Foreign Investment in Colombia

Foreign Investment in Colombia

Jessica Fourspring
Computer Skills for the Information Age
Marion Davis
9 March 2015

Foreign Investment in Colombia

The coffee market price crash during the 1980s changed the entire chemistry of the
Colombian economy. The country was in desperate need for help during the crisis. As a result,
there was a massive financial reform that loosened up the previously air-tight restrictions on
foreign investments. This caused a shift in financial control from governmental to privatelyowned companies. Although foreign direct investment is selective, engaging in this practice
benefits both the company and host country.
If the financial sector is well-developed, the host country has a greater probability of
receiving foreign direct investment, which will promote economic growth. In an article
examining the relationship between financial market development and foreign direct investment
in Latin American countries, Hajilee and Nasser (2015) concluded that, A well-developed
financial system acts as a mechanism in facilitating the adoption of new technologies in an
economythus promoting economic growth (p.241). Before a firm invests in a foreign
country, they consider market size, economic growth, the exchange rate, the tax structure,
financial costs and macroeconomic stability. Major companies with a well-established business
structure, large marketing channels and profitable market shares are preferred investing avenues
over other companies that are less influential to the economy. If a company is already wellestablished and profitable, the chances of it receiving foreign investment are much greater.
Engaging in foreign direct investment is profitable for companies and results in having an
advantage over domestically-owned companies. In an article analyzing the impact of foreign
investment in Colombia and studying banks specifically, Barajas, Steiner, and Salazar (200)
found that, Foreign-owned banks, regardless of whether they were originally owned by
nationals or not, have less non-performing loans, lower overall reserve ratios, and are more
productive. (section 3.2, para. 3). The quality of loans from foreign banks are better and have

Foreign Investment in Colombia

lower administrative costs. This results in the banks ability to separate their income from the
cyclical variations in the economy (Barajas et al., 2000). When a company does not have to
rely on the economy to be profitable, they will have an edge over other firms that rise and fall
with the stock market.
The host country greatly benefits from foreign direct investment due to the principle of
corporate social responsibility. This idea stems from the large amount of academic and social
activism pertaining to the exploitation and mistreatment of workers by foreign-owned firms.
Therefore, companies feel pressure to improve environmental and labor standards and other
national conditions to combat this negative image of foreign investors. An example of corporate
social responsibility is one that benefits the environment by reducing the amount of carbon
dioxide emission released. Colombia has received vast amounts of foreign direct investment and
thus has a, unidirectional causality from foreign direct investment to growth, it lends credence
to the thought that foreign direct investment not only leads to capital formation and employment
generation, but also enhances economic growth in host countries, according to Oladipo (2013,
p.581). Most Latin American governments, Colombia in particular, are trying to increase foreign
direct investment because they see that it promotes economic growth and is a significant source
of capital.
In conclusion, foreign direct investment provides massive benefits to both the host
country and the company that greatly outweigh the selective nature of investment. Colombia, the
host country, gains much needed economic growth and the investing company gains an edge
over their competition by going international. All companies should seriously consider the
immense advantages of foreign direct investment in Colombia.

Foreign Investment in Colombia

References
Barajas, A., Steiner, R., & Salazar, N. (2000). The impact of liberalization and foreign
investment in Colombia's financial sector. Journal of Development Economics, 63, 157196. doi:10.1016/S0304-3878(00)00104-8
Garavito, A., Iregui, A. M., & Ramrez, M. T. (2014). An empirical examination of the
determinants of foreign direct investment: a firm-level analysis for the Colombian
economy. Revista De Economa Del Rosario, 17(1), 5-31.
Gonzalez-Perez, M. A., Riegler, S., & Riegler, F. X. (2011). Foreign direct investment (FDI) and
social responsibility networks (SRN) in Colombia. GCG: Revista De Globalizacin,
Competitividad & Gobernabilidad, 5(1), 42-59. doi:10.3232/GCG.2011.V5.N1.03
Hajilee, M., & Al Nasser, O. M. (2015). The relationship between financial market development
and foreign direct investment in Latin American countries. The Journal of Developing
Areas, 49(2), 227-245.
Oladipo, O. S. (2013). Does foreign direct investment cause long run economic growth?
Evidence from the Latin American and the Caribbean countries. International Economics
& Economic Policy, 10(4), 569-582. doi:10.1007/s10368-012-0225-4