Disadvantages and Advantages of Subsidiary over Joint Venture
Firms interested in manufacturing abroad should weigh the options in which type of venture to choose. The subsidiary venture has some merits and demerits as compared to the joint venture.
First the firm has a control of its technological competency. Most firms thus prefer it for the entry mode because it reduces the firm’s risk of losing the control. It also very favored at the entry point in certain lines of operations like computer, semiconductor, pharmaceutical, and electronic industries. Secondly, subsidiary is the best in the realization location economies and the scale economics which usually flow from the production of standardized output from one or few number of the manufacturing plants. In case of pressure on costs build up, it may pay a firm for the configuration of its chain value in a manner that the value added at every stage is maximized. The joint venture will automatically shun such subservient role. Lastly, the subsidiary provides a firm with the tight control operations in various countries which it requires in cases of engaging in global strategic coordination, in other words, taking profits from a certain country to offer support for competitive attacks in another country (Hill &Jones, 165).
Despite all the advantages, the subsidiary has one major disadvantage as compared to the joint venture. According to Hill and Jones (165) it is expensive in the foreign market. The costly nature arises due to the fact that it is the responsibility of a parent company to shoulder all the risks and costs for setting the operation in abroad as opposed to the joint ventures risks and costs are shared, although a big part is borne by the licensee.
Works Cited
Hill, Charles W. L, and Gareth R. Jones. Essentials of Strategic Management. Australia: South-Western/Cengage Learning, 2012. Print.
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Study Notes:
What are the advantages and disadvantages of using a subsidiary rather than a joint venture for a firm interested in manufacturing abroad?
Advantages of using a subsidiary:
Control: The parent company has complete control over the subsidiary and can make decisions without seeking approval from partners.
Integration: The subsidiary becomes an integral part of the parent company and can be fully integrated into its operations and supply chain.
Branding: The parent company can use the subsidiary to promote its brand in the foreign market.
Tax benefits: Subsidiaries may be eligible for tax benefits in the host country, reducing the cost of manufacturing.
Long-term commitment: A subsidiary indicates a long-term commitment to the foreign market, signaling stability and reliability to customers and suppliers.
Disadvantages of using a subsidiary:
Cost: Setting up a subsidiary can be expensive, requiring significant investments in infrastructure and personnel.
Risk: The parent company assumes all the risk associated with the subsidiary, including market fluctuations, economic downturns, and political instability.
Local regulations: The subsidiary must comply with local regulations, which can be time-consuming and expensive.
Cultural differences: The subsidiary may face cultural differences, making it difficult to integrate with the parent company.
Dependence: The subsidiary may become dependent on the parent company, reducing its ability to respond to local market conditions.
In comparison, a joint venture offers a different set of advantages and disadvantages. For example, a joint venture allows a company to share the risk and costs of manufacturing abroad with a partner, while also providing access to local knowledge and expertise. However, a joint venture requires a sharing of control and decision-making power with a partner, which may lead to conflicts and difficulties in achieving common goals.
