China is a country that is very lucrative for foreign investment. It is a country that receives huge foreign capital. China attracts foreign investment because of its strong economy and low transaction rates. It has a strong capital market and an environment that is easier for the transportation and service delivery of goods. Resources are readily available in the country. The country posses highly trained professional workers that have global skills and are well equipped with technology.
J.R can embrace this opportunity and conduct business in China. The employees are highly experienced and have a high aptitude in technology hence they will manufacture quality oil that can compete globally. China is politically stable, and this will provide JR opportunities for setting up other business in the future.
Alternative ways of managing and financing the projects by JR international
A Sino foreign contractual Joint venture
A Sino foreign contractual joint venture can be signed by the two companies. This is an enterprise that would be set up in china territory by J.R International according to agreed terms and conditions. Parties sign a contractual agreement that prescribes their respective conditions. The joint venture spells out their income distribution, risk and debt responsibility, how the companies will manage and negotiate on property transactions expiry. When establishing this kind of a contract J.R will provide the land, machines used in exploration, factory building and facilities. Each company’s obligation is clearly spelled out in the contracts. In some cases, this kind of contract requires that the foreign investor should contribute to a certain amount of capital. The only disadvantage of this contract is that the JR Company may not meet the expenses due to its lean budget.
Share the company with foreign investments
This requires J.R international to establish a stock limited company within the territory of China. This will be established under the principle of stock. According to this principle, stocks will be shared equally among the companies; the stakeholders will take responsibilities for the company according to the amount of stock contributed. The company will take responsibility for the debts in the estate.
Investments in foreign companies have their own laws and statutes which JR International satisfies. The disadvantage of this kind of ownership requires that both the companies set up an employee share plan. This will highly cost the administration.
Foreign invested holdings
Foreign invested holdings a joint venture that is established within the Chinese territory, it deals with direct investment with companies that have limited liability. This type of holding is very expensive as it requires that a foreign company should posses a certain amount of companies in China that are worth thirty million of actual payment of the required registration principal. If J.R is to apply for these holdings it is required to posses a great asset and a good reputation.
Recommended ways of managing the project
Chinese foreign equity venture
This is an equity venture that is operated jointly by both the foreign company and Chinese investors. They share the profits, losses, and risks according to the proportion of the contributed shares in the capital registered. In this enterprise, JR International will contribute 25% of the total capital; this can be contributed in other forms instead of cash which can include buildings, workshop property, technology, field utilization and industrial property. The legal interest and the profits shared by JR International can be re-invested and remitted in China. This type of holding will encourage JR International to expand its investment plans in the future. The holding will allow JR to invest widely because it will allow for investment in other areas such as agriculture, infrastructure and energy as the holding permits.
Chinese foreign joint ventures provide greater flexibility in establishing a relationship for both parties in management and financing. This joint venture allows the firms a degree of marketing control which shortens time taken to obtain and have local information.
The best type of contract that the company should sign is the product sharing contract. This joint venture will not require JR international to set up a new corporation for establishing the manufacturing business. The two companies will participate in the venture by using the business license of the Chinese company under agreeable terms.
Mineral resources and petroleum exploration offshore is the kind of joint venture exploration that will require JR company to agree to enter into a contract with Shenzhen Company. Many risks will have to be taken when undertaking the joint exploration. This joint exploration occurs in three defined stages: exploration, development and production (Tesler 1998).
One advantage of this joint venture is that since JR Company is a capital intensive company aiming to explore oil in the Shenzhen it will save money. The two companies will share the risk involved in the production industry and create an economic scales. Another factor that will be desirable for JR will be the reduced cost involved in continuing its operation. In order to increase production and profits, the two companies will come together and combine their wealth through a higher level of technological innovation. This arrangement will most likely encourage the companies to contribute towards the projects in equal amounts. These international ventures have also been adopted by financial institutions that are internationally known e.g. World Bank.
They have instituted and eliminated trade barriers that restrict foreign ownership of businesses and the international flow of capital. International investment companies have been attracted and encouraged to start investments in China because of these favorable policies. In companies trying to exploit oil, a joint venture will be conducive enough to produce a new drilling alternative to search for oil. This joint venture will allow the two companies to share the cost of the project and reduce individual company risks if the oil is not found. This will be an added advantage between these two companies. Before a joint venture is agreed upon, an agreement of partnership must be established with firm commitment.
Legal measures to protect JR intellectual property rights
China has attracted global investment due to its legal business environment. It is transparent and has a reliable and an efficient legal system for business activities. China’s legal system is strengthened by the bilateral and multi lateral agreements and domestics legislations. Its laws and policies have conformed to the requirements of the market economy and the international rules.
Under the joint product sharing contract, the two companies will share the cost of production making exploration cheap. JR property rights will be protected by the Product sharing Contract (PSC) which ensures business laws and regulations are adhered to. The contract ensures that the government of China’s share of production covers the applicable amount of tax that will have been imposed to the international Company. PSC royalties and other types of taxes depend on gross production. JR will recover its cost of exploration, production and development through a certain percentage figure that both parties will have negotiated on.
If JR was to sign this contract it is expected to use Chinese goods and services if there occurs competition in price, quality and service delivery. The company is also expected to employ and use Chinese expertise in the exploration exercise. PRC laws will be used as the control laws. The laws are written in both Chinese and English language and carry the same weight and meaning. Disputes arising in the cause of the job will be solved through negotiations amicably.
