The China Venture

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After the decision for the investment structure has been taken, central issues for PRC investors are the composition of capital and extent of participation as well as the best financing option. Choosing the right structure can significantly affect profitability further down the road. 54 For foreign invested enterprises, China is a new site. According to Western standards, the financial institutions and instruments in China for debt financing are underdeveloped. Because of the stage of economic development and the system - that is to be reformed - it is difficult for companies to raise debt capital from international financial markets. For every investment it is therefore necessary to systematically analyse the possibilities and boundaries of debt financing for foreign companies, which must encompass the short-term as well as the long-term debt financing forms. FIEs, especially their foreign investors, are exposed as in most developing countries, also in China to the currency risk, that means the exchange rate risk and the transfer risk. The foreign currency problem is intensified on the one hand because of the big demand for foreign exchange for buying materials from abroad and for paying the dividends for foreign investors, and on the other hand through the difficulties of earning foreign exchange in the start up phase. FIEs’ finance management has to solve most of all problems of equity financing, debt financing and currency management. These three issues shall be analysed in the following. 55 2.3.3.1 Equity financing Every FIE in China is required to have a certain amount of registered capital, as specified in its approval documents. According to these approval documents, the foreign investor’s minimum share of equity capital must amount 25 % of the whole capital of the enterprise. Unless such registered capital is contributed, which must be done in a manner in accordance with Chinese law, the foreign enterprise cannot exist as a legal entity in China. Aside from the obvious method of investing registered capital in the form of cash, there are several other ways of contributing the required amount to the venture which may save a foreign investor money. Commonly, local partners have little cash to invest. Therefore, the Chine se company often may provide machinery, land-use rights and factories, or other assets as their portion of the investment, its share of registered capital (all of which are inherently difficult to value). Only a few local enterprises have readily accessible cash. Their very desire for a joint venture 54 Pausenberger/Völker, 1985, p. 21-24. 55 Pausenberger 1980, pp. 53 and Pausenberger/Glaum, 1993, p. 764 -768. 42
is often to acquire foreign capital and technology. Foreign investors should be aware of how their partner will finance their share of the investment. The foreign partner often contributes know-how, immaterial goods, machinery and technology from overseas. Foreign investors should keep in mind the requirement that only 25% of the foreign investor’s registered capital contribution to an FIE may comprise technology. 56 The foreign investor could also get his share of registered capital financed through loans from banking institutions or through investment grants from national and international finance companies such as KfW in Germany. The foreign investor as well as the Chinese counterpart, or the venture itself, could also use Chinese banks for financing their registered capital via loans. They may procure capital other than the registered capital through preferential-interest loans if it imports goods or machinery from the US or Europe via special government „soft- loans“, „mixed-loans“ or export credit programs, the purpose of which is to encourage the purchase of such goods. Applying for such loans requires certain guarantees, housing or real security and the approval of the venture through the authorities. The US Export-Import Bank offers bank guarantees to foreign purchasers of machinery and equipment from the US. The life of these loan contract is generally one to three years. 57 A foreign investor wishing to participate in a joint venture with a Chinese company may also raise money overseas by entering into a joint venture contract with a Chinese party. To raise public funds outside the PRC for use as registered capital, the investor first needs to set up a company overseas, if one does not already exist. Currency lending from outside China will require the approval of the State Administration of Foreign Exchange. This method of financing can also be used to raise capital for a joint venture that already exists. While a foreign investor must be prepared to initially contribute a good deal of equity to a venture to satisfy the Chinese regulations regarding registered capital, a wise financier would also attempt to invest equipment purchased abroad with the help of low-interest loan as a part of registered capital attributed to the FIE. Alternatively, a foreign party wishing to fund his enterprise with a Chinese party may prefer to issue shares in a separate overseas company, and then use the proceeds from the offering specifically for the purpose of funding the joint ve nture. Leasing of equipment and machinery in China provides another suitable alternative to loans for some investors in that such agreements are convenient to enter into and may have tax advantages. Another possibility of funding capital is inside financing through cash flows, 56 Buxbaum/Gonzalez, 1998, p. 10; de Waal, 1998, pp. 16. 57 Fan, 1994, pp. 189. 43
Page 1 and 2:
The China Venture: Business Environ
Page 3 and 4: Table of Contents List of Figures .
