Bsm 407 - International Economic Strategies Analysis Paper

International Economic Strategies Analysis Paper

BSM 407

Lei Pei

The City University of Seattle

International Economic Strategies Analysis Paper

My firm has developed a very popular, up-scale but reasonably priced, cook ware line of goods. As the demand is increasing, I have access to plenty of production capacity and capital. In order to make my firm become an international firm, I produce designs in number of countries: manufacturing in low-cost locations, and retail outlets in major U.S. and European cities. Even, the cheap labor force and cheap resources in low-cost countries bring many advantages for my firm. However, it is also difficult for a firm to organize their business in those low-cost countries. For instance, which kind of business model should I implement outside of the U.S.? Therefore, the problem is how to organize the business outside of the U.S.?

Depends on the situation of my firm, I would like to organize my business outside of the U.S. in this way:

I would like to set up reasonably independent subsidiaries in each foreign country, but it is not entirely rely on its parent company. I would create the reasonably brand image, procedures and typical planning for my local firms depend on their local conditions.

Here are pros and cons for the reasonably independent subsidiaries:

Pro: Cons:

Independent parent-subsidiary 1) Major income tax advantages.

2) Centralized management.

3) Financial flexibility.

4) Easy to implement the project or plan which is the adaptation of local conditions.

5) Dividend exclusion.

6) Brand effect.. 1) Hard to control.

2) Legal paperwork involved with creating a subsidiary can be lengthy and expensive. ( Chen, 2009)

After I research it online, I found that the most important advantage is: 1) Major Income Tax Advantages. It means that subsidiary does not pay a tax on its profits. Instead, its parent company files a "consolidated return" which includes the profits and losses of all the subsidiaries. This is a big advantage if some of the subsidiaries have losses, since their losses will offset the profits of others. "The current tax rules operate such that, so long as the CFC or PFIC regimes do not apply, income earned by a foreign subsidiary is not taxed until the foreign earnings are actually distributed as a dividend to the U.S. shareholder."(Daniel, 2009). From this sentence, it is true that the tax advantage for subsidiaries became an issue in U.S.

The second advantage is centralized management. As we known, having only one leader in any kinds of groups would be easy to manage. Subsidiaries, which are controlled by their parent company just have only one leading Board of Directors making the organization easier to control and manage.

The third advantage is the financial flexibility. Another word, having a parent-subsidiary relationship made every local firm feel safe. For example, if one of my firms has poor credit, it would be expensive to finance its operations as a stand-alone corporation. However, as a subsidiary, the parent company would arrange the financing and benefit from the credit of the entire group.

The forth advantage is that it is easy to go through a project or plan which is the adaptation of local conditions in an independent subsidiaries. Independent means not rely on something, an independent subsidiary means it is controlled or owned by its parent but it is not entirely rely on its