The current congressional hearings into Yahoo's role in the arrest of several Chinese dissidents should serve as a cautionary tale for companies doing business in China and other repressive states. On the one hand, I have a lot of sympathy for Yahoo's local employees in China: they really had no reasonable choice but to comply with Chinese law, no matter how repressive that law may be. Yahoo isn't paying them enough to become prisoners of conscience themselves.
I have no sympathy whatsoever for Yahoo's executives, however. China's appalling human rights record and vicious suppression of dissent are well-documented. They should have known that sooner or later someone would use their service for the "free exchange" of information that the Chinese government wouldn't like, and that they'd be stuck between American principles and Chinese laws. The backlash they are now experiencing is a completely predictable consequence of their approach to the Chinese market.
It's easy to say that any company doing business in China has to comply with the same laws, and any company avoiding China on human rights grounds is likely to place itself at a competitive disadvantage. In reality, Human Rights Watch explains, there are laws, and there's a gray area of unwritten understandings. For instance, some companies proactively censor material that they think might be objectionable, while others block only material that has been specifically banned. Some servers are physically located in China, under the jurisdiction of Chinese courts, while some are not. Some companies respond to criticism by changing their policies, some by spinning out Chinese subsidiaries that they cannot control. It's up to customers and shareholders to differentiate between those that try to maintain open information principles under very difficult circumstances, and those that toss principles under the bus as soon as it's expedient.