McGILL LAW JOURNAL
REVUE DE DROIT DE McGILL
Montreal
Volume 31
1985
No I
Canadian Business Negotiations in Post-Mao China: A
Progress Report on the New Foreign Economic Legislation
Richard J. Goossen*
In 1979, the People’s Republic of China
launched a drive to modernize its economy
with the aid of foreign investment, promul-
gating The Law of the People’s Republic of
China on Chinese-Foreign Joint Ventures
(J. VL.). Several Canadian corporations, anx-
ious to boost their exports of technology and
technical expertise, have responded to this
overture. Some have negotiated equity joint
ventures under the terms of the J. VL. Others
have interpreted the J. VL., which in itself is
a very ambiguously-worded statute, simply
as a signal of Chinese interest in developing
foreign economic relations; this latter group,
much larger than the first, has been content
to enter into more informal contractual joint
ventures or sales agreements. After summa-
rizing the key provisions of.the J. VL. and
related statutes and regulations, the author
examines the experiences of these Canadian
companies in the years since 1979 and iso-
lates a number of factors which determine the
success or failure of business negotiations in
China. Some of these factors, such as the
growing but still incomplete corpus of Chinese
foreign economic legislation, Canadian ex-
port promotion programmes and the cum-
bersome Chinese bureaucracy, he sees as
En 1979, dans le cadre d’une campagne vi-
sant la modernisation de son Economie A ‘aide
d’investissements 6trangers, la R6publique
populaire de Chine promulgait The Law of
the People’s Republic of China on Chinese-
Foreign Joint Ventures (J. VL.). Plusieurs so-
cit6s canadiennes, anxieuses de voir aug-
menter leurs exportations de technologie et
d’expertise technique, ont profit de cette oc-
casion. Certaines soci6t6s ont n6goci6 des en-
treprises d capitaux mixtes (“equity joint
ventures”). D’autres ont interprt6 le J. VL.,
dont la r6daction est fort ambigud, comme
‘expression d’un d6sir de la Chine de d6ve-
lopper ses relations &onomiques avec l’6tranger
Ce dernier groupe de soci6t6s, considerable-
ment plus nombreux que le premier, a pr6f-r6
negocier soit des op~rations conjointes moins
formelles (“contractual joint ventures”), soit
de simples contrats de vente. Apr~s avoir r8-
sum6 les dispositions de la J. VL. et les autres
lois et raglements pertinents traitant ce sujet,
‘auteur 6tudie les exp6riences de ces com-
pagnies canadiennes depuis 1979 et isole les
facteurs determinants du succ~s ou de l’6chec
de n6gociations commerciales avec la Chine.
Certains de ces facteurs, tels l’insuffisance de
la 16gislation chinoise en mati~re de com-
merce extdrieur, les programmes d’exporta-
tion canadiens et ‘encombrante bureaucratie
chinoise sont, selon l’auteur, des facteurs que
“B.A.(Hons)(Simon Fraser), LL.B.(McGill) employed in the China Trade Department of
Johnson, Stokes & Master, Solicitors and Notaries, Hong Kong. The author wishes to thank
Professor G. Blaine Baker of the Faculty of Law, McGill University, for his instruction and
encouragement. Any errors or omissions are, of course, those of the author alone.
McGill Law Journal 1985
Revue de droit de McGill
McGILL LAW JOURNAL
[Vol. 31
essentially beyond the control of Canadian
negotiators. He urges Canadian businessmen
attempting to negotiate entry into the China
market to concentrate instead on the factors
over which they can exert some control. One
such factor is the overall Canadian approach
to this new market, an approach which to
date has been insufficiently aggressive. An-
other is the outlook of Chinese negotiators,
which the author perceives as amenable to
influence by patient capitalist interlocutors.
The decisive factor, and the one over which
Canadian companies can exercise the greatest
discretion, is price: it is only when they can
offer their technology on more competitive
terms that they will be invited to participate
in more joint ventures in China.
ne peuvent contrl1er les n~gociateurs cana-
diens. 11 invite donc les milieux d’affaires ca-
nadiens int6ress6s A n~gocier leur entree dans
le march6 chinois A concentrer leurs efforts
sur des facteurs sur lesquels ils ont plus de
contrble. L’approche globale du march6 chinois
par le Canada qui, jusqu’A ce jour, n’a pas 6t6
suffisamment agressive, est un de ces fac-
teurs. Un autre de ces facteurs est l’attitude
des n~gociateurs chinois, laquelle, selon l’au-
teur, est susceptible d’8tre influenc~e par des
interlocuteurs capitalistes patients. Le facteur
concluant, qui est aussi celui sur lequel les
compagnies canadiennes ont ]a plus grande
libert6 d’agir, est celui du prix. Ce n’est qu’en
offrant leur technologie A des termes plus
competitifs que les investisseurs canadiens
seront invites A participer A d’autres entre-
prises A capitaux mixtes et operations con-
jointes en Chine.
Synopsis
Introduction
I. The Joint Venture Process in International Business
II. The Joint Venture Process in the People’s Republic of China
III. General Considerations for Negotiating Joint Ventures in the People’s
Republic of China
A. Management Control
B. Profit and Pricing Policy
C. Technology Transfer and Capital Contribution
D. Banking and Financing
E. Taxation
E Dispute Settlement
IV. A Canadian Framework for Joint Venture and Other Business Negotiations
in the People’s Republic of China
A. Canadian Business Involvement in the PRC
B. Elements of the Framework
1. Fixed Factors
a. Existing Legislation
b. Canadian Identity
1985]
CANADIAN BUSINESS NEGOTIATIONS IN CHINA
3
c. Role of the Canadian Government
d. Chinese Negotiating Strategy
e. Chinese Bureaucracy
2. Variable Factors
a. Canadian Negotiators
b. Technology Transfer
c. Pricing
d. Outlook of Chinese Negotiators
V. Conclusion
Appendix: Questionnaire Results
Introduction
In a 1979 field study carried out by the Export Promotion Review
Committee, Canada’s export efforts were found to be hampered by, among
other problems, noncompetitive export financing, lack of government co-
ordination and too few exportable products designed and developed in Canada.I
The Committee found that Canada’s high trade volume resulted not from
technical expertise or shrewd marketing strategy, but rather from the high
margin for error that Canada’s resource-based economy allowed its inter-
national entrepreneurs. Imports consisted mainly of manufactured products
and exports were primarily made up of agricultural products and raw ma-
terials. 2 While natural resources might provide a springboard for Canada’s
entry into foreign markets, it was felt that increased amounts of technology
and technical expertise should be exported to provide a more diversified
trade balance. It was recommended that, in the future, Canadian business-
men and government officials ought to adopt a fresh approach to the export
of goods and services.
The “Pacific Rim” in general, and the People’s Republic of China (PRC)
in particular, present the possibility for an innovative approach. The Pacific
Rim encompasses approximately twelve East Asian nations which have been
‘Export Promotion Review Committee, “Strengthening Canada Abroad: Summary and Rec-
ommendations” in KC. Dhawan, H. Etemad & R.W. Wright, eds, International Business: A
Canadian Perspective (Don Mills, Ontario: Addison-Wesley, 1981) 719.
2See K.C. Dhawan, H. Etemad & R.W. Wright, “Introduction: Canada in the World Econ-
omy” in Dhawan, Etemad & Wright, ibid., 1.
REVUE DE DROIT DE McGILL
[Vol. 31
gathering economic strength for the past several decades. 3 When Canada’s
trade with Asia surpassed that with Europe in 1982, this shift in world
economic power and its implications for this country were dramatically
underscored. 4 Typical of the reaction was a declaration by one writer that
“Canadians have awakened in the 1980s to the fact that the Asia Pacific
region is the new locomotive of dynamism in the world today”. 5 And indeed,
since 1960, the Pacific Rim’s share of total world economic output has risen
from eight per cent to seventeen per cent.6 Canadian businessmen, naturally,
are anxious to exploit this opportunity to expand their markets in the Pacific
Rim.
Geographically, demographically, and strategically, China is the prin-
cipal player in the Pacific Rim. The proclamation of The Law ofthe People’s
Republic of China on Chinese-Foreign Joint Ventures7 on 8 July 1979, raised
hopes that the PRC would assume an equally dominant role economically.
The J. VL. signalled the start of the “open-door policy”, 8 an increase in
economic interaction with foreign entrepreneurs. While it provided only a
flexible framework for potential investors, a great deal of interest was gen-
erated by this legal manifestation of the “Four Modernizations” programme
first enunciated four years earlier.9 The desire to penetrate a hitherto un-
tapped market was given further impetus by the notion that “the greatest
rewards are likely to go to those Western investors willing to be the first
participants in the joint ventures”.’ 0 The joint venture mechanism was to
3The definition of the Pacific Rim adopted here includes: Australia, China, Hong Kong,
Indonesia, Japan, Korea, Malaysia, New Zealand, the Philippines, Singapore, Taiwan and
Thailand. This is in preference to the broader definition used in R.A. Matthews, “The Era of
the Pacific” (1983) 4 Pol’y Options 53-at 54: “One can therefore view the Pacific area as having
two sides: east Asia and Australasia on the west, and the western parts of North and South
America on the east. That is the famous ‘Pacific Rim’.”
4N.V. Freeman, “Asia Pacific: Crisis or Challenge?”, Asia Pacific Business (June 1984) 3.
51bid.
6C.p. Alexander, “Jumping for Joy in the Pacific”, Time (12 November 1984) 72 at 74.
7Reprinted in China’s Foreign Economic Legislation, vol. 1 (Beijing: Foreign Languages
Press, 1982) 1, (1979) 18 I.L.M. 1163 [hereinafter the Joint Venture Law or J. VL. cited to
C.EE.L. ]. C.EE.L. contains the official Chinese texts and unofficial English translations of the
Joint Venture Law and related pre-1982 legislation and is used as the primary source of quo-
tations from such legislation.
8The use of the term “open-door policy” in the context of this essay is not to be confused
with the open-door policy proclaimed by the United States in the late nineteenth century to
ensure that trade in China would not be monopolized by any one imperial power.
9The announcement of the “Four Modernizations” programme by Premier Zhou Enlai in
January 1975 at the Fourth National People’s Congress gave clear notice that foreign trade
was to play an important role in the future economic development of China. The four targeted
areas were agriculture, industry, national defence and science and technology.
10C.A. Jaslow, “Practical Considerations in Drafting a Joint Venture Agreement with China”
(1983) 31 Am. J. Comp. L. 209 at 223 n. 79.
19851
CANADIAN BUSINESS NEGOTIATIONS IN CHINA
5
become a vehicle through which to channel the economic needs of China
and the capital and expertise of Western entrepreneurs.
In view of the Communist regime’s previous tenacious adherence to
the principles of political independence and economic self-reliance, the J. VL.
was hailed as an invitation for business cooperation by foreign investors.
A plethora of articles appeared in foreign legal and business publications,
closely scrutinizing the terms of the J. VL. and speculating on its likely
impact.II These articles, though, were essentially predictive in nature, as
they were based more on textual analysis than on any actual experiences of
foreign investors operating under the new legislation. It is only in the years
since the appearance of these first articles that foreign corporations have
undertaken such operations. What, then, has been the actual experience of
Canadian companies in the years since 1979? This article will build on the
initial scholarly analyses of the J. VL. and related legislation, examining the
business arrangements, including sales contracts, cooperative production
agreements, cooperative ventures, and equity joint ventures actually entered
into by Canadian companies during the past few years in China. A list of
practical considerations in negotiating a joint venture agreement with the
Chinese will be compiled. These elements will then be analyzed in terms
of fixed and variable factors. The conclusion will propose guidelines which
Canadian negotiators may follow when drafting joint venture agreements.
I. The Joint Venture Process in International Business
A basic definition of a joint venture was adopted in Central Mortgage
& Housing Corp. v. Graham:
A joint venture is an association of persons, natural or corporate, who agree
by contract to engage in some common, usually ad hoe undertaking for joint
profit by combining their respective resources …. 12
This definition of an “economic marriage” can just as easily be applied to
international business. Whether in a domestic or international agreement,
each partner brings to these undertakings something which the other needs.
In both cases, the focus of the joint venture is usually quite restricted,
ISee, e.g., D.I. Salem, “The Joint Venture Law of the People’s Republic of China: Business
and Legal Perspectives” (1981-82) 7 Int’l Trade L.J. 73; Jaslow, ibid.; P.D. Reynolds, “The
Joint Venture Law of the People’s Republic of China: Preliminary Observations” (1980) 14
Int’l Law. 31; LEG. Baxter, “Business with the People’s Republic of China” (1981) 59 Can.
Bar Rev. 337; F.C. Rich, “Joint Ventures in China: The Legal Challenge” (1981) 15 Int’l Law.
183.
12(1973), 13 N.S.R. (2d) 183 at 207, 43 D.L.R. (3d) 686 (S.C. T.D.), Jones J. This definition
is taken from W.H.E. Jaeger, ed., Williston’s Treatise on the Law of Contracts, vol. 2, 3d ed.
(Mount Kisco, N.Y.: Baker, Voorhis, 1959) at 555.
McGILL LAW JOURNAL
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representing only a “narrow community of interest in a single area”.13 Such
arrangements are becoming more common today as a prerequisite for greater
expansion by foreign investors in host countries, even in the Communist
world.
