Globalization and the Legal Profession

One offshoot of scholarship on the legal profession explores the reasons why law firms expand internationally and how they choose to do so. There is general agreement that most law firms are reactive and go abroad in response to client demand for services (Silver Reference Silver2009; Flood Reference Flood2013). In addition, international offices have good optics. They can help law firms project a cosmopolitan image and few want to be seen as lagging the competition. As Richard Abel wrote back in Reference Abel1993, “law firms sometimes appear to be seized by the adolescent angst that all your friends are at a party to which you haven't been invited—it is unbearable not to be there, even if you know you would have a terrible time” (741).

At the time Abel was writing, there was a push to open offices in global financial centers such as London, Tokyo, and Hong Kong, and the primary business was advising clients on mergers, acquisitions, and financial market transactions (Flood Reference Flood2007; Silver Reference Silver2007; Quack Reference Quack2012). Over time, many of these first forays grew deeper local roots. Carole Silver's work chronicles how the international offices of many US law firms slowly grew beyond a skeletal expatriate staff to include local talent. Local lawyers were often able to help foreign law firms navigate the local economic, political, and cultural context, a much‐valued skill set. In places where regulations permitted it, hiring local lawyers also opened opportunities to compete with local law firms for domestic clients (Silver Reference Silver2009). Localization has tended to go hand‐in‐hand with intensified competition between local and domestic law firms, as both sides try to duplicate the others' advantages. One result can be a boundary blurring between local and global, as domestic players start to look outside the country's borders and international law firms hire local expertise (Liu Reference Liu2008).

Existing research tells us much about the patterns and causes of law firm expansion, especially among the biggest and best‐known Anglo‐American law firms. However, less has been said about stagnation without exit. Though we explore this dynamic in the Chinese context, we expect that similar challenges face international law firms in other emerging markets, and that they stay in the game for similar reasons. Though some outpost offices may become wildly successful, and future research should explore the conditions under which this is true, a close look at China helps explain the lack of correlation between law firms' global presence and increased profits (Economist 2011).

Data and Methods

In 2012, there were 174 foreign law firms present in Mainland China.Footnote ⁶ Though this is a vanishingly small number compared to the 19,361 Chinese law firms registered that same year (Ministry of Justice 2013), Figure 1 shows an increasingly crowded market. In 2012, 57 percent of the international law firms present in China were American (eighty‐one law firms) or British (nineteen law firms), with the balance split among a range of countries, including Australia (seven), Germany (nine), France (seven), and Japan (fifteen).

Figure 1. Number of International Law Firms in China by Year (1992–2012)

Data compiled from MoJ lists published between 1992 and 2013.Footnote ⁷

Our analysis is primarily based on quantitative and qualitative data collected during ninety interviews conducted in 2013–2014. In interviews, we combined a set list of ten questions about billing, competition, collaboration, profit sharing, future plans, and revenue with a more open‐ended discussion about challenges and opportunities of the market. Ninety‐two percent of foreign law offices are located in Beijing or Shanghai, and we focused our fieldwork on those two cities, tallying thirty‐one interviews in Beijing and thirty‐seven in Shanghai.Footnote ⁸ Interviews either took place at law firm offices or cafes, and conversations ranged in length from thirty minutes to roughly three hours. English was our primary working language, with the exception of twelve interviews in Mandarin Chinese. By design, we mostly spoke to partners at international law firms so that we could ask big‐picture questions about the organizations. We supplemented seventy‐seven interviews with lawyers at international law firms with conversations with in‐house counsel at Chinese state‐owned enterprises, legal recruiters, reporters from trade magazines, and Chinese lawyers. (A full list of interviews appears in Appendix 1.)

Rather than relying on snowball sampling—a strategy that would almost certainly lead US‐based researchers to oversample US law firms—we drew a stratified random sample of eighty law firms to target for interviews. More detail about our sampling strategy is included in Appendix 2, a brief methodological note that we hope will help others interested in a similar approach. In brief, we selected law firms based on five factors: (1) whether the law firm appeared on three well‐known lists of high‐revenue law firms,Footnote ⁹ (2) first registration date with MoJ (before or after 2002), (3) whether the law firm had multiple offices in China, (4) the presence or absence of a Hong Kong office as of 2013, and (5) country of origin. We created sampling strata based on the five variables and conducted random sampling within each stratum. In so doing, we ensured our sample included a wide range of international law firms, including law firms from all eighteen countries present in the market.Footnote ¹⁰

Through a combination of e‐mails, follow‐up phone calls, and drop‐in office visits, we were able to speak to lawyers at fifty of the eighty law firms in our sample.Footnote ¹¹ These fifty law firms represent 62 percent of our sample and 28 percent of all international law firms registered with the MoJ in 2012.Footnote ¹² Many lawyers expressed curiosity about our findings, especially what our research might reveal about their competitors, and told us the topic was not sensitive as long as their names and the names of their law firms were kept confidential.Footnote ¹³

