Are you looking to expand your business internationally? Read our article on the five major actions to consider if you wish to ensure your overseas success.
There are a whole host of reasons why an SME or mid-cap company may choose to invest in new markets overseas. The influencing factors can be considerable, from economic crises at home to the opening up of new territories, or indeed, the high levels of growth observed in emerging economies.
With all this in mind, businesses often seek growth drivers abroad. They source from countries in which products can be produced and procured more cheaply, before selling them all over the world, over the internet or otherwise.
While the opportunities are considerable, international expansion poses serious challenges that should not be underestimated.
In order to maximise your chances of success, here are five actions to implement:
- Conduct a market study.
- Identify opportunities.
- Find a local associate or create a local entity.
- Recruit locally.
- Develop a currency hedging strategy.
These measures will enable you to prepare your expansion into a new market or your launch overseas while ensuring the best possible conditions for your business.
1. Conduct a market study
While conducting a market study may seem an obvious step, far too many SMEs rush into exporting or setting up a branch of their business abroad without taking the time to adequately analyse the desired market.
In order to gauge whether your offering is viable in a new market, you must first identify local demand for your products and services.
Your market study should provide answers to the following questions:
- Is the target market growing?
- How many of your competitors are already active in this country or territory?
- What is the USP (unique selling point) that differentiates you from your competitors?
- Which local cultural considerations will require you to adjust your offer accordingly?
- Will you require technical certifications or classifications that differ from those required in your country of origin?
- What are the potential legal, fiscal and logistical obstacles you may face?
Did you know?According to French investment bank Bpifrance, in 2021, the country will account for just 0.8% of the world’s population and 2.6% of global GDP. This means that 99.2% of French businesses’ potential customers are located outside French territory.
2. Identify opportunities
Once you have gained knowledge of the market, you will be in a better position to identify local opportunities.
But where to begin?
Here are some best practices that will help you get set up in a new market:
- Choose the most suitable sales channel (both for your product and the target market).
- Develop a sales strategy.
- Launch a prospecting mission.
- Participate in trade fairs or similar events related to your sector.
Trade fairs are also an opportunity to identify potential business opportunities and assess the extent of the opportunities available to you.
Taking part in them will give you the chance to learn more about the competition and meet local players, who may become future clients or even wish to collaborate with you directly.
Did you know?In 2018, according to the Forbes ranking of the best countries in the world in which to do business, the top 10 was made up of the United Kingdom, Sweden, Hong Kong, the Netherlands, New Zealand, Canada, Denmark, Singapore, Australia and Switzerland.
3. Find a local associate or create a local entity
There are many ways to set up your business in a foreign country.
Let’s look at some potential options, from the local sales representative to the opening of a local branch, or even the creation of a subsidiary or launch of a joint venture.
Local sales representative
Going through a local sales rep comes with a certain degree of flexibility. No immediate local presence is necessary, which gives you the chance to assess the attractiveness of your offer before investing a great deal of resources.
Advantages of a local sales representative:
- They are an independent agent and maintain a purely contractual relationship with your company.
- They handle the prospecting, sales and distribution of your products or services abroad, allowing you to gauge their success locally.
- They have in-depth knowledge of the local market and the demand for your type of product or service.
- They use their local network to benefit your business.
A local branch office is usually considered a mere extension of your existing company and does not typically constitute a legal entity in its own right. From an accounting perspective, it remains very much linked to the parent company.
Advantages of a local branch:
- Compared to a sales rep, it allows you to maintain greater control over your business’s customer base, brand and communications efforts.
- In some cases, local branches are not subject to local taxes, but rather, those applied in the country of origin (that said, it is essential to gain information on the tax policy in place locally before opting for this).
Unlike a branch office, a subsidiary requires a more significant local presence. From an accounting perspective, it is considered a legal entity in its own right. Launching a subsidiary is equivalent to setting up a local business, both administratively and fiscally.
Advantages of a subsidiary:
- A subsidiary benefits from significant resources, enabling the company to establish its presence in its new market.
- Considered an independent taxpaying entity, its profits are taxable in the country in which it operates. A subsidiary set up in a country with a more favourable tax regime may therefore present some fiscal advantages.
A joint venture can be a good way to tackle a relatively closed market, but more than that, it is a basic requirement for investment in some jurisdictions. There are, however, a number of advantages to partnering with a local private entity.
Advantages of a joint venture:
- A quality partner with a high level of brand awareness in the local market will lend credibility to your business and is likely to reassure your target customers.
- A local partner also benefits from a local network, which can be taken advantage of to help you assert your business’s presence.
Did you know?In some countries, joining forces with a local partner is a genuine regulatory obligation. Although deregulation efforts, with regard to foreign investors, have increased in China in recent years, some sectors remain relatively closed and require the involvement of local partners. In commercial vehicle manufacturing, for example, foreign investors are forbidden from holding more than 50% of a company’s shares.
4. Recruit locally
If you are serious about your development abroad, at some stage you will need to recruit local staff. This approach has many advantages.
Advantages of recruiting local staff:
- They have in-depth knowledge of the local market.
- They help increase your local credibility.
- In countries where wages, employers’ social charges or fiscal contributions are lower, this can represent a significant reduction in costs.
- Some countries also possess a highly specialised workforce in specific fields.
Did you know?According to a report by the PPI (Progressive Policy Institute) published in 2019, India will outstrip the United States in terms of the number of jobs directly linked to the mobile applications economy from 2024 onwards.
5. Develop a currency hedging strategy
Currency risk and volatility in the foreign exchange market are among the most important challenges you face when entering a new market abroad.
Adverse changes in the foreign exchange market can have a serious impact on:
- Your company’s profit margins.
- Payments made to staff abroad.
- Payments made to foreign suppliers.
In order to hedge against foreign exchange risk, it is essential to develop a hedging (natural, selective or systematic) strategy, with the help of financial products like forward contracts.
Natural hedging consists of both receiving payments and paying your invoices in the same currency on the same date.
Selective hedging involves implementing a foreign exchange policy for some, but not all, of your foreign currency transactions.
Conversely, systematic hedging consists of establishing an exchange rate policy for all your foreign currency transactions. This enables you to fully hedge against exchange rate risk.
Forward contracts to hedge against foreign exchange risk come in several forms:
Lock in the equivalent value of an invoice in a foreign currency, making it possible to maintain the company’s commercial margin without tying up its cash flow.
- Flexible forwards
Constitute a foreign exchange reserve, maintained at a fixed rate, for a period of 24 months.
- Dynamic forwards
Neutralise foreign exchange risk entirely through a fixed exchange rate, while also allowing the holder to benefit from a favourable movement on the foreign exchange market.
Did you know?According to American research firm Gartner’s Top Priorities for Finance report for the year 2019, margin erosion has been cited as one of the main challenges facing CFOs today.
SMEs and mid-caps enter foreign markets for a variety of reasons. Expanding internationally is, however, often a complex process. The best way of dealing with the potential pitfalls is through extensive preparation.
This begins with a market study and the identification of opportunities in the target market. Depending on the resources available, businesses may also consider employing local sales representatives or setting up a new entity in the desired market, followed by the recruitment of local staff.
The implementation of a currency hedging strategy is sometimes overlooked when it comes to international expansion, but it can be a vital element in protecting a company’s margins. In periods of high volatility, the currency market’s impact on a business’s cash flow can be a decisive factor, greatly influencing the success or failure of the their development overseas.