Nicaragua: rising star in the footwear industry
Nicaragua’s light manufacturing industry is one of the country’s most important economic sectors. Although Nicaragua has a long tradition of artisan footwear manufacturing, 2010 marked the beginning of industrial production and high volume export of fine leather footwear towards the United States and European Union markets.
Strategically located in the heart of the Americas, Nicaragua enjoys abundant natural resources, high levels of security and a young and productive labor force. Significant improvements in infrastructure and business climate have made the country an ideal export platform for light manufacturing and assembly operations and one of the most attractive destinations for foreign investment looking to improve their competitiveness in the global market.
When operating in Nicaragua, exporter-manufacturers do not only benefit from the strategic location of the country to provide a quick response to the U.S. and Europe markets, but also obtain considerable savings due to duty-free access their manufactrued products receive in these regions.
Besides having exceptional international trade benefits, Nicaragua offers other key advantages, such as: generous tax incentives and speed to market because of its advantageous geographical location and the most competitive labor costs structure in the region.
Competitive Advantages of Nicaragua as a Location for the Footwear Industry
1. Strategic Location
Nicaragua, the largest country in Central America, is located in the center of the isthmus between North and South America. The country is bordered by Honduras to the North and Costa Rica to the South, the Pacific Ocean to the West and the Caribbean to the East. Its strategic location means only a two and a half hour flight from the major airports of the United States and a shipping response of four to five days to southern U.S. ports.Major shipping companies such as Crowley Logistics, APL Logistics, Seaboard Marine, Maersk Sealand and NYK Logistics, and parcel carriers such as FedEx, DHL and UPS are currently serving the Nicaraguan market.
2. Trade Preferences for Footwear Made in Nicaragua
Nicaragua has subscribed free trade agreements with important trade partners around the world. The most relevant preferential trade agreements for footwear include:
- DR-CAFTA: Free Trade Agreement between Central America, United States and Dominican Republic. The Free Trade Agreement between Central America, United States and Dominican Republic (DR- CAFTA), in force since April 1st 2006, has promoted the dynamization of the national economy through significant benefits to various sectors, including a preferential access for footwear exports to the United States.
- Other Preferential Access Agreements, such as the E.U.-Central American Association Agreement, FTA Mexico - Central America, FTA Panama – Nicaragua, FTA Chile- Nicaragua.
3. The Most Competitive Cost Structure in the Region.
Nicaragua has the most competitive labor costs in the region, which makes the country a highly attractive location for labor-intensive manufacturing operations.
Nicaragua is not only the most competitive option in the region, but it is also drawing the attention of international companies looking to move out of Asia. China, in particular, represents a series of challenges for producers and exporters due to the rise of labor costs, particularly in coastal areas; wages can reach up to US$1.70 per hour or more, comparable to Mexico’s. Besides, there is a shortage of Chinese labor in the apparel and footwear industries. This situation in Asia challenges traditional supply models (sourcing) and encourages companies to explore and develop more competitive and closer production platforms to certain destination markets like the United States, making the option of operating in Nicaragua increasingly attractive due to its costs and location.
4. Access to a Qualified Labor Force
Nicaragua’s population is young and dynamic. Around 77 percentis under the age of 39 and Nicaraguan labor force is 3.2 million ofpeople are in the labor force. Nicaraguans are known for being hardworking,enthusiastic and have demostrated to have a fast learning curve.
5. High Levels of Personal Safety
Nicaragua’s security levels have earned the country international recognition as one of the safest countries in the Western Hemisphereand have become one of the most important advantages for investors.
6. Attractive Investment Incentives
Nicaragua’s free zone regime, compliant with World Trade Organization’s (WTO) guidelines for developing countries, grantsgenerous fiscal incentives to export-oriented operations thatinclude a process of transformation or added value. The incentives include:
- 100 percent income tax exemption for ten years (the normal income tax for companies outside the free zone regime is 30 percent).
- 100 percent exemption on import taxes for machinery, equipment, raw materials and inputs as well as the transportation or support services for operating activities in the free zone.
- 100 percent value added tax exemption.
- Free repatriation of capital.
7. Favorable Business Climate
Nicaragua has made very important progress to improve its investment climate in an effort to continue attracting high-quality foreign direct investments. Such advances are shown in the 2013 Doing Business Report, published by the World Bank, which ranks 185 economies in ten different indicators measuring the ease of opening and doing business in a country. The outcomes of this report show Nicaragua as the top-ranked location in the categories of protecting investors, enforcing contracts and resolving insolvency.
8. Quality Infrastructure
- Industrial space. There are currently 49 industrial parks approved by the National Free Zones Commission (CNZF, for its acronym in Spanish), 40 of which remain active.
- Energy. Nicaragua’s electric grid has an installed capacity of 1,000 MW, and a maximum demand of 610 MW. Currently, 64 percent of energy generation is derived from thermal plants. However, in 2007 and 2008, the Government of Nicaragua via the Ministry of Energy and Mines (MEM) developed a strategy to meet the deficit in energy generation by promoting the expansion and diversification of the energy matrix towards renewable, more efficient and sustainable sources.
- Water. Since Nicaragua possesses abundant water resources, the majority of companies and industrial parks have their own wells. Excavation and extraction expenses are incurred by the well’s operator and all relevant permits must be obtained. According to environmental regulations, companies that use water for their industrial processes and dispose of it afterwards do not have to pay more for the water used from their wells.
- Highway Network. The country has a 22,000 kilometer road network, including 382 kilometers that are covered along the Pan-American Highway, which branches into other highways that reach several cities of Nicaragua. This highway is the main route for most land cargo and is part of the road network interconnecting the largest cities on the country’s Pacific coast.
- Airport and Ports. In 2006, a US$60 million project was finalized for the expansion and modernization of the International Airport of Managua. This important project included not only infrastructure renovation for better passenger attention, but also the construction of new facilities for more efficient load management. The Augusto C. Sandino International Airport was classified as one of the safest airports of Latin America in terms of operational aviation security and it serves as a connection to 15 international destinations every day.
- Telecommunications. Since 1990, Nicaragua started a transformation process that implemented the newest technologies to reinforce telecommunication infrastructure. The telecommunications sector is fully-privatized and is considered one of the most modern of Central America. The two current providers of mobile phone services are Telefónica (Spain) and Grupo Móvil (Mexico).