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20 issues for businesses expanding internationally
Business briefing series
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First published October 2010
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Business briefing series: 20 issues for businesses expanding internationally
First edition
ISBN: 978-1-921245-62-6
Business briefing series: 20 issues for businesses expanding internationally 3
Business briefing series
20 issues for
businesses expanding
internationally
Anyone who has made the bold step of starting their own business has at some
stage dreamed about taking that business offshore in a bid for increased expansion
and to generate additional revenue.
Although ambitious and potentially very lucrative, such a move could also prove
very costly if not done correctly.
To assist business leaders with the process of taking on globalisation, the Institute
of Chartered Accountants in Australia (the Institute), in conjunction with Ernst &
Young (EY) has produced this thought leadership paper entitled Business briefing:
20 issues for businesses expanding internationally.
The publication is the third part of the Institute’s Business Briefing series designed
to help businesses to successfully navigate challenging issues. The commentary
in the report is divided into three key phases of an international expansion project:
•	 Planning for expansion
•	 Choosing your location
•	 Conducting business overseas.
Business briefing: 20 issues for businesses expanding internationally has been written
and presented in such a way as to maximise the reader’s understanding of the
issues. Each of the three sections contains a series of pull-out boxes which guide
the reader as to the types of questions that they should be asking with regard
to the business. These questions are consolidated into a detachable checklist at
the back of the publication which can be used when consulting the paper.
I trust that you will find this thought leadership paper interesting and
worthwhile reading.
Michael Spinks FCA
President
Institute of Chartered Accountants in Australia
Business briefing series: 20 issues for businesses expanding internationally4
Business briefing series: 20 issues for businesses expanding internationally 5
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Planning for expansion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1.	 Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.	 Global trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.	 Market research  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Choosing the location . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  10
4.	 Political and social climate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  10
5.	 Local tax and regulatory environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6.	 Legal system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
7.	 Innovation and incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
8.	 Location and infrastructure  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  13
9.	 Cultural compatibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  13
10.	 Local workforce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Doing business overseas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
11.	 Global management team  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
12.	 Global human resources considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
13.	 Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
14.	 Choosing the operating structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  18
15.	 Implementing the operating structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  18
16.	 Foreign exchange management and currency risk/controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  18
17.	 Business and international taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  19
18.	 Supply chain, transfer pricing and intellectual property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  19
19.	 Risk management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  20
20.	 Exit or wind-down . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  20
Checklist . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  21
Contact details . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Back cover
Contents
Business briefing series: 20 issues for businesses expanding internationally6
The Globalization Index1
supports many market indicators
that the trend towards ambitious international expansion
will continue. This research depicts a global landscape
where organisations execute their international
expansion strategies at a rapid pace. This speed of
expansion may indicate the strong desire by companies
to be the first-to-market and/or the imperative to
capitalise on new market developments.
The survey was conducted in August 2009, with 520
senior executives worldwide. 38% of respondents
indicated that they currently derive over half of their
revenue from overseas operations. As indicated in the
chart below, by 2012 more than half of the respondents
expect this to be the case, with one in four respondents
expecting to derive more than three quarters of their
revenue from overseas.
Only one in 50 executives surveyed believes containing
their operations within their home country or earning
less than 10% of their revenue from overseas markets
by 2012, to be a viable option.
What proportion of your company’s revenues is derived
from its overseas operations (i.e. outside your company’s
home market) currently, and in three years time?*
Regardless of the size of their international footprint,
the research identified the top five drivers for
businesses expanding internationally as overall growth
opportunities, profitability, access to materials, access
to human resources, and the ability to innovate.
Benefits for international companies
from globalisation
In which of the following ways has globalisation
had a positive impact on your business over the
past three years?
Introduction
In August 2010, China overtook Japan as the second largest economy in the world, and it is closing the gap
on the United States. The world is changing at a fast pace, driven by globalisation. Throughout the global
financial crisis, agile organisations continued their quest to participate in and prosper from the tremendous
growth in the emerging markets. Very few Australian organisations can afford to ignore this growth momentum,
nor the other benefits that can be achieved from investing in emerging and international markets.
1.	 The Globalization Index 2009 is a report written by Ernst & Young with the Economist Intelligence Unit. The 2010 edition of the report is expected to be
released in January 2011.
Proportion of
revenue from
international clients:
25 – 75%
10 – 24%
0 – 9%
Overall growth
Profitability
Access to materials
Access to
human resources
Ability to innovate
Investment
opportunities
Access to finance
86%
68%
35%
42%
27%
80%
51%
27%
27%
33%
53%
32%
39%
21%
31%
30%
27%
29%
16%
20%
15%
Source: The Globalization Index Survey 2009Proportion of revenue:
0 – 9%
10 – 14%
15 – 24%
25 – 49%
50 – 75%
Over 75%
Source: The Globalization Index Survey 2009
* Figures may not add up to exactly 100%, due to rounding.
0%	 100%
Now
Three
years
time
13	 10	 17	 23	 20	 18
2	 7	 15	 21	 28	 26
Business briefing series: 20 issues for businesses expanding internationally 7
This report, the 20 issues for businesses expanding
internationally, focuses on the core issues that you
should consider when formulating and executing your
international expansion strategy. It does not provide
country specific analysis, however, common themes
have been identified that can be applied regardless of
your target location.
The commentary in this report is divided into the three
key phases of an international expansion project:
1.	 Planning for expansion
2.	 Choosing your location
3.	Conducting business overseas.
The planning funnel
The diagram above depicts the importance of
funnelling your efforts to ensure the bulk of your
energy and resources are spent setting up successful
operations. The first two phases focus on identifying
potential locations and selecting the most appropriate
for your operations.
In the ‘planning for expansion’ section we examine the
importance of a clearly defined strategy, global trends
driven by changing demographics and market research.
The planning phase is vital to avoid wasting resources in
assessing investment locations that should never have
been considered in the first place.
The detailed assessment under the major heading
‘choosing your location’ involves looking at the
political and social climate, the local tax and
regulatory environment, the legal system, innovation
and incentives, location and infrastructure, cultural
compatibility and the local workforce. These issues are
looked at from a strategic point of view rather than a
country specific angle. Whilst for example legal systems
are not examined in any detail, we raise the question
whether your business is equipped to deal with a legal
system based on civil or Muslim law.
The last section deals with issues associated with doing
business overseas. An existing global management
team would make it easier to set up your footprint
in a foreign location. Would your management team
know how to deal with a request by a high ranking
official asking for a facilitation fee? Does your global
workforce need security protection in addition to other
incentive payments? Will your business be funded
by an intercompany loan or do you need to consider
more innovative funding arrangements such as Islamic
finance? Will you acquire an existing local business to
reach a certain market share quickly? Foreign exchange
management and currency risk/controls, business and
international tax, supply chain and intellectual property
and risk management issues are also looked at in
more detail.
Finally, we consider exit and wind down issues. Agile
organisations will go through the process described
above at regular intervals. Based on the findings they
may decide to wind down operations in one location
and commence operations in another. This may make
perfect commercial sense, however, broader brand and
reputation issues must be considered. For example, if
you have become an important employer in a particular
country or region your exit must be carefully planned to
mitigate social backlash.
Planning for expansion
Choosing the location
Doing business
overseas
Business briefing series: 20 issues for businesses expanding internationally8
Planning for expansion
1.	 Strategy
	 Clearly define and stress test your strategy
	 What are the implications of international expansion
for your existing business operations?
Very few organisations can afford to ignore the
increasing trend towards globalisation. Entrepreneurial
organisations that are the first to move often have
the most startling success stories. However, those
organisations that do not stress test the financial and
operational impact on their existing business, may lose
more than their dream of becoming a global player.
Before expanding internationally, you should have a
clear picture of what you are trying to achieve. Are you
searching for a new and cheaper source of capital,
market leading talent, more cost effective production,
new markets, or all of the above? Can you execute your
strategy alone or do you need strong partners both
from an advisory as well as a business perspective?
You should consider the pressure global expansion may
have on your domestic operations in terms of finance,
management time and human resources. Will you enter
the identified market(s) through acquisition, joint venture,
a partnership or a green field development? Ensure you
test your assumptions and have a clear understanding of
how long it will take to turn a profit.
2.	 Global trends
	 Is your organisation exposed to new and
emerging markets?
	 Has the composition of your major
competitors changed?
	 Is foreign direct investment in your industry
sector clustered in locations where you do
not have a presence?
It is important to monitor and to be aware of global
trends, particularly in relation to demographic changes.
Australia’s population is estimated to grow to 36 million
by 2050. To put this into perspective, that is equivalent
to the bi-monthly combined population growth of
China and India. World population growth is not a
new phenomenon; however it is the demographic
changes that arise from this growth that will affect
business practices and profitability in the future. In
countries such as China and India, population growth
is accompanied by increasing affluence and a growing
middle class consumer base. Therefore, the traditional
characterisation and perception of emerging markets
as predominantly low cost manufacturing centres is
quickly changing. Emerging markets are also becoming
strong consumer driven societies where the demand for
products and services is increasing faster than in more
established and mature markets.
The implications for your business are clear. You can
become a participant in these markets and tap into
an ever increasing consumer base to help secure
your future profitability, or you can watch others fill
that space. Those business leaders that do not act
risk watching others reap the benefits and may be
challenged when those first-movers turn their attention
to Australia. Seen from this perspective, international
expansion is also an opportunity to help strengthen your
business at home in the medium to long term.
The flow of foreign direct investment (FDI) into a country
is an important indicator of the economic viability of
that location. Similarly, demographic trends such as the
age and education profile of the population may also
indicate future economic vitality and the growth of a
consumer base. An example of this is Vietnam, where
more than 70% of the population is 30 years or younger.
Vietnam is currently attracting significant FDI in certain
industry sectors. 	
‘Global foreign direct investment witnessed a
modest, but uneven recovery in the first half of
2010. Developing and transition economies now
absorb more than half of global FDI.’
World Investment Report 2010
United Nations Conference on Trade and Development
Business briefing series: 20 issues for businesses expanding internationally 9
3.	 Market research
	 What research is available to provide you with
information on market and industry conditions?
	 Is this information up-to-date and what is the
future outlook?
	 Create a short list of new and emerging markets,
tap into existing networks, talk to your advisors
and visit your short listed locations.
Market research is very important but can be costly;
however there are numerous resources available free of
charge to help you uncover useful information about the
strengths and challenges of global markets. Much of
this research can be done from your home base and will
help you in generating a short list of potential locations
for expansion.
Reliable statistical data or reference material can
supplement but should not replace a field trip. The world
is moving and changing fast. What may have been a
good investment location historically, may not present
the same opportunities in the future. Tap into existing
networks via chambers of industry and commerce or
other organisations representing an investment location,
visit trade fairs, talk to your advisors, visit your target
locations and meet the local people. This will greatly
assist you to make an educated and informed decision
about whether that market is right for your business.
Business briefing series: 20 issues for businesses expanding internationally10
4.	 Political and social climate
	 Is the political system stable? How do you
assess sovereign risk?
	 Does the country suffer under high levels of
sovereign debt?
	 Is there likely to be social unrest or are workers
organised in powerful unions?
