After tripling during the second half of the 1990s, annual foreign direct investment (FDI(1)) inflows into Latin America and the Caribbean fell last year by 22%, to $86 billion. But the decline does not signal a shifting trend, says the World Investment Report 2001(2) published today by the United Nations Conference on Trade and Development (UNCTAD). Rather, it represents a correction from 1999, when inflows to the region were inflated by some major cross-border acquisitions.
For the first time ever, two Latin American firms are among the world´s top 100 transnational corporations (TNCs (3)), as tracked by WIR: Venezuela´s Petróleos de Venezuela, and Mexico´s Cemex. But the share of total foreign assets of the Latin American TNCs listed among the top 50 TNCs from developing countries fell; 11 of the top 50 are headquartered in the region(4) (see TAD/INF/PR/29).
The current volume of FDI in Latin America and the Caribbean represents an amount "unthinkable only a decade ago", according to WIR2001. Overall investment prospects, as well the distribution by industry, differ greatly from one country and subregion to another, however.
Flows into South America were mainly in services and natural resources. Brazil continued last year as the region´s largest host country, with inward FDI flows of $34 billion, most of which went into services (see figure 1). The pace of privatization slowed somewhat but remained important, accounting for up to 22% of total inflows, down from 28% in 1999. The single largest privatization deal was the $3.6 billion sale of the controlling stake in the bank Banespa to the Spanish BSCH.
Mexico, with $13 billion, was the second largest recipient, up 10% from the previous year. Mexico appears to be undergoing rapid transnationalization, probably as a result of the opening up of the economy (including membership in the North American Free Trade Agreement), WIR2001 suggests. The manufacturing sector continued to attract half of the inflows, but the share of financial services jumped to 31% of total inflows from an average 10% in the previous five years. This was the result of takeovers by Spanish banks that were triggered (with some lag) by the lifting of the remaining restrictions on foreign ownership of banks in 1999. BSCH acquired Serfin for $1.6 billion; its rival BBVA merged with Bancomer with a capital injection of $1.9 billion. The trend continued into 2001, with Citicorp´s $12.5 billion acquisition of Banamex in May, the biggest M&A operation in Mexican history.
Argentina and Chile experienced significant declines in their FDI inflows, partly because 1999 had seen three major cross-border M&As in these countries (Repsol´s purchase of YPF in Argentina, and Endesa España´s purchase of Endesa and Enersis in Chile). Inflows into some Andean countries, such as Colombia and Peru, were lower than in previous years, reflecting recent political and economic instability, while inflows into Venezuela rose, due to significant purchases in the services sector. These changes are also reflected in FDI inflows in relation to the size of domestic investment.
Mergers and acquisitions continued to be important in 2000, and were mainly directed at the services sector. The largest transactions included "Operación Verónica", by which Telefónica de España raised its stakes in its affiliates in Argentina, Brazil and Peru to almost 100%, and acquisitions by Spanish banks in Mexico and Brazil. In the electrical industry, there were major purchases by the AES Corporation (United States) in Brazil, Chile and Venezuela, amounting to $3.6 billion.
Chile was the largest outward investor, with outflows (almost $5 billion) exceeding inflows. However, a good part of its investments abroad are undertaken by foreign affiliates, such as Enersis (the electricity company owned by the Spanish group Endesa) and Entel (the former public telephone monopoly now controlled by Telecom Italia). The single largest investment abroad by a Latin American firm was the $2.8 billion acquisition by Mexico´s Cemex of Southdown in the United States, making Cemex the world´s third largest cement company.
1. "Foreign direct investment" is defined as an investment involving management control of a resident entity in one economy by an enterprise resident in another economy. FDI involves a long-term relationship reflecting an investor´s lasting interest in a foreign entity.
2. The World Investment Report 2001: Promoting Linkages (Sales No. E.01.II.D.12, ISBN 92-1-112523-5) may be obtained at the price of US$ 49, and at a special price of US$ 19 in developing countries and economies in transition, from United Nations Publications, Sales Section, Palais des Nations, CH-1211 Geneva 10, Switzerland, F: +41 22 917 0027, E: email@example.com, Internet: www.un.org; or from United Nations Publications, Two UN Plaza, Room DC2-853, Dept. PRES, New York, N.Y. 10017, USA; T: +1 212 963 83 02 or +1 800 253 96 46, F: +1 212 963 34 89, E: firstname.lastname@example.org.
3. "Transnational corporations" comprise parent enterprises and their foreign affiliates: a parent enterprise is defined as one that controls assets of another entity or entities in a country or countries other than its home country, usually by owning a capital stake. An equity capital stake of at least 10% is normally considered as a threshold for the control of assets in this context.
4. In terms of foreign assets, 1999: Petróleos de Venezuela (Venezuela), Cemex (Mexico), Petroleo Brasileiro SA (Brazil), Companhia Vale Do Rio Doce (Brazil), Gener SA (Chile), Metalurgica Gerdau SA (Brazil), Pérez Companc SA (Argentina), Savia SA de CV (Mexico), Gruma SA de CV (Mexico), Compañía de Petróleos de Chile (Chile), Companhia Cervejaria Brahma (Brazil).