Legal Issues on Trade and Foreign Investment in China - Essay Example

The following options are available for the structure, financing, and management of the computer-manufacturing project and the semiconductor-manufacturing project: a) Technology transfer This refers to the assignment of technological intellectual property developed and produced in one place to another using legal means like franchising or technology licensing. Using this alternative, DFW can sign a contract with ST that is restricted to the production of computers and semiconductor chips of a specific quantity in SEZ without establishing a joint entity in SEZ. The contract shall detail the specifications, range, quantities, and quality requirements of items including the obligations, rights, and interests of the two partners. In DFW needs to transfer new technology to ST, it shall offer technical assistance and key components and parts during the preliminary stage of production. The means of payment for the technical services shall be specified in the technology transfer contract. Eventually, ST shall produce the items purely with domestic components with the upgrading in their skills and increase in domestic supplies. The signed contract will end with the fulfillment of the quality and quantity requirements specified in it. Advantages DFW will improve competitiveness in the SEZ by influencing few features such as competence/skill, capital, exports, infrastructure, and technology. Transfer of technology with synergistic results are dependent on achieving "reasonable compatible" targets between developing countries and foreign companies. A technology transfer will generally profit the SEZ in one of two ways. It will provide to manage research and development to accelerate the creation of new technology. The other way a technology transfer can benefit SEZ is when it can share its technology with less-developed regions in an endeavor to assist them with essential technologies, such as infrastructure development or food production. Technology transfer will modernize the Shenzhen economy and change the way products are generated, so the region becomes more resourceful and productive within the global market system. Disadvantages Technology transfer involves the movement of material structure, knowledge, skills, organization, values, and capital from the place of production to the receiving site. The unseen features of technology, such as organization, skills, and knowledge might be much more decisive than the physical element it is for the effective transfer of technology. The technology that is transferred must also denotes the transfer of knowledge to the recipients, instead of making them rely on continuous external inputs and help. The new technology must be socially tolerable and beneficial on numerous levels, in addition to the general capability of communities to uphold healthy and sustainable livelihoods. Technological advances tend to raise complexity and uncertainty, making end users dependent on dedicated experts, and construct new knowledge obstacles for probable investors. In cases of the transfer of multifaceted production technologies, knowledge and technical proficiency become important hurdles to the transfer. b) Turnkey contract DFW can enter into a turnkey contract with SZ for the construction of a computer manufacturing plant and semiconductor manufacturing plant in the SEZ region. In this case, DFW will be entirely be responsible for the costs of designing and building the plant including its start-up and its capacity to produce computers and semiconductor chips as specified in the contract. ST shall provide a construction site for the computer manufacturing plant and semiconductor manufacturing plant, the required approvals from the Shenzhen government, the maintenance, and operational staff. On the other hand, DFW shall provide all the technology, design, and engineering services for procurement, supply, installation of all equipment, staff training, start-up of the plant, and guarantee that ST can use the plant to produce the items of contractual capacity for DFW. Advantages Turnkey contracts present many advantages over conventional building contracts. Because the developer still owns the building until the project is finished, he has financial motivation to complete the project as fast and efficiently as possible. A turnkey contract also provides additional time for an owner to look for financing and investors before he is needed to cater for the costs of the completed project. These contracts also save inexperienced owners from making hard construction decisions, leaving these verdicts in the hands of the developer or builder. Disadvantages The major demerit is the lack of control the owner retains over design and construction decisions. For some owners, this may imply that the project is not perfectly suited to their needs once it is complete. For others, this disadvantage may be ruled out by the probability for cost savings and shorter construction schedules. c) Equity joint venture This option involves the formation of a limited liability corporation in which ST and DFW both invest in and run the established processing plants and shares the profits, risks and losses. The liability of ST and DFW to the joint venture shall be limited to their shares in the registered capital. The two shall be legal persons subject to the laws of Shenzhen government. DFW and ST shall contribute money to cater for costs of equipment, machinery, technology, trademarks, or other intellectual property rights for the two projects. Through this venture, the Shenzhen ST will acquire advanced equipment and technology from DFW, refurbish their premises using foreign funds and technology, and upgrade their management in return for the resources they supply such as raw and processed materials, the plants buildings, and the workforce. Advantages DFW will benefit from: I. Access to new technologies: