5 Benefits and Challenges of International Expansion

Globalization was just a buzzword until a few years ago. Today, consumer needs are growing faster than ever, and companies are in a hyper-competitive landscape. Earlier, only giant corporations could consider an international expansion in response to increasing consumer needs. However, many small and medium-sized organizations have stepped up to expand to other countries in recent years. 

Global expansion has become necessary for companies to run successfully, and the benefits of this go beyond increased brand recognition. However, the risks involved can be overwhelming as well. But there are innumerable successful organizations out there facing these challenges head-on. If you are still on the fence about international expansion, this guide can help you gain a better perspective. 

Understanding International Expansion

International expansion refers to the strategy where companies build their business outside their base country into several other foreign countries. If you look at it, after establishing themselves in the local market, it is natural for the companies to look at growth areas. Many companies first choose to expand nationally and then look at capturing global markets. 

There are various ways to grow internationally. Some companies set up subsidiaries and some partner with local companies for global expansion. To run a business globally and successfully, business leaders need to understand the benefits and associated risks of this complex and dynamic process. Let us explore these aspects in detail.

5 Benefits of International Expansion

Companies expanding globally must take specific steps before entering a new territory. Some of these include conducting thorough research about the new market, adapting to local customs, and onboarding the right employees. With the right strategies in place, foreign expansion has considerable growth potential. Let's have a look at some of its benefits. 

1. Access to New Markets

Companies expand globally and gain access to a more extensive customer base. Your company's product may be available in a different country. The products or services your competitors sell may have some gaps in terms of pricing, quality, packaging, etc., that you can fulfill. Operating in a global market can be profitable for companies, especially those that started in smaller markets. 

If you already have a well-established company in your domestic market, taking your organization overseas is the way to grow. Entering one foreign market also paves the way to identifying other nearby potential markets where your business can be successful. The bigger the customer base, the more the sales.

2. Hiring from a Wider Talent Pool

Employees are one of the most critical assets in any organization. When companies expand globally, they need to expand their workforce. You need to hire the right people to grow successfully, especially in a foreign land. Global expansion can benefit you by giving you access to a global talent pool.

International employees can bring unique advantages such as advanced language skills, better productivity, and diverse backgrounds. They will also have enhanced knowledge about the local markets, contributing to market intelligence. These factors can keep your organization innovative and competitive.

3. Cost-effective Operations

With international expansion, economies of scale work at their best compared to local or national expansion. This means your company can manufacture more goods or outsource more services, like HR, at reduced costs. Some countries have lower costs of material or labor. So you can move certain functions, such as manufacturing, research and development, customer service, etc., to another country. Organizations that expand internationally can leverage foreign assets at a reduced financial load. 

4. Diversified Risks

Economic or political events in a country can sometimes disrupt a business. In worst-case scenarios, it may lead to a complete shutdown of your business. Companies that expand globally can disperse their assets. This, in turn, can diversify the risks the entire entity faces. An event may affect a company in one country or continent but not others.

Companies must protect their bottom line, i.e., net income, against unexpected events. Moreover, with international business expansion, they can balance the drop in sales in one country with an increase in another.  

5. Competitive Advantage

When cut-throat competition exists in your sector or industry, entering new markets becomes necessary. To outpace competitors, you need to expand your company internationally. You gain a competitive advantage with reduced costs, new talent, a more extensive customer base, etc. You also get the first-mover advantage in countries where your competitors are absent. 

Global expansion can also position you as an industry leader and showcase your forward-thinking mindset. You can develop an understanding of several markets and various target audiences. Such insights help you customize your products and services locally, making you better in the field.

5 Challenges of International Expansion

Wanting your company to expand internationally is lucrative but poses several risks. The unfamiliarity of new markets, onboarding new hires, streamlining operations, etc., is daunting. Before you decide on international expansion, here are some challenges you may face and need to resolve.  

