Entering China: an unconventional approach.

Abstract

Conventional wisdom has it that the best way to do business in China is through an equity joint venture (EJV) with a well-connected Chinese partner. But pioneering companies are starting a trend toward a new way to enter that market: as a wholly foreign-owned enterprise, or WFOE. Increasingly, says the author, joint ventures do not offer foreign companies what they need to succeed in China. For example, many companies want to do business nationally, but the prospects for finding a Chinese partner with national scope are poor. Moreover, there are often conflicting perceptions between partners about how to operate an EJV: Chinese companies, for example, typically have a more immediate interest in profits than foreign investors do. By contrast, the author asserts, WFOEs are faster to set up and easier to manage; and they allow managers to expand operations more rapidly. That makes them the perfect solution, right? The answer is a qualified yes. First, foreign companies will still need sources of guanxi, or social and political connections. Second, managers must take steps to avoid trampling on China's cultural or economic sovereignty. Third and perhaps most important, foreign companies must be prepared to bring something of value to China-usually in the form of jobs or new technology that can help the country develop. Companies willing to make the effort, says the author, can reap the rewards of China's burgeoning marketplace.