Overall among developing regions of the world, Latin America and the Caribbean was the star performer in 1997 in attracting foreign direct investment (FDI) from transnational corporations (TNCs). Within the region, Brazil is the champion, states World Investment Report 1998: Trends and Determinants (WIR98), released today by United Nations Conference on Trade and Development (UNCTAD).
Increases in FDI flows to the region in 1997 accounted for two-thirds of the overall rise in flows to all developing countries. In 1997, flows advanced by 28 per cent to reach US$56 billion. Brazil, which in 1993 had attracted just US$1.3 billion in FDI, secured US$16.3 billion in 1997 and thereby kept ahead of Mexico for the second year as the largest single recipient in the Latin America and Caribbean region.
The rise in FDI into Brazil reflects a combination of effective macroeconomic policies, the opening up of the economy and privatization programmes, which alone accounted for 27 per cent of FDI inflows in the last two years. Some 600 M&As have taken place in the last 6 years, and 61 per cent of these involved foreign buyers and 59 per cent involved the manufacturing sector.
Today´s report says the FDI boost was spread widely, as 30 countries in the region recorded increases in 1997 over 1996, with the strongest percentage advances registered by Venezuela, Mexico and Brazil. It stresses that sound economic growth, privatization programmes and the integration process of MERCOSUR have been important positive factors behind the region´s formidable gain in attracting FDI. Now "the prospects for FDI remain positive in the region."
The United States is by far the largest source of FDI into Latin America and the Caribbean with flows at US$24 billion in 1997 alone and a cumulative volume so far this decade of US$121 billion. Germany, France, Spain and the United Kingdom were the main European investors in the region. Japanese investment has also been rising recently, while that from the Republic of Korea and Taiwan Province of China, showed noteworthy gains in 1997.
Emerging regional FDI trends
The strength of the region´s economy, increasing efforts to attract FDI and privatization programmes are among the key factors influencing rising levels of FDI.
At one time there was concern that flows would be very strongly related to one-time privatization opportunities, but an analysis in WIR98 notes that investments in recent years "were made in new assets or in the modernization of privatized companies and of existing foreign affiliates, often in the form of new greenfield investments. The trend appears to be most pronounced in manufacturing."
Latin America´s strong FDI performance has been accompanied by changes in the nature of the investment it receives. TNCs appear to be undertaking more export-oriented investments, and primary-sector FDI is almost totally geared to international markets. The lion´s share of export creation by foreign affiliates has taken place in manufacturing, partly in response to the trend towards integrating manufacturing affiliates into global production networks, which can be most clearly seen in Mexico and in the Caribbean Basin.
Today´s report notes that apart from the region´s natural resources, markets and labour, the levels of FDI are now reflecting favourable macro-economic developments and pro-investment and other government policies. Regional integration policies are also providing a key stimulus with the evolution of both MERCOSUR and NAFTA generating new opportunities for foreign investors.
An interesting new feature in the region is the rapid growth of outward FDI flows. This is estimated to have amounted to US$9 billion last year after just US$2.3 billion in 1996. This represents a response by firms to privatization opportunities in neighbouring countries, as well as a response to the subregional integration programmes that are moving ahead.
Major foreign affiliates in the region
The biggest foreign affiliates of TNCs in the region, in terms of 1996 sales, are, unsurprisingly, located in the largest national markets of Brazil and Mexico, but it is interesting to note that seven of the top ten companies are all in the automobile sector. The leader, in terms of sales was Volkswagen in Brazil with sales of US$7 billion, followed by Chrysler in Mexico at US$6.5 billion, General Motors in Mexico at US$6.3 billion and General Motors in Brazil at US$5.4 billion. Next was Fiat in Brazil with sales of US$4.7 billion, just US$26 million ahead of Royal Dutch Shell in Brazil and then Carrefour in Brazil at US$4.5 billion, Ford in Mexico at US$3.9 billion and Ford in Brazil at US$3.8 billion and then, in tenth place, was Nestlé in Brazil at US$3.6 billion.
The report also points out that FDI into Central America, excluding Mexico, rose to US$1.2 billion from US$900 million. Costa Rica was particularly successful in attracting FDI into more sophisticated activities. In 1997, United States chip maker Intel Corporation started work on a US$500 million regional production and testing system in that country. Other high-tech companies are following suit.
Flows into Caribbean countries, excluding offshore financial centres, have risen to an annual average of US$1.2 billion in the 1994-97 period from around US$800 million in 1990-93. Among the financial centers, Bermuda has accounted for more than half of the flows into the entire subregion in this decade.