As the name goes,
this type of joint venture is rather similar to a equity joint venture
but in a contractual form. Before the joint venture, all liabilities,
rights and responsibilities are agreed upon a contract thus the parties
involve will negotiate the form of administration and profit division.
Contractual is different from equity joint venture because profit
sharing is not based on ratio of investment but according to form of
investment as per contract.
The major difference
between an equity joint venture and a contractual joint venture as means
in China market entry is that the latter neither necessarily calculates
the shares in the form of currency nor distributes profit in proportion
to their share, but share profit according to the form of investment and
the ration of profit sharing as per the contract. Joint venture is the
most common method in China market entry, there are many advantages of
It provides great flexibility to arrange business relationship in a way
that benefits both parties. This applies to the management of the joint
venture and its financing
Comparing joint venture with wholly foreign-owned enterprise, joint
venture investing reduces capital expenditure as well as manpower. With
joint venture, its easier to obtain the capital, the technology as well
as local society and government support
Joint ventures allow the firms to enjoy a higher degree of marketing
control which would shorten the time taken to obtain local market
A foreign investor does not need to set up a new corporation in China
under joint venture structures. The foreign investor and Chinese partner
participate in the joint venture by doing business using the Chinese
business license under a co-operative and contractual arrangement. This
would allow each partner to focus on their own specialty
However, there are
also some disadvantages of joint venture as means in China market entry:
Comparing with license and contract manufacturing in China, joint
venture requires the foreign enterprise to pump in more funds which
results in higher risks.
Due to culture differences and profit sharing issues, valuable time
would have been wasted after settling an agreement. Therefore, correct
communication techniques are important.
Undesirable income tax and liability implications if joint venture is
construed as a partnership.
Parties involved do not have the autonomy of a sole proprietorship in
the decision making process.