Record levels of FDI poured into Brazil, Argentina, Chile and Bolivia last year, according to the World Investment Report 2000: Cross-border Mergers and Acquisitions and Development (1), published today by the United Nations Conference on Trade and Development (UNCTAD). The report cites long-term growth prospects and major privatizations as the main factors behind the rapid rise in foreign direct investment (FDI)(2) by transnational corporations (TNCs)(3) in many Latin American countries.
Latin America and the Caribbean attracted an estimated $90 billion of FDI in 1999, compared to $73.8 billion the previous year. More than 80% of the FDI inflows were concentrated in the four largest recipients: Brazil, with $31.4 billion ($28.5billion in 1998); Argentina, with $23.2 billion ($6.5 billion in 1998); Mexico, with $11.2 billion ($10.2 billion in 1998); and Chile, with $9.2 billion ($4.6 billion in 1998). But perceptions of instability led to sharp declines in FDI flows to several countries: inflows to Colombia, for example, were halved, to $1.4 billion; those to Venezuela plunged from $4.4 billion to $2.6 billion; and FDI to Ecuador dropped by a quarter, to around $600 million.
Privatization has been an important means in recent years of attracting FDI to Latin America. It was the prime cause of record FDI flows into Argentina and Chile last year and has also been important in Central America and the Caribbean. Over the last two years, foreign investors participated in the privatization of electricity services in El Salvador, Guatemala and the Dominican Republic, of Tecommunications in El Salvador and Guatemala, and won airport concessions in Costa Rica and the Dominican Republic. Increasing amounts of FDI are being used to restructure previously acquired privatized enterprises.
Merger and acquisition (M&A) activity is also gathering pace in the region. North American and European companies have been prominent and a particularly noteworthy feature has been large investments by Spanish TNCs. Spain´s largest company, Repsol, made a $13.2 billion investment last year in Yacimientos Petrolíferos Fiscales (YPF) of Argentina, following a $2 billion investment in the enterprise in 1998. Six other large Spanish companies - Tefónica (Tecommunications), Endesa España (electricity), Iberdrola (oil and natural gas), Banco Bilbao Vizcaya Argentaria and Banco Santander Central Hispano (banking) and Iberia (air transport) - have been major investors in the region in recent years.
The MERCOSUR countries as a group (Argentina, Brazil, Paraguay and Uruguay, with Bolivia and Chile as associates), and particularly Brazil, obtained the lion´s share of the region´s FDI despite economic stagnation and the instability surrounding the currency devaluation of early 1999.
In the northern part of the region, NAFTA continues to play a key role in influencing FDI, mainly into the export-oriented manufacturing sector. Mexico´s exports to the NAFTA market (Canada and the United States) increased more than fivefold between 1990 and 1998. This process, initially led by TNCs from the United States, has shifted to European and Asian TNCs investing in Mexico in order to benefit from the NAFTA rules of origin. More recently, under-capitalization and under-provision in some service industries and in energy and infrastructure have combined with changes in regulatory frameworks to attract investors in banking, commerce, Tecommunications and energy, among other industries. WIR2000 states that these industries still attract relatively small amounts of FDI, but that they may provide significant investment opportunities in coming years.
TNCs based in Latin America and the Caribbean sharply boosted outward investment last year to $27.3 billion, from $9.4 billion in 1998. Bermuda was the largest base for acquiring firms in the region, with an outward FDI flow in 1999 of $15 billion, after a negative level of $363 million in 1998.
Much of the outward FDI originating in this region is intraregional. However, traditional Latin American investors, such as those based in Brazil and Mexico, also invest in countries outside the region. In 1999 this was the case of three quarters of the M&A deals made by Brazilian TNCs, while the four largest cross-border M&As from Mexico were concluded in either the United States or the Philippines.
As the transnationalization of firms gathers speed, the form and type of FDI have become more complex. The ultimate parent firm or the ultimate host country may be different from the immediate parent firm or the immediate host country. However, foreign affiliates of TNCs established in Latin America and the Caribbean are highly active acquirers of other firms in the region. Often, these deals look like domestic M&As, but in reality the ultimate beneficiaries of such deals are from different countries. The impacts of these seemingly domestic M&As go beyond the country in which the firms involved operate. In 1999, for example, more than 80 cross-border M&As were undertaken by firms in the region.
Largest Latin American firms increasingly transnational
The activities of Cemex S.A. de C.V. illustrate the growing transnationalization of some of the leading corporations in the region. Cemex is not only Mexico´s largest cement firm but also the world´s third-largest cement company, operating 56 cement plants in 30 countries in 2000. Cemex ranks fourth on UNCTAD´s list of the top 50 TNCs from developing countries in terms of foreign assets, and second in Latin America behind Petróleos de Venezuela, the largest TNC in a developing country.
Founded in 1906, Cemex went through several domestic M&As until it reached the number-one spot in Mexico in the late 1980s. In the 1990s, the company repeatedly used cross-border acquisitions to expand its overseas operations. In less than a decade, Cemex acquired all or part of three entities in developed countries and 10 in developing countries outside Mexico. Through these acquisitions, its production capacity more than doubled and its net sales almost tripled. While the company controls about 60% of the Mexican market, its domestic sales now account for less than half its total revenues.
Asian TNCs largely dominate the list of the 50 largest TNCs from developing countries in terms of foreign assets, but TNCs in Latin America are gaining ground. The ranking of these Latin American TNCs appears below.