Wholly owned subsidiaries

Definition

A wholly owned subsidiary is a company that is completely owned by another company, referred to as the parent company, which holds 100% of its shares. This ownership structure allows the parent company to have complete control over the subsidiary's operations and strategic direction, making it an attractive option for businesses looking to enter new markets or enhance their competitive positioning.

5 Must Know Facts For Your Next Test

1. Wholly owned subsidiaries provide businesses with greater operational control, allowing for seamless integration of corporate strategies and policies.
2. This market entry mode can involve significant capital investment, as the parent company bears all the costs associated with establishing and operating the subsidiary.
3. One of the main advantages of wholly owned subsidiaries is that they allow for full retention of profits generated by the subsidiary without the need to share with partners.
4. Establishing a wholly owned subsidiary often requires navigating complex regulatory environments, particularly in foreign markets where legal restrictions may apply.
5. Companies may choose this structure to protect proprietary technologies and intellectual property, minimizing the risk of sharing sensitive information with external partners.

Review Questions

• What are the advantages and disadvantages of using wholly owned subsidiaries as a market entry strategy?
  • Wholly owned subsidiaries provide complete control over operations and profits, allowing for strategic alignment with the parent company’s goals. However, they also involve significant financial investment and risk since the parent company must bear all costs and responsibilities. Additionally, companies must navigate complex regulations and potential cultural challenges in foreign markets, which can complicate operations.
• How do wholly owned subsidiaries compare to joint ventures in terms of risk and control?
  • Wholly owned subsidiaries offer full control to the parent company, reducing shared decision-making complexities seen in joint ventures. This structure minimizes risks associated with conflicts between partners but increases financial exposure since the parent must fully fund the subsidiary's operations. In contrast, joint ventures distribute risks but can lead to misaligned interests among partners, potentially impacting overall performance.
• Evaluate the strategic reasons why a multinational corporation might prefer to establish a wholly owned subsidiary instead of pursuing mergers or acquisitions.
  • A multinational corporation might prefer to establish a wholly owned subsidiary as it allows for a tailored approach to market entry without the complications that come from merging cultures or integrating operations post-acquisition. This strategy facilitates maintaining control over brand identity and operational practices while reducing risks related to incompatible corporate cultures. Furthermore, building a subsidiary from the ground up can be advantageous in developing countries where existing firms may not align with corporate values or objectives, enabling greater flexibility in establishing a presence that reflects the corporation's standards.

Related terms

Joint Venture:

A business arrangement in which two or more parties agree to pool their resources for a specific project, sharing profits and losses, but maintaining separate legal identities.

Foreign Direct Investment (FDI): Investment made by a company or individual in one country in business interests in another country, typically through the establishment of a business presence such as a subsidiary.

Acquisition: The process by which one company purchases most or all of another company's shares to gain control of that company.