Is there a major stigma towards offshore companies?

September 1, 2009 4:50 PM

Do most US companies prefer to work with US companies? Is there a major stigma towards offshore companies?

I used to live in the US as a non-US citizen to study and work (H1-b). During that time I set up a US corporation and started out on my own. Then I moved to South America where I now live permanently. And retained the US company under which I now trade and also have a US bank account, pay US taxes and have an SSN.

I provide an 'offshore' service, speak fluent English, have US telephone numbers (VOIP) porting to me here in Colombia. I mention this because I have always assumed that my clients feel more comfortable dealing with a US company as opposed to an offshore 'unknown' that can't be sued.

FWIW I work with major corporations as well as smaller companies and my location has never been an issue for them however most of that work as come through referrals and recommendations so it may be different in a more competitive bidding process.

Obviously I should ask my clients and speak to an accounting firm with cross-border expertise but i wanted to see what the hive mind turned up.

Cheers.

posted by lapsang to work & money (3 comments total)

I would imagine the answer to the question is: "it depends."

A firm located in Canada likely elicits a different reaction than a firm located in, say, Colombia. Further, the culture of the company doing the judging is also pertinent. Some companies are very small and insular while others are very large and international.

I don't think you can really apply a universal answer to your question.
posted by dfriedman at 6:53 PM on September 1

It is generally easier for U.S. companies to do business with other U.S. companies, for a variety of financial and legal reasons. In the financial sphere, trading exclusively in U.S. dollars eliminates foriegn exchange exposure (risk), and the banking costs of converting money, paying via bank instrument (LOC, sight draft, etc.). Also, as soon as a U.S. corporation begins to move sizeable amounts of money abroad, in either direction, a different level of bank reporting and oversight is triggered (KYC, etc.) In the legal sphere, U.S. companies doing business with one another are working in a well established body of Federal law, that governs and may supercede interstate commerce transactions, if they are in different state jurisdictions. If both companies are working in the same state, too, then they have an even greater commonality of practice on legal matters. This vastly reduces the complexity of contracts, and provides a body of precedent for the resolution of disputes that facilitates commerce. Stepping out of this well established legal framework, into international commerce, subjects the U.S. company to greater risks, and therefore greater costs, stemming from differences in legal systems, and the additional complexity and uncertainty of doing business under trade agreements and other international law.

For example, a company blending juice drinks, which has the option of using more expensive California grape juice as a base for its drinks, or importing cheaper Chilean juice, will find that there is a volume break even point where the additional fixed costs of banking (opening LOC to pay for juice, communication expense for facilitating export/import, customs fees, taxes, and brokerage expense, USDA clearances, etc.) and risks (lack of ability to return contaminated or defective product, risk of adulteration, risk of spoilage in transit, etc.) of importing the Chilean product makes it more expensive to use, than the California product. Thus, even if the Chilean product is much, much cheaper than the California juice, unless the blender has sufficient end volume to justify the set up costs for dealing with the international business process, using the Chilean product is likely not an option. One way U.S. companies deal with this, is to insist that their foreign suppliers do as you do, and establish a U.S. presence, with a significant U.S. asset base. That then allows them to deal with the foreign supplier's U.S. subsidiary, and offload the costs and complexities of product importation and payment to the supplier, while maintaining a course of business conduct entirely within the U.S. legal sphere.

But there are business endeavors which are entirely trans-national, too. These exist simply because of differences in relative economic levels of national economies, and their purpose is to exploit those differences for the mutual benefit of the participants on both sides of the transaction. Examples of this include U.S. - Mexican maquiladora operations, and offshore customer service operations in India for U.S. corporations. Because the cost benefits and profit potential for these operations is generally so clearly in favor of the U.S. side of the partnership, they have incurred some social stigma in the U.S. as exploitative of foreign workers, who get little of the money such schemes generate, and of U.S. workers displaced by cheaper foreign labor. Such situations have created strong political sub-groups opposed to NAFTA that have effectively stopped a number of South American FTA clones based upon CAFTA, most notably the one with Colombia, due to be implemented at the end of the Bush administration, but which still remains in limbo, under Democratic Party pressure in Congress. There are also strong suspicions in the U.S. public, about financial transactions with foreign banks, which have been used by wealthy individuals and U.S. corporations to launder money, avoid U.S. taxes, and support illicit operations of our CIA and also people like Manuel Noriega, and Pablo Escobar. Our Treasury Department has just come to agreement with UBS about turning over the names of 4,450 holders of numbered Swiss accounts which are believed to have been established to facilitate tax evasion in the U.S., and this has received substantial news coverage in recent weeks.

So, I think the answer to your question is generally "Yes, there is some stigma in the U.S. towards doing business with offshore companies and financial institutions, in direct consumer to business transactions, or for business to business transactions where quality of goods, or clarity of financial dealing is paramount."
posted by paulsc at 10:31 PM on September 1 [1 favorite has favorites]

Thanks a lot for your time and generosity paulc.
posted by lapsang at 1:01 PM on September 2