This article from Andrew Hupert in China makes a very good argument of why software piracy in China actually hurts second tier local software companies rather than Microsoft itself.

Old China hands remember China Star software. In the early 90s, we started using that now-familiar breathless VC tone to describe the Next Microsoft. Selling at a retail cost of about 30% of its rival Windows Office, it was bilingual, stable and functional. What happened?

Rmb 10 is what happened. China Star would kill Microsoft when Windows sold at US$500 per copy, but didn’t stand a chance at $1.20 per copy. Imagine what China’s software industry might look like if piracy hadn’t killed off a viable, home-grown alternative to Microsoft? What if the Chinese software industry had had 15 years to develop? The ramifications are tremendous. We’re not talking about a single company growing rich and powerful – we’re talking about a whole new class of industrial superpower. What if China Star had been allowed to develop into a whole new software platform – incorporating open-source developments that would come along 10 years later and powered by China’s eventual rise to economic superpower? Consider what China would look like if its universities were churning out computer engineers and software writers who would find challenging work at Chinese companies in software centers around China?

more here 

Although I tend to agree with many things in the article I would disagree that this has been planned like this 20 years ago. Like any other company we have long term and short term goals to attain. What you don't see are the many cool products and services that we want to bring or implement in China but during the review process are forced to give a yearly or quarterly projection of revenues to justify executing it. Although the China market is quite large and dynamic, the reality is that revenues and sales are dwarfed by older developed markets like North America, Europe and even Japan. Although growth and market share is important, revenue and costs need to be justified since the shareholders are the ones really paying the bills of these expansions. Most of the time, shareholders want to see returns this year and not 20 years down the line.

Microsoft has begun to extend to its partners and 3rd party developers the ability to come inside the fortified walls of the MS software environment so that we can extend IP protection to new and emerging developers if they are willing to build from within our platforms. Xbox Live Arcade and the XNA Express systems comes to mind as ways MS is reaching out to developers and software companies to build within our framework so that they reap the benefits of a secure network and distribution system to deploy their IP.

In closing, I think that MS has done a lot of working in trying to protect its IP both legally and programmatically in China, but in a way is also trying to protect and nurture the IP of both current and future Chinese eco system of developers as well - which as we know - is better for China in the long run. 

-Frank Yu