Foreign investment in China began with a trickle in the early 1980s and has increased since China is now among a significant percentage of the world of foreign investment funds. With China’s accession to the WTO and the vitality of the economy, it seems this trend will continue in the foreseeable future. Nevertheless, China remains an unfamiliar and difficult to do business for many small and medium enterprises (SMEs). A popular option for an SME his feet wet in the China market without risking much capital by setting up a representative office (RO) number.
Before I go into the “how” the establishment of a RO in China, it might be better to ask “why?”. Most of the companies to establish regional offices in China do so because they establish much easier than direct investment vehicles such as joint ventures and wholly foreign-owned public enterprises, and usually require only about one-tenth of the investments. OR may also in reducing the list of industries that are closed to operate direct investment instruments.
The downside is that there are very limited restrictions on the type of activities that an RO can exercise in. For example, an RO can not:
Conduct direct business activities: The activities of a RO should be product promotion, market research, liaison, and will be limited so forth, and it can not charge for their services still operate profitable activities such as direct sales or production costs (although they are subject to taxation under certain circumstances ).
Bill customers directly or sign contracts: These activities must be dealt with by the parents.
Direct hire employees: It must be an authorized agency of the human resources that are candidates for AR use transfers in return for a percentage of salaries. Some regional offices to recruit to end this system and to negotiate directly with candidates and send their names to the authorized agency personnel to run, so that they “return” then again the candidate AR. Although this does not seem to have caused many problems with the Chinese authorities still need the formality of legal proceedings, and payroll deductions will be respected.
Given these limitations, why create a RO at all?
1st A company may want to conduct market research to decide whether to make an investment for the future in China.
2nd A company may want an RO in a sector where foreign investment is currently in anticipation of future liberalization of Chinese foreign investment laws into conformity with its WTO commitments to establish prohibited. Meanwhile, it can be a presence to local connections, and learn the market.
3rd A company can be a modest amount of business with China in his homeland, but not penetration or resources to have made to justify a direct investment. Once the company achieved a larger market share it can always switch to a Joint Venture or Wholly Foreign Owned Enterprise.
4th Sectors of certain industries such as insurance and finance require foreign investors to a RO for at least two years before they operate a direct investment.
5th A company may want to use an RO in order to hire staff locally in order to find her Chinese suppliers.
6th A company may establish an RO with the aim of their legal limitations and the functional equivalent of a Joint Venture or Wholly Foreign Owned Enterprise, avoiding much of the cost and inconvenience. This approach is not recommended because it may cause, difficulties with the authorities.