Global Expansion

The Ultimate Guide to Developing an International Expansion Strategy

By January 31, 2020September 16th, 2020No Comments
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Over 85% of U.S. and UK tech firms desire an overseas presence, so global expansion is no longer an option for growing companies—it is a necessity. Global expansion distinguishes companies from their competition and enables them to increase revenue, find new talent, grow global brand recognition, no matter how successful they are in their domestic markets.

Expanding internationally is not always easy, but with proper planning and a thoughtful strategy, businesses of any size or with varying budgets can navigate the global marketplace with less stress.

Read on to learn more about essential considerations while developing your international expansion strategies, including why you should go global, how to set your business up for success on a global scale, hiring quickly and compliantly, and other important factors to address.

Why Do Companies Go Global? The Benefits of International Expansion

The global marketplace is a competitive landscape, but do not let that keep you from reaching your global business goals. 76% of U.S. and UK tech companies plan to be in three or more global markets by 2024, so firms that do not move overseas take a great risk of falling behind their competitors.

Keeping up with competitors isn’t the only reason companies must consider international expansion. The main benefits of global expansion include:

1. Discover New Revenue Streams

Reaching new customers and accessing broader revenue streams is an attractive benefit for companies of any size. Making global moves is key to accelerating growth as well as escaping plateaus in a company’s domestic market. 

2. Access Unique Talent

Sometimes workers with unique or highly in-demand skill sets are not available in a company’s domestic market, which is another reason why they must build global teams.

45% of U.S. tech firms say that access to talent is their primary motivation behind global expansion. International hiring helps you fill essential gaps on a team and gain insight into local cultures. 

3. Establish Credibility and Widen Brand Recognition

Global expansion helps businesses establish credibility and widen their brand recognition on an international scale, which are both essential steps on the way to becoming a global industry leader.

To successfully establish trust, firms must understand their new market’s unique demands. It is essential to develop a marketing plan tailored to new customers that successfully communicates your brand’s value in a way that piques interest and generates response. 

4. Take Advantage of Tax Incentives

It is common for foreign governments to offer tax incentives to attract companies from around the world. For example, in Malaysia, multinational firms pay a 17% tax rate, which is almost half of what firms based only in the U.S. pay (35%).

While tax breaks are beneficial to growing firms, it is not the only incentive they receive. Other benefits include:

  • Low-interest grants and loans for private companies
  • Regulatory concessions
  • Subsidized infrastructure development
  • Free-trade zones

The benefits of global expansion are attractive and well within any company’s reach. Making an international move is complicated, however, so it is vital to have a solid strategy in place before operating in foreign markets.

Now that you understand the benefits of global expansion, the next step is considering your strategy and methods for moving into new markets.

Set Yourself Up for Success: Key Elements of a Global Expansion Strategy

Global expansion is full of unknowns, but a strategic approach to international growth helps firms anticipate obstacles before they happen and saves your company time and money. Essential elements of a global expansion strategy include:

1. Setting Goals

The first step to developing an international expansion strategy is getting every member of your team on the same page with similar expectations for what globalization can do for your business. Business leaders need to align their goals with the target market’s goals and the basics of how the company plans to hire and establish a compliant presence overseas.

2. Determining Product-Market Fit

Before committing to a market, companies need to conduct research and ensure that there is a demand for their product or service in their new target market. Too many competitors or similar companies saturate a market, so firms need to determine if their target market is saturated, and find another market that better suits their expansion goals if so.  Also, the local economy may not be receptive to the product due to cultural differences, so firms must factor these differences into the decision-making process.

3. Researching Local Laws and Regulations

Local laws and regulations vary drastically from country to country. During strategy development, companies need to ensure they have the internal resources available to stay compliant or seek external assistance. 

4. Deciding How to Staff Your Expansion Plan

After deciding on target markets, firms need to think about how they will staff their overseas presence. Do you plan to ask existing employees to relocate to this new market? Or would you like to hire locals?

