Strategy

The Olympic effect

Have the Beijing Games spurred more Canadian companies to invest in China? Not really, but other factors have.

When Beijing was awarded the 2008 Summer Olympics in 2001, many hoped the Games would encourage the mysterious Middle Kingdom to adopt a more open policy toward the rest of the world. A large driver in that process, it was believed, would be a welcoming of increased foreign investment and Western-style business practices.

International Olympic Committee members, Western leaders and Chinese officials themselves all spoke of how hosting such a globally inclusive event would go a long way to accelerating such change.

Now, as athletes finally descend on Beijing and begin chasing gold medals, can those leaders claim their own victory around their challenge of opening China to Western business?

Not really, according to William Dodson, a Shanghai-based consultant to Western companies.

“The Olympics have had no discernable impact on investment figures,” he says. “For years now, many Western companies have wanted a slice of the Beijing Olympics pie, and some may have won contracts to supply products or designs. But in the overall scheme of foreign direct investment into China, the contribution is minimal.”

In many ways, the hopeful Western business and economic leaders have been powerless to affect change, due to the intransigence of China’s system itself. Dodson says it continues to suffer from a lack of transparency and citizen trust in its governments and financial institutions.

“The Chinese way of doing business is more one of avoiding institutions than using the institutions to facilitate business aims,” Dodson says. “Hence, business in China is much less transparent than in the West, with the aim of gaining the greatest financial advantage as quickly as possible.”

Chinese businesses achieve these ends, Dodson adds, by keeping several sets of accounting books, paying employees through an ad hoc set of allowances to escape minimum salary obligations for their industries, and a convoluted network of relationships with friends and family that can be trusted to keep secret any activities that may be deemed by law to be grey or black.

The forbidding shadow of China’s horrible human rights record has also helped deter the flow of Western business thinking. Widespread torture, thousands of executions each year after closed-door trials, and unchecked police power remain harsh realities.

“There have been very few noticeable improvements in human rights and, in some respects, the situation has deteriorated over the past decade around harassment of human rights activists,” says Alain Roy, program director of the Canadian section of Amnesty International.

He adds that his organization is encouraging foreign investors to factor the human rights situation into their dealings with China.

“We understand that companies…have limited influence, but they should not remain silent. They should always try to engage China in a dialogue and share their values and core beliefs and the importance of human rights.”

One entrepreneur in Kingston, Ont., however, believes that some companies in his industry are purposely staying silent not only about human rights in China, but also about their involvement there.

Larry Showler, owner of Frontenac Outfitters, says some North American manufacturers of canoes and kayaks are farming out production to China and shaving up to 30% off their costs in the process. What angers Showler is these firms’ apparent reluctance to inform consumers about where the vessels are being made.

“It’s being hidden, without question, and I think people have a right to know before they purchase.”

Unlike clothing, “where people don’t even look anymore” as to a garment’s place of origin, Showler says paddlers care a great deal about where their canoes or kayaks are built. They tend to be well-educated and environmentally conscious.

“We’re starting to learn about carbon footprints [in China], and all the shipping and the lack of human rights and all the other things that are happening as well,” Showler says. “People are passionate. They don’t want to have a product made in China.”

The WTO effect

While the Olympics may not have amounted to the catalyst for business change that some believed they would be, China has nevertheless progressed on some fronts throughout this decade.

Another event that occurred the same year Beijing was awarded the Olympics has had a much more profound effect on spurring increased Western influence: China’s entry into the World Trade Organization. Michael Ma, president of Forte Enterprise and Trade Ltd., an industrial equipment distributor just north of Toronto, has seen the WTO effects first-hand. Ma works with companies located throughout China.

“It used to be that China’s government would protect local businesses,” Ma says, referring to a system of tariffs and taxes that did little to encourage foreign investment. “But since joining the WTO, [that] involvement is getting less and less.”

Dodson has also noticed a decline in state interference toward foreign firms. “It is far easier and faster for a foreign-invested company to set up in China than it is in India,” he says.

Ma points out that business conditions stray further from the Western norm the farther one moves west from China’s major cities on the Pacific coast.

“The people’s philosophy [inland] is different. In Shanghai, they are exposed to Western culture. Inland, they don’t have much opportunity [to learn more about the West].”

Secrets to success

Slowly but surely, Western investment is on the rise in China. Construction spending, for instance, will grow at a rate of 9.7% annually through 2010, according to PricewaterhouseCoopers Canada. Much of that will come from the West, in the form of project management and planning know-how still lacking in China.

China is also a developing hotbed for technology outsourcing, a sector that will be driven by the country’s growing base of young, computer-savvy talent.

“When you look at the sheer number of graduates that come out of the Chinese post-secondary education system who have skills in IT, electrical engineering or computer science, it’s remarkable,” says Nigel Wallis, an outsourcing analyst with IDC Canada.

For those firms venturing behind the Great Wall, Dodson warns against making a mistake commonly committed by outsiders: suspending the due diligence procedures that are routinely carried out on their home turf. This diversion from the norm is partly due to the “charm offensives,” as Dodson calls them, of Chinese business and government officials.

However, the firms that enjoy success in China are those that resist such tactics and carry out market research studies, checks on property rights, and “even investigations into the backgrounds of suspect managers and owners of Chinese operations,” Dodson says.

Ma stresses the importance of establishing personal relationships with local leaders.

“If we do business in Western countries, we would do it in the meeting room or over the phone,” he says. “In China, a lot of discussion still happens around the dinner table. This is a big difference.”

Although the Olympics have largely failed to make the impact on the level of foreign investment that some believed they would, it appears that that rate will rise nevertheless, with Canadian business being a key player.

“Canada is a certain size, and as our companies look to grow, they have to look beyond their borders,” says Michael Clifford of PricewaterhouseCoopers Canada. “Do they go south, as has been the case traditionally, or do they try something new, like China or Eastern Europe? I think they will.”