Go Your Own Way report

Go your own way

an MSB guide to the journey from non-exporter to global business

In association with

Sarah Knaus

Kim Hayward

CBI senior international policy adviser

BDO audit and international liaison partner

T: +44 (0)20 7395 8148

T: +44(0)2380881897 (DDI)

E: sarah.knaus@cbi.org.uk

E: kim.hayward@bdo.co.uk

Go your own way — an MSB guide to the journey from non-exporter to global business

Contents

Foreword by Katja Hall and Kim Hayward

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Executive summary

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Conclusions 09 Medium-sized businesses: their journey to globalising

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First steps: building the knowledge and confidence to go abroad

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Second steps: boosting practical knowledge of doing business overseas

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Third steps: growing from successful exporter to international business

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Fourth steps: investing for greater rewards

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Final steps: becoming a truly global business

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References 44

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Go your own way — an MSB guide to the journey from non-exporter to global business

Improving the UK’s trade performance is central to our future prosperity – and MSBs have a critically important part to play in that process.

Katja Hall, CBI chief policy director

Go your own way — an MSB guide to the journey from non-exporter to global business

Foreword

With increasingly positive economic data, the UK seems poised for consistently steady growth for the first time in years. Sustaining this growth for the longer-term relies in large part on how well the UK can take advantage of the international opportunities available.

As the CBI called for in its report The only way is exports, released in April 2013, the UK must renew its role as a trading nation. This includes spurring businesses with the potential to export to take the first steps towards international sales. It also means encouraging businesses to go beyond exporting to investing abroad, and becoming global businesses.

As an essential part of the UK economy, medium-sized businesses (MSBs) must lead the charge towards global growth. Although not all MSBs will be in a position to expand internationally, those that have the potential should be encouraged to export and invest abroad.

Kim Hayward BDO audit and international liaison partner

In this report, we identify some of the major barriers that are preventing MSBs from meeting their international potential, and call on government and the private sector to increase the awareness and provision of support. In particular, we call on UK Export Finance (UKEF) and the private sector to plug the gap in export finance for small and medium-sized businesses. We also urge UK Trade and Investment (UKTI) and UKEF to continue to actively increase awareness among MSBs around the UK. Improving the UK’s trade performance is central to our future prosperity – and MSBs have a critically important part to play in that process. With this report, we hope to guide MSBs through the journey from non-exporter to global business and fuel conversations on how to further expand the UK’s international presence.

Katja Hall CBI chief policy director

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Go your own way — an MSB guide to the journey from non-exporter to global business

Executive summary Medium-sized businesses: their journey to globalising Improving the UK’s trade performance is central to our future prosperity – and medium-sized businesses (MSBs) have a critically important part to play in that process.

• The UK economy needs to become more open to international opportunities…

• …with businesses moving beyond exporting to investing abroad • MSBs have significant potential to grow internationally…

• …by journeying from non-exporter to global business.

First steps: building the knowledge and confidence to go abroad Many MSBs with the potential to export remain domestic-focused, in part because they lack the knowledge and confidence to find and pursue opportunities available abroad. So the first step for these future MSB exporters is to build up knowledge of overseas markets and how to approach them effectively.

• Many non-exporting MSBs have the potential for international success…

Second steps: boosting practical knowledge of doing business overseas Once a non-exporting MSB has knowledge of the opportunities abroad and the support available, the next steps include winning an export contract and through this, gaining an understanding of the practicalities of exporting. By obtaining this knowledge, MSBs can navigate the barriers that might prevent them from successfully exporting.

• …but a lack of knowledge of opportunities and confidence holds them back

• MSBs should consider obtaining local and cultural understanding…

• Strengthening international networks can help bridge these gaps…

• …while strategically developing international knowledge within the business

• …but on-the-ground experience is essential to building international know-how

• They should also work to identify ways to finance exports and reduce risk…

• Government also provides a platform for support, but must increase awareness.

• …including accessing UK Export Finance support.

Go your own way — an MSB guide to the journey from non-exporter to global business

Third steps: growing from successful exporter to international business To capitalise on overseas opportunities, successful MSB exporters should next begin to think and act like an international business.

This means expanding their footprint in existing markets and growing into new, high-potential countries. To do this, it will be essential to develop an international strategy that includes plans to grow the MSB’s presence in existing markets and venture into new opportunities.

Fourth steps: investing for greater rewards The next step for an international business is to invest abroad, using the knowledge developed in their international strategy to direct where the investment will be made and how it will look.

There are many models for investing, so an MSB should carefully consider the benefits of each option and protect against any of the negative risks that might develop.

• Tailoring the model of investment to each market…

• Internationalising means going beyond exporting…

• …helps MSBs generate and then meet international customer demand…

• …to expanding the MSB’s foothold in existing markets…

• … and increases their knowledge of doing business abroad

• …and looking to the next set of growth markets

• This international expansion can bring added risks…

• It also means undertaking financial planning for future growth.

• …but government support and other advice is available to help mitigate it.

Final steps: becoming a truly global business The final stage to the journey is operating as a global business. This entails developing business models and corporate structures that look at the business across numerous international markets. These processes will support an MSB to grow further and overcome the barriers that develop as the business grows.

• Global MSBs operate regional hubs...

• …and expand business processes while maintaining brand identity • They also consider business reputational risks…

• …and might support new exporters.

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Go your own way — an MSB guide to the journey from non-exporter to global business

Go your own way — an MSB guide to the journey from non-exporter to global business

Conclusions For business

For government

First steps: building the knowledge and confidence to go abroad • Larger companies can receive an advantage from reviewing their suppliers, advisers and government relationships to see which MSBs could benefit most from some assistance in entering overseas markets.

First steps: building the knowledge and confidence to go abroad • The Exporting is Great campaign should only be a starting point.

UKTI and UKEF must use their regional offices to actively seek out additional MSBs that have the potential to export, and offer support to get over the initial barriers.

• To overcome their knowledge gaps, MSBs that have the potential to export should engage with businesses experienced in the markets they wish to enter, and actively seek opportunities in these markets.

Second steps: boosting practical knowledge of doing business overseas • UKEF should dramatically accelerate the number of small and medium-sized businesses it supports, raising the number from 52 in FY 2012-2013 to 250 by 2015.

Second steps: boosting practical knowledge of doing business overseas • MSB exporters should seek to recruit executive and non-executive management with international experience, and use this knowledge to begin internationalising their exporting journey.

• Businesses and finance providers need to become better versed in identifying what type of trade insurance or finance a new exporter needs.

Third steps: growing from successful exporter to international business • MSBs should develop their international strategy with clear priorities country-by-country. They should set clear budgets for the required investment and explore solutions that minimise their upfront costs.

Fourth steps: investing for greater rewards • MSBs should weigh the benefits of each model of investment, and tailor their ventures to suit local market conditions.

Final step: becoming a truly global business • A global MSB should develop employees that it can then strategically place overseas to ensure the culture, brand and reputation of the MSB is preserved.

Third steps: growing from successful exporter to international business • The UK government should fully consider using fiscal levers to incentivise expansion into higher-growth emerging market economies.

• Government must seek State Aid approval for the Business Bank, to allow this initiative to get off the ground.

• Business and government must recognise the importance of supporting the expansion of MSB exporters by encouraging the provision of long-term capital.

Fourth steps: investing for greater rewards • Government should review the unintended consequences of the Bribery Act and develop a set of guidelines and recommendations for businesses clarifying the purpose, intent and scope of the Act. • UKTI should undertake a comprehensive review to equalise the quality of all Overseas Market Information Service (OMIS) reports, and examine ways to make the overall cost of the service performance-related.

Final step: becoming a truly global business • As and when the UK renegotiates bi-lateral tax agreements or a review of the OECD model double tax treaty is undertaken, an exemption to help MSBs establish economic activity in a new territory without significant tax costs should be considered.

