Foreign Investment in China

Introduction

Globalization is the core of international trade and production through multinational corporations. Companies often seek to expand their markets bilaterally, regionally and internationally. However, such expansions are met by different barriers based on the existing business environments. For instance, the foreign laws in destination countries are different from host countries’. In considering a hypothetical situation, there is Company G from Germany, a global leader that specializes on the production of X-style machine due to its know-how. As it may, the company wishes to expand its business interests to China. Apart from the specialization, the company aims at exploiting the abundant skilled labor in an industrial area in China in its entry strategy. The current paper considers whether company G can legally invest in China. Consequently, it proposes the best form of business through which that company G can invest. Finally, the paper explores how company G can maximize its technical capacity and minimize costs thereby developing its competitive advantage.

Background to China

China is a country in Asia with its capital city in Beijing. The country is governed by a president and prime minister from the People Republic Communist Party. The country has a geographic area of over 9 million square meters and its population exceeds 1.3 billion people. As in 2010, the GDP was $5.365 trillion and has been growing. China’s major trading partners are Japan, United States, European Union, South Korea and Taiwan. The main exports are textiles, fuels, light products and heavy manufactures. The country’s man imports include machinery, steel and chemicals.

China is governed by a constitution adopted in 1982. The constitution borrows from communism and capitalist types of economic models. It is somehow inclined towards the market economy structure. It places sovereign power on the people and authorizes parliament, the National People’s Congress, to exercise extreme authority. The congress has legislation powers and elects the president. The lower level congresses practice the same powers enacting legislation and administrative leaders such as governors or mayors. The president is the head of the government and bureaucracy. The constitution gives citizens political, economic, and social rights. The country is governed by increasingly centralized bureaucratic system of the communist party. On the other hand, the legislative dimensions have had two frameworks at the national and locals levels. However, administrative laws from the local units should not contravene the state or constitution of the People Republic of China. Nonetheless, the constitution guarantees development of autonomous laws though governed by Law of Self-government in Minority Autonomous Regions. Thus, economic hubs such as Hong Kong have laws that are structurally different.

The increasing legal reforms in China are geared towards the neoecocnomic development. The transformation is a move to the rule of law. Chinese law has created a distinct chinese capitalisim culture based on corporates and clients. However, it still has a preference for the family business while disputes are sought out of court. Nonetheless, corporates need to be socially oriented.

Business Laws in China

Company G investing in China solely depends on the existing business laws. The catalogue of industries guiding foreign investment amendments shows that Chinese legislation promotes foreign investments in machinery. The sub sectors in which the company G might operate include general machinery manufacture, specialized equipment manufacture, automobile and equipment manufacture, electric machinery and so on. The Ministry of Commerce directive offers incentives to some specialized products in the sub sections. The Department of Foreign Investment Administration coordinates the operation of foreign investment in China. It promotes foreign investments. It also formulates and enforces necessary laws that guide their operations. The department is responsible for approving the establishment of foreign investments in China. It is in line with the Chinese government initiative in streamlining the management of foreign investments. From the above description found in the catalog, it is evident that the company G can invest in China. However, the investment is capped at $ 300 million.

Best Form Business for Company G

Company G’s operations would be guided by Company law of People’s Republic of China. There are seven investment options in China. These include a wholly foreign owned enterprise that is a limited liability company 100% owned by foreigners; equity joint venture which is a limited company between Chinese and foreign investors, and cooperative joint venture between Chinese and foreign investors. Others are a foreign investment company limited by shares, which is a limited liability company by shares and China holding company that is a restricted foreign investment option where a foreigner can control local Chinese investors.

Wholly foreign owned enterprise is the best investment option for Company G since the manufacturing of machinery has been permitted by the industrial catalog issued by the Ministry of Commerce. This company is easy to form, and company G can control its intellectual rights. However, the cost of establishing a business is high for full owned foreign investments. Equally, there is no tax incentive for foreign investments while dividends paid to a foreign investor are subject to tax of between 5 – 10%. Nonetheless, Company G can easily attract capital from other foreign investors. Decision making is quick based on the ownership structure that has simple management and small board of directors. Similarly, it can also help avoid culture related problem. However, the company is subject to foreign income tax on its total income. Equally, the legal framework of China requires establishment of branches in all the provinces of the Republic.

