Forms of Investment and Management


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Forms of Investment and Management

  1. 1. Forms of Investment <ul><li>Equity joint ventures </li></ul><ul><li>Contractual joint ventures </li></ul><ul><li>wholly foreign-owned enterprises </li></ul>
  2. 2. Contractual Joint Ventures <ul><li>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 </li></ul><ul><li>a limited liability company is formed to hold and investment and operate the company </li></ul>
  3. 3. Contractual Joint Ventures <ul><li>a board of directors </li></ul><ul><li>Chinese side contribute land, factory and sometimes cash, while the foreign side provides technology, capital equipment and management skills etc. </li></ul><ul><li>minimum 25% of foreign investment </li></ul><ul><li>equity joint ventures and and tax benefits </li></ul>
  4. 4. Contractual Joint Ventures <ul><li>The respective contributions of each side are not contributed as equity shares </li></ul><ul><li>Profits can be distributed in any proportion agreed upon without regard to the contribution of each side </li></ul><ul><li>not necessarily registered as a company with limited liability </li></ul>
  5. 5. Wholly Foreign-owned Enterprises <ul><li>The foreign company contributes the entire equity, receive all the profits, and has complete and independent control over the running of the enterprise </li></ul><ul><li>initially not encouraged by Chinese government, but has become more popular and important in recent years </li></ul>
  6. 6. Wholly Foreign-owned Enterprises <ul><li>The case of 3M </li></ul><ul><ul><li>insisting on setting up a wholly owned subsidiary </li></ul></ul><ul><ul><li>the negotiation and initial difficulties: ideologically suspect (three no companies), export quota, foreign exchange, bureaucratic inertia </li></ul></ul><ul><ul><li>question: whether this reflects the problems specific to the early 1980s or to the wholly owned nature of the venture </li></ul></ul>
  7. 7. Another form of foreign investment: CITIC AND ITICS <ul><li>CITIC: China International Trust and Investment Corporation </li></ul><ul><li>like merchant banks, attracting and utilizing foreign capitals to China </li></ul><ul><li>together with China Everbright, directly under the State Council </li></ul><ul><li>CITIC Pacific in Hong Kong, investing in a many areas, ranging from airlines to telecommunications </li></ul><ul><li>ITICS at the local level; no direct relationship with CITIC and heavily influenced by local governments </li></ul>
  8. 8. Stages of Foreign Investments in China <ul><li>Four stages: 1979-1985, 1986-1988, 1989-present, and China WTO entry </li></ul><ul><li>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 </li></ul>
  9. 9. Stages <ul><li>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 </li></ul><ul><ul><li>to enter the import substitution market (to sell on the domestic market for foreign exchange) </li></ul></ul><ul><ul><li>to produce for the domestic market and compete with local and state-owned enterprises </li></ul></ul><ul><ul><li>examples: Coca-cola, Procter & Gamble and S.C. Johnson </li></ul></ul>
  10. 10. Stages <ul><li>Third stage: introduction of more government restriction on foreign investment </li></ul><ul><ul><li>emphasis on larger and top-ranked foreign firms that can bring more advanced technology </li></ul></ul><ul><ul><li>conflict of interests between the Chinese side and foreign firms </li></ul></ul><ul><ul><li>ambiguous attitude to investments from Hong Kong </li></ul></ul>
  11. 11. Key Issues <ul><li>Balancing foreign exchange </li></ul><ul><li>problems in sourcing products and materials locally </li></ul><ul><li>issues in human resources </li></ul>
  12. 12. Balancing Foreign Exchange <ul><li>All foreign enterprises are required by law to generate sufficient foreign exchange expenses </li></ul><ul><li>initially, force foreign enterprises to export and therefore limit the appeal of investing in China </li></ul><ul><li>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 </li></ul>
  13. 13. Balancing Foreign Exchange <ul><li>measures to solve this problem: </li></ul><ul><ul><li>setting up of currency swap centers, which allow RMB profits to be exchanged for foreign exchange </li></ul></ul><ul><ul><li>giving more products import substitution status </li></ul></ul><ul><ul><li>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) </li></ul></ul>
  14. 14. Ways of exchanging RMB for foreign currency <ul><li>Export production </li></ul><ul><li>use RMB profits to buy products unrelated to the venture and then export these products for foreign currency </li></ul><ul><li>swap centers </li></ul><ul><li>develop co-operation with firms making profits in foreign exchange through export </li></ul>
  15. 15. Sourcing Outputs and Materials Locally <ul><li>Financial reasons for local sourcing </li></ul><ul><li>political reasons for local sourcing </li></ul><ul><li>the Xerox and Polaroid cases </li></ul><ul><li>helping local partners to achieve the acceptable standards by training and co-operation </li></ul>
  16. 16. Human Resource Challenge <ul><li>Avoid an “us” versus “them” situation, which is all the more likely to emerge because of a heavy reliance on expatriate managers </li></ul><ul><li>creative methods need to be found to give respect to the Chinese managers, and the people they report to, in the joint ventures </li></ul>
  17. 17. Human Resource Challenge <ul><li>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 </li></ul><ul><li>other problems: habits inherited from the past, and limited labor mobility and lack of qualified workers </li></ul>
  18. 18. Human Resource Challenge <ul><li>Allegiances of local managers not only (or even not primarily) to the company but also to the respective functional superiors outside the company </li></ul><ul><li>vertical allegiances and other bureaucratic interference (the Olympic hotel case) </li></ul>
  19. 19. Human Resource Challenge <ul><li>To continue to rely on expatriate managers or to train and localize </li></ul><ul><li>If localization is a desirable goal, how the foreign firm should go about doing it? </li></ul>