Why some global business expansions fail

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By Rick Hammell, CEO, Elements Global Services

With new markets come new opportunities – and new challenges. Customs, cultures, laws, people, and processes can be radically different, and accordingly, it can be radically difficult to bring a business from one country to another.

At Elements Global Services, we recently surveyed 500 businesses to find out their views on international expansion. Our findings showed that 69% of these companies plan to pursue international growth within the next three years – and that many expect to face certain challenges.[1]

So what issues are causing the most problems for would-be global businesses?

  1. Business and tax requirements

Tax is often an issue for businesses operating in a single nation; for businesses operating in more than one country, it can be a major hassle. Some 26% of those surveyed described complying with overseas laws as a challenge when expanding abroad.[2]

It’s easy to see why. Companies expanding into other nations are thrusting themselves into a legal quagmire: they must be aware of taxes, fees, and tariffs, adherent to general trading standards and regulations, and for smaller organisations in particular, this can be a colossal undertaking. For example, when it comes to repatriating funds to a business’ home country, even large international corporations have had trouble: both Apple and Google have faced high levels of scrutiny for their efforts to move money from Ireland to the US.

Employment law is also an issue for every business: local regulations will vary from jurisdiction to jurisdiction, and continental regulations such as the GDPR can impose restrictions on how organisations handle employee data – and expensive fines on those which handle it poorly. The implications of hiring and managing employees can be off-putting for many companies which might otherwise pursue expansion.

If a business fails to adhere to the rules, it may have to halt its expansion plans, face legal reprisals, and deal with additional costs in its home country. Losing sight of regulatory adherence is all too easy to do – but it has unfortunate and complex consequences.

  1. Political and economic uncertainty

Every business is at the mercy of its particular set of political and economic circumstances. However, international businesses are exponentially vulnerable. It’s all too easy for growth and ambition to be hamstrung by changing economic and political headwinds – and this is reflected by Elements’ research. Asked about the three most important factors when choosing a country for international expansion, 60% cited economic stability and potential for economic growth – while 29% cited a reputation for enterprise-friendly governments and institutions.[3] It’s naturally hard for any business to make inroads in a country with vastly different laws and an environment that’s hostile to outside entrants, but SMEs must always make an effort to adapt to new legislative circumstances. To enter another market, they must play by its rules.

They also need the internal resources to support and manage the expansion: an SME without the capacity or the subject matter knowledge to pull off a global expansion in a radically different environment faces an uphill battle. Securing international growth specialists, experts on the ground, and other manpower should be a priority.

  1. Cultural barriers

 International expansion must always account for cultural variations. Language is, of course, one of the most important factors: if a business expands into Spain and publishes all internal training materials in English, new staff will naturally feel alienated and underappreciated.

But beyond language barriers, SMEs must make sure they account for the beliefs, customs, and preferences of their new market. European and North American companies, for example, might have a more collectively-oriented approach to team recognition and rewards: the idea that employees are all pulling together is crucial. In South East Asia, however, the efforts of the individual are considered more important, and rewards should be structured accordingly.

Some cultural barriers are also legal barriers. A contribution towards health insurance might be considered a perk in some jurisdictions, but in Germany, it’s a legal obligation. In China, employers have to pay into housing and social care programmes. Navigating these legal and cultural obstacles is a major challenge for many SMEs seeking international growth – and working with people who know how to do so should therefore be high on the agenda.

  1. HR essentials

Elements’ research suggested that hiring abroad was a major challenge – and one that came with its own sub-challenges. The most commonly cited were setting up payroll, benefits programmes, and other HR essentials (reported by 25%); the cost and time involved in recruitment (24%); and overcoming language and cultural barriers between domestic and international staff (24%).

Broadly speaking, HR is an underestimated cost of international expansion. Global staff aren’t likely to be overly happy working for an organisation that has clearly defined processes, benefits and rewards for one team and not others. Recruitment laws and customs also inevitably vary – partially due to language and cultural barriers between ‘head office’ staff and various international offices.

This can be broadly attributed to a lack of preparedness and strategy. To execute a successful international expansion, a business must have a clear roadmap in place – and it must work with expert collaborators. Establishing a new entity abroad has operational costs that are often underestimated, and only mount when an SME has not prepared for them.

International expansions are often perceived as expensive and risky. Businesses are turned off by the timeline of setting up an overseas entity, and the financial investment involved in taking on a new market. With no assurance of ROI – and no guarantee that they’re ‘striking while the iron is hot’ – they don’t know how to proceed, or if they should.

International expansions, of course, don’t have to be unduly expensive or time consuming. But they do have to be approached strategically. Businesses should not think of the above challenges as things to address or react to after the fact: to successfully grow into a new market, they must be proactive, they must plan, and they must work with the right partners. 

elementsgs.com

[1] Research by Elements Global Services, June 2018
[2] Research by Elements Global Services, June 2018
[3] Research by Elements Global Services, June 2018