Key Takeaways
1. Global expansion occurs when a business grows its operations outside of its ‘base country’ of operations.
2. Benefits of global expansion include: talent acquisition, cost reduction, business resilience, growth opportunities, and tax and compliance benefits.
3. Potential disadvantages of global expansion include cost of entity establishment, permanent establishment risk, not understanding foreign consumer markets, and non-compliance.
4. All successful examples of global expansion involve a company carefully understanding its target country of expansion.
Once established in their country of origin, every enterprise should consider whether global expansion is a good idea for their business.
In this article, we look at the meaning of the term ‘global expansion’, and assess the pros and cons of global expansion as a business strategy.
What is global expansion?
The definition of global expansion is the growth of a business outside its base country into multiple overseas locations. Of course, expansion is the natural trajectory of any successful business. Initially, this expansion tends to occur ‘locally’: The business will grow in its original location. Over time, businesses will often explore expanding ‘nationally’: Expanding within their existing country.
At a certain point, many businesses will look at expanding into other countries. Even if it is simply an expansion into a neighboring country, this is where it becomes a ‘global’ or ‘international’ expansion. For example, post-Brexit, many United Kingdom businesses are considering how to best manage their expansion into EU countries.
Kickstart your global expansion with Horizons.
Infographic: Nimdzi global expansion framework
Localization experts Nimdzi offer the following framework for global expansion, with an international marketing focus.
What are the benefits of international expansion?
There are significant global expansion benefits for companies, as well as potential global expansion challenges. First, let’s consider the benefits:
1. Acquire global talent
Your people are your most important business asset: It is impossible to grow an innovative business without getting the right workers in the right positions. Wherever you are based, however, geography will place limitations on your workforce. While talent is abundant in international hubs like London, New York, and Hong Kong, top operators are also found in Bangkok, Shenzhen, and Hanoi. Global expansion may give you the workforce you need, at a significantly cheaper price.
In addition to sourcing talent, consider several other ways your workforce can benefit from global expansion:
- Secondments or intra-group transfers
- According to Nathan Brunner, workers are eager to travel for their jobs and learn new cultures. Intra-group transfers and secondments from head office to other locations are an excellent mechanism for employees to see how things are done in other countries.
- Diversity of skillsets and cultural backgrounds
- In a connected world, it is essential that your business can deal with diverse customers from different corners of the globe. Global expansion can be a useful way to ensure your staff can engage all your customers during the customer onboarding process and well beyond it. Advanced skills in other languages can be of particular benefit.
- Enhanced knowledge of local markets
- You may have worked out that expansion overseas is a crucial mechanism for accessing a lucrative new market for your goods and services: Having staff on the ground in the target market helps ensure that you have the necessary market intelligence.
2. Reduce costs
Global expansion is often more cost-efficient than local/national expansion: In some countries, the costs of labor and materials are much lower. For some businesses, this will make it beneficial to move a core operational function, such as manufacturing, customer service, or research and development (R&D) to another country. For other enterprises, it may be sensible to outsource a back-office function such as payroll, HR, or finance to another country. But no matter which option you choose, it’s crucial to integrate efficient manufacturing EDI processes to streamline operations and facilitate seamless communication between supply chain partners.
If making this move toward global expansion, it is crucial that enterprises consider the taxation consequences of the expansion overseas (see further discussion of this below).
3. Become more resilient
A business in any one country can suffer shocks or negative business events that are localized to operations in that country. This may be caused by an economic or political event in that country. Or, there may be an event that affects a business in just one country, and not in others. International expansion reduces the overall risk to the business of any such event. A downturn in sales in one country, for example, can be balanced with an up-turn in revenue in another location.
4. Expand globally for growth opportunities
Market research often reveals that there is a unique opportunity for your product or service in a target country or countries. For example, it may be the case that:
- You produce a product that is not currently available in that country
- Your competitors are not yet operating in that country and you seek to be ‘first to market’
- The target market has shown a particular interest in the types of products or services that your company sells.
In any of these cases, global expansion will be an essential part of your growth strategy.
5. Expand globally for tax and compliance benefits
Some overseas locations may have tax and compliance regimes that are more favorable to your company. This may include, for example, lower corporate tax rates, different rules about ‘permanent establishment’, or different rules about tax deductions: For example, setting up an R&D company to receive the benefits of generous R&D tax credits, or setting up an intellectual property (IP) holding company in a country with low effective taxes on IP gains (for more information, see A Global Guide to Business Relocation).
Note that international tax arrangements are complex and care needs to be taken to ensure that all tax obligations are complied with. For example, US tax authorities have significant scope to tax overseas profits as worldwide income. Professional advice on your international tax strategy is absolutely essential.