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Go your own way — an MSB guide to the journey from non-exporter to global business

Medium-sized businesses: their journey to globalising Improving the UK’s trade performance is central to our future prosperity – and MSBs have a critically important part to play in that process.

• T he UK economy needs to become more open to international opportunities…

• …with businesses moving beyond exporting to investing abroad • MSBs have significant potential to grow internationally…

• …by journeying from non-exporter to global business.

The UK economy needs to become more open to international opportunities…

Trade has historically been at the heart of the UK’s national identity.

But over the past 30 years, the UK has been losing ground. One way to measure this is to look at our global export share, which has fallen to just 3.3% of world exports in 2012, down by almost half since 1980 (from 6.2%).1 We have to halt this decline and set about reversing it. With growing markets playing to our strengths and a strong ‘Brand UK,’ businesses must seize the international opportunities for exporting and investing abroad. Sustainable economic growth requires the UK to take advantage of these opportunities through exporting and investing abroad.

In The only way is exports, the CBI called for the UK to renew its role as a trading nation, rebalancing the economy towards international trade and investment.2 The balance of economic dynamism is shifting towards new higher-growth economies, with prospects in emerging markets increasingly outstripping those in mature markets. UK businesses as a whole – and our MSBs in particular – must go in pursuit of these new business opportunities. For example, as business infrastructure becomes more sophisticated, demand for the UK’s financial and business services is likely to rise.

Growing consumer incomes and an emerging middle class will also spur demand for high-end, luxury consumer goods – another area in which the UK specialises.

The CBI fully supports the chancellor’s ambition to double UK exports to £1 trillion and raise the number of exporting companies by 100,000 by 2020. But setting government targets is not enough if we are to realise our global ambition. UK businesses should certainly drive up their exports, but they need to go further, embarking on the journey from exporter to global business.

The CBI fully supports the chancellor’s ambition to double UK exports to £1 trillion and raise the number of exporting companies by 100,000 by 2020.

Go your own way — an MSB guide to the journey from non-exporter to global business

…with businesses moving beyond exporting to investing abroad The journey UK businesses should now undertake goes beyond the traditional notion of exporting or selling abroad, important and challenging as those activities are. The journey requires businesses to take the extra step of investing abroad and globalising their business models, while also working to grow their domestic footprint. Seeking out a more even balance of international and domestic success will provide a more solid underpinning to UK growth, securing the UK’s position as a leading and innovative economy.

MSBs have significant potential to grow internationally…

MSBs make up a dynamic sector of corporate Britain and play a significant role in the UK economy. Despite only representing 1% of firms, they employ 16% of the workforce and generate 22% of the UK’s revenue.3 The CBI believes these firms have the potential to make an even greater contribution in terms of creating jobs and growth however. In fact, in our 2011 report, Future champions, we estimated that these firms could be worth an additional £20bn to the UK economy if we provide them with more support. One of the critical ways to unlock this growth is through increasing their capability to export.

These firms have already proven their ability to develop the products, services and technologies that sell at scale and many MSBs do recognise the potential for growth that lies in exports.

Thirty-eight percent of the firms we interviewed for Future

champions cited the ability to improve export capability as a critical factor in their growth, and 51% of firms cited exporting to new markets as one of their main opportunities for significant growth over the next five years.4 Yet more than half (55%) of UK MSBs that export derive less than a quarter of their sales revenue from exports, compared to 49% of all companies.5 In other words, MSBs are lagging behind the UK average in how much their business currently depends on exports, despite having the potential to actually lead the UK’s export growth.

…by journeying from non-exporter to global business Successful companies that are active globally, like those exhibited in this report, demonstrate that MSBs have the potential to attain great international success by completing the journey to become a global business. The journey takes an MSB from domestic-facing business to exporting success and beyond to becoming internationalised, meaning active in a number of overseas markets, and finally operating on a global level (Exhibit 1, page 12). The time it takes to complete the journey and the actions at each step will vary for every MSB, but virtually all businesses face common challenges at each stage and should be aware of the support available to assist in their journey.

In the following chapters we outline how MSBs can overcome the hurdles to their international growth. And the journey is well worth embarking on. Ultimately, the non-exporters of today can be the global businesses of tomorrow, driving UK economic growth and prosperity to new levels.

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Go your own way — an MSB guide to the journey from non-exporter to global business

Exhibit 1 The journey from non-exporter to global business

First steps: building the knowledge and confidence to go abroad

Second steps: boosting practical knowledge of doing business overseas

Third steps: growing from successful exporter to international business

• Understanding their export potential

• Obtaining local and cultural understanding, including regulations

•D eveloping an international strategy

• Overcoming lack of confidence • Strengthening international networks • Developing on-the-ground experience • Seeking government assistance

• Developing international knowledge within the business • Financing exports and reducing risk • Identifying appropriate UKEF support

•E xpanding foothold in existing markets • Seeking growth to next set of markets • F inancial planning for future growth

Go your own way — an MSB guide to the journey from non-exporter to global business

Fourth steps: investing for greater rewards

Final steps: being a global business

• T ailoring model of investment to each market

•O perating subsidiaries that act as global hubs

• G enerating and meeting customer demand with sales offices or self-owned distribution centres

•E xpanding local business processes while maintaining brand identity

• I ncreasing knowledge of doing business and accelerating growth through partnerships and joint ventures (JVs) • C ombatting risks including corruption and bribery •S eeking government assistance to identify investment opportunities

•C onsidering business reputational risks • Supporting new exporters

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Go your own way — an MSB guide to the journey from non-exporter to global business

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First steps: building the knowledge and confidence to go abroad

Many MSBs with the potential to export remain domestic-focused, in part because they lack the knowledge and confidence to find and pursue opportunities available abroad. So the first step for these future MSB exporters is to build up knowledge of overseas markets and how to approach them effectively.

• Many non-exporting MSBs have the potential for international success…

• …but a lack of knowledge of opportunities and confidence holds them back •S trengthening international networks can help bridge these gaps…

• …but on-the-ground experience is essential to building international know-how • Government also provides a platform for support, but must increase awareness.

Many non-exporting MSBs have the potential for international success…

Exporting isn’t for everyone, and nor should it be. There are a range of financial and personnel factors that may rule out overseas activity. Exporting requires an MSB to have sufficient working capital and the willingness to manage the inherent risks, combined with the capability to physically export their goods or services. For an MSB to successfully navigate the challenges of doing business overseas, it normally needs to build on the foundation of a strong and sustainable domestic business.

Exporters choose to go abroad primarily for two reasons: the pull of significant or more rapid growth in foreign markets and/or the push of insufficient growth in the domestic market.6 An MSB weighing up whether to export should consider four questions: • Is there a demand for its goods or services in overseas markets?

• C an exporting add value to the business?

•W hat risk or potential is there for damage or loss through exporting?

• What resources must the business commit to see results?7

Go your own way — an MSB guide to the journey from non-exporter to global business

…but a lack of knowledge of opportunities and confidence holds them back

Strengthening international networks can help bridge these gaps…

Many potential exporters are held back by a lack of confidence, often caused by limited information on overseas markets. If an MSB is unaware of the opportunities available, it may take the view that there is no international demand for its goods or services, and so opt not to pursue international growth.8 A CBI member survey, however, demonstrates that two-thirds of businesses export the same products or services that they sell in the domestic market.9 This suggests that non-exporter MSBs are actually quite likely to find demand abroad, if they position themselves correctly and gain market intelligence.

To overcome this knowledge barrier, MSBs considering exporting should actively develop networks with experienced exporters.

One available network is through customers doing business internationally (Exhibit 2, page 16). Motivation for entering a market is overwhelmingly based on relationships, with 57% of all businesses going abroad because of customer enquiries and 24% pursuing existing contacts in the market.11 It is therefore important for MSBs to pursue relationships with their existing customers that are active exporters, as well as seek new customers overseas.

