The geopolitical environment and customs barriers significantly influence foreign investment in Central America. Understanding these factors is crucial for stakeholders looking to navigate the investment landscape effectively.
The current investment momentum in Central America shows globalisation at its fullest, influencing various economic, social, and political dimensions. As a starting point, increased access to markets has led to the development of numerous trade agreements, which companies can incorporate as a key element when building an investment business case for a proposed project.
Trade agreements have been a game changer for Central America in recent years. This access to different markets encourages foreign investors to establish operations in the region to take advantage of lower tariffs and enhanced trade opportunities. However, recent foreign policies have triggered different side-effects in how new investment projects are modelled.
Geopolitics are playing a key role amid this globalised setup. Several considerations illustrate the interdependence between foreign investment and regional economic development:
Political stability – political stability is a key determinant of foreign investment. Countries with stable governments tend to attract more foreign direct investment (FDI). In Central America, political instability, corruption, and governance issues can deter investors. For instance, Nicaragua has faced significant political turmoil, leading to a decline in foreign investment, while Costa Rica offers a long-term democratic system that enables project forecasting not only for short-term growth but also for mid-term evolution.
Regional cooperation and trade agreements – Central America has established several trade agreements, such as the Central America–Dominican Republic–United States Free Trade Agreement. These agreements enhance investment by providing better market access and reducing tariffs. However, geopolitical tensions can affect the implementation and benefits of these agreements, potentially creating uncertainty for investors.
US influence – the US plays a significant role in Central America’s geopolitical landscape. US foreign policy, particularly regarding immigration and security, can impact investment flows. Initiatives aimed at promoting economic development in the region can lead to increased investment, particularly in sectors such as infrastructure and technology.
China’s growing influence – China has been increasing its presence in Central America through investments and infrastructure projects. This shift creates competition for US investments and influences the geopolitical dynamics in the region. As China invests in critical infrastructure, it may alter the investment landscape and priorities for foreign investors.
Natural disasters and climate change – Central America is prone to natural disasters, which can disrupt economic activities and deter investment. The geopolitical response to climate change and disaster preparedness is crucial for maintaining investor confidence. Countries that proactively address climate risks may be more attractive to foreign investors.
These factors, together with certain additional considerations, have altered FDI significantly. According to the OECD, “Global FDI flows remained steady at low levels in the first half of 2025, at USD 663 billion, but showed mixed quarterly trends. They were up by 18% in Q1 but then dropped by 38% in Q2. The United States, Brazil and the United Kingdom were the top three FDI destinations worldwide” (FDI in Figures, October 2025).
The above statistic shows steadiness as to how foreign investment projects are being projected, outlining a more conservative approach by foreign investors. The publication presents Brazil and Mexico as the main recipients of foreign investment in Latin America. This highlights how certain challenges may be affecting the outcome of FDI projects in Central America.
Projects in Central America face several challenges that can impact their success and sustainability. These include issues related to taxes, new technologies, labour, and legal matters.
Taxation issues:
High tax rates – many Central American countries have relatively high corporate tax rates, which can deter foreign investment. Projects may struggle to maintain profitability under these conditions.
Tax compliance and complexity – the complexity of tax regulations can lead to compliance challenges for foreign investors. Frequent changes in tax laws can create uncertainty, making it difficult for businesses to plan and budget effectively.
Incentives and exemptions – while some countries offer tax incentives to attract foreign investment, such as Costa Rica and the Dominican Republic, the criteria of how these incentives can be reconciled with the tax position of the investment’s origin country might represent a challenge.
Adoption of new technologies:
Technological infrastructure – many projects may face challenges related to inadequate technological infrastructure. Limited access to high-speed internet and modern communication systems can hinder the implementation of advanced technologies.
Resistance to change – there may be resistance among local stakeholders to adopt new technologies, particularly in traditional industries. This can slow down project implementation and reduce competitiveness.
Compatibility – the lack of compatibility faced when implementing new projects in different regions can become a challenge. However, high-skilled resources can achieve the transition and implementation needed.
Labour issues:
Labour market constraints – projects may encounter difficulties in finding qualified labour. Skill mismatches and a lack of vocational training programmes can limit the availability of skilled workers. Nonetheless, countries such as Costa Rica have developed an objective mindset, focusing on developing solutions tailored to the foreign project’s needs.
Labour rights and regulations – compliance with labour laws and regulations can be challenging, particularly in countries with strict labour protections. Projects must adjust headquartered policies to local or regional regulations, allowing the adaptation of those policies to new standards.
Legal matters:
Regulatory uncertainty – projects may face challenges due to unclear or frequently changing regulations. This uncertainty can create risks for investors and complicate project planning. Policymakers in the region are starting to understand the importance of regulatory validation and certainty, which is a key element in setting the stage for new investment.
Intellectual property protection – limited understanding of intellectual property rights can deter foreign investment, particularly in technology-driven sectors. Companies may be hesitant to invest in regions where protection for their innovations is not clear.
Dispute resolution – the legal framework for dispute resolution can be slow and cumbersome in some Central American countries. This can lead to prolonged legal battles, affecting project timelines and costs. Thus, arbitration policies become a crucial condition for FDI projects.
Recommendations for upcoming projects in Central America
To enhance foreign investment in Central America and address the challenges faced by projects, the following recommendations should be considered:
Strengthening political stability – encourage initiatives that promote good governance, transparency, and anti-corruption measures. Political stability is essential for attracting long-term investments.
Enhancing trade agreements – advocate for the expansion and strengthening of existing trade agreements to ensure they provide tangible benefits for investors. This includes reducing tariffs and simplifying trade regulations.
Infrastructure development – prioritise investments in infrastructure projects, such as transportation, logistics, and energy. Improved infrastructure will facilitate trade and reduce costs for foreign investors.
Streamlining customs processes – implement reforms to simplify customs procedures and reduce bureaucratic red tape. This includes adopting technology solutions to enhance efficiency and transparency in customs operations.
Addressing taxation challenges – work with governments to simplify tax regulations and provide clear guidelines for foreign investors. Establishing stable tax regimes and transparent incentive programmes can enhance investment attractiveness.
Promoting technology adoption – invest in technological infrastructure and training programmes to support the adoption of new technologies. Collaborate with local educational institutions to develop a skilled workforce that meets the demands of modern industries.
Engaging with labour stakeholders – foster dialogue between businesses, labour unions, and government agencies to address labour issues and promote fair working conditions. Ensuring a stable labour environment is crucial for project success.
Improving legal frameworks – advocate for legal reforms that enhance regulatory clarity and protect intellectual property rights. Establishing efficient dispute resolution mechanisms can also improve the investment climate.
Addressing climate change – develop projects focused on sustainability and climate resilience. Investors are increasingly looking for opportunities that align with environmental sustainability, and proactive measures can enhance investor confidence.
Engaging with diverse investors – actively engage with a wide range of investors, including those from fast-growing markets such as China, to explore new opportunities and partnerships. This can diversify the investment landscape and reduce dependency on traditional investors.
Key takeaways on foreign investment in Central America
The interplay between the geopolitical environment and customs barriers is crucial in shaping foreign investment in Central America. While trade agreements and regional cooperation can enhance investment opportunities, political instability, corruption, and inefficient customs processes can deter potential investors. Additionally, projects face challenges related to taxation, new technologies, labour issues, and legal matters that must be addressed to ensure their success.
By tackling these challenges through improved governance, infrastructure development, streamlined customs procedures, and proactive engagement with stakeholders, Central America can create a more attractive environment for foreign investment, fostering economic growth and development in the region.
