Foreign Investment

Select the Right Business Entry Strategy for India: A Comparative Analysis of Joint Ventures, Wholly-Owned Subsidiaries and Franchising

Business Entry Strategy

Globalization has harmonized cultures and trends in terms of international trade. It has not just enlarged the businesses and their profits but also helped local entrepreneurs attract foreign investors. In this way, international businesses get the opportunity to make investments in different countries. In order to invest in India, there are different entry strategies available. Joint ventures, wholly owned Subsidiaries and Franchising are important modes of business entry strategy for India. In a joint venture, the ownership and risks are shared while in a wholly owned subsidiary, there is a total command of the parent company and franchising allows using the brand name and the selling of its products and services. Let’s understand each business entry strategy to select the right one for your business.

Joint Ventures

Joint Ventures are organizations that are owned mutually by two or more independent businesses. Joint Ventures are a lucrative option if the company believes that working with locals provides knowledge about the local conditions and facilitates acceptance of their involvement by the government and consumers. There are three ways in which a joint venture can be formed, they are:

  1. when a foreign investor acquires an interest in a local company,
  2. when a local company acquires an interest in an existing foreign firm, or
  3. when both the foreign company and the local company jointly form a new enterprise.

Advantages of Joint Ventures

  1. It is an affordable business entry strategy for international organizations to expand their business.
  2. It makes it possible to support huge ventures requiring huge capital costs.
  3. International organizations benefit from the information of local partners regarding local market conditions, culture, and political and business frameworks.
  4. Sharing of expenses and risks with the local partner helps the organization to make a global market entry.
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Disadvantages of Joint Ventures

  1. It leads to sharing of technology and business secrets of domestic organizations with international organizations.
  2. There might arise a clash between the investing firms regarding the control of the newly formed venture.

Wholly Owned Subsidiaries

A wholly owned subsidiary is the best business entry strategy if the international organization aims to have full control over the company. The foreign parent business makes the majority investment in its equity capital and therefore acquires full control over the subsidiary. There are two ways in which a wholly-owned subsidiary can be set up in India:

  1. By acquiring an organization that is ready and utilizing the international organization to deliver its goods or market its services in the host nation; or
  2. By setting up a new organization to begin activities abroad. Such a setup is also known as a greenfield venture.

Advantages of Wholly Owned Subsidiary

  1. The parent organization has full control over the subsidiary’s management and operation.
  2. There is less chance of leakage of technology, business secrets or competitive advantage to others.

Disadvantages of Wholly Owned Subsidiary

  1. The parent organization has to bear the entire burden of investment in its subsidiary which limits this business entry strategy only to big organizations as small or medium-sized organizations have limited assets to make foreign investments.
  2. Any misfortunes or losses arising from the subsidiary are completely borne by the parent organization.

Franchising

A franchise business is an authority given by an organization to someone permitting them to sell goods or services or undertake activities that the organization controls. In a franchise business, a franchiser is a person who grants the right to another to sell products or services under the brand name of the organization. The person or entity to whom the franchise is granted is called the franchisee. A franchise is an arrangement where a company sells another business the right to sell its products or services in return for payment. In a franchise, a license is granted to produce or sell a product under the conditions granted by the owner of these rights. The license allows the local entity to have access to the business’s proprietary knowledge, process and trademarks in order to sell products or provide services under the organization’s name.

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Advantages of Franchising

  1. Franchising is a big advantage for businesses looking for less investment and quick entry.
  2. In this business entry strategy, the business grows without demanding much effort from the owner.
  3. It has the ability to grow both the company as well as the brand.
  4. After the initial fee payment, the franchiser is not required to bear any other expenses.

Disadvantages of Franchising

  1. The franchiser cannot make a profit from the amount earned by the franchisee from the franchising business.
  2. The franchising agreement does not protect the franchiser from the potential risk of litigation[1].
  3. Franchising might be a low-cost business entry strategy but it does not come without financial investment.

The essential features of the three business entry strategies are as follows:

Type of EntryEssential Features
Joint VenturesLocal market exposure with the help of a local partner.Considered as a local entity. Low risk as investments and costs are shared with the local partner.
Wholly owned subsidiaryLocal market exposure.Considered as an insider who employs locals. Full control.High risk as high cost is involved. Time-consuming business entry strategy.
FranchisingFast-entry with low cost and low risk. Less control over the franchise business. Franchisee may become a competitor. For the success of a franchise business, the legal and regulatory environment must be sound.

In order to invest in India different business entry strategies are available. To make an efficient investment, it is important to settle the expectations and be aware of the legal basis of each business entry strategy of the country. Joint Ventures are strategic alliances where two or more businesses come together to benefit from a common purpose and every business has its specific role in the joint venture. So joint ventures are generally formed to utilize the expertise of other businesses for a common purpose. Wholly owned subsidiaries are incorporated when there is a need to diversify the products or services that are in a foreign market. Franchising is a suitable business entry strategy for expanding the supply chain of a business. In a franchise business, a new spot at a new location is opened by the franchisee under the brand name of the franchiser to expand the business reach. Franchise business is most common in food, dining and restaurant chains.

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Conclusion

In summation, it can be said that the most suitable business entry strategy varies from business to business. It mainly depends upon the business objective. If the international organization is trying to diversify its product or service in India then the most suitable business entry strategy can be a wholly-owned subsidiary as it provides full control to the parent company over the management and operations. If an international organization wants to take benefit of certain expertise provided by a local business in India then the suitable business entry strategy can be a joint venture. Finally, if the international organization is only interested in providing services in the different markets under its brand name without substantial investment then a suitable business entry strategy can be a franchise business. Thus, an international organization has to analyze what could be the most suitable business entry strategy in India based on its business objectives and legal framework regulatory that particular entry strategy.

Read our Article: How to Plan India Entry Strategy for your Business?

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