Critical Factors to Consider Before Selecting a Nearshore Location, Part 2: Business and Political Climate

A nearshore location’s business and political climate is first category analyzed in the TTIFC whitepaper “7 Critical Factors to Consider Before Selecting a Location in the Booming Nearshore Market.” In the weeks to come, we will publish more sections in an ongoing series that will further break down the aspects that go into the nearshore decision-making process. Read the introduction to the report here.

1. Business and Political Climate

Sebastian Menutti, an industry analyst at the San Antonio-based consulting and research firm, Frost & Sullivan, says that companies, first and foremost, demand that the location has a friendly business climate. Some value this even more than overall cost. “That would be factor number one,” says Menutti.

The tax code, regulations, and overall bureaucratic hurdles tend to be the top-line items. Companies essentially want to understand how difficult it will be to set up shop and operate efficiently in the country.

Naturally, companies find it appealing when locations have formal tax free zones or offer tax holidays and similar incentives for foreign companies that establish themselves as exporters. But the softer stuff matters, including how welcoming and helpful any foreign investment promotion agency officials can make them feel. Any accelerated ability to get up and running without going through reams and reams of red tape can be a big plus.

“You do an assessment looking at the cost profile, looking at the availability of talent, and looking also at the general business environment so that you’re not exposing yourself to more risk than is necessary,” says Johan Gott, an analyst at Chicago-based global consultancy AT Kearney.

For larger, serious companies, this assessment can be rigorous. And it needs to look deeper than the surface level, relying on up-to-date, on-the-ground understanding, not just looking at some World Bank statistics from five years ago or faulty reputation biases. “We have certain views of certain countries that sometimes are well founded and others that are less well founded,” says Gott.

He recommends that companies do their homework and consult with professionals that specialize in country risk analysis. Many research firms and other non-governmental organizations even offer publicly available rankings that show how each country fares in terms of bureaucratic burdens, red tape, and corruption, with the World Bank’s annual “Ease of Doing Business” rankings setting the benchmark.

Still, site visits remain important and can often tell you more about the reality than any analysis ever could. “At the end of the day, you have to go there and you have to talk to people who operate there to fully get a sense of what it’s like,” says Gott.

On top of the general tenor of the business climate, understanding the country’s political situation is always critical. While having excellent tax breaks is great, for example, the firm needs to have some confidence that these will be in place for the next five years and not be rescinded on a whim if a looming election puts the opposition in charge. In some countries, major structural change can happen very quickly.

Argentina is a key example of this in action. Its reputation changed dramatically over the past decade, with many companies abandoning it as an option given the rhetoric against foreign firms and general difficulties operating there. The inflation and exchange rate complications alone were enough to scare off many companies.

But things are beginning to circle back now. President Mauricio Macri, who took office in December 2015 following a dozen years of rule by Nestor and Cristina Kirchner, has changed at least the tone of the government’s outlook even if the on-the-ground factors remain challenging. But on top of the country’s population size, high education level, and talent pool benefits, the improved tenor and desire for more international engagement has prompted more firms to reconsider Argentina.

While it is not a nearshore location, one Asian outsourcing giant also comes up in this discussion — with more organizations now choosing to look elsewhere. “Many companies that had previously offshored to the Philippines are now having second thoughts about that because of their political instability, because of what the president says about the United States,” says Menutti.

One company, which asked to not be named, that had previously offshored both there and in the nearshore, said it is now relocating to Jamaica due to the current climate in the Philippines following last year’s election of President Rodrigo Duterte.

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