Today, according to the US International trade Administration (ITA), there are 293,000 registered US exporters generating US$2.1trillion and accounting for 13.8% of US GDP. Almost all are small businesses. Exports support 6.8million US jobs. In the UK, 15% of all businesses trade internationally. According to the WTO, in 2013 total world trade in merchandise amounted to over US$18trillion with another US$4.8trillion in services.
No wonder companies want to get in on the act – especially in countries where there is favourable tax treatment for exports. Expanding your business to another country can not only help you open up new markets but you can even develop country-specific products or services.
Yet doing business in a foreign country is not easy. Not surprisingly, it gives rise to difficulties and problems that are different from the problems you will have met whilst doing business back home.
The good news is that, with a bit of planning and some work, those problems can be overcome or – at the very least – controlled.
Why does international business exist?
Businesses operate internationally for four main reasons:
- Availability: Some products are simply not available from sources in the country where the customer lives. Airliners in Australia, bananas in Britain, gasoline in Germany.
- Price: Products and services can be a lot cheaper from sources in another country. Silk shirts are cheaper in Southeast Asia than in Switzerland.
- Prestige: There is a big market for prestige brands: Apple, BMW, Chanel.
- Profit: You may be able to make a lot more profit selling your goods or services internationally than you can back home.
Why should you start doing international business?
If you can find a place where your product or service is unavailable or cheaper than local competitors, you have a business opportunity.
If you make a product that is better than local alternatives – and people are prepared to pay a premium price, you have a business opportunity.
If these opportunities are more profitable than using the same money and energy to expand your domestic business, you should be thinking about going international.
What type of business?
Any business that passes any of the four tests above – or, if you are really clever, a business that is going to work for some other reason – will do nicely.
However, things usually turn out a lot better if it’s a business in which you have experience in your own country. Usually – but not always. Many successful businesses have grown out of start-ups where the owner had great business skills but no experience in the sector. Many businesses that have been highly successful “back home” fail to make in in the international marketplace, often because their founders lack the devotion, flexibility and special skills needed to succeed.
There are many different ways of developing your business internationally. Most of you are likely to start off thinking about a particular product or service that you want to export or buy in but there are other opportunities that you can choose instead – or bolt onto that basic model:
- Export or import agency/management company: Here, you employ a company to do the exporting or importing for you. This is useful if you lack the skill/time/inclination to do so yourself. This would often be done on a commission basis, sometimes topped up by a monthly or annual fee or “retainer”.You can also become an agency yourself and identify export or import opportunities for other companies. Once you have experience dealing with another country, this service can be bolted onto – or replace – your business of selling your own goods or services.
- Export trading company: Here, you identify business opportunities in other countries and try to source companies in other countries to fill those needs. As with an export agency, once you have experience dealing with another country this can be bolted onto – or replace – your business of selling your own goods or services. This would normally be done on a commission basis, sometimes topped up by a monthly or annual fee or “retainer”.
- Merchant: Here you buy goods in one place with the specific intent of selling them in another country, keeping the profit for yourself – but, of course, taking all of the risk.
Are you cut out for this job? It is not for everyone, or for the fainthearted.
- You need to be a salesperson!
- You need to enjoy challenges
- You need to work flexible hours: your partners might be 12 hours behind you
- You must be able to find innovative, simple and effective solutions to new problems
- You must be prepared to compromise on the “way we always do things”. Your partners will do things differently. Sometimes better.
- You must enjoy travel and working with people from other cultures
- You must be patient. In some countries – for example, China – you need to build relationships before doing any business and that can take a long time.
- Language skills help a lot
Do you have the time and commitment needed to make it a success? If not, does someone else in your company?
Starting to export or import requires a big commitment in time and energy. This can be difficult if you run a small company.
If you are thinking of appointing someone within the company to take charge of this process, they will need to have the power to champion the project and the authority to make things happen. In most cases they will need to be fairly senior in both experience and years if they are to get through the door of your potential partners. This is particularly true in China but also important elsewhere.
Where (not) to do business abroad
Now all that might be pretty obvious but, if you think your business idea is a winner, the big question is where to start.
In my view, there are some countries where you simply don’t want to do business: where you are likely to be eaten alive. In these countries the potential gains need to be enormous to make it worth even thinking about starting to do business. The size of the potential profits, in itself, should make you think twice!
Which countries should be avoided?
