Under what conditions would you recommend that the foreign subsidiary conform to the local norm...

Question:

Under what conditions would you recommend that the foreign subsidiary conform to the local norm of financial structure?

Localization:

Localization is the process in which the foreign subsidiaries of a parent firm would have to adopt the local norms in its operation. The localization would have both advantages and disadvantages against the parent firm's benefits.

Answer and Explanation:

There are some situations that a foreign operation should follow the local norms of financial structure.

  • Following the local financial structure will make the comparison between foreign operation with other local firms in the same industry would be more representative. That would allow the foreign operation to understand how it performs on average and its current position on the market.
  • The implementation of local financial structures would make the foreign operation easy to approach local funds if needed since the local financial institutions can assess the information easily.
  • A similar financial structure with local firms would reduce the criticism about the default risk of the foreign operation from local analysts.

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Capital Structure & the Cost of Capital

from Finance 101: Principles of Finance

Chapter 15 / Lesson 1
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