When it’s time to expand overseas, companies can benefit from our tips on international expansion 101. In this post we lay out the key benefits, methods for entry and options for hiring that companies can expect when considering a global expansion.
International Expansion 101: The Benefits
Companies can choose to expand overseas for a number of reasons, including access to new customers, revitalizing a brand, and talent acquisition. Other key benefits include gaining a competitive advantage, government incentives, and revitalizing your business.
Competitive advantage
It is easier than ever for companies to expand internationally. Along with other benefits, establishing a business model in a new country could open up a completely new base of customers. A fresh customer base not only adds more opportunities for your company, but also enables you to establish loyalty in a new market before your competitors. As a result, many firms choose to enter an international market to increase their competitive advantage and access new customers.
Government Incentives
In an effort to improve the local economy, many countries will offer a variety of incentives to companies looking to bring business into their country. For example, in Malaysia, corporate income tax is around 27% but after deductions, local companies pay around 19%. Plus, multinationals pay close to 17%. And while it could change with the current administration, the US has a corporate income tax rate of 35%. Given this, many US businesses take the opportunity to expand overseas in order to lower their tax rate on income.
Revitalize your Business
Many companies choose to expand overseas after finding success in their home country. One benefit of moving into a new country is increasing sales for an existing product or service. For example, if you’re selling a widget in the U.S. and sales have plateaued, you can potentially breathe some new life to sales by bringing the product into a new territory.
Access to new customers and new outlets for sales can increase profits and help your overall business thrive.
International Expansion 101: Entering the Market
When entering a new market, you need to establish a legal presence for your business in order to operate and hire employees. This can be done a number of ways depending on your goals within a country. The most common ways to enter a new market are setting up a foreign subsidiary and using an International PEO.
Foreign Subsidiary
Many business leaders think that they need to resort to a permanent subsidiary when they go global. Unfortunately, there are plenty of drawbacks associated with foreign subsidiaries, including:
- Initial and maintenance costs: Foreign subsidiaries can be expensive to set up, costing anywhere from $15,000 – $20,000 depending on the target market. In addition to initial set up costs, permanent subsidiaries are expensive to maintain. For one employee, you can plan to spend an average of $40K each year in hard costs.
- It takes time: You cannot set up a foreign subsidiary in a matter of days, or even weeks. In the UK, a subsidiary can take approximately two weeks to establish, but in a country like Brazil, it can take your company more than eight months to start operations. Plan for an average of three to four months for set up.
- Tear down costs: As much time and money that it takes to establish a foreign subsidiary, expect to triple that when you need to exit the market. Foreign subsidiaries are very difficult to tear down.
One option for avoiding the costly and timely downfalls associated with a foreign subsidiary is International PEO. This option handles risk mitigation, compliance, payroll, and benefits, allowing for you to focus on the success of your employee.
International PEO
International Professional Employer Organization (PEO), is an Employer of Record (EOR) solution. It’s a third-party service that hires your employees in a new market on your behalf. The International PEO company assumes all responsibilities related to that employment while your company manages daily responsibilities and employee liabilities.
While you can’t acquire large, physical assets in-country with this option, you can prevent liability and employment-based risks to ensure your company is maintaining compliance with local labor laws.
International PEO offers companies many benefits for international expansion including:
- Speed: International PEO cuts the time it takes to enter a foreign market by 90% when compared to creating a subsidiary
- Lower costs: International PEO can be up to 60% cheaper when compared to creating a subsidiary
- Risk mitigation: International PEO manages compliance requirements in your country and helps you hire employees without worrying about the risks
- Easier exit: If your strategy isn’t successful in your new market, you’re far from stuck. International PEO allows you to exit a market easily and quickly without the costs or times associated with a foreign subsidiary.
International Expansion 101: Hiring Employees
Once you’ve established a presence in a new country, it’s time to think about hiring team members. If you don’t want to maintain a full legal presence in-country and would rather simply manage a foreign team that handles global operations, you have a couple options.
As mentioned above, International PEO is a flexible solution for establishing a presence in a new country. In addition, it can be utilized as an efficient, compliant way to add new employees. However, it is not the only option for companies considering an agile international expansion. Other hiring options include a foreign BPO and international contractors.
BPO
A Business Process Outsourcing (BPO) company is a third-party provider that manages the operations and responsibilities for an entire business process. These processes can include supply chain, manufacturing and office administration. For example, an internationally-based call center is typically a BPO.
Risks of a BPO include cost, quality, and control. With a BPO, companies do not maintain control over employees – that is handled by the third-party provider. If issues arise, you could lose an entire department overnight, which can definitely start raising some major concerns.
Always check the fine print and make sure the company you choose to partner with has great customer service and support.
International Contractors
Similar to a BPO, international contractors are an option for companies that want a limited presence in their foreign market. An independent contractor can carry out operations overseas and represent your business, but there are plenty of risks involved with this type of relationship.
For example, out of the thousands of contract arrangements we review annually, an estimated 95% of them were misclassified.
An independent contractor lives in your target country and works for your team. They work under a contract that isn’t an employment contract. As a result, they don’t receive benefits or withholdings.
The most important aspect of the contractor relationship is autonomy. The contractor must work without oversight in order to remain compliant. For example, they cannot be held to a specific schedule and they can’t be confined to specific processes.
If your contractor disputes their employment status, chances are international labor courts will classify them as an employee. If this occurs, your firm is responsible for all back taxes and withholdings. Plus, you’ll be charged fines for not having a legal presence in-country.
You can prevent these risks by establishing a lean presence overseas through International PEO. This service can help you manage compliance when working with international contractors.
If your company is considering a move into an international market, we can help. Our International PEO solution has helped many companies achieve a successful global expansion. Reach out to our team today and see how our solutions can work for you.
