Joint ventures are businesses where a foreign firm goes into business with a local Chinese partner. For many years this was pretty much the only method of investing in China, and investment regulations were heavily weighted in favour of local Chinese partners. That was because the government was keen to ensure that not too much control was left in the hands of foreign investors (even though it was keen to attract foreign money).

More recently, the investment environment has changed significantly and most foreign investment is now in the form of wholly foreign-owned enterprises (see separate section). However, it may still be necessary or sensible for some investments to take the form of joint ventures.

Shapes of JVs
Joint ventures can take several forms and can reflect in a number of ways the contribution of the joint venture partners: ownership, financial contributions, management, the level of participation, the contribution of technology and know-how and so on. There is no minimum foreign contribution required to set up a JV. This allows for those investors who would prefer to remain a minority shareholder. In addition to this, contributions are not required to be expressed in monetary terms, for example they can take the form of labour, resources and services. Be warned: Chinese joint venture partners may tend to 'inflate' the value of their contribution (such as land and capital) because that way they get a better deal. There is nothing wrong with that, of course, but from your point of view, it is sensible to have an independent valuation of assets before committing to the joint venture.

You can pretty much negotiate whatever you want - some areas and localities are more amenable to accommodating foreign investors' needs than others. But, remember, you have to negotiate extremely carefully: leave nothing to chance and check and double-check all the time that your prospective joint venture partners has both understood and agreed to what you want to do. Don't rush negotiations: time spent negotiating each and every single issue at the outset will reduce the risks of things going wrong later.

Advantages of establishing a joint venture
Why choose a joint venture? What should you look for?
An ideal partner who is honest, entrepreneurial, straightforward in its dealings
• committed to the protection of the joint venture company’s IPR
• with good market access and local contacts
• and bringing with them a first-class workforce and facilities.

What are the problems with going the joint venture route?
Lack of information about the prospective Chinese partner. A foreign company that locates a likely-looking company in China may have little knowledge of the company’s background. In the past it has been hard to gain data about the commercial situation of Chinese companies or to substantiate their descriptions of themselves and their business relationships. This difficulty in carrying out checks to a rigour that would be usual in the West has sometimes meant foreign investors enter into JVs reluctantly, accepting the attendant risks.

However an increasing amount of advice is available nowadays, with UK- and China-based organisations (including CBBC) able to make checks on prospective partners. Some consultancies that specialise in this area offer comprehensive investigative services. Given the paucity of officially-filed business information in China, these processes may not amount to a full ‘due diligence’ check; but such investigations can provide sufficient information to warn - or alternatively, reassure – would-be investors about many Chinese companies.

The need to retain comprehensive control. A frequently-cited reason why foreign investors are not attracted to the JV option is a wish to retain comprehensive control over their China production – something a WFOE can offer but not a JV.

Disadvantages of establishing a joint venture
A main disadvantage to forming a JV is that someone else shares in the profits of the business. Such an arrangement may work well if the joint venture business aims to sell its products in China and gradually to grow in size, because that way both partners will benefit.

If, on the other hand, the purpose of the business is purely to export, then it makes less sense to have a joint venture partner.

Along with the sharing of profits, however, comes the sharing of the investment risk as the local partner contributes funds or assets into the enterprise.