Foreign Direct Investment (FDI) in made jeans in El Salvador is faced by multiple risks and potentially high operational costs. Though the nations foreign economic policies are friendly to FDI and promise a competitive business environment, the standards of living and the state of infrastructure and technology in the nation reduces its suitability for FDI in made jeans. Though this may change in time, El Salvador is currently unsuitable for FDI in made jeans.
Introduction
This paper seeks to determine the viability of investing in the made jeans market in El Salvador. El Salvador is a third world nation in South America that has developed a number of systems to attract direct foreign investors and improve its presence in the international market. The reports will analyze the strengths and weakness of the prospect of investing in the made jeans sector. Furthermore, an analysis of the state of technology in El Salvador has also been presented.
Assessment
The assessment of the opportunities and weaknesses of the prospect of investing in El Salvadors made jeans sectors will be analysed with the use of existing analytical framework that focuses on the industry and microenvironment condition. The main area of concern is to determine the profitability and viability of such a venture, its sustainability and threats and opportunities resulting from macro-environment variables.
Strengths
El Salvador is a signatory to the Central America-Dominican Republic-United States Free Trade Agreement (CAFTA-DR) (Peceny Stanley 2010). Furthermore, Australia as a nation has for a long period of time engaged in bilateral and multilateral trade involving El Salvador. It is therefore evident that El Salvador is appreciative of foreign direct investment and other forms of external investment in its economy. A review of the prerequisites to be a signatory of the CAFTA-DR reveals that structural and policy change are required to create an economic environment that is permissive of competition and free trade. This provides an opportunity for entry in the made jeans segment without being restricted by monopolistic and protective policies (Hill Dhanda 2004). El Salvador signatory to the CAFTA-DR is also important in the sense that it is associated with stability in the nations approach to foreign economic policies.
Expansion of the Panama Canal through developing a Centennial Bridge that was launched in 2004 provides an added advantage to investors seeking the made jeans market in El Salvador (Gammage 2006). The expansion of the Panama Canal and additional efforts aimed at improving dredging and maintenance of the canal will help improve accessibility of the Latin American nation. This is a strength considering that improved accessibility of El Salvador and therefore management of logistics from without the nation is made easy.
There has been a general increase in two-way international trade between El Salvador and other nations. The increase is a result of conscious strategies by successive governments aimed at diversifying trade as an avenue to improving the sustainability of the economy (Stump, Gong Li 2008). These efforts to diversify trade from the traditional agriculture-based trade to manufacturing and other alternatives provides a suitable platform for managing the made jeans sector. Successive governments failure to address unemployment as a key social issue guarantees availability of a labour force (Madrigal Tejeda 2009). Made jeans is quite labour intensive thus availability of labour in El Salvador is an added strength in harnessing this opportunity.
Weaknesses
The political environment presents a number of threats and weaknesses to efforts seeking to make FDIs in the made jeans segment in El Salvadors clothing industry. The government has adopted a policy that is permissive of high levels of competition and free trade which can easily result in an increase in the number of foreign direct investments. The policies may result in high levels of competition which may reduce profits made by foreign direct investors (Jrgensen 2000). Secondly, despite the awareness that El Salvadors government has of the importance of diversifying the economy and creating an environment that is permissive of competition, the state of support facilities and infrastructure in the nation is pathetic. The low awareness and emphasis awarded to improving infrastructure and quality of life through providing proper social amenities and public services is a risk when analyzing the suitability of El Salvador (Schrank Kurtz 2005). The poor state of infrastructure and social amenities is due to highly polarised politics within the nation. Furthermore, the cost of improving infrastructure and social amenities is quite high considering the nations low GDP earnings and the numerous natural disasters that destroy roads and disrupt railway transportation. Hurricanes and heavy rains are to blame for the poor state of the transportation system (Cosgrove 2002). On the other hand, polarised decision makings among politicians is to blame for the poor state of public services and social amenities that make El Salvador less attractive to experts and investors in made jeans.