Company G has another option, an equity venture between foreign and Chinese firms. It is a limited liability company owned in proportion of shared contributions. The investors call business shots on shares and unanimous decisions prevail. In most cases, foreign investment should be over 255 in the venture. The profit sharing also relies on shares’ contribution. However, the formation of equity joint venture requires time for negotiation with Chinese partners. Consequently, company G cannot control its intellectual property. However, a reprieve is offered because the existence of Chinese investors lowers the cost of formation. However, the benefits associated with equity venture can be transferred to wholly owned enterprises through outsourcing. It is easy for Company G to diversify its operations under the equity venture context.

Conversely, company G can also lobby Chinese investors to form a cooperative joint venture. The ownership depends on the contract agreement between the two parties. The venture only enjoys limited liability if it is set up under such a condition. The contract guides capital mobilization and sharing of profits. The formation of joint ventures requires negotiation as equity venture. Intellectual property is also risked as in joint ventures while the cost of establishment is lower than in a fully owned foreign investment. Evidently, the operations of joint ventures are restricted.

Wholly foreign owned enterprises are the most popular form of business adopted by large businesses in establishing subsidiaries in China when compared to other forms of foreign investment model. The most fronted reason is control of technology, trade secrets and intellectual property.

Comparative Advantage of Company G

China has increasingly opened its economy since joining the World Trade Organization. The economy has been heavily impacted by foreign investments. Foreign direct investment in China is the main cause of rapid development.

Company G will enjoy reduced tariff and non-tariff barriers. It is an important detail as investments become cheaper. Thus, Company G will enjoy low set up cost in importing capital goods lowering the cost of production. It has made China expand its auto industry where it does not have a comparative advantage. The cost of setting up companies is further lowered by existence of exclusive free economic zones. Thus, the economic zones such as Shanghai offer a locational option for company G. It is critical in determining how the company G would maximize its profits while minimizing cost. Tariff includes taxes and duty imposed on the operations of any business. The application of tariff acts as a barrier to businesses since it increases the cost of doing business. Various countries impose tariff barriers to protect local industries and prevent dominance of Multinational Corporation in their economies. Tariffs can affect Company G’s imports, exports and net profits. On the other hand, nontariff barriers affect businesses by introducing restrictions that might affect the normal operations. They include quotas, sanctions and embargoes on imports, exports and markets. Company G, for instance, is required to run offices in every province in China. This act may make little or no economic sense.

China has a comparative advantage in labor incentive products. As already noted, Company G has identified the labor economies of scale in the Chinese market. Thus, there is the existence of low cost well educated labor. In this case, Company G can maintain profit because the cost of labor is low compared to the parent company in Germany. Since it is legally acceptable, Company G can maximize on this option so long as it does not compromise the quality of its products. China has managed to create a substantive labor market. Therefore, Company G can enjoy this benefit from the economy.

From the introductory script, Company G specializes on the production of X-style machines based on the know-how. This kind of know-how and intellectual property form part of trade secrets that give the business a competitive edge in the market. The technology in the manufacturing process automatically lowers the cost associated with the production. Thus, it explains why the company is a global leader. Innovation and invention in the production always make businesses reduce wastages and adopt suitable best practice technologies. The knowledge is not only limited to production, but also markets, customers and competition, as well. Thus, the establishment of a subsidiary in China will exploit the already existing market network. It will also enjoy a reduced cost related to advertising and marketing.

Conclusion

In conclusion, Company G can legally set up a base in China since manufacturing of machinery is acceptable as per the Ministry of Commerce directive of 2011. At the same time, the company can explore various forms of foreign investment models. However, several scholars promote a wholly foreign owned enterprise since it has a quick and easy business model. Further, the form suits the investments that have been made on the technical know-how. Consequently, the new business subsidiary will enjoy a competitive advantage set by the firm’s know-how. At the same time, there is a comparative advantage set up in the China’s economy in the free economic zones and cheap labor.