The benefits are there, but don’t start the process without exploring potential problems you’ll face along the way.
5 min read
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Whether you’re trying to gain access to international markets, have a product or service that is more appealing to a foreign market than domestic customers or simply want to take advantage of a new business-friendly environment, there are many reasons for starting a business overseas.
While such opportunities can be extremely lucrative, they don’t come without their fair share of challenges. By being aware of the potential pitfalls that come with international business, you can get your own company started on the right track.
1. Tricky tax situations
Operating a business overseas will naturally introduce new tax complications in addition to what you would already deal with running a domestic business. If your business is based in the United States but operates overseas, you might be able to qualify for the foreign earned income exclusion (FEIE), which exempts some of your earned income from U.S. taxes.
On the other hand, businesses based in a foreign country typically don’t have to pay U.S. FICA or Social Security taxes. However, some countries have tax treaties in place that would still require that you make these payments.
You may also be responsible for taxes in the country where you are establishing your business. Consult with a tax expert so you don’t land in serious legal trouble.
2. Business registration and other regulations
Taxes aren’t the only regulatory issue to be aware of when establishing your overseas business. Some countries limit property rights for foreigners. Others require that you have a native partner involved in your business. Learning the regulations will help you take all the needed preparatory steps for establishing your company.
In an email conversation, Brian Yiu, company formation specialist at Get Started HK, a business that helps international clients with company registration in Hong Kong, explained, “Even if you won’t be living in the country yourself, you still often need to have your business registered at a physical address within that country. You will need someone who can receive legal documents for your business at that address. If you don’t follow these and other local regulations, you could get shut down before you can truly start your business.”
By fully understanding a country’s rules regarding foreign-owned businesses, you can avoid fines, property seizures and other legal penalties.
3. The economic climate of your target country
No two countries are economically the same. Many developing countries present significant opportunities, but issues such as income disparity and the potential for high inflation also lead to increased risk. Stable economies will typically offer a more secure environment for starting your business.
Rather than looking to indicators like GDP, Investopedia recommends that you evaluate a location’s “genuine progress indicator” (GPI). This metric adjusts personal consumption data based on factors like income distribution, education rates, crime rates and even pollution or changes in leisure time.
This offers a more nuanced picture of the local economic climate, helping you identify market trends and whether your target market would have the financial resources needed to do business with you.
4. Potential language barriers
If you’re not careful, it’s all too easy for international business efforts to get lost in translation. History is full of examples of when companies didn’t take the time to understand the local language, from KFC’s accidental Chinese translation of its slogan to “Eat your fingers off” to Braniff Airlines using a phrase that meant “fly naked” in Mexico.
Advertising mishaps can be humorous, but they also have the potential to offend your target audience. Things can get even trickier when dealing with government regulations or negotiating business deals. If you don’t understand the language, you might think you’ve successfully landed a deal, when in reality, the potential client still wants more time to think about it.
If you don’t already speak the language of the country you want to do business in, working with a qualified business interpreter or hiring a bilingual employee is an absolute must. This person should be fluent in both English and the native language and have a sound understanding of business terminology to keep you on track.
5. Don’t forget about cultural differences
Language isn’t the only difference that may exist when opening a business in a foreign country. Even countries that speak the same language can have significant cultural differences. Jamaica, Samoa and Canada all speak English as an official language, but you could hardly approach them with the same marketing messages or product lineup. You must adapt to fit the culture.
Writing for the Harvard Business Review, Nataly Kelly notes, “Put the customer first. The businesses I’ve seen with the strongest track record of global success all have this important mission in common. […] They view global marketing and localization not as a burden, but as an advantage against competitors, which enables them to attract customers in other markets, better serve them, and convert them into advocates for their brands.”
Successful overseas businesses are willing to adapt more than just their marketing. Quite often, they’ll also adjust their products or services to better fit a local market.
Starting a business overseas comes with its fair share of challenges, but it also provides unique opportunities that you might not enjoy if you exclusively focused on domestic markets. By considering these important factors before you take the plunge, you will be better positioned for a successful entry into an international market.