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Welcome to the ‘why’, ‘what’ and ‘how’ of the regulatory challenges that come up in an international expansion. Specific regulations vary from country to country and from industry to industry so I will talk in very general terms about the regulatory environments that you may have to comply with overseas, the kinds of risks you may face, and the potential impact on your business.
I will also show you how to minimise the risks from regulatory issues, so that you avoid unpleasant surprises. Digging into rules and regulations might sound deadly dull, but this is a complex and crucial area for anyone planning to operate a business internationally.
Top mistakes that people make in this space include:
- Insufficient research – they do not verify information and triangulate it with other sources.
- Rely on the black and white – they focus too much on the written laws and regulations and fail to take account of ‘soft’ law, how regulations are enforced, or the prevailing political mood and trends.
- Insufficient monitoring – they fail to keep abreast of changes and the rise of new trends or issues. The way around these mistakes is to:
- Do your homework – consult with as wide a range of people as possible. Test and verify the information and insights you get. This does not have to be expensive or time consuming and can be combined with other activities.
- Appreciate the nuance – Look how regulations are made and enforced, and the agenda behind the regulations.
- Set up an early warning system – Build relationships and goodwill early on.
Understanding the context
Just as with choosing a market, understanding your ideal international client, or creating marketing that works overseas, understanding the context is important when it comes to regulatory frameworks. The goal is to get as much knowledge as you can, in the shortest amount of time and for the least cost. You can do this by talking to people. It does not have to be an expensive activity, as many of them are people you would be talking to anyway. It is about getting behind the news headlines and really understanding what is going on in your sector and the wider context.
As you start going global, you will probably engage a local, in-country, lawyer or accountant to help you. These are fantastic people to tap for information and, if they are worth their salt, they should be happy to talk through what they think about the local political situation and how things are developing in the regulatory environment.
Other good sources of local information could be your embassy in the country you are trying to enter. Commercial teams at embassies are often good to talk to, because they have been doing business in the country a long time and know how things develop, know how things work and how decisions are made.
In terms of where to look to get this information, the following places should be initial ports of call:
- Publicly available information including press, media and social media
- Local lawyer
- Embassy
- Chambers of commerce
- Trade associations
- Business networking organisations
One of the first steps is to map out who your stakeholders are. You can do this under three headings:
Who influences or regulates the environment?
- What minister or ministries are responsible for regulating your area in the new market? It may be more than one if your product or your service crosses boundaries and does not fit neatly into one box.
- Is there a federal system in the state government or the municipal government in the city where you are going to be operating? Will you need to comply with more than one tier of regulation?
- Within the ministry or ministries, who are the key officials or key departments that you will need to deal with?
- If there is an independent regulator, who are they?
Who shapes or shares your success?
The second set of stakeholders are those who shape or share your success.
As I already mentioned, your local lawyer or accountant, your partners, suppliers and staff – those who benefit from your success – are all good sources of information and insight into what is happening.
Who are the communicators?
Understanding the context
Another area to investigate is how regulations are made and what the process is. Is it transparent and open? Are you able – either individually or through a business group or network – to influence the regulations or put your point of view across about what reforms or changes are needed?
You also need to understand how regulations are enforced, who is responsible for enforcing them, whether enforcement is strict and how independent the regulator is.
Triangulate your information
Understanding the regulatory environment is about doing proper detective work and it is a good idea to cross-check your information. Do not just rely on one or two sources or seemingly reliable pieces of information, try and broaden this out so that you can triangulate information and understand the broader agenda of the regulator or relevant government department. Government officials have particular agendas which are wider than your business area, and you should compare what you hear from government sources with what the embassy says, what the chamber of commerce says, what you read in the press, and what you pick up at business networking events.
Do not make the mistake of becoming too reliant on the same few trusted people, as it can lead you to putting less emphasis on some of the downside risks, or blind you to things coming out of left field.
- What ministry or other government agencies regulate your sector?
- Is there an independent regulator?
- How competent is the regulator?
- Are the regulations clear?
- When was the last update?
- What is the process for changing regulations?
- To what extent will you be able to influence implementation or changes?
- What are the trends in your sector?
Your product
- What standards does it have to meet?
- What licences are required?
- Does it comply with health and safety laws?
- What are the packaging requirements?
- Is there anything about how it interacts with the local language which will not work?
- Are there country-specific transport and storage requirements?
Several years ago, I worked with a small Australian company that sold designer homewares wholesale to retailers in the United States. Its key channel into international markets was a long-standing, stable relationship with a major American retailer.
