'An institutional view of China's venture capital trade: Detailing the variations between China and the West', Garry D Bruton and David Ahlstrom- Journal of Business Venturing 18(2), March 2003, 233. When a firm has surpassed its primary testing, venture capitalists in the West carry on with due diligence, normally together with evidence of the dynamics and position of the firm's product, production capability, market requirement, and position of key connections with other businesses (Fried and Hisrich, 1994). When venture capitalists first went into China, due diligence for funded projects in China was limited in range; in part, because the support activities upon which Western venture capitalists rely to perform such activities were not present [Bruton et al., 1999] and [Mann, 1997].
‘An institutional view of China’s venture capital trade: Detailing the variations between China and the West’, Garry D Bruton and David Ahlstrom- Journal of Business Venturing 18(2), March 2003, 233. When a firm has surpassed its primary testing, venture capitalists in the West carry on with due diligence, normally together with evidence of the dynamics and position of the firm’s product, production capability, market requirement, and position of key connections with other businesses (Fried and Hisrich, 1994). When venture capitalists first went into China, due diligence for funded projects in China was limited in range; in part, because the support activities upon which Western venture capitalists rely to perform such activities were not present [Bruton et al., 1999] and [Mann, 1997].
While venture capitalists are raising efforts to carry out Western-type due diligence, the availability and accuracy and reliability of data is still problematic. Regulations in China don’t require exactly the same level of public information be provided to the government or other regulatory bodies as happens in the West. Many cognitive institutions encourage the tight control of information and knowledge in China [Boisot and Child, 1988] and [Boisot and Child, 1996] . Within the central planning system, bureaucrats and entrepreneurs regulation information is crucial to understanding the market and local regulatory environment closely, dispensing it carefully to be able to acquire favors and other valued items [Boisot and Child, 1988] and [Boisot and Child, 1996] . As one venture capitalist revealed: It is common to invest three to six months more on due diligence [in China], compared to similar deals in the West. Particularly you need to understand what sort of connections the entrepreneur has, both with the government and other companies. These may represent significant assets for the firm. The result is that venture capitalists must be ready to make greater efforts in China compared to the West in order to find and aggregate a larger range of data in completing due diligence.
Major areas to look at in due diligence: legal research of the bureaucratic steps important to rent specific land, building certificates, entire operational costs of the rent, ecological regulations, license life span checking, pre-entry tax advisory, taxes of owners, stamp duty tax, tax incentives, special incentives, import/export duties exemptions (if any), tariff rebate plan for your items, rules and regulations for foreign traders in particular business. Generally, the process will proceed the following (we put together a complete due diligence process, other less rigorous deals will warrant lesser investigations/steps where appropriate): a. A Memorandum of Understanding or Letter of Intent setting out the main heads of agreement which will be signed involving Chinese party and foreign party, often along with a formal appendix with particular agreements relating to the due diligence activity including an exclusivity agreement and confidentiality agreement; b. Party assists the counter-party with a due diligence document request list, describing various documents/certificates which are expected from company; c. Report on the returned documents, and analysis of issues.
Request of further documentation based on the findings. d. Independent verification from the following sources: i) Carry out interviews with management; ii) Review registrations with local Administration of Industry and Commerce, as well as other appropriate government filings; iii) Site survey; iv) Geographical audit. This might be particularly applicable for the sale that you are completing, with the factory?s potential geographical impacts; v) Verification with banks; and vi) Employment of investigative/valuation agencies, where necessary. B. Information examined: Like other jurisdictions, there are particular parts of the company which must be assessed. We established the parts of particular importance below: 1) Corporate organization: a. Corporate structure; and b. Corporate approvals by related government agencies. Note: Corporate structures are extremely distinct to that of other countries, consequently, it is crucial to know the fundamentals of Chinese corporate law to be able to recognize the significance of findings. 2. 2) Land: a. Land use rights; b. Building ownership rights; and c. Ecological compliance. Note: Chinese land ?ownership? is very unique in that it allows for a system of long-term leases of the land itself, and full ownership rights to the land. Documents must be looked at cautiously, specifically, if the land and/or property is of considerable value pertaining to the procedure. 3) Debts: Loans, guarantees and mortgage contracts.
Note: China does not yet have a strong central credit rating system for companies. Consequently, any reports presented must be verified against independent sources to be able to confirm the same, as the primary report may simply lack specifics of the organization, producing a positive report when, in reality, there are many outstanding liabilities. 4) IP rights: Be sure that IP registrations are properly carried out, company is free from violation of others’ IP rights, licensing agreements are properly concluded, etc. 5) Material contracts: Particularly, if you are merging or acquiring the business as a going problem, the company must be cautious to be certain that they fully recognize commitments and investigate any outstanding commitments and/or liabilities thereunder. 6) Tax filings and payment: Ensure that taxes have been correctly registered and necessary expenses have been achieved. (This will have to be done in coordination with an accounting firm.) 7) Regulatory/legal compliance: 8) Special permits and other approvals: This category is often based on the business range of the target or counter-party to the settlement. 9) Employee matters: A strong workforce is particularly important in China, given the concentration of foreign investment in labor-intensive sectors and vast population for the service business. 10) Pending litigation/claims: This investigation, as litigation is often difficult to predict, is associated with robust warranty clauses assuring the counter-party that there are no outstanding or expected litigations or claims; and 11) Insurance plan.