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Country Report The Republic of Colombia
Columbia A Brief Overview
Colombia, or officially The Republic of Colombia, is the fourth largest country in South America and the third most populous country in the region. In comparison to the United States, Colombia is about the combined size of Arkansas, New Mexico and Texas. Colombia has an estimated population of 4 million people, of which 74% are located in urban areas. Currently, Colombia is immersed in violence by conflicting radical left-wing guerilla groups, right-wing paramilitaries, and the military; each destined to overtake the government. Bloodshed and kidnapping are rampant as extremist groups violently try to intimidate government and business officials. Foreign firms planning to locate to Colombia need to be aware of the turmoil and seriously consider the ramifications of making a significant investment in the country. This paper will illustrate the various, political, cultural, economic and legal hurdles foreign firms must consider before locating to Colombia.
Political Philosophy
Democratic or Totalitarianism
After achieving independence from Spain in 1810, Colombia has become a republic state, comprised of a democratically elected representative system with a strong executive. Two traditional political parties, the Conservatives and Liberals, have long fought for political control. During the ten year period of 148-158 (known as La Violencia) approximately 50,000 Colombians were killed as the Conservatives and Liberals were embattled in a civil war. The violence finally ended when both parties agreed to alternate the presidency and share cabinet positions. The Conservatives and Liberals, predominantly composed of the Colombian upper class, often face violent protest from various rural insurgent groups (FARC, ELN). Newly elected independent president, Alvaro Uribe, has dedicated his tenure to eliminating the violence and drug trafficking controlling his country. Uribe has lobbied for assistance from the United States and other nations, because he believes Colombia’s violence and drug issues are a global problem. Contrasting with many of its Latin American neighbors, Colombia has established a strong and enduring commitment to democracy. Colombia’s revised Constitution, enacted in 11, provides for a highly centralized republic form of government included a strong executive. The president and vice president are elected by popular vote to four year non-renewable terms. International firms considering making an foreign direct investment in Colombia should not place a considerable amount of attention of the country’s “democratic” political system. Although politicians are normally elected by popular vote companies must be aware of Colombia’s unstable political conditions. Political unrest in Colombia prompts numerous terrorist attacks that could hamper international businesses or place business leaders and employees in “harms way”.
Individualism vs. Collectivism
The Republic of Colombia was often subjected to a collectivist mindset until the early 1800s when the country gained independence from Spain. Today Colombia’s political system stresses individual freedom and prosperity over collective goals. As privatization increases and democracy continues to flourish many foreign entrepreneurs and investors become increasingly attracted to doing business in Colombia. As a result of Colombia’s individualistic political system, guerilla groups often demonstrate their distaste by terror bombings and political assassinations. Potential international entrants into the Colombian market normally are welcomed with “open hands” from the government to increase entrepreneurial activity and privatization, in hopes of reducing the country’s unemployment rate and debt. Although most foreign industry’s are welcomed by Colombia’s government, international business managers should be aware of the country’s current turmoil and prepare for protests and attacks from insurgent groups. Often violent guerilla groups feel foreign firms will only increase the riches of the upper class subject the poor to their current state of poverty.
Colombian Culture
Education
Before obtaining independence the Roman Catholic Church controlled the Colombian educational system, but the government increased their control early in the nineteenth century. Today Colombia has one the best educational systems in Latin America, with over 8 million students enrolled in primary, secondary, or higher education averaging an estimated 8. years. Public spending on education in Colombia is nearly 4% of GDP and the country’s literacy rate is 1%, ultimately producing a competitive and well educated work force for future investors. Foreign firms with intentions of locating to Colombia can expect highly educated employees, ultimately reducing the costs of training employees and the risk of have an incompetent workforce.
Language
Spanish is the official language of Colombia, however many ethnic groups speak their own individual languages. The education system includes English in the curriculum, however, few students know it and the language is rarely spoken. Many business people in Colombia understand English, but most foreign firms conducting business there should be fluent in Spanish. For instance, business cards should be printed on one side in English and on the other side in Spanish, however all cards should be presented with the Spanish side facing upward.
Religion
The Colombian constitution guarantees freedom of religion, however, 5% of the population is Roman Catholic. Recently over million followers have left the Catholic Church and began following other faiths, including Mormon, Lutheran, and Anglican
Social Structure
The Republic of Colombia constantly experiences infighting because various political groups (i.e FARC and ELN) believe the balance of riches between the countries upper and lower classes is drastic. Currently, 55% of Colombians live below the poverty line, while few upper class citizens occupy the majority of the countries money. Often many rural Colombian citizens support FARC and the drug cartels to show their disapproval to the Colombian government. Foreign business managers should try to bridge the gap between Colombia’s upper and lower class by bringing jobs that could ultimately benefit the countries poor. Mobility can be achieved in Colombia if individuals are given the opportunity and supplied with ample resources to succeed. By bring jobs to uplift the nations poor, international managers could play a significant role in reducing the violent acts of the FARC and ELN.
