A Financial Guide for Global Expansion

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In the post-COVID-19 economy, businesses big and small are facing new challenges in the US and global markets. Volatility, uncertainty, complexity, and ambiguity have become the new norm in many industries, making it vital for companies to prioritize business resilience, particularly when it comes to budgeting, cost savings, and lowering operating leverage. One way to reduce costs in wealthier countries is global expansion. By relocating support functions to lower-cost regions overseas, business leaders can better position their companies to weather any uncertainty that may lie ahead.

I run a financial advisory firm in Tbilisi, Georgia, where I’ve served as a fractional CFO for companies based in my home country as well as the US, UK, and Europe. From my work with more than 50 foreign entrepreneurs in industries from IT to manufacturing, I’ve noticed two emerging trends, both centered around global expansion: outsourcing supporting operations overseas, and opening branch offices abroad.

There are a number of advantages to each solution. Outsourcing supporting operations—whether to individual contractors or other companies—can provide a nimble, cost-effective option, allowing your business to scale up or down more quickly. Opening a branch abroad also allows you to tap into global talent while spending less on operating costs than you would at your company’s headquarters, giving your organization the flexibility it needs to ride the wave of any uncertainty.

Whether you simply outsource to overseas talent or expand your business abroad is a strategic decision that depends on your company, industry, and circumstances, and whose consideration lies beyond the scope of this article. Regardless of which option you choose, there are several factors to assess when considering expanding abroad, and this article focuses on key points to help you make an informed decision that’s right for your company.

Ease of Doing Business

When you’re opening an offshore branch or subsidiary, know that it’s easier and less expensive to start and run a business in some countries than others—choosing wisely can make a big difference to your bottom line. Considerations for ease of doing business, as these concerns are collectively known, include the freedom to operate without excessive governmental restrictions and regulations that may affect normal business operations, property rights, business rights, and bureaucracy. Many of these attributes have traditionally been measured in the World Bank’s yearly Doing Business report, which measures the business and investment climates in 180 economies worldwide. (At the time of this writing, this report is being updated and overhauled as the B-READY Project.)

As an example, this chart from the World Bank compares the US and Georgian markets—ranked No. 6 and No. 7 in 2020, respectively—for their overall business environments (a lower number indicates an easier environment):

Overall

6

7

Starting a business

55

2

Dealing with construction permits

24

21

Getting electricity

64

42

Registering property

39

5

Getting credit

4

15

Protecting minority investors

36

7

Paying taxes

25

14

Trading across borders

39

45

Enforcing contracts

17

12

Resolving insolvency

2

64

As you can see from this breakdown, even though some of the two countries’ overall ratings are similar, a company seeking to expand internationally may prefer to consider Georgia over the United States in many cases, depending on what its priorities are.

However, there are plenty of factors that fall outside the scope of this report, and the following are the ones that, in my experience, matter most when you are considering opening an offshore office.

Starting a Business

Find out how long it takes to start a business in your target location and what fees and details are involved. The easier and more streamlined the process, the less of an administrative, logistical, and financial burden it will be.

In some countries it might take several months and a significant amount of money to get through the bureaucracy before you can actually start your operations, but places like New Zealand, Singapore, and Denmark are known for how easy it is to start a business there. And in Georgia, for example, once you’ve done your due diligence, it takes just one day to register a business, with all standard documents available at a national registration office, requiring only a signature and a payment of $35.

There are also the logistics of finding a physical location if you need one—perhaps even building it yourself—and outfitting it. This entails renting or buying space, securing construction permits, finding and paying contractors, setting up utilities, and more. The regional variations in these costs should also be considered.

Putting Together a Team

People are key to business success. Whether you’re opening your own office abroad or evaluating contractors, here are the most important questions you’ll want to ask regarding employment rules and norms:

How long does it take to employ people?

