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.

Browse more Topics Under International Business

• Introduction to International Business and its Benefits
• Contract Manufacturing, Licensing and Franchising
• Importing and Exporting
• India’s Involvement in World Business
• Joint Ventures and Wholly Owned Subsidiaries
• Export Procedures and Documentation
• Imports Procedures and Documentation
• Foreign Trade Promotions: Incentives and Organisational Support
• International Monetary Fund (IMF) and World Trade Organisation (WTO)
• International Trade Institutions and Trade Agreements

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Joint Ventures

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.

(Source: thestoryengine)

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 accomplice 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 help an organisation to enter in 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 revelation of technology & business secrets to others.
• 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 subsidiary all alone.

Disadvantages of Wholly Owned Subsidiary

• The parent organization needs to make 100% equity investment in its subsidiary. Subsequently, this type of international trade is, not reasonable for little and medium-size 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.

Solved Question for You

Q: A foreign investor cannot invest in a local company to form a joint venture. True or False?

Ans: 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.