Colombia a promising economy: a look to the key issues for doing business

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Author and Contributor

Pablo Zambrano B

MSc Business Development

Grenoble Graduate School of Business

pablo.zambrano@grenoble-em.com

– 2015 –

With rapid growth rates and an increasing consumption, emerging economies are becoming global players offering value added products and services in saturated markets dominated by developed nations. This paper intends giving an overview of the Latin American region as well as a briefing of the Colombian market as an emerging economy. Key positive and negative issues where pointed in order to have a global vision of the market.

Overview to the Latin American Region 

With an estimated population of 588 million (The World Bank, 2014) within its twenty sovereign countries, Latin America has become a world player in terms of global GDP, foreign direct investment and growing population. These characteristics of more developed nations have lead Latin American countries to expand its boundaries and reach new markets.

However, this macroeconomic behavior started no more than forty years ago when the majority of the economies started to shift from an import substitution policy to an internationalization phase. In early 1950’s, Latin American countries began replacing foreign import with domestic production in order to protect their market of world recessions and depressions, decrease domestic unemployment and reduce dependency in other nations (Stanisljevic, 2014).

Nevertheless, these industries where inefficient and obsolete, as they were not exposed to internationally competitive industries and thus having small-scale economies problems. In the 1970 decade, the internationalization era began for Latin America by implementing more pro market strategies and reducing state controlled companies in order to overcome the issues that the import substitution policy arose (Stanisljevic, 2014).

Macroeconomic policies lead by the governments such as eliminating tariff barriers for foreign direct investment and economic incentives for local business to increase their participation in global supply chain of products and services, have leveraged some companies to have a more international scope.

During this last phase, Latin American countries have exhibited a number of similar characteristics that help to understand the development of its nations. To begin with, the term Multilatina defines a group of local enterprises that have chosen to respond to structural change in Latin America by expanding into other countries in the same continent (Stanisljevic, 2014). Such local companies began to understand its position in a more globalized economies to the point to be regional multinational players and global challengers.

Global Challengers are companies based in rapidly developing economies that are shaking up the established economic order. According to the BCG, companies such as Embraer, Magnesita Refratarios (Brasil), Falabella, LAN Airlines (Chile) Mabe, and Cemex (Mexico) (The Boston Consulting Group, 2013) entered to the club of the global challengers in 2013.

Another characteristic of Latin America economy is the presence of Grupos or family conglomerates. This term is defined as a large, privately- owned company that is highly diversified, and controls economic activity and employment in a large portion of a market (Stanisljevic, 2014). Family Conglomerates such as Grupo Bimbo (Mexico), Grupo SantoDomingo, Grupo Nutresa, Grupo Ardila –Lulle (Colombia), Grupo Ermirio de Moraes and Synergy Group (Brasil), are not only leading companies in their local markets but also important players in its neighbouring countries.

Last but not the least, is the presence of various emerging markets within the region, emerging economies are low-income, rapid growth countries using economic liberalization as they primary engine of growth (Robert E. Hoskisson, 2000) pursuing a more complete integration into the world economy. Although Latin America is a poor and unequal region, 80 million live in extreme poverty in 2011, middle class has shifted from being the 20% of the population in 1995 to 35% in 2011 as well as poverty has been reduced from 42% of the population to 25% in the same period (The Econonomist, 2014). This middle class rising is a key characteristic of emerging markets as is shifting consumption and production levels up.

Out of the twenty Latin American countries, five are considered as emerging markets or promising economies: Brasil, Mexico, Colombia, Chile and Peru (The Boston Consulting Group, 2013). These five investment- grade economies represent 75% of nominal GDP of the region having controlled inflation rates and a promising growth. Countries such as Brazil and Colombia are constantly referred in the BRICS and CIVETS acronyms, respectively, as they share similar features.

  

Colombia a Promising Economy

 Being one of the CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa), Colombia exhibits the third largest economy in Latin America rated as an upper middle income with a $378.1 billion (current USD$/2013) (The World Bank, 2014).

Colombia is not named as an emerging market only due to its GDP, it shares wide economic features with other nations boasting this same title. Firstly, according to the latest IMF projections, Colombia will continue with its positive trend increasing its economic growth for 2014 and 2015 with an annual percent change above 4.5 (IMF, 2014). This fact is to be highlight, as the country will have one of the most important growths in the region. Other emerging markets such as Brazil, Mexico and Chile will have growth rates of 2.7,3.5 and 4.1 respectively, for 2015 (IMF, 2014).

Additionally, per capita income has an increasing trend in the past years (see figure 1), rising from USD$5,105 in 2009 to USD$7,826 in 2013 and having a USD$ 14,400 forecast for 2018 (Proexport Colombia, 2014), these market behavior is a general characteristic of middle income economies according to he World Bank Attlas Method. (The World Bank, 2014). In turn, this positive performance has lead to a growing middle class : 25.3% in 2012 and a forecast 46.3% for 2025.

Figure 1:per capita income

In terms of foreign direct investment, the Colombian economy experienced USD$15,650 MM (16.7%) more than previous year. According to the World

Investment Report, the country is one of the top twenty host economies for FDI in the world with USD 16 billion in 2012. (United Nations Conference of Trade and Development, 2013).

Furthermore, in the past years the constitutions of Grupos have shaped the Colombian economy by having dynamic players in different industries. Such conglomerates have succeeded in crossing borders and increasing their participation in other Latin American countries.

