A thorough explanation of the advantages and disadvantages of international expansion for Japanese companies
Introduction: Why is International expansion attracting attention?
Today, I would like to know specifically about the advantages and disadvantages of International expansion for Japanese companies.
I would like to know from the conclusion, if possible, to make a point!
I’m a time-efficient person, mhmhm!
In a nutshell, do the advantages of International expansion for Japanese companies outweigh the disadvantages?
Yes, it exceeds.
(Whether investing internationally or exporting) sales will increase.
White Paper on Small and Medium Enterprises, 2014 Edition
Compared to firms that have not expanded internationally, firms that have expanded internationally continue to increase the number of employees.
White Paper on Small and Medium Enterprises, 2014 Edition
In terms of labor productivity, exporting firms have a per-employee labor productivity of 2,169,000 yen higher than non-exporting firms.
White Paper on Small and Medium Enterprises 2023 Edition
As before Corona and after Corona, Japanese companies (exporters) that have international expansion have higher labor productivity.
Even with mergers and acquisitions, closures, openings, rising labor costs, and many other things, companies that are expanding internationally are more stable.
That’s right.
However, it may be moderately difficult for a company with no experience in international expansion to be convinced that the disadvantages of international expansion outweigh the advantages before expanding overseas.
The following chart shows the results of a survey of 12,950 Japanese SMEs regarding their international expansion and return to the domestic market.
Less than 20% of SMEs are expanding internationally, 80% of SMEs are not expanding internationally, and of these, only 10% are interested in expanding internationally, with most SMEs indicating that they are not interested in expanding internationally.
The pie chart below shows a survey on SMEs’ growth and investment behavior, which also shows that 80% of SMEs said that investment in international expansion was not important.
We are what you call a minority.
But why?
Because I don’t know a lot about a lot of things, I’m sure.
I’d like to experience a bit of international expansion, but I don’t know how to start,
Because some industries are not at all capable of imagining international expansion.
It’s not that we don’t have information, or that we can’t estimate the risk, or that we have our hands full with our domestic business.
Yes, that’s right.
On the other hand, how about this one?
Below is an overview of the number of international offices of Japanese companies.
It has been increasing for the past 30 years.
As for the international expansion of small and medium-sized enterprises (SMEs), the number of firms that have begun exporting has increased in recent years compared to the bubble period.
This is despite the fact that the number of small and medium-sized enterprises (SMEs) in Japan is decreasing year by year along with the population decline.
International expansion of Japanese companies, Ministry of Economy, Trade and Industry, October 2007
Overseas Business by the NumbersOverseas Offices of Japanese Companies Doubled in 10 Years Monthly Business Concepts Editorial Board June 2016
Survey on the number of Japanese companies with international expansion, Ministry of Foreign Affairs of Japan, October 2022, edited by Paccloa Co. Ltd.
Questionnaire Survey on the Actual Status of International Expansion of Small and Medium Enterprises,” Sompo Japan Nipponkoa Risk Management, December 2013.
Metabolism of Small and Medium Enterprises Small Business Administration 2019
Why does international expansion continue to garner so much attention?”
The answer, it seems to me, lies in this gap.
Despite the fact that only a minority of companies are actively expanding internationally, the reality is that the number of Japanese companies expanding internationally has been increasing for almost 30 years.
For example, the following are two of the main reasons why we do not see the benefits of international expansion
・The industry, products, or services that really cannot be expanded internationally, and there is no merit in expanding internationally as a matter of fact.
・International expansion” itself is not well understood, so it is not an option for those who do not have a concrete image of what they do not know.
Below you can see the reasons why we are not interested in international expansion and why we have not expanded internationally to date.
Survey on International Expansion of Small and Medium Enterprises and Their Return to Japan” (reprinted)
The reasons for each are reiterated below.
Reasons for lack of interest in international expansion:
・It’s a business that is not suited for international expansion.
・I can run a business in Japan alone.
・Because of the risks involved in international expansion.
・I don’t have any information or triggers.
・Because we failed to expand internationally before.
