One of the three pillars of international diversification is that of income (the other two are assets and personal). In some respects, establishing a source of independent income not tied to any one specific jurisdiction is the most important task long-term because it gives you the freedom to live life as you desire rather than how others dictate.
One of the best ways to do this is through entrepreneurship:
- Create a "no borders" business that will allow you to earn a solid income no matter where you choose to work - structured in a way that doesn't trap it in any one jurisdiction.
- Set up a new business in a fast-growing, high-potential foreign country.
- Diversify your existing business into new jurisdictions.
It is the latter two categories that will be addressed in this week's interview. We'll chat with Ed Marsh, an international entrepreneur who has built companies in both Europe and Asia and now helps others, especially those from the US, do the same.
International Man: Tell us a bit about yourself.
Ed Marsh: I basically come from a family of lawyers and doctors, and that was originally the expected path for me. After university, I entered the military and was commissioned as an army officer. After a while, I missed seeing my family and decided it was time to get out.
Rather than lawyering or doctoring though, I decided to run a business. I wanted to be an entrepreneur. But I needed skills first, including how to sell. Selling came to me naturally, but not the way it was taught in school. I needed real experience.
I moved through several industries and that eventually brought me into a partnership with a German firm. I bought into their US subsidiary and that was a good fit for me. I should mention I was born in Germany and I'm married to a German national.
It was a technical company, like many German companies are, so it was a neat way for me to start an international business. I learned many lessons along the way, both in terms of partnership and international business itself.
We ended up dissolving that partnership and I set up a separate corporation which purchased the previous entity and established it as a stand-alone, not a subsidiary, but still doing much the same thing. That was when a Euro cost us about $.85 and the business model made sense no matter how you sliced it. Then the Euro started to give us fits.
In 2004 I decided that I needed some sort of a counter-cyclical diversification; something that would both adapt to multiple different business cycles in different markets, as well as offer some currency diversification from just the Euro/USD cross.
As I looked around and was trying to figure out where I wanted to go, my sense was that China looked appealing, but might well end up being a mirage. In contrast, India was a real struggle. They were moving in fits and starts and it wasn't a pretty process, but it might ultimately result in a more stable outcome. So I got on a plane and went there in 2004.
I wasn't quite sure what I was going to do when I got there or what I expected to learn, but that's where I needed to start. There was a market that I expected and still expect will be significant in my life and certainly in my children's life as well.
So I went there, started poking around, and decided that in fact there was a lot of opportunity potential. So I established a company. I staffed it and we started moving used machines from the US and selling them into the Indian market.
There were a number of beneficial changes that occurred during that time - reductions in duties, an emphasis from the Indian government with their 2006 budget, and an increase in the manufacturing base.
A number of things were working in our favor.
But as you can imagine, there were many lessons to be learned, having just parachuted in there with minimal preparation. They were all frustrating lessons, and many of them were expensive lessons.
Through all of that, though, what I realized was that my passion was really for building and creating and strategizing. What I grew tired of very quickly is the mundane operational details in managing a business.
So what I've done now is taken my various experiences and worked them into my current business, which is helping companies develop their export businesses.
The reality today is that no company really has adequate resources to deal with internationalization - not enough executive time, not enough managers and limited budgets to launch such grand new initiatives.
So we - "we" being myself and a team of collaborators with complementary specialties - act essentially as a global business development arm for companies that need to start, maintain or accelerate their global business efforts... but just can't do it on their own.
There's been a lot of focus over the last couple years on big projects in Brazil, and more broadly in Latin America.
IM: So you've run a business in Germany. You've run a business directly in India. You've also consulted with organizations - predominantly from the US - looking to go overseas and set up a new distribution channel or subsidiary. What characteristics, in your mind, must a jurisdiction offer to present a good opportunity?
EM: A lot of that depends on the strategic objectives. People approach this sort of thing with a lot of different background objectives. One thing I know is important to many International Man readers is the opportunity to use a business to establish a beachhead in a foreign area from which you can launch your personal or multi-flag effort. That could be a strategic objective.
It could be to generate more revenue for your business.
