China Entry Services
When a foreign investor decides to launch a business venture in China they will need to decide either to launch their business in the form of an actual capital investment, or to start out more cautiously by scanning the market, building networks, and/or using local representatives.
Those who intend to conduct a full range of business activities, should consider establishing a legal entity. In the case that a legal entity is preferred, the form of the entity chosen is crucial. Aspects that have to be considered are the sector of business and amount of money invested, as well as if a Chinese partner is desirable or even mandatory for the business, along with other general commercial and strategic considerations. In addition to the level of financial risk and control a company prefers for its China operations, government restrictions on specific industries affect the investment type made. Media, automotive, and telecom industries are examples of industries that may require foreign invested enterprises to have local partners.
A Representative Office (Rep. Office) represents the interests of the foreign investor by acting as a liaison office for the parent company. Rep. Offices may conduct market research, develop partnerships and business channels; however, all business transactions, including issuance of invoices, are managed by the parent company. Furthermore, Rep. Offices may not directly hire local employees but must rely on a government-authorized employment agency, but may hire a maximum of four foreign employees. Since Rep. Offices do not have a minimum investment requirement, they are not considered a Foreign Invested Enterprise. Rep. Offices are the least complicated way for a foreign firm to have a legal presence in China and were, at one time, the first choice for foreign companies with little or no previous experience in the country. However, given the restrictions on direct employment of local employees, transactions, and taxation on expenses, Wholly Foreign Owned Enterprises are typically a better option for entrants seeking to develop their business in the China market.
Wholly Foreign Owned Enterprise
Wholly Foreign Owned Enterprise (WFOE), the most popular Foreign Invested Enterprise (FIE), is a limited liability company fully invested by one or more foreign investors. Along with the rights afforded to a Rep. Office, a WFOE may also legally conduct business transactions within China and hire local employees on its own accord. However, they do have a minimum investment requirement that is dependent upon the locality and nature of the business. WFOEs are becoming more and more common and have begun to outpace Joint Ventures as the most popular vehicle for a China presence.
Equity Joint Venture (EJV) companies have capital investments from both local and foreign firms. The percentage of the capital investment determines the amount of profit and risk that both the foreign and local company assumes. Foreign firms entering industries where WFOEs cannot operate often use JVs, although this is becoming less prevalent as more and more industries begin to gradually open up to WFOEs.
Cooperative Joint Ventures (CJV) are also partnerships with a local company; however, the amount of risk and profit shared by each party is not determined by capital investment, but rather agreed upon at the beginning of the partnership. CJVs were used more in the 1990s when the Chinese economy was not as developed. International companies often injected funds while the local Chinese companies provided equipment and other necessities. Laws, regulations, and procedures for establishment can vary substantially between industries.
The common risk associated with entering into partnerships with other companies applies in China and is often exacerbated by disparities in culture and business practices between the foreign and local partners. Foreign Companies should enter into JVs only when both parties have reached a clear understanding of the business objectives and appropriate exit strategies have been developed.