Without education about alternative options, many companies fully commit in their new country through the direct foreign investment of hard assets. Establishing a foreign subsidiary is a requirement for some companies, such as real estate or manufacturing firms, given the nature of their business.
For companies selling a service or products that don’t require manufacturing, a permanent subsidiary is not a requirement. To help you fully understand this topic, we’ll explore direct foreign investment alternatives below. But first — we want you to learn about the risks involved with direct foreign investment.
Understanding the Risks of Direct Foreign Investment
Short- & Long-Term Costs
On average, a foreign subsidiary costs around $20K to set up. After initial establishment, subsidiaries cost roughly $40K per employee each year to maintain.
In addition, direct foreign investment is not a speedy process. In fact, it’s pretty lengthy. A typical foreign subsidiary takes about four months, on average, to complete.
This becomes an issue if you have talent ready for hire or are trying to meet business deadlines. The longer you wait on establishment, the longer it takes to increase revenue.
Hard to Leave
It’s called a permanent subsidiary for a reason. Once you establish a legal presence in market through a subsidiary, it’s very difficult to dissolve. You can expect to pay a combination of the start-up time and costs of the original subsidiary and multiply those by at least three to determine tear down costs.
If you’re new to the market, which is likely the case, you probably don’t have a secure connection at this point. When you establish a foreign subsidiary, you need to work with a local director. This is a big deal because the director of the company can, in certain countries, actually drain your bank account and you have no legal recourse. Now we all hope this would never happen, but it’s important to consider.
And finally, the big one. Compliance. Managing compliance in international markets is difficult. Rules and regulations change from country-to-country, which makes it difficult to learn and understand. Keeping up with changes to national/regional/local tax laws, payroll withholdings, employment law changes, and banking regulations is a requirement when you have a foreign subsidiary. Learn how to handle compliance overseas in our previous post.
Direct Foreign Investment Alternatives
Fortunately, you don’t have to use a foreign subsidiary to expand overseas. You have agile options that give your company a legal presence in-country without a full commitment.
Employer of Record (EOR) Services
An employer of record is an organization, like Velocity Global, that manages the legal responsibilities of employing international employees. The service reduces complexities associated with HR functions, market access, and paying overseas employees.
To put it simply, the EOR actually becomes the primary employer of your employees on paper. As a result, your business remains compliant and you have full access to new markets.
Other benefits of EOR include guidance with:
- Employment contracts
- Visa application & sponsorship applications
- Health benefits
- Termination requirements
First, an International PEO allows your team to hire employees in a foreign market without establishing a costly subsidiary. It manages monthly withholdings and can help you draft local employment contracts, which can help with managing permanent employees and contractors.
It works by essentially borrowing or leasing the International PEO’s company for your employees to access to the country or to decrease overhead.
Second, FSaaS is a unique service that manages risk and compliance while you focus on your international strategy. This option is great for getting in-country — fast and affordably.
Direct foreign investment alternatives also include hiring international independent contractors but do know, this comes with plenty of risks. Given those risks, which are laid out in detail here, you’ll want to be safe and first use FSaaS to establish a legal presence in-country. You don’t need a legal entity to work with contractors overseas, but it protects you from potential legal troubles if the contractor attempts to dispute their agreement.
In addition, when working with contractors, you want clear language in the agreement about IP protection and autonomy.
If you want to avoid direct foreign investment but still hire compliant employees overseas, we can help. Our FSaaS and International PEO help companies expand in over 185 countries quickly and affordably. Plus, you have our team of experts to support you the whole way!