China has acceded international convention that will ensure that intellectual property rights are protected. In regard to this, the following rights will be protected and safeguarded:
- Registered trademarks and service marks
- Patent knowhow and secrets of its trade
- Design rights and the copyright
This kind of protection is available in the various government bodies and some traditional mechanisms of legal actions. They are effective in the protection of JR intellectual property rights.
Incentives that Shenzhen will offer JR International
When China decided to allow foreign investment, the Government decided to control foreign investor’s access to the market and control their multinational activities. Special economic zones were established at Shenzhen and investors were encouraged to set up businesses.
The incentives offered were a reduced corporate tax income 0f 15%’. These tax concessions would be enjoyed by JR international. JR would be allowed a tax break of two years from their first year of profitability. Three year reduction of business taxes will also follow. This will offer tax benefits and opportunities to the foreign investor. This range of reduction and exemption follows certain criteria. The 15% reduction is available for production of foreign enterprise in the economic and technology zone. 24.5% tax reduction is available for production of enterprises that are in different economic zones depending on the location of the project.
The government of china will offer another incentive that gives the option of managing the enterprise under the management contract. It allows payment to be shared by the two companies benefiting from the project and obtaining maximum profits. In this case, JR will be exporting technology to Shenzhen; therefore, it will be exempted from paying business taxes. China gives an incentive that exempts taxes if the technology brought to its country is advanced and is in preferred condition.
China allows reinvestment of profits. According to this law, JR International could obtain a 40% percent refund of its share of income if it reinvests its profit in a period of five years. JR has an option of choosing a tax system that is suitable for its operation and will be most beneficial. JR will be exempted from taxes and the concessions and will retain this preference until the previous agreement one expires.
JR will be offered a high incentive by the government as it will be operating in the high economic zone of Shenzhen and it posses a high level of technology. It will benefit from duty free import of capital equipment and value added taxes on the rebated input. Tax holiday and reductions will be applicable to the JR Company for a period of ten years or more in its operation activity. Trading of Chinese currency is no longer restricted by the government hence allowing easy transactions of business.
Means of solving disputes
Mechanisms should be set up to solve disputes that may arise between JR multinational company and the Shenzhen Chinese Company. In such a joint venture, disputes are likely to arise and can include issues such as payment and dividends, management policies, salaries, and appointment, purchases and distribution of the products. A joint venture contract deals with the most vital matters so that a level of consensus is achieved that will exist between the partners. Even if a consensus is agreed upon, disputes still arise. One of the ways of solving small disputes can be by face to face meetings or give and take discussions between the two parties. An executive committee can be formed to solve the disputes when both parties are present.
Conflicts arising from managerial policies can be referred to the board of directors where both parties will be represented. When the board of directors meets there can be an outside director amicable to both parties who will play a vital role of solving the dispute. This person can be referred to as a mediator. Whenever the two companies are benefiting from the project they should be able to compromise when it comes to tradeoffs facing the project for them to have a successful operation. In case of a breached agreement the multinational company has veto powers over pressing issues such as the appointment of managers or major aspects of production and development. This is because in the local venture the local manager could have taken responsibility and established control over the key managerial positions.
Other conflicts that may arise from the joint venture may be solved by an arbitration process. Chinese laws prohibit off shoring dispute resolution. It prohibits a company from resolving a dispute outside the mainland. Both parties should agree on a chosen arbitrator who will listen to both cases and adheres to the arbitration laws. He/ she will be responsible for giving a verdict and settling the conflict. Court judgment made outside china with prominent jurisdiction is not enforceable in China. In contrast arbitration settlements made through this jurisdiction under the signatory state of the New York convection of the foreign Arbitral awards are recognized and are enforced in China law courts. Arbitration provides the greatest opportunity for foreign investors who seek to attract related dispute resolution. It requires submission of disputes to an impartial decision maker with the parties involved. It is neutral, confidential and flexible making it the best mechanism for resolving commercial and international conflict. Hong Kong has a judiciary system that is precedent upon the common British common law system. The arbitrating rules are adapted to the China related contraction Rule of law in which China makes the international arbitration the best choice for the foreign investors and business parties.
Negotiation and conciliation can also be applied to resolve the conflicts as emphasized by the Chinese government. Conciliating is a conflict resolution mechanism where both parties agree to utilize the service of a conciliator who then meets the parties at different times to try and resolve their differences. The conciliator does this to lower the tension involved. It’s an exercise that improves communications and provides technical assistance. It interprets issues and explores potential solutions. This is all in an effort that tries to bring about a settlement that is well negotiated (Bendaniel 1998).
Negotiation is a process where the mandated representatives of the two parties involved in the conflict meet together to resolve the differences and reach an agreement. It is a process that is carried out by representatives of the conflicting parties in order to resolve their differences. The end result largely relies on the kind of relationship the two parties have forged. It involves compromise by the two groups. The reasoning behind the compromise is that one party can emerge the winner and the other party loses. If the party that lost is not satisfied it can opt for legal measures to settle the dispute. In some cases if negotiation fails the two parties involved can call an independent mediator. The person appointed will be knowledgeable in settling conflicts and will advice the conflicting parties on how to go about in resolving their differences. His main duties are to try and catalyze the settlement process and end the dispute. The mediator is not responsible for forcing a settlement. His main job is to just come up with solutions that the two parties can opt to use. This way, the mediator is able to gain both parties’ trust because he won’t seem bias.
Bendaniel, David J. International M&A, Joint Ventures, and Beyond: Doing the Deal. Englewood Cliffs. NJ: Prentice Hall, 1998. Print
Tesler, Lester G. Joint Ventures of Labor and Capital. Ann Arbor. MI: University of Michigan Press, 1998. Print