There are two types of joint ventures. First, there is a nonequity or
contractual joint venture which entails a joining of interests with respect to
a certain enterprise. Most contractual joint ventures are distinguished by
three main characteristics, namely, pooled assets, shared profits and joint
management. The contractual joint venture itself need not be a limited
company; an agreement stipulating the rights and duties of the parties suf-
fices. The agreement will generally combine the funds, equipment and tech-
nology of the foreign partner with the labour, factory premises and raw
materials of the local associate. 14
The second form of participation, an equity joint venture, normally
requires more substantial capital investment. The essence of the equity joint
venture arrangement is the creation of a new limited company. Much care
is taken in negotiating the complex provisions of the agreement. 15 For in-
stance, the parties must determine the share ratio of the new limited com-
pany. The capital contributed by each partner can be either in cash or in
kind: factory buildings, machinery and equipment, land use rights, patented
technology, know-how and industrial property rights are examples. 16 The
duration of cooperation can vary from five years in the service and hotel
sector to twenty years in heavy industry.
The problem of reconciling the ideology derived from Marx and Engels
with the invisible hand of Adam Smith, a problem with which China is
currently grappling,17 was confronted in Eastern Europe almost two decades
ago. In 1967, Yugoslavia began to allow Western investments in state-man-
aged industrial enterprises, followed by Romania in 1971 and Hungary in
1972.18 There are certain similarities in the socialist encounters with capi-
talism on the two continents. Both Eastern Europe and China had been
13R.E. Cherin & J.J. Combs, eds, “Foreign Joint Ventures: Basic Issues, Drafting and Ne-
gotiation” (1983) 38 Bus. Law. 1033 at 1034.
14L. Fung, China Trade Handbook (Hong Kong: Adsdale People, 1984) at 172.
15R.J. Radway, “Overview of Foreign Joint Ventures” (1983) 38 Bus. Law. 1040 at 1043.
16Fung, supra, note 14 at 172.
17On 7 December 1984, an editorial in the People’s Daily proclaimed: “We cannot expect
the works of Marx and Lenin in their day to solve the problems of today.” The hasty correction
two days later, stating that the word “all” was inadvertently left out after “solve” only under-
scored the ideological confusion now reigning in China. See D. Bonavia, “The Marx Bothers”,
Far Eastern Economic Review (20 December 1984) 38 at 38-9.
18Rich, supra, note 11 at 189-90.
1985]
CANADIAN BUSINESS NEGOTIATIONS IN CHINA
7
isolated from the West for many years and the desire for advanced tech-
nology was tempered by a suspicion of foreign investors. Nevertheless, the
new laws promulgated in both areas were designed to encourage, not to
restrict, foreign participation in the domestic economy within a regulated
context.
The comparison between China and the Eastern European nations is
limited, however, in that the “Eastern European Laws were promulgated in
the context of a sophisticated European legal tradition which China lacked”.’ 9
While the Eastern European experience therefore cannot be used as a direct
model for what may eventually occur with the joint venture process in
China, some generalizations about socialist nations are useful. The use of
joint ventures in Poland, for example, illustrates that “socialist countries
recognize their need for technology from the Western democracies and wish
to follow a non-dogmatic approach in negotiating such arrangements”. 20
Moreover, many of the incentives used to encourage foreign investment in
Eastern Europe have been adopted by China,2 1 which is not surprising in
light of the fact that Chinese officials studied the Yugoslavian, Romanian
and Hungarian laws, among others, before enacting their own. 22 The J. VL.
is simply an enabling law made up of fifteen vaguely-worded provisions,
similar in nature to the statutes of the Eastern European countries, which
amount essentially to brief basic decrees of general application.23
II. The Joint Venture Process in the People’s Republic of China
The enactment of the Joint Venture Law in 1979 was not only an
economic measure; it was also a political act. Thirty years earlier, Chinese
Communist Party Chairman Mao Zedong had signalled the PRC’s intention
to steer a proud and independent course by proclaiming on 1 October 1949,
from the Gate of Heavenly Peace, that “China has stood up”. In Mao’s
vision of Marxism-Leninism, the responsibility for economic development
rested on the shoulders of the ideal Communist Man whose “attributes of
self-denial, total commitment, energy, struggle, initiative and inventiveness”
would overcome China’s lack of technical expertise.24 This theoretical base
translated into a policy of “men over machines” and “better red than expert”. 25
’91bid. at 190.
20J.G. Scriven, “Joint Ventures in Poland: A Socialist Approach to Foreign Investment Leg-
islation” (1980) 14 J. World Trade L. 424 at 437.
2’Rich, supra, note 11 at 190.
22Radway, supra, note 15 at 1045.
23Scriven, supra, note 20 at 428.
24A. Eckstein, China’s Economic Revolution (Cambridge: Cambridge University Press, 1977)
at 35.
25Ibid.
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This model of economic development prevailed until Mao’s death in
1976. With the arrest of the Gang of Four shortly thereafter, a new moderate
government, first under Hua Guofeng and then under Deng Xiaoping, emerged
to reassess the political and economic problems facing China. A pragmatic
philosophy inspired by Deng’s famous aphorism that “it doesn’t matter
whether the cat is black or white, as long as it catches mice” quickly came
into vogue. In 1978, this new regime reaffirmed, at the Fifth National Peo-
ple’s Congress, the Four Modernizations programme outlined three years
earlier by the late Premier Zhou Enlai. The areas targeted for increased
production, in which foreign investment was to play an important role, were
agriculture, industry, science and technology and national defence. In view
of the absence of a suitable legal framework for foreign entrepreneurs, the
J. VL. was enacted to regulate Western participation in the Chinese economy.
The J. VL. was not merely fifteen articles regulating a particular form
of business enterprise; rather, it symbolized the new Chinese open-door
policy of economic cooperation with foreign investors. Given the Maoist
doctrine of total self-reliance, full sovereignty and a classless society, the
promulgation of the J. VL. was said to represent “a major concession to the
West, illustrating China’s desire for Western investment”.2 6 The sincerity
of China’s objective of “expanding international economic co-operation and
technical exchange” as stated in article 1 has been verified in retrospect.
The attempts made since 1979 to clarify ambiguities in the J. VL. and to
implement complementary legislation 27 to alleviate the concerns of Western
investors have confirmed the good faith of the Chinese. A Chinese official
boasted in 1984: “People will find the full embodiment of China’s firm and
unshakeable open policy in all its legal documents, from the Constitution
to concrete laws and regulations concerning foreign economic affairs, from
bilateral to multilateral treaties. ‘ 28 While the legal system of China is only
six years old, and wide gaps remain to be filled by legislative draftsmen, an
energetic process of reorientation was indeed begun in 1979.
The J. VL. sets forth a framework for the negotiation and operation of
equity joint ventures. Contractual joint ventures, on the other hand, which
26Jaslow, supra, note 10 at 231.
27See, e.g., Provisions of the People’s Republic of China for Labour Management in Chinese-
Foreign Joint Ventures (promulgated 26 July 1980) reprinted in C.EE.L., supra, note 7, 20,
(1980) 19 I.L.M. 1454 [hereinafter the Labour Management Provisions] and Interim Procedures
for the Handling of Loans by the Bank of China to Chinese-Foreign Joint Ventures (promulgated
13 March 1981) reprinted in C.EE.L., supra, note 7, 27.
28Xiao Yongzhen, “Legislation Firmly Holds Open China’s Doors”, Beijing Review (22 Oc-
tober 1984) 16 at 17.
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CANADIAN BUSINESS NEGOTIATIONS IN CHINA
9
in China appear in a variety of guises such as cooperative ventures 29 and
cooperative production agreements, are separately and less extensively reg-
ulated. In practice, the terms of these various contractual joint ventures
have been left primarily to the imaginations of the contracting parties.3 0
For some investors the J. VL. has represented an opportunity to make
a substantial investment in China; for others it has simply signalled an
improving economic climate conducive to increased trade or the conclusion
of a contractual joint venture. A more fundamental distinction, however,
can be drawn on the basis of these potential investors’ differing appreciations
of the legal framework in China, as exemplified by the J. V.L.
On the one hand, those vigorously pursuing the China market stress
that a knowledge of custom and law are crucial to an understanding of the
J. VL.3 1 In their view the ambiguity of the provisions in the J.V.L. was not
only to be expected given the limited “conceptual reservoir” of legal thought
in China, but was deliberately designed that way as in other Communist
countries. 32 The Chinese, who do not rely on positive law as heavily as do
Western businessmen, treat the principles of equitable performance and
amicable dispute resolution as paramount. 33 While article 2 provides sta-
tutory protection for the foreign partner’s investment, it must be understood
that “[p]revailing commercial custom and practice is more important in the
Far East than dependence on legal rules and litigation skills for their en-
forcement”. 34 The provisions of the J. VL., while undeniably incomplete,
allow the relationship between the parties to overshadow the written law.
From this point of view, the perceived vagueness of the J. VL. could be
viewed as conferring flexibility on the Western partner when negotiating the
terms of an agreement. The J. VL. was meant to provide a framework within
which the details of participation were to be negotiated: “The forum for
29The Chinese term for “cooperative venture” has also been translated as “cooperative en-
terprise”. See, e.g., J.A. Cohen, “Some Problems of Investing in China” in J.A. Cohen, ed.,
Legal Aspects of Doing Business in China 1983 (New York: Practising Law Institute, 1983) 65
at 69.30Contractual joint ventures do have to abide by the terms of certain more general statutes
such as the The Income Tax Law of the People’s Republic of China Concerning Foreign En-
terprises (promulgated 13 December 1981) reprinted in C.EE.L., supra, note 7, 64, (1982) 21
I.L.M. 802 [hereinafter the Foreign Enterprise Income Tax Law]. See also infra, note 114 and
accompanying text.
31See Rich, supra, note 11 at 186: “Counsel preparing to enter a joint venture negotiation
with the Chinese would be wise to study these concepts of ‘self-reliance’ and ‘equality and
mutual benefit’, and be prepared to offer and defend proposed contract provisions in the context
of those concepts.”
32Baxter, supra, note 11 at 350.
33R. Edwards, “The Legal Framework of Chinese Trade” in H.M. Holtzmann, ed., Legal
34Baxter, supra, note 11 at 351.
Aspects of Doing Business with China (New York: Practising Law Institute, 1976) 63 at 65.
McGILL LAW JOURNAL
[Vol. 31
filling in the details is exactly that which Western businesses would have
the negotiating table.”’35 From this perspective, there is indeed
wanted –
a viable opportunity for Western entrepreneurs to explore the China market.
The barrier to participation is not the lack of legal structure, but a mental
block concerning a supposed absence of political stability. As one American
commentator puts it, “[t]he question of security essentially is one of political
risk”.
36
On the other hand, other Western entrepreneurs, for whom effective
legal guarantees are a prerequisite for investment in China, have proven
unwilling to accept this political risk. The early statements by Chinese of-
ficials that detailed regulations and additional legislation dealing with com-
pany law, labou; banking, foreign exchange, intellectual and industrial property
and taxes would follow the adoption of the J. VL., were viewed by these
individuals with scepticism. 37 There were underlying fears among some
foreign partners that a contract signed today might be altered by legislation
promulgated tomorrow. 38 As a result, some transnational corporations were
reluctant to embark on joint ventures until the legal framework was “more
fully fleshed out”.39 In 1979, for example, a Japanese electronics firm ad-
amantly refused to sign any joint venture agreements until the law affecting
potential business operations was clarified.40 These concerns have mostly
dissipated in the years since the proclamation of the J. VL. as the Chinese
have steadily solidified the legal foundation needed for business cooperation.41
In recent years, the Chinese have made a concerted effort to expand
the legal protection available to foreigners. As one Chinese editorialist noted:
Since 1979 China has enacted more than 40 laws and regulations concerning
such matters as Chinese-foreign joint ventures, the exploitation of offshore oil,
taxation of foreign enterprises, organizations and individuals in China, labour
management, administration of industry and commerce, foreign exchange, con-
trol, customs, import and export commodities inspection, banking and credit,
trade marks, patents, special economic zones, etc. 42
This process of legal codification and clarification has balanced the Chinese
objective of facilitating the transfer of technology and the foreign investor’s
need for legal certainty.
35Rich, supra, note 11 at 210.
361bid.
37Ibid. at 189.
38Cohen, supra, note 29 at 78.
39Rich, supra, note I I at 188.
4Ibid. at 188 n. 47.
41Much work, of course, remains to be done. One of the shortcomings in China’s commercial
law system is the continuing absence of a company law. See K.C. Wong, “A Legal Opinion”,
China Trade Report (June 1984) 13.
42Xiao, supra, note 28 at 16.
1985]
CANADIAN BUSINESS NEGOTIATIONS IN CHINA
11
Illustrative of this process is the Chinese Constitution of 1982, which
explicitly protects foreign investment at the constitutional level. Articles 18
and 32 envision cooperation between foreign enterprises and Chinese or-
ganizations and ensure protection of the “lawful rights and interests” of the
former.43
Another significant legislative development, which attempts to address
some major practical issues confronting Western investors participating in
joint ventures, was the issuing of the Regulations for the Implementation
of the Law of the People’s Republic of China on Chinese-Foreign Joint Ven-
tures on 20 September 1983. 44 The Deputy Director of the Ministry of
Foreign Economic Relations and Trade (MOFERT) Legal Division, speak-
ing in Canada in 1984, addressed the concerns of Canadian businessmen
by stressing that the Regulations “supply both assistance and guarantees to
the joint venture in planning and permit the full autonomy for its man-
agement”. 45 The Deputy Director also asserted that the Regulations provide
detailed guidelines on domestic channels available to joint ventures for the
purchase of raw materials and the sale of products.46 The United States
Department of Commerce responded favourably to the Chinese initiative,
noting that “the Regulations represent significant positive steps towards the
continued improvement in conditions encouraging foreign investment and
its contribution to China’s four modernizations”. 47 The Regulations appear
therefore to have allayed many Westerners’ fears.
