The compilation of these International Business Notes makes students exam preparation simpler and organised.
Joint Ventures and Wholly Owned Subsidiaries
Here we will learn about Joint Ventures and Wholly Owned Subsidiaries. These are the two important modes of conducting international business. A joint venture is about shared ownership and risk, while wholly-owned subsidiaries are about the total command of the parent company. Let’s understand them.
A joint venture implies establishing an organization that is mutually owned by two or more independent firms. It can be brought into reality in three noteworthy ways:
- A foreign investor buying an interest in a local company.
- Local firm acquiring an interest in an existing foreign firm.
- Both the foreign and local entrepreneurs jointly forming a new enterprise.
For example, a Joint venture is between Mahindra-Renault, founded in 2007 brings together India’s largest automobile manufacturer Mahindra & Mahindra, and world-renowned vehicle maker, Renault SA of France.
Advantages of Joint Ventures
- International organizations discover it is affordable for them to expand outside national boundaries.
- Joint venture makes it conceivable to support huge ventures requiring gigantic capital costs and furthermore, labour is shared.
- Foreign organizations profit from the information of domestic accomplices as they know the local market conditions, culture, dialect, political, and business frameworks.
- It prompts sharing of expenses and risk with a local accomplice which helps an organisation to enter the global market.
Disadvantages of Joint Ventures
- It involves sharing of technology and business secret techniques with a domestic organization in the foreign nation, thus there is always a risk of the revelation of technology & business secrets to others.
- A joint venture might lead to a clash, between the investing firms with regard to control of the newly formed venture.
Wholly Owned Subsidiaries
To keep full control over their venture, this method of international business is incorporated by organizations. The parent organization makes 100% investment in its equity capital and in this way takes full control over the foreign organization. There are two ways to set up a wholly-owned subsidiary in the international market:
- Setting up another organization thoroughly to begin activities abroad – also known as a greenfield venture, or
- Acquiring a ready organization in the foreign nation and utilizing that organization to deliver or market its services in the host nation.
Advantages of Wholly Owned Subsidiary
- The parent organization can exert full control over its operations in a foreign nation.
- The parent organization does not require to reveal its technology or competitive advantages to others as the parent organization looks after the whole activities of the subsidiary all alone.
Disadvantages of Wholly Owned Subsidiary
- The parent organization needs to make a 100% equity investment in its subsidiary. Subsequently, this type of international trade is, not reasonable for little and medium-sized organizations which have limited assets with them to put resources into foreign nations.
- Additionally, the parent organization needs to tolerate the whole misfortunes coming about because of losses of its foreign activities on its own, as it owns 100% equity.
- A few nations are hesitant to set up entirely owned subsidiaries by outsiders in their nation.
A foreign investor cannot invest in a local company to form a joint venture. True or False?
The statement is False. A local company can team up with a foreign investor to create a joint venture. This is one of the easiest ways for a foreign investor to gain entry into the domestic market.