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What is Subsidiary Company definition/concept

The company is an economic agent that uses the factors of production (land, labor or capital) in order to maximize its profits. There are several types of companies, among which are subsidiary companies. Subsidiary Company

The principle of subsidiarity applied to the business world

This type of company emanates the so-called principle of subsidiarity, which states that a function must be performed by those closest to it. In this way, a it is the one subordinated to a larger one.

This subordination is usually done through the massive purchase of shares in the subsidiary company. In other words, for a such company to exist, there must be a larger one, also called the parent company.

Not all companies start out as subsidiaries or branches, but most start their business trajectory being completely independent until the parent company decides to acquire it.

Advantages and disadvantages

There are several advantages for the binomial: parent company – subsidiary company can be interesting as a strategy. Among them we can highlight the following:

– From the perspective of the subsidiary company, the problems related to financing are significantly reduced;

– The parent company can be made with the shares of a subsidiary company to save the expense of setting up a new company. On the other hand, the parent company’s fixed costs are significantly reduced;

– With regard to market strategy, the parent companies are able, with the acquisition of a subsidiary company, to cover a greater market share and, simultaneously, reduce or eliminate competition in their sector;

– Subsidiary companies may also decide to be absorbed by another large company in order to obtain greater financial assistance than they had before; this allows them to expand and grow as an entity.

Despite the advantages, there are also some disadvantages:

1) this model does not adapt to any type of products and services on the market;

2) the parent company must have strict accounting control over the subsidiary company;

3) It has very limited autonomy, as it depends on the parent company.

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