The Advantages and Disadvantages of Doing Business in Colombia

Colombia has come a long way as a country and as a place to do business. The sensationalized version of Colombia that Narcos depicts is no longer accurate, though the reputation lives on.

Colombia’s history is long and complicated, filled with violent groups trying to control the country’s lucrative drug trade. But there’s so much more to Colombia than just drugs. 2017’s historic peace agreement between the Colombian government and the FARC, the largest guerrilla group, is a potential inflection point in Colombia’s history. And if I had to bet on a single Latin American country for the next 10-15 years, Colombia would be my pick.

Though many think it’s coffee, Colombia’s largest export is actually petroleum, which makes up over a third of the country’s exports, followed by coal, coffee, cut flowers, and gold. Coffee, however, was responsible for pushing Colombia toward a manufacturing based economy. After the War of a Thousand Days, which ended in 1902, Colombia’s coffee boom pushed the country to seek better transportation and manufacturing mechanisms.

Coffee production consistently grew in the 20th century, employing more than 500,000 families. While the government managed Colombia’s economy conservatively, the the political atmosphere turned increasingly unstable, corrupt and violent from the drug trade.

In 1991 the country adopted a new constitution. The motive for this wasn’t necessarily economic, but rather political, in order to make peace and bring drug lords to justice. Colombia remained relatively stable economically until the late 1990s when fiscal deficits cause a higher public debt which resulted in the country’s first economic recession in over 60 years. But by the early 2000s, the economy began to recover, due to high petroleum prices and stable coffee prices.

Some credit former President Uribe, who led from 2002 – 2010, as a leader who took a stand against terrorist groups disrupting the peace in Colombia. Though now marred by scandals, Uribe began to reform the country. In 2016, under President Santos, Colombia signed a peace agreement with the guerrilla group, Revolutionary Armed Forces of Colombia (FARC). As Colombia has stabilized and gotten safer, tourism has boomed, growing 250% since 2006, both for backpackers, but also for expats and digital nomads taking advantage of great quality of life and lower costs of living. Colombia’s luxury tourism market has grown exponentially as well.

Colombia’s safety has drastically improved, which means more stability and more opportunities for doing business. Medellin was named the most innovative city in the world and the murder rate is down 95% from it’s peak, which I’ve written about extensively before. Here are the pros and cons of working in the country today.

Advantages

Colombia’s GDP is steadily growing. 2015 saw a 3.1% bump, and while inflation remains at 4%, it’s expected to drop to 2-3% in the next year. Especially compared to its volatile neighbors, Colombia’s economy remains steady and ranked #53 in the World Bank’s 2017 Doing Business Report.

In the last ten years, Bogota has received US$16.77B in Foreign Direct Investment (FDI), and that number is expected to increase due to the 2016 peace agreement with the FARC guerrilla group. Cartagena is booming, and is cleaning itself up, and other major cities now have affordable direct flights from New York, Miami and more.

Investor confidence in Colombia is also growing. Thanks to political stability, along with steady economic growth, over 700 multinational companies have launched Colombian investment programs. Colombia is also a relatively open, free market economy, with several free trade agreements with partners such as the United States and the European Union. Furthermore, having ports on both the Pacific and Atlantic Oceans makes the country a strategic location to do business.

Colombians are qualified and entrepreneurial. The country has a literacy rate of roughly 95%, and the population encourages entrepreneurial opportunities. 71% of adult Colombians view entrepreneurship positively, and 60% of adult Colombians are potential entrepreneurs, according to Global Entrepreneurship Monitor. A study by the World Economic Forum and Global Entrepreneurship Monitor found that only Colombia and Chile had a high amount of early-stage entrepreneurial activity and an unusually high proportion of ambitious and innovative entrepreneurs.

The government is helping entrepreneurs. Ruta N, a federally-sponsored organization, offers early-stage companies support such as promotion, classes, finance opportunities, and vast networking in the city of Medellin. iNNPulsa, the Business Growth Management Unit of the National Government, promotes entrepreneurship, innovation, and productivity in all of Colombia. The organization’s goal by 2025 is for Colombia to be one of the top three most innovative economies and by 2032 one of the most competitive economies in Latin America. By offering grants, iNNPulsa gives Colombians the tools to generate economic growth and prosperity in the country.

By next year, the government wants to bring over 65% of the country online. This is not a distant goal since the country already has a smartphone adoption rate of 69% (the US is 75%). The Colombian government passed Law 1014 in 2006 that creates a national and regional network for entrepreneurial development. And in 2009, they passed Law 1286 to create a national system of science, technology, and innovation and to support high-technology, high-impact entrepreneurship.

The Ministry of Information Technology and Communication started Apps.co, seeking to create a new generation of digital entrepreneurs in Colombia. They nurture the connection between ideas, talent, and the market, offering collaborative work with entrepreneurs to turn ideas into businesses.

The support paid off as startup successes such as delivery service Rappi received an investment from big names including Andreessen Horowitz. Mercadoni, also in the delivery space, raised $6.2M from the US. Travel metasearch website Viajala has already raised $500,000 and is on its way to toward being the Kayak of Latin America.

Funds like Firstrock Capital, Torrenegra Labs, Wayra and company builders like Polymath Ventures are helping seed the ecosystem. Companies like Authy have been acquired by US startups and the ecosystem is starting to grow. My fund, Magma Partners, made our first three investments in Colombia in 2016 and 2017, including Portal Finance, the winner of our Latin America wide Fintech competition.

Setting up a business is relatively easy and has improved from 2016. In the Doing Business Report, Colombia ranks #61 for starting a business (up from 80 in 2016). Many international bodies, such as Standard & Poor’s, Moody’s & Fitch and the World Bank, identify Colombia as a trustworthy partner. So with high investor confidence, a relatively stable economy, and a strong entrepreneurial spirit, Colombia has many advantages when doing business in the country.

Disadvantages

There are a few areas where Colombia falls short and needs to improve. Of course, the drug trade is alive and well, though Peru has overtaken Colombia as the largest producer of cocaine. While the violence that follows the drug trade has drastically decreased, it is not gone completely. The peace agreement with the FARC, however, is seen as a measure to reduce violence country-wide.

Colombia also has poor management of intellectual property rights and was put on the United States Trade Representative’s “watch list” of countries with insufficient copyright legislation and enforcement. We recommend that most companies doing business from Colombia incorporate in the US and hold their IP there, and have a local subsidiary to accept payments and hire locals.

Colombian corporations do not pay necessary taxes, which leads to underinvestment in infrastructure and distrust of companies. Colombia ranks #139 in the Doing Business Report for paying taxes and a very low #174 for enforcing contracts.

Corruption and poor infrastructure still plague Colombia. Though the government has pledged US$70B to improve infrastructure, the results are still years, if not decades, away. Major cities generally work well, but connections between them are still not well developed.

Colombia ranks relatively high for the lack of transparency and corruption, according to Transparency International, and bribery is still part of doing business in certain sectors of the economy. While not anywhere near the levels of Brazil, Venezuela or Argentina, Colombia has work to do on this front.

Colombia still has ways to go in dealing with oligopolistic sectors of the economy, where competition is low, which can making starting a business difficult. However, with a much more stable economy than other Latin American countries and a highly qualified and entrepreneurial population, I’m very long Colombia because of it’s people, their ambition, and Colombia’s location and commitment to the global economy.

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