Latin Americas Decade - FDI Trends and Perspecives

Latin America’s Decade? FDI trends and perspectives

April 2012

Table of contents

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Latin America’s Decade? FDI trends and perspectives www.ocoinsight.com

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Introduction 1 Economic overview of Latin America 2 What is the panorama of FDI in Latin America? 4 Investment climate in Latin America 6 Source and destination markets 10 Who is investing where? 12 Latin America as an FDI source market 13 Capitalising on the rise of Latin America 15

Over the last decade, most Latin Americans celebrated the 200

th anniversaries of their

independence from Spain. After two centu-ries plagued by economic crises, military dictatorships, fiscal populism and economic stagnation, the region is now emerging as an haven of economic growth in the midst of global uncertainty. In a historic about-turn, the Head of the International Monetary Fund (IMF), Christine Lagarde, visited the region last year to gather support to contain the effects of the euro-debt crisis, while praising the political and economic stability the region has reached in the present decade

1. Other

global thought leaders, such as Luis Alberto Moreno, Head of the Inter-American Development Bank (IDB), have been popularising the idea that we are living now in the “Decade of Latin America”

2.

As each day passes, this idea of a Latin American decade is garnering more atten-tion from investors, analysts and business-men alike. In 2010, The Economist ran a special report called “Nobody’s backyard” drawing attention to the economic and polit-ical transformation the region is undergoing, currently materialised in economic growth and increasing inflows of FDI

3. In fact, ac-

cording to the Economic Commission for Latin America and the Caribbean (ECLAC), the region grew by 4.3% in 2011, resulting in a 3.2% increase in the region’s per capita GDP. Additionally, FDI to Latin America rose by an estimated 3.5% in 2011 to USD 216 billion. And, even in the midst of unfavourable international conditions, the ECLAC is now forecasting regional economic growth of 3.7% for 2012

4.

The region has an exciting decade ahead. Brazil, Latin America’s leading economy, already surpassed the United Kingdom as

the world’s sixth-largest economy in 2011, and the region’s economic giant is expected to overtake all European economies when it surpasses Germany in 2020

5. As many

people turn their attention to this year’s Olympic Games in London, many business leaders and investors will also be looking further ahead to the opportunities offered by the 2014 FIFA World Cup and 2016 Olympic Games in Rio de Janeiro. While both events will take place in Brazil, the FDI opportunities and investor interest these games will evoke are certain to extend to other markets in the region, which are also increasingly top of mind among investors.

In this paper, we examine the opportunities arising from the emergence of Latin America in the international economy. This comprises an economic and political outlook of the region, placing special emphasis on the divergent economic realities of this complex and diverse region. We then provide an in-depth analysis of the FDI flows and statistics to reveal the main trends and opportunities from the investment perspective. Finally, we will provide an analysis of the different countries with regards to their business climate and attractiveness for doing business. Based on all these approaches, we intend to come up with the general implications that might guide strategies for doing business and tapping into opportunities in Latin America.

Introduction

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1. Bloomberg: “IMF’s Largarde seeks Latin America help in historic about-turn”, 28/11/2011 2. Inter-American Development Bank: “IDB calls on Latin America and the Caribbean to cut poverty to 10% of population by 2025, 27/5/2011 3. Economist: “Nobody’s Back Yard”, 9/9/2010 4. Economic Commission for Latin America: “Preliminary overview of the Economies of Latin America and the Caribbean”, December 2011 5. BBC: “Brazilian economy overtakes UK’s, says CEBR”, 26/12/2011

"We are targeting architecture, construction and engineering firms already working in Brazil which are looking forward to the Olympic Games and the FIFA World Cup” Juan Balparda, Head of Investment Uruguay XXI

In 2011, the debates over fiscal consolidation in the United States, the debt crisis in the Euro-zone countries, and even the contraction that followed the earthquake in Japan, all helped to create an environment of economic uncertainty throughout the developed world. However, the developing economies as a whole expanded at a 6.1% rate in 2011, with China, in particular, presenting a robust growth of 9.1%, albeit slightly slower than in the previous year. The performance of the emerging Asian economies counteracted the negative trends from the developed world, and thus, the global economy reached a positive growth of 2.8%. In this context, Latin America and the Caribbean followed the trend of other emerging economies, presenting an economic growth rate of 4.3% in 2011, which expanded the per capita GDP by 3.2%. Although this is a slower pace when compared to figures of 2010, it is overall positive when compared to the performance of the developed economies. It is important to note that such economic growth was

uneven across the region, with South America and Central America presenting expansions of 4.6% and 4.1% respectively, while the Caribbean grew a significantly slower rate of 0.7%. Likewise, there are significant differences when statistics are disaggregated at country level. Panama, Argentina, Ecuador, Peru and Chile were the fastest growing economies with economic growth rates above 6%, while Brazil, the regional economic giant, achieved a moderate 2.9% following monetary and fiscal policy measures to avoid the overheating of the economy.

