國 立 政 治 大 學 商 學 院 國 際 經 營 管 理 英 語 碩 士 學 位 學 程

Transcription

1 商 院 際 經 營 管 理 英 語 碩 士 位 程 International MBA Program College of Commerce 碩 士 論 文 Master s Thesis 進 入 中 華 市 場 : 在 中 台 灣 以 及 香 港 設 採 辦 處 Entering the Greater China: setting up International Purchasing Office in Mainland China, Taiwan and Hong Kong Student: Pavel Strob Advisor: Professor David Chang 中 華 民 一 三 年 十 二 月 December 2014

2 進 入 中 華 市 場 : 在 中 台 灣 以 及 香 港 設 採 辦 處 Entering the Greater China: setting up International Purchasing Office in Mainland China, Taiwan and Hong Kong 研 究 生 : 趙 子 龍 Student: Pavel Strob 指 導 教 授 : 張 為 Advisor: David Chang 商 院 際 經 營 管 理 英 語 碩 士 位 程 碩 士 論 文 A Thesis Submitted to International MBA Program in partial fulfillment of the Requirements for the degree of Master in Business Administration 中 華 民 一 三 年 十 二 月 December 2014

3 Acknowledgements I would like to thank to all teachers and staff in IMBA program, to my advisor and my classmates. i

4 Abstract Entering the Greater China: setting up International Purchasing Office in Mainland China, Taiwan and Hong Kong By Pavel Strob This study is focused on issue of setting up International Purchasing Office in Greater China region. It describes history, development and importance of the region in global sourcing. It contains discussion of advantages and disadvantages of three distinct locations for setting up the office- Mainland China, Taiwan and Hong Kong. There is a detailed description of steps that are necessary to undertake process of starting the office and comparison of business registration process in different locations from legislative and business perspective. Author concludes that the best way for IPO in this region is holding company in Hong Kong with subsidiaries in Mainland China and Taiwan. However, due to political and economic dynamic of the region, this might be subject of change in near future. Keywords: China, Taiwan, Hong Kong, International Purchasing Office, Greater China ii

5 TABLE OF CONTENTS 1. Introduction Greater China Region Definition History and Position in Global Sourcing International Purchasing Office Definition and Function of IPO Setting Up of the Office Important Factors in Decision Making Process IPO in Taiwan SWOT Analysis IPO in Hong Kong SWOT Analysis IPO in China SWOT Analysis Comparison Conclusion Resources iii

6 List of Figures and Tables Figure 1: China s Planned High Speed Rail Network Table 1: Comparison of Company Types in Taiwan (1) Table 2: Taiwan Ease of Doing Business Index Table 3: Comparison of Company Types in Taiwan (2) Table 4: Hong Kong Ease of Doing Business Index Table 5: China Ease of Doing Business Index Table 6: Comparison of Selected Factors iv

7 1. Introduction In this paper I am examining topic of International Purchasing Offices (IPO) in Greater China region. I am using descriptive method to expose the problematic of starting IPO in respective locations in chosen region. I am also using comparative method to show advantages and disadvantages of different business environments. I hope this work might be useful for people who are interested in setting up IPO in the Greater China region and for people who would like to conduct further research on this topic. 1

8 2. Greater China Region 2.1. Definition Greater China region refers mostly to the areas of Mainland China, Hong Kong, Macau and Taiwan. It has no political- but cultural implications as it includes Chinese speaking (Sinophone) world. Even though Greater China has the same Chinese culture, it has political and administrative differences. Mainland China is ruled by People s Republic of China with Hong Kong and Macau as Special Administrative Regions. Taiwan is self-governed and is ruled by Republic of China. All of these entities have their own laws and administrative systems which have important implications for business and I will describe them later in this paper. I will focus on three entities: Mainland China, Taiwan and Hong Kong as they are very important for global sourcing and are big exporters of goods History and Position in Global Sourcing Greater China region is the world export powerhouse, with Mainland China being the world biggest exporter, Hong Kong being number 9 and Taiwan number Mainland China has started its way to become the world biggest exporter in the 1980s when Chinese communist party leadership changed and after period of Mao Ze Dong, more pragmatic leaders like Deng Xiaoping and Li Xiannian emerged. Chinese economy adopted many principles of capitalist system. The beginning of the new era can be described by famous saying: "Who cares if a cat is black or white, as long as it catches the mice." Government was focused on foreign trade as one of the major sources of boosting the economy, therefore they started special economic 1 Central Inteligence Agency: The World Factbook. [online]. [ ]. 2

9 zones that had special free-trade treatment compared to the rest of China. First economic zones were Shenzhen, Zhuhai and Shantou in Guangdong Province, Xiamen in Fujian Province and whole Hainan province. The other 14 followed: Dalian, Qinhuangdao, Tianjin, Yantai, Qingdao, Lianyungang, Nantong, Shanghai, Ningbo, Wenzhou, Fuzhou, Guangzhou, Zhanjiang and Beihai. This process is still ongoing, in 2010 another special economic zone was opened in Kashgar in province Xinjiang. Probably it is due to increasing trade with former Soviet republics in Central Asia. Taiwan became a seat of Republic of China, after Nationalists lost to Communist in Chinese Civil War, therefore its economy escaped Communist economic policies. During the second half of the 20 th century Taiwan transformed itself from agriculture based economy into industry based economy in a process that is often called Taiwan Miracle. Taiwan became one of the four Asian tigers (along with Hong Kong, Singapore and South Korea). Hong Kong is one of the leading financial centers in the world. It is the world s most free economy, according to Index of Economic Freedom 2 It is a Special Administrative Region of China. Hong Kong s specific position is given by a status of former British colony that used to be the center of trade between British Empire and China. In the second half of 20 th century it also benefited from not being part of Communist China, as many skilled workers moved there from Mainland China and helped to start economic boom. Hong Kong transformed from manufacture-based economy into service based economy. Today, most of its exports are re-exports and many trading companies are based here. 2 THE HERITAGE FOUNDATION. Index of Economic Freedom [online]. [ ]. Website: 3

