Motivations and Challenges: Taking US Multinationals Into New International Markets
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.