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U.S. Business Expansion Overseas: Opportunity and Surprise

U.S. companies accustomed to markets and business principals at home should be aware of significant differences that exist overseas with regard to labor laws, facility acquisition or lease, and more.

Summer 2012
Working overseas is a lesson in everything one takes for granted - not just facts, but emphasis. American markets may seem very different from each other, but compared to global site selection options, they are nearly identical. We are often unaware that we extrapolate only slightly from a narrow band of assumptions when selecting locations for expansion or retention of our businesses. Those accustomed to local or national markets may be surprised by the very significant differences in basic business principles and assumptions.

In 2000, Peruvian economist Hernando de Soto described the defining elements of strong capitalist economies. Mechanisms here are not built to protect property, but to protect transactions. Where a South American country might require multiple certifications of ownership and eligibility before a transaction can occur, American protections focus on the exchange of title and compensation.

This affects the environment for commerce, and the timeline. Transactions follow detailed protocols for serving notice, involving paid bailiffs, detailed calendars, and zero tolerance for failure. Acknowledgement of an e-mail saying, "We won't be renewing," may well be followed by, "You didn't serve notice - so your lease is extended." The number of steps and parties involved in executing a plan can be far higher than expected.

For this article, we convened four people and four perspectives. From the United States, Noah Shlaes and Bob Hess provided insight into the experience of American corporations as they look beyond their borders. Dan Robinson and Duncan Hamilton, our "embedded agents" in London, offer a view from the other end of the transaction. From these perspectives, we've assembled an interesting catalog of what can go wrong and right.

Labor, Labor, Labor
Many elements drive the evaluation of a location: commute patterns, building amenities, space configuration, availability and level of change in a labor pool, etc. In a U.S.-based selection, all are components of a sound choice. But overseas, and especially in Europe, they leave the realm of choice, and can take on the force of law, or something like it. Specifically, such business changes as displacements, expansions, and shifts in local labor markets are negotiated with "workers councils" - quasi-governmental bodies that are part planning board and part labor union. These councils concern themselves with what the experience will mean for employees in place. They emphasize existing jobs and existing employees, and the changes facing them.

So "moving a dot on a map" from a fixed workplace (like an established office or factory) to a work-from-home situation can have significant implications. For example, moving a job from the central business district to outside of an arbitrarily defined line can change several aspects that all affect the evaluation of the choice.

  • Recognition of revenue - In Munich, for example, moving outside city lines can reduce tax impact, as a result of moving economic activity outside the bounds of the taxing body.

  • Commute time - If you move too far, labor councils will not approve the commute time change occasioned by the strategy. In the UK, for instance, moves of more than 19 miles may trigger requirements for redundant positions and individual consultation.

  • Lead time - In the Netherlands, certain defined periods must elapse between notification of a move.

At the heart of this is a focus on workers' rights and preservation of existing employment. Thus, timelines, incentives, and change management techniques are quite different when working overseas.

In emerging markets, the pace of change can bring its own challenges. Rapidly rising wage rates in Asia can create high turnover in middle management, as strong leaders move to new opportunities. Rising quality of life also changes the reason companies move overseas; though drawn by low-cost labor, they stay because of new, expanding markets.

Getting Control of the Site

Accepted mechanisms such as leases may be less flexible and more standardized than U.S. companies expect.

  • Lease term - In France, for example, nine-year lease terms are defined by statute, with exit points at years three and six, and renewal at year nine, favoring the tenant.

  • Payment period - In many places, rent is paid quarterly, instead of monthly.

  • Termination rights - In the UK, the Landlord and Tenant Act preserves tenant rights to remain in space, and requires landlords to justify non-renewal. Mere lease expiration does not permit a landlord to replace a tenant.

  • Physical condition - In Europe, office space is typically delivered raw, without finishes. The phrase "tenant improvements" comes closer to being accurate in Europe than in the United States, because the cost of these physical changes is borne by the tenant. Rent is seldom if ever used to offset this cost, and the tenant is obligated in most cases to return the space to the lessor in the physical condition in which it was provided.

The upshot of all of this is that space is less liquid, and retention tends to be longer than is expected by most American companies.

Supply Constraints
It's easy to forget just how much land is available here at home. In Bulgaria, the phrase "developable land" had no particular meaning, because "land" referred exclusively to farms. When "land" was zoned to build anything more complex than a barn, government agencies became involved in the construction of those improvements. One could not buy land for development, speculative or otherwise.

Zoning and permitting can be excruciatingly specific. One cannot assume homogeneity of permitted uses, even within a single structure. One corporate client, which had operated an open plan "business center" on a floor of a modern building, intended to expand on an adjacent floor and signed a lease. When ready to begin construction, the company learned that this floor had permits only for private offices, and was not eligible for open plan construction. Obtaining appropriate permissions and certificates of occupancy added 90-120 days to the timeline.

This pattern exists elsewhere and creates a near-absence of speculative development, at least on the part of developers. Speculation can take the form of central planning, especially in China and India. These constraints mean several things:

  • 1. Supply is limited, with almost no speculative component;

  • 2. Rents are much higher than they are stateside, and;

  • 3. Utilization is also far higher, and is more closely managed.

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