83% of U.S. and UK tech firms plan to expand overseas in 2020. While many growth and talent acquisition opportunities exist around the world, these same markets carry significant business risks as well.
The World Economic Forum (WEF) recently released its Global Risk Report, highlighting the top risks businesses must anticipate before expanding overseas. These risks are not limited to one region. While region- and country-specific risks exist, increasing cross-border economic interdependence between businesses and governments means that growing companies face risks no matter where their global expansion leads.
International Business Risk #1: Fiscal Crises
As the threat of a global economic recession looms, businesses in all regions must anticipate and plan for mitigating a recession’s impact—no matter their sector or markets.
The Global Risk Report highlights high government debt and narrow financial stimulus as a critical concern for international businesses. The WEF’s respondents noted that in the event of a global recession, they do not anticipate government assistance. Governments must weigh postponing economic relief, cutting spending, or increasing taxes.
Poor public perception of governance does not bode well for markets; business-friendly governments attract global businesses in a number of ways, but often draw businesses with low corporate tax rates, investment incentives, and tax abatement programs. Overall, respondents viewed national governments’ failures and “profound social instability” as two of the most significant risks to doing business abroad. If governments erase what makes their markets attractive, foreign companies move elsewhere or remain in their domestic markets.
Political and social instability adds an element of ambiguity for businesses moving into markets with limited funds and in-flux timelines. Companies unsure of how long they plan to be in an international market cannot risk establishing an entity, only to dissolve it under tumultuous economic, social, and political unrest. International PEOs (professional employer organizations), like Velocity Global, enable companies to establish a presence in even the most uncertain markets—without the time commitment and hidden costs of entity establishment—and exit quickly if the need arises.
International Business Risk #2: Cyber Security
Cybersecurity takes the WEF report’s number two spot. As technology becomes increasingly central to businesses’ growth, ensuring server and systems protections is a must. Before businesses expand into overseas markets, they must explore and evaluate safety, as not all international infrastructures provide the same levels of cybersecurity. Japan and Singapore are Asia’s outliers in terms of top cybersecurity.
However, Europe and North America stand to lose the most from data breaches, which are the regions’ top threat in 2020. The number of breaches in the last two years is even more concerning under GDPR’s sweeping changes, as GDPR set out to make cyber communication more secure.
Beyond breaches, North American and European businesses expect data fraud and theft. Cyberattackers recognize the lucrative pay off of successfully hacking businesses and governments; data is the new gold. 2019 and early 2020 saw a number of high-profile hacks, including the United Nations, Microsoft, Facebook, and T-Mobile’s servers compromised. Formjacking, or credit card theft from purchase forms on e-commerce websites, is on the rise—and firms stand to lose significant amounts of money if compromised.
International Business Risk #3: Unemployment
Unemployment threatens both quality of life and social stability, and business leaders remain concerned about rising unemployment rates. While unemployment hits some regions harder than others, it is a global concern. Globally, unemployment sits at 11.7%. In the European Union, one of the most attractive regions for growing businesses according to the 2020 State of Global Expansion™ Report: Tech Industry, unemployment is 6.7%.
In Hong Kong, the fifth-most attractive country for global expansion according to the Report, unemployment grew from 2.9% in September 2019 to 3.3% by year’s end. While the country still attracts foreign businesses, ongoing protests sparked by Hong Kong’s proposed “extradition bill” caused many companies to shutter and contributed to unemployment’s rise—a sign businesses’ social instability concerns ring true.
Businesses targeting regions with high or growing unemployment must consider relocating existing employees. Relocation ensures that companies have the talent they need to drive their business forward if local talent is unavailable. Businesses bypass long-term commitments to unstable markets by partnering with an International Professional Employer Organization (PEO), which enables firms to break into new markets without establishing an entity.
International Business Risk #4: Energy Price Shocks
Even firms not directly connected to energy markets feel the strain when energy prices soar. Three of the world’s largest markets (the United States, China, and India) accounted for 70% of global energy increase in 2019.
Businesses must anticipate how energy price increases impact their global expansion plans. Energy price increases affect manufacturing companies and those reliant on shipping products more than services-based firms.
Firms also face social pressure for more environmentally-friendly societies, moving away from a fossil fuels-based world. This departure comes at a cost to businesses that do not have the financial or internal resources to drive a quick shift. They must consider their foreign market’s response if they rely heavily on fossil fuels.
International Business Risk #5: Failure of National Governance
Recent crises in Latin America (such as Argentina’s hyperinflation, and Venezuela’s political dissolution and mass emigration) showcase how governments' failures and scrutiny from both businesses and consumers impact markets. Across the Atlantic, Brexit uncertainties remain a crucial concern for both local and international businesses that operate in, trade with, or may expand into the UK.
National governments’ policy failures extend globally and contribute to growing geopolitical tensions, especially between the United States and China. U.S. and European businesses looking East must weigh the potential risks of an escalated trade war and tariffs’ impact.
Beyond bottom lines, the WEF warns that both businesses and governments must work together to address not only social issues but environmental issues as well; both impact the richest and poorest countries, albeit differently.
Wealthy and developing markets alike present challenges, either accounted for or unforeseen. Diversifying revenue streams (i.e., operating in multiple markets) enables firms to mitigate risks and challenges despite political tensions. But how companies expand is key. Relying on an experienced International PEO partner gives firms the support they need to confidently pursue overseas opportunities.
Mitigate International Business Risks with an Experienced Expansion Partner
Expanding overseas is challenging enough without additional economic, social, political, and environmental risks. However, businesses must plan for these risks and adapt their global expansion plans accordingly.
Companies benefit from partnering with an experienced global expansion partner like Velocity Global, whose experts assist in everything from helping firms select the most promising markets, to ensuring compliant hires in virtually any market—and assist with each step of the expansion process after.
Want to learn more about how Velocity Global’s International PEO solution helps firms just like yours compliantly expand into more than 185 markets? Let’s talk.