Expanding Across Borders: A Financial Handbook for Global Growth

In the current post-COVID-19 economic landscape, businesses, regardless of size, are encountering fresh challenges in both domestic and international markets. Volatility, uncertainty, complexity, and ambiguity have become pervasive across many industries, underscoring the importance of business resilience. To navigate this environment effectively, companies must prioritize budgeting, cost savings, and reducing operating leverage. One strategy gaining traction is global expansion, where businesses relocate support functions to lower-cost regions overseas, fortifying their ability to weather future uncertainties.

Based in Tbilisi, Georgia, I operate a financial advisory firm and have served as a fractional CFO for companies in my home country as well as the US, UK, and Europe. Through my work with over 50 foreign entrepreneurs across diverse sectors such as IT and manufacturing, I’ve identified two prominent trends in global expansion: outsourcing supporting operations overseas and establishing branch offices abroad.

Both strategies offer distinct advantages. Outsourcing to overseas contractors or firms provides agility and cost-effectiveness, enabling rapid scalability. Meanwhile, opening a branch abroad facilitates access to global talent at reduced operational expenses compared to headquarters, enhancing organizational flexibility.

Deciding between outsourcing and international expansion is a strategic choice influenced by company-specific factors. This article delves into critical considerations for expanding abroad, helping you make an informed decision aligned with your company’s needs.

Ease of Doing Business: When establishing an offshore branch or subsidiary, selecting a country with a favorable business climate can significantly impact your bottom line. Factors encompassed by the “ease of doing business” include governmental restrictions, property and business rights, and bureaucratic hurdles. Traditionally, these attributes are assessed through the World Bank’s Doing Business report, which evaluates the business environment in 180 economies globally. For instance, the US and Georgia were ranked 6th and 7th, respectively, in the 2020 report, signifying their business-friendly environments with lower rankings indicating greater ease of operation.

As you can see from this breakdown, even though some of the two countries’ overall ratings are similar, a company seeking to expand internationally may prefer to consider Georgia over the United States in many cases, depending on what its priorities are.

However, there are plenty of factors that fall outside the scope of this report, and the following are the ones that, in my experience, matter most when you are considering opening an offshore office.

Starting a Business:

The process of starting a business varies significantly by location, with some countries having lengthy bureaucratic procedures and high costs, while others offer streamlined processes. For instance, countries like New Zealand, Singapore, and Denmark are known for their business-friendly environments where setting up a business is relatively quick and straightforward. In Georgia, for example, once due diligence is completed, registering a business takes just one day at a national registration office, requiring only a signature and a payment of $35.

Logistics and Infrastructure:

Finding a suitable physical location is another crucial aspect. This involves renting or purchasing space, obtaining construction permits, hiring contractors, setting up utilities, and more. Costs and processes for these logistics can vary significantly by region and should be factored into your business planning.

Building Your Team:

Employing the right people is essential for business success, whether establishing your own office abroad or engaging contractors. Understanding employment rules and norms is key:

1. Employment Timelines: Know the duration it takes to employ individuals, particularly those transitioning from other jobs. Notice periods for resignations vary by country; for instance, it’s typically two weeks in the US and longer in some European countries. In Georgia, no formal notice is required for contractors.
2. Layoff Regulations: While layoffs are not desired, it’s important to understand the rules governing them. The time required for layoffs can vary based on employment contracts negotiated between parties. Severance obligations may also apply depending on the country’s laws. Contractors often offer more flexibility compared to full-time employees in many jurisdictions. Understanding these nuances is crucial for managing your workforce effectively.
3. Are there paid leave requirements?When you’re considering global expansion, it’s important to remember that many countries require employers to offer a minimum number of paid days off for permanent employees—which will represent a direct cost for your company. These days may include public holidays, vacation, sick leave, and parental leave.

   Some countries, like the United States, don’t require businesses to offer paid time off for any reason, including parental leave, but some US states do. And in many US industries, paid time off is customary regardless of the law. Extended paid parental leave—up to two years—is common in many other countries, such as Mexico and the Czech Republic, but with a lower cost of living and lower relative wages in many of these nations, this requirement may not overly burden the bottom line.

   In my experience, contractors aren’t eligible for paid leave anywhere, though of course you should make sure of this in any countries you’re considering.

   How much are wages?

   In general, more developed countries have a higher cost of living and higher salaries. Some businesses may find that offshoring can offer savings—allowing them to hire workers at a competitive rate for their region, while still saving money on what that same labor would cost in their home country.

   Many countries enforce a minimum hourly wage. According to a 2022 Organisation for Economic Co-operation and Development (OECD) minimum wage report (the latest numbers available), Australia has the highest minimum hourly wage in the world—approximately $14.50 in US dollars. The United States ranks No. 13, with a minimum hourly wage of $7.25. Some countries, including Georgia, have no minimum hourly wage requirement.

   Top 10 Minimum Hourly Wages Around the World (in USD)
   1	Australia	$14.50
   2	Luxembourg	$13.90
   3	New Zealand	$13.30
   4	United Kingdom	$11.50
   5	France	$11.40
   6	Canada	$11.20
   7	Germany	$11.10
   8	Ireland	$11.10
   9	Belgium	$10.90
   10	Netherlands	$10.50

   Of course, for many jobs, it’s customary and competitive to offer higher-than-minimum wages to employees, so it’s important to understand the norms for your industry in a particular country. According to a different 2022 OECD report, US wages average out to about $77,500 per year, while Mexico’s average yearly wage is just $16,685.