Each option has pros and cons that business leaders must weigh carefully. For example, existing employees might not want to uproot their lives and families to make a global move. If you choose to hire locally, the method you use is crucial.

5. Choose a Compliant Hiring Method

Businesses have a few different hiring options if they want to hire local nationals. The most common global hiring strategies include:

  • Foreign independent contractors
  • Registering as a Non-Resident Employer (NRE)
  • Establishing a foreign legal entity to hire full-time employees
  • Partner with an International Professional Employer Organization (PEO)

The next section explores each of these hiring options in-depth to help companies choose which method is right for their goals.

Global Hiring Strategies Explained

Choosing the right global hiring strategy is critical. Misclassified international employees cause severe financial and legal headaches for companies.

To avoid misclassification, many companies jump immediately to entity establishment. However, prematurely establishing an entity puts time and financial burdens on internal teams and costs firms even more if their entity is not successful, and they must leave a market earlier than expected.

To help you save time and money, here are four common global hiring methods, and the pros and cons of each:

1. Foreign independent contractors

Foreign independent contractors are contract workers—not full-time employees—that a company employs to do limited work for a fixed amount of time.

Benefits:

  • Saves money as companies do not have to provide benefits or health insurance that governments require full-time employees receive.
  • Companies do not have to establish a legal presence in the country where the contractor works.

Challenges:

  • Employees are at a high risk of being misclassified with this hiring method.
  • Companies face serious financial penalties if contractors perform the work of full-time employees instead of short-term or project-based work.
  • Some examples of penalties around the world include:
    • €225,000 fine and up to two years of imprisonment in France for employers who conceal employee working hours. Independent contractor misclassification brings with it a €150,000 fine.
    • €626 to €6,250 fine per misclassified employee in Spain.
    • AUD 63,000 fine for misclassifying an employee as an independent contractor in Australia.

2. Registering as a Non-Resident Employer (NRE)

Registering as a Non-Resident Employer is an option commonly available in Europe. An NRE is an attractive option because it gives companies a local Tax ID, but is faster and less expensive than establishing a legal entity.

Benefits:

  • Saves money, compared to establishing a legal entity
  • Less risk than hiring foreign independent contractors

Challenges:

  • This option is not available in every country
  • While it is technically compliant, an NRE is still a red flag to regulatory agencies due to tax avoidance and discrepancies, and companies are easy targets for auditors, which puts additional time strains on internal finance and accounting teams.

3. Establishing a Foreign Legal Entity to Hire Full-time Employees

A foreign legal entity ensures compliance and gives companies a local tax ID and allows companies to hire employees in that market. Companies must follow the unique protocol that varies by country to officially register their legal entity.

Benefits:

  • Entity establishment ensures compliance in every market.
  • Companies can hold fixed assets, which is critical for specific industries such as manufacturing and real estate.
  • It allows businesses to take advantage of lower taxes and other incentives.

Challenges:

  • Time-consuming and costly. On average, it takes up to 4 months and $15,000-$20,000 to get a foreign legal entity up and running.
  • It is up to internal teams to learn local laws and regulations and ensure compliance or the company faces legal action. These teams also must stay on top of laws as they change and update internal processes to stay compliant.
  • Firms must pay ongoing maintenance costs for a legal entity, which cost up to $200,000 per year on average.
  • Tearing down an entity is a long and challenging process. It takes roughly three times as long and three times as much money to tear down an entity as it takes to create one.

4. Partner with an International Professional Employer Organization (PEO)

International PEO is an innovative solution that helps companies hire employees anywhere in the world quickly, compliantly, and without the burden of establishing a foreign legal entity.

Benefits:

  • International PEO gets employees up and running in a new market in as few as 48 hours, and it is 60% cheaper when compared to creating a foreign subsidiary.
  • This solution utilizes in-country expertise to mitigate liability and employment-based risks.
  • International PEO is a flexible solution that allows companies to leave a market quickly, if necessary, with no additional fees.
  • Firms use this solution effectively across multiple markets at the same time.

