Navigating Business Complexity in Latin America: Political Risk and Regulatory Compliance

Karla Fernandez and Mauricio Carmagnani from TMF Group

By Simalco Brandlink

TMF Group, a business administration services company, has launched the 11th edition of the Global Business Complexity Index (GBCI). This index analyzes the challenges of establishing and managing businesses in 79 jurisdictions, representing 92% of global GDP. This year, seven Latin American countries have ranked in the top 20 of the most complex jurisdictions, with three in the top five.

Leading the list are Greece and France, followed by Colombia, Mexico, and Bolivia. Additionally, Brazil (7th), Peru (9th), Argentina (12th), and Paraguay (13th) also occupy prominent positions in the ranking.

The primary factor contributing to the complexity of Latin American countries is, undoubtedly, political risk. According to the study, 60% of respondents from this continent indicated that political risk is much harder for international companies to mitigate. Events such as recent government changes or upcoming elections, which create uncertainty, can influence companies’ decisions to invest in these jurisdictions, as they affect regulations, taxes, and trade policies.

Furthermore, regulatory compliance is also a significant challenge for operating in the region. Globally, 43% of companies feel prepared for future reporting obligations, whereas only 20% of those in South America share this sentiment, and 40% state that regulatory compliance negatively impacts foreign investment.

“It is interesting to examine the complexity index and see the factors that contribute to a country’s ranking. In the case of France, which is in the second position, the difficulty clearly lies in labor regulations. For example, a company must create a union if it has more than six or seven employees. In Latin America, the complexity is primarily legal and tax-related,” explains Karla Fernandez, Corporate Trust Director of TMF Group, who will present this report and discuss complexity alongside other speakers at the webinar ‘Infrastructure Projects in Latin America: Exploring Growth Potential and Business Opportunities‘ on August 14th at 10 am (GMT-5).

As a result, 80% of organizations operating in the region choose to reduce staff, and 50% are reconsidering their expansion objectives. Additionally, while globally, 79% expect an increase in foreign direct investment (FDI) in the next five years, South America has the most negative outlook, with only 67% expecting growth by 2024, and it is the region most likely to anticipate a significant decrease in investment (11%).

“The more complex a country is, the more crucial it becomes to have a partner like TMF Group to help navigate its challenges,” says Mauricio Carmagnani, Latin America Funds Director of the company. “You need partners who can organize the structure of that investment and manage day-to-day business operations in the destination country,” he adds.

40% of Latin American respondents said that regulatory compliance facilitates investment, while another 40% said it hinders it. Where does this contradiction lie?

M.C.: I don’t see regulatory environments ever facilitating the attraction of international companies to Latin America. The easiest countries to do business in the region are Uruguay (35th) and Chile (21st). Uruguay operates almost like an offshore jurisdiction, and Chile has a business environment similar to the United States. However, the rest of the region is very complex in terms of taxation, which deters investment rather than attracts it.

Could we say that Latin America is a complex region due to the rapid implementation of new regulations?

M.C.: The complexity lies in the change itself and its frequency. For example, the foreign exchange market in Brazil undergoes regulatory adjustments every month.

K.F.: If we look at Asian countries, excluding China, they have grown much more than Latin America in the past ten years. However, an accelerated growth process does not necessarily mean it is easy to operate in those countries, as this development naturally requires rapid regulatory changes.

What strategies should companies adopt when looking to invest in complex countries?

K.F.: When you establish yourself in an unfamiliar country or one with many changes, you need a partner who intimately knows that country. Without a good lawyer or accountant, it is practically impossible. This is especially critical in Latin America, which is experiencing many changes and has younger legislations. While wealthier countries are discussing how artificial intelligence impacts regulation, we are still reviewing taxes.

How does TMF support companies in navigating high-complexity countries?

K.F.: We primarily offer global entity management services in 87 countries and act as the first point of entry for foreign companies in a different jurisdiction than their headquarters. To establish in any country, you need to create a legal entity and obtain the necessary licenses, certificates, registrations, and more. We support this establishment process. Regardless of whether a company is in the top or bottom of the complexity ranking, with a local partner, you can navigate better.

Complexity in Latin America

– Mexico and Brazil are the largest economies in the region, yet they rank in the top five for complexity. What are their competitive advantages compared to less complex countries?

K.F.: Mexico has an undeniable advantage: its proximity to the United States. If it performs well, it will have ease of investment through nearshoring. Additionally, in terms of capital markets, trust laws in Mexico are more familiar to foreign investors. This is something we do not have in Brazil, which acts as a barrier for foreign investors or creditors to understand the contracts they are signing.

