FOREIGN INVESTMENT IN LATIN AMERICA AND THE CARIBBEAN 2004 REPORT Presentation by Mr. José Luis Machinea, Executive Secretary of ECLAC Santiago, Chile, 15 March 2005
TOPICS COVERED IN THE 2004 REPORT 1. Chapter I: Regional overview of FDI - FDI trends in 2004 - Trends among the region s leading firms 2. Chapter II: FDI in Brazil 3. Chapter III: FDI in the Southern Cone s electric power sector 4. Conclusions
1. Chapter I: Regional overview of FDI (a) FDI trends in 2004 Recovery of worldwide FDI flows thanks to an increase in flows to developing countries China: the top developing-country recipient, with disparate effects on different Latin American and Caribbean countries Flows to Latin America and the Caribbean grew (by 44%) for the first time in four years Services received the bulk of FDI flows
World FDI flows (Billions of dollars) 1,600 1,400 1,200 1,000 800 600 400 200 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 World Developed countries Developing countries (incl. E & C Europe) In 2004, FDI surged in developing countries
Flows to China and to Central and Eastern Europe continued to grow; those to Asia and to Latin America and the Caribbean rebounded strongly FDI flows to developing countries and to Central and Eastern Europe (Billions of dollars) 120 100 80 60 40 20 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Latin America and the Caribbean Asia-Pacific (excl. China) China Central and Eastern Europe Africa
100 FDI flows to Latin America and the Caribbean* (Billions of dollars) 90 80 70 60 50 40 30 20 10 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 * Excluding financial centres. The start of a new FDI boom?
6 FDI flows as a percentage of GDP, 1992-2004* 5 4 3 2 1 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 * 3-year moving average Source: IMF Africa Asia and the Pacific (excl. China) Central and Eastern Europe Latin America and the Caribbean China
China s success in attracting FDI and its effects on Latin America and the Caribbean New determinants: admission to WTO, expiry of the Agreement on Textiles and Clothing, growing success in intermediate- and high-technology sectors Enhanced benefits: export growth, industrial and technological upgrading of the Chinese economy Challenge for Mexico and the Caribbean Basin Keener competition for efficiency-seeking FDI Loss of export market share Trade (and investment?) opportunity for South America: increase in natural resource exports to China
FDI flows to Latin America and the Caribbean: Two realities (Billions of dollars) 70 60 50 40 30 20 10 0 1990 1992 1994 1996 1998 Mexico and Caribbean Basin 2000 2002 South America 2004 Stability in Mexico and the Caribbean Basin; volatility in South America
FDI flows to Mexico and the Caribbean Basin, 1990-2004 30 25 20 15 10 5 (Billions of dollars) 0 1990 1992 1994 1996 1998 2000 2002 Central America Caribbean Mexico 2004
FDI flows to South America, 1990-2004 (Billions of dollars) 60 50 40 30 20 10 0 1990 1992 1994 1996 1998 2000 2002 2004 Chile Andean Community Mercosur
FDI/GDP in South America, 2001-2004 (Percentages) Argentina Paraguay Uruguay Venezuela Colombia Peru South America Brazil Bolivia Ecuador Chile 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5
FDI/GDP en Mexico and Central America, 2001-2004 (Percentages) Guatemala El Salvador Mexico and Central America Mexico Honduras Costa Rica Panama Nicaragua 0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5 4,0 4,5 5,0 5,5 6,0 6,5
FDI/GDP in the Caribbean, Surinam Haiti Barbados Dominican Rep. Dominica Guyana Antigua and Barbuda Jamaica Trinidad and Tobago Saint Vincent and the Grens. Saint Lucia Belize Grenada Saint Kitts and Nevis 2001-2004 (Percentages) -6-5 -4-3 -2-1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
40 Latin America and the Caribbean: FDI by country of origin, 1996-2003 (Percentages) 35 30 25 20 15 10 5 0 1996-1998 1999-2001 2002-2003 1996-2003 United States EU (excl. Spain) Spain The drop in FDI from Spain strengthened the United States position as the biggest individual investor
70 Latin America and the Caribbean: FDI by target sector, 1996-2003 (Percentages) 60 50 40 30 20 10 0 1996-1998 1999-2001 2002-2003 1996-2003 Natural resources Manufacturing Services The service sector has traditionally been the top recipient, although the proportion of FDI in manufacturing has risen in recent years
FDI as manifested in TNC sales, 2003 (Consolidated sales of the top TNCs) Firm Country Sector Sales in LAC (millions of dollars) % of global sales 1 General Motors Corp. United States Automotive 14,317 7.3 2 Telefónica Spain Telecom. 14,112 44.7 3 Wal-Mart Stores United States Commerce 12,031 4.6 4 Volkswagen AG Germany Automotive 10,457 10.6 5 DaimlerChrysler AG Germany Automotive 10,123 6.5 6 Delphi Automotive Systems United States Motor vehicle parts 10,040 35.7 7 Repsol YPF Spain Oil/gas 7,345 17.5 8 Endesa Spain Electricity 7,257 38.7 9 Ford Motor Co. United States Automotive 7,168 4.4 10 Telecom Italia SpA Italy Telecom. 6,765 19.2
4.0 3.5 3.0 2.5 2.0 1.5 1.0 FDI can influence the Latin American and Caribbean region s global market share (Market share of world imports, in percentages) 1985 1986 1987 1988 1989 1990 1991 1992 Mexico and Caribbean Basin 1993 1994 1995 1996 1997 1998 1999 South America 2000 2001 2002 For example, the global market share of Mexico and the Caribbean Basin has grown thanks to FDI in non-natural-resource-based manufactures (automotive and electronics industries)
