The new international diligence factors for technology investment professionals: government support and culture.

With globalization, technology professionals are beginning to focus on a wider array of issues when performing diligence on companies. These new concerns include the government and culture where the company is located. To better explain the function of government and culture in the diligence process, this article summarizes these factors as applied to the technology industry in China, Taiwan, Japan, and South Korea. These countries are featured because East Asia has been the center of much recent attention due to China's tremendous economic potential and Japan's history of strong technology development. Taiwan is also well integrated into the technology industry and South Korea, with the world's most advanced Internet infrastructure, is a tremendous testing ground for technological advances. Moreover, each of these nations has unique cultural and government issues that are highly relevant to the development of intellectual property, and unlike most Western nations, they have governments that take a more hands-on role in regulating the economy.

The People's Republic of China

In China, negotiations are a major part of the culture, and everything for sale is negotiable. (1) This prevalence of negotiations encourages people to develop the instincts to notice and take advantage of opportunities--a good trait for entrepreneurs. In fact, technologically oriented entrepreneurship in China is thriving. Zhongguancun Science Park, China's equivalent of Silicon Valley with a focus on biotechnology and medical sciences, houses 5,000 high-tech companies, more than 200 research and development centers, and China's top three computer makers. (2) Entrepreneurship in general is even becoming a much larger and vital part of the local economy, as private businesses are the fastest growing segment of the Chinese economy. (3)

China attracts large-scale attention for the size of its potential market and for its cheap and technically advanced labor force. China still lacks several important conditions for developing entrepreneurial ventures, however. China's problems include, among other things, a lack of access to capital, efficient managerial structures, and marketing and financial skills?

Information disclosure for investors has proven to be a problem and no doubt will continue to be. In commenting about private investment firm The Carlyle Group's planned $1 billion investment in China, X.D. Yang, The Carlyle Group's managing director and former investment banker from Goldman Sachs, stated: "There is no question [that] when you invest in a Chinese company you need to keep your eyes wide open." (5) Therefore, before investment, a very careful examination of the company, its balance sheet and income statements, and the reputation of its managers is a must. Using stock options as an incentive for management to align goals with investors is also key. (6)

China also creates economic policies that favor its state-run enterprises. For example, in 2004 Beijing's government procurement office canceled a $3.5 million software deal with Microsoft just 10 days after it was awarded, following official complaints that local governments were not buying enough software developed domestically. (7) The government is also known to limit the supply of equity offerings by giving preference to state-owned enterprises or companies with better political connections rather than by basing decisions on the quality of the operations. (8)

Moreover, it is worth noting that China is a civil law state, meaning case law and prior court decisions, while somewhat relevant, are not binding. The rule as stated is what judges or bureaucrats will follow. These rules are broad enough, however, to allow bureaucrats to apply a particular policy to a given situation; if the bureaucrats find a law or policy undesirable, they can make certain company registrations and operations difficult for the owners (through unnecessary delays). (9) Such problems have improved somewhat of late, but having management with strong local connections can still be very helpful in this regard.

Another well-documented risk in China is the light protection of intellectual property. The Chinese traditionally have felt that they should pay only for tangible goods, not intangible items such as software. (10) In addition, the penalties for intellectual property infringement in China are vague and unimposing. For example, in 2003, a year that China faced pressure to increase enforcement of intellectual property rights while joining the World Trade Organization, the government dispatched 150,000 personnel to clean up intellectual property violations, but then levied only $400,000 in fines in all of China. (11) The enforcement problem is further complicated by a history of conflicting orders from different government administrations, leading many to habitually ignore government rules. (12)

On a positive note, public awareness of intellectual property law appears to be on the rise, as there have been a growing number of filed …