This article was first published in the January 2016 UK edition of Accounting and Business magazine.

Here’s an idea: grow your company internationally, reap benefits for your business and help improve your indigenous economy. And here’s an alternative idea: exploit your domestic markets to the maximum, ruling out foreign expansion as a risky adventure, which the statistics tell you will most likely end in tears.

Clearly these two strategies are incompatible, so boards thinking of obeying the urgings of lobby groups and politicians to export through selling directly or setting up abroad should first listen to the research findings of academics.

The business-inspired Cole Commission was certainly cheering for exports. Its final report published last year describes itself as ‘an action plan for the new [UK] government to turn the dial on exports’, adding that the report ‘is prepared, intentionally, to provide the government with a clear and concise blueprint from business to generate a step-change in export performance’.

Stay at home

An academic research paper has already identified a step-change in performance when companies go international, but not in the way envisaged by Cole. According to the analysis by three academics – Michael Mayer, professor of strategic management at Bath University; Christian Stadler, professor of strategic management at Warwick Business School; and Julia Hautz, assistant professor at the University of Innsbruck – companies usually underestimate the challenges of going global and would be better off staying at home.

According to the academics, admiring global high-performers such as GE, IBM, Shell and BMW is one thing; emulating them is quite another. Looking at the performance of 20,000 companies in 30 countries, the academics found that selling abroad had an average return on assets (ROA) of -1% as long as five years after the move into overseas territories. It takes 10 years to reach +1% ROA, and only 40% of companies turn in more than 3% ROA.

As part of their examination of companies in the database, the researchers also looked at those that had expanded domestically. Typically they had an average ROA of +1% after five years, rising to +2.4% after 10 years, with 53% exceeding 3% ROA.

Mayer and Stadler say the lesson from their research is that most companies should not treat international expansion as a default growth option. Like diversification, it comes with many challenges. Few companies have the size or management capabilities to make a success of going overseas, and for most it may well be more profitable to look closer to home.

Another conclusion of the research is that not all of those high-achieving companies have gained their exceptional success through the export market. The academics found that a third of the top 10% ROA performers in the database conduct almost no international business.

Most British businesses do take a cautious approach to the global challenge. Only a quarter of British small and medium-sized enterprises (SMEs) are internationally active, a figure that compares poorly with Germany, where half of similar companies are exporters.

Anthony Walters, ACCA policy manager – western Europe, says it is equally concerning that it’s the faster-growing economies, such as China and Russia, that are seen as the hardest to break into. He says: ‘Language is still a significant barrier for many attempting to break into these markets, and it would be good to see government do more to help SMEs overcome such barriers.’ Would-be exporters, says Walters, would also do well to seek advice from accountants on controlling export costs.

Lesley Batchelor is director general of the Institute of Export (IOE). Founded in 1935, the IOE describes itself as the ‘only professional body representing international trade’. So it is perhaps not surprising that Batchelor questions some of the academics’ findings: ‘This is more about companies that launch or acquire subsidiary businesses in foreign countries.’

Look before you leap

For Batchelor the message from the Mayer/Stadler/Hautz research is that companies should think carefully before moving outside their core area of experience and expertise. That move could be anything from just selling (either domestically or abroad) right up to running a manufacturing operation abroad. Or it could be moving from familiar domestic legislation to dealing with unfamiliar foreign jurisdictions. She says: ‘The message is not to be wary of exporting but to ensure that if you expand your corporate structure overseas, your company is definitely capable of handling that expansion and profiting from it.’

Michel Driessen, partner and transaction advisory services markets leader for EY UK & Ireland, says knowledge is vital. ‘To be successful globally, you must first understand your market: conduct comprehensive market research, hire the most experienced executives that know that market and understand the consumer groups and the channels to market. Second, learn about the culture and consider acquisitions that will leverage existing relationships and infrastructure. Third, and most importantly, be prepared and be patient. Plan early, phase your launch and commit staff to the project with plenty of lead time.’

Those who have not yet moved into international markets should realise how costly the venture is likely to be. ‘That does not mean you should not do it,’ Driessen adds. ‘But it will take years before it turns out right, and businesses can probably expand more easily locally rather than globally.’ The overriding corporate mantra for decades has been to specialise and not diversify, but Stadler and Mayer suggest it might be easier for corporates to increase the range of their products or move into a related business rather than enter a new international market.

Realism, not rules

The findings from the database analysis should not be seen as a counsel of gloom for international trade or for businesses looking to expand. As Batchelor points out, 97% of UK businesses are SMEs employing fewer than 10 people and are not going to become global players, although that should not stop them having realistic ambitions. ‘There is a danger in business of being too prescriptive,’ says Batchelor.

‘The companies I work with have different products and services, therefore different catchments, methods, levels of resource, knowledge, experience and skill, and routes to market. They can all become successful exporters in one way or another. The measure of their success comes from achieving their own plans.’

Mayer is equally clear that they are not saying they want companies to stay at home. ‘The point is that many companies overestimate the opportunities of going abroad and underestimate the risk and challenges going with it,’ he says. ‘Explore those risks and opportunities, and it can really pay off.’

Peter Williams, journalist