A business professor answers questions about the cultural and ethical issues of American-Chinese business relations and discusses how American companies are managing these differences.
The problems multinational companies face while doing business in China are well documented. The role of government in business and how different cultures communicate are just a few of the issues that complicate business relations, according to Steven Feldman, professor of business ethics at Case Western Reserve University.
Feldman’s new book, Trouble in the Middle: American-Chinese Business Relations, Culture, Conflict, and Ethics, examines how American and Chinese companies approach business issues, as well as the role of bribery and middlemen in business transactions. Feldman spoke to the China Business Review recently about navigating these differences, the role of the middleman, and how cultural incompatibilities lead to different views on intellectual property rights. This interview has been edited for length and clarity.
Can you explain what you mean by “trouble in the middle”?
Feldman: When two different business cultures try to do business together, they have different moral and cultural assumptions, different ways of seeing business, and different ways of conducting it. “Trouble in the middle” refers to the difficulty they have negotiating, compromising, even communicating to get their business transactions accomplished. This is quite common in American-Chinese business relations. Even when they speak the same language and understand what the words mean, they don’t understand the tacit meanings behind the words.
Do you have an example of when someone has successfully navigated these differences and had an agreeable outcome for both sides?
Feldman: In the preface of my book, I use an example of an American company that bought a Chinese state-owned enterprise, and there were several thousand employees that the Americans viewed as a huge cost. The Chinese looked at it positively because these people are employed and they have good jobs. They ended up creating an independent company that was hired by the one the Americans had just bought. They lost some employment, but not all. The Chinese started out thinking they needed these people. After it was all done, the Chinese saw things in a new way, a more entrepreneurial way. And the Americans normally would just have fired these people, but also saw that coming into China they had to work on employment issues. They couldn’t just come in there and do business as usual.
You write in your book about the role of the middleman in Chinese business and politics. Can you explain how the middleman is participating in and affecting how business is conducted in China?
Feldman: Before I went to China and started doing fieldwork, I had done interviews in the United States and I wasn’t focused on the middleman. But when I was doing fieldwork in China, I started realizing that they were right in the center of what I was interested in—which was how two different business cultures work together. I saw the middleman was right there trying to help the two business cultures work together.
It’s getting a little easier now that American companies have been there for a while, but even today you still need to use middlemen. One of the reasons you use them is just to communicate. Very early on there weren’t a lot of Chinese who spoke English. There weren’t a lot of Americans who spoke Chinese. Eventually the Americans started hiring Chinese, but at first they sent their own people to China at great expense, and they would hire middlemen to help them communicate, monitor, and negotiate with Chinese businesses. The middleman at first needed to know about both cultures, speak both languages and basically needed a driver’s license, and there weren’t a lot of people who did all those things back in the mid-1990s.
If you do business in China, you do business with the government. You need permits and approvals for many different things, so even if you’re not dealing directly with the government, they’re involved. And a lot of times they require payment on the side. So that brings up the Foreign Corrupt Practices Act for the Americans. People are worried about paying bribes—as we see now with these investigations—a they can get in a lot of trouble. Now, the middleman is not all that much protection. If you’re using a middleman who’s paying bribes, you can be held responsible for that. The American and Chinese governments are also investigating bribery more and more.
I talked to some Chinese researchers and they felt that there was a lot more American bribe-paying than I found. I don’t know if that’s right. I found that the American attitude was: we sell our products to a middleman, and the middleman sells it to the end-user and pays the bribe. The American view was that they have no responsibility for this because they sold the product to somebody else. I found case like that and they’re fairly open about it. The higher-level people would say they know nothing about it, and the middle management person would say it’s going on. Some people told me it was pervasive. Other people would say 40 to 50 percent of their transactions were through middlemen, and many of those involving bribes of one sort or another.
Paying bribes is not the only thing middlemen do. They do a lot of legitimate things like communicating, monitoring, negotiating, and providing contacts.
It seems like the middleman is in a position of power. How is the middleman shaping everyday business relations?
