Executive Summary
China has the world’s largest online population. But the Chinese government veils strict control over the internet using every instrument at its disposal. The internet is heavily censored, and the Chinese authorities use personally identifiable information obtained from the internet service providers and content providers, to identify, and prosecute dissident Chinese for violation of local laws. This has a serious implication on foreign internet companies that do business in China as they are now caught between the demands of the institutions of democracy and free speech they embrace, and the demands of the repressive Chinese government. But foreign internet companies must take a long term view of their business, and continue to do business in China, because they could be the catalysts of the very change they want to see to be able to do business in China smoothly.
Introduction
With 298 million internet users , China has the world largest online population. Yet, the online population of China is only 22.6% of its total population of over 1.3billion. Leading internet companies are eager to do business in china not only to tap the huge potential in the internet market in China, but doing business in China is wrought with several challenges, especially for foreign companies. The communist regime in China exercises very strict control over the internet and limits the flow of information within China to what the leadership wants China’s citizens to know about their own country and about the world . There are a number of cultural, technological, institutional and market barriers that demands a deeper understanding of the dynamics of doing internet business in China. The scope of this essay is to give a brief overview of the institutional challenges that foreign internet companies encounter, and outline a few suggestions that internet companies could do to surmount the institutional challenges.
Institutional Challenges.
Government Censorship of Internet. The Chinese government not only censors the internet heavily through a sophisticated firewall, but also demands voluntary compliance to self-censorship from internet companies. It also uses internet as a powerful tool for repression by collecting personally identifiable information from internet companies to prosecute chinese citizens who “misuse” internet to promote agendas that are against with the state policies. Any internet company in China must comply with the repressive policies of Chinese communist regime, in order to do business in China. However, such mute complicity to repressive policies invites public wrath in the home countries of the internet companies. The 2006 congressional hearings of Google, Microsoft, Yahoo!, and Cisco, highlights how the internet companies are caught between demands of the institutions of democracy and free speech, and the demands of the communist totalitarian regime in China. No doubt, the opportunities for internet business in China are huge. However, as the Electronic Frontier Foundation writes, internet companies can become unwitting conduits of Chinese propaganda and repression machinery: Internet routers can be turned into powerful wiretapping tools; web email servers can become a honey pot of stored communications plundered by state police to identify dissidents; and blogging services and search engines can turn from aids to free speech to easily-censorable memory holes .
Perils of Policy Lag. The government and law significantly lag behind the business and the growth of internet in China. For example, a number of companies advertise in the internet portals even when they don’t have the necessary licenses from government to do so. Many of these risk takers may in fact be big winners if they have the right contacts or if they can get their license changed at a later date when the new category in recognized. The danger, however, is that less well connected companies or those who become too visible often are punished by closure or other penalties which can make investment capital disappear without little warning or recourse. This could also make the internet companies liable for prosecution for complying with illegal methods of the advertisers.
Intellectual Property Rights. China has a poor track record of IPR. The experience of Ebay, which was sued in a Paris court for not checking its Chinese users who sourced and traded counterfeit goods is a good example that highlights the poor institutional support to IPR and the inefficacy of the Chinese laws to protect ecommerce business. This is a big challenge, especially when ecommerce portals provide access to Chinese nationals to trade goods across borders.
Internet Companies can be the Catalyst of Change. Due to serious institutional challenges in China, foreign internet companies are faced with umpteen conflicts of interests that require a lot of compromise on their core values. But internet companies must take a long term view of the situation. The focus must be on where China would be tomorrow, and not on where China is today. China is increasingly moving towards aligning its economy with the rest of the world. China’s recent inclusion into the WTO is a testimony to this fact. Given this direction of movement, China cannot remain but move towards greater freedom of its society in some form, and the internet companies can greatly accelerate this process. The internet companies can significantly empower the common man by giving him access to vast information that are not censored, and in this process, expose him to the power of information and free speech, albeit in bits and pieces. For example, the “Super Girl” TV Reality Show saw young Chinese citizens campaign and vote for their favorite singers, using electronic media such as mobile phones and internet, giving young Chinese citizens an opportunity to taste democracy and power of free choice, albeit in a completely different area. The Internet companies could accelerate the transition to a free society by merely being there and continuing to provide services. Sooner than later, the values of the rest of the free world will seep into the Chinese society through the internet,
Refraining from doing business in China is not a solution. Refraining from doing business in China is not a solution simply because a number of Chinese companies such as Alibaba are ever ready to comply with Chinese laws , and would jump to occupy the space vacated by international companies. Such an eventuality will wipe out the possibility of effecting any institutional reform through foreign businesses after they grow big enough in China to be able to effect the desired policy changes.
What Businesses must do, and What can be done?
Internet companies must comply with the local laws. However, they must not mutely comply with all the repressive laws. The companies must exhaust all legal options before it turns in personally identifiable information to the government. Companies must take preventive measures to save themselves from embarrassing situations. They must hold user information only to the minimum possible time, and must not provide those services that will require holding large volumes of personally identifiable user data in its servers inside China. The companies can also fund development of new technologies that can defeat firewalls. In the words of an Amnesty International report, “The need to comply with local law should not obscure the fact that these companies operate in a global economy regulated at different levels” . The foreign internet companies doing business can form an association, and lobby with the government in general to effect policy shifts to favorable terms, and in particular, whenever there is a conflict of interest. The companies must also partner with the local Chinese firms to be able to maintain good relationships with the Chinese government. The possible solutions are limited by our imaginations, and a collaborative solution must be evolved to help foreign internet companies do business in china smoothly.
Conclusion
Internet business in China is lucrative but there are serious institutional challenges that need to be overcome to do business in China without creating conflict of values for the internet companies. Nevertheless, foreign internet companies in China need to take a long term view, because they can be the catalyst of the very change they are seeking to be able to conduct business without conflict of values. The idea of a free society in China appears only more achievable with the Internet companies in China catalyzing the change that most Chinese citizens want, that most Chinese citizens deserve.
