Funding Foreign Direct Investment into China
By Janet L. Walsh, CEO of Birchtree Global
Jun. 29 – Companies interested in expanding operations into China typically do so to follow their customers, improve their supply chains, or manufacture at reduced cost. If considering a move to China, it may be helpful to look at the entry strategies used by firms currently operating in this market. With that in mind, below are a few methods that businesses currently operating in China have used to fund expansion in the market:
- Joint venture
- China investment financing
- Raising capital
- Multiple investment strategies
- Growth fund investments
- FDI through traditional entry ports such as Hong Kong
Examples are as follows:
Joint ventures, partnering with a local Chinese firm for vertical or horizontal integration strategies, have two important advantages. The first is the advantage of an immediate presence in the country, while the second is gaining a partner familiar with the business landscape. An established firm is also able to access government funding more easily than a foreign firm new to the market.
China Cord Blood Corporation, a life sciences company which stores umbilical blood stem cells, is one example of a successful partnership which has benefited from Kholberg Kravis Roberts & Company’s capital investment of US$65 million.
For these joint ventures, a key component of success is managing expectations, costs, performance measures, and cultures.
Cessna and Aviation Industry Corporation of China (an aviation joint venture) and Ascletis (a joint venture between the United States and Chinese entrepreneurs in specialty therapeutics for cancer and infectious diseases), are two other recent examples of successful joint ventures in this market.
Chinese investment financing
In the future, funding for operations in China may increase as the government seeks to develop a more robust, freely-traded internationalized renminbi (RMB). For example, from 2010 to 2011 there was a quadrupling in “dim sum bonds” or “Ronald McDonald Bonds.” These bonds are money raised in RMB in China to support Chinese investment. Companies such as McDonald’s, Tesco, BP Capital and L’Air Liquide have benefited significantly from this type of investment.
A recent conference with HSBC’s “Business without Borders” group on May 16, 2012 in New York City, moderated by the Economist’s Global Forecasting Director Leo Abruzzesse also discussed the rising attractiveness of RMB-financed bonds, particularly as the currency becomes more internationalized.
Metaps Inc. is a Japanese company that specializes in increasing revenues for smartphone apps. Metaps has arranged private placement financing to raise US$4.2 million from five venture capital firms. The proceeds from this capital raise are to be used to increase the company’s Asia-focused business platform.
Multiple investment strategies – public/private/investment
Large organizations, such as Siemens, benefit from multiple investment strategies to finance their global operations, combining public, private investment, and revenue from growth operations. Smaller firms can also use this concept to fund investments that may serve to hedge any concerns over disruption in elements of their strategy.
General Motors has done well with multiple strategies to establish a strong presence in the auto manufacturing market. Their efforts have been helped by Chinese subsidies and other incentives.
Growth fund investment
Sino-Ocean Land Holdings (along with its subsidiary Gemini Investments) and KKR China Growth Fund (a China-focused investment fund managed by Kohlberg Kravis Roberts & Co.) have established an investment process to capitalize on the long-term potential in China’s real estate market.
FDI through traditional entry ports such as Hong Kong
Historically, Hong Kong has been a gateway for FDI into the Chinese mainland. Hong Kong has a high per capita GDP but also some of the highest land and labor costs in Asia, much more expensive than the lower-cost Chinese mainland. Entering the Chinese market through Hong Kong by establishing a sales or subsidiary office in the special administration region and production facilities on the mainland is a useful market entry strategy.
The duty free status for Hong Kong goods into mainland China, minimized restrictions on Chinese tourists visiting Hong Kong, and the aging population in Hong Kong offer business opportunities in manufacturing, retail, tourism, and health-related businesses.
In conclusion, there is no one fixed method to enter the Chinese market. The above illustrations provide a short summary and serve to illustrate the broad range of options firms have when considering foreign direct investment. These options should be considered in light of future trends and opportunities as this market continues to evolve.
Janet L. Walsh is the CEO and president of Birchtree Global, LLC a business services firm that provides small and medium sized companies the legal, financial, and human resources start up services needed to successfully enter foreign markets. She can be contacted at: email@example.com.