CANADIAN FOREIGN DIRECT INVESTMENT IN LATIN AMERICA

Transcription

1 CANADIAN FOREIGN DIRECT INVESTMENT IN LATIN AMERICA Background paper prepared by Juan Martín Arellano May 2010 This paper looks at the relative importance, sectoral composition and geographical allocation of Canadian foreign direct investment in Latin America. The analysis provided follows the standard literature on determinants of FDI at large, and places Canadian investments in the context of total FDI flows to this region. This snapshot confirms the heavy presence of Canadian firms in the extractive industries and financial sectors there. Ce document se penche sur l importance relative, la composition sectorielle ainsi que l allocation géographique d investissements directs à l étranger canadiens vers l Amérique latine. L analyse utilise la littérature sur les causes déterminantes des IDE en général et place les investissements canadiens dans le contexte des flux d IDE mondiaux vers la région. Cette recherche confirme l importante présence des firmes canadiennes dans les industries extractrices et dans le secteur financier. Prepared for the Dialogue on Canada-Latin American Economic Relations, 27-28/5/10

2 2 I. Introduction There are four different types of Foreign Direct Investment (FDI) depending on the reasons for a firm to invest abroad. These are: (1) Resource-seeking FDI, the objective of resource-seeking FDI is to secure access to low-cost labor or natural resources for the investing firm. In some cases the aim of a multinational corporation is to acquire factors of production at a lower cost than in its country of origin and also because sometimes these factors are not available in the home country. This is often the case with FDI to developing countries where a foreign firm is frequently seeking national resources or low-cost labor; (2) Market-seeking FDI, this takes place when the investment aims at penetrating new markets or maintaining already existing ones; (3) Efficiency-seeking FDI which seeks to reconstruct existing production by taking advantage of a lower cost structure in the host economy or economies of scale in the production; and (4) Strategicasset seeking FDI which refers to investment that enables a multinational corporation to protect or develop its ownership specific advantage. During the past few decades the competition for FDI has increased around the world. For instance in 1980s Canadian outward FDI stock was around 5% and 10% of its GDP, but then it made steady progress to reach around 30% and 35% of its GDP, eventually exceeding inward FDI stocks in the mid-1990s. Canada now is in fact a net direct investor abroad. Source: Library of Parliament The following summary will study FDI in Latin America (excluding the off-shore financial centers of the Caribbean) and will emphasize the importance of Canada as a net investor in the region. Section II will touch on FDI to Latin America; Section III analyzes Canadian FDI in the region, and Section IV goes deeply to examine where the investments are going, which are main sectors where Canadian investors are found, and which Canadian companies are investing in Latin America.

3 3 II. FDI in Latin America Despite the global financial and economic crisis of 2008, FDI flows to Latin America and the Caribbean reached a record high in Excluding the financial centres in the Caribbean, the region received US$ 128,301 billion, surpassing by 13% the record level reached in 2007 (See Figure 2). This is an extraordinary performance considering that FDI flows worldwide shrank by 15% in the same period. The growth rate of FDI to Latin America and the Caribbean was above the world average and above the average for developing countries in general. The record high posted in 2008, however, conceals marked differences at the subregional level. The increase in FDI to South America was fuelled by two factors: commodity prices, which remained high through most of the year and attracted natural-resource-seeking investment, and the solid economic growth of the subregion, which encouraged market-seeking investment. In fact, FDI in natural resources, as a proportion of total FDI, continues to be greater than manufacturing. The strong increase of FDI in South America was due to the sharp rise of inflows to the top four recipient countries of the subregion: Argentina, Brazil, Chile, and Colombia which together they represented 89% of the subregion s total inflows. In contrast, the recession in the United States had a direct negative impact on the economies of Mexico and Central America, because it removed the incentive for efficiency-seeking investors to set up export platforms in the subregion. The close ties between these economies and the United States market led to a slowdown in economic growth in the subregion, which also resulted in market-seeking FDI being less buoyant. While FDI to South America climbed 24% to US$ 89,862 billion, FDI to Mexico and Central America fell 5% to US$ 38,438 billion. Figure 2.

