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Know What’s in Store Before You Open Doors Overseas

In a world that keeps getting smaller, it is almost inevitable that global expansion will come up in the boardroom. Here’s how to get global expansion right.

Consider that the European market for imports grew by €1.696B from May 2013 to April 2015, with year over year growth climbing from -5.1% to +1.4% in that time span (European Commission). And while China’s economic development has slowed, the decline of domestic production in that region also signals an increasing need for foreign goods and services.  Meanwhile, the U.S. trade gap is expanding and exports are on the decline: to sell in foreign markets, a local presence and local distribution provides an edge for near-term growth.

As the conversation unfolds, you should arm yourself with knowledge around elements that will likely come into play. Local labor laws as well as cultural distinctions, for example, can create major setbacks for a corporation’s bottom line if they come as a surprise.

“To sell in foreign markets, a local presence and local distribution provides an edge for near-term growth.”

Every market has its own perspective on how to treat employees. In Europe, crossing certain employee count thresholds triggers different requirements, and severance packages for local employees vary depending on their age and length of employment. In Turkey, businesses must employ five local residents for every foreign worker.

Other nuances emerge around employee expectations. In France, for example, a 35-hour work week is considered full time. In Europe overall, there is a significant difference in maternity leave policy: Most U.S. companies regard a six-week maternity leave policy as the baseline. But more and more countries abroad are providing their women with pre-partum and post-partum leave for well over six weeks. When your business is in a location that honors more time off, it’s important to plan ahead and make sure work is covered.

Also, just as you would for your U.S. locations, have a good understanding of how much it will cost to fire someone before you hire them—and never assume they won’t or can’t work for a competitor. The U.S.’ “noncompete” culture is somewhat of an anomaly; in many countries, an employer cannot prohibit an employee from securing a position that will enable them to make a living (as long as that employee is qualified for the work).

Even giants of corporate America have suffered significant losses overseas due to operational and cultural miscues. For example, Walmart’s expansion into Germany failed to the tune of an estimated cost of US $1 billion in part because Germans tend to prefer smaller and midsize stores rather than super-stores.

Perhaps one of America’s most iconic brands—Disney—experienced tremendous difficulties with the opening of Euro Disney in the early 1990s. Not only did the company miss the mark with audiences, they vastly underestimated labor costs: before opening the park, Disney executives projected labor costs at 13% of revenue, but in 1993, that number stood at 40%.

There are other key considerations when taking your company global, such as understanding local taxes and corporate structures appropriate for foreign markets. Also, be sure to keep your eye on intellectual property protection laws and be prepared to watch for a potential illegal duplication of goods.

Whether your business goes global because of a single sales opportunity or a key employee moving overseas, you may find that such a major strategic leap takes on a life of its own. If you head in this direction, be sure to conduct due diligence on the legal needs as well as the business landscape.

About Frederic J. Marx

Frederic Marx is Partner with Hemenway & Barnes LLP.