American Journal of Industrial and Business Management, 2013, 3, 549-556 Published Online October 2013 (
What to Know before Entering the Great China?—A
Foreign Investors’ Perspective!
Syeda Asiya Zenab Kazmi, Marja Naaranoja, Josu Takala
Faculty of Technology, University of Vaasa, Vaasa, Finland
Received July 31st, 2013; revised August 31st, 2013; accepted September 10th, 2013
Copyright © 2013 Syeda Asiya Zenab Kazmi et al. This is an open access article distributed under the Creative Commons Attribu-
tion License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly
This review article aims to explore options of entering in China with a foreign direct investment (FDI) motive. With an
attempt to investigate the FDI possibilities in China, the paper highlights key areas including, i.e., the determinants of
FDI in China, various related entry modes, the logic and criteria for making suitable FDI Location choice in China etc.
The findings of the paper offer extensive foresight on the popular FDI modes to enter China with pros and cons attached
to the international investment venture.
Keywords: Foreign Direct Investment; Modes of FDI; Direct Investor; Equity Joint Venture; Wholly Owned
1. Introduction
China has undoubtedly attracted huge foreign investment
during the past few decades. The country first made its
mark in the late 1970s with the exception of its low cost
resources and strong infrastructure, in addition to its
geographic location. Since then, the country never lost its
pace in economic race and emerged as a strong Asian
market force competing, head to head with the global
super powers. In brief, China’s open-door policy first
initiated in 1979 followed by its seven years continued
dominance as the world’s second largest FDI recipient
behind the United States. Till the end of May 2000, con-
tractual FDI in China totaled at $632.3 billion in 349,500
investment ventures, with actual investments of $320.6
billion. Finally China became the largest recipient of
foreign direct investment after touching $59.1 billion
level mark and strongly replacing United States figures
which managed $57.4 billion of FDI, during the second
quarter of 2012 [1].
The above facts and figures made the authors con-
vinced on the potentials of the Chinese location and in
their report they tried to investigate the concept and fu-
ture opportunities of foreign direct investment (FDI) in
China. The study aims at creating an insight over the
future possibilities related to FDI in China, especially
through the mode equity joint venture (EJV) in business.
Furthermore, the report also touched variety of factors,
contributing to the success of FDI strategy in China. The
above referred factors include; the status of FDI in China
in terms of determinants of FDI, other entry modes, FDI
Location choice etc. In the report, an additional attempt
is made to explain few key points relating to joint ven-
ture partner selection and FDI venture management with
specific reference to China as the study location. The
report ends with a discussion on current FDI perform-
ance pattern in China.
2. Theoretical Background
2.1. Foreign Direct Investment
FDI stands for Foreign Direct Investment. Foreign direct
investment is defined as an investment of foreign assets
into domestic structures, equipment, and organizations.
Furthermore, in China, FDI is alternatively termed as
RFDI; (R stands for Renminbi i.e., Chinese currency)
and seen as export-oriented activity. In 2003 alone, the
export figures by the foreign invested firms in China,
touched $240.3 billion mark, which accounted for ap-
proximately 55% of China’s total exports of $438 billion.
China has principal attractions like low-cost labor and an
enormous domestic market of more than 1.2 billion con-
sumers. In the 1980s, foreigners were restricted to ex-
port-oriented joint ventures with Chinese firms. In the
Copyright © 2013 SciRes. AJIBM
What to Know before Entering the Great China?—A Foreign Investors’ Perspective!
early 1990s, they were allowed to manufacture goods for
sale in the domestic Chinese market; and by the mid-
1990s; the establishment of wholly foreign-owned enter-
prises was permitted [2]. China’s accession to the WTO
forces the government to open up the services sector.
2.2. Popular Entry Modes to China
Foreign investors are generally free to choose their mode
of entry into the Chinese market through anyone among
the following options [3]:
Foreign investors can take any option of entry mode
(Table 1) in accordance to their business requirements as
well as venture feasibility.
