He Advantages And Disadvantages Of Each Alternative

Published Date: 02 Nov 2017

Professor XXX

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Student Name

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May 3, 2013

Given the limit on the total investment is $100 million, what are the alternatives for the structure, financing and management of the computer manufacturing project and the semi-conductor manufacturing project, and the advantages and disadvantages of each alternative? What is your recommended alternative and why?

The multinational company, DFW International, Inc. (DFW), which is headquartered in Texas, can form a joint venture with a company in China for the purpose of being able to invest in both the projects – computer manufacturing facility and semiconductor manufacturing facility. With the help of forming a joint venture with the company Shenzhen Technologies (ST), DFW will be able to invest in both the projects within its investment budget of $100 million. This is so because, according to the 1979 Law on Joint Ventures Using Chinese and Foreign Investment, both the parties – Chinese and the foreign company – were to invest jointly in the project. The total cost of both the projects come out to be $ 140 million; and keeping into account the information in the case that ST does not have enough financial capacity, DFW can invest its $100 million and have ST invest the remaining $40 million. This way DFW will be able to invest in both the projects within its set investment budget, ST will be able to carry out its expansion with the help of getting technology from DFW and by forming a joint venture with DFW, and the law regarding forming joint ventures will be followed, that is of both parties jointly investing in the projects. Apart from the above stated advantages, this alternative may have a few disadvantages. These disadvantages may include creation of an Us vs. Them culture. A joint venture may lead to rising conflicts between the employees of the two companies. These conflicts are likely to arise due to differences in the culture of the two countries. For example, in US more emphasis is put on individualism; whereas, in China group work and maintaining relationships are valued. Also, as it is mentioned that ST does not have enough financial capacity, it may even be possible that ST is not able to invest the remaining $40 million in the two projects.

Another alternative could be that the company DFW could have Shenzhen Government to take care of the infrastructure costs; while it invests the $100 million to both the projects. The remaining $20 million can be invested by ST. The advantages of this alternative are that the company ST will be able to invest at least $20 million, provided its weak financial condition. Moreover, the company DFW will be able to invest in both the projects within the investment budget of $100 million; and the government will take care of the infrastructure costs as it also the duty of the government to build roads and transportation. The disadvantages of this alternative may include the fact that ST is wholly owned by the Shenzhen government; therefore, it can be said that ST and Shenzhen government do not have enough financial capacity to undergo with this alternative.

Other alternatives may include DFW not investing in both, but only in one project. This way the budget can be met and there will not be a problem of ST not having enough financial capacity. However, this is not what the Board of Directors of DFW want. Therefore, taking up this alternative is highly unlikely.

I would recommend that DFW should opt for the first alternative. The reason behind this is that the advantages overweigh the disadvantages. Not only will DFW be able to invest within the set budget, the objective of ST of expanding will also be met. Moreover, the law of forming joint ventures will be followed by having both the parties jointly invest in the projects. In addition to this, it is less likely that the government of Shenzhen or ST will not be able to invest even $40 million to both the projects. Major investment will still be made by DFW; and ST can raise funds by various means which includes, both, internal and external financing.

What other concerns/issues should DFW consider if your recommended alternative is selected by the Board?

If DFW selects my recommended alternative, the company would go with the option of forming a joint venture with ST. This way the company DFW will be able to do what the Board of Directors of DFW want. Moreover, ST will be able to achieve its goal of expanding. The 1979 law of forming joint ventures in China will also be followed, in which both the parties are required to invest jointly.

Apart from the advantages of this alternative, there are also a few issues or concerns DFW will have to take into consideration. First and foremost, DFW will have to look at the disadvantages of forming a joint venture.

The disadvantages of forming a joint venture include limited liability. This means that both the companies will have a liability or obligation for its part. As mentioned in Forms of Foreign Investment Commonly Used in China, a "limited liability" corporation is formed when a joint venture is formed.

The second concern which DFW must take into account is that the joint venture will have a limited life. The joint venture formed will have a temporary life. This means that if one partner of the joint venture dies, the joint venture also seizes to exist. This will be so because the other partner will not be able to continue with the joint venture. Even though this can also serve as an advantage that the companies will not be bound in a joint venture permanently – they will come together only for a certain purpose – this also serves as a disadvantage for the reason that in China, businessmen aim to build and maintain relationships. If the joint venture has a limited life, building and maintaining relationships will not be possible.

