Foreign direct investment (FDI) inflows to Latin America and the Caribbean declined in 2002 for the third consecutive year, falling in 28 of the region´s 40 economies, according to the World Investment Report 2003(1), released today by UNCTAD. Flows were down by a third to $56 billion - the lowest since 1996. The decline was widespread across the region but concentrated mostly in services. In addition to global factors, gross domestic product (GDP) contraction, financial crises and political uncertainties in a number of the region´s economies, and devaluations adversely affecting market-seeking FDI were to blame.
UNCTAD estimates that FDI flows to the region in 2003 are likely to remain close to 2002 levels. Although the political and economic climate in the region is improving, the recovery will probably be slow. The factors that deterred market-seeking FDI in 2002 are persisting this year and will recede only slowly. But transnational corporations (TNCs) will continue to be attracted by the region´s natural resources, especially if high oil prices persist; and efficiency-seeking FDI in Mexico and the Caribbean basin will likely remain at 2002 levels this year. Foreign direct investment will continue to flow into Brazil´s manufacturing sector and is likely to resume in Argentina as its economy starts to recover.
In 2002, the largest FDI recipient was Brazil, with inflows of $17 billion, down from $22 billion in 2001 (see figure). The drop was concentrated in the telecom, electricity and gas industries. TNCs were attracted to these industries in the 1990s because of deregulation, privatization and the prospects of a growing market, but the recent economic recession and currency devaluation have reduced the profitability of their subsidiaries and halted new investment.
FDI flows into Mexico plunged from $25 billion in 2001 to $14 billion in 2002. The decline is explained mainly by the fact that there was no deal in 2002 comparable to the acquisition of Banamex by Citigroup in 2001. The manufacturing sector received as much FDI as in 2001, despite the slowdown in the United States and competition from China and other lower-cost countries. Those two factors are having the greatest impact on labour-intensive activities of TNCs and other firms in Mexico. (Employment in the maquila industry is currently 200,000 jobs below its peak in 2000.) On the other hand, the productivity of medium- and high-tech industries in Mexico and some other Latin American countries rivals that of their developed-country counterparts, and prospects for FDI in new industries are promising.
In Argentina, last year´s $1 billion worth of FDI inflows was only 10% of the average annual inflows received during the decade 1992-2001. Despite the impact of the economic and financial crisis of the current decade on TNC operations in Argentina, very few of them have actually left the country. However, there were large negative flows in the reinvested-earnings and intra-company-loans components of FDI, which indicates that established TNCs have been reducing their investments in the country. On the other hand, the crisis also represented an opportunity for foreign firms to acquire Argentine assets cheaply. Petrobras, for example, acquired a majority stake in Pérez Compac for $1.1 billion(2) in August 2002, the largest acquisition of the year in the region.
Chile was another country in which inflows declined substantially. The Andean Community, where natural resources are the main driver, was less affected by the slowdown, with the exception of Venezuela. Central America and the Caribbean saw their FDI inflows dwindle by 15% and 9% respectively.
Mexican firms dominate among Latin American TNCs
Among TNCs from Latin American countries, Mexican companies dominate the stage, with seven companies appearing on UNCTAD´s list of the top 50 developing country TNCs. Five other Latin American firms are on the list, four of them from the oil sector.
In the context of diminished FDI flows, Latin American governments are putting more emphasis on targeted FDI policies linked to an overall development strategy. Although openness to FDI is not decreasing, new attention to the quality rather than the quantity is evident. So far, Costa Rica has been the most notable example in this regard, launching a national FDI initiative that goes beyond liberalization and opening up to FDI, targeting specific sectors and companies in line with their development strategy, but Chile and Mexico are also developing new initiatives in this direction.
Some privatization initiatives have been postponed or cancelled because of a lack of political support, as in Ecuador, Paraguay and Peru. This attitude in host countries has coincided with a more cautious approach by TNCs in the industries affected, such as telecoms. As a result, privatization has ceased to be an important source of FDI in the region, at least for now. An important exception last year was the privatization of Mexico´s largest insurer, Aseguradora Hidalgo. The company was acquired by the US firm MetLife for $962 million.
Regional and bilateral integration agreements are increasingly used by countries in Latin America and the Caribbean to attract and benefit from FDI, with NAFTA the most prominent example. Inflows into Mexico originated mainly in the United States and concentrated on the assembly of manufactured goods for the US market. The combination of increased market access and locational advantages, such as cheap labour, prompted TNCs to locate manufacturing activities in Mexico, especially in areas close to the US border. NAFTA also meant a consolidation of the FDI policy reform that had started in Mexico in the mid-1980s and opened up the economy to foreign investors.