Forms of Investment

1. Forms of Investment Equity joint ventures Contractual joint ventures wholly foreign-owned enterprises

2. Contractual Joint Ventures a joint-stock enterprise with the Chinese and foreign partners each contributing equity and share in the investment, management, operations, risks, profits, and losses. Earnings are distributed in proportion to equity shares a limited liability company is formed to hold and investment and operate the company

3. Contractual Joint Ventures a board of directors Chinese side contribute land, factory and sometimes cash, while the foreign side provides technology, capital equipment and management skills etc. minimum 25% of foreign investment equity joint ventures and and tax benefits

4. Contractual Joint Ventures The respective contributions of each side are not contributed as equity shares Profits can be distributed in any proportion agreed upon without regard to the contribution of each side not necessarily registered as a company with limited liability

5. Wholly Foreign-owned Enterprises The foreign company contributes the entire equity, receive all the profits, and has complete and independent control over the running of the enterprise initially not encouraged by Chinese government, but has become more popular and important in recent years

6. Wholly Foreign-owned Enterprises The case of 3M insisting on setting up a wholly owned subsidiary the negotiation and initial difficulties: ideologically suspect (three no companies), export quota, foreign exchange, bureaucratic inertia question: whether this reflects the problems specific to the early 1980s or to the wholly owned nature of the venture

7. Another form of foreign investment: CITIC AND ITICS CITIC: China International Trust and Investment Corporation like merchant banks, attracting and utilizing foreign capitals to China together with China Everbright, directly under the State Council CITIC Pacific in Hong Kong, investing in a many areas, ranging from airlines to telecommunications ITICS at the local level; no direct relationship with CITIC and heavily influenced by local governments

8. Stages of Foreign Investments in China Four stages: 1979-1985, 1986-1988, 1989-present, and China WTO entry 1st stage: before 1985: joint ventures were geared to those that could earn foreign exchange: hotel and real estate ventures, light industrial plants producing for export

9. Stages 2nd stage: 1986-1988: broader forms of investments and effort to solve the problem of foreign exchange repatriation by setting up of currency swap centers to enter the import substitution market (to sell on the domestic market for foreign exchange) to produce for the domestic market and compete with local and state-owned enterprises examples: Coca-cola, Procter & Gamble and S.C. Johnson

10. Stages Third stage: introduction of more government restriction on foreign investment emphasis on larger and top-ranked foreign firms that can bring more advanced technology conflict of interests between the Chinese side and foreign firms ambiguous attitude to investments from Hong Kong

11. Key Issues Balancing foreign exchange problems in sourcing products and materials locally issues in human resources

12. Balancing Foreign Exchange All foreign enterprises are required by law to generate sufficient foreign exchange expenses initially, force foreign enterprises to export and therefore limit the appeal of investing in China as a result of a number of measures that help solve the foreign exchange problems, balancing foreign exchange has long ceased to be a serious problem, although it is still a problem for large firms

13. Balancing Foreign Exchange measures to solve this problem: setting up of currency swap centers, which allow RMB profits to be exchanged for foreign exchange giving more products import substitution status allowing foreign firms to balance their foreign exchange needs with other ventures in which they have an interest (allowing the profits of one to cover the shortfalls of another)

14. Ways of exchanging RMB for foreign currency Export production use RMB profits to buy products unrelated to the venture and then export these products for foreign currency swap centers develop co-operation with firms making profits in foreign exchange through export

15. Sourcing Outputs and Materials Locally Financial reasons for local sourcing political reasons for local sourcing the Xerox and Polaroid cases helping local partners to achieve the acceptable standards by training and co-operation

16. Human Resource Challenge Avoid an “us” versus “them” situation, which is all the more likely to emerge because of a heavy reliance on expatriate managers creative methods need to be found to give respect to the Chinese managers, and the people they report to, in the joint ventures

17. Human Resource Challenge prevailing assumption: Chinese managers a force to be dealt with, but basically a source of nuance and interference, and they should be honored but not drawn into the management process other problems: habits inherited from the past, and limited labor mobility and lack of qualified workers

18. Human Resource Challenge Allegiances of local managers not only (or even not primarily) to the company but also to the respective functional superiors outside the company vertical allegiances and other bureaucratic interference (the Olympic hotel case)

19. Human Resource Challenge To continue to rely on expatriate managers or to train and localize If localization is a desirable goal, how the foreign firm should go about doing it?