The main considerations and challenges that companies need to address as

they seek to expand their operations around the world

Today the globalisation, advancement of technology and transportation led nature of

the world’s business environment to become less small geographical arena.

Therefore, in a way it looks much easier than past to go for international expansion

of the on-going business. However, changing nature of various factors demand

greater care and efficiency than expected. This essay will focus on those

considerations and challenges that today’s business organisations need to address

as they seek to expand their operations around the world could be analysed under

three main phases. They are planning for expansion, choosing the location and

operating the business overseas.

When planning for international expansion, it is vital to have a clear long term plan

and understanding of the implications of international expansion for the existing

business operations. The reason is to define and test the business strategy followed

by identifying any positive factors arising from international expansion. Prior to go

ahead with expanding the business internationally, management should possess a

clear aim of what to be achieved by expansion. It could be for new and cheaper

source of capital, useful talent to exploit the market, cost cutting in terms of

production, new untouched market for existing or new products etc. All those aims

will not be easily achieved unless business has a partner either from business

perspective or advisory perspective. Similarly, pressure emerges from the global

expansion put on the local business operations by way of financial resources, human

resources and time of management. Moreover, it should be determined whether

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business should be expanded globally through joint venture, acquisition or

partnership. All those areas should be tested logically to ascertain and decide the

feasibility and time taken to generate profit from the expansion (De Wit, and Meyer,

2014).

Global trends is also another factor that should be monitored and be aware of under

the planning stage. This includes whether the current business is exposed to new

or/and emerging markets, whether the composition of major competitors has

changed and whether opportunities for foreign direct investments of business’s

industry is available in foreign locations where business does not operate at present.

All those issues are based on the demographic changes that evolve from the growth

of the population in countries (Johnson, 1994).

Growth of world population is not a new phenomenon but the demographic changes

may considerably impact the business practices and profitability in the long run. For

instance, it is expected to have approximately forty two millions of people in Australia

by the year 2050 (news.com.au). Similarly, in emerging countries such as China,

India etc. there is a positive correlation among growth of population, growth of middle

class consumer base and growth of upper income earners. Hence, those countries

are no more perceived as just low cost manufacturing geographical locations as

done in the past (Willis, 2005). Today those markets are becoming more popular as

consumer driven societies due to fast pace of demand for products and services

higher than in developed and mature markets. For those reasons, business could

either tap those markets to gain first mover advantage for a future growth and

stability. However, it is possible to wait and watch until another competitor take the

2
risk and follow later with better strategies. Either way business will be able to

strengthen local operations short to long term through effective participation of

international business operations (Garnaut, (1994).

Economic viability could be assessed from the amount of flow of foreign direct

investment in to a country. When FDI are welcomed to a country via attractive tax

and legal policies then going for those geographical locations could be prudent.

Similarly, demographic trends such as education level and age levels of people

could be an acceptable indicator for future growth of consumer base and economic

stability (Economic growth and the environment 2010). For example, today Vietnam

is able to attract FDI in several industry sectors due to the fact that over 70% of

Vietnamese are below thirty years of age Tamer (Cavusgil, 2009).

Market research is another important area under the planning for expansion of

business (ICCA, 2010). This would help to identify the right research to gain

information related to market and industry. Moreover, examine the information

whether to find out their future outlook and novelty is also important followed by

creating a shortlist of intended new markets, coordinate with existing networks,

establish sound communication with partner or advisors and vising those short listed

countries. However, this market research could become costly despite its

importance. However, various sources are still available free of charge to understand

and evaluate the challenges and opportunities in the global market (International

Expansion and Global Market Opportunity Assessment. 2014). Although there can

be sufficient statistical data and information through available sources, they should

not replace field visit to actual locations. The reason is only by visiting one could

3
gauge the viability of future business operations as world is changing so fast that

what would have been considered as ideal investment in the past may not offer

same opportunities in future. Communicate with chambers of commerce and industry

would help immensely. Further, visiting trade fairs, visiting and meeting local

consumers and advisors will also helpful. All these moves help the management to

have a well-educated and informed decision as to chosen target market is right for

the expansion of existing business globally (Pagell, 1999).

When it comes to choosing the location for the international expansion, it is vital to

look at business issues such as evaluation of sovereign risk, degree of sovereign

debt and level of social unrest including the degree of influence of trade unions

(ICCA, 2010). Globalisation accelerates the widening of political landscape in the

world. Hence, one country’s political decision would affect the business decisions of

globalised business community at large. The best example is the impact of global

financial crisis on all over the world that took place few years ago (Global Issues.

2014). Further, it is accepted that economic expansion is boosted by the

globalisation. Before deciding to invest in selected geographical location, it is

necessary to assess the political environment of that location. This examination

could include the social unrest or regional instability. These issues are evident in

most of the South East Asian countries in past few decades (Hamilton, 2012).

