The global economy is a world of new opportunities, but it's also a confusing place. How confusing? We surveyed members of our reader panel, the Inner Circle, and past Inc. 500 honorees. Entrepreneurs at 449 companies revealed their biggest concerns about doing business abroad. Here, we address the six that were mentioned most frequently.
Labor laws vary from country to country, but for the most part, you'll find that regulations are far stricter overseas. In the United States, employers enjoy considerable flexibility in hiring and firing. But in the European Union and much of South America, organized labor is much stronger and employers are legally obligated to consult with employee representatives, often a union or works council, before relocating an office, conducting layoffs, or even discontinuing a product line, says Aaron Schindel, a lawyer in the New York City office of the firm Proskauer Rose. Worker benefits also are more extensive, with many countries mandating that employers provide a month of paid vacation and mandatory bonuses, such as the Mexican aguinaldo--roughly equal to three weeks' wages paid right before Christmas. Severance for fired workers also tends to be far more generous. To take one extreme example, employers in Sierra Leone are required to pay displaced workers up to six years' annual salary. The lesson here is that the math that seems to make offshoring attractive often is incomplete. Hourly labor costs may be relatively low. "But other costs of exit can bring the overall costs right back to where they would be in the United States," says Lance Compa, who teaches labor law at Cornell University.
On the other hand, you'll likely catch a break when it comes to health care. Most countries offer workers universal health insurance funded in part by payroll taxes or employer insurance contributions. The rates can be high, but in many cases foreign payroll taxes cost employers less than rising insurance premiums in the United States.
Ultimately, you should have a patent in every country in which you do business. U.S. patents are not enforceable overseas. And in most foreign countries, you forfeit your intellectual property rights if you publicly disclose an invention or technology without a patent. In other words, the instant you begin talking about your widget--even at an informal sales call or trade show--you expose yourself to the threat of knockoffs and will have no ability to seek restitution. "It's an easy one to miss," says Constance Bagley, a professor at the Harvard Business School. "And once you blow it, you can't recover."
The problem is that few companies want to go to the expense and hassle of filing for an international patent--which runs about $5,000 per country-- before they're certain they've found a viable market. One option is to file with the Patent Cooperation Treaty under the United Nations World Intellectual Property Organization, says John Lanza, an attorney at the Boston office of the firm Choate Hall & Stewart. A PCT filing, which costs between $3,000 and $6,000, can preserve your right to patent your product in most major nations for up to 30 months. That will allow you to explore multiple markets before shelling out for foreign patents and to seek recourse if your product is knocked off in the meantime.
The boogeyman of IP theft, of course, is one of the world's most attractive new markets-- China. One way to protect yourself there, according to Ted C. Fishman, the author of China Inc., is via a licensing agreement with a Chinese business partner that requires a healthy upfront payment to you. You can also negotiate for the right to adopt any improvement made in China on your technology or process. These concessions can help make up the revenue you expect to lose to knockoffs. It's not exactly justice, but it's something.
The global supply chain is hardly frictionless. Moving goods across borders means dealing with customs regulations, post-9/11 security delays, and congested airports and seaports. Unless you can fit all of your imports into a couple of suitcases, you'll need to hire a freight forwarder. Forwarders handle all of the headaches of moving goods across borders. They know how to get stuff through customs quickly and will maintain records to facilitate tariff payments. What's more, by aggregating freight from multiple clients, they're usually able to negotiate attractive rates with shippers. Many forwarders offer niche services, specializing in geographic routes or specific industries. If you're new to global trade and lack an established distribution infrastructure, you might consider UPS (NYSE:UPS) or FedEx (NYSE:FDX), both of which have divisions to handle international logistics for business customers. They're adept at moving goods directly from your factory in Ningbo, for example, to your client's doorstep in Boise, saving you the cost of warehousing goods and the hassle of working with additional vendors for ground transport.
If possible, get customers to pay in dollars. If they insist on using local currency, you probably won't have any problems, provided the transaction is small and your margin on the deal is healthy. But accepting foreign currency can be dangerous with bigger deals. "Currencies can move 5 to 10 percent over the course of a couple months," says Robert Gotelli, head of North American FX Sales at Bank of America (NYSE:BAC). If your margins can't withstand that kind of drop, check in with your bank's foreign exchange desk. The people there will look at your situation and suggest tools to minimize your risk, such as a forward contract, which locks in a price at which you'll convert the foreign currency to dollars at a specified time, or an option, which grants the opportunity to convert the funds but does not require that you do so. Options are preferable when you're uncertain about the exact size or timing of a deal. On the other hand, banks charge a premium for options.
Another way to deal with foreign money is to forget about converting it into dollars and instead spend it in the country of origin--say, to buy parts or fund local operations. Rob Monster is founder of Global Market Insite, a Mercer Island, Washington-based market research software firm with customers in more than 60 countries. The company bills and collects in dollars, except in Europe, the Middle East, and Asia, where it keeps local bank accounts. "We have the ability to collect and spend in those foreign currencies," Monster says. "So to some extent we are hedged because we are able to reinvest the currencies."
Absolutely. Many countries roll out the red carpet for foreign entrepreneurs, even as they wrap local business owners in red tape. Governments often will provide American companies with resources such as one-stop shops for business registration, access to special pools of tax-funded R&D money, and physical real estate in regulation-light "special economic zones" designed to attract foreign investment. With offices in 80 countries, the U.S. Commercial Service can help you identify nations that are particularly eager to do business with Americans. For $680 to $800 per day, the Commercial Service's Gold Key program can set up appointments with potential overseas partners and provide translators. If you do take advantage of foreign tax incentives, hire a lawyer or accountant in-country to keep an eye on changes in the tax code. Also, make sure there are no currency exchange restrictions that would affect your ability to repatriate earnings.
Bribery is against U.S. law, even if it's committed overseas. There are exceptions for certain gifts and so-called "grease" payments when they are permitted by local law. But the regulations are murky at best, and the Feds have been cracking down on violators in recent years under the Foreign Corrupt Practices Act. In 2005, for example, Titan, a San Diego telecommunications firm, paid a record combined penalty of $28.5 million to the Department of Justice and the SEC for bribing officials in the west African nation of Benin. (Some of the illicit funds allegedly went toward buying a pair of $1,850 earrings for the president's wife.)
Finding a trustworthy local partner can provide you with some insulation from corruption. That's the strategy Michael Torreano used to open a restaurant in Dushanbe, the capital of Tajikistan. Torreano's partner meets with officials and makes sure fees and paperwork are processed in a timely manner. Torreano advises entrepreneurs to meet bureaucratic obligations well before the stated deadline. Corrupt officials will sometimes target for a shakedown those who are slow to file paperwork, he says. Finally, remember that there's always the chance that a person you bribe can't or won't deliver the promised help.