China "risky" for high-tech companies
Market research company Gartner has rated high-tech investments in China as "risky" despite the country's imminent entry into the World Trade Organization.
This is because commercial asset protection laws on the mainland are "still very rudimentary," said Lane Leskela, research director at Gartner Asia Pacific. He added that these "safe harbor" laws will take at least a decade to mature.
While bigger companies with vast resources can continue to expose themselves to a fair measure of risks, smaller firms might face difficulties, Leskela warned.
"And a lot of robust capital markets are stimulated by small- and medium-sized companies finding their footing," he said.
For years, foreign companies in China have complained about delays in getting permits, selective enforcement of fines and taxes, bureaucratic conflicts of interest, and sporadic enforcement of intellectual property and copyright laws.
China's planned admission to the WTO in November is expected to transform the country's legal and regulatory framework, but the change will not happen overnight.
Among the mainland's long-term challenges are the standardization of taxation, intellectual property, insurance, liability and bankruptcy policies, and the elimination of laws that favor companies from one country over another, Leskela noted.
"One very clear problem in China is that there are multiple agencies attempting to develop their own interpretation of certain economic behavior, investment laws, rules on partnership and joint venture structures," he said.
"There is a need for some reconciliation so that there is a single authority to consistently interpret and enforce foreign investment laws," he added, believing that China's entry into the WTO will slowly establish that.
Corruption is another hindrance, although China's large market and technologically competent work force are attractive investment considerations.
"Corruption exists in many forms in different countries. In the case of China, it is often associated with attempts by people along the chain of administration and bureaucracy to conduct something at the side--an idea equivalent to moonlighting in the West," Leskela said.
These attempts have been quite deliberate over the last five to six years, he said. "It's got something to do with commercial projects not getting the right level of approval from higher-level authority."
In addition, Leskela observed that many foreign companies have not been profitable over the past 20 years on the mainland.
"Until recently, it has been difficult to repatriate any profit in hard currency," he said. "Many company structures are designed to promote a reinvestment of capital into the (mainland) business to continue to grow it."
Last Monday, the WTO said that it had concluded negotiations over China's terms of membership, a decision that will pave the way for a formal invitation to join at the organization's November meeting in Qatar.
Approximately 1,300 national and local laws will need to be changed, according to statements from Chinese government officials.
"One of the hopes would be the ability to completely disclose the operating profits and losses of businesses of all types in China, be it foreign companies or domestic firms," Leskela said.
Staff writer Irene Tham reported from Singapore.