Since the late 1980s, EJVs and WFOEs have pre-
dominated over all other types of FDI, totaling up to ap-
proximately 80 percent of the total foreign capital in-
flows into China. However, the last several years have
seen a rapid proliferation of WFOEs.
2.2.1. Equity Joint Venture (EJV)
Equity Joint venture involves sharing business equity as
well as the risks in addition to participating in manage-
ment operations between partners (i.e., individual or le-
gal entities) to establish a continuing and profitable cor-
porate relationship. An international joint equity venture
indicates that one or more of the partners is/are foreign
nationals, [4].
In all joint equity ventures, a critical question is the
level of equity held by the different parties. This is typi-
cally seen as a deciding factor in who has control over
the joint venture operation. For many investors, 51 per
cent equity means control, whereas 50:50 means equal
power for partners [5]. In general, the purpose of an IJV
is to put together complementary resources of already
existing firms. Thus such resources normally comprise
not only ordinary financial, technical, human resources in
addition to the intangible resources like goodwill, tech-
nical know-how, team spirit and similar intangible assets
[6]. In the current global marketplace, strategic alliances
in the form of international joint ventures have become a
popular mode for entering foreign markets. However, the
higher costs and risks involved in undertaking R & D,
production, financing and market penetration have
Table 1. List of popular investment entry modes to China.
Sr. No. Modes of entries to China as Foreign investors
1 Equity joint ventures (EJVs),
2 Wholly foreign-owned enterprises (WFOEs),
3 Contractual (or cooperative) joint ventures (including
licensing and technology transfer agreements),
4 Joint exploration,
5 Cooperative development.
brighten the prospects for expanded strategic alliances
between global companies. In general, the top manage-
ment of IJV believes that no organization can manage all
of the high risks associated with the transnational busi-
ness ventures by itself. Joint Venture Partner Selection
The success of an equity joint venture depends on the
proper selection of a venture partner. In China, few sig-
nificant factors that must be taken into consideration
while selecting a joint venture partner are as follows:
Size of the partner company and its financial capa-
Partner’s complementary value (i.e., market share,
market knowledge, customer base, technology com-
petence, established distribution networks etc. are
important factors)
Element of trust
The location of the partner’s company.
In addition to the above factors, strategic, operational,
and cultural fit of the partner, the complementarity of the
partner, and compatibility of both parties in creating joint
value for the investment venture are the key areas to be
taken into consideration while selecting a joint venture
partner in China. The success of an international equity
joint venture depends principally on the appropriateness
and fitness of the partners towards each other with re-
gards to their business relationship [7]. The fitness crite-
ria for the selection of a joint venture partner are empha-
sized below;
1) Strategic fit—It is a degree to which a potential al-
liance partner augments or compliments a partner’s strat-
egy. Strategic fitness aspect includes non-conflicting
corporate strategies, absence of hidden competitive ad-
vantages, and combined opportunity which is greater
than that offered if one is to go it alone. Strategic fit re-
quires all partners to have similar resources and capabili-
ties and to contribute the amount of resources and capa-
bilities required [7].
2) Operational fit—Operational fit includes the ele-
msents like compatibility of processes, information sys-
tems, location of facilities, profitability and cash flows.
In order to derive value from strategic alliances, partners
must have compatible systems, procedures and technolo-
gies that can fit or work together [7]. The significance of
potential synergies through potential partners is one of
the significant criteria for operational fit as well to evalu-
ate the suitability of the alliance partners [8].
3) Cultural fit—It refers to the corporate culture as
well as the national culture fit. Corporate culture fit is the
compatibility between partner firms as reflected through
the organizational management style. This includes the
levels of employee participation, management operations,
delegation of responsibility, and centralized or decen-
Copyright © 2013 SciRes. AJIBM
What to Know before Entering the Great China?—A Foreign Investors’ Perspective!
Copyright © 2013 SciRes. AJIBM
tralized decision-making processes. While considering
corporate culture the issues such as ethics responsiveness
to change, and corporate governance take the center stage.
