1. FDI and Economic Growth in Latin America Andrs Lpez Review Seminar The Investment for Development Project 9-10 May 2003, Geneva, Switzerland Consumer Unity & Trust Society (CUTS)

2. FDI and Economic Growth in Latin America

1.FDI inflows in Latin America in the 90s

2.FDI trends in main host regions

3.The available evidence on FDI impact in Latin America

4.Conclusions and perspectives

3.

1.FDI inflows in Latin America in the 90s

4. The economic policy framework

Trade liberalization

Regional integration agreements

Privatizations

FDI deregulation and liberalization

Few cases of selective policies

Incentives for FDI:

• Export-oriented maquila, EPZ- (Mexico, Central America)

• Inward-oriented (Brazil)

5. Latin America has been a key host region for FDI in recent years

FDI inflows by host region/country, 1984-2001 (U$S million and %)

Source: UNCTAD 6. FDI inflows by host country, 1990-2001 (U$S million) Source: UNCTAD FDI inflows, top 10 developing countries 7. FDI influence in Latin American host economies grew strongly in the 90s Ratio of inward FDI flows to fixed capital formation, by host region /country(%) Source: UNCTAD 8. FDI influence in Latin American host economies grew strongly in the 90s (II) Ratio of inward FDI stock to GDP by host region /country(%) Source: UNCTAD 9. M&As were the predominant mode of entry Ratio of cross-border M&As to FDI inflows, by host region/country (%) Source: UNCTAD 10.

2.FDI trends in main host regions

11. MERCOSUR

• Main destination sectors:

• • Services: public utilities, banking, commerce, etc.

• • Manufacturing industry: less important than in the past (automobiles, food and beverages, chemicals)

• • Mining and oil (Argentina)

• Mainly market seeking investments (including intra-regional exports)

12. Mexico and Central America

• Main destination sectors:

• • Manufacturing industry (mainly maquila and assembly activities): automobiles, electronics, textiles, clothing

• • Tourism

• Export oriented activities (efficiency seeking)

• Main investor: USA

13. Andean Community

• Main destination sectors:

• • Mining, oil (export oriented)

• • Public utilities, banks, infrastructure (market seeking)

• • Manufacturing industry -only in Colombia and Venezuela- (market seeking and regional exports)

• Chile

• Main destination sectors:

• • Mining (export oriented)

• • Banking, public utilities (market seeking)

14.

3.The available evidence on FDI impact in Latin America

15. Balance of payments

Lower volatility than portfolio inflows

Short-term positive impact due to increased capital inflows

Medium-term negative impacts due to increased profit remittances and (in many countries) trade balance deficits

16. Foreign Portfolio and Direct Investment in Argentina Convertibility crisis Tequila crisis 17. Profit remittances in Argentina 18. Economic restructuring

Efficiency and productivity gains

Introduction of new product technologies, organizational techniques and quality standards

Decreasing backward linkages (increasing import content)

Few investments in high-tech sectors (exceptions: Brazil, Mexico maquila-, Costa Rica Intel-)

19. Investment

Crowding-out or neutral effects predominate (in Asia, crowding-in and neutral effects are the norm)

• Reasons:

• • M&As vs. greenfield investments

• • Passive vs. selective policies

• • Market failures in financial markets

• • Macroeconomic instability

Crowding-in effects exist when FDI stimulates new investments that would not have taken place in its absence.

Crowding-out effects take place when FDI displaces domestic producers or pre-empt their investment opportunities.

20. Exports

MERCOSUR:

• TNCs seemingly have not contributed to exports increase nor to exports diversification

Mexico:

• TNCs have made a major contribution to Mexican exports (including high-tech activities),but ...

• • Excessive concentration in the US market

• • Few linkages with the local economy (very high import content)

• • Competition with low wages countries (e.g. China)

21.

Mixed evidence

There are almost no studies available for the 90s

TNCs linkages with host economies have tended to decrease in the 90s

TNCs affiliates do rarely engage in R&D activities

Spillovers for host economies 22. Environment

Improved environmental management in TNCs affiliates (but environmental islands?)

Little evidence of pollution havens (possible exception: mining) and races to the bottom (although environmental regulations are generally lax)

23. Privatizations

Higher efficiency levels and increased investments in public utilities

Technological modernization (e.g. telecoms)

High tariffs and weak regulatory systems in many cases

24. Banking

Higher efficiency but no reduction in banking costs (exception: Chile)

No impact on credit availability

Foreign banks adopt conservative policies regarding credit

Positive effects on financial system stability? (what happened in Argentina?)

25.

4.Conclusions and perspectives

26. Perspectives for FDI in Latin America

A sharp reduction in FDI inflows took place in 2002, due to cyclical as well as structural factors:

• Global downturn in FDI

• US recession

• Lower economic growth in Brazil and Chile

• Argentinas crisis

Expectedly, countries will have to compete more fiercely for FDI, but FDI quality (more than FDI quantity) should be the main target

27. Policy recommendations

FDI has the potential to positively contribute to economic development, but so far its impact in Latin America has been below initial expectations

Pro-active policies where FDI is guided towards those activities and sectors that most benefit local development- are needed

Some policy objectives:

• Exports increases

• Fostering domestic linkages

• Attraction of FDI to knowledge intensive activities

• Fostering FDI spillovers

28. Policy recommendations (II)

Pro-active policies work well only if other conditions are met:

• Human capital availability

• Technological infrastructure

• Adequate institutional frameworks and strong State capabilities

Spillovers only arise if domestic firms have access to:

• Credit

• Technical assistance

• Human resources

• Information

Levelling the playing field for domestic firms