Since opening up in 1979, China’s economy has grown rapidly and its commercial law system has developed almost from scratch. In March 2011, the 11th National Peoples’ Congress declared that the construction of a basic socialist legal system was complete.
China Investment Types
In terms of foreign investment introduction, there are, as usual, direct investment method and other investment methods. Most of the foreigners’ business in China comes in the forms of sino-foreign joint ventures and wholly foreign-owned enterprises.
Wholly foreign-owned enterprises (WFOE)
For foreigners, Wholly foreign-owned enterprises (WFOE) is one of the best choice for them. In recent years, the WFOE has been the most popular vehicle for foreign investors to operate in China, accounting for 80 percent of China’s approved foreign-investment projects in 2009. The rise in popularity of WFOEs is largely due to relaxed foreign-investment restrictions after China’s 2001 accession to the World Trade Organization (WTO), which dismantled some barriers to foreign investment in the retail, trading, wholesale, and other sectors. The WFOE structure gives the foreign investor full business control and profit rights — but the investor also bears all the risks within the context of limited liability.
China WFOEs Advantages over JVs
One of the main attractions of this investment structure is that it takes less time to establish than a JV, because the foreign company does not need to select a suitable local partner or negotiate JV contract arrangements. In addition, the WFOE structure gives foreign companies greater control over their operations, as no local partner is involved in management and human resources decisions.
Most foreign investors—particularly after they have become familiar with China’s business environment—find it much easier to recruit, train, and retain employees when the foreign investor is in full control of the employer side of the relationship. Having the autonomy to manage employees also reduces the likelihood of intellectual property erosion.
The growing popularity of WFOEs does not eliminate the need to work with non-equity Chinese partners, however. Hiring local managers is essential to a foreign company’s success in China because their compensation requirements tend to be lower than their foreign counterparts and they are more familiar with local market conditions, business etiquette, rules and regulations, and government affairs. WFOEs must also interact with local companies to establish distribution channels, customer relationships, and in many cases a government affairs function, given the PRC government’s extensive role in the economy and society.
China WFOE Limitations
Not all sectors are open to WFOEs, however. Foreign investors in industries subject to foreign investment constraints, such as telecom and publishing, may consider investing through WFOEs established as consulting companies. These types of companies contractually control most business aspects of the licensed business, which is formally owned by Chinese investors or, where allowed, a JV.
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