To be successful in China, Internet companies need to make peace with market realities they have no control over, including government censorship and bureaucracy, according to Robin Li, CEO of the country's search engine leader.

When he first encountered these problems shortly after founding Baidu 10 years ago in Beijing, Li considered moving the company to Hong Kong, but concluded doing so would make him an enemy of the state.

"I'm Chinese. I don't have any other choices," he said at the web 2.0 Summit in San Francisco, where he was interviewed on stage by conference co-chair John Battelle. By contrast, a foreign company that doesn't obey Chinese rules can get in trouble with the government but still maintain a "strategic partner" status and be allowed to operate to a certain degree, he said.

Asked about Google's troubles in China, Li chalked them up mostly to a lack of understanding of the market's dynamics, which change fast as the Internet population grows and communications improve and get faster.

This year has been tumultuous for Google in China. It started with Google's decision to stop censoring results in its Chinese search engine after the company said that Chinese hackers had stolen Google intellectual property and broken into human rights supporters' Gmail accounts.

At first, Google provided an automatic redirect to its Hong Kong site from Google.cn. Google later restored Google.cn's landing page, providing only search services whose results it doesn't have to censor, such as music and product searches and offering a link to its Hong Kong site. In July, the Chinese government renewed Google's licence to operate in the country.

Li also dismissed suggestions that Baidu holds a "favourite son" status with the Chinese government. "That's a misperception," he said, arguing that the competitive landscape in the search engine market in China is more vibrant and crowded than in the US. "We're not the only game in town." However, Baidu is the market leader, used by 99 percent of the country's Internet users, according to Li. Revenue and profit are growing at a healthy rate and Baidu now has a market capitalisation of around $40 billion.

At different points several years ago, Yahoo, Microsoft and Google tried to buy Baidu for anywhere between $1 billion and $2 billion, but Li was able to convince his investors that they would reap higher returns if the company remained independent. "I knew Baidu had much larger potential," he said. When he decided to move back to his native country to found Baidu, Li worked in the US as an engineer at InfoSeek and had developed a search technology that received a US patent.

In Baidu's future Li sees what he calls "box computing," a ubiquitous and smart search-like box that replaces traditional operating systems in devices that boot up instantly. Via the box, users can search, launch applications and do a wide variety of computing tasks. "The box understands your intentions," he said. "We're developing technology to support this."

Li doesn't foresee Baidu crashing the US search market, because it's a mature market, but the company does have intentions to expand beyond China. It already has operations in Japan.