Why the shift in strategy, beyond the obvious fear of state intrusion and management of the scope of the permitted conduct of entities? Komesaroff suggests:
The shift in strategy reflects the fact that China's political system imposes limits on the ability of certain types of companies to participate safely in China. The problem of resource companies illustrates one limit; the Google case illustrates another. The common feature is that these companies operate in sectors where the ability to invest is severely circumscribed. Companies that need large investments tyo operate have no choice but to have a sizable on-the-ground presence. Yet those that just sell their products and services have no such need, as resource companies have belatedly discovered. In fact. having an on the ground presence can imperil their global businesses because of the potential for corruption and industrial espionage. (Id.).The pivotal event was thew trial and conviction of Stern Hu. "Although the trial clearly illustrated the deficiencies of China's opaque legal system, court documents convincingly demonstrated that the group were guilty. When an independent investigation commissioned by Rio Tinto found that these illegal activities had been wholly conducted outside the company's systems, the mining giant decided to reduce the role played by its local employees." (Id.). Komesaroff emphasizes that the problem is not one grounded in any sort of particular propensity to corruption within the Chinese system. He rejects that view. Instead, the problem is structural, inherently in the way multinationals organize their operations and grounded in the business environment in which foreigners operate. He notes that "foreign executives, especially those that do not speak Chinese, frequently hand over unwarranted responsibility to local staff in high stakes business transactions. Stern Hu's participation in Rio Tinto's iron ore allocation committee is one example." Komesaroff explaines that Rio Tinto's top executives must or should have known, or should have had appropriate operational systems been in place, that would have alerted them to the character of metals trading in China ("notorious for smuggling and bribery," id.) and that its metal traders "would be a prime target for customers offering illegal payments. Some of the blame therefore, must rest with the round eyed naifs at the top." (Id., at 9).
But perhaps more importantly, Komesaroff exposes another point of weakness in corporate structure and operation that opens them to liability in China--"the absence of a career path" for mainland Chinese employees working the local operations. (Id., at 9). Rather than integrate Mainland Chinese into their global operations and career structures they, perhaps like their Chinese operations are segregated. The consequences are obvious and well known, though those long understood insights appear not to have been applied in the Chinese case. Though he also notes that Chinese authorities also play a role in maintaining these cultures of divided loyalty.
Mining companies like Rio Tinto employ locals for the Chinese business connections and market knowledge, but such specific skills do not qualify them to work in other roles outside China. Knowing they have limited career opportunities makes it harder for Mainland employees to develop a sense of corporate citizenship. Moreover, Beijing is skilled at playing on Chinese employees' cultural identity to encourage them to reconsider their loyalties and confidentialities to their Western employers. (Id., at 9).The conflation of politics and economic activity, the presumption that, at the highest levels, economic activity musty be amalgamated with state policy, both internal and external, creates a sometimes tense contradiction in the role of Chinese employees of foreign enterprises. This contradiction becomes acute where the Chinese employees may be working for strong competitors of Chinese state owned companies. In the case of Rio Tinto, for example, the Chinese state, through its mining enterprises, was in the midst of seeking to acquire an interest in Rio Tinto, and competing with Rio Tinto for lucrative ventures in Africa and elsewhere, during the time that Stern Hu was operating for Rio Tinto. "In June, Rio rejected an offer by Chinalco, a state-controlled aluminum company, to raise its stake in the mining company to 18%, preferring a joint venture with BHP Billiton encompassing the iron ore assets of both companies in Australia. The Chinese government was irate. But the detention of the Rio employees would seem to justify some of those concerns." ("Behind Chinese walls:The detention of Rio Tinto employees in China has worrying implications," The Economist, July 17, 2009).
But Komesaroff also points to a second important event that has changed the staffing behavior of foreign companies in China: industrial espionage especially through cyber hacking. The 2009 breach of mining companies' computer systems that stored intelligence "was so extensive that it was only reasonable to conclude that Beijing had sanctioned the abuse to strengthen the negotiating hand of its floundering steel industry." (Expats Strike Back, China Economic Quarterly, supra, at 9). Western governments have increasingly taken a harder line in this respect with more public accusations of espionage. See, e.g., Kim Willsher, "Leaked French intelligence reports accuse China of industrial espionage: Executives lured into honeytraps and asked for interviews for nonexistent jobs, secret services documents say," The Guardian (UK), Feb,. 1, 2011 ("Secret French intelligence reports have accused China of widespread industrial spying, including the use of prostitutes, fake job offers, false orders and work experience students. The allegations come weeks after three executives at car maker Renault were fired after being accused of leaking details of a proposed electric car to unnamed Chinese recipients. They deny the accusation." Id.); Kate Connolly, Germany accuses China of industrial espionage: Cyber sabotage and phone hacking rife, agent says; Several Chinese workers caught stealing secrets, The Guardian (UK), July 22, 2009. The influential American Heritage Foundation has for several years suggested the possibility of espionage as a factor in on the ground economic activity in China. Larry M. Wortzel, Risks and Opportunities of a Rising China, Heritage Society (Lecture 948) June 22, 2006 (Talking point: "For those who do business in China, it is often difficult to know whether you are seeing state-directed espionage, corporate industrial espionage, or just some entrepreneur out to make money.").
Whether or not there was state involvement, the consequences were significant in terms of the willingness of these companies to expand their on the ground presence in China.
The miners tightened their computer protocols and relocated some sales and competitive intelligence functions to offices outside China. Shortly after Hu's arrest, Rio Tinto replaced their Chinese chief representative with an experienced Australian national. BHP Billiton went further, moving selected marketing functions to Singapore and requiring their chief Chinese representative to report to a new boss. Today, all four of the big multinational mining companies with permanent offices in China employ foreign chief representatives. (Expats Strike Back, China Economic Quarterly, supra, at 9).Komesaroff suggests that the impact is significant in terms of social costs of operation but not necessarily in strictly economic terms. These costs include localization efforts, though Kamesaroff notes that in sensitive sectors, like the extractive industries, Chinese restrictions on foreign participation makes localization more difficult in any case. (Id.). Kamesaroff concludes:
Without local production, global mining companies do not have the hassle of dealing with an army of local employees,. Fewer staff also makes cross cultural relations simpler and lessons the need for a local chief representative. Freed form daily operational routines, Rio Tinto, BHP Billiton, Vale, and Anglo-American can focus on long term activities such as market development, sales and government relations. Above all, leaner operations are safer--both for employees negotiating the murky world of Chinese commodity trading and fore employers trying to keep commercial secrets away from prying eyes. (Id.).But there is a systemic cost as well. Global integration and the development of consensus rules and social norms for the conduct of business tends to suffer in these contexts. In the long term, such difficulties raises barriers to trade almost as effective as the traditional barriers of tariffs and other charges. China will not be able to assume a leading role in trade if it encourages the use of its territory solely as a place for the production of things, leading its direction and management to find better locations elsewhere. That is the sort of thinking that might help propel a developing state to a higher level of development, but it still leaves the state in a passive position. To assume a leading role, the Chinese will have to come to terms with developing global consensus on business norms, and the role of the state (and its domestic legal order) within these frameworks. While that will necessarily have to be accomplished on Chinese terms, those terms will have to accommodate global consensus if China will assume a leading role as a global (rather than as a mere national) power. Ironically, of course, it remains in the national interest of other global powers to continue to encourage China to pursue a national rather than a global path.