Investing In China Setting Up A Representative Office
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Investing in China: Setting Up a Representative Office
Overview
Foreign investment in China began modestly in the early 1980s and has grown to capture a significant portion of global investment funds. With China's accession to the WTO and its robust economic growth, this trend is expected to continue. However, for many small and medium-sized enterprises (SMEs), China can still be a challenging business environment. Establishing a Representative Office (RO) is a popular strategy for SMEs to enter the Chinese market with minimal financial risk.
Benefits of a Representative Office (RO)
Before exploring how to establish an RO, it’s important to understand why. ROs are attractive because they are easier and cheaper to set up than joint ventures or wholly foreign-owned enterprises, often requiring only about a tenth of the capital. Additionally, ROs can operate in some sectors restricted to direct investment vehicles.
Limitations of a Representative Office
While ROs offer accessibility, there are notable restrictions:
1. Business Activities: ROs cannot conduct direct business operations. Their role is limited to activities like product promotion, market research, and liaison. They cannot charge for services or engage in sales or manufacturing, though they may be taxed in certain situations.
2. Invoicing and Contracts: ROs cannot invoice clients or sign contracts. These responsibilities lie with the parent company.
3. Hiring Employees: Direct hiring is not allowed. ROs must use authorized human resource agencies, which refer candidates in exchange for a percentage of salaries. Some ROs navigate this by pre-selecting candidates and then using the agency to formalize the referral process.
Why Establish an RO?
Despite these restrictions, there are several compelling reasons to establish an RO:
1. Market Research: Companies can conduct market research to evaluate potential future investments in China.
2. Strategic Positioning: Setting up an RO in sectors currently closed to foreign investment can prepare a company for eventual market liberalization aligned with WTO commitments, allowing them to build relationships and understand the market.
3. Business Expansion: Firms already conducting limited business with China might use an RO to enhance market presence before transitioning to a direct investment like a joint venture.
4. Industry Requirements: For sectors like insurance and finance, a two-year RO operation is often a prerequisite for direct investment.
5. Local Hiring: ROs can employ local staff to identify Chinese suppliers, facilitating smoother business operations.
6. Circumventing Limitations: Some companies may attempt to use an RO to function like a joint venture while avoiding costs and regulatory hurdles. However, this approach is risky and likely to lead to regulatory issues.
In conclusion, while establishing a Representative Office in China offers numerous strategic advantages for SMEs, it’s crucial to adhere to regulations and avoid activities that could attract legal complications. With careful planning, an RO can be a valuable stepping stone for deeper market engagement.
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