The Financial Guide to International Expansion: Going Global

Businesses of all sizes are faced with new challenges on the US market and the global one in the post-COVID-19 era. In many industries, volatility, uncertainty, complexity, and unclarity are the norm. It is therefore vital that companies prioritize their business resilience. This includes budgeting, cost-savings, and reducing operating leverage. Global expansion is one way […]

Businesses of all sizes are faced with new challenges on the US market and the global one in the post-COVID-19 era. In many industries, volatility, uncertainty, complexity, and unclarity are the norm. It is therefore vital that companies prioritize their business resilience. This includes budgeting, cost-savings, and reducing operating leverage. Global expansion is one way of reducing costs in wealthy countries. Business leaders who relocate support functions overseas to regions with lower costs can help their company weather future uncertainty.

In Tbilisi in Georgia, I own a financial consulting firm. I have served as an interim CFO to companies in the US, UK and Europe. In my experience working with over 50 entrepreneurs from industries ranging from manufacturing to IT, I have noticed two trends that are centered on global expansion. These include outsourcing operations abroad and opening foreign branch offices.

Each solution has its own advantages. It is possible to reduce costs by outsourcing operations to other businesses or contractors. This allows your company to grow or shrink more rapidly. You can also tap into the global talent pool while paying less for operating costs. This gives your business the flexibility to deal with any uncertainties.

This article does not cover the strategic decisions that you need to make when deciding whether or not to expand your business overseas. It is up for your consideration whether your company will outsource work abroad, as well as your industry and your circumstances. This article will help you evaluate the pros and cons of each option.

Easy to Do Business

If you are opening a branch or subsidiary offshore, be aware that some countries make it easier to run and start a business than others. Making the right choice can have a significant impact on your bottom line. As these issues are known collectively, the ease of doing businesses includes freedom from excessive government restrictions and regulations which may impact normal business operations. It also involves property rights, rights for business and bureaucracy. The World Bank has traditionally measured many of these characteristics in its annual Doing Business Report, which assesses the investment and business climates for 180 countries worldwide. This report, which is currently being updated as part of the B-READY Project at the time this article was written, has been completely overhauled and reorganized.

This chart, from the World Bank, compares US and Georgian market – ranked no. This chart from the World Bank compares US and Georgian markets–ranked No. 6 in 2020, respectively. In 2020, they will be ranked No. 6 and No. 7 respectively for their business environment (a number lower indicates a more favourable climate).

According to this analysis, even though the overall rankings of both countries are very similar in some cases, companies looking to expand abroad may choose Georgia rather than the United States, depending on their priorities.

There are many factors to consider when opening an overseas office. These are those that I have found are most important.

Start a business

Learn how much time it will take to open a new business at your chosen location, and the fees involved. It is easier to manage administratively, financially, and logistically if the process can be made simpler and more efficient.

Some countries require a lot of time and money before they can start their business. But places such as New Zealand, Singapore and Denmark make it easy to do so. In Georgia for instance, after you have done all your research, it only takes one day to open a new business. All the standard documentation is available in a local registration office and requires just a $35 payment.

You will also need to consider the logistical aspects of finding and outfitting a location, if one is needed. Renting or purchasing space is one way to do this. Other ways include obtaining construction permits, hiring and paying contractors and setting up utilities. These costs vary regionally.

How to Put Together a Team

The key to success in business is people. Here are some of the key questions to ask when evaluating contractors or opening an office overseas.

How long will it take for me to hire people?

It’s helpful to know the length of time you will need to wait before you can hire someone. The norms for resignation notices vary from country to country. In the US, it’s two weeks. But in Europe and other countries you may have up to two months. Contractors may have different norms–in Georgia, no notice is needed.

What is the law on layoffs and terminations?

It’s important to know the laws before it happens. The time you need to give someone notice may be determined less by the law and more by the terms of the contract. In some contracts, the clause may require the employer to provide notice of the dismissal at least one or two months before it is official. You should also look into the severance obligation, as certain countries may have laws governing minimum payouts for employees who are laid off. In many countries you may be able to negotiate more with contractors.

Is there a requirement for paid leave?

It’s crucial to consider global expansion when you are considering expanding your business. Many countries will require that employers offer paid holidays to permanent staff. This is a cost to the company. This may include holidays, parental leave, or sick leave.

In some countries like the United States businesses are not required to provide paid leave for any reason including parental leave. However, certain US states require it. In many US industries paid leave is commonplace, regardless of law. In many countries such as Mexico or the Czech Republic extended paid parental leave is common. However, with lower costs of living and relative wages, it may not be a burden on the budget.

You should check this with any country you are considering.

What is the average wage?

In general, the cost of living in more developed countries is higher. Also, salaries are higher. Offshoring may offer some businesses savings. They can hire employees at rates that are competitive for the region while saving on labor costs in their own country.

Most countries have a mandatory minimum wage per hour. Australia, according to the latest figures available from the Organisation for Economic Co-operation and Development’s (OECD), has the highest hourly minimum wage. It is approximately $14.50 US dollars. The United States is ranked No. The minimum wage per hour in 13th place is $7.25. Georgia is one of the countries that does not have a minimum wage per hour.

