Advantages of setting up a foreign Subsidiary
Analyzing the drawbacks and advantages of setting up a foreign subsidiary is crucial to formulate an opinion as to whether it is advisable to establish an international company or not.
If you’re planning to set up a foreign firm, you must consider the advantages of setting up a foreign subsidiary.
This article includes the various advantages of setting up a foreign subsidiary. So, without any further delay, let’s get started.
5 Advantages of setting up a foreign Subsidiary
To get your product or service into new markets, a foreign subsidiary is a legal existence in a different country i.e legal entities can market their services and items to the local community. They are also able to trade with items from other countries.
Additionally, companies with an established presence in the local area can boost branding recognition in other areas which can increase revenues. Foreign markets offer huge growth potential and some of the less well-known ‘middle economies’ have viable opportunities for expanding corporate growth.
A few of the advantages of setting up a foreign subsidiary include:
- More Affordable manufacturing Options
In certain markets, the establishment of an overseas subsidiary could allow you to access low-cost products and labor.
A lot of international markets have an advanced manufacturing infrastructure that can result in a lower cost of materials as well as lower prices for manufacturing in large quantities and help cut production costs overall.
- Access to Technical Knowledge
Many countries around the world, including those from Asia, provide access to the latest technologies and innovative methods of thinking about technological issues. Japan is one example. Japan continues to attract foreign investment because of its high amount of technical know-how.
One of the advantages of setting up a foreign subsidiary is that international companies can create an international workforce through the establishment of foreign subsidiaries. The use of a foreign subsidiary could help in distributing stock options to employees abroad simpler. Further details are available in the definitive guide to the issue of stock options to employees from abroad.
- Access to Local Information
The business can create new commercial relations with local partners and create joint ventures which take the benefits of local knowledge through the creation of a legal organization in a different country.
- Increased Expansion Possibilities
In certain cases expanding into a different country can lead to higher growth and earnings that wouldn’t have been feasible in the country of origin in particular when the market is overrun by rivals.
- Process Improvements and Incentives
Some governments welcome foreign investment and simplify the process of incorporation.
They might also offer opportunities to encourage foreign investment, and that includes:
- Tax breaks
- No minimum capital required
- SEZs (Special Economic Zones)
- Free trade zones
- Rapider incorporation processes
- There are no restrictions on foreign ownership of corporations.
Drawbacks of Establishing a Foreign Subsidiary
Here are a few of the drawbacks of setting up a foreign subsidiary.
- Increase in cost and duration
Setting up a foreign subsidiary may require a considerable amount of money and time, which is what prevents many foreign companies from investing in this venture.
The amount of capital needed to be paid up varies depending on the country and industry, however it can be quite high at times. In Singapore for instance an insurance intermediary company is required to have $300,000 worth of invested capital, and travel agencies need to have $100,000.
- Restrictions on foreign ownership
Certain industries are controlled in certain countries where foreign ownership is not permitted. In certain instances, no foreign ownership is allowed however in other instances the ownership requirement is local.
However, foreigners are allowed to invest a certain amount. Certain countries have been historically concerned about businesses that are owned entirely by foreign investors.
For instance, before the law was changed in the year 2019, the UAE required foreign investors to obtain an investment from a local company with at minimum a 51% stake in the company before the incorporation of an overseas subsidiary. Certain sectors in the UAE remain restricted to the involvement of foreign workers.
- Difficult Immigration Requirements
In a foreign country, working often requires complicated immigration procedures. It can be challenging either for your staff or you to obtain an employment visa or permit. It could take several weeks to get approval. Visas are usually only valid visitors for short-term stays, and business activities are often limited.
- Complying with the Complex Requirements
The most challenging aspect of setting up a foreign subsidiary is ensuring compliance. The hiring of employees as well as managing payroll, adhering to tax regulations, and registering the company’s activities can be a bit complicated.
Why should a company setup a foreign subsidiary?
Apart from the advantages that were mentioned earlier, setting up a foreign subsidiary comes with disadvantages too. If a company plans to be in a foreign nation for a prolonged period could decide to setup a foreign subsidiary due to the advantages that are often greater than the risk.
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Companies typically open foreign subsidiaries to establish a firm foothold in a foreign economy which is primarily to increase revenue, earn tax advantages and diversify the company’s assets to manage risk better.
- Brand recognition.
- Risk reduction.
- Diversification and efficiency enhancement.
- Tax benefits.
- Easy to make acquisitions or mergers.
- Non-profit benefits.
In the business world, the term “subsidiary” refers to an organization that is part of a different company that is typically called the parent company, or the holding company.
A Holding Company is a firm that holds more than 50% of the stock of a company and thus can oversee its activities. A Subsidiary Company is one where a different firm holds more than 50 percent of the shares and is completely in control of the operations of the company.
Azhar Ansari is a company formation specialist with 8+ years of expertise in international business. Financial planning, risk management, and other related areas.