Describe the advantages and disadvantages of wholly owned subsidies.

Question

What will be an ideal response?

Answer 1

Student answers will vary but should demonstrate accurate knowledge of the benefits and drawbacks of the wholly owned subsidiary model. Establishing a wholly owned subsidiary-that is, an independent company owned by the parent corporation-is the most costly method of serving an overseas market. Companies that use this approach must bear the full costs and risks (as opposed to joint ventures, in which the costs and risks are shared, or licensing, in which the licensee bears most of the costs and risks). Nevertheless, setting up a wholly owned subsidiary offers two clear advantages. First, when a company's competitive advantage is based on technology, a wholly owned subsidiary reduces the risk of losing control over the technology. However, this advantage is limited by the extent to which the government of the country where the subsidiary is located will protect intellectual property such as patents and trademarks. Second, a wholly owned subsidiary gives a company tight control over operations in other countries, which is necessary if the company chooses to pursue a global strategy. Wholly owned subsidiaries usually accept centrally determined decisions about how to produce, how much to produce, and how to price output for transfer among operations.