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FDI and Economic Growth in Latin America

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FDI and Economic Growth in Latin America

  1. 1. FDI and Economic Growth in Latin America Andrés López Review Seminar The Investment for Development Project 9-10 May 2003, Geneva, Switzerland Consumer Unity & Trust Society (CUTS)
  2. 2. FDI and Economic Growth in Latin America <ul><li>1. FDI inflows in Latin America in the 90s </li></ul><ul><li>2. FDI trends in main host regions </li></ul><ul><li>3. The available evidence on FDI impact in Latin America </li></ul><ul><li>4. Conclusions and perspectives </li></ul>
  3. 3. <ul><li>1. FDI inflows in Latin America in the 90s </li></ul>
  4. 4. The economic policy framework <ul><li>Trade liberalization </li></ul><ul><li>Regional integration agreements </li></ul><ul><li>Privatizations </li></ul><ul><li>FDI deregulation and liberalization </li></ul><ul><li>Few cases of selective policies </li></ul><ul><li>Incentives for FDI: </li></ul><ul><ul><li>Export-oriented –maquila, EPZ- (Mexico, Central America) </li></ul></ul><ul><ul><li>Inward-oriented (Brazil) </li></ul></ul>
  5. 5. Latin America has been a key host region for FDI in recent years <ul><li>FDI inflows by host region/country, 1984-2001 (U$S million and %) </li></ul>Source: UNCTAD
  6. 6. FDI inflows by host country, 1990-2001 (U$S million) Source: UNCTAD FDI inflows, top 10 developing countries
  7. 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. 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. 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. 10. <ul><li>2. FDI trends in main host regions </li></ul>
  11. 11. MERCOSUR <ul><ul><li>Main destination sectors: </li></ul></ul><ul><ul><ul><li>Services: public utilities, banking, commerce, etc. </li></ul></ul></ul><ul><ul><ul><li>Manufacturing industry: less important than in the past (automobiles, food and beverages, chemicals) </li></ul></ul></ul><ul><ul><ul><li>Mining and oil (Argentina) </li></ul></ul></ul><ul><ul><li>Mainly market seeking investments (including intra-regional exports) </li></ul></ul>
  12. 12. Mexico and Central America <ul><ul><li>Main destination sectors: </li></ul></ul><ul><ul><ul><li>Manufacturing industry (mainly “maquila” and assembly activities): automobiles, electronics, textiles, clothing </li></ul></ul></ul><ul><ul><ul><li>Tourism </li></ul></ul></ul><ul><ul><li>Export oriented activities (efficiency seeking) </li></ul></ul><ul><ul><li>Main investor: USA </li></ul></ul>
  13. 13. Andean Community <ul><ul><li>Main destination sectors: </li></ul></ul><ul><ul><ul><li>Mining, oil (export oriented) </li></ul></ul></ul><ul><ul><ul><li>Public utilities, banks, infrastructure (market seeking) </li></ul></ul></ul><ul><ul><ul><li>Manufacturing industry -only in Colombia and Venezuela- (market seeking and regional exports) </li></ul></ul></ul><ul><ul><li>Chile </li></ul></ul><ul><ul><li>Main destination sectors: </li></ul></ul><ul><ul><ul><li>Mining (export oriented) </li></ul></ul></ul><ul><ul><ul><li>Banking, public utilities (market seeking) </li></ul></ul></ul>
  14. 14. <ul><li>3. The available evidence on FDI impact in Latin America </li></ul>
  15. 15. Balance of payments <ul><li>Lower volatility than portfolio inflows </li></ul><ul><li>Short-term positive impact due to increased capital inflows </li></ul><ul><li>Medium-term negative impacts due to increased profit remittances and (in many countries) trade balance deficits </li></ul>
  16. 16. Foreign Portfolio and Direct Investment in Argentina Convertibility crisis Tequila crisis
  17. 17. Profit remittances in Argentina
  18. 18. Economic restructuring <ul><li>Efficiency and productivity gains </li></ul><ul><li>Introduction of new product technologies, organizational techniques and quality standards </li></ul><ul><li>Decreasing backward linkages (increasing import content) </li></ul><ul><li>Few investments in high-tech sectors (exceptions: Brazil, Mexico –maquila-, Costa Rica –Intel-) </li></ul>
