Companies are sometimes faced with the challenge of expanding their operations beyond their borders to take advantage of new business opportunities. International expansion has become an essential strategic step for companies seeking to grow and consolidate in international markets. Among the most popular options to achieve this expansion is the opening of subsidiaries.
This approach has characteristics, advantages and disadvantages that make it more or less appropriate depending on the particularities of the company, the sector and the target market. Choosing to open a subsidiary may depend on factors such as control over operations, initial investment, long-term strategy and associated legal and financial risks.
Aim of the article
The objective of this article is to analyse the subsidiary model as one of the most common forms of business internationalisation. We will explain what it consists of, its characteristics and, above all, the benefits and risks involved in choosing it in the context of international expansion.
The importance of international expansion
International expansion allows companies to access new markets, diversify their revenues and reduce their dependence on a single country or region. However, internationalising a company is not an easy task, as it involves facing challenges such as adapting to local regulations, overcoming cultural barriers and managing economic risks. The creation of subsidiaries is a crucial decision that can directly affect the success of the internationalisation strategy.
Companies that decide to expand internationally often do so for a number of reasons, including:
- To access new markets with higher demand for products or services.
- To gain competitive advantages over local competitors.
- To reduce costs by producing or purchasing goods in countries with cheaper labour.
- Diversify your customer portfolio, mitigating economic or political risks in your domestic markets.
What is a subsidiary?
A subsidiary is a company that is wholly or majority controlled and managed by another company, known as the parent company. Unlike other expansion models where operational control may be shared, a subsidiary is a direct extension of the parent company and operates under its complete control. The parent company usually owns more than 50% of the shares of the subsidiary, allowing it to make strategic and operational decisions on behalf of the subsidiary.
Subsidiaries are a common form of corporate internationalisation in sectors where direct control of operations is essential, such as banking, energy and telecommunications. Companies choose to create subsidiaries when they want to maintain greater control over the quality of their products or services and avoid the risks associated with licensing or granting rights to third parties.
How a subsidiary works in international expansion
In an international expansion through subsidiaries, the parent company establishes a new entity abroad that will operate under its direct control. This subsidiary may be engaged in the production of goods, the provision of services or the distribution of the parent company’s products in the foreign market. As an independent entity, the subsidiary can better adapt to local regulations, taxation and labour laws, all while following the strategic guidelines set by the parent company.
A key issue in setting up subsidiaries is the initial investment required, which is often higher than other expansion models. However, in the long run, companies with subsidiaries can reap higher profits due to the full control they have over their operations. In addition, the establishment of a subsidiary allows the company to consolidate its presence in international markets and to reinvest the profits generated in local growth.
Examples of companies using subsidiaries in their international expansion
The subsidiary model is common in sectors where quality and control are a priority. Examples of companies that have used subsidiaries to expand internationally include:
- Banco Santander: This financial group has established subsidiaries in Latin America, Europe and Asia, operating under the full control of the parent company.
- Telefónica: The Spanish telecommunications multinational has subsidiaries in several countries, which has allowed it to adapt to local regulations while maintaining control of its operations.
- IKEA: Although it uses other models in some markets, IKEA has preferred the subsidiary model in countries where it wants to maintain more direct control over its operations and strategy.
The use of subsidiaries allows companies to ensure a strong and consistent presence in key markets, allowing them to have greater control over their supply chain, marketing strategies and customer experience. However, this strategy also has risks, such as high initial investment costs and direct exposure to local market financial risks.
Benefits of expanding internationally through subsidiaries
The subsidiary model offers a number of significant advantages for companies seeking to maintain more direct control over their international operations. Although this approach requires a higher initial investment, it provides the parent company with greater control and the ability to manage all operational, strategic and financial decisions.
- Greater control over operations: One of the main advantages of creating a subsidiary is the absolute control that the parent company has over its foreign operations. This allows the company to align international operations with its global strategy and ensure that all processes are carried out in accordance with its corporate standards.
- Profit reinvestment: Unlike other expansion models, in a subsidiary, the parent company can reinvest directly in its growth or use profits to support other areas of its international operation.
- Organisational cohesion: A subsidiary is fully integrated within the organisational structure of the parent company, following the same policies, processes and standards as the parent company, ensuring that the brand identity and values remain intact.
Risks of expansion through subsidiaries
While the subsidiary model offers many benefits, it also carries risks that companies should carefully consider:
- High initial investment: The capital required to establish a subsidiary can be considerable, especially in markets with high costs or strict regulations.
- Total risk exposure: The parent company assumes all financial, operational and legal risks associated with the subsidiary.
- Regulatory barriers: Subsidiaries are subject to local regulations, which may include labour laws, tax regulations and trade restrictions.
Conclusion
Opening subsidiaries is an attractive option for companies seeking greater organisational cohesion and control over their international operations. Despite the risks and high initial investment, this model allows companies to consolidate their presence in key international markets, with the ability to reinvest profits and maintain the quality of their products and services. However, before opting for this strategy, careful planning and detailed analysis of the market and its local regulations is crucial.
If your company is considering expanding internationally by opening subsidiaries, it is important to have the right legal advice to ensure informed and confident decision-making. Contact us today for a personalised consultation with our business internationalisation lawyers. We can help you assess the risks, plan your legal strategy and ensure the success of your expansion into new markets.