FDI slows in 2014
The latest foreign direct investment (FDI) report by the United Nations Economic Commission for Latin America and the Caribbean (ECLAC) says that after a decade of strong growth, FDI inflows to the region fell by 16% in 2014.
Despite a couple of blips in 2006 and 2009, FDI flows into the region rose steadily over the last decade, from US$46.9bn in 2003 to a peak of US$189.9bn in 2013. But the trend broke last year, according to ECLAC1, with a 16% drop to US$158.8bn. Behind this lay the impact of lower commodity export prices and slower GDP growth across the region. A further fall is expected in 2015 because of continuing sluggish growth. Comparatively speaking, Latin America and the Caribbean is slipping back in the FDI stakes relative to Asia. Although global FDI fell by 7%, much of this was due to reduced flows into developed economies. FDI into developing countries as a group rose by 5%, but this in the main reflected strong increases in Asia, offset by the 16% decrease in Latin America and the Caribbean.
The two largest recipients of FDI in the region were Brazil and Mexico. Brazil recently has changed its methodology for calculating FDI. Under the old approach – which is comparable with other countries covered by ECLAC – FDI inflows last year were worth US$62.5bn, or 39.3% of the regional total. Under the new methodology Brazil says its 2014 FDI was a higher US$96.8bn, or 50.2% of a correspondingly revised regional total of US$192.9bn. Using the old methodology for the purpose of comparison, Brazil saw a 2% fall in FDI last year. ECLAC makes it clear it expects FDI to continue on a falling trend in Brazil this year.
Mexico was the second largest recipient of FDI in the region, taking in US$22.8bn last year, or 14.4% of the regional total. FDI fell sharply – by 49% – in 2014, but this reflects two big one-off factors that accentuated the variation between 2013 and 2014. The 2013 total was unusually high because the local beer maker Grupo Modelo was acquired for US$13.3bn, and the 2014 total was unusually low because the US telecoms company AT&T divested its US$5.6bn shareholding in América Móvil. But ECLAC suggests a recovery in FDI flows into Mexico can be expected due to a large number of projects announced in the manufacturing sector (particularly in the automotive sector) and the government’s structural economic reforms.
Chile was the third-largest recipient of FDI, with US$22bn, up by 14% on 2013 and reflecting the country’s continuing ability to “punch above its weight” in terms of attracting foreign companies. FDI inflows into Central America were down by 2%, and FDI in the Caribbean fell by 5%. Barbados, Paraguay and Antigua and Barbuda saw the largest increases, while the largest falls were in Suriname, Venezuela, and Grenada.
The share of last year’s inward FDI going into natural resources (mainly minerals and hydrocarbons production) fell to 17%, down from an average of 24% in 2009-2013. Manufacturing also dipped to 36% of the total, confirming services as the dominant sector with 48% of the total (up from 38% in 2009-2013). ECLAC attributes the lower investment in the natural resources sector to “the decline in the price of minerals that has been occurring since 2012, but is only now starting to affect FDI inflows”. As a share of regional GDP, FDI was 2.6% in 2014, a little below the long-term average. The proportion tends to be higher in smaller economies (up to 10% of GDP in the Caribbean); it was 1.5% of GDP in Brazil and 2.0% of GDP in Mexico. By source countries, the largest single investor in Latin America was The Netherlands (20% of the total that can be attributed to specific countries of origin), followed by the US (17% of the total) and Spain (10%). The Netherlands tops the list mainly because of its large investments in Brazil.
Official FDI from Asia is estimated at only 6%, of which China is apparently responsible for only one-sixth. However, it seems that China’s investment in Latin America may be significantly under-reported. Last year, Chinese companies made two major acquisitions in Peru (including the US$7bn purchase of the Las Bambas copper mine), but Peru’s central bank does not track investments by countries of origin. ECLAC estimates that Chinese FDI in Latin America has been running at US$10bn per annum in 2010-2013 and rose significantly above that in 2014, not least because of the Las Bambas transaction.
ECLAC calculates that foreign companies investing in the region are gaining an average return on capital of 5%. While profits reported by transnational companies fell by 16% to US$103.9bn last year, the figure was still “considered to be high” and reflected “a significant negative flow that affects the region’s current account deficit”. While continuing to welcome FDI’s contribution to Latin American growth, the tone of the ECLAC report suggests that governments would do well to audit the costs and benefits of FDI, including the environmental impacts. Commenting on the report, Alicia Bárcena, ECLAC’s executive secretary, said that Latin America should not make it a priority to recover last year’s fall in FDI inflows, but should focus instead on “attracting the FDI that contributes to productive diversification”. “This means”, she said, “articulating FDI with industrial policies and national development strategies based on quality and environmental sustainability”.
Multilatinas
Latin America is not just a recipient of FDI inflows, but also a significant foreign investor in its own right. A new study by the Latin American Programme at the US-based Wilson Centre2 focuses on the group of Latin American multinational companies known as ‘multilatinas’ or ‘trans-Latins’. These companies, it says, first emerged in the 1990s and then “surged forward with a huge wave of investment starting in 2000”. In the three years 2010-2012, they are reported to have been responsible for cumulative FDI outflows worth over US$350bn. It is perhaps not a coincidence that the three countries identified by ECLAC as the main recipients of inward FDI – Brazil, Mexico, and Chile – also appear in the Wilson Centre study as the main generators of outward FDI flows via multilatinas. In the period studied, Brazil had 25 multilatinas responsible for 41.5% of net FDI outflows, with “a clear preference for investing in Europe over the United States”. Mexico had 18 multilatinas responsible for 23% of total FDI outflows from the region, mostly focused on the US and North American market. Chile’s multilatinas had the highest growth rate; many saw growth abroad as critical to remaining competitive, given “the limited opportunities in a domestic economy of 17m consumers”.
[1] ‘Foreign Direct Investment in Latin America and the Caribbean’, ECLAC.
[2] ‘The Latin American foreign investment boom: recent trends and the evolution of Multilatinas’ by Adrián Blanco Estévez, Wilson Centre.