The democratic space in El Salvador is limited since the political system and government tend to influence decisions and uses the police force to deal with any form of demonstration or unrest. Foreigners found to be engaging in rallies and other forms of demonstrations are likely to be deported or detained. This is a risk for it minimises the avenues that a foreign firm has for raising grievances and channelling attention to their plight. The state of security and public transport within El Salvador is worrying (Prez-Brito 2009). Foreigners are targeted by conmen, violent robbers and muggers which further reduces the suitability of the nation to foreign experts (Mani 2007). The poor and overcrowded public transportation system may negatively affect the levels of coordination and operational efficiency that can be attained when operating in El Salvador. These are social problems that are a direct result of a political systems that pays little emphasis to the importance of improving internal infrastructure and social conditions as part of economic reforms. Setting up a made jeans venture in El Salvador is therefore likely to be associated with low manual labour costs and high cost of attracting and retaining foreign experts and ensuring their security (Leye 2007). Other operational requirements which include transportation and improving operational efficiency come at very high costs.
Technology in El Salvador
Despite being among the most densely populated nations in the Western Hemisphere and in Latin America, El Salvador is recording tremendous development in its technological ability (Hume 2008). Despite the setbacks arising from hurricanes, El Nio rains, earthquakes, volcanic eruption and mudslides that are common in this nation the government has taken on the initiative to improve the nations technological ability through improving its infrastructure and technical education in its institutes (Wood 2001 Spring 2008). Government efforts aimed at diversifying the economy have noted the potential associated with improving the nations technical ability as part of efforts aimed at harnessing its manufacturing and production potential (Clayson, Castaeda, Sanchez Brindis 2002).
El Salvadors teledensity has improved to slightly over 10 since the end of the civil war (Pasch, Miranda-Murillo 2004). One of the key factors driving the improvements in telecommunication penetration is privatisation of the telecommunication sector. Privatisation has led to an increase in the levels of competition between telecommunication stakeholders that has to a large degree resulted in the reduction of telecommunication costs and increased penetration (Barten, Montiel, Espinoza Morales 2002 Juli Kondrat 2005). Establishment of the Superintendency General for Electricity and Telecommunications (SIGET) in 1996 and subsequent regulations requiring interconnection between different local service providers has also played a role in improving the state of telecommunication in Superintendency General for Electricity and Telecommunications (SIGET). Investment in the telecom sector has risen steadily due to incentives offered by the government and competition within the sector, currently there are efforts aimed at improving mobile and fibre penetration (Prins 2006). The government has taken steps to improve the state and quality of technical education within the nation education system. Several institutes that specialise in technical education have come up while there has been an increase in the number of universities and institutes that offer technical education (Ripton 2006). Computer science and information technology has taken root in El Salvador via courses offered at tertiary and national level.
It is apparent that the governments commitment to improving the state of technology would go a long way in improving the suitability of the nation to made jeans. However, lack of an extensive production and machinery industry presents a complex scenario for investors seeking this opportunity (Rockwell Janus 2002). Sewing machines have to be imported at additional costs which may result in increased operational overheads. Though the governments commitment to improving communication may ease developing different stations or presence in different parts of El Salvador, this is limited by poor transportation infrastructure and the potent risks posed by natural disasters (Porzecanski Gallagher 2007). The low levels of computer and information technology literacy in El Salvador implies that computerisation or automation of operations for made jeans companies may take years to be realised. It is therefore apparent that the state of technology though growing in a positive direction is a risk rather than an opportunity to foreign direct investment in made jeans.
Conclusion and Recommendations
It is evident that there are a number of strengths and weaknesses associated with harnessing the made jeans segment in El Salvador via FDI. Government commitment to creating an economic and business environment that permits competition is a strength that presents a risk of entry of many competitors. However, the poor infrastructure, low state of information technology penetration, lack of machine production companies in the nation and poor state of democracy in the nation are some risks associated with operating in El Salvador. There are still various improvements that have to be made before El Salvador can become suitable for FDI in made jeans. El Salvador is thus currently unsuitable for FDI in made jeans due to multiple operational risks and high costs of operations though this may change with time.
