Foreign subsidiaries: are they the right choice for you?
Increasingly, companies are exploring global expansion to help grow their businesses. The opportunity to expand into new markets is more accessible than ever, thanks in part to the rise of remote work. However, companies still have to contend with significant challenges when expanding their businesses internationally. One of the most difficult tasks during that process is staying compliant with local laws in every country where they operate.
Opening a foreign subsidiary is one way for a company to expand internationally while remaining compliant. Going this route isn’t the best choice for all companies, though, because foreign subsidiaries have their drawbacks. This guide will explore the pros and cons of opening a foreign subsidiary to help you decide whether it’s the right choice for your company.
What is a foreign subsidiary?
A foreign subsidiary is a company owned or controlled by a larger company based in a different country. These are separate legal entities from the parent company. For example, athletic footwear and apparel maker Nike is headquartered in Oregon and owns foreign subsidiaries worldwide.
Foreign subsidiaries are created and based in the country where they operate, which eliminates certain legal obstacles for their parent companies. This is a key difference between a foreign subsidiary and a foreign branch of a company. Foreign branches are simply international offshoots of the original company and do not allow the company to compliantly hire full-time local employees in those locations.
When should you use a foreign subsidiary?
Using a foreign subsidiary is ideal for companies in certain scenarios. Some of the best circumstances for opening a foreign subsidiary include:
- Planning to establish a permanent presence in that country: Due to the significant upfront investment required to open a foreign subsidiary, doing so is most worthwhile if you plan to operate in the target country for a long time.
- Having considerable resources and staff to set up the foreign subsidiary: Conservatively, opening a foreign subsidiary costs hundreds of thousands of dollars and requires dedicated effort from your staff. If you can’t devote those resources to getting your foreign subsidiary off the ground, you should choose an alternative method of global expansion.
- Having time to execute your expansion: Setting up a new foreign subsidiary is a time-consuming process that takes months, so it’s best only to do so if you have plenty of time.
- Already opening other foreign subsidiaries: Business leaders who have experience creating foreign subsidiaries have a better understanding of the work required. They’re better equipped to undertake that process again.
Rapidly growing businesses may find that opening a foreign subsidiary is not the best option for them because they may need to focus their time and resources on daily operations.
Alternatives to foreign subsidiaries
Employers of Record (EORs)
One option is using employers of record (EORs). EORs are companies that act as legal employers for your international workers in particular locations. They allow you to hire local employees in foreign countries without setting up entities there.
Compared to subsidiaries, EORs offer significant cost and time savings. You don’t have to set up a separate entity or worry about local labor and tax laws in foreign countries—the EOR manages all that for you. With an EOR, your team will have more time to focus on critical business functions as opposed to tedious compliance issues.
Global Employment Platforms (GEPs)
One drawback of using EORs, however, is that you need one for each of the territories where you want to operate. That’s not an issue when you use a global employment platform (GEP), like Oyster. GEPs allow you to conveniently hire and manage talent from all over the world through a single platform. You won’t have to worry about the resource-intensive process of finding and partnering with multiple EORs if you opt for a global employment platform.
When is it better to use a GEP?
GEPs offer more flexibility and convenience than other options for expanding globally. The platform will help you hire, onboard, pay, and manage benefits for employees in multiple countries without opening an entity. You’ll also benefit from local expertise and guidance in each of the countries where you hire workers.
Using a global employment platform is ideal for companies looking to expand globally by hiring international workers. You may want to broaden your talent pool or bring in remote workers with specific skills not readily available in your country. GEPs allow you to explore new markets and hire global talent quickly without having to worry about all the administrative headaches and costs.
If you run into issues during your international expansion, support staff from your global employment platform will be available to help. Use a GEP to scale your global team with ease.
Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.
Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.
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