Congratulations, your small business has grown out of its tiny office block and now has enough cash to go multinational! It’s time to expand into other countries and make your brand known worldwide. What are the basic options for a fledgling multinational corporation to spread its wings? If your company meets any of the following five criteria, then your company can be considered a multinational company (MNC).
Branches are the more straightforward way to expand to another country. Simply take some cash, get the pertinent business licenses, hire a localization team, and set up a branch in a foreign country. You obviously want to set up your branch in a busy, international area – for example, if your company is attempting to expand into China, you should set up in cosmopolitan Shanghai, and not the nether regions of Urumqi. You’ll obviously pay more rent and taxes in Shanghai, but you have to make sure your company is highly exposed to other businesses that matter, paving the way to future local partnerships.
If your company is cash-rich, then acquisitions may be a better strategy than establishing branches. Acquiring a local company for the purpose of vertical or horizontal integration is fast and comparatively easy, provided that you plan to leave the original business (branch management, infrastructure) intact. By making the acquired company your subsidiary, you have the advantages of instant localization, name recognition, and an experienced team at the helm. However, do your homework before acquiring a subsidiary, lest your company experience acquisition indigestion.
Perhaps you don’t want to purchase local companies due to the hefty price tag. Maybe a local competitor, which cannot be acquired, is already dominating the market. In this case, the old adage “if you can’t beat ’em, join ’em” comes into play. Establishing a joint venture – or a partnership with a foreign company in the same industry – is an attractive option. Both companies set aside capital, resources, and technology in a new, shared company which is separate from the main operations at both companies. This is a popular option in countries, such as China, where the law is extremely strict with foreign businesses. Joint ventures have all the advantages of foreign acquisitions – such as localization and brand recognition – at a fraction of the cost. Most joint ventures split expenditures and profits 50/50.
Franchises in foreign countries operate similarly to those in the United States. A foreign affiliate will purchase a license from your company to use your brand in a foreign country. While the foreign affiliate retains ownership of your branded business, your company will receive royalties from each franchise. Franchising is the cheapest option, and the fastest way to build an established presence in a foreign country with minimal risk. The higher risks (sales, profitablity) are all absorbed by the foreign affiliate. However, foreign franchises have to be monitored closely, since the geographic and cultural divide can mask brewing problems.
Turnkey projects are more common in businesses requiring precise technological expertise – such as power plants, factories or oil drilling platforms. In this setup, your business sells its technological know-how to a foreign firm, which pays your company to build a modified copy of your plant to their specifications, from scratch to the operational stage. This includes all of your technologies and trade secrets. Once the plant is completed, you hand over the keys to the fully working plant to the foreign firm. All they have to do is “turn the key” to get started. While selling factories is extremely profitable, you also forfeit your own direct expansion plans in the country, due to another firm already holding the license to your technology. This is the trickiest of the five criteria and the one you’re least likely to encounter unless your company specializes in mass production or resource exploration plants focused on developing markets.