The degree of compatibility of the organizational culture,
the potential of the partners determines the joint ven-
ture’s significance [7]. In addition, the significance of
cultural compatibility for venture alliance effectiveness is
noticed as highly important [8]. Location Choices for FDI in China
The search for a better investment location to realize the
external comparative advantages and to save costs are the
main objectives for the FDI firms before entering to any
new country. In addition, to the already discussed lucra-
tive strategies (e.g., entering China through Hong Kong
as a quick and less expensive option etc.), there are vari-
ous other options available to enter China through the
locations like Hong Kong’s neighboring province,
Guangdong and the Pearl River Delta (PRD) region in
the vicinity [9], have their own advantages which were
extensively opted since 1980s.
The potential determinants of FDI location can be
studied through the research work conducted by numer-
ous worthy researchers [10-24]. On the basis of the re-
searchers’ feedback on the topic, below is the list of the
factors influencing FDI Location choices [20] and a Ta-
ble 2 reflecting theoretical support on the topic:
Easy market accessibility: It relates to factors namely;
Competitors, customers, transportation issues etc.
Attractive labor costs: This relates to the cost incurred
on the manpower while firm’s production operations,
Availability of suitable Infrastructure: This includes
the issues related to machinery and building etc.
Government FDI friendly policies: It involves the key
concerning areas like Quota, Taxations etc.
Agglomeration effects: It includes all those factors
that support and assist the firms to be clustered to-
gether at the geographical location where the eco-
nomic activity is strong.
A theoretical support for the numerous FDI entry
modes on the basis of theoretical support (Table 2) is
strengthening the concept’s applicability.
Chinese Government remained very consistent in in-
troducing supportive FDI location choices in China [2].
A brief overview on the above is in Table 3.
Table 3 presents a brief summary of the Chinese Gov-
ernments initiatives to encourage foreign investment in
the country. Advantages of International Joint Equity Venture
in China
In international equity joint venture, the political and
commercial risks involved are less unlike sole venture.
The host country officials are not eager to nationalize or
to confiscate the firm if it is partly owned by locals espe-
cially, especially if linked to the government in some
form. The Local market knowledge, culture, experience,
and access to technology and cheap labor, distribution
network, customer knowledge, mastery of customs, lan-
guage etc. brought by a local partner may be of utmost
importance for the business development and success.
Recruitment of labor and other staff is easier through the
local partners; leadership or management of the firm is
easier to perform with the help of a local partner. A local
firm may bring valuable adjusted and appropriate tech-
nological knowledge/skills [4]. Disadvantages of Joint Equity Venture in China
The objective of the local partner may be different from
those of the mother firm. Nepotism and bias by the joint
venture’s partner about the mother firm’s vested interests
in controlling the monetary flows and crucial decision
making is possible. Less profit and lack of cooperation is
possible, unlike in wholly owned subsidiary. This may
have negative impact on the joint venture business. High
opportunistic risks and the lack of trust is another weak-
ness of a joint venture depending on the partner. The
partner may take advantage of the business to copy the
partner’s know-how, style, and technology for his own
personal interest [4].
Table 2. List of popular investment entry modes to China with the theoretical suppor t .
Sr. No. Literature support Theorists
1 The corporate advantage of adjacent localities in addition to the market size of the host
region is considered to have potential effect on FDI location choices. Head and Mayer 2004.
2 A significant part of multinational activity tends to take the form of firms shifting a part of
process to low-cost locations.
Helpman, 1984, 1985;
Helpmanand Krugman, 1985.
3 Telecommunications infrastructure has positive linkage with the nature of production. Coughlin et al., 1991; Chen,
1996; Cheng and Kwan, 2000.
4 Transformation from the direct exports activities to the local production is considered as
a step towards cost reduction.
Horstman and Markusen, 1987;
Markusen and Venables, 1999.
5 Government policy has generally been viewed as a key variable that can attract FDI and
alter FDI flows across regions. Lunn, 1980.
6 Agglomeration effects are considered as the result of sanguine linkages among projects. Fujita et al., 1999.
What to Know before Entering the Great China?—A Foreign Investors’ Perspective!
Table 3. The trend of FDI investment actually started to
surge in mid. 1980 due to the governments following initia-
At first China adopted its open door policy in 1978
Acknowledgement of “Open Coastal Cities” for FDI in 1984.
