The economies of the United States, India, and China each grow with foreign direct investment (FDI) from foreign investors opening businesses in their countries. Although there are also people starting companies within each of these countries, this paper will focus on foreign direct investment from the point of view of a foreign investor or foreign company starting a company in these host countries. The United States and India make it easy, while China is notoriously difficult and laden with bureaucracy. Nevertheless, economic opportunity makes all three countries appealing for foreign direct investment.
Starting a Corporation in the United States
In order to form a corporation in the United States, the investor needs to choose what state they want to incorporate in and file the articles of incorporation with the state agency. Delaware is a common state for corporations to be formed in, as they do not require a physical presence in that state (Lau, 2011, p.339-340). Delaware does require that every business entity have a Registered Agent in the State of Delaware, and they provide a list of registered agents to expedite the incorporation process. Name registration fees are $75 and incorporation documents can be filed for $50 (Delaware Division of Corporations, n.d.). It has an effect on the entire U.S. economy too, as annual foreign direct investment accounts for an increase in between $194 billion and $312 billion annually (Bureau of Economic Analysis, 2020).
Ease of Process: Easy
Delaware, in the United States, outlines a clean and simple process for incorporating in their state (Delaware Division of Corporations, n.d.). The ease of this, as well as the transparency of the chancery courts is why most U.S. corporations are legally rooted in Delaware (Lau, 2011, p.339). Once an investor obtains a registered agent in Delaware, they can reserve a name and complete the certificate of incorporation and associated forms.
The Effect of the Process on the Economy
The ease of incorporation in Delaware creates a favorable economic environment. According to the Delaware Prosperity Partnership, they “merge an accessible and willing government with a low cost of doing business and powerful legal, governing, and corporate tax regulations.” New foreign direct investment accounts for $1.28 billion annually (Delaware Prosperity Partnership, n.d.).
Starting a Corporation in India
India requires a passport and educational qualifications in order to register a company. There is a nominal registration fee, which is no barrier to entry. A business plan, Articles of Association, and filing a form FC-1 online are the only requirements. Reading through the FC-1, a simple 7-page form, it is necessary for the company to have at least one resident in India as a contact on behalf of the foreign company (Form No. FC-1, n.d.). In short, it is simple and easy to start a business in India, without much required.
Ease of Process: Easy
The process is so simple that it can be completed online within a week, never going to a government agency office (Shenoy, 2019). People or foreign companies can incorporate a company according to the Companies Act of 1956 by registering a company (TechSciResearch, 2019). Companies must first consider what industry they will be in. The industry determines the approval process and how ‘automatic’ the approval process will be. Some sectors of industry are also forbidden, so investors need to be aware of those industries. Industries that are 100% approved by for foreign direct investment in India are agriculture, mining, petroleum, defense manufacturing, broadcasting, credit information companies, e-commerce companies, and pharmaceuticals (TechSciResearch, 2019).
Once the foreign investor has considered the industry, they should come up with and register a company name. The Indian Ministry of Corporate Affairs has a website where investors can search for registered companies in order to verify that the name is available. If the name is available, the investor can apply for a Director Identification Number (DIN) from the Ministry of Corporate Affairs. Once a DIN is obtained, the investor must register for a digital signature certificate (DSC), which India requires for the rest of the business registration, since the entire process is online. The registration eForm FC-1 is submitted to the Registrar of Companies along with the business plan and the Articles of Association, which describes the company’s management and operations (Ministry of Corporate Affairs, n.d.).
It is recommended to hire an experienced lawyer in foreign investment and Indian corporations to guide through the process. It is also important to get an accountant, as the company’s books will be audited every year (Shenoy, 2019). Overall, the process to start a business in India has made simple, easy to complete online, and is welcoming to foreign investment.
The Effect of the Process on the Economy
India has made foreign investment easy with changes in their foreign direct investment policy. There is a ready labor force, lower wages, natural resource abundance, and tax exemptions for foreign investors. The World Bank’s data shows that India’s GDP has increased from the equivalent of $2.03 trillion in 2014 to $2.7 trillion in 2018, with trends showing that foreign direct investment (FDI) is growing quickly due to foreign businesses starting companies in India (TechSciResearch, 2019).
Starting a Corporation in China
The company must be in an approved industry sector for foreign investment, as China has made certain industries prohibited (Sapore di Cina, 2018). China’s list of Encouraged Foreign Investment Industries is a pretty long list, so an entrepreneur can most likely find an opportunity in the list (Foreign Investment Administration, 2012).
In be approved to be a corporation in China, the State needs the name of the company, the industry, the list of owners, the managerial structure, the legal address of the company, the Articles of Association describing the business plan and business cope, the number of employees and their salaries and benefits, the registered capital and investments to be made, and a feasibility study (Sapore di Cina, 2018). The address has to be a real physical address, either owned or rented, and cannot be a virtual address. The feasibility study is a business plan in the format provided by the State, as well as an investment budget (Sapore di Cina, 2018). Of course, depending on the industry or location, China can require other documents as well.
Once approved, in order to get a business license, other forms are needed, with the Articles of Association, approval certificate, letter of recommendation from the banks, legal representative and list of stakeholders, and any other documents.
Ease of Process: Difficult
The regulations and bureaucracy can make it hard to start a company in China. Because of the difficulty of the process, it can take several months to go through the process, even with an experienced legal team. A strong legal partner and liaison will help a foreign investor or company navigate the State bureaucracy to help get a foreign company started. 65% of foreign investment companies are Wholly Foreign-Owned Enterprises (WFOE), while Representative Office, Partnerships Enterprises (FIPE), and Joint Ventures account for 35% of foreign investment. Wholly foreign owned enterprises are notoriously difficult to establish in China and includes a six to eighteen month process (INS Global Expansion Simplified, n.d.).
