The Stages of the Foreign Subsidiary Lifecycle

Multinational companies expanding into new markets often opt to establish a foreign subsidiary (s) or branch offices to support their business activity, utilizing various types of business structures with different registration and incorporation requirements. Whether or not the expansion is ultimately advantageous depends upon the level of opportunity in a specific location, its cultural and regulatory climate, and the time and money required.

Regardless of where a company expands, or whether it remains in a specific location, it is essential to understand the lifecycle of this process right from the start. There can be significant risks associated with expansion — as well as the withdrawal process if a company decides it should no longer remain in a country — and awareness of these can help mitigate them.

The expansion lifecycle includes the initial analysis (benefits of opening a subsidiary); researching country-specific regulations; planning the legal, regulatory, and organizational steps required; and administering the subsidiary. Additional elements include an analysis of a subsidiaries’ viability, and the steps required to close it if necessary.

The following sections explore these stages, with examples of challenges faced in various global locations.

Why Should a Company Open a Foreign Subsidiary?

There are a number of benefits to opening a foreign subsidiary: access to new markets, lower production costs, greater brand recognition, access to technical skills and knowledge, localized customer service, overall global expansion, utilization of trade-free zones, and local economic opportunities.

Access to New Markets

Case Example: Latin America

One of the more obvious reasons to set up a foreign branch is to gain access to new markets. For example, a U.S. company might establish a subsidiary in a business-friendly country in South America to more easily enter the markets of nearby countries. This provides the opportunity to bridge language and cultural barriers with a new customer base and to benefit from any trade agreements with regional economic partners.

One of the challenges of introducing products and services in to a new region is the need to meet local standards for quality, translation of any written materials, and compliance with each country’s customs, duty, and tax laws. In some instances, utilizing local providers can significantly help with expansion efforts.

Lower Production and Manufacturing Costs Case Example: China

Many companies in developed countries establish foreign operations to take advantage of local manufacturing facilities, which, in countries like China, can be more cost effective. Outsourcing production is a key strategy due to lower wages for workers.

However, there can be several disadvantages to establishing these facilities, such as meeting local immigration and employment requirements for expats from the home country. In China, foreign workers face a number of strict requirements for work permits and visas. The primary hurdle is the need to have a locally licensed and incorporated business in place before work permits can be issued.

Also, the pension and benefits system for local workers is strictly enforced and can add costs and additional compliance requirements for a new operation.

Expanding Brand Recognition

Case Example: U.S.

By opening a branch in a new country, a company has the opportunity to expand the reach of its brand. For example, the U.S. attracts businesses from around the world wishing to participate in the open business environment and large, visible economy. Many foreign businesses can benefit from the relatively strong market for products and services and can successfully introduce and market new brands…