Question

Compare the advantages and disadvantages of using a branch office to sell goods overseas compared to that of a subsidiary as a sales company.

Answer 1

If your growth plan includes taping into new markets, or you are searching for access to cheaper work and services, you might be considering setting up a subsidiary located overseas. Establishing an overseas subsidiary offers you some benefits but it also poses several drawbacks.

Like a franchise, an associate or a branch of an established corporation, a subsidiary is a corporate entity that has stock interests owned by another corporation, usually referred to as a parent or holding company. The parent corporation has over 50 percent leverage over a subsidiary, but this doesn't mean that the parent owns the subsidiary entirely.

Advantages

Some of the key advantages of a foreign-owned subsidiary is that the subsidiary is always able to provide input, direction and support to the parent company. While a subsidiary has the right to establish its own set of corporate standards, the fact is that the parent corporation will still have considerable control over the values, vision, and strategies regulating the subsidiaries. This oversight helps ensure that the subsidiary works with the same ethos and values as the parent company's, and has access to the talent pool of seasoned executives and rank-and-file staff of the parent company.

Another benefit of a foreign-owned subsidiary is that the parent company can share its expertise, especially the past productive financial systems, administrative services and marketing strategies. The subsidiary receives a structure, rather than beginning from scratch, from which it can easily scale up its operations. This not only helps to ensure that the subsidiary's base is solid, it also saves time and money. Additionally, cash flow and expenditure may be generated by the parent company should the subsidiary incur unforeseen losses.

Establishing a global subsidiary also enables a parent company to widen its target market and attract a new community of customers to its goods and services. Not only does this raise income in the host country but it can also have the tangential effect of helping the neighboring countries 'subsidiary enter markets.

Disadvantages

One of the major drawbacks of a foreign-owned subsidiary is that it can eat up a parent company's financial capital by developing this corporation. This is why the parent company needs to carry out feasibility studies to assess not only what the costs are to get the subsidiary up and running, but also what it would cost to maintain the subsidiary over the next five years, depending on various economic factors.

Through definition, a foreign-owned subsidiary is a corporation not organically originating from the country it operates in. As a consequence, cultural and political challenges that emerge which could have a negative impact on the subsidiary's performance.