Ten years ago, it was a brave multinational corporation that dared to set up operations in Colombia, then a hotbed for drug-related violence.
Times have changed, however, and the country has become one of the new darlings for multinationals willing to take on a level of risk beyond the BRICs—Brazil, Russia, China and India.
W.W. Grainger, the Lake Forest, Ill., distributor of industrial supplies, entered Colombia in 2010. Earlier, Grainger had pushed into the Asia-Pacific region, moving into China in 2006 and India two years later.
“At first blush, Colombia can be associated with the troubles it had years ago, but there’s been significant modernization from political, economic and security standpoints,” says Court Carruthers, president of Grainger International.
Most of that progress has occurred while Álvaro Uribe served as president, from 2002 to 2010. “Uribe has made huge progress in terms of improving literacy, wage conditions and employment,” says Jacek Dzierwa, global strategist and portfolio manager at U.S. Global Investors, an investment management firm that specializes in emerging markets.
Colombia remains on the periphery of many multinational firms’ radar screens, perhaps because its much larger neighbor, Brazil, has captured the heart of the international business community in the western hemisphere. Colombia, however, joins the CIVETS band of up-and-coming emerging markets, including Indonesia, Vietnam, Egypt, Turkey and South Africa. The Economist Intelligence Unit, which coined the acronym in 2009, expects those countries to grow at an annual rate of 4.5% over the next 20 years. Although they’re riskier investments than the more established BRIC nations, they could also provide outsized returns.
Grainger, which had $7.2 billion in 2010 revenue, saw enough of its customers enter Colombia in recent years to attract its attention. “Many of those companies are investing in Colombia because there’s an emerging middle class and a growing economy,” Carruthers says.
He described the Colombia’s financial system as “adequate” when compared to those of other emerging market economies. It’s dominated by a few banks, including Bancolombia, the country’s largest, and Banco Davivienda.
The Economist Intelligence Unit notes that Colombia’s “regulatory framework was strengthened after the 1998-99 financial crisis and is considered one of the strongest in the region.” The regulatory framework is a key factor for Grainger’s finance executives when the company considers entering an emerging market. Carruthers says that beyond the obvious factors—the presence of its international customers and the extent to which it can leverage its chain of more than 3,000 suppliers—the company considers whether it can operate its business in a transparent and ethical way. And that depends on the integrity of a country’s financial, legal and tax systems.
“We may look at a market with big potential economic opportunity, but what is really important is that we can operate in transparent way, as is the security of our Grainger team members,” Carruthers says.
Coface, a subsidiary of Nataxis that provides credit insurance, factoring, business information and receivables-management services worldwide, recently raised its business environment assessment of Colombia by one notch, to A4 from B. That places it “above the average of emerging countries” and ranks “it first in Latin America, in terms of accessibility and reliability of financial data,” Coface says. It adds that despite the country’s persistent corruption, the financial information provided by companies incorporated in Colombia, whether local or affiliates of multinationals, is more reliable “thanks to stringent tax codes.”
There’s a small army of local and international firms that specializes in introducing multinationals to the tax, accounting and regulatory systems, as well as market nuances, of specific countries. Grainger, however, first gathers business intelligence from the export sales offices it runs around the world, and it has built an internal team with significant international experience to analyze financial, legal and security risks.
“We like to develop our own knowledge and understanding first,” Carruthers says, before tapping third-party consultants to provide more detailed information.
Even so, when entering new markets such as Colombia, Grainger typically looks to partner with a local company that already has the expertise and much of the business infrastructure in place. In the case of Colombia, the company acquired an 80% interest in Torhefe, a 25-year-old distributor of industrial supplies to the industrial and resource sectors.
“We’ve been able to bring greater purchasing scale and move into material-handling products, such as motors, and safety products,” Carruthers says.
Colombia’s demographic, financial and economic trends appear attractive. For example, Dzierwa says, 65% of Colombia’s population has access to financial services such as credit cards, enabling them to buy consumer products such as PCs or TVs more easily. And the Colombian government has made it a priority to address the country’s severe housing shortage, which should generate significant construction and follow-on economic activity in coming years.
“People talk about the lack of infrastructure in Colombia—the quality of the airports, ports and roads. The mining companies especially complain that the country should improve those things to promote growth,” Dzierwa says. “But the investment climate is generally much more stable there than in neighbors like Ecuador, Venezuela and Bolivia.
Risks remain, however. “We know that a lot of countries have 10 years of good performance and then revert,” says David Backus, an economics professor at New York University’s Stern School of Business.
Backus notes that many thought Argentina had turned the corner during the 1990s, only to see it deteriorate starting in 2001. “From a business point of view, you want stability and countries like Chile have that,” he says. “It’s still early to say that about Colombia.”
See more stories here about countries where multinationals have spotted opportunities.