Introduction
This paper seeks to determine the viability of investing in the made jeans market in El Salvador. El Salvador is a third world nation in South America that has developed a number of systems to attract direct foreign investors and improve its presence in the international market. The reports will analyze the strengths and weakness of the prospect of investing in the made jeans sector. Furthermore, an analysis of the state of technology in El Salvador has also been presented.
Assessment
The assessment of the opportunities and weaknesses of the prospect of investing in El Salvadors made jeans sectors will be analysed with the use of existing analytical framework that focuses on the industry and microenvironment condition. The main area of concern is to determine the profitability and viability of such a venture, its sustainability and threats and opportunities resulting from macro-environment variables.
Strengths
El Salvador is a signatory to the Central America-Dominican Republic-United States Free Trade Agreement (CAFTA-DR) (Peceny Stanley 2010). Furthermore, Australia as a nation has for a long period of time engaged in bilateral and multilateral trade involving El Salvador. It is therefore evident that El Salvador is appreciative of foreign direct investment and other forms of external investment in its economy. A review of the prerequisites to be a signatory of the CAFTA-DR reveals that structural and policy change are required to create an economic environment that is permissive of competition and free trade. This provides an opportunity for entry in the made jeans segment without being restricted by monopolistic and protective policies (Hill Dhanda 2004). El Salvador signatory to the CAFTA-DR is also important in the sense that it is associated with stability in the nations approach to foreign economic policies.
Expansion of the Panama Canal through developing a Centennial Bridge that was launched in 2004 provides an added advantage to investors seeking the made jeans market in El Salvador (Gammage 2006). The expansion of the Panama Canal and additional efforts aimed at improving dredging and maintenance of the canal will help improve accessibility of the Latin American nation. This is a strength considering that improved accessibility of El Salvador and therefore management of logistics from without the nation is made easy.
There has been a general increase in two-way international trade between El Salvador and other nations. The increase is a result of conscious strategies by successive governments aimed at diversifying trade as an avenue to improving the sustainability of the economy (Stump, Gong Li 2008). These efforts to diversify trade from the traditional agriculture-based trade to manufacturing and other alternatives provides a suitable platform for managing the made jeans sector. Successive governments failure to address unemployment as a key social issue guarantees availability of a labour force (Madrigal Tejeda 2009). Made jeans is quite labour intensive thus availability of labour in El Salvador is an added strength in harnessing this opportunity.
Weaknesses
The political environment presents a number of threats and weaknesses to efforts seeking to make FDIs in the made jeans segment in El Salvadors clothing industry. The government has adopted a policy that is permissive of high levels of competition and free trade which can easily result in an increase in the number of foreign direct investments. The policies may result in high levels of competition which may reduce profits made by foreign direct investors (Jrgensen 2000). Secondly, despite the awareness that El Salvadors government has of the importance of diversifying the economy and creating an environment that is permissive of competition, the state of support facilities and infrastructure in the nation is pathetic. The low awareness and emphasis awarded to improving infrastructure and quality of life through providing proper social amenities and public services is a risk when analyzing the suitability of El Salvador (Schrank Kurtz 2005). The poor state of infrastructure and social amenities is due to highly polarised politics within the nation. Furthermore, the cost of improving infrastructure and social amenities is quite high considering the nations low GDP earnings and the numerous natural disasters that destroy roads and disrupt railway transportation. Hurricanes and heavy rains are to blame for the poor state of the transportation system (Cosgrove 2002). On the other hand, polarised decision makings among politicians is to blame for the poor state of public services and social amenities that make El Salvador less attractive to experts and investors in made jeans.