It may be, in some cases, to establish an on-the-ground entity to not only sell into a new market, but to also locate sourcing for your operation here in the US. Or, it may even be to establish an assembly operation in, for instance, a Mercosur country that will give you access to the Brazilian market without the burden of the substantial duties for which Brazil is known.
So, once you understand your primary objectives, you can start to develop a matrix of characteristics that will help you decide on the right jurisdiction for you.
Corruption is a huge consideration, particularly for American companies which must be aware of and comply with the FCPA regulations. But it's a reality in many markets, so that's an important point to consider. Other factors to consider include banking confidentiality, the ingrained respect and legal protection for private assets both for personal and corporate, and IP.
On the positive side of the ledger, it's really important to consider demographics.
At the end of the day, consumer demand directly or indirectly determines much of the success of a business. Finding markets that are not only suitable for your products, but also have favorable demographics in terms of a growing population, as opposed to many markets which have shrinking populations, is important.
Market trends. Political stability. For example, you're hearing more and more about the threats of, or outright nationalization in some of the Central and South American countries. You need to make a decision at some point.
Foreign Exchange trends are another important factor. You could do a tremendous job building a business, but if the exchange rate's moving against you, you're in trouble. If you've got a perspective of 20 years, it's probably not a material factor, but if your perspective is the next two or three years, it could be of substantial importance in your decision.
IM: What is the most challenging aspect of setting up a company overseas for someone who carries a Western mindset, who's used to the way we do things here?
EM: Of course, the most challenging aspect is overcoming that mindset. One needs to develop a fine sense of intuition to be successful in a foreign market.
We often take for granted the fact that another culture that seems superficially very similar to ours - we might look the same, drive on the same side of the road, etc. - is in reality often very different. I think we set ourselves up for failure by ignoring that fact.
The key in international business is to actually understand when you're about to "out-drive your headlights", as the saying goes. To be able to accept that you're never going to understand everything, even if you read a book, go to a course to show you how to hand your business card, or even live there for a while. At the end of the day, you're never going to really understand some of those differences.
Of course there are other difficult aspects too. The business culture itself can be very different.
The FCPA, as I mentioned earlier, can be an impediment in many markets. Some markets take much longer to make decisions than we're accustomed to in the US. Of course, we've got a quarterly focus in many cases, and in India, for instance, a 5-year focus is not at all unusual.
The frequency and vigor with which people will lie to you in many markets is accepted, but startling and disconcerting for us coming from the US.
Also, there are substantial differences in bureaucracy and regulation. We think that we're burdened with it in the US, and certainly from a Libertarian perspective we are tremendously, but in many ways the burden in other countries can be even more substantial.
I remember when I had to have a lease prepared for an office space in Mumbai. I think the lease agreement was almost 100 pages long, which is not unusual for the way Indian agreements are written.
Bureaucracy and regulation is something that can really be a substantial surprise, if not a challenge, in some markets.
And, of course, people. Somebody once shared an expression that if you could take the people out of business, business would be easy. I guess that's true.
There are a lot of difficult parts of business, and employees can be a big one. The laws, regulations and expectations around that can be very different.
IM: And yet with all of those challenges, in your mind, for the right person it's normally a good idea to move outside your borders?
EM: I would say absolutely. I think it's almost incumbent on a free businessperson to do so, if for no other reason than diversification.
If you're an American business and your business development and revenue generation focus to this point has been solely or primarily based on the continental United States, not only may you be struggling to expand your business beyond a certain point, but you've also got huge exposure to a single market that is very likely to have some difficult times for some time. It's really important from that business perspective to diversify into other markets.
Plus, I would contend that as much as we can talk about some of these risks in foreign markets, there are many challenges in our domestic market that we may not think about as directly, just because we're so accustomed to them.
IM: That makes a lot of sense. For those who are looking at setting up a brand new business overseas - they don't have anything established yet - what specific steps can they take to get started?
EM: Going into a new market, a new country, and setting up a business involves really multiple overlaid risks on top of each other. It's not an easy way to do things. When I was in the Army we used to airdrop into a lot of places. It wasn't for the purpose of creating a business, but almost with a comparable degree of uncertainty.
A lot depends on what kind of business you envision.
I can't imagine trying to undertake some sort of a new business you aren't familiar with from your home market and from your career expertise. I think trying to learn a new business and trying to learn the new market simultaneously would likely result in failure.
