Microsoft Opens the Gates: Patent, Piracy, and Political Challenges in China

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Microsoft faced many macro risks when operating in China. Many of these risks included software piracy, Chinese government pressure to transfer technology, host government promotion of competitor products, discriminatory procurement practices by sub-national authorities in China, and the strong encouragement for Microsoft to enter joint ventures with local firms. One main micro risk that Microsoft faced was when the Beijing Municipal government avoided Microsoft by awarding operating system software contracts for 2,000 PCs to Red Flag Linux. I see these risk increasing due to the fact that the Chinese Central Bank has put new restrictions to foreign exchange transactions in attempt to control the flow of convertible currency out of the country. This restriction set in place by the Chinese Central Bank was described as a "crackdown" on illegal transactions. This change will effectively make it more difficult for both domestic and international companies to move capital in and out of China. In result, only increasing the risks for MNCs to do business in China. Another main reason why I see the risks increasing is that the Chinese government has not made an effort to control the piracy/counterfeiting issues. Counterfeiters are China's largest state owned factories. These risk are also found in other developing countries such as India where piracy and counterfeiting is a big issue.

After the U.S.- China accord on intellectual property rights in 1992, it encouraged Microsoft to explore further opportunities in China. In order to manage political risk in China, initially, Microsoft signed various agreements with Chinese PC producers to pre-load its software on their computers. Other approaches to manage political risk included opening Microsoft Research China (Microsoft's second international research lab and the first one in Asia) and signed agreements with China's top four computer makers to preinstall Windows XP on their machines.

One of the most...
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