MSBs as a group are aware of this barrier, with 67% ranking a lack of market knowledge/insight as a high or moderate challenge to doing business internationally.10 A lack of knowledge often results in lack of confidence and low appetite for risk. This fear of the unknown is a powerful impediment to MSB export growth. Although many MSBs do begin to export by happenstance, leaving this to chance lowers a business’s exposure to opportunities.

These relationships can also pay dividends for experienced exporters. They should therefore support their MSB suppliers by partnering with suppliers to bring their products through to market, ordering ahead of production to ease cashflow, and by giving their supply chains long-term visibility of future commercial opportunities.

Government also has a role to encourage experienced exporters to collaborate through supply chains. Although larger businesses will be best positioned to offer this support, internationalised MSBs can also play a role in fostering growth of their smaller suppliers.

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Go your own way — an MSB guide to the journey from non-exporter to global business

Exhibit 2 Cheese Cellar – speciality food from the UK finds a market overseas Cheese Cellar has been in the speciality food business for a long time – and has built its business up to £75m annual turnover.

It is the largest UK wholesaler of speciality cheese, with customers in food service, speciality retail, conferencing, stadiums and airlines.

Cheese Cellar first began exporting in 2012, and has seen total sales grow by 30-35%. It has done this in part by capitalising on the demand for high-end British food abroad.

Its existing relationships with four and five-star hotels in the UK allowed it to reach similar customers overseas. Cheese Cellar’s knowledge of airlines has enabled it to provide cheese for first and business class flights from the UK into the UAE, Hong Kong, Sri Lanka, France and the Caribbean. Its ability to cut, wrap, pack and flow-wrap allows Cheese Cellar to tailor its products for different markets.

Go your own way — an MSB guide to the journey from non-exporter to global business

MSBs with international experience are another source of knowledge. These MSBs can gain greater exposure by sharing their success stories, and offering inspiration and advice to non-exporters. In Future champions, the CBI highlighted the need to encourage greater links between MSBs. We established M-Clubs, which offer owners and managers of MSBs the chance to network with peers, receive expert advice and share best practice. The first M-Club was held in 2012. These clubs continue to be held across the UK.

Conclusion: Larger companies can receive an advantage from reviewing their suppliers, advisers and government relationships to see which MSBs could benefit most from some assistance in entering overseas markets ‌but on-the-ground experience is essential to building international know-how Successful MSB exporters consistently agree that the most important way to build international networks is travelling to meet potential customers abroad. Even though the cost of overseas business trips can be expensive, face-to-face contact is arguably even more essential in developing relationships abroad than domestically. Spending time with potential customers, agents, and/or distributors and observing how they do business provides a personal connection that can be invaluable in developing trust.

An important opportunity for non-exporters to gain international experience and an understanding of the potential market is through trade missions organised by the government, business organisations and local trade associations (Exhibit 3, page 18).

These trips provide a platform for business-to-business networking as well as gaining advice from local embassy staff.

MSBs consistently tell us that trade missions with a focus on business size or sector are often the most useful, as they allow the programme to be geared towards a more targeted delegation. In response to this, the CBI and UKTI developed a series of trade missions specifically for MSBs. Led by the Minister for Trade and the CBI Director-General, the programmes for these trips are developed with MSBs in mind, with sessions on doing business in the local market as well as business-to-business and networking events.

These trips have taken MSBs to high-growth markets such as Russia, Turkey, and Brazil.

Conclusion: To overcome their knowledge gaps, MSBs that have the potential to export should engage with businesses experienced in the markets they wish to enter, and actively seek opportunities in these markets.

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Go your own way — an MSB guide to the journey from non-exporter to global business

Exhibit 3 e2v – Multi-million pound contract for the Russian-led World Space Observatory e2v is a leading global provider of innovative technology solutions for high-performance systems and equipment across a range of specialist markets. With its headquarters in the UK and annual sales of £200m, e2v employs 1,600 people across Europe, America and Asia. e2v has won a contract to supply imaging systems to the World Space Observatory-Ultraviolet, an international project led by the Russian Academy of Sciences, which is expected to launch in 2016 to study the universe in aspects beyond the reach of ground-based telescopes.

Even though e2v has a long history of exporting to 50 countries, there was still an important role for UKTI to play in helping to develop key relationships. To help secure this contract, an important meeting with a number of Russian project partners was hosted by the UK Embassy in Moscow during the joint CBI/ UKTI trade mission last year.

The first phase of the contract was signed at the MAKS International Aviation and Space Show in Zhukovsky, Russia.

Attending the ceremony were representatives from the British Embassy and UKTI.

Go your own way — an MSB guide to the journey from non-exporter to global business

Government also provides a platform for support, but must increase awareness UKTI, in conjunction with the devolved administrations, provide services geared towards both new and existing exporters. In FY 2012-2013, UKTI alone supported 841 non-exporting SMEs through their Passport to Export programme, and 1,155 SMEs with their Gateway to Global Growth (Exhibit 4, page 20).12 Since 2012, UKTI has also worked to develop an MSB Programme, which has been funded to support an additional 1,500 MSBs by 2015.13 Additionally, UKTI is increasingly holding seminars and webinars geared toward putting small and medium-sized businesses in touch with experienced exporters.

In general, businesses that access UKTI services rank their experience positively, with 76% of UKTI users ranking the overall service either a ‘4’ or ‘5’ out of 5.14 However, UKTI continues to struggle to increase awareness within the SME community. In all, more than two-thirds of SME exporters (69%) continue to be unaware of UKTI.15 Similarly, two thirds of MSBs do not know about UK Export Finance (UKEF), the UK’s official Export Credit Agency.16 Formerly known as the Exports Credit Guarantee Department (ECGD), it was renamed in late 2011 as part of an organisational shift which saw the agency expand its product range and attempt to target support towards SMEs, while maintaining its support for larger-scale overseas projects (Exhibit 5, page 21).

We welcome the introduction of UKTI’s Exporting is Great campaign nationwide, and encourage UKEF to follow suit with a targeted advertising campaign of its own. But advertisement and promotion alone are not enough to influence this difficult to reach audience.

UKTI and UKEF must simultaneously work on strengthening their local presence across the UK through existing regional offices.

The 28 regionally-based UKTI and UKEF advisers located around England should actively target non-exporters with international potential by networking within established business organisations and trade associations, as well as relevant advisors such as accountants, lawyers and banks. For uncertain MSBs, personal relationships are likely to be more effective than an ad campaign.

Conclusion: The Exporting is Great campaign should only be a starting point. UKTI and UKEF must use their regional offices to actively seek out additional MSBs that have the potential to export, and offer support to get over the initial barriers.

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Go your own way — an MSB guide to the journey from non-exporter to global business

Exhibit 4 UKTI Trade Support Services UKTI offers the folowing services to support UK businesses.

For more information, visit: ukti.gov.uk • I nternational Trade Advisers (ITAs) – located in 40 local offices around the UK, the ITAs provide advice on UKTI services.

• P assport to Export – programme for new exporters with turnover below £50m, this service assesses a company’s readiness for international business, and helps it build international trade capacity.

• G ateway to Global Growth (G3) – a 12-month programme of strategic support for existing SME exporters with between two and ten years’ export experience to help diversify into new markets.

•E xport Marketing Research Scheme – free, independent advice on how to get the most out of a marketing research project.

•E xport Communications Review (ECR) – provides a communications consultant to review all spoken and written communications, including website, to identify areas that can be improved to better match cultural and lingual demands.

It costs £500 per review. Businesses employing fewer than 250 people can qualify for a subsidy of £250.

•O verseas Market Introduction Service (OMIS) – bespoke service providing contacts and market information, as well as setting up meetings in the chosen market.

• B usiness opportunity alerts – free email service providing over 500 updates on business opportunities in 100 international markets every month.

• T radeshow Access Programme (TAP) – grant support for small and medium-sized businesses attending one of an agreed programme of overseas events organised by Accredited Trade Organisations (ATOs).

