4 common reasons why global business expansions fail
6 min read
19 July 2018
The advantages of expanding overseas are vast – but things can quickly go wrong. Here, Rick Hammell, the CEO of Elements Global Services, highlights the common reasons why international expansion fails.
At Elements Global Services, we surveyed 500 businesses and found that 69% plan to pursue international growth within the next three years. In addition, many expect to face certain challenges.
So what issues are causing the most problems for would-be global businesses?
1. Business and tax requirements
Dealing with tax can be a headache even when you’re only operating in one country. Some 26% of those surveyed described complying with overseas laws as a challenge when expanding abroad – and I can’t say I blame them.
When your company expands into other regions, you are thrust into a legal quagmire: you must be aware of taxes, fees, and tariffs, adherent to general trading standards and regulations. It becomes apparent very quickly for smaller organisations that this can be an enormous undertaking.
Even large international corporations have trouble with repatriating funds to a business’ home country. For years, Apple and Google have faced high levels of scrutiny for their efforts to move money from Ireland to the US.
The legal implications of hiring and managing employees can also be off-putting. Local employment law regulations will vary from one jurisdiction to another, and continental regulations such as the GDPR can impose restrictions on how organisations handle employee data.
Losing sight of regulatory adherence is all too easy to do. However, it has unfortunate and complex consequences. Regulations like GDPR impose heavy fines for falling out of the lines. If a business fails to adhere to the rules, it will often have to halt expansion plans, face legal battles, and spend more money.
2. Political and economic uncertainty
International businesses are vulnerable to political and economic circumstances. When asked about the three most important factors when choosing a country for international expansion, 60% cited economic stability and potential for economic growth. Some 29% cited a reputation for enterprise-friendly governments and institutions.
It’s naturally hard for any business to make inroads in a country that’s hostile to outside entrants and has vastly different laws but all must try to adapt to new legislative circumstances. To do so, they need the internal resources to support and manage the expansion.
3. Cultural barriers
Cultural barriers are often overlooked – which is a mistake as they play a big part in keeping hold of good staff. European and North American companies, for example, might have a more collectively-oriented approach to team recognition and rewards: the idea that employees are all pulling together is crucial.
In South East Asia, however, the efforts of the individual are considered more important, and rewards should be structured accordingly. Businesses must make sure that they account for the beliefs, customs, and preferences of their new market in every part of the businesses.
It should go without saying that language is one of the most important factors: if a business expands into Spain and publishes all internal training materials in English, new staff will naturally feel alienated and under-appreciated. Believe it or not, a lot of businesses still fail to localise materials in other languages.
Some cultural barriers are also legal barriers. A contribution towards health insurance might be considered a perk in some jurisdictions, but in Germany, it’s a legal obligation. In China, employers have to pay into housing and social care programmes.
4. HR essentials
Hiring abroad is another major challenge, partially because it comes with its own sub-challenges. Our respondents were aware of this. The most commonly cited challenges to do with hiring were setting up payroll, benefits programmes, and other HR essentials (reported by 25%).
This was followed by the cost and time involved in recruitment (24%) and overcoming language and cultural barriers between domestic and international staff (24%). HR is normally an underestimated cost of international expansion and one that can be avoided if the right planning is in place.
To execute a successful international expansion, a business must have a clear roadmap in place – and it can’t do it alone. Establishing a new entity abroad has operational costs that are often underestimated – but working with experts on the ground as part of the planning is a huge part of avoiding this.
Businesses are often turned off by the timeline of setting up an overseas entity, and the financial investment involved in taking on a new market. With no assurance of ROI – and no guarantee that now is the right time – they don’t know how to proceed, when to do it or if they should do it at all.
But it doesn’t have to be this way. International expansions don’t have to be unduly expensive or time consuming. If businesses are proactive, have made a plan, and work with the right partners, extra costs can be accounted for and legal quagmires can be avoided. If they do those things they will soon realise that the rewards nearly always outweigh the risks.
Rick Hammell is CEO of Elements Global Services