“Complex” Business Terrain Isn’t Stopping Nearshore Investment

Sometimes bizarre regulatory requirements and complicated socio-political terrain has failed to slow down Nearshore landings over the last year.

Some of the Nearshore’s most popular locations found themselves ranked atop TMF Group’s latest Global Business Complexity Index, a report that evaluates the ease of doing business in 77 countries. The report takes into consideration factors such as regulatory stability, how easy it is to comply with tax and employment regulations, the speed of paperwork and the accessibility of bureaucrats.

For the second year in a row, Brazil ranked as the most complex jurisdiction to do business in, “besting” countries such as France, Turkey, Italy and Bolivia. TMF attributes Brazil’s high levels of business complexity to constant regulatory changes, its three-tier tax regime and the removal of temporary, COVID-related government incentives for businesses in the country. 

Some of the Nearshore’s most popular locations found themselves ranked atop TMF Group’s latest Global Business Complexity Index

Mexico and Colombia, two of the most popular destinations for Nearshore investment, found themselves ranked fourth and fifth, respectively. 

For Mexico, TMF cited new tax and employment regulations, as well as the long and difficult journey towards company incorporation as the main reasons. It must be noted that Mexico ranked thirteenth in the index back in 2020 and third in 2021.

In Colombia’s case, the report points to multi-leveled tax regulations and the uncertainty brought by the recent presidential elections, in which the country elected its first ever left-leaning president in Gustavo Petro. Its ranking changed from eight to fourth between 2020 and 2021.

Argentina, Chile and Peru found themselves in the top 20 too, ranking twelfth, fifteenth and third, respectively. In contrast, Costa Rica –another Nearshore investment hotspot– fell from rank 9 in 2021 to 45 in 2022. Jamaica also improved its standing, moving from 30 to 59 over the past year.

TMF’s index isn’t the only analysis that points to Latin America and the Caribbean as rough terrain for investors, Nearshore or otherwise. The World Bank’s Ease of Doing Business report gives mediocre to concerning scores to some of the region’s most popular investment hotspots. Mexico ranked 61 in the latest edition of the report, finding itself atop all competitors in the region. It was followed by Colombia (67), Jamaica (71), Costa Rica (74), Uruguay (101) and Brazil (124). The report ranks 190 countries.

They Keep Coming

Using business complexity to evaluate investment potential for Nearshore countries, one would expect that most investors would steer away from the region, which is already known abroad as unstable terrain to land. The numbers tell a different story, though.

Foreign direct investment (FDI) inflows into the Latin America/Caribbean region reached US$142.8 billion in 2021, according to the latest data from the Economic Commission for Latin America and the Caribbean (ECLAC). Though the number remains under pre-COVID levels, it represented a year-over-year jump of over 40%, a sign of willingness by investors to bet once more for Nearshore countries even under the cloud of global economic uncertainty.

For specific Nearshore hotspots, the numbers are nothing to scoff at. Mexico managed to draw US$32.1 billion in FDI between January and September of 2022, a yearly jump of almost 30% in its inflows and the highest FDI volume recorded for a comparable period since 1999. Colombia managed to catch US$9.4 billion in the first 10 months of 2022. That’s a 63% jump and its highest number since 2015. In Costa Rica, from clothing retailers and tech companies to giants of the pharma industry, foreign companies keep landing operations. 

Conoce algunos de los principales datos incluidos en el documento "La Inversión Extranjera Directa en #ALC 2022" divulgado hoy por la #CEPAL. El informe indica que la #IED aumentó un 40,7% en 2021 en la región, pero sin retornar a los niveles prepandemia. https://t.co/Lloh5r7N1Q pic.twitter.com/n8jaxoocBL

— CEPAL (@cepal_onu) November 29, 2022

Latin America and the Caribbean have managed to remain attractive in the eyes of investors in spite of the regional reputation and the hurdles that businesses might find in their entry. Foreign capital still finds allure in the region’s potential and in the size of some of its markets. 

TMF recognizes the point in its own report, underlining the opportunities that can be found in Brazil and Mexico specifically, the two largest economies in the region and also the ones that show the most complexity for foreign businesses, according to the group’s index. 

Also, a complex cocktail of economic and geopolitical factors has pushed investors to cast interested glances towards the Nearshore. From the supply chain crunch, to high inflation and China’s own growing complexity for businesses, the Latin American and Caribbean region looks like a juicier bet. 

“The bifurcation of the world economy will present a huge opportunity for Latin American countries in the form of nearshoring,” pointed out The Economist Intelligence Unit in a recent report. “Compared with major Asian economies, our business environment rankings suggest that Mexico, Costa Rica, Chile and Brazil are best placed to compete and benefit from nearshoring trends.”

For tech, the landscape seems to grow more urgent from moment to moment. Though not as harshly impacted by geopolitics and supply chains, the IT industry is suffering the woes of wage inflation and a shortage of specialized talent amidst the growing demand for software services and digital transformation. Those pressures are pushing the industry towards Nearshore sourcing, with some venturing into the territory itself to set up delivery centers.

Industry sources have told NSAM that, although there’s still a lot of ignorance regarding the Nearshore’s potential, interest is growing. Tech companies –big, small and anything in between– are discovering the region’s credentials as an exporter of quality tech services and as a source of high-caliber tech talent that is willing to work remotely for lower wages. 

Don’t Count Your Blessings Too Soon

Though the Nearshore can be sure of its own attractiveness in the eyes of investors, countries in the region can’t sleep on that assurance for long. An increasingly menacing economic landscape, the drying-up of capital and the winds of change blowing in South America could spell disaster for the Nearshore if each country’s leadership makes the wrong moves.

TMF’s report does not point to a lack of interest by investors in jurisdictions that are complex to navigate. It does underline, however, the most concerning aspects of each territory, warning against a future in which foreign businesses grow impatient and prefer seeking for greener pastures.

China is a pertinent case study. Though a giant in the world economy which still remains very attractive in the eyes of investors, recent moves by the country’s leadership has foreign capital concerned about the growing difficulty of entering or operating there. This has led to a progressive decline in FDI flows.

Said another way: the Nearshore can’t rest on its laurels. As stated by The Economist in its report, “to take advantage of these [opportunities], the region’s new governments will have to roll out policy reforms in 2023 that respond to public concerns without causing too much damage to the investment climate”.

Otherwise, the chance of a lifetime will pass them by.