Microfinanzas

Entering China: An unconventional approach.

Executive summary: conventional wisdom has it that the best way to do business in China is through an equity joint venture (EJV) with a well-connected Chinese partner. But pioneering companies are starting a trend toward a new way to enter that market: as a wholly foreign-owned enterprise, or WFOE.

Increasingly, says the author, joint ventures donot offer foreign companies what they need to succeed in China. For example, many companies want to do business nationally, but the prospects for finding a Chinese partner with national scope are poor. Moreover, there are often conflicting perceptions between partners about how to operate an EJV: Chinese companies, for example, typically have a more immediate interest in profits than foreigninvestors do.

By contrast, the author asserts, WHOEs are faster to set up and easier to manage; and the allow managers to expand operations more rapidly. That makes them the perfect solution, right? The answer is a qualified yes. First, foreign companies will still need sources of guanxi, or social and political connections. Second, managers must take steps to avoid trampling on China´s cultural oreconomic sovereignty. Third and perhaps most important, for eign companies must be prepared to bring something of value to China-usually in the form of jobs or new technology that can help the country develop. Companies willing to make the effort, says the author, can reap the rewards of China's burgeoning marketplace.

If you are thinking about doing business in China, you have no doubt heardthe conventional wisdom that the best - indeed, the only- way to enter China is through an equity joint venture (EJV) with a wee-connected Chinese partner.

Listen again. China is changing, and so are the opportunities and challenges facing foreign companies that want to operate within its borders. Although EJVs are still necessary in some regulated sectors, and foreign investment is prohibitedin others, there is a growing trend toward a new and possibly much more effective way of doing business in China - as a wholly foreign-owned enterprise, or WFOE. EJVs and WFOEs are substantially the same in terms of taxation and corporate liability. They also operate under similar foreign-exchange rules and comparable import and export regulations for licensing, quotas, and duties. In fact, theironly real technical differences are that WFOEs take less time to establish than EJVs, are not required to have a board of directors, and are prohibited in some sectors in which EJVs are approved.

Government statistics on the number of WFOEs currently operating in China are dated and perhaps misleading because they do not discriminate between businesses and holding companies. But drawing on myexperience, I would characterize the movement toward WFOEs as dramatic. In fact, I anticipate that half of all foreign investments in China will be WFOEs by the year 2000. For example, at the Suzhou-Singapore Industrial Park, an industrial development area that the Chinese government calls a ¨showcase of the future¨ 94% of the 120 business projects approves so far are WFOEs, with an averageinvestment of $30 million per project.

Why are WFOEs taking hold in the current enviroment? The answer is not because of a change in China´s legal or regulatory codes. Instead, pioneering companies, frustrated by the limitations and underperformance of those companies have met only minimal resistance from authorities.

Chinese officials are proving far more concerned about what outside investorsbring to the country - in terms of jobs, tecnology, and foreign exchange - than how their deals are structured. At the same time, foreign investors are finding that WFOEs, because of the flexibility and managerial control they deliver, make an excellent fit with China´s competitive situation today. The bottom line: WFOEs may well be the win-win China strategy that businesspeople around the world...