Once established in their country of origin, every enterprise should consider whether global expansion is a good idea for their business. In this article, we set out five reasons why you should expand your enterprise internationally.
What is Global Expansion?
Expansion is the natural trajectory of any successful business. Initially this expansion tends to occur ‘locally’: The business will grow in its original location. Overtime, businesses will often explore expanding ‘nationally’: Expanding within their existing country.
At a certain point, many businesses will look at expanding into other countries. Even if it is simply an expansion into a neighboring country, this is known as ‘global’ or ‘international’ expansion. For example, post-Brexit, many United Kingdom businesses are considering how to best manage their expansion into EU countries.
There are a range of excellent reasons to take the step of global expansion. We set out five of these reasons below.
Expand Globally for International Talent
Your people are your most important business asset. It is impossible to grow an innovative business without getting the right workers in the right positions. Wherever you are based, however, geography will place limitations on your workforce. While talent is abundant in international hubs like London, New York, and Hong Kong, top operators are also found in Bangkok, Shenzhen, and Hanoi. Global expansion may give you the workforce you need, at a significantly cheaper price.
In addition to sourcing talent, consider several other ways your workforce can benefit from global expansion:
Expand Globally to Reduce Costs
In some countries, the costs of labor and materials are much lower. For some businesses, this will make it beneficial to move a core operational function, such as manufacturing, customer service, or research and development (R&D) to another country. For other enterprises, it may be sensible to outsource a back-office function such as payroll, HR, or finance to another country.
If making this move toward global expansion, it is crucial that enterprises consider the taxation consequences of the expansion overseas (see further discussion of this below).
Expand Globally to Mitigate Risk
A business in any one country can suffer shocks or negative business events that are localized to operations in that country. This may be caused by an economic or political event in that country. Or, there may be an event that affects a business in just one country, and not in others. International expansion reduces the overall risk to the business of any such event. A downturn in sales in one country, for example, can be balanced with an up-turn in revenue in another location.
Expand Globally for Growth Opportunities
Market research may have revealed that there is a unique opportunity for your product or service in a target country or countries. For example, it may be the case that:
In any of these cases, global expansion will be an essential part of your growth strategy.
Expand Globally for Tax and Compliance Benefits
Some overseas locations may have tax and compliance regimes that are more favorable to your company. This may include, for example, lower corporate tax rates, different rules about ‘permanent establishment’, or different rules about tax deductions: For example, setting up an R&D company to receive the benefits of generous R&D tax credits, or setting up an intellectual property (IP) holding company in a country with low effective taxes on IP gains (for more information, see ‘A Global Guide to Business Relocation).
Note that international tax arrangements are complex and care needs to be taken to ensure that all tax obligations are complied with. For example, US tax authorities have significant scope to tax overseas profits as worldwide income. Professional advice on your international tax strategy is absolutely essential.
In addition to differing tax obligations, there may be significantly different employer obligations for employee benefits in different countries. For example, in Germany, employers must make significant contributions to employee health insurance. By contrast, in New Zealand and Australia, with free public healthcare systems, there is no such requirement.
Global Expansion – the Right Way
In this guide we have looked at how expanding internationally has a range of benefits to companies, including:
While there are significant advantages to expansion, care has to be taken to manage this growth. Possible risks in the expansion include: