Risks companies face when expanding into the international market

The numbers speak for themselves. Three out of four medium-sized companies in France operate outside their domestic market, compared with just over one in ten SMEs.

They have over 12,000 subsidiaries abroad, accounting for a third of all French foreign subsidiaries. Almost a third of medium-sized companies have set up branches outside France, generating 20% of their total revenue, which is slightly below the 26% contributed by the overseas subsidiaries of major corporations, but twice that of SMEs, according to the Institut Montaigne. And although French medium-sized companies already enjoy a significant footprint outside their domestic market, nearly 40% intend to further expand their foreign operations. However, opening a subsidiary far from home could be treacherous, which is why it is important to calmly consider the matter from all different angles and weigh the risks.

Many medium-sized companies think the constraints they face in France will disappear when operating abroad and that they will be welcomed with open arms in the new market.

Vincent Astié, International Division and Corporate Manager at MMA, believes “many businesses are just too optimistic when they enter a foreign market. They don’t always follow the necessary steps like they would in France. But playing fast and loose this way could be a very risky game. It is important not to fall foul to naivety.” Companies must consider a wide range of risks before setting out to conquer new markets.

Property damage and business interruption

The business does not change once it has crossed over the border. “A medium-sized company needs to be sure their property enjoys the same level of insurance, in France and beyond,” explains Alain Carronnier, International Underwriting Coordination at MMA. A company’s premises and property must be protected wherever they are. Buildings and their content, as well as company inventories, can sustain damage or be destroyed in any country. It is therefore essential to cover this potential property damage along with and subsequent business interruption so as to avoid jeopardising the company’s long-term future.

Regulatory risk

You need to be aware that regulatory requirements differ from one country to another and sometimes even from one region to another. Each country, even within the European Economic Area, enforces its own regulation, in particular with respect to tax. Medium-sized companies therefore need to study local legislation to understand their rights and responsibilities to avoid facing any sanctions. Yet this is not an easy task, and it even tends to become increasingly complex over time.You need to be aware that regulatory requirements differ from one country to another and sometimes even from one region to another. Each country, even within the European Economic Area, enforces its own regulation, in particular with respect to tax. Medium-sized companies therefore need to study local legislation to understand their rights and responsibilities to avoid facing any sanctions. Yet this is not an easy task, and it even tends to become increasingly complex over time.

As protectionism grows in popularity around the world, some countries put in place ever more constraints for industrial companies wishing to start operating in their market, in particular by imposing new taxes. For example, all transactions made in dollars must go through the US Treasury, even if they do not involve any company based in the US. If a party breaches US regulations, which change daily, they may be fined up to 10% of the revenue declared by the holding company.

Political risk

In some countries, the authorities can confiscate your property or demand the termination of a contract without necessarily having any valid justification. Medium-sized companies must take this risk into consideration when they decide to enter into a market. They must also understand that international sanctions can be taken against certain countries or individuals.

For example, a company would find themselves in breach of international law if they develop business ties with a group that has a person sitting on its board of directors on whom sanctions have been imposed. As such, they expose themselves to financial and administrative penalties, and sometimes even criminal convictions. Medium-sized companies often have limited understanding of international rules, even though the consequences they risk are considerable and can leave a lasting impact. They must therefore be warned and informed of such risks.

Climate risk

Medium-sized companies must analyse a country’s risk exposure to natural disasters such as storms, flooding, drought, fire and earthquakes before they decide to set up operations there. Climate change and the increasing frequency of environmental catastrophes all over the world mean it is now more important than ever to take account of these risks.

Last year, many extreme weather events caused over €920 million in damage, seven of which accumulated total expenses of nearly €10 billion. Flooding in the US Midwest and South, along with wildfires in California, cost nearly €35 million alone, affecting operations for thousands of businesses in the process. Insurance providers are expecting to see expenses incurred through climate change related claims double by 2040. Such statistics give food for thought when considering where to set up your future subsidiary outside France...