CHINA
ORGANIZATIONAL STRUCTURE

     Foreign organizations that are contemplating entrance into China's market have three options available to structure its organization and they are as follows:

  A. Equity Joint Venture

  B. Contractual Joint Venture   C. Wholly owned Enterprise      The 3M Corporation elected the least desirable option, from the Chinese perspective, which was, wholly owned.  3M felt that although, the Chinese opposed this type of organizational structure, it offered the most protection from technology theft and enabled 3M to act more autonomously.  However, because the Chinese frown upon wholly owned enterprises, they make the requirements for the foreign corporation extremely onerous.  For example, 3M must pay the maximum tax rate of 50% versus the typical 33% charged to the two other types of organizational structures.  Also, China has very limited laws protecting wholly owned enterprises, which increases the risk of theft from a technology perspective.  Because China works on a network system where people with connections are the most effective at getting things done, 3M has had enormous difficulty in getting laws enforced and passed.
     3M has found ways to mitigate some of the risk associated with wholly owned enterprises in China, by hiring a local consultant firm who has the connections to get things done.  Although this firm costs 3M a significant amount of money, the company feels that it is a must for its long term sustainability.  3M also enjoys the freedom that a wholly owned enterprise gives them such as the ability to make decisions, hire and fire workers, and duplicate home office operating standards.  Ultimately, 3M feels that they chose the best structure for the organization to operate in China.
 


Sources:  Deresky, Helen, International Management (Prentice Hall 2000) p274-276.
Ignatius, Adi. “Find Road Bumpy but Have Few Regrets.” Wall Street Journal
August 1998:24.
Ignatius, Adi. “China’s Effort to Curb Economic Growth Is Likely to Damp Foreign Investment.” Wall Street Journal, Oct. 1988:26.