Finished Product: Country Risk Analysis

Subject: Management
Pages: 6
Words: 1703
Reading time:
7 min
Study level: Bachelor

Introduction

Diplomatic relationships are vital for global economic success and sustainability. The China-U.S row has significantly hindered import/export associations, thereby limiting economic growth and industrial development. China has been a major exporter of industrial and agricultural products to many nations including the U.S. BBC News records that disagreements related to free trade policies between the two countries are the main reasons behind the trade war (1). When trade sanctions are established, operating in a foreign country can be extremely challenging. For this reason, the U.S. has to invest in other countries to set up its Cotton hospital scrubs manufacturing plant. In this case, emerging markets are ideal due to the availability of the market and low operation costs (International Monetary Fund. Strategy, Policy, & Review Department 1). This paper considers Colombia and Brazil as the best alternatives for U.S. manufacturing of cotton hospital scrubs. Each nation has political and economic challenges that will potentially impact productivity and the market.

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Colombia and Brazil

Choosing an investment location requires careful consideration of the economic and political environments. MSCI, a website that tracks the accessibility of emerging markets for international trade, records that developing markets present a dynamic and valuable asset class (1). Notably, Colombia and Brazil constitute good environments for U.S. internationalization strategies. In addition to market accessibility, size, liquidity, and economic development are used to classify nations on the emerging markets index (MSCI 2). These factors are vital for any company that aims to establish and sustain its operations in an emerging market. In terms of the index risk and returns, Brazil is rated at a 75% performance level with a 4.73% turnover (MSCI 2). Since the country is highly accessible, the U.S. can invest in it. On the same scale, Colombia has a 76% performance rate with a 0.00 % turnover (MSCI 2). These countries have demonstrated rapid growth rates, providing opportunities for larger companies to set up operations and expand into new regions.

The ease of doing business is a vital factor to consider in international trade. According to Christy, more than fifty percent of global economic growth is driven by emerging economies (1). Developing countries were, for many years, obscure in the international trade sector until recently when they have gained recognition due to advanced research, technological innovation, and consumer networks. The availability of free trade agreements in Colombia and Brazil have also increased their relevance in global economic interactions, lowering their risk of investment (Kuepper 2). On a worldwide scale, Colombia and Brazil are given 70% and 59% suitability of doing business, according to World Bank-Doing Business Report (2). Brazil and Colombia are excellent options since the goal is to set up the manufacturing plant in a nation that guarantees safe and profitable operations.

Comparing the Political Developments of Brazil and Colombia

The political landscape is as essential as the economic environment in determining a suitable investment destination. Colombia has converted enormous swaths of public land to private ownership during the last two centuries (Vieira Costa 45). Much of this procedure was rationalized in the public eye to provide land to the poor and decrease rural poverty. Despite this, Colombia has one of the world’s largest concentrations of land ownership (Vieira Costa 45). Land distribution boosts voter turnout, makes government more competitive, and expands government services. Landed elites, however, employ patron-client relationships to influence local policy and leadership in their favor. The secondary, institutional implications of land distribution on power distribution surpass the primary effects on land distribution.

The political regimes of Brazil differ in several ways, influencing peace and business activities in the two nations. After more than four millennia under Portuguese control, Brazil obtained independence in 1822 and continued to operate under a monarchical regime until the eradication of enslavement and the military’s declaration of a republic in 1889 (Grinberg 46) Brazil, by far the world’s most populous nation in South America, was ruled by populist and military governments for more than a half-century until 1985 when the regime peacefully handed over control to civilian authority (Grinberg 46). Brazil’s interior continues to flourish in terms of industrialization and modernization.

Although economic crises may be unprecedented and tragic, some nations navigate the recessions more effectively, becoming great pillars on international economies. Brazil was regarded as among the world’s most powerful developing markets and a significant contributor to growth after successfully navigating a global financial crisis in the late twentieth century. The 2014 World Cup and the 2016 Summer Olympics, the first-ever staged in South America, were considered emblematic of the country’s progress (Swart and Lisa 9). Brazil, however, was afflicted by a drooping economy, rising unemployment, and rampant inflation from around 2013 to 2016, just recovering from a recession in 2017 (Swart and Lisa 14). Over the years, Brazil has worked on its fiscal policies, becoming one of the best nations to expand business operations. Former Leader Dilma Rousseff was impeached by Congress in 2016 for committing impeachable crimes against Brazil’s fiscal rules (Grinberg 48). These political transitions have significantly impacted democracy in Brazil, placing it above other nations regarding investor safety.

The Colombian economy has been growing despite various challenges associated with its political environment. After the collapse of Gran Colombia in 1830, Colombia was one of three countries that arose after Ecuador and Venezuela (Ocampo 95). During the 1990s, a decades-long struggle between government forces, paramilitaries, and anti-government insurgent organizations, primarily the Revolutionary Armed Forces of Colombia (FARC), increased (Vieira Costa 50). Political stability begins with the demobilization of militia groups, a step that saved Colombia from looming danger. Illegal armed groups developed in the aftermath of the paramilitary demobilization, with some former paramilitaries among its ranks. In November 2016, the Colombian government passed a final peace agreement with the FARC after four years of full-time peace negotiations, which was later recognized by the Colombian Parliament (Vieira Costa 50). Today, Colombia is among the best performing economies among developing nations.