4 4 An analysis of inflows of individual countries in the region shows that Argentina, Brazil, Chile, Colombia and Mexico received 80% of the region s FDI (See Table 1). In fact Brazil accounts for the bulk of the rise in FDI in the region. FDI inflows in that country reached a new high of US$ 45,058 billion in 2008, 30% above the record posted in Mexico, the second largest recipient of FDI in the region, was hit hard by the crisis and saw its FDI inflows fall 20% from 2007 to US$ 21,950 billion in Much of this drop can be attributed to the decline in FDI in the services and manufacturing sectors, especially those geared towards producing exports for the United States market. In both sectors, FDI was down by about 50% on the previous year. FDI flows to Central America remained stable, increasing 7% to US$ 7,554 billion. Costa Rica and Panama were the main recipients. El Salvador was the worst-hit. FDI in the country plummeted 48% with respect to the previous year to US$ 784 million. This drop should be analysed in context, however; acquisitions in the banking sector in 2007 generated an unusually high level of FDI, and the volume received in 2008 represented the second largest amount ever observed in the country. In South America, the increase in FDI flows to Argentina, Chile and Colombia was strongly driven by the rise in natural-resourceseeking FDI, especially in the mining industry in Chile and Colombia. In fact, naturalresource-seeking FDI still continues to account for the largest proportion of FDI in South America, while efficiency-seeking FDI has more weight in FDI flows to Mexico and the Caribbean Basin countries. Table 1. Net Inflows of Foreign Direct Investment, by Country or Territory (US$ Million) Argentina 7,290 23,987 10,418 2,166 2,148 1,652 4,124 5,265 5,537 6,462 7,979 Bolivia 949 1, Brazil 31,913 28,576 32,779 22,457 16,590 10,143 18,145 15,067 18,782 34,584 45,059 Chile 4,627 8,760 4,860 4,199 2,549 4,307 7,172 6,983 7,357 14,457 16,786 Colombia 2,828 1,507 2,436 2,541 2,133 1,720 3,014 1,0252 6,656 9,048 10,563 Costa Rica ,469 1,986 2,016 Dominican Republic 699 1, , ,122 1,528 1,578 2,884 Ecuador , El Salvador 1, , Guatemala Haiti Honduras Mexico 12,654 13,843 18,028 29,801 23,721 16,474 23,658 21,922 19,316 27,278 21,949 Nicaragua Panama 1, , ,497 1,907 2,401 Paraguay Peru 1,644 1, ,144 2,155 1,335 1,599 2,578 3,466 5,342 4,079 Uruguay ,493 1,222 2,043 Venezuela 4,985 2,890 4,701 3, ,040 1,483 2, ,716 Source: ECLAC

5 5 The main sectors where FDI to Latin America is located are in services and natural resources sectors. It is imperative to notice that the service industry accounts for almost half of total investments, also interesting is the sharp increase of investments in natural resources after 2008, as shown by Table 2 and Figure 3. Table 2. Distribution of FDI by Sector in Latin America Natural 26% 10% 12% 12% 11% 12% 13% 12% 15% 30% Resources Manufacturing 24% 25% 26% 38% 35% 38% 37% 36% 35% 22% Services 49% 60% 61% 51% 48% 46% 48% 51% 49% 47% Other 1% 5% 1% 1% 6% 4% 2% 1% 1% 1% Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Source: ECLAC Figure 3. Distribution of FDI by Sector in Latin America Distribution of FDI by Sector in Latin America 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Years Source: ECLAC Natural Resources Manufacturing Services Other

