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New Study of Chinese Marketplace Suggests Revised US Policy Priorities Behind the Open Door: Foreign Enterprises in the Chinese Marketplace by Daniel Rosen analyzes China's commercial operating environment on the basis of extensive interviews with 88 foreign managers at work in that country. Examining the entire array of business functions, the study draws major conclusions both for commercial operations in China and for US policy. On the business side, Rosen finds that the stumbling blocks encountered by foreign firms are not solely the result of mercantile Chinese policies, as sometimes suggested. Many problems are temporary transitional matters. Some are brought about by the errors of foreign investors themselves. Some result from a chaotic market structure that suffers from too little pro-competitive regulation. While centrally generated policy problems certainly abound (and receive considerable attention in Rosen's analysis), the diverse environment catalogued in the book presents numerous opportunities for improved corporate performance. The study sheds light on current business problems such as the default of Chinese provincial investment companies and widespread concerns about intellectual property protection. In cases such as these, Rosen demonstrates that foreign businessmen routinely misstep by overestimating the promises of local officials, ignoring central government warnings, or mistaking the readiness of the Chinese market for advanced products. The study provides the context to understand why smart businesses are prone to make these mistakes in China and how Chinese policy contributes to the problem. The study also chronicles the ways in which foreign invested (especially US) firms help transform the Chinese marketplace in desirable ways. Rosen offers evidence of a virtuous foreign impact in the establishment process, in the employer-employee dynamic, in plant reorganization, and in many other areas. In addition, the foreign corporate presence encourages China to move closer to internationally recognized standards of commercial conduct-including those required for accession to the World Trade Organization (WTO). On policy, many issues typically identified as first-order by the US government, such as intellectual property rights and investment performance requirements including local content and export quotas, are not the biggest problems in China in the minds of managers on the front lines. Perhaps the largest concern is the tension between pushing for faster liberalization and reform, on the one hand, and the preferential or extraordinary deals that firms secure to help them succeed, on the other. Incumbent companies - whether foreign or domestic - have long been known to pose an obstacle to economic liberalization. The most important reform to enable foreign and Chinese firms alike to enjoy competitive conditions thus may be an adequate Chinese competition policy regime. Yet this critical component of a successful market economy is barely on the table in discussions of China's WTO accession. Chinese central decision makers are increasingly aware of its importance but US policy has been reserved about raising it. The United States should therefore pursue Chinese accession to the WTO in parallel with mutual efforts to develop a suitable competition policy regime. These efforts will in turn necessitate greater US acceptance of a strong central authority in China to manage the process of reform, no matter how tempting it is to applaud the devolution of power to China's increasingly bold provinces. The greatest collision between business interests and policy interests in China for the United States, Rosen's study ultimately suggests, may be in resolving the divergence of interests between incumbent firms and potential newcomers in a way that permits China to reform its regulatory environment evenly while not unduly harming companies with large sunk investments already in place. The firms surveyed by Rosen identified many high priority and policy-related issues. Notably, many of these problems come back to an effective competition policy to replace the half political, half marketized system currently in place. These priority issues include: restrictions on the scope of foreign participation in distribution and provision of services; complications in managing internal corporate financing; restrictions on the firms' ability (related to scope prohibitions) to manage accounts receivable; government industry policy directives that steer investors in bad directions; and allocation of market shares for non-commercial reasons. There is considerable disjunction between this set of problems and the current negotiating agenda of the United States (and other countries) with China. Rosen therefore concludes his new study with four central recommendations: Reorient US policy toward more pragmatic goals; in particular, understand where policy is fundamentally at odds with China's quest for a stable and orderly reform process in light of that country's propensity for unrest. Consider the limits of the WTO, especially in areas where the organization is not yet mature such as competition policy and environmental policy, and seek to progress in those areas on separate but parallel tracks. Recognize evolving Chinese political reform; the US has underestimated the impending political reforms that economic liberalization has engendered, a failure that is counterproductive to the political liberalization we have sought using economic levers. Develop better bilateral assistance programs; the United States has a longer list of demands for China than any other developed nation yet lags behind almost everybody else in crafting a program of bilateral capacity-building even though the United States is especially qualified to assist Chinese regulators on such central issues as competition and monetary policy management. The conclusions drawn in Behind the Open Door are based on detailed case studies of commercial realities in China viewed business function by business function. Separate chapters are devoted to establishment, staffing, plant level productivity, post-production operations, and legal recourse for business problems. Summary tables in each chapter make clear that there exist a large number of complexities for foreign firms trying to operate in China. The analysis provides a road map-both for businesses and for benchmarking the work of US and other negotiators-for better understanding those complexities. About the Author: Daniel H. Rosen, Research Fellow, has written on Chinese economic and environmental developments, American policy toward China and bilateral commercial relations between the two countries. In addition to China, he has worked on US use of economic sanctions as a foreign policy tool, liberalization of global telecommunications markets, and the costs and benefits of removing trade barriers in East Asian economies. He is a Term Member of the Council on Foreign Relations. About the Institute: The Institute for International Economics is a private nonprofit research institution for the study and discussion of international economic policy. The Institute, directed by C. Fred Bergsten, provides fresh analyses of key economic, monetary, trade, and investment issues and recommends practical approaches for strengthening public policy toward these important topics. The Institute receives funding from a large number of private foundations and corporations. Used with permission. Copyright 1999. Institute for International Economics.