RSM Resources

Meet a new "multinational" company. A U.S. auto-parts manufacturer receives an ultimatum from a key international customer: "Establish operations abroad near ours so we can source cost-effectively, or we’ll find another supplier." The manufacturer acquiesces, taking the global plunge and keeping the customer.

Whether a firm pushes to expand overseas or is pulled, going global poses challenges, including finding business partners,protecting intellectual property and complying with different employment laws, tax policies and financial-reporting requirements. Planning and communication are critical — especially in a foreign country where terms such as"audit" and "compliance" may have different meanings.

Not in Kansas anymore
U.S. companies go abroad for fairly straightforward reasons,and each presents its own set of challenges upfront:

• A company entering new markets to sell its products to local customers needs to lease, buy or build facilities; develop sales and distribution networks; and secure licensing and other agreements.
• Firms expanding overseas to lower production costs must select the right market, evaluate set-up alternatives, and handle associated human resources issues at the new site and at home.
• Businesses moving overseas to meet the needs of a key customer are often venturing outside the United States for the first time and may need basic international know-how.

Midsized companies typically get their first taste of international business by exporting their products to customers overseas. Many of these companies ultimately decide to establish a sales presence abroad to meet customer needs and more effectively penetrate the market. As business grows, the logical next step may be overseas manufacturing. At any one of these stages, companies may consider low-cost foreign sourcing of parts or materials to help further control costs and gain a competitive advantage.

Growing your presence
Thomas B. McVey, U.S. delegate to the United Nations Commission on International Trade Law, outlines these options for establishing business overseas:

Foreign subsidiary. In this case, the parent corporation forms a separate legal entity and conducts business through it in the foreign country. Examples include corporations, limited-liability companies or other organizations permitted under foreign law. The parent company owns the subsidiary, although it usually has its own directors, officers, assets and liabilities.

Branch office. Here, the parent company establishes an office,distribution center or manufacturing operation that conducts business in the foreign country as part of the parent corporation. The facility generally operates under the parent’s corporate name, trade names and trademarks, and the parent company retains full legal liability for operations in the foreign country.

Representative office. The parent company opens a foreign office for limited purposes and does not conclude business transactions in the foreign country.Such offices typically limit themselves to generating leads, and local laws often dictate very precisely which activities the office can pursue.

Joint ventures. A joint venture involves two parties working together in the form of a partnership, corporation, limited-liability company or contractual relationship to pursue a business undertaking. It is usually subject to local legal restrictions similar to a wholly owned subsidiary, and it benefits from the contribution of capital, experience and local support by the foreign partner.

A company must consider not only international laws and regulations when venturing abroad but U.S. legislation and policies. The Sarbanes-Oxley Act of 2002, for example, is forcing many companies to test and implement new, more consistent (and more costly) financial reporting controls to link their global operations.

In addition, U.S. accounting standards,intellectual-property protections and other standards differ significantly from other countries. For example, a U.S.company with subsidiaries in South America and Europe may find itself with three different standards for reporting earnings and ensuring compliance with local laws. In addition to addressing the regulatory demands of three continents, the company faces the additional challenge of aligning its balance sheets to get an "apples-to-apples" look at how its subsidiaries are doing within the company.

Keys to success
Each option for establishing a business presence overseas is appropriate for different business situations, McVey says. No matter which expansion model you choose, however, experts agree you must keep an eye on five key (and closely related) issues to avoid trouble abroad:

Communication. When U.S.companies face problems overseas, including accounting discrepancies, contract disputes, lack of profitability and legal violations, communications is often a contributing factor. Language and cultural barriers can be difficult, and technical differences regarding the definition of certain terms often exacerbate problems. An "audit," for example, may mean something very different in Mexico than at home — so specify generally accepted U.S. audit standards, and if necessary, explain what that entails. Be sure your expectations for compliance,reporting, performance and profitability are clearly set upfront — and be doubly sure that your foreign team understands whose rulebook applies.

Controls. Trust is great, but it’s not enough to rely on from a hemisphere away. No matter where they set up shop, U.S. parent companies need to carefully establish clear standards and controls for bookkeeping, loss prevention, safety and quality. Europe highly regulates foreign businesses, making it less risky to do business there— but the penalties for noncompliance with local laws and policies can be severe. On the flip side, businesses operating in less regulated and less economically developed areas of the world may find governmental enforcement so lax they need to provide close oversight to avoid losses or other problems.

Reporting. Accurate reporting is the key to legal and regulatory compliance, both with regard to U.S. law and that of the host country. Reliability is critical — and relates closely to establishing appropriate controls — but so is comparability. For example, a company’s U.S.balance sheet will look fairly similar to that of its French subsidiary but will have far less in common with Brazilian or Chinese balance sheets.Translation is only part of the problem. With the proper controls, you should be able to generate reports that comply locally and apply globally.

Tax planning. McVey characterizes tax planning as one of the most critical areas in establishing foreign operations. U.S.companies are subject to U.S.tax laws related to their global operations and are not necessarily exempt from U.S.taxes. The parent company and its foreign affiliate will also be subject to the tax laws of the host country, which may not be advantageous.

Local compliance. U.S. businesses may also be subject to the host country’s laws pertaining to employment and termination, vendor relationships, marketing and advertising, environmental and consumer protection, and competition. Defining compliance is also key — in certain cases, native companies may ignore certain policies, but don’t assume you can do the same.

Effective global expansion depends greatly on tax policy and local law —issues that any company venturing abroad should review thoroughly in advance. External resources, including consultants specializing in business services or global expansion, can help midsized companies address these issues and identify outsourcing partners who can help manage your international efforts and be your "eyes and ears on the ground" wherever in the world you do business.