“There are things known and there are things unknown, and in between are the doors of perception.” Aldous Huxley certainly wasn’t talking about the risks of expanding a business internationally when he wrote this, but he could have been.
The domestic market is your things known; the foreign market is your things unknown, and the doors in between represent risks. Successful global expansion involves opening the right doors and knowing what’s behind them—mitigating the risks and making correct choices.
Here are seven big risks you face when you expand overseas.
1. Not being able to find the best overseas talent
Your business is only as good as your employees. Finding talent in your home market is difficult enough, but identifying candidates with the right skill set who share your company culture abroad is exceptionally challenging.
A professional network and a profound understanding of the market are prerequisites to hiring the right talent. However, it is nearly impossible to have this in a foreign country. The likelihood is that, without professional help, you will have to rely on one of two ways that does not achieve optimal results: attracting active candidates using cold methods or farming the task out to multiple recruitment consultancies that try to find a candidate quickly to nab the commission.
Neither of these methods will allow you to form the best possible team to drive your overseas expansion forward. Hiring employees quickly rather than correctly is likely to result in low morale and poor productivity. The employees could have difficulty adjusting and may leave the company. High churn is costly and disruptive to the business.
2. Employees leaving due to poor employee experience
Employees who do not share the company's mission and vision are more likely to leave the company, but retaining them is vitally important if you do find great candidates.
However, providing an excellent employee experience might be difficult, depending on how you expand your business internationally. If you set up your own foreign entity with its own HR department, the task will be easier. But if you don’t, managing HR and employee support remotely from a different country and time zone can be difficult.
Companies need to prioritise the well-being and satisfaction of their employees and ensure that any administrative questions are promptly answered, to maintain a positive and productive work environment. Not providing an excellent employee experience can have several negative impacts on a business's success.
First, organisations that do not provide an excellent employee experience are likely to experience high turnover rates, which are costly and disruptive. Second, employees who stay are less likely to be motivated, negatively impacting the quality of work and productivity.
Third, the company risks damaging its reputation, making it difficult to attract top talent, and there may even be a decline in customer trust and loyalty. Last, in some extreme cases, a lack of focus on employee experience can lead to legal issues, such as violations of labour laws.
3. Losing business due to language and cultural differences
When expanding a business into a country where English is the native language, it’s easy to believe—mistakenly—that things are the same as they are at home. But speaking the same language does not mean sharing the same culture or having the same way of communicating. Miscommunication can lead to catastrophic failures with both customers and employees.
Expanding into a country with a different official language can also be problematic and lead to loss of business if you don’t take active measures to ensure understanding and effective communication. A company that is insensitive to cultural norms and expectations could offend customers and employees.
Any company expanding internationally should take the time to understand the language and culture of the markets they are entering to help build strong relationships. Not doing so can lead to a lack of trust and a poor reputation, ultimately resulting in the loss of business.
What's more, it's essential to ensure that your user manuals, website, marketing materials, proposal templates, invoices, sales collateral, and other content are translated and localised correctly to avoid confusion and rejection.
4. Losing Intellectual Property (IP)
Your IP is your biggest asset: it generates your revenue and most of your value. It is comprised of many legal components—all of which apply to different expressions of the product. These include code, graphical user interfaces, databases, tech sheets, flow charts, and other design materials. Many of your employees can access different parts of your IP; for example, your tech team need to access your computer program, and your salespeople need to access your tech sheets.
When you expand abroad, you are not covered by the benefits of your national employment contracts, such as confidentiality, and you are not given immediate ownership of the IP your employees create. Worryingly, there is no uninterrupted chain of trust and possession of your IP flowing directly from your company to your employees and back again.
This puts you in a situation where the very thing driving your expansion—your IP—can put you at risk.
Losing IP has many serious risks for businesses: They are likely to relinquish their competitive advantage and lose out on revenue. They may also face legal issues, such as copyright infringement or trademark violations. And losing control of IP can ultimately result in losing trust from customers, partners, investors and other stakeholders.
