Forms of Business Entities for Entering the Chinese Market

There are many ways for a foreign company or multinational to enter the Chinese market. The easiest way is to open a representative office in China. Of course, Foreign Direct Investment (FDI) is most welcome.

Three Major Types of FDI

The three major types of FDI are Cooperative Joint Venture or Foreign Contractual Joint Venture, Equity Joint Venture and Wholly Forcign-Ownec Enterprise.

1. Foreign Contractual Joint Venture
   This form of joint venture is executed by signing a contract following consultation between concerned parties from China and other countries or regions. The contract shall define clearly the rights, obligations and interests distributed to each party. The contribution of each party of a cooperative venture does not have to be in the form of equity, and the share of profits, losses and risks are all stipulated in the contract. It is a contractual cooperative enterprise that allows a high degree of flexibility for both sides.
   
2. Equity Joint Venture
   This joint venture is one to which each party's contribution is decided through consultation and clearly defined in the contract. The venture shall be jointly invested, jointly managed, and the parties shall share its risks, profits and losses. Generally speaking, the ratio of foreign investment to total capital shall not be less than 25%. Each party's investment can be in cash or in the forms of premises, factory building, equipment, machinery or other materials, industrial property, patented technology and right to land use. A foreign equity joint venture is a limited enterprise of share ownership with the status of legal person.
   
3. Wholly Foreign-Owned Enterprise
   This form of direct investment refers to enterprises in China established by foreign companies, enterprises, economic organizations or individuals with funds entirely of their own. Therefore, it operates on its own and it takes responsibility for its profits and losses.

Ways of Entering the Market

Due to the huge potential of the Chinese market, it can be very profitable to enter it. But how does one enter the Chinese market? For overseas investors there are three ways to enter the Chinese market. Either they choose one of the two joint venture forms or they establish a wholly foreign-owned enterprise (WFOE).If the joint venture form is chosen, the overseas investor has to find a Chinese partner to start a business in China. In the equity joint venture both partners hold 50% of the company shares and have a joint management. There is no need of a joint management in the cooperative joint venture. In this case normally the Chinese partner supplies land, labour and raw materials while the overseas side provides the funding, equipment and technology. In each ease, a good relationship is vital to start and to run a successful enterprise in China. Apart from the above, the following points should be addressed.

1. Analysis of the Business Environment
   The business environment in China is changing fast, with the market gradually regularized. Studies should be made before any action is taken. Business and Trade statistics from open official sources, market research agencies, Chinese newspapers, trade journals in China, and reports from other companies can provide information and give a helping hand in business environment analysis, which is sure to benefit the decision-making process.
   
2. Identification of Challenges and Business Opportunities
   Before a company enters the market, its own strengths and weaknesses should be identified. Important questions should be answered, such as Does the company have experience in China? Is the company ready to make long term investments? Can the company only make short-term investments? Is enough man-power available to support the Chinese team? or Is the management flexible enough to take on the Chinese market?
   
3. Choose an Appropriate Product
   After proper market research, the company should be in a better position to choose the product that it will sell or produce in China. The buying power and cultural needs of the population will exert some influence on the choice of the products. Chinese customers like advanced foreign products. The government particularly prefers this kind of products. The company should pay attention to the packaging and the advertising. For example, lucky promising colors like gold and red are recommended.
   
4. Locate a Place for Doing Business
   As early as possible, the company should begin research into its choice of business location. Advantages and disadvantages should be discussed. The lack of infrastructure is a big obstacle for procurement, distribution and marketing. In China, each province or each city has its own characteristics. The location must he the first thing that you think about because of the unbalanced development from place to place, even in the same area or in the same city. The local environment is very different in comparison to each other, and for every special case, each province provides different advantages and disadvantages. In addition, the culture of the local community is also an important factor because the way of doing things is different from place to place.

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