A corporation can conduct business in a foreign economy by using a legal framework known as a foreign-invested enterprise (FIE). At crucial phases, establishing a Foreign Invested Enterprise means being subject to stringent government controls, which may limit their ability to make a profit. Furthermore, the FIE operating in the foreign nation may be subject to limited control by the foreign parent firm. In some ways, an FIE is similar to a Multilateral Investment Fund.
Understanding a Foreign Invested Enterprise
Legal entities called FIEs enable companies to operate in other markets. Businesses often use FIEs as a typical strategy to enter and operate in Asian nations, especially China. However, severe government controls might limit the possibility for profit in international enterprises during crucial phases. Additionally, when establishing a Foreign Invested Enterprise operating in a foreign nation, the foreign parent firm may have limited control over the enterprise. Understanding the legal framework of FIEs is crucial for international businesses intending to grow operations in China. FIEs in China include wholly-owned foreign enterprises (WFOE), cooperative joint ventures (CJV), equity joint ventures (EJV), and foreign-invested companies limited by shares (FCLS).
Establishing a Foreign Invested Enterprise in China
Foreign investors must carefully evaluate China’s legal and regulatory requirements before starting a business there. Here are two crucial actions investors must do in order to successfully launch a business in China.
Choosing the Right Project and Partners
The two alternatives available to foreign investors for choosing a project in China are either choosing a project put forth by businesses or institutions throughout China or putting forth their own investment ventures. Choosing the first alternative requires investors to select only initiatives that have official government sanction. When choosing the latter option, make sure that you comply with China’s industrial policies and invest in an industry where investment is allowed.
Investors must also locate trustworthy Chinese partners for their investments. It is the Chinese partner’s responsibility to submit the application for the establishment of investment projects. They must submit to the appropriate authorities for approval in joint ventures or cooperative ventures. Investors should work with advisors to help them build a presence in China for wholly-owned international enterprises.
Submission of Feasibility Study Reports
After granting the application for establishment, the authorities allow investors in a joint venture or cooperative joint venture to proceed with a feasibility study on the project. The feasibility study report should include ten components. These include items such as an implementation plan, project background and history, marketing and production capacity, materials and inputs, site location, project design, organizational costs, construction arrangements, financial and economic assessments, exchange rate equalization, and risk assessment.
The Chinese partner is responsible for submitting the feasibility report in equity and cooperative joint ventures. However, the foreign party shall continue to use an efficient channel for consultation to review the documents and procedure. Submit the report to the appropriate local government authority along with the application for establishment for entirely foreign-owned companies. These measures can help international investors successfully launch businesses in China.
Foreign investors who want to launch ventures in China must take into account the nation’s legal and regulatory restrictions. Here is a step-by-step instruction manual for starting a foreign-invested company in China.
Signing of Contracts and Charters of association
Equity or cooperative joint venture partners must discuss contracts, bylaws, and other legal papers. These agreements must meet specific standards, such as ensuring equality of rights and obligations for all parties.
Registration
Foreign investors must register both the business name and its establishment after approving the contract and charter of organization. All parties who successfully register will receive a business license.
Time Limit for Operation and Enterprise Termination
For foreign investment firms, the time frame is typically 20 years. If a deadline is established, the business will shut down when it has run its course.
Overall, the Chinese government has taken steps to make things easier for startups. It does this by permitting the submission of all applications, feasibility reports, and legal documents at once. Foreign investors can successfully start a foreign-invested firm in China by following the aforementioned steps.
References
- The official website of the Ministry of Commerce of the People’s Republic of China provides detailed information on foreign investment regulations, policies and procedures in China: http://english.mofcom.gov.cn/
- The China Briefing website is a useful resource for foreign investors in China, offering practical advice on setting up and running a business in the country: https://www.china-briefing.com/
- The China Law Blog is a blog written by lawyers and legal professionals specializing in Chinese law, offering insights and analysis on legal issues related to doing business in China: https://www.chinalawblog.com/
- The China Investment Monitor is a database of foreign investment projects in China, providing information on investment trends, industry sectors, and investment regulations: https://www.chinainvestmentmonitor.org/