M.C.: Brazil is the eighth largest economy globally in terms of GDP, with businesses across all sectors and minimal government investment. Regarding infrastructure or clean energy, no other country offers as much investment opportunity as Brazil.

Moreover, it has a growing consumer market. If you’re in agribusiness, in a country with 215 million inhabitants, you’ll sell a lot of food. If you’re a multinational looking to expand, Brazil should always be considered.

– Is it more attractive to do business in smaller, less complex regional countries like Uruguay and Chile?

M.C.: We’re talking about very small countries. Uruguay and Chile are smaller than Sao Paulo. They are attractive but have their limits, so they need to be less complex to compete effectively.

Uruguay ends up serving as a hub. If you want to start a business in Latin America, you can begin there and expand more easily into other countries. As for Ecuador (30th), if it ranks better than others, it’s likely because of very little foreign investment and fewer experienced individuals there.

Surprisingly, Argentina (12th) ranks lower. We ourselves struggle to make projections in Argentina because it’s heavily influenced by politics. In my view, it should rank above Colombia, Mexico, and Brazil.

– What is your outlook on the other countries in the region?

M.C.: Colombia has faced significant challenges due to drug trafficking and lacked investment for many years. However, since 2000, it has opened up and shown considerable business opportunities, being the third-largest country in the region and strategically located. Being Venezuela’s neighbor, which currently enjoys support from Russia and China, the United States is investing more in Colombia, attracting other players.

Bolivia holds substantial mineral resources, which could be attractive. Yet, I don’t see many advantages in this market due to its small size. Moreover, the government is increasingly creating new, confusing, and complex regulations, despite economic difficulties.

Bridge Nations

This year, the GBCI highlighted “bridge nations,” those commercial corridors where companies establish trade routes between different trade blocs to create redundancy in case of any failures.

These measures result from global polarization and the deteriorating relations between the United States and China, argues TMF Group, leading to the elongation and alteration of supply chains and the shifting of production away from mainland China.

– Among the countries considered as “bridges” is Mexico. What would be the reason?

M.C.: Mexico primarily due to nearshoring and being the largest Spanish-speaking country in the region. However, it’s so complex that you can’t use Mexico to do business in Colombia, for example. Hence, I don’t see other attractions for Mexico as a bridge country for doing business within Latin America itself.

– Do you see other countries in Latin America trying to become a bridge nation to attract foreign investment?

M.C.: Part of Uruguay acts as an offshore jurisdiction. It offers tax advantages for various businesses and is highly advanced in regulations, such as cannabis and gambling, which attract European, Asian, and American companies. If I want to pilot something in Latin America, doing it in Uruguay is almost risk-free in that sense.

Chile is also an example, thanks to its trade agreement with the United States. Many investors invest in Chile and then in Peru because both are small, but together they make an interesting combination.

– What are the trends that could change the economic complexity landscape in Latin America over the next five years?

K.F.: It all depends. We had a period with more alliances between countries and fewer barriers, but this changed with the pandemic, and today we are going through another phase. In Brazil, we realized that not only semiconductors are manufactured abroad, but even aspirin came from India, for example. So, we cannot look solely at regulations but at the macroeconomic context and how the world is reacting: are we going to abandon alliances because we don’t want to buy from a country with cheaper products, or are we afraid another pandemic will affect me?

We are in a phase where everyone is protecting themselves more, philosophically speaking. Europe is using the excuse of ESG not to buy from certain countries, for example. In Brazil, we are considering that we should start producing basic items in our country. So, it’s difficult to predict where we are headed because we are in a process of quite strong protectionism.

M.C.: On the other hand, I believe that increasingly important issues are clean energy and impact investments. Latin America is well-positioned because it has the Amazon rainforest and many natural resources, which place it in a more prominent position in the global economy.

However, as Karla says, everything must progress in parallel and have a more acceptable political environment. Argentina is in a transition process, Venezuela is always a question mark, and Mexico continues with the same government profile. We’ll see, but historically, politics still heavily influences the economy, unfortunately.

– In this case, how can companies use this complexity panel to explore investment and business opportunities?

K.F.: I think they need to understand the nuances. Again, complexity does not necessarily mean the country is unattractive, and making the decision of where to invest goes beyond complexity. For example, Mexico is complex, but if we look at its population, geographical location, and nearshoring opportunities, it’s a different story.

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