The Pros and Cons of Setting Up a Foreign Subsidiary

For any company contemplating expanding into a new market, the advantages and disadvantages of setting up a branch or foreign subsidiary will depend on the business opportunities, as well as the cultural and regulatory climate of the specific country. There are challenges associated with overseas expansion, and while some business issues are universal, such as complying with payroll regulations, other elements are more country-specific and require research into potential solutions to prevent unexpected delays or costs.

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Sep 07, 2016
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For any company contemplating expanding into a new market, the advantages and disadvantages of setting up a branch or foreign subsidiary will depend on the business opportunities, as well as the cultural and regulatory climate of the specific country. There are challenges associated with overseas expansion, and while some business issues are universal, such as complying with payroll regulations, other elements are more country-specific and require research into potential solutions to prevent unexpected delays or costs.

The Pros and Cons of Setting Up a Foreign Subsidiary

Setting up a subsidiary in a foreign country can have many positive effects such as expanding brand recognition, opening access to new markets and using efficient production methods to control costs. Entering a new location can mean increased revenue and business expansion that would not be possible in the home country.

However, in order to initiate a worthwhile venture in each new country, a company must consider factors such as:

  • Cost and time to establish a foreign subsidiary
  • Corporate policy toward compensation and other HR issues
  • Compliance risk for payroll, taxation and immigration rules
  • Establishing secure office premises, employee residences and bank accounts
  • Evaluating the growth potential against the required investment
  • Permanent establishment issues resulting in taxable local revenue
  • Contingency plans in the event that the new foreign office needs to be closed

Reasons to Establish a Foreign Subsidiary or Branch

There are eight reasons that could influence the establishment of a foreign branch. These reasons will be illustrated in the following paragraphs by identifying the advantages and disadvantages that could arise from establishing foreign subsidiaries in specific countries or regions.

1. Opening Up Access to New Markets For Products and Services

Entering a new region can open up access to multiple markets in neighbouring countries.

European Union

Pro: The European Union is one of the world’s largest and most sophisticated markets, with all member countries adhering to various business and immigration rules for consistency and ease of travel.

Con: Taxation of foreign businesses will differ depending on local country rules as well as whether the business is from a non-EU country. Naturally, with so many different member states, there will be language and cultural challenges in expanding into each new European country.

2. Expanding Brand Recognition

By opening a branch in a new country, a company has the opportunity to expand the reach of their brand.

USA

Pro: The USA attracts businesses from all over the world that are looking to participate in the open business environment and large, visible economy. Foreign businesses can benefit from the relatively strong market for products and services, as well as introducing and marketing new brands.

Con: The USA is well known for its stringent immigration policies, and that includes the issuance of business visas for foreign workers. There are an array of visa types depending on the type of employee, profession and current immigration status, and as many as three different agencies may be involved in approving the application.

For each foreign worker, a company must submit Form I-9, which establishes the identity and origin of the worker, including residency or existing visas...Read more

About Shield GEO

Shield GEO provides Employer of Record solutions in more than 90 countries around the world, ensuring legal compliance and rapid deployment of staff into any market for our corporate clients. We make international employment simple. To find out more about us, please get in touch.

Go to the profile of Tim Burgess

Tim Burgess

Director, Shield GEO Services Ltd

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