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:
Companies that will take control over the suppliers will benefit from the wholly owned subsidiaries.
They can form a vertical integration where the companies are under the same owner.
Wholly own subsidiary companies give space for the parent company to breathe and diversify, meaning they can fully grow and manage risk.
A company can avoid competition while entering a new market by combining with its subsidiary.
For doing business abroad, the wholly-owned subsidiary can be utilized for this purpose as well.
It is affordable for international organizations to expand their business outside the boundaries of their nation.
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.
It helps in sharing the risks and expenses which helps the entity to enter the global market.
The parent organization can take full control of the operations in the organization in the foreign nation.
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:
The parent company faces more taxes that are levied on these subsidiaries.
Doing diversification with the wholly-owned business may hamper focus on itself.
There may be a conflict between the parent and the subsidiary company that will affect the management of both companies.
Cost structure will shoot up, various other formalities need to be done with the wholly-owned subsidiary.
If the wholly-owned subsidiary proves inadequate to function, then it will disturb the flow of business of the parent company as well.
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.
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.
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.
The parent organization has to bear the risk, losses, and misfortunes because they own 100% equity.
Also, few Nations hesitate for setting up entirely owned subsidiaries by outsiders in their own nation.
FAQs on Joint Ventures vs. Wholly Owned Subsidiaries
1. What is the main difference between a Joint Venture and a Wholly Owned Subsidiary?
The primary difference lies in ownership and control. In a Joint Venture (JV), two or more companies share ownership, control, risks, and profits in a new entity. In contrast, a Wholly Owned Subsidiary (WOS) is a company that is 100% owned and controlled by a single parent company, which bears all the risks and retains all the profits.
2. What exactly is a Wholly Owned Subsidiary (WOS)?
A Wholly Owned Subsidiary is a business entity where 100% of its shares are owned by another company, known as the parent company. This structure gives the parent company complete control over the subsidiary's strategic decisions, operations, and policies. It is a common method for international expansion when a firm wants to maintain full control over its brand and technology.
3. What are the key reasons a company decides to form a Joint Venture?
Companies typically form a Joint Venture for several strategic advantages, including:
Access to New Markets: Partnering with a local firm provides instant access to its distribution channels and customer base.
Shared Costs and Risks: The high financial burden and risks of a new project or market entry are shared between the partners.
Combined Expertise: Partners can pool their technological, managerial, and operational expertise to create a stronger competitive advantage.
Political and Cultural Navigation: A local partner provides crucial knowledge of the domestic market's laws, regulations, and culture.
4. What defines a 'parent company' in the context of a subsidiary?
A parent company is a corporation that has a controlling interest in another company, called a subsidiary. This control is established by owning more than 50% of the subsidiary's voting stock. In the specific case of a Wholly Owned Subsidiary, the parent company owns 100% of the stock, giving it the authority to elect the board of directors and direct all operations.
5. How do control and risk differ in a Joint Venture compared to a Wholly Owned Subsidiary?
The differences are significant:
Control: In a JV, control is shared among the partners, meaning decisions require mutual agreement. In a WOS, the parent company has absolute and unilateral control.
Risk: In a JV, financial and operational risks are distributed among the partners according to their stake. In a WOS, the parent company bears 100% of the risk associated with the investment and operations.
6. When is a Joint Venture a more strategic choice for a business than a Wholly Owned Subsidiary?
A Joint Venture is often a better strategic choice when a company wants to minimise risk and investment while entering a new or complex market. It is particularly advantageous when a business lacks local market knowledge, needs access to a partner's established technology or distribution network, or when the host country's regulations restrict 100% foreign ownership.
7. What are the biggest risks or disadvantages of entering into a Joint Venture?
Despite its benefits, a Joint Venture carries several risks, such as:
Conflicts and Disputes: Disagreements over management style, strategy, and profit-sharing can arise between partners.
Clash of Corporate Cultures: Different operational methods and values can lead to inefficiency and friction.
Loss of Control: A company must share decision-making power and may risk exposing its proprietary technology or trade secrets to its partner.
8. Can you give a real-world example of a Joint Venture and a Wholly Owned Subsidiary in India?
Certainly. A famous example of a Joint Venture is Vistara, an airline formed between Tata Sons and Singapore Airlines. A prominent example of a Wholly Owned Subsidiary is Hyundai Motor India Ltd., which is fully owned by its South Korean parent, Hyundai Motor Company.
9. Why would a company choose a Wholly Owned Subsidiary to enter a foreign market, despite the higher cost and risk?
A company might choose a WOS despite higher costs primarily to maintain complete strategic control. This is crucial for firms that want to protect their proprietary technology, maintain a consistent global brand image, and integrate the foreign operation seamlessly with their global strategy without interference or conflicts from a local partner.
10. Is there a difference between a 'subsidiary' and a 'wholly owned subsidiary'?
Yes, there is a key distinction. A subsidiary is any company in which a parent company owns more than 50% of the shares. A Wholly Owned Subsidiary is a more specific type of subsidiary where the parent owns 100% of the shares. Therefore, every wholly owned subsidiary is a subsidiary, but not every subsidiary is wholly owned.