10 In Mainland China, exports of goods and services constitute 30% of GDP. China major exports are: electromechanical products (57 % of total exports) and labor-intensive products like clothing, textiles, footwear, furniture, plastic products, bags and toys (20%). In recent years, the exports of high tech products have been also growing and in 2012 accounted for 29 % of total exports. China s main export partners are the United States (17%), European Union (16%), ASEAN (10%), Japan (7%) and South Korea. Taiwan's economy is export-oriented. Main export products are electronics (28% of total), basic metals (9%), plastics & rubber (8%), optical and photographic instruments (8%) and chemicals (7%). Main exports partners are Mainland China & Hong Kong (42% of total), USA (12%), Japan (7%), Europe (11%) and ASEAN countries (15%). Hong Kong has an export oriented economy with 98 % of shipments coming from re-exports. Major exports are electronics and household electrical appliances which accounts for 58% of total exports. Other exports include clothing and footwear (6%), textile yarn and fabrics (2.4%), toys and games (2.3%) and watches and clocks (2.2%). Major export partners are China (54%), the United States (9.9%) and the European Union (9.7 %). Others include: Japan, Singapore, Taiwan and South Korea. 3 In Greater China region, we can identify three types of sourcing 4 : 3 TRADING ECONOMICS. China Exports [online]. [ ]. Web: 4 Nassimbeni, Sartor, 2006, page 500 4

11 Imposed international sourcing It is a resort to local suppliers as a counter-trade condition that allows selling Western products on Chinese market (it is therefore involuntary). Intermediated international sourcing It means that there is a third party between the two subjects- supplier and buyer. It is therefore kind of brokerage. Direct international sourcing This is a type of sourcing that is free of any brokerage or constraint in the choice of a supplier. There are several forms of direct sourcing: traditional (there is no operational integration between supplier and buyer), collaborative non-equity (it means collaboration between Western buyers and Chinese producers in design, production or logistic activities), collaborative equity (this means that collaboration is deeper and it involves equity ownership). In the Greater China region we can see the shift from intermediated sourcing to direct international sourcing (imposed sourcing is involuntary, so I do not consider it here). At the same time, we can also observe more Western companies buying equity in the production companies in the region and moving from traditional direct sourcing to collaborative equity sourcing. This is logical consequence of economic and political development of the region. 5

12 3. International Purchasing Office 3.1. Definition and Function of IPO There are several names used in literature about this phenomenon- list includes International Purchasing Office, International Sourcing Office, International Procurement Organization etc. G. Nassimbeni and M. Sartor, define IPO as: An international purchasing office can be defined as an offshore buying office or buying house set up to procure components, parts, materials and other industrial inputs to be used by manufacturing plants globally. According to this definition, an IPO can be a stand-alone purchasing office in a foreign country or an office inside a subsidiary (e.g. a joint venture) established abroad. 5 In increasingly globalized and connected economies, international purchasing offices play very important role. Purchasing parts and finished products in countries with low labor cost has been mode of business for many international companies. There are many benefits of setting up a separate organization, instead of buying centrally from home-country. The most important features are: Overcoming cultural heterogeneities Here are we mostly talking about companies from Western countries that set up office in Greater China region. One of the reasons why they do it is that there are significant differences between culture in the West and in Greater China. Cultural differences are so huge, that it might have a significant influence on getting or loosing important business. One of the reasons to set 5 Nassimbeni, Sartor, 2006, page 495 6

13 up IPO is to overcome these difficulties and to learn more about business culture of the country in which Western company is doing business. Very important cultural difference is importance of personal relationships (guanxi). This is one of the most important assets for Chinese businesspeople and setting up IPO in China enables to create, maintain and observe these relationships. Saving costs through localized financial transfers There is a possible huge benefit if a company does not buy goods and material from their home country. If a company buys goods through their IPO, it might save lot of transaction costs and is allowed to use government support when exporting out of the country. It is also useful when taxation in IPO country is lower than taxation in country of origin. This is very important benefit for companies that buy lot of resources abroad Main functions of IPO are: Operations support General support given to all activities abroad. When company conducts business in any foreign country, it needs information about the market and significant organizational help. IPO plays this role by conducting market research and creating organizational structure that is part of the mother company. Supplier performance check and quality control When buying goods from abroad, especially from Greater China region, it is very important to perform performance check of all suppliers. Buying companies have to know who they are dealing with, whether the manufacturer is a real manufacturer or mere trading company. They need to have data about supplier s business performance and their experience in the industry. 7

14 This type of information is difficult to get without being on the ground in the specific country. IPO is essential in getting this information and conduction performance check of suppliers, also in quality control of finished products. Commercial function- selling If IPO has form that is sufficient to conduct business on their own- i.e. selling goods on target market, it can be used for expansion of home company abroad. For example company that has been sourcing successfully from China and has set up an IPO there, has easier job to expand on Chinese market with their own products than company that has no previous contact with China. Selection of supplier and development of business relationships Except for conducting supplier performance check, IPO is essential in choosing the right suppliers and in developing business relationships with them. Personal relationships with suppliers play very important role in business in places with Chinese culture. Cultural gap reduction As discussed before in this paper, IPO is important for bridging two different cultures and in training employees in cultural understanding. Very common practice is sending employees of IPO back to the country of origin for training and vice versa. Cooperation in product development activities As most of the companies are shifting from traditional direct sourcing to more collaborative forms of cooperation, IPOs play important role in product development activities as they often play function of a bridge between product designers in foreign country and manufacturers in the Greater China region, facilitating their communication and collaboration. 8

