A risky business or an adventurous journey?
By Marcus Bergen
A famous British entrepreneur once reportedly said: “Paradise is where the British are the police, the French are the lovers, the Italians are the chefs, the Germans are the mechanics and the Swiss
are in charge. But then there is hell, which is where the Germans are the police, the Swiss are the lovers, the British are the chefs, the French are the mechanics and the Italians run the whole thing!”. This relatively harmless joke is a reminder that cultural considerations, or perhaps biases, certainly come into play when one is confronted with international expansion. Companies that are increasing their global presence need to make sure their resources continue to operate effectively abroad. Business is a global game. This newsletter discusses potential challenges and risks that companies face when they move abroad and what steps they can take to mitigate those risks.
Communication difficulties and cultural differences
Great communication is at the heart of effective international business strategy. Communicating across cultures, however, can be a very real challenge. Developing cross-cultural competency and communication skills are a core focus for successful multinationals.
Effective communication with colleagues, customers, banks and authorities abroad is essential for success in international business. And it’s often more than just a language barrier about which you need to be concerned. Nonverbal communication can make or break business deals, too. Proper research is essential to know how different cultural values and norms — such as shaking hands — can and will influence the way you communicate in a professional context. Being aware of acceptable business etiquette abroad, and how things like religious and cultural traditions can influence this, will help to better circumnavigate potential communication problems in
Cultural differences can also influence market demand for your product or service. The need your business may address domestically may already be met or not exist at all overseas. Local market insight is key, and there are a number of successful brands whose trusted business models simply weren’t viable in overseas markets. For instance, well-known coffee company Starbucks seriously struggled in Australia, where the demand for local, independent cafes and coffee shops vastly outweighed the appeal of the corporate giant.
Small practical considerations can also be easily overlooked, such as ensuring quality translations of product and marketing materials, and even confirming that your brand name works well abroad. A number of wellknown companies have had to consider adjusting the names of their brand or product when launching in a foreign market. Car-maker Chevrolet is perhaps the most commonly cited example with its model Nova, where “no va” literally translates to “no go” in Spanish—not the best product name for a car. Although plummeting sales figures in Latin America have proven to be an urban legend, the story of the “no go” car serves as a poignant reminder of the importance of preparing well before launching your business in a new market.
A clear risk for international business is political uncertainty and instability. Countries and emerging markets that may offer considerable opportunities for expanding global businesses may also pose specific pitfalls, which more established markets do not. Before considering expanding into a new or unknown market, a risk assessment of the economic and political landscape is critical.
Issues such as unclear or unstable policies and even corrupt practices can be hugely problematic in emerging markets. Changes in governments, representation and ruling bodies, can bring changes in policy, regulations, and interest rates that can prove damaging to foreign business and investment. In this context, Brexit comes to mind, as well as the emerging trade wars between the USA and its various global trading partners.
This growing trend towards economic nationalism makes the current global political landscape increasingly hostile towards international businesses. For another example, one can look at Facebook, which is banned in China due to government regulation over internet content. Closely monitoring political developments and planning accordingly can mitigate political risks of doing business abroad.
International company structure
If your aim is to be competitive globally, you must have a work force in place that’s up for the challenge. One fundamental consideration is the international structure of your organization and the location of your teams. For instance, will your company be run from a central headquarters? Or, will you have offices and teams “on the ground” in key markets abroad? If so, how will these clusters be organized? What autonomy will they have? How will they coordinate working across time zones? Also, will you consider hiring local market experts who understand the culture of your target markets, but will work centrally? And how have you organized an effective monthly reporting process and what internal controls will be implemented to ensure operating effectiveness?
