Chris Devonshire-ellis: Goodbye Old Tech Government, Hello New Tech Government

A fascinating aspect of China business right now is where to spot the next trends. The country is continually evolving, and with an over dependence of exports, it needs to move up the added value chain.

In fact, its doing more than just that. China is investing some serious money into high technology and innovative products across a multitude of disciplines. I covered part of these in my recent piece on new China Innovation, which was followed up by an analysis from my colleague Andy Scott on Cleantech. Everything is moving in China, from GM, biotech, alternative energy, pharmaceuticals, even space technologies, a lot of cutting edge research is being conducted by Chinas institutes, R&D bodies, universities and businesses. The brave new world is being born before our very eyes.

Yet doing business in China, especially in these new, developing industries, is going to happen in a manner not previously attempted, and foreign investors are going to need to adapt to the new parameters. This has to do mainly with the way in which China has organized itself structurally. Everyone is familiar with China being a one party state. Yet commercially, the impact is the same. About 90 percent of Chinas largest companies are either partly or wholly owned by the government. When, for example, the government announces it is going to invest US$700 billion over the next 10 years into alternative energy that money isnt going to go very far away from the purse strings. Itll be invested in state owned R&D centers, institutes, university funding, and when commercial applications can be found, into businesses that will also be state owned.

The implications for high-tech, cutting edge foreign investors are huge. China doesnt even need the investment dollars these days in many businesses (although certain sectors still require billions of dollars in research). What China wants is the technology and expertise that already exists overseas, and to try and marry that up with Chinese know-how, avoid duplication, and truly usher in a new century of new technologies. What will become important however is a shift in the dynamics of how businesses in China are viewed in this new dynamic sphere of innovation. Foreign investors, more than ever, are going to have to consider the political implications of dealing with a company that is represented by another nations government and one that in some quarters is still regarded as unfriendly. China itself is also going to have to adapt to meet its needs.

Political risk in new industries will become more of an issue than in the past, as will an overall understanding over exactly which bit of the government is responsible for your particular industry. Without that road map, it will be next to impossible to work out who your partners really are. Non-possession of that key piece of information means you fail to develop an understanding of the corporate culture or the dynamics behind a venture. Its not guanxi, its knowing who youre dealing with and its a sensible question to ask and to research. Within this, there are issues concerning ongoing matters of bribery and so forth, as the qualifying distinction between who is a Chinese businessman and who is a Chinese official become hazy, which is an aspect the U.S. Foreign Corrupt Practices act focuses on but this article is not intended to explore that avenue.

Rather more, the exciting element of investing in China in such industries is that China does in fact need all the help it can get in some cases financial but, in the majority, technological. China has already introduced incentives for foreign experts to work in China and the door for overseas participation is undoubtedly open.