Do You Have What It Takes to Do Business in China?

China has historically been a tough market for foreigners, and it’s getting even tougher when it comes to doing business on the Internet, as local firms increase their dominance and the Chinese government asserts more control. Most U.S. Internet firms in the People’s Republic have either offloaded their operations to Chinese companies through joint ventures or so-called “strategic partnerships” — or, like Google, pulled out entirely. The truth is that outsiders are unlikely to succeed, and in the process of trying, liable to waste valuable resources.

But it’s easy to see why companies take on the challenge. As I describe in an article for GigaOM Pro today (sub req’d), the market indicators are, indeed, mouthwatering. With 400 million Internet users and hundreds of millions more using the mobile web, the market is potentially huge. Revenue from online games and virtual goods alone totaled $3.6 to 3.8 billion in 2009, and is projected to grow 25-30 percent in 2010.

Numbers like that lead many firms to leap headlong into what looks like virgin territory — but they tend to underestimate the challenges. For anyone serious about expanding into China, here are three tips to consider before investing time and energy there.

1. Invest in Experience — The highest priority is to line up advisers with experience in China, from venture investors to lawyers to accountants to, in some instances, market-entry firms. It’s critical to understand the competitive, regulatory, and legal topography of any given industry and sector. If you can’t afford to do the proper market-entry work and due diligence, then you probably can’t afford to operate in China.

2. Prepare for Regulatory Complexity — On a revenue basis, operating in the PRC tends to consume a vastly disproportionate amount of management bandwidth. One reason for this managerial overhead is the government’s penchant for regulating media and communications. Several government bodies share jurisdiction over the Internet, making licensing and permitting a time-consuming and frustrating process. U.S. laws also present hurdles. Public or soon-to-be-public companies need to undergo rigorous Sarbanes-Oxley disclosure requirements as well as increased risk exposure under the Foreign Corrupt Practices Act.

2. Expect Copycats — Chinese developers and engineers are skilled, fast, plentiful and much cheaper than their U.S. counterparts. Imitation in China is more than flattery; it’s expected. However, China does have laws that protect patents and intellectual property — but only if you apply to the relevant government agencies and, in most cases, do it before you’ve entered the market or even engaged in discussions with potential partners.

Foreign firms willing to play by China’s rules have had some success, especially in online gaming, and as I discuss at GigaOM Pro there are strategies that can yield positive results for both companies and investors. But it’s also worth remembering that the U.S. is still the largest Internet market by revenue and will remain so in the foreseeable future. It’s also probably the easiest place to build a business.

Disclosure: The author is an angel investor in Stocktwits, which is backed by True Ventures, a venture capital firm that is an investor in the parent company of this blog, Giga Omni Media. Om Malik, founder of Giga Omni Media, is also a venture partner at True.

Photo courtesy of Flickr user Wolfgang Staudt

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