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Microsofts Risks Faced In China And Chinese Government Finance Essay

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Published: Mon, 5 Dec 2016

In the mid-1980s, Microsoft made its first foray into the Greater China region, a region consisting of Hong Kong, the People’s Republic and Taiwan. Lured by China’s phenomenal economic growth and Chinese engineering talent, Microsoft has progressively deepened it involvement in China.

Microsoft has faced significant challenges, such as the widespread piracy of its products, Chinese government pressures to transfer its technology, host government promotion of competitor products, discriminatory procurement practices by subnational authorities in China, and strong encouragement to enter into join ventures with local firms.

Risks faced in China and Chinese government

Aside from piracy, software enterprises generally face great risks in defending their IPR in China. Specific challenges include an unclear specification of IPR enforcement responsibilities among government agencies, weak criminal sanctions, corruption, localism and poor education about the requirement of IPR.

Foreign software firms also must contend with a strong undercurrent of Chinese nationalism. This nationalism can make government units, firms, and individuals reluctant to buy foreign products or do business with foreign firms.

Even if it does not have this effect, nationalism can lead to extreme sensitivity about the behaviors of foreign businesses. At the extreme, it can even engender worries about the impact of foreign software firms on national security and national independence.

Microsoft agreed to let the Chinese government see the source code for the Windows operating system and all Office 2003 products, which is taking risk that exposed its commercial secrets to others. The Kingsoft Office 2009, the user interface which is similar to Microsoft office 90% or above and it can download from the internet free of charge.

When people buying computer in China, if they are buying laptop, it usually not included operation system or only include Linux based system. Manufacturer can offer lower price to end user for purchase, because the foreign electronic products in China are charged higher price than other countries.

Moreover, when buying DIY computers in China, the shops will not only provide illegal copy of Microsoft windows, they will pre-install all useful copy version software to the end-users. The customers just plug the power and network and they can use the computer.

Now, these risks are changing in the future. For the time being, China quickly moved to make the requisite legal changes. People in China are become richer and Microsoft still offering half price of Chinese version software but same function with other countries versions.

Windows Genuine Advantage Notifications (WGA), which verify the end users Microsoft genuine or not, if the end-users are using non-genuine software, it will notify end-users are using non-genuine software within 30 seconds. It also not allowed end-users access to windows update to download latest update patch to fix the bug. People may feel the message are annoying and afraid their computer not safety because cannot be updated, so they will purchase genuine software.

These risks also present in other developing countries, like India. Microsoft Corp is less optimistic about China than India or Indonesia, due to the country’s lack of progress, in stamping out software piracy, chief executive officer Steve Ballmer said.

“India is not perfect but the intellectual property protection in India is far, far better than it would be in China,” the head of the world’s largest software maker has said in an interview in Hanoi, Vietnam. “China is a less interesting market to us than India, or Indonesia”.

The value of pirated software in China almost doubled to USD 7.58 billion from 2005 to 2009, the highest increase in the world, Washington-based Business Software Alliance and market researcher IDC said in a report in May.

While the piracy rate in the country fell to 79 per cent last year, it’s higher than in India, the Philippines and Thailand, according to the report.

How Microsoft manage political risks in China

To manage these risks, Microsoft’s top executives have built relationships with top Chinese leaders and the firm has invested heavily in China and built alliances with a number of Chinese technology companies. From time to time, Microsoft has lobbied the U.S. government to pressure China to enhance its protection of the intellectual property rights of foreign companies.

Microsoft work with their home governments to press the Chinese government to honor its commitment to open markets, institute basic economic rules of the road, enforce those rules it does have, and protect intellectual property rights. China remains a transitional economy with many aspects that are not transparent, fair, or even legal under the World Trade Organization’s rules. Currying favor with the Chinese government by ignoring these issues is a short-term strategy that will eventually undermine foreign firms.

According to Harvard Business Review, foreign companies should prepare in the following specific ways for the challenges they’re likely to face in China.

Safeguard intellectual property rights

Foreign companies should be cautious when transferring proprietary information to Chinese firms or developing it inside China. The likelihood that such information will be stolen is high. Many foreign corporations pursue legal action to protect their patents, but China’s legal system poses serious challenges for outsiders. Many technology firms operating in China have found creative solutions to these problems, such as releasing existing computer code and patents for public use, forming alliances with Chinese partners for joint production, and intensifying their lobbying efforts with influential Chinese government officials.

Develop strategies to recruit and train talented managers

A number of foreign firms have discovered that graduates of Chinese business schools lack the necessary skills to manage their operations. Some have created successful partnerships with Chinese colleges and universities, trading promises of future employment for influence in the business management curriculum. Foreign firms get properly trained managers; talented Chinese students get jobs.

