Wholly owned subsidiaries

Definition

Wholly owned subsidiaries are companies that are completely owned by another company, typically referred to as the parent company. This type of structure allows the parent company to maintain full control over operations, finances, and strategic direction of the subsidiary, making it an important aspect of global market entry strategies. They enable firms to penetrate foreign markets with greater autonomy while mitigating risks associated with local partnerships.

5 Must Know Facts For Your Next Test

1. Wholly owned subsidiaries allow companies to retain complete ownership and control over their international operations, reducing reliance on local partners.
2. Establishing a wholly owned subsidiary often requires significant investment and commitment, including capital for setup and ongoing operational costs.
3. Firms often choose this structure to protect proprietary technologies or intellectual property from potential exposure through partnerships.
4. These subsidiaries can take various forms, such as new builds or acquisitions of existing businesses in the target market.
5. While wholly owned subsidiaries offer maximum control, they also come with higher risks, including exposure to local market fluctuations and regulatory challenges.

Review Questions

• What advantages do wholly owned subsidiaries provide compared to other market entry strategies?
  • Wholly owned subsidiaries provide several advantages over other market entry strategies like joint ventures or franchising. They allow for full control over operations and decision-making, which can be crucial for maintaining brand integrity and strategic direction. Additionally, they enable the parent company to protect its proprietary information and technologies from potential leaks that may occur in partnerships. Furthermore, this structure can facilitate easier implementation of the company's global strategies without needing consensus from external partners.
• Discuss how establishing a wholly owned subsidiary can impact a company's risk management approach in foreign markets.
  • Establishing a wholly owned subsidiary significantly impacts a company's risk management approach by centralizing decision-making and operational control within the parent company. This means the parent can implement consistent policies and practices across its global operations, leading to more effective management of risks related to regulatory compliance and market fluctuations. However, it also exposes the company to greater financial risk, as all investments and potential losses are solely borne by the parent firm rather than shared with local partners.
• Evaluate the long-term implications of choosing a wholly owned subsidiary as a market entry strategy on a company's global growth trajectory.
  • Choosing a wholly owned subsidiary as a market entry strategy can have significant long-term implications for a company's global growth trajectory. This approach allows for rapid scaling in foreign markets due to complete operational control and alignment with corporate objectives. However, it requires substantial upfront investments and ongoing commitment, which can strain resources if not managed carefully. Over time, successful subsidiaries can become profitable hubs that drive further expansion into adjacent markets, but the initial risks must be carefully weighed against potential long-term benefits.

Related terms

joint venture:

A business arrangement where two or more parties collaborate to undertake a specific project, sharing profits, losses, and control.

foreign direct investment (FDI): Investment made by a company or individual in one country in business interests in another country, typically through establishing or acquiring assets.

market entry strategy: The planned method of delivering goods or services to a new target market and achieving competitive advantage.