Is Becoming A Subsidiary Good
| In spite of a number of advantages of setting up a wholly owned subsidiary (such as improved global strategic coordination, greater security for proprietary information and technological competence, and greater opportunities for maximizing location economies), it is still considered very risky. |
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There are a few vital points that act against the concept of setting up a wholly owned subsidiary. Once can even consider these points as major drawbacks or disadvantages of going ahead and setting up a wholly owned subsidiary.
The first and foremost point to be considered while setting up a wholly owned subsidiary is the huge amount of initial investment capital. The firm will have no other option but to bear all of the establishment costs for setting up the subsidiary on foreign land and operational costs to cover the global operations of this subsidiary.
The second and most dangerous drawback is that there is the risk associated with becoming a subsidiary. This risk is the risk of failure. The situation can go out of the hand, especially if a foreign subsidiary rushes ahead recklessly without trying to get familiarized with the cultural aspects and market swings in the host country. Often, it is seen that the subsidiary comes down crashing in no time. The main cause behind the failure of a subsidiary on foreign land is the fact that a subsidiary ends up being ignorant of the host country’s market situation and fluctuating market trends. The subsidiaries often end up misjudging the host country’s market situation and make erroneous decisions.
Especially when you consider the huge amount of capital to be invested, setting up a wholly owned subsidiary seems to be all the more risky. Such a high amount of investment coupled with a high degree of risk of failure often discourages people from opting for a wholly owned subsidiary.
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Is Becoming A Subsidiary Good