An even more recent development is The Patent Law of the People’s
Republic of China,48 which became effective on 1 April 1985. This legislation
is expected to “play an active role in accelerating the imports of technology
[and] the utilization of foreign funds” by filling what Western investors have
viewed as an important gap in Chinese law.49 The Patent Law replaced the
Regulations for Rewards on Inventions, under which all inventions belonged
to the state and all work units in China could make use of inventions as
43Translated as The Constitution ofthe People’s Republic of China (Beijing: Foreign Languages
Press, 1983) reprinted in A.P. Blaustein & G.H. Flanz, eds, Constitutions of the Countries of
the World, vol. 3 (Dobbs Ferry, N.Y.: Oceana, 1983).
44Translated and reprinted in Beijing Review (10 October 1983) supp. i, as well as in (1983)
22 I.L.M. 1033 [hereinafter the Regulations].
45W. Gooding & A. Mathieu, “Royal’s Deal Key Step in China Push”, The Financial Post
(8 September 1984) 1.
46 Ibid.
47American Embassy, Beijing, People’s Republic of China: Foreign Economic Trends and
their Implicationsfor the United States (Washington: International Trade Administration, 1984)
at 14.
48Translated and reprinted in Beijing Review (9 April 1984) supp. i [hereinafter the Patent
Law].
49Hu Mingsheng, “Patent Law Encourages Chinese and Foreign Investors”, Beijing Review
(9 April 1984) 23.
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[Vol. 31
they deemed necessary. Most recently, the Chairman of the China Inter-
national Trust and Investment Corporation (CITIC) reiterated the Chinese
commitment to continue the liberalization of economic policies and prom-
ised “further tax cuts, longer tax holidays, greater access to domestic mar-
kets, and a longer life-span for joint venture projects”. 50
The joint venture process in China cannot be fully understood without
an examination of the bureaucratic tangle through which most foreign in-
vestment agreements must pass. 51 Policy governing such agreements is gen-
erally coordinated and directed through the bureaucracy of the central Chinese
government. The two organizations which administer the J. VL. at this level
are CITIC and MOFERT.
CITIC’s stated purpose is “to introduce, absorb, and apply foreign in-
vestment”. 52 Confusion has been widespread among foreign investors since
CITIC is not the sole organization through which contact can be initiated;
various provincial development groups, municipalities and Special Eco-
nomic Zones (SEZs) 53 may agree to contract up to specified amounts.54 Some
argue that the most sensible route is to take advantage of CITIC’s broad
mandate to
undertake under commission from foreign corporations, enterprises, other eco-
nomic entities or individuals to negotiate and enter into short-term or long-
term joint venture agreements and related contracts with the various local
administrations and departments in China, and the corporations, enterprises,
and other economic entities thereunder, and vice versa.55
This allows the foreign investor to circumvent as many dealings with the
bureaucracy as possible. On the other hand, often the best contract may be
obtained by contacting all the provincial, municipal, and SEZ organizations
which offer the desired services and then striking the best deal available. 56
50A. Mathieu, “China to Offer More Incentives”, The Financial Post (20 October 1984) 16.
5 Jurisdiction varies with the amounts involved. See infra, note 54.
52Salem, supra, note 11 at 78 ×..
53At present, there are four Special Economic Zones, all in South China. These are small
enclaves, modelled after the export processing zones prevalent in many other East Asian coun-
tries. They have been designed to attract foreign and Overseas Chinese capital by offering
special concessions and modem infrastructures conducive to assembly operations and other
industry. The four SEZs are located in: Shenzhen, opposite Hong Kong; Zhuhai, adjacent to
Macao; and the old treaty ports of Shantou (Swatow) and Xiamen (Amoy).
54 ?Regulations, supra, note 44, art. 8.
55Salem, supra, note 11 at 79 ×..
56For a description of this process of decentralization, see S.L. Ellis, “Decentralization of
China’s Foreign Trade Structures” (1981) 11 Ga J. Int’l & Comp. L. 283. See also Cohen, supra,
note 29 at 97; W.P. Alford & D.E. Birenbaum, “Ventures in the China Trade: An Analysis of
China’s Emerging Legal Framework for the Regulation of Foreign Investment” (1981) 3 Nw.
J. Int’l L. & Bus. 56 at 84.
1985]
CANADIAN BUSINESS NEGOTIATIONS IN CHINA
13
Once the two parties have agreed to undertake an equity joint venture
and have agreed on the scope of the contract, the basic terms are expressed
in a signed letter of intent. This letter is then submitted to MOFERT which
is responsible for approving large-scale joint ventures and for maintaining
continual scrutiny and control of their operations. 57 Such approval is often
contingent on the results of a feasibility study. While there is occasional
disagreement over which participant will bear the costs of the study, the
Chinese tend to be flexible, though not overly generous. 58 The process by
which joint ventures are approved, which was shrouded in mystery in the
early 1980s, has now been clarified in the Regulations.5 9 Still, while the
Chinese criteria for the approval of a joint venture have been specified, “a
lengthy process of negotiation and documentation” remains the rule.6 0 MO-
FERT exerts considerable control over the final form of the joint venture,
as the terms of the contract must be vetted at various stages of the nego-
tiation process. 6 1 MOFERT also supervises the implementation of the pro-
visions of the joint venture and approves any subsequent modifications to
the contract. 62
If the joint venture is designed to export products, which the Chinese
prefer in order to obtain foreign exchange, other organizations within the
bureaucracy are mobilized. Foreign trade is directed by MOFERT, assisted
by the quasi-governmental China Council for the Promotion of Interna-
tional Trade (similar in certain respects to a Chamber of Commerce). The
actual conduct of foreign trade was previously the exclusive preserve of the
various Foreign Trade Corporations (FTCs), which have staff specialized in
dealing with a range of commodities from agricultural products to manu-
factured goods. 63 The monopoly of the FTCs, however, is eroding as the
rapid expansion of foreign trade has led to a decentralization of business
contacts with Western entrepreneurs in a drive to facilitate the sale of exports
and the transfer of technology. 64
The Chinese bureaucracy resembles a maze in which the starting point
is clear but the path leading out to a functioning joint venture is difficult
to trace. The Regulations are an attempt to remedy this situation. Article
57Cohen, ibid. at 95.
S5 Ibid. at 97.
59Among the documents which must be submitted are the joint venture agreement, the joint
venture contract and the articles of association. Regulations, supra, note 44, art. 9(2)(c).
60Rich, supra, note 11 at 193.
6’Ibid.
62Cohen, supra, note 29 at 96.
63Baxter, supra, note 11 at 342.
64Since the advent of the open-door policy, the province of Guangdong and the municipalities
of Beijing, Shanghai and Tianjin, for example, have been granted greater authority to conduct
foreign trade. See L. do Rosario, “That Old Sleeping Dragon is Awakening at Last”, Far Eastern
Economic Review (21 March 1985) 75.
McGILL LAW JOURNAL
[Vol. 31
6 sets out the line of authority which applies when a joint venture has more
than one Chinese participant. Article 8 stipulates that MOFERT will yield
to the governments of the provinces, autonomous regions and municipalities
or related ministries under the State Council (the Cabinet) the power to
examine and approve smaller-scale joint ventures. This attempt at decen-
tralization is designed to render the processing ofjoint venture applications
more efficient and to make the procedure less painful for foreign investors.
IH. General Considerations for Negotiating Joint Ventures in the People’s
Republic of China
Experience in the negotiation process is as crucial as understanding the
law, since lacunae in the existing legislation compel the partners to engage
in “serious, in-depth, personal negotiations”. 65 Because a chief characteristic
of Chinese law is “the bargain’s the thing”, an understanding of the manner
to approach the negotiation of a joint venture is necessary for full partici-
pation in the China market.66
A dual approach will be used to compile the practical considerations
forCanadian companies in negotiating joint venture agreements with China.
First, the J. VL. and related laws and regulations will be examined, in order
to provide insight into the vexing issues which often arise. Second, the
experience of Canadian investors in the bargaining process will be studied.
The Canadian experience in China, which consists mainly of negotiating
contractual joint ventures and a number of other types of business rela-
tionships, is relevant in its entirety in providing a framework of consider-
ations to be taken into account when drafting a complex contractual or
equity joint venture agreement.
A. Management Control
The J. VL. establishes in article 6 two fundamental provisions with
respect to the Board of Directors and management personnel. First, control
of the Board is ostensibly tipped in favour of the Chinese, as the office of
the chairman is filled by the local participant, while the one or more vice
chairmen are foreign representatives. From the standpoint of the Chinese,
however, an equitable balance is struck since “[m]anagement participation
[itself] is a major concession made to Western investors”. 67 Second, the
Board resolves disputes “through consultation by the parties to the venture,
65Salem, supra, note 11 at 73.
660. Lee, “Formation of Contract and Contract Law through Multinational Joint Ventures:
Indonesia, China and the Third World” (1983) 17 Int’l Law. 257 at 261.
67Jaslow, supra, note 10 at 217.
1985]
CANADIAN BUSINESS NEGOTIATIONS IN CHINA
15
in accordance with the principle of equality and mutual benefit”. 68 Since
this implies a form of “unanimity requirement”, 69 the question “what if
there is no consensus?” need not be asked. “The Chinese way is to discuss
things until agreement is reached. ‘ 70 It may be easier to stipulate unanimity
than to achieve it in practice and therefore the foreign partner should con-
sider the possibility of a stalemate and its consequences. 71 In addition, over-
loading the joint venture with too many unanimity requirements, which is
tantamount to a veto power for each participant, could paralyze day-to-day
operations. 72
One can argue that while ultimate control rests with the Chinese partner,
de facto power in the enterprise will tend to gravitate towards the foreign
participant. 73 As a general rule, extensive management experience and su-
perior technological expertise will give the edge to the foreign partner, at
least in the early stages, with the Chinese chairman adopting a purely su-
pervisory role. Even ultimate control is not beyond the foreign investor’s
grasp if during the negotiation process the latter holds out for the right to
appoint a majority of the Board members. A resourceful foreign participant
can secure a significant degree of control, as China has proven more flexible
in apportioning risk and control than have other socialist countries. 74 The
failure of article 6 to delegate exhaustively lower management positions also
allows Western experts to perform functions essential to the day-to-day
operations of the joint venture, such as those of technical director, quality
control director, production manager, engineering manager, commercial
manager and chief accountant. 75
Another consideration which should be taken into account when ne-
gotiating the management provisions of the joint venture contract is the
length of time necessary for foreign managers to remain involved in the
joint venture. While the contract can stipulate a phase-out of managers
within certain guidelines or a rotation between foreign and Chinese man-
agers, it should retain flexibility in order to provide for contingencies which
may arise during the life of the joint venture. 76 The power of the manager
to hire and fire personnel must also be determined. While article 6 of the
J. VL. permits conditions governing “[t]he employment and dismissal of
68J. VL., supra, note 7, art. 6.
69Jaslow, supra, note 10 at 219.
70Cohen, supra, note 29 at 85.
71Ibid.
72Jaslow, supra, note 10 at 219.
73Ibid. at 221.
74Salem, supra, note 11 at 91.
75Jaslow, supra, note 1O at 222-3.
76Cohen, supra, note 29 at 93.
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the staff and workers” to be negotiated by the parties, the Labour Manage-
ment Provisions now offer more explicit guidelines. 77 Another consideration
is whether less experienced Chinese managers should receive the same pay
as foreign executives. If so, from a foreigner’s standpoint, the joint venture
would be incurring unnecessary overhead.78
B. Profit and Pricing Policy
With the proclamation of the J. VL., Chinese Communist Party cadres
came face to face with the quintessential capitalist objective of profit max-
imization. While ideologically uncomfortable with the profits concept, the
Chinese hierarchy accepted it as a necessary lure to attract foreign investors.
But many felt that this concession on their part went unappreciated and
they criticized Western participants for being too concerned with achieving
minimum returns on investment, requiring regular profit transfers, and seek-
ing maximum profits over the shortest time possible. The mode of calcu-
lation and distribution of profits therefore must be resolved through negotiation,
since there is no applicable Chinese legislation. 79
The process of establishing a pricing policy to determine the margin or
profit on goods produced by the joint venture graphically reveals the dif-
ferent approaches of the two participants. The J. VL. refers to but does not
define the relevant terms: the “profits due” the foreign partner will be pro-
tected (article 2) and the “net profit” of the joint venture minus the joint
venture income tax on “gross profit” and stipulated deductions in the articles
of association are to be distributed in proportion to the partners’ “registered
capital” (article 7). Chapter VIII of the Regulations does not establish guide-
lines for pricing policy, but refers to those who will carry it out. For example,
joint venture products for sale in the Chinese domestic market “shall cor-
respond with state-set prices, be rated according to quality and paid in
renminbi (RMB)”, while prices of export products “will be fixed by the joint
venture itself’.80 Even though the pricing of joint venture goods is a major
issue in completing a contract, policy guidelines are intentionally absent
from the J. VL., thereby forcing the parties to reach an acceptable compro-
mise on the matter.81
Problems can easily arise with the accounting of profits and their re-
patriation. It is important to address various concerns such as whether local
accounting procedures will be used, whether accounting is to be done in the
77Supra, note 27.
7 8Cohen, supra, note 29 at 89.
79Jaslow, supra, note 10 at 230-3.
8 Regulations, supra, note 44, art. 66.
8 Salem, supra, note 11 at 104.
1985]
CANADIAN BUSINESS NEGOTIATIONS IN CHINA
17
local currency or whether accelerated depreciation and other Western con-
cepts can be used.82 The conciliatory policy of China and the lack of qualified
accountants allow foreign investors to dictate more of the terms than was
possible in Eastern Europe. 83 The repatriation of profits presents a problem
since the RMB is not readily exchangeable on the world market and imports
must be paid for with hard currency. 84 Of course, profits are of little use if
they cannot be converted to hard currency. While adequate export earnings
are probably the best remedy, what if the joint venture is unsuccessful in
the export market?85 Clearly, a number of difficulties in negotiating a joint
venture centre on reconciling the opposing approaches to the concept of
profits.
