy to its famous growth rates (7).

Yet in response to this week’s plenum, a professor at the China University of Political Science and Law, Li Shuguang, told Reuters that a fair and balanced legal system was paramount for China’s sustained economic growth (8). Some are sceptical of how much reform could really be implemented, but the gesture may certainly calm the nerves of investors wary of foreign investment with Chinese characteristics. The BBC recently reported growth rates for China marginally higher than expected (9), and whether this was helped or hindered by China’s strict regulations on foreign investment, one fact remains clear: amid the complaints and clamour against technology transfer and AML, the cost does not outweigh the temptation for technology for market in China. Yet.