NOTE - The model is also known in various guises as PEST, STEP, STEEPLE and PESTLE. It was originally conceived as ETPS by Harvard professor, Francis Aguilar.
So, how does PESTEL help with an overseas expansion plan?
Often used for existing challenges, PESTEL is also helpful for new market research. You could use it with a SWOT analysis to identify existing opportunities and threats. Or it can forecast future issues that will need careful management.
A PESTEL analysis will uncover obstacles that will make it harder to do business. Expanding globally carries many challenges due to differences between locations and countries. From language and customs to the pace of business change to the currency or technology.
Often, the biggest obstacle to doing business is registering a legal entity in-country. This process can be very costly and can take up to a year to complete. This time will be better spent growing market share, but can get eaten up by paperwork and delays.
Growth can be accelerated by working with a global employment outsourcing company. They can help you set up quickly without establishing a legal entity in a particular country. That means - speed to market!
Let’s examine each element of the PESTEL framework and some questions to ask when planning.
Political factors relating to government influence on the economy
To what extent does the government intervene in the economy?
Is the country politically stable?
Are there trade tariffs that will be a barrier to doing business?
Are there any sanctions imposed on the country?
Are there upcoming elections that could change the attractiveness of the country?
How quickly are business applications processed? Is it liable to bureaucracy?
For example, if you were looking to start a small business in Asia, the length of time can vary widely. This variance can slow your growth if you are caught unaware.
Airswift can help you establish a presence in Singapore within days. But we know in The Philippines it will take several weeks and perhaps months. In either location we can have talent deployed and effective immediately through our global employment outsourcing model.
The variations in establishment time are huge differences. And if you need to be generating cash quickly, every extra day matters.
Economic factors affecting business operations when expanding internationally
What is the economic growth rate? Is there projected growth in GDP over the next 5, 10 and 20 years?
Are there strategic industries that you can either compete in or supply to?
For B2C firms, is consumer spending expected to increase? A good indicator would be increasing proportions of middle-class incomes in society.
What is the unemployment rate?
Are interest/inflation/foreign exchange rates volatile? Are you capable of managing global payments in this country?
Are there incentives or foreign direct investment (FDI) initiatives to attract multinationals?
Failing to factor in hidden costs can impact the profitability of your expansion. You need to expect a stable investment plan to continue growing.
But volatile inflation or exchange rates will erode profits. As business expenses increase you may need to put off investment or hiring decisions.
Using BIS data, we tracked how much a currency had appreciated or depreciated since 2010. The chart represents how much the rate has deviated up or down each quarter over the 10-year period. The bar for each economy demonstrates how widely the currency had swung from high to low over time.
The currencies of Singapore, New Zealand and the Euro Area did not deviate much. However, there were big swings in Argentina and Russia as economic issues derailed growth. Depending on your business model, this volatility can represent a huge risk.
Of course, it is worth paraphrasing financial advisers and saying...
'Past performance does not predict future returns'
A better indicator of future potential can be seen in the social factors of an economy. In particular, the potential labour force and demographics can influence an economy.
Social and demographic factors impacting business and workforce planning
Is there enough local talent to meet your needs? If not, are there restrictions on hiring expats?
Is the country’s population considered to be young or aging?
What are high school graduation rates? How much of the population goes on to earn a degree in higher education?
Is the country stable or is there a history of social unrest?
Are there religious or cultural factors that you need to be considerate of?
Is your native language the same as your target country?
Are there differences in working culture that would be a shock to you or your employees?
If your business will need an educated, or large, labour force, the social makeup of a country is key. Future availability of talent is paramount to a successful expansion.
The rapid expansion of China on the world stage can be attributed to a few factors, including entry into the WTO and gradual economic opening. Furthermore, a huge driver of economic growth was the availability of a ‘demographic dividend’. They had a high proportion of the population of working age available to industry.
