International business

Top five constraints to international business in the mid-market

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Grant Thornton’s International Business Report (IBR) has identified some of the major constraints that are testing the mid-market’s ability to grow their businesses and explores how the mid-market is working to counter them with a focus on quality. The five constraints below are the most prominent according to mid-market firms who plan to increase their focus on international business over the next 12 months.

The adaptability and flexibility of the global mid-market leaves it well positioned to explore growing international business. To learn even more about the mid-market’s quest for quality amidst the challenges of an uncertain global climate, read our latest International Business article – ‘Quality knows no borders’ – where we explore how businesses are leveraging supply chains to improve their offer to customers.

International business ambitions: Mid-market growth and expansion
International business
International business ambitions: Mid-market growth and expansion
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5. Supply chains and complex procurement systems

The global mid-market has identified supply chains and complex procurement systems as one of the top five constraints restricting international business growth (55%). The reasoning for this may be explained by looking at the decision-making priorities of the mid-market. Cost effectiveness (54%) and sustainability (39%) have been found to be the two most important factors to the mid-market when making international supply chain decisions.

The recent inflationary environment, coupled with lower growth expectations, may explain why cost-effectiveness is shown to be a chief consideration. Inflation is now lower and more stable in most economies, but that doesn’t necessarily mean that prices are falling. Furthermore, in an increasingly competitive global market, it’s imperative that mid-market businesses seek out cost efficiencies to remain competitive, enable future investment and the use of flexible pricing policies.

There is also intense consumer and regulatory scrutiny on the supply chains of mid-market businesses. ESG reporting, while still voluntary in many territories, is rapidly becoming best-practice in a bid to display transparency and a sustainability-minded agenda.

In order to simplify and ease supply chain pressure, the mid-market has adopted a calculated approach to global business which has seen companies turn to territories they know well.

Dave Munton, Global head, International capabilities and support, Grant Thornton International, explains that,

“Businesses are looking to derisk the supply chain as best they can. We’re seeing more vulnerability to shocks than we’ve ever seen before. The best way to mitigate that is putting the critical components of your supply chain in jurisdictions which you think are less prone to change and disruption.”

When looking to develop international business, organisations now appear to be carefully planning their growth to build more resilience throughout the entire supply chain.

4. Shortage of finance

A high level of uncertainty has affected the global economy over the past number of years, with notable global conflicts, increasing commodity prices, and a fluctuating energy market all leading to high levels of inflation. This, in turn, saw “an associated fall in global Gross Domestic Product (GDP), suppressing general demand” according to Schellion Horn, Partner, Head of economic consulting, Grant Thornton UK.

Many central banks reacted by raising interest rates, making it much more difficult to borrow money and service debt – effectively restricting the mid-market’s access to capital. With these lending and liquidity constraints, mid-market businesses undoubtedly felt a finance squeeze that led to a reprioritisation and deferral of certain projects. 

However, while the mid-market is still concerned about this shortage of finance (57%), there is a renewed sense of optimism that’s prompted an appetite for investing in global business opportunities.

According to Schellion Horn, Partner:

“Companies are telling us they're optimistic about the economy. They’re optimistic that in the UK – but also internationally – the economy is improving. So, there's going to be increased demand for their products and services. They're also feeling increasingly certain about economic conditions. It's that combination of both optimism around the economy, but also certainty that encourages them to invest.”

So, although the data shows that the internationally focussed mid-market still sees a shortage of finance as a constraint on carrying out international business (57%), economic indicators show that this could soon become less of a barrier. Interest rates are expected to fall,[i] increasing access to capital, and driving the mid-market’s expansion into global markets following a period of relative caution.

3. Quality of transport infrastructure

The next constraint the mid-market sees as a barrier to growing international business is quality of transport infrastructure (57%). 

Quality can refer to how efficient the infrastructure is – how quickly are goods passing through and at what level of cost-effectiveness. If the relevant transport infrastructures are of poor quality, there can be a significant negative impact on trade volume and comparative advantage.

Michelle Alphonso, Partner, National transaction advisory services and Private equity leader, GT Canada, explains:

“In recent years we saw a lot of issues around the ability of companies internationally to deliver on time and as expected. Transport disruption created a lot of additional cost and complex delivery issues further down the supply chain. Now, there is a push to create more stability and more security around the quality of supply chain, the reliability of trade partners and the consistency of the quality that's being delivered.”

The mid-market is adapting to this by concentrating on expanding into locations with a strong existing transport infrastructure in an attempt to reduce costs and ensure reliability. 

