China's Bureaucratic Matrix.

The architecture of Chinese government is like a matrix, with geography on one dimension and the functional areas of government on the other. On the geographic axis, there is the central government in Beijing, simply called the center, which controls the next level, which consists of the provinces and China's four largest cities. Below the provinces are cities and counties, with townships and villages at the fourth and lowest level. On the other axis, powerful government ministries control key sectors of the economy and locate offices at each of the geographic levels. At each node in the matrix, there is tension between geographic and functional interests, which can dramatically slow the decision-making process.

Foreigners often believe that China's government is monolithic, with consistent policies and practices across all bureaucratic levels and geographic areas. The central government generally does in fact do a good job of speaking with one voice on key policy issues, whether it be China's policy toward Taiwan or the policy objectives of the latest round of economic reforms. Bureaucratic debates over policy are usually concealed from the public. Moreover, China is still an authoritarian, one-party state, and foreigners often assume that the lack of organized political opposition translates into consistent and stable policy.

Local autonomy in China usually means increased negotiating leverage for foreign firms. When local governments have the discretion to award financial incentives to foreign investors, these investors can negotiate simultaneously with multiple local governments, playing them against each other to get the best deal. Similarly, when a foreign company is established in multiple jurisdictions, the threat of downsizing or the promise of expansion can give them negotiating leverage over local governments. The effect is further magnified when many foreign companies co-locate in the same jurisdiction and coordinate their pressure on local government, as small Taiwanese firms do in southern China.

When local concessions to foreign firms go beyond guidelines set by higher levels of government, however, foreigner firms lose their power to appeal when disputes and outright malfeasance occurs. Similarly, when foreign firms start their negotiations at the central level, as is often the case with large deals, it is in their interest to locate operations in areas with close relations with the center. When Motorola negotiated its landmark deal to open a major manufacturing center in China, for example, it traded on the unprecedented size of its capital commitment to gain complete ownership control of its operations, a concession that could only be approved by the central government. When the production facility was located in the northern industrial city of Tianjin, it meant that the project would be geographically close to Beijing and that its daily interactions would be with the Tianjin Municipality, which reports directly to the center.

GeoHive Administrative divisions in China, charting population and area.

GeoHive / Philip Schäfer Map of China and its provinces.

	Thinking Point
	For your own business, research the advantages of the "top-down" approach used by Motorola against the "under-the-radar" approach exemplified by the Taiwanese firms mentioned above. In particular, learn about any regulations that may be subject to interpretation and adjustment by the center and any cost advantages that could be realized by negotiating with several local governments simultaneously.

The fluid relations between central and local governments are only one reason why Chinese bureaucracy is much less monolithic than it seems. Although the central ministries in Beijing seem to have clearly defined boundaries of authority, these are the result of years of aggressive negotiation and in-fighting among ministries. When there is a new and volatile development in Chinese society, such as the rapid rise of the Internet, rival ministries will compete intensely for the right to monitor, regulate, and tax the new activity. New regulations and policies are often vague and poorly defined because they are the outcome of a compromise among rival bureaucratic factions. These rivalries can continue for years, and often the intervention of one of China's top leaders is required. At all levels of government, in fact, decisions that seem routine are often pushed up through the bureaucracy until they reach a senior official.

Courtesy of The General Libraries, The University of Texas at Austin. Map of linguistic regions within China.

Courtesy of The General Libraries, The University of Texas at Austin. Map of population density in China.

Every few years, someone publishes a book arguing that China is on the verge of political disintegration into a feudal collection of municipalities, provinces, and geographic regions. There are certainly powerful separatist forces at work in China, including China's vast size and population, geographical barriers to communication and transportation, linguistic and cultural differences, growing income inequality, local protectionism, and vastly different attitudes toward the outside world. These forces are concrete and easily understood by foreigners, while the forces that maintain China as a single political entity are not as obvious. These include the increased economic interdependence among China's regions, including rapidly increasing exchanges of capital and labor, legal changes that have increased the center's share of tax revenues, and a personnel system that rotates the top political appointments in local governments. These forces, however difficult for the outsider to appreciate, are at least equal in power to the forces that threaten to pull China apart. The center can still put overwhelming pressure on specific locations for specific purposes for a limited time--although it does have to pick its battles.

For most foreigners working in China, bureaucracy comes in the form of daily interactions with the many local agencies that control, regulate, tax, inspect and monitor the foreign enterprise. While it is possible to have smooth cooperation with local government, particularly if the foreign enterprise has the support of local leaders, it is common for senior managers in both foreign and domestic firms to spend a great deal of time sorting out problems with the Chinese bureaucracy.

	Thinking Point
	When you meet a foreigner who works in China, ask for a description of his or her relationship with government, particularly those aspects that are the most important, troublesome or time-consuming. Then ask a Chinese manager the same question and compare the results.

Sudden changes in the regulatory environment are not random events, and the complaint that the Chinese bureaucracy behaves irrationally is not only inaccurate but does not point toward a possible resolution of the problem. A new, unannounced tax on a foreign enterprise, for example, can be the result of many factors. The local tax agency may be experiencing a decline in tax revenue from other sources, possibly because the local economy is heavily dependent on money-losing, state-owned enterprises. There may be a renewed sense that foreign firms have "deep pockets" that allow them to pay more taxes than domestic firms, regardless of what the tax code may say. There may also be a renewed sense that foreign firms are already privileged through a variety of laws and regulations that give them various financial incentives to invest in China, and that a new tax will level the playing field with domestic firms. Finally, the new tax may be an attempt on the part of a local official to extract a bribe from the foreign firm.