Thursday, May 31, 2007

Chinese Partners, Western Firms and the "Hotel California"Effect

In a recent post on the China Economics Blog, this article describes the problem of corruption in the Chinese Central Government which might arise when a foreign company tries to break into the China market.

In recent economic papers by myself and others it has been shown that corruption has a negative affect on FDI (at the country and regional level) as well as damaging reputation effects (and why of course China likes to keep all publicity about corruption levels to a minimum). This is not, of course, much of a surprise although there is the "speed money" theory where high corruption levels act to attract FDI if the investor believes that well placed bribes can speed up certain processes (and may then even result in increases in economic growth).

It is interesting therefore to get a new perspective - that of the advice given by foreign partners to Western investors/partners.

What is particularly interesting is that the "advice" from the local Chinese firms gives us an excellent glimpse into what is really happening on the ground and the perceived levels of corruption from locals.

This is in no way is meant to encourage Western firms to break the law but what is does show is that Western firms who DO stick closely to their perception of what the law is, are at a competitive disadvantage compared to local Chinese firms who may be taking so-called "short-cuts". Local firms are therefore exploiting local knowledge for economic gain and thus making business harder in China that it would be in a corruption free economy.

The other interesting aspect is what could be called the "Hotel California" effect. This is where foreign investment is allowed in with few restrictions, but once there it is made very difficult to leave.

To view this article at its original location click on the title of this post.

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