FDI and Economic Growth in Latin America

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FDI and Economic Growth in Latin America

• Andrés López
• Review Seminar
• The Investment for Development Project
• 9-10 May 2003, Geneva, Switzerland
• Consumer Unity Trust Society (CUTS)

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FDI and Economic Growth in Latin America

• 1. FDI inflows in Latin America in the 90s
• 2. FDI trends in main host regions
• 3. The available evidence on FDI impact in Latin
  America
• 4. Conclusions and perspectives

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• 1. FDI inflows in Latin America in the 90s

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The economic policy framework

• Trade liberalization
• Regional integration agreements
• Privatizations
• FDI deregulation and liberalization
• Few cases of selective policies
• Incentives for FDI
• Export-oriented maquila, EPZ- (Mexico, Central
  America)
• Inward-oriented (Brazil)

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Latin America has been a key host region for FDI
in recent years

• FDI inflows by host region/country, 1984-2001
  (US million and )

Source UNCTAD
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FDI inflows by host country, 1990-2001 (US
million)
FDI inflows, top 10 developing countries
Source UNCTAD
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FDI influence in Latin American host economies
grew strongly in the 90s
Ratio of inward FDI flows to fixed capital
formation, by host region/country ()
Source UNCTAD
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FDI influence in Latin American host economies
grew strongly in the 90s (II)
Ratio of inward FDI stock to GDP by host
region/country ()
Source UNCTAD
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MAs were the predominant mode of entry
Ratio of cross-border MAs to FDI inflows, by
host region/country ()
Source UNCTAD
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• 2. FDI trends in main host regions

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MERCOSUR

• Main destination sectors
• Services public utilities, banking, commerce,
  etc.
• Manufacturing industry less important than in
  the past (automobiles, food and beverages,
  chemicals)
• Mining and oil (Argentina)
• Mainly market seeking investments (including
  intra-regional exports)

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Mexico and Central America

• Main destination sectors
• Manufacturing industry (mainly maquila and
  assembly activities) automobiles, electronics,
  textiles, clothing
• Tourism
• Export oriented activities (efficiency seeking)
• Main investor USA

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Andean Community

• Main destination sectors
• Mining, oil (export oriented)
• Public utilities, banks, infrastructure (market
  seeking)
• Manufacturing industry -only in Colombia and
  Venezuela- (market seeking and regional exports)

Chile

• Main destination sectors
• Mining (export oriented)
• Banking, public utilities (market seeking)

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• 3. The available evidence on FDI impact in Latin
  America

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Balance of payments

• Lower volatility than portfolio inflows
• Short-term positive impact due to increased
  capital inflows
• Medium-term negative impacts due to increased
  profit remittances and (in many countries) trade
  balance deficits

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Foreign Portfolio and Direct Investment in
Argentina
Tequila crisis
Convertibility crisis
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Profit remittances in Argentina
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Economic restructuring

• Efficiency and productivity gains
• Introduction of new product technologies,
  organizational techniques and quality standards
• Decreasing backward linkages (increasing import
  content)
• Few investments in high-tech sectors (exceptions
  Brazil, Mexico maquila-, Costa Rica Intel-)

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Investment

• Crowding-out or neutral effects predominate (in
  Asia, crowding-in and neutral effects are the
  norm)
• Reasons
• MAs vs. greenfield investments
• Passive vs. selective policies
• Market failures in financial markets
• Macroeconomic instability
• Crowding-in effects exist when FDI stimulates
  new investments that would not have taken place
  in its absence.
• Crowding-out effects take place when FDI
  displaces domestic producers or pre-empt their
  investment opportunities.

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Exports

• MERCOSUR
• TNCs seemingly have not contributed to exports
  increase nor to exports diversification
• Mexico
• TNCs have made a major contribution to Mexican
  exports (including high-tech activities), but ...
• Excessive concentration in the US market
• Few linkages with the local economy (very high
  import content)
• Competition with low wages countries (e.g. China)

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Spillovers for host economies

• Mixed evidence
• There are almost no studies available for the 90s
• TNCs linkages with host economies have tended to
  decrease in the 90s
• TNCs affiliates do rarely engage in RD activities

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Environment

• Improved environmental management in TNCs
  affiliates (but environmental islands?)
• Little evidence of pollution havens (possible
  exception mining) and races to the bottom
  (although environmental regulations are generally
  lax)

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Privatizations

• Higher efficiency levels and increased
  investments in public utilities
• Technological modernization (e.g. telecoms)
• High tariffs and weak regulatory systems in many
  cases

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Banking

• Higher efficiency but no reduction in banking
  costs (exception Chile)
• No impact on credit availability
• Foreign banks adopt conservative policies
  regarding credit
• Positive effects on financial system stability?
  (what happened in Argentina?)

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• 4. Conclusions and perspectives

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Perspectives for FDI in Latin America

• A sharp reduction in FDI inflows took place in
  2002, due to cyclical as well as structural
  factors
• Global downturn in FDI
• US recession
• Lower economic growth in Brazil and Chile
• Argentinas crisis
• Expectedly, countries will have to compete more
  fiercely for FDI, but FDI quality (more than FDI
  quantity) should be the main target

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Policy recommendations

• FDI has the potential to positively contribute to
  economic development, but so far its impact in
  Latin America has been below initial expectations
• Pro-active policies where FDI is guided towards
  those activities and sectors that most benefit
  local development- are needed
• Some policy objectives
• Exports increases
• Fostering domestic linkages
• Attraction of FDI to knowledge intensive
  activities
• Fostering FDI spillovers

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Policy recommendations (II)

• Pro-active policies work well only if other
  conditions are met
• Human capital availability
• Technological infrastructure
• Adequate institutional frameworks and strong
  State capabilities
• Spillovers only arise if domestic firms have
  access to
• Credit
• Technical assistance
• Human resources
• Information

Levelling the playing field for domestic firms