Quality can also refer to the overall sustainability of a transport infrastructure. New global regulations, such as the CBAM in Europe, have forced companies to examine the overall quality of their transport infrastructures to see where improvements can be made to lower their associated carbon import costs.

According to Michelle Alphonso,

“We’re seeing a bigger discussion around where products are coming from, what's the quality of the labour force, and what are the economic and environmental considerations. These move in parallel to a lot of the ESG conversations that are happening, leading to a push for quality and a push for stability.”

The mid-market's focus on overall quality is seeing a shifting attitude towards stability and reliability. This quality of infrastructure allows for more consistency, less business risk, and overall better quality throughout a supply chain.

2. Geopolitical disruption

Major geopolitical uncertainty arising from a number of ongoing conflicts has had a significant impact on global supply chains – most notably in areas such as energy. The mid-market is understandably cautious of the negative effects geopolitical disruption can have on global business (58%), particularly in a year where close to half of the global population will go to the polls for important national elections. This is likely to see geopolitical uncertainty continue throughout the year and may impact mid-market companies’ international business plans.

One way that the mid-market has been adapting to this is through investing into economies that are seen as relatively secure and stable. Friendshoring and nearshoring are both emerging as popular tactics to reduce the risk of disruption.

Dave Munton explains:

“Business leaders want to understand and mitigate risk. They want to operate in environments that are stable, that are predictable, and that you’re not going to get too many shocks from. I'm not at all surprised that there's been quite a significant shift in trade and investment decisions being made into friendly countries. I don't think that's something we're necessarily going to see change in the near term.”

The US, in particular, has continued to be a popular choice for growth due to the strength of its recovery in terms of economic strength following COVID-19, and its history as a reliable and profitable market. Our data shows that it’s the most favoured destination for exporting goods and services among the global mid-market currently.

“We’re seeing a focus on trying to return to stability. Friendshoring offers a low-cost entry point with a high amount of stability, and potentially high returns. That balance of cost, quality, and risk mitigation – all those factors are playing into why it’s becoming more of a trend.” – Michelle Alphonso.

While worry and uncertainty around geopolitical disruption is still strong, the global mid-market has again shown a resilience and a willingness to adapt, that has allowed it to continue to drive international business growth.

1. Environmental constraints

The number one constraint on the ability to grow international business outlined by mid-market firms is environmental constraints and scarcity / cost of natural resources (58%). The impact of environmental considerations has already been seen in other constraints, most notably supply chains and complex procurement systems and quality of transport infrastructure, showing just how ingrained they are across every level of a business.

There has arguably never been more scrutiny on organisations to have a robust ESG plan in place – both to protect and grow the business. Regulatory pressure is steadily increasing, with a host of new regulations across multiple jurisdictions constantly being introduced. Consumer pressure is also increasing, as demand for green and ethical products continues to grow.

The global mid-market has previously not been subject to some ESG reporting measures due to their size. However, the regulatory requirements of larger companies to now report on areas such as Scope 3 emissions forces the mid-market to also comply. If they don’t, there’s a chance that partnerships and opportunities with larger businesses could be lost. 

This is where investing in people can be extremely beneficial for mid-market firms. Utilising strong local integration when conducting global business will allow for a stronger understanding of regulatory requirements and lead to better decision-making around environmental constraints.

Dealing with the barriers to international growth

What’s clear to see is that there’s a high level of interconnectivity between each of these constraints. For example, sudden geopolitical disruption could lead to widespread supply chain issues, impacting on quality or decreasing general access to global finance. What we’re also seeing, however, is how the mid-market’s approach to investment can offer an opportunity to reduce the level of impact these constraints may have. Where the mid-market has shown clear intentions to invest in technology (66%) and in their people (58%) – two areas that can help ease pressure among almost every constraint. 

In addition, more than half of the global mid-market (52%) is looking to expand their international footprint, showing there are still a lot of positive signs coming from firms. According to our data, 92% of mid-market firms have expressed that they feel prepared for any future unforeseen circumstances. This displays a drive and an ability to deal with many of the barriers to international growth. This general preparedness, coupled with a willingness to invest, and the overall resilience of the mid-market in the face of uncertainty, are just some of the many reasons why the mid-market remains optimistic for the future.

If you want to learn more about the mid-market’s focus on international quality, our latest report, 'Quality knows no borders’ explores how businesses are looking to further leverage their supply chains to improve their offers to customers. Access it now and discover what our latest IBR data has revealed about the mid-market’s international business plans.

i. - Steady but slow: Resilience amid divergence - 04.04