Is China Changing its Tune on Foreign Technology Companies?

China's very public spat with Google on Internet censorship has been making the news for months, but recently there have been a few developments which indicate that China is slowly becoming a friendlier environment for foreign technology firms. Microsoft, which like other companies has struggled to operate in a market where software piracy is rampant, won a major victory in a Shanghai district court against a Chinese insurance company found to be using illegal copies of its software. The court ordered the company to pay Microsoft over $300,000 in damages. The judgment comes on the heels of the Chinese government's decision to relax procurement rules that forced the government to choose Chinese technology for public tenders, a rule China's trading partners charged was a protectionist measure.

These developments are critical for several reasons. The Business Software Alliance says that piracy in China cost its members $6.7 billion in lost revenue in 2008, so firms have a strong financial interest in seeing China strengthen its enforcement of intellectual property (IP) protection. But there are other reasons why these stories matter to foreign technology firms. In the wake of China's unwillingness to back down in its confrontation with Google, many firms may have feared that they have little leverage in disputes that directly affect their ability to profitably operate in China. The sheer size and growth rate of the Chinese market means that companies wanting to do business there would have to bend to the Chinese government's decisions, for fear of being locked out. These latest developments provide hope that the Chinese government has a stake in enforcing IP laws and opening procurement rules, perhaps because Chinese firms are moving up the value chain and want reciprocal access to foreign markets.

Doing business in China still poses challenges for even large firms experienced in emerging markets, but these recent developments indicate new opportunity. For companies ready to seize it, a robust but respectful government relations effort can pay off in the long term, as Microsoft's high-level engagement with the Chinese leadership demonstrates. But persistence in lobbying home country governments to enforce trade rules and act as an advocate is also crucial, because it can magnify firms' influence and increase their leverage. Developing patient but proactive government engagement efforts on issues vital to a firm's success can yield positive results over the long term.