Business Environment in Guatemala
Guatemala is a country which is situated in Central America. It attained its independence on 15th September 1821. Guatemala has a population of about 14million people and a GDP of 26 billion dollars. It is a country with a wealth of natural resources which include petroleum, Nickel, rare woods, fish, chicle, and hydropower. The population is mainly composed of the indigenous Mayan people and the main language spoken is Spanish although there are about 21 other languages. The Guatemalans are mainly Catholics and Protestants. Its economy is mainly boosted by coffee, sugar and bananas which earns the country foreign exchange. Guatemala has experienced a lot of political changes since its independence (Vanden and Gary, Chapter Ten). During its first years of its independence it experienced several coups from the military. These were later to lead to a civil war, which lasted for about 36year. During the war the government had suspended the constitution and all political parties. Due to this instability the country has not been able to make sustainable development to its people.
Most of the people in Guatemala live in extreme poverty and around 10% of the population controls around 80% of the country’s wealth. Wealth distribution imbalance has led to illiteracy in a big section of the population. Over the years continuous constitutional reforms have shaped the country’s economy and political fields giving room for favorable business platform.
The country has a democratic form of government with a president, vice president and a congress which are directly elected through a national election. The office holders serve for a period of four years. The president is the head of state and government. Guatemala is a multiparty democracy .The constitution of 1985 paved the way for the separation of power providing for the three arms of the government (Vanden and Gary, Chapter Ten). These arms are the executive, legislature and the judiciary which are independent.
Guatemala over the years has seen internal conflict derail its economic efforts. However the peace accord of 1996 opened the window for investment. The government embarked on economic liberalization. It started reforms, enacting friendly laws to give investors favourable conditions of doing business. These reforms involved among others exemption from taxation dividends payout, Low VAT which stands at 12% and happens to be the lowest in the region. It has also started special tax incentives to foreign investors. It also removed VAT on the exports of coffee, sugar, bananas, meat and cotton.
The government of Guatemala has started initiatives to bring about sustainable development through efficient service delivery. Business registration processes have been stimulined so as to make it easier to do business in Guatemala. The notable procedures involves confidentiality of details provided to the mercantile registry and internal revenue service, speedy incorporation procedures where it takes at least five working days, low capital requirements making it easy to do business (Nonaka and Takeuchi 18). Foreign company registration is equally made easy and friendly for any multinational corporation to establish a branch in Guatemala.
Business environment in Guatemala has continued to be favorable. However, there are risks associated with doing business in this country. These risks are high insecurity, corruption, low education levels, inadequate and poor infrastructure and currently, increase of taxes by the government to finance development. Insecurity makes difficulty for business to carry out its operations for fear of been attacked. Employees for example who do marketing and distribution of products of a company will find it difficulty to work in area with high insecurity. This situation in Guatemala makes it difficulty to do business and increases cost of doing business since companies are forced to arrange for extra security if they have to operate in such areas. Corruption is a vice which raises the cost of business. This leads to high prices of products so as cover the lost cash through the vice.It is important for a business to employ qualified staff to spur the strategic objectives of the business. Guatemala being a country with low levels of education means that the country is short of adequate skilled personnel to handle the national demand for skilled labor (Nonaka and Takeuchi 18).In such situations the business entity is forced to employ expatriates whom it has to pay high salaries thus increasing cost of doing business. Inadequate and poor infrastructure leads to delays in delivery of goods and services. In cases of poor road networks it is difficulty to deliver goods and services to deserving customers. Long delays due to poor roads conditions leads to high losses due to lost business opportunities. Inadequate infrastructure also makes advertising of new products and giving general information to the consumers difficult and thus low business volumes.
Political instability in Guatemala where the government has been toppled on several occasions makes the business environment unstable. However the signing of the peace accord and the government’s commitment in implementation has brought about favorable conditions for doing business. The factors hampering doing business in the country can be mitigated through concerted efforts by the government sticking to the implementation of the peace accord. This will ensure that disarming of armed groups which pose a great security threat is supported by both parties. Ensuring that it is safe in the country brings about investor confidence thus economic recovery.
