Starting a business in another country can be financially and emotionally rewarding if you do your homework, have realistic expectations for success, and avoid or compensate for the potential obstacles that inevitably accompany a new venture. All new businesses are inherently risky. In the United States, perhaps one of the most friendly climes in the world for entrepreneurship, almost one-half of new business operations fail by the end of the fourth year, and one in four fail by the end of the first year.
While there are no statistics indicating the failure rate of new enterprises by country, you should assume that the difficulty of achieving success is as least as hard in a foreign land as here in the United States. However, there are a number of tips and techniques you can follow to help better the odds of success.
Tips to Launch a Business in Another Country
1. Identify and Quantify Expectations
Begin your effort by looking for parallels to the type of markets you’re already serving in the United States or elsewhere. Ideally, select countries or regions where you can could provide your products or services without making too many modifications to fit local standards or laws.
A tentative plan to move forward should be the outcome of your planning and due diligence, with answers for the following questions:
- Why Are You Undertaking This Operation? Are you escaping from an overly competitive market in the hopes that the new business will be less competitive? Are you expanding your business due to interest from the overseas market? Are you “pushing” your products or services to the new market or is the new market “pulling” your products by demand? Obviously, the latter is better than the former, but neither is a guarantee of success.
- What Are You Going to Do in the New Country? Will you sell products made elsewhere within the country, assemble or manufacture products for shipment outside the new country, manufacture and sell products within the new country, or a combination of all three? Be sure that the new locale has the resources to execute your business model, whatever it may be.
- Where Will Your Business Be Physically Located? Will you locate in a major city with ample infrastructure or outside where you may be called upon to provide more basics? Are your customers local, regional, countrywide, or beyond country borders? How will supply and movement of materials be affected? Do you have need of a trained or technologically aware workforce?
- Who Needs to Be Involved in the Planning and Execution of the New Venture? Do you need the input of local people in the country where you anticipate locating the business? What services will they provide? Who will they report to on your current staff? Do you have the existing resources to initiate an expansion into a new market? If not, what are you missing, and where will you get them?
- When Do You Want the New Business to Be Established? Do you have internal or external deadlines that must be met? How flexible are the deadlines? What constitutes “establishing the business” – a physical presence, first employees, first sales? Circumstances in a foreign country are generally outside of one’s control – can you compensate for delays at a reasonable cost?
- How Are You Going to Proceed to Meet Your Objectives? What are your major deliverables and timelines leading to your final objectives? Are they completely defined so they can be communicated clearly and unequivocally to those who must execute your plans? Have you considered every element – or as much as possible – that will affect your plans and developed alternative strategies if your plans go awry? Planning and execution go hand-in-hand; while you will inevitably overlook some element, your success is directly dependent upon the level of preparation you do before taking the first step.
It generally makes sense to start your operations on a small scale with the intention of expanding later on. For example, you might pick only one or two products to offer your foreign customers initially, or outsource manufacture with the ability to move it in-house as you gain knowledge. Maintaining optimum flexibility during the first days makes sense allowing you to test the waters of the market before dedicating too many resources.
2. Understand the Environment
While some experts such as Darren Kaiser claim that “starting a business overseas might actually be much easier, less risky, and more economically sound than setting up a business in your home country,” it is far better to expect problems than assume everything will go as planned. There are four major areas to consider when setting up shop in a new country:
- Regulatory Climate. Every country has its own version of immigration rules, financial regulation (limits on money into and out of the country), taxation, and employment law. If your business requires import or export of goods, you will need to check out any restrictions on the products being moved and the costs associated with their movement. Property rights generally vary by country, so don’t assume that your investment is safe based upon U.S. standards. Confiscation of property is not uncommon, particularly in emerging industrialized countries.
- Political Stability. Political turmoil is becoming more common throughout the world, especially in countries with high unemployment and nascent democratic regimes. While there is potentially great rewards in the most turbulent environments, there is also great risk. If you plan to begin your new business in a country that is rapidly evolving politically or economically, limit your financial exposure and personal risk until you are confident that you understand the environment and can appropriately cope with the potential changes.
