Chasing the Global Dream
Planning and a healthy dose of foresight help globally minded companies overcome the many complexities and challenges of expanding business abroad.
By Clare Fitzgerald |
With the vast majority of the world’s population residing outside the United States, a growing middle class in many countries, and an increasing demand for US products and services worldwide, the international market is an attractive one for American companies large and small. Think expanding customer bases, growing market share, accessing foreign labor markets, and escaping competition at home—to name just a few possibilities.
But companies eager to expand abroad often lose sight of—and fail to properly prepare for—the complex and unfamiliar customs and laws that can pose a significant number of risks, not to mention all those unexpected factors that can create barriers to success.
Whether you’re thinking about entering top US trade countries like Canada, Mexico or China, or venturing into more complex and harder-to-reach emerging markets, such as Africa, Indonesia and Turkey, consider these essential guidelines and tips before you make a move.
Gain the power of premonition
Although it sounds like a basic piece of advice, companies all too often skip the research and planning steps in their rush to enter a market at the optimal time.
“Companies tend to hurry when it comes to international expansion,” says Tonya McNeal-Weary, managing director at IBS Global Consulting, an international business development consulting firm based in Troy, Mich. “It’s so important to be prepared and to do your research before entering an international market. Find out who your competitors are, identify potential suppliers, research the local norms and find out how business is done in that market.”
After completing the initial research, outline your plan. “Many companies fail to do this up front,” says McNeal-Weary. “You need a business plan in place for international operations, because it’s going to be very different from your plan for domestic operations.”
Focusing on your end goal is a key piece of the planning process, explains Randy Worzala, regional director of business development for the Americas for TMF Group, an Amsterdam-based professional services firm that provides consulting, accounting, tax, HR and payroll services for businesses operating internationally. “When you first start going down the international path, identify the end goal and work backwards from there,” he says. “Forecast what the endeavor will look like in 18 to 36 months, because what you decide will have significant legal, tax, HR and structuring implications.”
It’s also important to pad your timeline. The period involved to incorporate in other countries is something US companies often underestimate, says Worzala. “One of the biggest challenges we see is organizations not allowing enough lead time,” he says. “Prospective clients come to us and say something like, ‘I found out at a staff meeting yesterday that we just hired 10 salespeople overseas, but I can’t process payroll next week and I don’t have an entity set up.’ It’s not the ideal scenario.”
“Don’t be that guy who gets a call from someone in Mexico and jumps on a plane to do business tomorrow,” warns Ramon Camacho, international tax services lead in the Washington, D.C. national tax group of audit, tax and consulting firm RSM US LLP. “Companies often respond to a business opportunity in the heat of the moment and set up a subsidiary or put a contract in place that often has to be undone.”
Camacho advises clients to take a more methodical approach. “When you start thinking about doing business abroad, talk through what that will look like,” he says, adding that a white-boarding session can help businesses think through and explore options. Once they determine their plan, Camacho also advises implementing an annual or semi-annual review process.
Another important part of up-front planning is securing management support, explains Matthew Poole, commercial officer for the Chicago Export Assistance Center
, an office of the US Commercial Service
, the trade promotion arm of the US Department of Commerce’s International Trade Administration
. “Expanding abroad can be a lengthy process that requires patience, so you need to make a plan and get management buy-in,” he says. “To do it right requires an up-front investment and an understanding that it may take several years for that investment to pay off.”
Think like a local
Although you’re planning for global activity, it’s crucial to focus your thoughts on the local jurisdiction you’re entering. Developing an appreciation for and understanding of cultural differences will go a long way towards smoothing the waters for your international venture. Every local market brings unique challenges and etiquette standards, and building a network of local partners can be the best way to navigate local business practices.
McNeal-Weary recommends starting with a self-assessment of your local human capital. “Ask yourself if you have the resources and talent on the ground that you’ll need,” she advises. “You’re going to need to hire people who understand the local laws and customs. Get a local CPA, an attorney and benefits broker.”
Worzala agrees that recruiting locally is key. “It’s not uncommon for the regulatory environment to change frequently, and it often changes retroactively,” he says, noting that in Mexico, for example, employees have to sign their pay slips, employers have to keep receipts of those for five years, and Social Security contributions have to be calculated twice. In China, the sheer volume of required licenses and permits can be overwhelming and difficult to interpret. “It’s easy for companies to get caught off guard with those regulatory nuances. Local expertise can be the only way to stay on top of those details.”
It’s also important to adapt your products to the local market, says McNeal-Weary. Think of Canada, where labels need to include both English and French translations. She also cautions to review pricing, marketing and branding strategies to make sure products and presentation fit into the local culture. You only have to think of the branding urban legend cautioning that some foreign markets assume whatever illustrates the can is in the can. Smiling lady on the tin? Smiling lady in the tin!
