International Expansion for SMEs
How SMEs can thrive through international growth.
Small and medium-sized enterprises (SMEs) are often seen as the backbone of the economy, contributing significantly to job creation and innovation. As the world becomes increasingly interconnected, more SMEs are considering international expansion as a growth strategy. While this presents exciting opportunities, it also comes with its own set of challenges. We’ll explore how SMEs can expand internationally whilst managing risks and maximising potential.
The appeal of international expansion
Many SMEs take the first steps in to international markets through online sales and then consider whether they should broaden their expansion into International markets.
Expanding into international markets can open doors to new customers, partnerships, and revenue streams. For SMEs, this could mean tapping into the global demand for their products or services.
UK SMEs that export internationally tend to grow 20% faster than those that operate solely in domestic markets. Moreover, companies with a global footprint are often more resilient during economic downturns, as they may be able to rely on diverse markets to stabilise revenue. Exporting also leads to increased productivity, with research from the Department for International Trade suggesting that SMEs that begin exporting see an average productivity boost of around 34%.
Despite these benefits, international expansion isn’t without risk. SMEs must consider various factors, including regulatory compliance, currency risks, tax, logistics, and local competition. The key’s to be prepared and to take informed, strategic steps.
Challenges and opportunities in international expansion
Regulatory hurdles
One of the biggest obstacles for SMEs looking to expand internationally is managing the different regulatory environments that apply in each location. Every country has its own set of rules regarding trade, customs, tax, and employment. Failing to understand the broad range of regulations can lead to increased costs, hefty fines and damage your company’s reputation.
Understanding the regulations can affect your decision on how to trade with individual countries including the commercial structures to be used. If employment regulations are severe then an SME may look to use a partner or outsource the activities rather than take on the employment risks.
It is also necessary to understand if the strategy undertaken creates a taxable presence in the overseas location. The taxation exposure can be local sales tax, such as VAT, employment taxes and social security costs and corporate income tax. It is possible to have an exposure to all of these taxes and the implications of these need to be understood.
Cultural differences
It is important to understand the cultural differences in the new markets. Consumer preferences, business etiquette, and even marketing strategies can differ drastically from one country to another. If these difference are not understood then the business is unlikely to reach its target audience and the expansion could be very costly.
Many SMEs initially struggle in new markets because they do not adapt their offerings to local needs. For instance, a food manufacturer that successfully exports to the US might need to alter recipes to suit local tastes when entering Asian markets.
Currency fluctuations and financial risks
Operating in multiple locations usually means operating in multiple currencies and this raises the risk of foreign currency exposures. If a business is operating on small margins then a small swing in the sales currency can result in the profit being eliminated and a loss being incurred. This places a greater risk on SMEs for cross border transactions and international expansion.
It is therefore important that SMEs look to manage the foreign exchange risks that the business faces. This can be through a number of strategies and will depend on the business structure, but can include natural hedges such as costs in the local currency or entering into forward contracts to fix the exchange rate for future income or expenses. This can provide certainty on the costs and income for the SME and reduce risks but may not maximise profits.
Expanding abroad for cost efficiencies
While the primary focus of international expansion often revolves around accessing new markets and boosting sales, it can also offer substantial cost-saving opportunities. This can be through establishing production or working with suppliers in regions where operating costs are lower than in the UK. For example, outsourcing production or services to countries with lower wage costs or favourable exchange rates could significantly enhance profit margins. Additionally, diversifying suppliers internationally can mitigate the risk of relying solely on UK-based suppliers, offering both cost advantages and supply chain resilience.
Choosing the right structure for international trade
The SME must decide on the correct structure to use when expanding internationally. This could be direct sales from the UK, setting up a branch or a company in the overseas territory There are a number of factors that need to be considered in determining the most appropriate approach for that territory, this includes the credibility in the local market place, the litigation culture in the country as well as taxation and regulatory implications.
The approach taken to structuring the business for international trade can impact on the SMEs exposure to taxation and can result in significant increased tax costs. The approach may require the employment of local people and this can create local payroll administration and tax costs. It may require the renting of premises in the target country and this can result in an exposure to the local corporate income tax on the profits attributable to that location. In addition, sales taxes can arise in the location and the failure to comply with the regulations can result in significant tax costs, interest and penalties.