5. Facing a lawsuit in a foreign jurisdiction
Facing a lawsuit in a foreign jurisdiction is a serious worry for any firm. Yet companies expanding internationally using popular methods such as PEOs are at risk.
Companies that expand using PEO solutions must employ their employees using a co-employment model, which means they still have total legal obligations for their employees. As they are still the co-employer, they are legally liable under foreign law in foreign legal jurisdictions and subject to foreign courts of law.
For example, a US company could retain a PEO in the UK to hire and provide HR services for ten employees in the UK and five in France. The PEO would use a local entity in France as its PEO partner to hire the five employees and provide HR services.
Because of co-employment, if an employee abroad had a grievance, the US company would be liable for their UK employees under UK law and liable for their French employees under French law. Company lawyers may not speak the language, and they certainly have no experience with the foreign legal system.
US companies believe they are legally covered if they employ overseas using PEOs; however, co-employment contracts have significant pitfalls. This presents great risks, as facing a lawsuit in a foreign jurisdiction could lead to colossal fees.
Additionally, employers can be legally responsible for civil and criminal offences committed by their employees. For example, the employer can be liable if an employee gets into an argument with a client and strikes them. The co-employment contract does not shield US employers from being legally responsible for their employees' actions overseas. Co-Employment means local foreign exposure.
6. Being fined for non-compliance
Facing a lawsuit abroad is the first legal worry. Another would be non-compliance with overseas regulations. Failing to comply in areas such as employment law, corporate law, private law, and taxation can result in astronomical fines and court fees.
Specific requirements depend on the type of business, size, and location, but companies need to be aware of several areas of compliance.
Health and safety: Businesses must follow health and safety regulations to ensure the well-being of their employees.
Employment law: Businesses must comply with employment laws related to hiring, wages, benefits, and working conditions.
Taxation: Businesses must comply with tax laws, including filing tax returns and paying taxes on time.
Data protection: Businesses that collect and process personal data must comply with data protection laws, such as the General Data Protection Regulation (GDPR) in the European Union.
Advertising and marketing: Businesses must comply with advertising and marketing regulations, including rules around truth in advertising and data privacy.
Intellectual property: Businesses must respect the intellectual property rights of others and may need to obtain licenses or permission to use certain materials.
Businesses should also be aware that regulations frequently change; therefore, keeping abreast of these changes is imperative to ensure continued compliance.
7. Losing your best talent because there is no continuity of employment
The end goal for companies expanding abroad using solutions such as an EoR is often to open their own entity when the time is right. At this point, they understandably want to transfer their employees from the EoR to their own entity.
Most local laws have transfer of business regulations controlling what happens when one company transfers employees to another. For example, they are known as TUPE in the UK; and Europe-wide, they are based on the EU's Acquired Rights Directive. Unsurprisingly, employees highly value these local laws.
However, as an EoR is an 'on paper' employer rather than the exclusive employer, it cannot transfer employees compliantly. This means there cannot be continuity of employment, resulting in the employees losing all of their accrued rights.
Not offering continuity of employment will likely negatively affect your chances of recruiting top talent, to begin with—no one wants to lose their highly sought-after benefits that often get better the longer the employee is employed at a company.
And if the employees are unaware of the continuity of employment when they are hired, they will undoubtedly be aware of it when they lose it. This is likely to cause disgruntled employees at best and high churn at worst. Worryingly, your company could suffer severe damage to its reputation and impede attracting and retaining talent in the future.
International expansion is a risky business. But the potential reward is enormous. It's certainly not worthwhile blindly opening doors and taking rash risks. But calculated expansion with complete information and a robust strategy is far more likely to lead to success—mitigating all risks possible.
This requires a mix of in-depth market research, legal and regulatory advice, and partnering with an expert local global expansion partner.