China
According to a 2003 report of the United Nations Conference on Trade and Development, China was the recipient of US$53.5 billion in direct foreign investment, making it the world's largest recipient of direct foreign investment, exceeding the US for the first time. Also, it approved the establishment of nearly 500,000 foreign-investment enterprises. The US had 45,000 projects by 2004 with an in-place investment of over 48 billion.[9]
Until recently, no guidelines existed on how foreign investment was to be handled due to the restrictive nature of China toward foreign investors. Following the death of Mao Zedong in 1976, initiatives in foreign trade began to be applied, and law applicable to foreign direct investment was made clear in 1979, while the first Sino-foreign equity venture took place in 2001.[10] The corpus of joint venture law has improved since then.
Companies with foreign partners can carry out manufacturing and sales operations in China and can sell through their own sales network. Foreign-Sino companies have export rights which are not available to wholly Chinese companies, as China desires to import foreign technology by encouraging JVs and the latest technologies.
Under Chinese law, foreign enterprises are divided into several basic categories. Of these, five will be described or mentioned here: three relate to industry and services and two as vehicles for foreign investment. Those five categories of Chinese foreign enterprises are: Sino-foreign equity joint ventures (EJVs), Sino-foreign co-operative joint ventures (CJVs), wholly foreign-owned enterprises (WFOEs), though they are not actually joint ventures and mentioned only for comparison, foreign investment companies limited by shares (FICLBS), and investment companies through foreign investors (ICFI). Each category is described below.
Equity joint ventures
An EJV is formed between a Chinese partner and a foreign investor. It is incorporated in both Chinese (official) and in English (with equal validity), with limited liability. Prior to China's entry into the WTO – and thus the existence of WFOEs – EJVs predominated among Chinese joint ventures. In an EJV, the partners share profits, losses, and risk in equal proportion to their respective contributions to the venture's registered capital.
The JV contract and the articles of association are the EJV's two most fundamental legal documents. The Articles mirror many of the provisions of the JV contract. In case of conflict the JV document has precedence. These documents are prepared at the same time as the feasibility report. There are also ancillary documents (termed "offsets" in the US) covering know-how and trademarks and supply-of-equipment agreements.
Minimum levels of equity are prescribed for investments[11] where the foreign equity and debt levels are:[12]
The total foreign investment in the project must be at least 25%. No minimum investment is set for the Chinese partner. The timing of investments must be mentioned in the Agreement, and failure to invest at the indicated time draws a penalty.
Equity joint ventures
An EJV is formed between a Chinese partner and a foreign investor. It is incorporated in both Chinese (official) and in English (with equal validity), with limited liability. Prior to China's entry into the WTO – and thus the existence of WFOEs – EJVs predominated among Chinese joint ventures. In an EJV, the partners share profits, losses, and risk in equal proportion to their respective contributions to the venture's registered capital.
The JV contract and the articles of association are the EJV's two most fundamental legal documents. The Articles mirror many of the provisions of the JV contract. In case of conflict the JV document has precedence. These documents are prepared at the same time as the feasibility report. There are also ancillary documents (termed "offsets" in the US) covering know-how and trademarks and supply-of-equipment agreements.
Minimum levels of equity are prescribed for investments[11] where the foreign equity and debt levels are:[12]
The total foreign investment in the project must be at least 25%. No minimum investment is set for the Chinese partner. The timing of investments must be mentioned in the Agreement, and failure to invest at the indicated time draws a penalty.
- Less than US$3 million: equity must constitute 70% of the investment
Co-operative joint ventures
Co-operative joint ventures (CJVs) are permitted under the law governing joint ventures between Chinese and non-Chinese partners. Co-operative enterprises are also called contractual operative enterprises.
CJVs may have a limited or unlimited structure. The limited-liability version is similar to an EJV – the foreign investor provides the majority of funds and technology and the Chinese party provides land, buildings, equipment, etc. However, there are no minimum limits on the foreign partner, allowing them to be a minority shareholder.
The other format of the CJV is similar to a partnership where the parties jointly incur unlimited liability for the debts of the enterprise with no separate legal personality being created. In both the cases, the status of the formed enterprise is that of a legal Chinese person which can hire labor directly as, for example, a Chinese national contractor might. Minimum capital is registered at various levels of investment.
Other differences from the EJV are:
Convenience and flexibility are the main characteristics of this type of investment. It is therefore easier to find co-operative partners and to reach an agreement than with an EJV.
With changes in the law, it has become possible to merge with a Chinese company for a quick start. A foreign investor does not need to set up a new corporation in China. Instead, the investor uses the Chinese partner's business license under a contractual arrangement. However, under the CJV, the land stays in the possession of the Chinese partner.
The percentage of the CJV owned by each partner may also change throughout the JV's life, giving the option to the foreign investor, by holding higher equity, to obtain a faster rate of return with the concurrent wish of the Chinese partner of a later larger role in the operations of the JV and maintaining long-term control.
