What Is a Foreign Invested Enterprise (FIE)?

A foreign-invested enterprise (FIE) is any one of several legal structures under which a company can participate in a foreign economy. FIEs tend to have tight government regulation at several important junctures, which can limit how much a company can profit from foreign ventures, as well as the amount of control that a foreign parent has over the FIE that is established in the foreign country.

Key Takeaways

  • A foreign invested enterprise (FIE) is a legal structure under which a company can participate in a foreign economy.
  • The term, "foreign invested enterprise (FIE)" primarily relates to operating in Asian countries, mainly China.
  • In China, FIE's can take many structures, including equity joint ventures (EJV), cooperative joint ventures (CJV), wholly-owned foreign enterprises (WFOE), and foreign-invested companies limited by shares (FCLS).
  • China recently updated its FIE laws, creating the new Foreign Investment Law, opening up new industries to foreign companies, further protecting foreign interests, and making it easier to operate foreign companies in China.
  • China also details how foreign investors can invest in Chinese securities under their qualified institutional investor (QDII) programs.

Understanding a Foreign Invested Enterprise (FIE)

Setting up an FIE is a common method for companies to access and operate in Asian countries, especially in China. China has notoriously been strict on how foreign companies can operate within the country setting up many rules regarding FIEs, where the term "foreign invested enterprise" is primarily applicable.

In China, any one of a number of legal entities can be considered FIEs, including equity joint ventures (EJV), cooperative joint ventures (CJV), wholly-owned foreign enterprises (WFOE), and foreign-invested companies limited by shares (FCLS).

Types of Foreign Invested Enterprises (FIEs)

An equity joint venture is a legal person with limited liability. In China, it is established between Chinese and foreign parties following the Ministry of Commerce's approval. The Law of the People’s Republic of China on Chinese-Foreign Equity Joint Ventures and the Implementing Regulations for the Joint Venture Law primarily govern these structures.

Cooperative joint ventures come in two forms: a pure version, in which parties do not establish a separate legal entity and thus bear the risk of profit and loss directly; and a hybrid version, in which the parties do set up a separate business entity that generally limits their liabilities to their capital contributions.

A wholly foreign-owned enterprise (WFOE) is a limited liability company (LLC) that foreign investors control. China originally conceived WFOEs to encourage manufacturing activities that were export-orientated and/or incorporated advanced technology.

An FCLS is similar to a joint-stock company that foreign investors can set up. It is the only form of an FIE whose shares can be listed on one of China’s stock exchanges (Shanghai Stock Exchange or the Shenzhen Stock Exchange).

China’s Updated Foreign Invested Enterprise (FIE) Law

In January 2020, China updated its laws related to FIEs. The new Foreign Investment Law, as it is known, further opens China's markets to foreign investors. The new law replaces all of China's previous laws related to FIEs. The law "provides for greater promotion and protection of foreign investment as well as enhanced regulatory transparency."

Operating a foreign business in China has been a difficult task for many companies. Foreign companies have met with more regulations and scrutiny than domestic companies in China, as well as being excluded from investing in certain sectors unless it has been a joint venture.

The new law is meant to make operating in China easier as well as opening up more industries that can be invested in, such as manufacturing, technology, and agriculture. Many of the updates come from requests made by U.S. investors, such as the "protection of foreign intellectual property rights and trade secrets."

Securities Investments

Qualified domestic institutional investor (QDII) programs are also part of foreign investment in China. A QDII is an institutional investor that has met certain qualifications to invest in securities outside of its home country.

China’s Securities Regulatory Commission grants a limited avenue for QDIIs, such as banks, funds, and investment companies to invest in foreign-based securities. QDIIs are also similar to QDLPs or China’s Qualified Domestic Limited Partnership program.