Expanding Internationally: 6 Legitimate Reasons NOT to Establish a Foreign Subsidiary
Expanding internationally is a milestone for a business, the next unlocked level with new opportunities and resources. Whether your company has its eyes on a new market for the sake of growing operations, gaining competitive advantages, or accessing a larger talent pool, is a venture that may challenge your expertise and strategic thinking. It demands an in-depth understanding of local legislation, foreign subsidiary establishment, tax burden and business culture in the target country. Digital-first companies that are used to limited on-site interaction may find this process especially exhilarating.
Say, your business is steadily growing and you have reached the point at which it is necessary to open a representative office or branch in Country A. You have interacted with foreign counterparts long enough to establish reliable partner channels. It is time to proceed from a remote to a hands-on approach that will rationalize your budget, bypass intermediaries and optimize business operations in Country A. Should you opt for a conventional procedure of setting up a foreign subsidiary?
Rather no than yes. Creating another liability on top of those that already exist is a time-consuming and resource-intensive process. A newly opened branch, which ultimately is new company miles (or thousands of miles) apart from the HQ, may bring about a myriad of challenges to the parent company. Let us take a look at 6 commonly reported issues that setting up a full-fledged foreign subsidiary implies. We will then discuss why your business should instead opt for advanced proceduresand delegate HR processes to reliable experts with a strong local network in Country A, saving you costs and headspace for high-priority aspects of expanding internationally.
What are 6 reasons why establishing a foreign subsidiary may be a wrong choice for your business?
1. It is costly and slow. Legal fees, company registration, license and financial setup fees, taxes, and other administrative costs are just a few of the expenses commonly associated with setting up a subsidiary overseas. Add office rent, authorized capital, accounting, translation and other fees that may be obscured until you are at a certain stage of the process. This may not be financially feasible for small- and medium-sized companies with budgets that need to be allocated with cautiousness and reasoning before expanding internationally. To make matters worse, the proceedings take up to 6 months: from research and preparation to non-stop maintenance of the newly established subsidiary, it is a drain on your time and resources.
2. It keeps you on a constant vigil for changing local legislation. Entering a new market fully compliant with the current law is half the battle: nothing in this world is permanent, and neither are labor and tax regulations. By opening a foreign subsidiary, your company is signing up for the job of monitoring updates in the local legislation. Since the 2019 pandemic, employment laws are among the most frequently altered, and not keeping up with the changes may result in painful penalties.
3. It requires advanced local expertise. From the complexities of foreign regulations and laws to a slow-rolling bureaucratic machine that showers you with paperwork as it goes, a new country is an unknown pasture for your business to explore, especially without guidance. There are also intricacies of negotiation practices and approaches to work schedules: what if your subsidiary is in a different time zone and you reaching out to local staff during certain hours is a red flag for the newly acquired foreign team? Even seemingly small factors like the amount of implicit communication in higher-context cultures or the use of emotional language in a professional environment can potentially cause misunderstanding and conflict.
4. It slows down talent acquisition. Access to human resources may be the reason why your company is coming to Country A in the first place. However, be prepared for an extended wait: your overseas subsidiary cannot hire employees until the process of its legal establishment is complete. This may hinder your efforts to start operations in Country A as soon as possible and you may lose out on the best candidates to more advanced competitors.
5. It is extremely risky. A foreign branch costs an arm and a leg to terminate. If your expansion strategy does not yield the expected results, it may take you longer to dissolve a foreign subsidiary than to set it up. The burden of legal and bureaucratic steps, notifying employees and even handling debt may also rest on your shoulders. Another thing to consider is external risks that are completely outside your control: currency exchange fluctuations, economic instability and political crises.
6. It challenges the transfer of knowledge and skill. As we said above, a foreign subsidiary is a new company that is coordinated and supervised locally. As the parent company, you need to ensure that the inside expertise is distributed to the local management smoothly and risk-free “ but is it easy to do so? Establishing long-term trust requires adequate soft skills both from the parent and the subsidiary. Moreover, factors such as the language barrier may prevent the newly acquired team from putting the shared knowledge into practice from day one.
What is an alternative way of expanding internationally?
There are a number of models for going international apart from foreign subsidiaries. If you are representing a small- or medium-sized business, or a company that operates in a fast-paced innovative field, you will appreciate a speedy and flexible solution, with as many tasks delegated to a reliable local expert as possible. Consider using a global Employer of Record (EOR) service. An EOR provider takes on a variety of tasks, responsibilities and risks and becomes your trusted aide as you explore a new market for expanding internationally.
What are the benefits of choosing EOR for expanding internationally over a foreign subsidiary?
- An EOR provider has profound knowledge of local labor laws, bureaucratic procedures and implicit standards of professional communication and negotiation.
- With EOR, your company can onboard employees in a target country within 2–3 days in contrast to a 6-month wait for an entity setup.
- No longer do you have to be concerned with running payroll and paying taxes for overseas employees “ the EOR provider does it for you.
- Taking on the risks of international hiring is a part of the service, and so is the management of terminations. From foolproof employment agreements fully compliant with the local laws to in-depth understanding of relevant procedures, EOR will be there to back you up in case the relationship with a foreign employee does not turn out as planned.
Acvian is an EOR provider with in-depth knowledge of the international labor market that puts people first: we take over all compliance and regulatory issues and provide assistance with employing and onboarding your team in the target country, saving you time and resources and making the whole process of expanding internationally as stress-free as possible. Contact our team today to learn more about the packages offered and start growing without delay!