Going International: Is it worth it?
One single decision could make or break a company. It will either be a success that leads to significant growth or a failure that could potentially send the company under. With great risk comes great reward, but is taking a company international worth it?
Markets that are 10 times the size of the US market, GDP increasing at staggering rates, and trends in consumer spending are some of the allures of taking ventures international. However, internationalization strategies are far from risk free.
Leading sources of international risk:
- Expropriation or nationalization
- International war or civil strife
- Unilateral breaches of contract
- Destructive governmental actions
- Harmful actions against people
- Restrictions on the repatriation of profits
- Differing points of view (either by government or people)
- Discriminatory taxation policies
A local semiconductor manufacturer learned about risks in international ventures the hard way when setting up offshore facilities in China in the late 90?s. Being a large successful business, it found that the fees were all much more than what other firms were generally charged there.
Specifically, when trying to tap into a steam line that ran directly under their site, the company was told it would have to pay a fee of hundreds of thousands of dollars. The operations manager commented ?when we told them that this fee would be a deal breaker they were quick to negotiate.? Although the $35,000 negotiated fee was much lower, it was still higher than what other companies there had been charged.
A local manufacturing venture, Pioneer Pump, chose to capitalize on existing business in Western Europe by opening a distributor of its product in the United Kingdom. This choice was much less complex than the off shoring previously mentioned;still, problems arose just trying to manage the venture remotely.
Business development was not happening the way that Pioneer had hoped; according to the President of Pioneer Jerry Turner ?revenues were on track, but margins had eroded significantly.? As it turns out, the decrease in margins was due to a lack of alignment between the company?s goals and the sales team goals.
Learning from the experiences of the semiconductor manufacturer and Pioneer above, companies can employ strategies to hedge the risks presented by going international.
Factors to mitigate international risk
- Insurance from Export-Import Bank, EDC, etc.
- Joint ventures with local or foreign partners
- Local stakeholders: Include local stakeholders and investment that might have more influence with the local government.
- Structural dependency: Making the international portion of the venture worthless without the established domestic portion.
- Lobbying: Employ lobbyists to speak for the interests of the venture to the government.
- Integrate with strategy: Integrate the venture with the economic development strategy of the government.
Many viable ventures have failed internationalization because they did not fully consider the risks. Learning from the experiences of others and employing risk mitigation strategies can enhance a venture?s chances of survival.