Question

ABC Limited is a leading entertainment, artists and performance brokerage agency in Australia. ABC Ltd founder Mr. Right realised that China is a world-class media and entertainment platform and wants to begin penetrating the firm’s popular musical, magic shows there, but ABC Ltd has little international experience. Mr. Right is unaware of the various types of investment and nontariff trade barriers that ABC might face in China.

Q1. What types of investment barrier(s) might ABC Ltd face if they decide to enter into the China market? (around 100 words)

Answer 1

There are both pre-establishment and post-establishment restrictions that foreign businesses (including those in the USA) may face when they wish to start operating in China, a socialist state.

Pre-establishment phase issues- the Chinese Ministry of Commerce and the National Development Reforms Commission classifies FDIs as restricted, prohibited, encouraged or allowed in the catalog that guides foreign investment in various industries of China. These guidelines may not be fixed and undergo adaptations over different periods and economic scenarios. Hence the FDI conditions are not guided by the market conditions but by the government. The government operating at the lower levels of administration also have some rights related to FDI and may have their guidelines for it. In China, FDI is invited based on individual cases, which further reduces consistency and causes uncertainty. Because of the resultant scenario, small and medium-size businesses cannot hope for easy initiation of operations in the country.

Post-establishment phase issues- the Chinese SOEs (state-owned enterprises) enjoy the protection provided to them by the state, whether they operate in the domestic market or abroad. Certain policy restrictions make the field uneven and turn to cause setbacks for foreign investors. For instance, the domestic companies of China got access to public funds after the implementation of the “Make in China” policy of the year 2025. These funds are available at the national, provincial and municipality levels. The free flow of money is not working well for China as well, as corruption is becoming increasingly common in the country.

A foreign company can invest in China through:

1. Contractual joint ventures
2. Equity joint ventures
3. Wholly owned foreign enterprise

Hence a foreign will have to assume a different legal form than what it has in the domestic market and home country. The legal form of the firm will be judged under the China Company Law and may be subject to more tough conditions. For instance, there may be guidelines regarding the CEO’s nationality. In some industries, government interference may be high and conditions of foreign investment may be tougher than the others. In industries including technology, government incentives are available and FDI inflow is actively encouraged. Some industries are to remain state-owned, according to government policies.

Apart from the policy considerations and barriers to FDI, there are also certain indirect barriers in China. These may include targeted law enforcement and discriminatory licensing regulations and procedures among others. Approvals also turn out to be more time consuming and burdensome for some foreign firms.

Therefore, it can be said that the Chinese government is quite selective in attracting FDI, and may encourage it only on a “needs” basis. ABC Limited needs to find out whether it can get encouraging conditions in China. Given the policy statements and background, few industries including the tech and aerospace (where Chinese lack the technology and allied resources) industry may only get favorable treatment in China.