Navigating the Risks of International Business Expansion

Expanding your business internationally offers an incredible opportunity to grow your business on a global scale, with the promise of a wide range of benefits such as accessing new markets, diversifying revenue streams, and elevating your brand to international acclaim.

While the potential rewards are promising, it is important to recognize that the path to global success is not free from challenges. At Wise, we're here to assist you in understanding the opportunities and rewards that lie ahead, while also providing the guidance necessary to manage risks.

Market Research and Strategy

Before exploring the risks and challenges associated with expanding your business internationally, let's discuss one of the most critical steps in this journey: comprehensive market research and strategy. Without it, you might find navigating international expansion really difficult.

Thorough market research is not just a formality; it's a necessity. It helps you as a business owner to understand local market dynamics, customer preferences, cultural differences, buying behaviours and pricing strategies. By fully comprehending these factors, you can adapt your product or service to cater to the unique tastes and needs of your target audience.

In addition, inadequate strategy can lead to poor market fit and low demand for your offerings, while misunderstanding local dynamics can result in costly mistakes. Having a fully fleshed out market research strategy is key to managing the risks of expanding internationally. If you're wondering how to get started with a market entry strategy, check out our comprehensive guide on the link below.

Market Entry strategy

Cultural and Communication Risks

One of the challenges of international business expansion are cultural and communication challenges that could lead to misunderstandings and miscommunications, potentially risking the loss of employees, partners, or customers. Building strong relationships with local partners and customers is crucial to overcoming these obstacles. It's essential to approach cultural differences with respect and an open mindset, learning about local customs, traditions, and business etiquette. Effective cross-cultural communication involves not only language proficiency but also an understanding of non-verbal cues, communication styles, and social norms.

To illustrate, Company ABC expanded their marketing consultancy agency from the UK to Singapore. By hiring Mandarin, Malay, and Tamil-proficient local talent, they were able to customise their services for the Singaporean market. Through thorough research into local customs and cultural norms, Company ABC recognized the importance of punctuality in Singapore. They discovered that formal meetings typically begin with a handshake and a slight bow of the head is seen as a courteous gesture. Additionally, Singaporean business culture follows a hierarchical structure where addressing individuals by their title or honorific is expected. These factors proved beneficial for the company's networking efforts and engagement with local business associations as they were able to build relationships and connect with potential clients.

Workforce differences

Managing a culturally diverse workforce while expanding internationally can be a complex task. Adapting to varying employment practices and regulations often requires extensive human resources efforts. To navigate these complexities effectively, it's essential to prioritise diversity and inclusion in your workplace, fostering a culture that values and respects employees' diverse backgrounds.

Partnering with local HR experts or legal advisors can be invaluable in ensuring compliance with local employment laws and regulations. Maintaining open lines of communication with your international workforce is critical. Regularly seek feedback from employees to understand their unique needs and concerns, and be prepared to adapt HR policies and practises accordingly.

For example, here at Wise, our team is truly international, and we take great pride in our diversity. We have 125 different nationalities represented at Wise, with nearly half of our team members working in a country that’s different from their nationality! Our Employee Resource Groups are voluntary, employee-led groups which promote an inclusive environment and a sense of belonging in the workplace.

Diversity and Inclusion

Financial Considerations

Financial risks, such as currency exchange rate fluctuations, are a major concern when expanding internationally. These fluctuations can significantly impact your revenue and profitability, adding a layer of unpredictability to your financial operations. To manage your financial resources effectively, consider diversifying your currency holdings, and maintain a robust financial cushion to absorb potential losses.

Additionally, risk mitigation strategies, such as currency hedging or insurance, can provide a safety net against adverse currency movements. With your Wise account, you can manage and control your international business payments by setting auto-conversion at the rate that suits you best. Find out more about how auto-conversions can help your business grow internationally.

When it comes to international business expansion, managing your finances is crucial. Wise offers a comprehensive solution tailored to the needs of an international business. With no monthly subscription for its international business account, Wise Business enables businesses to hold 40+ currencies, send payments to 160+ countries, and access local account details in 9+ currencies, including GBP, EUR, USD, and AUD.

Explore Wise Business account

Depending on how your business operates, expanding abroad could also require substantial financial resources, which could strain your business finances. If you're setting up a new office and need financing to fund it, accessing capital in foreign markets may be challenging, and securing financing could come with high interest rates.

In addition, careful financial planning and prudent risk management are key to maintaining your business's financial stability and success during international expansion.

Foreign Exchange Risk

Legal and Regulatory Risks

International business expansion comes with a set of legal and regulatory risks that demand careful consideration. These challenges can vary significantly from one country to another, making it essential to conduct thorough research and seek professional guidance.

