Expanding Overseas

Doing business in overseas markets has its highs and lows, and can be intimidating, especially for SMEs and start-ups. But it is possible for small businesses and large corporations to reap the benefits of expanding operations internationally and there are varying reasons companies choose to do so.

It is important though that a company researches the market it is trying to break into before making a decision – this includes weighing up the risks and benefits. And although the risks of expanding overseas are high, the benefits can outweigh them if foreign business is executed to good effect. This comes down to rigorous research of the country, culture and people the business is ultimately targeting abroad.

Advantages

International growth: Revenues from a well-diversified portfolio of overseas customers are vital for an exporting company to benefit.

ROI: Overseas trade, can increase financial performance and ultimately augment the returns on investment. There is then potential for businesses to amplify the commercial lifespan of existing products, even if they had become less popular in domestically.

Spreading business risk: A company may protect itself from unprecedented global disasters and market upsets such as financial meltdown, earthquakes and civil unrest through overseas business. The home market of a business could contract or even disappear during these unstable times, but the business may be saved by the revenue it generates overseas.

Market competition: Companies can improve their competitiveness through the observation of a range of trends in quality, product development, design and packaging.

FEX rates: As a business begins to trade overseas the reliance it has on its domestic market reduces and risks can be spread, especially in relation to exchange rates. For example, if a business does most of its trade in US Dollars it may be beneficial for said business to trade with Japan to spread the exchange rate risk between the Dollar and the Yen.

Disadvantages

The benefits of international trade aren’t void of risks. Setting up overseas may not move as quickly and successfully as anticipated. Local customs and/or legislation can slow things down. A change in policy, cultural difference and FEX risks may hinder businesses looking to expand.

FEX risk: Currency fluctuations could affect either the value of existing assets or liabilities denominated in foreign currency. This could ultimately result in a business becoming less competitive overnight, resulting in a loss of sales and loss of revenue.

Political risk: Investing in different countries whose political regimes can change over time also poses a few risks. Governments could discriminatorily change laws, regulations or contracts governing an investment. Companies engaged in international business use a combination of legal contracts, insurance and trade in financial instruments to protect income streams.

Cultural risk: Cultural differences could create problems in international trade. Failure to take into account different cultures might lead to damaging and costly mistakes. This could range from causing offence by not observing correct protocol, to inappropriate packaging and marketing. It goes without saying that the marketing of a certain business in one western country might differ to that of a country that is still developing and has differing cultural habits and beliefs.

Credit risk: Businesses should establish the credit rating of potential clients in many countries and guard against non-payment through, for example, letter of credit or credit insurance. The risk comes with the impact of (1) a customer’s financial drawback and (2) how to finance the offered credit period.

Buying and selling in overseas markets offers the potential for businesses to develop and expand opportunities but not without risk. Above all, patience is required as setting up any business overseas will take its time to become successful.

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