Emerging market wealth has grown five-fold within the last decade and it continues to expand as we start to see a robust middle-class developing across the global marketplace. In 2015, global wealth reached $250 trillion in the United States. Per the Credit Suisse Research Institute’s Global Wealth Report, the rise in household wealth was particularly strong in both the United States and China.
The growth of the middle class across nearly all countries has also been strong, and it too is a healthy indicator, since an expanding middle class is a key factor in determining the speed and sustainability of a nation’s economic development. It is predicted that global wealth is likely to continue to grow at a rate of 6.5%, reaching $345 trillion in 2020 and amounting to 38% above the current level of wealth.
Furthermore, the McKinsey Global Institute predicts that emerging markets will experience an increase in annual consumption rising from $12 trillion in 2010 to $30 trillion by 2025. During this time, we are expecting to see an increase in the share of world consumption from emerging markets, as it leaps from 32% to 47.3%. This favorable market forecast over the next 10 plus years makes the current landscape a prime environment for American small-to-medium-size businesses (SMBs) to take advantage of developing and expanding foreign markets.
The potential customer base in foreign markets is significant, because 96% of the world’s consumers live outside of the United States. We have seen many SMBs start to take advantage of the opportunities now present. In 2012, of the 305,000 U.S. companies that exported goods, almost 98% of those companies were SMBs with less than 500 employees, amounting to a total of 297,995 businesses. Additionally, in that same year, SMBs produced 33% of the goods exported. Per the U.S. Census Bureau, SMBs contributed to 19.1% of the $839 billion in exports that U.S. manufacturers shipped out and 64.8% of the $303 billion in exports that wholesalers were responsible for.
The cards are also stacked in favor of American SMBs expanding into foreign markets. The minimized competition within the global marketplace allows for U.S. SMBs to capture a larger share of the marketplace without friction. Additionally, the sheer advantage of being able to market oneself as an American enterprise tends to appeal inside the foreign marketplace. However, despite the favorable climate, many American SMBs are still reticent to capitalize on this not-so-hidden potential for economic success.
This phenomenon is partially due to barriers, both real and perceived, that make foreign expansion less intuitive to American SMBs. When these business owners prepare to expand into foreign marketplaces, they must be aware of the hidden pitfalls attached to the expansion. While the potential for reward is considerable, so is the potential risk.
A primary impediment of SMB expansion lies in the difficulties of foreign currency processing. Merchants must ensure they are equipped to accept the local currency within the international market. Once merchants conquer this obstacle they need to be adept at understanding how to move funds outside of that particular region or country. Fluctuations in the value of foreign and domestic currencies adds another inherent risk to currency exchange. Additionally, expanding into a global market requires merchants to be able to navigate foreign tax compliance and authorities. Furthermore, each country has its own laws, and one must be able to operate within foreign legal frameworks. American tax codes and corporate laws can be complicated enough, so dealing with an entirely new structure is no easy task.
Yet, despite all of these factors, the primary reason why merchants are reluctant to initiate cross border enterprise stems from one seemingly innocuous cause: fear of the unknown. Regardless of ease, entering an unknown foreign market is a risky step for a business to consider, because it carries many variables. Lacking a clear understanding of culture, customs and laws of foreign territories can make an SMB owner believe profitability in foreign markets is unobtainable. Being a foreigner can also lead a business owner to assume in-country competitors will have stronger networks and a better sense of the marketplace.
Consequently, understanding the risk when a business is considering expansion to foreign markets is an integral part of its overseas expansion plan. However, several SMBs still lack the corporate structure necessary to mitigate these problems, and they aren’t always connected to the right third-party providers that can help them navigate this uncharted territory. Since American SMBs that do attempt to enter an emerging foreign market could be confronted with a more arduous process than they were prepared to handle, it can sometimes take inexperienced merchants years to succeed.
Fortunately, with the help of a third-party global payment processing provider, ensuring an SMB is able to operate efficiently and effectively under a new territory’s laws and cultural standards doesn’t have to be a lengthy or risky process. Barriers can be navigated quickly and confidently, and a desirable share of a global marketplace will be sitting firmly within their grasp.
Cleveland Brown is CEO of Payscout