Throughout the latter half of the 20th Century, China had a large working age population. This was boosted by the migration of talent from agricultural to manufacturing roles. A large, low cost labour pool and strategic investment fuelled China’s growth. However, their competitive advantage is reducing as wages, and average ages rises.
Chinese working age population has peaked and will age over the next 40-50 years. In comparison, Sub-Saharan African countries like Mozambique has a growing labour pool. India will also maintain a high percentage of working age civilians over the same period. This had led to suggestions that India or Africa will be the centre of industry in the mid-21st century.
Alongside reduced availability of workers, an aging society will have less spending potential. This is a challenge for both government and individual as social spending and healthcare costs mount.
Technological changes and their impact on international expansion strategies
Are you able to access tech talent more easily in the new market?
Are there intellectual property considerations?
Do you have innovative tech that is not available in the new country?
Are you liable to disruption from local firms protected by domestic laws?
What government incentives exist to support investment in research & development (R&D)
The availability of a large population is not the only factor to consider. High technology companies looking to expand may want to consider the STEM graduation. It is here that China is managing their economic transition from manufacturing to technology successfully.
China are world leaders in science, technology, engineering, and mathematics undergraduate education. In fact, they quadrupled the number of STEM graduates between 2000 and 2014. These graduates will now be entering the prime of their careers.
Spending on research & development can be a good indicator of innovation within a country. Data provided by The World Bank highlights an outlier outside the largest economies. Korea has the highest proportion of researchers per million inhabitants and R&D spend as a share of GDP.
A nation focused on R&D can benefit a business that needs niche talent or an innovative supply chain. Another innovation indicator is the number of patents filed, and China excels here. By comparison, other BRICS countries (Brazil, Russia, India, and South Africa) are lagging.
Figure 5: Spending on R&D (as % of GDP) and number of full-time equivalent researchers per million inhabitants (The World Bank)
Environmental regulations and concerns when expanding your business internationally
Are you compliant with policies relating to power consumption or disposal of hazardous material?
What impact do carbon footprint targets have on your business?
Are there extreme weather conditions in the country?
What is the national policy surrounding energy? Are they investing in renewable energy or oil & gas?
Understanding environmental regulation is essential to maintaining a license to operate in country. If you were to expand to Europe, you need to be aware of the European Union Emissions Trading System. The EU ETS regulates carbon emissions and can increase business costs.
Implementing processes to ensure EU ETS compliance can be costly. You may need to hire environmental specialists or radically change operational procedures. Even companies in sectors not regulated by the EU ETS may face a higher cost. Their customers may seek to reduce supply chain spend to mitigate increasing costs.
Local environmental policies will also create opportunities for companies pivoting to meet climate goals. The UK plans to increase investment in offshore wind and attract global innovation. In fact, IRENA are forecasting global offshore wind capacity to increase 41x by 2050. As the industry grows, a global supply chain will grow with it.
Legal and regulatory considerations when expanding your business
Are there employment laws related to local hiring or immigration restrictions?
Do you understand local laws on payroll, taxation, safety, and contracts?
Do you have a thorough understanding of the termination process for employees?
What is the taxation policy?
Are your internal teams equipped to handle regulatory variance in each country?
How often do employment regulations change?
What role does the government play in regulations? Is it an interventionist or free market economy?
Are there competition laws designed to protect local firms against multinationals?
Can you demonstrate compliance with data protection laws such as GDPR in Europe?
There can be wide variances in regulations across countries. Corporation taxes can vary from 0% in the United Arab Emirates to 40% for foreign companies in India. There are also great differences in dismissal and severance regulations.
Failure to understand labour law can be costly and time consuming. In the USA, an individual worker dismissed after four years is not entitled to severance or a notice period. In contrast, a worker in Turkey is entitled to six months’ pay and a two-month notice period.
Mismanaging contracts can also impact your future ability to attract and keep talent. It is advised to work with a local employment expert to guide you throughout your expansion.
You may have also seen PESTELE with three E’s, with the last E representing ethical factors
In recent years, strategists have added another important factor. Ethical factors should guide business decisions around your workforce and license to operate.