Economic overview of Latin America


Figure 1: GDP Growth (%) Latin America and Caribbean 2004-2012

Source: ECLAC

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6. ECLAC: “The region in the decade of the emerging economies”, August 2011 7. ECLAC: “Preliminary overview of the Economies of Latin America and the Caribbean”, December 2011

“In contrast to the US and Europe, which are struggling with financial woes and a frustrated middle class, Latin America’s middle class in many cases continues to grow strongly”

Woods Staton, CEO, McDonald’s, Argentina



In 2012, it is expected that the region will grow by 3.7%, with South America growing slightly faster (3.9%). The growth will be led by the commodity-exporting countries such as Peru, Ecuador, Argentina, Colombia and Chile. Panama will again be the fastest growing economy albeit with a significantly slower rate of 6.5%, while Brazil will recover impetus showing an increase in the economic growth rate which is expected to be around 3.5%. In general, most economists agree that Latin America is today in a better position to face the global financial crisis because it has more fiscal space to implement countercyclical measures. In fact, the debt ratio was brought down by around 28% of the GDP which is the lowest in the region’s recent economic history. However, Latin America will not be immune to the uncertain climate of the global economy, and some negative effects are expected from the sluggish

environment in the developed economies – particularly in Europe – and the slight decline in the growth of emerging economies, following the cooling of the internal demand in China and India. This will probably drive down the demand of food products and have an impact on the commodity prices, thus undermining the terms of the trade of the region.

8. ECLAC: “The region in the decade of the emerging economies”, Op. Cit.

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"We had a very good year […] the region was very profitable for us […] There’s growth in most markets in Latin America because the econo-mies are doing well." Roger Crook, CEO DHL Express International Americas

Figure 2: GDP Growth Forecast, Latin America, 2012

Source: ECLAC



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According to UNCTAD, global foreign direct investments (FDI) inflows rose by 17% in 2011, to USD 1.5 trillion, surpassing the pre-crisis average for the first time since 2008. In this group, the 2011 increase in FDI flows was largely driven by Latin America and the Caribbean with an increase in 35%, when compared to the 2010, reaching the record figure of USD 216 billion, slightly higher than FDI inflows to the United States. The growth pace of the region is also faster than other world regions when compared to the 22.8% growth in Europe, the 11.4% growth in South East Asia, and the 30.6% growth of transition economies.

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It is important to note that UNCTAD includes the data of some offshore financial centres in the Caribbean, such as the Cayman Islands and the British Virgin Islands in their account, and this might distort the overall FDI statistics of the region. Following the methodology of the World Bank, the region presented the greatest increases in both inward and outward FDI flows among world regions in 2010, reaching USD 112 billion, a 40% increase on 2009. The World Bank estimate of 145.5 million USD for 2011 represents a significantly higher amount than the pre-crisis average and the historic record of 2008.

10

What is the panorama of FDI in Latin America?

Figure 3: FDI Inflows (selected world regions) in USD billions

Source: UNCTAD

According to the ECLAC, the bulk of the FDI goes to the South American sub-region which received US$85.1 billion - more than 70% of the regional inflows. These inflows were largely driven by Brazil which account-ed $48.4 billion, followed by Chile with 15 USD billion and Peru with $7.3 billion. For 2011, recent UNCTAD figures showed a continuous positive trend for South Ameri-can FDI recipients. FDI in Brazil rose 35.3%

to reach $65.5 billion, whereas the FDI to Chile increased 17.6%, slightly lower than the inflows to Mexico. Colombia experienced an impressive jump of 113% in 2011, reaching $14.4 billion, and surpassing Peru on its way to closing the gap with the leading recipients.

