Are Chinese Enterprises Ready to Go Global?

BEIJING, April 13, 2016 /PRNewswire/ -- LexisNexis and China Institute of Corporate Legal Affairs (CICLA) jointly released the "2015-2016 Survey Report on Chinese Enterprises Going Global" (click here to apply for an e-copy of the report)

On January 16, 2016, the "2015-2016 Survey Report on Chinese Enterprises Going Global" was jointly released by LexisNexis, a worldwide legal information provider, and China Institute of Corporate Legal Affairs (CICLA) in Beijing.

Initiating the survey in August 2015, LexisNexis and CICLA spent five months in sending out questionnaires to hundreds of enterprises and selecting representative enterprises for in-depth interview. A total of 120 questionnaires were collected and most of the respondents were legal managers or above from enterprises or relevant institutions, including general counsels and general managers from the legal departments of nearly 40 large central SOEs. Thomas Tang, senior consultant of JunZeJun Law Offices, authored the report.

In the survey report, it made an analysis of macro political and economic background and micro corporate data and cases to summarize the course and characteristics of Chinese enterprises going global, draw lessons and gain experience as well as provide guidance for enterprises going global.

Survey Background

The constant deepening of the "One Belt and One Road" strategy and the founding of Asian Infrastructure Investment Bank offered more opportunities for Chinese enterprises to go global. According to the data released by the Ministry of Commerce, from January to November 2015, Chinese enterprises invested a total of 14.01 billion US dollars in 49 countries along the "One Belt and One Road", with a year-on-year increase of 35.3%.

Chinese policies in relevant sectors showed new characteristics, and the Chinese government placed a premium on delegating powers and transforming functions to create a free and convenient business environment, and attached more importance to the supervision and monitoring of security. As a result, Chinese enterprises were obliged to perform more obligations when enjoying greater freedom. In the meantime, many enterprises going global were subject to rigorous financial regulation and reviews conducted by foreign governments, which in turn compelled Chinese enterprises to establish their international organizational structures and management patterns and adjust strategies so as to rise to challenges and sustain development.

In the face of opportunities and challenges when going global, what kinds of uncertainties will Chinese enterprises encounter? How to overcome the disadvantages due to asymmetric information? These are the issues Chinese government and enterprises have to address. Are Chinese enterprises ready to go global?

Risk Distribution

The report explored the international background, national policies, motivations and the course and characteristics of Chinese enterprises going global. According to the survey, market, technology and brand were three major motivations for our respondents to go global. Neighboring countries and developed countries which had trading relations with China in history were the first choice of cross-border investment; Generally speaking, Chinese enterprises focused on investment in manufacturing and resource development and increased asset-light investment in finance, biotechnology and health care mainly by way of sole proprietorship enterprise and joint venture; they tended to make large-scale investment and nearly 50% of our respondents invested over CNY 100 million in foreign countries.

In Chapter 2: Statistical Analysis of Chinese Enterprises Going Global, we delved into 13 major issues and risks in six phases (including project setting-up, due diligence, financing, taxation, business management and dispute resolution) for Chinese enterprises going global. According to the related data, our respondents needed to address common issues such as difficulty in access to information on projects and foreign countries, high risks in interest rate (exchange rate) and price fluctuation, and frequent disputes over contract, intellectual property or labor issues.  

Specifically, most of our respondents stated that they required acquiring a wealth of information through limited channels, including information concerning legal system, taxation system, foreign exchange system, labor issues and investment examination and approval procedures in foreign countries. Almost all the respondents had engaged or planned to engage such third-party service agencies as consulting firms, accounting firms and law firms. Nevertheless, the majority of third-party service agencies offered limited service options and lacked the understanding of market and customized services, leading to wrong decisions made by our respondents in the project setting-up phase.

In due diligence phase, most of our respondents tended to conduct due diligence investigations into business/law/taxation environment while neglected security review, taxation system and foreign exchange system. In practice, some due diligence investigations were conducted in a superficial manner and our respondents conducted due diligence mainly in their investigation into the assets and liabilities of target enterprises while neglected the trading potential and history of target enterprises.

