Setting Up A Subsidiary In India vs. Joint Venture In India

India has developed into a sustainable and profitable investment destination thanks to its modern infrastructure and technology, diversified and competent talent pool, and business-friendly legal landscape. India’s economy is currently the fifth largest globally, and on track to become one of the top three. The IMF projects that the country’s GDP will expand by 6.5% in 2024–2025, propelled by strong domestic demand and a growing working-age population.

All these factors have contributed significantly to transform India into one of the prime destinations for foreign investments. Having said that, the correct method of entry into the market is one of the most important choices that international businesses wishing to grow and establish operations in India must make. Let’s delve into the potential business setups that they can explore and the complexities that accompany them. 

Subsidiary setup

A subsidiary is a legal body owned completely by its foreign parent company. It acts as an independent entity but remains under the control of the foreign company. Complete control over the decision-making and operations allows the parent company to set up its business in India, employing global strategies without having to negotiate with local partners. 

In a subsidiary setup, the foreign company has full ownership, giving it a considerable advantage in intellectual property protection, resource management, and profit capture. However, this approach comes with its own set of obstacles, including significant financial investments to cover operational, legal, and administrative expenses and following up with regulatory compliance. Moreover, running an independent subsidiary entails managing all aspects of the business alone, which can be challenging without local expertise and aid.

Joint venture setup

A joint venture is formed when a foreign company partners with a domestic Indian company to create a new business entity. Both companies share ownership of the responsibilities, risks, and rewards. The local partner brings its share of knowledge of the domestic market, consumer behaviour, and regulatory frameworks as well as pre-existing connections, which can help the foreign company in penetrating the market, thereby bolstering the performance of the joint venture. Unlike a wholly owned subsidiary, a joint venture requires a smaller initial investment since the costs are shared with the domestic partner. However, the costs being shared means the profits are as well, which can be seen as a disadvantage as the parent company doesn’t get to keep all the earnings. 

Moreover, there may be considerable differences in the management style and company culture between the foreign and Indian partners which can create conflicts and impact efficiency. Therefore, both companies must have aligned goals and strategies and a strong compatibility for the joint venture to succeed. 

Summing up

The decision to enter the Indian market through a subsidiary or a joint venture depends on the foreign company’s objectives and resources. A subsidiary offers complete control and scope for larger profits but requires significant investment and operational involvement. A joint venture, on the other hand, offers shared resources, lower costs, and faster market access but comes at the cost of shared control and profit distribution. Companies must, therefore, carefully assess their strategic objectives, risk capacity, and local market environment before making a choice.