IM: If I were to summarize, Step 1 is to actually understand the business that you're going into, so you're not trying to learn a new set of skills in a foreign environment.
Then Step 2, make sure you do research on the market itself. Try to understand everything about the market as much as you possibly can. Become familiar with as many situations as possible, so that when you do eventually start setting things up, you're more comfortable than if you'd just been airdropped into the environment.
EM: I think that's fair. You need to plan and research properly.
IM: And for those that already have a business, whether it's a capital-intensive business or whether it's one that's relatively virtual and relies on labor - skilled or otherwise - what steps can they take to start moving some of that activity overseas?
EM: That's a much more common scenario than the previous one and one I deal with regularly. It comes back to your strategic objective.
Why do you want to do this?
What's your objective?
Do you want to build revenue?
Are you planning on selling your business to liquidate the equity that you've built in this company and convert that into retirement cash?
Do you plan to do that in three years?
Is your goal to create buzz and international awareness and build revenue in support of that?
Or do you see this as an opportunity to create a launch pad to establish your residence or apply for a second passport in a different country?
You've got to really clearly understand what it is you're trying to do. Then go through the process of analyzing the characteristics that we talked about earlier. Take those characteristics and match them up against the potential market you're considering.
Develop a plan that encompasses a good blend of near-term revenue potential with long-term market potential.
By the way, there are a lot of programs offered by the US Department of Commerce (I believe there are analogous programs in Canada) that will really help to give you a running start.
The US government has really hung its hat on exports as their job creation engine, and they are throwing a ton of resources at helping SMEs (small and medium-sized enterprises) develop those export markets. So there's a lot of assistance available from the government.
Then you need to get on a plane. Wander around in the streets. Take taxis that aren't air-conditioned. Really experience the market to see if it's a place you'll want to do business.
Then you've got to start having some meetings.
There's no substitute for sitting across the table from people and saying, "Well, this is what we can do for you," and have them say, "That's absolutely ridiculous. Maybe that's the way you do it in the US, but I can tell you ten reasons off the top of my head why that's simply a non-starter here."
Sometimes you can take that, adapt and come back for a second meeting.
On the other hand, there may well be factors you are unaware of that can make your idea a no-go.
For example, I recently heard a story about a company that made an interesting product for hanging in residential windows - some sort of holiday decoration - and they were talking about selling it in South and Central America. They wanted to replicate the success that they had in the US but didn't realize that many houses have bars over the windows there. The idea wouldn't work without some careful "localization".
So getting on a plane, going there, meeting people, and having those conversations is a critical step. You'll avoid problems later.
Then you have to figure out what your best channel option is. Again, this will potentially be driven by your broader objectives, not to mention your timeline and budget.
In some cases businesses can handle sales remotely. They're web-based businesses. eBay, of course, is a perfect example. Many companies handle their business primarily over the internet, so they don't need a substantive sales force or business entity on the ground in a market.
That frequently doesn't work, though, so companies have to hire a rep, contract with a distributor, or establish a contract with an individual contributor as a country manager.
Each of those has different degrees of administrative challenge and risk and there are pros and cons to each. It's an important step to understand what the best channel plan is, and that channel plan can certainly vary from market to market.
The sales and marketing plan has to be thoroughly prepared and it's got to be properly localized. That's something that many companies in the US tend to sidestep. It's not just a language issue. Even subtle things like colors, paper size, mobile-compatible websites in places where most of the internet access is over mobile devices, SMS versus email marketing - those kinds of things can make a huge difference in perception in a market. They deserve attention, because if they're overlooked there will be negative consequences, but people won't even necessarily be aware of those consequences or why they're occurring.
At the same time you're doing all this work looking overseas, there's a fair amount of internal infrastructure that has to be built as well.
Do they have the FX banking relationships that they need? Are they set up to be able to handle letters of credit? Does their current lending relationship support Ex-Im Bank products? Do they have the legal documents in place for foreign distribution contracts and other documentation? Are they going to set up foreign subsidiaries? Do they have a formal compliance procedure? Do they have the logistics relationships to the target markets to make sure that the products are properly shipped without incurring a lot of damage or delay?