The reason why we have not expanded internationally until now:
・No human resources.
・Unable to secure a sales channel
・I don’t know what kind of demand there is internationally.
・I don’t know what business practices and laws and regulations are overseas.
・I am worried about communicating with local people.
・Not sure which countries/regions to expand into
・No funds.
・Covid-19 Disaster limits behavior.
・Risk of conflict and political instability.
・Foreign exchange fluctuation risk
・Inability to secure raw materials and parts
・Intellectual property, technology and know-how will be leaked.
・International infrastructure is not well developed.
・Risk of natural disasters.
There are indeed many barriers to international expansion,
Don’t you think it is considered to be a good idea?
I think.
（If it’s this hard, I don’t think I’ll ever be able to do international expansion.)
But is this a barrier only to international expansion in the first place?
I think it is normal for any new project to start out with a lot of unknowns, which must be looked into before moving forward.
However, I think I understand “no trigger”.
If you have been doing business in the domestic market for a long time, there is no need or time to look overseas, and it is difficult to know whether there are companies that have truly succeeded in international expansion.
And the most recent challenge is, after all, the shortage of labor.
Even if the economy returns, many small businesses will not be able to take on more work than they have now, and the opportunity cost is immeasurable.
There is also a mismatch in human resources.
They want to do something new, but they don’t have the personnel to do it.
I hope the current employees are reskilling (learning new knowledge and skills needed on the job) and are able to do new things,
It is rare to find an employee who is willing to learn from the ground up what he or she did not have to do before, and do it for a similar salary, albeit with a small allowance.
(Is that me?)
Why are you actively considering international expansion under these circumstances?
・Has the company’s external environment suddenly changed?
As a matter of fact, like our company,
・Have you been thinking about international expansion for some time?
I think it is either
(You mean that is me, yay.)
That’s right.
By the way.
Continuing on from the previous point, I would like to ask you to look again at the graph of the status of international expansion of small and medium-sized enterprises,
・(Even after subtracting the number of SMEs that have withdrawn from the market, the number is increasing.)
・10.7% of “SMEs that have not expanded internationally” indicated that they plan to do so or are interested in doing so in the future.
There is a
In the same survey, the companies that listed as many barriers as they could, were still interested in international expansion, or were planning to do so in the future (start up or establish a company).
Why do more and more companies continue to expand internationally despite the many barriers and procedures involved in international expansion?
If there are SMEs that have achieved international expansion, why aren’t there more success stories around?
If international expansion is really possible, why isn’t it a more common initiative for SMEs to expand internationally?
It is the international expansion of small and medium-sized enterprises that raises such questions one after another.
Small and medium-sized enterprises (SMEs) looking to resolve this question continue to focus on International expansion.
I am very curious about this.
For those of you who are more focused on time efficiency, I will also give you a quick answer to the question you are asking now.
First, International expansion is challenging with many barriers, but the benefits of success are great.
Second, because there are few contacts between companies that have successfully expanded internationally and non-international companies, correct information is not available unless you ask for it.
And since common sense in domestic business does not apply to international expansion, unless all SMEs decide to learn the know-how of international expansion alongside their domestic business, international expansion will not become a common practice for SMEs in the future.
Oh, that’s right.
Learn more about the benefits of international expansion
1 Strengthen competitiveness (increase brand value)
So, let us start with the advantages of International expansion.
The first benefit of international expansion is increased competitiveness and brand value.
To survive in an international market by competing with foreign competitors means to take a piece of the pie from them (or to create a new market), which means that International expansion requires acquiring new competitive strengths and brand values that were not available in the domestic market.
What is the competitive edge to win in international markets?
What is the value of a brand that can be used internationally?
By facing up to our international customers, involving highly-skilled internal and external personnel and partners, and continuing to pursue this goal locally overseas, we will refine our existing strengths into an advantage that can be used overseas, and transform them one by one into weapons that can be used to our advantage in overseas markets.
The strong business competitiveness and brand value acquired through this process of international expansion is an intangible asset that cannot be obtained elsewhere and is a major advantage of international expansion, leading to a stronger company-wide management foundation that could not be achieved through business development at the Japanese headquarters alone.
