Business

Foreign Direct Investment in Guatemala
Introduction Foreign Direct Investment basically refers to the decision by an enterprise, normally a company to undertake an investment in a country that is outside its domestic territory. A company that chooses to invest in another country is referred to as a Multinational. When a Multinational opts to undertake a Foreign direct Investment, it may do so by investing in a new production unit or by acquiring and expanding the operations of a company already in existence in that particular country. The country that receives such an investment is known as a host country (EconomyWatch 2009).

The success of Foreign Direct Investment is very much dependent on the kind of relationship between the parent company and its foreign subsidiary. It is this kind of existing relationship that would give rise to multinational operation. An investment into a host country can only be regarded as Foreign Direct Investment if and only if the parent company is in direct control of at least 10 of the shares in the foreign affiliates. This is also applicable if a company has voting power in an affiliate business in a foreign country (EconomyWatch 2009).

Foreign Direct Investment can be looked at from two perspectives. These can either be an outward Foreign Direct Investment or an inward Foreign Direct Investment. This classification is based on the type of trade restrictions that are applicable to such investment. Foreign Direct Investment is being fostered by existing trade incentives in a host country. These incentives may include grants, subsidies, and tax breaks. On the other hand, Foreign Direct Investment may be hindered by restrictive trade policies and unfavorable business climate. A country may encourage Direct Foreign Investment as a way of promoting industrial development within its territory and also to benefit from the employment opportunities created. A country may also discourage Direct Foreign investment as a way of protecting its home industries from trade competition (EconomyWatch 2009).

Guatemala has over the years boosted of being Central Americas strongest economy. The country is however currently facing very stiff competition from countries such as China. The effectiveness of Guatemala in attracting Foreign Direct Investment can be attributed to the availability of low-cost office and industrial space as compared to other Central America countries. There is also high number of low-cost labor, while the call billing rates are also significantly low (FDIMagazine 2005).

Thesis Statement Foreign Direct Investment in Guatemala is key to the economic development of both the country and the entire Central America region.

Background to the Problem Guatemala is at a very strategic location amongst the Central American countries. The country has direct port access in both the Pacific and Atlantic oceans thus making sea cargo travels to the United States much faster and reliable. The flights to other parts of the United States also take less than three hours, while there also exist reliable ground transport network through Mexico. Being the largest economy in Central America, the country is endowed with high numbers of young and skilled labor force and suitable laws that grants foreign investors equal treatment as the natives. These factors have made Guatemala to gain Foreign Direct Investment advantage over most of the other Central American countries.

Problem Statement The creation of favorable business climate is a key consideration for any country or economy that is keen on attracting foreign investors. It is important that factors that suit investment such as trade regulations, availability of investment space, and the existence of low-cost but highly skilled labor prevail in a country for investors to consider it a prime investment destination. Guatemala is one such country that has been striving to create such favorable investment climate. The country further boasts of its vantage geographic location with easy access to markets in the United States. Given such favorable investment aspects, it is important to access the factors that could make other American and European destinations gain investment advantage over Guatemala.

Statement of Purpose Foreign Direct Investment has always played and will continue to play very central role in the economies of countries that receive such investment. Ranging from increased physical development, Foreign Direct Investment is very important in employment creating and the general improvement of living standards in the host country. It is from such a premise that countries would always intensify their advances into the world of business process outsourcing. The business climate that a country creates will play a very central role on its ability to influence foreign investors to invest into their territory. Though each and every may have its own unique investment advantages, it remains the responsibility of government to implement regulations that would entice investors to come to their countries.

Aims and Significance of the Research The aims of this research are
To highlight issues relating to Foreign Direct Investment in Guatemala.
To identify the factors that makes Guatemala a prime Foreign Direct Investment destination in Central America.

To identify the barriers to Foreign Direct Investment in Guatemala.
To come up with strategies that will enable the government of Guatemala gain competitive advantage over its competitors for Direct Foreign Investment in Central America.

This research is significant to both the government of Guatemala and foreign investors in their pursuit for business process outsourcing and investment decisions respectively. This is very important for the success of both the country and the foreign investors.