Timing is an important part of placing our findings in perspective. Our fieldwork in Beijing and Shanghai took place during the summer of 2013, and the 2007–2009 global financial crisis was still fresh in memory. The downturn left many China offices “in the fetal position … trying to cut costs and stay alive,” one lawyer remembered (SH28).Footnote ¹⁴ At the same time, however, a mood of cautious optimism reflected the broader worldwide economic recovery. Forty‐seven percent of law firms in our sample reported (usually modest) plans to expand, 41 percent called their practice stable, and only 10 percent said they were going to shrink.Footnote ¹⁵

A Constrained Market

Even in an era of declining trade barriers and widespread commitment to the idea of free trade, many markets are still shaped by state involvement. This is particularly true in China, where one hallmark of the transition to capitalism has been continued state control in some areas with a much more hands‐off approach in others. State control is particularly pronounced in sectors with weak domestic firms and high strategic importance (Hsueh Reference Hsueh2011). When the first foreign lawyers arrived in China at the start of market reforms, the legal market exhibited both of these qualities: nearly nonexistent competition from Chinese lawyers and high political sensitivity. Although Chinese law firms have grown into fierce competitors in recent years, today's legal market continues to highlight the tension between China's move toward free markets and ongoing state control of key sectors.

Above all, foreign law firms are constrained by regulations that prohibit them from practicing Chinese law or hiring Chinese lawyers. Though many international law firms employ Chinese citizens who have passed the bar exam, these lawyers must suspend their licenses to practice law for the duration of their employment. This means that much legal work, such as representing litigants in court, can be done only by Chinese lawyers working at Chinese law firms. In addition, foreign law firms can only open a representative office, rather than a partnership. This has tax implications, and many foreign lawyers express frustration at the lower taxes partnerships pay (Cohen Reference Cohen2011–2012, 2571; American Chamber of Commerce 2013, 286). Anywhere, tax treatment and scope of work would affect law firms' prospects. In China, these regulations give rise to the perception of a playing field sloped to benefit domestic players.

The history of lawyers in post‐Mao China helps explain the Chinese leadership's decision to chart a middle course between a free market for legal services and total exclusion of foreign lawyers. At the start of China's economic reforms, foreign investment was a priority and the domestic bar was poorly trained. “Much like ‘the drummers, messengers and concubines that accompanied ancient armies on the march,’ the first foreign lawyers trailed their clients' worldwide expansion in the 1980s and 1990s” (quoted in Faulconbridge et al. Reference Faulconbridge, Beaverstock, Muzio and Taylor2008, 455). Joint ventures became legal in China in 1979, and what started as a trickle of foreign investment swelled over the next two decades from just over 1 billion USD in 1980 to 193 billion USD in 2000.Footnote ¹⁶ Although opening a law office would not be legal until 1992, lawyers would ask clients to open a representative office, sponsor their visas, and then, under a sign bearing the client's name, set up shop inside (BA3; Lim Reference Lim1984, 8; Heller Reference Heller2003, 758). Chinese lawyers would remain part of the bureaucracy, working as civil servants in legal advisory offices modeled after the Soviet system, until the late 1990s and largely lacked the expertise to compete with foreign law firms for international work (Heller Reference Heller2003, 756; Godwin Reference Godwin2009, 143).

If foreign law firms had been allowed to grow unimpeded, it is likely that they would have quickly dominated the market. In 1992, however, the Chinese government released the first regulations governing foreign law firms, a change that simultaneously legalized the firms' presence and limited their activities.Footnote ¹⁷ Foreign law firms could now apply for a license to open an office, although hiring licensed Chinese lawyers and providing representation for Chinese legal matters remained off limits. Working around these restrictions, many firms built a practice guiding inbound investment (BJ12, BJ18; Jin Reference Jin2012).Footnote ¹⁸ Following China's WTO accession in 2001, foreign law firms' client base expanded to include multinationals hoping to sell to the China market, such as Carrefour and Wal‐Mart, as well as companies interested in shifting manufacturing overseas.

The timing of China's entry to the World Trade Organization in 2001 roughly coincided with the privatization of the Chinese bar. Following a State Council decision to convert state‐owned law firms to private partnerships, the proportion of state‐owned law firms fell from 98 percent in 1990 to 14 percent in 2004 (Stern Reference Stern2013, 160). This shift created a pool of Chinese lawyers free to collaborate with foreign law firms, as well as to compete with them.Footnote ¹⁹ Even after revisions to the regulations on foreign lawyers in 2001, foreign law firms were still only permitted to provide information about China's legal environment—not to practice Chinese law (State Council 2001). Although supplemental rules issued by MoJ later in the year clarified a few “no go” zones, including participation in litigation and issuing legal opinions (Godwin Reference Godwin2009, 139), the blurry boundary of allowable practice continues to create “endless debates and conflicts” between Chinese and foreign lawyers (Liu Reference Liu2008, 780).

