Top 7 Risks For Taking Your Business International
By Will Elton, Last updated: 2023-01-31 (originally published on 2019-09-05)
Every founder gets excited about the thought of expanding overseas. Not only can will it expand their brand name and attract a larger consumer base, but it is also a good way to spread the risk. While international expansion often comes with high returns, don’t overlook the risks that go hand in hand with going global.
Before you decide to scale across borders, give some thought to these factors so you’re prepared in advance:
Making the leap overseas is an expensive process. While expansion sounds fancy, you must also ask yourself whether your company’s financials can afford it. A company in its early years should focus on promoting its core business within the territory before thinking about moving into foreign markets. Many companies enthusiastically set up international branches, only to find out later that they had enough money for initial investments, but not for sustainable growth.
Exchange rate fluctuations
A U.K. investor’s return on a foreign business is tied to changes in the exchange value between the pound and that country’s currency. For example, if you trade in the U.S. and the U.S. dollar weakens against the pound, your profits will be worth less when you exchange them back to your own country’s currency. The exchange rate between currencies is constantly changing, be it caused by economic instability or diplomatic breakdowns. Inexperienced investors may find it difficult to predict or ascertain the actual value of their foreign investments because of these fluctuations. While some investors are intuitive enough to seize good timing, it’s also possible for your new market’s currency to drop sharply without any signs and you could lose a fortune.
Your foreign investment may be affected significantly by a country’s political climate. Political stability and economic performance are closely correlated. Major political events such as elections, diplomatic agreements, policy changes and labour strikes can have overwhelming impacts on the market. Looking at Hong Kong, who would have thought the Asian financial hub could become so turbulent overnight? A series of mass demonstrations have caused drastic declines in the retail and catering industries. Not to mention Brexit and the Sino-US trade war, the global political landscape is facing one of its toughest times. U.K. investors who have businesses abroad may find themselves caught in the political crossfire and suffer from unforeseeable losses.
Business culture can be very different among countries, especially between the East and the West. Cultural misunderstandings can affect international business relationships. When UK companies set up businesses in another country, they will have to establish connections with foreign clients and hire local employees. If you are not aware of the different cultural characteristics, you may accidentally offend a foreign business partner or colleague without knowing. For example, Brits and Americans have different working styles. Recent research shows that Americans work longer hours than Brits on average and self-promotion is seen as bragging in the UK but not so in the US. As a result, there may be times when a British investor feels frustrated at how their foreign counterparts behave. Understanding cultural differences are pivotal to establishing amicable and cooperative working relationships.
Navigating the way through foreign laws and regulations can be another challenge for UK founders. From tax codes to licensing requirements to labour laws, regulatory rules differ by country. Even with the help of lawyers, a company may find it troublesome to switch their business models or accounting practices to comply with overseas requirements. International accounting is a major concern for investors looking to explore foreign markets. The thought of complicated tax systems, rates and exemptions may turn off investors who are inexperienced with accounting. Introduction of new laws can also be a setback to the operation of foreign businesses. For example in 2014, Airbnb was forced to pay a huge fine for a breach of local tourism laws in Barcelona following an unexpected crackdown on advertised rental properties.
It’s not easy to persuade a foreign customer to trust your brand when a similar product from a local brand with long standing is also available. While big-name U.K. brands are able to capture a considerable portion of market shares overseas, small to medium–sized companies may find it extremely hard to gain a foothold. Local companies have another edge over your business because they tend to have better access to market information and business opportunities given their social and business ties. Not being able to get first-hand insight may mean you are missing out on many lucrative business opportunities.
The success of your company achieves in the UK may not translate into victory in another country. Possibly because the demand for your product is already met, or it doesn’t exist at all. Many notable brands do extremely well at home, but when they bring their business overseas, it fails. When Starbucks first expanded from the US to Australia, it seriously struggled because Australians preferred local coffee shops to corporate giants. Another example is Krispy Kreme, an American doughnut brand that has chains in the UK, Australia, Russia, Malaysia, Japan, Singapore, Taiwan and many other countries. Yet the chain in Hong Kong only operated for two short years before it closed down due to poor business. While doing market research and due diligence helps with assessing the viability of your business idea, you can never fully forecast customer response until you actually start running the business.
Bottom Line: should you invest overseas?
Breaking into international markets is a tough road. Strained financial resources, economic and political instability, complex regulations and local circumstances are all factors that may hinder your company from expanding abroad. Having said that, we are not trying to scare you off. Risks and opportunities go hand in hand, branching out overseas can be a life-changing step for your brand. When asking whether it’s a good idea to expand, if you believe you have a vision and the resources to support it, go ahead and take the leap.
This article does not constitute legal advice.
The opinions expressed in the column above represent the author’s own.