Another important area that needs attention is the local tax and regulatory

environment (ICCA, 2010). Under this, it should be identified whether the existing tax

regime is business friendly or competitive, availability of free trade agreements and

whether country’s regulatory regime establishes a strong corporate governance

4
framework (ICAA, 2010). Although, a low headline corporate tax seems to be

appealing to investors still there can be some hidden factors such as high

withholding taxes, consumption taxes namely value added tax. Therefore, thorough

market analysis should be conducted using commercial discussions with local

market experts. It should be understood that even though free trade agreements are

available in certain economies, governments could have imposed several legal

restrictions to protect the domestic markets in certain industries (Library of

Economics and Liberty, 2014). When there is a right balance between establishing a

better environment for efficient corporate governance in all the industries with more

entrepreneurial freedom or no discrimination for foreign businessmen then any

nations could be regarded as open for foreign direct investments (unido.org,2014).

When choosing the location for international expansion, one should pay attention to

legal system of that country (ICCA, 2010). In other words, investigation should be

made as to the find out whether the legal system is a common law and if not

outcomes are identifiable. And further assessment has to be done to find out

whether those prevailing legal, judicial system favour and protect the business and

commercial operations in that country. Whenever a right balance between protecting

the business’s common interests and safeguarding country’s consumer is provided

by effective legal system, high level of reliability could be assured in terms of

enforcing commercial agreements. The main legal systems are common law, Civil

law, Muslim law and mixed law (The World Fact book. 2014). As far as common law

system is considered, it becomes useful as the outcomes and framework is clear.

But, pure common law is seen in only limited number of countries today. On other

hand, many of the European countries and emerging markets follow the Civil law

5
while Muslim legal system is common in Gulf countries, Africa, Middle East and Asia.

All those legal systems have greater impact on international expansion. One way

legal system affects the international expansion from anti-trust and competition law

for mergers and acquisitions (ICCA, 2010). Similarly, legal system has capability to

protect trademarks, copy rights, distribution law, data protection law and competition

law. And setting the scenes for arbitration, litigation and mediation is done through

the legal system. Moreover, legal guidance will be provided for information

technology while employment issues are regulated by labour law (Cullen, and

Praveen 2010).

Moreover, today there are new issues that have higher impact on international

expansion in choosing location such as availability of support for innovation and

incentives (ICCA, 2010). This matter address whether to develop products in fast

growing markets or emerging markets, existing business has a presence at global

innovation clusters and whether sufficient and generous incentive system is

presence for innovative businesses. The reason behind this factor is that having and

maintaining a healthy environment for innovation is vital for business’s long term

growth. This innovation is centralised in some organisations while some follow

decentralised innovation strategy (Innovation management, 2014). Many strategic

and business drivers influence the decision to relocate research and development

activities to emerging markets. On the other hand, identification and understanding

of attractive host country government incentives, government grants and support

make the international expansion smooth (International Economics, 2014). Further,

host country may like to have foreign investments for boosting local economy by way

creating jobs and development of infrastructure etc. They even interest to have

6
negotiations and concessions and incentives. All these help to place the business in

strong bargaining position prior to going for final decision as to selecting the location

(Berg 2003).

Another consideration should be given to location and infrastructure facilities

(ICCA,2010). This encompass the assessment of security and reliability of the

infrastructure, methods to face telecommunication failures, power cuts and traffic

congestions etc. and finding out whether the location is central to other markets,

logistics of goods and services. In the first place thorough analysis should be carried

out identify the infrastructure in the target country in order to assess the reliability

and any detrimental or positive effects for the business operations in the long run.

Further, specific attention has to be paid to communication infrastructure in the target

location. Since business operations across the countries mainly depend on the

efficiency and effectiveness of information technology it is important to assess the

efficiency and capacity of mobile networks, telephone and data delivery systems

(world Economic Forum, 2012). Criteria for evaluating the infrastructure could be

how modern, how reliable, how vulnerable to power failures and cyber-attacks and

more importantly how adequate the existing emergency and disaster recovery

system. Similarly, consideration need to be paid to ascertain whether attributes that

made the business successful in past would be useful or not at the selected location

in terms of using people, products and other resources. Again, all these factors will

be affected by size, existing facilities, accessibility etc. (Vaghefi, 1991).

Another significant issue that have impact on expansion the business towards

international market is the cultural compatibility at target location (ICCA, 2010). For

7
this purpose, assessment has to be done to identify for any significant cultural

differences that are likely to have an impact on the style of business activities and to

identify any language obstacles. In many occasions entrepreneurs are successful in

establishing global footprint quickly (ENTREPRENEURSHIP GOES GLOBAL - Ivey

Business Journal . 2014). Nevertheless, with the diverse workforce having

different cultural values and practices it may not easy to operates in chosen location.

