Whether a company is a US automotive, UK biotech or Chinese computer maker, the primary challenge of globalisation remains the same: how to grow internationally. There are many places to start but the most important questions to address are: Why look overseas? Who will fund the expansion? What are the legal implications? How should the business be structured?
These fundamental questions need to be answered long before specifics of location are considered. For international expansion, the ‘why, who, what and how’ should always come before the ‘where’.
The first call should be to the company’s trusted business advisers. These intermediaries (or multipliers) are the vital link to the golden triangle of international expansion comprising the mover, the location and the ‘suits’ who can make it happen. In today’s new economy where people can source goods and services direct thanks to the internet, some people are questioning the role of the ‘middleman’. While it is true that in some industries, intermediaries have been rendered obsolete, for FDI they have never been more important. Any market that faces a complex and confusing set of choices is ripe for intermediation – and corporate expansion is such a market.
Access to resources
Three types of professional are crucial to world business: accountants, bankers and lawyers. They not only know your business as well as anyone, they also have access to vast resources of knowledge and contacts that can help you. Most of them will be part of an international network or alliance with members in any of the target markets that you are considering.
Intermediaries love networking. To some people an embassy reception is just a social event; for intermediaries it is a business-critical activity. The ingredients for a successful intermediary network is simple: put a few lawyers, bankers and accountants together in a room, add a few drinks, watch for the interaction and wait for the deals to flow.
The effectiveness of tapping into global networks can be seen in the recent example of one manufacturing company, based in the north of England, which was looking to establish a presence in Poland. Within minutes of raising the issue with the company’s accountants, Tenon, an impromptu conference call was organised with English-speaking lawyers and accountants based in Poland. They were immediately able to make practical suggestions and give advice on some peculiarities of Polish business law that could potentially save the company a lot of trouble down the line.
This meeting was made possible thanks to Tenon’s international network of business advisers, Morison International. It covers 65 countries and includes one of China’s largest firms of accountants. The power of leveraging these networks becomes clear when a local accountancy firm in a small Lancashire town can access the support of 75,000 Chinese colleagues on the other side of the world.
Other intermediaries also have their own networks, some with fully integrated offices (like the Big Four accounting firms and the major law firms covering most major markets) and others, like Tenon, that have created cross-border relationships with like-minded players.
A relatively new phenomenon is the specialist network, which brings together a range of specialist intermediaries in a ‘one-stop shop’ for inward investment. One such network is the Touchdown Europe grouping, which is based in the UK but has members and contacts in many European business capitals.
Touchdown Europe is a network of advisers from a range of disciplines that have been chosen for their understanding and expertise in helping companies to set up and expand in Europe. Partners include many major banks, specialist international law firms, accountants, human resources specialists, property agents and niche market entry consultants.
The kind of value that intermediary networks can bring to your corporate expansion is illustrated by a recent case of a US software company looking to make its first move into Europe. The company’s Boston-based CEO was planning its European strategy with its lawyers, when they were introduced to Touchdown Europe’s services.
Within 48 hours, a transatlantic conference call was held that involved a location consultant, a payroll and employee benefits specialist, a banker and a sales accelerator company. This was arranged free of charge and the hour-long discussion helped clarify a number of issues for the company. When it visited the UK a few weeks later, further meetings were arranged and several deals resulted.
Without this kind of initial service, international expansion becomes a ‘Yellow Pages lottery’ in which all of the ingredients have to be sourced individually without the same degree of trust and confidence.
Do your homework
The message is clear when it comes to sourcing intermediaries: do your homework and take advantage of the free initial services offered by different networks. A little local knowledge goes a very long way.
Increasingly, inward investment agencies are also seeking to influence intermediaries through the creation and management of multiplier networks. This can be seen, for instance, in the way that the UK’s Yorkshire Forward is tackling the fast-growing Nordic market. Rather than setting up an outpost in Stockholm or Copenhagen and launching above-the-line advertising in target markets, the regional development agency decided to focus on intermediaries, and in particular on London, which is a global crossroads. It realised that London was home to many important Scandinavian movers and shakers, from the major banks and niche Nordic-focused law firms to the networking organisations, such as various Nordic chambers of commerce, embassies and foreign media. For the past two years, Yorkshire has nurtured these targets through its own intermediaries network. The work is proving successful, with several live projects being handled by the agency following referrals from these intermediaries.
