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How China's Probe of GlaxoSmithKline Could Play Out

TAIPEI, Taiwan ( TheStreet) -- Chinese police are investigating GlaxoSmithKline (GSK - Get Report) and making arrests related to allegations that employees paid bribes to sell drugs.

The Chinese Ministry of Public Security's probe over the past month also involves possible tax-related violations and has widened to include common employees of the British pharmaceutical giant as well as in-country management, official media say.

Eighteen people were arrested last week, China's official media reported.

I won't offer an opinion on what the company did or didn't do.

But if the courts say laws were broken, what happens to GlaxoSmithKline will probably follow one of three formulas for foreign multinationals facing legal problems in China.

Scenario 1. GSK has enough experience in China to know it should cooperate with investigators and keep a low public profile. Violations of the sort suspected in the current probe are considered standard operating procedures for Chinese companies. But if a foreign firm gets charged, despite any history of living closer to the law than its local peers, the charges stick at least in the media because China's ubiquitous nationalism favors local firms over foreign rivals.

Consider Foxconn (2317.TW), a Taiwanese consumer electronics assembler. A rash of suicides in 2010 and a mass worker strike hurt its public image and raised questions about labor conditions. One answer seeker was Apple (AAPL), which had hired Foxconn to make consumer electronics in China.

Analysts said at the time mainland Chinese firms were treating workers worse than Foxconn, but none faced the same scrutiny.

In November last year, labor rights activists accused Samsung Electronics of hiring girls as young as 16 at two China plants and requiring workers to sign blank contracts. The allegations grabbed attention because Samsung is a global brand. What about its local counterparts?

GSK, one of the world's biggest pharmaceutical makers, shows signs of working with Chinese authorities. If that cooperation goes well, the company might need to pay a fine and develop a well-publicized internal cure for whatever legal ailments that that the police find. Its executives have condemned whatever happened but not explained the acts in much detail.
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