A company is planning to establish a manufacturing unit in a foreign country. The company is considering two options (i) Equity Joint Venture and (ii) Wholly owned subsidiary. Analyse these options and submit your report

A Comparative study of Equity Joint Venture and Wholly-Owned Subsidiary is given below. The CEO of the Company may take decision on the basis of merits of these joint ventures:- Basis of Points Equity Joint Venture Wholly-Owned Subsidiary Structure Separate legal entity, jointly owned by foreign party and local party Separate legal entity, 100% owned by foreign investor Entry into Market Faster Foreign party benefits from local party's customers, connections, knowledge of competitors, local laws and practices Slower Foreign investor has to grow business from scratch (e.g., hire employees, build demand, obtain sales) Start-up costs Lower to moderate Costs of establishing and maintaining joint venture vehicle can be shared Higher Costs of establishing and maintaining corporate entity borne solely by foreign investor Resource Commit-ment Lower to moderate Foreign party often contributes management expertise, intellectual property and know-how Local party often contri-butes employees, customers, plant and facilities Higher Foreign investor must hire local employees and/or transfer expatriates, purchase raw goods, etc. Intellectual Property Risk Higher Potentially sharing or giving away IP to local party (i.e., a competitor) Lower IP less exposed to a competitor because subsidiary is wholly-owned Return on Investment Moderate to higher Equity generally yields higher returns than royalties, but returns are shared with other joint venture party Foreign party may have licensed intellectual property to the joint venture vehicle in exchange for royalty payments Higher Equity generally yields higher returns than royalties Market Presence Moderate to higher Joint venture vehicle may provide a direct identity and presence in the market Moderate to higher Wholly-owned subsidiary provides direct identity and presence in the market Formality Higher Need a joint venture agreement and must form joint venture entity Possible ancillary agree-ments (e.g., intellectual property license, management services, shareholder rights agreement) Moderate Need to establish wholly-owned subsidiary Complexity of Docu-mentation Higher Negotiation of profit-sharing. Lower No counterparty or joint venture partner Termination Risk Moderate to higher May be difficult to obtain market intelligence and transfer jointly-developed products out of joint venture (i.e. cost and ownership issues) Potential for conflict over intellectual property developed during course of joint venture. Buy-out or termination procedures can be expensive and time consuming Lower Foreign investor owns 100% of subsidiary and, therefore, all of its assets