The aim of this essay is to discuss the advantages and disadvantages of setting up a wholly owned subsidiary (WOS) instead of a joint venture (JV). There are numerous studies and research papers done on which entry mode is best in different situations, but there is no simple task deciding which is the best unless one can see into the future. JV and WOS are two completely different entry modes with their distinct down- and upsides. Entering a new market gives both great opportunities and involves high risk. There is much at stake but if one choose wrong entry mode it can cost the company tremendously, that is why one should not take this decision based on a few factors.
The globalisation has given companies a bigger market opportunities, but competing in the global market one also gets involved in the environmental uncertainty, such as the economic recession. The competition is also getting harder, the mixture of big multinational enterprises, the niche specialized businesses and the new copycats pushes companies to be innovate and expand or just sell out. But what is most important to consider when one chooses an entry mode? Is it the cultural differences, cost, profit, risk, competitive advantage, the objectives, the internal and external environment, the foreign market, knowledge and experience? To find an entry mode with just advantages is impossible, the choice boils down to which factor the company values the most.
2.1 The advantages of WOS
A wholly owned subsidiary is either a completely new operation or an acquisition of another company where the parent company owns 100% of the stocks (Hill, Jones 2010). Being a sole owner the company can monitor and control all the decisions and actions of their subsidiaries in an efficient way (Otto, 2010). The amount of control is highest in WOS because there is no dilemma of having to merge different opinions, policies and cultures. The risk of losing valuable technological competency is at a minimal, this is one of the major reasons high-tech companies prefer this strategy. Control over the operations and profit is also a big advantage when a company wants to engage in global strategic coordination, they can use assets from one company in Sweden to support a competitive attack in India (Hill, Jones 2010). Most companies wants to expand and become global; if a company wants to realize location economies or the scale of economies they can invest in the whole value chain. Having that much control makes it easier to discover which way they can maximize every stage in the value chain (Hill, Jones 2010). 2.2 The disadvantages of WOS
Establishing a WOS is the most costly method and the parent company must bear all the costs and risks (Hill & Jones, 2010). The cost of having a WOS can be tremendous if the company fails since the company own everything. The more resources invested, the harder it is to regain the investment and become profitable again (Otto, 2010). If the company wants to operate in a foreign market the lack of knowledge about the local economy, politics and culture can be devastating. Getting information about the market and getting contacts within distribution channels are essential if a company wants to succeed.
2.3 The advantages of JVs
A joint venture can be defined as when two or more companies share their resources, risk, rewards and expertise to achieve a specific goal. (businesslink.gov.uk). There are many reasons for why a company would want to get a partner; the need for more capacity, access to new resources and assets, sharing of knowledge, competence, risk and costs. The need is often related to expansion, development of new products or services and particularly moving into new foreign markets. For an international business that wants to enter a foreign market the expertise and cultural understanding from a local partner would make it easier, a JV partner gives the company an easy route to access the...
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