The state of Hawai'i spent more than $112,000 to provide office space for Hawai'i companies at a Beijing technology park for nearly three years — but no businesses used the space.

The lease for the business incubator space was signed in April 2006 and terminated in March of this year. The state is still paying legal fees to comply with Chinese laws.

When it was announced in 2005, the state's partnership with the Beijing Zhongguancun International Incubator — China's largest technology park — was supposed to help Hawai'i companies search for licensees and suppliers in China while funneling Chinese businesses to Hawai'i. However, the deal, which was hashed out during a 2005 China trade mission led by Gov. Linda Lingle, turned out to be a costly lesson on conducting business in China.

During the nearly three-year partnership, no Chinese businesses moved to Hawai'i and no Hawai'i companies moved into the incubator. One local merchant bank paid $5,841 to rent part of the office, but it never occupied it.

The failed initiative illustrates the problems that foreign governments and businesses face in navigating China's complex and changing business environment, said Yuka Nagashima, president of the Hawaii Technology Development Corp., which oversees the state's business incubators.

"Things that we are comfortable with in the United States, that we take for granted, they're not (comfortable with)," Nagashima said. "There's a lot of cultural differences that you see even in a written document. There's a tremendous gap in business practices and in their corporate law.

"It's the wild, wild West, or East, as it may be in this case."

Problems encountered by the state included a change in Chinese rules that prevented the subdividing of office space for Hawai'i tenants. The initiative also was affected by a change in leadership at the Hawaii Technology Development Corp. and a delay in the availability of money needed to build an international business incubator in Kaka'ako, according to state and private officials.

In the end, the potential of the China-Hawai'i business exchange program was never realized.

"The Chinese government really did think about using Hawai'i as a gateway to the U.S., but because it took so long for us to establish this relationship and for the money to come through, they went on to building relationships directly with companies elsewhere," Nagashima said. "Originally they thought they had to go through Hawai'i to get to markets in California and New York. In reality, they were able to contact Silicon Valley to establish their own offices there and bypass Hawai'i."

LEADERSHIP CHANGE

The plan to have Hawai'i and China exchange incubator space was formed under HTDC's prior leader, Phil Bossert, who left in 2006 to join Yoee, an online China travel company. Bossert's plan included renting the incubator space through the state's nonprofit High Technology Innovation Corp. That entity then would sublease part of the office to then-startup merchant bank DragonBridge via an equity-for-rent agreement. Nagashima, who succeeded Bossert in May 2006, nixed that arrangement in favor of a traditional cash-rent deal.

Questions about leasing terms as well as differences in the way the Chinese and Hawai'i governments conduct business led to a delay in opening the Beijing incubator. The plan for the office was announced in summer 2005, but the office wasn't opened until spring 2006. In the end, the state's lease with the Beijing incubator was not what was advertised, Nagashima said.

"There were several government rulings that switched on us," she said.

The biggest change: The state could no longer subdivide and lease its Beijing incubator space to more than one company at a time. Additionally, the Chinese shelved plans to bring companies to Hawai'i, Nagashima said.

Meanwhile, DragonBridge, which was the only company to sign a sublease with the High Technology Innovation Corp., ran into its own problems. The company planned to use a portion of the state's office space in Zhongguancun to aid Chinese companies interested in branching out to the United States. DragonBridge's plan was to spruce up Chinese companies seeking U.S. investment capital, then collect a cash-and-stock fee based on how much money each company raised.

DragonBridge founder Barry Weinman said the company never moved into the incubator space because of delays that prevented the office from opening sooner. Additionally, the tech park was inconveniently located at a relatively remote site.

Today, DragonBridge is struggling because many U.S. investment firms have moved directly into China to find deals. That made it difficult for DragonBridge to find its niche, Weinman said.

"We all recognized that we were pioneering a new model with China and this was a high-risk, high-reward opportunity," Weinman said in an e-mail. "It was a labor of love for the benefit of Hawai'i and for the future of Hawai'i high tech. Unfortunately in these type of high-risk adventures, we needed the cooperation of two governments — China and Hawai'i, flawless and timely execution, and luck.

"Unfortunately that didn't come to pass, but the journey and opportunity for Hawai'i was worth the risk."

On Jan. 31 DragonBridge ended its lease of the space, which cost about $250 a month. Two months later, the High Technology Innovation Corp. closed the office.

"We wanted to get out of there, but we felt that until all the things were resolved, we were under the impression that we had to keep the office open because if we didn't keep the office open, there could be other penalties," Nagashima said. "It took a long time for our attorneys to figure out the safest, cleanest method to get out of there. That's why it was kept and DragonBridge did pay up their share."

'LESSONS LEARNED'

Overall, the initiative cost the state $112,171. The state also continues to pay a small amount of legal fees related to the initiative, Nagashima said.

The experience did have value for the state, even if it failed to met expectations, Nagashima said.

"It makes sense for the state to sort of be able to have learned the lesson once rather than have each of our companies spend precious time and money in trying to establish their own connections to get the same work done, so in that sense it was valuable because we can help concentrate that learning," she said.

"There were lessons learned, and that seems like the role of government."