C. Technology Transfer and Capital Contribution
The J. VL. stipulates that “[e]ach party to a joint venture may make
its investment in cash, in kind, or in industrial property rights, etc.” 86 The
contribution of the foreign partner shall “generally not be less than 25 [per
cent] of the registered capital of a joint venture”.8 7 Problems may arise
when assessing the Chinese contribution. The “right to the use of a site”
(article 5) may be part of the Chinese investment and, one writer suggests,
the value of such a contribution may be inflated as a retaliatory measure
depending on the valuation of the foreign partner’s assets.88 Also, since the
joint venture is required to give “first priority” to purchases in China (article
9), the contract should stipulate a ceiling on the cost of certain raw materials,
perhaps based on the value of the products on the international market and
the cost of their transportation to China.89 MOFERT recommends that
precious metals and natural resources “be priced in the light of the inter-
national market prices and paid in RMB”, and that water, electricity, gas
and motor vehicle oil costs be calculated according to domestic prices.90
The provisions of the J. V.L. governing the transfer of technology raise
a number of issues. For example, the requirement, in article 5, that the
transferred technology be both advanced and suitable to China’s needs has
82Jaslow, supra, note 10 at 233-4.
83Ibid. at 234.
84 Ibid.
85For a discussion of the six primary contractual methods which are utilized to solve this
problem in Eastern Europe, see ibid. at 235-6.
86Supra, note 7, art. 5.
87Ibid., art. 4.
88Salem, supra, note 11 at 88.
89Cohen, supra, note 29 at 98.
901bid.
McGILL LAW JOURNAL
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been criticized as contradictory; 9 1 the requirement “is simply too imprecise
and amenable to unilateral Chinese interpretation”. 92 Furthermore, the for-
eign partner may be liable in damages if it causes “losses by deception
through the intentional use of backward technology and equipment”. 93 There
is neither a definition of “intentional deception” nor a stipulation of what
tribunal is responsible for that determination. 94 Should such a finding be
made, there is no compensation scale. 95 The Chinese are also free to de-
termine whether a joint venture “possesses advanced technology by world
standards” entitling it to a reduction in taxes.96 The significant degree of
discretion vested in the Chinese and the lack of stipulated guidelines for its
exercise contrast sharply with Canadian or American boilerplate contracts,
which exhaustively detail the rights and liabilities of each party.
Advanced technology may be a source of relative bargaining strength
during negotiations, but its transfer often results in problems later in the
joint venture. 97 A detailed list of all items of technology should be drafted
in order to clarify the expectations of the parties. 98 A number of problems
may arise, however. The foreign partner must provide enough information
about the technology to convince the Chinese of its benefits, without re-
vealing trade secrets. 99 He must also discuss “the fate of the technology after
the expiration of the joint venture”. 00 The Western partner may also be
obligated to meet the demands of the local partner by supplying modifi-
cations and improvements to the technology and encouraging local research
and development during the joint venture.’ 01
Before the Patent Law became effective, the only written protection for
the Western partner was in the negotiated terms such as specific security
measures, non-disclosure and secrecy provisions. 02 Without such precau-
tions, the technology used at a particular joint venture site could be dupli-
cated at numerous other factories throughout China without remuneration
for the patent holder. Whether the Patent Law provides sufficient protection
for Western investors will depend upon the good faith of the Chinese in its
implementation.
9WJaslow, supra, note 10 at 246.
92Salem, supra, note 11 at 103.
93J. VL., supra, note 7, art. 5.
94Salem, supra, note 11 at 103.
9 5Ibid.
9 6J.V.L., supra, note 7, art. 7.
97Jaslow, supra, note 10 at 243.
98Ibid. at 244.
99Ibid. at 244 n. 231.
1Ibid. at 245.
’01Ibid.
1021bid. at 245-6.
1985]
CANADIAN BUSINESS NEGOTIATIONS IN CHINA
19
D. Banking and Financing
Article 8 of the J. VL. lists three basic guidelines concerning financing:
joint ventures must open accounts with the Bank of China, or a bank ap-
proved by the Bank of China, and conduct foreign exchange transactions
in accordance with the foreign exchange regulations of China, but they are
free to obtain funds directly from foreign banks. The basic functions of the
state-run Bank of China are as follows: management of China’s international
trade, operation in international money markets, exchange control, estab-
lishment of relations with foreign correspondent banks where foreign cur-
rency accounts are established, conduct of commercial and branch deposit
banking, and control of the payment of business enterprise taxes.1 03 Like
the FTCs, though, the Bank of China’s monopoly is quickly eroding in the
face of increased competition from CITIC, among others. 0 4
The Chinese have had to reacquaint themselves with the idea of secured
financing since the advent of the open-door policy. The Bank of China rules
for lending to joint ventures allow the parties to obtain collateral security
for their loans. If security is not available, guarantees of payment by the
partners are often crucial to obtaining foreign credit. The Bank of China,
however, has issued no guidelines as to the kinds of guarantees permitted,
by whom they can be made, and in what circumstances they will be granted.105
Another problem is that while the Bank of China has financial experts, many
officials still lack the sophistication required to carry out complex inter-
national transactions. 0 6 Since the Chinese are unsure of their own expertise,
no stable methods of financing have been perfected as yet. A Canadian writer
observed in 1981 that “the picture in regard to financing of business in the
PRC seems to keep changing and to indicate a government that modifies
its principles (even radically) if they hinder the pragmatic requirements of
a general policy of rapid modernization”, 07 and the situation remains un-
settled several years later. Obviously, a prerequisite to industrialization is
the ability to finance projects as they are conceived. This explains, in short,
the failure of China to accommodate more foreign investment since 1979.
In negotiating a joint venture agreement, difficulties in financing should be
resolved early, as the time invested will be lost if funding for the operation
cannot be arranged.
10 3Baxter, supra, note 11 at 357.
104N. Langston, “Fame is the Spur Two Chinese Financial Institutions Compete for Inter-
national Recognition”, Far Eastern Economic Review (6 June 1985) 58.
05Cohen, supra, note 29 at 94.
IO6Ibid.
071Baxter, supra, note 11 at 359.
20
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[Vol. 31
E. Taxation
The J. VL. barely refers to taxation. The PRC’s first comprehensive tax
system was established in 1980 with the promulgation of The Income Tax
Law of the People’s Republic of China Concerning Chinese-Foreign Joint
Ventures and The Individual Income Tax Law of the People’s Republic of
China.108 This legislation was a necessary supplement to the J. VL. since
“[i]n setting out tax bases, rates, incentives and administrative procedures,
the tax laws establish a structure which allows foreign investors to calculate
the costs of investing in the PRC”. 10 9 The J. VTL. assesses worldwide in-
come derived from the joint venture and offers a number of investment
incentives: tax holidays, loss carryforwards, reinvestment refunds and for-
eign tax credits.’ lo The LLT.L. provides for a progressive tax on income.
Individuals residing in China for more than one year are taxed on worldwide
income while all others are taxed only on income earned within China.I’
The J. VTL. incentives are designed to encourage use of the equity joint
venture vehicle, as opposed to the various forms of contractual joint ven-
tures for which fewer such incentives exist. Equity joint ventures engaged
in low-profit enterprises or in remote underdeveloped areas, for instance,
may receive a fifteen to thirty per cent reduction on income tax.” 12 A firm
reinvesting profits in China for five years may have forty per cent of the
reinvested amount refunded as an investment incentive under the J. VTL. 113
Businesses to which the Foreign Enterprise Income Tax Law applies are
offered no similar concessions. 1 4 There is also preferential treatment of
Chinese and non-Chinese employees and the withholding of individual in-
come taxes with respect to equity joint ventures.
10The Income Tax Law of the People’s Republic of China Concerning Chinese-Foreign Joint
Ventures (promulgated 10 September 1980) reprinted in C.FE.L., supra, note 7, 36, (1980) 19
I.L.M. 1452 [hereinafter the J. VTL. ]; The Individual Income Tax Law ofthe People’s Republic
of China (promulgated 10 September 1980) reprinted in C.EE.L., supra, note 7, 75, (1980) 19
I.L.M. 1451 [hereinafter the LLTL. ]. This new legislation replaced China’s two previous major
taxes: industrial and commercial consolidated tax, and industrial and commercial income tax.
For a discussion of the pre-1980 legislation, see Price Waterhouse, DoingBusiness in thePeople’s
Republic of China (New York: Price Waterhouse, 1979) at 17.
‘OP. Fields, “Taxation: The People’s Republic of China Income Tax Laws” (1981) 22 Harv.
Int’l L.J. 234 at 238.
RIOJ. VTL., supra, note 108, arts 5, 7, 6 and 16 respectively.
I.ILLTL., supra, note 108, art. I.
112Fields, supra, note 109 at 235.
” 3Cohen, supra, note 29 at 113-4.
“4The Foreign Enterprise Income Tax Law, supra, note 30, applies to cooperative ventures,
cooperative production agreements and foreign business establishments. It does contain a loss
carryforward provision in art. 6 identical to that in art. 7 of the J. VTL., supra, note 108;
otherwise, it is considerably less generous.
1985]
CANADIAN BUSINESS NEGOTIATIONS IN CHINA
21
Besides taking notice of the preferred treatment of equity joint ventures,
the foreign partner negotiating an agreement should be aware of potential
problem areas in the revenue laws. These stem from the ambiguity inherent
in much Chinese legislation which makes the extent of tax liability of foreign
partners uncertain. Tax planning is not facilitated by the absence of defi-
nitions of such terms as “cost”, “expense”, “losses” and “residing”.’ 15 The
considerable discretion vested in the revenue authorities, which allows them
to treat investors differently, may also backfire as foreign partners could
react negatively to any indication of favouritism by Chinese officials for
certain investors. A number of other unresolved tax-related questions per-
sist. What type of foreign income tax will the Chinese allow to be credited
against their own? Will joint venture subsidiaries and branches be permitted
the same tax credits? Is there a limit on the amount which can be offset?
In order to benefit from these various tax incentives, the foreign investor
at the bargaining table.
must clarify his status for tax purposes in advance –
E Dispute Settlement
While both parties plan to resolve present and foreseeable differences
through negotiation, the possibility of a deadlock must be provided for.
Article 14 of the J. VL. provides that a dispute “may be settled through
mediation or arbitration by a Chinese arbitration agency or through arbi-
tration by another arbitration agency agreed upon by the parties”. The Chinese
will go to great lengths to avoid arbitration on the assumption that reason-
able people should be able to resolve their differences without resorting to
legal confrontation before a judge. No matter how carefully drafted the
arbitration clause, the Chinese “will almost certainly attempt to negotiate
or invoke conciliation if a dispute arises, and only if these pre-arbitration
techniques fail will they resort to arbitration”.1 16 This approach is alien to
the usually-litigious North American businessman. The likelihood of ar-
bitration in China is less than in Eastern Europe since “an externally im-
posed, binding arbitral decision runs contrary to Chinese tradition and
practice”. 1 17 But since the Chinese and foreign partners both wish to avoid
arbitration in the interests of a successful joint venture, the presence of an
arbitration clause has a useful in terrorem effect.” 18
The foreign partner should insist on a provision requiring “friendly
negotiations” and mediation before recourse is had to a third party in order
to prevent the involvement of an arbitral body. If a contentious matter can
115Fields, supra, note 109 at 238.
116S.L. Ellis & L. Shea, “Foreign Commercial Dispute Settlement in the People’s Republic
of China” (1980-81) 6 Int’l Trade L.J. 155 at 172.
1’7Jaslow, supra, note 10 at 230.
“18Cohen, supra, note 29 at 109. See also Jaslow, ibid. at 229.
McGILL LAW JOURNAL
[Vol. 31
be resolved without arbitration this will save costs and avoid the risk of
destroying good relations between the parties.” 9 The terms of the arbitration
clause will vary depending upon whether the issue is to be resolved by
reference to Chinese law or to public international law. In the domestic
context, an arbitrator must be chosen from among members of the Chinese
Foreign Economic Trade Arbitration Commission. 120 The principles guiding
the approach of an arbitrator from this Commission are equality and mutual
benefit, independence and initiative by the disputants and consideration of
international practice. 12′ With respect to the use of public international law,
China has not yet ratified any international arbitration conventions but has
apparently abided by foreign arbitration awards involving domestic
corporations. 122
The arbitration clause should address a number of issues. Procedural
rules must be chosen. Those most often used are the International Chamber
of Commerce Rules, the Arbitration Rules of the United Nations Economic
Commission of Europe, or the UNCITRAL Arbitration Rules. 123 The lan-
guage of the proceedings should be specified. An appointing authority, such
as the Arbitration Institute of the Stockholm Chamber of Commerce, should
be included. Lastly, the forum of arbitration, which will determine the scope
of the arbitration powers, must be stipulated. Sweden is often favoured since
its laws are liberal in allowing parties to set their own standards and the
arbitrator is empowered to decide all issues brought before him. 124 Added
care in the drafting of an arbitration clause may therefore be rewarded in
the event of a dispute.
IV. A Canadian Framework for Joint Venture and Other Business Negotiations
in the People’s Republic of China
A. Canadian Business Involvement in the PRC
The information used to develop this framework for negotiating joint
ventures is based on a survey of Canadian businessmen by means of personal
interviews and responses received from a printed questionnaire. 125 While
a number of transnational corporations were contacted, they are not meant
“gEllis & Shea, supra, note 116 at 173.
’20Salem, supra, note 11 at 107.
121Ibid. at 108.
122Ibid. at 109.
’23Cherin & Combs, supra, note 13 at 1039.
1241bid.
125Results of the Questionnaire are reprinted in the Appendix to this article. To protect the
anonymity of the respondents, their communications are identified by roman numerals only,
unless their business activities in China have already been publicized.
