Trade flows

Going international is a risk, but so is doing nothing

The benefits of setting up operations in new markets can be huge, if you do your homework

Most companies these days are ‘born global’, regarding the world as their home market. This certainly seems to be the case for the many successful entrepreneurs I have met this week at the EY World Entrepreneur of the Year event in Monaco, spanning 53 countries.

But not everyone reaches the trigger point when the case for setting up a sales office or factory overseas becomes compelling. And even fewer make it past this stage and become truly international. Why?

Expanding operations to new markets – rather than just buying and selling abroad – could offer exciting new opportunities, the potential for higher growth or a chance to serve your clients better.

The operational advantages could be huge. Your business may become more cost-effective and enjoy economies of scale. When you increase your output by expanding internationally, you can often do so with lower average costs, increasing your margins, offsetting export costs with lower production costs, and reducing prices in your home market.

Picking the right markets and identifying the best opportunities is a challenge

International expansion could also inspire your business back home, showing you new ways to operate, or giving you ideas for new products and services that you could create a market for elsewhere.

But picking the right markets and identifying the best opportunities is a challenge, not to mention the many potential barriers that could get in the way.

How will you fund your business expansion, should you find a local partner, and what is the cost of finance, the tax rates and the local legal system, are there any incentives available from the local government?

Research is vital

Tax and customs laws, import restrictions, corporate organisation and agency or liability laws may all prove to be stumbling blocks. Technology transfer and foreign investment laws may force a business relationship to be a joint venture.

Currency fluctuations maybe another risk, and could expose the business to undue levels of volatility, unless it employs currency hedging strategies.

Failing to explore the opportunities in international markets is also a risk, and one few companies with big growth ambitions can afford to ignore

Internationalisation isn’t risk free. Even companies with the right combination of determination, market opportunity and risk appetite need to do their homework before setting up in new markets. Understanding what it will take to get out of a new market, should things go wrong, is just as important as knowing how to get in.

But failing to explore the opportunities in international markets is also a risk, and one few companies with big growth ambitions can afford to ignore.

Download the International Expansion report here