It is recommended to find an agency or legal firm to handle the process and formation and jumping through the agency hoops in China (Sapore di Cina, 2018). An experienced legal agent who is used to handling the process is needed to massage a foreign company through the process of getting approved and licensed (Lapowsky, 2010).
Inc. describes that the State needs to know what industry the business is in as China treats industries different depending on what they are trying to attract, such as high-tech. The industry may be encouraged, restricted, prohibited, or permitted, so the company needs to verify that the industry works for the Ministry of Commerce (Sapore di Cina, 2018). Businesses should formulate a five-year plan that is as broad as possible to give them the most freedom once approved, since that plan dictates what licenses and privileges they will be approved for. Inc. also explains that a foreign company needs to define their entity status (joint venture, Chinese owned, or foreign owned). The most common is the wholly foreign-owned enterprise (WFOE), since it maximizes the quality control by the foreign owner company (Lapowsky, 2010). As a foreign-owned enterprise, it is important for the foreign company is approved by the Chinese company to invest and own stock in the new Chinese company, and should have a letter of recommendation from the bank in its filings with the State (Sapore di Cina, 2018).
Once all of the required documents, including the business plan, investment budget, and scope of business, are submitted, applications are submitted to the Ministry of Commerce (MOFCOM) as well as the State Administration of Industry and Commerce (SAIC). Additional applications may be needed, depending on the location of the business as well. This work is all to get an approval certificate.
If the business receives an approval certificate, it has 30 days to register and apply for a business license (Sapore di Cina, 2018). The business must then deposit their registered capital in a Chinese bank and obtain any additional licensure that might be needed. They need to register with the Public Security Bureau, the Tax Bureau, the Customs Office, the State Administration of Foreign Exchange (SAFE), and they need to hire an accountant (Sapore di Cina, 2018).
The Effect of the Process on the Economy
China is very open to foreign investment, although the process is not easy. Despite the difficulties of their bureaucracy, China’s economy has grown by leaps and bounds due to foreign direct investment (FDI) this millennium. According to The World Bank, China’s processes create “excessive red tape and corruption” in their decentralized approach, so local governments are trying to set up “one-stop shops” to avoid the steps through multiple agencies (World Bank, 2010). Still, despite the difficult process, foreign direct investment increased 300% from 2000 to 2009, and manifucaturing-related FDI increased by 81% during that time period. The advantages of cheap labor, resources, and manufacturing in China offset the difficult process, so companies made the move to China regardless of the bureaucracy.
Foreign direct investment business opportunities exist in the United States, India, and China, although incorporation is certainly easier in the United States and India. China is working to streamline their processes and make one-stop-shops to expedite incorporation and cut red tape, which will attract even more businesses. All three countries have growing economies that are impacted favorably by new corporations starting on their soils.
Bureau of Economic Analysis. (2020). New Foreign Direct Investment in the United States. U.S. Department of Commerce. Retrieved from https://www.bea.gov/data/intl-trade-investment/new-foreign-direct-investment-united-states
Delaware Division of Corporations. (n.d.). How to Form a New Business Entity. Retrieved from https://corp.delaware.gov/howtoform/
Delaware Prosperity Partnership. (n.d.). Foreign Direct Investment in Delaware.
Foreign Investment Administration. (2012). Catalogue for the Guidance of Foreign Investment Industries. Ministry of Commerce; People’s Republic of China. Retrieved from http://english.mofcom.gov.cn/article/policyrelease/aaa/201203/20120308027837.shtml
Form No. FC-1. (n.d.) Ministry of Corporate Affairs eForm FC-1 for Company Registration for Foreign Investors. Retrieved from http://www.mca.gov.in/MCA21/dca/downloadeforms/eformTemplates/NCA/Form_FC-1_help.zip
INS Global Expansion Simplified. (n.d.). The Ultimate WFOE Guide: How to Setup a WFOE in China. Retrieved from https://ins-globalconsulting.com/ultimate-wfoe-guide-how-to-set-up-a-wfoe-wofe/
Lapowsky, Issie. (2010). 10 Steps to Starting a Business in China. Retrieved from https://www.inc.com/guides/2010/07/how-to-start-a-business-in-china.html
Lau, T. & Johnson, L. (2011). The Legal and Ethical Environment of Business (Vol. 1). Flat World Knowledge. Retrieved from https://resources.saylor.org/wwwresources/archived/site/textbooks/The%20Legal%20and%20Ethical%20Environment%20of%20Business.pdf
Ministry of Corporate Affairs. Steps to Register a New Company. Government of India. Retrieved from http://www.mca.gov.in/MinistryV2/incorporation_company.html
Sapore di Cina. (2018). How to Setup a Company in China as a Foreigner – Our Guide. Retrieved from https://www.saporedicina.com/english/how-to-start-a-company-in-china/
Shenoy, Sanjay. (2019). How to register a company in India: a complete guide. Retrieved from https://yourstory.com/2019/06/how-register-company-india-guide
TechSciResearch. (2019). How Foreign Companies Can Enter India! Retrieved from https://www.techsciresearch.com/blog/how-foreign-companies-can-enter-india/95.html
World Bank. (2010). Foreign Direct Investment – the China story. Retrieved from https://www.worldbank.org/en/news/feature/2010/07/16/foreign-direct-investment-china-story