The government should ensure that reforms are done to the education sector, make huge resource allocation so as to ensure that the country population gets adequate education. It is important that the government if possible put in place regulations requiring education compulsory to all children who have attained school going age. The country should also make a priority allocation of resources to enable it to quickly fix the country’s poor state of the entire infrastructure (Nonaka and Takeuchi 18). This will mitigate the losses being incurred in the country as a whole and spur economic growth.
Strengthening capital markets will also help business to raise capital through public offers and enhance economic growth. Adequate business capital ensures that the entity can invest heavily in its area of operation and reap the benefits of economies of scale. Sectors such as transport, telecommunications and electricity can be enhanced so as to provide adequate support to business through public private partnerships to increase efficiency. In reducing trade barriers and removal of trade tariffs will also enhance business growth (World Bank 5).
Considering the business environment in Guatemala entry of MNC is easy and this means the managers of any MNC should employ certain strategies so as to ensure that business competitiveness is maintained. Some of these strategies include brand management through continuous improvement in product innovation. This should also include improvement in cost, quality and service. The manager by employing this strategy will ensure that the products of the company are marketed in all segments of the populace.
Business process management is vital in the growth of businesses. Designing a process which will ensure that the organization relates well with its clients should be a priority to organization’s leadership (Gomez-Mejia and Cardy 20). A closer relationship with customers and suppliers puts the company on the profitability path through enhanced sales volumes. The clients of a company are the most valuable assets of the company and therefore should be well taken care of for they hold the future of that company.
Change management should be taken in account so as to ensure that all information of the company on any changes is disseminated to all employees in time. Continuous staff training is important so that they can keep abreast with any technological changes and adjust accordingly. The business should be structured in a manner to take into consideration any changes within the market to position the MNC strategically so as to tap the market potential.
Risk management enables the company to assess any threats in the market or in the venture. This will enable the MNC to commit resources to as to minimize or control the effects of the risks in the event that the unfortunate occurs. The company should identify priorities with consideration being given to the risks with high probability of affecting the business and the one with the highest impact on the business (Gomez-Mejia and Cardy 20). The managers should also employ strategies which will work towards eliminating layers of management creating flatter organizational hierarchies. This ensures that the company policies are quickly disseminated to staff and feedback is also obtained without bureaucracy. The resultant effect here is proper service delivery.
Time management should be enhanced in the modern management .P roper time utilization makes it possible for the company to make on time deliveries of goods and services to the consumers. MNC should ensure proper time management so as to remain competitive. Quality is one of the factors which should be considered for customer retention. Proper quality management makes the company continue dominating the market and conquering new markets due to product quality consistency. Therefore, adequate resource allocation to maintain quality ensures that the company stays ahead of its competitors. MNC operate in different environments and its managers should ensure that they make use of new technology as means to improving their operations (Gomez-Mejia and Cardy 20). The managers should always have a global focus so as to identify the needs of their diverse clientele. This also gives them the ability to concentrate on emerging markets.
Guatemala recently has been signing treaties with regional countries and other countries in the world. In 1994 Guatemala joined NAFTA (Northern America Free Trade Agreement). In this regard it has also embarked on making agreements to open its trade window with other countries. Like other countries US has entered into agreements with Guatemala and in 2005 it ratified the US-Central America Free Trade Agreement (CAFTA-DR) which came into force in 2006. U.S is the largest trade partner with about 36.5% of all it imports coming from there and exports amounting to about 40% (Gomez-Mejia and Cardy 20). Trading with US is not new since the countries have had along standing relationship all along.
The ratification of CAFTA-DR has seen the relationship take another dimension where US has been taking keen interest ensuring that Guatemala commitment to the implementation of the peace accord. The US has been pushing for human rights and the rule of law. The clamor for economic growth and sustainable development cannot be over emphasized in the relationship between these two countries. This has seen Guatemala attain considerable social –economic reforms and democracy. Apart from trade the US has been helping Guatemala through grants which channel through USAID.
