Eighteen months into China’s anti-corruption campaign, officials are still being removed from positions of power every day – and corporations and business people are increasingly caught up in the investigations, too.
GlaxoSmithKline was caught in the middle of this campaign a year ago, with evidence emerging that the UK drugmaker’s managers bribed doctors and officials with large sums of money. The scandal is among the most high-profile corporate corruption stories in China, with television stations repeatedly broadcasting the lurid details. With the company’s confirmation last month that executives had been emailed a secretly filmed sex video of Mark Reilly, then the company’s China head, the scandal made headlines worldwide.
Executives are asking why GSK, of all the multinationals operating in China, has been picked on – and what the case means for their own businesses in the country.
Before the anti-corruption campaign started, under the leadership of President Xi Jinping, it was no secret that corruption was widespread, and that pharmaceutical companies, both domestic and foreign, often had to bribe doctors with hongbao, or cash packets, and expensive goodies. If so, why are foreign companies more likely to be picked on and their practices subjected to maximum publicity?
There is an old Chinese saying: “Sa yi jin bai”. It means kill one to deter hundreds of others. Given the large number of corrupt companies, the government cannot afford to investigate and punish them all. So they pick and choose. In particular, they choose those that maximise the deterrence value – well-known foreign multinationals that have engaged in bribery. This is despite the fact that most of them follow better practices than China’s domestic companies because they have more at stake in terms of reputation and they face greater potential liabilities back home.
In the 1980s and 1990s, foreign multinationals would never have been picked on; officials would have looked the other way. The country was poor and in need of foreign investment and expertise. Companies willing to do business were given the red carpet treatmen t, with privileges such as tax breaks and free land use. Their jobs were sought by the best students from the finest universities; even Chinese people who returned from working and studying overseas would be given higher rates of pay. The door was wide open to foreign capital and knowledge.
Today it is a different story. Foreign capital and knowledge have no premium; indeed, it may even be the reverse. Multinationals face a significantly harsher landscape. Returning Chinese no longer enjoy a pay premium.
This all adds up to a significant shift in society’s attitudes towards things foreign – not least towards multinationals.
The first big difference is that, in a reversal of the situation of two or three decades ago, China is a capital-rich nation. It is perhaps second only to the US. So the red carpet is no longer being rolled out for foreign money. From computer to car manufacturing and more advanced industries, the country is internationally competitive on its own terms and no longer hungry for technical knowhow.
Second, entrepreneurship is booming, fuelled by abundant venture capital, angel investors and private equity funds. In the past decade, Chinese technology companies’ initial public offerings on Nasdaq, NYSE and the Hong Kong Stock Exchange have created many millionaires and billionaires, encouraging a number of talented senior executives to leave multinationals and investment banks and start their own businesses. This brain drain has blunted the multinationals’ competitive edge and eroded their position in China. They no longer enjoy unfettered admiration and reputation.
Third, while most multinationals are staffed by good citizens, a few individuals have undoubtedly helped take corruption to a new level. Before the mid-1990s, government agencies and state-owned enterprises would be the most favoured places to work for relatives of the powerful. But then Wall Street bankers came to Beijing. To win contracts to restructure and float SOEs, foreign investment banks competed hard to hire relatives of officials. In a country where relationships are everything, this is a sure way to secure deals.
Soon they had an over-concentration of well-connected relatives among their employees. Such hiring practices helped create resentment against foreign companies among the public.
China has also become more assertive on the international stage, which only adds to multinationals’ vulnerability in the anti-corruption campaign. Targeting them poses little risk but offers much in terms of potential domestic political gain.
Taken together, all these changes combine to make foreign multinationals easy targets to single out.
Zhiwu Chen is a professor of finance at the Yale School of Management
Fonte: FT