- Economic Potential. As a result of the worldwide recession, some countries are experiencing draconian tax burden and negative growth, most likely leading to social unrest and possible attacks on foreign-owned businesses. At the same time, other countries have rolled out the red carpet to new businesses as the key to a brighter economic future. Tax incentives have increased while regulatory bureaucracy has been streamlined and eliminated. Locating in one of the latter countries can benefit the populace as well as the new owners. If you plan to sell your products or services within the country, you should understand the general spending habits of the populace, as well as the existing competitive business environment. Established businesses are likely to react when you begin to affect their market shares.
- Cultural Differences. In addition to a possible language barrier, there are a whole host of cultural behaviors, attitudes, nuances and sensitivities that can affect your business. Consider employing a cross-cultural business consultant until you and your people are confident that you understand the nuances of communication. Remember that something as simple as a handshake may have significance that you don’t understand. Not bringing a gift or bringing the wrong gift might be disastrous, and sending a woman to conduct negotiations could spell doom. In some countries, religious customs may affect how and when business is conducted.
3. Determine Your Budget
While businesses fail for a variety of reasons, one of the more common causes is insufficient startup capital, generally stemming from the business owners’ optimistic projections of revenues and profits. Starting a new business is difficult under the best circumstances, but even more so when operations are remote and the business environment uncertain.
When making your projections, be conservative on estimating revenues and liberal when estimating expenses. Anticipate that your cash-flow break-even (the point when the money coming in meets or exceeds the money going out) will be longer than you initially expect.
Any review of public projects indicates that humans are woefully bad when estimating project costs or timelines:
- A Forbes article claimed that “people always finish projects behind schedule and over-budget”
- The State of Pennsylvania dropped a contract with IBM over a contract 42 months behind schedule and $60 million over-budget
- USA Today reported that two-thirds of NASA’s major programs were over-budget by more than 15% (requiring a report to Congress) and more than 6 months behind schedule
Private projects are no more likely to be on schedule and budget than public projects – just less publicized. Use a 50% to 100% “fudge factor” in your number for overseas projects and new businesses to ensure you have enough capital to ride out any problems or delays.
4. Resolve Logistics Issues Before Setting Up Shop
Many countries lack the infrastructure that exists in the industrialized counties. Even where movement of goods is not physically restricted, there may be regulations that affect the free flow of products within and outside the country, as well as fees, duties, and export taxes.
In some countries, the payment of bribes to local government officials is a normal business practice. Under the Foreign Corrupt Practices Act, U.S. companies, persons, and their agents are forbidden to make payments to foreign country officials to assist in or retain business. Violators can be subject to civil and criminal actions. Fortunately, the law allows for “facilitating payments” defined as small bonuses that can be paid out for facilitated service. If you will be setting up business in a country where “gifts” and bribes are the normal way of doing business, you must retain legal advice about what you can and cannot do before starting operations.
5. Find a Local Agent
A local agent, or sometimes an attorney or accountant experienced in international law, can be invaluable when establishing a physical presence in a new country. You don’t want to have your products seized or your operations shut down due to some miscommunication or misunderstanding with the local government officials.
6. Establish an International Banking Relationship
If you anticipate exporting or importing goods from or to a country, be aware of currency differences, and take measures to eliminate exchange risk where possible. This requires that you remain aware of constantly changing exchange rates. The foreign exchange market can be extremely volatile, and if you don’t pay attention, your revenues can quickly evaporate as money is converted between currencies.
Research your international money transfer options. Unless you are in need of some specialized service, you should not normally rely on your bank to send and receive money across borders. In many cases, you are charged exorbitant fees and have to wait several days for the money to clear and become available in your account. Be aware that there are numerous alternatives, such as Paypal, Skrill (formerly Moneybookers), and Payoneer.
Before venturing into a foreign country’s business market, always develop an exit strategy, and be aware of indicators that might trigger your retreat. If things go wrong, you will want to salvage as much of your investment as possible, so identify any restrictions on selling or valuing your business, as well as potential buyers if you do not have success or run into insurmountable problems. Beginning a business in a new country can be very profitable for all parties involved when it is done thoughtfully and with reasonable forethought to protect against possible negative outcomes.
What additional tips can you suggest to successfully launch a business in a foreign country?