Understanding the Basics of Expanding Your Business Abroad
Andrew J. Sherman, Partner, Dickstein Shapiro Morin and Oshinsky LLP
David J. Levine, Capital Partners, McDermott, Will and Emery
Each year, hundreds of entrepreneurial and growing companies consider international expansion as a marketing and growth strategy. When developing a strategic plan to launch an international business program, growing companies and their advisors must always consider the potential barriers and adjustments they might need to make to their product and service offerings. These include the following:
- Language Barriers. Although it may seem simple enough at the outset to translate the features of a given product or service into the local language, marketing the product or service may present unforeseen difficulties if the concept itself does not "translate" well. The target country's standards for humor, accepted puns or jargon, or even subtle gestures may not be the same as your domestic country's norms or idioms and may need to be adjusted accordingly.
- Marketing Barriers. These types of barriers most frequently go to the deepest cultural levels. For example, whereas many overseas markets have developed a taste for "fast food" burgers and hot dogs, differences in culture may dictate that the speed aspect is less important. Many cultures demand the leisure to be able to relax on the premises after eating a meal rather than taking a meal to go. These cultural norms can, in turn, be affected by factors such as the cost and availability of retail space. Direct and subtle messages in advertising campaigns may need to be modified. The appeal of using a particular celebrity in a campaign may vary, and the channels for promotion may also need to be modified to meet the educational patterns and needs of the local consumer. Even marketing methodologies may need to be modified. In certain cultures, such as in the United States, coupons are widely accepted and used by people who are both rich and poor. In other cultures, coupons are not widely used or accepted. In some cultures, even the use of comparative advertising, which is now commonplace in the United States, could be viewed as offensive or destructive.
- Legal Barriers. The company or its counsel must research tax laws, customs laws, import restrictions, corporate organization, and agency/liability laws. Domestic legislation needs to be examined as well for issues arising under labor law, immigration law, customs law, tax law, agency law, and other producer/distributor liability provisions.
- Access to Raw Materials and Human Resources. Not all countries offer the same levels of access to critical raw materials and skilled labor that may be needed to offer the service or enjoy the product. The growing company may want to consider what changes in the product or service may be feasible to accommodate this resources challenge without sacrificing the core business format.
- Governmental and Regulatory Barriers. The foreign government may or may not be receptive to foreign investment or expansion. A given country’s past history of expropriation, government restrictions, and limitations on currency repatriation may all prove to be decisive factors in determining whether the cost of market penetration is worth the benefits to be potentially derived.
- Intellectual Property and Quality Control Concerns. Protection of trademarks, trade names, and service marks are vital for the ability of an emerging growth company to operate abroad. The company needs to have a strategy in place for both protecting its intellectual property rights and enforcing them if violations are discovered.
- Dispute Resolution. The forum and governing law for the resolution of disputes must be chosen. On an international level, these issues become hotly negotiated due to the inconvenience and expense to the party who must come to the other’s forum.
- Use of a Local Liaison. It is critical for the growing company to have a local liaison or representative in each foreign market. This local agent can assist the growing company in understanding cultural differences, interpreting translation problems, understanding local laws/regulations, and in explaining the differences in protocol, etiquette, and custom. It may be advised to offer employment and equity to these foreign nationals so that they have a vested interest in the success of your operations abroad.
Global opportunities also bring certain challenges for which companies must develop appropriate strategies -- even established companies. For example, the world’s leading franchiser, McDonald’s Corporation, recently opened its first outlet in Iceland. It had to build an underground heated parking lot to attract customers. McDonald’s also recently opened in Israel. It spent months fighting with the Israeli Agriculture Ministry over the importation of the proper strain of potatoes for its French fries. Problems such as these aren’t insurmountable, nor are they enough of a barrier for an emerging growth company to reconsider overseas expansions. However, these examples are enough to illustrate the need for a thorough investigation of the company’s “readiness” to expand internationally and a thorough knowledge of the targeted markets.