The pace of change of the global political landscape
is accelerating due to globalisation. Political decisions
in one country may have far reaching implications for
trading partners or the globalised business community
at large. The response to the global financial crisis with
stimulus programs around the globe illustrated this.
Most governments appreciate that globalisation is the
motor of economic expansion.
However, as the graph below illustrates, concerns are
now emerging about new protectionism, regulations
and trade issues. More than 50% of Globalization Index
respondents believe that major economies will adopt
limited protectionist measures in certain key sectors.
Furthermore, the burden of sovereign debt may force
a country to abandon business friendly programs.
Which of the following assertions about the impact
of protectionism in coming years most closely reflects
your view? (% who agree with each statement)
An assessment of your target location’s political
environment, including the potential for social unrest or
regional instability is relevant for determining the risk of
any potential investment. This has been an important
issue in South East Asia, where various countries
have been affected by social unrest in recent years.
To support this, the graph below illustrates the
importance investors place on political stability in
assessing emerging market locations. Almost 60% of
respondents rated political stability as the most important
government-related factor to consider when deploying
FDI. Before entering a new market, you should evaluate
the risk based on the future outlook for the country or the
region, not just the status quo or historic events. Ensure
that you take note of any early signs of social unrest.
If you were to plan a foreign direct investment in
developed or emerging markets over the next year,
which of the following would you consider to be the
most important government related-factors?
Choosing the location
Source: The Globalization Index Survey 2009
0%	 10%	 20%	 30%	 40%	 50%
Major economies will adopt
limited protectionist measures
in certain key sectors
Global markets will remain or
become more open as governments
try to restore economic growth
The world economy will repeat the
protectionist errors of the 1930s
Domestic political expediency
will override claims by world
leaders to resist protectionism
‘Tit-for-tat‘ protectionism
will trigger a dangerous
downward spiral in global trade
Don’t know
Political stability
Developed Emerging
Source: The Globalization Index Survey 2009
0%	 20%	 40%	 60%
Macroeconomic stability
Host government attitude
towards domestic enterprises
Currency stability
Host government support
for inward foreign investment
Corporate and other
relevant taxes
Clarity and predictability
of the legal system
Strength and fairness of
legal system
Risk of nationalisation or
expropriation
Business briefing series: 20 issues for businesses expanding internationally 11
5.	 Local tax and regulatory environment
	 Is the tax regime business friendly and/or
competitive?
	 Does the country have free trade agreements
or double tax treaties?
	 Does the regulatory regime set the scene for
a sound corporate governance framework?
A low headline corporate tax rate is always appealing2
.
However, this can also be deceptive due to many
factors including the existence of state based taxes,
withholding taxes and consumption taxes such as a
value added tax (VAT). Your market analysis should
include commercial discussions with a local market
tax expert taking into account your specific facts and
circumstances where possible.
Free trade agreements generally indicate an open and
investment friendly economy. However, their existence
does not rule out the possibility of government support
for certain industries to protect domestic markets against
foreign competition, through subsidies or other forms of
protection. An extensive double tax treaty network may
likewise look impressive; however it is necessary to look
beyond withholding tax rates and test how the treaties
deal with mutual agreement procedures and arbitration
around transfer pricing, permanent establishment issues
and a global work force. Not all double tax treaties are
the same and some countries may try to assert taxing
rights beyond what investors would ordinarily expect
under OECD guidelines.
A country’s regulatory framework will be considered
open to FDI, if it can strike the right balance between
creating a secure environment for effective corporate
governance across all industry sectors, without
stifling entrepreneurial freedom or discriminating
against foreign investors.
2.	Ernst  Young Passport (includes the 2010 Worldwide Corporate Tax Guide, the 2010 VAT Guide, the 2009 Global Executive and the
2009 Transfer Pricing Global Reference Guide)
Legal systems around the world
Source: Legal systems around the world, University of Ottawa: www.juriglobe.ca/eng/index.php
Civil Law
Common Law
Muslim Law
Customary Law
Mixed System
Business briefing series: 20 issues for businesses expanding internationally12
6.	 Legal system
	 Is it a common law system? If not, are you
sure you understand the outcomes?
	 Do the laws and the legal and judicial
system provide support for and protection
of commercial activities?
An effective legal system that provides a balance
between protecting the commercial interests of
business, whilst also protecting the consumer, can
provide you with a level of confidence that you can
legally enforce your commercial agreements.
A common law legal system can be a huge advantage
as you will be much more likely to understand the
framework and outcomes. The map on page 11 shows
however that the number of countries with a pure
common law system is limited.
Civil law is the prevailing system in much of Europe
and in many of the emerging markets, while Muslim law
may be encountered when doing business in the Gulf
States, the Middle East and parts of Africa and Asia.
The legal system will affect every aspect of your
international expansion. For example:
•	 It will affect merger and acquisition activity
itself and will set boundaries through anti-trust
or competition law
•	 It will be instrumental for the protection
of trademarks, commercial design or plant
innovations (including copyright or distribution
law, data protection and privacy)
•	 It will set the scene for litigation, arbitration
or mediation
•	 It will provide guidance with respect to
information technology
•	 Labour law will regulate employment matters
•	 There is real estate, planning and construction
law to consider.
7.	 Innovation and incentives
	 Should you develop your products in emerging
or fast growth markets?
	 Should you have a presence at global
innovation clusters?
	 Are generous grants and incentives available
for innovative organisations?
Maintaining an environment that supports innovation
is critical for future business growth. Innovation can
be centralised, or decentralised and driven locally. As
demonstrated in the chart below, organisations with
a centralised strategy are just about as likely as those
with a decentralised approach to regard it as essential
to apply innovative ideas from local markets.
Innovation is critical to growth whether
centrally or locally driven
Please rate your agreement with the following statement
regarding innovation activities within your business
For many businesses, the decision to relocate research
and development activities to an emerging market will
be influenced by a number of strategic and business
drivers. These may include using the target location as
a strategic hub for market expansion into that region.
Conducting research in emerging and fast growth
markets can drive new ideas by tapping into a new pool
of innovative and market leading talent.
Choosing the location (continued)
Innovation centralised in headquarters
Innovation decentralised to local markets
Source: The Globalization Index Survey 2009
65%
68%
48%
67%
58%
61%
44%
52%
36%
49%
Maintaining an environment
where people can be innovative is
critical to future business growth
We adapt products and services
to the needs of local markets
We create product and services
specifically for local markets
We believe process
innovation is as important
as product innovation
Applying innovation ideas from
local markets is essential
Business briefing series: 20 issues for businesses expanding internationally 13
An understanding of the various government incentive
regimes ranging from tax holidays and incentives,
to discretionary government grant support may help
sweeten the deal for many organisations3
. In addition
to any formal programs, the host country’s government
may be interested in attracting your investment in
order to boost the local economy and create jobs in
strategic sectors. In most jurisdictions, governments
may be receptive to specific negotiated concessions
and incentives, depending on the circumstances and
the nature of the investment. It is important to consider
these possibilities at an early stage before committing
to the target location. This ensures that an effective
strategy can be developed that places your organisation
in a strong bargaining position.
8.	 Location and infrastructure
	 Is economic infrastructure secure and reliable?
	 How would you deal with power outages,
telecommunication down time or traffic congestion?
	 Is the location central to your regional markets,
suppliers of goods and services?
It is important to understand the infrastructure that will
be at your disposal in the target country and assess its
reliability and the positive or detrimental impact it may
have on achieving success in your target market.
Particular attention should be paid to the target country’s
communications infrastructure. In the digital age this
is arguably more critical than ever before, given the
importance of information technology to the effective
operation of modern businesses. You should consider
the capacity and efficiency of telephone and mobile
networks, and also data delivery mechanisms such
as fibre optic cable and broadband internet. Is the
infrastructure modern, reliable and safe? How vulnerable
is it to being compromised for example from power
failures and cyber attacks, and are there emergency
systems and disaster recovery plans in place?
When expanding into the target location, consider
whether the attributes which have made you successful
at home can be leveraged to drive success abroad. Your
ability to shift wealth, products, people and information,
will be heavily dependent on accessing adequate social
and commercial infrastructure. There are a wide range
of potential considerations such as the target location’s
size and accessibility, transport, utilities and information
systems, access to financial services and other factors.
9.	 Cultural compatibility
	 Are there significant cultural differences that may
impact the way you conduct your business?
	 Are there likely to be language barriers?
Entrepreneurial organisations through their very nature
can achieve growth and develop a global footprint
relatively quickly. However, it can take a long time to
create a diverse workforce that reflects the variety of
markets in which the organisation operates, and cultural
customs can impact significantly on business practices
in the chosen location.
Without early attention to these issues, your
management team may be left behind in terms of
cultural awareness and diversity. This can generate a
competitive disadvantage as the management team will
be required to make rapid decisions, while at the same
time ensuring that they have a clear understanding of
the local customs and operating conditions.	
Cultural business etiquette
•	 Bringing your host in Tokyo a bottle of American
whiskey is a thoughtful gift. It’s a major offense in
Dubai. American whiskey is revered in China and
Japan. But in the Islamic Middle East, and among
Muslim hosts in Asia, alcohol is strictly taboo
•	 In the Middle East and Asia, gifts must always be
given at the end of the meeting so they are not
regarded as bribes. In Latin America, however,
gifts are a great icebreaker and can be given at
the start of a meeting
•	 Business cards in Japan, China and other parts of
Asia are considered a representation of one’s self –
offer and receive cards with both hands, and always
look at it as if you’re studying it carefully
•	 In most of the Islamic Middle East, it’s the norm to
keep visitors waiting. This is not considered rude,
but an extension of the Middle Eastern custom to
mix business with pleasure. It is also acceptable
to ask about your host’s children, especially sons,
but never their wives.
Forbes: www.msnbc.msn.com/id/35986024/
3.	Ernst  Young, RD incentives in the new tax landscape.
Business briefing series: 20 issues for businesses expanding internationally14
Choosing the location (continued)
In this respect, the importance of language cannot be
overstated, as it will underpin everything the business
does in the target location. Effective communication
(or the lack thereof) has the ability to make or break the
business. It is a key foundation upon which the success
of the business may be built. Your management team
will need the language skills to communicate effectively
with those who will interact with your business including
government, regulators, financiers, suppliers, staff and
customers. Even in countries where English is commonly
spoken or is the language of business, regional nuances
can be a source of misunderstanding and can lead to
more serious problems.
As demonstrated in the diagram below, the level of
tolerance and understanding of cultural and ethnic
differences and language barriers in foreign markets
ranks highly amongst Globalization Index respondents
when asked about the most important cultural factors
when conducting business internationally. The top
ranked issue related to the level of international
experience of the workforce is discussed below.
Which of the following cultural factors do you expect to
be most important when conducting your international
business over the next year? (% of respondents)
10.	Local workforce
	 What is the availability, skill-set and cost structure
of the local work force?
When expanding into a global market, your human
resources can mean the difference between success
and failure. As your organisation grows off-shore,
getting the right people in the right location can
provide a vital competitive advantage. The quality of
the local workforce may often be the deciding factor
in determining whether to expand your business to
that location and also in determining how successful
such an expansion will be.
