Covid’s Impact on International Expansion in the US
Due to the Covid-19 pandemic, companies in the US during 2020 were subjected to increased market restrictions and medical challenges that limited their ability to expand globally. According to the St. Louis Fed, Covid restrictions decreased consumer spending in March by 6.6 percent ($1 trillion), and in April by 12.6 percent ($1.8 trillion). This downward economic pressure exerted by the virus led to many companies scaling back their operations and limiting production of goods and the availability of services. Companies were forced to lay-off employees, close stores, and cut spending. This economic contraction ended the longest running economic expansion in American history. For many corporations there was little reason to consider global expansion during such a difficult time.
US Companies Turning to Global Expansion
However, as the pandemic has slowly begun to be contained and an increasing number of vaccines have been administered, corporations are beginning to explore opportunities to diversify their business operations through overseas opportunities.
Recent research commissioned by Standard Chartered explored the international ambitions of multinational corporations from the top four western economies (USA, UK, France, and Germany). Over the past six months, the total number of multi-national companies who consider their best growth opportunities to be outside of their domestic market has grown from 37% to 42%. This 5% growth is an indication that the global opinion on the appropriate time to begin exploring international markets is already changing.
Leading corporations are beginning to reinvest time and resources into global markets around the world. According to the survey, opportunities for expansion are most heavily concentrated in three regions: Asia, the Middle East and Africa. Investment in these regions is projected to be driven by region-specific comparative advantages (i.e., oil production, labor costs, diversifying supply chains) that are the foundation of globalization. These foundations will continue to have very strong impacts on which companies succeed, and which fail to gain market share and increase revenue in the future.
Targeted Expansion Destinations
Regions in various parts of the world were considered for global expansion. In Africa, countries like South Africa, Algeria, Egypt, and Nigeria were considered the top destinations due to the abundance of natural resources. While, in the Middle East, the primary focus for US corporations were the three largest oil producers (UAE, Saudi Arabia, and Qatar).
Of the corporations surveyed, 85% of them identified Asia as their number one area for sourcing, market growth, and manufacturing. Asia’s appeal for investment and global expansion has been documented and researched extensively over the past several years. For example, according to the OECD, Asia receives the most foreign direct investment than any other region apart from the US.
There are a couple of reasons that illuminate why Asia receives such large investment and attention. First, Asia has recently become home to half of the world’s middle class (Financial Times). This increase in purchasing power parity (PPP) has been on a steady increase for the past several decades, leading to millions of new middle-class consumers looking for international companies that have prioritized global expansion. Second, Asia’s large population leaves plenty of market share that has yet to be established.
As PPP continues to grow throughout the large population in the region, the opportunities for corporations operating in the region will grow as well. Companies that take advantage of this growth will undoubtedly gain certain advantages over competitors in the future.
Barriers of Global Expansion
However, global expansion is not easy and should not be rushed or done hastily. Entering a market hastily or uncritically can lead to missteps that will prevent further expansion into that market. There are several barriers to global expansion. Countries around the world represent vastly different languages, diets, cultures, history and most importantly, legal systems.
Understanding regulations was considered the number one challenge for 41% of US companies, with 43% of CFOs raising this issue as a particular concern. Other issues that were raised for concern were: supply chain digitization, ESG (environmental social and corporate governance), and the collection of delayed receivables.
It is prudent to prepare for these challenges and create strategies to address them in a comprehensive way, as companies fail to penetrate foreign markets every year. Failure when entering into a foreign market is not limited strictly to small and medium sized enterprises. Any company can fall prey to hubris or lack of market preparation and lose the opportunity offered within those markets. A famous example is Amazon.
Amazon entered the Chinese market in 2004 with the purchase of Joyo.com. Although Amazon is one of the world’s richest companies, after 15 years they had control of a measly 1% of the Chinese market. There are many perspectives and possible explanations about what led to the failure of Amazon in China. One reason is their lack of understanding of the labor force. (Although Amazon was more organized in labor management, they were not as cheap as competitors). Another reason is the marketing methods that they used. Methods that had worked in Western markets did not have the same impact or reach in China, where consumers have differing aesthetic tastes for things like web design or product placement.
Another famous example is Walmart’s attempt to enter the Japanese market. Walmart purchased shares in Seiyu and began operating their well-known marketing strategy “Every Day Low Prices”. Japanese consumers take low prices to mean low quality, which prevented Walmart from gaining enough market share to be competitive in Japan. One of the reasons that this marketing strategy failed is due to Walmart’s lack of cultural understanding. These types of insights are difficult to learn through reading research, and requires someone who understands the local environment, and who can communicate it effectively to management.
However, for companies with the right approach, barriers to entry can be overcome. Through careful planning and analysis of a market, corporations can make successful entries into markets that would otherwise seem prohibitively expensive or risky. Some knowledge of the local culture and legal environment can make the difference between being an overnight success story and a costly failure. To be best prepared for this challenge, corporations should take advantage of expansion partners and consultants alongside internal resources.
Using Expansion Partners
Entering into a market blind can likely lead to confusion, misunderstanding, and inefficient practices. To prevent the loss of time and resources, expansion partners can be utilized to research and understand if the target market will be receptive of the service or product, if there is available talent to operate the business in that country, if there is competition that already dominates the market, or if there is sufficient infrastructure and funding to operate there.
For example, in China, regulations for Foreign Invested Enterprises (FIE) can be complicated or unclear. In 2019, the National People’s Congress adopted the Foreign Investment Law, which replaced several older regulations (the Sino-Foreign Equity Joint Ventures, Wholly Foreign-owned Enterprises and Sino-Foreign Joint Ventures).
Provisions in the new law are designed to increase transparency and encourage international cooperation. Certain provisions, like preventing domestic Chinese from forcing companies to divulge integral intellectual property, will offer increased protection to foreign companies from abusive practices. However, it is yet to be seen if these new regulations can be enforced, if the courts will be able to enforce them, or if the strained legal system can even handle the new cases.
For a company unfamiliar with the legal system in China, these barriers could seem prohibitively complex. In addition, the Chinese market and its regulations can change very fast and with little warning. These challenges, along with ambiguous cultural differences, could lead a corporation away from attempting to enter the Chinese market, resulting in unrealized revenue and market share.
However, a local expansion partner would not only be familiar with these issues but instead have a deep understanding of how to easily solve issues that could otherwise leave a company without any course of action. Having an expansion partner allows for more in-depth market research, communication of important cultural or linguistic differences, legal regulations, and other factors that will allow for success in foreign markets and allow opportunities to companies to compete for controlling market share.
As a global expansion service provider, we have helped hundreds of companies all around the world to setup in new countries seamlessly. Our well-defined solutions can be adapted to the needs of your company, providing you with the best answer to your expansion. We offer various services which include PEO, recruitment, payroll administration and many more. Get in contact with us right away and let our consultants provide you with the information you need to take your company global today.