Ignorance is Not a Defense in Global Expansion
In this article, Jason Gerlis examines the importance and particulars of global expansion. While a business may thrive internationally, jurisdictions in all parts of the world are increasing transparency with modern technological advances.
Despite the shrill voices of anti-globalization, the world is continuing to interconnect and U.S. businesses are increasingly going abroad to access new markets.
In fact, U.S. firms of all sizes are now expanding internationally. A recent study by foreign exchange company USForex found that 58 percent of small businesses already have international customers and 72 percent plan to grow their international customer base.
Establishing a regional presence in a new market can increase efficiency. Rather than operate as a foreign entity and subject yourself to import restrictions, it often makes sense to set up a subsidiary or make an acquisition in a target market in order to create a local presence and transact as a domestic entity.
The threat of tariffs and a possible global trade war only amplify the urgency for companies to establish legal entities within foreign markets and employ locals to avoid the penalties of protectionism. Already, the European Union has said it will retaliate against a host of U.S. products, including Harley Davidson motorcycles, bourbon, and blue jeans.
Globalization is now easier thanks to technology. Real-time connectivity has simplified the flow of communication and commerce. Meanwhile, the application of new technologies in developing countries is speeding economic growth and opening up new markets in those countries. Additionally, more jurisdictions in all parts of the world are now automating and digitizing their information storage and reporting requirements, which increases transparency.
Positive market forces push expansion
The advantages of expanding internationally are numerous. While the U.S. market offers fixed growth opportunity, international markets present a far more elastic upside. And even though the U.S. is still the world’s largest consumer market, it is also highly competitive. A company might be just a midsize player in its U.S. space but could potentially expand to a less developed economy and find itself the leader.
The stars have aligned to create a near-perfect atmosphere for U.S. corporations to aggressively pursue outbound market expansion. One leading driver of expansion now is the U.S. stock market. Its recent gains have made businesses more confident, allowing them to pursue new opportunities overseas.
Another strong influence is the recent changes to the corporate tax code, which for certain firms are creating surplus capital for growth initiatives. U.S. companies large and small are finding money to spare thanks to the lower tax rate of 21 percent and many of them are looking to spend it on market expansion abroad.
A second aspect of tax reform—the limit on interest deductions—is also motivating global expansion, because in many cases, acquisitions are now easier to finance than domestic deals. US firms can buy a foreign firm, but “push” the interest expense onto the foreign business’s balance sheet. This may result in greater tax-deductible leverage in the foreign authority than if a US business was acquired. We expect this will increase the already substantial trend of US firms merging with and acquiring overseas counterparts.
Immigration policies in the U.S. are also getting stricter, which impacts the ability of companies to hire skilled workers, and this, in turn, causes problems, particularly for the technology sector. If a firm in Silicon Valley can’t access the H-1B visa talent pool that it once used to augment its workforce, it may look to establish a local presence elsewhere. Canada, for example, has far friendlier immigration policies, and as a result British Colombia is arguably becoming a viable alternative to California. Hopefully the USA will advance investment in local training programs to create a domestic talent pool, which could both maintain the USA’s competitive advantage in high-tech, while also supporting workers in declining industries.
Meanwhile, the International Monetary Fund (IMF) is among the many agencies signaling bright prospects and optimistic markets around the world. It reported recently that the cyclical upswing underway since mid-2016 is continuing to strengthen. Some 120 economies, accounting for three-quarters of world GDP, saw a pickup in growth in year-on-year terms in 2017, the broadest synchronized global growth surge since 2010.
Local knowledge leads to success
Once you’ve decided that global expansion makes sense, the next question is where to go. You can start looking for your answer in TMF Group’s second annual Financial Complexity Index, which ranks accounting and tax-compliance complexities of investment, expansion and M&A activities across Europe, the Middle East, Africa, Asia Pacific, and the Americas.
Turkey, for example, is near the top of the TMF Group complexity index due to its extensive tax code, which is often changed and updated in legislation that is not always easily traceable. By contrast, Norway is one of the least complex nations in the world. Its regulatory environment is generally transparent with relatively low reporting requirements and little bureaucracy. Plus, the country’s tax framework is generally very stable—there are few large or sudden amendments in rates or legislation.
A business’s understanding of such financial, regulatory, and cultural factors will influence the speed with which it adapts to a new marketplace. It can also lead to greater opportunity. For example, in an emerging market that is complex, better understanding and quick adaptation can put you in the lead and give you first-mover access to a large market.
A company might know, for instance, that it wants to be in the Middle East. But which country in the region is most advantageous, given that each one has very different rules, regulations, cultures, and pay scales. How much will it cost to incorporate a company in a specific local market? How expensive is real estate? What are the tax requirements? How does a holiday like Ramadan affect business and the workforce there?
To understand this level of detail, companies need a local partner that can steer them in the right direction. A local partner can tell you what the competitive landscape looks like in a particular market, how the economy is operating, how consumers are feeling, whether they’re likely to purchase your goods and services, and much more.
Say, for example, you’re looking to expand to Eastern Europe. You might know that Poland has about 40 million people. But you might not know how many of those people live in cities, what their lifestyle is, how many mobile phones and cars the average family owns. The right local partner can tell you what the new Poland looks like and explain why the economy is growing into a powerhouse of Eastern Europe.
Due diligence makes all the difference
Wherever you go, you really need to do your due diligence to learn how your product will be received in that market, and what the macro and micro economic factors look like. From there, you can start to form a judgment of how successful you’ll be.
Expanding abroad also requires knowledge of the local bureaucracy. You’ll have to fill out numerous forms in the local market. If you’re based in Atlanta, can you complete those documents in Latvian or German without making a mistake? The last thing you want is to incur a large fine, or have your business shut down, for not doing something you didn’t even know you were supposed to do. In Qatar, there have even been reports of foreign nationals being imprisoned for more than thirty years for writing checks that later bounced. Ignorance is not a defense.
Local knowledge is vital wherever you are. But it’s especially critical in today’s rapidly changing global marketplace, where new products and services are introduced every day, where tax requirements evolve constantly and where cultural norms shift by the week.
The time is now for global expansion–but before you go, do your homework. After all, knowing the regional requirements and understanding the local playing field could be the difference between success or failure of your cross-border business initiatives.