Investing in a joint venture (JV) in China has attracted a certain amount of criticism among some sections of the legal community, who see them only as surefire ways to get into trouble, with the likely misbehavior of the Chinese partner providing a whole gamut of challenges best left well alone. Such views are myopic.

Indeed, in certain restricted industry areas, a foreign investor must have a JV partner, and in others, that partner must also possess the majority equity. If entry into these markets is to be undertaken, then there is no option-businesses must learn to live with a JV partner, and how to effectively manage them to minimize risk.

Alternatively, for some investors, having a Chinese partner may bring to the table certain advantages that may well prove useful and economical, such as inheriting a good quality factory, existing skilled or semi-skilled workforce, and existing distribution channels versus developing a plant from scratch. While it may make sense to "go it alone" with a wholly foreign-owned enterprise (WFOE) in the more developed areas of China such as Shanghai and the east coast, when business turns to China's central and western regions, having a Chinese partner with the local regional knowledge may also prove advantageous. To demonstrate China's diversity, one only needs to look at a bank note. The current renminbi series incorporates seven languages on the notes, and previous editions have featured some of China's 56 different ethnic minorities. China is much more than just Mandarin, rice, noodles and chopsticks, and local knowledge via a partner may well prove immensely useful when conducting business in the country's inland locations.

You may not be bound by China's regulatory regime to need a JV partner, but it may still make perfect regionally cultural and economic sense to have one.

Under these circumstances then comes the overriding question: How can you get the best out of your investment into a China JV? Or put another way: How can you best manage your JV partner?

In this article we will look at several separate scenarios: managing risk and due diligence, structuring a JV, managing a partner when owning a minority share, owning a majority share, and investing in a JV when you do have the option to use a WFOE instead. While some of this advice is interchangeable, all of it represents critical management tools that will allow a foreign investor to maximize his investment, minimize his risk, and develop a mutually profitable business with a Chinese partner.

Managing your China JV risk

What is risk?

Risk in China is usually financial and not criminal for the vast majority of foreign investors unless they themselves are corrupt. Consequently, legal counsels need to be aware of the financial aspects of risk and reward, and concentrate on these. Criminal liabilities are in any event well determined in U.S. and European legislation; companies will be familiar