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Democratic administration goes hand in hand with the allocation of power. Members of the FARC are required to forcibly remove, disarm, and reintegrate into society and government under the terms of the agreement (Grinberg 52). The Colombian government was also committed to establishing three new institutions as part of a ‘universal strategy for truth, justice, rehabilitation, and non-repetition. They included a commission of inquiry, a special unit to collaborate the search for those who went missing during the dispute, and a Jurisdiction for Peace, which serves justice for conflict-related atrocities (Grinberg 52). Colombia’s government has extended its attempts to have a presence in all of the country’s administrative departments. Similar to Brazil, Colombia has reasonably solid democratic institutions, defined by peaceful, open polls and the protection of individual freedoms, despite years of internal turmoil and drug-related security difficulties.

Ongoing Issues and Potential Challenges

Colombia’s economy faces significant hurdles as the commodity boom comes to an end. The most important ones have to do with the need to minimize the budget deficit and identify new sources of growth. A robust exchange rate volatility is necessary for achieving objectives and necessitates more aggressive activities in the foreign currency market; these initiatives also serve to moderate the inflation rate’s trajectory (Ocampo et al, 97). Finally, while fiscal readjustment has been satisfactory, extra public sector spending required by the peace deal, and the need to repair substantial structural tax imbalances caused by past tax reforms, have created budgetary requirements. These hurdles are most likely to limit operations in Colombia, thereby reducing the profitability margin.

However, there are grounds to anticipate that in the late twentieth century, such developing economies’ growth exploits will be more challenging to replicate and sustain. Bottasso et al. explain that achieving a ‘high-income status’ by relying solely on the extraction and exports of primary goods and other ‘basic’ products will be difficult (126). It has been suggested that exports centered on commodities suffer from poor terms of trade, are more frequently prone to volatility (Bottasso et al 128). They have less capacity to support the buildup of human and material capacities required for technological advancement and the manufacture of increasingly complex goods. This is a significant challenge that the U.S. would face in Brazil due to its mismatch between terms of trade, taxation policies, and production.

The Best Alternative-Colombia

Comparing the two nations’ economic and political landscapes, Colombia would be the best alternative for the U.S. to set up the manufacturing plant for cotton hospital scrubs. Although Colombia and Brazil are both politically stable, Colombia has better international relations through its free trade agreements. Incentives include a 15% income tax, customs duty exemption, and the application of benefits gained from global contractual arrangements, as well as the potential of engaging in the local market (Montenegro 300). Colombia’s investment climate has long been regarded as among the most welcoming to international capital. Colombia is among the most free-market economies in Latin America in relation to the total number of assets owned by foreigners. Except for media (which is capped at 40%), every industry is open to foreign investment (Montenegro 300). Colombia’s infrastructure is also more developed than Brazil’s system, making it easier for companies to source materials and sell their end-products.

Expectations in Five Years after Investing

Investments are often guided by a balance between the expected gains and challenges. After five years of investing in Colombia, the company would expect to have attained at least a 46% profit growth. This rate is below the country’s 70% economic performance level because the company would have to spend a significant portion of its income on the initial establishment costs and advertisement. As the company gains popularity and gets a good customer base, it would easily sell inside and outside Colombia, gaining higher profits as the years go. By the fifth year, the company may have set up additional manufacturing stations within the country.

Conclusion

In conclusion, internationalization requires a careful analysis of a nation’s sociopolitical and economic environments. As the China-U.S. row has negatively impacted business operations, American companies can invest in other developing nations with adequate infrastructural development and political stability. Colombia and Brazil are viable options in this case, with the former being the best alternative due to its rapid growth, advanced technology, and free trade policies.

Works Cited

Christy, John. “Emerging Market Economies—The BRIC.” The Balance, 2022, Web.

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Kuepper, Justin. “How to Evaluate Country Risk for International Investing.” The Balance, 2021, pp. 1-4, Web.

BBC NEWS. “US-China Trade Row: What Has Happened So Far?” BBC News, 2018, Web.

Bottasso, Anna et al. “Port Infrastructures and Trade: Empirical Evidence from Brazil”. Transportation Research Part A: Policy and Practice, vol 107, 2018, pp. 126-139. Web.

Grinberg, Nicolás. “From Populism to Neoliberalism: The Political Economy of Latin American Import-Substitution Industrialization: Argentina, Brazil, Mexico and Colombia in Comparative Perspective”. Latin American Perspectives, 2022, pp. 45-54. Web.

International Monetary Fund. Strategy, Policy, & Review Department. “How to Assess Country Risk”. Technical Notes and Manuals, vol 2021, no. 003, 2021, p. 1. Web.

Montenegro, Yamile Andrea. “Colombia and the International Business Environment”. Latin American Business Review, vol 18, no. 3-4, 2017, pp. 295-316. Web.

MSCI. “Index Solutions: Emerging Markets Index”. Msci.Com, 2022, Web.

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Ocampo, José Antonio et al. “Colombia’s Macroeconomic Challenges at the End of the Supercycle of Commodity Prices”. Journal of Post Keynesian Economics, vol 40, no. 1, 2017, pp. 95-111. Web.

Swart, Julia, and Lisa Brinkmann. “Economic Complexity and the Environment: Evidence from Brazil”. World Sustainability Series, 2019, pp. 3-45. Web.

Vieira Costa, Andressa Liegi. “Political Culture and Democracy in Latin America: Perspectives on Brazil and Colombia”. Encuentro Latinoamericano, vol 5, no. 1, 2018, pp. 45-65. Web.

World Bank-Doing Business Report. “Ease of Doing Business Score (0 = Lowest Performance to 100 = Best Performance) – Brazil, Colombia.” World Bank Open Data | Data, 2019, Web.