Avoiding the pitfalls of international expansion

The latest issue of Latin Trade magazine speaks to our Americas directors about how to navigate the complexity of that challenging market.

We republish the interview below with permission.

Launching a foreign-owned business venture in Latin America can be a challenge. In order to capitalise on a promising new market opportunity, multinational companies must navigate a complex set of legal, accounting, tax, real estate and human resource (HR) issues.

To minimise risk and avoid the pitfalls, many multinationals are turning to global firms that can provide valuable back-office services and support for their international expansion plans.

"As confidence in the global economic outlook improves, more and more multinational businesses are looking to Latin America grow their revenues and profitability," says Luigi Garlati, head of Americas at TMF Group, a leading global provider of support services to multinational businesses. "However, a failure to understand the numerous legal, regulatory and cultural issues that shape the business environment can be potentially disastrous."

If a company violates the U.S. Foreign Corrupt Practices Act (FCPA), the UK’s Anti-Bribery Law or international anti-money laundering (AML) regulations, the consequences can be severe. For instance, failure to comply with the FCPA, which prohibits the payment of bribes to foreign officials to assist in obtaining or retaining business, can lead to substantial fines against a publicly traded company, as well as its officers, directors, employees, stockholders, agents, consultants, distributors, joint-venture partners, and others. That makes it essential to maintain accurate accounting and financial records as well as a system of internal controls.

The compliance environment is particularly daunting in Latin America, where Argentina, Bolivia and Peru took the top three positions in TMF Group’s Global Benchmark Complexity Index, a survey of corporate secretarial experts based in more than 100 offices around the world. The study combined responses from both objective and subjective questions to evaluate the difficulty of doing business in jurisdictions in the Americas, Asia, Europe, Africa and Australia. Other Latin American jurisdictions in the top 25 were Nicaragua, Ecuador, Brazil, Venezuela, Chile, Dominican Republic, Guatemala and Honduras.

When expanding across borders, multinationals need to allocate more internal and external resources to comply with the requirements of complex jurisdictions, according to Garlati. To make good business decisions, international companies must also conduct in-depth due diligence research in a variety of fields, including the following:

  • Determining the most appropriate type of legal entity for compliance, risk management and tax purposes.
  • Finding trustworthy local business partners, suppliers and service providers.
  • Identifying a safe and secure location for a physical facility and whether to lease or purchase the property.
  • Screening, recruiting and hiring a productive workforce in compliance with local and national labour laws.

Rather than try to resolve these issues with an in-house task force or rely on the advice of independent local professionals in each country, Garlati suggests engaging a firm with global expertise in functional areas like tax, accounting, and human resources as well as on-the-ground knowledge of local markets.

"Our company’s slogan, ‘Global reach, local knowledge,’ reflects that combination of strategies," says Garlati. "TMF Group has dedicated specialists in place around the world that take care of the administrative burden so companies can focus on their global ambitions. Our teams of professionals have an in-depth knowledge of the requirements necessary to help establish and maintain fully compliant operating, holding and finance entities around the world."

Ari Ackerman, marketing director (Americas) at TMF Group adds, "TMF Group offers several QuickStart service packages to streamline entry into new markets, including a program for Latin American businesses considering a northward expansion to the United States or for companies around the world looking to penetrate markets in the Americas. Other QuickStart packages are designed to help multinationals simplify functions throughout a geographic region, or consolidate back-office service providers from multiple countries into a single provider."

"As an independent global firm, we can provide multinationals with consistent reporting procedures across jurisdictions, while being fully compliant with local regulations," Garlati says. "We provide a single point of contact no matter where a company operates, increasing accountability while reducing the time spent on compliance-related matters."

One of TMF Group’s multinational clients is ISS Group, a Denmark-based multinational facility services company with local operations in more than 50 countries in Latin America, Europe, Asia and other locations. "TMF Group is a trustworthy global partner that supports our value proposition of mitigating our clients’ risk through a consistent and reliable accounting, back-office and compliance service in countries where ISS is not currently present,” says Søren Gammelgaard, compliance manager.

Being able to focus on the core business issues is particularly important at a time when many multinationals are expanding their operations. TMF Group recently partnered with global research firm IDC to survey senior decision makers from corporations which were either planning to expand overseas or already had done so.

A large proportion of those surveyed – around 30 percent – plan to enter new markets within the next 12 months with this figure rising to 64 percent within two years, according to the IDC white paper, ‘Avoiding the Pitfalls of International Expansion.' This suggests a significant shift in business attitudes and priorities away from a conservative, often inwardly looking approach to a more confident, expansionist one, said the report.

Other findings of the report include:

  • The need to set up efficient financial procedures and banking facilities is also a major issue, and is quickly supplemented by the challenge of reconciling data from multiple subsidiaries, often involving delays and costs for the corporate finance function. Getting local financial reporting and regulatory filings done on time and to the exact local standards is a major issue. This is an area where on-the-ground local partners can play an important supporting role.
  • Local expertise and on-the-ground service providers can play a critical role in successful territorial expansion, particularly in terms of creating the new legal entity, recruiting and training its senior management and its operational workers, and creating and supporting the running of the day-to-day “mechanics,” such as payroll processing, cash management, regulatory reporting, and so on. These are areas where local knowledge and experience is often vital, if not an absolute necessity.
  • Enterprises considering international expansion should begin planning early and carry out extensive research into the specificities of the territory’s political, legal, and cultural environments, as well as into the competitive landscape and the target market and/or workforce.
  • Enterprises should give serious consideration to using third parties with strong local presence, particularly in the early phases of territorial expansion.

"One of the key recommendations in the IDC report was for expanding multinationals to consider working with third parties who have the requisite experience and local knowledge to help avoid the pitfalls," says Garlati. "Our team can deliver the right package of corporate compliance services to ensure that new subsidiaries are properly constituted and remain compliant with legal and working practices."

To read the article in the latest issue of Latin Trade, visit the site in English or Spanish.

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