Though no Chinese official has yet gone on the record to explain the rationale for restricting foreign law firms' scope of work, protectionism is likely. China's lawyers entered the twenty‐first century newly liberated from the state payroll and self‐conscious about their skills. Sheltering the nascent bar from international competition, at least temporarily, was a way to give Chinese lawyers breathing space to learn about cross‐border commercial law and how to run a law firm. In fact, a good number of developing countries have similar regulations in place. In Brazil, much like China, foreign lawyers are limited to practicing international law or the law of their home country. In India, too, foreign lawyers can only advise clients on foreign law on a “fly‐in, fly out” basis (Wilkins and Papa Reference Wilkins and Papa2013, 1172).Footnote ²⁰ The explosive growth of Chinese law firms over the past decade suggests this strategy worked. Though no Chinese law firm was larger than 200 lawyers in 2002, China's largest law firm, Dacheng, reached 3,200 lawyers by the end of 2013 (Liu and Wu Reference Liu and Wu2014, 1). Chinese lawyers have also become much more savvy about international business, especially the growing group with foreign degrees or work experience (Liu Reference Liu2008, 790).

In addition to protectionism, could there also be an authoritarian logic behind China's regulation of foreign lawyers? It is hard to know for sure, though some foreign lawyers detect a fragile welcome. As one long‐time practitioner describes it, the fear is that foreign lawyers “will infect China in some way that will lead to a coup, a revolution, whatever. … [The leadership] keeps us in a space and let[s] us do our business. If we do something bad, they can cut our throats. That's Chinese social control” (HK5). Lawyers have often been at the forefront of calls for political liberalism (Halliday and Karpik Reference Halliday and Karpik1997; Halliday, Karpik, and Feeley Reference Halliday, Karpik and Feeley2007) and keeping foreign lawyers away from Chinese law could be a way for the Chinese authorities to curb the diffusion of Western legal values, especially given potential difficulty controlling their activities. The surveillance, harassment, and detention meted out to outspoken Chinese attorneys would raise a clamor if applied to foreigners. Likewise, shutting down law offices and refusing to renew visas—two obvious strategies for disciplining expatriates—are far more high profile than eliminating a Chinese lawyer's livelihood by revoking her lawyer's license.Footnote ²¹ One further sign the Chinese leadership views law as a sensitive sector is that constraints on foreign law firms exceed those on foreign accounting firms, even though accounting also plays a critical role in securing FDI and access to capital markets. Unlike foreign law firms, major international accounting firms have enjoyed the right to audit Chinese companies and to form joint ventures since the early 1990s (Gillis Reference Gillis2014).

Overall, then, law is a strategic sector from a number of angles: for nationalists ticklish about Chinese sovereignty, for economic planners concerned about the Chinese bar, and for Party strategists monitoring political stability. Though it is hard to say which of these three logics—nationalist, protectionist, and authoritarian—dominate internal discussions about foreign lawyers, it is clear how strongly state intervention has shaped the Chinese market for legal services. Foreign law firms operate in a regulatory framework that has likely been shaped by multiple goals, with free trade and legal development vying among other concerns.

Types of Practice

If international law firms are not allowed to practice Chinese law, what business opportunities are left? In a constrained market, the main option is high‐end, nonlitigation services related to foreign capital. This might include mergers and acquisitions, overseas IPOs, foreign litigation and arbitration, technology transfer, real estate transactions, intellectual property protection, and FCPA compliance. Many large international law firms have a great deal of experience in these areas and cooperation with domestic law firms is also common. A large acquisition such as Shuanghui's 2013 purchase of pork producer Smithfield Foods, for example, would require both a foreign law firm to review compliance with US law and a Chinese law firm to ensure the deal conforms with Chinese law.

Focusing on foreign capital leaves international law firms with two principal types of clients: branches or subsidiaries of multinational enterprises, and Chinese enterprises expanding overseas. Thanks to a surge in overseas investment, the latter group has grown in recent years. Between 2005 and 2012, overseas direct investment by Mainland firms grew an average of 35 percent annually, opening up new opportunities for foreign law firms to oversee cross‐national deals and overseas IPOs (Ren Reference Ren2013). An international law firm, to take one example, represents the Chinese company planning a $40 billion dollar rival to the Panama Canal in Nicaragua. State‐owned enterprises (SOEs) are particularly valuable clients. SOEs “want to be seen as engaging top firms,” one lawyer explained, in order to “cast off the image of a developing country SOE and be seen as a global corporation” (SH11).