Although Colombia’s political system stresses an individualistic philosophy, Geert Hoftstede classifies Colombia as a collectivist society. Colombian people place a high emphasis on relationships and close ties among individuals. Colombia experiences high masculinity, power distance, and uncertainty avoidance in society. In essence, Colombia experiences a significant degree of gender differentiation, high inequality among intellectual capabilities, and high uncertainty.
Power Distance Ind. Uncertainty Masc.
Colombia 67 1 80 64
Firms planning to locate to Colombia need to be conscious of Hofstede’s results and determine how they affect operating a successful business. For example, Colombia’s Hofstede score for masculinity was 64 (similar to U.S. score), ultimately suggesting to foreign firms that genders roles are not sharply differentiated. International business managers should realize that females and males are normally not treated any different in Colombia’s business environment. Colombia’s high uncertainty avoidance score should allow international managers to realize that Colombians value job security and retirement benefits. In essence, managers should place a high emphasis on job security to get the efficient production from their employees.
International firms need to be aware of Colombia’s various cultural and workplace dimensions. For example, according to Hofstedes’s four dimensions, Colombia’s culture practices differ greatly from the United States. Foreign firms should be educated on the numerous cultures that exist in each international country they plan to locate to. For instance, punctuality is relaxed in Colombia but foreigners are expected to show up on time.
Economy
The Republic of Colombia contains a mixed economy, whereas most sectors of the economy consist of private ownership and minimal sectors have some state ownership and government planning. Over the past decade the government as dedicated their efforts to obtaining a free market system, emphasizing economic liberalization and major investment ties with the United States. In the early 10’s Colombia undertook an economic reform program to increase international trade and investment, ultimately reducing tariffs, increasing deregulation, and emphasizing the privatization of state-owned enterprises. Although privatization of many sectors of the economy are dominant, government participation still exist in the railway, petroleum, insurance and telecommunications industries. President Uribe maintains that specific state run companies will remain under state control; however, the government is planning to open up more state run firms to private investors in the significant future.
During the mid 10s privatization of Colombian airports, seaports, and financial institutions flourished. Liberalization was successful for nearly five years in Colombia, but the government began to increase the country’s debt due to higher spending on social welfare polices aimed at lower income individuals. As a result, in 1 the Republic of Colombia experienced a horrific recession that they still are trying to recover from. During the recession unemployment in Colombia soared to 0% and the economy shrank by 4.5%. The economy has shown improvement in 001 with the unemployment rate decreasing to 17% and and economic growth rising to 1.5%.
The United States is Colombia’s primary trading partner with combined trading in 001 exceeding $11.8 billion. Many products produced during the last 10 years in Colombia have benefited from the Andean Trade Preferences Act. Under the Act, many products exported to the United States are duty free. Colombia also benefits from the Generalized System of Preferences, an act adopted by developed nations to support imports from developing countries. Foreign firms looking to locate to Colombia should be conscious of the Andean Trade Preferences Act and the GSP because exports to other countries would be significantly cheaper. (Coltrade)
Foreign Direct Investment
Currently, Colombia welcomes foreign investment in virtually all sectors of the economy except for national security, defense, and hazardous wastes disposal. The government has established an institution, Coinvertir, to help foreign firms making an investment in Colombia. Legislation to increase foreign direct investment is based upon three principles; equality, universality, and automatic authorization. In essence, foreign companies are subjected to the same treatment as national firms, foreign investment is open to all sectors (except defense, national security, and toxic waste) and foreign investors may invest in all segments of the economy without government approval (Coltrade). Despite Colombia’s high security risk, foreign investment increased to $4. billion in 001, up from the previous total of $. billion. The government continues to encourage foreign direct investment by offering favorable taxation methods to investors and extensions of credit to new industries. Despite political and drug related violence, Colombia’s economy is steadily improving since the recession of 1.
Legal Aspects of Colombia
Private Property/Intellectual Property
The Colombian Constitution protects all forms of individual rights and intellectual property and establishes that it is the responsibility of the state to make sure those rights is upheld. Although private property rights are enforced in Colombia, the country still remains on the Special 01 “Watch List” for not providing efficient protection on intellectual property rights. Colombia has yet to fully cooperate with the World Trade Organization (WTO) Agreement in relation to protecting intellectual property. Music piracy has become increasingly rampant in Colombia since 18, with increased illegal reproductions of compact discs.
Corruption
Currently, corruption and bribery are practiced frequently by political leaders, police, and guerilla groups to settle differences and gain support from various groups in Colombia. In 000, the National Planning Department estimated that corruption directly costs Colombia $. a year. The International Monetary Fund estimates that Colombia that Colombia loses approximately $500 million dollars annually from tax evasion and another $600 million from settlements of corrupt politicians. Recently, Colombia’s new president, Alvaro Uribe, dismissed over 100 corrupt custom officials in his first attempt to rid the country of corruption. Transparency International, an international anti-corruption group, ranked Colombia 57th among 10 corrupt nations this year. Foreign firms looking to locate to any country must be aware of corruption and bribery practices, but firms should be extra cautious about corruption in Colombia.
