Foreign direct investment into Latin America hit its highest level in the region’s history last year despite severe turbulence in financial markets, the European sovereign crisis and slow growth in the United States.
Over the last three years, FDI has averaged $120 billion annually and last year’s figure will be slightly higher, Alicia Bárcena, executive secretary of The Economic Commission for Latin America (ECLAC), told Emerging Markets.
However the mix of inward investment has changed in a way that raises questions. Growth was driven by Chinese investors that are typically focused on low value-added extractive industries. China accounted for some 8-9% of the region’s FDI in 2010.
But interest from Europe and the US, which tends to focus on value-added and socially responsible projects, declined relatively.
European and North American investment typically involves technology transfers, high standards of social and environmental responsibility, and creates higher skilled jobs in key industries such as automotive production. In turn, that helps spread best social and environmental practices, Bárcena said.
While Chinese investments remain extensively in extractive industries, the country is increasingly behind manufacturing acquisitions. Increasingly, recipients are looking to gain more value from extractive investments, she noted.
Royalties are increasing and countries such as Bolivia and Ecuador are renegotiating contracts. Moreover, many countries are looking to bolster the value-added chain by tying investments in mining to investments in iron and steel.
“Latin America needs to gain innovation and technical capabilities as other large natural resources economies Finland and Norway did in the past. You need to have active policies to boost productivity,” Bárcena said.
The European Union remained the region’s second largest investor with the US in third place both behind intra-regional investments. But flows from Europe are declining as an overall percentage. Indeed, last year saw some European firms monetize their investments in Latin America to repatriate funds.
A marked trend is cross-border transactions by Latin companies. These have become the most important source of FDI, showing the growing power of the so-called “multilatinas”.
The currency appreciation in many countries in the region is helping multilatinas acquire abroad and their own backyard is a good place to start.
However, there is a flip side to the currency boom. “Currency appreciation is very much on people’s minds and worrying economic authorities,” Bárcena says.
It risks creating balance of payments difficulties in the region and is contributing to distortions within economies such as Brazil where industry is declining as a share of the economy while extractive industries grow in importance.
Consumers in high currency economies are turning to imports, which makes it difficult to develop industry and services.
That is contributing to protectionism in the region, a trend that is not confined to Latin America, she said. “This is happening across the world as we look for a new trade equilibrium. The crisis has stalled the opening of the global economy.”
ECLAC is analyzing 10 years of European-Latin investment trends and monitoring closely the relationship between China and India with Latin America as trade flows continue to prove dynamic.