What Is an Equity Joint Venture?

An equity joint venture (EJV) is a partnership between a Chinese company and a foreign entity established for the purpose of operating a business in China. The partnership forms a new entity that is authorized under Chinese law. There are a number of ways a multinational company can can enter the Chinese market, but the EJV is a structure favored by both the Chinese government and local businesses.

When a western multinational company wants to set up operations in a country aligned with its world view, legal system, and market structure, it will typically choose to obtain authorization directly from the host country's government to buy property, build facilities, ship in employees, and otherwise function as a business settled at that location under its own auspices. Setting up operations in China, however, is a more complicated process for businesses from most other countries in the world. EJVs make it easier for a foreign company to establish an operational presence in China by having it partner with a Chinese company to form a new, jointly-owned enterprise. The government prefers this sort of arrangement because it enables Chinese companies to materially participate in the development of their market while increasing the local company's expertise through its association with the foreign entity. That expertise will remain a Chinese resource long after the partnership has run its course.

This type of enterprise is called an equity joint venture because each partner contributes capital to the new entity and shares in the profits and risks in proportion to its investment. Under Chinese law, the foreign partner must contribute at least 25 percent of the capital needed to start the business, but otherwise the ownership percentages can be negotiated through the development of a joint venture contract. The law allows contributions of cash, equipment, property rights, intellectual property rights, and buildings to be used as the equity contribution, but, unlike most western corporation laws, it does not allow labor hours or personal services to contribute to a partner's equity position.

Legally, the equity joint venture has some features that are unique to the Chinese law and unknown under the typical corporation law in the west. Principal among these differences is a restriction on the transfer of stock. An EJV partner is not allowed to sell his position or shares in the venture without government approval. This is a stark difference from the stock of ordinary corporations, which is freely transferable. Furthermore, the partner cannot withdraw his investment during the life of the enterprise.

An equity joint venture is structured to exist for a finite length of time, usually between 30 to 50 years. It is formed by filing articles of association with the Chinese government. Once the EVJ is registered, it enjoys domestic privileges that exceed other ways a multinational could enter into the market. The EJV is considered a Chinese legal entity that can hire local workers and own land and buildings.