11

9. UNCTAD: “Global Investment Trends Monitor” January 24 2012 10. World Bank: “Global economic prospects 2012” 11. ECLAC: “Foreign Direct Investment in Latin America and the Caribbean 2010”



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Figure 4: Geographic distribution of FDI 2010

Country 2010 2011 Growth

Brazil 48.4 65.5 ▲ 35.3%

Mexico 19.6 17.9 ▼ - 8.8%

Chile 15.1 17.6 ▲ 16.4%

Colombia 6.8 14.4 ▲ 113.4%

Peru 7.3 7.9 ▲ 7.4%

Argentina 7.0 6.3 ▼ -10%

Figure 5: Main recipients of FDI in Latin America 2010-11 (USD billion)

Source: ECLAC Source: UNCTAD

There are some trends to highlight with regards to the panorama of inward FDI in terms of inflows. As a whole, the region has benefited from the economic scenario presented in the previous section. The robust growth of emerging economies in Asia increased the prices of natural resources and food products, which are the bulk of the export basket of the region, but also increased demand for manufacturing and services. Resource-seeking FDI, driven by these higher commodity prices, prompted large investments to the sub-region, particularly in mining and hydro-

carbon rich countries such as Colombia, Chile and Peru.

The sub-region has also benefited from a surge in local market-seeking FDI which was attracted by the rising local demand triggered by higher employment, economic growth and currency appreciation, and in general, due to the expansion of the middle class, particularly in Brazil (but also in Chile, Colombia and Argentina). According to the ECLAC, around 43% of the FDI in the region is focused on natural resources, which reflects once more the raw-material orientation of South America.

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Sub-Region

Destination Macro-Sector

Prevalent type of FDI Services Manufacturing

Natural Resources

South America 30% 27% 43%

Local/Regional Market-seeking FDI. Resource-seeking FDI.

Mexico / Central America

41% 54% 5%

Efficiency-seeking FDI.

Figure 6: Destinations and types of FDI

Source: OCO Global, based on statistics from the ECLAC

12. Ibid.


The experience of Mexico and Central America is however different due to its greater commercial integration and links with North America. FDI going to these markets intends to capture not only the internal markets, but also use these countries as low-cost export platforms to tap into opportunities in the United States and Canada, due to location and wage advantages. For instance, the sluggish demand in the United States explains partly the decline in the FDI going into Mexico in 2011. Although manufacturing plays an important role in the FDI attracted to the sub-region, most Central American nations are shifting rapidly to services-oriented economies. Some of the advantages that positioned the region as a textile and

garment export platform are now becoming targeted assets for investors in business and professional services, especially those provided by call centres and business processing outsourcing (BPO) companies.


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“Latin America is very important for Samsung because it is an area that is growing fast […] Countries where GDP grows faster [means] people have more money to spend”

Teobaldo Palacios VP Latin America, Samsung Electronics

Investment climate in Latin America

The global slowdown will affect the countries in different ways, depending on their participation in global value chains and export destinations markets. Investors should take care to understand how different countries are integrated into global economy and how flexible their trade structure is to re-direct exports if demand declines in a given market. In general terms, the integration of Latin America into the international economy has been irregular, and hence, diverse degrees of international openness and pro-business orientation can be found throughout the region. In fact, Latin America is less integrated than other world regions with less than 20% of its exports being intra-regional, significantly lower trade figures, when compared to the Asia Pacific region where it accounts for 45% of the total trade.

13 One of the reasons behind this

lack of intra-regional trade is the natural resource orientation of Latin American exports whose main markets are found outside the region. Nonetheless, the lack of convergence of Latin American economic

blocs and the divergent degrees of openness also play a key role. Currently the integration landscape is dominated by three customs unions: the Mercosur, the Andean Community and the Central American Common Market, with four countries of the region (Mexico, Chile, Panama and the Dominican Republic) not belonging to any of these customs unions.

13. ECLAC: “The region in the decade of the emerging economies”


Chile is the most open economy of the region, having in force sixteen Free Trade Agreements, which allow investors and domestic companies access the markets of most countries in the Americas, Europe (both the European Union and the European Free Trade Association), and increasingly the Asia-Pacific region.

14 For

this reason, Chile has the most balanced trade basket in terms of destinations with China and Japan as the main destination of its exports (29.4%), followed very closely by Europe (21%). From a political point of view, Chile has a very consistent pro-

business with the best business environment of the region, ranking first on the World Economic Forum’s Global Competitiveness Index, the World Bank’s Doing Business 2012 and the Heritage Foundation’s Economic Freedom Indexes.

The economic policies of Chile will remain stable in the coming decades, having been implemented by the successive socialist governments of the “Concertacion”, and recently ratified by the conservative government of President Sebastian Piñera, who is also a prominent businessman.