In addition to differing tax obligations, there may be significantly different employer obligations for employee benefits in different countries. For example, in Germany, employers must make significant contributions to employee health insurance and pay for the existence of a ‘works council‘ representing employee interests. By contrast, in New Zealand and Australia, with free public healthcare systems, and less stringent employer regulation, there are no such requirements.
Video: Strategies for global expansion
International Search Engine Optimization (SEO) and Search Engine Marketing (SEM) leaders, SEMRush, give a detailed breakdown of how to assess a market for global expansion.
What are the disadvantages of global expansion?
Despite the benefits, global expansion is not for every business. Some potential downsides of global expansion include:
- Costs of setting up entities/subsidiaries
- To do business in another country, it is often expected that that business set up a local subsidiary/legal entity in that country to conduct business in that location.
- Aside from the cost of lawyers/notaries and registration with government authorities, there are often substantial minimum capital requirements (e.g., €25,000 in Germany).
- Permanent establishment risk
- Permanent establishment is a concept in international tax law which says that a company is subject to corporate income tax in a jurisdiction when it has a ‘permanent establishment’ there: In short, this means having a fixed place of business in that country, through which business is carried out.
- This means that expanding globally without paying attention to the potential tax consequences could result in a large and unexpected tax bill elsewhere.
- Insufficient understanding of foreign markets
- Without first-hand experience, it can be difficult to understand that market well enough to know whether a specific product or service would succeed there.
- There have been many examples of overseas expansion failing where a business failed to understand a foreign target market (see the examples of Tesco and Starbucks below).
- Non-compliance
- As they say, ‘you don’t know what you don’t know’.
- Operating in a foreign country means understanding tax, commercial and employment laws that may operate differently than in your base country.
- There is a risk that failing to employ staff correctly (e.g., making the right tax and payroll deductions), or breaking other laws, could leave you with substantial fines and back-taxes/back-charges.
Successful (and unsuccessful) examples of global expansion
Apple has staked its future on global markets, rather than the domestic front. Asia and Europe are major markets, with Chinese consumers being, by far, the largest consumers of iPhones.
Of course, for Apple, global expansion is not just about finding new markets for its products, and business branding, but its global supply chain: Supply chains from 43 countries are required to produce the final product. For example, while final product assembly occurs in China, the accelerators in iPhones come from Germany.
Red Bull is another truly global brand. By far the most popular energy drink in the world (at 40 percent of market share), many assume that Red Bull is a North American brand. In reality, it is a joint Thai-Austrian collaboration, founded and based in Salzburg, Austria. Its unique marketing approach — sponsoring extreme sport events, and owning football teams, alongside traditional commercials — has given it a global prominence no competitor has come close to.
But not every global expansion is a success story: UK grocery chain Tesco had successfully pursued expansion into China, India, Malaysia and continental Europe. It was only when expanding into the US that it faced difficulties. This failed expansion was partly a timing issue (2007 — the recession saw reduced interest in the relatively pricey ‘ready meals’ that Tesco was most famous for); but it was also about a failure to understand the kind of store that is geographically suited to the suburban United States. The smaller stores, located near public transport hubs and residential areas, did not gel with the ‘big box’ mentality of many US shoppers. It pulled out of the market for good in 2013.
Another famous failed expansion was the Starbucks expansion into Israel. Opening five stores in Tel Aviv in 2001, they had pulled out by 2003. There is some controversy and disagreement over why Starbucks failed, but reasons cited include:
- A failure to understand the Israeli preference for stronger coffee styles (such as Turkish coffee)
- An inability to compete on price with cheaper local coffee
- A poor relationship with the local expansion partner
- An underestimation of the loyalty of locals to small ‘Mom and Pop’ operations.
Streamline global expansion with Horizons
Global expansion has numerous benefits for ambitious companies: It means access to new consumer markets, improved supply chains, access to top staff and cost savings.
But global expansion also carries risks. Companies that have not carefully planned their expansion can struggle through not understanding their target market, inadvertently make tax and compliance errors, and be stung with the substantial cost of entity set up.
The best way of mitigating these risks is to engage a capable global expansion partner. Horizons can get you set up and hiring in a target market, quickly, and without the need to establish an entity. Any local talent acquired can be employed via Horizons’ Employer of Record solutions, taking payroll, employment and HR compliance off your hands.
Frequently asked questions
Global expansion has a range of benefits for companies, including cost savings, access to talented overseas employees, and access to new consumer markets. It is also, arguably, beneficial to the world economy as part of globalization.
A global expansion strategy is a planned, intentional approach to overseas growth. A robust global expansion strategy gives your company the best chance of overseas success.
