When foreign firms became interested in China in the early 1980s, the central government dictated the terms of entry, requiring multinationals to form partnerships with state-owned enterprises. The foreign firm usually had little incentive to learn about the local Chinese firms who were their suppliers and customers, leaving that task to the local partner. Foreigners now have more options for entering the Chinese market and often choose to work without a local partner at all. This increased freedom, however, means that the typical foreign firm in China must assess the capabilities of dozens of Chinese firms as suppliers, competitors, partners and customers in order to be successful.

State-owned enterprises (SOEs)
SOEs are typically large firms in strategic industries, such as energy, automobiles and steel, that are owned directly by the central government. While some are profitable, many lose money and must rely on government subsidies. The government requires state-owned firms to provide an expensive array of benefits for their workers and their families, including housing, health care, pensions, vacations and education. A state-owned firm can be losing money because of this "welfare burden," because the government is forcing it to charge artificially low prices for its products, or simply because its management is incompetent or corrupt. Many state-owned firms have in effect been privatized by issuing shares of stock and by having some or all of their welfare obligations moved to other entities. If the government remains the dominant shareholder, however, there is rarely any improvement in performance. The outcome can be very different when the new owners are private investors or foreign firms, who negotiate for the right to radically restructure the SOEs before they agree to invest.

Private firms
Private firms are typically very small, with only a few employees and a limited presence in a single local market. Many are retail stores, restaurants or services such as repair shops. Private firms tend to remain small because of political and regulatory restrictions, including very limited opportunities to borrow money for expansion. Private firms are notorious for evading taxes, moreover, and remaining small makes this practice much easier. Although the very idea of private ownership and private business is counter to Communist ideology, private firms employ more workers than any other sector of the economy except for rural collectives, thereby contributing to social and political stability in China's cities.

Foreign-invested enterprises (FIEs)
Foreign companies for many years were only allowed to invest in China by partnering with a Chinese firm to form a separate legal entity known as a joint venture. Foreign firms may now create their own local subsidiaries in China under their complete ownership and control. They can also acquire partial ownership of state-owned enterprises, privatizing them in effect. All of these vehicles for foreign investment are collectively known as foreign-invested enterprises. While foreigners often complain about low or no profits in China, many multinationals are expanding into China, and their workers and managers generally earn higher wages than their domestic counterparts.

One example of a successful Chinese firm is Guangdong Kelon, a manufacturer of refrigerators and air conditioners based in the southern province of Guangdong. While legally government-owned and classified as a semiprivate firm, Kelon's success is the result of competitive advantages that are easily understood by any American executive: rapid product development, high rates of investment in research, and the building of a national distribution system. Kelon received $10,000 in startup funds from the local government, and its nominal status as a government-owned business probably meant that it was immune from the bureaucratic harassment experienced by private companies, but for the most part Kelon has succeeded because it is run by managers who are profit oriented and entrepreneurial.

	Discussion
	Guangdong Kelon was able to outshine other mainland companies by running a corporate-image campaign, created by Leo Burnett. Kelon put forth an image of corporate transparency--that is, providing a full and frank account of its corporate activities--in order to be seen as more investor-friendly. Examine Kelon's website (www.kelon.com/kelon_en) and imagine that you are a private investor. {Dis: Do you feel that you have enough information to make a decision on whether to buy Kelon stock? If not, what information is lacking?}

Evaluating the capabilities of a Chinese firm involves much more than simply assigning them an ownership category. Some state-owned firms are very profit driven, and collectives can have many of the shortcomings of state-owned enterprises. Privatized firms vary tremendously in their performance and profitability. Foreigners tend to identify most strongly with market-oriented firms, since they can readily understand the sources of their success. But market-oriented firms, such as Guangdong Kelon, typically operate in markets with volatile demand and an excess of competitors, and they are often denied bank loans and the right to issue stock, particularly in their early stages of development, resulting in a lack of financial resources to withstand a short-term reversal in their fortunes.

In many industries, a profit-oriented approach is not enough. Good connections with government may be essential in order to secure bank loans, favorable interpretations of regulations, access to supplies and materials, and other benefits. State-owned enterprises by their nature are hard-wired into the Chinese bureaucracy, but other types of firms must use their guanxi, or informal connections, to have any influence.