Emerging markets: Expanding to a new frontier

The first of a three-part series on planning, forming, and maintaining a registered legal presence in emerging markets

This article is the first of a three-part series on planning, forming, and maintaining a registered legal presence in emerging market geography.

It’s Monday morning, and your company’s European business director calls you. She wants to expand business to Saudi Arabia, and a consulting firm has confirmed the market potential. She wants sales representatives in-country and selling products by next week. She asks you, “What should we care about from a legal perspective?

Overview on emerging markets

This scenario is one that we, as counsel, may encounter in various forms. As of July 2013, McKinsey’s Global Research Institute reported that expansions in Asia, the Middle East, Latin America and Africa represent a $30 trillion opportunity. “Emerging markets” expansions, which represent growth and profitability, may also be fraught with risk that, without understanding and proactive mitigation, may overly consume legal time and resources.

Considerations for expanding to an emerging market

As corporate counsel, we wear many hats: from risk profiler and mitigator to business analyst, and even de facto project manager. Given our knowledge of the business and understanding of home jurisdiction legal issues, the role is ever-evolving. We may also take on an active role to balance what the business wants with what is legally and practically achievable. Regardless of the role you play, there are several key steps and considerations to establishing a presence in a new geography: 

Finding competent, reputable advisors

Whether it is a law firm or agent, you should find an experienced advisor who is familiar with multinational corporations, particularly companies from your home country. Competent, reputable advisors come in many forms: as satellite offices or affiliates of known International firms, referrals from friends or peers, or even found in directories like Chambers and Partners[2] or Martindale[3].  

After choosing an advisor, immediately set expectations and find out any cultural differences that could ultimately impede or delay the overall process. For example, in Qatar, which is seven to 10 hours ahead of the United States, a 40-hour workweek spans Sunday to Thursday, lawyers rarely work on holidays, and appropriate response time is within two to three business days.

NEXT: What are the risks associated with each individual expansion?

Identify key risks associated with each individual expansion

When expanding to a new geography, identify the key risks associated with that country. Is that country considered high risk? Is there a high corruption rate?[4] Depending on your company’s plans, consider the following:

  • ease of doing business
  • cost and ease of sending and receiving funds
  • foreign ownership restrictions
  • political climate or stability
  • U.S. relations or sanctions
  • any recent changes in business laws
  • Intellectual Property protection, infringement, or enforcement
  • court systems or arbitration climate
  • available remedies, enforceability of foreign awards or judgments

After making assessments also factor in the associated costs as it relates to the overall budget and projected profits. This can help the entire business team comprehensively account for and understand the costs associated with the risk.

Determine the entity structure

With the exception of third party agents or distributors, most countries require forming some type of legal entity in order to conduct business. Working with the business to understand the purpose, function, size, and location of the potential business will lay foundation for choosing the most suitable option. In some cases, it may be possible to set up a company in a country that is authorized to do business in a neighboring country without tax or corporate registration requirements. For example, a Romanian limited liability company can also legally do business in Bulgaria.

Set a timeline for the process…then double or triple it

Unlike a day or week-long company formation process in the United States, forming a presence in an emerging market, whether organic or by shelf-company acquisition, could span months or even years. This can happen for number of reasons, including document requests from governments, layers of government discretionary clearances, and changes in local law. In China, a government ministry may require document submission on A4 paper in black liquid ink and round company stamp. Submission of documents on alternate paper, signed in different ink color or stamp shape may be immediate grounds for rejection.

NEXT: What are the next steps?

Also, do not underestimate the time associated with document formalization processes, like apostille, embassy legalizations and foreign notarizations, or the impact of public holidays, like Christmas or Ramadan, which can lengthen timelines by months. Doubling or tripling the timeline from the outset can set reasonable expectations and accommodate unforeseeable delays.

Planning for next steps

The planning stage is one of many involved process steps. By taking extra measures ahead of the process, you can have all the necessary tools to map out a clear picture with the business team.

Part two of the series, will address the considerations for setting up the company and the overlap between employment law, real estate, business and finance. Part three will discuss ongoing maintenance and compliance requirements.

[1] Note: This article only covers the process for establishing a wholly-owned subsidiary or affiliate of a multinational corporation, and does not explore the details or considerations of emerging markets expansion through acquisition growth, forming joint ventures, partnerships, or other complex relationships with distributors, third party vendors or agents.

[2] http://www.chambersandpartners.com/

[3] http://www.martindale.com

[4] Transparency International compiles reports on country information and ranks them in Corruption Perception Index (CPI), which charts worldwide perceptions of that country’s level of public sector corruption.

Contributing Author

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Charlotte L. Bernard

Charlotte Bernard is associate counsel for Global Structure and Finance at Brady Corporation, a publicly traded multinational manufacturer. She has formed companies across the Americas,...

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