In business management phase, our respondents mainly faced political risks (e.g. wars and unrests) and market risks (e.g. interest rate and price) in foreign countries and most of them neglected to address side issues on the review conducted by foreign governments. Since economic crisis wrecked economy, all the countries attempted to strengthen the regulation of their economic and financial system as well as stress the importance of corporate social responsibilities. As the cases indicated, there was an increase in the number of Chinese enterprises subject to the reviews conducted by foreign governments and this incurred huge costs.

Chinese enterprises also encountered the difficulty in resource integration in project operation phase, including labor disputes and tax compliance, with more than 50% of our respondents involved in local civil proceedings, which, according to many respondents, arose from poor communication with foreign governments and cultural conflicts. It suggests that Chinese enterprises conduct due diligence in labor system and taxation system in foreign countries when going global.

Role of Legal Affairs Department

We affirmed that most of our respondents placed a premium on the vital role of legal affairs department in controlling risks. Specifically, 73% of them set up their legal affairs department in charge of overseas investment; 89% of them had their legal affairs department follow up projects from the decision stage to the completion of project and 55% of them had their legal affairs department assist the business department in carrying out overseas projects.

Practical Guidelines for Overseas Investment

We set out the guidelines for solving issues and preventing risks summarized in the research findings as follows: (1) Adopting the Business Mode of Multinational Enterprise: To develop a unified central decision-making system and global strategies, establish a worldwide unified human resource, accounting and legal system, define unified risk prevention assessment standards; popularize contract and dispute settlement template format, increase funds management capability; highlight financial security, provide compliance training, reserve trans-national talent resources and carry out diversified management; (2) Defining Enterprises' Demand in a Proper Manner: To develop variable strategies subject to different requirements for market, technologies and brands; (3) Conscientiously Conducting Due Diligence: To conduct investigations into investment risks in different sectors, establish proper due diligence investigation procedures subject to enterprise requirements and put the procedures into practice; (4) Establishing a Comprehensive and Systematic Long-term Risk Prevention Mechanism: To purchase insurance, establish a legal traceability mechanism, develop the contingency plan and leverage bilateral/ multilateral cooperative mechanisms to enjoy preferential policies in foreign countries; (5) Highlighting Post-project Resource Integration: To attach importance to effective communication with local governments, employees and communities and alleviate the impaction of cultural conflicts on resource integration; (6) Placing a Premium on Dispute Resolution: To understand existing multilateral dispute resolution mechanisms, international arbitral institutions & arbitration rules and enforcement of international arbitral awards.

At the press conference, Margaret Fung, Country Manager of LexisNexis expressed that the survey initiated the exploration of Chinese enterprises going global. Subsequently, LexisNexis and China Institute of Corporate Legal Affairs will work together to establish an exchange platform for Chinese enterprises going global and hold a series of forums on major issues and high risks summarized in the report.

Issuers of the Report

China Institute of Corporate Legal Affairs

China Institute of Corporate Legal Affairs is a platform for research into corporate legal affairs established by the Legal Daily Office. The Legal Daily is a state-owned newspaper under the supervision of the Central Political and Legal Affairs Commission and it is recognized as a battlefield of public opinions for the Communist Party of China (CPC) and State's construction of democracy and legal system, the official mouthpiece of the CPC's political and legal frontline and the sole central legal daily newspaper published at home and abroad.    

China Institute of Corporate Legal Affairs is committed to setting up the most influential exchange platform, cooperative platform and resource integration platform in Chinese corporate legal affairs circles, improving the strategic status of the department of legal affairs in a company, building a strong legal team, pooling resources, bringing the role of platform into full play, employing the editing and operating mode, raising brand value and reaping diversified profits. 

LexisNexis®  Legal & Professional

LexisNexis®  Legal & Professional is a leading global provider of content and technology solutions that enable professionals in legal, corporate, tax, government, academic and non-profit organizations to make informed decisions and achieve better business outcomes. As a digital pioneer, the company was the first to bring legal and business information online with its Lexis® and Nexis® services. Today, LexisNexis® Legal & Professional harnesses leading-edge technology and world-class content to help professionals work in faster, easier and more effective ways. Through close collaboration with its customers, the company ensures organizations can leverage its solutions to reduce risk, improve productivity, increase profitability and grow their business. LexisNexis® Legal & Professional, which serves customers in more than 175 countries with 10,000 employees worldwide, is part of RELX Group PLC, a world-leading provider of information solutions for professional customers across industries.

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