There are three main forms business establishments can take for foreign companies operating in China:
1) Representative Offices
2) Joint Ventures and
3) Wholly Foreign Owned Enterprises.
The form chosen by a foreign investor is dependent on many factors:
1. How active one wants to be in China
2. The industry one is investing in
3. Whether or not a Chinese partner is necessary, either because it is required by law or to benefit from the partner’s experience within and access to the Chinese market.
One of the popular forms of foreign company establishment is a Representative Office. The downside to this establishment type is that Representative Offices are very limited in the activities they can carry out. They can not carry out direct business activities and are limited to activities such as market research and liaison. In practice, some Representative Offices exceed their business scope and thus leave themselves open to negative legal ramifications.
If a foreign company wants to legitimately carry out profit making business activities in China then they must set up a Joint Venture with a Chinese partner or a Wholly Foreign Owned Enterprise (WFOE). Many investors prefer Wholly Foreign Owned Enterprises to Joint Ventures as it gives them full control over their business. However, there are certain industries in which a Wholly Foreign Owned Enterprise cannot be established, although this list is getting progressively shorter. Some investors do still choose to cooperate with a Chinese partner and form a Joint Venture for strategic reasons. In general, though, WFOEs are gaining popularity, mainly because they are easier to establish now than in the past.