5 Industry-Specific Legal and Regulatory Obligations that can Impact Your Business Expansion Abroad
This article is part 13 of a 17-part series on global expansion. You can find the full list below this article.
Imagine you’ve planned this exciting trip to Japan and you’re at the airport waiting to board your flight. You scroll through your phone to pass the time and then decide to take another look at the swanky Airbnb apartment you’ll be staying at for your first few nights in Tokyo.
But your booking information is gone. *Poof!*
Confused, you try to see if you can contact the host but since you can’t find the booking, you can’t remember how to look them up.
In a panic, you start to worry about how you’re going to reach the venue – or if you need to find an alternative. And your flight has already started boarding.
This is exactly what happened to many Airbnb guests back in 2018, when Japan decided to change the laws about private lodgings which required all hosts to have a registered license. Any host who did not have a displayed license number on their listing was automatically removed from the site, which sent many hosts and guests into a panic on how to reach each other for arrangements that were already in motion.
Local laws and regulations can impact your business at any time. And in many cases, these regulations might force you to change and adapt how you conduct business or even pose limitations around the business you conduct.
You’ll need to be mindful of regulations that will affect your specific industry, as well as some general business regulations that have an effect on all kinds of businesses. Will you need a license? If so, can you obtain one yourself or will you need a local partner? And if you get a license, are there rules that will impact how you do business?
Industry-specific regulations and examples
Here are some industry-specific regulations to consider when expanding your business abroad, with examples of how companies have been affected by each:
Operational License Regulations
A license is basically a document that grants you permission and authority to do something. For example, nowadays in many cities across the globe, there are apps that you can use on your phone to rent a scooter. When you’ve reached your destination, you can simply leave the scooter for the next person to use it. In a country like Japan, however, this kind of business was shut down due to regulations in which individuals need to have a license in order to ride motorized scooters. A company once tried to mitigate this policy by only offering their scooters within one district of Tokyo, but the business never picked up.
There are financial regulations that illustrate these operational license regulations as well. In Japan, when you want to establish a brokerage or regulated finance company where you take money from both individuals or institutions to invest, it is easier to get a license to take institutional money but harder to get a license to take from individuals. The assumption is that institutions have the technical knowledge to make decisions to invest money but regular people might not.
In South Africa, the opposite is true where it is a lot easier to take on money from individuals as opposed to institutional funds. It is not necessarily the license that is harder to obtain, but the due diligence required by institutions before providing capital. For example, you may need to have a minimum amount of capital or due diligence in excess of 200 pages to ensure their client’s funds are safeguarded, a 10-year track record, ESG principles, and beyond, in order to qualify. The idea is that individual investors only need to know that a manager has a license and does not need to know the ins and outs of the entity structure like an institutional investor does.
Trade regulations can impact how you get your product into a country, and how much it could cost you. Sometimes, the cost alone can cause you to look for alternative methods of setting up your company’s manufacturing, distribution, and operations. Here’s another example related to electronic vehicles: If you are trying to import electronic vehicles to Vietnam, the trade regulations could make it too costly for it to be a viable business avenue. One company decided to set up their manufacturing plant within Vietnam so that their products could be declared as being of Vietnamese origin while saving them on punitive customs duties and associated import costs by avoiding cross-border shipping. As an added benefit, they were also able to take advantage of their company strategy to apply for local green incentives.
Data Protection and Ownership Regulations
Let’s say you’re a technology company that collects data, and you offer a free platform in which you monetize through advertising. If you move into a territory that has strict data protection rules, you may have to change how your business operates. For example, some territories do not permit overseas companies to own an individual’s personal information, which means that there would need to be a business and operating model (as well as legal structure and internal processes) in place to ensure that local information is not transferred, especially not transferred to overseas locations. Another thing to consider would be server location; if data is not permitted to be outside of the jurisdiction, then you may need to have local servers or a local cloud in order to comply with local policies and standards.
Intellectual Property Regulations
Intellectual property (IP) is a source of a competitive advantage that allows companies to earn profits over and above the industry average. If your business relies on significant IP to differentiate itself in the market and make a profitable business, it is key that you understand the IP rules in the markets you are expanding to. For example, there could be regulations that mean a local registration of IP is required and/or that a local entity needs to have that registration.