• O pen to Export – an online portal created by UKTI in 2012 as a one-stop-shop for free information and advice on exporting (http://opentoexport.com).

Go your own way — an MSB guide to the journey from non-exporter to global business

Exhibit 5 UKEF services UKEF provides trade finance and insurance solutions to support UK exporters. For more information, visit: gov.uk/government/ organisations/uk-export-finance

• E xport Working Capital Scheme – a guarantee provided to a bank, so it can help a business to finance the working capital needed to deliver an export contract.

• Export Insurance Policy – an insurance policy for a UK exporter that covers them against non-payment of an export contract.

The policy covers costs incurred should the customer become insolvent before the goods are delivered or if they fail to pay due to specified political, economic or administrative events.

• L etter of Credit Guarantee Scheme – a guarantee to a bank which enables a UK bank to confirm a letter of credit – one of the safest ways to ensure that you receive payment.

• B ond Support Scheme – a guarantee provided to a bank, so the bank can help to arrange the issue of a bond to an overseas customer, potentially improving your cash flow. It covers most types of contract bonds.

•B uyer and Supplier Credit Facilities – a guarantee provided to a bank that enables it to make a loan to the overseas buyer of a UK export which is repayable over two years or more. The UK exporter is paid out of the loan for amounts payable under the export contract when due. This assures the exporter of receiving payment.

•B ond Insurance Policy – an insurance policy provided direct to a UK exporter to protect against a demand for payment under a bond which is unfair or caused by political events.

• D irect Lending Facility – a new product that will see UKEF provide buyer credit loans directly to overseas buyers in order for them to purchase UK exports.

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Go your own way — an MSB guide to the journey from non-exporter to global business

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Second steps: boosting practical knowledge of doing business overseas

Once a non-exporting MSB has knowledge of the opportunities abroad and the support available, the next steps include winning an export contract and through this, gaining an understanding of the practicalities of exporting. By obtaining this knowledge, MSBs can navigate the barriers that might prevent them from successfully exporting.

• MSBs should consider obtaining local and cultural understanding…

process of researching these areas is time-intensive, but essential to success. The internet holds much of this information, but it requires patience and persistence to comb through all of the available resources (Exhibit 6).

Contracting an agent or distributor on the ground is one option that can help navigate some of these cultural issues. Business advisers, such as accountants, lawyers and bankers can provide sectorspecific market research, advice on the best regions/cities, help

• …while strategically developing international knowledge within the business

Exhibit 6 Using the internet as a tool for growth

• T hey should also work to identify ways to finance exports and reduce risk…

Market intelligence information can be found on the internet, through free and publicly available resources. The UK government provides a plethora of free resources across gov.uk, but it is often poorly targeted and difficult to find. In 2012, UKTI introduced the “Open to Export” portal, which sought to bring together private and public sector knowledge in a one-stop-shop.

• …including accessing UK Export Finance support.

MSBs should consider obtaining local and cultural understanding…

Doing business in any overseas market requires MSBs to understand cultural differences such as local customs, regulations, and legal considerations, which all have an impact on how business is conducted in any given country. There can also be major variations between particular local markets, such as states or regions, which increase the complexity of doing business. Even for first-time exporters sending goods to or bidding for a single project in a new market, this knowledge is of utmost importance. The

This website is a step in the right direction. They now need to refocus their efforts to bring together the overwhelming amount of advice on exporting into a simple cross-government tool. For example, if a business is looking to export to China, it should be able to access information on the market, including the ‘Doing Business In’ guide, political risk updates, information on visa requirements for travelling to countries on business, and any tax or trade agreements that impact doing business abroad. The existing “Open to Export” portal can act as the hub for this information.

Go your own way — an MSB guide to the journey from non-exporter to global business

Exhibit 7 BSI – new agreement to reduce technical barriers for UK companies exporting to China Standards are powerful tools that help increase productivity and competitiveness and drive innovation, trade and growth. The UK and China recognize the importance of standards for business and industry and the value they bring to their economies, in supporting the implementation of government policy and to society at large.

BSI – the UK’s National Standards Body – is negotiating with its counterpart in China to establish a new system which will enable British Standards to be more widely accepted in China.

Under the proposed cooperation agreement, British businesses will be able to request that China adopts the British Standard for their specific products and services. This will remove the need for the British company to demonstrate that it has met the equivalent Chinese standard, facilitating market access, saving money and time for the British company, and therefore increasing the international competitiveness of British companies in the Chinese market.

Scott Steedman, director of standards at BSI, says: “A standards agreement has the potential to greatly stimulate the supply of products and services across both UK and Chinese markets, encourage regulatory compliance and enhance the market access opportunities for small and medium-sized enterprises.”

explain the cultural differences and even provide market entry advice to help identify the appropriate agents or distributors on the ground.

Another set of local challenges for new exporters are the regulations and legal barriers that impact the export of a product or service.

In a BDO survey, 38% of businesses cited increased regulation as the major barrier to expansion abroad.17 For example, exports of some goods require an export licence before the product can leave the UK port. Other regulations such as inspections and standards can slow the process of exporting a product to another country even further. By following certain internationally-recognised standards, such as those set by the British Standards Institution, MSBs can ease some of the regulatory burden for each export (Exhibit 7).

Market entry advisers can also offer information on overcoming regulatory barriers, in particular any tax or customs barriers that might crop up. Some can even provide one-stop-shop services on the ground including low-cost premises. Business-to-business networking is another source of knowledge of how to deal with burdensome regulations and identify local sales teams that understand the market requirements.

Many new-to-exporting MSBs choose to export to countries with similar regulatory regimes to the UK, because it eases some of the barriers to trade. As Exhibit 8, page 24 demonstrates, many of the countries with the most business-friendly regulatory, or politico-legal, regimes in the world are traditional destinations for UK exports. In particular, the common regulatory framework of the EU allows UK businesses to sell across the largest market in the world with comparable ease.

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Go your own way — an MSB guide to the journey from non-exporter to global business

Exhibit 8 World map showing level of pro-business regulatory regime

No data Least friendly

Most friendly

‌while strategically developing international knowledge within the business In addition to seeking market entry knowledge, MSBs also need to have certain skills within the organisation to successfully internationalise. These skills include cultural awareness and foreign languages. The CBI report Changing the pace identified the need to develop language skills to support an internationalised UK economy. Two in five employers (38%) listed foreign language skills as helpful in building relations with overseas suppliers, customers and other contacts.18 Other considerations include employing staff with a willingness to travel or live abroad, and possessing the ability to work with people from different cultural backgrounds.

Source: BDO International Business Compass 2013

Many successful MSB exporters were significantly helped in these first steps by global experience that their managers brought into the company. Experienced managers will have practical knowledge of doing business overseas, as well as existing contacts in international markets. However, smaller MSBs with limited international exposure might find it difficult to recruit staff with this expertise.

For these businesses, another means to gain valuable international experience is through appointing non-executive directors with international experience. But as demonstrated in Future champions, MSBs often struggle to take advantage of the knowledge and experience that should be available through their

Go your own way — an MSB guide to the journey from non-exporter to global business

non-executive directors. For businesses interested in exporting, it is therefore important to seek executive and non-executive directors with international knowledge and expertise, and then actively work to harness the international knowledge needed to grow abroad.

Conclusion: MSB exporters should seek to recruit executive and non-executive management with international experience, and use this knowledge to begin internationalising their exporting journey.

They should also work to identify ways to finance exports and reduce risk…

When an MSB receives its initial overseas contract or export order, business might need to quickly produce additional output. In the first instance, shorter-term working capital is likely to be most appropriate at this stage. However, changes in the finance market can now mean that deals take longer to fulfil. As a result, MSBs seeking to export should think ahead, and ensure that the right type of finance is in place for potential export orders. Types of finance such as invoice financing, overdrafts, and short-term loans can provide this necessary working capital. For MSBs that export through large-value orders, securing working capital to cover the upfront cost of production will require persistence to secure the necessary funds (Exhibit 9).

