Joint Ventures in China Face New Rules of the Game

Article excerpt

Economic and legal changes require a different approach from both new and existing joint ventures.

OVERVIEW: Joint ventures between foreign enterprises and business partners in the People's Republic of China are confronting new economic and legal conditions. The new conditions require changes in the way that existing JVs operate and that new JVs are structured. Companies planning to form JVs in China are therefore advised to move quickly, establish a reliable foothold, search for alternatives to bank financing, maintain good relationships with the authorities, be prepared for their partner becoming privatized, invest in quality, and offer state-of-the-art technology. Recent growth of (parts of) the Chinese economy, together with China's open door policy, have encouraged foreign enterprises to create joint ventures with Chinese business partners. Generally in these JVs, the foreign company provides the technical expertise, equipment and some of the financing, while the Chinese partner contributes the facilities (often technologically obsolete), the labor force, contacts with central and local government officials, and market access. These JVs have proved to be the most effective way for foreign companies to gain a foothold in the Chinese market, and China's economy has benefitted greatly from them. However, China has also lost a large amount of foreign exchange as a result. Consequently, the government, trying to minimize the detrimental effects while keeping control over foreign investment, has recently changed the rules of the game for joint ventures. Not only do the new JVs have to cope with these changes, but existing JVs are confronting measures they had not anticipated and that are severely affecting their operations and profitability. Growth in Foreign Investment

Following the "6.4 event" of 1989, when many students were killed in protests against the government, a large number of Western countries banned trade with China, and loans from Western banks were stopped. By 1990, however, the inflow of foreign investment began to increase. Foreign investment was further stimulated by Deng Xiaoping's announcement in 1992 of the intention to speed up the reform of the economy and to grant easier access for foreign enterprises. The stimulation of foreign investment is illustrated by the approval of 47,000 foreign-funded projects by the Chinese government in that year, 3.8 times the number approved in 1991. A total of US$ 11.16 billion was actually invested in 1992. Three years later, by the end of 1995, the total number of approved foreign-funded enterprises had increased to more than 258,903. Actual foreign investment in 1995 was US$ 48.4 billion, 11.7 percent more than in 1994. The actual foreign investment from 1991 to 1995 was more than US$ 133.37 billion. The increase in foreign investment projects is illustrated on the chart, next page (1,2). To judge the direction and impact of the foreign investment, we discern the following important factors: The scope of investment is widening. In the past, it was concentrated in electronics, food, construction materials, machinery for the chemical industry, textiles, pharmaceuticals, and agricultural processing. Recently, the power generation, transportation, communication, banking, insurance, and educational sectors have attracted investment.

The tendency to make only small and medium sized investments is changing in favor of larger ones. Many multinational enterprises are aiming to have access to the Chinese market by investing there. By the end of 1995, more than 200 large international companies had invested in China. As a result, the average investment in each project grew from less than US$ 1 million in 1990 to US$ 1.71 million in 1994 and up to US$ 2.45 million in 1995 (3). There is greater economic participation. Foreign investments and the output related to them are becoming significant in terms of the total Chinese economy. By the end of 1995, more than 120,000 foreign-funded enterprises with 12. …