A common mistake for foreign companies attempting to enter the Chinese market (or most markets for that matter) is not establishing a presence in China. Without a local office, the success of the company in the new market will be much more difficult to obtain. Three strategies are available to “setting up shop” in the country.

The Representative Office

At a minimum, you should have a representative office (shortform: rep office) in China. Typically, you'll want to set up this office in one of the larger, first-tier cities, such as Beijing or Shanghai. However, more companies are choosing 2nd and even 3rd tier cities for their offices as a way of establishing a presence in China's cities that are most likely to grow in the near future and that may be even more affordable.

Before choosing this arrangement, understand that your representative office has limited power in China. The company can be useful for marketing research and for keeping an eye on the Chinese sector for the parent company. But the company is not allowed to do anything that would make a profit so your company cannot use a representative office for buying or selling. However, you are still required to pay taxes to the government even though you are running at zero margin.

The main advantage of this type of arrangement is that you can use your representative office to "break the ice" with the Chinese market, to establish your company's reputation within the country, and to set the stage for further entry down the road with minimal initial investment.

The Joint Venture (JV)

If you opt for a joint venture approach, you will need to secure a partner in China. This method is one of the best options because you are able to build on the reputation of your established partner in the country and because you do not need to invest in setting up your own office within the country.

However, you cannot afford to underestimate the importance of choosing the correct JV partner. Because you are going to be relying on your partner to establish your reputation in the Chinese market, a poor choice can actually hurt your chances of being successful.

Wholly Owned Foreign Enterprise (WOFE)

This option is the best choice if you plan on establishing a full manufacturing or processing presence in the country. While this option gives you more freedom and does allow you to make a profit, it also requires a higher amount of capital investment so be sure to have thoroughly researched your market beforehand.

Even if you do establish a WOFE, you may also want to have representative offices in the cities where you will be primarily selling your goods or you may want to form a partnership with a distribution agent that does business in several Chinese regions to ensure you stay abreast of the markets. By establishing a presence in China using this strategy, you’ll be able to enter the market more easily and more successfully
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