(27 May 2015) Flows of Foreign Direct Investment (FDI) towards Latin America and the Caribbean declined 16% in 2014 to total $158.803 billion dollars, the Economic Commission for Latin America and the Caribbean (ECLAC) revealed today. This result reverses the growth trend seen during the last decade—with the exception of declines in 2006 and 2009—since a further reduction is forecast for this year.
In 2014, FDI inflows were affected by the region’s economic deceleration and lower prices for its raw material exports, according to the annual report Foreign Direct Investment in Latin America and the Caribbean 2015 released today at the United Nations organization’s headquarters in Santiago, Chile. Between 2003 and 2013, these flows expanded from $46.937 billion dollars to a nominal record of $189.951 billion dollars.
Worldwide, FDI fell 7% in 2014 versus the previous year, although inflows to developing countries rose 5%, mainly due to Asia’s performance. The participation of Latin America and the Caribbean in these global flows reached 13%, the document indicates.
“ECLAC believes that Latin American and Caribbean countries’ policies should not be oriented towards recovering the amounts of Foreign Direct Investment achieved in the last decade, but rather towards attracting the FDI that contributes to productive diversification,” said the Executive Secretary of the regional organization, Alicia Bárcena. “This means articulating FDI with industrial policies and national development strategies based on equality and environmental sustainability.”
Brazil continued to be the biggest recipient of Foreign Direct Investment in Latin America and the Caribbean. In its report ECLAC provides two FDI figures for Brazil in 2014, due to changes in the methodology used in that country. For comparative purposes both at a national and regional level, the organization used the figures obtained with the methodology utilized until last year, which estimates that the country received FDI of $62.495 billion dollars in 2014 (contributing to a regional total of $158.803 billion dollars). If the new national measurement is used, Brazil’s FDI figure in 2014 rises to $96.851 billion dollars, hiking the regional total to $192.933 billion.
After Brazil, Mexico is the second-largest recipient of FDI, with inflows of $22.795 billion dollars in 2014, down 49% from 2013. This sharp decline is explained by the impact of an extraordinary deal made in 2013 (the purchase of Modelo brewery for $13.249 billion dollars) and the disinvestment of AT&T in 2014 totaling $5.570 billion dollars.
Flows towards Chile reached $22.002 billion dollars, which was higher than the amount received in 2013 but below the record notched in 2012, while Colombia received $16.054 billion dollars (holding steady) and Peru registered $7.607 billion dollars (18% below 2013 levels). In terms of subregions, FDI in South America and Mexico fell significantly in 2014, while flows towards Central America and the Caribbean showed a much smaller decline.
The average profitability (FDI income divided by total FDI stock) of transnational companies in the region fell to 5% in 2014, while overall profits reported by these companies fell 16% to $103.877 billion dollars, a figure that is still considered to be high. As it did last year, the report warns that these profits represent a significant negative flow that affects the region’s current account deficit.
In terms of sectors receiving FDI, the ECLAC study shows an important decline in natural resources: from 23% between 2009 and 2013 to 17% in 2014. The manufacturing sector held steady at 36% of the total, while the services sector jumped to 47%. There are still very few projects that have been announced for high-technology sectors but medium-high technology projects have increased. The automotive sector has received record FDI flows both in Brazil and Mexico in the last two years.
Europe (mainly the Netherlands) and the United States continue to be the main investors in the region. Despite the difficulty of identifying the countries of origin in official statistics, the report indicates that direct investment from Asia rose from 5% to 6% in 2014. ECLAC estimates that FDI from China reached $10 billion dollars annually between 2010 and 2013, and this figure probably rose in 2014 due to the fact that Chinese companies participated in some of the biggest acquisitions in the region, mainly the purchase of the Las Bambas mine in Peru for $7.005 billion dollars.
In 2014, investments by Latin American transnational companies, known as “trans-Latins,” fell for the second straight year to $29.162 billion dollars, down 12% from 2013 for the same reasons that explain the FDI decline in the region. Translatinas’ investments had averaged $45 billion dollars per year between 2010 and 2012, although this behavior was very volatile due to the fact that they are concentrated in very few countries, sectors and companies.
Last year, the region’s main investors abroad were Chile ($12.052 billion dollars), Mexico ($7.610 billion) and Peru ($4.452 billion dollars).
In this latest edition, the report analyzes in-depth the FDI received by the Caribbean, where these flows are much more significant than in the rest of the region as a proportion of Gross Domestic Product (GDP). The document explains that Caribbean countries offer numerous incentives to companies to attract FDI, including exemptions on income tax and customs duties. The report recommends that these benefits’ usefulness be reviewed as part of a coordinated promotion policy.
Finally, the study also examines the impact of FDI on the environment, which has not been measured or regulated sufficiently by countries in the region, the organization warns. Transnational companies are key actors for the transition towards sustainable development, both because of their weight in the regional economy as well as the sectors in which they operate.
These transnational companies have technology that can help reduce environmental impact and the innovative capacity to ensure cleaner, low-carbon production. For this to happen, sustainable business models must be devised both for companies and for countries, the report stresses.
According to ECLAC, it is necessary to strike a balance between corporate strategies and the development goals of countries that receive Foreign Direct Investment to better harness the potential of these flows. This means that officials must implement public policies that align macroeconomic, productive, social and environmental objectives to favor a more diverse and sophisticated production structure, as well as social inclusion.