Establishment of Economic and Technology Development
Zones (ETDZs) for FDI.
Establishment of 05 Special Eco. Zones (SEZs) till 2002 i.e.,
three Zones in Guangdong, one in Fujian and one in Hanian
Introduction of Open Coastal Areas for FDI.
Technical and Industrial Development Zones were established
to support FDI.
Bonded Zones were established for FDI.
Border Economic Cooperation Zones were established to sup-
port FDI.
Export Processing Zones were established.
*China’s potential market size, low labor cost, preferential policies (e.g., tax
credits), openness, geographic proximity, and political stability as primary
factors attracting FDI.
2.2.2. Who lly Owne d Su bsidiary (Sole Ventu re)
Wholly owned subsidiary or a sole venture is when a
firm establishes a presence in a foreign country either
through buying an existing company (acquisition strategy)
or through building a unit from scratch. A subsidiary is
fully owned by the mother firm unlike joint venture,
which is partially owned by the mother and by one more
local/domestic/third country private partner companies or
partners. The mother firm may be an industrial firm or
non-industrial, service firm [5]. A wholly owned sub-
sidiary is when a company sets up a new venture in
which it owns 100% of its stocks [25]. A unit to be es0
tablished by an industrial firm may be: a sales promotion
unit, warehouse unit, R & D unit, technology transfer
unit, manufacturing unit, financing unit, holding unit, or
an assembly unit. In a wholly owned subsidiary, 100
percent of this new subsidiary’s stock is owned by the
parent firm. It is entirely owned by its holding company
and all the voting for a wholly owned subsidiary is done
by the parent company and/or its other subsidiaries. Advantages of a Wholly Owned Subsidiary in
Traditional direct investment methods, such as setting up
wholly-owned subsidiaries offer the benefits of total
profits and full control over the foreign subsidiary.
However, the higher costs and risks involved in under-
taking R & D, production, financing and market penetra-
tion brighten the prospects for expanded strategic alli-
ances between global companies as top management be-
lieves that no organization alone can manage all of the
high risks associated with transnational ventures Disadvantages of the Wholly Owned
Subsidiaries in China
In China, the biggest disadvantage of a wholly owned
subsidiary is that it is very expensive to run the business
operations without a local partner. It is actually the most
expensive mode of entry choice in terms of investment
capital. When choosing a wholly owned subsidiary, the
firm will have to bear all of the costs of setting up the
operation. If the firm chooses an established firm to
promote its products, trying to “marry” the two cultures
(i.e., the host country and the home country) may collide.
The consequences may outweigh the advantages of WOS.
Choosing a wholly owned subsidiary, especially green
field is an expensive and difficult entry strategy to China
because usually no firm alone can manage all of the high
risks associated with this modality [25].
2.3. The Determinants of FDI in China
Foreign direct investment represents special form of
capital flows involving not only the location and capital
etc. but intangible assets as well such as production
know-how, management skills and multinational enter-
prises as the major players of FDI.
National characteristics, including economic growth
rates, labour costs, availability of skilled labour and tech-
nology, government regulations, open policy for FDI and
topographical characteristics can affect the success of
FDI in addition to the list of key determents mentioned in
Table 4.
In addition, socio-cultural, economic and political
conditions create boundaries among different countries.
Such factors are significant determinants of MNEs deci-
sion making with regards to their overseas activities;
there is reason to believe that regional distinctions within
countries may influence the location of FDI decisions
Table 4. Key determinants of FDI in China.
