Due diligence is a process by which a company or individual thoroughly investigates all aspects of a financial or business decision before deciding how to proceed. In the case of foreign or emerging markets decisions, due diligence often means acquiring an understanding of the laws, political stability, weather patterns, currency trends, and macroeconomic characteristics of the target country or region. As part of the due diligence process, companies and individuals often rely on third-party contractors or specialized internal teams to ensure an accurate and unbiased assessment of a specific project’s costs, risks, and expected benefits.
Market Research and Groundwork Prior to Investing
For example, in the case of the mining or petroleum extraction industries in Colombia, foreign and domestic investors must understand what the legal framework is for such ventures and how this framework may vary as governments change. Furthermore, in the case of industries that can be so regulated, private corporations must be aware of the fact that the national government imposes very strict environmental and health requirements on them in order to protect valuable ecosystems and rural communities. Thus, foreign investors must be aware that, at times, they are legally required to comply with a complex amount of regulations and paperwork, which consumes both time and resources. All of these aspects of foreign ventures are taken into account during the due diligence process and its costs are incorporated into financial projection models.
In the specific case of Colombia, one must keep the foreign exchange rate in mind. On December 13, 2016, one US dollar (USD) was valued at 2,970 Colombian Pesos (COP). Meanwhile, on July 31, 2018, one USD equaled 2,890 COP, which means the Colombian Peso has remained relatively stable over the last two years. Likewise, it is important to remember that Colombia is currently implementing a historic Peace Agreement with its last major guerrilla group, which has opened large areas of the countryside to agricultural production and commodities extraction. Moreover, as a new President is set to be sworn in next week, it is important to monitor the country’s trade patterns and the amount of trade agreements currently in place in order to assess the kind of international access that each market provides.
In this regard, Latin America’s Pacific Alliance, which was created in 2012 and brings together Chile, Peru, Colombia, and Mexico, is looking to expand its membership, market integration and intraregional trade now that the Trans-Pacific Partnership (TPP) initiative seems to be collapsing. Currently, Ecuador, Guatemala, Panama, and Costa Rica have all expressed interest in becoming full members of the Pacific Alliance. Simultaneously, Canada, New Zealand, Singapore, and Australia have joined the Pacific Alliance as Associate Members. The Pacific Alliance is an ambitious project that has the potential of becoming Latin America’s most important integration bloc with Asian and Pacific markets.