Our interviews also uncovered two ways of thinking about market niche. Lawyers at most of the Anglo‐American firms in our sample talked about a practice area specialty, such as intellectual property or M&A. In contrast, lawyers from the vast majority of firms from continental Europe, Asia, and Latin America defined their market niche as handling work from their home country or region. For example, bread‐and‐butter work for an Italian law firm might include outbound work (e.g., helping an Italian luxury brand franchise in China) as well as inbound work (e.g., guiding a Chinese company's efforts to acquire an Italian business). We call this group “trade route lawyers,” as their labor underpins a circuit of capital flowing between two fixed destinations.Footnote ²² Here is a typical example of how a trade route lawyer discussed his firm's comparative advantage: “there's no way [clients] will come to us for a Houston deal or a Peruvian deal. Fortunately for us, there are a lot of mining companies and oil companies in [our country] … . That's really our sweet spot” (BJ6).Footnote ²³

In an industry where global reach sometimes seems like a universal aspiration, the prominence of trade route lawyers reminds us that global ambitions can be modest as well as major. Trade routes, some well worn and others newly forged, create demand for lawyers who can handle transactions governed by local law, rather than US, UK, or Chinese law. Cultural affinity helps, too. Lawyers' skill navigating decision‐making dynamics inside client headquarters is an advantage, along with the opportunity to speak a shared native language over a beer at the end of the day (SH15).Footnote ²⁴

As Chinese law firms have grown in prominence and competence, it is reasonable to ask what comparative advantage foreign law firms still enjoy. The industry's global players point to a worldwide network of offices beyond what any Chinese law firm can currently match. Reputation matters too, and big deals sometimes require the imprimatur of an international law firm to verify the bona fides of a transaction. Acting as “sanctifiers” of business transactions remains an important role (Flood Reference Flood2007, 35), particularly at SOEs where risk‐averse legal departments prefer firms with international stature (BJ15). In contrast, offices of less well‐known law firms emphasize value, individualized problem solving, and a more intimate relationship (SH5, SH14). Any price premium over Chinese law firms is worthwhile, some lawyers further argue, to avoid the risk that Chinese lawyers might sacrifice attorney‐client privilege if asked to disclose information to a government authority (BJ26; Cohen Reference Cohen2011–2012, 2573).

The Outpost Office

When lawyers reflect on the China market, size is often the first way they differentiate between business models. More boots on the ground generally means a wider range of practice areas and closer proximity to a full‐service model. Figure 2 shows the size distribution of international law firms' China practices.Footnote ²⁵ Our findings echo what Carole Silver found when she mapped the international offices of sixty‐four US firms in Reference Silver2007: international offices are generally small. Excluding London, the average size of a US law office abroad was sixteen lawyers (Silver Reference Silver2009, 1444). Six years later, we saw little sign of growth beyond that baseline. The median law firm in our sample employs eleven lawyers in China, and 60 percent of firms are represented by six to nineteen lawyers. What counts as a large China practice is relatively small, as well. Employing twenty lawyers was large enough to join the eight biggest law firms in our sample, a miniscule size compared to several hundred lawyers at a sizable law office in a major US city.

Figure 2. Distribution of the Size of China Practices (N = 49). [Color figure can be viewed in the online issue, which is available at wileyonlinelibrary.com.]

To some extent, size and market niche are related. Much as economic sociologists would expect, many foreign law firms in China search for a narrow enough niche to reduce price competition (Fligstein Reference Fligstein1996, 659). Micro‐practices sometimes occupy a niche so specific to the skills of the partner‐in‐charge that they report no direct competition (BJ20, SH36).Footnote ²⁶ On the other end of the size spectrum, law firms need a certain bulk to handle capital markets work, a lucrative, high‐profile practice area that requires significant manpower and runs the risk of overemployment if deal flow slows (BJ12).

The small size of most international law offices goes hand‐in‐hand with grumbling about pricing pressures, client loyalty, deal flow, and competition. Taken together, this litany helps explain China practices' most basic problem: profitability. Although no reliable statistics exist, virtually no one thinks most China practices are making money. One long‐time practitioner, a Beijing‐based lawyer named Robert Lewis, estimated in a Reference Lewis2013 blog post that 70 percent of foreign firms in China are not covering operating costs (Lewis Reference Lewis2013). Certainly, lucrative markets such as New York and London drive up profits per partner (PPP) and revenue per lawyer, two prized measures of how law firms stack up against their competitors. One partner at an international law firm that typically generates over a million US dollars in revenue per lawyer told us that most China practices would be lucky to hit $600,000 (BJ8). As one Shanghai‐based partner explained: “If you come in here expecting to make a lot of money, especially right away, you ought to understand almost no one is making money” (SH37; see also Kriegler Reference Kriegler2013).

