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How to Gain Competitive Advantage for Big International Wins

How to Gain Competitive Advantage for Big International Wins

By Monday, 09 December 2019 01:15 PM Current | Bio | Archive

Increasing globalization has pushed companies to expand into multiple countries and build businesses without borders.

However, there are many considerations other than sales when expanding abroad. Some of these are very commonly understood and well known but others are more obscure and easy to miss.

In this article, I have tried to elaborate on some aspects that are not commonly understood when expanding globally.

Building Local Teams

It is very well recognized that having local teams is essential in many countries owing to cultural and language limitations. Most businesses are now aware that the ‘direct’ approach of doing business prevalent in the US may not work well in countries with a different and more formal culture as is the case in the Middle East and Far East. In addition, most countries do not have English as the first language and may not even consider English to be their common business language.

However, what is often missed are the regulatory requirements for local hiring in various countries. In Saudi Arabia, for example, hiring foreigners for sales jobs is almost impossible while in China a representative offices can only hire up to 4 foreign persons. Companies in Brazil have to follow “the principle of proportionality” which means that at least 2/3 of all employees must be Brazilians and they have to gain at least 2/3 of all paid salaries. Mexico has a rule that no more than 10% of the employees of a Mexican company can be foreigners, with some exceptions such as senior management.

Methods for approaching customers or industry partners will also differ from place to place. Trade fairs or shows may not be as productive in developing countries, where many businesses (including government contracts) work often through personal contacts.

Thus, hiring local is often not just a business requirement but also sometimes a regulatory requirement.

Product Positioning

Many aspects of product positioning are well known. Example are price sensitivity in Asian countries winning over quality, product requirements like left-hand drive vs right-hand drive cars in various countries, local regulations for products such as the recent EU Medical Device Regulation (MDR) which has created complications for the U.S. medical device manufacturers. Most companies carry out a detailed analysis of all of these aspects before expanding globally.

However, some important yet overlooked regulations can often play a role in product positioning or even product viability. Some examples include:

  1. Tax regulations – Product positioning can determine VAT applicability and severely impact product pricing. In the case of software, the classification as a product or service or “license to use” can determine the applicable tax and the tax slabs. India has recently issued a clarification for IT-enabled services. Based on this, the service can either be taxable at an 18% rate or at a 0% rate. This can entirely change the viability of a business in the country.
  2. Health and safety regulations - Nestlé’s instant noodles, “Maggi” was banned in India on June 5, 2015, by the national food regulator, Food Safety and Standards Authority of India (FSSAI) for alleged “lead content” beyond permissible limits under the “Food Safety Act”. The market share of instant noodles took a nosedive from 90% to 53% causing a massive loss to Nestlé’.
  3. Privacy regulations – besides GDPR in the EU, most countries are coming up with their own privacy regulations. The scope and implications of such regulations are often misunderstood. Even product companies that collect, process or retain any personal data need to comply with these regulations.
  4. Reporting requirements – although the product compliance requirements are often complied with, many regulator reporting requirements may be overlooked. In India, all software exporters (the definition is very wide) need to report a variety of information to regulators. This is required even if the companies are not benefitting from any tax or other benefits or not set up in any software development parks.
  5. Country specific regulations - Sweden banned advertisements directed at children under age 12 even for food and toys! Barcelona charged Airbnb and HomeAway a massive fine for listing houses that were not in the city's tourism registry. Such factors play a crucial role in product or service positioning in any country.

Logistical standpoint

Logistics costs can play a critical role when entering a new country. Most companies perform a detailed analysis of where to manufacture and sell before entering foreign markets.

However, tax regulations can sometimes play a role. Some examples include:

  1. Indirect tax and import duty regulations – this is perhaps the most crucial consideration when determining logistics. Local country regulations often differ. Recent political and legal changes such as Brexit and duties on exports from China often play a significant role in determining logistics.
  2. Local tax and other benefits – Countries such as India, China, Italy etc offer reduced or no taxes or other incentives and benefits for local manufacturing and for certain types of high tech industries in special economic zones.

Entity Set up

There are various types of employing entities that typically can be applicable. The usual progression is to set up a representative office (RO) or just a “payroll only” registration and then move on to a company or in rare cases a branch office.

An RO is the simplest form of entity and is used for market surveys and scouting for customers. ROs cannot undertake any commercial activities such as, for example, signing contracts with customers. ROs have minimal compliance obligations and are generally not subject to tax, albeit countries such as China and Spain are exceptions. ROs are usually short-term entities used only for market research or liaison to “toe the water” in a new market.

Branch offices are rarely used as they can create a taxable presence of the parent company in the foreign country.

Private limited liability companies are an appropriate form of setup to do business long term in a country. Many countries have now simplified the setup processes and reduced the minimum required startup capital – the mini-GmbH in Germany is a good example of this.

Limited liability companies are viewed in many countries as being more stable both by customers and employees. In addition, in certain countries (eg Germany or France) this may be a prerequisite to winning government contracts or contracts with large multi-nationals.

The choice of entity to operate within a country can therefore impact on winning customers as well as the ability to attract high caliber employees.

Shan Nair is the president of Nucleus, a one-stop global expansion solution for businesses and a consultant on international expansion.

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