Joint Ventures and Wholly Owned Subsidiaries

What are Joint Ventures and Wholly Owned Subsidiaries?

The JVs (Joint ventures) are generally characterized by shared ownership, returns, and risks, and also shared governance. 


Next, a Wholly owned subsidiary is a company whose entire stock is held by another parent company. The subsidiary generally operates independently of its parent company, the subsidiary has its own senior management structure, organization layout, and clients, this is not an integrated division or unit of the parent company.


The parent company on acquiring all the shares of a wholly-owned subsidiary, there are no minority shareholders. The subsidiary with the permission of the parent company operates in their own division, this act makes them an unconsolidated subsidiary.

 

Wholly Owned Subsidiary 

A company whose 100% of the common stock is owned by the parent company is called a wholly-owned subsidiary. A company is liable to be a wholly-owned subsidiary through an acquisition by a parent company, apart from this a regular subsidiary company is only 51-99% owned by the parent company.


Wholly owned subsidiaries is a method of international business which is incorporated by the entities for keeping full control over their Ventures. The organization which makes a hundred percent investment in its capital takes full control over another entity. In the international market, there are two ways for setting up wholly-owned subsidiaries. Those are - 

  • Greenfield venture is setting up another organization to begin the activities abroad.

  • Acquiring an organization that is already established in the foreign nation and making by utilization of that organization for delivering services in the host nation.

 

Wholly Owned Subsidiary Example 

A wholly-owned subsidiary may be in a different country than the parent company. The subsidiary has its own management structure and clients. Owning a wholly-owned subsidiary might help the parent company maintain its operations in wide geographic areas and markets or a different separate industry.


Volkswagen AG owns other distinguished brands that are Audi, Bentley, Bugatti, Lamborghini that are wholly owned by Volkswagen AG. 


Another example is Marvel Entertainment Company is the wholly-owned subsidiary of Walt Disney.

 

Joint Venture Subsidiary

A joint venture (JV) is a type of business arrangement where two or more parties come to an agreement and pool their resources for the purpose of achieving a specific task. This task can be a new project or for any other business activity.


In a joint venture (JV), the participants together are responsible for their own profits, losses and the costs incurred and are associated with them.  


In a JV business, there is a partnership in common sense but even in legal structure, they are business partners. JVs are used as a common purpose to partner up with a local business and then to enter a foreign market.


Joint Ventures - When an organization establishes and is mutually owned by two or more independent firms, it is known as a joint venture. It is about shared ownership and risk. It can bring into reality in these ways - 

  • When a foreign investor creates interest in a local company. 

  • When a local firm is interested in a local company. 

  • When local and foreign entrepreneurs both jointly form a new enterprise. 

 

Wholly Owned Subsidiary Advantages & Disadvantages 

Advantages

The advantages of a wholly-owned subsidiary are hereunder:

  1. Companies that will take control over the suppliers will benefit from the wholly owned subsidiaries.

  2. They can form a vertical integration where the companies are under the same owner.

  3. Wholly own subsidiary companies give space for the parent company to breathe and diversify, meaning they can fully grow and manage risk.

  4. A company can avoid competition while entering a new market by combining with its subsidiary. 

  5. For doing business abroad, the wholly-owned subsidiary can be utilized for this purpose as well.

  6. It is affordable for international organizations to expand their business outside the boundaries of their nation. 

  7. Joint ventures make it easy and beneficial for supporting huge ventures which require huge capital and labor and which eventually is shared in joint ventures. 

  8. It helps in sharing the risks and expenses which helps the entity to enter the global market.

  9. The parent organization can take full control of the operations in the organization in the foreign nation.

  10. The parent organization is not needed for revealing its secret technology and techniques to others as they are the ones who look after everything of the company alone. 


Disadvantages

The disadvantages of a wholly-owned subsidiary are as follows: 

  1. The parent company faces more taxes that are levied on these subsidiaries.

  2. Doing diversification with the wholly-owned business may hamper focus on itself.

  3. There may be a conflict between the parent and the subsidiary company that will affect the management of both companies.

  4. Cost structure will shoot up, various other formalities need to be done with the wholly-owned subsidiary.

  5. If the wholly-owned subsidiary proves inadequate to function, then it will disturb the flow of business of the parent company as well.

  6. It has the risk of sharing secret techniques and the risk of revealing secrets of businesses which is a disadvantage of it. In a foreign nation, the sharing of technologies with the domestic organization may lead to the risk of the revelation of important things. 

  7. Joint ventures might lead to a clash which can happen between the firms in regards to controlling and operating the venture and can lead to a lot of problems.

  8. The parent organization needed for making a full investment in its subsidiary which is not reasonable for small and medium-sized organizations who have limited assets and resources for putting into the foreign nation. 

  9. The parent organization has to bear the risk, losses, and misfortunes because they own 100% equity. 

  10. Also, few Nations hesitate for setting up entirely owned subsidiaries by outsiders in their own nation. 

FAQs on Joint Ventures and Wholly Owned Subsidiaries

1. What are the Reasons for a Company to Form a JV?

The three big reasons for a company to form a JV are:

  • Leverage Resources – The company can use the combined resources of both the companies to enjoy the benefit of the large scale of production with limited resources.

  • Cost Savings – Economies of scale help both the company and they can benefit from a lower per-unit cost.

  • Combined Expertise – With the business being owned by the same head they will achieve combined expertise at the management level.

2. Who is a Parent Company?

A parent company is a company that is owned by enough voting stock in another firm (known as the subsidiary unit). The parent company controls management and operation by influencing and electing the board of directors of the subsidiary company. Companies that operate under this management, and their influence is dominated by other companies are deemed subsidiaries of the parent company.

3. What are Unconsolidated Subsidiaries?

Unconsolidated subsidiaries are those companies who are owned by a parent company by owning their voting stake but who have individual financial statements that are not included in the consolidated or combined financial statements with the parent company. This company may be a wholly-owned subsidiary.

4. What is Vertical Integration?

Vertical integration is a type of strategy where a company owns or controls its suppliers, distributors, or retail locations for its value or supply chain. Vertical integration benefits companies by allowing them in the process of control to reduce costs and improve their efficiencies.

5. Can a foreign investor invest in a local company to form a joint venture?

Yes, a foreign investor can invest in a local company to form a joint venture. Aur we can say that a local company can team up with any foreign investor so that they can create a joint venture. This is considered to be one of the easiest ways for any foreign investor to gain entry into the domestic market and run their business.

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