Every ambitious enterprise will reach a stage in their growth journey when they consider international expansion. One survey found that 87% of U.S. firms consider international expansion to be necessary to secure long-term growth. Here we look at the key reasons why you should consider expanding your business globally, and set out five steps you should take before making the leap.
What are the advantages of global expansion?
Serving your domestic market feels comfortable: You have prospered in that business environment, and likely know it very well. Expanding internationally, by comparison, feels risky — particularly where target countries have an unfamiliar linguistic and cultural environment. That said, there are compelling reasons why you need to start thinking about this. Potential advantages of growing internationally include:
- No more ‘placing all your eggs in one basket’. International expansion is a form of ‘geographical arbitrage’; economic turbulence in one region can be offset by profitability somewhere else;
- Slashing expenses. It is no secret that outsourcing operations to countries with lower costs for labor and materials can contribute significantly to the growth of the enterprise;
- People talent. You may find that you need to expand into another country to get the people talent that your company needs;
- Specific growth opportunities. For example, you may have identified that a certain country lacks the presence of a product manufactured by your company, and seek to fill a gap in the market.
Whatever your reason for expanding globally, there are several steps that you should take before making your decision:
- Explore the business case for expansion;
- Evaluate the financial impact on the wider enterprise;
- Consider any legal and compliance issues;
- Collaborate with a global staffing partner; and,
- Refine your recruitment strategy.
We look at each of these steps in turn.
Explore the business case for expansion
You may have a particular target market in mind. Or, you may be interested in global expansion, but not sure which particular location to target. In either case, you need to establish a robust business case for the expansion decision itself, and for the actual method that will be used for expansion.
In some cases of failed global expansion, it seems implausible that there was a robust business case in place before the expansion decision was made. Consider the case of Starbucks lackluster expansion into Australia. Starbucks opened its first stores into Australia in 2000, growing to 90 stores by 2008. By that point, it needed to close 90 percent of its stores.
The demise of Starbucks in Australia was not entirely surprising to locals who have had a robust espresso culture since the 1950s. The relatively higher-calorie, and more expensive, Starbucks drinks, simply did not appeal in the same way that they did to North American and Asian customers. Starbucks’ fortunes in Australia only began to improve, it seems, when its focus shifted to a more targeted tourist market already familiar with its products.
So, what do enterprises need to do to avoid this kind of situation? In forming the business case for global expansion into a particular locale, enterprises need to consider the following elements:
- SWOT (strengths, weaknesses, opportunities, threats) analysis of the proposed expansion. This includes evaluating any particular cultural differences in the target country that might be relevant to your business’s offerings;
- Competitor analysis. Look at your competitors in the target market, and evaluate their offerings against that of your own business;
- Market research. Have market research commissioned from the target country itself, to ensure you have up-to-date information from close to the source;
- Develop your marketing strategy for the target country. Does your existing value proposition translate into the new market? How will you position yourself within the new market?
Consider the financial impact on your existing business
If all goes according to plan, global expansion will significantly benefit the enterprise as a whole. But at the same time, it can pose risks to the existing business that need to be mitigated. Businesses need to evaluate:
- Available funding. Any new operation is unlikely to be profitable in the short term. Will the expansion be financed through equity or debt, and is the business as a whole able to weather the burden?
- Reputational effects of a failure or perceived failure. Consider the case of Burger King in New Zealand: The owner of the New Zealand Burger King franchise operator went into receivership in April 2020 after around 25 years of operation. It has been suggested that an expansion based on debt, combined with exceedingly slim profit margins, was its downfall. As soon as cashflow slowed even slightly, due to the COVID-19 crisis, the debt could not be serviced and the receivers took over. In light of the legal structures that Burger King uses to manage its international business, there will be little direct financial impact on the overall brand. However, the indirect hit to their overall reputation could be significant.
A key part of minimizing any negative impact of the expansion on the broader business will be ensuring that the right financial and legal arrangements are in place to support the expansion.
