A more interconnected world and decades of trade liberalization have made the overseas expansion of a business much easier than it used to be. However, opening new locations internationally isn’t suitable for every business.
We’ll explore the risks and opportunities of going global, questions you should ask before committing to a course of action, and how to take your business overseas.
What are the pros and cons of going global?
Expanding overseas brings a slew of advantages as well as some downsides. Consider the following pros and cons of going global.
Upsides of overseas expansion
- Brand-new markets: Generate additional revenue streams from a brand-new market to reduce your dependence on one market.
- Business growth opportunities: Growth opportunities may be limited at home, but you can take much of the knowledge and experience you’ve gained in acquiring market share and apply it with a local spin abroad.
- Access to new labor markets: This is particularly helpful for tech companies. Make your hiring process easier by opening premises close to a talent cluster in another country to recruit new employees. In some cases, you may wish to shift some production elements from your home country to overseas because of lower costs.
- Localized shipping: Retailers and wholesalers opening overseas locations can offer more competitive pricing to local customers because of reduced transportation costs and the lack of import tariffs.
- Improved overseas service: A presence in another country localizes customer service, thereby allowing you to develop excellent customer service relationships with clients abroad.
Downsides of overseas expansion
- High startup costs: The cost of opening up your business in new territories expands well beyond leasing commercial premises and establishing infrastructure overseas. There may be a significant time lag between beginning trading and generating enough revenue to cover costs. There also may be additional regulatory requirements to fulfill. For example, a pharmaceutical manufacturer may have to apply for local certification for their medicines.
- Risk of hefty retreat fees: If your overseas expansion doesn’t go according to plan and you must close operations, there will be significant detachment costs, including those related to closing premises leases, terminating employees, and exiting supply agreements.
- Reliance on local contractors: You may have to rely on expensive local contractors for a prolonged time before and after launch to deal with legal and HR compliance challenges. You’ll also need to work with local organizations to process payroll, launch localized sales processes and marketing plans, recruit management and staff, and more.
- Exchange-rate fluctuations: Overseas profitability may suffer if the new operating country’s home currency rate falls.
- Reduced transparency: Although it’s possible to monitor overseas performance through key performance indicators, it’s harder to see where issues may be developing because of distance and differences in cultures and time zones.
To further reduce risk and introduce new capital when you’re expanding outside the U.S., consider finding business investors, such as venture capitalists, to help fund your business.
What questions should you ask when deciding to go global?
Overseas expansion will test everything about your business to the limit. The rewards are great, but the risks are real. Ask yourself the following questions before you and your C-suite team commit to going global:
Do you really need a physical presence overseas?
Are you sure you can’t serve international customers well from your current base? If you sell products, could you partner with a local wholesaler or distributor instead of investing in physical infrastructure in a new country?
Do you have the cash to go global?
Expansion always costs more and takes longer than you expect. This effect can be more pronounced with global expansion. Examine your cash flow management, and ensure you have the funds for international expansion.
Can you afford to neglect your home operation?
When going global, you and your C-suite team may have to neglect the home country operation for months at a time. Setting up an overseas presence takes an enormous time investment, and you may need to send senior managers out for long stretches. Are you confident in your home team’s management capabilities?
Have you chosen the right country for your international expansion?
Try to select a country whose markets are similar to your home market’s. Prioritize lower trade barriers, proximity, currency and cultural similarities. Canada ticks many of these boxes. Emerging markets may offer great opportunities, but they come with bigger risks.
Will your product sell in an international market?
Your product or service might be in constant demand in your home market, but you can’t take that for granted overseas. Invest in focus groups and a market segment analysis to get customer feedback and assess demand. This will give you a better chance to establish and maintain a strong foothold.
Can you price competitively and still make good money?
China and other Southeast Asian countries dominate international goods exports with enormous economies of scale. Even if you open a factory and produce locally, will you be able to compete with the powerhouses on prices and still make money?
Are there well-known brands already in your target country?
According to international growth expert Hanns Schempp, you can’t rely only on digital marketing to expand overseas. Your international digital marketing strategy should include brand advertising and positioning that directly take on competitors in target countries.
Are you prepared to work under a different regulatory regime?
The European Union is unusual in that its member countries share many government- and industry-specific regulations. If you’re expanding to the EU, you’ll need to become very familiar with those regulations and get the necessary approvals, certifications and licenses. You’ll almost certainly have to invest in localized labeling and language adaptation for your brand, packaging and advertising.
Are you clear on how to maximize tax efficiency and compliance?
Planning a tax-efficient structure and local operation includes complying with local tax codes and applicable double-tax treaties with the U.S. and any intermediate overseas entities that are part of a tax-optimized structure. Be aware that many foreign banks are reluctant to deal with many U.S.-owned or -connected companies because of the high cost of complying with U.S.-dictated reporting rules, such as those established under the Foreign Account Tax Compliance Act. In any case, because of know-your-client rules, it might take months to open an account.