Protecting against the risk of non-payment and currency fluctuations is another important financial consideration for new MSB exporters. These businesses will rarely be in a position to demand up-front payment for products or services sold abroad, so they will need to consider what payment terms they should operate.

Exhibit 9 Mechatherm – financing the next phase of growth Mechatherm International was established in 1973. It supplies furnaces, casting machines and ancillary mechanical handling gear to the aluminium industry. Its turnover for 2013 was £16.5m, and orders have already been taken for 2014 totalling £26m. Since 1990, exports have on average made up 85% of turnover.

Even from early in Mechatherm’s business lifecycle, it was able to find export work, due to having existing overseas contacts. These grew as a result of the contraction of the aluminium industry in the 1980s, when many of the UK engineers from the aluminium industry went to work in the Middle East. As a result, Mechatherm increasingly received orders from that region.

Even as a successful exporter, Mechatherm has always had difficulty in gaining sufficient banking facilities to maintain and then expand their business. Its finance provider has always capped its exporting facility relative to turnover, which does not always match the up-front cost of manufacturing goods.

As such, Mechatherm has had to consider turning down potential orders due to a lack of ability to issue bank guarantees or bonds. It has actively pursued support from UKEF, and has received backing by the Minister for Trade. But Mechatherm continues to struggle to obtain working capital for some of its export opportunities.

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Go your own way — an MSB guide to the journey from non-exporter to global business

Local knowledge of competitive terms of credit, and research into a buyer’s credit history are essential to best position an exporter to receive payment.

Regardless of the credit terms set, there is always the risk that an exporter will not be paid for the goods or services delivered, or that a fluctuation in currency price will leave the business with a much reduced profit margin or none at all. Banks and insurers offer products that cover these risks, including: •e xport finance – a bank facility that takes on the risk of exporting after a sale has been agreed. Facilities include letters of credit and pre- or post-shipment financing.

• t rade credit insurance – provides the exporter with cover if a buyer fails to pay, under proscribed conditions. Some insurance will also cover for political risk limiting payment and/or the outbreak of war.

MSBs should seek to be well-versed in the products available before signing an export contract. Banks can advise existing clients on what coverage is available and for which countries. It is therefore important for potential exporters to discuss exporting with their bankers as part of gathering knowledge.

Conclusion: Businesses and finance providers need to become better versed in identifying what type of trade insurance or finance a new exporter needs.

…including accessing UK Export Finance support UKEF offers products to bridge the gap between exporter demand and the risks that banks or insurers cover. But in a recent CBI survey, export finance was identified as the top business priority for government action to boost exports.19 Since March 2011, when UKEF added products for SMEs to its existing platform of services for capital and semi-capital goods, the provision of export finance has increased. In FY 2012-2013, UKEF funding reached the highest level in over a decade, but it only provided direct support to 52 SMEs.20 When compared to the number of SMEs supported by its international counterparts, it is clear that UKEF needs to dramatically accelerate its support for the UK’s smaller exporters.

For example, the direct lending scheme launched in early September has a minimum deal value of £5m. With MSB exporters seeking to finance their first international efforts through typically smaller deals, this facility does little to support initial export efforts.

To further its support for MSBs, UKEF should intensify its drive to identify the financing gaps in the private market, ensuring that its existing products are geared towards supporting smaller deals and newer exporters.

Conclusion: UKEF should dramatically accelerate the number of small and medium-sized businesses it supports, raising the number from 52 in 2012-2013 to 250 by 2015.

Go your own way — an MSB guide to the journey from non-exporter to global business

To further its support for MSBs, UKEF should intensify its drive to identify the financing gaps in the private market, ensuring that its existing products are geared towards supporting smaller deals and newer exporters.

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Go your own way — an MSB guide to the journey from non-exporter to global business

3

Third steps: growing from successful exporter to international business

To capitalise on overseas opportunities, successful MSB exporters should next begin to think and act like an international business. This means expanding their footprint in existing markets and growing into new, high-potential countries. To do this, it will be essential to develop an international strategy that includes plans to grow the MSB’s presence in existing markets and venture into new opportunities.

• Internationalising means going beyond exporting…

• …to expanding the MSB’s foothold in existing markets…

• …and looking to the next set of growth markets • It also means undertaking financial planning for future growth.

Internationalising means going beyond exporting…

Once an MSB has learned how to export successfully and is seeing growth from selling abroad, the next stage is to prepare for future international expansion. To do this, an MSB should develop a strategy that drives this international growth while protecting against the increased exposure to risk.

Market intelligence is the foundation for any internationalisation plans. Knowledge of opportunities and barriers frames the ambitions of an MSB, while highlighting missing pieces that need to be actively filled in. Market Entry Advisory services from both the private and public sectors will play a major role in advising MSBs on the shape of their international strategy and how to prioritise the actions. So too will seeking knowledge and advice from businesses that have experience operating in the markets of interest.

Understanding a country’s investment environment – including regulatory barriers or currency and political risks – is essential in determining where to make the first steps towards investment point. Exhibit 10 demonstrates BDO’s assessment of investment opportunities by country, according to their economic, political-legal and socio-cultural conditions.

Conclusion: MSBs should develop their international strategy with clear priorities country-by-country. They should set clear budgets for the required investment and explore solutions that minimise their upfront costs.

Go your own way — an MSB guide to the journey from non-exporter to global business

Exhibit 10 BDO International Business Compass to help evaluate the overall social and economic development of countries and regions

BDO International Business Compass Politic0-legal conditions

Economic conditions – GDP per capita – Public debt – Per capita FDI inflows – Inflation – Business freedom – Infrastructure – Total tax rate – Market potential

– Political stability – Quality of regulation – Rule of law – Corruption control – Trade freedom – Investment freedom

Market Attractiveness – Population – Inflation – Per capita consumption expenditure – Political stability – Infrastructure – Trade freedom

Socio-cultural conditions – Population growth – Unemployment rate – Per capita consumption expenditure – Health – Education – Work freedom

Production location Attractiveness – Total tax rate – Infrastructure – Market potential – Wage costs – Rule of law – Work freedom – Investment freedom Source: BDO International Business Compass 2013

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Go your own way — an MSB guide to the journey from non-exporter to global business

Exhibit 11 Steelite – export success ensures Steelite International is fit for the future Steelite International’s ambition to become a globally recognised exporter of quality ‘Made in England’ tableware has proved a winning business formula. The Stoke-on-Trent based company has achieved record sales of £70m in its 30th anniversary year, and now trades in more than 130 countries.

The business is the leading supplier of table top ranges to hotel chains such as Hilton and Four Seasons, pub and restaurant giant Whitbread and P&O Cruises.

Back in 1983 Steelite’s UK/overseas trade split was 40/60, which they actively targeted to reverse. Today, exports now represent 85% of the business.

Their secret has been to create a diverse product range which meets the differing requirements of world markets, coupled with a robust corporate structure of wholly-owned associate companies and distributor partners to offer an expanded table top range which includes quality glassware, melamine and cutlery.

Steelite’s ambitious international plans continue to develop.

It predicts further strong growth within the US as well as emerging markets such as Russia and Eastern Europe, the Middle East and South America. The recent acquisition of iconic fine bone china brand Royal Crown Derby will further strengthen its global presence.

…to expanding the MSB’s foothold in existing markets…

Expanding an MSB’s foothold in existing markets is also an important part of an international strategy. This will focus on identifying new marketing and sales strategies to gain greater market share. As an MSB begins to gain more confidence internationally, it might need to consider tailoring its products or services to suit the local market. Successful exporters, such as Steelite, have in part had international success because they were able to identify gaps in their offering for each market and find products to plug them (Exhibit 11).

MSBs at this stage should also begin to consider how investments in existing markets can help to build their foothold. When thinking about this, it is important to understand avenues for further internationalisation. Necessary considerations include: •M arket analysis – what knowledge should be studied, including regulatory, risk and location analyses?