Though lawyers often pin their financial problems on unsophisticated clients who undervalue their work, industry observers connect low fees to low legal risk. Hiring a top‐notch lawyer is less urgent when few deals fall through and regulatory fines remain relatively low (Lin Reference Lin2013). In addition, keen competition generates pressure to lower prices. “Frankfurt is far less competitive than Shanghai!” as one German lawyer exclaimed, and foreign lawyers have a long list of rivals (SH41). In addition to competition from other international firms, both long‐established and freshly arrived, a majority of law firms in our sample cited Chinese law firms as key competitors. Global and local law firms have been chasing similar clients inside China for some time and, by the end of the first decade of the 2000s, a number of top Chinese law firms began opening offices abroad to move aggressively into the global market.Footnote ²⁷ Compounding these pressures, international law firms also face competition from fly‐in lawyers spending short stints in China and from consulting firms focused on helping foreign companies.Footnote ²⁸

Choices about office space highlight the struggle many international law firms face to control costs while generating revenue. Offices in China are typically rented unfinished and the expense of renovation pushes smaller, more cost‐conscious law firms toward shared executive offices (SH35, SH42) or lower‐rent locations in an older building, on a less desirable floor, or in a less fashionable part of town. In contrast, law firms with deep pockets can pay for offices with a view, or located directly across from the elevator bank, and buy posh furnishings. As one Shanghai‐based lawyer explained, some major firms “probably spent three to five million just fitting out their office. They have office space facing the Bund [and the Huangpu River]. When you see a set up like that, you know that breaking even is a pipe dream” (SH22).

Profitability remains a struggle even inside top‐tier international law firms with global name recognition. At law firms accustomed to healthy profits, internal expectations can be high. As one partner at one of the five leading UK law firms, a group known as the Magic Circle, explained:

Nor has the promise of outbound investment materialized. Instead of building a roster of long‐term Chinese clients, law firms often find their prices undercut by competitors anxious to put together a blue‐chip deal list. The big SOEs “could get all their legal work done for free,” one partner said, “every firm in the world wants to say they worked for Sinopec” (SH36). At SOEs that report to the central government, price wars are institutionalized through the requirement that several law firms bid for every sizable job (BJ5, BJ8, BJ10, BJ29, BJ31). Though mandating multiple bids is designed to combat corruption, lawyers say the procurement department's “horse and pony show” depresses prices (BJ8). As another lawyer put it, “the people in the procurement department are used to buying stationery, not professional services …. The only thing they can actually comprehend is the price. They have no idea how to assess the quality of a firm” (BJ5).Footnote ³⁰

The bottom line is that China is a marginal part of nearly every international law firm's business. For more than 80 percent of the law firms in our sample, lawyers reported that Mainland China generates less than 5 percent of global revenue.Footnote ³¹ Unprompted, many China‐based lawyers offered justifications for losing money. Though most accept that a China practice should be judged by its accomplishments, an ideal that maps onto what sociologist Mark Suchman calls pragmatic legitimacy, many lawyers went on to argue that their achievements are either hard to measure or just around the corner.Footnote ³² Stacking up revenue versus expenses, for example, fails to capture referrals for work ultimately billed overseas (BJ10, BJ25). Branch offices located far from headquarters often tend to feel peripheral unless they are highly profitable and, indeed, many China‐based lawyers consider themselves far from the center of the action. As one partner put it, “our closest office is probably Abu Dhabi and they're a small outpost as well, so I'm not at the center of things” (BJ24).

Toward a Theory of Law Firm Growth in Emerging Markets

Any paper that focuses on similarities between organizations runs the risk of overlooking differences between them. Though we argue that the outpost office is a popular and persistent organizational response to the pressures international law firms face in China, there is also variation in size and market strategy. Even a hasty look at Figure 2 raises questions about outliers. Rather than ignoring heterogeneity, this section offers a first cut at the variables that explain variation in size.Footnote ³³ This is also rich ground for future research. We see these findings as hypotheses worth testing, as scholars extend existing theories of law firm growth to include expansion globally.Footnote ³⁴

We used linear regression to estimate the correlation between law firm size and six characteristics: (1) time in China, (2) the presence of a Hong Kong office, (3) whether the law firm was listed among the Global 100 highest revenue law firms in 2012, (4) whether the law firm is Anglo‐American, (5) the percentage of offices located outside the home country, and (6) the percentage of partners with a Chinese surname.Footnote ³⁵ Descriptive statistics for each variable, as well as more information about measurement, are available in Appendix 3.

To start, the regression models presented in Table 1 show a first mover advantage. In all three models, the correlation between size and time present in the market is positive and statistically significant, holding other variables constant. In other words, the longer a law firm is in China, the bigger its offices in China tend to be.

Table 1. Regression Models Predicting the Variation in the Size of Foreign Law Firms' China Practice

	Model (1)	Model (2)	Model (3)
	Firm Size	Firm Size	Firm Size
Years in China	0.886	0.922	0.906
	(2.76)**	(2.99)**	(3.10)**
If have HK office	11.750	6.217	5.842
	(2.97)**	(1.65)	(1.68)
If US or UK firm	6.370	5.395	5.948
	(0.92)	(0.82)	(0.92)
If Global 100 firm	−4.557	0.012	−2.775
	(0.56)	(0.00)	(0.34)
Proportion of offices outside home country		16.493	16.358
		(2.19)***	(2.26)***
Percent partners with Chinese surname			8.151
			(2.03)***
Constant	−2.539	−11.834	−12.716
	(0.69)	(1.86)	(2.13)***
VIF	1.87	2.07	2.22
Observations	49	49	49
R 2	0.47	0.52	0.55

Linearized t‐statistics in parentheses.

