Barriers to Foreign Investment in the Chinese Internet Industry

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Barriers to Foreign Investment in the Chinese Internet Industry Summary: Developing an Internet business in China is not easy, even though the country has the largest Internet user population among all countries in the Asia-Pacific region. Chinese laws make foreign investment difficult, and the country -- quite unlike the United States -- has strict legal controls on information and distribution and poor enforcement of intellectual property laws. This article explains the barriers facing high-tech companies in China. [pic]

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China has the largest population and one of the fastest-growing economies in the world. If only one percent of its population participates in the New Economy, China will provide a market of more than 13 million potential customers for Internet businesses around the world. Today, China has approximately 22.5 million Internet users, according to a survey released by the China Internet Network Information Center. Although nongovernmental organizations and foreign agencies have questioned the accuracy of these figures, none have disputed that China has the largest Internet user population among all countries in the Asia-Pacific region. While the Chinese market is attractive, developing Internet business in China is not easy and can be frustrating at times. Due to the different political, social, economic and cultural conditions, foreign investors face significant barriers to establishing Internet businesses in China. Disillusioned from their idealism and tired of the bureaucratic red tape and regulatory hassles involved in investing in China, many investors have exited the Chinese market. Foreign Investment Law

The current Chinese laws and regulations are unclear as to whether foreign investment in the Internet industry would be allowed. Experts generally maintain that Chinese telecommunications laws forbid foreign participation in the Internet sector. Under those regulations, foreign investment in the telecommunications sector is heavily restricted. Telecommunications services are limited to local providers, such as China Netcom, China Telecom, China Unicom and JiTong Corporation. With its imminent accession to the World Trade Organization ("WTO"), China is expected to relax its foreign ownership rules. In November 1999, China signed a bilateral accession protocol with the United States, laying out the terms for China's accession to the WTO. Under this agreement, China will allow 30% foreign ownership of telecommunications firms upon accession to the WTO, 49% after the first year, and 50% after the second year. In light of this agreement, one can optimistically predict that China in the near future would provide a more favorable environment for foreign investment in the Internet industry. However, depending on interpretation by the Chinese government, this favorable environment may be limited to Internet Service Providers ("ISPs"), which are regulated by the Ministry of Information Industry ("MII"). Such an environment may not be applicable to Internet Content Providers ("ICPs"), which are regulated by the MII and other governmental agencies. Considering China's stringent information control policy, it would not be a surprise if China places heavier restrictions on foreign ownership of ICPs than on foreign ownership of ISPs. Stringent Information Control Policy

Since its establishment in 1949, China has adopted a very stringent information control policy. To maintain control over the dissemination of information on the Internet, the Chinese government requires all connections to overseas computer networks to go through the sole international gateway operated by the MII. The government also forbids any individuals or entities from setting up or using other channels for international access. In addition, the recently released content regulations have outlawed the dissemination of certain information. Such information includes: • information targeted...
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