‘Companies are viewing the labour market
more through a global lens, and in many cases,
off-shoring decisions, especially in higher,
value-added functions, are being driven by talent
shortages at home as much as by cost-cutting.‘
A.T Kearney, Global Services Location Index 2009
When setting up a local workforce in your target
location, there are numerous practical issues to consider.
You will need to think about the education level and
experience of your prospective workers and how much
you will need to invest in training. You will need to
determine the terms and conditions of employment
and you may need to negotiate with individuals, labour
unions or other bargaining agents. There may be local
legislation or regulations concerning working hours,
weekends and public holidays and there may also
be local customs or practices that will impact on the
operation and activities of your workforce. In addition
you will need to consider your global remuneration
approach and whether short term and long term
incentive programs will be offered to your overseas
employees, as well as the tax and regulatory implications
associated with this.
Source: The Globalization Index Survey 2009
0%	 10%	 20%	 30%	 40%	 50%
Level of international
experience of workforce
Degree to which products
and services need to be adapted
to suit foreign markets
Tolerance of foreign business
influence in host markets
Level of tolerance and
understanding of cultural/ethic
differences in your foreign markets
Language barriers in
foreign markets
Cultural similarity to
home market
Degree to which advertising
and cultural imagery can be
understood internationally
Press and media freedom
in foreign markets
Openness to foreign cultural
influence (e.g. through
television, cinema etc.)
Business briefing series: 20 issues for businesses expanding internationally 15
11.	Global management team
	 Who will negotiate with government, customers,
suppliers and business partners? How should you
manage risks such as bribery and corruption?
	 Who will be responsible for the recruitment of staff?
	 Do you have an international management team or
do you need to build one?
Commencing business operations in a new market can
involve significant risks, and therefore it is important to
have a strong management team that understands the
challenges ahead. Having established the business in a
new country, a variety of issues may present themselves
such as:
•	 How to ensure that your business operations
run smoothly?
•	 How much hands on involvement is required by
your management team?
•	 How much time and resources will it consume
setting up your operations?
•	 Will some members of your management team
be required to spend a lot of personal time in the
new location?
•	 Will Australian expatriates be sent to run the
business or can the services of local managers
be relied upon?
To be prepared, you must consider the challenges your
business will face during the start-up phase, and who
from a management perspective is best placed to deal
with those challenges. In determining this, consider
any potential negotiations with the government or other
local officials in the host country. Negotiations might be
required over issues such as licensing arrangements, tax
concessions, labour conditions and local joint venture
partners. The right negotiating technique will be essential.
Does your organisation have sufficient knowledge of the
host country and expertise to conduct negotiations or
will you need specialists with expert local knowledge to
negotiate on your behalf? The graph on page 16 shows
that organisations that operate in more than 10 countries
Doing business overseas
Corruption Perceptions Index 2009
9.0–10
8.0–8.9
7.0–7.9
6.0–6.9
5.0–5.9
4.0–4.9
3.0–3.9
2.0–2.9
1.0–1.9
0–0.9
The Corruption Perceptions Index (CPI) measures the perceived level of the corruption in 180 countries and territories around the world. The CPI is a ‘survey of
surveys’, based on 13 different expert and business surveys. Scores range from 0 (perceived to be highly corrupt) to 10 (perceived to have low levels of corruption).
© Transparency International. All rights reserved.
Business briefing series: 20 issues for businesses expanding internationally16
Doing business overseas (continued)
are highly likely to have a diverse management team
whilst those with only domestic operations are unlikely
to have a significant proportion of senior management
from another country.	
More global companies are more likely
to have international management
Roughly what proportion of senior management are
nationals of another country?
Have you also considered the possibility of corruption
in your host country? Is it common for local officials
or business people to demand bribes, facilitation fees
or kick-back payments? How will you deal with such
demands while protecting the interests and integrity of
your business? Will the local authorities be of assistance
or will they be complicit in the process? Failing to
identify and deal with such risks can bring serious
consequences; as such practices may be criminal
offences under the laws of both Australia and the
host country and punishable with heavy fines and/or
prison sentences.
The map on page 15 illustrates the perceived levels
of corruption in countries around the world.
12.	Global human resources considerations
	 What benefits will you provide to expatriates and
what are the tax consequences? Do your employees
require security protection?
	 Do you have a team that can deal with assignment
management, immigration and tax compliance?
	 Should these functions be outsourced?
Although expatriates know your business and may
enjoy the opportunity to work overseas; they may also
lack local knowledge. Relocating and remunerating
expatriates can be more expensive than local hires,
so you should first consider the objectives of the
assignment and your desired return on investment. If
you decide to use expatriates rather than local hires, you
must also consider what happens when the assignment
is finished. A repatriation plan should be implemented
so the knowledge and skills gained on assignment are
retained within your organisation. You must also ensure
that you have the resources to manage the related local
and international compliance obligations, particularly if
you are expanding into more than one country.
To ensure your expatriate staff are not distracted from
the job at hand, organisational support will be required
to deal with relocation and immigration issues. This level
of support will vary from organisation to organisation;
however this along with the development of an incentive
plan should be factored in, even if the new host location
is attractive. Generally, most organisations develop formal
mobility policies that consider issues such as the level of
remuneration, relocation benefits and other incentives.
Increasingly organisations are also linking their mobility
programs with their talent management strategy. The tax
affairs of your employees will also get more complicated
with tax exposure in more than one location, specifically
due to the revised rules in Australia for the taxation of
employment income. Benefits provided to your Australian
workforce whilst working overseas could potentially be
assessable both abroad and domestically. Tax equalisation
arrangements are a common mechanism used for
employees who work abroad for a period of time.
Another important consideration (and cost) will be
that of security for your employees. In some countries,
expatriate employees may be the target of extortion
threats, kidnapping attempts or other forms of violence.
They will need to be assured of their safety, which
may include specific accommodation, transport
and protection arrangements as part of their overall
remuneration and benefits package.
Senior management from another country:
Less than 5% 5 – 14% 15 – 24% 25 – 49% 50%+
Source: The Globalization Index Survey 2009
* Figures may not add up to exactly 100%, due to rounding.
0%	 100%
	 %
55	 22	 9	 6	 5	
88		 5	 1	4	
30	 16	 19	 9	 26	
Foreign
operations in
11 or more
countries
Foreign
operations
in 1–10
countries
Domestic
operations
only
Business briefing series: 20 issues for businesses expanding internationally 17
13.	Financing
	 What are the cash flow needs of your business?
What is your projected revenue growth? Are your
financial models sound or overly optimistic?
	 Do you need strong partners to finance your
expansion? Have you considered Islamic finance
as a source of funds?
	 What is the debt equity mix of funding? What are
the tax consequences?
It is important to stress test your financial models and
revenue targets to ensure you can service your debt.
This testing should involve hypothetical parameters such
as an interest rate hike, currency deflation or difficult
market conditions. During the global financial crisis,
successful businesses continued their growth path due
to the establishment and implementation of realistic and
effective business models that had been stress tested.
There are many options available for raising finance
for your global expansion. There are, of course, well
established conservative options including bank or
intercompany loans, however, you may wish to consider
emerging financing options such as Islamic finance.
The map below depicts how Islamic finance is
available worldwide.
How you manage your ongoing finance raises significant
taxation considerations both in Australia and your target
country. You should test your assumptions by using
financial modelling to determine if you can achieve the
desired debt to equity ratio recommended by your financial
advisors. You should confirm that your treasury function
is permitted under local and Australian law to ensure that
the terms of your finance arrangements do not breach the
transfer pricing rules or thin capitalisation thresholds. Hybrid
financing arrangements, changes to the non-portfolio
dividend exemption and withholding tax implications,
need to be reviewed carefully from a tax perspective.
You should stress test assumptions made in financial
models to ensure that you can still service the
recommended debt levels if certain factors turn to
the worse. You should also confirm that the proposed
debt to equity ratio on both the Australian and foreign
entity balance sheet is permitted under the relevant
taxation law as potential breaches of the transfer
pricing or thin capitalisation rules can result in the
denial of tax deductions.
Global Islamic Funds by Home Country of Asset Manager (QI 2010)
3
5
9
1
4
1
1
1
2
6
100
6
7
2
82
24
2
181
1
3
177
3
13
26
8
34
4 5
2
18
14
Malaysia
~5.1
USA
~2.7
KSA
~22.8
Bahrain
~1.2
UAE
~6.1
Kuwait
~4.0
27
Note: Funds per country include those managed by
players headquartered in that respective jurisdiction.
	Indicates total AuM of Islamic funds in US$ billion
	 Indicates the number of funds
Islamic AuM
by Country
(US$ billion):
10+
1–10
0.5–1
0.1– 0.5
0.01– 0.1
Source: Eurekahedge, Zawya Funds Monitor, Ernst  Young analysis
Business briefing series: 20 issues for businesses expanding internationally18
14.	Choosing the operating structure
	 Are you looking for slow organic growth?
Will you start out with a sales office or are you
looking for a green field development?
	 Are you looking to establish an immediate local
presence? If so, will you set up a joint venture
or will you acquire an existing local business?
There are a number of factors that will determine the
method of entry into your chosen location. The market
conditions and the opportunities to capture immediate
market share will impact the design of your initial
business model and structure. For example, you may
have time to establish various operating entities and
build up your infrastructure such as factories or, you may
only have time to set-up a simple representative office
from which you can immediately negotiate customer
contracts. These factors may in turn drive your choice
of legal operating structure and also the method you
adopt to gain a foothold in the market. For example,
will you establish a joint venture with a host country
partner or operative and/or set-up various contracts
to establish your operations? There will be costs and
benefits associated with these choices which must be
considered, including those concerning commercial,
legal, regulatory and tax issues.
15.	Implementing the operating structure
	 What are the legal and administrative procedures
and regulatory requirements for setting up the
operating structure and starting the business?
	 Should you outsource the set-up to corporate
secretarial service providers?
How easy is it to start-up your business in the host
country? What is the level of red tape and how will
you go about cutting through it? You may have local
accounting and reporting obligations and other legal
statutes that you must comply with at start-up and on
an ongoing basis. Penalties for non-compliance may
be severe, including criminal prosecutions and prison
sentences. How will you make sure that you have
identified all obligations and how you will satisfy them?
It may be cost effective to outsource your corporate
secretarial, accounting and tax functions to local experts.
16.	Foreign exchange management and
currency risk/controls
	 Is the local currency stable or volatile?
	 Is currency hedging available at a reasonable cost?
	 Could currency restrictions inhibit or even prohibit
the flow of international funds?
Organisations generally can hedge international internal
transactions effectively without adverse outcomes,
although the tax and accounting treatment can be
complicated. The risk and commercial exposure rises
exponentially where transactions with external suppliers
and customers are involved.
The diagram below illustrates the fall of the Euro against
the US Dollar initially triggered by the sovereign debt
crisis in Greece. The fall of the Euro accelerated when
the crisis spread to other European countries. The rise
and fall of a currency can impact the economics of an
entire project or production set-up. It can significantly
alter the margins of goods sold on the world market, as
well as the cost of overseas sourced inputs. The hedging
of cross currency supply or loan contracts may remove
some of the risk but will also come at a cost.
