Every founder gets excited about the thought of expanding overseas. Whether you’re a former bookseller in your parent’s garage or an aspiring cool kid’s hats seller, going overseas can attract a more extensive consumer base.
What are the risks of entering an international market?
While international expansion often brings high returns, don’t overlook the risks associated with going global.
Venturing into international markets is not just a matter of prestige or expanding your company’s footprint; it’s a significant financial commitment that demands careful planning and robust financial health.
The allure of global expansion often comes with the vision of tapping into new customer bases, diversifying company assets, and increasing market share. However, beneath this appealing veneer lies a complex and costly process that can strain even the most well-prepared organization’s resources.
Before you decide to scale across borders, give some thought to these factors so you’re prepared in advance:
1. Financial resources
Firstly, the initial investment required to enter an international market can be substantial. This includes not only the obvious costs like setting up a local office, hiring staff, and marketing expenses but also less apparent expenses such as legal fees for navigating local regulations, costs for adapting products or services to fit new markets, and expenses related to supply chain adjustments.
These financial demands require a solid capital base, which a company might need help to maintain its operations long enough to become profitable in the new market.
In addition to these direct costs, there are also opportunity costs to consider. The resources allocated for international expansion are not being used to strengthen and grow the business domestically.
Many companies, especially those in their nascent stages, need to pay more attention to the need for a sustainable financial strategy that supports the initial setup and the ongoing operations in a new market.
Enthusiasm and ambition can lead to premature expansion without understanding the financial risks involved. When the reality of operating expenses, competitive pressures, and slower-than-anticipated market penetration sets in, these companies face the difficult choice of injecting more funds into the venture, often at the expense of other business areas, or retreating from the market altogether.
2. Exchange rate fluctuations
Currency fluctuations can significantly impact the cost of setting up and operating in a foreign market. Exchange rates may vary unpredictably, affecting budgeting and financial statements. Due to adverse currency movements, companies often find themselves spending more than anticipated to maintain their overseas operations, which can erode profit margins.
For example, if you trade in the US and the US dollar weakens against the pound, your profits will be worth less when you exchange them back to your country’s currency.
The exchange rate between currencies is constantly changing, caused by economic instability or diplomatic breakdowns.
Inexperienced investors may need help 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.
3. Political instability
The interplay between political stability and a nation’s economic environment must be balanced, especially when considering international expansion.
A stable political environment is often synonymous with a predictable and secure economic climate, making it desirable for foreign investors.
Political events, ranging from elections and changes in government to diplomatic shifts and policy reforms, can significantly alter the business landscape overnight.
Such events may lead to changes in trade policies, taxation, and foreign investment regulations, directly affecting businesses operating within or planning to enter these markets. Moreover, labour strikes and social unrest can disrupt operations, supply chains, and local economies, leading to substantial financial losses and operational challenges.
Taking Hong Kong as an example, the unexpected political upheaval in 2019 is a stark reminder of how quickly a seemingly stable business environment can become volatile. The mass demonstrations disrupted daily life and led to a severe downturn in vital economic sectors such as retail and catering, showcasing the fragility of business operations to political climate changes.
Furthermore, global events like Brexit and the ongoing Sino-U.S. trade war exemplify the complexity of the international political landscape. These situations create a web of uncertainty that can trap unsuspecting businesses, leading to trade, investment, and market access complications.
4. Cultural differences
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 must 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 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.
5. Compliance challenges
Navigating foreign laws and regulations can be another challenge for UK founders.
Regulatory rules differ by country, from tax codes to licensing requirements to labour laws. Even with the help of lawyers, a company may need help to switch its business models or accounting practices to comply with overseas requirements.
International accounting is a significant concern for investors looking to explore foreign markets. The thought of complicated tax systems, rates and exemptions may turn off investors who need to become more experienced with accounting.
Introducing new laws can also be a setback to the operation of foreign businesses. For example, in 2014, Airbnb was forced to pay a massive fine for violating local tourism laws in Barcelona following an unexpected crackdown on advertised rental properties.
6. Local competition
It isn’t 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 UK brands can capture a considerable portion of market shares overseas, startups and SMEs may find it extremely hard to gain a foothold.
Given their social and business ties, local companies have another edge over your business because they tend to have better access to market information and business opportunities.
Not getting first-hand insight may mean missing out on many lucrative business opportunities.
7. Local demands
A product or service that enjoys considerable success in its home country might not necessarily replicate that success abroad.
The experiences of global brands like Starbucks and Krispy Kreme are testaments to the challenges of international expansion. Starbucks, for instance, faced significant hurdles when it attempted to enter the Australian market.
The brand struggled to compete against the strong preference among Australians for local coffee shops, which are deeply ingrained in the country’s coffee culture. This misalignment with local tastes and preferences led to a tough market entry for Starbucks, highlighting the importance of understanding local consumer behaviour.
Similarly, Krispy Kreme’s venture into Hong Kong is another example of how cultural and market differences can impact the success of international expansion. Despite the brand’s popularity in countries such as the UK, Australia, Russia, Malaysia, Japan, Singapore, Taiwan, and many others, its operations in Hong Kong lasted only two years.
For businesses considering international expansion, it is crucial to evaluate the economic aspects and cultural fit of their products or services. This involves understanding the legal and regulatory landscape, as detailed in resources like employment contracts, and engaging with local consumer trends and preferences. Tailoring strategies to align with these local demands can significantly enhance the chances of success in a new market.
The risks of expanding a business internationally
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.
We are not trying to scare you off. Risks and opportunities go hand in hand, and branching out overseas can be life-changing 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.
