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COVID-19Global Expansion

Beyond COVID-19: Why Global Expansion Remains a Cost-Effective Solution During Economic Downturns

By May 22, 2020September 5th, 2022No Comments

The COVID-19 pandemic brought with it economic turmoil unseen since the Great Depression. Some of the world’s largest economies-the United States, The European Union, Japan, and Canada-took the hardest hit; the International Monetary Fund (IMF) forecasts that each will see GDP contractions between 5.2 and 9.1% in 2020. Across the globe, the IMF predicts that advanced economies will experience a 6.1% contraction-slightly more than three times the global -3% reduction.

However, even amid a global economic downturn, businesses must stay vigilant and plan for a post-COVID-19 world. While no market is able to escape the ripple effects of COVID-19, some markets will not recoil as much as others. Businesses taking advantage of available overseas growth opportunities need a flexible, agile solution that benefits both their bottom line and short- or long-term presence. This post explores how companies have the ability to do both at a fraction of the cost and time required with foreign entity establishment, while also planning for a post-COVID-19 business landscape.

Which Markets Offer the Safest Global Expansion Option?

That depends on business goals. According to the IMF’s April 2020 economic forecasts, the world’s most advanced economies will shrink at 4.6%, while emerging and developing economies will dip by 1%. However, some emerging Asian markets will still see growth, albeit revised downward to modest levels.

China, the world’s second-largest economy and the largest population, remained on track to eclipse all other countries in terms of economic growth in 2020 at 6.1%, according to the IMF. The COVID-19 pandemic, however, stunted that growth and revised its figure down to 1.2% for the year, leaving only India with larger GDP growth at 1.9%. Other emerging and developing Asian nations’ growth stands at 1.0%.

But much like COVID-19’s spread, the pandemic’s economic impacts on a long-term scale remain to be seen; the financial fallout will extend into 2021, though the IMF is hopeful for significant growth across advanced and emerging markets.

Even among economic uncertainty, India may serve as one of the most promising markets for post-coronavirus global expansion. Before the COVID-19 pandemic, 40% of U.S. and UK tech companies agreed that India offered the top tech talent for their global expansion needs, while 35% identified it as the top market for their overall global growth, according to the 2020 State of Global Expansion™ Report: Technology Industry.

Though Asia could weather COVID-19’s economic storm better than other regions, Europe’s 2021 projections show a rebound lies ahead; Germany, Italy, and France could see 2021 GDP growth at 5.2%, 4.8%, and 4.5%, respectively. These countries are top of mind for U.S. and UK tech executives’ global expansion goals, with 41% recognizing Europe as the most promising region for growth, while 30% cited the region as a rich tech talent pool.

Even as the promise of growth and talent in these markets endures, businesses must anticipate unexpected COVID-19-related financial and operational challenges in any market. Hurdles persist under the best global expansion scenarios, but COVID-19 presents unprecedented economic and operational obstacles, adding a layer of uncertainty to any expansion. Despite inevitable challenges, businesses still have a flexible, cost-effective solution that reduces their financial and operations risks in virtually all markets.

Entity Establishment Proves Inflexible in a Post-COVID-19 Landscape

Travel bans halted nearly all international travel, but this doesn’t mean growth opportunities faded as well. However, businesses must exercise caution when selecting their global expansion method.

Until relatively recently, entity establishment remained the primary global expansion method. However, this method comes with significant costs, restrictions, and potentially drawn-out regulatory headaches. These factors cause stress under normal conditions. But with COVID-19’s impact, businesses now have fewer resources to invest and potentially lose should a market’s conditions become disadvantageous.

Specifically, fewer companies may want to invest the average initial entity setup cost of $20,000-let alone the $200,000 annual maintenance costs-if India, Germany, or any other markets do not meet the desired growth goals. If a company needs to exit a market for any reason, it must contend with entity teardown costs (often at three times the initial investment) and the length of the dissolution process, which can take months or years.

During the time it takes to establish an entity, businesses must also factor in opportunity costs. In the four-month average of initial establishment, companies reallocate energy and financial resources that could otherwise support other projects at home or in other markets. Similarly, if a company sees opportunities in multiple markets, then establishing an entity in just one of those markets may prohibit or drastically limit resources in each market.

Find Flexibility with an Agile Global Expansion Method

Businesses have the option to take advantage of overseas opportunities without leaving their domestic location-or establishing a costly foreign entity.

Entity establishment restricts firms’ flexibility both at home and abroad. Conversely, a global Employer of Record affords businesses the flexibility they need to adapt quickly to market changes-an essential consideration given COVID-19’s unpredictability.

An Employer of Record solution does not require firms to establish an entity. Quite the opposite: this solution comes without the overhead attached to entity establishment, saving firms up to 60%, compared to entity establishment. Additionally, businesses can hire essential employees in a matter of days and operate in their new market in the same time frame. This accelerated time-to-market virtually eliminates missed opportunity costs, and gets businesses up and running 90% faster than entity establishment.

Because businesses do not need to set up a permanent presence through an entity, they can quickly and seamlessly exit any market just as quickly as they entered. This adaptability means firms are able to test a market before hiring multiple employees or committing to more time there, while exploring opportunities in other markets or allocating funds to domestic pursuits. With no additional teardown time or fees, companies enter other markets while ending operations in their initial international market, if needed.

Pursue Global Expansion with an Experienced Partner

Global expansion comes with a number of benefits and challenges. But as the COVID-19 pandemic lingers for the foreseeable future, businesses’ risks become magnified. However, Velocity Global’s Employer of Record solution mitigates these risks, and gives firms the flexibility to take on overseas growth opportunities with confidence.

With global expansion capabilities in more than 185 markets, businesses like yours can take advantage of time-sensitive opportunities, short-term projects, or take the first step towards a long-term presence abroad.

Ready to learn more about how Velocity Global can help your firm diversify its revenue streams in multiple markets during-and after-COVID-19’s economic uncertainty? Let’s talk.