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6 December, 2017
From a historical and political point of view, Sino-Foreign Joint Ventures represent the essence of relations between China and the world as well as the main business and corporate strategy responsible of the extraordinary economic growth and success of Chinese enterprises, which started with the “Chinese economic reform” and the great opening of the Asian giant to the world.
As is known, the Chinese economic reform refers to the program of economic reforms known also as “Socialism with Chinese characteristics” in the People’s Republic of China that was started in December 1978 by reformists within the Communist Party of China, led by Deng Xiaoping.
Economic reforms have introduced market principles and were carried out in two stages. The first stage, in the late 1970s and early 1980s, involved the decollectivization of agriculture, the opening up of the country to foreign investments, and permission for entrepreneurs to start businesses, even if the main industries remained state-owned.
The second stage of reform, in the late 1980s and 1990s, involved the privatization and contracting out of much state-owned industry and the lifting of price controls, protectionist policies, and regulations, although state monopolies in sectors such as banking and petroleum remained.
In this very long-term plan, by starting from zero, China had to restructure and modernize all the sectors of industry, state-owned enterprises, management of public companies and introducing in the legal system private domestic companies, change corporate culture, choose what manufacturing, import and export (just to mention few things to do).
Consequentially, China needed to make accessible its immense land to foreign investments and let in the most advanced and efficient foreign enterprises in order to acquire the necessary knowledge to achieve the ambitious goals of its reform (…The State shall encourage the establishment of export-oriented or technologically advanced production-type co-operative enterprises…).
Ironically, among those necessary foreign investors to increase quality and standards, especially in the heavy and high-tech industry, there were China’s “best” enemies, USA and Japan.
So, if the underlying directive was learning “what and how to do” from its enemies-future business partners-competitors, it was necessary for China finding an investment vehicle that would have allowed foreigners and Chinese working together under the strict control of the government.
China wanted to “learn” quickly and therefore it started to attract foreign enterprises/investments by offering low labor and production costs, and by making the vast domestic market just a honey trap because rapidly filled in by Chinese products and services, and then, in few decades, starting to export its products and conquer the international markets (…The State encourages cooperative joint ventures to sell their products on international markets…).
As result, an obligatory equity joint venture with a Chinese state-owned company as partner was the first and only investment vehicle available for foreign investors to operate in China.
The introduction of joint ventures marks a turning point for China, especially if we consider/remember that prior to 1979, the legal system of China did not provide any mechanism for foreign investment, and the 1978 Constitution seemed expressly to preclude such foreign investment insofar as it described the PRC as “a socialist state of the dictatorship of the proletariat” in which the means of production were under “socialist ownership by the whole people and socialist collective ownership by the working people.”
This situation radically changed July 1, 1979, when the Fifth National People’s Congress adopted the “Law of the People’s Republic of China on Joint Ventures Using Chinese and Foreign Investment” (JV Law), and additionally, in 1982, when the Chinese government amended the Chinese Constitution in order to provide explicit constitutional protection to foreign direct investment in general, and equity joint venture investment in particular.
But to be welcomed, these equity joint ventures established within China’s territory had to and yet “must be able to promote the development of China’s economy and the improvement of the science and technology for the benefit of socialist modernization.”
Nowadays, China allows foreigners to establish two types of joint ventures, “equity joint venture” and “cooperative joint ventures”, and in those businesses qualified as restricted, an obligatory joint venture with a Chinese partner (usually a state-owned enterprise) is still the only investment vehicle available for foreign investors.
However, the original scenario of joint ventures in China has changed substantially over the years. For example, many businesses that at the beginning of the great opening could enjoy tax incentives or full tax exemptions because they were considered innovative or fundamental to China’s growth, have now lost those benefits. Materials and production costs, salaries and wages have increased considerably. During the years, new investment vehicles have been made available to foreign investors. Many foreign enterprises have suffered great losses due to the Chinese partner or simply did not make the planned profits, always because of the Chinese partner.
Thus, if the initial reasons for foreign investors to venture with a Chinese partner were basically the compulsoriness of the law, “tempting” low labor and production costs, tax incentives and friendly tax policies, and the “mirage” of a boundless market, it is important to understand, nowadays, that these reasons are disappearing and foreign enterprises have more safe alternatives, if a joint venture is still a useful and profitable vehicle to operate in China.
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Written by 常磊Pierluigi Damiano Lenge
