Unlike a franchise, an affiliate or a branch of an existing business, a subsidiary is a business entity that has stock shares controlled by another company, which is typically referred to as a parent company or a holding company. The parent company has more than a 50-per cent control over a subsidiary, but that doesn’t mean that the parent fully owns that subsidiary. Parent companies that own 100 per cent of a subsidiary are described as having a wholly-owned subsidiary. Regardless of whether a subsidiary is wholly owned or partially owned, a parent company has a strong say in how that subsidiary operates.
One of the primary advantages of a foreign-owned subsidiary is that the parent company can still provide guidance, direction and support to its subsidiary. While a subsidiary has the right to develop its own set of business practices, the truth is that your parent company will always have significant influence over the principles, vision, and tactics that govern the subsidiary. That control helps ensure that the subsidiary will operate with the same culture and values as those of the parent company, and will have access to the parent company’s talent pool of experienced executives and rank-and-file employees.
Another advantage of a foreign-owned subsidiary is that the parent company can share its resources, especially the financial systems, administrative services and marketing strategies that have proven successful in the past. Rather than starting from scratch, the subsidiary receives a framework, from which it can quickly ramp up its operations. This not only helps ensure the foundation of the subsidiary is strong, it also saves time and money. In addition, the parent company can provide cash flow and investment, should the subsidiary suffer unexpected losses.
Establishing a foreign subsidiary also enables a parent company to expand its target consumer and to introduce its products and services to a new group of prospects. This not only generates revenue in the host country but also it can have the tangential effect of helping the subsidiary access markets in neighbouring countries.
One of the major drawbacks of a foreign-owned subsidiary is that establishing this business can eat up the financial resources of a parent company. That’s why the parent company must conduct feasibility studies to determine not only what the costs are to get the subsidiary up and running but also what it will cost in the next five years to sustain that subsidiary, based on various economic factors.
also, a disadvantage is Cultural and Political Challenges in Host Country.