1. Language and Cultural Barriers

For successful business expansion in a foreign territory, it is vital to develop an understanding of the local language(s), culture, and business etiquette. It is necessary to bridge these gaps between team members who reside in different countries but collaborate for work. You also need to develop cultural sensitivity amongst team members to avoid situations or remarks that may be considered inappropriate in the new country. 

You can view these linguistic and cultural gaps as areas of improvement in your product or service offerings, specific processes, and ways of conducting business. Resolving these challenges highlights your company's ability to blend into and respect a new culture. This reflects positively in the eyes of new clients and customers.

2. Compliance Risks

When considering international expansion for your organization, not knowing about the local regulations can invite compliance and legal challenges. There could be vast differences in the tax structure, payroll obligations, labor laws, etc., between your home country and the new country. 

Managing an international workforce requires an understanding of a lot of things. It includes country-specific contracting models, work visa sponsorships, weekly working hours, vacations, maternity or paternity leaves, etc. You can work with a local specialist or an online platform that helps you make informed decisions in this aspect.

3. Establishment Costs

International business expansion gives you access to new markets and, thus, can be profitable in the long run. But to expand internationally, whether it is just to test a new market or a long-term expansion, you need to take into account the setting up and shutting down costs. 

Remote expansion may be less costly than physical expansion, but the nature of work may only allow some companies to choose the former setting. Either way, you must set up a business entity, build infrastructure, pay local workers, hire consultants, etc. There are also ongoing costs to keep the business up and running successfully. You must also be prepared with the required expenses for shutting the operations if required. 

4. Unfamiliar Markets

While entering a new market can be competitively advantageous in many aspects, it also poses challenges. You will need to compete with already established companies. Unless you have invested your resources in market research, you will have difficulty competing against local players. 

Established companies will have better local market knowledge, established customer relationships, familiarity with the legal landscape, etc. If you do not prepare for these challenges, your costs may rise, products or services may fail, or you may face legal risks, etc. 

5. Human Resources Management

International expansion brings in several HR challenges regarding hiring, payroll obligations, employee classification, tax compliances, etc. You also need to consider the time zone differences, language and cultural barriers, and different levels of technology, among many other things. Companies planning to expand internationally must also prepare for costly, lengthy, and intensive paperwork. 

A well-set-up team in a new country can significantly benefit your company once you surpass the above challenges. The better your employees' management, the better the productivity.

Manage Your Global Team With Skuad

Setting up a business entity in a foreign country requires a strong HR administration, compliance with local laws, and hiring international workers. While it can offer a wealth of benefits, it is a very complicated and time-consuming process.

To expand internationally and work with global talent without setting up a legal entity, partner with Skuad as your Employer of Record. With Skuad’s unified platform, you can easily hire, onboard, and pay employees and contractors in over 160 countries. Get in touch with our experts to streamline your global expansion process.

FAQs

1. What are the factors to consider for international expansion?

Global expansion comes with several advantages but also poses several challenges. Companies must consider factors including but not limited to identifying new markets, linguistic and cultural barriers, tax and employment guidelines, economic and political landscape, financial viability, etc. 

2. What is an example of international expansion?

Apple Inc. is an example of a successful international company founded in 1970 in the United States. The company sold electronics, software, hardware, streaming, and other services worldwide. After establishing itself in the US market, Apple expanded internationally to Tokyo, Japan, in 2003. The company sells its products internationally and has supply chain networks in 43 countries.

3. Why is international expansion necessary?

International expansion provides several benefits for your business. It gives you access to new markets and a more extensive customer base, thus increasing your sales. You can also hire from a global talent pool, diversify your risks, and get increased brand recognition. 

4. How does international expansion impact business?

Companies that expand globally experience various benefits, including access to new markets, increased sales, and cost savings. With the right strategies, the company can expect several growth opportunities. However, international expansion comes with challenges, such as social and cultural gaps, communication barriers, time zone differences, tax and legal compliances, etc. Identifying ways to resolve these challenges efficiently for sustainable business growth is essential.