5 pitfalls Singapore SMEs should avoid when expanding overseas

According to the SME Development Survey 2013 by DP Information Group (DP Info), fewer Singapore SMEs are doing business overseas (54 percent in 2012 compared with 46 percent in 2013). This could be due to the perceived risks of internationalisation.

However, when growth is stagnant and a company has reached market saturation in Singapore, it is time to consider expanding overseas to capture new revenue sources and growth opportunities. Identifying the challenges and pitfalls in advance will make the transition to a foreign market a smoother one.

Here are five pitfalls Singapore SMEs should avoid when expanding overseas:

1. Engaging with the wrong business partners

It is important to do due diligence on potential partners in the new market before expanding there. Take advantage of business verification services (if available), equivalent to the online service provided by ACRA in Singapore, to do background checks on potential partners, buyers, agents, or distributors you have engaged to help with your expansion.

Their businesses should be “live” and have good credit ratings. They should also have a solid history of compliance with local tax laws.

2. Administrative and other red tape

In overseas markets there will always be red tape and legal and taxation issues to trip you up before you are ready to commence trading. Local tax regulations and fire safety laws (especially if you are in the warehousing and storage business) can slow your progress considerably.

It is important for SMEs to consider the rate of withholding taxes on interest and dividends from securities owned by non-residents. You may be able to enjoy a reduction in withholding taxes due to Singapore's tax treaties with different countries, but your company must meet certain requirements to enjoy the benefits.

You may have to engage in-country experts to help you cut through the administrative and other red tape, but this will add to the expansion costs.

3. Talent attraction and retention woes

Talent attraction and retention is a perennial headache for employers everywhere, not just in Singapore. If you intend to establish a physical presence in the overseas market, you would need to establish a core leadership team comprising the country head and sales, finance, IT, and customer service executives.

However, they cannot be expected to align themselves with your company's mission and values overnight. Some SMEs, in their rush to hire new employees with the skillset to establish a business presence quickly, hire the wrong people.

It is best to send an experienced team from the company headquarters to handhold the overseas team until the transition period is over and the new team can stand on their own two feet.

4. Market development headaches

A lack of understanding of the overseas market can stymie business growth. It takes time to identify and develop market segments for your products and to build a strong brand presence in the new market. Once you have identified your target demographics, you need to understand that consumer motivations vary from market to market.

In the self-storage industry, for example, while security is an important consideration among users in Singapore and Hong Kong, it is a greater concern among those in Malaysia.

Self-storage facilities have to be located near or next to the MTRs in Hong Kong to be even viable, whereas proximity to public transport is less of a concern in Singapore and Malaysia where most users are car owners.

5. Neglecting the home market

A common mistake the leadership team makes is neglecting the home market when expanding overseas. Ensure that your home team is mature and skilled enough to function on its own without the need for micromanaging, and established processes are running like clockwork, before you get caught in the frenzy of overseas expansion.

If your company has reached a point where expanding overseas is the only way to ensure its continued growth and profitability, being aware of the pitfalls will ensure that you do not stumble in foreign markets.