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Expanding a business into a new country introduces many challenges in regulatory compliance, cultural navigation, and human resources (HR). Companies face a dilemma between leveraging employer of record (EOR) services or establishing a local agency for new market entry.
This article compares the two approaches and explores how EOR services can be effective alternatives to foreign subsidiary setups. It also offers quick tips to help you choose the best approach for your business.
EOR services and subsidiary setups: Nature and differences
Venturing into foreign territories can be daunting. Businesses must navigate international laws, cultural differences, logistics and infrastructure, and HR complexities.
Establishing foreign subsidiaries is a well-known solution to these problems. However, EOR services emerge as a more cost-efficient approach to global market expansion.
Let’s define both strategies to better illustrate how EOR services can be an alternative to foreign subsidiary setups.
Foreign subsidiaries: A traditional path
A foreign subsidiary is a separate overseas agency responsible for its assets and taxes. It requires setting up a legal establishment in your target country. As with most business practices, it comes with significant commitments and challenges, such as:
- Legal formation. Navigating local regulations, obtaining licenses, and complying with corporate governance requirements are time-consuming and resource-intensive for employers.
- Financial investment. Setting up a subsidiary requires substantial upfront investment in office rent, recruitment fees, salaries and benefits packages, and relocation expenses. You must also consider ongoing operating costs for payroll software, utilities, insurance, and legal and compliance fees.
- HR management. The separate agency manages HR functions, including data entry services and talent acquisition. You must find staff to handle payroll processing, tax compliance, and employee benefits administration in a foreign country.
Despite its challenges, this approach allows you to maintain significant control over operations, brand messaging, and intellectual property protection. Building a local HR team can also help you form an invaluable cultural understanding, as local workers are familiar with customs, communication styles, and workplace norms.
This knowledge helps in effectively managing employees, resolving conflicts, and creating policies that align with the cultural expectations and values of the local workforce. Moreover, it enhances employee engagement and satisfaction, as the HR team can tailor their approach to meet the unique needs and preferences of the local staff.
The EOR approach: An emerging strategy
EOR is similar to information technology (IT) support outsourcing. It involves delegating specific business functions—in this case, HR tasks—to a third-party vendor. The service provider acts as your legal employer on record, handling all aspects of workforce management.
The nature of this practice contributes to its popularity, especially for businesses seeking expansion. According to Valuates Reports, the global EOR market value hit $4.3 billion in 2023. Reports show the sector can expand at a compound annual growth rate (CAGR) of 6.8% by 2030.
An EOR can be a great alternative to a foreign subsidiary setup due to the following benefits:
- Faster market entry. EOR firms already have established foreign subsidiaries, allowing you to bypass the lengthy and complex process of setting one up.
- Reduced costs. Unlike establishing a legal branch, partnering with an EOR requires fewer investments. You only have to pay their service fees, often based on your workforce size.
- Improved global talent acquisition. The EOR firms’ networks and connections can help you tap into a broader pool of talent and niche experts.
- Minimized legal and regulatory risks. EOR providers deeply understand and stay updated on ever-changing employment laws and regulations in the countries where they operate.
- Flexible and scalable workforce. As your business grows and your needs evolve, your EOR partner can help you scale your workforce quickly.
While this practice offers many benefits, it gives you limited control over HR functions, such as customizing employee benefits or implementing policies. Nevertheless, you still maintain authority over daily administrative tasks and performance management.
Considerations for choosing between EOR services and subsidiary setups
Although EOR can be a strategic alternative to foreign subsidiary setups, considering both options thoroughly is still ideal. The decision usually depends on your company’s needs, goals, capabilities, and target markets.
Let’s discuss the key factors to consider when choosing the right approach to global expansion:
1. Long-term business goals in new markets
Understanding your expansion objectives helps you gauge the level of commitment and control required in the new market.
Assess your global expansion goals by considering the following:
- Market size and growth rate
- Market share and ambition
- Brand positioning
- Customer engagement
- Supply chain and logistics
A subsidiary may be better if you plan to become a significant player in your target location and establish a lasting presence. However, if your long-term goals are still uncertain or you want to test the waters of the new market before committing, EOR services are ideal.
2. Nature and niche of business activities
The nature of your business activities determines the level of operational control you need in the new market. Deciding on the kind of work your team will perform abroad is essential in determining whether to leverage EOR services as an alternative to subsidiary setups.
Is your team providing direct sales and remote technical support or constructing a manufacturing facility? Do you require high adaptability for complex products or low adaptability for standard services? Manufacturing necessitates a subsidiary for production control, while remote work might be suitable for an EOR.
3. Business needs and internal capabilities
Once you’ve determined your goals and niche, check if you have the resources to accomplish them. Identify any gaps in expertise, resources, or infrastructure you must address.
Your HR, legal, and financial capabilities are critical components to navigating the complexities of global expansion. To help you evaluate these aspects, consider the following questions:
- How complex are your anticipated HR needs in the new market?
- Do you have experts in payroll processing, benefits administration, and recruitment support?
- Does your company have in-house legal counsel with experience in international business laws?
- Do you have the budget for significant upfront investments and ongoing operating costs?
Establishing a foreign subsidiary is ideal if you have complex HR needs and adequate resources. However, if your company lacks HR expertise but needs to handle complex tasks in the new market, an EOR can fill that gap.
4. Geographic location of your target market
Some countries have intricate regulations regarding business setup, labor laws, tax codes, and other compliance requirements. Research information about these regulations in your target market.
Navigating complex regulations might necessitate a dedicated subsidiary team, while an EOR’s local expertise can be valuable for managing compliance. You should also consider the location’s political and economic stability, consumer cultural preferences, and proximity to suppliers and customers.
Assessing these factors empowers you to decide between EOR services and foreign subsidiary setups.
5. Potential exit strategies
The choice between an EOR and a subsidiary hinges on your long-term commitment to the new market. Considering exit strategies clarifies your intentions and helps you choose the path that aligns with your vision.
Are you confident in your long-term commitment to the new market, or do you want to maintain some flexibility for potential future exit? Establishing a subsidiary can be a complex process to unwind, while an EOR partnership offers a more flexible exit strategy.
The bottom line
The key to successful global expansion lies in making informed decisions about your strategies. Although EOR services can be a cost-efficient alternative to subsidiary setups, several factors must still be considered to ensure you maximize the potential of your new markets.
Your decision should heavily rely on your business’s strengths, weaknesses, and goals while considering the characteristics of your target location.
Let’s connect if you want to learn more about leveraging EOR services for your market entry strategies.