Strengthening competitiveness.
2 Risk diversification
The second benefit of international expansion is risk diversification.
As a result of gaining competitiveness and brand value that can be used in international markets, the company will not only be able to develop products and services that can be used only in the domestic market, but will also be able to acquire know-how for horizontal development tailored to other markets.
This is a risk hedge against an uncertain future, and a step toward a stronger management foundation.
If you have the know-how to develop and localize new markets on your own from scratch, you can avoid being left with nothing to do due to sales damage.
In fact, even with the Corona disaster, there are many small and medium-sized Japanese companies that have been able to develop their businesses to a competitive advantage over their competitors due to the fact that they have multiple international sales outlets and their overseas subsidiaries operating at all times.
I heard many managers, not only from Japanese companies but also from small and medium-sized enterprises overseas, say that they have never felt so glad to have expanded internationally as they did this time.
Many of the companies that hit record profits during the pandemic were no doubt planting the seeds of risk diversification on a regular basis.
Don’t put all your cakes in one basket
(Don’t serve the cake in one basket).
…eggs, though.
Don’t put all your eggs in one basket
(Don’t put all your eggs in one basket.)
Diversify your risk, you mean.
EGGS…
3 Increase in sales
The third benefit of International expansion is increased sales.
Unfortunately, however, international expansion does not lead to an immediate increase in sales.
This is because strengthening competitiveness and diversifying risks in international expansion is a new challenge for companies entering the market, and losses often persist for the first few years.
However, compared to the shrinking domestic market in Japan, developing sales channels in countries where the population is more than 10 times the size of Japan’s and will continue to grow in the future will certainly lead to increased sales if the wrong methods are used.
Countries with large populations today include India, China, the U.S., and Indonesia, while countries with population growth rates, or explosive population growth in the future, include Pakistan, Nigeria, Ethiopia, and the Congo, which are unfamiliar to Japanese companies.
For these countries whose populations will grow in the future, it will be necessary to create strategies that understand the cultural customs, religions, and historical backgrounds of these countries, whether they are on the edge of Asia or in Africa.
Note that the population growth rates of developed countries are negative across the board.
Businesses cannot taper off if they only develop business within their own countries.
Japan, which peaked in 2008, is no exception, and it is said that we have only 10 to 15 years left to “maintain” the “status quo” without taking on new challenges. It is said that Japan is not an exception.
(It is said that even processes and jobs that do not have cost benefits from AI and mechanization today will be largely replaced in 10 to 15 years, and will be replaced by business models that suit this trend.
2023 World Population Ranking by Country/Region (United Nations) Sekaihab Editors
A deeper look at the disadvantages of international expansion
On the other hand, there are disadvantages to international expansion.
1 Culture Gap (not easy customer understanding, agent and employee training)
The first disadvantage of international expansion is that there is a culture gap to overcome.
Specifically, it is not easy to understand international customers, and it takes a lot of time and effort to educate overseas distributors and employees hired locally. Even if you try to put yourself in the other party’s shoes, you will frequently encounter things that you do not understand or agree with.
The clue is that no one chooses to lose their own money, and this is universal.
What is being advocated in front of you is an unmissable stronghold for the person or company, or a milestone for securing profits.
It is imperative to spend more time communicating with and observing the person or company to understand what the action or assertion is really intended to do, what it can be substituted for, what the drop-off point is in doing so, and what actions to avoid culturally.
No matter how advanced DXing becomes, it is impossible to understand different cultures only in a short and rational way.
It takes a very advanced technique to complete communication with international personnel and companies using only web conferencing.
Overcoming the culture gap is essential to international expansion, but the inseparability of business and understanding of unfamiliar cultures for Japanese companies is a disadvantage of international expansion.
2 Local legal and regulatory barriers
The second disadvantage of International expansion is that there are laws and regulations specific to the international locality.
