Jv or Wfoe in China?

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Market Entry Methods for Western Firms in China

Since its Open Door policy was created in 1979, China has become the largest recipient of foreign direct investment of all developing nations. Jonathan Wilson, senior lecturer at Ashcroft International Business School in London, claims there are two basic methods for market entry to China: a joint venture (JV) or a wholly foreign-owned enterprise (WFOE). Initially most Western firms chose the former, however, in 1997 the latter began to grow rapidly and the year 2000 marked the first time the number of WFOE’s exceeded that of JV’s. Many factors have been cited for the shift away from JV’s including concerns of competence of the Chinese partner, a dislike for shared control, and frustration that JV’s often do not deliver expected business objectives. Wilson argues that this trend towards WFOE’s will continue in the long term, however, he also does not believe JV’s will become extinct because they continue to be a practical method of entry, most notably for small to medium-sized Western firms.

Although China’s entry to the World Trade Organization seems to favor the establishment of WFOE’s, and even as foreign companies acquire more practical experience in China they are increasingly likely to “go it alone,” some instances still favor the formation of a JV. Wilson contends that the nature of the industry or geographic location may not support a WFOE – for example, the Chinese government is actively encouraging foreign companies to invest in its western regions and cities there are far less developed than Shanghai, Guangzhou or Beijing. Due to the lack of government experience in handling foreign direct investment in western China, initially a JV might be a better option.

In addition to access to markets, JV’s also offer the benefit of guanxi (personal relationships) which is a key factor for business success in China. Guanxi very often follows the “you scratch my back, I’ll scratch yours” mentality and is a...
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