Ninety-five percent of the world's consumers live outside the U.S. In 1999, one-third of the revenues derived by the companies on the S&P 500 index came from outside of the U.S.; today it is already one-half, and by 2025 two-thirds of the revenues of the 500 largest American companies will come from beyond our country's borders.
As the global economic landscape evolves, it has become increasingly clear to a majority of business owners and top managers that international expansion is no longer simply an option to diversify markets, obtain larger profit margins and reach more target customers. It has become an absolute necessity for long-term survival.
Yet companies in the U.S. need to shore up their competitive positions in order to successfully compete on the new global playing field. Sixty-five percent of the world's population is bilingual, but only nine percent of the U.S. population speaks a second language. Only one percent of U.S. businesses now export, says the Small Business Administration. Roughly one-half of them export only to a single country.
Much has been written about the need for more effective policies, education, information and support from government and Non-Government Organizations (NGOs). I would like to focus here on steps that companies themselves must take to develop and implement successful plans for international expansion. Each step could command its own chapter in a book, but here is a brief overview. Take a hard look at your business and ask yourself and your colleagues if international expansion is suitable for your organization.
- Is there an organizational culture in place to facilitate and support cross-border transactions?
- Do your company's products or services offer a strong and sustainable international competitive advantage that is adaptable, if needed, to local market conditions?
If the answer is yes, then ask yourself if there is sufficient commitment among your top management to mount a sustainable, long-term, focused, and somewhat expensive effort to expand internationally? Without true commitment, any efforts will be doomed.
If the answer is no, then a key question remains: Is your organization willing to invest time, effort and money to develop the international culture, and modify or change the product or service offerings to become competitive overseas?
Once these issues are addressed, next steps would be to assess potential markets and their current and hopefully future economic, political and business climates. Most foreign expansion takes place either via a top-down approach of systematic analysis and orderly market penetration, or bottom-up market entry, which could be a result of an individual foreign buyer meeting a U.S. seller at a trade show or finding him/her on the Internet. A combination of the two is a rather frequent scenario.
Once the market selection is set, a comprehensive scouting trip needs to take place by senior management to visit all the target countries. Prior to the trip, and on an ongoing basis, management and relevant personnel need to immerse themselves in studying the language and culture of the chosen market(s). The objectives of such trip include:
- Developing a comprehensive local network of U.S. government and NGOs, financial, legal and business development professionals;
- Finding local partners and assessing the competition, understanding organizational issues, personnel qualifications and availability, reviewing available financial systems and financing alternatives. (This is not a complete list, but just a sample of the many issues that must be addressed.)
- Most importantly, it is vital to look beyond the veneer of high-voltage optimism and hype, which often accompany rapidly growing emerging markets. You must carefully piece together the true and realistic picture of what is happening in the target country. Many international markets today can and will offer superb opportunities for the U.S. companies. Yet, entering a situation with rose-colored glasses and not doing thorough due-diligence to understand the market is tantamount to suicide.
- If the initial scouting visits confirm the viability of the target market(s), it is then prudent to explore political risk insurance for direct investment, or credit insurance with a political risk component for export shipments. Then, your company must institute a compliance program in accordance with the Foreign Corrupt Practices Act (FCPA) and indoctrinate all its employees and foreign partners in what constitutes compliance.
In larger organizations, it is vital to create an environment where international managers have sufficient autonomy to make decisions locally without having to involve the home office in every step. On the flipside, top management needs to become comfortable enough with the international markets so as not to panic with every headline coming out of those markets.
International expansion is a very serious business that requires commitment, deep understanding of local culture, language and the business landscape. It requires constant management and analysis, with total focus and a strong team of professional advisors.
Expansion abroad should be planned for the long-term and be impervious to the "shakes and rattles" that can occur even in mature, let alone emerging and frontier markets. Risk mitigation is key and risk-reward analysis is even more important when doing business outside our borders.
Alexander Gordin is a co-founder and managing director at Broad Street Capital Group Bank, a merchant bank in New York City, and a trustee at the strategic think-tank Princeton Council on World Affairs. Gordin is a speaker and a leading expert on international trade with emerging economies and recently authored the book "Fluent in Foreign."