In the app economy, tech companies can go global at the push of a button. Whether they’re seeking additional revenue or a skilled talent pool, it’s no surprise that four in five tech companies said they plan to expand to at least one new country over the next 12 months, according to Velocity Global.
International business expansion is, in fact, the core focus for more than half of companies that received investment in the last 12 months, according to the same 2020 report.
However, companies face significant challenges when it comes to establishing a presence in a new country. And they often rush to expand without taking a step back to develop an international business strategy.
“One of the biggest mistakes that companies make is they are overconfident in their ability to move quickly,” says Stanton Miller, Managing Director of Cash Management Sales at Bank of the West. “A company has got this great idea, they know what they want to accomplish, and they say to themselves, ‘Hey, we’re going to go expand. We think the market is ripe.’
“Then they start getting there and need to finance it, to get the goods there, to get the money in and out,” he says. “And they get bogged down in all the minutiae of the different banking systems and different rules and regulations.”
“One of the biggest mistakes that companies make is they are overconfident in their ability to move quickly.”
While international business expansion is a growing and lucrative trend, companies that want to maximize the benefit of global growth must do it thoughtfully and with an international business strategy in place.
Top Destinations for International Business Expansion
The drive for overseas expansion continues to heat up, thanks to the ease of transacting with customers anywhere and tapping markets everywhere.
Europe remains the most attractive revenue growth target by US tech companies, according to the Velocity Global report. Asia, which comes in second for revenue growth, is the top destination for international business expansion in pursuit of tech talent. Together, potential sales growth and advanced tech skills in these regions are driving a trend that shows no signs of slowing.
In fact, the push for international expansion by US tech companies is among the fastest-growing segments that Miller oversees, with companies throughout the country looking to transact in other countries.
Developing an International Business Strategy
Each region presents its own set of challenges, from immigration to managing international business payments. The issues of data privacy and taxes in Europe are formidable, while the repatriation of funds and tariff concerns are of particular concern in China.
Businesses entering new markets need to:
- Recruit, manage and retain the right people
- Comply with ever-changing local labor laws and regulations
- Manage tariffs or export fees or VAT/GST
- Navigate immigration processes
- Stay current on tax updates.
A significant proportion of organizations in the Velocity Capital report admit to pulling out of an international market at least once because of one or more of these factors. Recruiting internationally was cited as the top barrier for expanding internationally, followed by tariffs and export fees, as well as managing employee immigration.
Although not cited as a risk in the survey, the flow of funds in and out of a country can also be a significant, and sometimes surprising, headache. Restrictions on funds leaving China, for example, can be a particular challenge, while foreign exchange fluctuations in Europe and elsewhere are typical causes for concern.
This is the main reason that having a local relationship with a bank that understands and has a presence in overseas markets can mean the difference between failure and success when expanding internationally, Miller says. Without a bank or financial institution that has good processes in place, successful global growth can be a difficult and long discovery process.
7 Tips for International Business Expansion
Speak with your tax advisor about the most tax-efficient location for international sales and billing.
Learn about SEPA
Thanks to SEPA (the Single Euro Payments Area), you are no longer required to have in-country accounts for each European country you operate in. With few exceptions, companies can centralize payments and receivables in one location.
A particular concern for companies expanding into Europe is ensuring they understand the EU’s General Data Protection Regulation (GDPR). Put into force in 2018, the regulation dictates how data is handled across every sector. Subject to potentially steep penalties, it is important to be mindful of how you handle all customer data.
Keep Tabs on Regulations
Keep in mind that each country can have its own currency, laws, and regulations. It can be valuable to identify in-country, on-the-ground partners for banking, accounting, and other operations.
Get a Handle on International Cash Flow
Understand restrictions around sending money into a country (e.g., capital injections) or out of a country (e.g., repatriating surplus cash).
Set Up Your Supply Chain
If you manufacture physical goods, the supply chain setup is key. You might want to have multiple supply chains in case one is significantly impacted by events outside your control. Such events can include natural disasters, or, as we’re seeing more recently, trade wars.
Factor in FX
Once you expand internationally, foreign exchange rate fluctuations can significantly affect your results. Factor in the risk and consult with your banking provider about ways to minimize this FX impact on your results.
“I think the biggest thing and the most challenging thing is that these companies understand the US financial system,” Miller says. “But then as you go into Europe, for example, there are all these local rules and regulations that they’ve got to understand in order to stand up a company, including how the flow of the money’s going to work.”
Avoiding Self-Inflicted Errors
Other companies bring the worst challenges upon themselves.
“Some of these companies get going so fast, they open up accounts in countries that, frankly, they might not even end up doing business in,” Miller says. “And then they have all of these accounts and they’re having a treasury group that is forced to manage all of these accounts in countries where they’re not even being used.”
“Some of these companies get going so fast, they’re opening up accounts in countries that frankly they might not even end up doing business in.”
While it might seem like a good idea at the time, moving fast and aggressively positioning your company for the possibility of sales down the road is not always the smartest move.
“You really do have to look before you leap,” Miller said. “And plan, and strategize.”