US Corporates’ Global Ambitions Remain Strong Despite Protectionism

A recent surge in U.S. protectionism has global trade in jeopardy.

Analysis published Monday (May 22) from ratings agency Fitch concluded that the potential for a spike in trade protectionism is a significant risk to the global economy.

“A hypothetical trade war would lead to adverse outcomes in all major economies,” said Fitch Chief Economist Brian Coulton in a statement. “The U.S. and the countries directly targeted by the imposition of punitive U.S. import tariffs would see the largest losses of GDP, but global repercussions would be significant as business and household confidence falls, asset prices weaken and trade flows are affected more widely, including through disruptions to multinational supply chains.”

That’s a bleak outlook, but new research from TMF Group suggests that — while outbound foreign direct investment from U.S. companies is indeed slated to decline this year, overall, businesses continue to promote an agenda of international growth. Perhaps even more surprising, TMF’s report found, there is more at play to this trend than U.S. businesses simply seeking cheaper products and services.

TMF released its report “Venture Further — What drives international expansion and investment by U.S. businesses?” last week. Written in conjunction with Forbes, the report, which surveyed C-Suite executives from U.S. businesses with multinational footprints, explores their motivations for going global in such geopolitically turbulent times.

Raimundo Diaz, head of Americas at TMF Group, and Jason Gerlis, regional director of North America at TMF Group, both chatted with PYMNTS about the findings in the report.

For both executives, some of the data came as a surprise.

“What we see is that there is a continuing trend toward interdependence in the global economy,” said Gerlis, adding that this trend continues despite geopolitical concerns of recent years — and even of the last few months. “Technology continues to break down barriers between cultures, and businesses are continuing to look abroad to access new markets and expand their customer base.”

According to Diaz, most surprising for him was the fact that driving costs down was far from the top reason U.S. firms explored cross-border markets. According to TMF, just 12 percent of survey respondents cited decreasing operational costs and boosting cost efficiency as their top motivation behind exploring international markets.

Instead, nearly half (45.6 percent) said their global expansion is to open new markets and increase market share. Expanding existing operations, boosting R&D and finding new talent were also high on the list.

“Cost-driven localization outside the U.S. seems to be low on the list of priorities for our C-Suite interviewees,” Diaz said. “It used to be, in the past, that one of the reasons why people would establish themselves in other countries was so that you could deliver services or products at the local cost. That doesn’t seem to be the case anymore.”

That shift has occurred in only the last decade or two, he added.

But that’s not to say that this wave of protectionism in the U.S. — the same trend that led to Brexit — isn’t real. Rather, Diaz explained, it’s part of broader ebbs and flows of the global economy.

“There is a global trend, in terms of internationalization of companies, and that’s not going to stop,” he said. “If you look back in history, what you see is globalization will go at full-speed, and then people will step back, and there is a moment of protectionism. But the long-term trend is that countries are looking outwards, trying to make it attractive for people to look into their jurisdictions.”

He pointed to Ireland, which successfully shaped tax policy to attract FDI in the market, as well as jurisdictions in Asia that are doing the same.

Juggling Corporate Finance Pressures

But just as tax policy can attract foreign investment from other countries, Diaz and Gerlis added that compliance to local regulators can be one of the biggest challenges for companies expanding globally.

“Every country has its own way of working, and the problem is that the devil is in the details,” Gerlis said of the particular tax and other financial rules that vary from market to market. “Companies that are experienced and savvy realize that the one thing they can’t afford to get wrong is the books. And the one person you don’t want to annoy are the revenues and customs regulators.”

Other financial challenges are top-of-mind for businesses when eying international growth, TMF’s report found.

In fact, according to the survey, the top priority once a business has entered a new market is to get their banking and accounting ducks in a row. Indeed, establishing banking and accounting measures in the new market is the number-one challenge named by survey respondents to their global growth, cited by nearly a third of professionals.

Both Diaz and Gerlis agreed that jurisdictions the world over are increasing their attention on compliance, forcing businesses to do the same. According to Gerlis, the U.S. is notorious for its compliance pressures and can often trip up international companies looking to operate there.

“The U.S. is getting very hot on compliance,” he said. “The IRS has trained us all to be very cautious. Whether it’s negligence or outright fraud, the acceptance of error in the U.S. is extremely low.”

“In the Americas, compliance is enforced very strictly,” added Diaz. “And, on top of that, it’s very immediate. Rules change, and the tax authorities require compliance pretty much within a month.”

That may catch some international businesses off-guard, he noted, adding that not only is there a legal repercussion to noncompliance, there is a reputational one, too.

“Imagine if Microsoft was on the front page of the paper [with the headline]: ‘Microsoft trying to avoid taxes in Brazil,’” he posited. “The reputational impact is very strong.”

And while other markets’ compliance demands may not be as severe, Diaz said U.S. firms have a lot on their plate, too. And sure, technology may be breaking down barriers to entry when it comes to working internationally, but having actual partners in other markets is critical to ensuring a smooth — and compliant — transition, the executives said.

“Companies end up working with people that know the local situation very well,” Diaz said, “because if they had to know what the rules of every country are, they would go crazy.”

According to Gerlis, the challenge will likely only grow larger.

“The process of opening a bank account and new business, and remain[ing] compliant, is likely to be more complex as time goes on,” he said, “which is why you must have partners locally who know how to operate and keep you compliant.”