In addition to foreign exchange management, you need
to ensure that the target location does not impose
limitations on the movement of currency in and out of
the country.
Doing business overseas (continued)
Nov	 Dec	 Jan	 Feb	 Mar	 Apr	 May	 Jun	 Jul	 Aug
	 2009	 2010
Source: Yahoo Finance
1.55
1.50
1.45
1.40
1.35
1.30
1.25
1.20
Business briefing series: 20 issues for businesses expanding internationally 19
17.	Business and international taxation
	 Are you aware of how the new Australian attribution
regime in relation to controlled foreign companies
may allow you to take better advantage of
efficiencies overseas?
	 How will profits be taxed in your target location?
What is the treatment of losses?
Consider how tax is assessed and paid in the host
country. The timing and quantum of tax payments
will impact your cash flow. Ensure that start up losses
can be carried forward to reduce future tax liabilities.
Payment of withholding taxes will typically be required
on cross-border payments of interest, dividends and
royalties. In certain jurisdictions, taxes will be triggered
on the payment of technical services fees and other
payments to non residents. Double taxation agreements
may operate to allocate taxing rights between the host
country and Australia. Detailed tax due diligence is
recommended if you are acquiring a foreign business.
‘The reform of the Australian CFC rules will
improve the competitiveness of Australian
businesses expanding overseas. Overall it
will be the catalyst for better efficiencies in
foreign operations.’
Daryn Moore, Ernst  Young Australia, Partner
Oceania Leader – International Tax Services
Australian international tax rules such as the controlled
foreign company (CFC), thin capitalisation and transfer
pricing rules must also be considered. Australia has
and is continuing to reform the CFC rules to ensure
that Australian organisations are not disadvantaged in
competing overseas. Non-portfolio dividends paid by the
foreign organisation to Australian corporate shareholders
are not taxable in Australia at the corporate level and also
do not generate franking credits. Australia does allow for
certain tax deductions for a loss or outgoing incurred in
deriving foreign dividend income. 	
18.	Supply chain, transfer pricing and
intellectual property
	 Have you identified all possible supply
chain efficiencies?
	 Have you considered potential Australian tax
issues as you move functions, intellectual
property and risk offshore? Is your intellectual
property and data protected?
The development of an effective supply chain process
is vital to establishing efficient operations and achieving
maximum profitability. You should consider local and
international commercial contracts, the adequacy of local
physical infrastructure beyond that which was assessed
during start-up and the reliability of associated services
on which the business will rely.
You could also explore the possibility of vertical
integration such as the acquisition of key suppliers or
distributors. However in doing this, you should give
consideration to any potential infrastructure, regulatory
or other constraints that may hinder such an expansion.
If you have operations in multiple countries, you may
consider the suitability of the target location for a shared
services centre. An example may be moving your
existing production or other business functions from
Australia and/or other locations to your target location.
Such decisions may result in the shifting of risk and/or
intellectual property from the target location to another
location. This may have an impact on the cost structure
and profitability of your business from an international
perspective and give rise to transfer pricing and other
tax issues. Revenue authorities often focus on these
types of transactions.
Business briefing series: 20 issues for businesses expanding internationally20
Doing business overseas (continued)
19.	Risk management
	 Have you identified areas of risk and how you
will address them?
	 Are your foreign operations susceptible to fraud?
There are a number of business risks that should be
considered when entering an emerging or international
market. To identify these risks, Ernst  Young conducted
research to ascertain the top 10 business risks facing
multinational firms.
The Ernst  Young Business Risk Report 20104
is based
on interviews with industry executives and analysts
representing 14 industry sectors. The survey asked
each interviewee to identify and rank the top business
risks for 2010. Aggregating the results worldwide
and across industry sectors, resulted in the following
top 10 business risks for multinational firms ranked
by importance:
1.	 Uncertainty around regulation and compliance
2.	 Access to credit and the impact of rising levels
of government debt
3.	 The withdrawal of global stimulus programs
4.	 The global war for talent and compensation
structures
5.	 The strategic imperative of succeeding in an
emerging market, as these markets continue to
drive global growth
6.	 Increased cost pressures as the result of commodity
price inflation and low cost competitors
7.	 Incumbent firms in transitional sectors adjusting
to non-traditional entrants
8.	 Staying ahead of consumer preferences and
government regulation on environmental issues
9.	 Political backlash and reputational risks triggered
by corporate social responsibility breaches
10.	Rescue mergers and regulatory changes that may
force new transactions.
The above list has changed considerably in both order
and content from the 2009 report, which demonstrates
that businesses operate in a dynamic, ever-changing
global environment that requires constant monitoring.
The business risk associated with not succeeding in
an emerging market for example, moved from rank 12
in 2009 to rank 5 in 2010. You should also recognise
that in such an environment, to manage existing and
newly emerging risks, an effective risk management
strategy and process should be implemented. Obtaining
appropriate insurance in your selected host country is
an important consideration to mitigate against potential
business risks.
You should also consider your organisation’s exposure
to potential fraud. Are you at greater risk if the control of
your organisation resides in only a handful of managers,
rather than a structure with a board of directors and
policy and process around corporate governance,
internal/ external audit and other external controls?
20.	Exit or wind-down
	 Will you continue to maintain a presence
in this location?
	 What are the legal and commercial issues
associated with terminating business
and employment contracts?
	 What is your strategy for redeploying
your resources?
There are different ways to exit or wind-down your
operations in a host country. You will need to take into
account local laws, tax and financial issues. You must
also determine if you wish to maintain a presence in the
host country. Options may include liquidation, the sale
of shares or even floating the business. The exit strategy
should be part of your overall business plan.
There are also reputational risks to consider, particularly
if your business was an important employer in a country
or region. To avoid costly litigation or compensation
payments you must also be aware of the industrial
relations environment. Consider whether local
regulations restrict the transfer of funds overseas.
4.	Ernst  Young Business Risk Report 2010
21Business briefing series: 20 issues for businesses expanding internationally
20 issues for businesses expanding internationally
Table based on the top 20 issues and related questions.
Planning for expansion Yes No
1.	 Strategy •	 Clearly define and stress test your strategy
•	 What are the implications of your international expansion for your
existing business operations?
2.	 Global trends •	 Is your organisation exposed to new and emerging markets?
•	 Has the composition of your major competitors changed?
•	 Is foreign direct investment in your industry sector clustered
in locations where you do not have a presence?
3.	 Market research •	 What research is available to provide you with information
on market and industry conditions?
•	 Is this information up-to-date and what is the future outlook?
•	 Create a short list of new and emerging markets, tap into existing
networks, talk to your advisors and visit your short listed locations
Choosing the location Yes No
4.	 Political and
social climate
•	 Is the political system stable? How do you assess sovereign risk?
•	 Does the country suffer under high levels of sovereign debt?
•	 Is there likely to be social unrest or are workers organised in
powerful unions?
5.	 Local tax and
regulatory
environment
•	 Is the tax regime business friendly and/or competitive?
•	 Does the country have free trade agreements or double tax treaties?
•	 Does the regulatory regime set the scene for a sound corporate
governance framework?
6.	 Legal system •	 Is it a common law system? If not, do you understand the outcomes?
•	 Do the laws and the legal and judicial system provide support for and
protection of commercial activities?
7.	 Innovation and
incentives
•	 Should you develop your products in emerging or fast growth markets?
•	 Should you have a presence at global innovation clusters?
•	 Are grants and incentives available for innovative organisations?
8	 Location and
infrastructure
•	 Is economic infrastructure secure and reliable?
•	 How would you deal with power outages, telecommunication
down-time or traffic congestion?
•	 Is the location central to your regional markets and suppliers of goods
and services?
9.	 Cultural
compatibility
•	 Are there significant cultural differences that may impact the way you
conduct your business?
•	 Are there likely to be language barriers?
10.	Local workforce •	 What is the availability, skill-set and cost structure of the local work force?
Business briefing series: 20 issues for businesses expanding internationally22
Doing business overseas Yes No
11.	 Global management
team
•	 Who will negotiate with government, customers, suppliers and business
partners? How should you manage risks such as bribery and corruption?
•	 Who will be responsible for the recruitment of staff?
•	 Do you have an international management team or do you need
to build one?
12.	Global human
resources
considerations
•	 What benefits will you provide to expatriates and what are the tax
consequences? Do your employees require security protection?
•	 Do you have a team that can deal with assignment management,
immigration and tax compliance?
•	 Should these functions be outsourced?
13.	Financing •	 What are the cash flow needs of your business? What is your projected
revenue growth? Are your financial models sound or overly optimistic?
•	 Do you need strong partners to finance your expansion?
Have you considered Islamic finance as a source of funds?
•	 What is the debt equity mix of funding? What are the tax consequences?
14.	Choosing the
operating structure
•	 Are you looking for slow organic growth? Will you start out with
a sales office or are you looking for a green field development?
•	 Are you looking to establish an immediate local presence? If so, will you
set up a joint venture or will you acquire an existing local business?
15.	Implementing the
operating structure
•	 What are the legal and administrative procedures and regulatory
requirements for setting up the operating structure and starting
the business?
•	 Should you outsource the set-up to corporate secretarial
service providers?
16.	Foreign exchange
management and
currency risk/controls
•	 Is the local currency stable or volatile?
•	 Is currency hedging available at a reasonable cost?
•	 Could currency restrictions inhibit or even prohibit the flow of
international funds?
17.	 Business and
international taxation
•	 Are you aware of how the new Australian attribution regime in
relation to controlled foreign companies may allow you to take
better advantage of efficiencies overseas?
•	 How will profits be taxed in your target location? What is the
treatment of losses?
18.	Supply chain,
transfer pricing and
intellectual property
•	 Have you identified all possible supply chain efficiencies?
•	 Have you considered potential Australian tax issues as you
move functions, intellectual property and risk offshore?
Is your intellectual property and data protected?
19.	Risk management •	 Have you identified areas of risk and how will you address them?
•	 Are your foreign operations susceptible to fraud?
20.	Exit or wind-down •	 Will you continue to maintain a presence in this location?
•	 What are the legal and commercial issues associated with
terminating business and employment contracts?
•	 What is your strategy for redeploying your resources?