The biggest concern the companies should be ready to encounter is that of rising conflicts amongst the employees of both the firms – DFW and ST. This would be so because the differences in culture of the two companies. In DFW, the employees are most likely to stress importance on individual performance; whereas, in ST, employees are most likely to value group work. China is a high context country; whereas, US is not. This would lead to a creation of Us vs. Them culture in the joint venture. The goals and values of the employees would contradict. Moreover, the objectives of the firms may be different as well. This may also lead to conflicts. DFW may want to invest for the sole purpose of increasing revenue; whereas, ST is forming a joint venture for the purpose of expansion. As DFW would be investing more than ST, it might expect to get a greater share of the profits. This would also lead to creation of disputes amongst the two companies.

Other issues the company must be concerned about, if opting for the recommended alternative, involve that ST may not be able to generate enough finance to invest the remaining $40 million. This is a possibility because it is mentioned that ST does not have enough financial capacity; therefore, it might not be able to raise $40 million. ST may not be able to get required loans. This means that the company ST may not be able to raise money through external financing. Also, it may not be able to raise finance internally. It is mentioned that Shenzhen government wholly owns ST.

Conclusively, there are many concerns DFW must take into account before deciding to go with the alternative I recommended. These concerns include, majorly, the disadvantages of forming a joint venture, and the possibility that ST may not be able to invest the remaining $40 million into the two projects. DFW, in this case, would have to go with another alternative if ST is unable to invest $40 million.

What kind of investment incentives could SEZ provide to DFW to make the entire project (computers, semi-conductors and infrastructure) viable?

The Shenzhen Special Economic Zone (SEZ) had the main objective of attracting foreign investments in China mostly through forming joint ventures. SEZ offers some incentives to the foreign company. In this case, SEZ offers DFW labor, land use and tax incentives.

The first incentive offered to a foreign company, DFW, includes labor. Foreign companies can avail the opportunity of hiring Chinese labor at low wage rates. As the wage rate is low in China, workers can be hired at low cost; and eventually, the company would be able to make higher profits. The foreign company would then have the right to, both, hire and fire labor from China.

Another incentive SEZ might offer to the foreign company is that of use of land. This means that DFW could set up the joint venture to operate in China. Moreover, the company was offered infrastructure. Infrastructure includes roads and transportation for the company to commence its operations. SEZ also serves as a mean to transport parts and raw materials between DFW and ST.

The third incentive offered by the SEZ is that of tax incentives offered to the foreign company, DFW. SEZ’s incentives involve reducing corporate income tax rate and exempting foreign nationals from giving income taxes. Furthermore, this incentive involves having no custom duties on imported material; provided that they were for re-exports.

For example, in the Hainan province, the Chinese government strongly encourages foreign firms to invest in the SEZ. In order to ensure this, some incentives are offered to the production enterprises; which, in this case, is ST. These incentives include tax subsidies and exemptions to the production enterprises.

In addition to this, the foreign enterprises are also offered with incentives. Tax exemptions and subsidies are also offered to the foreign companies on activities which include sale of products and reinvestment of profits. Additionally, DFW will also be offered priority banking and financial treatment. SEZ also offers tax exemptions and subsidies to technologically advanced companies; for the purpose of bringing in more advanced technology to China.

The other incentives offered to the DFW by SEZ may include the fact that there are a large number of buyers in China. The main reason supporting this fact is the huge population of China, which is continuing to grow. Moreover, keeping into account that China’s economy is growing strong, it is highly likely that the purchasing power of the population of China will grow as well. The inflation rates are low in China and the GDP is approximately over 8% per annum. Growth in the purchasing power of the residents in China would mean that DFW will be able to make higher profits by investing in SEZ. The laws related to foreign investments have been notably eased in recent years. This is also an incentive that is offered by the SEZ to the foreign companies in an attempt to encourage foreign investments.

In conclusion, in order to make the entire project (computers, semi-conductors and infrastructure) viable for DFW, SEZ will offer a few incentives to the foreign company. These incentives would include low labor costs, use of land, tax exemptions and subsidies, increasing purchasing power and, hence, increased number of buyers in China.

What intellectual property concerns do you see, and what protections are available for DFW's proprietary technology?