It’s common for employers to pay higher than minimum wages for certain jobs. This is because it helps to keep the competition going. A different OECD 2022 report shows that the average US wage for a year is $77.500, while Mexico pays only $16,685.

A used car reseller based in Los Angeles is one of the companies I’ve worked with. The company contracts with 60 employees in Georgia and pays $50,000 per month to operate that office. The cost of operations in California would be at least three-times higher, but the company is able to get the talented employees it wants at a reasonable price.

Other employee benefits?

Ensure that your benefit package matches the benefits offered by local companies in the countries you are targeting. You’re in competition with the local business. Pension savings, health coverage, free lunches or subsidised meals, stock options and other benefits are all worth considering. Remember that contractors might not receive these benefits. Be sure to include this in your planning.

Understanding Taxes

It is important to calculate the tax cost, because different countries use different methods of calculating taxes. They also have significantly different rates. It is always a good idea to hire someone who knows how the country operates, the laws, the common practices and the lesser known exemptions. A local tax expert can help you save money and ensure compliance by monitoring your business operations. Here are some tax-related issues that you should consider.

Corporation Income Tax

The company is liable for paying corporate income tax on its profits. The difference in tax rates between countries can also be due to the method of calculating the tax. In the US, Georgia Italy and Japan (among the 62 nations that signed the Estonian Tax Convention), companies do not pay tax on their profits until they are distributed. If you have back-office operations abroad, it may be worth deciding to invest any profits from this entity into your business with 0% tax.

Personal Income Tax

Personal income tax in many countries is paid and calculated by the individual; however, employers may also be required to withhold personal income taxes. What matters for employees in either situation is the net amount they receive after tax. In a sense, therefore, personal income taxes are a burden shared by individuals and businesses. It is a fact that the more the tax rate increases, the greater the negative impact on the bottom line of the company.

The cost of income tax can differ depending on which employees you hire, since contract workers may have a different tax rate. The income tax for Georgian permanent employees is set at 20%, and tax is deducted. Contractors in some industries are eligible for tax breaks and may pay as little as 1%. This can result in contractors being much cheaper to hire than employees.

Tax exemptions

Knowing how to avoid paying unnecessary taxes is essential. Tax breaks are offered by many countries for specific industries, employees and products. It is important to consult a local expert in order to accurately determine the return on investment of setting up a business presence.

Professional Standards

Certain professions have to adhere to certain regulations and standards. It’s vital to ensure that the standards of a foreign country where you are considering outsourcing are just as high as those you maintain within your own company. Many Western pharmaceutical companies are now partnering with Chinese laboratories for drug research and development, after China revamped their regulatory system.

It may also be simpler to off-shore only the activities which don’t typically require intense scrutiny. For example, IT, marketing, customer service, and legal support. Even certain financial functions, such as financial management and planning, investor presentations, internal financial reporting and financial analysis can be outsourced.

However, certain financial activities cannot be safely offshored. This is especially true for tax accounting and financial reporting. Activities that are required to meet safety standards might not be possible offshore.

Political Climate

There are many ongoing political and armed conflict around the globe, which can have an impact on business. Georgia, for example, has had to deal with both the Russian occupation and the exodus of Russians from their homeland following the Russia-Ukraine conflict. The result is more freelancers available, and this may be beneficial to companies that are looking to expand in Georgia. However, it may also cause the currency to increase, as well as real estate prices, which could reduce cost savings for businesses. The associated tensions are also a concern for businesses who value stability.

Social Factors

You need to make sure that when you open an overseas office, or work closely with contractors from abroad, your colleagues will be prepared for success at your business. And that your organization is prepared to effectively manage them. Consider these three cultural factors:

The Language of the Speaker

Be sure to hire locals who can speak your language of business before choosing a new location. I recently asked Indians why India was such a success in terms of IT outsourcing and customer service. All agreed that the main factor was widespread English proficiency.

Educational Institutions

Another important consideration is education. You should also check if there is enough talent in the area with your desired skills or certifications.

Work Culture

When it comes to the integration of your team, culture is important. Some countries have a tradition of only having professional meetings and relationships, while others expect employers and staff to get to know each other better. Make sure you know what potential employees will be expecting and that it is in line with your corporate culture.

Integrate your overseas team: Parting advice

When I am advising clients to set up overseas operations, I suggest they hire a person dedicated to ensuring that the operation runs smoothly. You want your remote team to feel like they are part of the company and that their goals and values match those at headquarters.

A company with which I am familiar was founded in Tbilisi, Georgia, to offer back-office services to a major Los Angeles-based brand. The firm has more than 150 staff members who provide IT support, database maintenance, customer service, and photo editing. A US representative visited Tbilisi every month for the first six-months of the partnership to ensure that the team’s back-office was in line with the firm’s mission and key priorities. The top Georgian management was then ready to fully take control and benefit from its team.

The initial investment and effort to expand overseas may seem overwhelming, but the return on your efforts can be substantial over time. This guide can help you get started. You may find that expanding internationally is the best way to save money and increase your business’s resilience.