China is one of the world’s oldest, most dominant civilizations. Yet, it remains shrouded in mystery, walled off from the rest of the world and a victim of ancient stereotypes.

The Beijing Olympics offered China a chance to reopen its doors. For American CIOs and business leaders, it’s a chance to ponder China’s future in the global business world.

Few experts can shed more light on China’s business and IT potential than Harvard Business School professor F. Warren McFarlan, the dean of American IT academics. He’s been studying China—both up-close and from afar—for decades, and has chronicled its development through the centuries. What he sees is a country that has built up formidable technological infrastructures and educational institutions. At the same time, pollution has muddied the waters (literally), and intellectual property violations have plagued its reputation.

But that’s no reason to count China out, McFarlan posits. The question is, What will the next incarnation of China look like? Will it be the world’s sweatshop, an outsourcing go-to that will take India’s throne? Or will it grow into a dominant player in the world of business and technology?

McFarlan analyzed China’s potential impact on American business and IT, as well as its massive challenges, in a wide-ranging conversation with CIO Insight Online Editor Brian P. Watson. What follows is an edited, condensed version of that conversation.

CIO Insight: What do American IT executives need to know about China right now?

F. Warren McFarlan: It’s something they really have to keep their eyes on. We know that IBM has about 6,000 people there, Hewlett-Packard has a huge presence, and India’s Tata and Infosys are spreading there very rapidly. The language is the challenge. There’s a lot of outsourcing being done to Japan instead of China because they have a history of adapting to English. But China is a very technologically adept and friendly group. They’re willing to work very hard for vastly different compensation numbers than we’d pay them if they were here.

China has many different markets. American co mpanies operating in them need support from their own IT staff or their outsourced staff. Almost all the technology and outsourcing vendors are dragged in there to support the Chinese subsidiaries of the American companies. Chinese companies like appliance manufacturer Haier and shipping firm Cosco are growing, and they need a level of control and systems integration. They’re spending heavily to get the productivity and service levels up.

There are as many people coming out of Chinese universities technically trained as there are coming out of Indian universities. It’s a combination of skill level and cost, and India has gone right up the value chain. But how long are American companies going to be able to do outsourcing business with just HP, Accenture, EDS, etc.? Where do the Indian companies Infosys, Wipro, etc., fit in as their brands come into the marketplace? And China has a deeper pool and much broader, deeper technology infrastructure than India does.