Assess possible legal and compliance issues
You are likely familiar with the legal and compliance environment for your business domestically. However, moving into another country requires you to be familiar with the rules as they apply in that new location. Matters to consider here include:
- Whether it is advisable to set up a subsidiary in the new jurisdiction to carry on business, or use tripartite agreements to manage any staff in the new jurisdiction;
- Whether any functions should use a Professional Employer Organization (‘PEO’). A PEO hires and administratively manages employees on behalf of your enterprise. We consider PEOs in greater detail below;
- The tax implications of any expansion. If the enterprise has a fixed presence in the target country where it carries out its business, it is likely to be classed as a ‘permanent establishment’ in that country and to have tax obligations there. Tax returns, corporate income tax and other taxes may all be owed in the new jurisdiction;
- Employment and health and safety obligations. In addition to tax, there are likely to be a range of other compliance obligations that arise from operating in another jurisdiction. You need to seek professional advice to ensure that you comply with these new obligations.
Collaborate with a strategic staffing partner
By the time you have made the expansion decision, it is likely that your enterprise has already built a significant product or service, and possesses a formidable reputation. It is important, where possible, to leverage this position and surpass your competitors by being ‘first to market’ in the chosen region. In order to do this, the enterprise needs to be able to deploy staff quickly and compliantly.
This is where a global staffing partner comes in. Through Professional Employer Organization (PEO) or Employer of Record (EOR) solutions, you can onboard staff at speed, often within a matter of days.
Global staffing solutions mean reducing or eliminating administrative and compliance headaches, so you can focus on growing your actual business. If all goes to plan, you will also gain the ability to compete with larger businesses, at the same time as scaling your business in a quick and compliant manner.
A good PEO solution should include:
- Compliant employment agreements. Many countries have a complex web of laws, rules and regulations that can be difficult for foreigners to understand. A good PEO will draft compliant contracts that incorporate best practices into them. They will also make appropriate statutory declarations with local authorities and register the employee at local labor bureaus to comply with local and national regulations in the country of expansion;
- Onboarding. The PEO should have a local team that will ensure that all immigration requirements, mandatory insurances, in-country tax registrations, and other key declarations are in place to ensure compliance;
- Payroll processing. The PEO should set up a compliant international payroll system for your business and make proper calculations for individual income tax, insurance payments, social security contributions, and other allowances. It should also manage employee expenses and reimbursements, preferably without charging you extra every time you need to process an expense. A good PEO makes payroll easy; your company should simply receive a monthly statement and invoice without all the additional hassles;
- Ongoing support – A PEO must take on all employer of record responsibilities, which includes handling termination and severance arrangements, employee renewals, and compliance matters related to the employment relationship.
Using a PEO means your company can:
- Access new markets rapidly;
- Reduce risk by delegating employer responsibilities;
- Establish compliant back-office operations;
- Scale the business up or down in a flexible manner;
- Avoid or delay the expense of setting up a separate entity;
- Rely on the PEO’s HR experts, tax specialists, and legal specialists instead of having to pay third parties;
- Delegate time-consuming administrative functions to a local expert.
Refine your recruitment strategy
The final step in working out your international expansion strategy is recruitment. By partnering with an international recruitment company, you gain access to a worldwide pool of candidates. It is through assessing both local candidates and foreign candidates that companies can find the most suitable candidates who will support growth in the new market.
Indeed, tapping into an international team can provide your company with significant advantages, including:
- Improved innovation output;
- Increased productivity;
- Diverse educational and cultural backgrounds;
- Advanced language skills;
- Enhanced local knowledge to help access new markets.
Your recruits can fill important roles within your company, such as:
- Launching a new product series or service;
- Helping you restructure your organization;
- Leveraging your reputation to create new relationships with local partners.
Any good recruitment provider will customize a recruitment project to match your company needs, enabling you to target candidates that have the right education, experience, and background to advance company goals and integrate well into your existing staff.
At a certain point, expanding overseas is likely to make sense for any enterprise of a substantial size. But before doing so you need to consider:
- Whether the business case for expansion into a particular country adds up;
- Whether funding arrangements are in place to ensure that the new international arm of your business thrives;
- Your compliance and legal obligations in the new country;
- The benefits of collaborating with a global staffing/PEO partner;
- Your recruitment strategy.
New Horizons Global Partners offers international consulting services to ensure you don’t misstep with your international expansion. Our specialists can advise on how to set up new corporate entities, maintain compliance, and implement the outsourcing or staffing solution that is right for you.