A subsidiary (also known as a subsidiary company) is a company in which another company, the parent company, controls at least 50% of the capital.
The latter is also in charge of directing and administering it. It can already name the people who will manage the subsidiary concerned. On the other hand, it can impose its strategic decisions concerning the subsidiaries it manages.
Note: Several companies can come together to achieve the 50% required capital and thus create a subsidiary. In addition, if the same subsidiary wants to manage its subsidiary, it is possible to create a sub-subsidiary. In large groups, it is not uncommon to observe this phenomenon of Russian dolls nested in each other.
The advantages of the subsidiary…
- Nationalization. A subsidiary company located abroad receives the nationality of the country it operates in. Thus, all the products it manufactures and exports benefit from this nationalization.
- Autonomy of management. Unlike the branch created by the parent company, which has no room for maneuvering, the subsidiary remains autonomous in terms of management. That is, the parent company does not have to direct the activity of the subsidiary steadily. On the other hand, it receives activity reports at regular intervals.
- Legal autonomy. Still, in comparison with the branch, the subsidiary is a legal entity. It means she acts in her name (as if she were independent). Similarly, it must pay taxes to the country where it operates, which can be a significant advantage if the taxation is lighter than in France.
- Similarly, if the subsidiary encounters difficulties (unpaid debts or lawsuits due to the malfunction of a product sold, for example), the parent company does not suffer the repercussions that could harm its image.
- Control retained on the marketing and marketing strategy. This is often an unknown element, but if you are a manager and are afraid of losing control of your subsidiary if you create it, do not worry! Buying, marketing, communication, or even sales are all elements on which you will remain a decision-maker: the subsidiary will be satisfied to put in the means to ensure the accomplishment of it.
- Having to deal with additional administrative documents for a subsidiary can put off more than one entrepreneur. However, most administrative procedures and operations are managed by branch management, making the task much less time-consuming for the parent company.
… but also disadvantages.
- Substantial implementation costs: at this level, it is more of a warning than a fundamental defect. Let us say more than the basic investment can come back expensive because we must consider several elements such as the contribution of initial capital, providers… Establishing a subsidiary is a decision that must be matured upstream and recommended for companies of sufficient size in good financial health.
- Request a good knowledge of the target country: jurisdiction, taxation, and different economy…). Analyzing all these parameters can take time, and in case of misinterpretation, the consequences can be a blow to a newly established subsidiary.
- Establishing relationships can be long and painful at first: the cultural barrier can complicate the recruitment process and the integration of staff into their work environment. To overcome this problem, it is interesting for the (future) parent company to start establishing a network even before the creation of the subsidiary: less time lost, subsidiary more quickly ready to operate…