15 4. Setting Up of the Office After the decision has been made to start IPO in Greater China region, company has to make the most important decision- where to locate it. We have basically three different legal systems (not including Macau as it is not very important from the position of sourcing), also Mainland China constitutes such a huge entity that there are many differences between different provinces and cities. Choosing the right location is therefore very important. There are many factors that might have influence on this decision and I will examine them closely further in this paper Important Factors in Decision Making Process As the most important factors for decision I see these ones: Existing and planned business operations It is important to analyze, what type of business operations wants the mother company conclude through their IPO. It can be either buying finished product through traditional direct sourcing, or it might be buying raw materials or spare parts and moving them to another country or region for processing. Local costs Local costs play very important role in decision making process. Especially in Mainland China, there are huge gaps in costs between different cities. Setting up an IPO in Shanghai comes with totally different price tag then setting it up in Chengdu. However, it is also very important to see how the local costs are progressing. For example in Mainland China, local costs are rapidly increasing, in Taiwan, it is stagnating. Therefore the decision must take into account growth of local costs in the territory, as moving IPO address later comes with significant costs. 9

16 Utility costs Other important costs are utility costs, this means prices of energies, water and gas. Those are highly influenced by many factors, including weather- utility costs in city in Northern China will be higher than in city in South in which there is no need to use heaters. However, in summer there are significant costs for air conditioning. Also, government subsidies for households are important factor. Expat costs Basically every IPO requires expatriate workers. These people are usually senior figures in company hierarchy and therefore there are many issues connected with their expatriation. As companies starting IPOs in Greater China region are mostly Western companies, there are many cultural differences expatriates have to face. Salary must be therefore high enough to motivate expatriate workers and it must be paired with additional benefits that allow expatriates and their families feel like home. It is common that foreign companies pay international schools or kindergartens for their kids, two times business class flight back to their country per year for whole family, rental of flat in secured compound, gym and other forms of leisure activities, language classes etc. Expat costs are therefore very high. Infrastructure In global sourcing, infrastructure plays a key role. There is no reason to buy goods and materials if there is no way how to transport them to the desired place. When looking for a right place to set up an IPO, it is necessary to look up if there are any international airports in the vicinity, what is the nearest sea port for shipping containers of goods, how are the roads and highways, also whether it is well connected to railway and high speed rail. 10

17 Telecommunication One of the functions of IPO is to communicate with local suppliers and to bridge the country of IPO and country of origin. Therefore telecommunication is very important aspect. In Mainland China for example, internet is censored, therefore Google products like Gmail are being blocked. Same goes also for other Western tools that are commonly used by companies like file sharing program Dropbox. This might mean additional costs and problems for companies. Political factors Greater China region has turbulent political past and currently there are many factors that might cause instability. Situation over territorial claims in South China Sea is currently worsening, there are anti-government protests in Hong Kong, new Chinese government under Xi Jinping is strengthening its authoritarian rule and Taiwan s legislature was just recently occupied for three weeks by students who are afraid of China s influence on Taiwan s politics and economy. It is therefore very important to take political factors into account. Taiwan has democratic environment, therefore this might be one of the reasons why some companies might consider Taiwan over Mainland China. It is also important to evaluate what might be the next steps of country s government as it might influence operations of an IPO in the country. Incentives Countries benefit from influx of foreign capital, therefore they try to offer incentives for foreign companies to set up their offices there. This is a very important factor for decision, as it might save huge amount of costs. Also- amount of incentives usually signals what is the general opinion of government towards foreign capital. 11

18 Technological progress Importance of technological progress highly depends on the industry. While companies in textile industry do not have to worry much about it and they usually focus on lowest price, companies in machinery industry have to care about it a lot as achieving certain quality of machines and adapting new technologies is crucial for their business IPO in Taiwan Setting up IPO in Taiwan might be done either directly by an individual (future IPO director or assistant) or through a specialized company. The optimal method of choice is highly influenced by language barrier as the procedure is conducted in Mandarin Chinese (traditional characters). Taiwan civil servants usually speak certain level of English, however they are not entitled to fill in all the documents for foreign applicants. Before starting a business registration process, applicant for setting up and IPO has to decide, what type of legal entity they desire. There are 5 types of entities and foreign business is not restricted from choosing any of them: 1. Sole proprietorship 2. Partnership 3. Branch office 4. Representative office 5. Company/Corporation Each of these entities has their own benefits and restrictions, however, considering the function and powers of foreign company s IPO, the possible options are either branch office, representative office or company (sole proprietorship and partnership are not corporate 12

19 entities). Branch office Branch office is an organizational unit of a foreign company in Taiwan. It cannot own other companies or subsidiaries. Main benefit of branch office is that it does not have to pay repatriation tax. This is a tax that Taiwanese government charge a foreign company with subsidiary in Taiwan that wants to send their profits back to the mother company in home country (it is addition to normal taxes). Branch office does not have this duty. However, there are limitations considering paid-in capital and annual turnover connected with branch office set-up. Representative office Taiwanese representative office of a foreign company is another option. The biggest drawback of this option is that representative office is not actually allowed to conduct business in Taiwan. It only allows foreign company to send their representative to Taiwan and serve as a representative, communicate with suppliers and partners, doing market research etc. Representative office is the easiest entity to set up in Taiwan, however its powers are very limited. Each year it has to show proof of activity (signed contracts, s showing communication with Taiwanese suppliers etc.) Company This is the most common way to conduct a business in Taiwan. Under Taiwan company law, there are four types of locally incorporated companies. The most common types are familiar: Company Limited by Shares and Limited Liability Company. The other two are rarely used in practice, there are Unlimited Company and Unlimited Company with Limited Liability 13

20 Shareholders. 6 For IPO of foreign company, suitable forms will be Company Limited by Shares and Limited Liability Company. Company Limited by Shares is more suitable for big companies that are planning extensive growth and hiring many employees. For smaller companies is more suitable Limited Liability Company. We can therefore conclude that for opening IPO in Taiwan, there are three suitable forms: branch office, representative office and company. For companies that are planning serious development in the region with direct international sourcing, company is most suitable form of their presence on the market. Currently there is not given minimum required capital to start a company or representative office. However, the law requires company to have a Certified Public Accountant that has to certify that paid-in capital is sufficient. In practice, the lowest amount acceptable is probably NTD. Most accountants will probably encourage the owners to put in at least NTD. 7 However this number depends on type and scale of business. 6 Elias Ek, 2012, page Elias Ek, 2012,page