If IP is owned abroad, there could also be rules that state that if royalty payments are made to the IP owner, that the intercompany contract needs to be registered with the local regulatory and/or tax authorities and payments need to be at arm’s length (from a transfer pricing perspective).
Also if IP is being developed in one country it is key to be clear what your IP strategy is. For example, will any IP developed be owned by the headquarters or the local entity doing the development/R&D? If it is the headquarters, then what are the rules around how this IP is registered, transferred, and/or owned? Intercompany contract R&D arrangements are the norm, but these need legal and fiscal awareness to ensure an efficient and compliant setup.
Take for example a company that has a video streaming service in Asia. They were present in Indonesia providing their content (this is IP) to local consumers via an overseas-owned platform (this is also IP).
They had a compliant structure and business model in place to facilitate this. However, as the Indonesian market grew and became more and more important to this company, they started to do local original productions (in other words, they were creating new IP). They did not have the correct legal and tax structure and business framework in place to ensure that any IP created was funded and owned by the overseas parent.
These activities resulted in a tax audit, and all original content created in Indonesia has been deemed the property of the Indonesian company which meant that its use by the overseas parent in many other jurisdictions warranted a royalty to be paid to the Indonesian company. Double taxation and associated adjustments and penalties followed and the fact that this was not set up correctly to begin with, turned out to be an expensive mistake for the company.
Further, if you plan to share your IP with partners or third parties, you absolutely need the appropriate legal representation to protect the IP from misuse or from being stolen. Sometimes, Non-Disclosure Agreements (NDAs) are brushed off as a formality but when sharing IP with third parties an airtight NDA is something you must wield.
NDAs are just the beginning. Depending on your technology and situation you may need other agreements in place to protect your IP.
If you will establish a manufacturing plant, you’ll need to look into manufacturing regulations that could affect how your company operates. Manufacturing regulations include topics such as safety for employees and environmental laws that may restrict the materials you use or the scope of your production. If you are creating any food products, then safety and health regulations for the consumer must also be followed. At the end of the day, the manufacturing regulations are all about how safe your plant is for the people and environment it affects.
What regulations will your company need to consider when expanding abroad?
Once you’ve decided to enter a jurisdiction, you’ll need to perform a scenario analysis on how you will conduct business to assess any regulatory obstacles. There are numerous laws in addition to these that could impact your business; we can help you understand what kind of regulations to expect when you’re looking to enter a jurisdiction, and how to better mitigate your risks and thus vary your approach when entering a new market. Feel free to reach out to us here.
With special thanks to Sam Barrett from EY’s APAC Operating Model Effectiveness team for his inputs and insights in putting together this series of articles.
International Business Expansion Series
This article is part 13 of a 17-part series about International Business Expansion. Here’s a list of the full series to give you a well-rounded understanding of what to consider when expanding your business abroad, from strategy to execution to management:
- The #1 Thing that Companies Need for a Successful Expansion Abroad
- The 3 Components of a Market Analysis to Know if Your Product is Viable Abroad
- How to James Bond Your Profit Margin with Location Analysis
- How to WIN in a New Market with These 6 Models of Execution
- Lost in Translation: How Culture Can Impact Your Business Expansion
- Show me the money: How to Fund Your Business Expansion Abroad
- Risky Business: The 2 Key Layers of your Operating Model to Align with Your Growth Strategy
- Avoid Being Taxed: How Tweaking the Structure of Your Organization Can Protect Your Bottom Line
- Trash Talk: Why You Need to Analyze Your Processes Before Expanding Globally
- 5 Reasons Why You Should Customize Your Technology for Your International Expansion
- Setting Up a Business Abroad: The 4 Kinds of Structures & Legal Implications
- Landlocked: How your Transaction Flows can Impact Your Access to Funds
- 5 Industry-Specific Legal and Regulatory Obligations that can Impact Your Business Expansion Abroad
- “Health Checks”: Your Ticket to Building a Sustainable International Business
- How Much Is Your Business Worth? 4 Drivers that Increase the Value of Your International Business
- Plug and Play: How to Efficiently Scale Your Business When Expanding Abroad
- Beach, or Boardroom? Plan Your Exit Strategy Before You Expand Globally