Pros and Cons of International Expansion
As demand increases for products or services in international markets, or other business needs emerge, growing companies may at some point face the prospect of global expansion. This is a natural evolution and offers significant opportunities if approached in the right way at the right time.
While going global can make sense, the decision should factor in the overall cost/benefit for a company as well as preparing for a new level of HR support and administration for staff on assignment. As with any shift in business direction and scope, there are both pros and cons to consider when expanding internationally.
1. What are the Factors Affecting International Expansion?
The reasons to expand globally are manifold and will vary depending on the business type and overall market strategies. Companies will be forced to consider a range of factors when deciding to enter a foreign market. These include:
- Cost and time to establish a foreign subsidiary
- Corporate policy toward compensation and other HR issues
- Compliance risk for payroll, taxation and immigration rules
- Establishing secure office premises, employee residences and bank accounts
- Evaluating the growth potential against the required investment
- Permanent establishment issues resulting in taxable local revenue
- Contingency plans in the event that the new foreign office needs to be closed
When looking at these factors, a multinational will need to decide whether to use a DIY approach to enter the new market, or to outsource essential functions to a third party. When the realities of expansion are looked at closely, many of the inherent challenges can be met more easily when using local partners to administer staff assignments, payroll and immigration compliance.
2. From the Company Perspective: Pros of International Expansion
The first step in evaluating entry into a foreign market is the impact at a corporate level, both in terms of cost, effort and opportunity. There are a few primary reasons for expanding internationally, depending on the country and region of the world.
· Access to New Regional Markets for Products and Services
The most obvious reason to expand internationally is to access the global marketplace for sale of goods and services. This is especially attractive to companies that may be located in less developed economies and market regions where growth is limited.
Regions like the EU with their open market approach to member states may offer an exponential opportunity for growth within the entire EU market.
· Brand Recognition
Opening branches abroad can expand brand recognition to attract new customers and establish credibility in the marketplace. For example, entering a market like the US can mean a large boost in visibility, especially for companies from less developed markets.
· Cost-effective Manufacturing or Production of Goods
It is a common practice for companies to outsource production to countries with less expensive labor and infrastructure costs. For a US or European company, offshore production of goods in a country like China can offer real cost savings and competitive pricing of products.
· Customer Service Centers
Companies with an existing international clientele may want to set up regional customer service centers for technical and administrative support. Setting up a proprietary service center in a foreign region allows a company to overcome time zone differences and minimize delays in response.
· Use of Free Trade Zones
Many countries offer free trade zones to encourage participation by foreign companies in transport, storage or production facilities. As an example, the UAE has a free trade zone and business-friendly tax structure that can give convenient access to Middle Eastern markets, without the requirement of local majority ownership.
3. Cons of International Expansion
Even with the advantages of expansion, every company will face some challenges when entering foreign markets.
· Tightening Immigration Rules
The task of setting up a branch and assigning staff can be daunting in the face of immigration rules for long-term workers. Expect a stringent government review of both the company’s registration and obtaining work permits for any assigned management or employees...read more
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