According to the Bureau of Economic Analysis, direct investment from the United States was $5.96 trillion in 2019. However, the Economic Commission for Latin America and the Caribbean (ECLAC) – a United Nations entity – reported that the main investor in Latin America is Europe, ahead of the United States. That is surprising given our rich shared history and geographic proximity. Of the total of $160 billion in foreign direct investment, the Latin American countries that receive most investment are Brazil (43%), Mexico (18%), Colombia (9%), Chile (7%) and Peru (6%).
Long before the pandemic, U.S. companies were looking at Latin America as a potential business destination. Many firms have already opened representative offices, shared service centers, call centers, back office support departments and even established businesses operations in the region. Of course, the pandemic has slowed that trend for the time being, but it is still true that Latin American support can help boost revenue and minimize cost of sales and/or expenses. Opening abroad remains an option for firms looking to increase their client base or gain significant savings on office rentals and payroll matters. However, there are many questions to answer to bring that plan to fruition. Above all, the questions: “is there a market?” and, “can I save money doing this?” should be at the forefront of your mind.
The Latin American Market
Latin America is a region populated by more than 652 million people – more than double the U.S. population. The region extends across a land mass of 7.7 million square miles, almost double the United States. With an average GDP growth rate of 0.9% (2019) the region offers a competitive market for American companies.
If you are worried about stability and purchasing power, each of the 33 Latin American countries has its own government and political organization. That reduces the political risk associated with a central government which can impact your operations at a federal level by passing a single law.
When it comes to income, GDP per capita ranges from as much as $85,975 in the Cayman Islands to as low as $1,913 in Nicaragua. So, whether you are in B2B or B2C, your products or services will likely find a buyer. You just need to be strategic and do the proper research around supply and demand before you develop an entrance strategy.
If your concern is currency risk; there are four countries who use the U.S. dollar as local currency; (Panama, El Salvador, Ecuador, and Puerto Rico). Meanwhile, Mexico and Brazil, the largest economies, are controlled by a floating exchange rate. However, you can control the risk by buying swap contracts at their central banks.
Research Always Wins
According to Gapminder, an independent Swedish foundation, school attendance for men in Latin America ranges from 4.7 to 11.8 years, when for women it is 3.8 to 12.2 years. That means that access to highly qualified professionals is possible in the region. However, that is not uniformly true. You must have a good human resources strategy to find the best talent. In addition to this, the median average salary ranges from $22,296 to $1,298. Of course, fluctuations might occur depending on the industry and how senior or specialized you need your employees to be. A good exercise is to compare how much would you be paying if you open or send a back office operation anywhere else against doing so here.
You might also want to consider that English is the native language for some Caribbean countries, so communication would not be a problem. Another difference related to HR matters is benefits. A private health care plan is not mandatory, a retirement pension is typically covered by social security and dental insurance is a very rare thing to include in a job offer. Furthermore, benefits like company cars or corporate credit cards are not commonly given. Typically, only senior executives and salespeople have them. Instead, companies typically prefer to hire salespeople with their own car and pay a monthly amount as fuel allowance.
Another major expense for any company is office rental. Due to the Covid-19 pandemic and the implementation of work-from-home programs across industries, office rental prices are dropping across the world. But as we all learned from the 2008 financial crisis, real estate trends are in constant movement. Given that the market will most likely recover it is worth looking at the pre-pandemic data on real estate prices. In New York, you could spend $14,800 a year for office space per employee. In Panama City, the yearly cost per employee is around $3,384, more than a $10,000 saving a year per person – and bear in mind that Panama City is one of the ten most expensive cities in Latin America.
In conclusion, the short answer is yes, you can have a positive impact on your income statement by opening an operation in Latin America. Of course, when thinking about one market or another, always look for a proper consultant, or a group of multidisciplinary specialists. Labor law, tax law and culture are completely different from what you are used to in the United States and could potentially be the reason why you win or lose in your Latin American venture.