How Censorship Hurts Chinese Internet Companies

Beijing's block of Facebook, YouTube, and Twitter has allowed domestic equivalents to grow. But by shunning global markets, their long-term outlook is uncertain.
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baidubanner.jpgBaidu, a Chinese equivalent to Google, has yet to make much of an impression outside of China. (Reuters)

Alibaba, Baidu, Sina and Tencent: China is full of successful, homegrown Internet companies, many of which are worth billions of dollars. Yet of these, only one, Alibaba, is a global trader -- and then only to offer Chinese products. Most of these companies do not bother to offer a version of their website in any language other than Chinese. Even when listing their stock on the New York Stock Exchange, they seem to reveal only an ambition to conquer China, not the world. Baidu tells us that it is "the leading Chinese language Internet search provider," while Tencent describes itself as "a leading provider of Internet and mobile and telecommunications value-added services in China." Compare this language with that from companies in Silicon Valley. Google describes itself as "a global technology leader" and Facebook declares its mission "to make the world more open and connected."

This difference in ambition begs the question: Why has China, the world champion of the outsourcing of goods, not translated its success into exporting services? China may be the world's factory, but India stands poised to become the world's back office, and Silicon Valley remains its information intermediary.

This is especially puzzling given China's three natural advantages: one, a large domestic market that should permit Chinese companies to develop economies of scale without braving foreign waters; two, a large labor pool of trained engineers; and three, a large diaspora in the United States, which would help connect Chinese companies to American companies.

But despite these advantages, China runs a huge deficit in trade in services; in 2012, the country exported $190 billion of commercial services while importing $281 billion, a deficit of $91 billion. In other words, Americans, Europeans and others export far more services to China than China exports to the rest of the world. What's keeping Chinese companies from accomplishing in services what it did with manufacturing?

The most obvious reason is language. Even though Chinese students now learn English from kindergarten, relatively few people in the workforce are fluent in the language -- especially when compared to a country like India.

But even if China develops a large English-speaking workforce, it still faces a second major roadblock: while Western businesses and consumers freely buy goods produced in China, they may be reluctant to buy services from there. Unlike goods, services often contain personal or sensitive information, and can be harder to evaluate at customs checkpoints. Services involve data -- information about people and businesses that can be shared or used without a person's knowledge. Consider the data at issue for the two types of enterprises involved in the international trade in services -- those from Bangalore, and those from Silicon Valley.

Commercial services - including those used by Fortune 500 companies -- outsourced to India typically consist of information technology outsourcing or business process outsourcing. For example, IBM likely employs the majority of its employees in India, where they process bank records, perform financial analyses, and write software. Chinese workers can no doubt handle these tasks, but given the reports of industrial espionage in the country, foreign businesses may be wary of trusting their internal workings of their computer systems, accounting, or customer relations platforms. As a corollary, companies might also be unwilling to reveal to their customers that they outsource customer personal data to China. In a time-sensitive services environment, uncertainty about whether information flow can be interrupted for political reasons is difficult to tolerate. Most people do not have the same fear of transferring information to India, which, as the world's largest democracy, maintains a boisterous and free press.

The Great Firewall of China not only keeps American Internet companies out of China, it keeps Chinese Internet companies in.

The service providers of Silicon Valley also deal in consumer and business data: They store photos and documents, deliver letters, connect friends and colleagues, and find things across the Internet. Many of the details of our lives are now data that pass through Silicon Valley companies. Would we trust such information to a Chinese Internet company? The difficulty is not necessarily that the Chinese companies are likely to be worse stewards than American ones, but that they must abide by the dictates of a government that is not directly accountable to the people. Those outside China may be less than keen to transfer personal data to a country with few restraints on governmental snooping. In this way, the Chinese censorship and surveillance regime undermines China's services exports.

In at least one way, Chinese Internet companies have actually benefited from censorship. By banning or blocking popular services such as Facebook, Twitter, and Google in order to control information flow about politics, China has instead steered its people toward homegrown alternatives like Kaixin, Weibo, and Baidu. Political repression has thus eliminated the principal competition for local Chinese Internet entrepreneurs, but in doing so denied Chinese consumers access to some of the world's best services.

Furthermore, local success may prove ephemeral as Chinese people connect more deeply with the world. Take for example one of China's most popular social networks, Qzone, from Tencent: It's available only in Chinese, as if the only people someone would want to network with already speak Chinese. The huge Chinese market has allowed Tencent to become hugely profitable nonetheless, but that alone does not guarantee a bright future as a multinational. Qzone has not yet sought to go toe to toe with Facebook or Google in a free market outside China -- a quality that might, in the long run, erode its success in China itself. As Chinese people themselves become increasingly globalized, they will turn to companies (if the law allows) that can better connect them with the world at large, not just within China. Tencent has recognized this and has begun venturing outside with its popular messaging application WeChat, which is available in nearly 20 foreign languages.

Of course, American companies have recently come under pressure because of Internet surveillance by the U.S. government. Recent revelations of programs like PRISM and Xkeyscore have raised concerns that the United States government may be accessing their information with few constraints. For American commerce, this is troublesome: Silicon Valley will only hold its leading position across the world only so long as people continue to believe that they can trust their information to American companies. Going forward, Americans will have to work hard to convince the world that they will be careful custodians of personal information.

But for its part, China's political repression harms its global ambitions when it comes to cyber-trade. The Great Firewall of China not only keeps American Internet companies out of China, it keeps Chinese Internet companies in.

This essay was adapted from Anupam Chander's new book: The Electronic Silk Road: How the Web Binds The World Together Through Commerce.

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Anupam Chander is the Director of the California International Law Center and a professor of law at the University of California, Davis.

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