The world is a big place, and companies wishing to invest have many domestic and foreign options. For example, 1,806 U.S.-based companies invested in Germany in some way in 2021, almost matching the pre-pandemic total.
One way we can truly diversify is to pursue opportunities both at home and abroad. Excluding sources of investments may alter the way a startup builds and shapes its culture. It can also influence how leadership and directional structure align. Foreign investments (such as companies, commercial loans, or opening foreign offices) encourage globalization and mitigate risk for businesses.
Excluding investment sources creates a new manifestation of development capacity and vision that’s much more narrowly focused. Let’s explore the benefits and consequences of foreign versus domestic investments.
The good, bad and ugly of foreign investments
Foreign investments can broaden a company’s portfolio while introducing your people to diversities of culture and experience. These varied interactions create a well-rounded team with innovative thought processes driven by a greater volume of inputs. Additionally, overseas investments can provide specific tax incentives that can boost the company’s bottom line.
The host country receiving the investment benefits as well. A foreign direct investment, or FDI, helps stimulate the local economy while making international trade much easier in the face of tariffs and geopolitical strife. With direct investments, a company buys property and equipment in another country. This enables a transfer of resources, including technology and knowledge, that significantly increases the productivity and efficiency of the workforce.
But there’s good and bad in every investment, and foreign investments are no different. Investing in a foreign country means speaking different languages with people who have different traditions, which could lead to misunderstandings and miscommunications regarding the goal of the investment. With all this talk of the good and bad of foreign investments, domestic ones come with their own advantages and disadvantages.
What comes with going domestic
Domestic investing is much easier to accomplish, as you’re already aware of the regulations and have locally available resources to help. Expanding a business locally can save time and money while simply growing the team you already have. And you make it easier to attract investors, which is why entrepreneurs in China aim for direct public listing on domestic exchanges.
Furthermore, investing domestically is easier and more comfortable, allowing you to grow what you already know works. However, focusing on steady local or regional development can slow the path of international expansion.
We’ve already seen how a global health crisis and regional military action can affect regions in different ways. A geographically diverse portfolio lowers your exposure to these risks while potentially unlocking entirely new sectors not available in your current market. By narrowing investments to only domestic, you risk missing growth opportunities while leaving your portfolio with too much exposure to the risks affecting that area.
3 ways to strategize resource allocation
There’s a misconception that overseas investments lower domestic investment, but a recent study found this simply isn’t true. The reality is that globalized investments help grow multinational firms both vertically and horizontally.
If your business is looking to invest, here are three tips for devising a plan.
1. Create a strategy.
You’ll need two strategies for your business investments: one that’s domestic-focused and one for international exposure. And your foreign investments should take a local-first approach that focuses on highly localized products and services. This brings a competitive local advantage and ensures success wherever you expand.
Operating in foreign markets gives you a portfolio that looks and feels like separate business units. The new mergers and acquisitions should easily fit into the overall brand of the parent company while providing access to labor, natural resources, and other advantages of the new location.
2. Improve your understanding of regulatory compliance.
When investing overseas, it’s critical to keep an eye on regulatory compliance. Public policies are typically geared toward protecting the general welfare, and as a foreign company, you’ll need to ensure you’re fully aware of all related rules and regulations.
Before expanding into another country, make sure you fully understand the legal ramifications both at home and abroad. Geopolitical strife could lead to economic sanctions from one of your countries on the other. This could cause major hurdles for your business—but the more proactive you are, the better.
3. Travel to wherever you may invest.
It’s critical to physically travel to the country you plan to invest in. This provides a closer look and clearer idea of the potential outcomes. Countries, like companies, have credit ratings, which is an excellent start to your due diligence. However, you’ll need boots on the ground to really feel and understand what it’s like doing business there. When visiting a new country, find its chamber of commerce for a closer look at how easy it is to operate there while making connections to help you survive.
A company’s investment portfolio is meant to diversify against risk and maximize earning potential. Often, this is done domestically first, but foreign investments can significantly improve a company’s books. There are vast opportunities available for those willing to seek them, but you must be prepared.
Contributed to EO by Kevin Xu, the CEO of MEBO International, a California- and Beijing-based intellectual property management company specializing in applied health systems. He also leads Skingenix, which specializes in skin organ regeneration and the research and development of botanical drug products. Kevin is co-founder of the Human Heritage Project.