How to properly do business in El Salvador

You are a compliance and risk officer for a large corporation that wants to expand into the global market by manufacturing its product in a different country. Present your argument for expansion in the country of El Salvador, located in Central America.

Introduction

The world has now become much more globalized and interconnected. Countries, through trade agreements and other legislative action have reduced cross-border frictional costs. This not only encourages cross -border transactions put also reduces the cost of doing so, thus lowering the cost for consumers. These lower costs drive still further demand, thus creating a cycle that encourages international trade amount peer nations. International expansion provides businesses with access not only to consumer within the respective country but also to workers and lower cost labor. El Salvador is not different in this regard as it provides entrants with access to a low-cost labor force who are eager to work longer and more productive hours than their American counterparts. This is particularly used of a business is commodity like in its operations and relies heavily on routine tasks. Proximity to one another is also a strong catalyst for trade. Canada, America, and Mexico are all connective via land and ocean. As a result, trade agreements between these nations is particularly advantageous for all parties involved, particularly as Mexico has very low labor costs. El Salvador can also benefit due to its proximity to both Merico and North America. El Salvador also benefits from access to waterways that also can facilitate commerce and shipping. Finally, technology has also created a strong economic incentive for expansion overseas. Technology, particularly for El Salvador, to better compete globally without needing to carry extensive inventories or spend heavily on research and development. Instead, the companied can leverage technology for shipment of digital products and services to individuals looking to access it markets. It can also use technology to make it more attractive for businesses to enter the market as well. In all, El Salvador is first well positioned to take advantage of the growing trends of globalization that are occurring around the world. It has strong geographic proximity to Mexico, North America and other Latin nations. It has a low-cost labor force which will be attractive to businesses that heavily prices sensitive to macro-economic trends such as commodities. The country has access to waterways and other nature resources that encourage commerce and shipping via ocean. The country has a stable rule of law with peaceful transitions of power. Finally, it has untapped potential within the technology sector that can be leverage to benefit those who enter the market (Aedo, 2012).

Present your argument for expansion in the country of El Salvador, located in Central America.

As noted in the introduction, El Salvador is an ideal location for a commodity, export driven business model. For one, the country benefits from a very low waged labor force. The minimum wage in El Salvador is $304.17 per month. As a result, expansion into the country will be much cheaper from an international context. In addition, the country does have a high level of worker benefits. Pensions, 401k, and PTO are much different than their American counterparts. As such companies expanding into El Salvador will be pay less wages and less benefits. This is a strong boon for commodity like businesses as their variable costs remain low. With low variable costs, negative commodity price swings will not have as severe economic consequences on the company expanding into El Salvador. In addition, with lower wages and benefits, the costs of operations are much lower, thus increasing profit margin and profitability over a business cycle. However, as will be noted in the disadvantage section, the country experiences higher than normal inflation which partially offsets these profitability gains (Alesina, 2015).

El Salvador has over 300 rivers, the most important of which is the Rio Lempa. Originating in Guatemala, the Rio Lempa cuts across the northern range of mountains, flows along much of the central plateau, and cuts through the southern volcanic range to empty into the Pacific. Due to the expense waterways in El Salvador, sea travel can be leverage to facilitate commerce within the country. Sea travel is important to expansion to any country as it helps to first facilitate commerce. It provides another alternative in which goods can be shipped to the country. In addition, it provides a much cheaper alternative as shipping, particularly for goods that are not time sensitive, tends to be a much more cost-efficient approach. For one, shippers can carry more cardo at one time as compared to airlines, rail, and trucking. In addition, due to its standardized nature, shipping is also much efficient. Through access to multiple shipping and commerce alternatives, the country can continue to foster economic growth and development. El Salvador’s tropical climate has little seasonal variance. This is benefit as for shipping as there is much smaller variability as it relates to weather disruption or delays related to commerce (Dang, 2011).

Government in El Salvador is a free market system which allows business to flourish. The government is a representative government similar to that of America. The political climate towards business is also very friendly as El Salvador has one of the lowest businesses tax rates in America. This further encourages foreign direct investment as business has government support along with low corporate tax rates. Lower tax rates, along with lower wage rates makes the country much more appealing from an expansionary perspective.

What compliance and ethical issues will you encounter and how will you address those challenges?

From a compliance and ethic perspective, El Salvador is not as strong relative to other alternatives in central America. For one, the government suffers from heavily political corruption. In many instances’ politicians have been known to accept bribes in exchange for political and business favors. In order to expedite licensing and other political hurdles, the government often unofficial accepts bribes. These activities are often done behind closed doors and are “unwritten rules” related to business in El Salvador. Recent administrations have looked to take a tougher stance on political corruption with the results remaining to be seen. Currently the country ranks 80th out of 151 countries as it relates to political corruption.

The country has a large crime problem with stems from 20% of the country living in extreme poverty. Drugs, gangs, and crime are all very prevalent within the country. This undermines investment as many potential employees will steal from the company. High crime rates present other ethical considerations as it relates to wages paid, security of employees, and philanthropy within the country to support economic growth.

Advantages and disadvantages of your choice in an analytical manner.

Many of the advantages of an expansion of El Salvador have already been discussed above in detail. This section will focus primarily on the disadvantages.

As noted earlier, the company suffers from high poverty rates which leads to lower wages in the country. These lower wages are an advantage for companies who do not require skilled labor for many tasks that are routine in nature. In addition, crime is a large disadvantage of the country as it undermines economy development, lowers return on investment, and lowers the amount of foreign direct investment. In also increasing expenditures on crime prevention and security thus lower profitability and margins. Due to lower profitability the company will be unable to properly hire personnel needed to help uplift the country out of poverty (Chioda, 1984).

Another disadvantage to expressed above is related to the sheer size of El Salvador. The country itself is very limited due to its size and scale. The country in total has GDP of roughly $25 Billion dollars. To put this into perspective, the GDP of the New York Metro area is roughly $1.57 trillion, over 40 times that of the entire country of El Salvador. This would suggest a long growth trajectory of the country, but many disadvantages remain that could inhibit growth severely. For one, the population is also very low at just $6.5 million people. Population growth has historically average 2.5% per year which is higher than the United States, but still not enough on an absolute basis to create large levels of consumer demand for products and services. Roughly 20% of this population is at the poverty level which further undermines the ability for businesses to sell their products internally within the country. Due to its small population, low GDP, and high poverty rates the country will not be able to internally support business operations in a profound manner. This can be mitigated through globalization and selling of products to other countries however (Bleakley, 1984).