Different ways of Chinese market entry for Finnish deep tech startups

In recent years, China has thoroughly carried out reforms to decentralise and lower barriers to entry, reform of innovation oversight and of promotion of fair competition, and reform to support efficient service in a convenient environment (CBBC 2019). There are mainly 5 different ways to enter Chinese market: Selling products and services to the Chinese market, entering the market as direct investment to China as wholly foreign-owned enterprise, as Joint Venture with local partners, as local representative office setup, and through merger and acquisition.

We illustrate more in detail for the two scenarios for market entry: enter the market via technology transfer and entering through merger and acquisition known as M&A.

Selling products and services

Among the 5 different ways for market entry, selling products and services to the Chinese market is the most direct way with less commitment with local partners, or rather the relationship is quite transactional. Companies can sell the goods and services through local distributors or online. Of course, foreign companies need to study the market carefully for their product-market fit and find the right partners to help them with the sales in China. Companies need to make sure the products and services are inline with local regulations and policies before market entry.

Wholly Owned Foreign Enterprise

Setting up wholly foreign-owned entities require foreign enterprise to have direct investment in China. Companies can benefit from having direct control of its operation and IPR. However, foreign companies need to investigate carefully of local rules and policies, and make sure their products and services comply with local requirements. It is also important for companies to choose the best location for their business. Each city in China has their own competitive areas. A strong network is vital for wholly owned foreign enterprise to survive and compete in Chinese market.

Representative Office

Establishing local presentative office is with low cost but also with limitations on business activities. Many companies use this method to “test the water” in the Chinese market and use the time to actively socialize in China to build relationships because an effective network known as Guanxi is very important for doing business in China.

Joint Venture

Joint development or co-development is a deeper form of partnership where the corporate and startup share resources – usually including labour, capital and IP – in order to jointly develop a product or service (Bannerjee & Bielli & Haley 2016). Joint Venture is one of the most common way for foreign companies to enter Chinese market. By having reliable business partner for the joint venture, foreign companies save time and energy to build networks and familiarize with the market.

Shareholder structure needs to be negotiated and agreed upon with local Chinese business partner in advance. Ensuring a healthy, long-term relationship takes concerted effort, requiring clear and effective communication, maintenance of trust, and an ongoing perception of mutual benefit. Monitoring and measuring success (or failure, as the case may be), is vital to keep track of the progression (of the collaboration(s) and should feed back into the company’s periodic strategic reviews.( Bannerjee & Bielli & Haley 2016).

Technology Licensing

According to the report from EU SME Center (Guo & Huang & Kimmons 2020), technology can be transferred in the following ways:

• Licensing: A common practice; includes patents, designs, technical secrets, and know-how;

• Ownership transfer: An uncommon practice; generally not recommended due to the risk of IP infringement.

Process of transferring technology to China (Guo &Huang & Kimmons 2020)

Based on the exclusive rights conferred by a patent, licensing is permission granted by the patent owner to another party to use the patented invention based on agreed terms and conditions (including, for example, the payment of royalties), while the patent owner continues to retain ownership of the patent. (Guo &Huang & Kimmons 2020).

Licensing allows the Finnish deep tech startups align their technology and knowhow with the sales and distribution advantages of their Chinese partners. The partnership via licensing can be established as manufacturing or by establishing together as Joint Venture. Joint ventures take co-developement a step further, in terms of pooling resources into a new legal entity, with its own governance structures and business processes (Bannerjee & Bielli & Haley 2016). Both methods are widely used in the case of market entry. It is important to declare the ownership of intellectual property in the beginning of the partnership by written format.

A sound partnership cooperation allows both parties involved in the partnership to utilize their advantages and serve the best interests of each party. However, a not well managed partnership would lead to detrimental results, for example, IP infringement or even lawsuits. It is suggested that all partnerships should be well considered, and once decision made for execution, commitment and efforts are certainly needed which applies universally not only in Chinese market. Especially given the fact Chinese market is quite unique itself, which usually demands lots of time and resources to invest in in order to make foreign business successful in China. Whilst changing priorities cannot always be avoided, damage can be minimised if there is a clear exit strategy – that is, clearly-defined conditions under which partners will withdraw from the collaboration (Bannerjee & Bielli & Haley 2016).

Merger and Acquisition

As market globalize, and the pace at which technologies change continues to accelerate, more and more companies are finding mergers and acquisitions to be a compelling strategy for growth (Harvard Business Review 2001, 74). In the context of this thesis topic, M&A can attract large institutional investors to Finnish deep tech startups and in case the transaction succeeds, it will not only add competitiveness to Chinese corporate investors technology advantages, but also enables Finnish deep tech startups to access Chinese market successfully through Chinese institutional support because the market capability from the acquirer in China is robust. After all, acquisitions remain the quickest route companies have to new markets and to new capabilities (Harvard Business Review 2001, 74).

Due diligence is designed to reduce resource ambiguity in a target firm and to define the expected value created by merging the resources of two distinct organizations (Faulkner & Teerikangas & Joseph 2012, 623). And it should be conducted prior to the M&A decision was made regarding the target firms. Due diligence can help the acquire understand clearly of the target firm during the pre-acquisition phase and therefore smoothen the integration phase and facilitate M&A success after acquisition.

In Finland investment exit through M&A is the most common in comparison with other countries in Europe. According to Bo Ilsoe (2020), the Partner of NGC Capital, Finnish companies had a lower percentage of IPOs than companies in the rest of Europe (5% vs 11%) and a higher percentage of M&A events (89% vs 84%).

Exit types in Europe (Ilsoe 2020).

However, post-merger integration also demands lots of efforts due to the differences in cultures and corporate cultures, which is vital for the success of M&A activities. Integration success of cross-border mergers will depend on the degree of interaction between the two firms, the degree of integration, and the extent to which the firms value their original cultures (Faulkner & Teerikangas & Joseph 2012, 409).

Reference:

China-Britain Business Council (CBBC).2019. In the Zone: A Comprehensive Guide to China’s Zones and Regions.

David, Faulkner and Satu, Teerikangas and Richard J, Joseph. (eds.) 2012. The handbook of mergers and acquisitions. Oxford : Oxford University Press cop.

Ran, Guo & Yun , Huang & Alexandra , Kimmons & Yue, Li & Yu , Lin & Demi, Ping & Ben , Rotheram & Bill ,Tian &Hannah , Williams & Torsten , Weller & Charlie , Zeng & Yuki , Zheng. 2020.Exporting Goods, Services and Technology to the Chinese Market.EU SME Center

Siddharth, Bannerjee and Simona Bielli and Christopher Haley. 2016.Scaling Together: Overcoming Barriers In Corporate-Startup Collaboration. Nesta. March.

Harvard business review on mergers and acquisitions. 2001.Boston: Harvard Business School Press.

Bo,Ilsoe. 2020. NGP Capital’s New Tool Analyzed Over 30,000 European Startups-Here’s What We Found Out.Slush.org. 3 December.  Accessed on 23.3.2021. https://www.slush.org/article/ngp-capitals-new-ai-tool-analyzed-over-30000-nordic-startups-heres-what-we-found-out/


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s