Companies definitely need access to new technologies in order to enter into the global markets and to grow their business. An equity joint venture or strategic alliance can offer a DFW technology from a contributor that it will not otherwise be capable of developing due to time constraints, resources, or costs. The proper new technologies can provide the new business with a launch pad into new markets and products. ii. Cost Reduction: An equity joint venture may be able to present DFW with the technology, manufacturing, or distribution capabilities that it could not otherwise have the funds for. This type of partnership permits the combination of combined strengths that make it more likely for both businesses to be successful. At the same time, the equity joint venture may also slacken capital for use in other activities or markets. iii. Learning Opportunities: Forming an equity joint venture allows DFW and ST to work with other businesses in similar or related industries. This offers participants the chance to learn from each other's mistakes and successes. It may also create a regular collaboration or transfer of information, technology, business practices, and operational processes. iv. Tax Transparency: Tax transparency may be advantageous for tax scheduling functions and may facilitate the partners to gain more efficient tax relief or capital expenditure or losses. Disadvantages i. Loss of Competitive Advantage: An equity joint venture with an actual or potential competitor, like DFW as is often the case with joint ventures may endanger the cooperative benefit that DFW might otherwise have grown in the absence of the cooperation. DFW must decide before entering into the venture whether such goals and opportunities can be achieved without the backing of the competitor. ii. Lack of Control: No matter how the alliance is organized, DFW and ST inevitably will lose particular elements of control over the projects. In order for both participants to benefit, they must also sacrifice something, which is typically power over the aspect of their business and, in turn, depend on the other participants. Therefore, it is vital that both participants simultaneously; a. configure the management of the joint venture in such a way as to retain as much control as possible without suppressing the project and b. Carry out due diligence on the participants to guarantee a level of trust amongst them. iii. Governmental Relations: Equity joint ventures may be created with foreign entities that can lead to considerable opportunities for a growing business. However, such ventures must also put into consideration local laws and government review systems that may affect the project. iv. External Finance: An equity joint venture provides fewer means of acquiring exterior funding compared to a corporate entity. An equity joint venture would be the most suitable alternative for these projects because it is most likely to benefit DFW, ST and the Shenzhen government. It provides a means of successfully implementing the project and managing the cost constraints because both partners would contribute to the projects. [2] The major issues to consider if an issue joint venture is selected as an alternative are concerns over intellectual property rights and competitive advantage protection. The equity joint venture might fail due to poor implementation and execution, lack of leadership support during the preliminary times of the joint venture, imbalance in what the two partners bring to the venture and poor communication between parties. In order to successfully manage an equity joint venture, the partnership project of ST and DFW should mirror the shared goals and objectives of their parent companies to prevent unrealistic expectations, which will have a direct impact on the success of the project. the key factor is the extent of motivation underlying the decision to form the partnership. The partners’ characteristics and power of the motivating factors entering into an equity joint venture will have a straight impact on partner approval and eventually on the performance of the projects. [3] SEZ could make the entire project viable by providing tax benefits on foreign direct investment by DFW and facilitating DFW in establishing the two manufacturing plants in the zone on standalone basis without approval of Shenzhen bank. SEZ could also offer duty free status on items such as raw materials, machines, and parts under the joint venture contract subject to certain conditions. The duty free status could also be provided for imported items for the development of infrastructure and cut land registration charges. SEZ could provide tax holidays to FWD for a particular number of years to make the project more feasible. Additionally, SEZ could ease the export policies of Shenzhen, offer exemption from service tax and other levies, which extended by the Shenzhen government to provide DFW with a healthy environment for conducting its business and facilitate the easy growth of the region. It could also partner with private and public banks to offer financial aid for businesses and provide proper sewerage and drainage systems. These incentives would not only be a main boost to the domestic economy and provide more employment opportunities but also a chance for FWD and ST to boost their production and successfully implement the projects would benefit from the location and financial benefits for doing business in a SEZ and access to cheap, well educated labor which graduates from the University of Shenzhen will provide. The incentives help in establishing and operating the plants using simplified compliance procedures and documentation. [4] Intellectual property concerns/ protections As a manufacturer of technology products characterized by very short lifespan, intellectual property rights (IPR) play a critical role in protecting DFW’s proprietary technology. As evidenced by the increased spending on research and