China market entry - Investment
Direct investment is always referred to as Foreign Direct Investment (FDI), which is sufficiently large to affect a company"s subsequent decisions, this is sometimes a majority ownership, but sometimes it"s just a significant minority ownership. There are three main types of direct investment: equity joint venture, contractual joint venture and wholly foreign-owned enterprise.
Equity joint venture
An equity joint venture is a partnership between an overseas and a Chinese individual, company/enterprise or financial organizations approved by the China government. Companies in an equity joint venture share both mutual rewards and risks. This is one of the most preferred manners for cooperation where the Chinese government and Chinese businesses are concerned.
However, overseas parties are only allowed to invest at most 25% of the entire registered capital in the form of cash or trade property rights etc. The parties to the joint venture shall share the rewards, risks and losses according to the ratio of investment.
Cooperation among the partners is imperative for a noteworthy joint venture. However, cooperation does not mean the need to always use the same strategies. Each equity joint venture partner plays supplementary and complementary roles with the other thus different strategies are frequently adopted by each partner. The Chinese partners" strategies must be in compliance with the State economic development programmes.
Contractual joint venture
As the name goes, this type of joint venture is rather similar to a equity joint venture but in a contractual form. Before the joint venture, all liabilities, rights and responsibilities are agreed upon a contract thus the parties involve will negotiate the form of administration and profit division. Contractual is different from equity joint venture because profit sharing is not based on ratio of investment but according to form of investment as per contract.
The major difference between an equity joint venture and a contractual joint venture as means in China market entry is that the latter neither necessarily calculates the shares in the form of currency nor distributes profit in proportion to their share, but share profit according to the form of investment and the ration of profit sharing as per the contract.
Joint venture is the most common method in China market entry, there are many advantages of joint venture:
* it provides great flexibility to arrange business relationship in a way that benefits both parties. This applies to the management of the joint venture and its financing
* comparing joint venture with wholly foreign-owned enterprise, joint venture investing reduces capital expenditure as well as manpower. With joint venture, its easier to obtain the capital, the technology as well as local society and government support
* joint ventures allow the firms to enjoy a higher degree of marketing control which would shorten the time taken to obtain local market information
* a foreign investor does not need to set up a new corporation in China under joint venture structures. The foreign investor and Chinese partner participate in the joint venture by doing business using the Chinese business license under a co-operative and contractual arrangement. This would allow each partner to focus on their own specialty
However, there are also some disadvantages of joint venture as means in China market entry:
* comparing with license and contract manufacturing in China, joint venture requires the foreign enterprise to pump in more funds which results in higher risks
* due to culture differences and profit sharing issues, valuable time would have been wasted after settling an agreement. Therefore, correct communication techniques are important
* undesirable income tax and liability implications if joint venture is construed as a partnership
* parties involved do not have the autonomy of a sole proprietorship in the decision making process
Wholly foreign-owned enterprise
Wholly foreign-owned enterprises refer to enterprises established in China by foreign investors, exclusively with their own capital, according to Wholly Foreign Owned Enterprise Law of the People Republic of China (PRC). It does not include branches set up in China by foreign enterprises and other foreign economic organizations. Therefore, the formation of a wholly foreign-owned enterprise must be with capital coming only from outside China and without any co-investment by Chinese entities.
The advantages of establishing a wholly foreign-owned enterprise as means in China market entry include:
* autonomy and independence to carry out worldwide strategies of its parent company without having to consult their Chinese partners
* full control over management and production quality and profit distribution provided that the legal limitations are fulfilled
* able to issue invoices to customers in Chinese currency, RenMinBi (RMB), receiving revenues in RMB, and converting RMB profits into US dollars for remittance to their parent company overseas
* safeguard their technical intelligence and the chemistry of their equipment
* increase its operations and management efficiency and advance further in development
The disadvantages of establishing a wholly foreign-owned enterprise as means to do business in China include:
* lack of Chinese partner and local contacts. A Chinese party may have the necessary relationship ("Guan Xi") to secure authorization of certain projects or the expertise to handle strict bureaucracy. The Chinese party may further obtain land-use rights for a particular site or may have particular know-how, technology, assets or resources which would not otherwise be available
* spending more time and effort to hire trained professionals and to create a sales network
* unable to obtain cheaper alternatives of land acquisition (for joint ventures)
* huge investment involved will result in higher risks. At the same time, it is also tougher to obtain the production resources and obtain Chinese government support.