1. MOD001068 Chinese
Economy: Issues and Policies
Module Leader: Dr Jonathan Wilson (3rd Floor, LAIBS Building)
jonathan.wilson@anglia.ac.uk
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2. Lecture 2: Foreign Direct Investment
in China
 Structure:
 WTO
 Market entry
 Threats to foreign firms investing in China
 IJV success factors
 Case examples
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3. What is the WTO?
 World Trade Organisation
 Replaced GATT in 1995
 Global Organisation – deals with the
rule of trade
 149 members (accounts for 97% of
world trade)
 Aims to allow smooth trade between
nations
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4. Why did China enter the WTO?
 To show it is a serious player on the global stage
 To encourage foreign investment through opening up its
markets
 To allow Chinese firms to compete in other international
markets
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5. China’s commitments - examples
 China will provide non-discriminatory
treatment to all WTO members
 China will eliminate dual pricing practices
 The WTO Agreement will be implemented
by China in an effective and uniform
manner by revising its existing domestic
laws and enacting new legislation fully in
compliance with the WTO Agreement
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6. Main market entry methods
 Equity joint venture
 Cooperative joint venture
 Representative office
 Wholly Owned Foreign Enterprise
(WOFE)
 Foreign company limited by shares
 Cooperative development
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7. Advantages of joint ventures
 Ability to use a partner who is honest, entrepreneurial,
straightforward in its dealings
 Committed to the protection of the joint venture company’s
IPR with good market access and local contacts and bringing
with them a first-class workforce and facilities
 Both partners share the risk
 Can tap into local contacts – guanxi and guanxiwang
Source: Adapted from www.cbbc.org
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8. Advantages of a WFOE
 The advantages of establishing a WFOE include:
(1) Independence and freedom to implement the worldwide
strategies of its parent company without having to consider the
involvement of the Chinese partner;
(2) Ability to formally carry out business rather than just a
representative office function and capable of issuing invoices to
their customers in RMB (Chinese Currency) and receive revenues
in RMB;
(3) Capable of converting RMB profits to US dollars or other
foreign currency for remittance to their parent company outside
China;
(4) Greater protection of intellectual property rights, know-how
and technology since no partner required and therefore more
control of IP;
(5) Greater efficiency in its operations, management and future
development.
 Source: www.cbbc.org
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9. Disadvantages of joint ventures
 Lack of information about Chinese partner
 Lack of trust
 Someone else shares in the profits of the business
 Lack of control over China production
 Communication can be a problem, particularly with a large
number of JV partners
 Decision-making, who makes the ‘final’ decision?
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10. Changes in mode of entry
 Since 2001 WFOE has overtaken the
number of IJVs
 Why? –
 Relaxation of regulations,
 Foreign firms more experienced –
particularly in relation to cultural
understanding
 Easier decision-making, e.g. BP
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11. Joint venture success factors
 Share the same strategic objectives
 Regular communication
 Foreign firm – always send ‘big boss’
 Understand / adapt to cultural differences
 50/50 EJV problems with decision-making
 Above all – persistence, hard work and
maintaining successful relationships
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12. Model for market entry decision-making and operational
change
Strategic objectives: access to markets, growth,
local knowledge, pressure from competition,
and saturation of domestic market
 * Evidence suggests change principles can be anything that means the Chinese partner
is no longer perceived as adding value to the joint venture relationship, together with
relaxation to regulations governing operational modes as a result of WTO entry
(Wilson and Brennan, 2003). Source: Wilson, J. and Brennan, R. (2003) ‘Market entry methods for Western firms in
China’, Asia Pacific Journal of Marketing and Logistics, 15 (4), pp. 3-18.
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Western company
EJV WOFE / CJV Change principles*

13. Reasons for market entry
 “Our objectives were obviously to try and create a business
market share and hopefully to develop a profitable company”
 (Director, UK Engineering Company)
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14. Possible threats to foreign firms
investing in China
• IPR infringement
• Protectionism e.g. Cherry Valley (Beijing
Duck)
• Government ‘moving goalposts’ e.g.
McDonalds
• Corruption
• Local / foreign competitors
• Lack of cultural understanding
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15. 15 6C hexagon of IJV success factors
Control IJV
Co-operation
performance
Consensus
Commitment Communication
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Cultural
understanding
Source: Wilson, J. (2006) Inter-Partner Relationships and Performance in Western-Chinese Joint Ventures: An Interaction Approach

16. Implications for Chinese firms
 Need to compete with foreign organisations
 Learning can be achieved through a joint venture
 Able to compete outside domestic market
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17. 17Case examples: Western firms in China
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18. 18 Case examples: Western firms in China (cont)
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19. Next week
 Read: Read: Xiaowen Tian ‘Managing
International Business in China’ pp.72-
93.
 Li, Huaning and Clarke-Hill, C.M. (2004)
‘
Sino-British joint ventures in China: Investment ’,
European Business Review; Vol.16, No.1.
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