International trade is an often-misunderstood area of a business’ operations but expanding into new global markets can provide companies with good opportunities to grow their customer or consumer base outside of their domestic markets, sometimes more easily and quickly.
In this blog, we explore the intricacies of international trade and present the risks and complexities for UK businesses looking to expand internationally.
Written by: Paul Jaftha, Associate iFD
Estimated reading time 5:00 minutes
World trade has proliferated since the end of the Second World War and has been a significant driver of global growth; since 1945, there has been a 38-fold increase in the volume of world trade, and it has had a wide range of social, political, and economic effects:
- One billion people have been lifted out of global poverty over the last 25 years.
- Consumers and households now benefit from cheaper imports and increased choice.
- Productivity has increased because of innovative technology, increased competition, investment, and exploitation of economies of scale.
- Firms now have wider access to talent pools and other production inputs.
- Firms now have a greater number of potential consumers and lower costs from lower tariffs.
According to United Nations Conference on Trade and Development’s (UNCTAD), global services exports were valued at US$5 trillion in 2020, representing 5.9% of world GDP and 22.6% of total world trade in both goods and services. More recently, it reports that in 2021 world trade in goods ‘remained strong’ and trade in services ‘finally returned to its pre-Covid-19 levels’.
How can international expansion benefit my business?
Successful international expansion requires detailed research, meticulous planning, and the development of a solid go-to-market (GTM) strategy.
UK businesses may benefit from international trade in the following ways:
- Growth generated by introducing goods/services to new international markets.
- Risk minimisation and mitigation by having multiple operations in several international locations.
- Access to cheaper raw materials and new customers may increase sales revenue and profits.
- UK businesses can recruit individuals from a wider talent pool with different experiences and expertise.
- International expansion could help UK businesses manage cash flow in a more sustainable way.
Despite the benefits of international trade, businesses often run into difficulties along the way.
How does a business navigate foreign laws and regulations?
Legal environments across geographies may differ greatly and can be complex or ambiguous in nature. Therefore, gaining an early and thorough understanding of the local laws and regulations governing a particular market is crucial.
General areas of compliance to focus on include:
- Financial regulations
- Accounting and taxation
- Customs (import and export regulations)
- Employment legislation
- Transfer pricing
- Sector-specific regulatory requirements, such as quality standards or specific trade laws
Similarly, the lack of reliable and transparent information and data could also be challenging in certain markets from legal and commercial perspectives.
One way of mitigating the risk of these challenges is to collaborate with trustworthy local partners (e.g., accountants, HR specialists and lawyers). It is essential to have robust legal counsel to provide guidance and support; legal partners experienced in local laws and regulations are highly adept in navigating the local regulatory environment, especially when this landscape is ambiguous or open to local interpretation. Money invested in obtaining knowledgeable partners in these areas is money well spent.
How do I structure my business for international expansion?
When it comes to international expansion and trading across different geographies, how businesses are set up and structured is a key consideration. Many businesses assume it is unnecessary to establish a formal entity when they begin to embark on international expansion, and in certain instances, this may be possible depending on the level of presence required or route to market (e.g., e-commerce), however, when looking to hire local staff or inject growth capital this could be an oversight. Actively selling within a market will require company registrations, accounting filings, and tax. Additionally, businesses should expect to encounter difficulties when hiring local staff, importing, exporting, or receiving overseas funding (and repatriation of profits) without a formal structure.
Other decisions must be made regarding centralising or decentralising functions (e.g., finance, sales, and marketing), considering key local expertise required, cost, and time zones.
Therefore, assessing and setting up the correct company structure from the get-go is imperative to achieving the company’s GTM plan in a particular market.
What are the risks of international expansion to my business?
Currency exchange and inflow/outflow of funds
Exchange rates and local pricing strategies
As the exchange rates of currencies, like the pound sterling, dollar, euro etc., are freely traded and not fixed they can fluctuate sometimes strongly for a variety of reasons. Companies trading internationally will have to pay suppliers or receive payments from customers in foreign currencies. This is an important consideration for UK businesses because it can significantly impact a business’ bottom line if these factors are not considered when setting local pricing strategies.
Hedging strategies to reduce currency risks
Hedging strategies can be utilised to reduce a business’ exposure to currency fluctuations. However, these can be complex to set up, especially in markets with significant controls over their currency and the inflow/outflow of foreign exchange.
Hedging strategies can provide financial certainty to transactions and currency balances (where there is a significant gap between order taking and contract payment) but we would recommend you seek expert guidance.
Inflow and outflow of funds
Country jurisdictions where tight management of inflows and outflows of funds and repatriation of funds to parent companies makes remittance of payments for services to overseas parties difficult and time-consuming.
For example, capital controls were utilised to restore stability in Iceland in response to the collapse of the country’s banking system during the global financial crisis and in Greece when the country was exposed to the European sovereign debt crisis. Historically, China, Argentina, India, Malaysia, Nigeria, South Africa, Turkey, and Ukraine have also deployed controls to reduce the volatility of currency rates. More recently the ongoing invasion of Ukraine by Russia has forced Moscow to introduce capital controls in response to economic sanctions imposed by foreign governments.
Receiving payments from customers could also be challenging in these types of environments which may lead to bad debt. These tight controls can also make the funding of subsidiaries through capitalisation or intercompany loans challenging.
Complexities in international supply chains
International supply chains can add significant complexity and variability to operations and must be considered in the GTM planning and forecasting process. As a business’ international operations may cover multiple jurisdictions (as well as agents and entities), trade policies, customs, and compliance regulations may cause supply chain disruptions.
Part of the challenge is finding reliable logistics support and third-party logistics partners who are experienced in local and international policies, regulations, and procedures, including duties and logistics costs. Gaining a good understanding of these complexities and costs is important not only from an operational perspective but should also be considered in any local pricing and margin strategy, as they can have a significant impact on profitability.
Traceability within supply chains is becoming more important in the age of ethical sourcing, sustainability, social responsibility, and product safety, so UK businesses must consider this as part of any new supply chain setup.
Cultural differences and challenges in communication
Thorough research before going to market to understand local cultures, norms, and etiquette is vital to building strong and effective relationships with customers, suppliers, and partners and managing the local team.
Prepare yourself by reading up about any differences in local cultures and business practices (e.g., differing negotiation or communication styles) that may be present. It is also good to seek out local advice and first-hand experience (e.g., trusted business networks, organisations such as Chambers of Commerce, or local partners).
Communicating in different languages may be challenging; translators or local staff could support this but ensure that they are trustworthy. The same goes for any documents or contracts written in foreign languages.
Why is consolidation important for international expansion?
Accounting for international expansion can be an arduous process. While operating through one local entity can make trading easier, establishing multiple entities in different regions introduces more complex accounting processes, such as dealing with multiple currencies, paying the correct amount of tax across multiple geographies, inter-company transactions and having to consolidate results in multiple jurisdictions.
Consolidation accounting is the process of combining the financial results of several subsidiary companies into the combined financial results of the parent company. Consolidation is important for international businesses because preparing consolidated financial statements is a legal requirement for medium-sized businesses.
iFD and international expansion: How we can help
Several of our iFDs have developed a breadth of international expansion expertise and gained considerable experience supporting early-stage and growing businesses in numerous international markets, including the UK, USA, China, Australia, and Africa.
Meet our iFDs here.
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Written by: Paul Jaftha, Associate iFD
Paul is a CFO with extensive International market experience. He has built his career specialising in Finance and Operations, having held executive positions in numerous international markets including the UK, USA, China, Australia, and Africa.