During the 20 days of roadblocks last October, not only was the transport of fuel, raw materials, and finished products in Guatemala hindered. In addition to the shortage of perishable foods in stores and supermarkets, the breach of local and export contracts halted or postponed investment decisions.

Fredy Palma, manager of the Puerta del Istmo Special Economic Development Zone (ZDEEP), confirms that these events had an impact on the legal certainty sought by investors, and some projects that were under negotiation to set up industries or distribution centers postponed their investment decisions until they could see how the situation would unfold.

 “The roadblocks affected value chains and the country's image, which has improved in the eyes of credit rating agencies, but companies are seeking legal certainty, and guaranteeing freedom of movement is essential,” Palma said.

The relocation of global companies' plants, or nearshoring, seeks to shield value chains from external events that could affect the smooth flow of raw materials, goods, and services. However, for companies to relocate parts of an industrial process within the country, they require specific incentives that the government must promote.

It is precisely a business model that gained  relevance due to the difficulties in supply chains caused by the restrictions imposed by China in response to the pandemic, and generated expectations of attracting investment throughout Latin America. In the case of Guatemala, according to official data, between 2020 and June 2023, investments totaling US$6.4232 billion were confirmed, including US$2.2 billion in reinvestment in the telecommunications sector.

Since 2022, the Foreign Capital Investment Promotion Law has been in force, granting special tax treatment to new foreign investors who establish themselves in free trade zones or free zones (Zolic) for a period of three to ten years. Although the Ministry of Economy announced at the time a specific law to promote nearshoring, no bill has been submitted  to Congress.

Fragile chains

Investment projects promoting productive networks have been set up in the country, such as Yazaki, Pakka Inc., Nextil, PepsiCo, and PriceSmart, included by Pronacom [for its acronym in Spanish: National Competitiveness Program] among the investments that chose Guatemala.

However, last month's roadblocks “affected workers' ability to get to the factories. It was a difficult week that resulted in an estimated US$45 million in losses in textile exports,” states Alejandro Ceballos, director of the Clothing and Textiles Commission (Vestex), adding that supplies and merchandise were held up on the roads or at the port.

The Yazaki company, based in Puerta del Istmo, reported problems at the borders in bringing in products from other countries in the region, delays in the arrival of raw materials, and the risk of incurring penalties for failing to meet delivery deadlines.

“The road blocks highlighted the absence of the government. Nothing was done to protect people's rights in the face of a strike that not everyone agreed with and that ultimately caused more damage than it achieved,” said Ceballos, calling for institutional strength and for authorities to fulfill their responsibilities.

Melissa Corzo, coordinator of the Food and Beverage Commission of the Guatemalan Exporters Association (Agexport), commented that during the roadblocks, companies operated at 23% capacity and initial losses are estimated at US$19 million. Containers were unable to be transported for export, and raw materials and supplies were detained.

“The population has already shown its frustration with the political class, but the streets are not the place to solve the problem,” added the Vestex executive.

For the Pharmacists' Guild of the Guatemalan Chamber of Industry, the impact of the roadblocks affected the transport of raw materials and finished products to points of sale in the country and in Central America. It also caused difficulties in transporting personnel to pharmaceutical plants and led to the suspension of medical visits and sales teams.

Nearshoring, then, is an attractive alternative if most stages of a production process are located in the same territory. However, there is still room for improvement in order to take advantage of the opportunities offered by nearshoring, given competitors such as Mexico, which this month approved tax incentives for investments of this type in key sectors of its economy: semiconductor, automotive, electrical and electronics industries, medical and pharmaceutical devices, agribusiness, food, and the production of films and audiovisual works.

Pending transformation

Although Central America offers significant opportunities to take advantage of nearshoring strategies, in Guatemala, poorly integrated efforts between sectors complicate the landscape for attracting investment, said Palma, who began operations in late 2020.

The country enjoys economic stability, an improved business climate, training opportunities for the workforce, and attractive sectors for investors, explained Palma, who sees greater opportunities given Mexico's shortage of industrial facilities.

The Mexican Association of Private Industrial Parks—which manages more than 430 locations in 27 states—anticipates that the occupancy trend will continue for another three years as a result of nearshoring, with annual growth rates above 30% and occupancy rates above 97%. There are more than 425 parks in 27 states, and demand for space continues to grow. By the end of this year and the beginning of 2024, 47 new parks could be built to meet requirements of up to 2.5 million square meters.

The experience of the neighboring country, according to the publication “Mexico in the North American Factory and Nearshoring” by the Economic Commission for Latin America and the Caribbean (CEPAL) [for its acronym in Spanish], dates back to the 1960s, with its integration into global production chains through the maquila industry and its shared border with the world's largest economy, as well as the development of logistics chains to later insert itself into global chains.

In Guatemala, despite the country's progress in passing a package of competitiveness legislation to support legal certainty for investments—such as the Law on Simplification of Administrative Requirements and Procedures, the Law on Promotion of Foreign Capital Investment, reforms to the Free Trade Zone Law, and legislation on leasing and insolvency—the lack of a specific law on nearshoring, as Mexico has, should be a priority for the executive and legislative authorities taking office in January.

Call for greater integration

It is not just a matter of legislation. “Attracting investment requires joint efforts by the experts and the public and private sectors. So far, there have been isolated efforts targeting entrepreneurs, which makes it difficult to position Guatemala as an investment destination,” said the manager of Puerta del Istmo, considering that companies seek “to be closer to the means of production, raw materials or intermediate goods, and skilled labor.”

Clothing and textile companies are looking to join factories that are already operating in the country and make joint investments, because administrative issues still cause them concern and setting up a new company to obtain registration takes at least a year, explained Ceballos, reiterating that Mexico has made progress in infrastructure such as ports, industrial parks, and other factors that make it competitive.

In the case of Guatemala, a Single Window for Investments was created, but it lacks joint operational capacity among the entities to carry out the procedures, and they need to be more agile, said Palma, who cited the purchase of land and health and environmental licenses as among the main difficulties.

In recent years, more than US$200 million has been invested in Puerta del Istmo in construction and  land acquisition to strengthen the infrastructure required by companies. Palma indicated that light manufacturing, auto parts, electronics, food and beverages, pharmaceuticals, medical supplies, and the clothing and textile sectors are areas that can be developed in the country.

Ceballos confirmed that at least 29 companies are seeking information to invest in the country, despite the international environment with conflicts in Israel and lower consumption in the United States. This year may see investments from Taiwan, China, and Indonesia, which are following the experience of Korean entrepreneurs who have been operating from Guatemala for some time, he added.

 “It's not that we want fewer requirements or to break the law, but rather that the procedures be streamlined,” he added, estimating that it takes between one and two years to obtain the authorizations and registrations to set up a company.

The situation in other countries in the region is similar, but according to Palma, some offer direct assistance to investors, accompanying them from their first visits and guiding them through the steps to meet the requirements. It's the beginning of the journey.

Find out more about Guatemala Moving Forward on our Prensa Libre and Guatevisión video channels, a joint venture focused on solutions journalism.