1985]
CANADIAN BUSINESS NEGOTIATIONS IN CHINA
23
to represent a cross-section of the Canadian business community. These
companies were surveyed precisely because they had become involved in
some form of business relationship with China. This in itself may indicate
certain characteristics atypical of Canadian companies, such as large res-
ervoirs of capital and aggressiveness.
The Questionnaire was a means of obtaining first-hand information on
current Canadian business involvement in China. Overall, the results were
quite satisfactory. Thirty-three companies were polled, and twenty re-
sponded. (Seven of those stated that the Questionnaire did not apply to the
activities of their organization.) The interviews, which varied in length from
thirty minutes to two and one-half hours, resulted in thoughtful and com-
prehensive commentary on the company’s involvement in China. The busi-
nesses surveyed were involved in sales relationships, contracts for the transfer
of technology, and joint ventures. One of the most important findings of
the survey is that there appears to be a progression of involvement which
usually begins with the selling of goods or services to China. If the Chinese
are pleased with their purchases, there may be an exploration of the pos-
sibility of transferring some of the technology used to manufacture the prod-
uct. Where China offers a competitive advantage, such as inexpensive labour
or the required natural resources at a reasonable cost, then discussions might
ensue in order to establish a joint venture to exploit the opportunity.
A number of Canadian companies with the potential to become in-
volved in joint ventures in the future are presently involved in a “simple
sales relationship”.’ 26 These sales encompass a broad range of goods and
services. Company XI, for example, is involved in activities “of a devel-
opmental/marketing nature”.1 27 It has not yet entered into any agreements,
although company representatives have been sent to China on several oc-
casions over the past five years and relations with various government au-
thorities have been established. 128 The main thrust of Company XXIII,
which designs and manufactures data communications products, is to pur-
sue business opportunities which lead to direct sales of its products. 29 While
these two Canadian companies have had some limited success in sales re-
lationships with China, other corporations have made no progress what-
soever. Company II’s discussions over selling a nuclear power reactor and
radiotherapy equipment to China have not developed beyond the prelim-
inary stage.’ 30 Company VI, which recently purchased woven cotton goods
from China, found “business relations with them very unsatisfactory with
’26Letter from Company XIX.
127Letter from Company XI.
128Ibid.
’29Letter from Company XXIII.
130Letter from Company II.
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them [sic] not meeting their shipping date obligations”. The Vice President
stated unequivocally: “We do not have and will not entertain any joint
venture agreements with this country.”‘ 31
The types of contracts entered into by these companies fall along a
spectrum ranging from simple sales agreements to complex equity joint
ventures. At one extreme, for example, Company XII completed two con-
tracts for the sale of technology and equipment for an energy recovery project
in a sulphuric acid plant.132 The Corporation agreed to install this technology
and the Chinese merely had to pay the price. Other Canadian companies
furnished such services as the design and manufacture of subsea and offshore
production systems, 133 the exploration and development of offshore oil re-
sources, 134 and consulting services for the study of transportation and coal-
handling facilities.’ 35 In these agreements Canadian expertise was put to
work in China, while the host country, besides payment, provided the op-
portunity for Canadian companies to explore a new market. 136
The sale of technology is often accompanied by a training programme
provided by the Canadian company for Chinese personnel. In return, if the
Chinese are able to manufacture the product at a lower cost than that pre-
vailing worldwide, the Canadian company may distribute its wares through
its international network. Spar Aerospace Ltd’s sale of thirty-one satellite
earth stations and related technology was accompanied by an agreement for
extensive technical cooperation, including an exchange of technical person-
nel. 137
Some of the companies included in the survey were involved in joint
ventures, primarily contractual rather than equity arrangements. 38 Com-
pany VII is presently carrying out a “Cooperative Development Agreement”
with China’s Ministry of Post and Telecommunications in which Chinese
personnel will be trained to develop the product. If the technical device can
be economically manufactured, the Canadian company will market it, with
13’Letter from Company VI.
’32Interview with Process Manager, Company XII (10 January 1985).
1331nterview with Vice President, Company X (9 January 1985).
134Pamphlet of Company VIII.
’35Reply to Questionnaire, Company IX.
136See Appendix, Section I, Part B, question 4.
137Reply to Questionnaire.
138Besides the equity joint ventures entered into by the companies contacted there are two
others of which the author was aware as of early 1985. One entails the construction and
operation of the Canoble Hotel in Beijing by Josephine Chong and Ray Noble of Toronto:
interview with Richard Ling of Dorais & Martin, Avocats, Montreal (24 October 1984). The
other involves the training of office personnel in China by Temporary Manpower Services of
Toronto.
1985]
CANADIAN BUSINESS NEGOTIATIONS IN CHINA
25
the Chinese receiving a percentage of the royalties.1 39 A cooperative pro-
duction agreement was entered into between Unican and a FTC, namely
the China National Light Industrial Products Import and Export Corpo-
ration. 40 The Chinese received technology and training while Unican ob-
tained world marketing rights for Chinese padlocks. 14 1 The Royal Bank of
Canada is involved in a contractual joint venture with CITIC to manage a
Hong Kong-based merchant bank, China Investment and Finance, which
has been in operation since 3 December 1984. This fifty-fifty partnership,
with total capital of U.S.$4.1 million, will promote and finance overseas
investment and capital construction projects in China. 142 Equity joint ven-
tures were being pursued by two Canadian companies. Company XXIX,
which is involved in management consulting, recently signed a joint venture
agreement with the Chinese Ministry of Coal for a coal gasification project
due to come on line in 1985.143 A facility is being built in China, with each
side supplying fifty per cent of the equity, to combine Canadian technology
with a Chinese catalyst. 144 Company I examined four proposals during 1984.
Two of the projects were abandoned, but it appears that the remaining two
will be consummated. A calcium bauxite project to manufacture refractory
bricks for furnaces, in its third year of negotiation in 1985, appears to be
near completion. The other joint venture project involves manufacturing
anodized extrusions for windows and doors by building a showpiece factory
with “world state-of-the-art technology”. 145
Significantly, each of the companies participating in the equity joint
venture process has been present in China for between ten and forty years.
The confidence of the Chinese must be nurtured through lengthy economic
interaction. This state of affairs has led a former Chairman of the United
States Senate Subcommittee on International Trade to caution investors:
“The Chinese place a great deal [of emphasis on] honesty, word, and saving
of face. If you’re not cut out that way, stay home!”‘146 The development of
a relationship built on trust is therefore a prerequisite for any intensive
involvement in China.
‘391nterview with executive, Company VII (25 November 1984).
’40A.D. Gray, “Unican Moving to Lock in Promising Future”, Financial Times of Canada
1411bid.
142″New China-RBC Venture Makes Headlines”, Intertell (September/October 1984) 1; Gooding
(13 April 1981) 24.
& Mathieu, supra, note 45.
1431nterview with Director, Marketing Asia, Company XXIX (25 January 1985).
144Ibid.
145Interview with Vice President, Planning and Business Development, Company 1 (4 January
1985).
146A. Ribicoff (Address to the Asian Financial Society Conference on “Investment in the
People’s Republic of China”, 18 June 1985) quoted in R. Rachid, “Experts Tallying Results
of US-China Business Ties”, Journal of Commerce (21 June 1985) 5A.
McGILL LAW JOURNAL
[Vol. 31
The negotiation of joint venture agreements, or of any business ar-
rangement, takes place within a framework of contractual expectations. Both
parties assume, for example, that they will be able to benefit from the com-
pletion of an agreement. The Chinese have attempted to clarify their ex-
pectations to Western investors through legislative preambles,147 publications,148
and trade delegations dispatched overseas. 49 Interested foreign govern-
ments have then been able to notify domestic economic sectors of oppor-
tunities available in China. In Canada, for example, China Economic Overview:
A British Columbia Perspective was published in 1982, pinpointing areas of
business involvement where B.C. firms have significant expertise. 150
Another assumption is that Canadian companies have something to
offer the Chinese in the form of a competitive advantage over their rivals.
The Canadian companies contacted for this study were generally large and
successful, enhancing the notion that their corporate growth was achieved
through an edge over other business associations. The competitive advan-
tage generally lay with the advanced technology marketed by the Canadian
business. For two companies this advantage was achieved by developing a
system which no competitors had as yet been able to match. A Company
XII executive cautioned, however, that in China strong competition from
Japan meant that “our technology must be better, because if it is just as
good as, we cannot compete”. 15’ Other Canadian companies argued that
their competitive advantage was based more broadly on such factors as their
company’s initiative, 152 its willingness to share technology and to train Chinese
personnel, 53 or its superior knowledge and expertise. 54
As noted earlier, all negotiations take place with the relevant branch of
the Chinese bureaucracy. Once the appropriate organization has been no-
tified, depending on the nature of the transaction, the negotiation process
can take place in two ways. If the foreign company wishes to purchase
mation of various laws. See, e.g., Hu, supra, note 49.
147Official statements are often made in China concerning the purpose of a new law which
is to affect foreigners. In the case of the J. VL., supra, note 7, such a pronouncement was
contained in art. 1, explaining that this new legislation was proclaimed “[w]ith a view to
expanding international economic co-operation and technical exchange”.
148The Beijing Review provides a Chinese commentary on the motives behind the procla-
149See, e.g., Gooding & Mathieu, supra, note 45 at 24: “A senior mission from Peking
completes an eight-city tour of Canada this week, explaining some of the structure behind
China’s open-door policy and hoping to drum up interest in closer economic ties between the
two countries.”
150M. Cox, China Economic Overview: A British Columbia Perspective (Victoria: Ministry
5 ‘Supra, note 132.
1
152Supra, note 143.
153Reply to Questionnaire, Company XXVIII.
154Supra, note 133.
of Industry & Small Business Development, 1982).
1985]
CANADIAN BUSINESS NEGOTIATIONS IN CHINA
27
Chinese products, initial contact and negotiation will usually take place at
the Guangzhou (Canton) Chinese Export Commodities Fair.155 The Fair,
held twice a year since 1957, has lost some of its importance, however,
owing to the increasingly decentralized approach of the Chinese government
to foreign trade. 156 The first meetings have an almost ritual format starting
with preliminaries and formalities, and then proceeding to substantive is-
sues.’ 57 There is a division of duty and responsibility among Chinese offi-
cials. There are Chinese representatives who meet the prospective purchasers
and function as passive note-takers rather than as sales personnel, while
other Chinese officials make the actual decisions.158
For Canadian companies selling technology, the process is often ini-
tiated at the invitation of a Chinese government organization. The nego-
tiations will move to Beijing (Peking) only when the Chinese are ready to
receive the Western businessmen. The Chinese will expect detailed infor-
mation prior to the meeting in order to make the interaction more pro-
ductive. In discussions regarding the sale of technology, there are two steps
in the negotiation process. There is an encounter with technical experts who
“ask everything” with respect to the operation of the technology.’ 59 If the
technology is deemed satisfactory, the Canadian representatives meet with
a group of commercial officials whose purpose is “to drive the price down”.160
Just as is the case for negotiations at an Export Commodities Fair, the
authority of these officials is limited as they cannot negotiate over a ceiling
price or change any of the terms of the contract.’ 61 This is not to say that
the Chinese are inflexible. The experience of Canadian companies is that
while the Chinese are willing to compromise, this flexibility must be ex-
ercised at the appropriate level of the bureaucracy.
Part of the framework of the bargaining process is the use of standard
form contracts in order to clarify the expectations of the parties. When a
specific Chinese project is opened up to bids by foreign companies, a model
contract may be supplied in order to indicate the financial considerations
which should be taken into account. The China National Oil Corporation,
for example, supplied model contracts to thirty-three oil companies to assist
them in submitting bids on designated contract areas on the Pearl River
55Canada, People’s Republic of China: A Guidefor Canadian Exporters (Ottawa: Department
of External Affairs, 1983) at 21.
156do Rosario, supra, note 64 at 76.
157E.A. Theroux, “The Chinese Export Commodities Fair” in Holtzmann, supra, note 33,
41 at 55.
1 8Ibid. at 56.
159Supra, note 132.
’60 bid.
16 1Ibid.
REVUE DE DROIT DE McGILL
[Vol. 31
Basin in the South China Sea. 162 Canadian companies, when initiating dis-
cussion for an equity joint venture, may make use of specimen contracts
and articles of association as points of departure. 63 While the specimen
contracts leave many terms to be clarified by the parties themselves, they
do attempt to strike a reasonable balance between the aspirations of the two
parties, and thereby prepare the Canadian company for the negotiation
process. 16 4
In general, joint venture agreements will be completed in three stages. 165
An initial draft will be submitted by the foreign company which may be an
adaptation of a specimen contract. At the second stage, the contract will be
revised to reflect Chinese concerns. Lastly, the final draft will be hammered
out. While this three-stage process is not followed in all cases, the use of
specimen contracts as a starting point illustrates the give-and-take which
characterizes the negotiation process.
B. Elements of the Framework
In order to determine how Canadian companies should approach the
negotiation of ajoint venture, the experience of businesses in consummating
sales agreements, cooperative production agreements, cooperative ventures
and equity joint ventures will be synthesized. One must bear in mind that
the extent of the experience of Canadian businessmen to this point is based
largely on the negotiation of contractual rather than equity joint ventures.
Many of the same problems occur in negotiating sales agreements and co-
operative ventures as arise in equity joint venture discussions and thus all
forms of involvement can be integrated.
The success of bargaining depends upon one party, say the Canadian
company, knowing where the other, here the Chinese negotiators, will com-
promise and where they will not and perhaps cannot. A valid framework
for the negotiation of a joint venture must take this into account. Accord-
ingly, the framework comprises factors which are beyond the control of the
162Supra, note 134.
630ne example, a confidential document drawn up by a large accounting firm and dated 15
1
September 1984, includes some general comments on equity joint ventures in China, a model
contract of forty-nine clauses and forty-two proposed articles of association.
164Ibid.
