FDI to Latin America remains strong in 2012

 

Inflows of foreign direct investment (FDI) to Latin America in the first six months of 2012 rose by 8% year on year, while FDI abroad by Latin American enterprises soared by 129% in the same period, according to data released on October 23rd by the UN Economic Commission for Latin America and the Caribbean (ECLAC). Although the rise in FDI inflows was somewhat uneven across the region, the overall positive trend continues to highlight the region's attractiveness as an investment destination, which stems from its economic stability and relative dynamism, coupled with its significant energy and mineral resources (against a backdrop of persistently high commodity prices). Booming FDI outflows in turn reflect the increasing dynamism and internationalisation of the emerging transnational companies (known as "multilatinas") based in the region.

Inflows of FDI to the region continued the upward trend observed in 2011 (when, at US$153.5bn, they surpassed their 2008 peak of US$137bn and represented 10.2% of total FDI worldwide, up from 6.9% in 2009), reaching US$94.3bn in the first six months of 2012. This compares with US$87.3bn in first-half 2011 and supports our forecast scenario of another solid year for FDI to the region, with a total of US$148m expected for 2012, despite the current environment of sluggish global growth and financial market volatility.

Uneven performance across the region

The positive general FDI trend observed in the first half of the year hid uneven performance at the country level. Although the Dominican Republic (up by 145% year on year), Chile (80%), Bolivia (53%), Guatemala (47%), Argentina (42%) and Peru (31%) all saw strong climbs in FDI, investment inflows were down in El Salvador (by 60%), Nicaragua (20%), Venezuela (20%) and Mexico (19%). However, rises in FDI in important investment destinations such as Chile, Argentina, Peru and Colombia (up by 18%), coupled with a solid performance by Brazil (where FDI decreased marginally—by 2%) compensated for falls experienced elsewhere and contributed to the region's overall good performance.

Brazil confirmed its primacy as the preferred investment destination in the region, with its US$43.2bn accounting for 46% of all FDI received by Latin America in first-half 2012. It was followed by Chile with US$12.3bn, which overtook Mexico and consolidated its position among the top regional FDI recipients. Mexico (US$9.6bn), Colombia (US$7.8bn), Peru (US$5.4bn) and Argentina (US$5.4bn) also confirmed their attractiveness for foreign investors, benefiting from a combination of fairly good business environments (with the exception of Argentina), competitive advantages in manufacturing (in the case of Mexico) and abundant natural resources. Mexico's declining trend from 2011 will be reversed in the second half of the year, when the acquisition of Grupo Modelo by a Brazil-based brewery, AmBev (controlled by Belgium's Anheuser-Busch InBev), at a cost of US$20.1bn, will be taken into account.
The Dominican Republic was the main investment destination in the Caribbean, receiving US$2.4bn in FDI in the first half of the year. The impressive 145% year-on-year rise reflected the acquisition by AmBev of Cervecería Nacional Dominicana (CDN) for US$1.2bn. Panama and Costa Rica lead Central America as FDI destinations, accounting for US$1.4bn and US$1bn respectively.
Venezuela continued to lag at the bottom of the league in comparison with its peers, with US$1.9bn of FDI in first-half 2012, down by 20% year on year. Although this performance was probably exacerbated by uncertainties surrounding the October election outcome, it also reflected the ongoing deterioration in the country's business environment: Venezuela ranks 80th out of 82 countries in the Economist Intelligence Unit's business environment rankings for 2013-17.
Although we expect FDI to the region to continue its positive trend and reach a new record of US$196.5bn by 2016, we see the low percentage of total inflows to technology and other high value-added sectors as a worrying feature that is set to continue unless the region improves its innovation ecosystem and human resource base to attract such investment. This is even more urgent given the weak growth prospects in the forecast period for the euro zone, which has been traditionally a key source of FDI in higher value-added sectors.

Multilatinas continue to expand, but are limited to a small number of countries and sectors

Reversing the decline experienced in 2011 (when they fell to US$22.7bn, from US$44.9bn in 2010), FDI outflows from the region increased by 129% in the first half of 2012, with a total of US$21.4bn invested abroad, compared with only US$9.3bn a year earlier. The upsurge was mainly because of Mexican and Chilean multilatinas, which respectively invested abroad US$11.5bn (up by 111% year on year) and US$10.2bn (up by 113%), amounts similar to their total investment abroad for the whole of 2011.
Brazilian FDI outflows continued their negative trend of 2011, with net borrowings granted by subsidiaries abroad to Brazilian parent companies increasing, and capital contributions being cut at home—which resulted in a negative balance for FDI outflows of US$2.7bn. This does not point to less dynamism by Brazilian multinationals operating in international markets, but an increased focus on domestic markets amid an uncertain global economic outlook.
The data for the first six months of the year highlight the fact that the multilatinas remain concentrated in a handful of countries and sectors, which makes flows quite volatile over time. Meanwhile, ECLAC highlights how the process of internationalisation of Latin American companies has entered a completely different phase since the middle of the last decade, with increased activities and presence abroad—a trend that we expect to continue.

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