Knowing that attracting customers requires significant investment, it’s challenging to know where to invest your time and money. We can’t give you a sure-fire recommendation for your specific business, but in this series we will focus on how using a foreign affiliate strategy can help you get closer to your customers.
What is a foreign affiliate?
By setting up an affiliate (or subsidiary), your business establishes a company in that market to serve your interests there. It operates as a local business with respect to regulations, laws and taxes, and is the most common way that Canadian companies use to set up operations abroad.
Whether you establish a small legal presence or a full-scale manufacturing facility, the important thing is that you are giving your customers a place where they can deal with you directly. Most Canadian companies use their affiliates to sell their goods and services locally; others use them to warehouse Canadian-made products for local distribution, or to produce goods for the target market.
Finding customers using affiliates
Simply being closer to your current or potential customers makes building relationships in a market less challenging, which means you are more likely to attract opportunities for sales growth and company expansion. Based on a survey of Canadian companies that have affiliates, we learned that a clear majority experienced a positive impact on sales, customer base and competitiveness. Specifically, well over half (59 per cent) reported an increase in sales in a target market where they were already selling in a traditional way.
Top target markets for expansion
Companies reported their operations in the U.S., China and the U.K. had the most potential for growth (in that order) and cited China, India, the U.S. and Brazil as the next top markets to target.
Challenges of operating affiliates
When it comes to operating affiliates abroad, Canadian companies tend to struggle with complying with local laws and regulations. That’s because the regulations are either completely different or, worse, not transparent. Canadian businesses can also expect to face human resources, cultural differences, exchange rates and distance-related communications as difficulties in new markets.
It’s worthwhile to note that 38 per cent of Canadian businesses reported no problems at all. Their local operations were unaffected by differences in their new markets. With that in mind, your business has a good chance of operating overseas affiliates reasonably trouble free.
Geographical proximity can also have additional benefits such as simpler logistics, easier provision of after-sales support and elimination of time zone/communications problems. All of this can result in lower costs, supply chain efficiencies and increased productivity. At a macro level, well over half of the companies agreed that using foreign affiliates has positive economic and social effects for Canada. By bolstering domestic business and creating employment opportunities both abroad and at home, Canada benefits from its companies having a physical presence in global markets.
To learn more about the benefits of foreign affiliates, check out the infographic below.
The positive impacts of expanding internationally
Canadian companies that open foreign affiliates typically enjoy a wide range of advantages. This infographic shows you the percentage of Canadian companies with international operations that reported a positive impact on:
Impact on the bottom line
Ninety-two percent believe their company is more competitive because of their operations overseas. Clear majorities (81% or more) said it has had a positive impact on company sales, customer base, profits, growth and market share.
Top destinations for foreign affiliates
The majority of companies’ set up operations in the United States (73%) and sell to the United States (75%).
Half of the companies said they plan to expand their network even further in the next five years. China, India, the United States and Brazil are cited as the next go-to places for expansion.
Contribution of foreign affiliates to Canada
More than half of respondents agree foreign affiliates generate benefits for Canada. Sustaining domestic business (32%) and creating employment opportunities (27%) are the most-frequently cited benefits of foreign affiliates to Canada.
Source: EDC Research Panel; Angus Reid Forum; based on a sample of 546 Canadian exporting companies in 2015.