Steps to offshore investment

Benefits of Offshore Investment
Growth is the prime reason companies wish to invest offshore. “Australia is a relatively small market, so once you've grown to a certain mass you struggle to grow,” says Skinner. “By investing in some of the growing economies in Asia and some of South America, the benefit is accessing faster growing economies. Some of those markets are riskier so typically you can get higher margins. Access to new markets and high margins are very attractive to investors.”

Exporters often bemoan the strengthening Australian dollar, but when it comes to offshore investment, a strong dollar is a good thing. “The growth of the Aussie dollar helps, it gives you more buying power to make a material investment,” notes Skinner. “It's a great opportunity to buy if you have a few extra dollars on your balance sheet.”

Diversification is also a reason to consider offshore investment. Skinner believes that the economic downturn of the United States will not affect us as much as it might have in the past because Australia now has interests and investments elsewhere. “We have benefited from the fact that we are so close to Asia and Asia has been growing so well,” he says. “Our diversification and our proximity and our access have softened that blow, so we're seeing more interest in those non-traditional markets. They've become almost traditional markets, particularly the BRIC countries—Brazil, Russia, India and China.”

Potential investors need to examine the reasons why they want to invest offshore. The cost and regulatory barriers are quite significant and Aranha says companies must genuinely want to commit to long-term growth, rather than simply reduce costs. “Very few companies shed jobs in Australia and go overseas just to continue making widgets. That kind of negative approach to business is not going to give you longevity,” he remarks. “It may reduce your initial costs so you can survive for a few years more, but unless you’re doing something spectacular with your product, there will be someone out there doing it even cheaper than you are.”

Offshore Investment Barriers
Investors need money to invest, and therein lies the first barrier. The Global Readiness index showed that 92 percent of survey respondents funded their expansion through retained earnings, so the reality is that offshore investors tend to be medium to large companies with equity to spare.

“Companies don’t have access to finance easily as they would for local business,” explains Aranha. “Let’s take a company that wants to put up a factory in China. They go to an Australian bank; Australian banks tend to rely on your cash flow as well as what you can provide in terms of security and they are not comfortable taking a factory in China as security. In those circumstances, the company goes to China and says ‘we’re putting this factory here, can we have some money?’ and the Chinese bank says ‘we’d love to, but you don’t have a track record with us’.”

He adds that the venture capital industry in Australia has, anecdotally, been quite conservative. “Because of that, companies with great ideas with incredible growth potential end up needing much, much more than any bank can give them. What ends up happening is that they get equity from overseas venture capitalists and that’s sad because Australians don’t tend to benefit.”

Skinner agrees that money is a big part of offshore investment, particularly because it allows a business to survive during the time it takes to reap returns. “There's usually a long lead time before you'll be successful, so you need to have some backing to withstand the setting up offshore,” he says.

Investment requires a significant outlay of time because of the due diligence required—mainly research, legal and bureaucratic paperwork—but also because investment is a long-term strategy and investors should be patient, especially in the initial stages.