There are only three paths for foreign investors to start doing business in China. The options are simple; you can open a representative office, a wholly owned foreign enterprise or you can run a joint venture with a local partner. Here’s a brief guide to each and their pros and cons.
A representative office requires an established overseas entity which should have been trading for at least two years (though this can be circumvented by buying an “aged” off the shelf company). Occasionally this requirement is ignored by the licensing authorities but there are no guarantees of this.
The representative office is allowed to establish an identity in China and to conduct negotiations with local businesses and pay invoices. It is not allowed to sell products in China or to hire and fire staff (any staff you need will be selected by the local authority and will cost you more than if you could hire direct).
Pros: In principle it’s a quick way to start a business, it enables you to do business in China legally
Cons: In practice it’s expensive, you lack control over your workforce, and you can’t sell anything locally
Wholly Owned Foreign Enterprise (WoFE)
We’re told by Chinese lawyers that this option is almost always chosen over a representative office in practice. A WoFE allows you to run your own business in China with total control over practices such as hiring and firing and where you can establish your office etc.
Because of the level of control granted to the owners many expatriates swear blind that this is the only or best way to do business in China. However it’s worth being aware that there are certain sectors in which WoFE’s may not be set up and others where the competitive nature of your business may be severely damaged by being wholly foreign owned.
Pros: In practice it’s cheaper to set up than a representative office, it offers you complete control over your business, you can hire and fire staff, setting up a WoFE is uncomplicated if a little time consuming
Cons: Lacks access to certain sectors, cannot qualify for state grants or subsidies which may be commercially damaging particularly if your business is in a “five year plan” focus area
A Joint Venture is a commercial entity that is jointly owned and managed by a Chinese investor and a foreign one. There’s been an enormous amount of media attention given to the difficulties faced by early investors in the country when starting a joint venture.
Certainly it ‘s not the easy option for conducting trade in China however joint ventures offer enormous opportunities for those willing to overcome the cultural hurdles, they qualify for subsidies in priority sectors and are well regarded by the state which may make certain barriers to business easier to overcome.
Pros: Qualify for subsidies, easier to overcome bureaucracy, will certainly have better connections for doing business inside of China
Cons: Can be a nightmare of culture clashes, partners need to be chosen carefully or you can end up with two organisations under one roof, require a high-level of co-operation and communication to be successful
The best place to start if you’re looking to set up in China is by talking to a local lawyer who can walk you through the options and the costs and give you an insight into local regulations and policies which may influence your decision.