Sr. NoProminent determinants of FDI in China are;
1 Market size as well as the GDP of the host country
(i.e., China is an example for being the fasted growing
economy in the world)
2 Flexibility towards foreign direct investment
3 China’s WTO membership,
4 Attractive currency exchange rates,
5 Foreign investment friendly Tax policy ,
6 Obvious economic growth potential,
7 Availability of raw materials, economical skilled labor,
technology and infrastructure,
8 Geographical location/ the proximity of China in the
9 Political Stability.
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What to Know before Entering the Great China?—A Foreign Investors’ Perspective! 553
China’s institutional reforms and its continuous im-
provements initiatives for creating desirable investment
environment are among other external global factors that
have played significant role in attracting FDI into China
during 1980 and 1992. Institutional reform and FDI in-
flows enhanced supported each other mainly in Guang-
dong which was first designed and opened up as a show-
room to receive FDI. Cities such as Shenzhen, Dongguan,
Zhuhai, where foreign manufacturing firms started land-
ing as investors, rapidly urbanized through FDI-driven
export-led economic growth. Since 1992, with the intro-
duction of refined fundamental economic policy in China,
more diversified FDI flew into PRD, especially including
from Europe and U.S.A. in addition to the two overseas
Chinese economies i.e., Hong Kong/Macau and Taiwan
List of numerous factors contributing to EJV problems
(Table 5) have been identified, but the primary fact
stems from the joint ownership mismatch, especially
involving joint venture management pattern such as; two
or more parent firms’ collaboration.
2.4. Analysis of the Entry Modes to China
Different firms have different reasons for internationali-
zation of their business operations or investment activi-
ties. Some are seeking new outlets for their products and
know-how outside their home markets while others are
seeking expansion of capital and new technology not
available in their own countries. Product characteristics
are expected to influence the export channel decision by
dictating the need for control of the marketing and mer-
chandising program in the host country [28].
However, each one of the entry mode, discussed in this
report has different implications with reference to the
degree of command and control which a firm can exer-
cise over the foreign operation, the resources it must
commit to the foreign operation, and the risks that it must
bear to expand within a foreign country. Thus, the per-
formance of one investment mode in relation to the other
is a critical measure of its relative efficacy and would
directly affect each other’s choice [25].
Henceforth, from the perspective of effective control
and high profit margin, wholly owned subsidiary is ap-
propriate, but the cost and the risk involved is high due to
the of lack of command over Chinese language, culture,
Table 5. List of Reasons for recent shift in FDI entry modes.
Sr. No. Reasons of re c ent shift in entry modes
—from WFOEs to EJVs
1. The substandard past performance experiences of
numerous EJVs during the recent past,
2. The inherent advantages of WFOEs,
3. Alterations in the government regulations
4. An uncertain environment.
market know-how and the local regulation. In China,
building relationship (i.e., termed as guanxi in local lan-
guage), is highly important since without having the
connection or an active local partner it’s extremely chal-
lenging to operate in the local business scene.
The cost of establishing and managing a wholly owned
subsidiary is really high unlike Joint venture, though the
profit margin is significantly higher, if the business suc-
ceeds. International joint venture provides a firm with
less cost of establishment, effective, efficient and quick
market penetration, though the opportunistic risk is high
as well, depending on the partner’s selection.
Different companies pursue different things in their
internalization objectives [6]. Some are seeking new out-
lets for their products and know-how outside their home
markets while others are seeking capital expansion and
new technology which unavailable in their own countries.
In order to achieve these goals, a firm must determine
appropriate mode for organizing its foreign business ac-
tivities. Among the vast array of alternative modes avail-
able, international joint ventures (IJV) and wholly owned
subsidiaries (WOS) represent two primary but largely
competing strategic options that a firm may choose. Each
of these strategies has different implications for the de-
gree of control which a firm can exercise over the foreign
operation, the resources it must commit to the foreign
operation, and the risks that it must bear to expand into a
foreign country. On the basis of this analysis and the en-
tire report equity joint venture (EJV) is the most appro-
priate efficient mode of FDI to China.
Business Entry Strategies to China
There are two popular ways of entering into China’s
most potential and lucrative business market, which are
as follows:
1) Entering China through Hong Kong distributors
The option of entering into China’s business market
through Hong Kong distributors involves few concerns
which are included in the following list:
Only the correct and balanced settlement on all the
above questions can guarantee the success of business
decision of a foreign investor. Though the option of en-
tering China via Hong Kong apart from few concerning
points (Table 6), is an attractive option but it has its own
pros and cons that are summarized as below:
An instant guide (Table 7) reflects the comparative
option stand points for the FDI entry to China through
Hong Kong.
