High Tech Medical Technologies, Brand X and Coal Inc - Investment in China - Case Study Example

Chinese Business Law Customer Inserts His/her Name Customer Inserts Grade Course Customer Inserts Tutor’s Name 11/02/ 2011 Introduction Investing in any country requires extensive research and the ability to draw out or implement strategies that will work out for an organization in that specific country. As companies grow their market share and profit margins in a specific market, they need to grow their operations into other regions. Companies which invest into new markets do so by either opening new wholly foreign owned entities (WFOE), joint ventures (JV) or through the use of representative firms. These companies have to adhere to legal and operational framework set by different authorities in the foreign countries they operate in and China is no exception. China’s economy has been growing at a steady rate over the past decade, this and other factors has seen its growing stature as an investment destination choice for many companies. This paper is going to look into three firms operating outside China but selling to the region, the firms are High Tech Medical Technologies, Brand X and Coal Inc. Company profiles High Tech Medical technologies is a company with clients in China, the company produces medical equipment for hospitals. High Tech. relies mainly on the technology the posses to produce these equipments. Therefore intellectual property rights mainly apply to the firm in the production of medical equipment since their technology can be easily replicated by anybody once they understand their trade secrets. Companies such as High Tech value their patents so much due to the fact that these patents can be easily reproduced once anybody gets to know High Tech’s technology. Brand X is a clothes designer based in the USA; it is considering starting operations in China. Its main concern is high labour costs and thus it is considering options of operating a plant in China through arrangements such as joint ventures (JV), wholly foreign owned entity (WFOE) or through third party contracting. Coal Inc. is a large corporation dealing in the production of high grade Coal products used by large industries in production. The company has enough capital to fund for the establishment of a plant; it has some considerations to make including if it is to enter into a JV or WFOE with one of the only two coal raw material suppliers in China. High Tech’s Investment in China High Tech’s recent consideration is to set up a plant in China after it was approached by its medical manufacturer based in Chengdu in Western China. In the case of this scenario, High Tech is not short of money and therefore it can establish a new factory in China or it even has an option of setting up a joint venture (JV) with a Chinese partner. High Tech consideration has to undergo a lot of research and procedures for it to set up a factory in China. China’s growing influence in the world of trade and economics has seen many foreign firms set up factories in the region. However due to regulatory and legal framework issues in the country, many organizations have shied away form investing in the region. China has many regulatory and legal framework policies which do not encourage companies to operate in the country; some of the complaints by foreign firms are the lack of proper judicial systems (Schaffer, 2008). High Tech’s market activities in China and its interest to increase its market presence in the country is a prudent move. China’s economical growth has increased its per capita expenditure thus more Chinese citizens purchase good more frequently. Chinese internal markets coupled with its population are a factor to consider when a company is seeking to grow its market share. The American Chamber of Commerce based in China which represents manufacturers and American businesses operating in the country has shown optimism in operating in China and the need for more foreign businesses to establish base in China. The economic outlook for China has encouraged a lot of organizations to relocate their businesses there but most companies do so with caution due to licensing, business environment and other issues associated with operating in the region (Bu, 2010). High Tech’s Choice of Business High Tech’s intended investment in China is of big concern to the company executives and shareholders. The company is spoilt over choice between establishing a JV (Joint Venture) or WFOE (Wholly owned foreign entity). Their choice however will depend on the company’s vision and strategies. High Tech’s has enough money to establish a plant in China, however it wants to keep its risk at a minimum therefore in this scenario a joint venture would be appropriate step to take. However due to the nature of business they operate in and the lack of enough regulatory measures to protect their patents in this case it would be advisable for High Tech to establish a wholly foreign owned entity. Through the establishment of a WFOE, High Tech has the opportunity to export its technology to China and have the chance of interacting with its clientele closely. The company good financial position can enable it tap into the Chinese market by opening a small operational plant in the country that would later grow in size as customers increase. The benefit of establishing a WFOE is that one can use foreign expertise fusing the workforce which cheap Chinese labour in the manufacturing process. Most importantly is the fact that a WFOE is easier to manage due to total control that the management has over the plant compared to a joint venture (JV). Legal Issues High Tech intended investment in China is likely to face many challenges, but the biggest challenge it will face is that of legal framework issues. Before an investment is sanctioned