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This is reported by the American Chamber of Commerce in South China Report 2022, foreign companies are quite optimistic about their expansion plans in China. A whopping 72% of companies surveyed planned to expand their business in China over the next three years.
But even with a large number of interested companies, foreign investment in China declined 2.1% in 2022. This can be attributed to restrictions placed on closures due to Covid along with the complexities of expanding into a huge and complex market like China for both small and large enterprises.
Not knowing the laws of the country can lead to serious complications and loss of money and time. For example, AstraZeneca, the global pharmaceutical giant, found out the hard way that it required government permission to transfer genetic material from citizens to third parties, even within China’s borders, resulting in criminal arrests of the company’s employees.
Avoid these six mistakes to ensure you don’t fall victim to a similar unfortunate incident when venturing into the Chinese market:
Related: 6 tips for doing business in China
1. Not researching business registration laws
Setting up a subsidiary in a new country, especially one as legally complicated as China, is a huge undertaking both in terms of time and money. You can choose to hire individual consultants and law firms to guide you through various steps or complete the entire process yourself.
While the government incorporation costs to register a Wholly Foreign-Owned Enterprise, or WFOE, aren’t much, and you might be tempted to do it yourself, a single mistake could cost you thousands of dollars in legal fees.
For example, when registering a WFOE, make sure the scope of your business is broadly defined in the application to accommodate future changes, but specific enough to be approved by authorities. Using this crucial element incorrectly can cause legal problems for your business later on.
On the other hand, the services of the Professional Employers Organization (PEO) allow you to have a legally approved presence in the country without getting bogged down in lengthy registration cycles. This is because a global PEO such as INS worldwide handles legal compliance, payroll and other legal benefits on your behalf worldwide.
2. Missing critical certificates and licenses
China has strict laws regarding the products and services that are allowed to be sold within its borders. Multiple government agencies require your products to be certified and licensed before distribution.
Your company and products must also comply with the Negative foreign investment list, Market access negative listand the Untrusted entity list. Completing these additional requirements correctly is time-consuming. That is why many companies work with a local entity that is well versed in all necessary certificates and licenses to reduce this legal burden.
3. Not studying local tax rules
Tax laws for businesses in China may differ from those in many Western countries. Corporate tax, business tax, import duty, value added tax and more should be carefully studied before starting operations in the country.
Legal and tax advisors can help you assess the impact of all relevant taxes on your activities in China. Therefore, it is essential to know them thoroughly during the early stages of your expansion.
Related: 3 steps to successful international expansion
4. Ignore local labor laws
Chinese labor laws can differ significantly from what you are used to in your home country. Strict employment contracts are required by law and are limited to fixed-term, permanent and project-based contracts.
When hiring in China, additional clauses, such as a non-compete clause, may also differ from, for example, American contracts. For example, compensation must be paid to an employee during the non-compete period.
Severance pay calculation in China is also something you should be aware of. Basically, companies owe employees one month’s salary for each year of service completed.
Employment contracts can be tricky if you are not familiar with the Chinese labor landscape. Using the services of a local PEO can make the process easier for you.
5. Not having watertight dispute resolution contracts
Dispute settlement clauses are heavily negotiated when doing business with Chinese entities. Companies must come into watertight arbitration clauses when working with local suppliers. The US and China are both parties to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York” Convention).
But the arbitration clause must be properly drafted: deciding which arbitration institution and rules to choose, the location of the arbitration, the language to be used, and the applicable law that will govern any dispute.
Arbitration clauses can drag your company into years of litigation and huge financial losses. Therefore, it is always better to consult with a trusted partner who knows the ins and outs of dispute resolution in the Chinese context.
6. Failing to Protect Your Intellectual Property
China’s IP protection laws have improved dramatically over the years, giving foreign companies much more legal protection to protect their IP. But the burden of proof is still on the company to obtain copyright protection before it starts operating in the country. Global trademarks are not automatically protected in China, so you need to re-register them. And with the first-to-file trademark system, this must be done as quickly as possible.
Related: Considering an Overseas Expansion? Avoid these 3 mistakes.
Flexibility and partnerships to unlock success in China
Companies considering expansion into China are poised to unlock more and sustainable growth in one of the world’s largest economies. But diving headlong without the necessary homework can quickly wipe out your expansion dreams and tarnish your brand for years to come.
In addition to legal compliance, it is also incredibly important to take the time to study China’s cultural and socio-political landscape in order to effectively adapt your products to the market. Chinese companies also differ from their Western counterparts in corporate hierarchies, compensation structures, distribution channels, advertising laws, and more. Being flexible and open to partnerships is the key to taming the Chinese dragon.