6 6 By country of origin, the United States continues to be Latin America s largest source of FDI, followed by Spain, and Canada (See Figure 3). Figure 3. III. Canadian FDI to Latin America As stated above, Canada is now a net global investor. This relatively recent phenomenon has been driven in large part by financial services and natural resources firms, areas where Canada has traditionally enjoyed a competitive advantage either because of historical factors or because natural endowments. Natural-resource-seeking investments, such as those in energy, metallic minerals, and wood and paper are among the principal components of Canadian investment abroad; however, the largest recipients of Canadian outward investments are service industries, such as finance services and insurance, and retailing, most likely driven by market-access strategies (See Figure 4 on next page). In short, Canadian FDI is driven by two main corporate strategies: Natural-resource seeking by mining companies; And market-seeking by banks or financial service providers. Canada investments in developing countries ratifies the importance of Latin America and the Caribbean as region since most of Canadian FDI to the developing world (42%) in 2008 went to Latin America as shown by Table 3 and Figure 5 on the next pages.

7 7 Figure 4. Canadian FDI by Sector FDI from Canada by Sector 50% 45% 40% 35% 30% 25% 20% % 10% 5% 0% Wood and paper Energy and metallic minerals Machinery and transportation equipment Sector Finance and insurance Services and retailing All other industries Source: Statistics Canada Table 3. Canadian Stock of Foreign Direct Investment to Developing Countries (C$ Millions and Percentages) Latin America Eastern Europe Africa Asia Total ,976 20,613 23,327 30,290 (46%) (55.7%) (44.7%) (42%) ,243 13,227 (2.1%) (1.4%) (19.6%) (18%) 635 1,445 2,218 4,019 (3.3%) (3.9%) (4.3%) (5.5%) 9,507 14,403 16,366 25,018 (48.6%) (39%) (31.4%) (34.5%) 19,540 36,983 52,154 72,554 (100%) (100%) (100%) (100%) Latin America includes Haiti and Dominican Republic Source: ECLAC and Statistics Canada

8 8 Figure 5. Canadian Stock of Foreign Direct Investment to Developing Countries (C$ Millions) Canadian Stock of Foreign Direct Investment to Developing Countries 35,000 30,000 25,000 20,000 15,000 10,000 5, Years Latin America Eastern Europe Africa Asia Latin America includes Haiti and Dominican Republic Source: Statistics Canada As mentioned earlier, Latin America is becoming an important destination of FDI from Canada. Without taking into account FDI to the off-shore financial centers OFC of the Caribean, the main recipient countries of Canadian FDI are Brazil (7.5%), Chile (6.0%), Mexico (4.2%), Argentina (2.1%), Peru (1.5%), and the Dominican Republic (1.0%). In fact, if we exclude the OFCs of the Caribbean, Latin America is the main destine of Canadian outward foreign direct investment in the developing world. These data on table 3 and figure 5 suggest that Canadian FDI in Latin America and the Caribbean is a recent phenomenon, taking place mainly in the period. The importance of Canadian FDI in Latin America (excluding the Caribbean) is very significance and the stocks of Canadian FDI have increased steadily over the last decade, as shown by Figure 6 on page 8. The value of investments by Canadian companies in Latin America and the Caribbean more than doubled over , from US$ 18.3 billion to US$ 37.4 billion, which ratifies the view that the Canadian business presence in the region is in a marked process of renewal and expansion.