In consideration of the Guatemalan situation where the country has a wealth of natural resources i wish to recommend petroleum as the product for exportation. This will ensure that the country continue to earn foreign exchange. These funds can be used to support its ambitious development plan and relieve its population of increased taxes currently being imposed to finance development. The proceeds from the exportation of petroleum can also be used to uplift the living standards of the people of Guatemala. Studies in Guatemala have shown that a large number of the populace live in extreme poverty a situation which can be reversed considering the availability of natural resources.
Guatemala as an emerging economy has business opportunities but these come with obstacles. The just ended civil war which lasted for 36 years poses serious threats since a lot of illegal fire arms in the hands of criminal. This has lead to high insecurity in the country and it continues to hamper investment in the country. The government has not been able to completely deal with this situation and put it under control (Gomez-Mejia and Cardy 20). Due to this cost of doing business in Guatemala has been very high. Investors tend to shy away from insecure business environments.
The Guatemala’s security situation has contributed to slow investor response. Political instability has also been an obstacle to doing business in Guatemala. The fact the country has just come out of a civil war makes investors not to move in speed. Many investors would rather wait and see how the situation is to be following the peace accord. There is no investor who would want to put money in a place whereby the situation is uncertain for fear of incurring losses.
Infrastructure forms the foundation for businesses. The absence of a good infrastructure in Guatemala has seen many investors shy away from investing in the country. The cost of doing business is high since businesses are likely to incur losses due to lost business opportunities, lost clientele as a result delays in delivering goods and services and losses emanating from wastages for the case of perishables goods going bad while being transported.
Guatemalan economy is looking up. The current political situation where the country is experiencing political stability following the peace accord is bound to spur economic growth. The government is also carrying out reforms in all sectors so as to put in place laws that are investor friendly. It is also partnering with other countries such France, US and Italy who are currently helping the country through donor funds to assist in development. Basically in the next few years the framework in the country will start bearing positive results. The country’s commitment to civil government as opposed to military rule has made it easier for the country to attract foreign investment.
All reforms since 1996 peace accord such as the enactment in 2001 of free negotiation of foreign currency act has seen the central bank free up money market thus bringing about easy foreign currency trade. This has seen foreign exchange and trade grow tremendously. Reforms in the education sector which is geared towards providing education to all will reduce illiteracy levels. This will bring about skilled human resources. Knowledge is power and therefore a population which educated and well informed will assist the country to achieve its development goals.
Guatemala has successfully been able to reduce the terms of the president, vice president, and congress to four years and those of Supreme Court judges to five years making it possible to pave way for change of leadership without some politicians clinging to power many years without bringing meaningful development to the people. Support from the regional neighbours has also seen the country register tremendous achievement in its development goals. The country has partnered with its neighbours to defeat high level corruption and money laundering which for many years has had negative effects on the country’s economy. Their effort to reduce crime rates through disarming the dissidents has been unrelenting, giving the country a peaceful business environment. Implementation of a just system within its system of governance for the resolution of disputes has also contributed immensely in ensuring that there is clear system and institutions to arbitrate in case of a dispute as opposed to punitive processes which were being exercised by the military junta.
The country is also experiencing serious reforms to put in place a good and reliable infrastructure. This will enable easy movement of goods and services. It will also enable the country businesses to make huge savings in areas where they were spending heavily in terms of operational expenses. Public service reforms in the country have seen the country reduce bureaucracy in government’s policies (Gomez-Mejia and Cardy 20). Notably is the removal of long processes of business registration at the mercantile registry and national revenue service where registration requirements are so clear and it takes only five working days to have the company registered. This shows the country’s commitment n ensuring that public affairs are conducted in an efficient and transparent manner. Current privatization of many state corporations is also seen as a concerted effort by the country’s leadership to bring in efficiency and minimize losses through efficient management
In conclusion we must look at the two scenarios of doing business in Guatemala. First we need to look at scenario one, that is doing business in the country in those early years when the country was in constant internal conflict. During this time doing business was extremely difficulty due to high crime rate, illiteracy, low levels of education and lack of proper infrastructure. These coupled with bad governance of the military juntas made doing business a living hell. Businesses really made huge losses and others literary had to shutdown their operations. Those who continued to operate would charge high prices for their goods and services meaning that these were only affordable to the elite section of the population. In fact no wonder, about 75% of the population is still poor today and cannot afford basic commodities and live below two dollars a day which seen as extreme poverty.