Assumptions This research is based on the assumption that though every country has its own unique geographical advantages for Foreign Direct Investment, the ability of a country to gain investment advantage over its competitors is significantly influenced by the trade policies that are put in place by the government. Pursuing trade policies that appeal to foreign investors is therefore very critical to governments as this is what will determine the amount of Foreign Direct Investment that the country receives.

Research Question The main research question for this paper is Can Guatemala continue to rely solely on its geographical advantages to attract Foreign Direct Investment in the face of very stiff competition from other Central American countries The research sub-questions include

What major trade policies should Guatemala pursue to enable it remain a prime foreign investment destination

How best can Guatemala moderate the business climate for the foreign investors without giving them undue advantage over local industries

Limitations The main limitation of this research follows from the fact that the world business climate is very rapidly changing and the needs for each and every industry are quite varied and very rapidly changing. It is therefore not prudent to say that any single trade policy can form a common roadmap for the attraction of Foreign Direct Investment in any given country.

Key Words Foreign Direct Investment, Multinational Corporation, Host country, Foreign investor.
Literature Review Guatemala is a Central American country with a not very vast land surface measuring approximately 109,000 square kilometers. The country has three major regions including the cool highland where population is very dense, the tropical areas bordering the Pacific and Caribbean coasts, and the tropical jungle. The country has a total population estimated at nearly 13 million with a population growth rate of 2.1. The countrys capital is the Guatemala City, while other major cities include Mixco, Villa, and Nueva. The monetary unit of this country is Quetzal. The administration is a constitutional democratic government. The country attained its independence from Spain in 1839 following the collapse of the United Provinces of Central America (Infoplease 2010).

Guatemala is a country with quite diverse microclimate that allows for the production of a wide range of high quality agricultural produce for the export market. This has created availability of raw materials for the agribusiness sector. Investment in this agribusiness sectors is therefore a prime investment opportunity in Guatemala. Foreign investors can therefore seize this huge potential and help in developing the countrys agribusiness manufacturing process so as to substantially increase the value of such produce in the international market (CBS Interactive 2010).

The country has been aggressively pursuing efforts geared towards improving its competitiveness as well as the investment climate. Such efforts have seen the countrys flow of Direct Foreign Investment by nearly 55 in the year 2006. The efforts have also seen numerous foreign investors actively venture into Guatemala particularly following the enactment of the Foreign Investment Law in 1998. This law was intended provide guidelines and promote foreign investment. Key in this law is the intellectual property rights protection, government procurement, arbitration, commerce, telecom, and insurance laws that comply with the Central America Free Trade Agreement. These have been very critical in enhancing market access to foreign companies (U.S. Department of State 2008).

According to the statistics from the Central Bank of Guatemala, there has been significant increase in the flow of Foreign Direct Investment into the country following the concerted efforts of the government to ensure competitiveness. Though there is no reliable data on the stock of Foreign Direct Investment, available records indicate an increment of close to 55 between 2005 and 2006. The Central Bank further expressed optimism that the trend was bound to continue in the years to come if the government efforts are prudently pursued (U.S. Department of State 2008).

Conclusion and Discussion Though Guatemala enjoys a lot of geographical advantages given its vantage location and access to critical trading infrastructural facilities, the country must still do a lot in terms of policy formulation that will make it a destination of choice for foreign investors. It is however important to note that despite the numerous benefits that come with Direct Foreign Investment to a country, the significance and value of local firms is very vital to a countrys economy. Subsequently, all trade policies that a country pursues as a measure of facilitating the flow of Foreign Direct Investment must first put into consideration the interest of the local investors.

It is from this viewpoint that the government of Guatemala must pursue its bilateral trade agreements to ensure that local industries are significantly protected from unfair competition from foreign industries. This is very important in ensuring the economy of the country is more strongly supported by local investors and not highly dependent on the foreign investors. The success of Foreign Direct Investment in Guatemala can be attributed to the specification of investment incentives in the law and making such incentives available to both foreign and local investors without discrimination.