Part one: The Law
As introduced yesterday, understanding the legal environment is only a part of the equation to success here in China. The other part is understanding the culture and ideas of the country you are doing business in. Consequently, success will come for those that do not just think local, but also act local.
To begin with new series of entries on cultural obstacles when doing business in China, i think it is important to start with the differences related to law. For years China was
For years China was ruled by imperial dynasties, and a common expression during that times was “the mountains are high and the emperor far away.” Everyone wanted good governance but because there was a lack of rule-by-law, local officials had wide-ranging power and decision-making authority, that sometimes was at odds with what the emperor wanted. Furthermore, Chinese cultural ideas were different than what developed in the West. During dynastic rule, Chinese emperors and authorities saw law as an instrument to create order and often made and wielded laws quite practically. However, because of Chinese society’s hierarchical nature, abstract discussion about the law, outside of authorities, was not encouraged, and over time this led to a commonly held view that law is not over the authorities but rather just a tool that they wield. This idea largely governed Chinese law until the early twentieth century and is very different from legal ideas that developed in the West. In particular, even from the time of the ancient Greeks it was not the usage of law but rather the philosophizing about law and justice that created the foundation of legal concepts. Over time because of this influence, law was seen as more important than any individual leader. Because law was deemed most prominent, it helped in the creation of “natural rights” (which later developed into the concept of human rights), and good governance came to be defined as protection of these rights and the proper upholding of the law.
Of course, China is no longer a dynasty today, but still compared to many Western nations, its law system is not as clear or defined. Part of this is due to the historical rule-by-law instead of the more Western focus of rule of law mentioned above.
(
Rule-by-law, this expression indicates a system in which the government make use of the law as the most convenient means to govern the country. It must be underlined that on the exact meaning of the terminology “rule by law” and “rule of law” there are some contrasts and different interpretations: (1) “
Rule of law
”
is an intrinsically moral notion. It is difficult to have a consistent theory of rule of law without appealing either to natural law theory or to some higher rule by law (e.g., divine command theory). (2) “
Rule by law
”
is very different, despite some superficial similarities. Rule by law is prudential: one rules by law (properly speaking) not because the law is higher than oneself but because it is convenient to do so and inconvenient not to do so. In rule of law, the law is something the government serves; in rule by law, the government uses law as the most convenient way to govern
).
This is only a part of an interesting paper by Kenneth Winston on this subject in the context of Chinese Legalism, available at the following web-site:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=952630
)
Another major reason is that from the founding of the PRC in 1949 till the opening-up policy in the late 1970s, China had almost no legal development at all. In fact, China did not have a comprehensive set of criminal laws until 1979, and during the troubling times of the Cultural Revolution there was not even a functioning Ministry of Justice. After Deng Xiaoping gained power, he quickly turned his attention to developing a wide-ranging set of criminal and civil laws, mainly taking ideas of the West and adjusting them as he and other Chinese officials saw fit to move their country forward economically. So while China’s laws are still incomplete and unclear by Western standards, it must be recognized that China has made great improvement in the establishments of a system of laws.
In relation to China’s legal regime governing business, China’s continuing transition to a more market-based economy has prompted Chinese officials to move more toward rule-by-law. They are making considerable progress, however, there are still times when personal connections (i.e.,
guanxi
), and the morality and justice associated with such traditional ideas outweighs the law in the minds of just not officials but also businesses. This will be examined more in detail later.
Although rule of law may not be a part of China’s past, there are two reasons to believe that it will be a part of China’s future. First, many scholars argue that a system of formal laws is required in a society that like China’s is growing, and is becoming increasingly integrated into the world economy. It is not just foreign investors who need protection from capricious legal interpretations; Chinese companies, too, will benefit from the relative certainty of a consistent, rule-based order throughout the country. Second, the shortcomings of China’s legal system are widely acknowledged within China, and the central government is making efforts to rectify them. One example would be the new
Enterprise Income Tax Law
(enacted in March 2007 and which took effect in January 1, 2008, available at:
http://www.lehmanlaw.com/
) which is intended to standardize the tax treatment of domestic firms and FIEs and bring more clarity, transparency and fairness to the system.
In relation to this topic, also the “Chinese legal system” should be analized. Although this is not essential to the explanation of these themes, our readers should be aware of the main its characteristics. (A clear and brief description of it is avaiable at
http://www.loc.gov/law/help/china.php
).
With the next entry I will explain briefly the role of the Chinese government in the business context.
– Cristiano Rizzi