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Foreign Subsidiary | definition
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 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 :
- Entering into profitable new markets :
- More credibility and security-overseas :
- 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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