in China, it has to meet stringent legal requirements set out by different authorities. Enforcement of laws within the justice system in China is difficult due to factors such as bureaucracy, interference and protectionism. According to different consultants and lawyers with expertise in Chinese business, Chinese legal system suffers from interference from the Chinese Workers Party which is responsible for appointing judicial officials. The independence of the judiciary in China is in doubt due to political appointment of judges and interference of the judiciary’s work by political forces in the country. According to Prof. Peerenboom, the Chinese judiciary falls short of standards set for the rule of law (Bu, 2010). These standards require for the judiciary to be technically competent, independent and enjoy sufficient powers to resolve disputes fairly and impartially. High Tech’s investment in China would be safer if they establish a wholly foreign owned entity (WFOE) compared to establishing a joint venture. This is because of ineffective intellectual property rights in the country, China has for long faced the problem of enforcing law that governs against piracy and intellectual property theft. High Tech relies mainly on its technology to produce medical equipment; the technology it uses belongs and is licensed only to them. Thus if High Tech chooses to invest through a joint venture, the suggested partner based in Chengdu in Western China is interested in learning to produce medical equipment that meets High Tech’s standards. Another legal hurdle that High Tech could face is that of lack of support from the Chinese government, the Chinese government recently enacted laws which were meant to spur Chinese innovation, these laws doesn’t encourage import of technologies from other countries (Schaffer, 2008). Therefore it would be prudent for High Tech to establish a WFOE which will enable it to protect its intellectual properties using international laws since the company was incorporated outside China. Brand X investment in China Brand X growth plan involves investing in China due to cheap labour market in the country; the company aims to minimize its operating costs. Compared to other countries especially in the west, China has a large population which enables it to produce cheap labour for its industries. The textile industry whereby Brand X is involved in is a fast changing industry globally thus competition in this industry is very high. Brand X should involve extensive research in its quest for a solution towards its investment in China. Some of the options that Brand X could use include setting up a joint venture (JV), wholly foreign owned entity or third party contracting. By setting up a JV, Brand X would have to look for a partner in China who specialises in textile manufacturing. The advantages of JV include shared costs, shared risks and increased market reach. A joint venture could work for Brand X in that it the firm reduce will costs through cheap labour, increase market share as the Chinese partner could open up markets for Brand X. However some of the disadvantages of a JV include, lack of total control since the Chinese partner could decisions not anticipated by Brand X. Intellectual theft is another disadvantage of A JV because a partner might use Brand X’s designs in producing his/her clothes therefore leading to problems in the JV. The other option of setting up a WFOE might be advantageous to Brand X due to the fact that a WFOE is totally controlled by the mother company and in this case Brand X. A WFOE is of benefit to Brand X given that decision making process takes a short time and human resource management is controlled by the management as opposed to a JV where all partners have to be in agreement on such issues. The disadvantage of a WFOE include: high capital outlays, high risks and high cost of maintenance. Investing in a WFOE requires huge capital outlays which could be a drawback for Brand X given that establishing an independent plant is costly and it increase the chances of risks occurrence which usually costs the business a lot of money. Due to long procedures and legal framework needed in establishing a WFOE, a lot of time would be taken in setting up a plant under this option and therefore it will cost an organization such as Brand X a lot of money. The option of third party contracting in this case involves contracting a third party manufacturer to produce the garments on behalf of Brand X based on terms agreed between the two firms. The advantage of using third party contracting is that costs can be managed, quality can be assured and it is time saving. Third party contracting is usually good for a company which has a large market share since it allows the company to order for quantity of products its wants. The disadvantage of third party contracting is in case of disputes resolutions mighty be lengthy or issues of jurisdiction of where the cases are to be handled might arise. Legal and implementation framework Brand X’s intended operation in China is subject to several legal and planning agendas which need to be sorted out. In the case of Brand X, they could contract a third party firm to conduct manufacturing on its behalf; this would the best decision based on its current position. In order for Brand X to contract a third party firm, it must conduct enough research to establish textile firms which are ready and willing to conduct business with them. In doing so, Brand X will face several legal hurdles such as coming up with a contract or arbitration on issues causing conflict. The judiciary system in China is faced with a myriad of problems including protectionism, interference and lack on integrity. For instance, many experts including Prof. Donald Clarke, the first foreign lawyer in China have argued that