This is an interesting post on Googles Blog at:

Google explains. At the outset, I want to acknowledge what I hope is obvious: Figuring out how to deal with China has been a difficult exercise for Google. The requirements of doing business in China include self-censorship – something that runs counter to Google’s most basic values and commitments as a company. Despite that, we made a decision to launch a new product for China – Google.cn – that respects the content restrictions imposed by Chinese laws and regulations. Understandably, many are puzzled or upset by our decision. But our decision was based on a judgment that Google.cn will make a meaningful – though imperfect – contribution to the overall expansion of access to information in China.

Until a few weeks ago, Google has been serving Chinese Internet users the same way we serve all Internet users worldwide since the company was founded in 1999. Though we had no operations or employees in China, we were able to provide a Chinese-language version of Google.com that, thanks to the global nature of the Internet, could easily be reached by users inside China. In 2002, we started to learn that Google was sporadically unavailable to Chinese users. In the fall of that year, we awoke one morning to emails from Google users in China informing us that our service was completely unavailable. We faced a choice at that point: hold fast to our commitment to free speech (and risk a long-term cut-off from our Chinese users), or compromise our principles by entering the Chinese market directly and subjecting ourselves to Chinese laws and regulations. We stood by our principles, which turned out to be a good choice, as access to Google.com was largely restored within about two weeks.

However, we soon discovered new problems. Many queries, especially politically sensitive queries, were not making it through to Google’s servers. And access became often slow and unreliable, meaning that our service in China was not something we felt proud of. Even though we weren’t doing any self-censorship, our results were being filtered anyway, and our service was being actively degraded on top of that. Indeed, at some times users were even being redirected to local Chinese search engines Nevertheless, we continued to offer our service from outside China while other Internet companies were entering China and building operations there.

A bit more than a year ago, we decided to take a serious look at China and re-assess whether our approach there was the best strategy. We spent a lot of time talking to Chinese Internet experts and users, scholars and academics inside and outside China, respected “China hands,” human rights groups and activists, government officials, business leaders, as well as our own Chinese employees. From those discussions, we reached the conclusion that perhaps we had been taking the wrong path. Our search results were being filtered; our service was being crippled; our users were flocking to local Chinese alternatives; and, ultimately, Chinese Internet users had less access to information than they would have had.

http://googleblog.blogspot.com/2006/02/testimony-internet-in-china.html