Coca-Cola offers one example of an effective multinational business structure. The company is organized into groups per continent, each overseen by a President. These central Presidents manage Presidents of smaller, country-based or regional subsidiaries. As such, the company has a profound global presence, but the CocaCola brand and products are controlled centrally and consistent around the world. While Coca-Cola is a vast international brand, the structure of your business and the number, nationality, and level of expertise of your professionals will vary depending on your industry, product, and the size of your business. But irrespective the size of your company, controls need to be implemented to ensure that your overall company objectives are met successfully.
Foreign laws and regulations
Along with getting your company structure in place, gaining a comprehensive understanding of the local laws and regulations governing your target markets is essential. From tax implications through to business and trading laws, piloting legal requirements is a central function for any successful international business. Eligibility to trade is an important consideration, as are potential tariffs and the legal costs associated with entering new markets.
Airbnb had to face a serious issue in 2014, with a crackdown on advertised rental properties falling outside local housing and tourism regulations. The company was made to pay a €30,000 fine for a breach of local tourism laws in Barcelona.
It’s important to note that employment and labor rules and regulations also differ by country. For example, European countries stipulate that a minimum of 14-weeks of paid maternity leave be offered to employees, while on the other hand, benefits available to U.S. employees under the Federal Family Medical Leave Act of 1993 (FMLA), and various State regulations are more restrictive and not as generous.
With the complexity involved in foreign trade and labor laws, investing in knowledgeable and experienced corporate counsel can prove invaluable.
Beyond compliance with official laws, engaging in international business often requires following other unwritten cultural guidelines. This can prove especially hazardous in emerging markets with ill-defined regulations or potential corruption. In response, companies doing business in the United States must comply with the Foreign Corrupt Practices Act, which aims at eliminating bribery and unethical practices in international business. A good rule of thumb is to beware of engaging in any questionable activities, as recent history shows that FCPA charges have resulted in some very real and substantive fines and settlements. In 2004, the German engineering company Siemens was forced to pay a fine of USD 450 million (!) for bribing foreign government officials around the globe and in 2015 tire company Goodyear settled an FCPA case for USD 16 million related to kickbacks allegedly paid in a number of African countries.
Foreign jurisdictions often demand that a local set of statutory accounts be prepared under local GAAP to satisfy local legal and fiscal requirements. Of the important considerations when it comes to doing international business, tax compliance is perhaps the most crucial. Accounting can present a challenge to any businesses that is liable for corporation tax abroad. Different fiscal systems, rates, and compliance requirements can make the accounting function of a multinational significantly challenging.
Accounting strategy is key to maximizing revenue and profit, and the location where your business is registered can impact your tax liability. Mitigating the risk of various layers of taxation makes good business sense for any organization trading abroad. Being aware of the effective tax treaties between countries where your business is trading will help to ensure that you’re not paying double taxes unnecessarily.
As price setting and payment methods are major considerations, currency rate fluctuation is one of the most challenging international business problems to navigate. Managing exchange rates must therefore be a central part of the strategy for all international businesses. Global economic volatility, however, can make forecasting exchange gains and losses especially difficult, particularly when rates fluctuate at unpredictable levels.
Major volatility can seriously impact the balance of business expenses and profit. For instance, if your company is paying suppliers and employees in U.S. dollars, but selling in markets with a weaker or more unpredictable currency, your company could end up with a much smaller margin — or even a loss. One way to protect yourself against large fluctuations in currency is to pay your operating costs in the same currency as the one you’re selling in. This may also mean switching to more local production where possible to better balance your outgoing cash-flows and sales revenues. Alternatively, implementing hedging strategies by trading in (future) foreign currencies to shield your organization from exchange rate uncertainty might be the more effective, but somewhat more costly, approach to take.
It is clear engaging on global expansion might be an adventurous journey, but it is definitively a business that comes with risks attached. Solid preparation, proper planning and thorough strategy development are key in mitigating these risks of international expansion. Set the right strategy and priorities, be clear about the objectives of expansion and closely monitor progress. Don’t be distracted by non-strategic factors and develop a sound strategy on the basis of what works best for the business, rather than geographical convenience or personal connections.