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Pros and Cons of International Expansion

As demand increases for products or services in international markets, or other business needs emerge, growing companies may at some point face the prospect of global expansion.  This is a natural evolution and offers significant opportunities if approached in the right way at the right time. 

While going global can make sense, the decision should factor in the overall cost/benefit for a company as well as preparing for a new level of HR support and administration for staff on assignment.  As with any shift in business direction and scope, there are both pros and cons to consider when expanding internationally.

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1.      What are the Factors Affecting International Expansion?

The reasons to expand globally are manifold and will vary depending on the business type and overall market strategies.  Companies will be forced to consider a range of factors when deciding to enter a foreign market.  These include:

  • Cost and time to establish a foreign subsidiary
  • Corporate policy toward compensation and other HR issues
  • Compliance risk for payroll, taxation and immigration rules
  • Establishing secure office premises, employee residences and bank accounts
  • Evaluating the growth potential against the required investment
  • Permanent establishment issues resulting in taxable local revenue
  • Contingency plans in the event that the new foreign office needs to be closed

When looking at these factors, a multinational will need to decide whether to use a DIY approach to enter the new market, or to outsource essential functions to a third party.  When the realities of expansion are looked at closely, many of the inherent challenges can be met more easily when using local partners to administer staff assignments, payroll and immigration compliance.

2.      From the Company Perspective: Pros of International Expansion

The first step in evaluating entry into a foreign market is the impact at a corporate level, both in terms of cost, effort and opportunity.  There are a few primary reasons for expanding internationally, depending on the country and region of the world.

·      Access to New Regional Markets for Products and Services

The most obvious reason to expand internationally is to access the global marketplace for sale of goods and services.  This is especially attractive to companies that may be located in less developed economies and market regions where growth is limited.

Regions like the EU with their open market approach to member states may offer an exponential opportunity for growth within the entire EU market.

·      Brand Recognition

Opening branches abroad can expand brand recognition to attract new customers and establish credibility in the marketplace.  For example, entering a market like the US can mean a large boost in visibility, especially for companies from less developed markets.

·       Cost-effective Manufacturing or Production of Goods

It is a common practice for companies to outsource production to countries with less expensive labor and infrastructure costs.  For a US or European company, offshore production of goods in a country like China can offer real cost savings and competitive pricing of products.

·       Customer Service Centers

Companies with an existing international clientele may want to set up regional customer service centers for technical and administrative support.  Setting up a proprietary service center in a foreign region allows a company to overcome time zone differences and minimize delays in response.

·       Use of Free Trade Zones

Many countries offer free trade zones to encourage participation by foreign companies in transport, storage or production facilities.  As an example, the UAE has a free trade zone and business-friendly tax structure that can give convenient access to Middle Eastern markets, without the requirement of local majority ownership.

3.      Cons of International Expansion

Even with the advantages of expansion, every company will face some challenges when entering foreign markets.

·       Tightening Immigration Rules

The task of setting up a branch and assigning staff can be daunting in the face of immigration rules for long-term workers.  Expect a stringent government review of both the company’s registration and obtaining work permits for any assigned management or employees.

·       Cultural and Language Barriers

Most regional markets such as the EU or Southeast Asia still have cultural and language barriers between countries, as well as different rules for doing business that may be unfamiliar.

·       Incorporation Costs and Regulations

Companies establishing their own production facility or setting up a branch will face registration and incorporation hurdles that can be significant and time consuming without expert assistance. 

·       May Still Need to Outsource Services

Because of the challenge of incorporating a branch solely for customer service purposes, many companies choose to outsource through call centers, but then lose some degree of personalized service by experienced staff.

·       Capitalization and Ownership Requirements

Some countries have capitalization rules for foreign companies, and the UAE even requires that at least 51% of any company have local ownership (except in free trade zones).

4.      From a Global Mobility Perspective: Facing the Challenge of International Assignments

Once a company decides it is time to embark on international expansion plans, the next task now lies with the global mobility professionals charged with assigning and supporting staff in new countries with different laws and regulations.  Even if a company chooses to expand globally, international employment carries a new level of administrative complexity and cost.

·       Technical Challenge

There are numerous technical hurdles to overcome when entering a new country, that all need to fully researched and understood ahead of time.  It may be necessary to solicit local experts and partners in the new location to avoid non-compliance, delays or penalties.

·       Contract

Often, existing contract templates will need to be modified to fit the host country’s laws.  This can include items like notice periods, severance, leave, pensions and benefits.  There are typically local employment law standards that need to be reflected in the contract, and your standardized contract policies may be overridden by local rules.  You may even need to draft the contract in the local language if required.

·       Taxation

There are two taxation issues that come up when doing business in a foreign country: permanent establishment (PE) resulting in corporate tax, and personal income tax for assigned staff.  Triggering PE depends on a host of factors that lead to a continual business presence for taxation, and those tests are being broadened in many jurisdictions.

Personal income tax of staff is one aspect of calculating compensation in the event that there is no tax treaty in place to equalize rates.  Local payroll is subject to host country taxes even for expats.  Social security withholding may also differ from the home country, but those contributions still need to be made locally.

·       Immigration

Try to establish as early as possible in the process what the immigration requirements and timeframes are for the new country because, without the correct immigration status, your people won’t be able to commence work within the required timeframe.  It is tempting to use short-term business visas in some cases, but for longer assignments valid, sponsored work permits are essential.

·       Payroll

Some countries operate restrictions on how employees are paid (for example, stating that salary must be paid in the host country and in local currency), some operate restrictions on the amount of currency that can be transferred out of the location.  Because remote payroll is not allowed in many countries, establishing a local payroll with a fully incorporated entity is a pre-requisite for most international assignments.

·       Internal Issues

For global mobility professionals in the HR department, there are also questions about how the new country of assignment will be handled internally.  Decisions have to be made on how assignees are managed, especially if there is no HR rep in the host country.  In many cases the success of an assignment will depend on how well staff are supported by HR in terms of communication, problem-solving and ongoing management.

It is at this juncture that the HR department has to take an honest look at whether they need outsourced third-party support when entering a new country.  Notably, those solutions can be surprisingly cost-effective and can speed the deployment of staff abroad.

5.      DIY vs GEO Solution

While some companies can justify the time and expense of setting up a foreign subsidiary using a DIY approach, there are many instances where utilizing a GEO local employer of record is a better alternative.  Many of the technical and corporate issues discussed can be easily resolved by the use of a GEO and affiliated in-country experts. 

The GEO already has a legal entity in place that can handle all aspects of payroll, employment and immigration requirements in the host country.  In essence, the GEO becomes a multinational’s flexible and comprehensive employment solution when expanding internationally, as an alternative to a DIY incorporation approach.

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