CEOs across the world are facing a fraught, unstable economic environment. Nearly three-quarters of CEOs believe that global economic growth will decline over the next year – marking a record-high level of pessimism.
CEOs are particularly cautious about international operations – largely due to geopolitical instability and sweeping changes caused by the pandemic. In an EY study of 1,200 CEOs globally, 97 percent altered their planned investment strategies in response to geopolitical shifts. Nearly one-third called it quits on a planned investment.
True, CEOs do face a time of uncertainty. But CEOs shouldn’t be shying away from global opportunities; they should be embracing them. Over the past couple of years, there has been a surge in protectionist policies. Europe, China, the United States, and other major global players are all trying to reduce their dependence on others for key imports. To circumvent these political minefields and tap into all potential markets for their products, CEOs need to establish local entities and hire local employees.
Global expansion is no small task – and certainly not one to be taken lightly. It takes enormous work to select target markets, navigate the intricacies of local laws, and ensure adherence to all proper procedures and policies. But done correctly, expanding can bring tremendous value to a company – and is well worth the risk.
As the world increasingly is veering to protectionism, forward-looking companies will need to trade in a country rather than with a country. Here we discuss the subtle distinction between these two models and the strategic business opportunities and threats involved in going international.
There are several main benefits to taking your U.S. based company international. The first is the opportunity to break into a new market for your product or service with the resultant increase in sales and enterprise value of your business. The other is sourcing a lower cost option for your technology, human capital or manufacturing needs, thus increasing EBITDA and therefore the enterprise value of your business. In addition, going global increases the ability of your business to adapt to sudden political upheavals or changes, the most recent examples being the Russia sanctions and the move away from China on manufacturing, which mitigates risk to your business. Lastly, being in an indigenous country may allow you to obtain lucrative government contracts or contracts with other large multi-nationals who will often only contract with a local subsidiary.
In many of the above cases, you will often need to establish a foreign office and associated legal structure. This will increase the complexity of your business bringing into play foreign HR, tax and legal compliance issues, some of which include an understanding of the local culture and ensuring that the foreign office is run in a manner aligned to this culture (while still having a unified corporate image). One glaring example of this is an unlimited annual leave policy applied in US can actually be misinterpreted in India to mean no leave at all! That’s why it is important to ensure that you receive expert help to make sure that you are in both local regulatory compliance as well as cultural nuances. These will vary by country and business sector, so it is best not to assume that what works in the US will work in another country.
Once you are up and running in a new country it is important to train your senior and middle management on the dos and don’ts of laws affecting local hiring and employment, so the proverbial HR banana skins are not stepped on. In general, once you go abroad, the legal, HR and finance functions of your business acquire a greater importance as mistakes can have costlier repercussions. It is also imperative when you go abroad to ensure there is an adequate budget to cover these needs, often viewed as unproductive costs, since cutting corners may save the organization money in the short term but can have long lasting expensive and time-consuming consequences.
We have also seen smaller businesses start on the path to global expansion by trading with a country – meaning they have foreign customers but no foreign employees or local footprint. This is a well-worn path to expansion but is unfortunately not sustainable as sales volumes rise. Also, in countries where currencies are non-convertible (e.g., Mexico, Brazil, India, China), customers will wish to pay locally in local currency. They want to do this in order to avoid the hassle of obtaining foreign exchange control permission or alternatively there may be significant non-recoverable withholding taxes levied on sales revenues which need to be sent abroad. All of these will necessitate a switch from trading with another country to actually trading in another country sooner rather than later.
So, what steps can CEOs take to go global? Here are some tips:
Do your research. Before expanding into a new market, it is important to thoroughly research the local business environment, market scope, degree of local market customization as well as local regulations and cultural differences. This will help you make informed decisions about where to expand and how to tailor your products and services to local customers. Make sure that you have a strategic plan that outlines your goals, target markets, and key performance indicators. It is also important to set a budget and make sure that it is adequate for the undertaking.
Establish a local presence. To build trust with customers and suppliers, it is important to establish a physical presence in the country you’re expanding into. This can involve setting up a subsidiary, partnering with a local company or appointing a Value-Added Reseller as examples.
Hire local talent. To gain access to the best talent in your new market, consider hiring local employees who understand the local culture and business environment. This can help you build strong relationships with their customers and suppliers.
Build a global senior management team. To ensure that your global expansion is successful, build a team with diverse skills and experience. This can include hiring employees also at senior level at your Head Office with international experience and/or partnering with consultants and advisors who have experience in your target market.
Expanding your business globally can be a game-changer for your company as well as giving you an opportunity to access new technology and innovation. Different countries have different technological and manufacturing strengths, and by expanding into new markets, businesses can tap into these strengths and gain access to these new opportunities. This can help your organization stay ahead of the competition and drive innovation.
However, as explained above, there are also challenges associated with global expansion. Businesses must take into account the cultural nuances and laws of the country they want to expand into, from language and communication styles to business customs and practices. Failure to do so can result in misunderstandings, lost business opportunities, and reputational damage. Having a local entity/management can help businesses navigate cultural differences and build strong relationships with local customers and suppliers and sometimes can also be crucial in winning contracts with local government or larger companies.
It is also important to understand that there are significant challenges associated with navigating complex regulations and laws. Every country has its own set of regulations and laws, and complying with them can be difficult and time-consuming.
However, despite the risks, global expansion can provide a catalyst for significant change for businesses, providing access to new markets, talent, innovation, and continued growth.
Written by Dr. Shan Nair.
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