To master global branding for your business, maintain brand consistency, develop customizable campaigns, and vet all brand representatives thoroughly.
How do you take your business global?
Now that you’ve answered the questions above and decided that your operation is ready to go global, here’s what to do:
1. Establish your overseas infrastructure.
Establishing overseas infrastructure and teams is challenging. Consider the following steps during and after your launch:
- Get communication systems in place. It’s essential to establish clear communication both within your company and with the outside world. Does the company have the communication skills to compete in a globally interconnected economy? Digital technologies have made it easier for smaller companies to become multinational. However, your global firm must adapt to different communication methods and remote team meetings. Although your company may gain from the communication advantages offered by digital connectivity, the business also may sacrifice some of the coordination and interconnectedness of face-to-face interaction.
- Familiarize yourself with local resources and customs. Follow international business etiquette, and adapt legal, commercial, and human resources policies and procedures for differences in language, business practices, social customs and regulations. External talent could help lead or complement the beachhead team until they’re ready to go it alone.
- Train managers you’re transferring overseas. Most companies train managers at home and then move them abroad. Whether you train managers in-house or in the new location, they must be able to adapt to the new culture and be effective leaders in that country. Investing in employee training is essential.
- Consider local partnerships to mitigate risks. Whether your business model is distribution, joint venture, franchise or manufacturing, you can cut business expenses and reduce financial exposure and infrastructure costs by partnering with local businesses. Don’t rush; your local partner choices can make or break your success.
Many companies that expand overseas engage local outsourced HR services to manage the first few staff intakes, especially in countries that have cultural, legal and employment frameworks that are vastly different from those in the U.S.
2. Get your C-suite and management team ready.
Executives and managers play big roles in your business’s success. Here’s how to get your team ready:
- Prepare to master cultural differences. Learn as much as you can about cultural differences before you expand overseas, and ask for local employees’ help postlaunch.
- Cultivate local talent. Most overseas teams rely on home country leadership early on, but this drains time, money and resources over time. Consider international recruitment in your new location; look for experienced or developing leaders there who can eventually be responsible for strategy and direction.
- Develop senior leaders. Develop strategic expertise in every country across all business disciplines, including manufacturing, sales, administration and marketing. Train these leaders on how to manage people and resources to ensure things get done on time and correctly.
- Nurture global leaders. Over time, develop emerging leaders at home and globally and prepare them to run the business at the C-suite level when it’s their time.
The best video conferencing services let you stay in touch with overseas teams regularly. Remote meetings cost substantially less than overseas business travel.
3. Use PEST analyses to plan for the unexpected.
Companies that are growing or already trading overseas often carry out PEST analyses. A PEST (short for “political, economic, social and technological”) analysis helps you consider your business’s place in the world from the perspective of events you have little or no control over.
Carrying out regular PEST analyses will help you answer the following questions and provide the information you need to plan for unexpected events:
- Be aware of what’s happening around you. Monitor local and global legislative, regulatory and market developments via publicly available media and customized reports. Consider using in-house hires and consultants to watch for developments, or consult industry associations and advocacy groups.
- Respond proactively. When things change, adapt quickly. For fast-evolving markets, use scenario planning to formulate responses and contingency plans. Local political and regulatory changes can present opportunities or dangers.
- Be aware of each country’s risks. You are at risk on multiple fronts from political instability and the relationship between the U.S. and your new country. Local suppliers may be chosen over you. Your assets may be confiscated. Alternatively, the U.S. government may require you to withdraw for security or other reasons. You may be at risk of retaliatory actions. Consider every potential scenario, and develop ways to mitigate risks and protect assets and investments.
- Pay attention to political events at home and around the world. Political changes at home and abroad can affect trading conditions; Brexit is a prime example. Although the U.K. public voted for Brexit (leaving the European Union) in 2016, the separation did not occur until 2020. The situation is expected to remain fluid for years. Companies exporting to and from the U.K. and EU states have had years to prepare for the transition, and ongoing political statements by both sides give businesses a clear direction on future potential regulations and tariffs.
Overseas acquisitions are another way to go global
Starting operations in an overseas territory can be risky and challenging. You must find the right talent and target customers to bring in sales and revenue.
Overseas acquisition is another way to go global. If you purchase a company overseas, you’re buying a business with a market share, employees and revenues to offset your financing. You’ll also have access to the company’s advisors, lawyers and accountants, who will be keen to retain your business.
There are pros and cons to expanding overseas organically and via acquisition. Both routes require careful initial consideration and due diligence before you commit to any course of action.
Robert Courtney contributed to the reporting and writing in this article.