Labor Laws
Colombian law mandates that any employer with at least 0 school age employees and obtains assets over a certain minimum, provide primary schools for their employees if the workplace is more than two kilometers from the nearest school (Coltrade).
Foreign firms with intentions of locating to Colombia must be familiar with the country’s unique labor laws. Colombia has three main labor contracts including, fixed contracts, indefinite contracts, and temporary contracts. In a fixed contract both parties agree upon the duration of employment (1- years). A written notice must be given one month in advance to terminate this contract. Indefinite contracts are not predetermined by either party, but understood to be indefinite. Temporary contracts are agreed upon to be for occasional or temporary work, not consisting of the normal day-to-day activities of the firm. Every labor contracts contains a trial period (no longer than months) that allows the employer to evaluate the employees and each party is allowed to terminate their contract without any compensation during this period. Labor contracts can be terminated for many reasons including death of an employee, mutual agreement, expiration of a contract, and employee resignation (must provide 0 day notice). Foreign business managers should be aware that wages can be negotiated among employer and employee if negotiated wage is equal to or greater than the minimum wage set by the Colombian government. Each year the government establishes a minimum wage for a 48 hour work week (minimum wage in 00 is $117).
In Colombia foreign employees may not account for more than 0% of union leadership and can not be elected into any leadership positions. Colombian companies with more than 10 employees may comprise only 10% of their workforce with foreign employees. Although the wage rate is considerably cheaper in Colombia compared to the United States, foreign managers need to adjust and comply with Colombian labor regulations. Often many U.S. firms locating to another country plan to relocate a percentage of their domestic employees to ensure operation are ran successfully, but in Colombia managers need to be aware of the strict laws mandating a maximum number of foreign employers. In essence, foreign firms locating to Colombia must be willing to hire Colombian natives for leadership and other valuable positions.
Violence and Drug Trafficking
The Colombian government continues to battle violent guerrilla groups and narcotic traffickers as peace agreements have failed. The two major guerrilla groups, the Revolutionary Armed Forces of Colombia (FARC) and the National Liberation Army (ELN) are composed of approximately ,000 Colombians and claim to represent the rural poor opposing Colombia’s wealthy class. FARC and ELN routinely carry out kidnappings, hijackings, and assassinations against political figures. The challenge of the government is to preserve the country’s democratic system while eliminating the violence of these insurgent groups. FARC obtains approximately $00 million annually from the profits of Colombian drug trade and ransom kidnappings.
Colombia, the world’s largest producer of coca, a cocaine derivative, is responsible for 0% of the cocaine that enters the United States. Colombia drug trafficking, led by the infamous Cali Cartel, brings in an estimated $5 billion annually. In addition to the significant amount of cocaine exported from Colombia, exportation of heroin and marijuana continue to increase. The United States has donated $1. billion and volunteered military assistance in an effort to reduce Colombia’s drug trafficking. Currently Colombia has resorted to spraying pesticides on coca plantations to reduce the production of the drug. As a result, many coca farmers have aligned with FARC, ultimately planning more violent protest against the Colombian government.
Colombia’s Attractiveness Benefits, Costs, Risk
Benefits
Foreign firms need to be aware of the numerous benefits, costs, and risks associated with doing business in Colombia. Benefits of locating a foreign firm in Colombia include the countries population (third most populous country in South America) and attractive location. Colombia is located in the northwest of South America with easy access to United States ports. In addition, Colombia is an urbanized society with a literacy rate of 1%, therefore employees will be educated enough to work for foreign firms. Many international firms planning to locate to Colombia must be conscious to the benefits of first-mover advantages. Although Colombia is currently inflicted with many violent opposing political groups, early entrant firms into the country could reap significant benefits if peace negotiations are successfully implemented.
Costs
Colombia presents foreign firms with many costs associated with doing business there. For instance, Colombia has one of the highest taxation levels in Latin America, comprised of four internal and two external taxes for investors. Included in the external taxes are tariffs and various taxes on imports. In 15 the Colombian Congress passed The Special Tax Stability Regime, approving government to guarantee a fixed tax rate up to ten years for foreign investors. Most companies operating in Colombia are forced to pay for ransom insurance policies because of the frequent occurrence of kidnapping.
International companies are constantly presented with numerous risk related to doing business in Colombia. Colombia is a country ravaged by war from dueling political groups, and currently is the third largest recipient of United States aid. Wealthy or prominent business leaders always have to be cautious in Colombia because of the countries high kidnapping rate. The U.S. State Department estimates that more than ,000 people are kidnapped each year in Colombia.
Risks
International firms planning to locate to Colombia often face political risk from the countries numerous insurgent groups. FARC and ELN often are involved in numerous kidnappings and other violent terrorist like activities. Colombia also presents international firms with intellectual property problems. Firms must be aware Colombia does not currently comply with most intellectual property laws, ultimately putting many firms at risks of losing their intellectual property. In addition to violent political groups and weak intellectual property laws, Colombia also exposes many international companies to corruption. Corruption exists in Colombian politics, national defense, and the legal system, therefore it may not be profitable for businesses to operate in Colombia if several groups have to be paid off.
Conclusion
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