Challenges:

  • Not cost-effective for companies that want to hire a high headcount in one country.
  • Companies cannot hold fixed assets.

While hiring is a critical aspect of every international expansion strategy, it is certainly not the only thing companies need to plan for before moving into foreign markets. Depending on your industry and function within your company, there are unique elements of your global expansion strategy that you and your teams must proactively think through.

Essential Considerations Before Going Global

Global expansion puts a heavy burden on companies, specifically  HR, finance, legal, and business development teams. Because of the added logistics and responsibility associated with expansion, each team has different factors to consider before successfully entering new markets.

Here are several factors each team that is critically involved in a firm’s global expansion plan needs to consider while creating an international expansion strategy:

1. HR considerations

HR teams need to develop an international recruitment plan and understand that their hiring processes change from country to country due to different cultural expectations. Some differences include:

  • Expected salary and benefits
  • How HR teams conduct interviews
  • Types of technologies available

After hiring, additional management processes change based on the country. Notice periods are just one example. In the U.S., HR teams receive the standard two weeks’ notice when an employee quits. In Singapore, however, the standard is around 90 days, so organizations need to adjust for these differences when off-boarding members of their international workforce.

They also need to consider the challenges of managing and communicating with global teams. HR departments must consider:

  • Offering centralized communication channels (such as email, chat tools, project management systems)
  • How teams will navigate workload and different time zones
  • How cultural differences impact communication styles

2. Finance considerations

Most finance teams are price-conscious, and global expansion puts a financial strain on companies if they chose the wrong market for their product, establish an entity too soon, or have to tear down a legal entity to exit a market.

Finance teams need to be prepared to do research and find the global expansion option that is right for their budget. Accounting teams must be ready to learn about local tax codes, so they avoid serious fines for noncompliance.

3. Legal considerations

There are many consequences to consider if a company faces legal action in a foreign country. Noncompliance with local laws such as misclassified employees often lead to legal risks. Legal teams must consider regulatory intricacies when companies face legal action due to noncompliance with foreign labor laws.

A company’s internal legal teams need to be prepared to help other internal teams (HR, Finance, Sales, Marketing, and others) to diligently research and understand local laws and regulations.  

4. Business development considerations

Successfully introducing a new product into a foreign country takes plenty of market research. Before a business commits to opening an office, it needs to know if there is enough demand for their product or service.

A new market always brings plenty of unknowns. Still, business development teams can prepare for hurdles by researching which current or new competitors already have a presence in a target country. This research helps your international sales teams get a head start and be able to communicate to prospects how your product is superior to competitors’.

In addition to market research, sales professionals working in the new country need to understand the unique culture and business practices in the region to turn foreign prospects into customers successfully.

How International PEO Streamlines Global Expansion

There are a lot of factors to consider before going global—but the process doesn’t have to give businesses a headache or take up too much time and financial resources. Partnering with an International PEO provider like Velocity Global streamlines the global expansion process and puts less burden on a company’s internal teams.

Complete Guide to Developing an International Expansion Strategy Some benefits of International PEO include:

  • Save time and money, compared to other global expansion methods
    • International PEO is 60% more cost-effective than establishing an entity, and your firm begins operating in a new market in as few as 48 hours.
  • Test new markets with less risk
    • Global expansion comes with plenty of unknowns. However, with a flexible/agile solution like International PEO, your company can test new markets without making the long-term commitment that entity establishment requires.
    • If your company needs to leave a market unexpectedly, there are no additional fees or time commitments with International PEO.
    • This solution is compliant in over 185 countries, so there is less legal risk compared to other hiring options like foreign independent contractors. 
  • Less burden on internal teams
    • With International PEO, Velocity Global handles all payroll, compliance, benefits, and risk mitigation, so you can focus on managing your global teams.

When you’re ready to take your business overseas, Velocity Global is here to help you achieve your goals quickly and compliantly. Contact us today to learn more about what International PEO can do for your company.