Risks of International Expansion: Top Aspects of Proactive Planning

Every company wants to grow and expand internationally at a certain stage of its development. However, business teams often come across a variety of international business risk factors when planning or executing new market entries. Knowing these risks is a fundamental precondition for their proper management.

This article walks you through the main types of risk in international business and shares the most popular mitigation strategies for a smooth and compliant expansion.

Why Endure the Risks of Entering a New Market?

Hundreds of entrepreneurs take the risks of entering a new market every year. Yet, despite the inherent risk, according to the Cloudtalk statistics, over 47% of business owners were planning a global expansion in 2024. Though this decision may seem to put business operations under strain at first glance, it offers a solid ROI and multiple benefits if executed correctly:

• Hedging against local economic problems and risk diversification across geographies.
• Capturing the valuable growth opportunities of the present-day global market.
• Accessing new talent pools by hiring local workforce.
• Increased ROI from continually expanding customer bases.
• Expanding brand visibility and a positive corporate image.
• Taking advantage of the innovation opportunities in different markets.
• Enhancing the competitive advantage via international expansion.
• Building an economy of scale via improved logistics and operational efficiency.
• Extending the existing products’ lifecycle by entering new markets.

As you can see, international operations are a potentially lucrative avenue for financial growth and development. Therefore, it is important to understand and manage all associated challenges proactively to enable proper market expansion.

Main Types of International Business Risk + Mitigation Strategies

So, what factors to consider when starting a business in another country or expanding your existing operations abroad? You should consider the following eight sources of international business risk, from legal to financial aspects and beyond.

Cultural Challenges

Setting up successful operations in a new market, especially if it’s a new region for you, requires a thorough understanding of cultural norms and acceptable marketing tactics. For instance, aggressive marketing campaigns that work well in the West will hardly be of any value in Asian countries like Japan; they can even harm your reputation and draw customers away from your products. The notorious example of Carrefour’s exit from Japan is a good learning lesson for all businesses.

Remedy: The best way to go is to localize product offerings in line with the dominant culture and consumer preferences. For instance, McDonald’s has managed to localize their product offerings (e.g., the Teriyaki Burger offering), thus enjoying success in the Japanese market.

Linguistic Challenges

Linguistic considerations also play a role in the process of new market entry planning. Your team should have local experts on board, who will ensure the linguistic correctness of your promotional messages and advertising campaigns to avoid embarrassment. Proper communication with the local team is also essential for smooth business operations at all stages.

Remedy: The best way to go with international expansion to a linguistically different market is to hire local consultants or an expansion team proficient in this language. Thus, you will avoid language-related confusion and potential misinterpretations hazardous for your company’s reputation.

Regulatory and Legal Complexities

Entering a new market without legal due diligence is a high risk method of international business expansion. Every country has a unique legal framework that regulates local entrepreneurial operations, and every company has to comply with it without exceptions. A failure to account for the local trade, tax, and labor laws may result in costly fines and a total ban on operations. A good illustration of this factor’s importance is the huge fine suffered by Google upon its entry into the EU market. The tech giant’s failure to comply with the GDPR regulations caused serious problems, from a 50 million euro penalty to eroding user trust and brand reputation.

Remedy: Work with a team of legal experts to study all the legal nuances before the actual expansion. Develop a well-planned legal strategy and engage professionals in the target country to guarantee compliance.

Operational Logistics

If your company is not digital-only, you also have to take the infrastructure and logistics factors into account. This consideration is especially relevant for retailers wishing to expand to developing regions, such as Sub-Saharan Africa. This part of the African continent offers immense growth opportunities because of the largely untapped customer base, but the region has inadequate transportation networks, which impede market entry and cause severe market fragmentation.

Remedy: One possible solution to the logistics problem is to partner with local shipping providers that have a fleet and know the geography well. If your financial capacity allows it, you may also invest in the development of local infrastructure, thus contributing to the broader social change in underdeveloped regions.

Competitive Challenges

Another source of risk in the target market is market saturation with competitors. You should select locations for your expansion with proper regard to the saturation of your niche, as entering a highly competitive market with numerous established players can hardly promise you profits and success. A good example is China, a highly saturated tech and e-commerce market dominated by indisputable giants Tencent and Alibaba. Even Uber failed to carve a niche for itself in China, as it failed to outperform the local Didi Chuxing, and the company finally left China after two years (2014-2016) of unsuccessful efforts.

Remedy: Look for less saturated markets where your products and services can become trendy and demanded. Find your niche and focus on differentiation to win your customer base in new locations. Consider entering a new market by partnering with a local business.

Economic Volatility

Every country has a unique political and economic climate and degree of stability, which determine your long-term business sustainability in that location. It’s always safer to enter stable environments because inflation, political unrest, and deep economic problems often create unfavorable working conditions. A recent example of such a problematic entry is Kellogg’s expansion to Venezuela – a state with troubled politics and hyperinflation.

Remedy: Choose new locations based on policy predictability, a stable economy, and sound economic growth potential. Avoid troubled states with political conflict and instability.

Financial Risks

Financial challenges may also surface upon new market entry because of differences in foreign exchange rates and inflation. Companies can incur financial losses in case of sharp currency rate changes in their home country or the target state. One recent example is Argentina, a country suffering from continuing rapid inflation. As a result, Argentinian exporters have to spend more money on purchasing goods from overseas locations, making their financial operations less profitable.

Remedy: Companies can address financial challenges by buying foreign currency in advance or fixing prices with their partners in a way that removes or reduces price variability.

International Talent Management

It is often hard for international businesses to find and retain the needed talent in new locations. Many foreign companies come with competitive rates and appealing work conditions, but talent management on an international scale is still cumbersome and demanding. Differences in work cultures, compensation expectations, and the lack of required skill sets may all play a role in hindered hiring practices. Additional complexities come from international payroll and HR management, for which your company may not be ready.

Remedy: The best solution to international human resource management and global hiring is to partner with a provider of specialized services like GEOR. We offer a wide range of recruitment, hiring, and staff administration services to simplify global hiring and streamline new market entries for clients. If your only purpose is employment outsourcing, you may even avoid the need to establish a legal entity in the new market.

Proactive Planning is Key to Managing International Business Risk Factors

The presented evidence and analyzed cases illustrate a variety of risks of expanding business internationally you may come across at any stage of your new market entry. Make sure to plan the process in advance and consult experts with relevant expertise; they will help you devise a smooth, compliant strategy without costly mistakes and repercussions. Risk management in international business is a specialized field with numerous nuances and peculiarities; therefore, it’s vital to do your due diligence and minimize any potential hazards in the target location.