They are countries where:
- The rule of law doesn’t work: If you have a legal problem or dispute there is no reliable legal system to sort it out.
- Property rights are not respected: Including intellectual property rights. Will your “partners” simply steal your designs and business?
- Countries that are fundamentally corrupt: This is related to the rule of law problem but slightly different. Are you going to have to pay bribes to get anywhere? If so, this is likely to be illegal in your own country – and puts both your business there and your liberty at risk.
- Countries that are politically very unstable: Political instability is a part of life and can create lots of opportunities but some places are so unstable – and likely to get so unpleasant if there is a change of regime – that they are probably best avoided by all but the bravest business.
- Countries where you are likely to get killed or taken hostage!: This puts me off, but I know of a number of people who have started successful businesses in such places. Doing so requires special skills and precautions.
Essential preparation for doing business abroad
There are some top tips for people starting to do business in another country:
The possible target markets, potential customers and their needs in terms of your products or services. How are you going to deliver?
The more quality research you do the more successful you will be.
There are masses of good sources of information online – and quite a lot of junk.
See our guides to doing business in the various countries we cover for more information about good sources.
Always visit the countries where you are thinking of doing business.
A written business plan is all but essential. This is mainly for your own internal use rather than to present to third parties.
How do you want to set up this business?
There are many options. The best choice of structure – company, sole trader, representative office etc – can greatly improve you tax treatment. For as long as you are merely selling your existing products or services without opening up a presence overseas this is usually not critical. You can fine tune the structure when you know whether the operation is a success. See our guides to doing business in the various countries for more details of the options available to you.
People: You will need to find the right person or people to work with.
- Loyal: They are your representative and could destroy your business
- Motivated: Especially, self-motivated and able to operate semi-independently but to an agreed plan
- The right age: Some markets demand a little grey hair!
- Language skills: They MUST speak the local language
- Culturally aware: They must be prepared to adapt to – and embrace – local culture
- Flexible: Able to adapt on ongoing events
- Bright: This person will be dealing with some very smart people from a background of little local commercial experience.
- Experienced: Some knowledge of your industry – and, preferably, some experience operating internationally away from head office – is a huge advantage.
- A salesperson: Someone who can sell your company.
How are you going to pay for it?
There will be a cost. Translating materials, translating web pages, travel to the country, finding agents etc. However, at this first stage it is usually quite small. If you are successful and want to expand this part of your business, it costs a lot more.
Most small companies fund this trial out of their regular cash flow but there are several other options. See our Guide to Funding your International Business for more details.
However you intend the fund the business, the costings need to appear in the business plan.
Letters of credit
Whether you are importing or exporting goods, you will need to know about letters of credit. These will probably be less important if you are offering services internationally.
A letter of credit is a document from a bank guaranteeing that a seller will receive payment in full as long as certain delivery conditions have been met. In the event that the buyer is unable to make payment on the purchase, the bank will cover the outstanding amount. This can offer a guarantee to the seller that they will be paid, and the buyer can be sure that no payment will be made until they receive the goods.
Importing and exporting involves risks. Exporters run the risk of buyers failing to pay for goods, while importers may risk paying but never receiving anything. Because of the distances involved, it may be difficult to resolve any disputes.
There are several different types of letters of credit available, depending on your circumstances.
If you are exporting anything other than the smallest items to individual buyers you will want to think about using one! However, sometimes it turns out to be better business to take the risk as obtaining and using letters of credit usually involves both delay and cost.
They are especially useful in larger international transactions where the buyer and seller may not know each other and are operating in different countries with different legal systems.
They are issued – for a significant fee – by regular and specialist banks. If you’re an exporter you should be aware that you’ll only receive payment if you keep to the strict terms of the letter of credit. You’ll need to give documentary proof that you have supplied exactly what you contracted to supply. Using a letter of credit can sometimes cause delays and other administrative problems.
Growing your international business
Your decision to start doing business in another country can have a major impact. GK – a Realtor based in Florida – decided to explore selling to Chinese investors. Two years later he has sold over 1,000 units to Chinese investors, who now account for about 20% of his business. This all required large amounts of time, money and effort but it has all been very worthwhile.
At a different level, TB makes electric violins in rural England. He started low key sales to foreign buyers via his website. About 10% of his business now comes from overseas but he has invested little in attracting this business.
There are now specialist qualifications in international trade.
Articles of interest
You might want to look at the following:
How to Start an Import/Export Business. This contains lots of useful background information.