Motivations and Challenges: Taking US Multinationals Into New International Markets - Global Trade Magazine
  June 5th, 2017 | Written by

Motivations and Challenges: Taking US Multinationals Into New International Markets

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  • US companies’ international expansion plans are motivated by a sophisticated variety of factors.
  • US companies are increasingly managing their R&D, technology and talent on a global basis.
  • The world is becoming much more regulated and compliance-driven.
  • The political climate may slow globalization, but cannot reverse it.

In March‭ ‬2017,‭ ‬TMF Group,‭ ‬a global provider of corporate and administrative services,‭ ‬in association with Forbes Insights,‭ ‬canvassed the views of‭ ‬250‭ ‬C-suite Executives from US-headquartered multinational companies to understand their motivations and challenges in taking their organizations into new international markets.‭ ‬The results of that survey are explored in a‭ ‬study,‭ ‬“Venture Further:‭ ‬what drives international expansion and investment by US businesses‭?” ‬recently issued by TMF Group.‭ ‬Following is a conversation with Raimundo Diaz,‭ ‬Head of Americas at TMF Group,‭ ‬about the findings and what they mean for companies seeking to expand internationally.

What were the most important findings of the survey‭?
There are several key takeaways from the survey.‭ ‬First,‭ ‬US companies continue to expand internationally.‭ ‬Despite a small drop in overall international expansion plans for‭ ‬2017‭ ‬and‭ ‬2018,‭ ‬US multinationals continue to look for substantive business opportunities driven by the search for new markets and new customers.‭ ‬Second,‭ ‬in a post-offshoring economy,‭ ‬US businesses are becoming more varied and sophisticated in their reasons for investing abroad.‭ ‬Third,‭ ‬US companies recognize that they operate in an increasingly global and complex world where local knowledge is the key to business success.‭ ‬Globally,‭ ‬compliance rules everywhere are getting stricter.‭ ‬It’s not about where you go,‭ ‬but how you do it.

Where are US companies planning to invest and expand over the next two years‭?
The developed economies of Northern and Western Europe‭ (‬including France,‭ ‬Germany,‭ ‬the UK and Ireland‭) ‬as well as Canada remain the most favored destinations for investment over the next two years for half of the businesses surveyed,‭ ‬though for Canada and Western Europe that represents a notable decline from even higher investment activity levels over the preceding two years.‭

The emerging markets of South America also remain a destination of choice for over a third‭ (‬36.4‭ ‬percent‭)‬,‭ ‬though that too represents a slight decline in FDI intentions there.‭ ‬The biggest jump in interest was recorded for Australia and New Zealand,‭ ‬with a more than nine-point jump in the share of respondents saying they would invest in the region,‭ ‬potentially signaling resurgent sentiment toward the broader Asia Pacific‭ (‬APAC‭) ‬region.‭

Eastern Europe also bucked the global downward trend with a slight increase‭ (‬+3.2‭ ‬percent‭)‬.‭ ‬A number of markets there,‭ ‬such as Bulgaria and the Baltic states,‭ ‬are emerging as nascent innovation and technology hubs.

Plans for investment or expansion increased significantly more for Australia and New Zealand than any other region in the world.‭ ‬How do you explain this‭?
Australia and New Zealand are attractive,‭ ‬resilient markets.‭ ‬Australia,‭ ‬in particular,‭ ‬has the unique distinction of being the only major developed economy not to have experienced a recession over the past‭ ‬25‭ ‬years.‭ ‬Australia and New Zealand are also easy countries in which to do business.‭ ‬Language and cultural similarity and proximity to China and Southeast Asian markets make them a foothold that US companies often take in APAC.‭ ‬To some extent,‭ ‬they may also be benefitting from somewhat decreased interest in Canada,‭ ‬Latin America and Western Europe.

What is driving the international expansion and investment of US businesses‭?
US companies‭’ ‬international expansion plans are motivated by an increasingly wide and sophisticated variety of factors.‭ ‬Perhaps not surprisingly,‭ ‬opening new markets,‭ ‬gaining market share and expanding existing operations are the most common motivators,‭ ‬cited by more than‭ ‬40‭ ‬percent of the businesses surveyed.‭ ‬But,‭ ‬interestingly,‭ ‬nearly a third are looking to improve their R&D and technological capability and more than a quarter are seeking new talent and skills or new sources of capital.‭ ‬Contrary to much conventional wisdom,‭ ‬cost savings are not a significant motivator for going abroad,‭ ‬with only about‭ ‬1‭ ‬in‭ ‬8‭ ‬respondents citing that as a factor.‭ ‬We’re in a post-offshoring economy.‭ ‬Companies are primarily looking internally to streamline and be more efficient‭; ‬they are looking internationally for new markets,‭ ‬technologies,‭ ‬skills and resources.‭

Why do you think so many US companies are going abroad to boost their R&D and technology and/or to seek new talent and skills‭?
This is not surprising.‭ ‬US companies are increasingly managing their R&D,‭ ‬technology and talent on a global basis.‭ ‬This can be seen in the push to establish centers of excellence in places like Costa Rica and the emergence of innovation/tech hubs in the Baltic States and Eastern Europe.‭ ‬The impetus is not only to provide resources for their US operations,‭ ‬but also to provide the capability for companies to expand and grow markets abroad.

