Hello everyone and thanks for reading another edition of my China Tech Law Newsletter. Today’s post is about the current environment for foreign investment in China. I’m not going to get into all of the details of different policies, I'm going to discuss the overall point I’ve been making on calls with clients now and over years past. There have been a lot of stories in the press about how China is not welcoming foreign investment anymore.
For sure, things like the new regulations on data security requirements that have been implemented and related inquiries by government authorities into foreign (and domestic) companies continue. And the definition of what is considered “national security” is expanding, although you could say the same thing about almost any country these days. China gets more attention in many ways because, well it’s a bigger part of the global economy than it used to be.
I think the broader point is, even if we were to assume that national regulators and national policies are getting more stringent in their approach to regulating companies, that does not necessarily equate to being inhospitable to foreign investment.
If you’ve read this blog at all before, you’ll have seen me say many times that regulators to this day are still not actively trying to look, for example, into any openly gray zones on VATS/ICP licenses to see whether cloud software companies are in full compliance there. If they did, there would usually be something the company did completely unrelated to the license that is the driver for the inquiry, which again, is rare and the exception not the norm. This story is the same across industries.
Also, just like in the US and elsewhere, we really need to distinguish the approach of the national and local governments right now. There is no omnipresent, one voice on issues like this. Local governments in particular, due to budget pressures are hungrier than ever for foreign direct investment. I was on a recent call with a client which is starting to do a business in China which in the past would have been seen as too new, too untested, too many variables for whether all aspects would be fully kosher in China. To my surprise, but now not surprised at all, the Shanghai government is actively recruiting them to expand in China with Shanghai as a base. That’s Shanghai. Imagine the welcome-with-open-arms reception you’d get in a second or third tier city to invest there now?
One other thing that is in the mix - China has a lot more local champions now. Companies which are very eager to expand out of China given all the intense competition in China (see earlier post). The companies that can survive this competition are ready to become world-class once they hit the global stage. Did they get there from being in close proximity to foreign companies all these years? Sure, but not necessarily because hard IP was copied. Because they were in close proximity to good ideas, good business practices, top talent that was brought up and nurtured at global companies in China which have now migrated to local champions. That’s inevitable and not to be feared.
Global companies are global because over the course of decades, they’ve managed to stay one step ahead. Even if that advantage is fading in China, global companies still benefit from being in-country. Where we see more and more multinationals increasing not decreasing their investment in China precisely because they need to learn just as much from Chinese companies now and the market in China as Chinese companies need to learn from them. At the same time, it’s also about mentality. I recently did a podcast with the former head of 3M China, who emphasized the point that 3M succeeded by viewing themselves as a local company with local decision making and local speed of execution.
In the end, I’d sum it up like this. On the one hand, China is bigger, has more local competitors, and then you might argue in the aggregate less in need of foreign investment. But on the other hand, because its bigger it’s also more confident that it can manage new businesses, new business models, new technologies, and embrace the innovation those things create. And that produces opportunities for foreign and local players alike.
OK, that's all for this week. Please continue to catch these posts every 14 days, and subscribe if you haven't already! See you back here again soon.
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