A foreign subsidiary is an excellent way to expand your business globally. However, there are many things to consider before setting up such a company. In this article, you will understand what the pros and cons of foreign subsidiaries are.
In order to set up a foreign subsidiary, you must first determine whether or not it makes sense for your company. Find out more about the pros and cons of this strategy. Setting up such a subsidiary is a great way to expand your business internationally. However, you should be aware of some important considerations before making a move. Like any other significant business venture, foreign subsidiaries have benefits and drawbacks. These elements are at the top of the priority list:
Pros of Foreign Subsidiaries
A company that establishes its very own foreign subsidiary wields significant influence over how that subsidiary is run. The parent company can take a ‘top-down’ approach to instill its own unique culture, values, and vision in the subsidiary by installing its board of directors. On the other hand, the subsidiary reaps the benefits of the parent company’s valuable shared resources, such as financial systems, technology systems, sales and marketing expertise, and a plethora of business opportunities. These resources allow the foreign subsidiaries to immediately shift into a higher gear and compete more effectively in their market.
Entry Into Profitable New Markets:
‘If a company isn’t growing, it’s dying,’ as the adage goes.
Similarly, establishing a foreign subsidiary allows the parent company to grow and expand into regions and industries where it would otherwise be unable to do so. New foreign markets bring new customers and sales opportunities, allowing the parent to expand its brand in financially valuable foreign markets.
A Foreign Subsidiary Earns More Credibility and Protection Overseas.
Companies that establish a subsidiary in a foreign country are generally taken more seriously by local industries, governments, and business affiliates than companies that simply open a branch office there.
Foreign financial institutions, for example, are more willing to do business with foreign subsidiaries that have received the legal and fiscal stamp of approval from the local and national governments where the subsidiary is located.
Furthermore, a parent company’s liability for its foreign subsidiary is limited.
For example, suppose a subsidiary is involved in litigation. In that case, the subsidiary, not the parent or holding company, is liable, ensuring protection from any significant financial penalties that may arise from legal issues overseas. Furthermore, suppose a subsidiary fails to meet expectations (or worse). In that case, the parent company can quickly sell it, often to another company in the very same foreign country.
Cons of Foreign Subsidiaries
Costs Can Accumulate
The cost of establishing a foreign subsidiary, both economically and in terms of time, can be substantial.
While costs vary by country, it’s frequent to see capital requirements of several hundred thousand dollars and timelines of six to nine months when establishing entities in foreign countries.
Furthermore, some country legal mandates require parent companies to send staffers on-site to sign documents and attend specific meetings, adding costs and time to the bottom line.
Exiting a country where you’ve set up foreign subsidiaries can be costly and time-consuming, as statutory filing fees can take months to pay. Liquidating a wholly owned subsidiary in China can take anywhere from eight to twelve months.
Companies considering establishing a foreign subsidiary should conduct a five-year financial feasibility study.
Cultural Differences
Cultural and commercial integration in a foreign country may be challenging for American businesses.
Operating in a foreign country often entails dealing with various bureaucratic, political, rate of exchange, legal issues and processes, and language, currency, and physical distance issues. To protect the organisation from various compliance risks, local knowledge and experience versed in the nuances of the local requirements are required.
Staffing Acquisition And Onboarding Issues
Recruiting new talent from outside the country presents its own set of challenges for a parent company’s human resources department.
When running a foreign subsidiary, inside knowledge of local job postings, conducting interviews, job offers, benefits, and onboarding is not a luxury. It’s a necessity.
Conclusion
The decision to establish foreign subsidiaries is based on your company’s specific long-term business objectives. That process begins with a thorough examination of your company’s financial, logistical, and management capabilities and where your best ‘fit’ might be in another country.
It’s also good to run some internal circumstances to see if a subsidiary makes more sense than simply opening a branch office in another country.
