I was prompted to write this post by talk that Mexico should consider joining the RCEP (Regional Comprehensive Economic Partnership). But how many Mexican companies can really take advantage of the opportunities these sorts of trade agreements bring? How many Mexican companies are in a position to penetrate other markets? There’s nothing wrong with internationalism, but as Friedrich Nietzsche said, “He who would learn to fly one day must first learn to stand and walk and run and climb and dance; one cannot fly into flying.”
1. The International Market is Not The Same as Your Home Market
As an international law firm, Harris Bricken does much of our businesses with companies that operate in multiple markets, often on multiple continents. We provide expert legal counsel to business operators who themselves cannot be expert in the laws and regulations of each of the jurisdictions in which they operate, whether they are manufacturing or marketing and selling goods and services.
An important part of our job is to tell clients that just because they can do something in their home country doesn’t mean they can do the same thing in a foreign country. This is even true within the United States, where regulations can be very different from state to state.
As attorneys, our role is to provide bulletproof legal counsel that supports our clients’ business strategies and actions. That said, we are often better connected locally in markets to which our clients want to expand, and we are asked to advise on business issues and we are delighted to do so where we feel we can add value.
The first question – and the only question I will address here today – is whether or not you should be expanding to Market X or Market Y at all. “Because it’s there” is a poor reason to do so, as is “Because our shareholders/investors expect growth”.
You don’t have to be a Google search expert to find plenty of stories about companies that overreached internationally because they did not understand their target market was different than their home market. Yes, human beings are essentially the same the world over, but there are cultural differences, and alongside those cultural differences are legal and regulatory differences.
As an example, the 1990s were a gold rush moment for multi-level marketing (MLM) companies in China. But after a few scandals and abuses, the government decided it needed to step in. Today sales representatives cannot earn commission from the sales of colleagues they have recruited into the organization.
Another well-known example: Walmart invested in Japanese supermarket chain Seiyu in 2002, hoping to bring American-style big box retailing to Japan. Last month Walmart sold most of its stake in Seiyu, acknowledging it had failed to win over Japanese consumers, and following France’s Carrefour (2005) and Britain’s Tesco (2011) out the door.
At the same time, your Google skills can bring you thousands of success stories. Even in big box retailing in Japan, where Costco has managed to be hugely successful while its competitors have failed. When it first explored entering the Japanese market Costco was told it would have to partner with an established local company, something Walmart did with Seiyu, but even though Costco normally does find a local partner when it opens an overseas operation, Japan’s highly structured retail distribution framework would have forced Costco into a business model antithetical to its philosophy of cutting out the middleman to keep prices low. Costco faced tough obstacles, but today it has over 25 stores in Japan and is a household name.
So, you’ve Googled, you know people have failed, you know people have been successful. But you’re going to be successful, right? Because you’ve got a great product or service, you’ve been doing well in your home market and you want to conquer the world.
2. Should YOUR Business Go International?
I will assume you have identified your overseas target market(s) using parameters somewhat more exacting than: “I was on holiday there a couple of years ago and I loved the people and culture. It would be cool to have an office there.” I assume also your overseas expansion strategy is not the result of a thought process like this: “Alice (Employee #6) is from Taiwan and she has some connections there, people he went to college with. We can send Alice to Taipei to reconnect with them and they can help us get going.” No, no, no, no. There is a non-zero chance Alice will have an Excellent Adventure (at your expense) back in Taipei with her friends, but Alice is an engineer with no entrepreneurial or marketing experience, and she is unsuited to setting you up in a new market 8,000 miles from home (with all due respect to readers with engineering degrees who have successfully set up overseas operations 8,000 miles from home!). See Your Chinese-American VP Don’t Know Diddley ‘Bout China Law And I Have Friggin Had It.
If you want to take your company global, or even only expand overseas to one or several markets, here’s what you should be thinking about — this is really, really, really only the 30,000-foot view, and if you’re serious about conquering the world you are way beyond this “Global Conquest for Dummies” blog post:
1. What markets seem like a good fit for your products/services?
2. What similar products/services exist there now? How are the companies offering those competitive products/services doing? Are they struggling? Are they killing it? If they’re struggling, why can you expect to do better? If they’re killing it, why do you think you can garner market share? If there are no products/services at all like yours in your target market, how much time, effort and money are you prepared to invest in market education?
3. How much do you know about your target market(s)’ language and culture (including at least the basics of its business culture)? If the answer is: “I was on holiday there a couple of years ago and I loved the people and culture. It would be cool to have an office there.”, you probably should at least spend another couple of hours on Google. Even better, if you can afford it, spend a month there talking to people. Not just the expats at the American Club, but taxi drivers, café owners, people you meet in bars, and so on. A month on the ground is a worthwhile investment in a new market.
4. What do you know about the laws and regulations governing your business? If you are in food or beverages, what requirements does the local FDA impose on manufacturers, importers and sellers? How streamlined is the Customs bureaucracy? What are the local labor laws and how will that affect your costs? Is it possible to fire incompetent (or criminal) employees? Or even lay them off if your business hits a bump in the road? How easy/hard will it be for you to get visas for any non-local employees you want to transfer or hire for your new operation? Ask a lawyer with extensive local experience who also understands your business and business culture and can explain the differences.
5. What do you know about local corporate structures? About regulations governing foreign ownership? About banking/payments practices? And the rule of law? Are there any local (tax or other) incentives to encourage foreign direct investment? These are basic, basic details you may take for granted because in your home market they just work. They don’t just work everywhere. Again, talk to a good lawyer.
6. How good is the local infrastructure? Not only for shipping and your supply chain, but for the basic stuff, e.g. how long will it take to get from your headquarters to your factory or sales office in this market? Are there schools and supermarkets and cultural attractions (and accommodations) that your executives (and their families) will find acceptable?
7. How well (or poorly) do local laws protect your company’s intellectual property? Are there potential conflicts with laws and regulations in your home market(s)? What about the security of your (and your customers’) data? Here I’m thinking about China’s new cybersecurity regime, usefully and comprehensively analyzed in a four-part series starting here.
8. Does your firm have the internal resources to support operations in [insert name of country in which you’re thinking of setting up manufacturing or sales and marketing operations]? Or will overseas expansion be a distraction, costing your company time and money and energy and inhibiting growth in your major markets?
Finally, the Big Question: Are you considering overseas expansion for the right reasons? Or is your home market big enough to support continued growth for years or decades to come? If your home market is the United States, Canada, Mexico, Indonesia, Spain, Australia, Brazil, France, Germany or any of the other nations with a GDP of US$1 trillion or more, you should probably continue to “dance with the one that brung you” unless you truly are prepared to do more than this.
We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.
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