A statement this week from Reporters Without Borders will make unsettling reading for foreign companies eager to join China's internet boom. The press freedom watchdog accused the US internet portal Yahoo of helping Chinese authorities to identify and convict a local journalist of leaking state secrets.
In April, Shi Tao was sentenced to 10 years in prison for sending foreigners an e-mail that Chinese authorities alleged contained state secrets. Reporters Without Borders said Yahoo's Hong Kong subsidiary had supplied the Chinese "investigating organs" with "account information" that helped them to track the journalist down.
Yahoo officials have so far declined to comment on the allegation. However, the accusation highlights the pitfalls awaiting foreign companies as they try to secure a foothold in one of the hottest markets in global business. If they are seen as compromising their ethical standards in bowing to Chinese demands, they may put their reputation at risk.
As a general principle, companies choosing to operate in a country should be prepared to obey its laws. When those laws are so reprehensible that conforming to them would be unethical, they should be ready to withdraw from that market.
The accusation against Yahoo raises a further issue about co-operation based on custom, rather than law. Reporters Without Borders said Hong Kong's legislation - to which Yahoo's subsidiary is subject - does not spell out e-mail service providers' responsibilities when presented with a court order by the mainland authorities.
A similar issue surfaced in June when it emerged that Microsoft's joint venture Chinese internet portal had banned words such as "democracy" and "freedom" from being used to label personal websites. Since there is no specific Chinese prohibition on the use of words such as "democracy", the company appeared to be bowing to custom, rather than law.
In defending western companies' involvement in China, it is sometimes argued that more leverage can be exerted from inside the country than from without. Media and internet companies in particular can plausibly be expected to make a positive difference by helping to prise open a closed society. Through their companies, it is argued, western countries can exert "soft power" to effect social change.
But soft power of this kind relies at least in part on attractive norms and values. If those norms are breached by foreign companies operating in China, the argument loses much of its force.
Being seen to compromise the values of their home markets also carries a reputational risk for companies, such as Microsoft, which are powerful global brands. They should recall that the Chinese market, while lucrative, is not as valuable as the existing markets that they risk alienating.
