How To Avoid Risks Of Expanding Business Internationally: Strategies for Mitigation

Venturing into international markets offers unique growth opportunities for companies, including expanding their audience, increasing sales volumes, and gaining access to new technologies and ideas.

Of course, exploring new horizons for your business inevitably involves encountering risks. The extent of risks you may face depends on the industry of your business, the resources at your disposal, and the specific market you are entering.

It is worth noting that there are always unforeseeable factors, most likely linked to geopolitical conditions. Political risks and currency fluctuations remain persistent high risks in international business. According to the latest findings in the Beazley’s Risk & Resilience Report: Geopolitical Risk Snapshot 2024, 30% of international business leaders consider political risk to be the biggest threat they will face this year. Another high risk factor in business is competition, even major companies like Netflix and Amazon are currently contending with as they endeavor to tap into the highly promising Indian market.

Among other types of risks in international business are challenges associated with different cultures, peculiarities of local markets, lack of adaptability and rapid response to changes, and difficulties in finding the necessary talent.

To effectively expand beyond national borders, companies need to conduct a thorough market analysis and implement strategies focused on risk minimization.

Let’s explore some of these strategies in this material!

Legal Requirements and Regulatory Risks in Expanding into Local Markets

Ensuring strict compliance with the legal mandates of a new market is paramount for a successful entry. Thorough analysis, assessment and risk management in international business can minimize legal challenges, such as aligning with local hiring practices, navigating intricate tax policies, and adhering to trade regulations.

Contemporary Concerns in Intellectual Property Rights

This can also be related to the pressing issue of intellectual property rights violations. For instance, the report Intellectual Property: Rights Challenges Facing Foreign and Canadian Companies in China: Survey Results and Analysis highlights that copyright infringements of materials from foreign companies are widespread in China, although the situation has somewhat improved in recent years. Similarly, Chinese rules and regulations regarding trade secrets are scattered across various laws and regulations, rather than consolidated into a single trade secrets law (like the “Uniform Trade Secrets Act” (UTSA) in the United States). This situation adds to the confusion for foreign companies trying to protect their trade secrets.

Regulatory Risks

Before we move on to financial risks, let’s talk about regulatory risks, which can be somewhat seen as intersecting with regulatory-legal peculiarities.

Regulatory risks can manifest in various aspects, such as:

• Licensing and certification.
• Customs and trade barriers (changes in tariffs, quotas, customs procedures).
• Competition rules (antitrust legislation, restrictions on mergers and company activities).
• Financial regulation (changes in reporting requirements, accounting standards, tax laws).

Comprehending and adeptly navigating the legal intricacies and regulatory risk mitigation are imperative for the effective advancement of business ventures on the global stage.

Financial Risks: From Exchange Rate Fluctuations to Incentive Accruals

Financial risk in international business arises from legislative changes in different countries, political instabilities, inflation, and exchange rate volatility.

Currency exchange rates are sensitive to geopolitical events and economic uncertainties. Their fluctuations can occur unexpectedly, impacting your budget and financial reporting.

The unpredictability of market conditions necessitates continuous monitoring and adaptation of financial strategies. Given such contingencies, companies should strive to mitigate financial risks by diversifying investments, utilizing financial derivatives, and other tools to safeguard against adverse market changes.

To streamline certain administrative tasks, companies can leverage specialized software that enables them to design, implement, and track compensation packages while ensuring compliance with rules and internal policies.

Cultural Differences in Customer Relationships and Within the Team

When discussing unsuccessful international experiences, a common example often cited is Walmart’s departure from the German market due to misjudgments in pricing, product selection, and employee culture. Conversely, a notable success story is how Lidl managed to overcome initial missteps in understanding American consumers and establish a foothold in the U.S. market.

Addressing the topic of cultural differences typically involves highlighting the challenges faced by global teams and the potential pitfalls a company may encounter during expansion, as well as strategies to avoid them. Nevertheless, it is important to acknowledge the strengths of diverse teams, as research has shown that less homogeneous teams tend to process information more meticulously, are less prone to groupthink, and exhibit greater creativity. However, the very factors that make them stronger – personal diversity (gender, age, language, values) and experience (varying levels of economic development and political systems in their home countries) – сan become obstacles if not properly managed and organized.

Challenges in Finding the Right Talent

It is often said that people are the most valuable resource of any business. The process of finding suitable candidates involves identifying and attracting potential job applicants from various channels to fill open positions within the organization. Following the search, a thorough assessment is conducted.

Candidate evaluation entails assessing qualifications, skills, experience, and cultural fit of potential employees. This process helps make informed decisions and select the most suitable candidate for the role.

Attempting to independently tap into a broad talent pool in the international market, managing a human resources department from another country with a different time zone, can be extremely challenging. There are various ways to address these challenges, from delegating them to your HR department, hiring international recruitment agencies, to working with a Global PEO (Professional Employer Organization). Each option has its own pros and cons, and here are some notable points:

• When entering new markets, agencies and PEOs already possess the necessary expertise and tools for working with foreign labor, unlike your company’s HR department.
• Payment consideration: agencies charge based on the number of employees they handle, while PEOs work on a percentage rate from payroll, taking on the entire human resources management process.

Finding the right approach that aligns with your business objectives and resources is key to successfully navigating the complexities of global talent acquisition and management.

Challenges in Talent Management

The absence of flexibility and the inability to respond promptly to urgent tasks are antithetical to the concept of successful expansion and risk management in international business.

You should have the ability to easily enter new markets or adjust your workforce size without establishing legal entities, maximize your talent potential in alignment with talent strategy and business goals, and receive real-time insights into the status of your international workforce along with any pertinent updates or changes in local regulations.

In the modern world, this can be achieved through software that streamlines processes for attracting, developing, and retaining employees. It offers tools for monitoring, managing, and optimizing employee performance.

Strategies to Mitigate Risks in International Business

Conclusion

Before entering the new market, conducting comprehensive analysis and preparing a strategy are essential. Within the framework of local conditions, various international business risk factors of different nature await your company. We have identified the following:

1. Legal peculiarities of the local market and potential challenges with labor and commercial legislation, tax policies, and intellectual property rights.
2. Financial risks linked to exchange rate fluctuations, local tax peculiarities that can significantly impact the company’s financial stability.
3. Cultural differences can serve as barriers not only in studying the target audience and defining its profile but also in interpersonal and professional relationships among employees. It is crucial not to overlook the adaptation phase of your employees to ensure long-lasting commitment!
4. People are the most valuable resource in a company. Effectively delegating the entire process of establishing labor relations proves beneficial for tapping into a broad talent pool in the international market.
5. One of the key aspects of successful business expansion is the ability to easily enter new markets, manage workforce size flexibly, and maximize talent potential.