One of the things we are always preaching on this blog is the need to first ask whether what you are proposing to do in China is legal or not. I am always telling of how a company once contacted us, bragging about the huge amount it had spent on market research and proudly proclaiming it to have revealed a “huge need” for a Western company in a particular industry.  My knee-jerk response to which was that I did not even realize that foreign companies were now allowed in that industry.   Ten minutes of research soon revealed that they were not and this company ended up never going into China, wasting the money it had spent to prove it would have done well there.

We were recently contacted by a very much on the ball investement research company regarding the legality of setting up shop in China as a Wholly Foreign Owned Entity (WFOE). We did some quick research (so quick, in fact, that we did not even charge for it) and our initial response was as follows:

 The most recent version of China’s Catalogue of Foreign Investment provides the following:

Restricted Industry:

Article 9.3: Market Research (restricted to joint ventures)

Prohibited Industry:

Article 6: Social Survey

We view this as meaning that foreign companies cannot engage in company research as a WFOE. However, many companies do it by creating a service WFOE stating that it will assist foreign investors in investing in China. Then what they really do is market research. As long as you do get caught, it does not matter. If you do get caught, the risk of any real problem is pretty low. Unless that is that you say something in your research that offends the wrong person.

We actually have represented a number of market research firms operating in China as WFOEs.  Heck, we have represented some of them on contracts with large Chinese SOEs and with large multinationals.  But these companies mostly interview 3,000 people about their thinking on handbags; they are not doing in-depth research on Chinese publicly traded companies, which spin-off massive amounts of money to important people.

So here are some of your options:

1.   Do a “consulting” or a service WFOE and run the risk.

2.   Do it as a Joint Venture.  Find someone in China to do this with and set it up so that you effectively control it.

3.  Operate from Hong Kong and fly people in.

The company chose to wait.

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Photo of Dan Harris Dan Harris

Dan is a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network.  His work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

He was named as one of only three Washington State Amazing Lawyers in International Law, is AV rated by Martindale-Hubbell Law Directory (its highest rating), is rated 10.0 by AVVO.com (also its highest rating), and is a recognized SuperLawyer.

Dan is a frequent writer and public speaker on doing business in Asia and constantly travels between the United States and Asia. He most commonly speaks on China law issues and is the lead writer of the award winning China Law Blog. Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed Dan regarding various aspects of his international law practice.

Dan is licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at his firm, Dan focuses on setting up/registering companies overseas (via WFOEs, Rep Offices or Joint Ventures), drafting international contracts (NDAs, OEM Agreements, licensing, distribution, etc.), protecting IP (trademarks, trade secrets, copyrights and patents), and overseeing M&A transactions.