When you’re hiring someone who will have to quit their current job before they can start working for you, it helps to know how long you’ll have to wait. Resignation notice norms and expectations vary by country, from two weeks in the US to two months or more in some European countries. Norms for contractors may be different—in Georgia no notice is required.

What are the rules about layoffs?

No company hires workers with the expectation of layoffs, but it’s smart to be aware of the rules before the possibility develops. In some cases, the time required before you can let a person go may depend less on the law than on the employment contract terms negotiated between the parties. A contract might include a clause that requires the employer to give notice at least two weeks or one month before the official dismissal. It’s also worth looking into severance obligations as some countries have laws about minimum severance for laid-off employees. You may have more flexibility with contractors in many countries, however.

Are there paid leave requirements?

When you’re considering global expansion, it’s important to remember that many countries require employers to offer a minimum number of paid days off for permanent employees—which will represent a direct cost for your company. These days may include public holidays, vacation, sick leave, and parental leave.

Some countries, like the United States, don’t require businesses to offer paid time off for any reason, including parental leave, but some US states do. And in many US industries, paid time off is customary regardless of the law. Extended paid parental leave—up to two years—is common in many other countries, such as Mexico and the Czech Republic, but with a lower cost of living and lower relative wages in many of these nations, this requirement may not overly burden the bottom line.

In my experience, contractors aren’t eligible for paid leave anywhere, though of course you should make sure of this in any countries you’re considering.

How much are wages?

In general, more developed countries have a higher cost of living and higher salaries. Some businesses may find that offshoring can offer savings—allowing them to hire workers at a competitive rate for their region, while still saving money on what that same labor would cost in their home country.

Many countries enforce a minimum hourly wage. According to a 2022 Organisation for Economic Co-operation and Development (OECD) minimum wage report (the latest numbers available), Australia has the highest minimum hourly wage in the world—approximately $14.50 in US dollars. The United States ranks No. 13, with a minimum hourly wage of $7.25. Some countries, including Georgia, have no minimum hourly wage requirement.

1

Australia

$14.50

2

Luxembourg

$13.90

3

New Zealand

$13.30

4

United Kingdom

$11.50

5

France

$11.40

6

Canada

$11.20

7

Germany

$11.10

8

Ireland

$11.10

9

Belgium

$10.90

10

Netherlands

$10.50

Of course, for many jobs, it’s customary and competitive to offer higher-than-minimum wages to employees, so it’s important to understand the norms for your industry in a particular country. According to a different 2022 OECD report, US wages average out to about $77,500 per year, while Mexico’s average yearly wage is just $16,685.

One company I work with is a used-car reseller, based in Los Angeles. It contracts with a 60-person office here in Georgia, and the full cost of operating that office is about $50,000 a month. Operations would cost at least three times as much in California, but this way the company gets the talent it needs, at a price that makes sense for its bottom line.

What other employee benefits are expected?

Make sure your benefits package is competitive with the packages offered by companies native to the country you’re targeting. Remember, you’re competing with local businesses. Consider pension savings, health insurance, free or subsidized lunches, stock options, and more. Again, contractors may not typically receive all of these benefits, so be sure to factor that into your planning.

Understanding Taxes

Calculating the cost of taxes is crucial, as different countries have different approaches to taxes and significantly different tax rates. I always suggest that business owners hire a consultant who has operated in the target country for a while and knows the written law, common practices, and lesser-known exemptions. Having a local tax expert monitoring your operations will ensure that you’re always in compliance and can also help save your company money. These are some specific tax issues to consider.

Corporate Income Tax

Corporate income tax is payable on profits generated by the company. Note that the difference between two countries might lie not only in the tax rate but also in the way the tax is calculated. For example, in the 62 countries that have signed the Estonian tax convention, including the US, Georgia, Italy, and Japan, companies don’t pay any tax on profits unless they distribute them. So if you run back-office operations in another country, you might decide to reinvest any profit from that entity back into the business at 0% tax.

