Preparing SMEs for global expansion

AMID the gradual reopening of borders, renewed partnerships between Singapore and markets such as South Korea and the Middle East have presented new opportunities for local businesses. At the industry level, the Singapore Business Federation reported increased confidence among local businesses in expanding overseas, with about a third looking to scale up their operations and enter new markets this year.

However, the economic terrain has shifted in many ways over the last 2 years, making overseas expansion even less straightforward than it was. We have seen a rise in virtual assignments – which involves the employee remaining in the home location but performing the role required of them in the host location – since the Covid-19 pandemic.

We have also seen a rise in international remote work. However, it can be challenging to perform certain roles on a virtual or remote basis, especially if they relate to business expansion which often requires face time with foreign clients or partners.

Businesses are also increasingly challenged to improve employee well-being to alleviate the physical, mental and emotional strain of the pandemic, alongside having to navigate immigration compliance, tax planning, and administration that comes with overseas relocation – all of which have become more complex in many countries as a result of Covid-19.

Impact of rising energy costs and geopolitical challenges

Rising energy costs are putting a strain on small and medium-sized enterprises (SMEs), especially given their limited capital and resources. With the Russia-Ukraine conflict and the spike in demand as economies around the world recover from the pandemic, petrol prices rose by an average of 34 per cent year on year, according to ECA International’s recent cost of living survey.

To mitigate the impact of energy prices, the Singapore government announced a S$1.5 billion support package to aid businesses and households. This includes a grant that funds up to 70 per cent of energy-efficient equipment purchases, as well as the expansion of schemes to aid businesses with cash flow.

However, while such measures can alleviate the pressure of rising energy costs that SMEs face domestically in the near term, the long-term impact of global inflation remains. Local companies looking to expand will need to factor in higher-than-average costs of doing business abroad – from day-to-day logistics and exports to the cost of relocating employees and likely higher salaries for those locally engaged in the host location.

Further complicating matters are ongoing challenges in markets around the region. Foreign companies face various barriers to entry in China as the country continues with its zero-Covid policy, while ongoing socio-political tensions in Myanmar have resulted in roadblocks for businesses. Elsewhere in the region, Japan’s weaker exchange rate has reduced the short-term attractiveness of this location for investment or expansion, as any local revenue when converted back to Singapore dollars will be worth less than it was last year.

Building market entry teams

While some local companies remain undeterred in their expansion plans, overseas assignments have become less appealing to their employees due to the uncertainty Covid-19 has created in their personal lives. Those with dependents may have greater concerns around the health, educational prospects, and well-being of their loved ones, and may not wish to endure quarantine protocols required in some destinations or risk being unable to return home to family if travel restrictions tighten once again.

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Therefore, companies looking to form market entry teams will need to increase their focus on employee well-being and apply a more empathetic approach in creating persuasive relocation packages for assignees, while also increasing the financial incentive on offer for those willing to relocate. Businesses will also need to take a more proactive stance in facilitating employees’ moves, ensuring that they are able to quickly settle and be comfortable from the get-go.

Depending on their business priorities and the locations where they operate, SMEs may consider exploring different arrangements in order to encourage the right person to take on the assignment.

One type of arrangement that has gained traction during the pandemic is the virtual assignment, which involves the employee remaining in the home location but performing the role required of them in the host location. This has evolved from a stopgap measure into a means of increasing flexibility and expanding the talent pool, but may only be a feasible option for some industries.

Fluctuating exchange rates

For those businesses that deploy key personnel to their overseas operation, they must keep an eye on exchange rate fluctuations, as this can affect the value of overseas assignees’ compensation packages. For instance, if the currency the assignees are paid in has weakened, their salaries may no longer be enough to meet their host country’s expenditure needs or home country commitments.

Companies assigning people overseas must consider practical ways to protect expatriate salaries from these exchange rate movements. The best approach will depend on the organisation’s payroll capabilities, the locations where they operate, as well as its company culture.

Rebounding housing market: High demand, low supply

Another major expense for SMEs who deploy talent to their regional operations is employee benefits, of which host housing assistance is a major example. Amid the increasing cost of living, rental costs have also seen significant upswings in several locations in the last couple of months – a legacy of the series of demand and supply shocks triggered by the pandemic as well as the nascent recovery.

As people return to these cities to live and work, demand for housing has risen. However, the supply of long-term rental units has remained largely inelastic and even dropped in some markets.

For example, in Seoul, higher real estate taxes have led some landlords to remove their properties from the market, while others pass on the cost to tenants. In Doha, property owners have shifted their focus to the short-term rental market – likely in a bid to capitalise from the upcoming Fifa World Cup in November and December – which has curtailed supply at the same time that the country has reopened its borders.

While the recovery from the global pandemic brings opportunities for many SMEs, the concurrent economic risks associated with the resulting volatility and increased uncertainty of operating overseas present hurdles on the road to business growth through overseas expansion for SMEs.

Overall, with well-informed decisions and the ability to quickly adapt to a constantly changing environment, businesses that push forward with their expansion plans can build long-term resilience and come out of the pandemic in a stronger position.

The writer is the regional director for Asia at ECA International.