Who Runs the Show?

Thinking of running a business abroad? If you
employ local people, you’re naturally the boss.
But the local government regulates your
operations. So who runs the show?

WHEN I WAS A YOUNG, ONLY CHILD, and my father told me to do something, we would always have this exchange:

Me: Why do I have to do that?

Dad: Because I’m the boss.

Me: Well, then who am I the boss of?

Dad: You’re the boss of the bugs.

It’s sort of a silly little exchange between a father and child, but it reminds me a lot of running a business abroad. As a business’s leader, you play the father role to the local employees, but you also play also the child role to the host-nation’s government.

For the sake of this section, we’ll assume you plan on operating the business you incorporated in your home country, but also now are starting to operate on another country’s soil. Some countries will not allow this because of a desire to protect domestic businesses and prevent the tax losses, but many countries do. There are pros and cons to both, which I’ll talk a bit about later.

Different profiles for businesses in host nations

Here’s the thing about running a business overseas: Countries are as unique and different as can be when it comes to foreign business regulations, work permits, labor laws, governmental involvement in your business, taxes, etc. The best way to learn the ins and outs of who runs the show, as it pertains to you, is to examine the rules of the target country. You may well want to hire a local attorney to help with this.

In general, as long as you’re running your business within the host-nation’s rules and regulations, you are free to run your operation as you see fit. Host countries will typically be more welcoming to companies who come in and hire a lot of local people than to, say, a self-employed graphic designer from Canada who wants to live and work in his Paris apartment, but plans to maintain his Canadian citizenship, pay Canadian income taxes, and not employ any French citizens in his business. The French government may not deny the Canadian graphic designer his work permit, but it would a lot happier if he grew his business, purchased or rented a large office space in Paris, and employed 15 French graphic designers.

As you’ve seen from all the foregoing sections, before you make the decision to open an office, shop or factory or move your entire business overseas, you really need to do your homework on costs, feasibility, local government regulations, taxes, etc. While it may truly be financially beneficial, more companies go bankrupt trying to move their operation overseas than any other reason, mostly due to inadequate planning.

Plan and test

I’m not trying to dissuade you. More than anything, I want you to be happy doing business, wherever you end up. I just don’t want to see you fall into the trap that has swallowed up so many others. When you’re conducting your research on the host nation or area, ensure you do a full market test of the area, just as you would if you were starting a small business if your home town.

It’s harder conducting a market test abroad, especially if the laws differ a lot from your home country’s, and especially if the language is different and you’re not at least conversational. Think about this, too; have you begun paperwork for renting or purchasing the space you will need? What language is it in? Have you had your home country’s attorney look at it? Do you need a local attorney? All the same rules apply for starting or moving your business overseas as if you were moving it to another part of your home country. The only difference is that there are a multitude of variables that can be easily overlooked which can be crippling and/or costly if you find them out too late. And some mistakes can even hurt you back in your home market. For example, Nike suffered significant bad publicity when the working conditions in their overseas factories made the news in the US.

Buying a local business

Because it can be difficult and risky it to start a business from scratch abroad, purchasing an already established local business there may be more likely the way to go… for a few reasons. For starters, the business is already up and running, and may even already have local employees (who you would be smart to keep, at least for the time being). Additionally, there is likely already a clientele in place, local folks who should wander in on Day One, expecting the same service as always.

As in your home country, however, it’s essential to do some research to learn why the business is for sale in the first place. There are firms that specialize in transitioning business owners, and from your home country, they can connect with their folks in or near the country you desire to relocate or expand into, in order to conduct a business evaluation, market test, account audit, etc. This will alleviate a lot of the risk and probably save you time and money down the road. With or without such advisors, take the time to understand every page of documentation you intend to sign, inside and out.

Previously, we discussed the pros and cons to owning a company in a foreign country vs. having to conduct all business through a local intermediary. Consider the automotive industry. In many countries, there are domestic as well as foreign car companies, all competing for customers. Whatever country the car company is incorporated in is the country that collects the income taxes on that company’s revenue, which would be considered a win for that country. However, if a foreign car company comes to a new country, builds a huge car manufacturing plant and employs and pays 5,000 local citizens to work in the plant building cars, then the host country will get to collect the income taxes from the 5,000 local employees. So you can see how I said there were pros and cons to each.

S.G. and M.R.M.