development by companies, firm IPR promotes technology transfer from developed countries, which encourages the development of businesses in developing countries. A strong IPR region will enable DFW to produce and market their goods while protecting their technology and patent from counterfeits. It encourages investment and trading, as adequate protection of IPR will guarantee safety and protection of DFW’s proprietary technology from competitors. On the other hand, weak IPR regions will discourage DFW from transferring technology owing to high threat of losing competencies. It reduces licensing and investment due to a greater risk of losing technology to competitors. For DFW, IPR is a significant element in choosing investment regulations, taxes, trade policies, production incentives, and competition rules. Counterfeiting is a main intellectual property rights concern for DFW’s proprietary technology in the foreign market. The protection of patents and trade secrets is another concern of crucial importance. Infringement of intellectual property rights is widespread and systemic in china, and enforcement of legislation regarding the same is ineffective and inconsistent. Particularly in the case of start-up where the main assets are intangible, the incapacity to protect property rights is a critical concern for DFW. Shenzhen government provides market access, and there are prospects of protecting the intellectual property rights of foreign companies intending to transfer technology and production to SEZ. The Shenzhen government has enacted strict laws and amended its patent, copyright and trademark laws in efforts to revamp its intellectual property system. The bold steps and firm initiatives taken by the Shenzhen government reaffirm its assurance to eradicate and curb the intellectual property rights infringement problem. Presently, foreign investors operating in the country have witnessed some improvement in terms of the immediate actions taken regarding potential intellectual property rights infringement. Remarkable, the Shenzhen government has enacted a number of policies related to intellectual property rights infringement. Shenzhen has created the WTO affairs centre, assuming training, consultation, legal and forum service measures to offer pertinent professional services. [5] The following dispute resolution mechanisms are available to DFW to resolve any controversies that may arise regarding the investment: a) Combining Arbitration with Conciliation This is one of the main legislative mechanisms available in the Chinese law for resolution of conflicts. Article 51 of the Chinese Arbitration Law provides: “The arbitration tribunal may carry out conciliation prior to giving an arbitration award. The arbitration tribunal shall conduct conciliation if both parties voluntarily seek conciliation. If conciliation is not successful, an arbitration award shall be made promptly. If conciliation leads to a settlement agreement, the arbitration tribunal shall make a written conciliation statement or make an arbitration award in accordance with the result of the settlement agreement. A written conciliation statement and a written arbitration award shall have equal legal validity and effect.” (Tao, 101) Articles 45-50 of the China International Economic and Trade Arbitration Commission (CIETAC) arbitration rules provide: “ If both parties have a desire for reconciliation or one party, so desires and the other party agrees to it when consulted by the arbitration tribunal, the arbitration tribunal may conciliate the case under its cognizance in the process off arbitration. The arbitration tribunal may conciliate cases in the manner it deems appropriate. The arbitration tribunal shall terminate the conciliation and continue the arbitration proceedings when one of the parties requests a termination of the conciliation or when the arbitration tribunal believes that further efforts to conciliate will be futile. If the parties have reached a settlement outside the arbitration tribunal in the course of conciliation conducted by the arbitration tribunal, such settlement shall be deemed as on which has been reached through the arbitration tribunal’s conciliation. The parties shall sign a settlement agreement in writing when a settlement is reached through conciliation conducted by the arbitration tribunal, and the arbitration tribunal shall end the case by making an arbitration award in accordance with the contents of the settlement agreement unless otherwise agreed by the parties. Should the conciliation fail, any statement, opinion, view or proposal which has been made, raised, put forward, acknowledged, accepted or rejected by either party or by the arbitration tribunal in the process of conciliation shall not be invoked as grounds for any claim, defense and/or counterclaim in the subsequent arbitration proceedings, judicial proceedings or any other proceedings.” (Moser, 93) b) Mediation This central and most frequently used mechanism worldwide embraces a high level of international diplomacy to solve disputes. It is a flexible procedure carried out confidentially where a neutral individual actively helps parties in working towards a negotiated agreement of a disagreement. The two parties have decisive control of the decision to resolve and the tying terms of resolution. It is designed to achieve solutions that are mutually and commercially acceptable and not to accomplish solutions that reveal legal rights and obligations (Campbell, 251). Works cited Campbell, Dennis. The Comparative Law Yearbook of International Business: Cumulative Index, Volume 1-26, 1977-2004, Including Special Issues: 1992 ... Global Economy. The Hague: Kluwer Law International, 2006. Print. Moser, Michael J.. Business disputes in China. 2nd ed. Huntington, N.Y.: Juris Pub., 2009. Print. Tao, Jingzhou. Arbitration Law and Practice in China. Austin, Tex: Wolters Kluwer Law & Business, 2008. Print. Read More