Nearshoring in El Salvador can occur in the field of tech

Arizona State University supply chain expert, Dale Rogers, explains that companies seek to move to countries that provide added value for foreign direct investors. Nearshoring in El Salvador has the potential to be a solution.

Nearshoring, investment, and growth opportunity for El Salvador

Suppose Nearshoring in El Salvador is an option for companies seeking to relocate their operations as part of their global strategy. In that case, it must act to educate the country’s workforce in the technology field to develop the requisite supply of qualified labor.

This is according to Dale Rogers. Rogers is an Arizona State University professor who was recently in El Salvador to speak at the forum on “Nearshoring, investment and growth opportunity for El Salvador.” The Chamber of Commerce and Industry of El Salvador organized the event.

Rogers, who works in the Supply Chain Management department of ASU, explained in an interview with Salvadoran media that, as a result of the complications that the world has had with the supply chain due to the Covid-19 pandemic, Central American countries now have a historic opportunity to take advantage of nearshoring. He added that many US companies that for more than 40 years had been supplied from markets mainly in Asia are now diversifying their supply locations to include locations closer to home.

“Large companies are looking for geographic diversity and not just supply. The lesson of the pandemic is that there may be supply stress (crisis), but businesses must diversify these risks. So companies are looking for new places to buy their products, and Central America and nearshoring in El Salvador seem to be possible sources of this type of manufacturing, “ Rogers.

In this context, El Salvador can be an option for new economic activities beyond the textile sector that has already made its way into the United States market, its leading trading partner.

Rogers believes that he is not “excited” about what the textile sector can contribute to El Salvador’s nearshoring strategy since he does not consider it a “transformational” industry. However, it is a sector with a high degree of geographic mobility.

In fact, Professor Rogers points out that Central America has vital industries for the local economies that do not generate a very high added value. Most of them are based on raw materials.

El Salvador must concentrate efforts on higher value-added activities

Instead, he points out that Nearshoring in El Salvador can benefit from focusing on high-tech industries since they can significantly contribute to the economy.

He explained that, in these markets, it is necessary to invest in a high-added value. This translates into training people to be engineers in technological areas, for example.

“It would be great for El Salvador to concentrate efforts and attract a technology supplier, whatever it may be, since there are many levels in the supply chain. Then, the country can concentrate on specific components. Bringing a huge maquila to the country where they will make finished products is unnecessary. Nearshoring in El Salvador can begin by concentrating on different parts of the technologies, starting with the basics of the supply network and eventually moving up the value chain,” Rogers noted.

He added that “to have high-tech manufacturing, you have to possess a labor force that has a powerful work spirit and train it,” An example of this can be seen in computer assembly or the manufacture of telephone components.

In this sense, he suggests that nearshoring in El Salvador can progress by encouraging more people to study technical careers in universities and that there be more training at the non-university level. “Because this is the only way you can take advantage of the location and the qualified and hardworking Salvadoran workforce to advance in more technologically complex industries,” he says.

To promote nearshoring in El Salvador, it is essential to lower the risk of doing business in the country

Another key for the country to be attractive in its nearshoring strategy is that no factors stop or add risk to investments.

“The most important thing is to lower the risk of doing business in El Salvador. Therefore, Salvadoran leaders must minimize friction experienced by companies in the Salvadoran context. Specifically, the country’s government must create and implement a regulatory structure attractive to foreign capital investment,” added Rogers.

For example, he mentioned that China had been a highly regulated economy. Still, until recently, the Chinese government applied the rules so US companies could efficiently work with little friction with those regulations. This situation,  however, has changed in recent years.

Therefore, the ASU professor summarized that a trained workforce is needed for nearshoring in El Salvador to succeed. This is in a context with regulations applied correctly, and arbitrariness is avoided, in addition to low costs.

“Because low costs are not everything, although they do spark the interest of foreign companies; but it is not the only thing that determines an international investment, (because) there are the issues of a quality labor force and regulatory ease of doing business.”

To promote nearshoring in El Salvador, the country’s Chamber of Commerce and Industry has insisted on revising the Salvadoran arbitration law to conform to international law. Enacting such a change can help generate certainty in applying legal norms to foreign direct investors.