How To Do Business In China: A Guide For Entrepreneurs And Investors

HANGZHOU, China -- China is one of the world's largest and most alluring markets, and as it continues to become a more attractive destination for foreign investment, entrepreneurs and investors are flocking to the country to take advantage of the many benefits of doing business here.

But not without some trepidation.

The country is notorious for its tangled bureaucratic web, and it has gained a reputation as a place where deals and contracts are often treated more like suggestions than concrete agreements.

In recent years, however, the Chinese business climate and regulatory structure have improved, and experts and businesspeople say that with a little effort and knowledge, launching a venture in China can be easier than ever.

Find a Chinese partner

The first and most important thing anyone hoping to set up a business in China should do is find a local partner. A local partner will most often be an established Chinese-owned company, or a businessperson with good contacts in the country who can navigate the complicated regulations and legal processes and, most importantly, deal with China's government directly.

Peter Adriaens, a professor at the University of Michigan's Stephen M. Ross School of Business and a professor of entrepreneurship at Sichuan University's Suzhou Institute in Suzhou, is establishing a company called Water Risk Analytics in China.

Having a Chinese partner, he says, is essential.

"It's not like you just get money and you're up and running, like in America," Adriaens advises. In China if you want to get a company up and running, you typically do need a Chinese partner. If you're an entrepreneur and you say, 'Oh, there's a big pot of gold in China; I'm going to go over there and get in on that without having a Chinese partner, then you're going to get trampled."

Having a Chinese partner does pose some risk -- the partner company could take your intellectual property and leave you behind, for example -- so it's critical to vet potential partners thoroughly before making any decisions.

A good partner is an incorporated company that is about the same size as your firm, at least partly Chinese-owned, and well-connected in the Chinese market, Adriaens said. You want to avoid partnering with massive state-owned enterprises (they'll out-leverage your firm every time) but ensure that the partner has the network necessary to get things done in China. You will likely work with these large state-owned enterprises anyway, as they end up being involved in much of the significant business that takes place in the country.

It's a good idea to retain a Chinese lawyer before attempting to enter the Chinese market, as the paperwork and regulations, while nowhere near as opaque and complicated as in the past, are still difficult for a foreigner to navigate.

Understand the business culture

China is a world away from America or Europe, and more than a world away when it comes to doing business there. In America, contracts, deals and other arrangements are fairly transparent between businesses working together. Not so in China.

Shan Nair, co-founder of the Nair & Co. global service outsourcing company, said that understanding how China operates, or working with someone who does, is essential for a businessperson eyeing the Chinese market.

"If you know what you're doing, it's not hard, but if you don't know what you're doing, it can be very hard and costly," Nair explained. "There are some complications, but if you're talking to someone who knows what they're doing in China, then they can navigate all these options and obstacles and help you get through it."

That said, you should educate yourself somewhat so that you're not blindly led by your partner during interactions with the Chinese. One of the key things to know about China: "Nothing is aboveboard," counsels Adriaens.

In China most business gets done over drinks in social settings, as opposed to in America, where it often goes done in the boardroom or on the golf course. And decisions are more often made informally during conversations rather than on paper, a fact that helps keep the country's "old boys network" alive.

"When you set the deal terms, because you're dealing with a Chinese firm the deal terms could change at any time while you're invested in the company. What's on the paper is not necessarily ironclad," Adriaens said. "They often do all sorts of things that were not agreed to on paper."

It's also important to be aware that the government will generally have a hand in almost everything that happens in China.

"One factor that can go in the benefits or struggles column is certainly the relationship aspect," according to Josh Timberlake, a senior manager in Deloitte Consulting's strategy and operations practice. "There's a lot of decision-making that rests on the shoulders of, maybe, investment-zone officials or provincial officials about whether a project fits. That's a dynamic that countries need to be much more cognizant of [when they go] into China."

These are the tough realities of Chinese business, but the situation appears to be improving as China's companies and government realize they need to adapt to the times and to globally accepted best practices.

Realize unique opportunities

It may sound like doing business in China is quite the nightmare, and it can be in some ways. But if you can deal with the headaches, you can get access to a wide range of unique and lucrative opportunities.

The Chinese government is emphasizing innovation as one of the keys to its future economic success, and as such, it's providing a number of unique incentives that can make doing business there very profitable.

One such opportunity comes from the abundance of state-funded tech parks and incubators. These massive projects have been set up in hopes of bringing innovative companies together in self-sustaining communities, and the government is doing everything it can to attract foreign investors and firms to these sites.

Sylvia Zhu, a representative of the Chine Investment Bureau's Talent Office, explained the special benefits of China's innovation hubs and tech parks during a recent tour of the Zheijang Hangzhou Future SCI-TECH City in Hangzhou.

Zhu said the tech hub -- which, like many similar parks, spans dozens of buildings and offers rent-free apartments to workers for the first three years of employment there -- is a great place for foreign businesses to consider locating their Chinese operations or for entrepreneurs to start a new venture.

"We offer subsidies for residential, we offer tax refunds as a reward for companies, and we offer subsidies for facilities for research to the maximum of 6 million remnibi for three years," Zhu said. "We bring all the high-tech industries together here."

Another major benefit of doing business in China is Chinese government-backed venture capital, which has some major benefits over typical American-style venture capital.

Because the venture capital funds are state-backed, Adriaens said, the expected return on investment is often 20 percent or lower, significantly less than most American venture capital funds would expect to see. On the downside, in return you generally have to give up a 50 percent stake in the company, versus the 20 percent to 30 percent generally yielded in the U.S.

But even conceding that stake, there can still be huge benefits, especially for investors in an American company located in one of the prominent tech parks.

"Any U.S. company backing a company going to China will get 60 cents on the dollar for every dollar invested," Adriaens said. "That 60 cents, I know that's the case in Suzhou and Dalian and Hangzhou and a couple of other parks. Every park has a little bit different match involved, some have a cap; some don't, but there will always be a match."

China is no longer the Wild West of business that it once was, but it is still a dynamic place where bold, informed investors and entrepreneurs can trade a little risk and uncertainty for potentially great reward. It's globalization in action, and it's not as difficult or scary as it was even a decade ago.