In today’s interconnected world, small businesses have unprecedented access to fast growing global markets. From opening up new revenue streams and sources of supply to reducing operational and tax costs, expanding into international markets has never been easier and can offer significant benefits.
One of the most significant benefits of accessing new foreign markets is the potential for increased revenue. By expanding sales or services into a new country, small businesses can tap into new sources of demand. Depending on the company’s product or service, entering a new market can mean tapping into hundreds, thousands, or even millions of new potential customers.
Reduced sales volatility
People across the globe are linked more and more in the current digital age. However, this has not erased the differences persisting from country to country and region to region in terms of economic cycles, key industries, available resources, consumer needs, consumer spending, and even climate. By diversifying sales and services strategically across multiple markets with varied economic, businesses and consumer profiles, a U.S. company protects itself from the sales volatility of operating in a single market. Reduction of order volatility has the added benefit of helping to maximize capacity utilization and profits across any given period.
Economies of scale
Access to global markets can help small businesses achieve economies of scale. With a larger customer base, small businesses can increase their production and lower their unit costs. This can lead to improved profit margins and a more competitive pricing strategy.
Access to global resources
By expanding into international markets, small businesses gain access not only to a wider range of customers, but also to a potentially broad array of suppliers, technologies, and talent. This can help to improve operations, reduce costs, and permit businesses to become more competitive. For example, a small business that sources its materials from a single supplier in one country may be vulnerable to price fluctuations or supply chain disruptions. However, by accessing wider markets, small businesses can more easily identify alternative suppliers that can reduce their dependence on any one supplier.
Accessing global markets can also provide small businesses with new financing opportunities. By operating in multiple markets, small businesses can attract investors from around the world, increasing their access to capital. By partnering with other businesses in different markets, small businesses can form strategic partnerships to gain and share access to new customers, technologies, and capital, which supports the growth of their business.
Lower tax costs
U.S. tax law provides generous tax incentives for U.S. companies that export goods or services to other countries, or that license to foreign markets. Income related to such export activity can qualify for a tax rate reduction a third lower than the normal rate. This significant rate reduction leads to an overall reduction in the cost of doing business and can help small companies compete more effectively in foreign and U.S. markets.
U.S. tax treaties with other countries generally contain provisions to ensure that a U.S. company’s sales to foreign markets will not be subject to foreign taxes if it carries out sales transactions without a business presence in the destination country. U.S. companies that export goods or services can typically qualify if they avoid creating a business presence in the destination country.
Increased brand and enterprise value
A product or service that is recognized and purchased by consumers in multiple countries or regions results in a more valuable brand. The increase in revenue and reduction of costs afforded by international expansion results in increased enterprise value. If business owners have plans to sell their company one day, expansion into foreign markets is an easy way to increase the value of their business.
Reduced revenue risk via diversification of markets
Additionally, access to global markets can provide small businesses with opportunities to enter new industries or markets, reducing their dependence on a single product or service.
Exposure to new markets can help small businesses gain valuable insights about their product and service lines and how to effectively operate by leveraging the global economy.
Fortunately, expanding into foreign markets doesn’t necessarily require setting up a presence in a foreign country. Many small businesses tap foreign markets by simply exporting from their home country which is fast entry and low risk. Depending on the business, sales in foreign markets can be achieved via direct sales from the domestic business entity either through an online website direct to customers or via sales to local country distributors or retailers. Under the export scenario, warehousing and delivery of goods to foreign customers can also be handled by low-cost, third-party fulfillment centers so that business owners can focus on their product or service.
Another fast and low-risk avenue for reaching foreign customers is to utilize licensing or franchising arrangements with selected businesses in foreign countries. Under this arrangement, the task of serving customers in foreign markets is assigned to the foreign country licensing partner that will handle production and delivery of products and services.
If a company happens to require someone in the foreign country to handle any matters, it should be possible to hire contractors rather than having to set up local employees.
We’re here to help
Whether you start by exporting goods and services from the U.S. or you’re ready to set up operations in a foreign country, we can help you develop an ownership structure and supply chain that will ensure maximum tax efficiency while maintaining alignment with your goals and objectives.
While expanding into global markets can offer significant benefits for small businesses, there are also challenges that must be considered. From regulatory hurdles and compliance issues to cultural differences and a fluctuating global market, small businesses must navigate a complex landscape to succeed in international markets.
Our new service line Mowery & Schoenfeld International is committed to empowering our clients’ transformative, international growth with a keen understanding of foreign tax regulations and cross-border transactions. Contact us today if you want to learn more about the benefits and risks of international business practices.