Wholly foreign-owned enterprises (WFOEs)
WFOEs are enterprises solely controlled by foreign investment. China's entry into the World Trade Organization (WTO) around 2001 has had profound effects on foreign investment. Not being a JV, they are considered here for comparison only.
The WFOE is a Chinese legal person and has to obey all Chinese laws. As such, it is allowed to enter into contracts with appropriate government authorities to acquire land use rights, rent buildings, and receive utility services. In this it is more similar to a CJV than an EJV.
WFOEs are expected by the PRC to use the most modern technologies and to export at least 50% of their production, with all of the investment to be wholly provided by the foreign investor(s) and the enterprise to be within their total control.
WFOEs are typically limited liability enterprises[14] as with EJVs, but the liability of the directors, managers, advisers, and suppliers depends on the rules which govern the Departments or Ministries which control product liability, worker safety or environmental protection.
An advantage the WFOE enjoys over its alternates is protection of its know-how, but a disadvantage is the absence of a Chinese party.
As of the 3rd quarter of 2004, WFOEs had replaced EJVs and CJVs as follows:[13]
Foreign investment companies limited by shares (FICLBS)
These enterprises are formed under the Sino-Foreign Investment Act. The capital is composed of value of stock in exchange for the value of the property given to the enterprise. The liability of the shareholders, including debt, is equal to the number of shares purchased by each partner.
The registered capital of the company is a share of the paid-in capital. The minimum amount of the registered capital of the company should be RMB 30 million. These companies can be listed on the only two stock exchanges in the PRC – the Shanghai and Shenzhen Stock Exchanges. Shares of two types are permitted on these exchanges – Types "A" and Type "B" shares.
Type A are only to be used by Chinese nationals and can be traded only in Renminbi. Type "B" shares are denominated in Renminbi but are traded in foreign currency, and can be traded in foreign exchanges and by Chinese nationals having foreign exchange privileges. Further, state enterprises which have been approved for corporatization can trade "H" shares in Hong Kong and on the New York Stock Exchange.
Investment companies by foreign investors (ICFI)
ICFIs are established in China by solely foreign-funded businesses or jointly with Chinese partners who engage in direct investment. They must be incorporated as a company with limited liability.
The total amount of the prospective investor's assets during the year preceding the application to do business in China has to be no less than US$400 million within the territory of China. The paid-in capital contribution has to exceed $10 million. Furthermore, more than 3 project proposals for the investor's intended investment projects must have been already approved. The shares subscribed and held by foreign ICFIs should be 25%. The investment firm can be established as an EJV.
On March 15, 2019, China's National People's Congress adopted a unified Foreign Investment Law[15] which came into effect on January 1, 2020.
List of prominent joint ventures in China
- AMD-Chinese
- Huawei-Symantec
- Shanghai Automotive Industry Corporation (上海汽车集团股份有限公司), also known as SAIC (上汽) and SAIC-GM (上汽通用), is a Chinese state-owned automotive manufacturing company headquartered in Shanghai, operating in joint venture with US owned General Motors. Products produced by SAIC joint venture companies are sold under marques including Baojun, Buick, Chevrolet, Iveco, Škoda, and Volkswagen.
- General Motors with SAIC Motor, formerly known as Shanghai General Motors Company Ltd., makes numerous cars in China in four factories, especially under the Buick marque, but also some Chevrolet and Cadillac models. In November 2018, the company announced new Chevrolet models for the Chinese market, including an extended-wheelbase Malibu XL, a new Chevy SUV concept, and a new Monza.
India
JV companies are the preferred form of corporate investment, but there are no separate laws for joint ventures. Companies which are incorporated in India are treated on par with domestic companies.
Private companies (only about $2500 is the lower limit of capital, no upper limit) are allowed[16] to invest in joint ventures in India together with public companies, limited or not, and likewise with partnerships. Sole proprietorships are allowed too. However, the latter are reserved for non-resident Indians.
Through capital market operations, foreign companies can transact on the two exchanges without prior permission of the Reserve Bank of India, but they cannot own more than 10 percent equity in paid-up capital of Indian enterprises, while aggregate foreign institutional investment (FII) in an enterprise is capped at 24 percent.
Joint ventures may also be established as wholly owned subsidiaries (WOS) and project offices and branch offices, incorporated in India or not. Sometimes, it is understood that branches are started to test the market and get its flavor. Equity transfer from residents to non-residents in mergers and acquisitions (M&A) is usually permitted under the automatic route. However, if the M&As are in sectors and activities requiring prior government permission (Appendix 1 of the Policy) then transfer can proceed only after permission.[17]
Ukraine
In Ukraine, most joint ventures are operated in the form of a limited liability company,[19] as there is no law specifically providing for the establishment of joint ventures. Protection of the rights of foreign investors is guaranteed by the Law of Ukraine called "On Foreign Investment". A JV can be established without the formation of a separate legal entity under a so called Cooperation Agreement.[20] Under the Ukraine civil code, a CA can be established by two or more parties; rights and obligations of the parties are regulated by the agreement. Cooperation Agreements are widely spread in Ukraine, mainly in the field of oil and gas production.
