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Trade and Foreign Investment in China Essay

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Updated: Apr 8th, 2021

China’s has one of the fastest growing economies in the world. Its economy has managed to maintain a double-digit annual growth over the last decade. Even the recent global economic crisis has not managed to slow down this growth rate. This makes China a good investment destination. Although the Chinese have stringent market entry rules, there are still various options that are available to JR. China’s economic rules are modelled around Communist ideologies. This means that their fundamental economic structures are different from the ones found in Unites States. JR has several options when it comes to investing in China. To lessen the shock of this massive investment, there are several financial and structural approaches that can be adopted.

An Equity Joint Venture is one approach that can be adopted by JR. An equity joint venture refers to a situation where an overseas company enters into a government approved partnership with a Chinese investor. If JR picks an investor to get into such an agreement with, both JR and the investor would have to share mutual rewards and risks. Under this arrangement JR is expected to finance at least twenty five percent of the initial capital investment. The main advantage of this arrangement is that risks and rewards are shared in accordance with the ratio of investment. This means that JR can enter into a partnership where the company invests only its prepared capital of one hundred and twenty-five million dollars. The disadvantage of this arrangement is because it is hard to get the right partner to enter into business with. This is considering this individual has to be a Chinese citizen. The investor JR enters into a partnership with has to be cooperative and trustworthy.

The other option of handling this investment is through a contractual joint venture. This agreement is similar to a joint venture but it is more contractual. This means JR has the option of drawing up a contract that suits the Company’s needs and expectations. In this case all the liabilities, responsibilities, and rights will have to be agreed on beforehand. Unlike in a joint venture, profits and risks do not have to be shared according to the ratio of investment. The advantages of contractual joint venture include the fact that JR would not be required to obtain a foreign investor’s license. The other advantage is that this method of entry offers a more flexible mode of operation provided it is stipulated in the contract. In addition, JR can be able to secure better marketing control rights using this contract. The disadvantages of this method include the fact that it will take a longer time for the company to set up due to the time spent settling all the issues in the contract. In addition, this form of investment usually comes with higher risks. Another disadvantage is that this investment might be considered a partnership depending on what is contained in the contract. If this happens, additional taxes might be incurred.

If JR is does not prefer any of the above methods, then the company may consider technology transfer. In this case, JR would have to give up details of its proprietary technology in exchange of either investment rights or infrastructure development. This approach may end up doing JR more harm than good and it should only be adopted as a last resort. However, it might save the company a great deal of money depending on the terms of agreement between JR and the Chinese government.

JR’s top management has already ruled out the option of financing the whole project. This in turn rules out the option of entering the market through a wholly foreign- owned enterprise. Under these circumstances the best option for JR is a contractual joint venture.

JR seeks to enter into two different types of businesses that are covered by two separate industry specifications. The first one is the hospitality industry and the second is the manufacturing industry.

The first requirement is an export and import license. This is because the semiconductor manufacturing firm may require exporting raw materials. Moreover, this specification is needed because JR is targeting both domestic and foreign markets.

There are those responsibilities that JR will have to delegate to the Chinese based partner. For instance, the Chinese investor will first submit an application to the Chinese authorities seeking to establish the contractual joint venture. The investor will also submit the necessary contracts and other documents that are relevant to the agreement. These documents must be appropriately signed. The investor is also expected to submit the list of Board of directors of the joint venture company. All the other documents required by China’s ministry of Commerce are supposed to be submitted by the Chinese investor.

The joint venture may be disapproved in case it is considered a threat to national security or it is an environment pollutant. The Ministry of Commerce in China may also decline the joint venture if it undermines China’s sovereignty.

China is part of countries that have agreed to international laws that protect intellectual property. However, JR must register its trademarks and patents with the necessary Chinese agencies. This will ensure that these trademarks and patents are well protected within China. Under Chinese laws, a patent is granted to the person who files it first. This means that JR does not have to prove it invented its patents. Under these same laws all trademarks need to be registered with China’s Trademark office.

JR wants to establish the hotel and manufacturing projects in an area specified as a special economic zone (SEZ). SEZs in China were primarily meant to open up China to foreign investment. By choosing to invest in Shenzhen JR is set to accrue benefits that are specific to a SEZ.

The first incentive JR is set to enjoy is the availability of a low cost and a vast pool of labour. Both the hotel and the manufacturing projects are set to utilize a lot of local labour. SEZs will provide JR with this important resource. In addition, Chinese laws grant JR the power to hire and fire.

The other incentive that comes with these SEZs is land use. Land offered in SEZs attracts a lot of infrastructure development. This will save JR the immense burden of infrastructure development. The strategic location of SEZs also ensures close proximity to ports and other transport networks. Any private property in SEZs is protected under China’s constitution. This gives JR a sense of security and privacy when the firm sets up a factory and a hotel in this region.

JR is also set to benefit from the tax incentives that come with SEZs. Some of these incentives include a reduced cooperate income tax rate for JR. The other incentive is a reduced personal income tax and it applies to foreign citizens working in SEZs. JR will also not be required to pay custom duties on materials and raw materials that are meant to be re-exported. This is another tax incentive offered to businesses operating in the SEZs.

All agreements made by JR are prone to disputes. This is why it is important for JR to be conversant with the available dispute-resolving mechanisms. As a foreign investor JR has three main methods of dispute resolution available to the company. All these mechanisms are catered for in the PRC’s laws.

The first of these is conciliation. This is where JR initiates friendly communication with the other party in dispute. For this mechanism to be recognised by the Chinese laws, it has to consider the principles of equity, voluntariness, and legality. This mechanism should always be considered first. This is because it ensures relationships are not severed and it is faster than the other mechanisms. The agreement reached in such a case is recognised by PRC’s laws.

The other mechanism is arbitration. This is a more formal dispute resolution mechanism. This method applies only to cases where the agreement by JR and the other party in dispute contains an arbitration clause. The resolution reached through arbitration is final and confidential. This resolution can also be enforced by a court of law. Either Chinese or American arbitrators can be involved in this process.

Litigation is the last form of dispute resolution that JR can resort to. Litigation happens when the dispute cannot be resolved through conciliation and the parties disagree on the arbitration outcome. The dispute is then forwarded to a court of law. This is usually a very long process of dispute resolution. Both foreign and Chinese courts can be elected to decide on the matter. This process is subject to prior agreements and laws that apply to JR’s operations.

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IvyPanda. (2021) 'Trade and Foreign Investment in China'. 8 April.

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