Feldman: I would think that the middleman is not the problem, he’s the solution. The problem is that a lot of these government officials and other aspects of the Chinese environment require bribes and the middleman is one of the solutions to that. If all the middlemen were taken to Siberia, that wouldn’t solve the problem. You would still be facing a Chinese government with around 100 million officials and many of them asking for money. In the 1990s when deregulation really started, it was blatant. Now, because the Chinese government passed new anti-corruption laws, a lot of it has been driven underground.
I talked to one Chinese president of an auto parts manufacturer, and she was complaining that middlemen were in some case exploiting their position by trying to get payments from both the American and the Chinese firms. If the Chinese company dealt directly with the Americans they would get a better deal but the middleman is so aggressive—trying to benefit themselves and their client—they become exploitative of the Chinese firm.
So the middleman can have influence on business and they have a pretty important position in some cases and can exploit it. On the other hand, middlemen’s profits over time tend to decline because once the Americans learn about business in China, they either fire the middleman because they will open up their own sales force or they will start to pay them less because they can hire other middlemen they’ve met or make the middlemen compete with each other. The best position for the middleman tends to be at the beginning, when they have sort of a monopoly situation. Over time there’s always the chance that the American and Chinese companies will start doing business directly.
Can you discuss some of what you call “cultural incompatibilities” between how the Chinese and Americans view intellectual property rights?
Feldman: One is just the issue of private property. For Americans, private property is at the root of our cultural and legal system. It’s not for the Chinese. Through Chinese history, private property from the Confucian point of view has always been somewhat questionable. For thousands of years the officials who ran the country were tested through extensive examinations on classical knowledge. You were tested to see if you could repeat it, if you could copy it. That’s thousands of years of a very different view than the modern, younger American culture which is a couple hundred years old. By the time Mao died in 1976, private property didn’t even exist. It wasn’t until the mid-1980s before China even had a law for intellectual property rights.
Also, the Americans have the technology (that the Chinese want). American companies are probably the most advanced innovators in the world, especially cutting edge, high-tech innovations in pharma and IT. If China played by the same intellectual property rules, the Chinese would be paying a lot more for it and getting it slower, and they probably would be developing slower.
In China you’ve got 1.3 billion people and a private sector that’s two-thirds of the economy—I think that’s 45 million small companies, mostly family owned. It’s a very competitive economy, and those companies don’t get a lot of support from the government, so they need to survive and there’s a lot of copying going on. The vast majority does not have the capital so they see that they can, for example, make this battery and put “Eveready” on it and make it identical to an American company’s. Or an American company will come in and set up a plant and hire Chinese to make batteries, and some of those batteries and blueprints might walk out the back door.
Then there’s the legal system. If the Americans file a case in China they might lose $5 million in terms of their intellectual property that was ripped off, and even if they win, the court awards them $30,000. So even if they win, they don’t win.
One of the things I found out is that basically every country has (violated intellectual property rights). In the 1990s, Singapore was accused by the Americans of being the prime intellectual property rights violator. Taiwan was accused in the 1980s of being the worst. Now they’re saying China is responsible for 80 percent of worldwide intellectual property rights violations. I found out that the Americans were accused of this in the 18th and 19th century. The British and the Germans accused the Americans of copying everything. The Americans didn’t start passing laws until 1890 when their own economy needed protection. One of the theories is that the Chinese are going to keep stealing until they have to protect their own intellectual property rights.
What do you think American business executives should know about their Chinese counterparts before they go to China?
Feldman: One thing is the role of the Chinese government and how central it is in China. Also, it takes time to do business in China. You need to develop relationships, and if you don’t get to know who you’re doing business with and go in there and try to do business quickly, it doesn’t come out too well. The Chinese are good to work with in many ways, but you need to develop those personal relationships and understand the environment.
Was there anything in your research that Americans generally misunderstand about cultural and ethical issues about doing business in China? And what about the Chinese?
Feldman: One thing is the Chinese think they understand the Americans better than the Americans understand the Chinese. That could be true. One place that the Americans and the Chinese are different is in strategic planning. Americans companies, especially if we’re talking about Fortune 500 companies, like to have a medium- or long-term plan about how they want to see a business develop. This doesn’t make any sense to a Chinese company. The Chinese are not thinking long term, the Americans are thinking long term and they don’t understand each other very well.