Foreign businesses looking for the most cost effective method of establishing a presence in China may want to consider a type of joint venture partnership. The basic idea of this approach is that a foreign company will establish a relationship with a local Chinese firm so both end up benefiting from the arranging. The nature of this relationship can come in several forms.

Technology Licensing

One of the least advisable JV methods is through technological licensing. The foreign company allows the Chinese firm access to their patented technology and lets them manufacture the goods for sale in the country. A portion of the profits ends up going back into the pockets of the foreign company but this approach is very likely to backfire. Because of the lax intellectual property laws in China, the local firm can take the technology, make it their own, and become competition instead of a cooperative agent.

Manufacturing Joint Ventures

Another method for establishing a presence in China involves the manufacturing industry. Foreign manufacturers can form a relationship with manufacturers in China to do all or part of their tasks. In some cases, assembly of goods is completed in the country. The different pieces may be constructed outside of China then sent into the country where they are put together at a Chinese factory then sold in China or exported to other parts of the world. Although the costs of such a process seem to make it an ill-advised strategy, the low cost of operations in the country keep it profitable.

A second approach is for the foreign company to contract with Chinese factories to make their goods then ship them around the world. Because staffing costs in other parts of the world are much higher, this approach makes financial sense while also helping foreign companies begin establishing themselves in the Chinese market.

Other Types of Licensing

Trade permits are one of the most effective methods of licensing for foreign companies. Very little capital is required, and the foreign company is going to benefit from working with already established Chinese firms. Basically, this type of JV relationship works because the foreign company allows the Chinese company to sell a particular good or service. Franchises are one of the well-known examples of these relationships. In exchange for this permission, the Chinese company is required to give a portion of its profits to the foreign firm.

There are some risks to consider with this approach as well. For example, foreign companies typically have a hard time overseeing the operating of local Chinese businesses so they will have very limited control over the operations, including product quality. Additionally, there is nothing stopping the licensee from breaking off the deal and using his newly acquired knowledge to set up a competing company.

Clearly, licensing and setting up a joint venture partnership are cost effective but they do have their limitations and risks. Any company considering these approaches to establishing a presence in China needs to carefully weigh the pros and cons before making the decision.