Forms of Investment and Management
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Forms of Investment and Management

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Forms of Investment and Management Forms of Investment and Management Presentation Transcript

  • Forms of Investment
    • Equity joint ventures
    • Contractual joint ventures
    • wholly foreign-owned enterprises
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • Key Issues
    • Balancing foreign exchange
    • problems in sourcing products and materials locally
    • issues in human resources
  • 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
  • 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)
  • 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
  • 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
  • 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
  • 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
  • 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)
  • 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?