One prominent risk is the complexity of foreign laws, regulations, and trade restrictions. Compliance can be a daunting task, with legal frameworks differing widely between countries. Small businesses may face difficulties in navigating these unfamiliar legal landscapes, potentially leading to legal disputes and financial penalties.

To address this risk, it is advisable to engage with legal experts or advisors who specialise in international business law. These professionals can provide crucial insights into the specific legal requirements of the target market and help the business establish a strong legal foundation for operations abroad.

Intellectual property protection is another critical concern, as standards and enforcement can vary considerably. Intellectual property covers things that are not physical, but still valuable and can be owned.

There are several main types:

1. Copyright: This protects original creations like books, music, art, and movies. It gives the creator the right to control and use their work, so others can't copy or use it without permission.
2. Trademark: A trademark is something unique that identifies a brand or company, like a logo or slogan. It helps people recognize and trust certain products or services.
3. Patent: Patents protect new inventions, like cool gadgets or technologies. They give inventors exclusive rights for a while, so others can't steal or use their invention without permission.
4. Trade Secret: This is confidential information that gives a business an advantage, like secret recipes or customer lists. It's protected by keeping it a secret from everyone else.
5. Industrial Design: This protects the way a product looks, like its shape or design. This is important for things like furniture or packaging, where how it looks is part of what makes it special.
6. Geographic Indications: This is about special products that come from specific places and have specific qualities because of that. Think of Champagne or Darjeeling tea. These names protect the reputation and quality of those products. Knowing about these different types of intellectual property helps people and businesses keep their ideas, creations, and brands safe. It encourages creativity and innovation while giving legal protection against unauthorised use or copying.

Failure to adequately protect intellectual property can result in costly infringements and a loss of market advantage. Small businesses can mitigate this risk by consulting experts in intellectual property law and proactively securing patents, trademarks, and copyrights in the target market.

Logistics and Supply Chain Disruptions

Logistics and supply chain disruptions are significant concerns when expanding an e-commerce business internationally. Issues related to shipping, customs, and supply chain management can disrupt your operations and have a domino effect on your entire business. Delays, increased costs, or loss of goods are just a few of the potential consequences which can then link to the impact on customers.

To mitigate these risks, it's essential to have a robust logistics and supply chain strategy in place. This strategy includes identifying reliable international shipping partners, understanding local customs regulations, and optimising your supply chain for international operations. Building redundancy into your supply chain can also help cushion the impact of disruptions.

Imagine a company that manufactures smartphones. They rely on a single supplier for a critical component, such as the display screens. If this supplier experiences a disruption, such as a natural disaster or production issues, it could significantly impact the smartphone production and availability.

To mitigate this risk, the company decides to build redundancy into their supply chain. They identify and onboard a secondary supplier who can provide the same quality display screens. By having two suppliers, the company ensures that even if one supplier faces a disruption, they can still continue manufacturing smartphones using the alternative supplier.In this scenario, building redundancy means having a backup option in place to cushion the impact of disruptions. By diversifying their supply chain, the company reduces their vulnerability to single points of failure, ensuring a smoother and more resilient operation.

Learn about Third-party logistics warehousing

Political and Economic Instability

Political instability, changes in government policies, and economic fluctuations are pivotal factors that can significantly impact the business environment in your target country during international expansion. These variables introduce uncertainty and risk, which can pose considerable challenges to your expansion plans.

To navigate these issues, it's crucial to stay well-informed, closely monitoring political developments, government policies, and economic indicators that may influence your business. Engaging with local experts or consultants who possess a deep understanding of the local political and economic environment can be instrumental in helping you anticipate and respond to potential changes.

Moreover, maintaining financial flexibility by building contingencies into your budget and financial planning can help your business better weather economic fluctuations or sudden policy shifts.

Diversifying your operations and avoiding overreliance on a single market can also help mitigate risks associated with political instability or policy changes.

Explore Wise Business

Take your business to new places with Wise Business:

• No monthly subscription international business account
• Multi-currency support: hold 40+ currencies, send payments to 160+ countries, and get local account details for 9+ currencies including GBP, EUR, USD, AUD.
• Low cost currency exchange: mid-market exchange rate with transparent fees
• Batch payments: pay up to 1,000 recipients at a time in multiple currencies with one spreadsheet
• Multi-user access: manage user permissions and choose from any of the 5 roles to manage what your team members can view, access, and manage
• Business debit expense cards for you and your team: up to three digital cards per team member, and set spending limits according to your business needs
• Accounting integration: connect with Xero, QuickBooks, FreeAgent and more.