What is Foreign Subsidiary ? Pros and Cons


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Foreign Subsidiary | definition

Any larger corporation or parent company that has a branch of it operating overseas is known as a foreign subsidiary. The reason why companies go with the foreign subsidiary is that they want to build a corporate toehold in a particular overseas economy, to generate the profits primarily, increase tax benefits and diversify the assets of the firm for better risk management. Examples of foreign subsidiaries includes:-
  • Walt disney, owning 100% of marvel entertainment that produces movies.
  • Nike Inc has more than 100 subsidiary companies.

Structure of Foreign Subsidiary

The percentage of the foreign subsidiary being owned by its parent company, estimates its designation.

  • In the foreign subsidiary stock the parent company mostly holds the controlling interest more than 50 %.
  • If the dominant company holds 100% of the foreign subsidiary’s stocks, then it is known as a wholly owned subsidiary.
  • The associate or affiliate company is the one having the ownership stake less than 50%.
The foreign subsidiary operations are structurally independent from the parent company. The assets and liabilities of a foreign subsidiary is its own responsibility, being a separate legal entity for taxation and regulatory oversight by the subsidiary where the company was established. So the country where the foreign subsidiary is located, the laws of that country apply to it.

The parent firm controls the overall makeup of the foreign subsidiary. The parent company has the authority to :

  • Establishment of Board of governors.
  • Without the shareholder approval, sell a subsidiary.
  • Building a foreign subsidiary on its own terms, without a shareholder vote.

6 Pros of Foreign Subsidiary

There are certain ups and downs associated with the Foreign subsidiaries just like any other major business. The pros are mentioned as following :

  • Major Advantage being a parent company : 
Any company that has its own foreign subsidiary has a lot of power related to how that subsidiary functions. The parent firm establishes its own board of directors that gives it a Top-down approach as it has owned unique culture, values and vision in the subsidiary. The subsidiary also gets benefits such as valuable resources shared with them, such as financial systems, technology systems, marketing and sales experience and huge business options, from the parent company directly. A subsidiary can instantly soar a higher gear and have a better market performance.

  • Entering into profitable new markets : 
If a company isn’t growing, its dying is a famous business proverb. This also works for the foreign subsidiary as the parent firm expands into regions and industries due to it. The parent firm turns into the brand of a potentially profitable foreign business due to the new customers, and new sales options.

  • More credibility and security-overseas :
The local industries, business affiliates and take the foreign subsidiaries launched by the large companies more seriously as compared to the office branch in a foreign country. The foreign subsidiary having the legal and fiscal stamp of the local and country government where the subsidiary is located, is preferred for a business more. It gives a finite liability for its foreign subsidiary. As an example if the foreign subsidiary is facing the lawsuit it has to face the liabilities, not the parent or holding company. The parent company has the authority to sell the subsidiary easily in case if the subsidiary is not meeting the expectations.
  •  Acquiring the Technical Skills : 

Most of the asian countries give great access to the advanced technology and novel ways of thinking about the technical issues. Alot of foreign investment goes in Japan as they offer a high level of technical knowledge. A completely global team can be recruited by the foreign subsidiaries. The foreign employees get a more straightforward issue of equity compensation due to a foreign subsidiary.

  • Expanding opportunities : 

An enhanced business growth and boosted revenue is observed when a business enters into a new country. These increments do not happen in the home country especially when there is a high competition in the domestic market.

  • Streamlined Processes and Incentives : 

Foreign investments are welcomed in some countries and processes are made to incorporate the firm simply. Some countries also provide the perks to encourage the foreign investments such as :

  • Special Economic zones.
  • Faster incorporation processes
  • Tax incentives
  • No or few restrictions on foreign ownership of companies
  • Free trade zones

Cons of Foreign Subsidiary

  • Cultural Differences :

A U.S.-based company may find it difficult to set up in a foreign country due to cultural differences. Many differences are associated, such as currency, language, physical distance problems, and operations in a foreign country. All these issues arise due to different political, bureaucratic, and exchange rates, legal issues, and processes.

  • Hiring and staffing acquisition issues :

Hiring new talent in a foreign country is a great challenge for the parent company’s human resource departments. The hiring process and culture are different in different countries, so the parent firm should have complete knowledge of job posting, interviewing, job offers, and benefits becomes a necessity.

  • Accumulated costs :

The cost of setting up a foreign subsidiary is high in terms of finances and time requirements. The time required ranges from 6-9 months with the capital requirements of many hundred thousand thousand dollars to wholly set up the foreign subsidiary overseas. Additional costs and time are required if there is a legal requirement of sending the staffers of the parent company on-site to sign documents and attend some meetings.

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