Specifically, for exports, there are import regulations that are required when importing into the local market, distribution regulations that are required when subsequently distributing goods and services, and business registration and licensing that are required for business development in the first place.
In addition to the above, there are foreign investment regulations, environmental regulations, tax laws, labor laws, etc.
These of course all vary from country to country.
As a precaution, the authorities of the relevant local authorities and permit application procedures may change from time to time, so updating information is essential.
If there is a person in charge in the domestic department who is fluent in the local language, it is possible for a Japanese company to gather information from the authorities’ website, but it will be difficult without some prior knowledge to reach the appropriate information without omissions and misunderstandings. And the biggest reason for the difficulty is as follows.
・Some countries have rules that have not been translated into the language of the country.
・The quality of the local experts may or may not be able to solve the problem.
Currently, local laws and regulations are not only a barrier for Japanese SMEs, but also for all foreign companies investing in a country.
3 Political and natural disaster risk
The third disadvantage of international expansion is the risk of political and natural disasters.
Political systems and natural disaster risks are often unparalleled in Japan. The country’s political power, diplomatic relations with neighboring countries, security and crime, and
The types of natural disasters and damage estimates for each region, local sanitary conditions, medical conditions, susceptible diseases, religious customs and taboos, etc,
It will be difficult to adequately protect employees and customers unless the organization is ready to take action at all times.
If a country’s infrastructure, including electricity, gas, and water supply, transportation network (road, rail, air, etc.), transport routes, and logistics are not stable, it is important to ensure local productivity and be prepared on a daily basis for “what to do in an emergency? It is important to be prepared on a daily basis for such a situation.
Steps and preparations required for international expansion
These are the advantages and disadvantages of international expansion.
Here are the steps and preparations necessary for International expansion.
1 Market Research: The Importance of Survey Design as a Key to Success
Step one in the process of international expansion is market research, right?
A field survey conducted for international expansion is called an F/S survey, which means a business feasibility study.
I have studied a little, so I know this much.
Good, you are right.
The F/S survey is to investigate whether or not the business can really be commercialized in the country concerned.
We invite you to read more about the F/S Survey here.
Have you conducted a feasibility study in the overseas country?
2 Human Resource Development: Building a Global Team
Step two in the process of international expansion is human resource development.
Building a global team is essential for the international expansion of SMEs. In particular, it is essential to assign excellent personnel who can develop international markets with the same fervor as the management.
There are two ways to train personnel in charge of international operations: one is to hire new personnel for international operations, and the other is to train internal personnel to become international personnel.
In any case, four new capacity-building activities will be required, which have not been required for domestic operations in Japan.
4 Capabilities
１ Ability to launch new businesses
２ Risk management skills
３ Cross-cultural adaptability
４ Business English Proficiency
For more information, please read the second half of our 26 Recommendations for International Expansion Consulting Firms and Developing the Necessary Capabilities.
3 Establishing a Local Company or Agency Contract: Benefits and Steps for Local Connections
Step 3 required for International expansion is the establishment of a local subsidiary or agency agreement.
However, the strategy to take will depend on the strength of the company and the stage (or steps) of international expansion, such as whether to establish a local subsidiary or to proceed through an overseas agency contract.
We hope that you will read “How to proceed with a roadmap for international expansion” to understand the degree of difficulty of each business type before moving forward with your plans.
Summary: For success in international expansion
It was good to understand in detail today the advantages and disadvantages of International expansion.
Advantages of International expansion
1 Strengthen competitiveness (increase brand value)
2 Risk diversification
3 Increase in sales
Disadvantages of international expansion
1 Culture Gap (not easy customer understanding, agent and employee training)
2 Local legal and regulatory barriers
3 Political and natural disaster risk
What is essential for success in international expansion?
It is about understanding the advantages and disadvantages of international expansion, and then securing the right people who can make that international expansion possible for that company alone.
(Here I am.)
If you, as the person in charge, have difficulty moving forward with your international business alone, or if you, as a business manager, need someone to consult with, please do not hesitate to contact us.
Please let us consult with you.
Yes.
…
And with the person in charge.
Yes.
（great…)