165J.J. Combs & R.E. Cherin, “Negotiating Session” (1983) 38 Bus. Law. 1069 at 1069.
1985]
CANADIAN BUSINESS NEGOTIATIONS IN CHINA
29
Canadian negotiator and those which are not. The former are thus, from
the Canadian standpoint, “fixed” factors, while the latter are “variable”.
1. Fixed Factors
Fixed factors are basic structural components of the negotiation process;
they are constants which must be accepted by the Canadian negotiator. For
example, the existence of Chinese legislation and its consequences are simply
part of doing business in China. The fixed factors which will be discussed
include the legislative framework in China, the Canadian identity of the
company, the assistance provided by the Canadian government, the strategy
of Chinese negotiators and the procedural requirements of the Chinese bu-
reaucracy. While efforts directed at changing the fixed factors in this ne-
gotiating environment may be rewarded, ultimate contractual success is
more likely to result from efforts expended on the variable factors.
a. Existing Legislation
One fixed factor, from the Canadian point of view, is the body of existing
foreign economic legislation. While many of the concerns expressed by Western
investors are slowly being incorporated into the law, the basic statutory
framework is unlikely to be altered. Complying with this legislation, al-
though it is rudimentary and still in flux, is unavoidable. Among the busi-
nesses included in the survey, two attitudes emerged, depending on how
directly the state of the law impinged on the negotiation process and the
relationship of the parties.
On the one hand, the legal system was assessed in relation to the basic
question: “Can we rely on the Chinese to perform their obligations?”‘166 The
lack of law with respect to protecting the investment of Canadian companies
was not considered to be important. 167 China was viewed as “a reasonable
place to do business, in terms of reliability and solvency”. 168 This over-
shadowed any consideration of legal provisions since the development of a
business relationship proceeded on “the basis of trust”. 169 As a Company
I executive pointed out, “the day you have to take that agreement out to
make your point your deal is finished”. 170
The other assessment of the importance of the legal system was grounded
in concerns over the state of the law governing the actions of the contracting
parties. A Company XXIX representative noted that a lack of sufficiently
166Supra, note 139.
167Supra, note 132.
168Supra, note 139.
169Ibid.
‘ 70Interview with Senior Vice President, Company 1 (28 September 1984).
McGILL LAW JOURNAL
[Vol. 31
detailed law created uncertainty, and this was compounded by China’s on-
going process of legislative reform. 171 With the Chinese market “rapidly
changing from year to year”, legal stability would be useful. 172 The changing
nature of the law led to direct problems for one company. An executive
explained that the government’s recent attempts at a comprehensive reform
of China’s economic structure, summarized in a document entitled A De-
cision of the Central Committee of the Communist Party of China on Reform
of the Economic Structure (which he referred to as “The Decision”), led to
confusion within the Company. 173 This document, which was approved by
the third plenary session of the Twelfth Central Committee on 20 October
1984, applied the “responsibility system”, 174 adopted several years earlier
in the agricultural sector, to the industrial sector.175 Company representatives
were unsure as to what industries were still centrally planned and which
Chinese officials to talk to. 176 At the time of the interview on 4 January
1985, the executive contacted still did not know whether or not the relevant
sector would be centrally planned. 177 Under these circumstances, the Com-
pany decided it would be too risky to proceed with this particular joint
venture since any project requires the official approval of the appropriate
branch of the Chinese bureaucracy.
b. Canadian Identity
All the companies contacted agreed that the Canadian identity of their
corporation was an asset.178 Whether this is translated into tangible benefits
is, however, another matter. All other things being equal, would a Canadian
company receive a contract instead of an American, Japanese, British or
German company simply because of its place of incorporation? Given the
competitiveness of the Chinese market, national identity may be a true asset
if it allows a Canadian company to benefit economically from the uncon-
trollable political factor of how one’s nation is perceived abroad. At the
17’Supra, note 143.
1721bid.
17 3Supra, note 145.
174The responsibility system, as applied in the agricultural sector, basically turned over re-
sponsibility for crop selection, tillage, harvesting and marketing of production on particular
tracts of land to individual families. Title to the land, however, remained with the production
team or production brigade (village-level collective units). By analogy, the responsibility system
in the industrial sector will yield authority over production, pricing and marketing to profes-
sional managers at individual factories and enterprises. Ownership of these factories and en-
terprises, though, will be retained by the state.
175R. Delfs & D. Bonavia, “A New Kind of Socialism”, Far Eastern Economic Review (1
November 1984) 24.
176Supra, note 145.
177Ibid.
178See Appendix, Section I, Part G, question 4.
1985]
CANADIAN BUSINESS NEGOTIATIONS IN CHINA
31
same time, however, Canada is among the smallest of the Western indus-
trialized nations in terms of domestic market and Gross National Product.
Canada’s economic limitations restrict its political clout.
A Company I executive explained this dichotomy. The United States
is the major political and industrial force in the West: “It can afford to deal
with China in one way. China has its own perception of the United States,
and I’m sure puts it in a special category for dealings.” Canadian companies
therefore “are not treated as highly when competing with American inves-
tors”. On the other hand, Canadian identity is a “plus” since “the Chinese
don’t perceive us as a threat to them in any way”. 179 The experience of
Company VII was similar to that of Company I; the goodwill felt among
the Chinese toward Canada was transferred to the Company representatives.
A Company VII executive noted that a favourable impression of Canadians
contrasted starkly with the attitude, common among the Chinese, that Amer-
ican corporations represented the worst excesses of capitalism. 1 80
c. Role of the Canadian Government
There were mixed reactions on the part of the companies surveyed to
the role of provincial and federal government organizations in offering as-
sistance to exploit the Chinese market. The financial support supplied by
provincial governments varies substantially. British Columbia, for example,
takes a direct interest in what occurs in the Pacific Rim. 81 The Ministry
of Industry and Small Business Development attempts to assist B.C. firms
wishing to become involved in the China market. 8 2 In Quebec, by contrast,
until recently there has been little provincial money available for the mar-
keting or development of products overseas. A Company VII executive
posited that the provincial government, burdened by domestic issues, was
not emphasizing the development of overseas markets. 83 The federal gov-
ernment is involved through various agencies. The role of the Department
of External Affairs, especially through the Canadian Embassy in Beijing,1 84
179Supra, note 170.
180Supra, note 139.
18’See, e.g., “Bank of China Considers Putting Branch in Canada When Conditions Are
Right”, The [Montreal] Gazette (5 October 1984) B5; “B.C. Looks at China Market”, Can-
adexport (28 January 1985) 2.
182Cox, supra, note 150.
183Supra, note 139. See also A. Booth, “Quebec Scratching Surface of Business, Trade Po-
184See Appendix, Section I, Part G, question l(d)(i).
tential”, The Financial Post (13 July 1985) S20.
REVUE DE DROIT DE McGILL
[Vol. 31
was generally viewed as helpful, while the reaction to the Export Devel-
opment Corporation (EDC) 85 and the Canadian International Develop-
ment Agency (CIDA)186 was less enthusiastic.
External Affairs, through its Office of Trade Development, provides
information on various world markets open to potential Canadian export-
ers. 187 As a recent advertisement in Asia Pacific Business states, the De-
partment will provide “practical help, current market intelligence, [tips on]
how to bid on contracts [and] how to set up agency representation, helpful
advice, introductions and tips on local customs”. 8 8 A Company VIII ex-
ecutive explained that the assistance of the Canadian Embassy in Beijing
was helpful in organizing meetings and giving relevant advice on current
Chinese policies. 189 Although Company XXXII went to China “on its own”,
its representatives were given valuable assistance by the Embassy once they
arrived. 190 One Company X executive did suggest, however, that the number
of Embassy staff should be increased to deal with the growing workload.191
The EDC is a Crown corporation that reports to Parliament through
the Minister of State for International Trade. One of the main functions of
the EDC is to “finance foreign buyers of Canadian capital goods and related
services when extended credit terms are necessary [and] are not available
from commercial lenders”.’ 9 2 In October 1984, the EDC and the Bank of
China signed a general financing agreement which included a $2 billion line
of credit for Canadian capital goods and services exports to China and
official Chinese guarantees for supplier credits arranged by the EDC. 193 This
arrangement should facilitate Canadian involvement in major Chinese pro-
jects, requiring $25-30 billion for coal mines, nuclear power plants and the
South China Sea oil exploration programme. 94 But a previous agreement,
CIDA Programs” (1984) 5 China Reporter 24.
185See Appendix, Section I, Part G, question l(d)(ii).
186See Appendix, Section I, Part G, question l(d)(iii). See also “How to Get the Best from
187As a starting point, companies requesting information will receive a packet, entitled “Ex-
ports Build Canada”, including brochures of interest to Canadian exporters, such as the Di-
rectory of Trade Publications, Business Directory of Canadian Trade Representation Abroad,
and Trade Promotion Support.
188Asia Pacific Business (June 1984) at 14.
189Reply to Questionnaire, Company viii.
’19Reply to Questionnaire, Company XXXII.
191Supra, note 133.
192People’s Republic of China: A Guide for Canadian Exporters, supra, note 155 at 32-3.
’93B. Simon, “Canada’s EDC Signs C$2bn Export Finance Agreement with China”, Financial
Times [of London] (3 October 1984) 5.
194
p. Lush, “China to Require Over $25 Billion for Projects”, The [Toronto] Globe and Mail
(9 October 1984) IBL.
1985]
CANADIAN BUSINESS NEGOTIATIONS IN CHINA
33
also for $2 billion in credits, resulted in only two sales totalling $26 mil-
lion. 195 While the financing structure is in place, Canadian investors have
competition since China has reached agreements for export credits with
numerous other countries as well. 196 In addition, a Company X executive
noted that the financing provided by the EDC is not as attractive as the
arrangements which other countries have negotiated for their exporters. 97
Canadian companies have mixed appraisals of their experience with
the Industrial Cooperation Division of CIDA. The Division provides a
maximum of $15,000 to undertake preliminary starter studies for possible
business opportunities, a maximum of $100,000 for a more in-depth via-
bility study and, if appropriate, up to $250,000 to offset costs incurred in
the early stages of the business venture. 198 Company IX, a consulting ser-
vices corporation, received financial assistance for its transportation and
coal-handling facilities studies, but felt CIDA’s procedures for handling funding
requests took too long.199 Company VII expressed the same concern. The
Company applied for $72,000 from CIDA to initiate a viability study. A
Company executive complained on 25 November 1984: “We applied on
January 16, 1984, and they [CIDA] are still dithering whether or not to
provide funds for covering expenses for four Chinese [technicians] in Canada
luring a four-month period. We went ahead and did it anyway. ‘ 20 0 Gov-
ernment approval in such instances is extremely important in its effect on
corporate decision-making. If CIDA shows reluctance, a department head
is likely to wonder why his company should invest more money in a project
when even his own government will not support it.201
d. Chinese Negotiating Strategy
The strategy of the Chinese negotiators, from the perspective of the
Canadian company, is a fixed factor in the bargaining process. While the
Chinese are willing to compromise on many issues, their approach is rooted
in a vastly different culture and is a constant in the negotiation process.
Most Canadian companies agreed that the Chinese are “excellent negotia-
tors”. 20 2 One gets the impression that Canadian companies, along with other
Western entrepreneurs, hoped that the lack of expertise among the Chinese
in technological matters would extend also to the sphere of negotiation.
i95Ibid.
I9 6Ibid.
197Supra, note 133.
98C. Gray, “CIDA: The Canadian Catalyst”, Asia Pacific Business (June 1984) 6.
1
199Supra, note 135.
2OSupra, note 139.
20’Ibid.
202Reply to Questionnaire, Company XXIX.
McGILL LAW JOURNAL
[Vol. 31
Often the Chinese are in a stronger bargaining position than the Canadians,
since with so many to choose from, the Chinese can play one foreigner off
against the other.
Canadian companies were confronted with other difficulties by the Chinese
negotiators. In some cases the Canadian company became frustrated at the
apparent lack of understanding of fundamental business concepts by Chinese
negotiators. A Company I executive complained that the Chinese do not
genuinely comprehend the meaning of the words “joint venture”, which he
understood as conveying the concept of working together to develop and
exploit a comparative advantage. 20 3 The Chinese viewed themselves as a
separate entity within the joint venture and did not comprehend the idea
of working for the benefit of the company, the success of which benefits
both parties. 20 4 In other words, the Chinese do not “contribute to the total
but attempt to maximize their [own] position”. 205 While this concern for
protecting their own interests is understandable given China’s history, it
may destroy the competitive advantage of the joint venture company. For
example, if Chinese negotiators demand that the domestic employees be
paid United States equivalent wages, which would eliminate the compar-
ative cost advantage, the raison d’tre of the joint venture vanishes. While
the root problem seems to be the reluctance of the Chinese to recognize
that decisions must be taken jointly for the benefit of the company, the
obstacle to rectification of this situation, according to the Company I ex-
ecutive, is that the Chinese have not yet seen this as a barrier to the operation
of a successful joint venture.20 6
The negotiation experience of Canadian companies has led to a ques-
tioning of the “good faith” of Chinese representatives. In other words, there
seemed to be a discrepancy between the rhetoric of Chinese publications
and the hard facts of negotiation. The basic principles followed in China’s
legislation concerning foreign economic affairs, according to published state-
ments, are to safeguard state sovereignty, to protect the lawful rights and
interests of foreign business people, and to provide real benefits to foreign
investors. 207 An integration of these principles is found in the Patent Law
which is meant to protect the patent rights of foreigners within China and
to help China proceed with the transfer of technology. 20 8 Some Canadian
executives expressed the view that the concern with the interests of for-
eigners was not, however, always accounted for in practice. One Canadian
203Interview with Director of Business Development, Company 1 (4 January 1985).
2041bid.
205 bid.
20 6 bid.
207Xiao, supra, note 28 at 16.
