Foreign Invested Enterprise: A Comprehensive Guide

What is a Foreign Invested Enterprise (FIE)?

A Foreign Invested Enterprise (FIE) is a company established in one country with significant ownership or investment from foreign individuals, organizations, or entities. Simply put, it is a legal structure under which you can participate in a foreign economy. 

Say you run an IT (Information Technology) company. You are based in the United States and are known for your advanced software and technology products. You decide to establish an entity in a rapidly growing market like China so you request the license and permits from the Chinese authorities and set up a Foreign Invested Enterprise (FIE).

It allows you to access the vast customer base of the country, leverage the skills of local professionals, and navigate the local business landscape more smoothly. Ultimately, setting up an FIE fosters business internationally and helps you keep up with the dynamic tech industry.

FIEs play a critical role in boosting global ventures and increasing accessibility. There are four ways of foreign investment.

• Foreign Direct Investment
  FDI enterprises are when you directly invest in a company or organization in a foreign country.

• Foreign Portfolio Investment
  FPI means investing in financial markets, like bonds, stocks, and other securities in a foreign country.

• Foreign Indirect Investment
  Foreign Indirect Investment includes investments made through a third party or an intermediary.

• Sovereign Wealth Funds
  Sovereign Wealth Funds are state-owned funds, typically funded by foreign currency reserves or natural resource revenues invested in foreign countries.

It is essential to note that the government in the host country often limits the profit and amount of control a foreign parent has over the foreign entity set up. Therefore, it tends to have specific regulations and requirements regarding foreign investment management and compliance with local laws.

When to Use a Foreign-Invested Enterprise?

Establishing a Foreign Invested Enterprise may seem daunting at first, but it can significantly benefit your business. Here are some factors to consider whether an FIE is worth your investment.

1. Market Potential

Establishing an FIE can be strategic when a country has substantial market potential. You can position your business to explore local demand, consumer preferences, and emerging trends to capture a market share.

2. Access to Local Resources

You can access and source local resources, such as raw materials, skilled labor, or specialized expertise in another country. It is especially beneficial where proximity to resources is a competitive advantage.

3. Regulatory Environment

Some countries and regions favor FIEs or offer incentives for foreign investment. Setting an FIE in these locations can lead to cost savings, tax benefits, and streamlined regulatory processes. Further, some industries or sectors may have more favorable conditions for foreign investors.

4. Cultural Considerations

Cultural nuances significantly impact business success when going international. An FIE can facilitate better understanding and adaptation to local customs and practices. It allows direct engagement with the local market and enables you to tailor approaches that resonate with consumers.

Types of Foreign-Invested Enterprises

Understanding the different types of Foreign Invested Enterprises is essential to evaluate which approach suits your needs best. You can consider three kinds of FIEs when planning to establish one.

1. Wholly Foreign Owned Enterprise (WFOE)

A Wholly Foreign Owned Enterprise is a business entity in a foreign country where a foreign investor or company holds all the ownership and capital. It allows the foreign investor to control its operations, management, profits, and intellectual property within the regulations framed by the host country.

Some typical characteristics of a Wholly Foreign Owned Enterprise include:

• Ownership Control
  You retain ownership and control over the enterprise and implement business strategies independently.

• Profit Retention
  The profits or revenue generated by a WFOE allows you to reinvest or repatriate earnings as desired.

• Management Autonomy
  You make managerial decisions, frame operational policies, and handle day-to-day tasks.

• Limited Liability
  A WFOE limits your liability to the capital invested and reduces the risk exposure.

Starbucks is one illustrative example of a WFOE. The coffee giant has several wholly-owned coffee shops and outlets in various countries worldwide. The ownership enables the company to retain full decision-making power over store design, menu offerings, quality standards, and customer experience.

A WFOE thus allows you to establish a business presence in a foreign country without losing ownership control. It facilitates direct engagement in specific markets and tailors your operations to suit local preferences and engage with the market while preserving the brand identity and strategic objectives.

2. Joint Ventures (JV)

A Joint Venture (JV) is a collaborative business arrangement between a foreign investor and a local company or entity in a foreign country. Both parties contribute resources, capital, expertise, and technology to establish and operate a new entity or project. They share risks and rewards according to the terms agreed upon in a joint venture agreement.

Here are some notable features of Joint Ventures:

• Shared Ownership
  Joint Ventures present a structure where foreign and local partners share ownership and invest in the venture.

• Collaborative Management
  Each party contributes its expertise to manage responsibilities and decision-making authority.

• Risk Diversification
  Pooling resources and sharing risks allow better risk management and navigating potential setbacks and challenges.

• Technology Transfer
  Joint Ventures allow partners to transfer intellectual property, technological expertise, and know-how.

