Political Factors in your PESTEL Analysis

Part 2 of 7

Introduction

This blog post is being updated in the fourth quarter of 2023. Over the past year and more, a great deal has been written about how, in many countries, leaders of well-established democracies have moved to a more authoritarian style of governance. This is not a political statement, it is a reality, not just for the citizens of these countries but also for the international businesses that operate in these countries or intend to commence operations in these countries. We are not taking a position as to whether this is good or bad. Rather, we are asking if, given the current political climate in a country: is it a good idea to invest there, continue to invest there, or execute an exit?

This is a perfect example of the types of influences that you must consider when assessing the political factors in a PESTEL analysis. You will recall that a PESTEL analysis considers external factors that may impact a business. As a reminder, the six factors include Political, Economic, Social, Technological, Environmental, and Legal. This post takes a closer look at the political factors considered in a PESTEL and provides some interesting, real-life examples, including, of course, the one mentioned above.

According to Business-to-You, political factors:

…are all about how and to what degree a government intervenes in the economy or a certain industry. Basically, all the influences that a government has on your business could be classified here. This can include government policy, political stability or instability, corruption, foreign trade policy, tax policy, labor law, environmental law, and trade restrictions. Furthermore, the government may have a profound impact on a nation’s education system, infrastructure, and health regulations. These are all factors that need to be taken into account when assessing the attractiveness of a potential market.

The following table lists some of the topics that might be analyzed when considering political factors:

Topics to analyze when considering Political Factors

Examples of Political Influences to Evaluate in Business Planning

Here are two actual examples of political influences we evaluated in the course of our business planning work for our clients:

• Several years ago, a successful Eastern European public relations firm asked us to write a business plan for a visa so that the firm could open a New York office where it would represent (lobby) for clients wishing to have better relationships with the U.S. government and U.S. companies. The reason for the New York office is that some countries can be extremely challenging and, for the most part, ineffective because of these governments operate. Their initial concerns were, of course, of a political nature. However, in completing their PESTEL analysis, they were able to determine that there were no other obstacles to opening a New York office, including legal issues.
• A Brazilian consumer products company imported products from a European country and then distributed the products to customers in Brazil and other Latin American markets. The Brazilian taxes were so high that the company’s operating profits were all going to the government. After doing a PESTEL analysis, the company decided to move the business to Orlando, Florida, and in doing so not only saved a great deal of Brazilian taxes but began to sell to customers in the United States as well. Importantly, while the PESTEL analysis revealed that the company could mitigate its tax issues with a move to the U.S., it also highlighted the fact that there were both political and legal matters to attend to as a result of the visa requirement necessary for the company’s CEO to relocate to Orlando.
• We recently completed work for an American private equity investor to create a commercial finance company to be based in Lagos, Nigeria, that will serve businesses and governments in west Africa. The new company was to be capitalized with $50 million in equity and $200 million in debt. Due to the current political instability in Nigeria, the equity portion of the new company has been pared back to $30 million and the debt has been reduced to $100-$150 million.

Political and government factors affect every company in every country. All businesses must be flexible enough to respond to changing rules and policies. Companies are often not able to control changes to rules and policies that happen in the future. However, for companies considering moving to or expanding to a new country, they are well-advised to complete a PESTEL analysis and give careful attention to the new country’s political issues.

This is Part 2 of our series on PESTEL analyses. Go to Part 1 here. Our next post in this series will be on the Economic matters to be considered in a PESTEL analysis.

Other Articles in the PESTEL Analysis Series

• Put Your PESTEL to the Mettle (Part 1 of 7)
• Political Factors in your PESTEL Analysis (Part 2 of 7)
• Economic Factors in your PESTEL Analysis (Part 3 of 7)
• Social Factors in your PESTEL Analysis (Part 4 of 7)
• Technological Factors in your PESTEL Analysis (Part 5 of 7)
• Environmental Factors in Your PESTEL Analysis (Part 6 of 7)
• Legal Factors in Your PESTEL Analysis (Part 7 of 7)