Foreign investment in Latin America (Latam) and Caribbean plummeted to a decade low in 2020 and the small uptick expected this year falls short of the global average, according to a recent report by the UN’s regional commission.
The findings by the UN Economic Commission for Latin America and the Caribbean (ECLAC) have prompted calls for “a profound transformation” of public policies to channel foreign direct investment (FDI) towards activities and sectors that bolster sustainability productivity, sustainability and innovation.
ECLAC’s recommendations tackle not only FDI’s diminishing role in the region’s growth, but also the sobering finding that it has not created the expected spillover benefits.
“There is no evidence that FDI has contributed to significant changes in the region’s productive structure in the past decade and that it has been a catalyst for transforming the productive development model,” the report states.
Challenging accepted wisdom
Overall FDI into Latam and the Caribbean was $105.5bn in 2020, which is the lowest volume since 2010 and caps a downward trend that started in 2013. The report recognises that FDI has “made significant contributions in the region”, but improving labour productivity — which ECLAC notes is just 19% of that of the US — is not one of them.
Its executive secretary, Alicia Bárcena, told fDi that over the past decade, the “vast majority of flows were channelled towards sectors that were already consolidated … and where transnationals have been playing a prominent role for decades.” These include automobile, electronics, steel, telecommunications and financial services.
“Inflows were strongly influenced by the international dynamics of commodity prices and privatisation processes,” she continued. “Accordingly, FDI did not act as a catalyst for major changes in the region’s production dynamics, [which] would be desirable.”
When asked if this challenges the accepted wisdom that FDI is a force for good, Ms Bárcena’s response is matter-of-fact. “FDI is the result of companies’ strategies … to supply our markets, gain access to natural resources, improve efficiency or access some strategic resource. [It’s neither] a force for good or the opposite — it is an economic reality.”
To boost productivity, Ms Bárcena has called on the region’s governments to establish incentives and rules to guide foreign investment into the development of supply chains, foster technological spillovers, and build local knowledge and capabilities.
Enhancing FDI’s role in sustainable development is also part of the solution. The report identifies eight sectors linked to the green economy — including sustainable tourism and e-mobility — where the region could benefit from foreign companies’ know-how and business models.
The ‘reprimarisation’ risk
Implementing these recommendations is complicated by the challenging economic backdrop. ECLAC does not expect regional economic growth to hit pre-pandemic levels this year. Instead, it believes FDI inflows will not exceed 5% growth — significantly less than the 10–15% global FDI recovery forecast by Unctad for 2021.
Ms Bárcena also noted that the US and EU recovery plans promote the development of physical and digital infrastructure, and sustainability, which could attract new foreign investment. But in Latam and the Caribbean, like many other developing countries, tighter budgets mean efforts are focused on resolving economic and social emergencies.
The report highlights another risk posed by rising commodity prices, warning that some countries could ‘reprimarise’ to boost short-term growth, undoing the progress made in reducing reliance on natural resources. “This means a return to an economic model that has not been able to guarantee a sustained increase in gross domestic product and productivity over time,” the report states.
Latam and the Caribbean did experience some positive developments last year. The Bahamas, Barbados, Ecuador, Paraguay and Mexico bucked the global trend and managed to grow FDI volumes in 2020 compared to 2019, according to ECLAC data. The region maintained its decade-long standing as the second-biggest destination for renewable energy investments, trailing only Europe.
This is important not only because it helps the transition to a more environmentally sustainable development model, “but also because [it] offers an opportunity for incorporating new technologies and creating networks of local suppliers,” said Ms Bárcena.
Notable greenfield announcements last year include Turkish firm Anex Tourism Group’s $1.8bn hotel investment in Punta Cana in the Dominican Republic, and General Motors’s $1bn expansion of its Ramos Arizpe plant in Mexico to build electric vehicles. Sweden’s Girindus Investments also committed $3.2bn to develop a first-of-its-kind pulp mill in Paraguay — the country’s largest private investment to date.