While the profit growth recorded by multinational enterprises (MNEs) in developed countries remained relatively modest, income generated by firms in emerging market economies, between 2002 and 2011, quadrupled, and enterprises in Latin America and the Caribbean posted the highest returns on their investments, the Columbia Centre on Sustainable Investment (CSSI) stated in a recent report. Infrastructure improvements, combined with robust domestic growth and large natural resource discoveries led MNEs in Latin America and the Caribbean to report the strongest growth during this period. Companies that focused on serving the region’s domestic markets witnessed the highest returns on their invested capital.
As a result, Latin America and the Caribbean have experienced significant increases in greenfield FDI in recent years. The fDi Report 2014, an annual review of FDI by greenfield investment monitor fDi Markets, reveals that in the past year alone, FDI in the region more than doubled. Total greenfield FDI increased from $69.4bn in 2012 to $139.8bn in 2013, and projects initiated by foreign firms increased by 10.2% during the same year.
While FDI into developing countries has significantly increased, CSSI cautioned that it has also become emerging markets’ largest external liability. The CSSI report warned that governments would need to guard against a potential balance-of-payments crisis.
“FDI income is now higher than portfolio or other investment income, and one of the largest items in the balance of payments as a whole,” the CSSI cautioned. “This should be a reminder that FDI is a financial liability that needs to be repaid. It remains a powerful instrument to change a host country’s production structure and raise productivity, but not to alleviate external imbalances over the long term. Between 2008 and 2011, FDI income originating in Latin America was almost double the surplus in goods trade. In other words, the profits of MNEs are a major determinant of the external constraint for the economies of Latin American and other developing countries, and could play a major role in any potential balance-of-payments crisis, as loans and portfolio flows have in the past.”