Latin America is not a monolithic market, but rather a tapestry of vibrant cultures and diverse economies, many of which have tremendous growth potential, that make it a compelling yet complex proposition for any company venturing into global expansion.
Implementing a successful market entry strategy in Latin America requires a nuanced approach, based on a deep understanding of this inherent duality: Latin America is a land of opportunity, albeit an intricate and complex one. For an uninitiated foreign company, navigating this terrain without a trusted local guide would be a strategic liability. Strategic liabilities can quickly turn into legal liabilities.
There is no shortage of reasons for investing in Latin America. With a population of over 660 million people, the region boasts a comparatively young consumer base, characterized by a growing middle class. A deep pool of skilled, multilingual and relatively affordable workers, particularly in the technology sector, further enhances the region’s demographic profile. Latin America is also increasingly attractive as a strategic hub for nearshoring and supply chain diversification.
However, opportunities often come tightly coupled with challenges, and in this case, a substantial set of structural and macroeconomic problems. Political and economic volatility are defining characteristics of the region’s business environment, with political cycles that are often extreme and can lead to radical and unanticipated changes in applicable law. This instability is layered on top of deep-seated structural deficiencies, such as inadequate infrastructure that can drive up logistics costs, as well as the perpetual threat of chronic inflation, high interest rates and significant currency volatility. In addition, businesses, markets and government relations are much more relationship-driven in Latin America than in more mature market economies.
Countries like Brazil and Colombia are known for their very regulated environments and frequently changing rules. In many jurisdictions, including Chile and Bolivia, there are strict legal requirements for companies to maintain a local national or resident as a legal representative, making a local partnership a prerequisite for incorporation. Nevertheless, perhaps the most compelling argument for securing a local partner in Latin America is the complexity of the region’s governance landscape, which often proves to be the greatest challenge for foreign entrants. Having a local partner, particularly a minority partner without exceptional veto powers, can provide significant benefits, both legally and commercially, without compromising power and control over the business.
Given these multiple challenges, a local partner transcends the role of a mere facilitator to become a strategic imperative. A local partner functions as an indispensable guide, shield, key and translator, which are key roles, given that success in business in Latin America is fundamentally built on relationships. This is a cultural concept deeply ingrained in the culture of the region. The emphasis on personal connections and la confianza (trust) is the bedrock of commercial activity. An effective local partner serves as an essential cross-cultural facilitator – a cultural liaison who provides introductions, vouches for the foreign company and guides the team through the nuances of local business etiquette. This function helps the foreign enterprise overcome the “legitimacy deficit” it faces as an unknown outsider with no preexisting relationships in the region and, accordingly, no confianza.
In terms of commercial and legal risk mitigation, a well chosen local partner provides on-the-ground intelligence, offering early warnings of impending political or regulatory shifts that enable a venture to adapt proactively. Beyond risk management, a local partner provides the keys to the market itself, granting immediate access to established distribution channels, supply chains and customer networks, which can dramatically accelerate market penetration.
The Partner and Legal Structure Selection Blueprint
Selecting the right local partner is a critical decision and should be approached as a strategic courtship with four primary phases:
- Internal alignment – Begin by defining the strategic objectives and critical capabilities you need from a partner. Create a detailed “partner profile” to guide the search.
- Sourcing candidates – Utilize a multidimensional approach by engaging with local industry associations and professional service firms.
- Evaluation of competencies – Rigorously assess candidates based on their market reputation, track record, financial stability and operational capabilities.
- Assessing strategic and cultural fit – Confirm that the parties share the same vision for the venture, the same values and compatible corporate cultures. This phase is the most nuanced, and may require a significant investment of time to build the genuine personal connection and trust (confianza) that underpins successful business in the region.
From the legal risk management perspective, choosing the right partnership structure – ranging from a joint venture to a distribution agreement – is as important as choosing the partner and can have profound implications for control, capital investment and exit strategy.
- Joint ventures (JVs) – The JV model represents the deepest level of integration, in which partners combine their resources to create a new, jointly-owned entity. JVs work best in the context of long-term, capital-intensive projects where shared risk and deep local integration are essential.
- Distribution and agency agreements – Contractual relationships with distributors and other similar agents are ideal for companies seeking rapid market access with minimal initial investment, because they leverage the local partner’s existing sales and logistics network.
- Licensing and franchising – Licensing and franchising is an effective strategy for companies with substantial brand equity and a replicable business model, enabling them to scale rapidly with very low capital risk.
Companies often consider establishing a wholly-owned subsidiary in Latin America. Having a wholly-owned subsidiary offers complete control of the business, but it also entails significant risk and investment. However, for a new market entrant in Latin America, the idea of “complete control” can be deceptive, as a lack of understanding of the local context may result in the loss of operational control or even a complete failure of the venture. For example, the labor force in a particular jurisdiction may be prone to work stoppages and launching frivolous labor claims, but applicable employment laws set a high bar for terminating employees for cause, while at the same time the courts are disproportionally pro-employee, all of which may lead an unfamiliar newcomer in the market to omit taking appropriate precautions and adopting appropriate hiring practices to manage related risks. One can argue that, although a partnership requires the foreign company to cede some equity and sharing decisions with respect to the venture, in doing so, the foreign entrant gains, in return, the critical local knowledge and networks that facilitate accurate operational control in that environment.
Due Diligence and Risk Assessment
While comprehensive due diligence is always necessary to identify and mitigate hidden risks, particularly when selecting a local partner, this exercise must extend beyond standard financial and legal reviews to include a thorough investigation of integrity, corruption and political exposure. For example, a company based outside Latin America can be held legally responsible for corrupt payments made by its local partner. While the goal is not to find an unconnected partner with few relationships, who would likely be ineffective, much care should be used in identifying a local partner whose network is an asset, not a liability.
History is plagued with examples of ventures gone wrong for a variety of reasons, including misalignment on goals or operational styles, which creates significant friction; strategic gridlock resulting from shared authority; and, most importantly, the potential for derivative liability and reputational damage in the event a partner engages in misconduct.
Conclusion
For a company with no prior experience in Latin America, a carefully selected local partner is a strategic necessity. The region’s combination of opportunity and volatility creates an environment where local knowledge, networks and cultural fluency are the most critical factors in determining success. However, success also depends on conducting the partnership process with military-style discipline, expanding due diligence to assess integrity rigorously and committing to the active, long-term management of the relationship, while simultaneously transforming partner selection from a transaction into a courtship. A robust legal agreement that defines roles, metrics and clear exit strategies for the parties is essential. By following these steps and successfully implementing a confianza contract, a foreign company can transform the region’s inherent complexities from an insurmountable barrier into a manageable business reality, unlocking the door to one of the world’s most dynamic emerging markets.