  19. 19. Investment <ul><li>Crowding-out or neutral effects predominate (in Asia, crowding-in and neutral effects are the norm) </li></ul><ul><ul><li>Reasons: </li></ul></ul><ul><ul><ul><li>M&As vs. greenfield investments </li></ul></ul></ul><ul><ul><ul><li>Passive vs. selective policies </li></ul></ul></ul><ul><ul><ul><li>Market failures in financial markets </li></ul></ul></ul><ul><ul><ul><li>Macroeconomic instability </li></ul></ul></ul><ul><li>“ Crowding-in” effects exist when FDI stimulates new investments that would not have taken place in its absence. </li></ul><ul><li>“ Crowding-out” effects take place when FDI displaces domestic producers or pre-empt their investment opportunities. </li></ul>
  20. 20. Exports <ul><li>MERCOSUR: </li></ul><ul><ul><li>TNCs seemingly have not contributed to exports increase nor to exports diversification </li></ul></ul><ul><li>Mexico: </li></ul><ul><ul><li>TNCs have made a major contribution to Mexican exports (including high-tech activities), but ... </li></ul></ul><ul><ul><ul><li>Excessive concentration in the US market </li></ul></ul></ul><ul><ul><ul><li>Few linkages with the local economy (very high import content) </li></ul></ul></ul><ul><ul><ul><li>Competition with low wages countries (e.g. China) </li></ul></ul></ul>
  21. 21. <ul><li>Mixed evidence </li></ul><ul><li>There are almost no studies available for the 90s </li></ul><ul><li>TNCs linkages with host economies have tended to decrease in the 90s </li></ul><ul><li>TNCs affiliates do rarely engage in R&D activities </li></ul>Spillovers for host economies
  22. 22. Environment <ul><li>Improved environmental management in TNCs affiliates (but “environmental islands?”) </li></ul><ul><li>Little evidence of pollution havens (possible exception: mining) and “races to the bottom” (although environmental regulations are generally lax) </li></ul>
  23. 23. Privatizations <ul><li>Higher efficiency levels and increased investments in public utilities </li></ul><ul><li>Technological modernization (e.g. telecoms) </li></ul><ul><li>High tariffs and weak regulatory systems in many cases </li></ul>
  24. 24. Banking <ul><li>Higher efficiency but no reduction in banking costs (exception: Chile) </li></ul><ul><li>No impact on credit availability </li></ul><ul><li>Foreign banks adopt conservative policies regarding credit </li></ul><ul><li>Positive effects on financial system stability? (what happened in Argentina?) </li></ul>
  25. 25. <ul><li>4. Conclusions and perspectives </li></ul>
  26. 26. Perspectives for FDI in Latin America <ul><li>A sharp reduction in FDI inflows took place in 2002, due to cyclical as well as structural factors: </li></ul><ul><ul><li>Global downturn in FDI </li></ul></ul><ul><ul><li>US recession </li></ul></ul><ul><ul><li>Lower economic growth in Brazil and Chile </li></ul></ul><ul><ul><li>Argentina’s crisis </li></ul></ul><ul><li>Expectedly, countries will have to compete more fiercely for FDI, but FDI quality (more than FDI quantity) should be the main target </li></ul>
  27. 27. Policy recommendations <ul><li>FDI has the potential to positively contribute to economic development, but so far its impact in Latin America has been below initial expectations </li></ul><ul><li>Pro-active policies –where FDI is guided towards those activities and sectors that most benefit local development- are needed </li></ul><ul><li>Some policy objectives: </li></ul><ul><ul><li>Exports increases </li></ul></ul><ul><ul><li>Fostering domestic linkages </li></ul></ul><ul><ul><li>Attraction of FDI to knowledge intensive activities </li></ul></ul><ul><ul><li>Fostering FDI spillovers </li></ul></ul>
  28. 28. Policy recommendations (II) <ul><li>Pro-active policies work well only if other conditions are met: </li></ul><ul><ul><li>Human capital availability </li></ul></ul><ul><ul><li>Technological infrastructure </li></ul></ul><ul><ul><li>Adequate institutional frameworks and strong State capabilities </li></ul></ul><ul><li>Spillovers only arise if domestic firms have access to: </li></ul><ul><ul><li>Credit </li></ul></ul><ul><ul><li>Technical assistance </li></ul></ul><ul><ul><li>Human resources </li></ul></ul><ul><ul><li>Information </li></ul></ul>Levelling the playing field for domestic firms

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