The frustrations for foreign companies doing business in China are on display in a new incident that shows how government roadblocks are created to dissuade investment in Chinese technology.

Zeus Entertainment says it will terminate its CNY192.5 million investment project in Xiaodu Interactive Entertainment because of Chinese restrictions on foreign ownership of media technology companies.

Zeus Entertainment announced on April 27, 2016 that the company made a CNY192.5 million investment in Xiaodu Interactive Entertainment with its own fund and the company gained a 10% stake in the latter on the completion of the investment.

Xiaodu Interactive Entertainment is a new company separated from Baidu's video business. The company aims to become the leading platform for professional generated contents in China.

But Xiaodu Interactive Entertainment needs to obtain a license for publication of audio-visual programs. According to related government policies, the applicant should not include foreign-invested companies. But, Zeus Entertainment is a joint venture with investments outside mainland China. In order not to affect Xiaodu Interactive Entertainment's license application, Zeus Entertainment decided to terminate its investment after careful analysis and friendly negotiation with various parties of the agreement.

In April 2016, Baidu separated its video business and established Xiaodu Interactive Entertainment. Baidu later announced that Xiaodu Interactive Entertainment completed nearly CNY1 billion funding from investors such as Shanghai New Culture Media Group and SAIF Partners.

China does not allow any whole or partial foreign ownership stakes in companies engaged in Internet content in China. So businesses that provide online streaming video or online news must be 100% owned by Chinese entities. Some companies get around this predicament by establishing variable interest equity entities, but more conservative foreign investors worry about the legality of VIEs in China.