Foreign direct investment (FDI) flows to Latin America and the Caribbean climbed by 16 per cent in 2011, driven mainly by higher investment in South America, UNCTAD’s annual survey of investment trends indicates.
FDI entering South America rose by 34 per cent, while inflows to Central America and the Caribbean, excluding those to offshore financial centres, increased by 4 per cent (see figure 1). FDI to offshore financial centres fell by 4 per cent, the World Investment Report 20121 notes.
The report, subtitled, “Towards a New Generation of Investment Policies,” was released today.
According to the publication, high FDI growth in South America was mainly due to its expanding consumer markets, relatively high growth rates and natural-resources endowment. In Central America and the Caribbean, excluding offshore financial centres, a more positive outlook in 2011 for the United States of America -- with which these countries have deep economic ties -- offset the impact of the weakening global economy on FDI. In 2011, FDI to offshore financial centres remained significant, representing 31 per cent of the region’s total.
Although investors from developed countries increased their investment in greenfield FDI projects in 2011 (up 19 per cent), they have also divested more assets than they have purchased in the region’s cross-border merger and acquisition market during the last three years, particularly in the case of European and North American transnational corporations (TNCs). This is occurring at the same time as the advance of TNCs from Japan and from developing economies. Examples include the acquisition by Mitsubishi (Japan) of copper assets in Chile from Anglo American (United Kingdom of Great Britain and Northern Ireland) for $5.4 billion; and the acquisition by a Japanese investor group of Quadra FNX Mining Ltd. (Canada) for $724 million. Other examples are the purchase by two Chinese companies (Sinopec and Sinochem) of petroleum assets in Argentina and Brazil from Occidental Petroleum (United States) and Statoil (Norway) for the respective amounts of $2.4 billion and $3.1 billion.
The report says this trend is likely to continue in 2012 with the announced retreat of some major European financial institutions as they respond to pressure to bolster their balance sheets. The gap will likely be filled by local or regional institutions looking to become international in scope, the World Investment Report 2012 contends. Banco Santander (Spain), for example, announced the sale of assets in Colombia to Chile’s Corpbanca for $1.2 billion, and ING (Netherlands) announced that it would sell its insurance and pensions businesses across much of Latin America to the Grupo de Inversiones Suramericana (Colombia) for $3.85 billion.
Outward FDI flows from Latin America and the Caribbean have become highly volatile since the global financial crisis, the report notes. They decreased by 17 per cent in 2011 after a 121 per cent increase in 2010. That increase, in turn, followed a 44 per cent decline in 2009. This volatility is due to the growing importance of flows that are not necessarily related to investment in productive activity abroad, as reflected by the high share of offshore financial centres in total FDI flows from the region, and the increasing repatriation of intra-company loans by Brazilian outward investors, which reached a record $21 billion in 2011.
A shift towards a greater use of industrial policy is occurring in some countries in the region, with a series of measures designed to build productive capacities and boost the manufacturing sector. These measures include higher tariff barriers, more stringent criteria for licences and increased preference for domestic production in public procurement. These policies may induce “barrier-hopping” FDI into the region; and appear to have had an effect on firms’ investment plans. TNCs in the automobile, computer and agriculture-machinery industries have announced investment plans in the region. These investments are by traditional European and North American investors to the region, as well as TNCs from developing countries and Japan.
Short-term prospects of FDI to Latin America and the Caribbean are muted, the report says. The region is likely to remain attractive to foreign direct investors given its natural resources and its relatively higher growth prospects at a time of overall global uncertainty. In addition, the shift towards a greater use of industrial policy may induce “barrier-hopping” FDI into the region, and appear to have already had an effect on firms’ investment plans. However, the uncertainty created at the global level by the European debt crisis is affecting the region’s short-term prospects as well as FDI, which is likely to register, at the best, a slight growth in 2012.
Figure 1 - Top five recipients and sources of FDI flows in Latin America and the Caribbean, 2010 and 2011
(Billions of dollars)
Source: UNCTAD, World Investment Report 2012.
Note: Countries ranked on the basis of the magnitude of 2011 FDI flows