Foreign direct investment in Latin America and the Caribbean

Competition and productivity
Foreign Direct Investment
Globalization - Trade
Macroeconomics - Economic growth - Monetary Policy
Microeconomics - Competition - Productivity

In 2013 global FDI flows rose by 11%, although behind this global figure lie large differences between regions. Whereas FDI in the European Union recovered strongly (38%), after a heavy fall in 2012 (-56%), flows to the United States slipped 5% and those to developing and transition economies were up by 6% and 45%, respectively.

Growth in the region slowed to 2.5% in 2013, and United States monetary policy sowed uncertainty in the markets, which led to heavy depreciation in the region’s main currencies. Prices for natural resources, though still at high levels by historical standards, continued to fall owing to uncertainty regarding the economic situation in China and the developed world.

 foreign direct investment inflows and FDI inflows  as a proportion of GDP, 1990-2013
Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures and estimates at 8 May 2014.
a FDI figures indicate inflows of foreign direct investment, minus disinvestments (repatriation of capital) by foreign investors. The FDI figures do not include flows into the main financial centres of the Caribbean. These figures differ from those set out in the 2013 editions of the Economic Survey of Latin America and the Caribbean and the Preliminary Overview of the Economies of Latin America and the Caribbean because they show the net balance of foreign investment, that is, direct investment in the reporting economy (FDI) minus outward FDI.

The fact that FDI flows overall held steady despite the external conditions was largely a reflection of the US$ 13.249 billion purchase of Modelo, a beer maker, by a European firm. Without that transaction, flows into the region would have been down on the 2012 figure. The Modelo acquisition also regained Mexico its position as the second largest recipient of FDI in the region, with total inflows of US$ 38.286 billion, over double the amount received the year before. Mexico thus ranked behind Brazil, which received US$ 64.046 billion in FDI, 2% down on 2012 but ahead of Chile, which received US$ 20.258 billion, 29% less than in 2012. Investment was sharply up in other economies in the region, as well, including Suriname (86%), Panama (61%) and the Plurinational State of Bolivia (35%). Overall, FDI in Central America rose considerably (21%), while flows to the Caribbean declined (-19%).

By sector, services received the highest proportion of FDI inflows in 2013, with 38%, followed by manufacturing (36%) and natural resources (26%). As noted in relation to the global figures, however, these averages mask large differences between countries and subregions. With the Modelo acquisition, Mexico’s manufacturing sector accounted for around 70% of the country’s investment inflows. Natural resources capture over 50% of FDI inflows in several countries, and as much as 70% in the Plurinational State of Bolivia. In fact, in South America (not including Brazil), natural resources receive more FDI than services, and manufacturing only small amounts.

 inward foreign  direct investment, 2012-2013
Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures and estimates as of 8 May 2014

Not all FDI in the region represents a net inflow of capital. Reinvested profits of transnational corporations are a component of FDI that has increased in the past decade, exceeding capital contributions in the last few years. In 2013 this trend was broken and capital contributions accounted for 42% of total FDI, reinvested earnings 38%, and inter-company loans 20%. Although reinvestment of profits was lower in 2013 than in 2012, the profits reported by transnational firms rose 2%, to US$ 111.662 billion. Even so, in some economies that receive a lot of FDI in mining (such as Chile and Peru) profit reinvestment was heavily down.

The different economies in the region also showed large differences with regard to the countries of origin of the investments. The United States remains the largest investor in Latin America and the Caribbean generally, with a particularly prominent role in Central America (30% of inflows) and Mexico (32%). Europe overall is the largest investor in Brazil (46%), Mexico (54%) and Colombia (36%). In all the countries except Mexico, trans-Latin firms make significant contributions to FDI flows IED. This is especially true in Ecuador (where FDI by trans-Latins accounts for 46% of inflows), Colombia (30%) and Central America (39%). Inflows from Asia have held steady.

Contrasting with inward investment, outward FDI was down by 33% in 2013, at US$ 31.611 billion, one of the lowest figures for the past decade. The fall may be attributed chiefly to a large drop in outflows from Chile and Mexico, and to the fact that Brazil recorded negative outflows for the third year running. The only country to buck the trend was Colombia, which made outward investments worth US$ 7.652 billion in 2013, compared with slightly negative outflows in 2012. Of the 20 largest mergers and acquisitions by trans-Latin firms, seven originated in Mexico, five in Brazil and five in Colombia.

In Latin America, FDI inflows have stabilized at a high level in the past three years, but the impact of these investments on the well-being of the region’s inhabitants is still a matter of debate. In theory, investments from developed economies should bring technological progress which can spill over to other firms and sectors in the host economy. On the other hand, FDI is a broad concept which includes both greenfield investments (which create or expand production capacity) and mergers and acquisitions which represent merely a change in the ownership of assets. The two types of investment have very different impacts on the local economy.

The impact of FDI depends to a great extent on the type of investment. Investments in technology-intensive sectors have more potential to contribute to development through knowledge transfer and local capacity-building. But FDI in high-tech manufacturing represents only a small proportion of the total and showed no change in 2013. It is also important to recall that the capacity the subsidiaries of foreign companies have to form linkages with local firms is just as —if not more— important than the technology intensity of FDI.

FDI flows will remain generally stable over 2014, although trending down slightly. This year’s economic growth will be only slightly better last year’s, and the prices of export commodities, especially minerals, seem unlikely to regain the levels they had reached before starting to slip over the past two years. Accordingly, ECLAC estimates that variation in FDI flows will be between -9% and 1% with respect to 2013, depending on whether a number of large acquisitions go through.

This entry is part of the Foreign Direct Investment in Latin America and the Caribbean Briefing Paper prepared by ECLAC and published on May 2014
To see other ECLAC publications please go to ECLAC Repository

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