Since 1979, IPRs (Intellectual Property Rights) have been protected and acknowledged in the People's Republic of China. The China has assented to the key international agreements on fortification of IPRs. Nationally, protection of intellectual property law has also been recognized by administrative legislation, management regulations, and verdicts in the areas of trademark, patent and copyright. This has directed to the formation of a broad legitimate framework to defend both foreign and local intellectual property. In spite of this, copyright defilements are common in the PRC and it has been increasing with the passage of the time.

In China, the DFW’s proprietary technology has not been protected under the law or the Article. Additionally, the US businesses operating in China have always been facing issues for the intellectual property rights. The DFW would encounter the issues in registering and implementing their patent rights, protecting trademarks and brands, and struggling piracy of copyrighted works in China. Certainly, the IPR (protection of intellectual property rights) is placed at the 5th position among this year's top matters. It has graded steadily in the top ten matters each year that USCBC has piloted its investigation. In fact, it has been deliberated that almost ninety five percent of the companies encounter issues while registering their companies and obtaining the property rights for their brands in China. In addition, the concerns about piracy, counterfeiting, and other systems of IPR violation have a broad influence on the operations of the DFW, and that shall constraint what the company is willing to produce, research, vend, and license in China. (Sato, 2010)

Furthermore, the corporations report obstinately high levels of apprehension about IP fortification in China, businesses also deliberate that China has made some development in defending intellectual property rights in current years, underscored by three high- level Chinese administrative efforts to guard IPR, containing the 2010-2011 special campaign for IPR protection, 2008 National IPR Strategy, and the November 2011 creation of a new central government leading group to endorse IPR protection. IPR protection, though, remains perplexing for the reason of its diversity, comprising not only a comprehensive assortment of segments but also a combination of IP types: copyrights, trademarks, trade secrets, patents, and other zones. There is no "one-size-fits-all" method to confronting IPR protection. Each set of IPR matters includes different administration agencies and diverse approaches. The advocacy methods and elucidations sought from PRC administration agencies must be tailored to challenge each of these trials, yet synchronized to deliver leverage and to show development across the panel. (Berrell & Wrathall, 2007). The DFW also endure to have varied views about their ability to use China's prevailing civil, administrative, and judicial networks to address IPR infringement. High verges for activating criminal consequences continue to avert businesses from making improved usage of criminal forfeits to battle piracy counterfeiting. Moreover, the Administrative penalties and fines are low in contrast with the range of the delinquent. Civil indemnities remain inadequate in many cases to compensate businesses for infringement, and civil instances take substantial resources and time to trail.

If a controversy arises in respect of the investment, what dispute resolution mechanisms are available to DFW resolve the matter?

There are 3 primary means to resolve a commercial argument that may arise in respect of the investment; negotiation, arbitration and litigation

NEGOTIATION

The simplest method for resolving the dispute for the DFW is through the bilateral negotiation. It is the least affluent and it can preserve the operational association of both the parties involved in the dispute. In fact, most commercial agreements in China consist of a clause specifying that negotiation ought to be employed before other argument settlement contrivances are trailed. Additionally, if DFW experiences strain in directly negotiating an elucidation to a dispute with the SEZ, the DFW may find support from Chinese government administrators who can reassure the SEZ to honor the terms of the agreement. However, the DFW ought to stipulate a time limit for this procedure.

ARBITRATION

If the DFW does not attain the desired goals through negotiation the next preferred method is Arbitration. Unless both the parties (DFW and SEZ) can settle on arbitration after the argument has ascended, the fundamental separate agreement or contract must specify that disputes will be set on through arbitration. Agreements to adjudicate usually stipulate a choice of arbitration body, which may be positioned in China or overseas, and a selection of law to oversee the argument. There are 2 Chinese administration supported arbitration bodies for managing cases encompassing at least one external party: Trade Arbitration Commission (CIETAC) and China International Economic. The Agreements involving foreign corporations conducting business in China as in case of DFW and SEZ; often deliver for CIETAC arbitration. CIETAC differentiates between two sorts of argument resolution, domestic and foreign-related. For an argument to be categorized as foreign-related, one of the corporations must be an external entity without a key production investment or facility in China.( Dispute Resolution in China, 2013)

LITIGATION

An absolute method to resolve a viable dispute in China is through litigation in Chinese benches. In China, overseas companies and individuals have the same aptitude to bring action in law court as Chinese companies and citizens.