Meeting Export Regulatory Requirements
Any U.S. company thinking of doing business overseas – even a small amount of business – must consider the implications and requirements of a body of U.S. regulations broadly defined as “export controls.” It is incumbent on U.S. individuals and companies that sell, ship, or transfer – including electronically – any goods, technology, or services to determine what, if any, controls or restrictions apply to selling and shipping their items outside the United States. U.S. law imposes an obligation of due diligence for U.S. exporters of goods, services and technology to “know your customer.”
At a minimum, to ensure compliance with U.S. export controls, U.S. exporters must consider their specific products involved, the identity of the customer, the known end user or users, the destination country, and the actual and potential end uses for the goods. Step one in ensuring export controls compliance is to determine the export classification of the products or technology involved. Most goods are classified under the U.S. Export Administration Regulations (EAR) as civilian, "dual use" goods, in contrast to military goods classified under the "Munitions List" and subject to the International Traffic in Arms Regulations (ITAR). All goods classified under the ITAR require special licenses before they may be exported. Some dual use goods classified under the EAR also require a license before exporting, but most are classified as “EAR 99” and require no license before exporting to most destinations. It is the duty of the exporter to determine whether a license is required, or risk a significant penalty for exporting contrary to U.S. controls. Any questions should be resolved in advance of shipping, and the agencies will provide official rulings and guidance for this purpose.
In addition to classification compliance, exporters must also comply with prohibitions against shipping to or doing business with certain designated entities and individuals and in certain countries. The U.S. government maintains and frequently updates the regulations and lists imposing these restrictions. Under current U.S. law, trade by U.S. businesses is prohibited – absent a specific U.S. government license – with Iran, Sudan, Libya, and Cuba. Any dealings with these countries and nationals thereof should be particularly restricted. Sales and shipments to these and every other country should still be screened against the various denied parties or entities lists maintained (and revised regularly) by U.S. government agencies (see below).
Various trade compliance services are available for hire to help exporters meet these regulatory requirements. Companies planning to undertake exporting or other overseas operations can and should, however, implement at least a basic trade compliance program of their own to avoid or minimize the risk of significant liability under the U.S. regulations. Compliance guidelines and specific requirements may be gleaned from the Web sites of the relevant federal agencies. Moreover, the specific lists of denied parties can be accessed at the Web sites below.
Denied Persons List (Commerce/BIS)
Unverified Parties List (Commerce/BIS)
Entity List (Commerce/BIS)
Specially Designated Nationals List (Treasury/OFAC)
U.N. Sanctioned Persons - Security Council Resolutions 1390 and 1455
Defense Trade Controls List of Debarred Parties (State/ODTC)
International Marketing Strategy
Going into a new market blindly can be costly and lead to disputes. Market studies and research should be conducted to measure market demand and competition for your company’s products and services. Take the pulse of the targeted country to gather data on the following checklist of relevant considerations:
- Economic trends
- Political stability
- Currency exchange rates
- Religious considerations
- Dietary customers and restrictions
- Lifestyle issues
- Foreign investment and approval procedures
- Restrictions on termination and non-renewal (where applicable)
- Regulatory requirements
- Access to resources and raw materials
- Availability of transportation and communication channels
- Labor and employment laws technology transfer regulations
- Language and cultural differences
- Access to affordable capital and suitable sites for the development of units
- Governmental assistance programs
- Customs laws and import restrictions
- Tax laws and applicable treaties
- Repatriation and immigration laws
- Trademark registration requirements
- Availability and protection policies
- Costs and methods for dispute resolution
- Agency laws
- Availability of appropriate media for marketing efforts.
In addition, you may need information about specific industry regulations that may affect the product or service you offer to consumers, such as health care, financial services, environmental laws, food and drug labeling laws. Get going on your research, and you’ll be poised to take advantage of global opportunities.