Question

In what ways is exporting a better way of entering into international markets than setting up wholly owned subsidiaries abroad.

Answer 1

Exporting refers to the process of selling goods and services to companies in other countries as per their requirements. It involves the movement of goods by air or sea from the home country (where the goods are produced) to other countries (which import these goods). On the other hand, a wholly-owned subsidiary is a firm in which a parent company makes an equity investment to acquire full control over it. Despite the fact that a parent company has full control over a wholly-owned subsidiary abroad, the exporting model is a better way of entering into international markets. This is because of the following factors.

(a) Lesser complexities involved: Compared with setting up a wholly-owned subsidiary, exporting is a much easier way of entering into international markets. This is because export management is a much simpler and easier process without complexities. On the other hand, the management of a wholly-owned subsidiary is a complex and rigorous task.

(b) Less investment required: The amount of time and money required to be invested in the export business is less than that in a wholly-owned subsidiary. This is because subsidiaries involve setting up manufacturing plants and starting operations in other countries, which require large amounts of money and effort. Thus, export is a favourable mode of entering into international markets.

(c) Less exposure to risks and losses: As exporting requires a smaller investment, the risk involved is negligible. On the other hand, in the case of a wholly-owned subsidiary in another country, the parent company owns 100 percent share, and thus, it bears the entire risk in case of failure of the subsidiary. Hence, exporting is said to be a better mode of entering into international markets.