The Advantages & Disadvantages of Foreign Owned Subsidiaries

A subsidiary is a company, corporation or limited liability company that is controlled by a parent company. The parent owns more than 50% of the subsidiary’s voting stock. For the purposes of taxation and regulation, the parent company and subsidiary are considered separate entities. The subsidiary, and consequently the parent company, must adhere to the laws of the country where the subsidiary resides.

Incorporating a subsidiary in a foreign country

Incorporating a subsidiary in a foreign country can be a great way to set out feelers in different markets and get a sense of how your business could if at all, fit into the regional area. Developing and emerging markets can offer excellent growth prospects for businesses either setting up or expanding overseas but they can be risky.

It is essential to review a number of factors before making any decisions on when, where and how you are going to make your move and establish yourself as a competitor. These include political stability, logistics infrastructure, availability of skilled workers in your sector, legal systems, fiscal and monetary policies, and rights on the property.

If you time your entry in your chosen market well you will get a head start on any future competitors by already occupying and having local knowledge of the area. A strong customer base and good working relationships with local suppliers are the foundations of business and can take years to establish so getting in early is advised.

A subsidiary can be set up starting from nothing or through the acquisition of a local company, depending on the location there are benefits to both choices.

Advantages of Foreign-Owned Subsidiaries

There are various advantages of choosing a subsidiary as the business vehicle for your company set up or expansion internationally. The main aspect is the control and support of the parent company. The already established parent company will have the resources and employees to staff the subsidiary so the subsidiary receives a ready-made network of people with experience in the business.

Many parent companies send executives to subsidiaries to get them started, ensuring they have a reliable person in authority to manage the subsidiary’s operations. The brand and reputation of the parent company also transfer to the subsidiary so all the intellectual property is protected from rival firms.

Much of the day to day business aspects of the companies can be shared between the parent and subsidiary, with joint financial systems, shared marketing programmes, and cooperative administrative services available. This can save both money and resources as well time developing and putting them into place. Because the assets of the subsidiary are controlled by the parent company, the parent company has the authority to invest as much or as little as they want into the subsidiary, depending on how well its location within the new market goes and reducing the risk of financial loss as a result.

Disadvantages of Foreign-Owned Subsidiaries

The main disadvantage of setting a subsidiary abroad is the cost. Acquiring a local company may be a quicker way to establish the company in its new surroundings but it will also be a more expensive option. It may be difficult for the parent company not to overpay for the local company’s assets and the price will be bumped up further if there is a bidding war.

The usual problems of working in a foreign country also apply. There could be language difficulties, cultural differences, and a lack of workers skilled in the areas you need. It is important to remember that the parent company holds all responsibility for the subsidiary and so any legal or financial action taken could lead to implications for the parent company. For this reason following local procedures and regulations to the letter is necessary to avoid charges or fines.

Establishing a foreign subsidiary can be your first step to business success abroad. Assessing all the options and carefully weighing up the benefits and risks will allow you to determine whether it is worth a go for you. Getting advice from a company formation expert can help answer any questions you have and overcome some cultural and language difficulties so take advantage of their expertise.

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