21 Table 1: Comparison of Company Types in Taiwan (1) Category Limited Company Company Limited by Shares Responsible person 1 person 1 person Board of directors 1 person 3 people Supervisor None 1 person Shareholders liability Limited to the capital Limited to the capital contribution Un-distributed Earning Tax All earning must be distributed and allocated contribution All earnings must be distributed and allocated before the end of June of the before the end of June of the following year. 10% following year. 10% undistributed earnings tax. undistributed earnings tax Sale of shares Sales proceeds taxed as 1.3 % stock transaction tax. personal income. Governance Regular board and Regular board and shareholders meetings shareholders meetings required by law. required by law. 8 The processes of setting up a business entity in Taiwan are very similar to processes common in Western countries. The main problems could be attributed to language barriers and legal compatibility between foreign country and Taiwan legal systems. Regardless of type of entity, it is necessary to present: foreign business license, letter of incorporation and power of 8 Elias Ek, 2012, page

22 attorney. Foreign documents needed for setting up the office must be translated into Mandarin Chinese by a certified translator. From most countries it is necessary to have these documents legalized by Ministry of Foreign Affairs and afterwards presented to Taiwan Economic and Cultural Office for further certification. Taiwan ranks as number 16 in Ease of doing business index. This index was developed by World Bank Group and it compares world economies to one another in these fields: Starting a Business, Dealing with Construction Permits, Getting Electricity, Registering Property, Getting Credit, Protecting Minority Investors, Paying Taxes, Trading Across Borders, Enforcing Contracts, Resolving Insolvency. Table 2: Taiwan Ease of Doing Business Index Year Ranking As for the business registration procedures, it is different when starting a branch office, representative office and company. Branch office Branch office does not form a separate legal entity, it does not have any shareholders or directors. It is basically extension of a foreign company within Taiwanese law. Foreign company has to appoint: 1.) Agent for litigious and non-litigious matters 9 WORLD BANK GROUP. Doing Business: Ease of Doing Business Index Rankings [online]. [ ]. Web: 16

23 2.) Branch manager Both of these positions can be held by one person, however the branch manager must have legal residence in Taiwan. There is no minimum capital for registering a branch office, but the foreign company must show it has enough financial funds for their operations. If the branch office wants to hire foreign employee, it must have minimum capital of NTD, if it wants to hire multiple foreign employees, it s capital must be NTD. To set up a branch office it is necessary to have a functional company in foreign country. Certificate of incorporation must be translated by a certified translator into Mandarin Chinese and it must be legalized by Taiwanese Economic and Cultural Office in respective country. There is a list published by Ministry of Economic Affairs (MOEA) listing special industries for which it is necessary to obtain license. If the business of foreign company opening the branch falls into one of these categories, it has to get special permission from MOEA. Firstly, applicant has to apply for a name of branch at the Department of Commerce of MOEA. This name has to be in traditional Chinese characters and it has to be approved by the ministry (it cannot be same or very similar to already existing name of other company). This paperwork has to be done in MOEA location in Taipei. Afterwards, it is necessary to supply MOEA with these documents: Two copies of application form for name reservation with the MOEA approval seal. Two copies of the registration card (standardized document by MOEA). Two copies of the registration card for the branch (standardized document by MOEA). Application letter. 17

24 Power of attorney appointing the company s litigious and non-litigious agent. Power of attorney appointing the branch manager. Photocopy of the articles of incorporation Photocopy of company s certificate of incorporation Duplicate of the official document issued by the foreign government authorities if the company s establishment requires special approval Photocopy of the ROC competent authorities approval letter if the business of the branch requires a special permit Minutes of the board of directors meeting Photocopy of the notice of inward remittance and the exchange memo for operating capital remitted into the ROC Photocopy of the identification card of the company s litigious and non-litigious agent and branch manager (if this person is ROC citizen) One of the following: residence documents of the litigious and non-litigious agent (if the person is a foreigner), photocopy of a valid Alien Resident Certificate (ARC) or signed photocopy of his passport or certificate from his country s government identifying him and stating his residence or affidavit from him stating his residence and nationality Photocopy of the original house ownership certificate for the building of the branch or a document to prove payment of the latest house tax, and a photocopy of the original house lease contract or an agreement issued by the house owner. Registration fee set by MOEA Photocopy of Investment commission s approval letter if there is higher than 30 % stake of Mainland Chinese investment in the company If applicable, Power of attorney appointing a CPA or lawyer to apply for registration. 18

25 After fulfilling all of these steps, it is up to the MOEA to decide. They can contact the applicant and ask for additional clarification of any of those steps. If they are satisfied, they will recognize the application and issue receipt and approval for the branch operating capital. After transfer of operating capital, the company is ready to get the tax number. It is necessary to apply for it to local Office of Commerce. After this step, if the applicant is planning to import or export, he has to register with Bureau of Foreign Trade at the MOEA for import/export registration. To hire employees, it is also necessary to apply for health and labor insurance. This is effectively the end of branch office registration process. Representative office Unlike branch office, representative office forms a separate legal entity, however there are many limitations that it has to respect. It serves as a legal entity of a foreign company in Taiwan. It does not serve as a separate company or subsidiary in Taiwan- for this purpose it is necessary to start a company (registration procedures for starting a company will be discussed later in this paper). Just like with branch office, matters of starting a representative office must be solved through MOEA. Registration procedure is very straightforward, however, every application is solved through a civil servant who has a power to interpret it. Therefore the application is influenced by subjective views of the civil servant. As for my experience the same application is judged differently by different civil servants, which might cause troubles to some applicants, especially if he has to go through translating all materials from his language to Chinese and some words might offer more ways of explanation. To register representative office, it is necessary to follow these steps at the MOEA: 19

