There are different types of companies that foreign investors could establish in China, each with its own advantages, featuring different levels of risk, and requiring different levels of resources and commitment. The most popular types of entities are:
- Wholly Foreign-Owned Enterprise (WFOE, 外商独资企业), where the foreign investor (legal or natural person) has full ownership and control of the entity. It requires strong commitment and resources but exposes the foreign investor to fewer risks and gives an easier exit strategy.
- Sino-Foreign Joint Venture (JV, 中外合资企业), where the foreign investor (legal or natural person) shares the ownership and control of the entity, according to different percentages agreed by the parties, or as mandated by Chinese laws and regulations. It requires strong commitment and resources, although generally less than WFOEs thanks to the presence of the Chinese partner. However, this type of structure exposes the foreign investor to higher risks, which in the long run might make an exit strategy very complicated.
- Representative Office (RO, 代表处), the “easiest” type, requiring less resources and types to establish. However, it has significant limitations in terms of activities that can be carried. It is generally chosen as a first market entry tool, to explore the market and develop networks.
In some cases, only joint ventures are allowed to be established by foreign investors in certain restricted sectors, as regulated by the Foreign Investment Negative List, sometimes with specific equity caps (see FAQ “Are there restrictions for setting up foreign-invested companies in China?“).