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Companies must understand cultural differences in international expansion, or risk prosecution

Companies that expand overseas are laying themselves open to commercial and reputational risks if they fail to acquaint themselves with the cultures of the host country, according to a study.

Businesses expanding overseas must understand cultural differences to reduce the risk of alienating stakeholders or even criminal prosecution, a report has warned.

International Business Expansion without the Pain, by professional research firm IDC and commissioned by professional services company TMF group, found HR faces huge challenges when a company expands globally.

The research, seen exclusively by HRmagazine, found expansion into new territories is often "fraught with commercial and reputational risks".

It stated that as markets and supply chains continue to globalise and the buying power shifts from western economies to Asia, Latin America and Africa, HR must adapt to the many challenges.

Celia Baxter, head of HR at specialist distribution company Bunzl, says the process of moving into a new market could take up to five years, so it is critical to "build the right relationships" in the area.

"An important role for HR is to see whether the existing or local talent will fit with the business or whether you should bring your own people over," Baxter told HR.

"If [Bunzl] is going into a new country, we look to find out whether the existing management team can fit the Bunzl culture and whether they are people who are going to prosper, because you're not just buying business, you're buying the people."

The study found HR departments must be given time to develop local understanding of law and culture in order to build "deep levels of trust" with local teams internally, and with partners, customers and regulators externally.

The study suggests HR departments source local expertise and on-the-ground service providers because these can play a critical role in successful expansion - particularly for recruitment and training. It found local knowledge in areas such as payroll processing and regulatory reporting, is "often vital".

Designing and maintaining financial incentive schemes for employees is a major issue for organisations expanding abroad. The report recommends businesses think through the life cycle of incentive schemes; for example, what works in the set-up phase might not work in later phases when the pace of change slows.

The report recommends talking to external advisers to help HR with the new legal structures. They can also advise on commercial strategies and use of outsourcers, such as payroll providers.

Hiring, training and deploying local people are critical issues in all stages of the expansion, and HR will have a key role. "Skimping on HR" is something many organisations do, said the study, but this can lead to "very unfortunate results". It found that training the right number of the right people can be a major undertaking.

Baxter said: "Where you're more mature as a business in certain areas like the UK, it's easier to implement your own team, but in countries with different laws and ways of doing business it's better to have local knowledge."

Deborah Williams, global head of HR and payroll at TMF, said business leaders must support HR. "In many countries HR talent is in limited supply," she said. "The more companies start to explore and open up new business in different parts of the world, the more complex the HR challenges become."

"I don't think companies are giving HR enough responsibility and time to deal with important issues such as pay laws, incentives and reward.

"There needs to be given more recognition to things such as collective labour agreements."