Create emergency response plans

A firm’s director of Chinese operations should be responsible for implementing a system that can work around disruptions caused by public health crises, environmental calamities, or large-scale social unrest. A number of businesses already have information technology systems that allow employees to work from home. During the SARS crisis in 2002 and 2003, some companies were prepared to mitigate the damage of production stoppages by allowing people to work in shifts, minimizing the concentration of individuals in one place at any one time.

When these sorts of emergencies occur, some global corporations face pressures to allow expat employees to leave the country. Preparing Chinese workers to assume the functions vacated by foreign workers is essential for the continuity of operations. Whatever the strategy used to reduce these risks and the added expense in training and equipment, operations in China demand such preparations so that business can continue even when workers cannot all assemble in one place.

Diversify risk

This element of corporate strategy is as crucial in China as it is anywhere else. R&D, production, and supply chains should not be concentrated in any one Chinese province or region-or in China generally.

Challenges and Opportunities

Aside from piracy, software enterprises generally face great risks in defending their IPR in China. Specific challenges include an unclear specification of IPR enforcement responsibilities among government agencies, weak criminal sanctions, corruption, localism and poor education about the requirements of IPR.

The chance of corruption increases when Microsoft deals with the government. Chinese rely on “guanxi” when deal with others. To build up a relationship between each other, there may be corruption. Cronyism necessitates the maintenance of political relationships and by implication, the continuation of the existing political elite. This encourages political authoritarianism, the repression of political competition, and a focus on the short term.

Crony capitalism is likely to have a detrimental impact on the distribution of income. While the favoured economic and political elite enjoy economic rents, these are obtained at the expense of producers, and more generally, consumers.

In part the perception that corruption is a major problem in Asia is a result of the growing importance of the Chinese economy. The evidence on the occurrence of corruption in China suggests that the problem is getting worse, although this could be largely a statistical artifact that is the result of better detection and a high probability of action being taken.

Corruption brings a number of costs. It raises both transaction costs and uncertainty. It is unfair in the sense that it is a regressive tax that imposes a considerable burden on smaller firms. It undermines the legitimacy of the state. Perhaps most significantly, corruption distorts resource allocation.

By raising transaction costs, corruption reduces the amount of investment, both domestic and foreign. It can also distort sectoral resource allocation, favouring large projects where potential bribes are likely to be greater. More generally, corruption encourages behavioural shifts favouring rent-seeking as opposed to wealth-seeking activities. The corruption is linked to high legal risks and uncertainties.

Foreign software firms also must contend with a strong undercurrent of Chinese nationalism. This nationalism can make government units, firms, and individuals reluctant to buy foreign products or do business with foreign firms. Even if it does not have this effect, nationalism can lead to extreme sensitivity about the behaviors of foreign businesses, at the extreme, and it can even engender worries about the impact of foreign software firms on national security and national independence.

Security concerns no doubt play a big part in the considerations of the Beijing regime. Last year a cryptographer for a Canadian software firm working in the US said he found a feature in Windows called an NSAKey. This heightened speculation over whether Microsoft software contains a back-door key that could be operated by the National Security Agency, which gathers intelligence for the US government from around the world. Though Microsoft said the key was innocuous and no evidence has been found of its use, the discovery has left many in China and elsewhere suspicious.

As well as security concerns, Chinese interest in Linux is driven by commercial considerations. In China as elsewhere, one of the most attractive features of the Linux operating system is that unlike Windows, whose source code is kept secret, the code for Linux is freely available on the Internet. Any computer programmer is free to modify Linux’s code, as long as their modifications are made freely available. Not only can Chinese businesses avoid the enormous licensing fees associated with Microsoft software, by utilising the work of volunteer programmers they can also avoid a large part of development costs as well.

The Chinese government has attempted to build its own operating system, but has been unable to keep pace with the rapid changes in the industry. With an army of volunteer programmers, Linux now gives them the tools required to do this, posing a major threat to US penetration of the world’s largest potential computer market.

It is this threat to the position of the US in the world market that is the driving force behind the proposed break-up of Microsoft. Its near monopoly position has left the US computer and information technology industry unable to diversify in the manner required to conquer emerging markets such as China.

Google’s management risks in China

Google, American based company also faced political management risks in China, which is totally different in America. For example, the Google the result searched by Google are censored. Some keywords cannot be appeared; competitors are supported by China government etc.

To obey China’s censorship laws, Google’s representatives explained, the company had agreed to purge its search results of any Web sites disapproved of by the Chinese government, including Web sites promoting Falun Gong, a government-banned spiritual movement; sites promoting free speech in China; or any mention of the 1989 Tiananmen Square massacre. If you search for “Tibet” or “Falun Gong” most anywhere in the world on google.com, you’ll find thousands of blog entries, news items and chat rooms on Chinese repression, but cannot search in google.cn.

Google’s decision did not go over well in the United States. The company’s stock fell, and protesters waved placards outside the company’s headquarters in Mountain View, Calif.