Chapter I: Regional overview of FDI (b) Trends among the region s leading firms Smaller TNC share of the total sales and exports of the region s leading firms Rise of local private firms, emergence of trans-latins Resurgence of State-owned oil and gas firms New services: a budding opportunity, although projects are few and FDI volumes are very low
Latin America: Total sales of the top 500 firms, by ownership, 1990-2003 (Percentages) 50 45 40 35 30 25 20 15 10 5 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Foreign private Local private State-owned Foreign firms are losing ground
60 TNC share of the operations of the region s leading firms (Percentages of sales in each category*) 50 40 30 20 10 0 Among the top 500 Among the top 25 in the primary sector * Percentages of exports in the case of the top 200 exporters Among the top 100 manufacturers Among the top 100 service providers 1998-1999 2002-2003 Among the top 200 exporters Since the end of the FDI boom, the TNC share of sales and exports has declined in all sectors
The rise of trans-latins (Leading firms by sales, 2003) Firm Country of origin Sector Sales (millions of dollars) 1 Petrobras Brazil Hydrocarbons 33,138 2 Telmex Mexico Telecommunications 10,399 3 América Móvil Mexico Telecommunications 7,649 4 CEMEX Mexico Cement 7,167 5 Companhia Vale do Rio Doce Brazil Mining 6,729 6 FEMSA Mexico Soft drinks/beer 6,669 7 Odebrecht Brazil Construction 5,998 8 Grupo Carso Mexico Industry/Commerce 5,045 9 Gerdau Brazil Steel 4,627 10 Grupo Alfa Mexico Petrochemicals 4,164
The resurgence of State-owned firms as a result of... Strong demand for commodities (hydrocarbons, metals) and a consequent upturn in their prices International influence of PDVSA (Bolivarian Republic of Venezuela) Political circumstances (Bolivia) and the response to a crisis situation (Argentina) led to the establishment of State-owned hydrocarbons firms in these countries
Attracting FDI in new services Call centres, shared services, information technologies, regional headquarters, R&D FDI in new services: efficiency-seeking and, in some cases, regional market-seeking Represents an opportunity that the region has not seized adequately in terms of attracting highvolume, high-quality FDI. The region is lagging behind other developing countries in this regard (it receives only 3% of FDI in these services and 6% of all call-centre projects).
2. Chapter II: FDI in Brazil Importance of FDI Predominance of a local and regional market-seeking strategy Government interest in promoting efficiency-seeking export-oriented FDI
35 30 FDI inflows, 1980-2004 (Billions of dollars) Beginning of privatizations Privatization of Telebras 25 20 Amendments to the Constitution Devaluation of the real 15 10 5 External debt crisis Beginning of MERCOSUR Real Plan Automotive regime Interbrew- AmBev transaction 0 1980 1982 1984 1986 1988 1990 1992 The latest FDI cycle is accounted for by market expansion, an upturn in the economy, stronger guarantees and new opportunities in privatized services and other sectors 1994 1996 1998 2000 2002 2004
TNC shares in Brazil s total sales and foreign trade, 1992 and 2000 (Percentages) 70 60 50 40 30 20 10 0 Sales Exports Imports 1992 2000
Brazil: FDI, by recipient sector and country of origin, 1996-2004 (Percentages) NATURAL RESOURCES 4.0% MANUFACTURES 27.9% OTHER 36.9% UNITED STATES 21.8% SERVICES 68.1% NETHERLANDS 10.5% PORTUGAL 6.6% FRANCE 7.9% SPAIN 16.3% Services have received the lion s share of FDI, although manufactures have gained ground in recent years. The United States is the largest investor; Spain and Portugal played an important role during the FDI boom.
Elements of an FDI policy Reduce the Brazil cost : mitigate factors having a direct impact and those linked to risk and uncertainty Clearly define the role of FDI: improve the regulation of services and implement the new industrial policy Create an agency to administer the new FDI policy Identify beneficial opportunities Attract the relevant TNCs Evaluate the benefits on an ongoing basis
3. Chapter III: FDI in the Southern Cone s electric power sector Causes of the electricity crisis: Regulatory uncertainty and risk Weather-related factors (drought) Macroeconomic factors (devaluation) Problems in some TNCs operating in the region
Energy integration in the Southern Cone is crucial for electricity markets The Southern Cone must increase its electric power capacity. One way to do this is to attract new FDI from new agents such as petroleum firms interested in integrating gas and electric power activities. Governments can implement policies to promote the formation of a regional market in line with the region s development strategy. This also requires coordination among the countries energy policies.
4. Conclusions FDI is increasing, but outstanding challenges remain Goals: Improve the quality of FDI and enhance its impact (technology transfer, deepening of production linkages, human resources training and local business development) Improve the business climate to boost TNC activity Heed signs of discontent: disputes brought before international tribunals (mainly by TNCs in Argentina) Design targeted policies to promote FDI Evaluate the benefits in the context of each country s development strategy
4. Conclusions The biggest challenge for Latin America and the Caribbean, apart from continuing to increase FDI inflows, is to enhance the impact of FDI by defining national strategies to facilitate its entry. The countries must also provide for the ongoing evaluation of the effects of FDI and implement targeted policies to improve its quality.
FOREIGN INVESTMENT IN LATIN AMERICA AND THE CARIBBEAN 2004 REPORT Presentation by Mr. José Luis Machinea, Executive Secretary of ECLAC Santiago, Chile, 15 March 2005