Does the country have a reputation for poor workforce policies? Does this include child labour or human slavery violations?
Does the country have policies to encourage fair trade practices?
Can your business contribute to social improvement through corporate social responsibility initiatives? These could include philanthropic or charitable activity to support national advancement.
Labour laws and workers’ rights vary by country. And not all countries are receptive to foreign companies implementing local employment policies.
If a US company is expanding, the Occupational Safety and Health Administration’s (OSHA) standards may not apply. So, it will be difficult to regulate and standardise working conditions between countries. This could cause tensions between headquarters and policy makers.
Another ethical factor to consider is expectations of working hours and conditions. Our World in Data found global variance in working hours and productivity levels. An expanding company used to long/short working hours may have a culture shock elsewhere.
Okay, so that helps me understand potential constraints. How can I still expand my business overseas?
International growth is key to staying competitive. It’s a process that should be carried out carefully. Otherwise, you may encounter a number of pitfalls.
On Thursday, October 29th at 16:00 GMT, we’re running a webinar to discuss the biggest mistakes to avoid during a global expansion project.
How partnering with a global employment & mobility specialist can help in foreign markets
Your strategy to expand overseas should consider partnering with a local expert. Companies that specialise in global employment can help navigate the intricacies of expansion.
Here are a few ways of how they can do that:
They have experience operating in the country
They are familiar with the local employment and tax laws
They have networks of local talent
They understand the details of successful and compliant country operations
A global employment and mobility provider can help with all, or some of, the following.
Global Employment Outsourcing
This is where a provider acts as the Employer of Record. They can act as a third party between the company and its employees. The most important benefit is that the provider holds the legal entity and liability. They also understand how to calculate payroll, taxes, leave accrual and administer benefits.
They are, essentially, a full scale outsourced Human Resource function for your company, which is beneficial when expanding. Corporate tax liabilities are reduced since they aren’t the legal employer of record, even while technically operating in-country.
Global Immigration Services
If any part of your workforce will include expats, you’ll need to manage immigration service. A local partner can manage work permits and authorizations, applications, and advisory services.
Tax laws vary by location, and payroll is a detailed process that can be prone to error. You may wish to work with a provider who has a track record and systems for processing local payroll.
Many companies choose to outsource payroll due to limited infrastructure. They can then save time and money and focus on scaling their operations.
Mobilizing an expat workforce has many facets. From managing real estate to relocating family members and finding accommodation and schools.
When you work with a Global Mobility provider, they handle this. This then frees you to focus time and attention on setting up an in-country operation.
When setting up operations in a new location, creating an HR function is essential. As such, you may want to opt for consulting advice from local specialists.
Summing up: Why is international expansion important to business success?
When you are growing fast, a market expansion strategy helps you go further and build for the long term. This allows for faster organic growth of a company.
How can a PESTEL analysis help?
A PESTEL analysis identifies the challenges and opportunities of a global expansion. By analysing the new market, business leaders can decide if it is a viable opportunity.
What are the advantages of global expansion?
Global expansion can be a source of new revenue streams and organic growth. It can also help mitigate intense competition through new markets and diversification. Other benefits include improved access to talent pools, investment, and a more diverse customer base.
What are the challenges of international expansion?
A PESTEL analysis uncovers many challenges of global expansion. For business planning the cultural, political, and legal barriers can be most complex. Key considerations include the below:
The time and cost of setting up a legal entity
The risk of tax and labour law non-compliance
Governmental policy relating to your industry
Access to talent
How to execute a successful global expansion strategy
Companies who partner with a global employment and mobility provider find many benefits. The following are benefits that our clients have experienced when partnering with Airswift:
Speed to market
Ability to quickly mobilise a global workforce
Reduction of tax liability
This post was written by: Liz Fiumara and Rob Boyle, Content Development Manager and Marketing Campaign Specialist
Join our webinar on 29th Oct to avoid common mistakes when expanding globally