July 25th, 2016

Foreign Investment in Latin America

The Overall Picture

On a yearly basis, the Economic Community of Latin America and the Caribbean (CELAC) along with the United Nations publish a joint report of Foreign Direct Investment (FDI) in the region. The following article is based on the 2015 report and seeks to highlight the important dynamics that dominated the region during the year 2014.

Latin America and the Caribbean (LAC) received a total of $158.803 billion dollars in FDI during 2014. Interestingly, the foreign country with the most FDI in the LAC region is the Netherlands at 20% of all capital investment, followed by United States at 17%, and Spain at 10%. Surprisingly, Chinese FDI in the region only accounted for 1% of the total in 2014.

Specific Investments in Latin America and the Caribbean

During 2014, the largest receiver of FDI in the region was Brazil with more than $60 billion dollars. The second and third places were held by Mexico and Chile, respectively, both receiving more than $20 billion dollars; with Colombia ranking fourth in FDI for 2014 at approximately $15 billion dollars. According to the CELAC report, FDI represents an important contribution to the social advancement of the region, given that investors and companies bring innovation, needed capital injections, technological advances, and even higher international production standards to many economic sectors. It is estimated that 60% of the FDI into the LAC region is technology-intensive. This includes mechanization and precision technologies in sectors such as agriculture and manufacturing. The modernization, through integrated technology, of the LAC economies promises to yield higher productivity and profits.

Because of the importance and potential benefits of FDI, national economic promotion agencies throughout the region (e.g. ProColombia and its counterparts) have identified key sectors where sustainable and environmentally friendly investments are needed most. These key sectors are the following: renewable energy at 23%, agribusiness and forestry at 21%, tourism at 15%, and light manufacturing at 12%. As a share of the overall GDP of the LAC region, FDI stands at 2.6% of the total. Obviously, this percentage varies between specific Latin American countries. For example, FDI represents 2.0% of Mexico’s GDP and 1.5% of Brazil’s GDP.

FDI profitability during 2014 averaged 5% in the LAC region, with an estimated $103.877 billion dollars in total income for foreign investors. Based on the reporting by transnational companies, it is estimated that 50% of these gains are repatriated, whereas the other half is reinvested in the region. The South American country with the largest FDI increase during 2014 was Paraguay, whose foreign investments increased by 230%. Similarly, the sectors that received most FDI in the LAC region during 2014 were: the services sector at 47%, manufacturing at 36%, and natural resources at 17%.

Though affected by recent headwinds in strategic sectors, such as the price drop in commodities markets worldwide, Latin American and the Caribbean remains a strong performer and a promising region for foreign investors.

(Read more on Colombia’s Economic Outlook)

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