20 issues checklist (continued)
Contact details
The Institute of Chartered Accountants
in Australia
33 Erskine Street, Sydney, NSW 2000
GPO Box 9985, Sydney, NSW 2001
Service	 1300 137 322
Phone	 02 9290 1344
Fax	 02 9262 1512
Email	 service@charteredaccountants.com.au
charteredaccountants.com.au
Lee White
Executive General Manager – Members
Phone	 + 61 2 9290 5598
Email	lee.white@charteredaccountants.com.au
Ernst  Young
Ernst  Young Centre
680 George Street, Sydney
GPO Box 2646, Sydney NSW 2001
Phone	 +61 2 9248 5555
Fax	 +61 2 9248 5959
www.ey.com
Graham Frank, Partner
Asia-Pacific Chief Operating Officer – Tax
Phone	 +61 2 9248 4810
Email	 graham.frank@au.ey.com
Daryn Moore, Partner
Oceania Leader – International Tax Services
Phone	 +61 2 9248 5538
Email	 daryn.moore@au.ey.com
Greg Logue, Partner
Oceania Leader – Strategic Growth Markets
Phone	 +61 2 9248 5870
Email	 greg.logue@au.ey.com

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20 issues for businesses expanding internationally paper

  • 1. 20 issues for businesses expanding internationally Business briefing series
  • 2. The Institute of Chartered Accountants in Australia (the Institute) is the professional body representing Chartered Accountants in Australia. Our reach extends to more than 66,000 of today’s and tomorrow’s business leaders, representing some 54,000 Chartered Accountants and 12,000 of Australia’s best accounting graduates who are currently enrolled in our world-class postgraduate program. Our members work in diverse roles across commerce and industry, academia, government and public practice throughout Australia and in 109 countries around the world. We aim to lead the profession by delivering visionary thought leadership projects, setting the benchmark for the highest ethical, professional and educational standards, and enhancing and promoting the Chartered Accountants brand. We also represent the interests of members in government, industry, academia and the general public by actively engaging our membership and local and international bodies on public policy, government legislation and regulatory issues. The Institute can leverage advantages for its members as a founding member of the Global Accounting Alliance (GAA), an international accounting coalition formed by the world’s premier accounting bodies. The GAA has a membership of over 800,000 and promotes quality professional services to share information and collaborate on international accounting issues. The Institute is constituted by Royal Charter and was established in 1928. For further information about the Institute visit charteredaccountants.com.au Disclaimer This discussion paper presents the opinions and comments of the author and not necessarily those of Ernst & Young, the Institute of Chartered Accountants in Australia (the Institute), or their members. The contents are for general information only. They are not intended as professional advice for that you should consult a Chartered Accountant or other suitably qualified professional. Ernst & Young and the Institute expressly disclaims all liability for any loss or damage arising from reliance upon any information contained in this paper. © Ernst & Young Australia and the Institute of Chartered Accountants in Australia 2010. All rights reserved. ABN 50 084 642 571 The Institute of Chartered Accountants in Australia Incorporated in Australia Members’ Liability Limited. 0910-37 ABN 75 288 172 749 Ernst & Young. At Ernst & Young, we understand the challenges and we know what it takes to drive sustainable growth because we’ve helped many of the world’s most dynamic and ambitious companies develop into market leaders. Our global network of Strategic Growth Markets professionals are dedicated to serving the changing needs of fast-growth companies. Whether working with dynamic mid-cap companies or early stage venture-backed businesses, our professionals around the world draw upon their extensive experience, insight and global resources to help growing businesses reach their full potential. As well as providing traditional assurance, advisory, tax and transaction advisory services, our professionals work with you to reduce the complexity of legislation, help align your tax strategy with your business goals, expand into new markets and pursue mergers, acquisitions or other strategy transactions to take your business to the next level. We can provide guidance around how to manage and control your risks, so that you can approach the future with confidence. So whether your business thrives on entrepreneurial spirit, innovation or superior customer service – and regardless of your stage of growth – our Strategic Growth Markets team can help you take the next step. It’s not luck that makes leaders. Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 144,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organisation, please visit www.ey.com All information is current as at October 2010 First published October 2010 This communication provides general information which is current as at the time of production. Published by: The Institute of Chartered Accountants in Australia Address: 33 Erskine Street, Sydney, NSW 2000 Ernst & Young Address: Ernst & Young Centre, 680 George Street, Sydney Business briefing series: 20 issues for businesses expanding internationally First edition ISBN: 978-1-921245-62-6
  • 3. Business briefing series: 20 issues for businesses expanding internationally 3 Business briefing series 20 issues for businesses expanding internationally Anyone who has made the bold step of starting their own business has at some stage dreamed about taking that business offshore in a bid for increased expansion and to generate additional revenue. Although ambitious and potentially very lucrative, such a move could also prove very costly if not done correctly. To assist business leaders with the process of taking on globalisation, the Institute of Chartered Accountants in Australia (the Institute), in conjunction with Ernst & Young (EY) has produced this thought leadership paper entitled Business briefing: 20 issues for businesses expanding internationally. The publication is the third part of the Institute’s Business Briefing series designed to help businesses to successfully navigate challenging issues. The commentary in the report is divided into three key phases of an international expansion project: • Planning for expansion • Choosing your location • Conducting business overseas. Business briefing: 20 issues for businesses expanding internationally has been written and presented in such a way as to maximise the reader’s understanding of the issues. Each of the three sections contains a series of pull-out boxes which guide the reader as to the types of questions that they should be asking with regard to the business. These questions are consolidated into a detachable checklist at the back of the publication which can be used when consulting the paper. I trust that you will find this thought leadership paper interesting and worthwhile reading. Michael Spinks FCA President Institute of Chartered Accountants in Australia
  • 4. Business briefing series: 20 issues for businesses expanding internationally4
  • 5. Business briefing series: 20 issues for businesses expanding internationally 5 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Planning for expansion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 1. Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2. Global trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3. Market research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Choosing the location . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4. Political and social climate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 5. Local tax and regulatory environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 6. Legal system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 7. Innovation and incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 8. Location and infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 9. Cultural compatibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 10. Local workforce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Doing business overseas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 11. Global management team . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 12. Global human resources considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 13. Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 14. Choosing the operating structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 15. Implementing the operating structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 16. Foreign exchange management and currency risk/controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 17. Business and international taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 18. Supply chain, transfer pricing and intellectual property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 19. Risk management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 20. Exit or wind-down . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Checklist . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Contact details . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Back cover Contents
  • 6. Business briefing series: 20 issues for businesses expanding internationally6 The Globalization Index1 supports many market indicators that the trend towards ambitious international expansion will continue. This research depicts a global landscape where organisations execute their international expansion strategies at a rapid pace. This speed of expansion may indicate the strong desire by companies to be the first-to-market and/or the imperative to capitalise on new market developments. The survey was conducted in August 2009, with 520 senior executives worldwide. 38% of respondents indicated that they currently derive over half of their revenue from overseas operations. As indicated in the chart below, by 2012 more than half of the respondents expect this to be the case, with one in four respondents expecting to derive more than three quarters of their revenue from overseas. Only one in 50 executives surveyed believes containing their operations within their home country or earning less than 10% of their revenue from overseas markets by 2012, to be a viable option. What proportion of your company’s revenues is derived from its overseas operations (i.e. outside your company’s home market) currently, and in three years time?* Regardless of the size of their international footprint, the research identified the top five drivers for businesses expanding internationally as overall growth opportunities, profitability, access to materials, access to human resources, and the ability to innovate. Benefits for international companies from globalisation In which of the following ways has globalisation had a positive impact on your business over the past three years? Introduction In August 2010, China overtook Japan as the second largest economy in the world, and it is closing the gap on the United States. The world is changing at a fast pace, driven by globalisation. Throughout the global financial crisis, agile organisations continued their quest to participate in and prosper from the tremendous growth in the emerging markets. Very few Australian organisations can afford to ignore this growth momentum, nor the other benefits that can be achieved from investing in emerging and international markets. 1. The Globalization Index 2009 is a report written by Ernst & Young with the Economist Intelligence Unit. The 2010 edition of the report is expected to be released in January 2011. Proportion of revenue from international clients: 25 – 75% 10 – 24% 0 – 9% Overall growth Profitability Access to materials Access to human resources Ability to innovate Investment opportunities Access to finance 86% 68% 35% 42% 27% 80% 51% 27% 27% 33% 53% 32% 39% 21% 31% 30% 27% 29% 16% 20% 15% Source: The Globalization Index Survey 2009Proportion of revenue: 0 – 9% 10 – 14% 15 – 24% 25 – 49% 50 – 75% Over 75% Source: The Globalization Index Survey 2009 * Figures may not add up to exactly 100%, due to rounding. 0% 100% Now Three years time 13 10 17 23 20 18 2 7 15 21 28 26
  • 7. Business briefing series: 20 issues for businesses expanding internationally 7 This report, the 20 issues for businesses expanding internationally, focuses on the core issues that you should consider when formulating and executing your international expansion strategy. It does not provide country specific analysis, however, common themes have been identified that can be applied regardless of your target location. The commentary in this report is divided into the three key phases of an international expansion project: 1. Planning for expansion 2. Choosing your location 3. Conducting business overseas. The planning funnel The diagram above depicts the importance of funnelling your efforts to ensure the bulk of your energy and resources are spent setting up successful operations. The first two phases focus on identifying potential locations and selecting the most appropriate for your operations. In the ‘planning for expansion’ section we examine the importance of a clearly defined strategy, global trends driven by changing demographics and market research. The planning phase is vital to avoid wasting resources in assessing investment locations that should never have been considered in the first place. The detailed assessment under the major heading ‘choosing your location’ involves looking at the political and social climate, the local tax and regulatory environment, the legal system, innovation and incentives, location and infrastructure, cultural compatibility and the local workforce. These issues are looked at from a strategic point of view rather than a country specific angle. Whilst for example legal systems are not examined in any detail, we raise the question whether your business is equipped to deal with a legal system based on civil or Muslim law. The last section deals with issues associated with doing business overseas. An existing global management team would make it easier to set up your footprint in a foreign location. Would your management team know how to deal with a request by a high ranking official asking for a facilitation fee? Does your global workforce need security protection in addition to other incentive payments? Will your business be funded by an intercompany loan or do you need to consider more innovative funding arrangements such as Islamic finance? Will you acquire an existing local business to reach a certain market share quickly? Foreign exchange management and currency risk/controls, business and international tax, supply chain and intellectual property and risk management issues are also looked at in more detail. Finally, we consider exit and wind down issues. Agile organisations will go through the process described above at regular intervals. Based on the findings they may decide to wind down operations in one location and commence operations in another. This may make perfect commercial sense, however, broader brand and reputation issues must be considered. For example, if you have become an important employer in a particular country or region your exit must be carefully planned to mitigate social backlash. Planning for expansion Choosing the location Doing business overseas
  • 8. Business briefing series: 20 issues for businesses expanding internationally8 Planning for expansion 1. Strategy Clearly define and stress test your strategy What are the implications of international expansion for your existing business operations? Very few organisations can afford to ignore the increasing trend towards globalisation. Entrepreneurial organisations that are the first to move often have the most startling success stories. However, those organisations that do not stress test the financial and operational impact on their existing business, may lose more than their dream of becoming a global player. Before expanding internationally, you should have a clear picture of what you are trying to achieve. Are you searching for a new and cheaper source of capital, market leading talent, more cost effective production, new markets, or all of the above? Can you execute your strategy alone or do you need strong partners both from an advisory as well as a business perspective? You should consider the pressure global expansion may have on your domestic operations in terms of finance, management time and human resources. Will you enter the identified market(s) through acquisition, joint venture, a partnership or a green field development? Ensure you test your assumptions and have a clear understanding of how long it will take to turn a profit. 2. Global trends Is your organisation exposed to new and emerging markets? Has the composition of your major competitors changed? Is foreign direct investment in your industry sector clustered in locations where you do not have a presence? It is important to monitor and to be aware of global trends, particularly in relation to demographic changes. Australia’s population is estimated to grow to 36 million by 2050. To put this into perspective, that is equivalent to the bi-monthly combined population growth of China and India. World population growth is not a new phenomenon; however it is the demographic changes that arise from this growth that will affect business practices and profitability in the future. In countries such as China and India, population growth is accompanied by increasing affluence and a growing middle class consumer base. Therefore, the traditional characterisation and perception of emerging markets as predominantly low cost manufacturing centres is quickly changing. Emerging markets are also becoming strong consumer driven societies where the demand for products and services is increasing faster than in more established and mature markets. The implications for your business are clear. You can become a participant in these markets and tap into an ever increasing consumer base to help secure your future profitability, or you can watch others fill that space. Those business leaders that do not act risk watching others reap the benefits and may be challenged when those first-movers turn their attention to Australia. Seen from this perspective, international expansion is also an opportunity to help strengthen your business at home in the medium to long term. The flow of foreign direct investment (FDI) into a country is an important indicator of the economic viability of that location. Similarly, demographic trends such as the age and education profile of the population may also indicate future economic vitality and the growth of a consumer base. An example of this is Vietnam, where more than 70% of the population is 30 years or younger. Vietnam is currently attracting significant FDI in certain industry sectors. ‘Global foreign direct investment witnessed a modest, but uneven recovery in the first half of 2010. Developing and transition economies now absorb more than half of global FDI.’ World Investment Report 2010 United Nations Conference on Trade and Development
  • 9. Business briefing series: 20 issues for businesses expanding internationally 9 3. Market research What research is available to provide you with information on market and industry conditions? Is this information up-to-date and what is the future outlook? Create a short list of new and emerging markets, tap into existing networks, talk to your advisors and visit your short listed locations. Market research is very important but can be costly; however there are numerous resources available free of charge to help you uncover useful information about the strengths and challenges of global markets. Much of this research can be done from your home base and will help you in generating a short list of potential locations for expansion. Reliable statistical data or reference material can supplement but should not replace a field trip. The world is moving and changing fast. What may have been a good investment location historically, may not present the same opportunities in the future. Tap into existing networks via chambers of industry and commerce or other organisations representing an investment location, visit trade fairs, talk to your advisors, visit your target locations and meet the local people. This will greatly assist you to make an educated and informed decision about whether that market is right for your business.
