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A report from The Economist Intelligence Unit CORPORATE OVERSEAS EXPANSION Opportunities and barriers Sponsored by: Corporate overseas expansion: Opportunities and barriers Contents About this report 2 Executive Summary 3 Introduction 5 Chapter 1: Strategy and approach 6 Chapter 2: Operational challenges 12 Conclusion 18 Appendix: survey results 19 © The Economist Intelligence Unit Limited 2015 1 Corporate overseas expansion: Opportunities and barriers About this report Corporate overseas expansion: Opportunities and barriers is an following individuals and their organisations (listed Economist Intelligence Unit (EIU) report, sponsored by TMF alphabetically) for sharing their insight and experience: Group. It investigates the range of practical issues companies l Kelvin Au, managing director, Metail face when they start setting up operations in a foreign country and how they deal with those issues. l Jerry Buhlmann, chief executive, Dentsu Aegis Network l Sally Campbell, group head of mergers and acquisitions, In August-September 2015 The EIU surveyed 155 senior Hiscox executives who have some or very good knowledge of the issues involved in their company’s expansion into foreign l James Kidd, CFO, AVEVA markets. Survey respondents included 33 chief financial l Nicholas Nash, group president, Garena officers, 31 chief operating officers, 31 general counsels or l Brian Pallas, founder and chief executive, Opportunity chief legal officers, 30 chief procurement officers and 30 heads Network of payroll or senior payroll professionals. l Jose Papa Neto, chief executive, WGSN Geographically, 46 respondents were drawn from North l Gilles Raymond, founder and chief executive, News Republic America, 46 from Europe, 47 from Asia-Pacific and 16 from rest of the world. They represent a wide range of industries, l Joseph Smith, general manager, EMEA, Hootsuite including manufacturing (16% of respondents), IT and l Chris Southworth, director, International Chamber of technology (16%), professional services (16%), financial Commerce (UK) services (11%), retailing (8%), transport, travel and tourism (6%), construction and real estate (5%), and energy and l Matthew Tilley, finance director, Taylor Vinters natural resources (5%). Of the companies included in the survey, 80 have an annual revenue of less than US$500m and The EIU bears sole responsibility for the content of this 75 have an annual revenue of US$500m and above. report. The findings and views expressed in the report do not necessarily reflect the views of the sponsor. Anna Lawlor was The EIU also conducted 11 in-depth interviews with senior the author of the report, and Martin Koehring was the editor. executives. The insights from these interviews appear throughout the report. The EIU would like to thank the November 2015 2 © The Economist Intelligence Unit Limited 2015 Corporate overseas expansion: Opportunities and barriers Executive summary As the 2008-09 recession fades from memory areas, including legal/compliance, HR/ and credit conditions improve, many companies administration and accounting/tax. Chris are considering expanding into new markets. Southworth, director of the International In doing so, they face a multitude of challenges Chamber of Commerce (UK), says that it is not spanning the range of corporate functions. unusual to find big-brand companies with no export experience at board or executive level, This report is based on a survey of 155 senior which is likely to be one factor for a reliance executives and 11 in-depth interviews with on support from trade organisations such as experts who have special knowledge of the chambers of commerce. issues involved in their companies’ expansion l The socioeconomic circumstances in the into foreign markets. The main findings of the target country are the biggest physical location research are presented below. issue in corporate overseas expansion. This l A desire to open new markets and gain concern is linked to the above-mentioned desires market share drives corporate expansions to access new markets and/or gain market share. abroad. This is especially the case for European Perhaps connected to the socioeconomic factor, countries, as sluggish growth in domestic the second-biggest concern is exchange-rate markets has encouraged many European volatility. Among the job functions surveyed, companies to seek stronger returns overseas. As CFOs view physical location issues in the James Kidd, CFO at the UK-based multinational corporate expansion process with particular information technology company AVEVA, concern. explains: “We do take inspiration from the l Concerns about data protection and privacy demands of other markets.” laws are the biggest legal/compliance issue. l Many companies seek support from This is particularly the case for COOs and general governments and chambers of commerce. counsels/CLOs as well as for respondents based Around half of survey respondents rely on in Europe. However, general counsels/CLOs are resources provided by their local government more likely than other functions in advocating in- and/or chamber of commerce, especially house control of the legal and compliance aspects North American respondents. Support from of the expansion, while many COOs prefer using governmental agencies and chambers of external experts in this field. commerce also features highly across business © The Economist Intelligence Unit Limited 2015 3 Corporate overseas expansion: Opportunities and barriers l Local employment customs, practices and HR practices—while maintaining our core laws are the main concern for HR/payroll. operating principles” is crucial to undertaking an Those interviewed for this report agree that expansion. maintaining company culture while respecting l Excessive bureaucracy in the local tax local customs and cultural differences is system is rated as the biggest accounting a fundamental objective for a successful issue for businesses expanding overseas. COOs international expansion. Jose Papa Neto, chief and senior payroll professionals see this as a executive of global fashion-trend forecasting particular issue. By contrast, a country’s level company WGSN, says that “being aware of and of taxation seems to be far less of a concern in adapting our operations to accommodate for companies’ expansion projects than might have the complexities of individual markets—from been expected. sales strategies and respecting culture to local 4 © The Economist Intelligence Unit Limited 2015 Corporate overseas expansion: Opportunities and barriers Introduction Expanding into an overseas market is a daunting available, increasing consumer choice and and exciting proposition for any ambitious, high- rationalising consumer pricing. growth company. International expansion is a key driver of revenue growth and tends to provide The global financial crisis has been seen as businesses with improved return on capital, an a catalyst spurring companies to launch increased reinvestment rate and greater security overseas operations; sluggish domestic growth through more diversified revenue streams.1 can encourage companies to search for more Moreover, the pace of growth from overseas vibrant markets overseas and diversified expansion tends to be quicker than domestically revenue streams, while the return to a positive generated growth. domestic economic environment buoys business confidence, making an overseas investment more From a competitive standpoint, businesses that palatable to the corporate C-suite. launch internationally gain access to a wider customer base and grow their brand “footprint”. This report will first explore the ways in which Plus, globalisation and the Internet-enabled companies across different sectors approach an open, instant access to global information means overseas expansion; what prompts consideration that businesses with footholds in non-domestic of an expansion; how they identify potential territories can bring to clients the added benefit locations; and their general approach. It will of their “on-the-ground” understanding of a then move on to consider the ways in which these diverse marketplace. Increased competition companies operationally approach key thematic across global marketplaces feeds corporate areas, such as legal/compliance, accountancy/ innovation, making new products and services tax and human resources/administration. 1 “4 Real Benefits from International Expansion”, Chief Executive, April 16th 2012. Available at: http://chiefexecutive. net/4-real-benefits-from- international-expansion/. © The Economist Intelligence Unit Limited 2015 5 Corporate overseas expansion: Opportunities and barriers 1 Strategy and approach Motivating factors However, there is disagreement among the experts interviewed for this report as to the The motivations for businesses to expand into validity of this assumption. Brian Pallas, founder an overseas locale are almost as diverse as the and chief executive of Opportunity Network—a businesses themselves. International expansion digital company which originated in Italy and can be a bellwether of business confidence when now has offices in New York, Barcelona and acquiring foreign brands or entering into joint (just this year) London, Santiago and Dubai— ventures as well as a sign of corporate health; supports this view: “It’s traditionally been the profitable companies stockpiling cash reserves case in global markets that when growth slows are frowned upon as growth is considered to down, companies will begin to look outside 2 be curtailed by the