Once established in their country of origin, every enterprise should consider whether global expansion is a good idea. In this article, we set out five core benefits of expanding your enterprise internationally.
A talented workforce
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.
There are other workforce benefits to global expansion, however:
- Secondments or intra-group transfers. One survey reports that 39% of Generation Z and Millennial workers would not accept jobs that don’t allow for travel. Not only do many employees seek international experience, this can be crucial to business growth as well. Intra-group transfers and secondments from head office to other locations are an excellent mechanism for employees to see how things are done in other countries;
- Diversity of skillsets and cultural backgrounds. In a connected world, it is essential that your business can deal with diverse customers from different corners of the globe. Global expansion can be a useful way to ensure your staff can engage all your customers. Advanced skills in other languages can be of particular benefit;
- Enhanced knowledge of local markets. You may have worked out that expansion overseas is a crucial mechanism for accessing a lucrative new market for your goods and services: Having staff on the ground in the target market helps ensure that you have the necessary market intelligence.
In some countries, 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, it is crucial that enterprises consider the taxation consequences of the expansion overseas (see point 5, below).
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.
Market research may have revealed that there is a unique opportunity for your product or service in a target country. For example, it may be the case that:
- You produce a product that is not currently available in that country;
- Your competitors are not yet operating in that country and you seek to be ‘first to market’;
- The target market has shown a particular interest in the types of products or services that your company sells.
In any of these cases, expanding into another country will be an essential part of your growth strategy.
Tax and compliance advantages
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 effectives 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.
Expanding the right way
Expanding internationally has numerous benefits to a company, including:
- Enhancing your workforce, while preserving and growing your profits;
- Reducing the cost of doing business through outsourcing key functions;
- Mitigating risk by spreading your business geographically;
- Growing your business in a new market;
- Securing tax and compliance advantages.
While there are significant benefits to expansion, care has to be taken to manage this growth. Possible risks in the expansion include:
- Being unable to recruit and manage staff in a target market you are unfamiliar with;
- Outsourcing operations to another country without a full understanding of the compliance or cultural environment in that country;
- Moving into countries whose political or economic circumstances constitute considerable risk to your business;
- A failure to understand your target customer when moving into a new country;
- Misjudging your tax obligations and significantly under-estimating your tax liability/receiving tax penalties.
Minimize risk with the right global partner
To minimize these risks, we recommend that you partner with recruitment and compliance specialists in the target market. New Horizons Global Partners provides the full suite of advisory services to set you up in your new target market.
In addition, through its ongoing PEO and ‘employer of record’ solutions, New Horizons can provide ongoing cost savings for your expansion efforts.