Definition of Subsidiary Company

A company is an economic agent that uses the factors from production (land, labor or capital) in order to maximize your profits. There are many types of companies, among which are subsidiaries.

The principle of subsidiarity applied to the business world

This type of company emanates from the so-called beginning of subsidiarity, which affirms that a function must be performed by whoever is closest to it. In this way, a subsidiary company is one that is subordinate to a larger one.

This contingency is normally carried out through the massive purchase of shares in the subsidiary company. In other words, for there to be a subsidiary company there must be a larger one, also called the parent company.

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

Advantages and disadvantages of subsidiary companies

There are several advantages for which the parent company-subsidiary company binomial can be interesting as

strategy. Among them we can highlight the following:

- From the point of view of the subsidiary company, the problems related to financing are significantly reduced.

- A parent company can take over the shares of a subsidiary company to save the costs of setting up a new company. On the other hand, fixed expenses by the parent company are significantly reduced.

- With respect to the market strategy, the parent companies achieve with the acquisition of a subsidiary company to cover a greater market share and, in parallel, reduce or eliminate the competence in your sector.

- Subsidiary companies can also decide to be absorbed by another larger company in order to have help financial greater than they had and this allows them to expand and grow as an entity.

Despite the advantages, there are also some disadvantages:

1) This model does not suit all types of products and services on the market,

2) the parent company must keep a strict accounting control of the subsidiary company,

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

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