There's a lot of that kind of internal stuff that needs to be fleshed out while the overseas business development part is going on.
IM: It's obviously a very complicated topic, but I suppose at the end of the day the reward dramatically outweigh the challenges of setting up initially, if done correctly of course.
EM: That's fair to say. Again, I think it feels complicated because it's different. It's unusual. It's unlike what many American businesses are accustomed to. On the other hand, if you were to just parachute into an American business and have to figure out how to process checks and how to call the freight company to pick up shipments on a regular basis without any background or any infrastructure in place, that would feel confusing as well. It's something to be aware of, but not to be scared of.
IM: Do you recommend that businesses going overseas partner with somebody local who has the experience and the correct mindset to be successful in that market?
EM: China is the market everybody talks about quite a bit, and China has requirements for percentages of ownership and partnering with local companies. If you're talking about China or other countries which may have similar regulations, then it's a moot point. You have no choice.
In general, my initial advice is not to go that direction if you don't have to.
It's very difficult to assess somebody's real business character over the course of a few meetings or even six months of working together.
You can only start to know if a company is one with whom you'd really want to partner after having shared the ups and downs of a business over the course of a year or two. There's no way to do that by initially engaging in a partnership.
So, although a partnership can be fruitful long-term, I would discourage people from using that as an initial tool.
IM: Right. I guess this will depend on a person's particular goals, but in your mind, what places today offer the best opportunities for growing a new subsidiary or new company?
EM: You're right, of course. It does depend on the nature of the business and what each company's or individual's priorities are, as well as the timeline.
Demographics is really a driving characteristic. There has to be a substantial enough market for a business to grow. So working from demographics, that means that Africa, Latin America, and Asia are the places that potentially are superficially the most appealing.
The market's also got to have money. There's no point in going there and setting up an operation with inadequate consumer or business funding available to buy your product in any sort of quantity.
You have lots of conversations with people about China, and folks talk about the magnitude of the market there, but you also need to look at overall stability as well.
I could be completely wrong, but my sense is that China is likely going to experience some fairly substantial instability, so it might make sense to have some operation there, but as a primary focus or one that requires a substantial investment would cause me to hesitate.
You want to look and see if the individual per capita income, growth of the middle class, and standard of living are increasing. If there's an optimism; an expectation that people's lives will improve. That's what I look for.
It could be that Turkey is part of that, or it could be that Turkey is not. Turkey's kind of in flux right now but it could offer opportunities.
Some of the Southeast Asian markets are pretty exciting right now. There are a fair number of Latin American markets - obviously Brazil leading the pack - that seem to have a lot of potential. Longer-term, some of what's happening in Africa (depending on the product and how long that horizon is) is pretty interesting too.
I would say that for most of the folks reading this, Panama would be an interesting place to look. As an example, it's generally affordable. There's some reasonable inflation there, but it's not outrageous yet.
It's generally affordable to set up and it's pretty welcoming to foreign entities. It's a great launching point for the Latin American market - and Colombia as well.
IM: If you could do it all over again, are there any mistakes you'd be sure to avoid?
EM: When I wanted to open my business in India, I figured the way to do that was to find a lawyer to establish a legal entity, just like you did any other place I was familiar with.
I went to my American attorneys and they couldn't recommend anybody. I went to my German attorneys, Latham & Watkins, which has a huge international footprint. They sent some emails around and came back with a couple recommendations. I met some folks who were tremendously capable barristers, but unfortunately didn't tell me that in India you don't use an attorney to set up a company.
We spent five months discussing elaborate structures and esoteric points and trying to set up a shell corporation in Mauritius and all kinds of other stuff, and all I wanted to do was just create a private limited corporation.
What I learned later was that in India you don't go to an attorney like you do here, where you can set up a corporation in 48 hours. You go to a chartered accountant and they get it done efficiently and inexpensively.
So the big lesson here is to do your research. I suppose another lesson could be: Be careful about making assumptions.
IM: That's a very good way to wrap up the interview. Thank you for your time today.
EM: You're welcome.
If you enjoyed reading this interview, you'll probably also like "Selecting Your First Overseas Market: Do's and Don'ts" and "Diversify Your Business Internationally".