The democratic space in El Salvador is limited since the political system and government tend to influence decisions and uses the police force to deal with any form of demonstration or unrest. Foreigners found to be engaging in rallies and other forms of demonstrations are likely to be deported or detained. This is a risk for it minimises the avenues that a foreign firm has for raising grievances and channelling attention to their plight. The state of security and public transport within El Salvador is worrying (Prez-Brito 2009). Foreigners are targeted by conmen, violent robbers and muggers which further reduces the suitability of the nation to foreign experts (Mani 2007). The poor and overcrowded public transportation system may negatively affect the levels of coordination and operational efficiency that can be attained when operating in El Salvador. These are social problems that are a direct result of a political systems that pays little emphasis to the importance of improving internal infrastructure and social conditions as part of economic reforms. Setting up a made jeans venture in El Salvador is therefore likely to be associated with low manual labour costs and high cost of attracting and retaining foreign experts and ensuring their security (Leye 2007). Other operational requirements which include transportation and improving operational efficiency come at very high costs.
Technology in El Salvador
Despite being among the most densely populated nations in the Western Hemisphere and in Latin America, El Salvador is recording tremendous development in its technological ability (Hume 2008). Despite the setbacks arising from hurricanes, El Nio rains, earthquakes, volcanic eruption and mudslides that are common in this nation the government has taken on the initiative to improve the nations technological ability through improving its infrastructure and technical education in its institutes (Wood 2001 Spring 2008). Government efforts aimed at diversifying the economy have noted the potential associated with improving the nations technical ability as part of efforts aimed at harnessing its manufacturing and production potential (Clayson, Castaeda, Sanchez Brindis 2002).
El Salvadors teledensity has improved to slightly over 10 since the end of the civil war (Pasch, Miranda-Murillo 2004). One of the key factors driving the improvements in telecommunication penetration is privatisation of the telecommunication sector. Privatisation has led to an increase in the levels of competition between telecommunication stakeholders that has to a large degree resulted in the reduction of telecommunication costs and increased penetration (Barten, Montiel, Espinoza Morales 2002 Juli Kondrat 2005). Establishment of the Superintendency General for Electricity and Telecommunications (SIGET) in 1996 and subsequent regulations requiring interconnection between different local service providers has also played a role in improving the state of telecommunication in Superintendency General for Electricity and Telecommunications (SIGET). Investment in the telecom sector has risen steadily due to incentives offered by the government and competition within the sector, currently there are efforts aimed at improving mobile and fibre penetration (Prins 2006). The government has taken steps to improve the state and quality of technical education within the nation education system. Several institutes that specialise in technical education have come up while there has been an increase in the number of universities and institutes that offer technical education (Ripton 2006). Computer science and information technology has taken root in El Salvador via courses offered at tertiary and national level.
It is apparent that the governments commitment to improving the state of technology would go a long way in improving the suitability of the nation to made jeans. However, lack of an extensive production and machinery industry presents a complex scenario for investors seeking this opportunity (Rockwell Janus 2002). Sewing machines have to be imported at additional costs which may result in increased operational overheads. Though the governments commitment to improving communication may ease developing different stations or presence in different parts of El Salvador, this is limited by poor transportation infrastructure and the potent risks posed by natural disasters (Porzecanski Gallagher 2007). The low levels of computer and information technology literacy in El Salvador implies that computerisation or automation of operations for made jeans companies may take years to be realised. It is therefore apparent that the state of technology though growing in a positive direction is a risk rather than an opportunity to foreign direct investment in made jeans.
Conclusion and Recommendations
It is evident that there are a number of strengths and weaknesses associated with harnessing the made jeans segment in El Salvador via FDI. Government commitment to creating an economic and business environment that permits competition is a strength that presents a risk of entry of many competitors. However, the poor infrastructure, low state of information technology penetration, lack of machine production companies in the nation and poor state of democracy in the nation are some risks associated with operating in El Salvador. There are still various improvements that have to be made before El Salvador can become suitable for FDI in made jeans. El Salvador is thus currently unsuitable for FDI in made jeans due to multiple operational risks and high costs of operations though this may change with time.
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