The Nissan, Renault, and Mitsubishi alliance is a remarkable joint venture in the automotive industry. The French automaker Renault joined Nissan and later incorporated Mitsubishi to form a robust network. The venture allowed the companies to share technology, resources, and expertise, ultimately increasing their market presence, cost savings, and competitive edge.

Joint Ventures allow you to collaborate with local entities and harness complementary strengths for mutual gain. It helps you tap into new markets, share risks, leverage local expertise, and achieve joint objectives.

3. Foreign Invested Partnership Enterprise (FIPE)

A Foreign Invested Partnership Enterprise (FIPE) is a relatively new business entity in certain jurisdictions. It allows foreign investors to establish partnerships with Chinese individuals or entities for conducting specific business activities. While foreign investors hold majority ownership in a joint venture, a partnership between foreign investors offers equal rights.

Here are the features characterizing a Foreign Invested Partnership Enterprise:

• Balanced Collaboration
  Both partners share ownership and contribute equally to decision-making and responsibilities.

• Investment Composition
  The local partner and foreign investors invest resources and expertise to create a more integrated blend of capabilities.

• Flexibility and Structure
  FIPEs furnish a more flexible structure in the partnership agreement and allow you to customize the arrangement as required.

• Cultural Fusion
  You can infuse your offerings with authentic cultural elements and enhance the appeal to the local market.

Imagine a foreign sustainable fashion brand aiming to enter the lucrative Chinese market. The company chooses to commence its plans using FIPE. The Foreign Invested Partnership Enterprise approach allows it to collaborate with a well-established Chinese eco-friendly materials supplier.

The partnership will merge international design sensibilities with local materials expertise. It will help you meet the growing demand for stylish and environmentally conscious clothing options in China.

In essence, you can utilize these different types of Foreign Invested Enterprises to expand your operations internationally. You can tailor your foreign subsidiaries to suit specific market conditions and objectives and conduct business.

When is a Foreign Invested Enterprise not Required?

Now, as beneficial as an FIE Foreign Invested Enterprise is, it is optional where you intend to engage in limited activities. Further, there is no need to establish it when the target country grants specific exemptions. Other such scenarios include:

• No Physical Presence
  Foreign entities intend to conduct occasional or temporary business activities, like trade shows, conferences, or short-term projects, in a foreign country without a permanent establishment.

• Service Provision
  Companies specializing in specific services such as consulting, online services, software development, and more may be allowed to operate remotely.

• Export/Import Activities
  Specific licensing or regulatory requirements allow foreign entities to engage in export or import activities without an FIE. 

• Limited Investment Thresholds
  Some countries have investment limits. Investment below it exempts a foreign investor from establishing a full-fledged FIE.

China's Foreign-Invested Enterprise Law

Establishing an FIE is a common strategy for firms to access and operate in Asian countries, especially China. China is very particular regarding how foreign companies participate in their economy. It has framed rigorous rules on everything from business law to social credit. Consequently, businesses wanting to invest in or build entities must be diligent about compliance.

The country made significant changes to its foreign investment regime with the Foreign Investment Law (FIL) in January 2020. It strived to create a more open and predictable environment for foreign investors. Here are the prominent points in the new law:

• National Treatment
  The law states to treat foreign investors equally with domestic investors and prohibits discriminatory treatment against foreign-invested companies.

• Negative List
  The Negative list specifies sectors where foreign investment is prohibited or restricted. Sectors not on the list are open to foreign investment.

• Intellectual Property Protection
  The Foreign Invested Enterprise law reinforces the protection of foreign investors' intellectual property rights (IPR).

• Legal Protection
  Foreign investors can access legal remedies and protection mechanisms like arbitration and legal action rights.

• Taxation
  FIEs are subject to tax regulations, including value-added tax, corporate tax, and other relevant taxation policies in China.

In addition, China has also relaxed the requirement for minimum registered capital. The foreign-invested companies must obtain relevant permits and approvals from Chinese authorities and operate within the specified business scope.

How can Skuad Help?

Opening an entity in China accompanies various legalities and regulations, even if your primary purpose is to hire talent in China. 

That is where an Employer of Record (EOR), Skuad, can help. Skuad enables you to hire, onboard and pay globally distributed employees and contractors, easily – without establishing a local legal entity. The unified platform helps you stay 100% compliant with employment laws and regulations. 

Navigate the complexities of hiring in China and over 160 countries and expand your workforce globally – book a demo today!

FAQs

Q. What are the motives for foreign investment?

Market seeking, gaining resources, strategic asset acquisition, and improving efficiency seeking are the multiple factors or motives for foreign investment. Companies often turn to foreign-invested enterprises to enhance profit generation, unlock growth opportunities, and have an edge in the international market.