Most firms choose to set up a representative office in order to gain experience and acquire a better understanding of the size and potential of the market in China. They use this representative office to lay out their long term goals and oversee their other business operations or joint ventures in China.
The mission of a representative office is to act as a liaison between the home office and trade organizations or related industries in China. Often representative offices engage in market research and establish contacts with prospective customers and potential partners.
A representative office is restricted from engaging in certain activities and may not receive fees for services they provide, directly generate income, or sign contracts which generate income. Representative offices are allowed to negotiate contracts which are later signed in the name of the home office located outside China.
According to the State Administration for Industry and Commerce (SAIC), Foreign representatives must register a representative office within six months of establishing a business presence in China. Those who have not obtained approval or have not gone through the procedures for registration shall not be permitted to undertake business operations in the capacity of the home office.
Failure to comply with the registration requirements shall result in the assessment of a RMB 10,000 (US$ 1150) fine and in serious cases the involved party may be banned from engaging in further business activity in China. The SAIC enforces the above regulations by random checks and through informants in related Chinese companies.
The registration of a representative office is required in order to lawfully employ Chinese nationals, to open a bank account, to import personal effects duty-free, to import office equipment without an import license, to obtain direct telecommunication lines, to display signs with the company name, or to use business cards that identify the company's presence in China. The representative of a company is unable to obtain a multiple entry visa or legally rent an apartment without a commercial domicile registration booklet obtainable only after the registration of the representative office has been completed.
There are many intangible benefits related to the establishment of a representative office. Often the office serves no other purpose but to present an image to the prospective Chinese customers and potential partners. The location and furnishings of a representative office are very important in China because the Chinese are often unable to visit the home office of the foreign company and are only able to judge the viability of a company by their operations in China. Foreign representative offices occupy the most expensive real estate in Beijing and high class office space is in such demand that rental costs have doubled in the last 18 months, at present averaging $7.00 per square foot per month. Many foreign companies use their offices as a carrot to their Chinese counterparts showing the rewards that will follow if their business cooperation is successful.
The representative office is also an effective tool to convince the Chinese that their foreign counterpart is serious about the China market. The establishment of a representative office assures the Chinese partner that their counterpart is in China for the long term. Chinese executives frequently express their uneasiness about the commitment of the foreign party during negotiations by telling stories about the foreign company that came to China to negotiate a joint venture and then disappeared. The establishment of a representative office can also enhance the foreign party's bargaining power.