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Figure 7: Selected Business Climate Indices

Compiled by OCO Global

Figure 8: Average Geographic Distribution of Exports, 2007-2011 (% of Exports)

Source: ECLAC

14. Details on Free Trade Agreements and Customs Unions can be checked at the Foreign Commerce Information System from the American States Organisation (OAS) http://www.sice.oas.org/agreements_e.asp


United States Europe China and Japan Latin America

Argentina 6.9 17.8 9.4 40.9

Brazil 12.5 23.2 14.0 21.1

Uruguay 6.1 17.7 4.1 39.7

Paraguay 1.8 8.4 2.8 67.2

Chile 11.6 21.0 29.4 18.7

Colombia 39.1 13.7 4.1 30.4

Peru 18.1 17.3 19.4 18.1

Ecuador 39.1 13.1 2.4 37.5

Bolivia 8.2 8.2 8.1 62.0

Mexico 80.8 5.3 1.6 6.4

Panama 16.1 3.4 1.7 69.3

Costa Rica 37.2 17.4 7.7 24.9

El Salvador 48.5 5.8 0.5 42.0

Honduras 45.2 19.7 2.0 26.9

Nicaragua 34.3 11.5 1.2 40.4

Guatemala 40.4 5.6 1.9 41.9

Dominican Rep. 60.1 12.8 3.8 4.8

http://www.sice.oas.org/agreements_e.asp


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Politics should not be a matter of great concern for investors in Mexico, the second most open economy in the region with twelve Free Trade Agreements in force, and with one of the best business environments in the region. After several governments from the Revolutionary Institutional Party (PRI), the last two governments from the conservative National Alliance party (PAN) have pursued the bulk of the same economic policies the PRI started a decade ago, and it is unlikely that in the coming presidential elections, either PRI or PAN candidates will propose to change the path the country is following. However, unlike Chile, Mexico might be more vulnerable to external shocks because it concentrates the bulk of its exports in one market: the United States. As a full member of the North American Free Trade Agreement (NAFTA), the performance of Mexico will hence rely heavily on the performance of the American economy, destination of more than 80% of its exports

As a whole, the MERCOSUR countries (Brazil, Argentina, Paraguay and Uruguay) are among the less integrated to the international economy with few free trade

agreements in force. The members of the trade bloc concentrate their exports at an intra-regional level. The exports to the United States could be as low as in the case of Paraguay which represents less than 2% of the total exports. The sub-region could be moderately exposed to a drop in demand from the European Union, which is on average the second destination of their exports, but since the export basket is comprised mostly by commodities, it is expected that the region could re-direct their exports to the emerging Asian economies which are becoming increasingly important trading partners. Although most investors and analysts agree that MERCOSUR countries lag behind in terms of ease of doing business and openness, Uruguay stands out in the group due to its performance on competitiveness and business investments rankings. In the last decade, Uruguay has been very successful in capitalising the market opportunities that arise from the regional market, reaching a FDI-to-GDP ratio of 5.9%, second only to Chile (7.4%) in South America.



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The political and economic outlook of the Andean Community presents the con-trasting scenario between Colombia and Peru, on one side, and Bolivia, Ecuador and Venezuela, on the other. The first two countries have championed internationali-sation and free trade, while the other coun-tries pursue an inward-looking economic model. Peru, in particular, has followed the Chilean experience and currently has (10) free trade agreements in force, which in-clude the Asian markets of China, Japan and South Korea. Like Chile, Peru has been also enthusiastic in cultivating a spe-cial relation with the growing Asia Pacific region, which is now the main destination of its exports. The recent election of Ollanta Humala last year created fears that Peru would lose its pro-investment orientation, but after several months in office, the gov-ernment has been credited by the local me-dia for balancing its social agenda with a strong pro-business orientation, considering that it still has the overall third best busi-ness environment, based on the most cred-ited investment climate rankings. With a di-verse, young and growing population, Co-lombia is counted as one of the CIVETS nations, the new generation of BRICS. However, when compared to Peru, the trade of Colombia is less diversified and it currently is concentrated in the United States and its neighbours in Latin America. The government of Juan Manuel Santos has manifested the interest of Colombia in diversifying its exports, particularly opening up linkages with the Asia Pacific region, fol-lowing the experiences of Peru and Chile.

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The geographic location of Colombia makes it an interesting emerging market with a double opportunity of being a gate-way to avoid trade barriers to the markets of South America, and a strategic platform for tapping opportunities in the US and Canada, due to the recent approval of the FTAs with these two countries.