Personal Income Tax

In many countries, personal income tax is calculated and paid by individuals; in others, personal income tax is withheld by the employer. In either case, what matters to employees is what they net after taxes. Hence, the personal income tax is, in a way, a shared burden for individuals and corporations. The higher the rate, the higher its negative effect on the corporation’s bottom line.

Income tax costs can vary depending on the type of employees your company hires, as contract employees may be taxed differently. In Georgia, the income tax rate for permanent employees is 20% and the tax is withheld. However, contractors in certain industries may qualify for tax reductions and pay only 1% in taxes. That can make contractors in Georgia much less expensive to hire than permanent employees.

Tax Exemptions

It’s crucial to know how to save on unnecessary taxes. Many countries offer tax breaks for certain industries, products, types of employees, and more. This is one reason it’s so important to work with a local expert, as only then can you accurately calculate the ROI of establishing a presence in that country.

Professional Standards

Some professions are regulated and required to follow certain standards—and it’s important to make sure the professional standards in a country you’re considering offshoring to are as strict as the ones you set within your company. For example, many Western pharmaceutical companies have begun to partner with Chinese labs for drug development now that China has revamped its regulatory system.

Alternatively, it may be easier to offshore only those activities that typically don’t require extensive scrutiny, such as IT, marketing functions, legal support, and customer service. You can even offshore certain financial functions such as internal financial reporting, financial planning and analysis, financial management, and investor presentations.

However, not all financial activities can be offshored safely—particularly tax accounting and external financial reporting. Likewise, activities that must meet certain safety standards may not be feasible to offshore.

Political Climate

Unfortunately, there are still many active political and armed conflicts in the world, and the proximity of such conflicts may impact business operations. For example, in addition to dealing with the Russian occupation of part of its territory, Georgia has seen an influx of Russian citizens leaving their home country in the wake of the Russia-Ukraine war. This has resulted in more available freelance talent, which may benefit companies looking to expand into Georgia, but it has also caused the local currency to strengthen and real estate prices to rise, which may reduce the cost savings to businesses. And of course, the associated political tension is also potentially concerning to businesses, which tend to value stability.

Social Factors

When opening an office or working closely with overseas contractors, you need to ensure that your new colleagues are prepared to succeed at your company—and that your company is equally prepared to manage them effectively. Here are three significant cultural aspects to consider:

Language

Before selecting a location for expansion, be sure you can hire enough local employees who speak the language you use to conduct business. On a recent trip to India, I asked people there why they thought India had become such a successful hub for IT and customer support offshoring. Everyone agreed that widespread English fluency was the key.

Education

Education is another important factor to consider. Make sure there are enough people with the skills and/or certifications you need available in your new location.

Work Culture

Finally, culture matters when it comes to integrating your overseas team. In some countries, it’s customary to have strictly professional relationships and meetings, while in others it’s expected that employers and employees will get to know one another better and “spread the bread,” a Georgian phrase that means sharing a meal together. Know what your potential hires will expect, and make sure it aligns with your own corporate culture.

Parting Advice: Invest in Integrating Your Overseas Team

To my clients setting up operations overseas, I always suggest hiring a dedicated person who will be responsible for making sure the operations run smoothly. As a business owner, you want to know that remote teams feel included and share the same goals and values as those working at headquarters.

One company I work with was established in Tbilisi to provide back-office support to a large Los Angeles brand, with more than 150 employees providing IT support, database management, customer services, and photo editing services. For the first six months of the relationship, a US-based representative traveled to Tbilisi once a month to make sure the back-office support team was aligned with the company’s key priorities and mission. After that, top management in Georgia was ready to take over fully, and the company was able to benefit from the full value of its overseas team.

Expanding overseas can seem daunting at first, and the list of things to consider is always longer than you expect, but despite the initial effort and investment, the payoff can be significant over the long term. Using this guide as a starting point, you may well discover that global expansion is the key to unlocking financial savings and growing increased business resilience.

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