UK plc risks international expansion ‘own goal’

UK mid-cap businesses are investing more in international operations and expect to increase revenue abroad over the next three years amidst a tough economy at home. However, they remain uncertain about how to manage the challenges and risks that come with playing away, according to the 2012 BDO Global Ambitions Report – an international survey of CFOs from mid-sized companies by accountants and business advisers BDO LLP.

More than eight in ten (82%) UK mid-cap firms feel optimistic about their international expansion plans, while three quarters (78%) expect to generate more revenue from investment abroad in the next three years. The results also indicate that UK CFOs believe doing business abroad is no more difficult than three years ago, with 65% reporting that conducting business is the same and a further 16% reporting it has become easier.

However, while many UK firms are being lured abroad by better access to overseas markets (56%) and new customers (56%), beneath this positive outlook some UK firms are pursuing international expansion plans as a result of tough trading conditions at home. According to BDO’s Global Ambitions report, a third (31%) of UK CFOs have been forced to expand their horizons by difficult domestic conditions – more than the majority of their international peers.

Despite many feeling pushed to expand overseas, UK mid-caps face a situation of ‘arrested development’ – feeling constrained by uncertainty around how to operate away from home. UK firms are concerned about a number of risks and challenges, particularly instability caused by currency fluctuations, which is believed to be the greatest risk, according to one third (33%) of UK CFOs. Of those finding expansion difficult, many name the burden and complexity of increased regulation as a key challenge (38%), even greater than the tough economic climate (31%). However, the fact that this is in spite of a push by countries such as China and India to ease red tape points to a misunderstanding of the real challenges these businesses face.

Significantly, over 6 out of 10 (61%) claim that the Eurozone crisis has had little or no impact on their overseas investment plans, with only 8% saying it has had a large impact. This indicates that UK plc believes that the real rewards from investing overseas lie in the BRIC countries (where 45% plan to invest), with traditional safe haven markets such as the USA (27%), Germany (21%) and France (15%) also attracting investment. A trend further emphasised by UK CFOs ranking Greece and Spain as more risky individually to invest in than Pakistan, Egypt and Kazakhstan[1].

Kim Hayward, International Advisory Partner, BDO LLP commented: “Disappointingly, UK mid-caps find themselves in a challenging situation. Pushed abroad by conditions at home, they are pursuing growth overseas but in some instances are lacking in awareness as to how to address the real challenges involved. Crucially, those investing abroad for the first time seem to lack the confidence and knowledge they need to operate overseas.

“But this push and pull dynamic needn’t be a negative force. To turn the challenge into an opportunity and mitigate the risks of expansion, British businesses, and SMEs in particular, for whom the gamble is proportionally bigger, need to seek advice at home and both advice and support on-the-ground abroad about how to expand successfully. To give their firm a competitive edge overseas, it is crucial to do thorough research into target markets, choose the right local adviser or partner and take things one step at a time.”

Reassuringly, BDO’s Global Ambitions report finds that the British economy won’t see a gaping hole as a result of home-grown businesses investing overseas, as risk-averse foreign CFOs remain attracted to the UK as a safe prospect for investment. According to the survey, the UK is still among the top 10 investment hotspots, with 45% of CFOs outside Britain planning to invest in the UK on account of strong client relationships in the country (29%) and the opportunity presented by the market’s size (24%).

Kim Hayward concluded: “With domestic businesses increasingly placing their bets for growth abroad, it’s reassuring to see that international firms are still backing Britain as a safe bet. As the UK holds its place as a safe haven for investment, the present risk-averse stance selected by foreign CFOs can only mean good news for the British economy.”