There has been a trend lately of companies “going global” at an earlier stage in their development. The idea of a multinational presence is exciting, but expanding a business overseas involves the careful consideration of risk and cost.
Before you decide to scale internationally, here are a few key issues small- and mid-sized companies should consider:
Employee liabilities. If possible, it is always in your best interest to hire talent in cost-effective, employer-friendly countries. Otherwise, you will be stuck being accountable for various obligations. Economic, social and legislative conditions that help create this nexus include: low social security costs; low statutory minimums for vacation pay, overtime, sick pay and family leave, a low forecast for future wage inflation and areas where there are no short-term plans for government-enforced employer pensions or related contributions, among other factors.
Social security. Remember social secrurity is not the same around the globe, with some countries having extremely high rates. Social security is generally lower in Asian countries as compared to Europe. For instance, in India social security costs, including Employees’ Provident Fund (EPF) and Employees’ Pension Schemes (EPS) hover around the 12 percent mark, which is rather low. By contrast, France has among the highest social security rates in Europe, and the cost calculations are very complex.
Termination provisions. Terminiation can be a tricky matter depending on what country your employees reside. Most of the jurisdictions in Europe have a notice period and severance pay provisions which need to be adhered to in case of employee terminations. This is vastly different from the US, which has employment-at-will provisions whereby either the company or the employee can terminate the employment relationship at any time, with or without cause and with or without notice.
Contract enforcement. Contract provisions should take into account the local legal systems. Local judiciaries, in some cases, may favor local defendants in procedures to honor and enforce judgment. In China, for instance, we have found that many contracts entered into by foreign companies are vague and show a lack of understanding of the Chinese legal system. As such, foreign companies may file a legal claim to right a wrong based on e-mails, verbal communications, and what has been common practice over time. Yet, this approach does not typically work in China, which can lead to hefty penalties and costly lawsuits for foreign companies doing buisness in the country.
Increased inflation. Rates of inflation will affect the price of doing business overseas. Therefore, negotiating fixed prices over a two to three year period, or negotiating the price to be in a specific currency could prove to be very cost-effective. Note, India has one of the highest consumer price inflations among the emerging nations.
Increased regulations by tax and value-added tax authorities. It’s very important to have proper documentation of taxes on goods and services. In particular, it is essential to consider the rates of value-added tax (VAT) and probability in the current climate of increases. For example, recently Spain increased its general VAT rate to 21 percent (previously 18 percent) and the reduced tax rate to 10 percent (previously eight percent) and China has implemented VAT pilot schemes across the nation and will be expanding to more sectors soon.
Getting a foothold in the fastest-growing economies. Understanding the requirements of the fastest-growing markets is essential for growing and having an international presence. For instance, China continues to grow at nearly 7.5 percent and India around 5.5 percent. Estimates show 70 percent of world growth over the next few years will come from emerging markets, with China and India accounting for 40 percent of that growth. Some of the other fast-growing APAC economies include the Philippines, Indonesia, Thailand and Malaysia.
For U.S. companies, expanding operations overseas can be beneficial for business. The most important thing to keep in mind during these difficult economic times is to take the proper steps to protect the company while doing so.
Venkat Eswaran is the senior vice president of global services at Nair & Co, a company that counsels businesses on international expansion. In his role, Eswaran heads the global operations of the firm and oversees the delivery of all client services. He is an expert on India-inward investment and acts for a variety of private equity and VC firms, in addition to multi-national companies of varying size. Venkat is a qualified Indian chartered accountant and tax expert.