Invest & Cooperate in China
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:
1. 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
2. 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
3. joint ventures allow the firms to enjoy a higher degree of marketing control which would shorten the time taken to obtain local market information
4. 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.