Doing business in Colombia – Key Issues.

As stated in the previous part, Colombia’s performance in the past decade has enabled its industry to become attractive for local and international investors.

As positive key issues a company may face up: human resources, free trade agreements and free trade zones and government reforms, have increased the willingness of business in doing business in Colombia.

 Free trade agreements (FTA), free trade zones and alliances

In terms of international trade the country exhibits an attractive position as it has signed FTA’s with almost 50 countries in the world giving access to its products and services to a global market of 1.5 billion consumers (Proexport Colombia, 2014). In the same way, Colombia is part of the Pacific Alliance made up of Mexico, Peru and Chile. This alliance is a key issue for the continent and its members as it has direct access to markets that represent 85.7% of the World GDP. Due to its geographic position, the Alliance can easily attend Asian and North American markets offering flexibility for global value chains (James, 2005). Finally, free trade zones are accessible in the country with no import duties, allowing sales to the local markets and representing more than 8 million m2 available for companies willing to locate.

Recent Government Reforms

The government modified the credit policy by strengthening legal rights of borrowers and lenders. It allows entrepreneurs and new players in the economy not to not give typical guarantees for credits as a land but to support the credit with future revenue or other assets. This reform as well as the elimination of the need of a provisional registration for property and start up where taken into consideration by The World Bank for placing Colombia in the 34th position in the Doing Business Report 2015.

Human Resources

As another trend of developing countries, education systems have shifted to attain global necessities in different areas. The nation displays an increasing qualified work force as more than 400,000 graduates and specialist in engineering studies in the last decade are working in different international projects. Likewise, there are state initiatives that aim specializing the workforce such as the Digital Talent that provides training through technical and technological, graduate and post-graduate programs in order to meet the increasing domestic and global demand for IT services and solutions.

However, companies still have to deal with negative issues:

 Corruption and Conflict

Corruption defined as the abuse of public power for private benefit (Uhlenbruck Klaus, 2006) is a mayor issue for Colombia as a developing country. The country still faces several corruption challenges as the involvement of the public and private sectors, clientelism, lack of state control and weak presence in in remote areas of the country, and the inefficiency of the criminal justice system (Hernan, 2013). According to Transparency International’s 2012 Corruption Perception Index, ranks Colombia 94th out of the 176 countries and territories assessed, withascoreof36onascaleof0– 100. Related to corruption, Colombia’s armed conflict threatens political stability and business development as it acts a constraint for investment mainly because there are no guarantees (prosecution, fraud, lack of justice and control).

Taxation

Although the country reduced corporate income tax and payroll taxes, it made taxes payment difficult and a policy very difficult to be interpreted.

Infrastructure

Colombia suffers of an inadequate supply of infrastructure in terms of transportation, roads, ports and other structures and facilities necessary for the industrial development. This issue is in the top 10 constraints for doing business as it rises operational, freight and other related expenses for companies. To have a specific idea the cost of exporting a container in Colombia is US$2.355, while in Chile, for example, is in US$910. In regards to imports, the cost is US2.470 per container, while in Peru it is US1.010 (La Republica, 2014).

As a result, Latin America is a source of opportunities due to the explained features, however, it also has its “black side” that most multinationals are not willing to attain.

 http://www.colombia.co/ 

Bibliograpy

 

Hernan, G. (2013). Colombia: Overview of Corruption and anti-corruption. .: Transparency International.

IMF. (2014). Subdued Growth in Latin America for 2014. .: IMF Survey.

James, E. C. (2005). Distance, Time and Specialization: Lean Retailing in General Equilibrium. The American Economic Review Vol 95 , 292 – 314 .

La Republica. (2014, October 28). Economía. (D. L. Republica, Producer) Retrieved October 29, 2014, from La Republica: http://www.larepublica.co/colombia- lidera-por-primera-vez-el-doing- business-entre-pa%C3%ADses-de- am%C3%A9rica-latina_186156

Proexport Colombia. (2014). Colombia Bring IT on . Bogota: Proexport . Proexport Colombia. (2014). Investment Environment and Business Oportunities in Colombia. Bogota, Colombia: Proexport.

Robert E. Hoskisson, L. E. (2000, June). Strategy in Emerging Economies. The Academy of Management Journal , 249- 267.

Stanisljevic, J. (2014). Business Operations in Emerging Markets Module Sessions 1&2. Grenoble Ecole de Management. Grenoble, France: .

The Boston Consulting Group. (2013).

Allies and Adversaries – 2013 BCG Global Challengers. Boston, USA: The Boston Consulting Group.

The Econonomist. (2014, January 02). Americas View. Retrieved October 21, 2014, from The Economist: http://www.economist.com/blogs/americasview/2014/01/poverty-latin- america

The World Bank. (2014, . .). The World Bank. Retrieved 10 27, 2014, from World Bank Open Data: http://data.worldbank.org/region/LA C

The World Bank. (2014, January). The World Bank Data. Retrieved October 21, 2014, from The World Bank: http://data.worldbank.org/indicator/ NY.GDP.PCAP.CD

Uhlenbruck Klaus, R. P. (2006, June). The Impact of Corruption on Entry Strategy . Organization Science , 402- 414.

United Nations Conference of Trade and Development. (2013). The Wolrd Investment Report. .: UNCTAD.

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