How do SMEs and "born globals" choose which market to expand to?
When evaluating which international market to expand to, startups and SMEs need to consider factors including availability of talent, tax rates, competition & ease of establishment.
"Even within regions such as the EU, there are marked differences in tax rates, culture, bureaucracy and the speed with which a business can be established."
Some businesses are born global
We recently attended the Global Expansion Summit in London where a number of speakers explained the shift that has taken place in the business world in the last two decades. One speaker reasoned that "While traditionally, companies took years to take that first step into a new geographic market, many companies today, particularly those that are technology driven, are what is now termed as 'born globals'". What he means is that rather than expanding on a gradual, organic basis through their domestic markets before considering cross border expansion maybe five years later, this type of company seeks to derive a substantial proportion of their revenue from the sale of their products in international markets from inception or at least very early on in their development - they have a global strategy in place and a clear vision in their business plan that they offer a global product or service with wide appeal that can be adapted to meet local preferences and needs.
The needs of the internationally expanding business
So what are businesses looking for in new markets? Invariably, wherever a business is from or whatever sector they are in, the expanding business will be looking for:
- Access to markets: customers, suppliers, sales
- Access to talent: where they can recruit and retain skilled people
- Access to support networks such as investment agencies that will ensure a soft landing in the location
Factors that influence where to expand to
Cross border expansion can sometimes be customer-led if a particular customer needs to be serviced locally. However, to prevent an aborted attempt to break into a new market, all companies need to evaluate what is on offer in different markets as there are significant discrepancies in different countries in terms of what is available to companies setting up.
Well respected sources rank countries on an annual basis based on how easy it is to do business there, one example being the World Bank Ease of Doing Business report. Businesses should look carefully at factors such as how quickly a company can be set up, levels of bureaucracy, ease of gaining credit, enforcing contracts, levels of tax and so on. Though they may grab the headlines, trading in the larger markets offered by the BRIC or MINT countries may not be as straightforward as anticipated. While the rankings are dynamic and governments are constantly changing legislation to make their regimes more attractive to foreign companies, the 2017 World Bank Ease of Doing Business rankings position New Zealand as the easiest place to do business, while China is positioned at 78, Brazil at 123 and India at 130.
Discrepancies exist within regions
Even within regions such as the EU, there are large discrepancies in terms of the ease of doing business- for example, Dublin ranks as the 10th easiest city to get established, whereas Berlin is currently the 114th.
Tax can make or break a business
When it comes to tax, rates vary wildly, even within large trading blocks such as the EU. For example, corporate tax is just 12.5% in Ireland whereas it is 27.5% in Italy. And in the U.S, corporation tax is 35% compared to 15% in Canada.
But even within countries rates of tax can vary – consider combined state and local sales tax rates across the U.S. In 2017, these range from 9.98% in Louisiana to 1.76% in Alaska. Getting good tax advice could be the difference between success and failure for a business in a new market.
Whatever the headline rates of tax, expanding companies must look beyond these rates and consider hidden or indirect taxes that will be levied, impacting profits.
How the importance of market factors is influenced by sector
The sector of business a company is active in will also influence the importance of various ‘ease of doing business’ factors e.g. if you are in the media sector, the degree of media freedom will be an important factor to consider. Regulations and culture vary hugely across countries.
The role of culture cannot be underestimated - to succeed in a new market, there has to be the right cultural fit for the business with the market. The employer needs to consider whether their talent will be able to have the type of lifestyle they want and how tolerant a country is towards various lifestyle choices.
Consider secondary and tertiary cities
In some of the larger tier one cities, it will inevitably be more difficult to compete for talent in terms of the package you can offer. This applies to attracting and retaining staff. If you have to retrain and rehire people constantly, it will stall your business and the fees will mount up, hitting your profits.
It is certainly worth looking at what secondary cities offer – there are world class universities and much available talent and you may not have to compete as hard to attract and retain these people in these less high profile cities. Setting up in a smaller city brings added benefits in terms of your profile - you will have the opportunity to make a greater impact.
Finally, companies looking to expand should always talk to local investment agencies and professional advisory firms who will open doors for you to their local networks, ensuring you meet the right people who can help your business to succeed in a new market in a shorter space of time.
For advice on international expansion
Contact Giles Brake at the Alliott Group Executive Office to be put in personal contact with an accountant, lawyer or tax advisor at a local independent member firm in 200+ cities worldwide.