There are many international expansion strategies to choose from when pursuing growth into foreign territory, each with benefits, pitfalls and considerations. Some countries employ fairly unique and sometimes difficult legislation to protect their markets, while others are very open in an effort to attract development.
Whichever country you’re looking into, an expansion strategy needs to be developed to successfully and compliantly enter that country. But what expansion methods are there? Here are three types of the most common strategies to consider, as well as their pros and cons.
Licensing arrangements allow other companies to use your intellectual property, but there are stipulations surrounding what these use cases can be. For example, a licensing arrangement is either exclusive to a company, non-exclusive or specifically exclusive to a location or circumstance.
It’s a relatively simple way to capitalize on a foreign market and usually means you’re getting access to pre-existing supply chains and distribution methods. Licensing arrangements are to be found in many places, such as franchising (One famous proponent of franchising is McDonald’s) and private labeling. This is where your product is sold under the name of another company.
When it comes to licensing arrangements, it’s the legislation involved that puts people off. Similarly, if you have the ability to put your product to market by yourself, that may seem like the more attractive option, especially when wanting to increase your brand reputation in an area.
You must also consider whether the licensor is the right choice for you. Evidently your product is worth licensing, but you don’t want its reputation downgrading through association with an unpopular brand name.
Furthermore, licensing arrangements apply differently the world over. For example, in the UK, the Intellectual Property Office stipulates that companies must obtain a ‘license of right’ with their product patent, which means that other entities are now able to license those products. If you’re a UK company looking to do this, you’d have to fill out Patents Form 28 and then have potential licensors approach you directly.
This is just one example, as each country will have its own approach that needs to be understood before making any progress.
- Quick market access.
- Leveraging licensee experience and market position.
- Increased revenue and reach from new markets.
- IP licensing may create collaboration opportunities for further innovation.
- Cross-border IP legislation can be complex.
- Legal fees can be high.
- Risk of breach by third party.
Mergers & Acquisitions
It’s a common phrase with a more common meaning, describing the state where one organization can either ‘merge with’ or ‘acquire’ another. Think of Exxon Mobile (formerly Exxon and Mobile respectively) or when Disney acquired Pixar and Marvel.
Mergers and acquisitions (M&As) are greatly beneficial when done successfully, providing you with the full infrastructure capabilities of a separate organization. While the preparation can take years, once the proverbial papers have gone through, you’re good to go.
Because of the time it takes for these processes to be completed, they can be very expensive. Similarly, there's the issue of exchange and interest rates. If the acquiring firm is from a country with a weaker currency, the process can be even more expensive. However, the opposite is true for companies from countries with stronger currencies.
There’s also the issue of regulatory statutes. Like with licensing arrangements, these vary from country to country. Let’s take the US, for example. Did you know that in the US, a foreign firm is not allowed to own more than 25% of an American airline?
There are a key number of legislative propositions that apply to both foreign countries looking to either merge with or acquire other organizations on American soil. For example, Section 7 of the Clayton Act provides that no individual or company can acquire the whole stock, share capital or assets of another “where in any line of commerce . . . in any section of the country, the effect of such acquisition may be substantially to lessen competition or tend to create a monopoly.”
There is also The Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”). The HSR Act maintains that M&As cannot be complete until the involved organizations have filed the case with the Federal Trade Commission (FTC) and the Department of Justice. These agencies then determine whether the transaction will adversely affect US commerce under antitrust law.
There’s also the Exon-Florio Amendment to contend with. Although, it’s unlikely you’d come under any scrutiny through this amendment, as it pertains to stopping foreign businesses acquiring American business if they pose a threat to national security.
Mergers and acquisitions are a high-risk, high-reward expansion method and so should be approached with a great amount of care and consideration.
- Access to a complete distribution infrastructure.
- New talent and innovation pools.
- Potential for stronger brand identity.
- Resource intensive, in terms of both time and money.
- High failure rate, with 40% to 60% of M&As failing to increase market value.
- Risk of culture clash.
Entity Set-up, PEO and EOR
Not a set expansion method in itself, but rather a means to ensure your expansion goes without a hitch. Entity set-up is where an organization creates an entity, usually a physical premise with a registered business, in another country. While this is a common expansion method and more often than not, successful, it does present a significant challenge, especially for first-timers.
For example, the set-up costs alone can be large. Premises, expatriation, tax obligations, utilities, security, even cleaning - these will all take a chunk out of your expansion budget. On the other hand, working with a Professional Employer Organization (PEO) can help you shirk these costs and keep your expansion process running smoothly.
A Global PEO can act as the Employer of Record (EOR) for expansion, helping to recruit overseas talent, arranging their payroll and deducting tax at source. They can also help to prepare you for the specific financial, legal and cultural differences you and your company might experience during expansion.
- Fast speed-to-market.
- Bespoke cultural knowledge.
- Full compliance guaranteed during expansion.
- Background screening.
- 24/7 Support.
- In-country HR capabilities.
- Technological advantage through real-time data and communications.
- Represent an added cost to your expansion.
- Not a guarantee that the entire expansion will be a success (although this is mainly due to environmental factors).
These are just three international expansion strategies that are available to you. If you’re looking for more information on expansion, as well as strategies and growth options, download our guide.
Expansion Considerations for Rapidly Growing Businesses
The complexities of expansion, globalization and international regulations can seem never-ending. However, they’re not insurmountable. Through the right preparation and collaboration, you could be seeing your business thrive in another territory sooner than you’d think. But you need to do the research.
Download our guide to discover more helpful advice on how to take advantage of the global market and take your business to the next level.