  • 10. Business briefing series: 20 issues for businesses expanding internationally10 4. Political and social climate Is the political system stable? How do you assess sovereign risk? Does the country suffer under high levels of sovereign debt? Is there likely to be social unrest or are workers organised in powerful unions? The pace of change of the global political landscape is accelerating due to globalisation. Political decisions in one country may have far reaching implications for trading partners or the globalised business community at large. The response to the global financial crisis with stimulus programs around the globe illustrated this. Most governments appreciate that globalisation is the motor of economic expansion. However, as the graph below illustrates, concerns are now emerging about new protectionism, regulations and trade issues. More than 50% of Globalization Index respondents believe that major economies will adopt limited protectionist measures in certain key sectors. Furthermore, the burden of sovereign debt may force a country to abandon business friendly programs. Which of the following assertions about the impact of protectionism in coming years most closely reflects your view? (% who agree with each statement) An assessment of your target location’s political environment, including the potential for social unrest or regional instability is relevant for determining the risk of any potential investment. This has been an important issue in South East Asia, where various countries have been affected by social unrest in recent years. To support this, the graph below illustrates the importance investors place on political stability in assessing emerging market locations. Almost 60% of respondents rated political stability as the most important government-related factor to consider when deploying FDI. Before entering a new market, you should evaluate the risk based on the future outlook for the country or the region, not just the status quo or historic events. Ensure that you take note of any early signs of social unrest. If you were to plan a foreign direct investment in developed or emerging markets over the next year, which of the following would you consider to be the most important government related-factors? Choosing the location Source: The Globalization Index Survey 2009 0% 10% 20% 30% 40% 50% Major economies will adopt limited protectionist measures in certain key sectors Global markets will remain or become more open as governments try to restore economic growth The world economy will repeat the protectionist errors of the 1930s Domestic political expediency will override claims by world leaders to resist protectionism ‘Tit-for-tat‘ protectionism will trigger a dangerous downward spiral in global trade Don’t know Political stability Developed Emerging Source: The Globalization Index Survey 2009 0% 20% 40% 60% Macroeconomic stability Host government attitude towards domestic enterprises Currency stability Host government support for inward foreign investment Corporate and other relevant taxes Clarity and predictability of the legal system Strength and fairness of legal system Risk of nationalisation or expropriation
  • 11. Business briefing series: 20 issues for businesses expanding internationally 11 5. Local tax and regulatory environment Is the tax regime business friendly and/or competitive? Does the country have free trade agreements or double tax treaties? Does the regulatory regime set the scene for a sound corporate governance framework? A low headline corporate tax rate is always appealing2 . However, this can also be deceptive due to many factors including the existence of state based taxes, withholding taxes and consumption taxes such as a value added tax (VAT). Your market analysis should include commercial discussions with a local market tax expert taking into account your specific facts and circumstances where possible. Free trade agreements generally indicate an open and investment friendly economy. However, their existence does not rule out the possibility of government support for certain industries to protect domestic markets against foreign competition, through subsidies or other forms of protection. An extensive double tax treaty network may likewise look impressive; however it is necessary to look beyond withholding tax rates and test how the treaties deal with mutual agreement procedures and arbitration around transfer pricing, permanent establishment issues and a global work force. Not all double tax treaties are the same and some countries may try to assert taxing rights beyond what investors would ordinarily expect under OECD guidelines. A country’s regulatory framework will be considered open to FDI, if it can strike the right balance between creating a secure environment for effective corporate governance across all industry sectors, without stifling entrepreneurial freedom or discriminating against foreign investors. 2. Ernst Young Passport (includes the 2010 Worldwide Corporate Tax Guide, the 2010 VAT Guide, the 2009 Global Executive and the 2009 Transfer Pricing Global Reference Guide) Legal systems around the world Source: Legal systems around the world, University of Ottawa: www.juriglobe.ca/eng/index.php Civil Law Common Law Muslim Law Customary Law Mixed System
  • 12. Business briefing series: 20 issues for businesses expanding internationally12 6. Legal system Is it a common law system? If not, are you sure you understand the outcomes? Do the laws and the legal and judicial system provide support for and protection of commercial activities? An effective legal system that provides a balance between protecting the commercial interests of business, whilst also protecting the consumer, can provide you with a level of confidence that you can legally enforce your commercial agreements. A common law legal system can be a huge advantage as you will be much more likely to understand the framework and outcomes. The map on page 11 shows however that the number of countries with a pure common law system is limited. Civil law is the prevailing system in much of Europe and in many of the emerging markets, while Muslim law may be encountered when doing business in the Gulf States, the Middle East and parts of Africa and Asia. The legal system will affect every aspect of your international expansion. For example: • It will affect merger and acquisition activity itself and will set boundaries through anti-trust or competition law • It will be instrumental for the protection of trademarks, commercial design or plant innovations (including copyright or distribution law, data protection and privacy) • It will set the scene for litigation, arbitration or mediation • It will provide guidance with respect to information technology • Labour law will regulate employment matters • There is real estate, planning and construction law to consider. 7. Innovation and incentives Should you develop your products in emerging or fast growth markets? Should you have a presence at global innovation clusters? Are generous grants and incentives available for innovative organisations? Maintaining an environment that supports innovation is critical for future business growth. Innovation can be centralised, or decentralised and driven locally. As demonstrated in the chart below, organisations with a centralised strategy are just about as likely as those with a decentralised approach to regard it as essential to apply innovative ideas from local markets. Innovation is critical to growth whether centrally or locally driven Please rate your agreement with the following statement regarding innovation activities within your business For many businesses, the decision to relocate research and development activities to an emerging market will be influenced by a number of strategic and business drivers. These may include using the target location as a strategic hub for market expansion into that region. Conducting research in emerging and fast growth markets can drive new ideas by tapping into a new pool of innovative and market leading talent. Choosing the location (continued) Innovation centralised in headquarters Innovation decentralised to local markets Source: The Globalization Index Survey 2009 65% 68% 48% 67% 58% 61% 44% 52% 36% 49% Maintaining an environment where people can be innovative is critical to future business growth We adapt products and services to the needs of local markets We create product and services specifically for local markets We believe process innovation is as important as product innovation Applying innovation ideas from local markets is essential
  • 13. Business briefing series: 20 issues for businesses expanding internationally 13 An understanding of the various government incentive regimes ranging from tax holidays and incentives, to discretionary government grant support may help sweeten the deal for many organisations3 . In addition to any formal programs, the host country’s government may be interested in attracting your investment in order to boost the local economy and create jobs in strategic sectors. In most jurisdictions, governments may be receptive to specific negotiated concessions and incentives, depending on the circumstances and the nature of the investment. It is important to consider these possibilities at an early stage before committing to the target location. This ensures that an effective strategy can be developed that places your organisation in a strong bargaining position. 8. Location and infrastructure Is economic infrastructure secure and reliable? How would you deal with power outages, telecommunication down time or traffic congestion? Is the location central to your regional markets, suppliers of goods and services? It is important to understand the infrastructure that will be at your disposal in the target country and assess its reliability and the positive or detrimental impact it may have on achieving success in your target market. Particular attention should be paid to the target country’s communications infrastructure. In the digital age this is arguably more critical than ever before, given the importance of information technology to the effective operation of modern businesses. You should consider the capacity and efficiency of telephone and mobile networks, and also data delivery mechanisms such as fibre optic cable and broadband internet. Is the infrastructure modern, reliable and safe? How vulnerable is it to being compromised for example from power failures and cyber attacks, and are there emergency systems and disaster recovery plans in place? When expanding into the target location, consider whether the attributes which have made you successful at home can be leveraged to drive success abroad. Your ability to shift wealth, products, people and information, will be heavily dependent on accessing adequate social and commercial infrastructure. There are a wide range of potential considerations such as the target location’s size and accessibility, transport, utilities and information systems, access to financial services and other factors. 9. Cultural compatibility Are there significant cultural differences that may impact the way you conduct your business? Are there likely to be language barriers? Entrepreneurial organisations through their very nature can achieve growth and develop a global footprint relatively quickly. However, it can take a long time to create a diverse workforce that reflects the variety of markets in which the organisation operates, and cultural customs can impact significantly on business practices in the chosen location. Without early attention to these issues, your management team may be left behind in terms of cultural awareness and diversity. This can generate a competitive disadvantage as the management team will be required to make rapid decisions, while at the same time ensuring that they have a clear understanding of the local customs and operating conditions. Cultural business etiquette • Bringing your host in Tokyo a bottle of American whiskey is a thoughtful gift. It’s a major offense in Dubai. American whiskey is revered in China and Japan. But in the Islamic Middle East, and among Muslim hosts in Asia, alcohol is strictly taboo • In the Middle East and Asia, gifts must always be given at the end of the meeting so they are not regarded as bribes. In Latin America, however, gifts are a great icebreaker and can be given at the start of a meeting • Business cards in Japan, China and other parts of Asia are considered a representation of one’s self – offer and receive cards with both hands, and always look at it as if you’re studying it carefully • In most of the Islamic Middle East, it’s the norm to keep visitors waiting. This is not considered rude, but an extension of the Middle Eastern custom to mix business with pleasure. It is also acceptable to ask about your host’s children, especially sons, but never their wives. Forbes: www.msnbc.msn.com/id/35986024/ 3. Ernst Young, RD incentives in the new tax landscape.
