CEO Insider

5 Common Pitfalls of Businesses Looking to Expand Globally

Dr. Shan Nair, President at Nucleus

The world today is increasingly interconnected.  This is particularly so in the case of business. At first glance, the fact that immigration and market protective barriers are coming down worldwide can be taken to imply the reverse.  However, this is far from the case. The very fact that immigration is becoming more difficult means that companies need to go to where the skills are rather than import the skills to where they are.  Equally the imposition of market protective tariff barriers means that manufacturing companies need to both manufacture and sell in their target markets when previously they did not do the former.  The robust nature of the global communication infrastructure and recent developments in Artificial Intelligence, Robotics and Virtual Reality technology will enhance this trend.

There are many different reasons why companies often expand abroad.  Examples are:

  • To show their product or service has international reach rather than just domestic appeal.
  • To hire the right skilled personnel.
  • To reduce costs of operation, manufacture or R&D.
  • To abide by the requirements of large customers who demand a local presence.
  • Inheriting foreign operations resulting from an acquisition or merger.

In each case, there are a few common pitfalls.  I will go through these in turn below.

  • Regulations covering the proposed type of business

Many countries (such as, for example, China and India) restrict or do not allow foreign companies to operate in certain market sectors.  It is therefore important before entering a market or acquiring a domestically owned company that proper enquiries are made and professional advice obtained.  This may seem obvious, but it is surprising how often it is overlooked with disastrous consequences down the line.

  • Anti-corruption, anti-money laundering policies and trade with banned countries

It is important to understand the local country’s policies on anti-corruption and anti-money laundering and to obtain professional advice on their interplay with the policies in the country where the business is headquartered.  Many countries have regulations in this area with extra-territorial reach, the US FCPA and UK Bribery Act being prominent examples. Equally China has the death penalty as a possible outcome for a foreign company stealing IP from a domestic company. Even large multinational companies can fall foul of these regulations as the daughter of Huawei’s founder has recently found out.  Clearly, it is impossible for the Board to control every action of a multinationals’ business; however, it is important for the Board not just to implement the right culture in the business but also to have business wide policies and procedures in place that encourage genuine whistle blowers and determine how a complaint is then investigated and handled by the business.

  • International taxation

Every country’s internal revenue services today want a slice of the tax cake.  As a result, a multinational company can become caught the middle between the revenue authorities of two countries.  The likelihood of this scenario increases the more aggressive is the tax structure of the business especially if shell companies in tax havens are involved – the “Irish double sandwich” used by a few US multi-nationals until recently is a good example.  Generally, however, companies can consider they are on safe ground if they can show that:

  • There is directly relevant to the nature and extent of their business, and
  • the transfer pricing agreements between the parent and its foreign subsidiaries are appropriately worded, each with a transfer price that is itself benchmarked to demonstrate being within market norm and consistent with accepted pricing methodologies employed by both countries’ regulators.

Banking

A home -based company expanding abroad for the first time today will encounter banking as a major headache. Recent major penalties quite rightfully imposed by US regulators on foreign banks have, however, made them extremely wary of accepting US outbound business.  The internal audit departments of the major banks impose criteria often far in excess of that required by legislation. The process can be iterative, time consuming and sometimes personally intrusive with questions being raised on answers to a prior set of questions again and again and, in some cases (e.g Singapore and Hong Kong), the bank can require the CEO or CFO to personally present themselves with ID information.  It is interesting to speculate how many genuine and potentially successful businesses are being stifled by banking over-regulation originally introduced for a very laudable purpose!

  • GDPR and Data Privacy

GDPR has become law in EU.  There are massive potential penalties for breaches of GDPR and/or failure to timely report breaches.  It is interesting to note that, while many companies have implemented data protection procedures and practices in their handling of customer data, they have not done so internally in their handling of employee personal data.


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Dr. Shan Nair
Dr. Shan Nair, President at Nucleus, a serial entrepreneur and consultant on international expansion. He has worked with many early-stage companies, several of whom have since become household names such as Tesla Motors, FaceTime and Ruckus Networks. Dr. Shan is an opinion columnist for the CEOWORLD magazine.