26 Applicant has to present these documents: 1. Document certifying the identity and residence of the representative. 2. Power of Attorney, if the application is filled by an agent (lawyer or CPA). 3. Duplicate or photocopies of the documents certifying the establishment of the foreign company in its own country. 4. Power of attorney appointing the representative in the ROC. 5. A photocopy of the original house ownership certificate for the building of the representative office or a document to prove payment of the latest house tax and a photocopy of the original house lease contract or an agreement issued by the house owner. 6. Two copies of registration card (given by MOEA). 7. Application form (given by MOEA) It is necessary to register for: 8. Taxes- representative office does not pay taxes since it cannot earn money but it has to be registered for withholding number at the tax office. 9. Health and labor insurance- without this it is not possible to hire employees. This successfully ends representative office registration procedure (if approved by MOEA). Company Setting up a subsidiary company is most advanced form of foreign company presence in Taiwan. It is also more difficult and demands higher requirements than setting up mere branch or representative office. However, for fully functioning IPO this is the recommended type of entity. There is one issue that has to be decided before- whether to start company limited by shares or limited company (LC.) 20

27 Table 3: Comparison of Company Types in Taiwan (2) Category Limited company Company limited by shares Number of shareholders One natural person or 1 judicial person is minimum Two natural persons or 1 judicial person minimum Responsible person 1 person 1 person Board of Directors 1 person 3 people Supervisor None 1 person After deciding the right form of company, it is necessary to reserve a name with Department of Commerce, MOEA. After this, the next necessary step is to apply to investment commission of MOEA for approval of foreign investors. This is the key issue for starting a foreign owned company in Taiwan and it requires undertaking these steps: Hand in these documents: 1. Application form from MOEA. 2. Approved application for company name and business scope. 3. Confirmed roster of shareholders and capital amount. 4. Power of Attorney authorizing a judicial person as the representative of a corporate investor (if needed). The power of attorney should include the name of the investor, name of attorney and the definite scope of authorization. 5. Certificate of incorporation or Certificate of corporation for corporate investor and it s organizational chart. There might be required additional documents like register of directors, register of shareholders, details of ultimate benefactors (owners). 6. Power of Attorney from a corporate investor appointing and authorizing a local agent to deal with the application process to obtain government approval of foreign investment. 21

28 7. Signed copy of passport of corporate representative (if applicable). 8. An Identification Certificate of Overseas Chinese issued by Overseas Chinese Affairs Commission or a signed copy of the passport bearing the endorsement of Overseas Chinese status should be authenticated by the representative office of the Republic of China in the applicant s home country (if applicable). 9. Power of Attorney from an individual investor appointing and authorizing a local agent to deal with the application process to obtain government approval of foreign investment (if applicable). 10. Signed photocopy of valid passport of the individual investor. If the individual investor is from Hong Kong or Macau, additional documents such as local permanent residence certificate or ID Declaration should be attached. As it was mentioned earlier in this paper- it is necessary to have all these documents notarized and legalized by ROC office in applicant s country. There are special administrative procedures if the paid in capital is higher than 500 million NTD. However, it is not likely that for starting IPO it would be necessary to have such paid in capital, so I will not examine the procedure in this paper. For setting up a company it is necessary to pay paid in capital. In Taiwan there is a procedure for that: It is necessary to open bank account for preparatory office (it has to be preparatory since the company is not set up yet). After this, the money shall be remitted to this bank account and CPA has to certify that the amount is enough (these is no specification of what is enough, however it is not recommended to make it too low). Within 15 days of it, it is needed to send application (provided by MOEA) to Investment commission of MOEA to examine and certify 22

29 foreign equity investment. When all these steps are fulfilled, it can proceed to the official registering of the company. Applicant has to provide this general information: 1. Amount of capital, par value per share, total number of shares and number of shares to be issued for incorporation. 2. Name, address and number of shares subscribed and paid for by each shareholder. 3. Name of directors and supervisors and their terms of office. 4. Name of chairperson of the board. 5. Percentage of after-tax profits to be shared by the company s employees, if any 6. Accounting (fiscal) year The documents that are required are: 1. Application form 2. Articles of incorporation 3. Minutes of the incorporators meeting 4. Minutes of the Board of Directors meeting and attendance record 5. Photocopy of bank passbook evidencing that the capital contributed by the incorporators has been deposited in a savings account in the name of the proposed company s preparatory office 6. Copy of the bank statement showing deposits in, and withdrawals from the bank account up to the date of issuance of the auditors report 7. Balance sheet and schedule of incorporators capital contributions as of the date of incorporation, and schedule of expenditures from the capital 8. Photocopy of the foreign corporate incorporators representatives 23

30 9. Power of Attorney appointing individuals as the foreign corporate incorporators representatives 10. Signed photocopy of passports of foreign individual incorporators 11. ID documents from directors, supervisors and chairpersons. 12. Register of shares. 13. Chop engraved with Chinese name of the board chairperson. 14. Chop engraved with Chinese name of the company. 15. Registration form. This registration has to be done in local Office of commerce (i.e. in Taipei- Taipei City Office of Commerce. Importers and exporters have to apply for import and export license at the MOEA. After this, the path for starting a company is free, it is just necessary to apply for health and labor insurance so that the company can hire employees SWOT Analysis Taiwan is currently not a usual place of choice for setting up IPO in Greater China or Asia-Pacific headquarters of international companies. Most of them set up offices in Hong Kong, Shanghai or Singapore. When European Chamber of Commerce in China polled their members in 2011 to rank major cities in the region based on attractiveness for setting up Asia-Pacific regional office, Taipei ranked number 11. It was not surpassed only by Shanghai and Hong Kong, but also by other Mainland China cities like Beijing, Guangzhou and Shenzhen. 10 It is surprising, because with good living conditions, well-educated and 10 EUROPEAN UNION CHAMBER OF COMMERCE IN CHINA. The Asia-Pacific Headquarters Study 2011 [online]. [ ]. 24