  • 14. Business briefing series: 20 issues for businesses expanding internationally14 Choosing the location (continued) In this respect, the importance of language cannot be overstated, as it will underpin everything the business does in the target location. Effective communication (or the lack thereof) has the ability to make or break the business. It is a key foundation upon which the success of the business may be built. Your management team will need the language skills to communicate effectively with those who will interact with your business including government, regulators, financiers, suppliers, staff and customers. Even in countries where English is commonly spoken or is the language of business, regional nuances can be a source of misunderstanding and can lead to more serious problems. As demonstrated in the diagram below, the level of tolerance and understanding of cultural and ethnic differences and language barriers in foreign markets ranks highly amongst Globalization Index respondents when asked about the most important cultural factors when conducting business internationally. The top ranked issue related to the level of international experience of the workforce is discussed below. Which of the following cultural factors do you expect to be most important when conducting your international business over the next year? (% of respondents) 10. Local workforce What is the availability, skill-set and cost structure of the local work force? When expanding into a global market, your human resources can mean the difference between success and failure. As your organisation grows off-shore, getting the right people in the right location can provide a vital competitive advantage. The quality of the local workforce may often be the deciding factor in determining whether to expand your business to that location and also in determining how successful such an expansion will be. ‘Companies are viewing the labour market more through a global lens, and in many cases, off-shoring decisions, especially in higher, value-added functions, are being driven by talent shortages at home as much as by cost-cutting.‘ A.T Kearney, Global Services Location Index 2009 When setting up a local workforce in your target location, there are numerous practical issues to consider. You will need to think about the education level and experience of your prospective workers and how much you will need to invest in training. You will need to determine the terms and conditions of employment and you may need to negotiate with individuals, labour unions or other bargaining agents. There may be local legislation or regulations concerning working hours, weekends and public holidays and there may also be local customs or practices that will impact on the operation and activities of your workforce. In addition you will need to consider your global remuneration approach and whether short term and long term incentive programs will be offered to your overseas employees, as well as the tax and regulatory implications associated with this. Source: The Globalization Index Survey 2009 0% 10% 20% 30% 40% 50% Level of international experience of workforce Degree to which products and services need to be adapted to suit foreign markets Tolerance of foreign business influence in host markets Level of tolerance and understanding of cultural/ethic differences in your foreign markets Language barriers in foreign markets Cultural similarity to home market Degree to which advertising and cultural imagery can be understood internationally Press and media freedom in foreign markets Openness to foreign cultural influence (e.g. through television, cinema etc.)
  • 15. Business briefing series: 20 issues for businesses expanding internationally 15 11. Global management team Who will negotiate with government, customers, suppliers and business partners? How should you manage risks such as bribery and corruption? Who will be responsible for the recruitment of staff? Do you have an international management team or do you need to build one? Commencing business operations in a new market can involve significant risks, and therefore it is important to have a strong management team that understands the challenges ahead. Having established the business in a new country, a variety of issues may present themselves such as: • How to ensure that your business operations run smoothly? • How much hands on involvement is required by your management team? • How much time and resources will it consume setting up your operations? • Will some members of your management team be required to spend a lot of personal time in the new location? • Will Australian expatriates be sent to run the business or can the services of local managers be relied upon? To be prepared, you must consider the challenges your business will face during the start-up phase, and who from a management perspective is best placed to deal with those challenges. In determining this, consider any potential negotiations with the government or other local officials in the host country. Negotiations might be required over issues such as licensing arrangements, tax concessions, labour conditions and local joint venture partners. The right negotiating technique will be essential. Does your organisation have sufficient knowledge of the host country and expertise to conduct negotiations or will you need specialists with expert local knowledge to negotiate on your behalf? The graph on page 16 shows that organisations that operate in more than 10 countries Doing business overseas Corruption Perceptions Index 2009 9.0–10 8.0–8.9 7.0–7.9 6.0–6.9 5.0–5.9 4.0–4.9 3.0–3.9 2.0–2.9 1.0–1.9 0–0.9 The Corruption Perceptions Index (CPI) measures the perceived level of the corruption in 180 countries and territories around the world. The CPI is a ‘survey of surveys’, based on 13 different expert and business surveys. Scores range from 0 (perceived to be highly corrupt) to 10 (perceived to have low levels of corruption). © Transparency International. All rights reserved.
  • 16. Business briefing series: 20 issues for businesses expanding internationally16 Doing business overseas (continued) are highly likely to have a diverse management team whilst those with only domestic operations are unlikely to have a significant proportion of senior management from another country. More global companies are more likely to have international management Roughly what proportion of senior management are nationals of another country? Have you also considered the possibility of corruption in your host country? Is it common for local officials or business people to demand bribes, facilitation fees or kick-back payments? How will you deal with such demands while protecting the interests and integrity of your business? Will the local authorities be of assistance or will they be complicit in the process? Failing to identify and deal with such risks can bring serious consequences; as such practices may be criminal offences under the laws of both Australia and the host country and punishable with heavy fines and/or prison sentences. The map on page 15 illustrates the perceived levels of corruption in countries around the world. 12. Global human resources considerations What benefits will you provide to expatriates and what are the tax consequences? Do your employees require security protection? Do you have a team that can deal with assignment management, immigration and tax compliance? Should these functions be outsourced? Although expatriates know your business and may enjoy the opportunity to work overseas; they may also lack local knowledge. Relocating and remunerating expatriates can be more expensive than local hires, so you should first consider the objectives of the assignment and your desired return on investment. If you decide to use expatriates rather than local hires, you must also consider what happens when the assignment is finished. A repatriation plan should be implemented so the knowledge and skills gained on assignment are retained within your organisation. You must also ensure that you have the resources to manage the related local and international compliance obligations, particularly if you are expanding into more than one country. To ensure your expatriate staff are not distracted from the job at hand, organisational support will be required to deal with relocation and immigration issues. This level of support will vary from organisation to organisation; however this along with the development of an incentive plan should be factored in, even if the new host location is attractive. Generally, most organisations develop formal mobility policies that consider issues such as the level of remuneration, relocation benefits and other incentives. Increasingly organisations are also linking their mobility programs with their talent management strategy. The tax affairs of your employees will also get more complicated with tax exposure in more than one location, specifically due to the revised rules in Australia for the taxation of employment income. Benefits provided to your Australian workforce whilst working overseas could potentially be assessable both abroad and domestically. Tax equalisation arrangements are a common mechanism used for employees who work abroad for a period of time. Another important consideration (and cost) will be that of security for your employees. In some countries, expatriate employees may be the target of extortion threats, kidnapping attempts or other forms of violence. They will need to be assured of their safety, which may include specific accommodation, transport and protection arrangements as part of their overall remuneration and benefits package. Senior management from another country: Less than 5% 5 – 14% 15 – 24% 25 – 49% 50%+ Source: The Globalization Index Survey 2009 * Figures may not add up to exactly 100%, due to rounding. 0% 100% % 55 22 9 6 5 88 5 1 4 30 16 19 9 26 Foreign operations in 11 or more countries Foreign operations in 1–10 countries Domestic operations only
  • 17. Business briefing series: 20 issues for businesses expanding internationally 17 13. Financing What are the cash flow needs of your business? What is your projected revenue growth? Are your financial models sound or overly optimistic? Do you need strong partners to finance your expansion? Have you considered Islamic finance as a source of funds? What is the debt equity mix of funding? What are the tax consequences? It is important to stress test your financial models and revenue targets to ensure you can service your debt. This testing should involve hypothetical parameters such as an interest rate hike, currency deflation or difficult market conditions. During the global financial crisis, successful businesses continued their growth path due to the establishment and implementation of realistic and effective business models that had been stress tested. There are many options available for raising finance for your global expansion. There are, of course, well established conservative options including bank or intercompany loans, however, you may wish to consider emerging financing options such as Islamic finance. The map below depicts how Islamic finance is available worldwide. How you manage your ongoing finance raises significant taxation considerations both in Australia and your target country. You should test your assumptions by using financial modelling to determine if you can achieve the desired debt to equity ratio recommended by your financial advisors. You should confirm that your treasury function is permitted under local and Australian law to ensure that the terms of your finance arrangements do not breach the transfer pricing rules or thin capitalisation thresholds. Hybrid financing arrangements, changes to the non-portfolio dividend exemption and withholding tax implications, need to be reviewed carefully from a tax perspective. You should stress test assumptions made in financial models to ensure that you can still service the recommended debt levels if certain factors turn to the worse. You should also confirm that the proposed debt to equity ratio on both the Australian and foreign entity balance sheet is permitted under the relevant taxation law as potential breaches of the transfer pricing or thin capitalisation rules can result in the denial of tax deductions. Global Islamic Funds by Home Country of Asset Manager (QI 2010) 3 5 9 1 4 1 1 1 2 6 100 6 7 2 82 24 2 181 1 3 177 3 13 26 8 34 4 5 2 18 14 Malaysia ~5.1 USA ~2.7 KSA ~22.8 Bahrain ~1.2 UAE ~6.1 Kuwait ~4.0 27 Note: Funds per country include those managed by players headquartered in that respective jurisdiction. Indicates total AuM of Islamic funds in US$ billion Indicates the number of funds Islamic AuM by Country (US$ billion): 10+ 1–10 0.5–1 0.1– 0.5 0.01– 0.1 Source: Eurekahedge, Zawya Funds Monitor, Ernst Young analysis
  • 18. Business briefing series: 20 issues for businesses expanding internationally18 14. Choosing the operating structure Are you looking for slow organic growth? Will you start out with a sales office or are you looking for a green field development? Are you looking to establish an immediate local presence? If so, will you set up a joint venture or will you acquire an existing local business? There are a number of factors that will determine the method of entry into your chosen location. The market conditions and the opportunities to capture immediate market share will impact the design of your initial business model and structure. For example, you may have time to establish various operating entities and build up your infrastructure such as factories or, you may only have time to set-up a simple representative office from which you can immediately negotiate customer contracts. These factors may in turn drive your choice of legal operating structure and also the method you adopt to gain a foothold in the market. For example, will you establish a joint venture with a host country partner or operative and/or set-up various contracts to establish your operations? There will be costs and benefits associated with these choices which must be considered, including those concerning commercial, legal, regulatory and tax issues. 15. Implementing the operating structure What are the legal and administrative procedures and regulatory requirements for setting up the operating structure and starting the business? Should you outsource the set-up to corporate secretarial service providers? How easy is it to start-up your business in the host country? What is the level of red tape and how will you go about cutting through it? You may have local accounting and reporting obligations and other legal statutes that you must comply with at start-up and on an ongoing basis. Penalties for non-compliance may be severe, including criminal prosecutions and prison sentences. How will you make sure that you have identified all obligations and how you will satisfy them? It may be cost effective to outsource your corporate secretarial, accounting and tax functions to local experts. 16. Foreign exchange management and currency risk/controls Is the local currency stable or volatile? Is currency hedging available at a reasonable cost? Could currency restrictions inhibit or even prohibit the flow of international funds? Organisations generally can hedge international internal transactions effectively without adverse outcomes, although the tax and accounting treatment can be complicated. The risk and commercial exposure rises exponentially where transactions with external suppliers and customers are involved. The diagram below illustrates the fall of the Euro against the US Dollar initially triggered by the sovereign debt crisis in Greece. The fall of the Euro accelerated when the crisis spread to other European countries. The rise and fall of a currency can impact the economics of an entire project or production set-up. It can significantly alter the margins of goods sold on the world market, as well as the cost of overseas sourced inputs. The hedging of cross currency supply or loan contracts may remove some of the risk but will also come at a cost. In addition to foreign exchange management, you need to ensure that the target location does not impose limitations on the movement of currency in and out of the country. Doing business overseas (continued) Nov Dec Jan Feb Mar Apr May Jun Jul Aug 2009 2010 Source: Yahoo Finance 1.55 1.50 1.45 1.40 1.35 1.30 1.25 1.20