Two trends will be shaping the economic integration landscape in the region over the coming decade. Pivotal for the influence of Brazil in South America will be the imple-mentation of the economic measures in-cluded in the Declaration of Cuzco

16, which

foresees the creation of a common market between the MERCOSUR, the Andean Community and Chile, on the framework of the Union of South American Nations (UNASUR). The other initiative, mostly championed by Colombia and Chile is the recent establishment of the so-called “Alliance of the Pacific”, which integrates the economies of Colombia, Peru, Chile and Mexico, all of them located in the Latin American Pacific rim. These countries not only share a high degree of openness and competitiveness, but have also taken con-crete measures to increase their commer-cial and economic linkages. For instance, they recently launched the MILA (the Span-ish acronym for Integrated Latin American Market), a single stock market that inte-grates the former stock markets of Lima, Bogota and Santiago. Likewise, the invest-ment and export promotion agencies of Mexico, Colombia, Peru and Chile have al-so agreed to share international offices worldwide to channel investors to the region and increase the exports to the markets of Asia and Africa

17.

15. Wold Politics Review: http://www.worldpoliticsreview.com/articles/8383/colombias-santos-moves-to-diversify-foreign-policy 16. Declaration of Cuzco (Peru) http://www.comunidadandina.org/ingles/documentos/documents/cusco8-12-04.htm 17. MercoPress


http://www.worldpoliticsreview.com/articles/8383/colombias-santos-moves-to-diversify-foreign-policy

http://www.worldpoliticsreview.com/articles/8383/colombias-santos-moves-to-diversify-foreign-policy

http://www.comunidadandina.org/ingles/documentos/documents/cusco8-12-04.htm


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FDI projects are an interesting measure for informing the strategies of Investment Promotion Agencies of the region. According to the FDI Markets data monitor, Latin America and the Caribbean attracted 1,364 projects in 2011 which accounted for around 9% of all projects globally. Although the region still lags behind Asia Pacific, North America and Western Europe in terms of number of projects; it witnessed a fast growth of 18,4% in 2011. In terms of jobs, the region saw a 34% growth in job creation, the fastest of any world region, whereas in terms of capital expenditures the region presented a growth of 10% compared to 2010. It is important to note

that although Latin America lags behind in terms of project numbers, it was the second region globally both in terms of capital expenditure and jobs in 2011, with shares of 19% and 18% respectively. This means that the FDI projects attracted to the region in the last couple of years are generally more capital- and labour-intensive than those attracted to other world regions.

FDI Projects to Latin America: source and destination markets

Figure 9: Inward FDI Projects –Latin America & Caribbean 2003-11

Source: fDi Markets

Figure 10: Inward FDI Projects –Latin America & Caribbean 2003-11

Source: fDi Markets



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Most of these FDI projects to Latin America came from Western Europe which account-ed for 40% of the share, followed closely by North America with 34%, and then by the increasingly important Asia Pacific region with 13%. Although Europe is the main source of FDI for the region, the main in-vestor by far is the United States with a 30% share of the FDI projects, followed then by Spain with 11%. Investment Pro-motion Agencies targeting investors in the United States should note that the bulk of investors come from California, New York, Texas and Florida. In the rest of the world, all sources of FDI presented an increase last year, especially Japan and the United Kingdom. The latter increased its projects

in more than 50%, surpassing Germany as the second source of FDI from Western Eu-rope. According to the ECLAC, China has become the third source of investment be-hind the United States and Europe in Latin America, reaching 15 billion USD in 2010. The country’s primary sectoral focus is on hydrocarbons and natural resources, which explains why its share of overall FDI pro-jects lags behind other source markets.

Figure 10: Main source countries FDI projects 2011

Figure 11: Main destination countries FDI projects 2011

Most of the companies investing in Latin America are looking to avoid certain trade barriers and tap into opportunities from do-mestic or regional markets. It is natural that Brazil is thus the main destination in terms of projects with a share of 36% in 2011, fol-lowed by Mexico, Argentina and Colombia. These four countries are also the biggest domestic markets of the region and ac-counted for approximately 75% of the pro-jects tracked in 2011. In sub-national terms, the city of Sao Paulo was the pre-

ferred destination with 9% of the FDI pro-jects, followed by Rio de Janeiro with 3.2% of the regional share. The capitals of Ar-gentina, Mexico, Colombia and Chile were the preferred destinations in their respec-tive countries due to their significant share in the national GDPs, but it is important to note that secondary medium-sized cities such as Guadalajara and Monterrey in Mexico and Curitiba in Brazil are increas-ingly catching the attention of investors.