The company was on the cusp of expanding its operations to Japan when it was sued under California’s Proposition 65, also called the Safe Drinking Water and Toxic Enforcement Act. The law – which is intended to help Californians make informed decisions about protecting themselves from chemicals that could cause cancer, birth defects, or other reproductive harm – requires companies to include warning labels on products that contain even trace amounts of the chemicals or substances on the Proposition 65 List.
My client had been completely unaware of Proposition 65 and none of its products sold in California carried the appropriate warning label. Shortly after the lawsuit popped up, the major retailer dropped the company as a supplier, dramatically reducing cash flow and throwing all areas of the business into disarray. Although the company held on by a thread and kept trading, its international plans were permanently shelved.
As that company’s experience illustrates, it is vitally important that you familiarise yourself with compliance obligations relating to your product, and that you fulfil them!
Establishing a presence
Not everyone will need to set up a presence in-market right away, but when you do, here are some of the regulatory considerations you will need to take into account.
- How do we register a company and what form should it take?
- Do we need a partner?
- What name and logos can we use?
- Can foreigners own land?
- Will the banking system work the way we want it to?
Not so long ago, I worked with a company to set up offshore operations and banking in a Pacific jurisdiction. It was the company’s first real foray into international markets and they had not thought carefully through what banking facilities they needed, and which ones were merely nice to have. They were frustrated to discover that the only bank in the jurisdiction which would accept them as a client had far less sophisticated facilities than they were accustomed to at home.
Hiring and firing
When you start up in a new market, you may not have any staff. However, as you grow, you may need a team on the ground, whether these are sales representatives, consultants, office or warehouse managers. Here are some questions to ask yourself:
- What are the regulations concerning employing staff e.g. need to provide minimum conditions?
- What is the minimum wage?
- Are there compulsory pension, health or other costs?
- Are there any workforce localisation policies?
- What are the regulations for work permits for expatriates?
- How easy is it to fire staff?
In Indonesia, for example, hiring expatriate workers is difficult. Government policy requires that domestic or foreign companies operating in Indonesia should not hire an expatriate to do a job that can be carried out by an Indonesian.
For the Indonesian government to accept a company’s application for the employment of an expatriate, the employing company must:
- Justify why the position needs to be filled by an expatriate
- Demonstrate that the expat has the proper educational background
- Respond to the questions of the Ministry of Manpower at an interview
- Show that there is an open slot in the company’s manpower plan, previously approved by the Ministry of Manpower.
If these requirements (and others) are satisfied, then the expatriate can be issued a work permit. After the work permit is approved, the company can apply for a semi-resident visa for the new employee.
Employers of expatriates are required to implement training programs for Indonesian employees and it is necessary for foreign companies to have an Indonesian national employed as a counterpart to every expatriate employee.
In addition to the applications and bureaucratic hassles of hiring foreigners, the Ministry of Manpower imposes a tax of $1200 on every foreign employee hired. The tax is applied to training programs to upskill Indonesians.
Indonesia’s strict labour laws, which make termination of employees extremely difficult, is another challenge for employers, particularly foreign companies that do not maintain a full human resource capacity in the country.
China is another case in point. Officially, there is no regulation explicitly placing quotas on the number of expats a company can hire. However, local government agencies – often the municipal Human Resources and Social Security Bureau – have the authority to decide on applications for hiring foreign employees. In practice, these agencies have a habit of refusing applications for foreign employees over a certain limit. The guidelines are not published or explicitly revealed through any channels.
Anecdotal evidence from firms on the ground suggests that when assessing whether it is necessary for a company to hire foreigners, and if so, how many, the government considers things like the applicant’s business scope and size, registered capital, and internal structure, as well as the specific position in question. For example, a company with little registered capital wanting to hire a large number of foreigners is likely to see its application refused.
Companies may directly enquire with the relevant authorities, providing details such as their registered capital and target industry, to get an understanding of how many foreigners they will likely be allowed to hire, or engage with a local accountant, lawyer or business consultant, to assist them in sourcing this information.
Operations
- Health and safety regulations
- Customs regulations
- Tax regulations, including value added taxes (VAT, GST, state taxes)
- Local content regulations
- The need to comply with an inspection regime
At times, these regulations can seem quirky. In the UAE, for example, livestock are inspected upon arrival. Agricultural pesticides may only be imported by a registered importer holding a valid import licence, and imports of pharmaceutical products are subject to specific transport regulations.
In India, live animals, plants, and parts of plants must come with health certificates issued by an approved authority in the country of origin. Plants can only be imported through ports where fumigation and inspection facilities are available and fruit, vegetables and all foodstuffs must be inspected on arrival. Food quality and purity are subject to strict national and state regulations. These also cover the use of preservatives, colouring matter, artificial sweeteners, and containers and their marking and labelling.