  • 19. Business briefing series: 20 issues for businesses expanding internationally 19 17. Business and international taxation Are you aware of how the new Australian attribution regime in relation to controlled foreign companies may allow you to take better advantage of efficiencies overseas? How will profits be taxed in your target location? What is the treatment of losses? Consider how tax is assessed and paid in the host country. The timing and quantum of tax payments will impact your cash flow. Ensure that start up losses can be carried forward to reduce future tax liabilities. Payment of withholding taxes will typically be required on cross-border payments of interest, dividends and royalties. In certain jurisdictions, taxes will be triggered on the payment of technical services fees and other payments to non residents. Double taxation agreements may operate to allocate taxing rights between the host country and Australia. Detailed tax due diligence is recommended if you are acquiring a foreign business. ‘The reform of the Australian CFC rules will improve the competitiveness of Australian businesses expanding overseas. Overall it will be the catalyst for better efficiencies in foreign operations.’ Daryn Moore, Ernst Young Australia, Partner Oceania Leader – International Tax Services Australian international tax rules such as the controlled foreign company (CFC), thin capitalisation and transfer pricing rules must also be considered. Australia has and is continuing to reform the CFC rules to ensure that Australian organisations are not disadvantaged in competing overseas. Non-portfolio dividends paid by the foreign organisation to Australian corporate shareholders are not taxable in Australia at the corporate level and also do not generate franking credits. Australia does allow for certain tax deductions for a loss or outgoing incurred in deriving foreign dividend income. 18. Supply chain, transfer pricing and intellectual property Have you identified all possible supply chain efficiencies? Have you considered potential Australian tax issues as you move functions, intellectual property and risk offshore? Is your intellectual property and data protected? The development of an effective supply chain process is vital to establishing efficient operations and achieving maximum profitability. You should consider local and international commercial contracts, the adequacy of local physical infrastructure beyond that which was assessed during start-up and the reliability of associated services on which the business will rely. You could also explore the possibility of vertical integration such as the acquisition of key suppliers or distributors. However in doing this, you should give consideration to any potential infrastructure, regulatory or other constraints that may hinder such an expansion. If you have operations in multiple countries, you may consider the suitability of the target location for a shared services centre. An example may be moving your existing production or other business functions from Australia and/or other locations to your target location. Such decisions may result in the shifting of risk and/or intellectual property from the target location to another location. This may have an impact on the cost structure and profitability of your business from an international perspective and give rise to transfer pricing and other tax issues. Revenue authorities often focus on these types of transactions.
  • 20. Business briefing series: 20 issues for businesses expanding internationally20 Doing business overseas (continued) 19. Risk management Have you identified areas of risk and how you will address them? Are your foreign operations susceptible to fraud? There are a number of business risks that should be considered when entering an emerging or international market. To identify these risks, Ernst Young conducted research to ascertain the top 10 business risks facing multinational firms. The Ernst Young Business Risk Report 20104 is based on interviews with industry executives and analysts representing 14 industry sectors. The survey asked each interviewee to identify and rank the top business risks for 2010. Aggregating the results worldwide and across industry sectors, resulted in the following top 10 business risks for multinational firms ranked by importance: 1. Uncertainty around regulation and compliance 2. Access to credit and the impact of rising levels of government debt 3. The withdrawal of global stimulus programs 4. The global war for talent and compensation structures 5. The strategic imperative of succeeding in an emerging market, as these markets continue to drive global growth 6. Increased cost pressures as the result of commodity price inflation and low cost competitors 7. Incumbent firms in transitional sectors adjusting to non-traditional entrants 8. Staying ahead of consumer preferences and government regulation on environmental issues 9. Political backlash and reputational risks triggered by corporate social responsibility breaches 10. Rescue mergers and regulatory changes that may force new transactions. The above list has changed considerably in both order and content from the 2009 report, which demonstrates that businesses operate in a dynamic, ever-changing global environment that requires constant monitoring. The business risk associated with not succeeding in an emerging market for example, moved from rank 12 in 2009 to rank 5 in 2010. You should also recognise that in such an environment, to manage existing and newly emerging risks, an effective risk management strategy and process should be implemented. Obtaining appropriate insurance in your selected host country is an important consideration to mitigate against potential business risks. You should also consider your organisation’s exposure to potential fraud. Are you at greater risk if the control of your organisation resides in only a handful of managers, rather than a structure with a board of directors and policy and process around corporate governance, internal/ external audit and other external controls? 20. Exit or wind-down Will you continue to maintain a presence in this location? What are the legal and commercial issues associated with terminating business and employment contracts? What is your strategy for redeploying your resources? There are different ways to exit or wind-down your operations in a host country. You will need to take into account local laws, tax and financial issues. You must also determine if you wish to maintain a presence in the host country. Options may include liquidation, the sale of shares or even floating the business. The exit strategy should be part of your overall business plan. There are also reputational risks to consider, particularly if your business was an important employer in a country or region. To avoid costly litigation or compensation payments you must also be aware of the industrial relations environment. Consider whether local regulations restrict the transfer of funds overseas. 4. Ernst Young Business Risk Report 2010
  • 21. 21Business briefing series: 20 issues for businesses expanding internationally 20 issues for businesses expanding internationally Table based on the top 20 issues and related questions. Planning for expansion Yes No 1. Strategy • Clearly define and stress test your strategy • What are the implications of your international expansion for your existing business operations? 2. Global trends • Is your organisation exposed to new and emerging markets? • Has the composition of your major competitors changed? • Is foreign direct investment in your industry sector clustered in locations where you do not have a presence? 3. Market research • What research is available to provide you with information on market and industry conditions? • Is this information up-to-date and what is the future outlook? • Create a short list of new and emerging markets, tap into existing networks, talk to your advisors and visit your short listed locations Choosing the location Yes No 4. Political and social climate • Is the political system stable? How do you assess sovereign risk? • Does the country suffer under high levels of sovereign debt? • Is there likely to be social unrest or are workers organised in powerful unions? 5. Local tax and regulatory environment • Is the tax regime business friendly and/or competitive? • Does the country have free trade agreements or double tax treaties? • Does the regulatory regime set the scene for a sound corporate governance framework? 6. Legal system • Is it a common law system? If not, do you understand the outcomes? • Do the laws and the legal and judicial system provide support for and protection of commercial activities? 7. Innovation and incentives • Should you develop your products in emerging or fast growth markets? • Should you have a presence at global innovation clusters? • Are grants and incentives available for innovative organisations? 8 Location and infrastructure • Is economic infrastructure secure and reliable? • How would you deal with power outages, telecommunication down-time or traffic congestion? • Is the location central to your regional markets and suppliers of goods and services? 9. Cultural compatibility • Are there significant cultural differences that may impact the way you conduct your business? • Are there likely to be language barriers? 10. Local workforce • What is the availability, skill-set and cost structure of the local work force?
  • 22. Business briefing series: 20 issues for businesses expanding internationally22 Doing business overseas Yes No 11. Global management team • Who will negotiate with government, customers, suppliers and business partners? How should you manage risks such as bribery and corruption? • Who will be responsible for the recruitment of staff? • Do you have an international management team or do you need to build one? 12. Global human resources considerations • What benefits will you provide to expatriates and what are the tax consequences? Do your employees require security protection? • Do you have a team that can deal with assignment management, immigration and tax compliance? • Should these functions be outsourced? 13. Financing • What are the cash flow needs of your business? What is your projected revenue growth? Are your financial models sound or overly optimistic? • Do you need strong partners to finance your expansion? Have you considered Islamic finance as a source of funds? • What is the debt equity mix of funding? What are the tax consequences? 14. Choosing the operating structure • Are you looking for slow organic growth? Will you start out with a sales office or are you looking for a green field development? • Are you looking to establish an immediate local presence? If so, will you set up a joint venture or will you acquire an existing local business? 15. Implementing the operating structure • What are the legal and administrative procedures and regulatory requirements for setting up the operating structure and starting the business? • Should you outsource the set-up to corporate secretarial service providers? 16. Foreign exchange management and currency risk/controls • Is the local currency stable or volatile? • Is currency hedging available at a reasonable cost? • Could currency restrictions inhibit or even prohibit the flow of international funds? 17. Business and international taxation • Are you aware of how the new Australian attribution regime in relation to controlled foreign companies may allow you to take better advantage of efficiencies overseas? • How will profits be taxed in your target location? What is the treatment of losses? 18. Supply chain, transfer pricing and intellectual property • Have you identified all possible supply chain efficiencies? • Have you considered potential Australian tax issues as you move functions, intellectual property and risk offshore? Is your intellectual property and data protected? 19. Risk management • Have you identified areas of risk and how will you address them? • Are your foreign operations susceptible to fraud? 20. Exit or wind-down • Will you continue to maintain a presence in this location? • What are the legal and commercial issues associated with terminating business and employment contracts? • What is your strategy for redeploying your resources? 20 issues checklist (continued)
  • 23.
  • 24. Contact details The Institute of Chartered Accountants in Australia 33 Erskine Street, Sydney, NSW 2000 GPO Box 9985, Sydney, NSW 2001 Service 1300 137 322 Phone 02 9290 1344 Fax 02 9262 1512 Email service@charteredaccountants.com.au charteredaccountants.com.au Lee White Executive General Manager – Members Phone + 61 2 9290 5598 Email lee.white@charteredaccountants.com.au Ernst Young Ernst Young Centre 680 George Street, Sydney GPO Box 2646, Sydney NSW 2001 Phone +61 2 9248 5555 Fax +61 2 9248 5959 www.ey.com Graham Frank, Partner Asia-Pacific Chief Operating Officer – Tax Phone +61 2 9248 4810 Email graham.frank@au.ey.com Daryn Moore, Partner Oceania Leader – International Tax Services Phone +61 2 9248 5538 Email daryn.moore@au.ey.com Greg Logue, Partner Oceania Leader – Strategic Growth Markets Phone +61 2 9248 5870 Email greg.logue@au.ey.com