Shannon K. O'Neil

Latin America's Moment

O'Neil analyzes developments in Latin America and U.S. relations in the region.

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Foreign Direct Investment in Latin America Holds Steady in 2013

by Shannon K. O'Neil
July 2, 2014

Robots weld cars at the Ford Motor Company's Sao Bernardo do Campo facility in Sao Bernardo do Campo, June 14, 2012 (Paulo Whitaker/Courtesy Reuters). Robots weld cars at the Ford Motor Company's Sao Bernardo do Campo facility in Sao Bernardo do Campo, June 14, 2012 (Paulo Whitaker/Courtesy Reuters).

In 2013, foreign direct investment (FDI) in Latin America reached $185 billion according to the latest ECLAC report, continuing the slight upward trend of the last three years. Brazil maintained its number one position as the largest FDI destination, raking in $64 billion (over one third of all regional FDI). Mexico came in second, with some $38 billion (boosted by the $13 billion purchase of the rest of Modelo by Belgian based Anheuser-Busch InBev, a company run by Brazilians). Mexico’s Pacific Alliance partners—Chile, Colombia, Peru—also had a fruitful year, with a combined $47 billion in investment. And despite its economic woes, Argentina garnered $9 billion.

Regionally, more than 38 percent of the total flow went to the service sector—including finance, telecommunications, and electricity. Manufacturing ranked a close second with over a third of the inflows, and the remainder going to natural resource production (26 percent). These flows varied by country. For example, 70 percent of FDI in Mexico went into manufacturing, while in South America, excluding Brazil, most of the flows targeted natural resources.

For those hoping FDI will drive employment, productivity, and improve well-being more generally, the “quality” of FDI matters as much as the quantity. Investments in natural resources have fewer economy wide benefits when compared to those in manufacturing, technology, or some services. For instance, a 2012 study by ECLAC estimates that construction, commerce, and certain types of manufacturing create some seven jobs on average for every US$1 million invested, while mining and petroleum FDI generate just one job for every US$2 million invested.

On this front, the news is somewhat positive. Within the manufacturing sector, FDI for medium level technology projects grew–comprising roughly 84 percent of total investment (flows into low-tech areas shrunk, while those into high-tech remained relatively flat).

ECLAC also measured the accumulated foreign direct investment. Here Latin America fares well vis-à-vis other emerging markets, with its 32 percent of GDP average besting Russia (25 percent), India (12 percent), and China (10 percent). Chile tops this list, with its FDI stock totaling 77 percent of GDP. This deep foreign investment base also means that outward flows of profits are significant. In 2013 they averaged 81 percent of the value of FDI inflows–meaning transnational corporations with operations in the region have gotten back almost as much in profits as they invested.

Perhaps one of the most striking trends in Latin America in recent years has been the amount of investment among neighbors. In 2013, Ecuador’s largest outside investments came from Uruguay, while El Salvador’s emanated in Panama. Mexico was among the top four countries investing in Brazil, Costa Rica, Ecuador, Honduras, Nicaragua, and Paraguay. While the majority of Latin America’s FDI still comes from the United States and Europe, of the top twenty mergers or acquisitions in the region, seven of the buyers were from Latin American countries.

ECLAC, "Foreign Direct Investment in Latin America and the Caribbean 2013"

ECLAC, “Foreign Direct Investment in Latin America and the Caribbean,” 2013.

This trend reflects the growing influence and power of Latin American countries upon their neighbors’ economies. Historically, analysts have looked to the United States, Europe, and more recently China for needed funds in Latin America, in part due to lackluster domestic savings rates near 18 percent (versus 52 percent in China). But as these trends show, it is increasingly Latin American nations that may shape the direction of jobs and ultimately growth in the region.

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