ECLAC to Latin America: get proactive to get quality investment

Details: Michael Schwartz; Category: Trends & Forecasts; 28 May 2007; 11056 views

The UN Economic Commission for Latin America and the Caribbean recently published a report pointing out that foreign investment in Latin America and the Caribbean increased in 2006. Whether the increase matches expectations or not is another matter. According to one leading critic it does not and many companies, particualry in the ICT sector appear to be voting with their feet...

The UN Economic Commission for Latin America and the Caribbean report "Foreign investment in Latin America and the Caribbean" makes the case that some improvement in the investment climate has taken place in the region's investment patterns. However, it also conceeds that although progress has been made, the region lags behind the rest of the world.

Competition among countries worldwide for quality Foreign Direct Investment (FDI) is increasingly intense. In response, a growing number of countries are adopting proactive policies to assure that these capital inflows are in line with national development strategies and goals. The report presents an overview of successful experiences from outside the region and diverse steps to close the gap with world leaders in attracting quality foreign investment.

In ECLAC's view, Latin American and Caribbean governments have previously taken a passive approach to policies in this area, with resulting weaknesses in securing this type of investment. Latin American and Caribbean countries are now beginning to take a more proactive stance towards assertive, integrated policies in order to attract foreign direct investment. And yet, in most cases, the institutional framework to promote foreign investment remains weak.

According to Miami Herald and El Nuevo Herald columnist, Andres Oppenheimer, first impressions in the report are deceiving. Digging deeper, it reveals that while foreign investments worldwide grew by 34 percent, in the CALA region the growth rate was a paltry 1.5 percent in dollar terms.

It gets worse. Among other findings are:

Latin America and the Caribbean are getting an increasingly smaller share of worldwide foreign investments, which are mainly going to the industrialized world. In the early 1970s, the region got 17 percent of all world foreign investments. From then on, the percentage went down in the 1980s, rose to 16 percent in the late 1990s and has been declining since.
In 2006, the region got only 8 percent of all world investments, the second lowest percentage in 15 years.
The region's share of investments going to developing countries has fallen even more dramatically, as China, Southeast Asia, India and Eastern Europe are rapidly outpacing it. While Latin America received 47 percent of all foreign investments to the developing world in the early 1970s, its share dropped to about 27 percent last year.
While foreign investments to South America are generally aimed at the purchase of raw materials and foreign investments in Mexico and Central America are usually geared at producing manufactured goods more efficiently, there is very little investment anywhere in the region in industrial research and development aimed at producing higher-value-added goods.

The countries that got by far the biggest share of foreign investment were Mexico, Brazil and Chile, which together accounted for more than 60 percent of all foreign investments in the region. Measured in relation to the size of their economies, the biggest foreign investment recipients were Panama, Trinidad and Tobago and Uruguay.

ICT companies pull out

The report also highlights the fact that there has been a loss of interest by multinational companies in the region. Among the multinational firms in the Telecoms sector that have left the region or significantly reduced their operations, the report cites France Telecom, Verizon, BellSouth and AT&T.

In conclusion, the report itself suggests that successful policies to attract FDI must take three areas into consideration: national development strategy objectives; comparative advantages of the host country; and investor needs subject to the policies and budget limitations of the recipient country. The report states that active polices to promote foreign investment should foster coordination between the private sector and government institutions, including the creation of investment promotion boards and other public agencies with sufficient economic and human resources to carry out this process.

But in his rather different conclusion, Oppenheimer suggests it will remain hard for Latin America to attract foreign investments, or lure back the more than $400 billion that its own citizens have deposited in offshore banks and real estate abroad, when most of the headlines coming out of the region talk about nationalizations and other measures that scare away investors.

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