What are the biggest challenges facing companies in expanding internationally‭?
In a word:‭ ‬complexity.‭ ‬Compliance rules across virtually all aspects of doing business are getting stricter and more complex virtually everywhere.‭ ‬This is reflected in the uniformly high number of respondents citing challenges such as establishing banking and accounting measures and statutory records,‭ ‬selecting and incorporating the right entity type and providing official evidence of good standing.‭ ‬Other common challenges include identifying premises and/or a process agent and data protection and privacy laws.‭ ‬Understanding the local landscape in terms of compliance and regulation,‭ ‬accounting,‭ ‬tax and HR practices and being able to effectively navigate that landscape are the keys to successful international expansion.‭

How do you account for the decrease in international investment and expansion plans in‭ ‬2017/2018‭?
Overall,‭ ‬it’s a very modest decrease and it’s important to keep in mind that it’s from a historically high baseline of international investment activity by US companies.‭ ‬The bottom line remains that US companies continue to expand and invest globally to find new markets,‭ ‬customers,‭ ‬technology,‭ ‬talent and resources.‭ ‬I think that the main message here is that globalization is still in place,‭ ‬although at a slower pace than in the past.

What were some of the unexpected or surprising findings of the study‭?
The resilience of the UK despite Brexit and the apparent drop in planned investment in Canada was a surprise as we continue to see strong interest in Canada among our clients.‭ ‬The drop-off may be industry specific and attributable to low oil prices which has curtailed expansion in the energy sector.

While we’ve recognized for some time that we’re in a post-offshoring economy,‭ ‬I was still struck by the very low weighting given to cost-saving as a motivator for international investment and expansion.‭ ‬Finally,‭ ‬given the high profile of intellectual property‭ (‬IP‭) ‬rights issues in some markets,‭ ‬it’s something of a surprise that fewer than‭ ‬20‭ ‬percent of respondents cited IP protection as a significant challenge.

Many of the biggest challenges cited in the study involve matters related to compliance,‭ ‬such as establishing banking and accounting measures.‭ ‬Why is that‭?
The world is becoming much more regulated and compliance-driven.‭ ‬We are seeing that in virtually every market,‭ ‬developed or emerging alike,‭ ‬and every country does it differently.‭ ‬That’s why local knowledge and understanding are so important to helping companies navigate the complexities of rapidly changing regulatory and compliance environments around the world.‭

Though the survey did not specifically ask about the political situation,‭ ‬how do you think the current political climate is affecting the global investment and expansion plans of US business‭?
Whether in the US or elsewhere,‭ ‬the political climate may somewhat slow the globalization trend,‭ ‬but cannot reverse it.‭ ‬If one country pulls back,‭ ‬others will step in as evidenced by the recent enactment of the Canada-European Union Comprehensive Economic Trade Agreement‭ (‬CETA‭) ‬and the decision by the remaining Trans-Pacific Partnership‭ (‬TPP‭) ‬members to move ahead with the TPP despite the withdrawal of the United States.‭ ‬Policy changes may delay or influence decisions on where companies locate specific headcounts,‭ ‬but such changes are unlikely to reverse the overall trend toward interdependence in the global economy.‭ ‬As the survey shows,‭ ‬regardless of the political situation,‭ ‬US companies will continue to seek opportunities abroad.

What advice would you give companies contemplating international expansion‭?
I would echo the one piece of advice that our survey respondents most frequently said they would give to a peer considering international investment or expansion:‭ ‬plan thoroughly and do your research.‭ ‬Companies need to be clear on their reasons for investment or expansion and to thoroughly investigate and understand the political,‭ ‬economic,‭ ‬social and legal landscape of the markets they are entering.‭ ‬The importance of local knowledge when entering a new market cannot be overestimated.‭

What other research does TMF Group have in the works about doing business internationally‭?
In early June,‭ ‬we will be releasing the results of a survey about the easiest and most complex jurisdictions in the world for accounting and tax compliance.‭ ‬The leading provider of global business and compliance services ranked‭ ‬94‭ ‬jurisdictions across Europe,‭ ‬the Middle East,‭ ‬Africa,‭ ‬Asia Pacific and the Americas from most to least‭ ‬complex.‭