   One company I work with is a used-car reseller, based in Los Angeles. It contracts with a 60-person office here in Georgia, and the full cost of operating that office is about $50,000 a month. Operations would cost at least three times as much in California, but this way the company gets the talent it needs, at a price that makes sense for its bottom line.

   What other employee benefits are expected?

   Make sure your benefits package is competitive with the packages offered by companies native to the country you’re targeting. Remember, you’re competing with local businesses. Consider pension savings, health insurance, free or subsidized lunches, stock options, and more. Again, contractors may not typically receive all of these benefits, so be sure to factor that into your planning.

   Understanding Taxes

   Calculating the cost of taxes is crucial, as different countries have different approaches to taxes and significantly different tax rates. I always suggest that business owners hire a consultant who has operated in the target country for a while and knows the written law, common practices, and lesser-known exemptions. Having a local tax expert monitoring your operations will ensure that you’re always in compliance and can also help save your company money. These are some specific tax issues to consider.

   Corporate Income Tax

   Corporate income tax is payable on profits generated by the company. Note that the difference between two countries might lie not only in the tax rate but also in the way the tax is calculated. For example, in the 62 countries that have signed the Estonian tax convention, including the US, Georgia, Italy, and Japan, companies don’t pay any tax on profits unless they distribute them. So if you run back-office operations in another country, you might decide to reinvest any profit from that entity back into the business at 0% tax.

   Personal Income Tax

   In many countries, personal income tax is calculated and paid by individuals; in others, personal income tax is withheld by the employer. In either case, what matters to employees is what they net after taxes. Hence, the personal income tax is, in a way, a shared burden for individuals and corporations. The higher the rate, the higher its negative effect on the corporation’s bottom line.

   Income tax costs can vary depending on the type of employees your company hires, as contract employees may be taxed differently. In Georgia, the income tax rate for permanent employees is 20% and the tax is withheld. However, contractors in certain industries may qualify for tax reductions and pay only 1% in taxes. That can make contractors in Georgia much less expensive to hire than permanent employees.

   Tax Exemptions

   It’s crucial to know how to save on unnecessary taxes. Many countries offer tax breaks for certain industries, products, types of employees, and more. This is one reason it’s so important to work with a local expert, as only then can you accurately calculate the ROI of establishing a presence in that country.

   Professional Standards

   Some professions are regulated and required to follow certain standards—and it’s important to make sure the professional standards in a country you’re considering offshoring to are as strict as the ones you set within your company. For example, many Western pharmaceutical companies have begun to partner with Chinese labs for drug development now that China has revamped its regulatory system.

   Alternatively, it may be easier to offshore only those activities that typically don’t require extensive scrutiny, such as IT, marketing functions, legal support, and customer service. You can even offshore certain financial functions such as internal financial reporting, financial planning and analysis, financial management, and investor presentations.

   However, not all financial activities can be offshored safely—particularly tax accounting and external financial reporting. Likewise, activities that must meet certain safety standards may not be feasible to offshore.

   Political Climate

   Unfortunately, there are still many active political and armed conflicts in the world, and the proximity of such conflicts may impact business operations. For example, in addition to dealing with the Russian occupation of part of its territory, Georgia has seen an influx of Russian citizens leaving their home country in the wake of the Russia-Ukraine war. This has resulted in more available freelance talent, which may benefit companies looking to expand into Georgia, but it has also caused the local currency to strengthen and real estate prices to rise, which may reduce the cost savings to businesses. And of course, the associated political tension is also potentially concerning to businesses, which tend to value stability.

   Social Factors

   When opening an office or working closely with overseas contractors, you need to ensure that your new colleagues are prepared to succeed at your company—and that your company is equally prepared to manage them effectively. Here are three significant cultural aspects to consider:

   Language

   Before selecting a location for expansion, be sure you can hire enough local employees who speak the language you use to conduct business. On a recent trip to India, I asked people there why they thought India had become such a successful hub for IT and customer support offshoring. Everyone agreed that widespread English fluency was the key.

   Education

   Education is another important factor to consider. Make sure there are enough people with the skills and/or certifications you need available in your new location.

   Work Culture

   Finally, culture matters when it comes to integrating your overseas team. In some countries, it’s customary to have strictly professional relationships and meetings, while in others it’s expected that employers and employees will get to know one another better and “spread the bread,” a Georgian phrase that means sharing a meal together. Know what your potential hires will expect, and make sure it aligns with your own corporate culture.

   Parting Advice: Invest in Integrating Your Overseas Team

   To my clients setting up operations overseas, I always suggest hiring a dedicated person who will be responsible for making sure the operations run smoothly. As a business owner, you want to know that remote teams feel included and share the same goals and values as those working at headquarters.

   One company I work with was established in Tbilisi to provide back-office support to a large Los Angeles brand, with more than 150 employees providing IT support, database management, customer services, and photo editing services. For the first six months of the relationship, a US-based representative traveled to Tbilisi once a month to make sure the back-office support team was aligned with the company’s key priorities and mission. After that, top management in Georgia was ready to take over fully, and the company was able to benefit from the full value of its overseas team.

   Expanding overseas can seem daunting at first, and the list of things to consider is always longer than you expect, but despite the initial effort and investment, the payoff can be significant over the long term. Using this guide as a starting point, you may well discover that global expansion is the key to unlocking financial savings and growing increased business resilience.