Another local element to consider is the value of in-person interactions and relationship building. “Don’t expect to manage relationships remotely,” says Poole. “Overseas, people really value face-to-face interaction. There may be travel costs up front for those visits, but it’s really worth it to put in that face time.”
McNeal-Weary agrees that other countries are much more relationship oriented. “We’re used to business being done the American way, but that’s not the way they do it in other countries,” she says. “In many other countries, people want to visit face-to-face several times and have personal conversations. They want to know about your family and where you’re from before they will want to do business with you. Understanding that process and having patience are key.”
Know the regulatory requirements
You need to focus on understanding and staying compliant with US and foreign regulations and financial reporting requirements early on in the process. “Be aware that laws change and things will be shifting around all the time,” says Camacho.
One of the first steps is to find out how much activity is required in order to have a taxable presence in your target country, Camacho adds. “Every country has different rules about when you trigger it, so you have to check the laws of each country,” he says. “A lot of times companies have taxable presence and don’t even know it.”
Companies also need to stay on top of tax treaties, which can affect and alter local laws. But it doesn’t end there. You also need to be familiar with and aware of implications from Base Erosion and Profit Shifting (BEPS) proposals, says Camacho. The Organisation for Economic Cooperation and Development
, a Paris-based think tank, has released a BEPS framework that is leading many jurisdictions to make changes to their tax guidelines.
Once you have a foreign presence and are paying taxes, a whole host of other issues crop up, including the question of transfer pricing, which affects any company doing business abroad and can be a hang up for many. International regulations require that related companies supporting one another pay the market price for the services exchanged. So if a German operation needs access to senior management in the United States, for example, a fee must be collected.
But pricing those transactions can be tricky. Companies need to find a pricing methodology with the best data to support it. “You have to document what you are doing for the government to respect it,” says Camacho, noting that many companies prepare a lengthy transfer pricing report to justify their methodology. “You have to have a well-reasoned narrative or you run the risk of incurring a penalty.”
Companies further need to be on top of reporting rules like the Foreign Account Tax Compliance Act (FATCA)
, since what can seem like minor compliance details can have a large impact on your business, according to Camacho. FATCA, for example, allows the Internal Revenue Service (IRS) to enter into information-sharing agreements with foreign governments. Companies creating foreign subsidiaries are required by foreign banks to classify themselves for FATCA purposes before they can open a bank account. “We’ve had many companies come to us saying that the forms are so complicated they can’t figure them out,” he says. “The rules turned what once was a one-page IRS form into an eight-page form and created many new and complicated classifications.”
Another set of reporting rules to note is the Report of Foreign Bank and Financial Accounts, which mandates reporting the control you have over any foreign bank accounts. According to the IRS, US taxpayers with a financial interest in, or signature authority over, a non-US bank account are required by the Bank Secrecy Act to report the existence of the account to the Treasury Department’s Financial Crimes Enforcement Network. “It’s often a newsflash to people when they find out there is a personal obligation,” says Camacho.
Tap external resources
Navigating the regulatory and cultural waters surrounding foreign markets is no trivial feat, which is why external resources often can provide the expertise, decision-making and task-management aide that could otherwise drain time and productivity during a global expansion.
Government agencies are one place to start. The US Commercial Service
operates 106 US offices and 128 overseas offices in 79 countries, and offers free counseling services and market research, as well as more extensive business matchmaking services for a nominal fee, says Poole. If, for example, a Chicago company wants to expand overseas, it can work with bilingual international trade specialists in the US Commercial Service who will reach out to individuals and suppliers in the targeted country on their behalf.
Poole explains that his office helps companies doing business abroad for the first time to identify markets, set up meetings and secure buyers and suppliers. It also helps more sophisticated international businesses crack into hard-to-reach markets. The US Commercial Service further compiles international country profiles and can report on local companies, which can help to provide peace of mind for US companies working with international buyers.
“We like to think of ourselves as a resource for the business community,” says Poole. “Even if you just have an export-related question, by all means give us a call. We work with a lot of different agencies, so even if we don’t know the answer we can always point you in the right direction.”
The State Department, Small Business Administration
, the Export-Import Bank
, the US Trade and Development Agency
, the US Agency for International Development
and other government agencies also offer economic, security, political and market analysis and other resources to support doing business abroad.
What’s more, professional services firms like RSM US LLP
, TMF Group
and IBS Global Consulting
can provide counseling on entity structuring, accounting, tax and HR planning, as well as insight and analysis on global business trends. TMF Group, for instance, publishes an annual
Global Complexity Report
that ranks the relative ease and complexity of doing business in more than 80 countries around the world.
Understanding risks, cultural nuances and regulations, and taking advantage of the wide range of expertise that’s right on your doorstep, can help companies stay on top of the constantly shifting international landscape as they begin their global expansion. “It’s a long-term commitment, but it can ultimately be very fruitful,” Poole concludes.