• I nvestment vehicles – which model should be used?

• I mplementation – what must be done to successfully expand abroad?

•O perational – how will the international arm of the business be run?

• F inance and accounting – what will remain an internal process and what will be locally outsourced?

• T ax services – what issues need to be understood when operating in multiple countries?21

Go your own way — an MSB guide to the journey from non-exporter to global business

Exhibit 12 Business intentions to expand into market over next decade (% change) 18

Indonesia 16

Thailand

Breaking into high-growth markets, even as an experienced exporter can be a cumbersome and complex process. International strategies should include a generous timeline for developing relationships and gaining brand awareness in overseas markets.

With the long-term commitment of expanding and potentially investing in the future, international MSBs should seek to identify their markets of the future, as opposed to markets of today.

16

Brazil 11

Singapore

11

South Africa

11

Japan

11

Turkey 10

Malaysia 8

Russia

8

South Korea

8

Vietnam

8

India

8

China Mexico 0 2

markets further afield. In particular, businesses that are seasoned exporters might seek greater returns by turning their attention towards the opportunities presented by high-growth markets (Exhibit 12).22

8 4

6

8

10

12

14

16

18

20

Source: CBI export survey, January 2013

…and looking to the next set of growth markets Another part of an MSB’s international strategy is identifying new markets in which to seek opportunities. With many MSBs first exporting to countries with similar cultural/regulatory regimes, once they have gained confidence in exporting, they might turn to

As many of these high-growth markets also present high risks, there should be more support to encourage businesses to take the leap while keeping exploratory costs low. In The only way is exports, the CBI suggested that government consider leveraging a ‘new markets incentive’ in the form of a tax rebate against costs related to the exploration of overseas markets.23 Although government is unconvinced by this proposal, they must do something to level the playing field for MSBs that are competing with firms from countries, like the United States and Germany, which offer tax incentives to help tip a business over the barrier of exploring and ultimately expanding into new markets.

Conclusion: The UK government should fully consider using fiscal levers to incentivise expansion into higher-growth emerging market economies.

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Go your own way — an MSB guide to the journey from non-exporter to global business

It also means undertaking financial planning for future growth A forward-thinking international strategy will also include plans to finance long-term growth. As MSBs move on the journey beyond just exporting, they will need to have financing available to fund international investment. Long-term, or patient, capital for SMEs and MSBs represents a five-year plus investment, which provides a growing business with certainty and stability as it grows and encounters more risks.

It can often be difficult to obtain patient capital. It is widely accepted that there has long been a structural gap in the market for small and medium-sized businesses to access growth capital. The Breedon Taskforce estimated a finance gap in the range of £26bn to £59bn for smaller businesses.24 Precisely where the gaps are most felt has been debated, but the Rowland’s review found that small and medium-sized businesses seeking growth capital between £2-10m on a long-term affordable basis have the most difficulty.25 For growing MSB exporters, these gaps in long-term finance can significantly impact the internationalisation of their business.

However, MSBs are beginning to seek long-term finance from alternative sources such as retail bonds and private placements to fund their growth aspirations and allow them to become international businesses. These types of alternative finance are highlighted in the CBI report, Ripe for the picking.

The CBI is also calling on government to ensure that State Aid approval is sought to allow the Business Bank to support access to patient capital. The Business Bank can help support the development of international strategies within MSBs through support and advice services such as the GrowthAccelerator programme.

Conclusion: Government must seek State Aid approval for the Business Bank, to allow this initiative to get off the ground.

Conclusion: Business and government must recognise the importance of supporting the expansion of MSB exporters by encouraging the provision of long-term capital.

Go your own way — an MSB guide to the journey from non-exporter to global business

As MSBs move beyond just exporting, they will need to have financing available to fund international investment.

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Go your own way — an MSB guide to the journey from non-exporter to global business

4

Fourth steps: investing for greater rewards

The next step for an international business is to invest abroad, using the knowledge developed in their international strategy to direct where the investment will be made and how it will look. There are many models for investing, so an MSB should carefully consider the benefits of each option and protect against any of the negative risks that might develop.

Although investing abroad presents a new set of challenges, 51% of MSBs agree that the rewards from expanding by investing abroad outweigh the risks. MSBs that have embarked on this path through international investment offer the following insight:

• Tailoring the model of investment to each market…

Market entry knowledge and advice continues to play a major role in helping an MSB successfully invest abroad. A single business can have different investment models for each market. The required knowledge and related regulation can be overwhelming, so an MSB needs to thoroughly analyse each model. Internal knowledge of the implications for each type of investment is essential. As is seeking external support from accountants and banks to assess the MSB’s financial security abroad and at home.

•… helps MSBs generate and then meet international customer demand…

• … and increases their knowledge of doing business abroad • This international expansion can bring added risks…

• …but government support and other advice is available to help mitigate it.

Tailoring the model of investment to each market…

There are numerous models of foreign investment that an MSB should consider before determining which is best suited to their company in a given market (Exhibit 13). The model that an MSB chooses in one country might not suit their business in another, so it is important for investors to be highly knowledgeable about the market dynamics within each country.

• Find good staff and partners in the region • Do thorough research to improve your knowledge of the market • Take your time/go one step at a time.26

Conclusion: MSBs should weigh the benefits of each model of investment, and tailor their ventures to suit local market conditions.

Go your own way — an MSB guide to the journey from non-exporter to global business

Exhibit 13 Models of foreign investment Model

Definition

Pros

Cons

Joint venture

An agreement between two companies to develop a new, separate entity. Often used to complete a singular project.

The UK MSB can learn from the local business with minimal investment and commitment.

The small commitments by both companies often lead to a lack of outcome. The investor must adhere to any of the legal agreements for the term of the contract.

Partnership

Two or more partners jointly share responsibilities and control over business.

Local partners can provide on-the-ground experience and existing networks. In certain countries, partnerships offer a solution to local ownership laws.

Even a 51%/49% will place the minority partners at a significant disadvantage, with frequent disagreement and impasse.

Franchise

The foreign operator adapts the successful UK business model in-country, paying the franchisor for use of trademarks and goods/ services.

Franchisees offer local knowledge and experience, and brand expansion with no direct cost. Unlike in partnerships, the franchisors retain full control over the strategic design of the local branch of the company.

Due to the nature of franchising, any change to business strategy requires re-negotiations with each franchisee.

This can slow down innovation and decrease ability to react to each individual market.

Whole ownership (greenfield)

The UK business owns and controls the entire enterprise from the initial investment.

Investor business maintains complete control over the investment.

Requires the investor to independently gain necessary local market and regulatory knowledge.

Investing through acquisition

Buying existing businesses to achieve instant market share.

Acquiring an existing business allows a business to quickly scale-up their operations in a foreign country.

The risks involved in any M&A apply to this model.

(JV)

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Go your own way — an MSB guide to the journey from non-exporter to global business

…helps MSBs generate and then meet international customer demand…

The motivation for determining where to make overseas investments often comes from international customer demand and requirements. As the Benoy case study demonstrates, sales offices are often necessary to build on initial projects or exports abroad (Exhibit 14). They are particularly important if an MSB does not have an in-market agent or distributor, as they allow the business to have sales staff on-the-ground to meet with customers during local business hours. These individuals can also network in-market to develop new relationships that lead to future business deals.

For MSBs that have up to this point contracted with local agents or distributors, customer demand may lead to a need to invest in a local distribution or logistics centre. Often at this stage, MSBs will inject finances into their local contractors to better control the sales processes and reap greater financial rewards. These investments allow the business to take a step towards fully controlling their in-country sales, while maintaining the networks that the existing local businesses have already built up. By doing so, MSBs achieve scale that would otherwise take them years to develop themselves.

… and increases their knowledge of doing business abroad Investing by joint venture, partnership or franchising is another way to seize the opportunities in an international market. Undertaken between MSBs and local companies, these partnership agreements can also provide the UK company with a quick way to increase its footprint in an overseas market with a relatively low investment.

