How foreign companies can successfully establish operations in Asia
Asia’s Economic Growth Remains Strong
- In recent years, economic growth in Asia has attracted numerous multinational companies seeking opportunity.
- In 2018, Asia was the largest recipient of foreign direct investment (FDI) in the world, with inflows amounting to US$476 billion. China, Hong Kong and Singapore were the largest regional recipients of this investment.
- Asia is considered likely to contribute more than half of all growth in global consumption by 2020 – where product and market segments are growing rapidly.
Asian Markets Pose a Significant Challenge to Western Companies
- Rapidly changing Asian markets defined by a multitude of jurisdictions and business cultures present a significant challenge to any foreign business seeking to expand in the region. And while the region has experienced some recent economic slowdown, it continues to provide major opportunities for expansion.
- Among the most important considerations for foreign companies seeking to enter Asia is the competitive challenges they’ll face from local companies that maintain lower costs, fragmented distribution channels, while serving a growing base of consumers with often limited incomes and a wide variety of preferences and minimal brand loyalty.
- Hyper-competitive local markets where local companies provide products with incremental innovations, short product cycles and low prices – require global companies with often low local brand recognition, to utilize new methods to compete. Some of these problems are projected to decrease as the region’s economies mature. Western companies, therefore, must establish well-coordinated and efficient regional strategies with an aim to pleasing consumers at the local level.
- The most effective foreign companies in Asia are utilizing more agile and cooperative business strategies with entrepreneurial regional leadership teams that drive innovation and cut costs, as opposed to centralized administrative structures and independent country operations.
- Asian operations of foreign multinationals that succeed the most are also provided with the authority, autonomy, capital and talent they need to succeed from organizations that see Asia as an essential market.
- Successful Asian organizational models involve teams of senior executives with diverse cultural and market experiences, who work together to improve performance throughout the region.
Prime Considerations When Expanding into Asia
- With this competitive climate in mind, companies who choose to forge ahead with expansion plans should keep in mind some key considerations when expanding in the region.
- Notably, foreign companies seeking to expand into Asia can set up a new business or expand their existing operations via branch offices or subsidiaries.
- But before moving to Asia, businesses must consider which countries in Asia are best suited to their goals and what type of business should they be operating here.
Which Jurisdiction Should You Choose?
- Foreign businesses will find similar opportunities in Asia no matter which country they choose to focus on. Therefore, in order to distinguish between jurisdictions, it’s important to consider the size and the local regulatory environment for your type of business in the target market.
- China and Japan are the largest markets in Asia, with China now the world’s largest economy and Japan possessing high consumer purchasing power. Other Asian economies are also very attractive for foreign companies as a result of less regulated markets and incentives to foreign investors. These markets include Hong Kong and Singapore. Market research studies are helpful here in determining which locales are best for your business goals.
Business Structures and Regulatory Considerations
- Once a target Asian jurisdiction has been chosen, companies can establish operations either through a branch office or subsidiary company.
- There are differences between subsidiaries and branch offices, therefore its’ important to consider utilizing a local Asian PEO to help guide you through establishing the appropriate business structure suited to your unique needs.
- Two of the most important considerations you’ll have when choosing between a subsidiary or a branch are the regulatory framework that exists for each structure in the jurisdiction where you plan to operate.
Characteristics of a Branch Office
- Branch offices are totally dependent on the parent company and therefore any Asian branch would be undertaking the same activities of the parent company in the home country.
- Advantages of a branch office including low cost of registration and administration.
- In Japan, for example, branch offices are relatively simple to establish as share capital requirements are no longer required. Hence, the parent company may choose how much it might invest in a Japanese branch.
- Parent companies are also able to offset some of the taxes paid in Asia against those paid in home jurisdictions. Many double tax treaties are in place between Asian and foreign jurisdictions, removing the double taxation of foreign businesses operating in Asia.
Characteristics of a Subsidiary Office
- Subsidiaries register locally as independent companies and are considered tax residents, thereby permitting them to benefit from often favorable local tax regimes in Asia.
- In Hong Kong, for example, foreign companies can register subsidiaries as limited liability companies, permitting full independence to operate in Asia and with the benefit of a generous corporate tax regime.
- Singapore also offers several benefits to foreign companies expanding there. Notably, however, Singapore treats subsidiaries and branches similarly – hence there’s no significant advantage to selecting either.
To Sum it Up
- Asia’s booming economic growth, growing middle class with expanding spending power, and many local jurisdictions providing unique opportunities, makes it an ideal place for foreign companies seeking growth outside their home markets.
- Asian markets are highly unique, offering a variety of languages, business cultures, regulatory environments and consumer preferences.
- With all this in mind, it’s important for foreign companies to consider using the services of a local Asian PEO who can help you determine if the market is right for you and if so, how to develop a strategy and business presence ideally tailored to your needs and which will help you realize a prosperous future in the world’s fastest growing region.