Nearshoring in Latin America: a new horizon for venture capital investment and startups

Since the inauguration of Joe Biden in 2021, the United States has sought to reduce its dependency on China and other far-off countries in the fields of manufacturing and technology. This paradigm shift has opened opportunities for nearshoring or the relocation of business operations to nearby countries, and Latin America stands as an attractive alternative.

Nearshoring is not only relevant for large corporations. It also significantly impacts venture capital investment in the region. Mexico, represented by organizations like the National Council of the Maquiladora and Export Manufacturing Industry (Index), has seen a surge in foreign investment, including venture capital.

At the same time, in 2022, startups in the logistics and transportation industry in Latin America received 67% less capital than in 2021, a historic year for risk investments, according to a study by the entrepreneurial organization Endeavor and the Glisco Partners capital fund.”

One of the decisive factors for this happening was the lack of understanding by investors of various technological business models. However, by 2023, the trend seems to be changing, and more and more investors are betting on tech startups, including those in the logistics sector. As demonstrated by a study by CB Insights on private capital investment.

State of Fintech Q2 2023. (Source: BC Insights)

Another decisive factor for the expansion of nearshoring is—according to Víctor Soulé, Partner Director of Accounts and Markets for EY North Latin America, in Forbes—is technological innovation by players within the sector and the critical role that institutions must play in terms of regulation, especially in the case of Mexico.

Brazil, the second country with the most potential for nearshoring according to IDB studies, has been more timid in attracting such investments. However, the latent demand for technology and modernization could be a magnet for venture capital, mainly if structural challenges such as lack of technological development and modern industrial policies are addressed. According to The Logistics World, the Brazilian country can increase its exports by USD $7,844 annually.

The arrival of more foreign companies in Latin America through nearshoring has a domino effect on the startup ecosystem in the region. Uruguay, with its economic and political stability, is already seeing an inflow of foreign capital, according to Inés Bonicelli of Uruguay XXI in an interview for The Logistics World. These investments offer local startups funding and opportunities for strategic partnerships and access to larger markets.

Argentina presents an interesting case. Although economic challenges plague the country, the crisis has created a robust and resilient startup ecosystem, seeking innovative solutions to local and regional problems. This environment attracts the attention of venture capital investors, despite economic risks.

Advantages of Nearshoring in Latin America

The website BizLatin Hub points out that the nearby relocation of operations in Latin America offers multiple advantages for international corporations looking to strengthen their information technology (IT) teams and for tech startups like fintech, which are increasingly expanding their services to receive and make foreign payments.

Some of the advantages of nearshoring are:

• Cost Savings. The first advantage to consider is financial savings. The Latin American region has highly specialized professionals who generally demand more affordable salaries than their counterparts in the United States or Europe. This allows international companies to maintain high-quality standards without incurring high costs.
• Wide Range of Qualified Professionals. Its large number of IT experts characterizes Latin America. In addition to their high qualifications, many of these professionals are bilingual in English and Spanish, simplifying interaction with global companies and the implementation of technological projects.
• Time Zone Convenience. Another element that promotes nearshoring in this region is its geographical proximity to North America and Europe. This factor facilitates the coordination of working hours, allowing for more fluid and effective collaboration in project management.
• Ease of Communication and Cultural Affinity. The cultural aspect is also significant in this relationship. The cultural similarities between Latin America and the markets of North America and Europe are greater than with countries like India or Pakistan. This improves understanding and communication, reducing the chances of misunderstandings and optimizing efficiency.
• Solid Business Environment. Lastly, Latin America offers a reliable and safe business environment. Several countries in the region maintain stable economies and policies that favor foreign investment, making them attractive destinations for long-term growth and investment from foreign entities.

Latin America has a business environment that seems to be stabilizing. Many countries in the region have solid economies and policies favorable to international business, making them attractive places for investment and the long-term expansion of foreign groups.