August 19, 2013
In today’s global market, expanding overseas is no longer a luxury – it is a necessity, according to a recent survey of chief financial officers and other senior executives at companies with annual revenues of $50 million to $1 billion.
The report, titled “Pushing the Boundaries of Overseas Expansion,” finds that as growth remains lackluster in some of U.S. market sectors, 65 percent of American businesses are aggressively pursuing international expansion in an effort to drive sales and win new customers in 2013.
Unlike previous years when international expansion was used for outsourcing, small-and-mid-sized companies are now looking to establish in new markets to diversify their mix of customers and they want to do it quickly and with potentially less risk.
Of the 161 executives surveyed from companies already operating overseas or considering international expansion, two-thirds expect international markets to be among their companies’ top priorities over the next three years, with 95 percent of businesses and executives expecting to have customers in at least two foreign countries in the next three years. Of the respondents, 20 percent currently serve customers in more than 20 countries, and 32 percent plan to have customers in more than 20 countries in three years. For three-fourths of the executives surveyed, their interest was in growing revenues and expanding their customer base, with only 8 percent of respondents reporting a goal of reducing expenses.
Accordingly, a majority of respondents, 57 percent, indicated that entering new markets in emerging economies would be moderately important or critical for them in the next three years. And the number of businesses looking to expand in those parts of the world will only grow.
The research also finds that American executives continue to feel more comfortable expanding into developed economies like the United Kingdom and Australia. However, developing economies are the growth hotspots as they grab an ever-larger share of the world’s wealth. While Europe is relatively familiar to those surveyed, American executives acknowledge an increasing interest in emerging economies. With purchasing power shifting to the resource wealth of Africa — where an overwhelming 85 percent of survey respondents either find doing business difficult or don’t know the local terrain — Many see Africa offering tremendous opportunities given recent market trends and will make these territories important frontiers for business expansion.
However, while many of the executives see the upside, they also acknowledge the challenges that come with international expansion, such as legal, financial, and reputation risks.
Survey respondents say that hard-to-understand rules and regulations make the risks associated with overseas expansion difficult to evaluate.
The report offers candid insights from those surveyed about how they have met – or in some cases did not meet – the challenges involved when operating overseas. Of the respondents surveyed, the three biggest hurdles cited are ensuring compliance, managing tax implications and aligning their goals with the local culture. One of the consistent themes to emerge from the survey is that executives frequently elect to enlist outside experts when expanding to and operating in foreign countries. Experts say companies need to understand in expanding overseas that things are very different from country to country and laws and regulations need to be monitored very closely to ensure compliance, otherwise the damages can be enormous.
While these might seem insurmountable when considering overseas expansion, experts say to gain an understanding of the local markets, cultures and regulatory environment, it is important for companies to seek out partners with the expertise they need, especially in emerging economies, to help them navigate the risks and business climate.
The report cites expansion into China as example. Surprisingly, survey respondents report they were most familiar with China as an emerging market, but nearly half (44 percent) went on to describe it as the world’s most difficult place to do business. China’s rapidly changing regulatory environment is of major concern and necessitates constant monitoring and adjustment.
In the past, international expansion has been associated with outsourcing or lowering operational overhead, but that’s no longer the case. Today, international expansion is about being where the customers are, opening new markets and realizing as much growth potential as possible. Where the highest profile growth market is also the most challenging one, solutions are clearly needed. As the risk-reward equation of international expansion evolves, companies must learn to embrace the many challenges associated with operating overseas. Some will discover the hard way that they simply don’t know what they don’t know.
The study was conducted by High Street Partners and CFO Research.
By K. Lola Samuel, THE AFRICA BAZAAR Staff writer.