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.
Different ways of entering Chinese market
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.
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.
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.
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 development or co-development is a deeper form of partnership where the corporat 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.
Joint Venture is also a most welcomed way from the government point of view, especially when the business is closely related with key sectors in China. 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).
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.
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).
Finnish entrepreneur environment in general has attracted lots of attention from international investors, as mentioned in the macro environment part previously regarding Finland. Finnish deep tech startups need competitive partners to help them scaleup and commercialize internationally. Therefore, in the case of establishing Joint Venture with Finnish deep tech startups, if the opportunity is promising to commercialize and scaleup from Chinese partners’ point of view, they would act not only as business partner but also as investor to the Joint Venture in China by capital injection into the joint venture. At same time, Finnish deep tech startups can license their intellectual property to the joint venture, by this way, both Finnish deep tech startups and Chinese business partners are committed into the Joint Venture. The reality is that, whilst many startups may have few assets other than intangible assets and hence it is reasonable to be protective, instances of corporate partners stealing IP are, much rarer than instances of collaborations falling apart due to lack of disclosure (Bannerjee & Bielli & Haley 2016).
There are pros and cos for Finnish deep tech startups to enter as Joint Venture into the Chinese market. For the pros, it is an efficient and cost saving way to enter the market. Especially for Finnish deep tech startups, they usually lack sufficient cash flows to enter foreign market, this way for establishing joint venture will help them achieve market scaleup and commercialization greatly and efficiently. Keeping in mind, that normally the Chinese business partners which are able to invest in the joint venture are usually having solid roots in China, it will save Finnish deep tech startups lots of energy for building relationship and sales channel from the scratch in comparison with other startups. For the cons, the difficulty is often in identifying the right corporate representative to speak with in order to initiate a relationship. Large firms also face search problems, both in terms of finding startups (who often have a very low profile), and then in terms of screening for suitability (Bannerjee & Bielli & Haley 2016). Moreover, cultural differences and communication barriers are just adding extra weight to the existing pressure, which makes Joint Venture partnership not as easy as it sounds. Therefore, a reliable intermediary to connect Finnish deep tech startups with Chinese partners is important, to help with both communication and due diligence.
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. A detailed due diligence phase together with all the phases in M&A are shown in Appendix.
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%).
M&A will help with the synergies by combining the competitiveness from both Finnish deep tech startups and Chinese corporates. 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). And unfortunately, too many organizations fail because they treat the integration of acquired companies just that way-as an engineering exercise and not as one that affects people’s lives and futures(Harvard Business Review 2001, 200).
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/