*** Significant at 5 percent level;

** significant at 1 percent level.

Second, a firm's global reach—measured by the proportion of offices located outside the home country—is statistically significant.Footnote ³⁶ In other words, international law firms with more of a global presence tend to have bigger offices in China. All eight of the practices with more than twenty lawyers in our sample are attached to law firms pursuing a global strategy.Footnote ³⁷ These global players span multiple continents and aspire to “marshal, on a dime, a vast targeted array of impeccable talent, backed up by deep resources across virtually 24 time zones” (MacEwen Reference MacEwen2013). British law firms are strongly associated with this global approach, which some attribute to the small size of the UK's domestic legal market (BJ33) and others chalk up to the colonial legacy (SH20, SH31). Either way, going global represents a bet on the future. If London and New York become less important markets over the next twenty years, a global strategy will appear prescient.

Finally, localization is a statistically significant variable, albeit one that is challenging to measure and interpret. We use the percentage of partners with a Chinese surname as a crude measure of localization and find that it is positively correlated with size. As job seekers know well, bilingual and bicultural lawyers are in high demand at international law firms, especially if they hold a foreign law degree. As one legal recruiter put it, “the market always wants somebody who is bilingual, ideally dual qualified … those people; you could place them in a second” (SH26). Partners with a Chinese background appear to embody the cultural knowledge and language skills necessary to navigate China, especially when it comes to wooing and winning Chinese clients. From our data, though, it is unclear which way the causal arrow runs. Are partners with a Chinese background better at business development? Or are bigger firms better at attracting this sought‐after group?Footnote ³⁸

Though there is room for a much more nuanced understanding of what drives growth, these three basic trends will confirm the suspicions of many market veterans. Our analysis lends support to the conventional wisdom circulated among lawyers and legal recruiters: the largest China practices tend to be attached to firms that entered the market early, are committed to a significant international presence, and run by a leadership team with at least a degree of bicultural familiarity.Footnote ³⁹

A Ceiling on Growth?

Outliers aside, the skew of the size histogram highlights how hard it has been for most law firms to grow into what one lawyer called “a full sized adult Rambo” (SH19). Beyond the obvious point that a competitive market is hardly an ideal environment for expansion, why have so many international law firms run up against a ceiling on growth?Footnote ⁴⁰ Rather than detailing issues that are practice‐area specific, or tied to business cycles, this section focuses on two factors that affect nearly every firm operating in the market: state regulation and internal firm structure.

Government regulations tend to produce coercive isomorphism, or convergence on a single way of doing business in response to similar rules, and the ban on practicing Chinese law has clearly shaped China's market for foreign legal services (Powell and DiMaggio Reference Powell and DiMaggio1991). Advocates of protectionism would not be surprised to hear a foreign lawyer boast “if they [the Chinese government] allow me to practice Chinese law, I'm going to pick the best Chinese lawyers from Fangda, Jun He [top Chinese law firms]. I'm going to wipe them out” (SH16). At the same time, however, the prohibition on practicing Chinese law is not absolute. Instead, foreign law firms are allowed to dispense advice on the Chinese legal environment, a vague formulation that provides cover for a wide range of activities.

One way to gain insight on the effect of different regulatory regimes is by looking at Hong Kong. Hong Kong has long been a link between China and global capital markets, as well as a location where many international law firms opened early due to British colonialism. Since 1994, the regulations governing foreign law firms have also been more permissive than those on the Mainland. Individual foreign lawyers are eligible to become Hong Kong qualified,Footnote ⁴¹ while foreign law firms can either join profit‐sharing associations with local law firmsFootnote ⁴² or register as Hong Kong solicitors' firms.Footnote ⁴³ For the 32 percent of the firms in our sample with a Hong Kong office, those offices are significantly larger than the firm's presence on the Mainland: an average of forty‐one lawyers, compared to just twenty‐two inside Mainland China.Footnote ⁴⁴ As one Hong Kong‐based lawyer explained, “you don't need an office of twenty or thirty people in [Mainland] China, but it is easy to grow to forty or fifty people in Hong Kong” (HK3).

