International Joint Ventures - Essay Example

Reasons for shifting to wholly owned subsidiaries rather than joint ventures Wholly owned subsidiaries and joint ventures Subsidiaries are those companies which are controlled by larger organizations like an MNC. It guarantees full operational ownership in the host country. A wholly owned subsidiary is one where the parent company owns 100% stocks of the subsidiary company. These are the expensive and complicated form of market entry. To establish a wholly owned subsidiary, a company can either enter into ventures with a local company or can establish a new venture on its own in the host country (Charles & Jones, 2007, p.290). A joint venture is a strategic move adopted by countries while setting up a business outside their home countries.

In joint ventures a group of companies come together to conduct a specific business objective (Gutterman, 2002, p.1). Basically wholly owned subsidiaries and joint ventures differ on the aspect of ownership. While joint venture companies may be owned by two or more companies wholly owned subsidiaries are owned by a single company which maintains complete control over it. In the light of the trade reforms and practices introduced by WTO, it becomes easy for a country to establish its subsidiary company in a foreign country where it would have its complete control over the daily activities.

Many companies avoid in establishing joint ventures due to the complexities involved in the coordinating policies, decisions and execution with a different company. Let us take the example of the Chinese economy. The trade reforms have changed the Chinese economy drastically. China which previously had its monopoly over almost all of its trading activities by the state owned companies (Siyuan, 2007, p.22) has now adopted the WTO policies by becoming one of its member countries (International Joint Ventures in China after WTO Accession: Will Trust Relations Change?, 2005, p.5).

It has opened its markets in agriculture to the world. With the establishment of WTO trade rules, baking industry in China underwent a sea change. Foreign banks that were not allowed to operate freely in the Chinese market found the opportunity to establish international wholly owned subsidiaries in the country that would be controlled by the foreign national companies. This was beneficial for the Chinese economy too as the foreign banks introduced new technology and which helped to increase the economic growth (Foreign banks develop in China after WTO entry, 2011).

The relative advantages and disadvantages of the JVC versus the wholly-owned subsidiary as a means of market entry Trade reforms introduced by WTO- an idea After the establishment of WTO in 1995, many trade reforms were introduced across countries. This has extended to the Asian countries too like China and India. WTO introduced several reforms in the trading system. WTO has lowered trade barriers across nations through negotiation. This has resulted in reduced costs of production as the import cost gets lowered and the cost of the resources which became cheaper.

This directly leads to the reduction in the cost of the consumer articles which reduces the cost of living for the people (World Trade Organization, 2008, p.6). Reducing trade barriers have also increased the income levels of the companies both at a personal level and also from its business perspective. This also contributes in increasing the world