Advantages Of Setting Up A Wholly Owned Subsidiary
| A subsidiary is a smaller business unit which is controlled by another larger business unit. The controlled smaller unit is known as a ‘company’ or as a ‘corporation’ while the larger controlling business unit is known as the ‘parent company’.
Usually, an individual cannot function as a subsidiary because a business unit functions only through its board of directors and employees. However, one can obtain control of the company by obtaining ownership of the company’s stocks.
By a wholly owned subsidiary, we mean a subsidiary which owns all the 100 percent stocks of the company. However, this is not always easy, considering the huge amount of capital to be invested. Also the risk of failure may be high if a foreign subsidiary decides to rush ahead on its own, owing to the possibility that it can make wrong decisions because it is not familiar with the host country’s market situation and fluctuating market trends.
There are many advantages of setting up a wholly owned subsidiary which include the following:
- Offers security and good protection for the proprietary information, company’s trade secrets, expertise and technical knowledge, apart from offering a high degree of control over the operations. Unlike in a joint venture, in a wholly owned subsidiary, the company’s trade secrets, technological competence and administrative decisions can be well-guarded.
- Improves global strategic coordination as it offers strong control over the global operations of that subsidiary. This is particularly significant in the case of parent companies which need to completely rely on foreign managers to manage the operations of their various plants.
Enhances the chances of maximizing location economies by bestowing greater freedom to choose location closer to a favorable market area, which also has the added advantage of readily available cheap local labor.
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