2) Market entry via direct channels in China. The op-
tion to enter Chinese business market by the foreign in-
vestor is to use direct channels which are listed as fol-
Chinese foreign trading corporations (FTCs)
Industrial trading corporations (ITCs)
Copyright © 2013 SciRes. AJIBM
What to Know before Entering the Great China?—A Foreign Investors’ Perspective!
Copyright © 2013 SciRes. AJIBM
Table 6. Hong Kong as foreign investor list of key concerns while entering China through Hong Kong.
Sr. No. Key Concerns
a. What should be a key criterion to select Hong Kong distributors—priority perspective?
b. How to evaluate the real worth and value of the selected distributors located at Hong Kong—benefit perspective?
c. Which areas they actually focus on and specialize in—potential perspective?
d. Are the selected distributors physically operating from China or just the travelers—presence perspective?
e. What is the quality of their operational set up?
f. What guarantees and assurances they offer to your business—services perspective?
Table 7. A Quick over view on the pros and cons of FDI entry to China through Hong Kong.
Advantages Disadvantages
1 The easiest and quickest way to export 1 Difficulty in reaching the end users directly
2 No language barriers 2 Dependency on the middleman
3 No significant culture barriers 3 Limited knowledge of consumers’ needs
4 Well established channels with Mainland 4 Still subject to tariffs/quotas
5 Issues in the provision of Post sale service
6 Local market entry restricted and only possible through local and direct channels in China.
Independent entrepreneurial third party trading com-
Domestic end-users
Domestic Chinese distribution companies
Any option from the above strategies can be opted, af-
ter proper brainstorming and thorough research espe-
cially, keeping in view the nature of business and the
available matching options in China to pursue a business
3. Concluding Discussion
Any foreign investment decision by a business initiator
involves a great deal of courage, keeping in view the
challenges attached with the options of opening up new
frontiers and chasing the unknown local opportunities.
This is undoubtedly a difficult option to do business
anywhere in the world. However, it becomes more chal-
lenging if the foreign investment decision involves China
as a target location due to the following critical factors
The perplexing culture,
Language barrier,
Strong influence of Confucianism in the overall op-
erations, including the business practices having
strong key force of “guanxi”,
Non comparative governmental policies,
Legal differences (e.g., on the areas of intellectual
property, local governments regulations specifically
on business practices, labor unions structure and op-
erational routines, the local rules, customs regulations,
taxation etc.
Limited indigenous skilled labor availability,
Strong competition and
Finally the underutilized market primarily consoli-
dating Chinese national companies.
Though China is considered a tough business location
to enter as a foreign investor, the potential long-term
economic opportunities attached to the option are too
encouraging to restrict the investor’s entry decision.
Hence, the business managers of foreign firms indulge
quite frequently in learning and following the options
what the other foreign investors pursue to enter China.
However, while pursuing their business strategies in
China, the foreign investors learn to handle the socio-
economic cultural dissimilarities, but they usually de-
scribe that the way is more difficult than what they ex-
perience in any other foreign location [29].
However, with the passage of time, the tight invest-
ment conditions eased up in China through Govern-
ment’s investment friendly gestures. Such initiatives
started with Chinese business and trade barriers in 1978.
Year 1992 was seen as the turning point in China’s po-
litical and economic reforms with the potential steps like
Mr. Deng Xiaoping’s visit to the southern provinces and
his desire for accelerating economic reforms by giving
green signal to initiate foreign business and trade in-
vestments. Chinese government encouraged the foreign
investors through the introduction of softer trade and
What to Know before Entering the Great China?—A Foreign Investors’ Perspective! 555
investment regulations, opening up new business zones,
export promotion offices at foreign locations, local dis-
tributor’s approach, and distributors in Hong Kong’s role.
Consequently, till the year 2012, China appeared as the
top FDI recipient country after by touching $59.1 billion
level mark to replace USA. This paper aimed at provid-
ing knowledge to the foreign investors, business strate-
gist and the students who are interested to know the di-
rect investment in China.
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