From the October Special Report issue of Treasury & Risk magazine

To Boldly Go

Elizabeth Minick, Bank of America Merrill LynchExpanding internationally can be just as challenging for multinational corporations as it is for companies venturing overseas for the first time. By sharing best practices, global banks can play a critical role in helping companies overcome the obstacles and increase the likelihood of a successful outcome.

International expansion is not only a challenge for domestic corporations taking their first steps overseas. Companies which have been operating internationally for years, decades or even centuries often find the process of entering new markets just as challenging as for those expanding internationally for the first time.

 

IN PURSUIT OF GROWTH

As companies continue to focus on bottom line growth, the economic slowdown in more mature economies has prompted growth-minded corporates to look further afield for the next opportunity. As a result, companies with an existing multinational presence are increasingly focusing on markets such as Latin America, Africa, Eastern Europe and parts of Asia, many of which are experiencing much higher economic growth rates than western markets.

Whatever the industry sector, expanding into new countries and regions presents many challenges—even when a company has entered new markets in the past. It can be tempting to assume that strategies, processes and structures that have already been used can be successfully applied in other markets. However, each country and region comes with variations in local market practices and regulations, causing the need for companies to tailor their global expansion approach when entering each new country.

 

KEY CHALLENGES

The challenges faced by companies expanding internationally are numerous and diverse.

What is the optimal bank account structure? Depending on the country in question, the company may need to establish a specific banking structure. This could be different than the structure implemented in other geographies, especially if the target market lacks a mature banking infrastructure.

Some countries and trading partners require companies to work within a particular banking structure due to specific products and services required. Establishing and working with a new structure can be especially challenging when it comes to incorporating the new structure into the company’s existing treasury infrastructure, as the related services may lack the technological infrastructure required of the home office or regional treasury center.

Are there local currency, foreign exchange or regulatory factors to consider? It is important that companies gain a full understanding of the local currency and any challenges that may arise when integrating it into the company’s global liquidity structure. Liquidity management techniques used elsewhere may not be possible in all markets. For example, physical cash pooling is not available in some countries, meaning that companies may consider using alternative liquidity management structures such as interest optimization or notional pooling.

Where the local currency is concerned, treasurers will need to take the time to understand any capital or exchange controls that may exist within the market, as well as any specific documentation that may be required in support of FX transactions. Other considerations include the country’s local payment instruments and receivables practices, languages and culture.

Knowing and understanding diverse and evolving regulatory climates can be another challenging aspect of international expansion. Companies will need to understand and stay abreast of any regulatory developments currently in the pipeline.

Will headquarters be able to achieve full visibility and control? If a company has a global treasury structure in place, it will typically aim to integrate any new countries into its existing structure, which can present a range of challenges due to permitted liquidity movement and accepted banking practices. A key goal is to make sure that whoever has ultimate global responsibility for the company’s cash flows is able to have visibility and control over cash in the new markets. However, local regulations in certain countries may make this difficult to achieve.

Are technology platforms compatible? Most companies aim to use technology consistently across their global structures, but local variations can present further challenges. The company’s existing ERP system may need to be modified in order to send payments and accept information reporting files in a particular format if required by the local banking partner.

 

WORKING TOGETHER

Companies have much to gain if they are able to leverage the expertise and experience of the right global bank. A well established and connected global bank can provide the local knowledge a company needs from the outset.  This collaboration will increase the chances of a successful expansion operation and produce results that live up to expectations.

The right global bank can advise on everything from banking regulations and foreign exchange restrictions to local technology and cash management capabilities. While companies are looking more to their banks for this type of input than in the past, there is always more that companies can do to educate themselves about challenges and opportunities in new markets.

As well as advising companies at a strategic level, banks can also provide practical support throughout the expansion process. Drawing upon previous experiences with clients, banks will be able to share best practice implementation procedures for setting up operations in new markets. When multiple banks are being used, the company’s global bank can be brought in early to help build the cash management structure in an integrated way across the new country or region, while also keeping sight of the  global strategy.

When it comes to global expansion, knowledge is power. Before embarking on an expansion project, companies should gain as much information about the country as possible—including seeking other sources of information—from banks themselves as well as third party advisers. As companies expand overseas they can also improve their knowledge by speaking to other companies which have undertaken similar projects in the past. There are many opportunities to collaborate with peers from different industries—or indeed from within the company’s own industry when appropriate—who can offer insights about best practices and lessons learned. The company’s global bank may be able to facilitate this process by putting the company in touch with other clients who have embarked upon a similar project.

 

BE PREPARED

All too often, companies find that the process of expanding globally is more difficult than they have anticipated, even if they are already operating at an international level. The more knowledge a company can gain at the beginning of the project, the more realistic its expectations will be in terms of the challenges it is likely to face—and the greater the likelihood of a smooth and successful integration. The right global banking partner can provide unparalleled support throughout the process.

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