Most Fortune 1000 companies are currently doing business in China. In addition, many small and medium sized U.S. companies are doing business there as well. China is the fastest growing consumer economy in Asia and unless conditions change, will soon surpass Japan as the largest Asian economy and becomes the second largest economy in the world.
Many Chinese now have cars, own their own homes (apartments, condominiums or houses), eat out frequently and are willing to buy western products, eat in western restaurants and shop for new products and services. China will host the 2008 Olympic Games. China entered into the World Trade Organization in 2002 and has a pro business government and progressive economic policies that encourage foreign investment.
China has an infrastructure to support its economy in terms of telephone communications, Internet connectivity, highways, air transportation and railways. In its cities you will see modern skyscrapers, well laid out streets and all the consumption culture with shopping malls like those in the west. Office space throughout the country is plentiful.
Types of Business Entities
The current Chinese law recognizes three types of business entities that have foreign interest.
Type 1: A Foreign Representative Office
This was the earliest and for a time the predominant form of foreign related entity that was allowed to do business in China. This arrangement allows only for liaison work between the foreign parent and local businesses. It cannot generate revenue in China and cannot sign or enter into any types of revenue generating contracts with local businesses. It is sole a communications vehicle that helps its parent company to do business with Chinese clients. Although they are easy to establish and help promote the image of its foreign parent, it can be expensive and has negative tax consequences.
Type 2: A Joint Venture (JV) Company
The foreign company provides the product, the money and sometimes the management expertise while the Chinese company provides the local connections necessary for government approval and local market expertise. The two companies split any profits. In China a Joint Venture is a recognized corporate entity. However, the JV can conduct business in China like any other business with some restrictions that apply in certain industries. With china’s entry into the World Trade Organization, the country is becoming more and more open to foreign businesses. A JV can now enter into a vast majority of Chinese industries. A primary disadvantage is the shared decision-making power that often results in delays and confusion. Minority participation in a JV is not a good idea.
Type 3: A Wholly Foreign Owned Enterprise (WFOE)
A WFOE is a 100 percent wholly owned foreign subsidiary doing business in China. This is becoming the vehicle of choice for foreign direct investment in China. The WFOE is a registered local company but the difference with other companies is 100% foreign ownership. The advantage of this approach is absolute decision-making power, no sharing of profits, more control over operations, speed of decision-making and more use of western business customs. The lack of local government connections reduces the ability to influence government permits, taxes and other decisions. This can be mitigated by using expert assistance, hiring qualified local managers and building a quality staff.
Cost of Starting a Business
The cost of starting a business is dependent upon the type of business, the size and the goals. The pool of unskilled workers is inexpensive. Skilled, white color workers are getting expensive in the larger cities, but the salaries are still lower than comparable positions in the U.S. and Europe. Getting a business registered can often cost a few thousand dollars. If your product requires product testing to be permitted in China, this process can require weeks or months to complete and may cost several thousand dollars more. It is a good idea to get assistance for an organization that specializes in foreign business formation in China.
© 2006-2007 East-West Economic Development Center