The size of Hong Kong offices reflects the city's history and institutions, as well as the regulatory regime.Footnote ⁴⁵ Before international law firms formally entered China in 1992, it was common to use Hong‐Kong‐based lawyers to set up a legal framework for investment in China. Habit has kept some of this work in Hong Kong and, as in earlier days, Hong Kong remains a regional economic center. Some lawyers still treat Hong Kong as a base for a pan‐Asian practice and travel to other Asian cities to meet clients. This is credible both because people are accustomed to seeing Hong Kong as a hub, and thanks to the Hong Kong Stock Exchange and the Hong Kong International Arbitration Centre. These institutions sustain Hong Kong's reputation as a commercial center, and generate demand for legal work related to capital markets and arbitration. Yet regulation is also critical. Most international law firms with a footprint of at least forty lawyers have developed Hong Kong law capability in order to take on litigation and regulatory work (HK4, HK5). Local law capability offers entrée to next level of localization by allowing international law firms to compete for a broader range of commercial legal work. Though local law capacity is not a surefire route to greater profits, it is telling that a good number of international law firms in Hong Kong see value in developing it (Zhang 2014). When foreign law firms are allowed to participate legally in the full spectrum of the legal market, as in Hong Kong, investment in higher headcounts makes more strategic sense.

In Mainland China, where the regulations are much more restrictive, regulatory ambiguity about the boundaries of allowable practice stifles growth both directly and indirectly. Most directly, certain types of legal work are off limits, such as litigation and issuing legal opinions.Footnote ⁴⁶ These can be major practice areas and eliminating them shrinks the number of lawyers needed on the ground. As others have detailed (Liu Reference Liu2008; Godwin Reference Godwin2009, 142), one common workaround is hiring a Chinese law firm to handle a lawsuit or provide a legal opinion.Footnote ⁴⁷ Collaborating with capable Chinese lawyers can also allow foreign firms to avoid hiring.Footnote ⁴⁸ Even outside forbidden areas where partnerships are strictly necessary, Chinese law firms are sometimes a welcome source of flexible labor. As one European involved in a two‐lawyer micro‐practice explained, “the simple reason we don't need to expand is because we have access to capacity at XXX [name of Chinese law firm redacted]” (SH14).

More indirectly, legal ambiguity limits growth by fostering uncertainty. It is an open secret that foreign law firms offer advice on Chinese law in order to keep clients happy and stay in business. One experienced lawyer complained that following the letter of the law means that “you aren't supposed to do anything! … The requirement to hire a Chinese law firm to provide your client with advice, it just doesn't work that way. Clients are not going to accept double bills” (BA2). Although lawyers agree that the ban on practicing Chinese law is poorly enforced and the worst consequences are typically a warning or fine, it can be hard for firm leaders to invest in a practice that local authorities could credibly shut down at any time.Footnote ⁴⁹ As one partner explained to us:

Second, the internal structure of international law firms creates dynamics that can hinder growth. Ninety‐five percent of firms in our sample are global partnerships where equity partners divvy up worldwide profits.Footnote ⁵⁰ Often, this profit‐sharing structure creates isolationist wings of partners who see local business thriving and dislike the idea of international adventures. In their view, every dime spent outside the home country is a far‐fetched business proposition that reduces the profit pool (BJ19, BJ20, SH31, SH35, SH38, HK3). In this environment, a small office is easy to justify and expansion can be hard to sell. An argument for increased headcount is often a nonstarter, especially in firms eager to improve profitability and move up the professional rankings. When times turn tough, even modest China practices find themselves forced to justify their continued legitimacy within the organization.Footnote ⁵¹ “Headquarters is thinking: China is on fire,” one lawyer said, “there is tremendous growth there. [So] why aren't you more profitable?” (SH11).

Even if the head of a China practice wants to take on risk to expand, in short, the structure of a global partnership makes it hard for him or her to do so. This has implications for innovation. It is no accident that there is more dynamism and diversity among Chinese law firms than among international China practices. Among Chinese law firms, prominent examples of fresh ways of doing business include Yingke, a fast‐growing law firm often compared to the McDonalds franchise model, and Zhong Lun, a firm striving to foster a reputation as a prestigious and global legal brand (Liu and Wu Reference Liu and Wu2014; The Lawyer Reference Lawyer2014). Hotspots of innovation among international law firms are more unusual, and require either firm‐wide buy‐in or a willingness to grant atypical independence to an entrepreneurial individual.Footnote ⁵² Another way of understanding outpost offices, in other words, is by looking at politics inside law firms, to see why arguments for expansion often struggle to attract champions.

The Logic of Entry and Exit

Our observation that most China practices struggle to grow beyond a mid‐sized outpost is based on data from one point in time: summer 2013. Without longitudinal data, it is impossible to talk about trends over time, let alone pinpoint when international law firms reached their zenith in terms of size. There are reports that many foreign law firms doubled or tripled in size in the years directly following China's WTO entry (Li and Liu Reference Li and Liu2011–2012, 2851) and, regulatory restrictions notwithstanding, their trajectory might have appeared ascendant had this article been written during that brief golden age.Footnote ⁵³ Some international law firms have clearly stayed the course in China because of significant profits, either in the past or perhaps even now.