PREPARING FOR INTERNATIONAL TAX CONSIDERATIONS
The chosen structure can create new tax obligations. Different countries have different rules for VAT, corporate tax and payroll schemes and understanding these is crucial to maintaining compliance.
As an example different countries have different corporate income tax rates and although there is a focus on these, the real factor to consider is the effective corporate income tax rate. In some countries the rates can be higher, but there can be more generous reliefs or some of the income can be exempt from tax. It is important to understand what the potential tax exposures are and working with a tax professional is vital to ensure you’re not caught off guard by unexpected liabilities in your new market.
Additionally, double taxation treaties can help prevent paying taxes twice on the same income, but that tax rate you pay can be higher than in the UK. The UK has over 130 such treaties, so depending on where you expand, this could help reduce your overall tax burden.
Steps to successful international expansion
1. Conduct market research
The first step in international expansion is thorough research. Understand the market dynamics of the country you want to expand into. Identify the demand for your products or services, the competition and the regulatory environment. It’s important to know if there’s enough potential for growth to justify the costs of expanding.
Many free or low-cost tools are available, such as the UK’s Export Academy, which offers support for SMEs looking to expand abroad. Resources like these can provide invaluable insights into your target region’s market trends, consumer behaviour and industry standards.
2. Build local partnerships
Having the right partners in place can make a huge difference when entering a foreign market. Local partners can help you navigate legal requirements, customs regulations and other challenges that might not be apparent to someone unfamiliar with the local market.
For instance, working with a local distributor or an agent who understands the local retail landscape can save you time and money. Similarly, hiring local talent or setting up a local advisory team could give you the cultural insights needed to effectively tailor your products and services.
3. Adapt your product and marketing strategy
Successful international expansion often requires product and service adaptation. Your current offerings may need adjustments to align with local consumer preferences, and your marketing strategy may also need to shift to resonate with the local audience.
Take the time to understand cultural nuances, and consider adjusting everything from packaging design to marketing channels. In certain markets, social media platforms like WeChat or Line may be more popular than Facebook or Instagram, requiring a shift in digital strategy.
4. Financial planning and currency risk management
A sound financial plan is essential when expanding abroad. Consider all costs, from initial market research to the setup of local operations, and prepare for unexpected expenses. Planning for cashflow disruptions is also crucial and common when moving into new markets.
One way to minimise financial risk is to set up multi-currency accounts to manage payments more effectively. Another option is using hedging strategies to protect against currency fluctuations. Working with an accountant experienced in international trade will give you a clearer picture of your financial exposure and the tax implications of operating in multiple countries.
5. Leverage technology
Technology plays a key role in international expansion. Tools like cloud-based accounting software can simplify financial management across borders. Meanwhile, customer relationship management (CRM) systems can help you track and nurture client relationships, regardless of location.
Additionally, eCommerce platforms have made it easier for SMEs to reach global audiences without needing a physical presence in each country. Online sales channels can be cost-effective for testing new markets before committing to larger investments.
Examples of successful SME expansions
BrewDog
Starting as a small craft beer company in Scotland, BrewDog now has a global presence with bars and breweries across the world. One of the keys to their success was their ability to connect with different consumer bases by adapting their marketing approach for each region. Their irreverent, bold style resonated in the US, while their environmentally friendly approach helped them succeed in European markets.
Innocent Drinks
Innocent Drinks started in the UK, but quickly expanded across Europe by maintaining a consistent brand message while tailoring their product offerings to local tastes. They successfully managed the balance between global consistency and local relevance by making subtle changes to their ingredients and marketing based on regional preferences.
Why now is the time to expand
Despite economic uncertainty, international expansion remains a viable growth strategy. Globalisation isn’t going away, and with the rise of digital tools and platforms, it’s never been easier for SMEs to access international markets.
As of 2023, global eCommerce sales are expected to exceed £5tn, providing immense opportunities for UK businesses. At the same time, supply chains are evolving, and businesses that diversify their supplier and customer base across borders are more likely to weather potential disruptions.
By planning properly, managing financial risks and building the right partnerships, SMEs can unlock new opportunities and achieve sustainable growth in foreign markets.
Wrapping up
Expanding internationally is a significant and challenging step for any SME. However, with the right preparation, financial planning and understanding of local markets, it’s possible to succeed. We’ve helped numerous businesses leap international markets, offering guidance on everything from regulatory compliance to managing foreign exchange risk.
Let’s have a conversation about how we can support your business as you enter the global marketplace.