Exhibit 14 Benoy – growth through demand Benoy was established in 1947 as a rural architectural practice, designing agricultural buildings locally in Nottinghamshire. This continued until 1975 when the company began looking outside its traditional market towards town centre development, which allowed expansion within the UK. The delivery of Bluewater in 1999, then the largest shopping centre in Europe, was a significant milestone. The enormous success of Bluewater led to significant enquiries from abroad including, in 2001, an invitation from an ex-UK client which had relocated to Asia, to pitch for a major retail project in Hong Kong – now called Elements – which Benoy secured in 2002.

Although this was a difficult time economically and politically for Hong Kong, complicated by the SARS outbreak, Benoy used the Elements project as a springboard to secure further work in Hong Kong, and subsequently China and other parts of Asia, creating five further offices in the region.

Benoy managing director Nick Lamb says: “Ten years or so of working overseas has had a dramatic effect on our business and this work, now in over 50 countries, accounts for around 80% of our 500+ staff and £50m turnover.”

Go your own way — an MSB guide to the journey from non-exporter to global business

These investment models have varying levels of control over the local entity. For businesses already active in-market, these investment options are often a way to grow confidence and may eventually lead to the business buying out its partner entirely.

Partnering or franchising can also provide MSBs with a path to enter new markets, where having a local enterprise is either required by law or by custom. In some cases, there is only one logical option for an in-market partner. However, MSBs might struggle with identifying these partners and conducting the necessary due diligence. Businesses might seek different models of investment depending on local market attributes.

Business organisations, such as the CBI, UK India Business Council or the China British Business Council, are actively seeking to expand their overseas networks of support for UK companies.

This work, supported by UKTI, and the British Chambers of Commerce should help to provide support for investors seeking local knowledge.

This international expansion can bring added risks…

A clear and well-developed international strategy should mitigate many of the risks inherent in investing abroad. However, one consideration that grows exponentially when partnering and investing abroad is a business’s exposure to bribery and corruption. The UK is rightly leading the charge against global corruption, which is morally wrong and distorts markets. However, the unintended consequences of the UK’s Bribery Act can limit the international expansion of MSBs.

Practical challenges remain for businesses due to the mismatch between the provisions of the Act and local customs and practices.

In its current form, the Bribery Act has created a perception that it is now more difficult to do business with UK firms, and that it is more complicated for UK companies to start exporting. The Section 7 corporate offence clause has put the UK at a disadvantage compared to global competitors, such as: •G erman companies that are not subject to criminal liability for associated persons • F rench companies that cannot be prosecuted for failing to prevent bribery •U S companies, which are permitted low-value facilitation payments that are not intended to influence the outcome of an official process in an overseas country.

There is also a clear administrative burden created by the Act. For example, nearly half of the length of some UK Export Finance application forms arises from the Bribery Act.27 Therefore, the CBI calls on government to further its review of the Bribery Act and develop a set of guidelines and recommendations for businesses to clarify the purpose, intent and scope of the act Act consistent with its desire to significantly increase UK exports.

Conclusion: Government should review the unintended consequences of the Bribery Act and develop a fresh set of guidelines and recommendations for businesses clarifying the purpose, intent and scope of the Act.

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Go your own way — an MSB guide to the journey from non-exporter to global business

…but government support and other advice is available to help mitigate risks Although many MSBs at this stage will feel adequately equipped to identity potential partners and conduct their own due diligence, government support is also available. In particular, UKTI’s Overseas Market Introduction Service (OMIS) reports can be used to identify local businesses and potential partners, and provide in-market intelligence on them. Of all OMIS reports commissioned, in the year to June 2013 39% were in relation to identifying companies with which to joint venture, partner, or franchise overseas.28 Although OMIS ranks well in UKTI assessment surveys (76% in 2012-2013), the low rate of take-up among MSBs is worrying.29 UKTI must continue its work to identify and seek out MSBs at different stages of the journey. MSBs that have commissioned OMIS reports often complain about an inconsistency in the quality of output from OMIS reports. The depth of market intelligence provided by the reports varies depending on which office or individual completes the report.

This lack of consistency appears to discourage MSBs from commissioning future reports, saving the money to do the research internally. To counter this inconsistency and provide value to MSBs, UKTI should therefore base the OMIS report cost on outcomes rather than the process of putting the report together. This will drive the UKTI staff to identify information that is useful for international investors.

Conclusion: UKTI should undertake a comprehensive review to equalise the quality of all OMIS reports, and examine ways to make the overall cost of the service performance-related.

Go your own way — an MSB guide to the journey from non-exporter to global business

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Go your own way — —an anMSB MSBguide guideto tothe thejourney journeyfrom fromnon-exporter non-exporterto toglobal globalbusiness business

5

Final steps: becoming a truly global business

The final stage of the journey is operating as a global business. This entails developing business models and corporate structures that look at the business across numerous international markets.

These processes will support an MSB to grow further and overcome the barriers that develop as the business grows.

• Global MSBs operate regional hubs…

•… and expand business processes while maintaining brand identity • They also consider business reputational risks…

• …and might support new exporters.

Global MSBs operate regional hubs…

As a business globalises, it should consider the end needs and benefits of establishing a structure of overseas subsidiaries, and sometimes regional hubs. Geographically speaking, the UK is well-placed to serve as a headquarters for global businesses as few destinations are over a ten-hour flight, and it sits in the middle of the global time zones. However, it is impossible to run a truly global business without establishing offices in the important regional zones of the world. Global businesses need to be able to respond to challenges in local time, without referring back to the UK-based headquarters.

What cities or countries these subsidiaries or regional hubs should be based in are dependent upon the MSB’s industry and international goals. However, when doing business in a country like the USA or China, it is often an unofficial prerequisite to have a subsidiary in-market. This demonstrates to local businesses and potential partners that the MSB is serious about investing in the market.

These global hubs also act as spring boards into other markets in the region. Although the MSB’s international strategy will remain in the hands of the UK-based headquarters, these hubs can provide in-market knowledge and local understanding of where future demand will develop (Exhibit 15).

Go your own way — an MSB guide to the journey from non-exporter to global business

Exhibit 15 Cromwell – investing for the future Established in 1968 as a supplier of industrial consumables into industry, Cromwell Tools is now a Sunday Times Top Track 250 company with headquarters in Leicester. Group sales in 2013 are at an all-time record of £271m, creating work for 1900 employees worldwide. Cromwell started exporting more than 25 years ago and export sales today account for 13% of turnover. It directly invests in 12 overseas markets, exports to over 40 more markets, and has plans to further expand in the years ahead.

Cromwell’s journey into exports was initially customer-led.

However, the key to its future international success is to identify the markets of tomorrow. To this end, Cromwell now looks towards the developing economies that are, or will be the world leaders in the future. Export plans now include countries like China, India, Indonesia, Brazil, Russia, Turkey and Vietnam to name a few.

International trade manager David Gollings advises that new exporters should “make sure it is planned well, that you have the patience for things to happen, and that you are in it for the long term. Exporting takes time to build but it is worth the journey.”

…and expands its business processes while maintaining brand identity As an MSB globalises, it will face increasing customer demand for new products and require quick turnaround on delivery for goods and services. Global hubs can help to manage these local

demands, but MSBs may also consider sourcing services or assembling goods locally. Basing a number of these in strategic points around the world can ensure the MSB can match global demand and compete with local businesses.

Although it is important for global MSBs to take on these global business processes, it is often essential that they retain their British identity. As discussed earlier, being British is often one of the selling points for new exporters. Businesses like Cath Kidston demonstrate that while a business can shape its international offering by taking on a global identity, at its heart the MSB remains a British company (Exhibit 16, page 42).

