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published on 11 November 2020 | Reading time approx. 5 minutes
When internationalising a business model established in the domestic market, the entrepreneur determined to go abroad has to deal not only with the question of which of his products can be economically successful in which markets, but also with numerous cultural, legal and fiscal aspects of the business activity. In this regard, not only the underlying legal conditions in the foreign target market or the home country have to be considered. Above all, the interaction between these two jurisdictions and the resulting mutual effects on the business model are decisive for the economic success of the planned venture.
Especially when entering a non-European market, a careful comparison of the entrepreneurial goals for this market with eventually existing legal constraints will be crucial. In many countries, foreign-financed investment projects are by no means on an equal footing with investments of domestic market participants. In contrast to intra-European investments, dedicated foreign direct investment laws are often used to create a specific legal framework for foreign investors. As a consequence, foreign investors may be excluded from certain business activities, industries or forms of establishment or may depend in their business activities on the fulfillment of certain requirements or minimum standards. The range of possible constraints may extend from certain minimum investment volumes (e.g. regarding the capital adequacy for local subsidiaries), to the compliance with quotas or minimum/maximum limits for the employment of local and foreign workers, to the mandatory involvement of nationals as co-shareholders of local subsidiaries or local agents of different kinds.
A distinction is to be made between investment restrictions on the establishment of foreign companies and any product-related restrictions on international goods traffic. Unlike within the EU, where harmonized regulations and, in addition, basic freedoms apply, in particular the free movement of goods, the practical enforcement of which has been strengthened by the entry into force of Regulation (EU) 2019/515 in April 2020, third countries third countries can certainly prohibit the sale of goods that do not comply with their national regulations (such as food, drug and medical device laws). Therefore, when foreign investments are made in these countries, the national regulations in place at the designated investment location should be carefully examined, including eventually applicable regulations of any neighboring markets or markets to be supplied from this location. The existence of possible trade facilitations by way of international trade agreements between the countries concerned as well as possible culturally determined commonalities (e.g. halal certification standards) should also be taken into due consideration.
However, a careful consideration of the legal framework existing in the target market when planning a market entry can also be of special benefit if the foreign investment project is able to profit from certain incentive measures in the local market, e.g. in case of an establishment in certain regions or industries designated by the national legislator as eligible for subsidy. Such subsidized investments are then most commonly granted tax breaks up to a complete suspension of certain tax obligations for a certain period of time.
In the case of larger investments into a solid and permanent infrastructure abroad, e.g. when setting up a foreign production site or establishing a larger distribution center abroad, the national and international investment protection measures available in the target market are also likely to play a decisive role. The more extensive and long-term the investment into a foreign market is, the more interested an investor will be in a most effective protection of his investment against expropriation or other political risks. Outside of the EU, bi- or even multilateral investment protection agreements, which the foreign government may maintain with the investor’s home country, should provide the desired protection in this regard. However, as there is no uniform international standard for these international investment protection agreements, the protection granted under a specific agreement may vary considerably depending on the different countries involved. A careful prior examination is therefore inevitable.
In addition to the general conditions of foreign investments in the respective market abroad, when entering foreign markets, an effective and most complete integration of the concerned investment into existing corporate structures at home must also be taken into account. As obvious and trivial as this aspect may appear, in practice it is precisely here that the greatest obstacles to successful internationalisation lurk.
The often mentioned "intercultural competence" is not only decisive for establishing successful business relationships abroad. It also ensures that the business structures established there, as fully owned subsidiaries or (exclusive) sales partnerships, are integrated as smoothly as possible into the business practice of the parent company and thus, are able to develop their full potential. Without a profound knowledge of the local business and management culture, this cannot succeed.
However, this does not mean that the German parent company shall absorb as thoroughly as possible the cultural habits predominant in the respective foreign market. Much to the contrary: In the case of several foreign locations, this approach would inevitably lead to a patchwork of the most diverse business and management cultures within the group of companies, making cross-border corporate management impossible. But, after the successful completion of investment planning and market entry, it is precisely a central corporate management of all international activities of the German parent company that is decisive for the economic success of the entire group of companies. In this regard now, a corporate culture shaped by the parent company and implemented as uniform as possible for all (international) locations, is the basis for the establishment of such global corporate management system and thus a very important success factor for the internationalisation of companies.
An inadequate management of the international business activities of German and European companies can have most serious legal consequences even in their home countries. Most European countries have an extremely high regulation density in their jurisdictions, often paired with maximum effective tax systems.
In Germany, for example, the establishment of an internal tax control system has been mandatory for many years. And this obligation does not end at the German or European borders: The company resident and taxable with world income in Germany is rather required to declare to the concerned tax authorities its international business activities including all profits resulting therefrom, as completely and accurately as possible. Carelessly made errors may quickly lead to severe criminal consequences for all persons involved. A similar situation occurs in export control, where compliance failures of the German parent company when exporting prohibited goods or goods subject to a prior export authorization can have enormous legal consequences – not only in Germany.
Also when documenting transfer prices, structuring cross-border supply relationships in terms of value-added tax or implementing a worldwide compliance guideline, internationally operating companies must always keep an overview of the highly complex and sometimes even conflicting legal requirements at home and abroad. This is the only way to avoid serious legal and economic consequences.
The therefore required transparency of a company's international business processes can only be achieved by establishing a global control system and actively implementing it in the company’s daily business practice.
Just as it is a matter of course for many companies to adapt their product range, recipes and manufacturing processes to different preferences in different markets without distorting the unmistakable characteristics of their products (such as different recipes for food due to dietary habits or national requirements for the production of certain consumer goods like food), internationalised companies should also bring together the diverse framework conditions of their international business activities in a uniform compliance system to be used within the entire group of companies.
Consequently, a due examination of all cultural, legal and fiscal framework conditions in the respective target markets as well as their appropriate consideration in the context of market entry is only a first, albeit very important step for the successful internationalisation of companies. Equally important is the subsequent successful establishment of a carefully maintained corporate controlling system as soon as the first international business structures are up and running.
Carla Everhardt
Associate Partner
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