Source: fDi Markets



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When crossing historic FDI data from 2003 to 2011 in terms of source and destination countries, some trends are uncovered. American and Canadian companies usually prefer Mexico as their main destination, accounting for 34% and 35% of the projects respectively. These companies draw on Mexico as a low-cost export platform in the context of the NAFTA agreement. Western European FDI prefers Brazil as their main destination, particularly when it comes from Portugal (88%), the United Kingdom (41%), France (40%), Italy (51%) or Netherlands (53%), in order to avoid trade barriers and reach the domestic market of this country. The only European exceptions are the Spanish companies which usually prefer Mexico (28%) and oth-er Spanish speaking countries in the Americas, due to cultural and linguistic par-ticularities. Asia-Pacific FDI concentrates heavily in Brazil with it attracting 50% of the Chinese FDI, 43% of the Indian FDI, 49% of the Korean FDI and 39% of Japanese FDI. For all Asian countries, Mexico is the second destination, but other markets, such as Colombia, Argentina and Chile are becoming top of mind among investors as well. In 2011, most of the projects were focused on services with Software and IT Services leading the trend, followed by Business Services, which represented almost a third of the projects. This is partly explained by the positioning of the region as an off-shoring and near-shoring platform to serve

the markets of Europe and the United States, due to wage, location and human capital advantages. The strategies of American, Spanish and Indian companies have created a new scenario with leading multinationals such as IBM, Microsoft, Tata Consultancy Services, Accenture, Oracle, HP and Intel shaping the trend. More inter-esting is the rise of projects in Metals and Industrial Machinery which is partly a result of the growing regional demand due to the mining and infrastructure boom in the re-gion, particularly in South America. A nega-tive trend is seen in Hotels and Tourism as a response to the sluggish demand of tour-ism due the global slowdown, which has particularly affected the countries of the Caribbean.

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When reviewing historic data from 2003 to 2011, interesting trends are found in terms of sectors and sources of FDI. The two leading sources of FDI to the region, Spain and the United States have historically been sources of FDI in the Business Ser-vices, IT Services and Communications sectors, with Spain being also important in Financial Services. Other Western Europe-an countries have also been sources of IT services, with increasingly leading roles in Financial Services (United Kingdom, Swit-zerland), Tourism (France), Metals (United Kingdom, Sweden, Italy), Industrial Machin-ery (Italy, Sweden), and Chemicals (Netherlands).

Who is investing where?

18. ECLAC: “Foreign Direct Investment in Latin America and the Caribbean 2010”



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Germany is the second investor in most Latin American countries and it is an im-portant source of FDI in Automotive OEM, Automotive components and Chemicals. FDI from the Asia Pacific region focuses on manufacturing projects in Metals (Japan, China, Korea), Industrial Machinery (China), Automotive Components (Japan), Automotive OEM (Japan, China, Korea) and Electronics (Japan, Korea). Around 50% of Indian companies concentrate their investments in IT and Business Services, with Pharmaceuticals being the second key sector for Indian companies in the region. Finally, it is important to note that around 58% of Canadian projects and 56% of Australian projects are found in the Metals sectors, making these two countries a great source for that particular sector. A similar analysis can be done crossing the historic data in terms of sectors and desti-nations of FDI to define any sector-specific trends. The data shows that most of the projects in Metals, Business Services, Soft-

ware & IT Services, Communications and Financial Services have a more or less even distribution among countries of the region with Brazil and Mexico always as their main destination. In other sectors the bulk of the FDI is concentrated in one of the biggest markets of the region such as the case of Industrial Machinery (45% in Brazil), Automotive Components (49% in Mexico), Chemicals (45% in Brazil), Auto-motive OEM (39% in Brazil), Electronic Components (55% in Mexico), Plastics (44% in Mexico) or Consumer Electronics (35% in Mexico). Although other countries have a small share in comparison to Mexi-co and Brazil, it is important to note upward trends in Metals (Chile, Peru), Minerals (Colombia, Peru, Chile, Argentina), Food Products (Argentina, Chile), Chemicals (Argentina, Colombia, Chile), Automotive (Argentina), Renewable Energies (Chile, Peru), and Pharmaceuticals (Colombia, Ar-gentina).

Latin America as an FDI source market

Following a global trend of consolidation of new multinational companies from emerg-ing markets, Latin America and the Carib-bean reached a record of 43, 1 billion USD in outward FDI, according to the Economic Commission for Latin America and the Car-ibbean (ECLAC). It means that the share of Latin American outward investments in FDI flows originating from the emerging world nearly tripled from 6% in 2000 to 17% in 2010. One of the reasons behind the rise in the Latin American outward FDI has to do with the emergence of the so called “Trans Lat-ins” or Trans-Latin American corporations whose main investments are usually di-rected to neighbouring countries. The

ECLAC figures for 2010 registered that around 47% of the mergers and acquisi-tions and that 59% of the Greenfield invest-ments happened within the region.

