By Harry Handley
In 2010, China introduced the National Plan for Medium and Long-term Education Reform and Development (2010-2020) to improve Chinese education standards to match international levels. To do so, the government further opened the higher education sector to foreign investment, allowing foreign universities to enter the higher education sector through joint ventures with local partners. Seven years down the line, the increased support, both financial and regulatory, has led to an influx of Sino-foreign joint education programs and institutions.
Enrollment in universities has increased from 15 percent to 40 percent in the last ten years, and is expected to increase by a further 50 percent by the end of the decade. In 2016, 450,000 of those enrolled in higher education studied at one of the increasing number of Sino-foreign joint institutions around China, such as the University of Nottingham Ningbo China (UNNC), a joint venture between the UK’s University of Nottingham and Zhejiang’s Wanli Education Group. In recent years, there has been a shift in how Chinese students perceive these joint institutions. Originally, they were seen as an easy route to studying abroad in the West, but now some have earned strong academic reputations in their own rights.
The growing number of high school graduates competing for university places each year make China an attractive target for foreign universities seeking to increase their global presence and revenue stream. However, before entering the market, it is vital to understand the available entry methods as well as the likely challenges that lie ahead.
According to the Catalogue of Industries for Guiding Foreign Investment, entry into the Chinese higher education industry is still restricted. Foreign institutions still require a Chinese partner whose stake and administration comprise over half in the venture. There are three main methods of establishing a Sino-foreign joint institution, with increasing levels of integration and commitment. The three partnerships all require the approval of both the provincial education department and the Ministry of Education before a Chinese-Foreign Cooperative Education License can be issued.
Joint education programs
A joint education program is the least capital intensive and integrated entry method. Simply put, these involve the foreign university providing teaching resources and materials accreditation to the Chinese partner in order to offer a joint course. Examples include the London Business School Master’s program offered at Fudan University in Shanghai and the joint MBA offered by Cornell and Tsinghua University in Beijing. Whilst this method may be the quickest and least costly way to enter the Chinese higher education market, it affords the least exposure to the foreign partner.
Joint institutions established without legal person status
Also known as the ‘campus on campus model’, foreign universities can establish joint institutions with a local partner without creating a new legal entity. This usually involves the foreign partner attaching their institution to an existing campus of the Chinese university. In this situation, the Chinese partner is responsible for signing all legally binding agreements on the joint institution’s behalf. The ‘campus on campus’ method requires a sizable capital investment, and the legal powers of the foreign university are significantly limited. Therefore, partner choice is especially important.
RELATED: Pre-Investment and Entry Strategy Advisory from Dezan Shira & Associates
Joint institutions with legal entity status
The most integrated and capital intensive entry mode requires establishing a separate legal entity for the joint institution. As a separate legal entity, the new joint venture is able to sign legally binding agreements in its own right; thus, giving the foreign partner more legal power than the other methods. Creating a legal entity also affords the joint institution greater autonomy over its academic content. However, the new entity must have a Chinese president and a Chinese-majority board, restricting the influence of the overseas university. There are currently eight joint institutions with legal entity status in China, including UNNC, the Wenzhou-Kean University, New York University Shanghai and Xi’an Jiao Tong Liverpool University (XJTLU).
Challenges faced by incumbents
Of course, the education sector will present challenges for new entrants. Learning from the experiences of predecessors may be key to success in this highly regulated market. Aside from integration troubles and cultural issues that may arise, management and senior figures in incumbent joint institutions have also identified a number of other obstacles.
Firstly, the Chinese regulatory environment is often difficult for foreign players to understand. In contradiction to the education reforms laid out in 2010, recent NGO laws introduced in China appear to have tightened local governments’ grips on the education sector. These laws are vague at best and leave much to the provincial education departments’ own interpretations. As such, communication and relationship building with these departments is critical. Additionally, transnational universities also have to abide by the regulations set in their home countries, which may sometimes be in conflict with the Chinese regulations.
Secondly, rifts over academic freedom can be hard to bridge. Gao Xiqing, a board member of Duke Kunshan University, described academic freedom as “a relative concept”. The Chinese government still maintains significant control over taught curriculum and prohibits teaching in areas such as civil rights, civil society and press freedom. This raises the question as to whether foreign universities are tainting their reputation and image as ‘bastions of free inquiry’ by conforming to the controls and restrictions in China. Willingness to compromise is a key consideration that must be addressed before entering the sector.
Born out of the previous two issues, the final challenge is high faculty turnover. In an interview with AmCham, Madelyn Ross of the Hopkins-Nanjing Center stated that it is often difficult to retain faculty members for over a year. This significantly increases the running costs and hampers the development of the joint institution’s reputation.
Considerations and opportunities
In spite of the regulatory difficulties, local governments in China are encouraged by the central government to invest in joint institution projects. For example, in 2014, the Kunshan city government contributed US$200 million for the Duke Kunshan University campus, while Duke University donated US$42 million. Part of the appeal is that the presence of an international university can drastically increase the status of lower-tier Chinese cities. As such, local governments may be willing to invest more in order to stave off competition from other cities. However, money should not be the deciding factor for the entrant.
As with any expansion, there must be a clear end goal, such as increasing research capabilities, to help define the correct entry mode. A clear goal can also help guide the right choice of partner and location. When vetting potential partners, especially in instances where legal responsibility is solely with the Chinese partner, an extensive selection and due diligence process must be conducted.
Cultural clashes are to be expected, but these must be worked out through negotiation. In order for the joint institution to be a success, shared objectives and common ground must be established. Denis Ross, a senior figure at Duke Kunshan University, suggested that new institution should not depend on the reputations of the partner universities, but should instead be treated like a startup.
Overall, the Chinese higher education sector offers a challenging environment for potential foreign entrants. However, if the correct combination of entry mode, partner and location can be found, entering China can be highly advantageous for foreign universities, and set them apart from their competitors both at home and abroad.
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email firstname.lastname@example.org or visit www.dezshira.com.
Stay up to date with the latest business and investment trends in Asia by subscribing to our complimentary update service featuring news, commentary and regulatory insight.
China Investment Roadmap: the Education Sector
In this issue of China Briefing, we navigate through China’s regulatory framework for investment into education, presenting a roadmap for best practices in the industry. We examine the key market information that has driven the industry’s growth, analyze the different investment models that are available for foreign companies, and finally discuss the effect that China’s recently released NGO law will have on foreign investment into education.
An Introduction to Doing Business in China 2016
Doing Business in China 2016 is designed to introduce the fundamentals of investing in China. Compiled by the professionals at Dezan Shira & Associates in June 2016, this comprehensive guide is ideal not only for businesses looking to enter the Chinese market, but also for companies who already have a presence here and want to keep up-to-date with the most recent and relevant policy changes
Establishing & Operating a Business in China 2016
Establishing & Operating a Business in China 2016, produced in collaboration with the experts at Dezan Shira & Associates, explores the establishment procedures and related considerations of the Representative Office (RO), and two types of Limited Liability Companies: the Wholly Foreign-owned Enterprise (WFOE) and the Sino-foreign Joint Venture (JV). The guide also includes issues specific to Hong Kong and Singapore holding companies, and details how foreign investors can close a foreign-invested enterprise smoothly in China.