9 9 Figure 6. Canadian Stock of Foreign Direct Investment to Latin America Canadian Stock of Foreign Direct Investment in Latin 35,000 30,000 25,000 20,000 15,000 10,000 5, Years Latin America Source: Statistics Canada IV. Canadian FDI to Latin America by Destination, Sector, and Investor As stated above, the more dynamic elements driving Canadian FDI appear to be associated with services. Canadian FDI in financial services has responded extremely well as it represented the largest increase in FDI share, and by a large margin. In 1983, only 15% of Canada s FDI came from the financial services industry, whereas by 2006 that share stood at 45%, that is, the share tripled over the period Some of the major Canadian banks, such as Scotiabank, Royal Bank and CIBC are now expanding to include the rest of the Americas (Scotiabank is the third largest bank in Peru). Other institutions, such as management companies (Brookfield Asset Management) and pension funds (Ontario Teachers Pension Fund) are also internationalizing by taking on many more direct investments involving the control of the companies in which they participate. Canadian FDI in natural resources in Latin America has taken place mainly in the mining sector. In fact, natural-resource-seeking investments, such as those in energy, metallic minerals, and wood and paper are among the principal components of Canadian investment abroad. Furthermore, the dominant Canadian mining companies are global leaders: Falconbridge, Inco, Barrick Gold, Placer Dome and Teck Cominco were all found on the 2005 list of top 25 metal mining companies. Canadian mining companies currently account for a world-leading 40% of global exploration expenditure. The Mining Association of Canada (MAC, 2007) has described Canada s importance in the global mining industry in the following manner: Canada received the biggest slice (19%) of global exploration expenditure in 2006; Canada exported more than 1 billion Canadian dollars (Cdn$) of each of aluminum, gold, nickel, copper, zinc, iron ore, uranium, potash and diamonds;

10 10 Toronto has become the mining capital of the world and is the global leader for mining finance with 38% of the world s equity raised in 2006; Vancouver is home to the world s leading cluster of exploration companies (850) and expertise. Investment in the manufacturing sector is the least significant. Indeed, growth in manufacturing as a focus of Canadian FDI seems to be somewhat stifled by the difficult experiences of the principal companies employing efficiency-seeking internationalization strategies. Canada s global leaders firms tend to fall into two main groups, (1) large companies based on natural-resource extraction, traditional services and relatively lowtech manufactures and (2) smaller companies whose internationalization processes are more linked to sophisticated niche activities. The larger Canadian global firms tend to be found in: Natural-resource extraction (Teck Cominco, Barrick Gold, Cameco, Fording, Canfor, Tembec and PotashCorp) and related services (Finning International, Shawcor and CHC Helicopters), Traditional services - financial (Manulife Financial, MacDonald Dettwiler and Atco), commercial (Weston Foods and Couche-Tarde) and transportation (CN Rail and Trimac) Lower-tech manufactures - food and beverages (McCain Foods, Connors Bros. and Cott), paper (Abitibi Consolidated) and chemicals (Nova Chemicals, Agrium and Methanex). Exceptions to this rule are found in autoparts and transportation equipment (Magna International, Linamar and Bombardier), telecommunications equipment (Nortel, Research in Motion) and contract manufacturers (Celestica), among others whose activities relate primarily to medium- and high-tech manufactures. Of the top 10 Canadian companies shown in Table 5, three are financial and five are mining companies. Table 5. Top 25 Canadian Companies Investing in Latin America ($US Millions) Rank Company Sector Investment as of 2003 Reported assets acquired minus disinvestment, Estimated investment as of 2007 Countries 1 Goldcorp Mining 292 7,901 8,193 Argentina, Brazil, Mexico 2 Brookfield Asset Finance 2,143 3,423 6,566 Brazil, Chile Management 3 Yamana Gold Mining 402 3,403 3,805 Argentina, Brazil, Chile 4 Scotiabank Finance 1,639 1,733 3,372 Argentina, Brazil, Chile, Costa Rica,