208Hu, supra, note 49 at 23.
1985]
CANADIAN BUSINESS NEGOTIATIONS IN CHINA
35
executive has stated that the Chinese “want technology for nothing”. 209 A
similar view was that China’s purpose in enacting the J. VL. is to “get your
technology”, and not to supply the domestic Chinese market with goods
produced by a joint venture. 210 The joint venture mechanism was looked
upon as a “scheme to get advanced technology” without giving up any
foreign exchange.2 11 Canadian companies entering joint ventures in the fu-
ture should treat published statements concerning the extent to which for-
eigners’ wishes will be satisfied with some scepticism, as this will make the
bargaining process more tolerable.
e. Chinese Bureaucracy
All negotiations for business agreements with foreigners are channelled
through the Chinese bureaucracy. The two problems encountered were quite
basic: to whom does one talk and who makes the final decision? The dif-
ficulty in finding the proper person to communicate with was viewed by a
Company I executive as one of the major barriers to completing a joint
venture.21 2 Other businessmen agreed that the excessive bureaucratization
of doing business in China created unexpected problems. For example, many
Chinese officials do not want to make a decision on their own –
“they
always answer to someone else”. 21 3
Even when a representative of the appropriate department is found,
there is still the problem of determining who actually makes the decision.
Obviously, much time can be wasted if a company is addressing the in-
appropriate department. The situation is exacerbated since there are many
government officials attempting to make arrangements with foreign busi-
nessmen “in a highly indiscriminate way”. 21 4 All branches report to a central
bureau, and each department wants a project so that it can become involved
with foreign investors. 215 The problem, according to a Company XII ex-
ecutive, is rooted in Chinese custom. If, for example, six possible projects
were presented for consideration to a Canadian company, it would choose
only the number which could be competently completed. In China, however,
the head of the decision-making agency might approve all the projects so
as to save face by not offending anyone.21 6
209Supra, note 190.
21OSupra, note 132.
21 Ijbid.
212Supra, note 145.
213Supra, note 132.
214Supra, note 203.
215Reply to Questionnaire, Company XII.
216Ibid.
REVUE DE DROIT DE McGILL
[Vol. 31
At the same time, there is an element of decentralization within the
bureaucracy with major cities, provinces, SEZs and the central government
all competing for partners which further complicates matters for companies
that are preparing proposals for projects in China. This is further com-
pounded by technical considerations. The Company XII executive noted,
for example, that “we don’t know [which factory or enterprise] would have
the ability to fabricate and market the product best”. 21 7 While the Canadian
companies are disoriented, the Chinese bureaucracy assumes added control
by negotiating simultaneously with a number of Western businessmen. From
a Canadian perspective, these are “friendly negotiations which put you at
total risk”.218
2. Variable Factors
Variable factors are those over which the Canadian participants have
immediate control and which are subject to compromise. They include the
ability of Canadian negotiators to strike a bargain, the terms of the transfer
of technology, the price paid for the goods and/or services provided and
the outlook of Chinese negotiators. These factors allow scope for the crea-
tivity of the parties and enable a consensus ad idem to be reached within
the framework for negotiations as defined by the fixed factors.
a. Canadian Negotiators
Canadian businessmen have the power to exercise their contractual
creativity through the variable factors in the negotiation process. One major
factor is the approach taken by the Canadian entrepreneurs towards the
enterprise. A charge commonly made against Canadian investors, domest-
ically and internationally, is that they are not aggressive enough. 219 Ac-
cording to John Ellis, former Chairman of the Pacific Basin Economic Council’s
Canadian Committee,220 too many Canadian entrepreneurs have not con-
sidered the China market: “To the average businessman, the Pacific Rim is
something distant where they can’t really perform; but they can –
those
217Supra, note 132.
218lbid.
2191bid. See also Freeman, supra, note 4 at 3.
22
0’The Pacific Basin Economic Council (PBEC) is an organization of executives from fifteen
countries with business interests in the Pacific Rim. Its role is twofold. First, Canadian busi-
nessmen can meet their counterparts from other countries. Second, according to a Company
I executive, the real work of the Canadian Committee of the PBEC in Canada has been “to
build up activities that will raise the level of understanding in the business community at large
about the advantages that exist for Canada in developing the Asia and Pacific markets”. See
“Interviews: Pacific Basin Economic Council”, Asia Pacific Business (June 1984) 17, and Free-
man, supra, note 4 at 13-6.
1985]
CANADIAN BUSINESS NEGOTIATIONS IN CHINA
37
markets need our goods and services.” 221 A Hong Kong businessman sar-
castically noted: “Everyone knows the Canadians need to sell exports; some-
day even the Canadians themselves will realize it.”222 The companies contacted
for this study are among this country’s most aggressive, yet the executives
of these transnational corporations accepted this claim as an accurate gen-
eralization. The approach of Canadian companies is generally a reaction to
the state of the market rather than an aggressive attempt to create openings
for the sale of products. Among the companies consulted, the typical attitude
was illustrated by Company XXIV: “Our efforts will be in proportion to
the returns. ‘223 Because of the global perspectives of these transnational
corporations, the approach to China had to be balanced with objectives in
other world markets. 224 The management approach of Company I and Com-
pany VII is to develop niches for their products in numerous national mar-
kets. Specific goals and policies are only clarified once a foothold is established
and the opportunities can be assessed in relation to the available resources
of the corporation. 225
Once a company decides to enter the China market, a primary require-
ment for successful negotiation is, as one executive put it, “patience, pati-
ence, and patience”. 226 This quality is needed as a tonic for the slow-moving
bureaucracy and the Chinese approach of developing trust over time with
a foreign partner. Since time is an important consideration in placing es-
timates on the costs of a project, bureaucratic delays mean the contract may
have to be revised to include price adjustments. Company I’s experience
with joint ventures is that an average of three years of negotiation is re-
quired.227 Since this is “probably an unacceptably long-winded process”,
things are often done in parallel: the project is assessed and the joint venture
is negotiated simultaneously. 228 A Company I executive noted that the time
frame requires rapid short-term action or the opportunity disappears. 229 The
Chinese bureaucracy, however, often allows form to take precedence over
administrative efficiency. The Canadian company must therefore build up
reserves of patience; this is easily said, but in practice one’s patience wears
thin.230 Once the trust of the Chinese is earned, the process of negotiation
will speed up. As a Company X executive stated, earning the confidence of
22 “Interviews: Pacific Basin Economic Council”, ibid. at 18.
222Personal communication from T.I.H. Tsang (15 January 1985).
223Reply to Questionnaire, Company XXIV.
224See Appendix, Section I, Part R
225Supra, notes 139 and 170.
226RepIy to Questionnaire, Company XXVII.
227Supra, note 203.
228 bid.
2291bid.
230Reply to Questionnaire, Company X.
McGILL LAW JOURNAL
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the Chinese is not as simple as merely buying and selling products, for a
personal relationship must be established which will facilitate business
interaction. 231
Canadian businessmen must also be certain that they are communi-
cating their ideas effectively to the Chinese negotiators. According to a Com-
pany XXIX executive, “communication is the key to the entire negotiation
process”. 232 Barriers to communication arise based on language and cultural
differences. To remedy the language difficulties, competent translation fa-
cilities are crucial. Chinese custom may create obstacles for Canadian busi-
nessmen in understanding precisely what the Chinese negotiators mean. The
Company XXIX executive explained that “[they] never explain exactly what
it is a question of saving face”. 233 As a result, “yes means
… [they] mean –
maybe and maybe means no” and “nobody ever says no”. A nodding of
the head by a Chinese representative may mean “we understand you” and
not “we agree with you”. Company XXIX’s negotiations for a coal gasifi-
cation joint venture were almost scuttled because of a breakdown in com-
munication. The Canadian side did not understand the Chinese viewpoint,
but once this communication problem was rectified the joint venture agree-
ment was eventually completed. 234
b. Technology Transfer
The terms for the transfer of technology from the Canadian company
to China allow for the greatest amount of contractual creativity. Problems
arise on both sides of the bargaining table. The J. VL. highlights the Chinese
desire that the technology contributed be truly advanced and appropriate
to China’s needs. The Chinese will, of course, request detailed information
on the nature and uses of the technology available for sale to determine
whether it meets this legislative requirement. 235 If the conditions are sat-
isfied, the Chinese may buy, lease, or cooperate with the foreign partner to
develop modifications to the technology. Canadian businessmen encounter
problems when selling technology to China. At the start of the open-door
policy there was no protection of intellectual and industrial property. Will
the new Patent Law ensure the confidentiality of technological expertise?
There is the fear that if the Canadian company does sell technology, and it
can be duplicated with impunity, the corporation’s services will no longer
be required by the Chinese.
2311bid.
232Supra, note 143.
2331bid.
2341bid.
235j. VL., supra, note 7, art. 5.
1985] CANADIAN BUSINESS NEGOTIATIONS IN CHINA
39
A number of forms for the transfer of technology based on the goals
of the business enterprise have been negotiated by Canadian companies. In
some cases, there is a straight sale of technology which is used to increase
the productivity of an existing Chinese business. 236 More common among
Canadian companies is some form of cooperative venture or production
agreement. This sometimes involves a sale of equipment and related tech-
nology which China does not possess and the training of the Chinese to
operate the process independently of the Western investor.237 The Canadian
company is in a stronger bargaining position in straight sales than when it
enters into a true cooperative venture or production agreement with China.
These latter contractual joint ventures are the result of more balanced ne-
gotiations since the Canadian company is seeking an advantage by ex-
panding into China. One advantage often sought in China is inexpensive
labour. Unican’s cooperative production agreement, for example, resulted
in the Chinese receiving equipment and technology for the manufacture of
sophisticated locks. Unican will benefit since the Chinese-produced locks
are two to three times less expensive than its own wares and, with the world
marketing rights, there is an opportunity for tremendous growth abroad. 238
The problems inherent in marketing technology provide an opportunity for
much flexibility in negotiation. While there is a danger that patent rights
may not be effectively protected, a company cannot become a world leader
by protecting existing technology, but only by having confidence that its
research and development department will continue to give it a competitive
edge.
c. Pricing
Another variable factor in the process of negotiation is price. When a
Canadian company supplies a type of technology which none of its com-
petitors has as yet developed, the price is weighed in relation to the benefits
the technology can confer on the Chinese. Company XII’s sale of technology
and equipment could result in great savings to the Chinese by enabling
recovery of a greater amount of energy from a sulphuric acid plant than the
process presently used. This energy could then be used for heating, thereby
lessening dependence on the use of coal. 239 If a Canadian company is offering
technology identical to that of its competitors, the price is of paramount
importance. This is especially true when China is soliciting bids on certain
projects, such as the development of offshore resources. It is only when the
price of Canadian goods and services is competitive that other factors will
236Supra, note 215.
2371bid.
238Gray, supra, note 140 at 24-5.
2 39Supra, note 132.
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come into play. A Company X executive, for example, posited that if the
price for a product offered by an American and a Canadian company was
the same, the Chinese would choose the Canadian product based on the
national identity of the company.240 An official of Canada’s Department of
External Affairs argued, with respect to exporters, that “Chinese officials
attach enormous importance to price”, with the consequence that Canadian
companies “are pricing themselves out of the market”. 241 The criticism of
Canadian exporters that their goods are too expensive has some merit to
it.242
Another issue related to pricing is the manner of payment. A Company
XII executive expressed the concern that should the profit be paid in RMB
to the foreign partner, it would be of no use since it could not be converted
on world money markets. The RMB is usually only bought and sold as
needed for domestic commercial and travel purposes. 243 With respect to
foreign exchange transactions, the RMB is used solely as a unit of account. 244
China’s lack of foreign exchange has created difficulties for Western investors
participating in joint ventures. Foreign employees must receive effective
compensation for their services and a corporation entering a joint venture
will require payment for its products in convertible currency. The foreign
exchange shortage has caused many possible projects to be aborted. The
joint ventures actually entered into are therefore often geared to marketing
products overseas or to building Chinese hotels open only to foreign tourists,
both proven means of maximizing hard currency earnings.
d. Outlook of Chinese Negotiators
In view of China’s recent adoption of the open-door policy, the dearth
of sophisticated capitalist expertise is understandable. While the Chinese
continue the task of reforming and revitalizing their economy, the devel-
opment of a business-oriented outlook among government officials is oc-
curring more slowly. From a Canadian standpoint, this leads to what is
perceived as unbusinesslike behaviour on the part of Chinese bureaucrats.
The Chinese hesitancy to make concessions, a feature of Chinese negotia-
tions experienced by Canadian businessmen, is sometimes misdirected when
Western business concepts are not grasped. A Company I executive asserted
240Supra, note 133.
241″Potential for China Trade Called Too Big to Ignore”, The Toronto Star (11 October 1984)
B16.
244Ibid.
242Supra, notes 219 and 222.
243Price Waterhouse, Doing Business in the People’s Republic of China (New York: Price
Waterhouse Center for Transnational Taxation, 1985) at 8-9.
1985]
CANADIAN BUSINESS NEGOTIATIONS IN CHINA
41
that when negotiations for a joint venture with the Shanghai State Devel-
opment Corporation began in 1981, his Chinese counterparts were inex-
perienced, almost naive.245 For example, when negotiations over the valuation
of the capital contributions to the joint venture were taking place, the Chinese
asked to receive the equivalent of New York value for the land on which
the factory was to be built and United States equivalent wages for the work
force. 246 One Canadian company also found it difficult to convince the
Chinese that the quality of the product was crucial to its pricing,247 in other
words, that with a small improvement of the product, much more could be
charged.
