An affiliated company is a firm that is connected to another firm through common ownership or control. This connection can be through various means such as one company owning a significant share of the other company or both companies being owned by a third entity. Affiliation does not mean that there needs to be complete ownership. It implies a significant influence over the other decisions of the other company without direct control over its operations.
Let us assume that an affiliate company is a member of a family. Just like all siblings might not live under the same roof but still share common parents and influence each other, affiliate companies are separate businesses that have strong connection with each other through common ownership. This common link can influence how they operate, decision making, or collaborate with each other.
The concept of an affiliate company is important from the viewpoint of corporate economics in studies that involve market structure, corporate governance, and strategic business alliances. When we understand how companies are interconnected we can understand more about competition, innovation, and economic power within industries. Affiliations also influence the accounting and tax planning activities as they have an impact on financial reporting and tax liabilities.
For example, a tech conglomerate might own a significant stake in several smaller tech startups and this makes these startups affiliated companies. The startups might be operating independently but their strategic directions might be influenced by the conglomerate. In the same manner, there might be two companies one producing raw materials and the other manufacturing finished goods, might be affiliated if they are both controlled by a single parent corporation. This type of affiliation can lead to synergies in supply chain management and strategic planning.
Source: A to Z of Economics by Dr. NC Raghavi Chakravarthy