In 2002, though, something changed, and the Chinese government decided to shut down all access to Google. Why? Theories abound. Sergey Brin, the co-founder of Google, whose responsibilities include government relations, told that he suspects the block might have been at the instigation of a competitor – one of its Chinese rivals, Baidu.

Intimidation and “self-regulation” are, in fact, critical to how the party communicates its censorship rules to private-sector Internet companies. To be permitted to offer Internet services, a private company must sign a license agreeing not to circulate content on certain subjects, including material that “damages the honor or interests of the state” or “disturbs the public order or destroys public stability” or even “infringes upon national customs and habits.” One prohibition specifically targets “evil cults or superstition,” a clear reference to Falun Gong.

Government officials from the State Council Information Office convene weekly meetings with executives from the largest Internet service companies – particularly major portals that run news stories and host blogs and discussion boards – to discuss what new topics are likely to emerge that week that the party would prefer be censored.

American Internet firms typically arrive in China expecting the government to hand them an official blacklist of sites and words they must censor. They quickly discover that no master list exists. Instead, the government simply insists the firms interpret the vague regulations themselves. The companies must do a sort of political mind reading and intuit in advance what the government won’t like.

About 15 percent of the time, Google was simply unavailable in China because of data jams. The firewall also began punishing curious minds: whenever someone inside China searched for a banned term, the firewall would often retaliate by sending back a command that tricked the user’s computer into believing Google itself had gone dead.

Microsoft seemed chastened by the public uproar; at the Congressional hearings, the company’s director of government relations expressed regret. To try to save face, Microsoft executives pointed out that they had saved a copy of the deleted blog postings of Chinese government unfavoured content. Microsoft appeared to be so afraid of the Chinese government.

In 2010, Google is attacked by large scaled Chinese hackers, and Chinese authorizes the attack, to obtain information from some specific users of Gmail. Google posted a blog on its official blog.

“These attacks and the surveillance they have uncovered–combined with the attempts over the past year to further limit free speech on the web–have led us to conclude that we should review the feasibility of our business operations in China. We have decided we are no longer willing to continue censoring our results on Google.cn, and so over the next few weeks we will be discussing with the Chinese government the basis on which we could operate an unfiltered search engine within the law, if at all. We recognize that this may well mean having to shut down Google.cn, and potentially our offices in China.”

Google may not satisfy to the Chinese government’s action of limited the freedom speech on the internet, and that the above facts combined force Google to rethink its operations in China. Finally, Google decided to close Google.cn and redirected to Hong Kong Google.

Serious risk of Microsoft in China

The US Government (USG) has identified “three areas of global trade and technology transfer that are occurring with increasing frequency and that have the potential for broad national security or economic impact. Sales and contracts with foreign buyers imposing conditions leading to technology transfer, joint ventures with foreign partners involving technology sharing and next-generation development, and foreign investments in US industry that create technology transfer opportunities may raise either economic or national security concerns.”

In press reports, Microsoft’s representative in China, Bryan Nelson, has characterized some of China’s domestic software firms as “world class,” mainly in terms of their software application programs. Similarly, Intel’s China director has termed Chinese computer products as “very advanced systems and very competitive with multinationals.”

Thus, according to The China Business Review, “compared to their counter parts in other emerging sectors in China, foreign firms in the software sector seem willing to impart some (if not all) of their advanced technical know-how to domestic [Chinese] companies, especially in cases where the foreign firm supplies underlying software, such as operating systems or database engines, on which applications tailored to the China market must rely.”

The software firms are taking risks of exchanging market share and technology transfers in software development – despite concerns over IPR infringements and creating competitors – will lead to more gains than losses in the long term.

However, “many foreign software firms have yet to turn a profit, and continue to risk considerable resources on China’s market potential.” The danger lies in the fine line between collaborator and competitor. With the supporting of China’s government, Chinese domestic firms may absorb the technology, programming skills, and processes needed to move ahead of their mentors.

The Kingsoft office 2009, which similar to Microsoft Office 2003 – 90% above and offering with a competitive price. It’s offering half of a tenth price of Microsoft Office, although it’s old version than Microsoft Office. The underdevelopment of China IPR and supporting of Chinese government, Microsoft still cannot sue successfully.

In order to expand the share in China potential market, Microsoft still required cooperate with local companies and labor to develop local Chinese version software. To reduce the speed to technology transfer, Microsoft can export the source code of older version software to China and still keeping R&D in US to reduce the losses of fast captured and modified by local firms before the IPR is well developed.

Conclusion

To conclude, the software piracy and IPR still challenge to Microsoft’s growth in China. Compare with local Chinese, the cost of Microsoft’s software still high that will encourage piracy. The IPR are still relatively underdeveloped than other countries. Microsoft can request US Government to pressure Chinese government, to speed up the development of IPR on US-Sino Trade agreement or WTO convention. (2989 words)


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