Company XII encountered similar attitudinal problems in its negoti-
ation over the terms of an energy recovery project. There was a disagreement
over valuation, the Chinese negotiators contending that their contribution
of land, building and labour was equal to the value of the technology and
managerial expertise supplied by the Canadian company. 248 The Chinese
proposed that their managers be paid the same high salaries as the Company
XII executives. This, according to a Company XII officer, was simply not
feasible given the relative inexperience of the Chinese. There was also a
problem regarding the use of accounting methods. To the Canadian company
the overhead represented a fixed cost, while for the Chinese it was counted
as profit.
Still, what is perceived as an “unbusinesslike” outlook on the part of
the Chinese represents a variable factor as it can be altered during the
negotiation of a joint venture, which often lasts several years. During the
course of Company I’s negotiations, for example, the Chinese became more
aware of the ramifications of their own proposals and their original “na-
ivet6” was replaced by more reasonable expectations. This accumulated
experience helped accelerate the process. Thus, by patient and unrelenting
reiteration of their positions, Canadian investors can in time cultivate an
attitude of mutual understanding and cooperation with their Chinese partners.
V. Conclusion
This article has examined the framework in which Canadian companies’
negotiations for joint ventures and other forms of business involvement in
the PRC are carried out. In light of this experience over the past few years,
the time may now be opportune to propose some tentative guidelines for
Canadians attempting to reach equity joint venture agreements under the
245Supra, note 145.
246Ibid.
247Supra, note 203.
248Supra, note 132.
McGILL LAW JOURNAL
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J. VL. These guidelines, based on an assessment of the fixed and variable
factors in the negotiation process, are designed to compensate for some of
the deficiencies in the present approach of the Canadian business com-
munity in the PRC, as the potential exists for much more extensive use of
the joint venture vehicle.
Among the fixed factors, China’s existing foreign economic legislation should
be a concern of Canadian companies, but not a bar to a commercial rela-
tionship. Representations ought to be made to the Chinese to plug the still
numerous gaps in their statutes and regulations, but efforts channelled in
various other directions (to be outlined below) are likely to be more pro-
ductive. The Canadian identity of the companies is clearly a positive, if
somewhat nebulous, factor and should be emphasized in all marketing ac-
tivities, though not to the exclusion of more substantive qualities like price
and technology. The Canadian government could perhaps allocate its re-
sources more efficiently; a lobbying campaign aimed at the EDC and CIDA
might eventually yield more competitive financing and quicker action by
those two agencies. External Affairs might also be prevailed upon to add
more commercial attaches to the staff at the Embassy in Beijing and to open
up consulates in entrep6t centres like Shanghai and/or Guangzhou.
Some of the fixed factors are not peculiar to Canadian investors. All foreign
investors are similarly affected by the ability of Chinese negotiators to play
one foreign company off against another and thereby to extract significant
concessions from putative investors before coming to any agreement. Like-
wise, Canadian companies are beset with exactly the same frustrations in
dealing with the cumbersome Chinese bureaucracy as their rivals.
The more serious impediments to success lie in the variable factors, those
over which Canadian companies have direct control. While Canadian busi-
nessmen have been gaining experience in negotiating business agreements
with the PRC, for the most part they appear to lack aggressiveness, especially
in contrast with their American and Japanese counterparts. While this is
obviously a gross generalization, it is noteworthy that few executives dispute
it. The time is now at hand for Canadian corporations to commit themselves
firmly to pursuit of the China market. This can be achieved in various ways,
from the establishment by more companies of permanent offices in Beijing,
Shanghai or Guangzhou to the endowment by those same companies of
chairs in the study of Chinese law at Canadian law schools. 249 The required
aggressiveness will only come after a greater and more informed commit-
ment to involvement in the PRC. The biggest barrier to success is the pricing
249For a discussion of similar policy considerations, see M.A. Goldberg, The Chinese Con-
nection: Getting Plugged into Pacific Rim Real Estate, Trade and Capital Markets (Vancouver:
University of British Columbia Press, 1985) at 73-95.
1985]
CANADIAN BUSINESS NEGOTIATIONS IN CHINA
43
of Canadian goods and services. It is only when, and if, these are compet-
itively priced that serious negotiations can be undertaken; not until Chinese
officials can envision a transaction which complements their modernization
process at a reasonable price do the other factors even come into play.
Therefore, top priority must be given to bringing prices down to such “rea-
sonable” levels.
With respect to the other variable factors, they have not generally proven
to be critical obstacles. The often “unbusinesslike” outlook of Chinese cadres
can in time be modified by continued exposure to Canadian and other
capitalist interlocutors across the bargaining table; in any case, the patience
of Canadian businessmen has not yet been exhausted. The terms of tech-
nology transfer have, for the most part, gone smoothly, with Canadian com-
panies generally proving quite cooperative. And the increasing competition
between various Chinese provinces, municipalities and SEZs for the same
foreign investment funds can even be turned to advantage by well-informed
Canadian businessmen. The Chinese custom of playing one foreign com-
pany off against another could thereby be nullified, with Canadian com-
panies in turn playing one province or SEZ off against another before deciding
where to locate their equity joint venture.
In short, with the proper preparation and attitude, the opportunity is ripe
for Canadian businessmen to take full advantage of what is potentially the
largest market in the fast-growing Pacific Rim. The problems associated
with China’s Joint Venture Law and other foreign economic legislation,
while numerous, are not insurmountable. If Canada’s businessmen can sur-
mount them, they will have taken a step towards resolving their own coun-
try’s structural economic problems, as well.
Appendix: Questionnaire Results 250
Section 1: General Questions Concerning Your Business Relationship with the Peo-
ple’s Republic of China (PRC)
Part A: Company Data
1. What are the chief products or activities of your company?
2. What was your total value of consolidated sales for the year 1983?
Part B: Process of Involvement
250This Questionnaire, reproduced here in abridged form, was originally drafted by Mr Gary
M. Lawrence and the author in consultation with Mr William Coleman of the Canada-China
Trade Council and has received the support and encouragement of Mr W.R. Robinson of the
East Asia Trade Development Division of the Department of External Affairs. Despite the
assistance provided by these agencies, full responsibility for the initiation and coordination of
this project remains with the author alone.
REVUE DE DROIT DE McGILL
[Vol. 31
1. How long has your company been involved in a business relationship with the
PRC?.
2. What was the nature of your initial involvement and to what extent has your
business relationship progressed?
3. Are you currently involved in a commercial agreement or negotiations for a
commercial agreement with the PRC?
If yes, what is the nature and extent of this business involvement?
4. Why did you choose to pursue a business relationship with the PRC?
(a) Developing new markets
(b) To overcome tariff barriers
(c) Future protection for existing market
(d) Matching competitors
(e) Geographical diversification
(f) To obtain new materials
(g) Political stability
(h) Host government attitude
(i) Using patents/licences
(j) Facilities/resources available
(k) Lower cost conditions
(1) Host government tax incentives
(m) Other reasons (Please describe)
5. What sources of information assisted you in coming to this decision?
6. Was anyone in your company familiar with the PRC before your decision was
taken?
Yes [9] No [4]
7. Was anyone in your company aware of potential associates in the PRC?
Yes [8] No [5]
8. How long did you deliberate before deciding to enter into a commercial agreement
with the PRC?
9. Was this longer or shorter than the time it would usually take for your company
to make such a business decision?
Longer [5] Shorter [2]
Part C: General Assessment of Experience
1. How does your company evaluate the efficacy of your business relationship with
the PRC? (Please describe briefly)
(a) In terms of return on investment:
Positively [4] Negatively [1]
(b) In terms of percentage of overall profit:
Positively [3] Negatively [2]
1985]
CANADIAN BUSINESS NEGOTIATIONS IN CHINA
45
(c) Rate of growth of sales:
Positively [5] Negatively [1]
(d) Achievement of other scheduled objectives:
Positively [3] Negatively [1]
2. Has your business relationship with the PRC been as fruitful as initially anticipated?
Yes [4] No [1]
Please briefly explain some of the unexpected problems that your company has
encountered, and some of the unexpected advantages that your company has profited
from.
3. How important are your local associates and contacts to the success of your
commerical involvement in the PRC?
4. Is your company satisfied with the manner in which your business relationship
with the PRC has developed?
Yes [6] No [3]
5. Are you content with your present operations in the PRC?
Yes [6] No [3]
6. Would your company be willing to participate in other commercial agreements
with the PRC in view of your experience to date?
Yes [12] No [0]
Part D: Problems Encountered
1. Please comment upon any effects which the host government’s policies, or its
actual application of those policies, have had upon your operations, your plans for
expansion, and your competitive position. Please comment briefly with reference to
any of the following areas which may be relevant:
(a) Methods of allocation of foreign exchange
(b) Allocation of import licences
(c) Application of import duties
(d) Allocation of manufacturing licences
(e) Regulations or pressure for exporting
(f) Regulations or pressure against profit levels
(g) Regulations or pressure against proposed or actual payments or returns for pat-
ents, licences, or technical assistance
(h) Remittance of profits or repatriation of capital
(i) Employment or salaries of expatriates
(j) Taxation policies
(k) Special attitudes toward the private sector
(1) Special attitudes toward foreign investors
(m) Intervention on political grounds
(n) Intervention on social and cultural grounds
(o) Any other areas
McGILL LAW JOURNAL
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Part E: Conflict Resolution
1. How are the conflicts which arise between your company and your associates
resolved?
2. Have you ever been involved in a conflict with the PRC that was ultimately
resolved by international commercial arbitration?
Yes [0] No [9]
3. If yes, what was the nature of the dispute, and what was its solution?
4. Why was arbitration chosen as the means of dispute resolution?
5. From which countries were the arbitrators chosen?
Part F: Future Outlook
1. Does your company have any long term objectives with respect to your business
relationship with the PRC?.
Yes [11] No [1]
2. What is the emphasis placed on these objectives in comparison to those pursued
in other national markets?
Part G: Assistance of Canadian Government and Non-Government Organizations
1. Were any of the following organizations helpful in initiating and maintaining your
business relationship with the PRC?
(a) Canada-China Trade Council
Yes [4] No [9]
(b) Pacific Basin Economic Council
Yes [1] No [12]
(c) Asia Pacific Foundation of Canada
Yes [0] No [13]
(d) Government organizations:
(i) Department of External Affairs
Yes [11] No [2]
(ii) Export Development Corporation
Yes [4] No [9]
(iii) Canadian International Development Agency
Yes [7] No [6]
Please describe the nature of the assistance that was provided by each or any of
these organizations.
2. Could these organizations have been more helpful in your effort to establish and
maintain a business relationship with the PRC?.
1985]
CANADIAN BUSINESS NEGOTIATIONS IN CHINA
47
Yes [5] No [6]
3. Were any non-Canadian foreign businesses benefiting from advantages provided
by their national governments that were not being provided by the Canadian government?
Yes [2] No [2]
4. Was the nationality of your company, in any way, an asset in your business dealings
with the PRC?
Yes [13] No [0]
Section II: The Equity Joint Venture
Part A: Introduction
1. Is your company involved or has your company ever been involved in an equity
joint venture with the PRC, pursuant to The Law of the People’s Republic of China
on Chinese-Foreign Joint Ventures, effective 8 July 1979?
Yes [2] No [111
2. Please briefly describe the nature of this equity joint venture.
(a) Name of the joint venture company
(b) Chief products/activities
(c) Date of agreement, and date of commencement of operations
(d) Value of total sales last year
(e) Percentage of share of host country market
(f) Projected future share of this market
3. Is your company involved in similar equity joint ventures in other countries?
(Please list.)
4. Who made the first approach or suggestion regarding a joint venture and in what
year was this initiative taken?
5. Why was the joint venture form chosen by you and your associates for this project?
(Please rank reasons in order of importance and explain briefly.)
(a) Host government regulations or pressure
(b) Spread risk
(c) Convenience of associates’ complementary resources/facilities
(d) Associates’ established control of resources/facilities/channels of supply or dis-
tribution made association necessary
(e) Better access to loan funds/capital/preferential treatment by government (Please
describe.)
(f) Easier to establish identity as “local concern”
(g) Other reasons (Please describe.)
6. What degree of control does your company feel to be necessary before participating
in a joint venture? Please discuss under the following headings:
(a) Percentage of the equity
(b) Percentage of representation on the Board of Directors
(c) Company representatives in key positions
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(d) Voting rights
Part B: The Negotiation Process
1. Is an understanding of the PRC’s past experience with Western entrepreneurs an
asset in the negotiation process? Explain briefly.
Yes [9] No [1]
2. Was knowledge of the political ideology of the PRC helpful in understanding the
bargaining approach adopted by the Chinese?
Yes [10] No [1]
3. Were difficulties encountered in negotiating the following aspects of the joint
venture agreement? (Some companies answered on the basis of other types of agree-
ments which they had negotiated.)
(a) Taxation laws and tax incentives:
Yes [1] No [3]
(b) Banking arrangements:
Yes [0] No [4]
(c) Management control:
Yes [3] No [1]
(d) Calculation of profits:
Yes [3] No [1]
(e) Manner of termination of participation:
Yes [0] No [3]
(f) Technology transfer:
Yes [4] No [2]
(g) Pricing and marketing:
Yes [3] No [3]
(h) Dispute settlement:
Yes [1] No [3]
How were these issues resolved?
4. What areas of the negotiation listed in question 3 presented the greatest impe-
diment to the completion of a commercial agreement?
5. In which areas was the PRC willing to compromise?
1985]
CANADIAN BUSINESS NEGOTIATIONS IN CHINA
49
6. Did the following factors play a role in altering the balance of your company’s
bargaining power in the negotiation process? (Please explain briefly.)
(a) Level of technology:
Yes [7] No [1]
(b) Management expertise:
Yes [4] No [3]
(c) Type of product your company could supply:
Yes [6] No [2]
7. At what level was this commercial agreement negotiated? The level of your rep-
resentatives? The level of the negotiators for the PRC?
8. What are your competitive advantages or disadvantages with respect to your
competitors in the PRC?