Therefore, proper identification of those differences and remedies to cope up with

those issues need to be decide in advance to avoid later management difficulties

and damages. The main area that has to be looked in to is the language of business

operations. Although, English is widely spoken globally when it comes to emerging

markets such as Asia, China etc. their native languages becomes more common in

day today activities (The Guardian . 2014). Therefore, selecting right individual with

language knowledge, training for effective communication etc. need to be done to

avoid any possible misunderstanding and serious issues. Some of the cultural

factors identified in the order of significant are level of international experience at

workplace, degree to which products or services need to be adopted to foreign

market, level of tolerance and understanding of cultural and ethnic differences in the

target location, language barriers in new chosen location, cultural similarity to home

market and freedom of advertising to influence consumers (Johnson et al 2006).

Finally under choosing location, availability, skill set and cost of local work force in

the target location is much influential factor (ICCA,2010). When expanding the

business overseas right selection of people and placing them at right location is

crucial as it could make the difference of success and failure of the business

overseas. Therefore, workforce in target market is deciding factor when expanding

8
the business internationally. Since it is impossible to export all the human resources

to the foreign location, setting up of a local workforce in target location becomes

inevitable (G20 Training strategy, 2010). Hence, various practical issues have to

considered such as expected level of education and experience of the prospective

employees and amount of finance if there is need to train them, terms and conditions

of employment, negotiations with industry labour unions and bargaining parties,

adhering to minimum wages, working hours, holidays and other local customs and

practices that totally or partly different from home country (Vaghefi, 1991).

Apart from planning for expansion and choosing the location final and much critical

challenge is the doing business overseas (ICCA, 2010). This involves variety of

issues to address. The main issue is the risk factor associated with several areas

such as appointing the right people to negotiate with suppliers, customers and other

stakeholders, appointing the right management to recruit employees and need to

develop an international management team in absence of such team. Therefore,

business will have to address the issues such as how run the expanded business

smoothly, number of management personal required, what is level of resource

requirement, what is the degree of reliability of local services etc. All those

challenges could be faced with effective negotiations with government authorities of

the host country for licencing arrangements, tax concessions and labour

requirements (Vaghefi, 1991).

At this point, it is also important to consider the possibility of corruption new

business location by way of demanding bribes and unlawful payments by local

officials (ICCA 2010). As these acts may be criminal offences under the legal system

9
of both host country and home country. Next critical challenge is the responsibility

towards the global human resources. This includes dealing with security protection

and tax benefits, appointing an efficient team to deal with immigration, tax and

assignment management and decide to do those functions internally or outsourced.

These issues will be solved considering the cost and benefit for the business (Sanyal

2005).

Another most important challenge is the financing aspect for the international

expansion (ICCA 2010). In this situation, management has to analyse the cash flow

of the business, projected revenue etc. Similarly, consideration of strong financing

partners such as banks, intercompany loans should be done. Further, the impacts of

tax on the business and debt equity mix are crucial areas for study. Decision of

going for slow organic structure or looking for joint venture or acquire existing local

business for have fast local presence are much important when doing business

globally. Factors such as market conditions and capability to exploit market share

immediately shape the operating structure and business model for the global

business (How Strategy Shapes Structure. 2014). Associated cost and benefits need

to be analysed carefully before going for either joint venture with local business or

establish offices or factories for business operations. Then, the implementation of

operating structure is taken place examining legal and administrative procedures to

set up the business (Globial Talks Business, 2014).

Moreover, it is vital to decide whether to outsource the set up to corporate

secretarial service firm (ICCA, 2010). Another important aspect is the management

of foreign exchange and currency controls. Under this management should examine

10
whether the local currency is stable or volatile and possibility of currency restrictions

that would inhabit and prohibit any movement of international funds. The reason

behind this is that fluctuation of currency could have an adverse effect on the

international business as margins of goods and services tend to change (WTO,

2011). Since, the ultimate objective of international expansion is to boost the

profitability careful consideration has to be given to international taxation. Hence,

study of methods of imposing taxes on business revenue at target location and

methods of treating losses have to be made (Carpenter and. Dunung, 2014).

When doing business operations in chosen location, management needs to pay

attention to the strength of the supply chain for the smooth operations (Strategic

Operations Management , 2014). Moreover, the decisions relating to transfer pricing

need to be done when moving goods and services from one location to another.

Finally, cost and complexity involving in exit or winding up business from unprofitable

locations takes paramount importance (ICCA 2010).

In summary, the challenges and considerations that were mentioned in previous

paragraphs when going for international expansion fall in to three main criteria such

as planning, choosing the location and doing actual business operations. Strategy,

global trends and market research are the main challenges under the planning while

political climate, social climate, legal system, tax policy, innovations, infrastructure,

culture and local workforce are considerations when choosing the location. Finally,

operations of business affected by global human resources issues, financing,

operating structure, foreign exchange, supply chain, transfer prising and exit or wind

down easiness.

11
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