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“In five years, we want to have 20 branches in the United States […] we will invest close to 25 million USD to do so”

Allan Toledo International Business President Banco do Brasil

19. Ibid.



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Mexico, Brazil, Chile and Colombia accounted for 92% of the outward FDI from the region, while in per capita terms Chile and Colombia have the highest FDI-to-GDP ratios with 4.6% and 2.3%, respectively, showing the internationaliza-tion of these two countries. Mexico was the leading source of FDI from the region with around 12,6 billion USD, largely driven by acquisitions such as those of Bimbo (acquired Sara Lee Group in US) and Televisa (acquired shares in Univision), or investments by America Móvil in telecommunications. Brazil was the second source with around 11.5 billion USD, largely driven by companies from natural resources, such as Vale do Rio or Gerdau. Finally, the third source of FDI in the region was Chile, reaching 8.7 billion USD, focusing mostly on financial services and the retail sector, driven by investments of Cencosud and Fallabella. In terms of projects, FDI Markets tracked 230 outward FDI projects from the region. The preferred destination was Latin America (57%), followed by North America (18%) and Western Europe (8%). In terms of countries, the United States is the main destination with a 17% share in 2010, followed by other Latin American countries such as Argentina (9%) and Colombia (9%). China is also becoming a destination

for Latin American countries with a share of 6% of the projects. As in the ECLAC figures, the main source of FDI were Brazil (35%), Mexico (18%) and Chile (16%) in 2010, partly due to the internationalisation processes of these countries. When crossing historic statistics of FDI sources and destination, interesting trends are found. Brazilian firms have an important share in overall Latin American FDI into the United States (36%)

20, China (61%) and

Mexico (35%). Mexican firms are important in Brazil (33%) and Panama (19%), whereas Chilean firms are key investors in Argentina (23%), Colombia (31%) and Peru (29%).

Country FDI Outflow (Million) Share Lat Am GDP Ratio

Mexico 12,694 29% 1.2%

Brazil 11,500 27% 0.6%

Chile 8,744 20% 4.6%

Colombia 6,744 16% 2.3%

Figure 12: FDI Outflows, Share in Latin American FDI outflows and FDI-to-GDP Ratios, 2010

Source: ECLAC

“[We] understand that large Latin-American companies, the “multilatinas”, are rolling out ambi-tious strategies of globalisation. These powerhouse players need consistency across their global op-erations, in their home bases and all over the world. That is exactly what our investments allow us to deliver to them.”

Jeff Kelly CEO, BT Global Services

20. % of Total FDI Projects that comes from that specific Latin American country



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Capitalising on the rise of Latin America

We can argue in conclusion that Latin America has an exciting decade ahead. In-vestors and Economic Development Or-ganisations could tap into many opportuni-ties arising from the emerging markets of the region. But, in order to capitalise on these opportunities, it is worth to bear in mind key points mentioned throughout this paper, which might inform the strategies to attract investment into Latin America, or to invest in the region. Key learnings for Latin American Economic Development Organisations (EDOs): A targeted, market-driven approach is crucial: EDOs from the region must have a market- driven approach and build value propositions based on the supply-side opportunities over the coming decades. For instance, countries such as Chile or Peru should target Engineering Services or IT Services companies that serve the booming mining sectors. Company targeting should take into account these supply-side opportunities arising from the growth in infrastructure, housing and agriculture sectors, and also highlight the rising local private demand.

Know geographical sources of FDI and focus efforts accordingly: Most of the FDI into Latin America comes from Western Europe (mainly from Germany and Spain) and followed by North America (United States) and Asia Pacific (China). EDOs attracting investments for the region should target the US states of Florida, New York, California and Florida. Those targeting activities in Europe should focus on the United Kingdom, France, Germany and Spain, depending on sector- specific strengths. Asia – Pacific is becoming an increasingly important source of projects, particularly from emerging multinationals in China, India, Japan and South Korea.

Understand the main drivers behind regions’ investments: Trends show that American and Canadian investors prefer Mexico as their principal FDI destination to use it as a platform to export to North America. EDOs from Central American and Andean countries, with strong commercial linkages to the United States and similar wage and location advantages can catch further opportunities arising from these markets. Western European FDI prefers Brazil as their main destination triggered by local demand and the interest of avoiding trade barriers. This could be an opportunity for other countries linked to Brazil, such as Uruguay, which could become low-cost and business-friendly platforms to target the Brazilian market. In the case of Asia Pacific, most FDI is mainly concentrated in Brazil, which means that EDOs from Latin America should increase their presence in the region to attract a greater share of projects.

