Cost Factors for International Business

Conducting business abroad means factoring in several different cost considerations than domestic ventures. Aside from obvious cost factors such as shipping and monitoring technology for its logistical operations, the company must also pay for cost factors related to its marketing, finance and economic divisions.

Research and Development

What works well in one country might not translate overseas. Businesses must research the infrastructure, population and local culture in order to be successful. Additionally, the company must run tests, offer samples, issue surveys and conduct other extensive programs within the new country. Purveyors of technology-related products must ensure the circuitry is compatible with the country’s infrastructure and its products illustrate the correct language.

The design of some products might need modification. For example, the color and size of products differ significantly in Japan and Europe than in the U.S. While the United States prefers larger vehicles, for example, Japanese and European customers typically prefer smaller vehicles to match the narrower roads and parking spaces.

Exchange Rate Conversion

Conducting business overseas requires exchanging the host country’s currency to the foreign country’s legal tender. However, currency exchange is costly and risky: The exchange rate can fluctuate within a matter of seconds. Therefore, many international businesses factor in the cost of currency exchange by drafting a forward contract. These contracts lock in the exchange rate in advance so both parties know the value of the currency they will be receiving beforehand. Companies that do not draft this type of contract are subject to changes in the currency value and can possibly lose copious amounts of money.

Taxation

International businesses are subject to the taxation of the foreign country. Governments of some countries intentionally set a low tax rate to encourage companies to set up shop within their borders. Maurice D. Levi, author of “International Finance,” cites the Bahamas, Bermuda and Grenada as examples of tax havens. Therefore, a cost factor for international companies is deciding which country offers the greatest economic advantage for their operations.

Marketing and Advertising

Some advertising methods do not work well overseas. Multinational corporations offering products to a foreign market spend money on methods of advertising and marketing that blend best with the local demographic. For example, a company pitching cleaning products in Mexico might want to do so through product placement in a telenovela, whereas the Swedish population might respond best to a humorous television commercial that uses extremely few words. Some Arabic countries would not respond well to a commercial with scantily-clad women.

Michael White, author of “A Short Course in International Marketing Blunders,” explains how the “Made in America” logo of the “OK” hand sign insulted a number of countries where such a hand gesture represents inflammatory concepts. In Greece, for instance, the sign is an invitation to perform a vulgar act. To avoid offending the local population, multinational businesses sometimes choose to spend extra money and hire a local advertising company that already understands the culture.

References

About the Author

Since 2008 Catherine Capozzi has been writing business, finance and economics-related articles from her home in the sunny state of Arizona. She is pursuing a Bachelor of Science in economics from the W.P. Carey School of Business at Arizona State University, which has given her a love of spreadsheets and corporate life.