Expanding overseas is no longer a far-off goal for smaller businesses. Advances in technology and shifting work dynamics make it possible for any company to go global. While common reasons for international expansions include growth opportunities, most business leaders don’t make these moves overnight. They typically take time to evaluate several factors, such as logistics.
By nature, global expansions carry more risks than domestic growth strategies. Language and cultural barriers, infrastructure and resource differences, and potential political instabilities are among the chief reasons. These factors needn’t spell the end of your expansion plans, but they can’t be ignored, either. Before you take your business activities across international borders, here are four things you should be aware of.
1. Local Labor Laws
Whether you decide to hire employees or contractors in a different country, you need to know the local labor laws. These regulations will impact what type of workers you can hire under various circumstances and for different roles. Hiring and classifying a person as an independent contractor when they should be an employee can result in severe consequences.
Those penalties might include hefty fines for each violation. While hiring contractors is sometimes a more economical way for businesses to expand globally, review what distinguishes employees from contractors. Those lines of separation may include how long the person works for your organization. Other factors can involve who provides tools and materials and which side has control over the work the individual performs.
Before you decide where to recruit and if you want to pay international contractors, determine whether it makes sense for your business model. If you plan on establishing a local legal entity, hiring employees may be a better fit. You might want to have direct control over people’s performance or have them work only for your company. In these scenarios, it’s preferable and more legally feasible to recruit full-time employees.
2. Market Fit and Opportunity
Your company probably wouldn’t start selling its products or services in a domestic market without doing research first. The decision to seize an overseas opportunity requires just as much diligence and preparation, if not more. Variances in cultural norms and traditions, language differences, and existing loyalty to competitors can impact how your product will sell.
As with domestic market expansions, take a good look at your product’s or service’s features, advantages, and benefits (FAB). The FAB model breaks down a product’s attributes and what advantages and benefits customers will get from them. A FAB analysis helps your business identify why customers will want to purchase the product. This type of assessment also shows how a product or service can fill any local market gaps.
Ideal markets for expansion have discernable market needs and population segments eager to find solutions for their pain points. You’ll also want to conduct a competitor analysis using the SWOT or PESTLE method. Map out the market’s size, revenue potential, and which segments the business is going to target. Also, identify direct and indirect competitors and current and upcoming legislation that may impact the company’s operations.
3. Logistics and Distribution
Establishing new offices in a distant land has an adventurous appeal. The market and opportunity to learn about a different culture might look promising. But is it practical for your business to manufacture or deliver products there? There must be transportation hubs and local resources that add to your expansion strategy’s feasibility.
For instance, a company with nearby manufacturing facilities may have an easier time with distribution. It’ll usually be more cost-efficient to distribute products if they only have to travel a few hundred miles across land. Existing relationships with suppliers that have local distribution networks can also be advantageous.
International markets that are further from a business’s home country or operations can present several logistical challenges. There are greater risks involved, including potential shipping delays and increased costs. Companies also have to consider what types of infrastructure exist in global markets. The versatility and condition of that infrastructure will heavily influence distribution. Airports, roads, railways, and telecommunications should factor into any strategy.
4. Taxes, Tariffs, and Trade Agreements
Naturally, one of your company’s objectives with an international expansion is to turn a profit. You might not expect a global division to be in the black during the first year. But to get there eventually, the business will need to be mindful of local operating costs. This includes things like taxes and tariffs, which tend to be steeper in some countries than others.
Governments usually impose higher tariffs and taxes to discourage competition for local or national producers. Tariffs and taxes can also seek to balance trade between domestic and international businesses. Sometimes higher customs fees apply to specific products and imports. The end game may be to completely deter imports of those particular goods to protect domestic industries. Conditions like these can make a market less attractive from a financial perspective.
Shelling out more money to sell your products in one country might be less feasible than paying lower taxes in another. On the other hand, existing free trade agreements like the USMCA (formerly NAFTA) could boost potential profits. Knowing what financial impacts exist in various countries for non-domestic businesses and the extent of those impacts can help guide decisions. Although the bottom line isn’t everything, an expansion strategy won’t get off the ground if it’s unsustainable.
Before You Go
If you’ve decided it’s time to expand your business beyond your country’s borders, you’ll need to plan carefully. Global expansions often carry higher stakes for companies because there is more uncertainty. Political instabilities, sudden regulation changes, and economic crashes are difficult to predict. Plus, you and your team are usually unfamiliar with another country’s laws, cultural norms, language nuances, resources, and tax systems.
While partnering with local experts and legal counsel is beneficial, leaders need detailed international market information to make sound decisions. Business owners should be aware of everything that can influence recruiting strategies, marketing and product positioning, distribution, and profits. No global expansion is without risks and obstacles. But knowing what pitfalls and challenges you might encounter can help you avoid the most serious ones.
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