Despite the world economic recession, companies are "going global" at an earlier stage in their development than ever before. Expanding overseas involves the careful consideration of risk and cost. What are those potential hazards? And what can be done about them?
Here, I outline 10 issues CFOs and other C-level executives should consider when doing business globally:
1. Risk of non-payment in business transactions – This can be due to a company going into liquidation. As a result, it's important to carefully screen your customers/trade partners and, ideally, have them forward purchases in a compatible currency.
2. Political risks and the importance of taking credit insurance – For example, if you have a contract to ship goods to Country A, and have an irrevocable letter of credit from a major bank in, say, the UK, there would seem to be no need for insurance. But if there is a significant political event in Country A, then the contract could be thwarted and the costs never recovered.
3. Risks to the financing of your operations – Governments will increasingly restrict interest expense deductions to manage their deficits. For example, the Netherlands government presented to Parliament proposals to restrict deductibility of "participation interest expense," which is incurred on a debt-financed acquisition.
4. Enforcement of contracts – In China, for instance, many contracts entered into by foreign companies are often vague, and show a lack of understanding of the Chinese legal system. Foreign companies sometimes want to base a claim on e-mails, verbal communications, and what has been common practice over time, which doesn't typically work in China. For foreign companies, these assumptions can often lead to hefty penalties and losing lawsuits.
5. Increasing employee liabilities – Hire talent in cost-effective, employer-friendly locations if you can. Conditions that help create this nexus include:
- Low Social Security costs (a low percentage ER contribution and an earnings cap)
- Low statutory minimums for vacation, pay, overtime, sick pay and family leave
- No mandatory collective agreements
- Not a country that operates using "just cause" termination
- Low forecast for future wage inflation
- No short-term plans for government-enforced employer pensions
6. Increased inflation – Rates of inflation will affect the prices you pay when doing business overseas. Therefore, negotiating fixed prices over two to three years, or negotiating price to be in a consistent currency could prove to be cost-effective.
7. Increased regulations by tax and VAT authorities – It's very important to have proper documentation of taxes on goods and services. In particular, it is essential to consider the rates of VAT and probability in the current climate of increases in this rate. For example, recently Spain announced an increase in VAT rates, but did not clarify the amount of the increase.
8. Increasing strictness on compliance failures in import/export procedures – A Singapore company, for instance, was fined $25 million for failing to follow import procedures. Does your third-party forwarder maintain records to demonstrate compliance with import/export procedures? If not, then it is your liability. This audit trail is particularly important where submissions are electronic.
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9. Shortening the supply chain – For a major exporter that is sending goods to, say, 30 different countries, taking a look at how those goods are getting there can result in being able to extract cost reductions.
10. Getting a foothold in the fastest-growing economies – China continues to grow at 7% and India at 5%. But understanding the requirements of these markets is essential.
In China, these include:
- Developing a comprehensive "China strategy." Be aware of the significant cultural, language, legal, and business differences from region to region within China.
- Selecting the right partners, suppliers and resellers. Understand the objectives and motivations of any party with whom you plan to do business.
- Being mindful of the role of contracts in business relationships (as addressed above).
(Read More: Inflation in China – Is It Making a Comeback?)
To do business in India, you should consider that:
- Setting up branches and liaison offices requires a profitable track record of the parent company.
- VAT rates differ from state to state as can the VAT rules. Hence, the location of your business becomes important.
- New rules demand registration under service tax, even for firms exporting 100% of their services, under the reverse charge mechanism.
- There is increased regulation under a multitude of laws.
- Aggressive tax authorities are questioning the transfer pricing methodology and data, so there is a need for comprehensive benchmarking analysis to be done annually.
- Changing of your registered office from one state to another is a cumbersome long, drawn-out affair to be avoided if possible.
- Increasing wage inflation and attrition are factors
(Read More: India in a 'Horror Show' as Growth Slumps)
For U.S. companies, expanding operations overseas can be a real plus for their business. The most important thing to keep in mind during these difficult economic times is to take the proper steps while doing so.
Dr. Shan Nair is an expert in international expansion, a highly sought-after speaker on globalization and a contributing author for various publications. Since founding Nair & Co. in 1994, he has helped grow the company from a small U.K.-based professional services firm to a global enterprise with offices in U.K., India, China, U.S., Japan and Singapore. Nair & Co. currently serves more than 750 client operations in over 50 countries. Dr. Nair began his career as a nuclear physicist, obtaining his Ph.D. from The University of Oxford.