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Wholly Owned Subsidiary Essay

A company wishing to own a foreign wholly owned subsidiary can do so either by starting from the ground up, or by acquiring a going concern. When starting from the ground up, also referred to a Greenfield investment, the company takes on the risk related to the unknown pitfalls of building a new facility, implementing new processes, and working within a new culture.

To make a comparison, implementing a Greenfield investment over acquiring a going concern is less appealing do to the complexity and risk of first time foreign market entry. In most cases market entry is made through acquisition of facilities which are already up and running. One on the biggest advantages of acquisition is that it provides a cost effective way to obtain technology and/or brand names.

To try to put things in perspective, In the United States the average size of foreign direct investment through acquisition has been about nine times of that created by the establishment new firm.

A joint venture is defined as a shared ownership in a foreign business and can fall under one of the following four business arrangements. First, a corporate entity formed by an international company and local owners. Second, a corporate entity formed

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by two international companies for the purpose of doing business in a third market, Third, a corporate entity formed by a government agency and an international firm. Forth, a cooperative undertaking between two or more firms during a limited-duration project.

One of the advantages of a joint venture when comparing to Greenfield investments is the fact that the smaller commitments have lesser financial resources because responsibilities are shared. Other advantages include; trading and pooling alliances which support overall market objective. Also, having a local partner provides an interface for better understanding of the local culture and government, as well a connection to valuable in-country business relationships.

In some countries where 100 percent ownership is prohibited, a joint venture provides the only means of ownership. The two largest disadvantages of a joint venture include loss of profit due to profit sharing, and lose of control when ownership falls under 50 percent.

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