Ways to enter the Chinese market – Direct vs. Indirect

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Written on: January 6, 2024

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Foreign investors entering the Chinese market
Ways to Enter the Chinese Market – Direct vs. Indirect

Ways to Enter the Chinese Market – Direct vs. Indirect

For foreign investors looking to enter the Chinese market, there are several preliminary issues to consider. Among those issues is whether you want to found a company in China or simply want to do business there, with nothing more than maybe a small office.

In general, there are two main options: Directly establish a legal entity vs. indirectly establish an entity in China.

Direct Establishment of an Entity in China

This approach lets you directly establish a legal entity in China, which can be done in one of two ways:

  • Establish a Wholly Foreign-Owned Enterprise (WFOE) on your own, or
  • Establish a Sino-Foreign Joint Venture (JV) together with a Chinese company.

It is worth noting that, in order to further attract foreign investment, China passed a new Foreign Investment Law (FIL) in 2019. This law provides more protection than the previous ones in various areas, including IP to foreigners who want to expand their business to China.

Updates for 2024

  • Enhanced Legal Framework: The FIL has been further updated to enhance protections and streamline procedures for foreign investors.
  • Greater Market Access: New sectors have been opened for foreign investment, providing more opportunities for WFOEs and JVs in sectors like telecommunications and medical care.

Indirect Establishment of an Entity in China

This approach allows you to conduct trade in China indirectly, without registering a company locally. There are several ways to do this:

  • Establish an office or branch, which makes it easier for you to deal with your potential business partners and clients.
  • Appoint an agency and/or distributor.
  • Enter franchise agreements with qualified business partners.

Updates for 2024

  • Digital Market Entry: Leveraging e-commerce platforms and digital trade channels has become increasingly popular, allowing businesses to reach Chinese consumers directly without a physical presence.
  • Enhanced Regulatory Compliance: Recent regulations on data security and cross-border data flow must be adhered to when operating indirectly.

The Bottom Line for Foreign Investors Entering the Chinese Market

While each option has its own pros and cons, the one that will work best for you, or which ones you can legally choose, depends on your circumstances. These can be the products or services you are selling or the technology you are licensing.

Key Considerations for 2024

  • Regulatory Environment: Stay updated with the latest regulatory changes, including compliance with the Data Security Law and Personal Information Protection Law.
  • Economic Incentives: Explore new economic incentives and grants available for foreign investors in 2024.
  • Strategic Partnerships: Consider forming strategic partnerships with local companies to navigate the complex market landscape.

For more detailed information on how to successfully enter and navigate China’s large market, we recommend speaking with Emilia Shi, a seasoned business lawyer with extensive experience in Chinese market entry strategies.

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