for a court to arbitrate a case they usually tend to favour local businesses and in most cases it is difficult for foreign businesses to get justice. As a result, Brand X should sign third party contracts to be governed by international laws that could be arbitrated in international courts such International court of Arbitration based in Denmark. Chinese courts of arbitration like the China International Economic and Trade Commission (CIETAC) mainly solves cases involving commercial undertakings however it tends to favour local (Chinese) businesses over other businesses (Schaffer, 2008). Brand X must also draw a contract that does not contravene with laws of the regions where it and its partners operate in, these and other legal issues need to be addressed in the contract agreements it draws. Coal Inc. investment in China Coal Inc. is supplier of high end coal products to heavy industries; most of its customers are located in China. Of late it has been considering of setting up a plant in China either through JV or WFOE. In case the company pursues a joint venture then it will have a choice between two firms, one located in Xian and the other located in Tianjin. The plant located in Xian belongs to someone who enjoys privileges from the local leadership due to his close relations with the mayor. The Xian partner is located in the western region and though it has extensive market, the company machinery is very old and outdated equipment. On the other hand the Tianjin partner is a new factory with new equipment but it has less experience on producing and marketing coal products. The Tianjin partner is located in the Tianjin high tech zone while it land rights use are a bit unclear. The challenge that Coal Inc. faces is that of selecting between a joint venture and setting up a wholly owned entity in China. In setting up a joint venture several legal and financial considerations are to be decided upon by management. Some of the considerations include risks; pay off period, legal and environmental issues. In this scenario if Coal Inc. was to set up a wholly owned entity in China it would be in direct competition with other coal producers in the country. This would create unnecessary competition which would lead to greater risks for the business; in addition it would take time for them to capture the market leading to longer investment pay off period (Bu, 2010). However if Coal Inc. would set up a joint venture with one of the firms it could reduce risks and grow it market share and have the ability to even export its products. Coal Inc. choice of a partner would depend on the company’s strategy and decisions concerning investment in China. Coal Inc. would like to keep its risks to a minimum since it has enough funds to invest in setting up a plant, thus a JV would suit their business needs. Coal Inc. Business Undertaking Coal Inc. plans to undertake a joint venture agreement with one of the coal producers based in China, therefore it could consider some legal, business and political considerations in setting up the venture. The legal framework under which most of foreign investments in China operate is governed by the Chinese law. This law governs on issues concerning scope of business, ratio of contribution by partners, land use rights and other issues. In this scenario, it would be advisable for Coal Inc. to set up a JV with the Xian partner due to the latter’s well networked market share and the availability of the company to make use of its land. Setting up a joint venture with an experienced and well connected firm like the one in Xian would be a benefit for Coal Inc. due to the tendency of Chinese authorities favouring well known local firms (Schaffer, 2008). In setting up a local venture several processes are involved but the most important procedures are securing financial funding and local support for the project. In the case of Coal Inc. a joint venture should be set up whereby the Chinese partner would be the major contributor in the project with Coal Inc. mainly contributing with its expertise and e equipment. This would ensure that Coal Inc. minimises it risks lest a dispute occurs, in the occurrence of disputes the joint venture should agree on a multi pronged arbitration approach. Such arbitration could include use of international bodies such as International Arbitration Commission or the termination clauses set up in the law should not favour any of the parties involved (Schaffer, 2008). Chinese laws tend to have clauses which encourage protectionism of local manufacturers; these laws could cause problems in a joint venture therefore it is prudent for the partners to agree to solve their problems amicably within the precincts of international laws since both partners are foreign to each other. Conclusion The business environment in China has improved tremendously over the years. Although there are several criticisms towards their flawed legal system which makes the business environment a little bit tricky. The Chinese legal system is flawed due to interference from local party officials who can rescind judges’ decisions in court and furthermore they have powers in appointing judicial officials. However in a bid to correct these inconveniences the government came up with the China International Economic and Trade Commission (CIETAC), this commission was to arbitrate on legal disputes between local and foreign businesses (Bu, 2010). The Chinese government should do better to improve its legal systems for them to attract massive investment into the country due to signs of China’s growing influence within the global arena of business. References Bu, Y. (2010). Chinese Business Law. Beijing, China: C.H. Beck. Schaffer, R., Agusti, F. & Earle, B. (2008). International Business Law and Its Environment. New York, NY: Cengage Learning. Read More