Scenario two, looks at doing business in the current environment. Following the peace accord of 1996, it has seen the country start recovery process with ambitious plans for development. The country is making reforms in all sectors of the economy to spur growth and open the window for extensive foreign investment. These reforms have been initiated to give special incentives to the movers of the economy. The government has removed Vat on the export of coffee, sugar, meat, cotton and bananas. It is also promoting production of vegetables, fruits and flowers which are mainly in the agricultural sector. In order to promote growth in this sector the country has banned the importation of meat, fish and other associated agricultural produces. This will ensure that producers of these products do not face unfair competition originating from product of other countries which may be cheaper due to cheaper production costs in their country of origin.
The government has started economic liberalization. This has seen the government carry out special tax incentives, exemption from taxes dividend payout and similar benefits, lowered Vat to as low as 12%. The government promotes business also through putting in place easy registration regulations, as opposed to bureaucratic regulations practiced earlier (Gomez-Mejia and Cardy 20). Regional countries such as Honduras, Elsalvador, Argentina have been assisting the country achieve economic power through trading partnerships such as NAFTA. The US has made tremendous assistance to the country through technical support even in times of disaster such as Hurricanes, floods and volcanic eruptions. These efforts have made the country remain on course in terms of development since resources are not strained during these disasters.
It is important to note the country has natural resources which have not been exploited. The current political environment will encourage the country to invite investors to explore these resources and benefit the country greatly. The availability of petroleum in the country means that the product will be cheap in the country. This will support the industries since they will be obtaining energy cheaply. The country apart from investing in petroleum exploration it should also provide for more funds to explore other natural resources which can be a source of foreign exchange through exports to other countries.
Proper management of these resources and the benefits of efficient utilization in the recent future will start trickling down to the businesses and eventually the country will witness improved living standards for it population through affordable goods and services. This scenario makes any future business prospects in Guatemala bright since the government is on track in its plans (Gomez-Mejia and Cardy 20). Its plans to continue offering incentives makes one feel that it is time to invest in Guatemala. The increase in taxes not withstanding, it is clear that the advantages in the current environment outweighs the disadvantages to conduct business in the country.
Strategy for Conducting Business with U.S
Guatemala has identified U.S as one of the potential partners in business. This is attributed to the fact that U.S has numerous resources that it lends to the Guatemala government to support business development ventures. U.S enjoys high tax reduction while investing in Guatemala and in return it assists Guatemala in identifying business ventures. U.S for example has played a very major role in the petroleum exploration in Guatemala by providing the required technology. Other countries have also been encouraged to invest in Guatemala by the improvement in business registration processes in Guatemala. In return Guatemala exports its products to those countries while those countries also import their products in Guatemala.
Obstacles with conducting Business in Guatemala
Guatemala has an approximate of 30% rate of illiteracy. This is a main challenge to business investors because it means there are few people who can do skilled jobs. It is relatively expensive to hire professionals from outside Guatemala to work in various businesses established in Guatemala.
Guatemala has more than 60% of its population living below poverty line. This poses a challenge to businesses because the consumer base is only limited to few who can afford to buy their products. An effect of these can be reduced sales that may hinder businesses from maximizing their profits.
In terms of telecommunication and infrastructure, Guatemala is among the least developed nations in Latin America. For any business to thrive, there si need for reliable infrastructure such as roads and buildings. It is therefore a challenge for most businesses to transport their finished products from their factories. Efficiency is therefore hindered as a lot of time is wasted due to the poor state of roads.
Risks associated with conducting business in Guatemala
Some of the risks one is likely to encounter in Guatemala are in distributing finished goods by companies to the consumers. Due to the poor state of the roads many goods are likely to be damaged during transportation or are likely to be delayed and this might lead to huge losses. This can be mitigated by the government involvement in developing the local infrastructure in order to boost business activities.
Increase in investment rates
It is not certain how the trend of charging interests to individual companies will continue. The possibility is that when the rates move up exorbitantly, companies might decide to withdraw their businesses from Guatemala. This risk can be mitigated by introducing favorable interest to the investors