Rising confidence amongst UK SMEs is leading to a surge in firms looking to new international markets for the first time in order to grow sales. However, a lack of understanding of their target market’s local nuances can create unwelcome headaches, says regional Managing Director Michael Adams.
Expansion into new overseas territories is exciting and often hugely rewarding for a company. It can create new opportunities, increased sales, new clients, new products and much more, but it is also a time-consuming and expensive process, fraught with commercial and reputational risk.
As business confidence continues to improve after several years of cost-cutting, an increasing number of corporates are now looking to the horizon to grow operations. In the past year alone we have noticed a real anxiousness, amongst SMEs in particular, to be part of this big international push.
All very well and good. However, some businesses are quickly learning the hard way that overseas expansion places a huge administrative burden on them which not only distracts from the day job but also makes life very difficult when they fail to fully understand such things as local regulatory and cultural differences.
Companies based in developed Western economies, especially the UK, often take for granted the familiarity of established and transparent legal, tax and regulatory frameworks as well as the open, fair and business-friendly cultures that underpin them.
However, when looking to set up in a new country for the first time, especially an emerging economy, firms are often shocked by just how complex and highly nuanced the environment is. For example, in a recent study we conducted of 81 countries, Argentina was found to have the most complex corporate regulatory regime in the world. This is, to a large extent, the result of there being a civil law rather than a common law framework, as in the UK and Hong Kong for instance.
In many instances, the local regulatory and legislative landscapes are constantly changing, particularly relating to things such as employment, tax, real estate and environmental law. Depending on the territory, there can often be issues around transparency and predictability of pricing and the ability to enforce contracts, which can often prove costly when things don’t go according to plan.
There can also be a host of regional variances within one country, or odd local bylaws that are not immediately apparent, where companies are often unaware that a breach has occurred until it’s too late. And it’s not just understanding those various laws, but how they are interpreted and then the practical aspects of how they are applied.
Failures in this regard can often lead to the accidental alienation of local officials, employees, communities, customers and other stakeholders. The consequences can include exposing the company to fines, suspension of trade, or worse, criminal prosecution.
To give you an example, missing a deadline for filing a tax return would in many countries represent a minor infraction. However, for one foreign-owned company operating in Thailand where a hard line approach is taken, this oversight resulted in an arrest warrant being issued for the director in whose name the accounts should have been filed, despite the company not owing any tax.
For another, a US-based business, there were some delays with a recent routine tax review in Egypt. The local official was unhappy with the speed in which the process was moving and so threatened to issue a notice of an investigation into tax evasion. Clearly the damage that this could have caused to the reputation of the firm in question was significant.
Whilst I am constantly surprised by the range of countries that businesses are expanding into – we recently helped set up a global shipping firm in the Marshall Islands, for example – China still remains the most popular destination overall and for good reason.
But China also remains one of the most complicated places on earth to operate. Whilst more business friendly than Brazil, India or Russia, its regulatory system is markedly bureaucratic, especially compared with neighbours such as Hong Kong, Malaysia and Singapore.
For example, in Hong Kong it takes around 80 man hours to pay your taxes compared with mainland China which takes as much as 400. To build a new warehouse will on average take less than a month to process the paperwork in Singapore compared with one year in China.
And the regional variances I mentioned earlier are painfully evident in China with each province having its own unique interpretation of commercial law. Enforcing a contract in Nanjing, for example, can take three to four months, but in Changchun you can wait 18 months for the same result. In Shanghai, registering a property is a four-step process whilst in Nanning there are three times as many steps involved.
That said, companies should not be put off by the numerous challenges and potential pitfalls associated with international expansion. There are plenty of lessons to learn from those who have been there before, that if taken on board can help prevent a large headache for management.
Principally among these is prior preparation. Start early and never skimp on pre-launch research and planning. Carry out extensive research into the territory’s political, regulatory and cultural environments, competitive landscape and potential areas of financial, legal and reputational exposure.
And, when the time comes, get help from trusted advisers and service providers on the ground – their local knowledge and experience will be invaluable when setting up the legal entity, assisting with recruitment and creating and supporting day to day functions such as HR, compliance, payroll and financial reporting. This will ultimately mean that firms can avoid the distraction and stay focused on what they do best.
This article originally appeared on the Growth Business website. Click here to view the article.