31 mandarin-speaking workforce, proximity to Mainland China, democratic environment, reasonable cost of living, Taiwan might be very good place for setting up an IPO or other form of regional office for the Greater China region. Raising of attractiveness for setting up the IPOs would certainly bring benefits to Taiwanese economy and offer meaningful job possibilities with international reach for Taiwanese citizens. However, at this time, process of setting up an IPO in Taiwan is not very convenient compared to Hong Kong or Singapore, Taiwan is also behind in internationalization, English environment and E-government. Permanent problem for Taiwan is lack of international recognition that does not allow Taiwanese government to use economic diplomacy to the same extent like countries that have higher external recognition. Taiwan now maintains costly official relations with 22 small, mostly impoverished countries that recognize Taiwan in exchange for aid. However, those relations have been mostly fruitless as they do not bring any benefits to Taiwanese economy, nor they bring any change of Taiwanese international position. Taiwan should probably invest more money and effort into informal relations with important players and emerging countries, rather than investing into formal relations with countries that do not have a real potential. Further liberalization of its relations with China would also increase Taiwan s attractiveness for setting up IPO. Strengths Strategic location, besides from China, it is easy to reach other big players in region like Japan or South Korea. Good quality of life for expat workers- political and social freedom, no censorship, convenient life. Web: 25

32 Cost of living is lower compared to Hong Kong or Shanghai. Taiwanese employees have easier access to Japan, South Korea and other countries in the region (visa problem is common for citizens of Mainland China as they face more restrictions while travelling to other countries). Weaknesses Process of setting up IPO is not convenient for foreign companies, it requires using of Chinese names and chops, English is not widely spoken and civil servants have absolute power of interpretation of business application. Taiwan is an island, therefore it is necessary to fly to any other location within the region. Political uncertainty over Cross-strait relations. Complicated international position. Opportunities Further internationalization of business registration process, accepting Western business practices and wider usage of English in civil service. Making business process easier and more simple, introducing possibility of online registration and developing e-government. Threats Possible conflict with China (military or economical). Competition in the region is quickly rising- besides from Mainland China, Hong Kong and Singapore, there are other quickly emerging players like Malaysia, Vietnam or Indonesia IPO in Hong Kong Hong Kong is home of many IPOs and procurement divisions and it is one of the most favorite 26

33 places for setting up IPO in Asia. It is a usual place of choice for setting up offices of Western companies. According to Hong Kong Government statistics, there are 1,339 subsidiaries of U.S. parent companies in Hong Kong, making the United States the largest source of subsidiaries in Hong Kong. Among those U.S. subsidiaries, 822 are regional headquarters or regional offices. 11 One of the reasons that make Hong Kong so popular is that starting office or company is very simple and straightforward. Other reason is, that unlike in Taiwan or Mainland China, in Hong Kong it is not necessary to translate statutory documents into Chinese, English documents are sufficient. Table 4: Hong Kong Ease of Doing Business Index First of all it is necessary to decide the right entity. It is possible to start a branch office, representative office or a company. Branch office If a company incorporated outside Hong Kong establishes a place of business in Hong Kong, it must register with the Companies Registry as a Registered Non-Hong Kong Company within one month of establishment. Unlike a subsidiary limited company, a branch office is not a separate legal entity from the parent and can leverage funds off the credit rating of its owner. 11 EXPORT.GOV. Doing Business in Hong Kong [online]. [ ]. Web: 12 WORLD BANK GROUP. Doing Business: Ease of Doing Business Index Rankings [online]. [ ]. Web: 27

34 Representative office cannot engage in profit-making activities and can only fulfill limited functions. It is useful if a company wishes to explore the Hong Kong market before making a larger investment. If the company decides to enter into a transaction which creates a legal obligation, it must change the business to a limited company or branch office. Company Company- especially limited company- is the most commonly-used company type. This is a company which is incorporated in Hong Kong, which means that the owner can take advantage of all the tax benefits and concessions available to any fully incorporated business, including the Closer Economic Partnership Arrangement (CEPA), a free trade agreement with Mainland China. A private limited company in Hong Kong requires at least one director who is a natural person and one company secretary. If the company has one director only, the sole director cannot be the company secretary of the company at the same time. If the company secretary is a natural person, he/she should ordinarily reside in Hong Kong. If the company secretary is a body corporate, its registered office or place of business should be in Hong Kong. A non-hong Kong resident can be appointed as a director. The registered office of the company must be situated in Hong Kong. There is no requirement for shareholders to be Hong Kong residents. The sole shareholder can be a director of the company. 13 Business procedures For registering any form of entity, the name must not be the same with any other company in companies registry kept by Registrar of Companies. In Hong Kong, the process can be largely 13 INVEST.GOV.HK. Doing Business in Hong Kong [online]. [ ]. Web: 28

35 done online. Branch office For setting up a branch office, it is necessary to fulfill these steps: Provide Companies Registry: 1. Articles or Statues of the parent company 2. Names of directors 3. Registered office address 4. Name of Hong Kong resident representative who will act for the company 5. Filled application form (Application for Registration as Registered Non-Hong Kong company) 6. Filled form called Notice to Business Registration Office Process is very easy and it is not necessary to provide many documents, however, given the fact that in Hong Kong it is very easy to form a separate company, it is not recommended for IPO to set up just a branch office. Representative office The registration procedure for setting up a representative office is the same like for branch office. However, for setting up IPO in Hong Kong, I would recommend to start a company, not a branch or representative office. Company Setting up a company in Hong Kong is the most recommended way to set up IPO in Hong Kong. It requires these steps: Before setting up a company, it is necessary to decide which type of company is most suitable. 29

36 There are two possibilities- company limited by shares (the liability of members is limited by the articles of association to the amount unpaid on the shares respectively held by them) and company limited by guarantee (share capital and the liability of members is limited by the articles of association to the amount that the members respectively undertake to contribute to the assets of the company in the event of its being wound up). Most of the companies are companies limited by shares, company limited by guarantee is used widely by non-profit organizations. After this decision, it is needed to choose a name for the company- the name cannot be same or very similar to the ones that are already registered within the Companies Registry or the ones that have registered trademark. Afterwards, it is necessary to apply with these documents (Hong Kong allows to apply electronically through portal called e-registry, otherwise it is possible to hand it hardcopy documents to the Register): 1. Incorporation form 2. A copy of the company's articles of association 3. A Notice to Business Registration Office 4. Consent to Act as First Director After this, Companies Registry will issue the Certificates of Incorporation and Certificate of Business registration. Hong Kong companies need a HK resident as a secretary, therefore there is necessary to appoint a company that provides this service or appoint a HK resident to serve as a secretary. A Hong Kong company must hold an annual general meeting in every calendar year when, 30