One way to sustain the UK identity of a global company is by establishing a programme to foster the growth of internationallyminded staff based in the UK. By incubating and supporting international interest and knowledge from early in an individual’s career, an MSB will be able to develop future international staff from within. The programme should include secondments to the international offices, which will help to further develop the individual’s knowledge and experience, as well as contacts overseas. This will help to ensure that the MSB has future leaders to carry the goals of the organisation throughout the world.

Conclusion: A global MSB should develop employees that it can then strategically place overseas to ensure the culture, brand and reputation of the MSB is preserved.

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Go your own way — an MSB guide to the journey from non-exporter to global business

Exhibit 16 Cath Kidston – a truly global British brand Cath Kidston is one of the UK’s leading lifestyle retailers, and celebrated its 20th anniversary in September 2013. Known for its original prints and fresh take on design, the brand offers a broad range of products from bags, accessories, homeware, garments and a range for children. The company trades from 133 stores across the UK, Europe and extensively throughout Asia where the business is represented in seven countries with a further two opening before the end of the year.

The predominant model for the Asian markets is through an exclusive distribution agreement, providing a single partner in each market the right to operate standalone Cath Kidston stores, and in selected markets, wholesale to an approved local distribution network. This approach of partnering with an experienced local operator creates a powerful relationship, allowing the business to grow profitably but remain consistent to the DNA of the brand and is likely to be the primary international model for the business in the future.

In China, the decision was made to enter the market through a wholly-owned operation, in order to provide a greater level of control and execution of the brand values for launch as well as to gain a deeper understanding of the commercial and operational realities of trading there.

They also consider business reputational risks…

As an MSB globalises, it will also need to understand the complexities of operating across many markets. Increased mobility of goods, services, labour, capital and ideas have combined to allow MSBs to structure their operations in an increasingly global manner.

Responsible global businesses need to be able to master the external environment in which they’re operating. It’s about understanding the public policy that shapes the way they do business, and being able to anticipate risks and opportunities at home and abroad. All this is vital for business reputation and trust.

Anticipating change in the business, political and economic environment, and being able to manage a crisis situation can make or break a business.

In particular, it is important for global MSBs to understand how to manage their exposure to international tax regimes. Entry into a new territory beyond a very low level of preparatory activity is likely to create an immediate tax obligation for an MSB in that new territory.

This brings complexity and tax compliance obligations that can be onerous, costly in terms of professional advice as well as tax costs and can potentially be a barrier to global expansion. As and when bi-lateral tax agreements between the UK and other countries are re-negotiated or a review of the OECD model double tax treaty is undertaken the tax barriers to entry into a new territory could be eased by an exemption for MSBs from local taxes before a certain de minimis level of economic activity in that new territory is reached.

This would allow the MSB to put its toe in the water in a new territory

Go your own way — an MSB guide to the journey from non-exporter to global business

without significant tax compliance cost and then see how it goes.

By the time the de minimis level has been reached, the MSB should have a better view on whether the economic activity in that new territory is worth further investment and only at that point would local tax costs and obligations start to accrue.

How profits generated overseas are taxed in new territories needs to be understood, as well as the tax consequences in that new territory and in the UK of repatriating those profits. The UK has now moved to a more territorial basis for the taxation of business profits, which means that overseas business profits are unlikely to be subject to UK tax, although there are exceptions to this. MSBs need to consider withholding taxes on dividends, interest and royalty flows as they can be an absolute cost of doing business overseas.

Conclusion: As and when the UK renegotiates bi-lateral tax agreements or a review of the OECD model double tax treaty is undertaken, an exemption to help MSBs establish economic activity in a new territory without significant tax costs should be considered.

‌and might support new exporters MSBs that have achieved success on the global stage should also consider how they can assist smaller UK businesses that may not have international experience. As discussed earlier, supply chains play an important role in bringing non-exporters to market and supporting their internationalisation. When an MSB has reached a level of global success, it should begin to think and act like a larger business.

Support can include providing in-market knowledge, potentially sharing office space, and helping to connect customers with local networks. Assisting in this way can further bolster the UK economy, which will ultimately help domestic demand grow. It will also help to internationalise smaller customers. This has an add-on effect for the globalised MSB, as they will have more knowledgeable supply chains that understand what it takes to succeed internationally.

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References

1 UNCTAD 2 T he only way is exports, CBI, 2013 3 A nalysis based on the Department for Business, Innovation, & Skills data and the FAME database. Future champions, CBI, 2011 4 Future champions, CBI, 2011 5 C alculation from Department for Business Education & Skills data, 2011 6 CBI export survey, January 2013 7 F irst steps to exporting, ICAEW, http://www.icaew.com/~/ media/Files/Library/collections/online-resources/briefings/ directors-briefings/EI1FIRST.pdf 8 BIS Economic Paper No. 13, May 2011 9 CBI export survey, January 2013 10 C BI international survey, December 2012 11 I nternational business strategies, barriers & awareness monitoring survey 2013, UKTI, p123 12 P IMS Position at Q1 FY 13-14, summary results, UKTI, June 2013 13 M essage to UKTI network on mid-size businesses (MSB) programme, 2013 14 P IMS Position at Q1 FY 13-14, summary results, UKTI, June 2013

15 G rowth: an ICAEW perspective, Institute of Chartered Accountants in England and Wales, February 2013 16 CBI M-Clubs surveys, 2012 17 Global ambitions, BDO, 2012 18 Changing the pace, CBI, 2013 19 CBI export survey, January 2013 20 UKEF data, FY 2012-2013 21 India unlocked, BDO 22 CBI export survey, January 2013.

23 The only way is exports, CBI, 2013.

24 Breedon taskforce 25 Ripe for the picking, CBI, 2013 26 Global ambitions, BDO, 2012 27 https://www.gov.uk/government/organisations uk-export-finance 28 PIMS position at Q1 FY 13-14, summary results part 2, UKTI, June 2013 29 PIMS position at Q1 FY 13-14, summary results part 2, UKTI, June 2013

Go your own way — an MSB guide to the journey from non-exporter to global business

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About the sponsor: BDO BDO is the largest international accountancy network focussed on the mid-market with over 1200 offices in 138 countries.

• During the latter stages of the journey, BDO provides investment and structuring advice to those businesses looking at overseas joint ventures or acquisitions and our anti-bribery diagnostic tool We work with mid-sized businesses on their strategic, financial and and specialist advisers ensures companies are aware of any fiscal agenda helping them realise their ambitions. We help our potential weaknesses which could leave them exposed under clients through this journey of internationalising their operations the UK Bribery Act working in conjunction with our international network and other specialist advisers.

• Once businesses decide to go fully global, BDO helps them to navigate local corporate tax regimes, manage the employment • BDO helps businesses identify which countries, and sometimes tax issues for their expatriate staff, repatriate funds to the UK and regions, present the greatest opportunities for them understand, manage and mitigate the additional risks of • We advise exporters of the potential regulatory and tax regimes operating an multinational business that they may encounter through the different sales channels In the UK BDO has over 3000 people delivering exceptional client they may adopt service from 23 offices to businesses across a range of industry • When companies are ready to take the step from exporting to sectors. With the extent of interest we see from British businesses putting down a footprint overseas, we advise on the optimal seeking to exploit the market opportunities in the far east, we have structure, help them understand different cultural aspects and both a China and India Advisory Services team of professionals commercial practices, help them recruit on the ground , with a deep understanding of the cultural and business issues in introduce them to sources of finance and reputable local those countries, and who have the language skills and professionals and even identify potential joint venture or supply relationships in the UK and overseas to help our clients with these chain partners particular journeys.

• If appropriate, we can help MSBs outsource their accounting and payroll requirements as well as provide local audit and tax compliance services from the local BDO office

For further information, contact: Sarah Knaus CBI senior international policy adviser Centre Point, 103 New Oxford Street London WC1A 1DU T: +44 (0)20 7395 8148 E: sarah.knaus@cbi.org.uk

October 2013 Š Copyright CBI 2013 The content may not be copied, distributed, reported or dealt with in whole or in part without prior consent of the CBI.

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