It may be easier for a company to operate a business in a foreign country as a wholly owned subsidiary.
When a subsidiary is considered wholly owned, this indicates that all of the outstanding common shares currently issued by the company are held by a single parent company. Basically, a wholly owned subsidiary is a company wholly owned by another entity. The subsidiary continues to operate with the authorization of the parent company, with or without direct contribution from the parent company.
There are several reasons why a company would choose to operate a wholly owned subsidiary rather than simply absorb the acquired company into the parent corporate operation. One of the most common reasons is a location issue: the subsidiary may physically reside in a different country than the holding company. When that is the case, there may be compelling financial and regulatory factors that make it much more financially sound to allow the company to remain more or less autonomous.
Name value is another common reason. Often a well-known and respected company is acquired by another entity that does not have name recognition in that particular market. Instead of spending vast amounts of time and resources to build a reputation, the holding company will simply decide to stay in the background. This allows the wholly owned subsidiary to continue to enjoy current name recognition and market share, while working with the parent’s resources to find ways to enhance that reputation.
In some cases, the subsidiary will be an investment in one market sector by a company that is more closely associated with an entirely different industry. This allows the parent company to diversify its holdings and thus become less susceptible to abrupt changes in consumer tastes and demand. It is not uncommon for a wholly owned subsidiary to provide a steady stream of income during a period of financial decline for the parent, keeping both entities afloat until the holding company returns to profitability.