“Beyond economic management in the country, Colombia’s key factors have been an export diversification policy and tax legislation focused on ensuring legal security, which has generated investor confidence.”

Proexport Colombia



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Know where to focus your sectoral targeting: Most of the FDI attracted to the region is concentrated on IT Services, Business Services and Financial Services due to the positioning of the region as platforms for offshoring and near-shoring. Metals and Industrial Machinery sectors have jumped in the recent years due to the infrastructure and mining booms in South America. Latin American EDOs targeting projects on Services should focus their activities in the United States, United Kingdom, India and Spain. Those targeting manufacturing activities should focus on Germany, Japan, China and South Korea. In the Metals sector, Australia and Canada are becoming an interesting source of projects, while India is increasingly being important for pharmaceuticals.

Latin America as a growing FDI source for the Americas: Latin America is becoming a source of FDI with a new record on outward investments in 2011. Colombia, Brazil, Chile and Mexico are the main sources of FDI due to the internationalisation of their firms. Most of the outward FDI is concentrated in Latin America, followed by North America.

The emergence of Trans Latin corporations creates an opportunity for American EDOs attracting FDI in the context of economic slowdown in Europe, and they should consider strengthening their activities in the main source countries of the region. Key learnings for investors: Understand the drivers of growth and consequent investment opportunities: Investors must be aware that the rise of Latin America is explained by a combination of external and internal factors. Externally, the rise of commodity prices has created positive gains of terms of trade for South American countries, whose export basket is composed mainly of food products, hydrocarbons and minerals. The high commodity prices, particularly in mineral and food products, create huge opportunities for investors in the mineral-energetic and agro-industrial value chains. For instance, Engineering Services or IT Services companies serving the mining industries might find many opportunities in the booming mining sector of South America. Likewise, Agro-Chemical producers could take advantage of the booming agricultural sectors. Meanwhile, internally, the rise of local demand has to do with a boost on investment as a consequence of cheaper imports and a boost in private consumption due to the expansion of the middle class in several countries. From the “investment” side, many investors from Industrial Machinery and Equipment sectors could find opportunities as a result of the drive of modernisation of Latin American companies. Likewise, consumption- oriented sector such as Food & Beverages or FMCG (Fast Moving Consumer Goods) producers could take advantage of an increasing demand from the booming middle class in countries such as Brazil or Argentina.


“With the aim of diversifying our FDI inflows beyond the mining sector, [Chile’s] Foreign Investment Com-mittee has set up a comprehensive portfolio of public and private pro-jects. This will allow us to promote concrete business opportunities in infrastructure such as airports, mari-time works, renewable energies and electric transmission, among oth-ers.” Matias Mori, Vice President, Foreign Investment Committee of Chile


FDI in Renewable Energy: a promising year ahead www.ocoinsight.com

Understand sub-regional differences: Although the rising of the local demand triggered the attraction of market-seeking FDI across the region, investors must be aware of the differences between the opportunities to invest in South and Central America. Most of the FDI going to South America is raw-material seeking, driven by high commodity prices and the endowment of natural resources of the sub-region. FDI going to Central America and Mexico is largely attracted by the wage and location advantages to tap into the opportunities in North America. Investors from Electronics, Automotive and Aerospace sectors targeting the US market, might take advantage to the commercial linkages this sub-region has with that market. Likewise, BPO and IT services companies could take advantage of wage differentials in Central America to near-shore from the sub-region. Investors approaching the region should also have a good understanding of the often complex and different economic

realities and investment climates within the region. Mexico and Central America might be dependent on the situation of the US economy, whereas some countries such as Chile, Brazil and Peru might be more resilient due to strong links with booming Asian economies. Likewise, investors should examine the degrees of openness and investment climates before expanding to the region in order to make the right decisions to face the current slowdown. Emerging Latin American corporates create significant investment opportunities: Latin America is becoming a source of FDI with a new record for outward investments in 2011. The emergence of Trans-Latin corporations creates an opportunity for investors that might be interested in supplying products or services to this new generation of multinationals. It also creates further opportunities for mergers, acquisitions, joint-ventures and partnerships with local regions.

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Documents

Latin Americas Decade - FDI Trends and Perspecives