37 among other things, the audited accounts of the company are adopted. An annual return of the company must also be filed with the Companies Registry every year. A Hong Kong company must also notify the Companies Registry of any special resolution passed, the creation of a charge over certain assets and any change which may occur in the information contained in the documents already filed. The changes of a company which require notification include: change of share capital, change of directors and/or secretary and/or their personal particulars allotment of shares, change of company name, and alteration of the Memorandum and Articles of Association resignation of auditors, change of registered office. If a company fails to comply with such requirements, the company and every officer of the company who is in default might be liable to a fine or even imprisonment. I think the most convenient way is to use one of the many agencies that offer service of setting up a company in Hong Kong. Price for their service is around 1300 USD and it includes setting up the company, secretary service for a year and virtual office (serves as a registered address of a company) for a year. Applicant does not even have to go to Hong Kong and the only necessary documents are soft-copies of passport and proof of registered address. With express service this can take just three working days. Opening corporate bank account in Hong Kong, however, might be more complicated than forming a company. It requires that the applicant comes in person to Hong Kong and meets with bank representative. Bank usually wants to see viable business plan as a proof that company will be generating profits. It is also necessary to show them proofs of registered address of the company and the applicant, bank might also ask for other documents like Director Declaration. 31

38 SWOT Analysis Hong Kong is financial hub for whole Asia-Pacific region, it benefits from its historical connection to the Western world, as English is official language and law system stems from British tradition. The major source of trouble is growing competition from major cities in Mainland China that might mean that international companies might set up their offices directly there in the future, however at the moment, they still can t match Hong Kong in international environment, transparency and convenience of setting up a business. Other source of trouble is political instability caused by clashes between Chinese backed Hong Kong government and popular movement Occupy Central over electoral reform. Strengths Easy, quick and foreigner friendly process of business registration. English is official language, it is not necessary to translate documents into Chinese. Foreign friendly city, comfortable for expatriates. Financial, business and transportation hub, Mainland China can be reached by train and metro. Weaknesses High cost of living, one of the highest property prices in the world. Overcrowded. Uncertain future- possible political instability. Opportunities Upgrade current online presentation of Companies Registry, make business registration process even more comfortable and intuitive. Focus on law enforcement, so that Hong Kong does not have bad reputation for money 32

39 laundering through HK companies. Threats Losing position of business center for doing business in China to Mainland Chinese cities that get more support from Chinese government. Political instability IPO in China Setting up IPO in China is more complicated than in Taiwan and Hong Kong and there are restrictions for foreign investment. It is necessary to have a Chinese lawyer, CPA or a specialized company to do it. China s Ease of doing business index is far behind Taiwan and Hong Kong, currently reaching 96 th position in the world. Table 5: China Ease of Doing Business Index China s government sets up 5-year plans in which they set up economic goals for next 5 years. 15 For companies trying to set up business in China it is recommended to get familiar with this plan as it might be beneficial to choose business line that is listed among the priorities. The possibilities for setting up IPO are either through joint venture, representative office or 14 WORLD BANK GROUP. Doing Business: Ease of Doing Business Index Rankings [online]. [ ]. Web: 15 BRITISH CHAMBER OF COMMERCE IN CHINA. China's Twelfth Five Year Plan ( )- the Full English Version [online]. [ ]. Web: 33

40 Wholly Foreign Owned Enterprise (WFOE). Joint venture is a partnership between a foreign business and a Chinese company or citizen. For a foreign company without a trusted Chinese entity or individual it is therefore not possible to use this form of entity as IPO s base. Other option is representative office- it is for Chinese circumstances easier way of starting an entity, however, Chinese government is currently clearly not supporting this time of entity, as they are laying new limitations. Therefore the only suitable option for in IPO in China is WFOE (for foreign companies that have no possibility or will to form a joint venture). Forming WFOE Firstly it is necessary decide the form of WFOE. It is possible to have Consulting, Trading and Manufacturing WFOE. With Consulting being the easiest to form and Manufacturing being the most difficult. Ideal form for IPO is Trading WFOE. It is necessary that a Chinese lawyer, CPA or company with permission of relevant authorities acts as a sponsor. The required documents that are needed for forming WFOE are: 1. 2 x Certificate of Incorporation, Articles of Formation or Equivalent document certified by Chinese embassy or Chinese consulate overseas (if there is corporate investor), Passport copies of Investors need be certified by Chinese embassy or consulate (if there is individual investor) 2. 2x Bank Reference Letters from investor s bank (to declare a good standing) 3. Passport copy of: (i) Parent company's director (ii) China company's Legal Representative and (iii) China company's supervisor 4. China Legal Representative provides: 6 photos (2 inches size), brief resume 5. Registered capital; Business Scope; 8 proposed Chinese names of China company 6. Office address in China, 2x leasing contracts, 2x certificate of real estate ownership, and 2x 34

41 landlord identification 7. 4x Letter of Authorization 8. The latest annual audit report copy from the parent company: provided by a Certified Public Accountant (CPA) and Customs HS Code of proposed Import/Export products in China After getting these documents, liaison company will have to undergo these steps: 1. Name registration with State Administration of Industry and Commerce (SAIC) 2. Certificate of Approval by Ministry of Commerce or Foreign Economic Cooperation Bureau 3. Apply for Business License with SAIC 4. Chops made by Public Security Bureau (PSB) 5. Organization Code License by Technical Supervision Bureau (TSB) 6. Tax Certificate by Taxation Bureau 7. Registration and Approval with State Administration of Foreign Exchange (SAFE) 8. Open foreign currency and RMB bank account 9. Inject capital from investor s overseas bank account 10. Capital Verification Report by Certified Public Accountant 11. Apply for permanent Business License with SAIC 12. Financial certificate registration 13. Statistics license registration 14. Import/Export license (applicable for Trading & Manufacturing WFOE) In China, setting up minimum paid-in capital is up to the local authorities. In major cities like Shanghai it is higher than in smaller cities, however civil servants in major cities have bigger experience with foreign companies than civil servants in smaller cities, therefore it is 35