Still, the small size and slim profits of most China practices begs two related questions: Why do new firms continue to enter a crowded, competitive market? And, once present, why are they so reluctant to leave? On the entry side of the ledger, quite a bit can be chalked up to mimetic isomorphism, the tendency to imitate organizations perceived to be successful (Powell and DiMaggio Reference Powell and DiMaggio1991). Today, lawyers practicing in China admit “it is a bit of a herd mentality” (BJ10) and identify a widespread “dot on the map strategy” characterized by “big offices and very few people inside” (SH6). “Firms [still] feel like they have to be in China if they are going to be global,” as an observer of the legal industry put it. “China is the third leg of the global axis—the US, Europe and China—even if no one is making any money” (BA5). Many inside the legal profession agree that a China presence is de rigueur for a firm to be a global contender (BA1, SH22, SH24, BJ11, BJ18, BJ24).

Though some firms approach expansion decisions with a great deal of forethought, others move forward with far less consideration. In initial discussions about China, some law firms work with outside consultants to develop a strategy (SH18, SH22), while others rely exclusively on insiders who can speak to marketing and business development in China. Regardless of who does the analysis, China's rocketing economic growth offers a ready‐made argument for expansion. Here is how Zhong Lun law firm partner Robert Lewis described a Reference Lewis2013 event targeting managing partners of more than 100 top law firms worldwide:

For lawyers, it is unclear whether economic growth is a good proxy for business opportunities. Very little information is publicly available about the size of China's legal services market, let alone estimates of revenue or market share for individual law firms. Limited data make it hard to put together a sophisticated cost‐benefit analysis and, in the absence of good information, mimicking others is a time‐tested response to uncertainty (DiMaggio and Powell Reference DiMaggio and Powell1983; Suchman Reference Suchman1995; Henisz and Delios Reference Henisz and Delios2001). One legal consultant is amazed by “how little thought” can go into the decision to open a new office. “A lot of it comes down to vanity and ego. To the extent that there is a rationale, it's that such‐and‐such a firm, who is perceived to be a competitor, is doing it …. Frankly, lawyers are not the best businesspeople” (BA5).Footnote ⁵⁴ Other decisions about entry are idiosyncratic, such as lobbying from a partner eager to live in China. As in one case, a Chinese‐speaking partner might say “why don't we open up an office in China? I can staff it and I'm sure we'll do really well” (BJ18).

Once a China practice is launched, firms tend to see the value of staying put. Winning regulatory approval to open a representative office requires significant time and effort, and the license itself comes to be seen as an asset worth preserving. “Firms don't close,” one lawyer offered, “because they figure if they close, they'll never be able to get back in [because of] licensing and the cost to their reputation. And they are right” (HK3). The belief that the future is bright for law firms that stay the course corresponds to what economists call option value. As one lawyer put it, “think five years, ten years out … there's cause for optimism because the market will only get bigger. And not all the firms here are going to survive. Some will pack up and go home” (SH37; see also SH38, BJ18; Sokol Reference Sokol2007, 14). An outpost office represents a bet that future benefits will exceed current costs, a calculation made with the knowledge that reentry is a hassle. A China presence can be a defensive play for firms unsure about the future, in other words, as well as an active effort to make money in the present. Nor does maintaining a financially marginal outpost office seem strange when so many other firms are doing it too.

Some law firms can better afford to bet on future benefits. For firms with at least $1 billion in revenue, a group that included twenty‐three law firms in 2013, allocating 1 percent of revenue to a China option value would give the China practice a sizable $10 million dollar buffer to operate in the red. At lower‐revenue law firms, or law firms that are financially troubled, subsidizing a China practice would be more of a stretch. At times, however, even smaller players decide future possibilities in China are alluring enough to justify investment. At one regional law firm hovering around $200 million in revenue, an analogy to Japan proved persuasive. As the head of the China exploration committee put it, “firms were able to jump on opportunities in Japan, like MoFo [Morrison and Foerster], and that became very profitable for them. … China could be even bigger” (SH18).

The option value argument is particularly attractive because of the perennial possibility that the regulations governing foreign law firms could change. Rumors about loosening restrictions have been circulating for some time now, accompanied by speculation that competition with Singapore and Tokyo to serve as the financial hub of Asia might trigger reform, particularly coupled with the growing competitiveness of domestic law firms.Footnote ⁵⁵ Certainly, the regional trend is toward liberalization, with Japan allowing international law firms to hire local lawyers in 2005 and Korea permitting joint ventures with local firms in 2016. The Japanese experience, however, is a reminder that removing regulatory roadblocks is not a panacea. In Japan, international law firms have struggled to attract top‐notch Japanese lawyers and compete with Tokyo's Big Four law firms (Brennan Reference Brennan2013). For all that new regulations would change the game, challenges such as stiff competition and the pressures of partnership are unlikely to disappear.