Wholly foreign-owned enterprises

Definition

Wholly foreign-owned enterprises (WFOEs) are business entities that are entirely owned by foreign investors, allowing them to operate in a host country without local partners. This model became significant in China as it provided foreign companies with full control over their operations and allowed them to retain their intellectual property. WFOEs emerged prominently after the implementation of the Open Door Policy, which aimed to attract foreign investment and facilitate economic growth while maintaining a degree of governmental oversight.

5 Must Know Facts For Your Next Test

1. WFOEs gained traction in China after the Open Door Policy was enacted in the late 1970s, marking a shift towards more market-oriented economic reforms.
2. The establishment of WFOEs allows foreign companies to bypass potential issues of trust and shared control that can arise in joint ventures with local firms.
3. WFOEs have been vital in sectors such as manufacturing and technology, where foreign companies seek to protect proprietary technologies and processes.
4. To set up a WFOE, foreign investors must comply with local laws and regulations, which include obtaining necessary licenses and permits from the Chinese government.
5. WFOEs contribute significantly to China's economy by creating jobs, introducing new technologies, and boosting exports.

Review Questions

• How did the establishment of wholly foreign-owned enterprises reflect changes in China's economic policies after the Open Door Policy?
  • The establishment of wholly foreign-owned enterprises marked a significant shift in China's economic policies following the Open Door Policy. This change reflected China's move towards embracing market-oriented reforms and attracting foreign investment. By allowing full ownership to foreign companies, China aimed to enhance its economic development, modernize its industries, and increase technological advancements while maintaining control over its economy.
• Compare and contrast wholly foreign-owned enterprises and joint ventures regarding operational control and risk-sharing.
  • Wholly foreign-owned enterprises provide complete operational control to the foreign investor, eliminating the complexities associated with local partnerships. In contrast, joint ventures involve shared ownership between foreign and local partners, leading to collaborative decision-making but also potential conflicts. While WFOEs enable better protection of intellectual property and business strategies, joint ventures may offer access to local market knowledge and distribution networks.
• Evaluate the long-term implications of wholly foreign-owned enterprises on China's economic landscape and its integration into the global economy.
  • Wholly foreign-owned enterprises have significantly impacted China's economic landscape by fostering innovation, increasing competition, and enhancing productivity across various sectors. As these enterprises establish a strong foothold in China, they contribute to the country's integration into the global economy by facilitating technology transfer and improving supply chains. Over time, WFOEs have played a crucial role in transforming China's manufacturing sector while also influencing local firms to adapt and innovate, ultimately reshaping the dynamics of the Chinese economy.

Related terms

Open Door Policy: A diplomatic policy initiated by the United States in the late 19th century aimed at ensuring equal trading rights for all countries in China, promoting foreign investment.

Joint Venture: A business arrangement where two or more parties collaborate to create a new entity, sharing both profits and risks, often involving local partners in the host country.

Foreign Direct Investment (FDI): Investment made by a company or individual in one country in business interests in another country, often through establishing business operations or acquiring assets.