11 11 Dominican Rep, El Salvador, Honduras, Mexico, Nicaragua, Panama, Peru 5 Barrick Gold Mining 2, ,123 Argentina, Chile, Dominican Rep, Mexico, Peru 6 Ontario Teachers Pension Finance 1,226 1,226 Brazil, Chile Fund 7 Methanex Manufacturing 1,000 1,000 Chile, Trinidad and Tobago 8 Nortel Services Argentina, Brazil, Mexico 9 Teck Cominco Mining Chile, Mexico, Panama, Peru 10 Rusoro Mining Mining Venezuela 11 Nexen Inc. Oil and gas Brazil, Colombia 12 TransCanada Corp Oil and gas Colombia, Mexico 13 Kinross Gold Mining Brazil, Chile, El Salvador 14 PotashCorp Mining Brazil, Chile 15 Agrium Manufacturing Argentina 16 Onex Corp Finance Mexico 17 Quebecor World Manufacturing Argentina, Brazil, Chile, Colombia 18 Finning International Inc Services Bolivia, Chile 19 Sun Life Financial Finance Chile 20 Petrobank Energy & Oil and Gas Colombia Resources 21 Celestica Manufacturing Brazil, Mexico 22 McCain Foods Manufacturing Argentina, Brazil 23 Transcontinental Manufacturing Mexico 24 HudBay Minerals Mining Mexico 25 Iberian Minerals Corp Mining Peru Source: ECLAC Most of Canadian FDI is concentrated in only a few countries of the region, mainly Mexico, Brazil, Chile, Argentina, and Peru. The major group of firms investing in Latin America are resource-extraction companies, especially those in the precious metals sector. In fact, Canadian exploration companies continue to invest heavily in the region (See Table 6 to see which companies operate in Latin America and Figure 7 to see the share of Canadian mining companies in the region). Mining is the single activity in which Latin America in the most prominent region for Canadian FDI. The investments of mining companies are focused on Mexico, Chile, Brazil, Argentina and Peru. For instance, Barrick Gold s South American operations of (total reserves: 38 million ounces of gold) and the Dominican Republic mine (reserves: 18 million ounces of gold) account for over half of the company s overall proven and probable reserves.

12 12 Table 6. Presence of Canadian Mining Companies in Latin America by Assets Company Goldcorp Barrick Gold Principal products Precious metals (gold) Precious metals (gold) Revenues 2006 ($CMillions) Headquarters Location Assets in Latin America 2006 ($CMillions) Latin America Presence 1,900 Vancouver 13,726 Argentina, Brazil, Chile, Dominican Rep, Guatemala, Mexico 6,400 Toronto 3,769 Argentina, Chile, Dominican Rep, Peru Yamana Gold Precious (gold) 169 Toronto 2,345 Argentina, Brazil, Chile, Honduras, Nicaragua Kinross Gold Precious (gold) 1,000 Toronto 941 Brazil, Chile, El Salvador IAMGold Precious (gold) 377 Toronto 831 Ecuador, Guayana, Mexico, Surinam, Peru, other Teck Cominco Base metals (zinc) 6,500 Vancouver 806 Chile, Mexico, Panama, Peru Potash Corp Other (potash) 3,829 Saskatoon 519 Chile Sherritt Base (nickel) 1,100 Toronto 260 Cuba Silver Standard Resources Precious (silver) n.a. Vancouver 164 Argentina, Chile, Mexico, Peru Breakwater Base (zinc) 452 Toronto 138 Chile, Honduras Resources Inmet Base (copper, 1,100 Toronto 16 Panama zinc) Fording Coal Other (coal) 1,800 Calgary 16 Mexico Intrepid Mines Precious (gold) n.a. Toronto 6 Argentina, others First Point Minerals Precious (gold) n.a. Vancouver 4 Honduras, Nicaragua Total Canadian Firms 24,627 23,541 Source: ECLAC

13 13 Figure 7 Along with mining companies, Canadian banks or asset management companies represent the other major group of firms investing in the region in recent years. They have done so in order to offer their financial services in local markets, as is the case for Scotiabank and Royal Bank, or to acquire real estate or infrastructure assets in those markets, as has been the case for Brookfield Asset Management and Ontario Teachers Pension Plan. Canadian manufacturers have also been important market-seeking investors in Latin America and the Caribbean. Prime examples include Quebecor World, McCain Foods, Magna International and Agrium. References Beauregard-Tellier, Frederic Canadian Foreign Direct Investment: Recent Trends. Library of Parliament. Economic Commission for Latin America and the Caribbean (ECLAC) Chapter IV- Canadian FDI in Latin America and the Caribbean. Foreign Investment in Latin America and the Caribbean Foreign Direct Investment in Latin America and the Caribbean. Briefing paper.