Imagine your company has grown so much that you’re now looking to expand into new markets. That’s a huge milestone! But it also comes with a big decision: How do you go global? You have two main choices; opening a foreign subsidiary or partnering with an Employer of Record (EOR).

In today’s world, going global can mean big rewards, but also big risks. According to a survey, 73% of CEOs believe global economic growth will decline over the next 12 months, making it the most uncertain time for business leaders in over a decade . So, choosing the right expansion strategy has never been more critical.

But what do these options mean, and which one is right for your company? Let’s break it down into simple terms.

What is a Foreign Subsidiary?

A foreign subsidiary is like setting up a mini version of your business in a new country. Think of it as opening a branch office or even a new store in a different city. This subsidiary has its own legal identity, separate from your main company. It operates under the laws and regulations of the new country. But it’s still owned by your main company, so you have control over how it runs.

Example:
Let’s say your company, headquartered in the U.S., wants to expand into Germany. By opening a subsidiary there, you set up a new legal entity under German law. This allows you to hire local employees, follow German business regulations, and adapt to the local market.

Read More: What is a Foreign Subsidiary - Gloroots Glossary

Pros:

1. Control and Flexibility: Since you’re in charge, you can run the subsidiary the way you want.
2. Local Credibility: Customers and partners in Germany see your business as a local entity, which builds trust.
3. Tax Benefits: Some countries offer tax incentives to foreign companies that set up subsidiaries.

Cons:

1. High Setup Costs: It’s like setting up a new company from scratch. You’ll spend a lot on legal fees, office space, and more.
2. Complex Compliance: You’ll have to follow all the local rules, which can be tough if you’re not familiar with them.
3. Time-Consuming: It can take months, or even years, to fully establish a subsidiary.

What is an Employer of Record (EOR)?

An EOR is a service that helps companies hire employees in other countries without setting up a legal entity. The EOR acts as the legal employer for your international staff. This means it takes care of things like payroll, taxes, and benefits, while you focus on managing your employees’ day-to-day work.

Example:
Suppose you want to hire a developer in Japan, but you don’t have a presence there. Instead of setting up a subsidiary, you work with an EOR. The EOR hires the developer on your behalf, handles all the local legalities, and you just pay the EOR for the service. It’s like having a local HR team that does all the heavy lifting.

Pros:

1. Quick Market Entry: You can start hiring in weeks, not months.
2. Lower Costs: No need to spend on legal fees or infrastructure.
3. Compliance and Risk Management: The EOR takes care of local employment laws, reducing your legal risks.

Cons:

1. Less Direct Control: Since the EOR is the legal employer, you may have less control over certain HR decisions.
2. Not Ideal for Long-Term Establishment: EORs are great for quick market entry but may not be the best for a permanent presence.

Read More: The Pros and Cons of Hiring with an Employer of Record (EOR) (gloroots.com)

EOR vs. Subsidiary: Which One Should You Choose?

When deciding between a Foreign Subsidiary and an Employer of Record (EOR) for global expansion, here are essential distinctions to guide you:

• Legal Presence:some text
  • Subsidiary: Functions as a full, separate legal entity within the foreign country, requiring setup and compliance with local laws.
  • EOR: Acts as the legal employer on your behalf, enabling you to hire without forming a new legal entity.
• Setup Time:some text
  • Subsidiary: Involves a long setup process, often ranging from 6 to 9 months or more.
  • EOR: Fast-track entry, typically requiring only 2-4 weeks to initiate hiring and operations.
• Cost:some text
  • Subsidiary: Entails higher setup and ongoing operational costs due to legal, administrative, and facility requirements.
  • EOR: Lower upfront and operational costs since there's no need to establish a new entity.
• Control:some text
  • Subsidiary: Offers full control over HR policies, operational procedures, and decision-making.
  • EOR: Provides control over day-to-day management but limited influence over HR compliance and legal aspects.
• Compliance Management:some text
  • Subsidiary: Must adhere to comprehensive local regulations, with full responsibility for compliance management.
  • EOR: Handles all compliance-related responsibilities, ensuring adherence to local employment laws.
• Risk:some text
  • Subsidiary: Involves higher risk with greater investment and complexity in terms of legal obligations.
  • EOR: Mitigates risk by managing compliance, reducing exposure to legal and regulatory issues.
• Dissolution:some text
  • Subsidiary: Lengthy and complex exit process, requiring significant time and legal effort.
  • EOR: Allows for a faster and simpler exit if the business needs to withdraw from a market.

When to Choose a Foreign Subsidiary:

• You want long-term control and growth in a specific market.
• You have the budget and resources for high initial investment.
• You need complete control over HR, compliance, and operations.

When to Choose an EOR:

• You want a quick and flexible way to hire internationally.
• You’re testing a new market or region.
• You don’t have the resources to set up a legal entity.

Read More: EOR Vs Staffing Agencies: Which Is Best for Your Business? (gloroots.com)

Economic Context: Why CEOs are Reconsidering Global Strategies

The global economic outlook isn’t as bright as it once was. According to PwC’s Global CEO Survey, 73% of CEOs believe that global economic growth will decline over the next 12 months. Inflation, macroeconomic volatility, and geopolitical tensions are the top concerns, causing CEOs to rethink their expansion strategies. This uncertainty has led many companies to look for cost-effective ways to expand internationally without taking on too much risk.

In this environment, many companies are opting for EOR partnerships. It allows them to enter new markets with minimal costs and low risk. An EOR offers the flexibility to scale operations up or down depending on how the market evolves, making it a safer bet during uncertain times.

Why Partnering with an EOR Makes Sense Now

Given the current economic climate, partnering with an EOR is a smart move. According to the PwC survey, 60% of CEOs do not plan to reduce headcount, and 80% want to retain staff despite economic pressures. An EOR helps companies maintain a global presence and retain talent without the financial burden of setting up a subsidiary.

If you’re unsure about the long-term viability of a market, an EOR lets you “test the waters” before making a more permanent commitment. Plus, it’s a great way to manage international employees without worrying about compliance, taxes, or legal headaches.

Conclusion: Take the Next Step with Gloroots

In the debate between an EOR and a foreign subsidiary, the right choice depends on your company’s needs. If you want long-term control and are willing to invest heavily, a subsidiary may be right. But if you need a cost-effective, quick, and compliant solution, an EOR is the way to go.

Why Choose Gloroots?

‍Gloroots simplifies global expansion by handling everything from payroll and compliance to employee benefits. With our EOR solutions, you can hire talent in over 140 countries without the hassle of setting up a legal entity. We help businesses enter new markets quickly and compliantly, so you can focus on what you do best; growing your business.

Ready to expand globally? Talk to our advisors today and see how Gloroots can help you take your business to the next level!