By Zheng Lifei (China Daily)
Updated: 2007-11-12 09:02

Foreign investment, which has played a significant role in sustaining the rapid growth of the Chinese economy, has acquired a new form, that of mergers and acquisitions (M&As).

As China has become more conscious about the quality of its foreign investments, rather their quantity, foreign companies have also made adjustment in their mode of entry into this market, with more and more tilting toward M&As.

In the early stages of economic reforms, Chinese companies were eager to tap foreign capital, often ready to cede market share for advanced technology from foreign partners. And foreign companies, being new in the market, were only too happy to have a local partner to steer them through the unknown terrains in the form of joint ventures.

An apparently mutually beneficial arrangement, these tie-ups - encouraged by the Chinese government at the time - created more problems than they solved. Foreign investors were unhappy that they, often as minority shareholders, couldn't run the joint ventures to their liking, while Chinese companies discovered that the joint ventures did not always result in the technology transfer and management expertise expected of them.

Chinese companies would also often be tricked by their foreign partners. At times foreign companies would let the joint ventures languish in the red, safe in the knowledge that they could always offset their losses by selling their shares and charge high patent fees. When it got too difficult for the Chinese companies to bear the costs after years of losses, their foreign partners would often come to the "rescue", offering to buy out the venture altogether, having gained sufficient knowledge of the Chinese market by then.

But many multinational companies today wouldn't choose this roundabout way of entry, preferring instead to go it alone. Thus foreign companies, private equity funds (PE) in particular, now prefer to acquire local players directly.

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