42 recommended to set up IPO in one of the major cities like Shanghai, Beijing or Guangzhou. Paid-in capital required tends to be very high, around USD SWOT Analysis Mainland China has hegemonic position in the region, it has therefore lot of leverage compared to both Hong Kong and Taiwan. No company that does global sourcing can ignore it. Chinese government clearly prefers large companies, therefore for foreign SMEs it might be difficult to set up IPO there, because of large capital requirements. Major cities in Mainland China still do not match Hong Kong in terms of quality of life, transparency and convenience of setting up a company. Strengths Huge and rapidly growing market. Hegemonic position in the region. Weaknesses Authoritarian and restrictive political system. Uncomfortable live for expatriates- pollution, censorship. Unpredictable economic and political situation. Opportunities Acceleration of modernization and innovations. Investing in research and development, moving up to the production ladder in terms of quality and innovation. Major Chinese cities might overcome Hong Kong and Singapore and become world financial and business centers. 36

43 Threats Slowing down of reform and transformation process. Economic downturn. Social instability, violent nationalism towards foreign countries and citizens. Ecological problems. 37

44 5. Comparison When we look at the data, we can easily conclude that in terms of registering business, Hong Kong offers the easiest way, China the most difficult and Taiwan is in the middle, developing more towards Hong Kong. However, in terms of efficiency of starting IPO- China naturally offers largest market and more options than both Taiwan and Hong Kong. Taking Fortune 500 companies as a reference, according to Towers Watson Asia study, Hong Kong currently hosts 34 % of Fortune 500 Asia-Pacific headquarters and China 15.8 %. Trend is that these companies are moving their headquarters to Singapore, which now hosts 40.8 % of Asia-Pacific headquarters of Fortune 500 companies. At the moment, Taiwan is not an important place for headquarters of these companies. 16 IPO must be in touch with suppliers, therefore transportation is important issue. Most of the factories are located within the area of Mainland China, therefore the best and cheapest way regarding transportation is setting up office in some major Chinese city with good air and high speed rail connectivity (Shanghai, Beijing and Guangzhou). China has many airports with wide international and domestic reach. Beijing Capital International Airport, Guangzhou Baiyun International Aiport and Pudong International Airport are among the busiest airports in the world. 17 Most IPOs are located in Shanghai. It has two international airports and is a major hub for high speed rail transportation. China has largest 16 CNBC: Bad news in Hong Kong is good news for Singapore [online]. [ ]. Web: 17 AIRPORTS COUNCIL INTERNATIONAL. Year to date Passenger Traffic [online]. [ ]. Web: 38

45 high speed rail system in the world with 15,448 km of tracks in use that connect major cities with each other, this system is planned to grow further with aim to connect economically less developed western areas with cities on Chinese coastline. 18 Figure 1: China s Planned High Speed Rail Network Hong Kong as a special administrative region, has different political and administrative system than Mainland China and it is necessary to cross the border control while entering Mainland 18 THE ECONOMIST. Faster than a speeding bullet [online]. [ ]. Web : est-will-soon-stretch-considerably-farther-faster 39

46 China from Hong Kong. Hong Kong is formally connected to Chinese high speed rail system through Shenzhen, however procedure of immigration clearance remains, therefore travelling from Hong Kong to city in Mainland China is not as fast and convenient as travelling between two Mainland Chinese cities. Hong Kong International Airport is 10 th busiest in terms of passenger traffic in the world 19 and it offers good connectivity to other countries in the region. Taiwan is an island and there is no land transportation connection with Mainland China. It has high speed rail system that connects major cities on western coast of the island. Regular flights between Taiwan and Mainland China were resumed in 2008, however their number remains limited. Taiwan has very good air connectivity with Japan, Korea and other countries in the region through Taoyuan International Airport (largest airport in Taiwan). Hong Kong has a big advantage over Mainland China and Taiwan in terms of language. It used to be British colony, therefore English remained as official language. All communication with government can be conducted in English. In Mainland China and Taiwan, official language is Mandarin Chinese, with simplified script used in Mainland China and traditional in Taiwan. All foreign documents must be therefore translated and communication with government is conducted in Chinese. To me, the crucial difference is that China does not offer the same living standard like Hong Kong or Taiwan. This is important factor to consider, even though it is difficult to express it quantitatively. Chinese cities are polluted. It is common habit to smoke everywhere including 19 AIRPORTS COUNCIL INTERNATIONAL. Year to date Passenger Traffic [online]. [ ]. Web: 40

47 restaurants or even elevators. Noise levels are very high- car and scooter drivers constantly honk, cities are rapidly growing so there is also noise from construction works. People are used to throw waste and spit on the ground, sometimes they let their kids defecate right in the middle of the street. Traffic is very bad and dangerous with myriads of electric scooters riding both on the roads and pedestrian walkways, disrespecting any traffic rules. Stay in China might therefore become nightmare for people who are used to Western standard of living, especially if they come with their families. Both Hong Kong and Taiwan offer more convenient lifestyle with easy-to-access natural spots, beaches and more civilized and clean environment than major cities in Mainland China. Table 6: Comparison of Selected Factors Location Taiwan Hong Kong China Population (mil.) GDP (bil. USD, nominal) 20 Corporate tax rate (Offshore profits, 25 capital gains, dividends, and most Hong Kong bank deposit interest 20 INTERNATIONAL MONETARY FUND. World Economic Outlook Database [online]. [ ]. Web: 41