Page 5 and 6: 3.2.3.2 Special Funds for Setting U
Page 7 and 8: 3.4.1.1 National Culture ..........
Page 9 and 10: List of Tables TABLE 2-1: THE AREAS
Page 11 and 12: GBP Pounds Sterling GDB Guangdong D
Page 13 and 14: 1. Introduction: The China Venture
Page 15 and 16: After a short discussion with the p
Page 17 and 18: co-operate with other firms, especi
Page 19 and 20: The Chinese operating legal system
Page 21 and 22: First of all, Britain’s predomina
Page 23 and 24: democratic centralism, all governme
Page 25 and 26: The courts are the state organs exe
Page 27 and 28: more than three hundred intermedia
Page 29 and 30: 2.2.8 Company Law China’s first n
Page 31 and 32: Things seem have to become a lot cl
Page 33 and 34: 2.3.1.1 Financial sector developmen
Page 35 and 36: securities, trading, initial public
Page 37 and 38: underdeveloped compared with market
Page 39 and 40: established in January 1996 by 59 p
Page 41 and 42: Chinese Banks Foreign Banks Financi
Page 43 and 44: system formulation has been put on
Page 45 and 46: The separation of production and co
Page 47 and 48: swap centres (see also above). From
Page 49 and 50: investors with little experience an
Page 51 and 52: them, while a branch with a shortag
Page 53: Loans, public offerings of shares,
Page 57 and 58: 2.3.3.2 Debt financing As getting t
Page 59 and 60: the approval of special authorities
Page 61 and 62: control compared to national enterp
Page 63 and 64: usiness in China and related issues
Page 65 and 66: 3. Pre-Entry Strategic Consideratio
Page 67 and 68: While the testing for the general r
Page 69 and 70: of relevant contacts to suppliers a
Page 71 and 72: partner companies with free servici
Page 73 and 74: strengths which his own company lac
Page 75 and 76: Central Committee of the Communist
Page 77 and 78: environment for foreign investment
Page 79 and 80: legal and regulatory environment of
Page 81 and 82: 3.2.4.3 Legal Framework for Foreign
Page 83 and 84: • China’s entry into membership
Page 85 and 86: • stipulates that advanced techno
Page 87 and 88: Government approval. Foreign invest
Page 89 and 90: Co-operative Joint Venture Status P
Page 91 and 92: Reflecting on these points the foll
Page 93 and 94: Success Factors concerning Products
Page 95 and 96: Success Factors concerning Company
Page 97 and 98: high-technology are eligible for th
Page 99 and 100: Available Distribution Channels A m
Page 101 and 102: Available Distribution Channels Mar
Page 103 and 104: Available Distribution Channels Mar
Page 105 and 106:
Illustrative Case Studies The follo
Page 107 and 108:
Available Distribution Channels Mar
Page 109 and 110:
Which Aspects should SME's Focus on
Page 111 and 112:
Strategy No. 1: Have Cash A comfort
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expenses have a detrimental effect
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As a conclusion, network oriented m
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3.2.13 Case Study: Swisstec, Lyss 3
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factor which makes the foreign firm
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developed within the SME, its impac
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3.3.1.3 The Role of Technology Mana
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Indirect export and direct export a
Page 127 and 128:
maintenance or the use of establish
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Government Central Exploiting Sales
Page 131 and 132:
in the most advanced provinces and
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network through which the products
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Siemens or Motorola, they may have
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Chinese partners. He also began to
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orders. However, a country may also
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Germany/Switzerland China democrati
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3.4.2.4 Conversation at the first m
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only after a certain time and even
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3.4.3 Experiences of European Compa
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ones who atte nded a course. They s
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Another Chinese tactic is, as menti
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4. Post-Entry Strategic Considerati
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and the other one in China. The com
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experience in operating production
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In these two cases, the companies m
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5. References Aharoni, Y. (1966): T
Page 163 and 164:
Dony, A. G. (1998): Market Entry St
Page 165 and 166:
Islam, I. / Chowdhury, A. (1997): A
Page 167 and 168:
Madura, J. (1993): International Fi
Page 169 and 170:
Semkow, B. W. (ed.) (1995): China F
Page 171 and 172:
6. Appendix 6.1 Fact Sheet People
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