Other examples of regional agencies using intermediaries to reach into new markets include the Welsh Development Agency, whose efforts to attract Indian companies to Wales have been boosted by working closely with London-based lawyers of Indian descent. This approach has resulted in several new investments. Similarly, agencies like Scottish Development International, Mersey Partnership and UK Trade & Investment all have specific initiatives directed at intermediaries.
Who you know
The saying ‘it’s not what you know, it’s who you know’ is true of global business. Entering any market for the first time is a difficult and complex task that is always helped by having a few friendly faces on the ground locally. This is particularly true when doing business in any of the emerging Asian countries, where personal contacts and long-standing relationships are a prerequisite of any successful venture. Intermediaries can shorten your learning curve and provide access to well-established business networks.
Businesses, being generally wary of potentially expensive, charge-by-the-hour professional advisers, often leave it as long as possible before bringing in the lawyers and accountants. This is a false economy. It is far more prudent to engage advisers from the outset of any relocation or expansion project. Time (and money) spent on them in the early stages of an international move could ensure a speedier, cost-effective and ultimately more successful project.
Too many businesses, especially small and medium-sized firms, bring in lawyers only once there is a problem or the deal is ready to be negotiated. This misses an opportunity to use the good contacts that your advisers will have and ignores a transformation in professional services that has been under way for several years. The days of banking, legal and accounting issues being mere commodity services are long gone. In international business, these professionals increasingly act as business advisers and flexible solution providers.
Variety of advisers
Be open-minded in your interpretation of what an intermediary is. Although bankers, lawyers and accountants are key, there are many others who can be useful, including HR consultants, property agents and specialists in market entry, site selection, sales and marketing.
Your long-term business is potentially very valuable to intermediaries, which enables you to leverage a great deal of free advice.
Wherever you decide to expand or relocate, there will be similar considerations and decisions to be made and, unsurprisingly, there are intermediaries to help at every step of the way.
For example, here are some of the things you would need to consider for Europe:
- The market opportunity. The first and one of the most crucial steps is your ability to define your market context and business direction. What markets are you intending to enter? Are there any barriers to entry? What are the market strengths in your particular geographical location? Who will be your competition?
- Choosing the right location. Finding the optimum location for your business is a challenge – there is so much choice available. How do you choose the location that adds some serious value to your bottom line? Understanding the various pros and cons of each location should be an early consideration, especially if grants and incentives are involved because they require planning and can take time.
- Agreeing the best method of entry. Will you consider buying an existing player in a market, or look to establish a joint venture with someone? If you are setting up a new entity, what type of operation will you have? You need to consider the differing tax, operational and marketing benefits offered by different types of operation. You can choose between a representative office, branch or subsidiary company with limited liability. There are particular business advantages to each, depending on your circumstances.
- Getting the best tax structure. How will your European entity earn its income? The operation may book all the sales it makes in the region and so be trading on the normal profit and loss basis. Alternatively it may act as a service provider to the parent, for example by providing local marketing expertise. In this case, your method of recognising revenue will depend on the type of trading structure: the options include a commission basis and a mark-up on costs. You will have to think about intra-group trading agreements and transfer pricing documentation as required by revenue authorities, determine your European tax structure and take care of your tax filings and other compliance matters.
- Understanding Value Added Tax (VAT). VAT/Customs duty is complex. A new business is likely to be required to register for VAT. If so, you will have to think about registration and compliance, and any planning opportunities if your products are liable to import duty.
- People issues. These can include the relocation of staff, work and residence permits, employee benefits packages to attract and retain the best staff, and issues related to payroll and expenses – if you are employing even one staff member, you will need to ensure compliance with European payroll systems.
- Financial management. Suitable banking and finance facilities will need to be implemented to ensure the efficient transfer of funds between Europe and your corporate HQ. Keeping tight control of an overseas operation can be a worry, so you need accounting support services to ensure you retain control. This will include management accounts and reports, sales invoicing, credit control, VAT returns, purchase ledger management, payments to suppliers, expense claims-checking and reimbursement.
- Choosing the right property. Both commercial and residential property issues need to be considered. With a wide range of choice, from serviced offices to leases and developing your own facility, there will be specialists eager to share their knowledge and insight.
So remember, before you try the do-it-yourself approach to expanding overseas, have a chat with the ‘suits’. You could be surprised how they can help. There is much more to your accountant, lawyer and banker than meets the eye.
Douglas Clark of Tenon techlocate (e-mail: email@example.com) and Adam Breeze of Breeze Strategy (e-mail: firstname.lastname@example.org) are UK-based inward investment consultants.