For foreign companies, there are four main forms business establishments in China can take: 1) representative offices 2) branches of foreign companies 3) joint ventures and 4) wholly foreign owned enterprises. The avenue chosen by a foreign investor is dependent on many factors: How active one wants to be in China; the industry one is investing in; and whether or not a Chinese partner is necessary, either because it is required by law or in order to benefit from the partner's experience in and access to the Chinese market.
The most popular form of establishment is a representative office, but they are very limited in the activities they may carry out. They may not carry out direct business activities and are limited to activities such as market research and liaison. In practice, some representative offices exceed their business scope and thus flirt with negative legal ramifications.
If one wants to legitimately carry out profit making business activities, one must set up a Joint Venture with a Chinese partner or a wholly foreign owned enterprise.
As for branches of foreign enterprises, they are allowed only in theory and, therefore, there exist no implementing regulations.
Many investors prefer Wholly Foreign Owned Enterprises to Joint Ventures, because this gives them full control over their business. However, there are certain industries in which a Wholly Foreign Owned Enterprise cannot be established - although this list is getting shorter and shorter. Also, some investors choose to cooperate with a Chinese partner to form a Joint Venture for strategic reasons. In general, though, WFOEs are gaining popularity, mainly because they are easier to establish now than in the past.
