Despite the recent financial and economic crisis, Chile’s outward foreign direct investment (OFDI) in 2009 surpassed the record level of 2008, reflecting the strength of Chilean firms and the country’s continuous commitment to integrate into the world economy. Two decades ago, Chile was an unlikely foreign direct investor. Today, even with no explicit policies to promote outward investment or the creation of national champions, Chile stands out as the third biggest investor of Latin America in absolute terms and as the first one in proportion to its GDP, even outperforming other emerging economies of similar size in other regions of the world.
In the middle of the 1980s, Chile underwent important market reforms that reshaped its private sector. At the time, the country ranked seventh as a foreign direct investor of Latin America and the Caribbean, based on its stock of assets held abroad. However, privatization, deregulation and trade and financial liberalization increased competition in local markets and pushed local firms to raise efficiency. The increased competitiveness of some domestic firms at the beginning of the 1990s led to the emergence of Chilean firms as global players.
Today, Chile is the third largest foreign direct investor of the region, only behind Brazil and Mexico. What is even more remarkable, in terms of its GDP, the country ranked number one in the past two years. Despite the worldwide financial and economic crisis, Chilean firms continued their expansion and, in 2009, Chile’s OFDI amounted to $8 billion, a 16 percent increase compared to 2008. Chile’s outward FDI stock has almost tripled in less than a decade, underlining the remarkable upward trend in the internationalization of Chilean multinational enterprises (MNEs).
The emergence of Chilean firms in the 1990s resulted in a gradual increase of OFDI flows until 2000, followed by a sharp contraction in 2001- 2002. The fall resulted from two factors: one was the economic crisis in Argentina, the main recipient of Chilean OFDI, accounting for 20% of it between 1998 and 2000; the other one was the acquisition of Enersis and AES Gener, the main Chilean electricity firms that had managed to grow abroad, but were acquired by bigger global players such as the Spanish Endesa.
After the contraction in the years 2001 and 2002, Chilean OFDI has steadily grown, reaching almost $8 billion in 2009, a historical record. Chile does not only stand out as the first foreign direct investor in proportion to its GDP in Latin-American, but it has also performed remarkably well in comparison with countries of similar economic size from other regions, which are also globally integrated, such as the Philippines, Thailand and the Czech Republic.
The growth of Chilean OFDI flows was accompanied by a fast process of regional diversification, mainly in North and Latin America. Certainly, Latin America remains the main recipient of Chilean OFDI in the past decade (40 percent). However, if at the end of the 1990s the main target of Chilean firms was Argentina, the accumulated flows from 2000-2008 show that Brazil, Peru and Uruguay have become the main target countries in recent years. In addition, Mexico and Colombia became more important for Chilean companies. Likewise, OFDI flows toward North America have risen significantly, from almost nothing to 11 percent of total flows in this decade, with the United States as the main target country. OFDI to Europe did not follow a continuous pattern; on average, they represented 11 percent of total flows in the period analyzed.
The sectoral composition of Chilean OFDI during the period 2000-2008 is dominated by three sectors that together accounted for more than 50 percent of all direct investment abroad during this period: financial services, insurance and real estate and services (32 percent), mining (11 percent), and retail (10 percent). It is worth mentioning that almost 20 percent of Chilean OFDI in the past decade was directed to the Cayman Islands and Panama, i.e., to financial centers, thus overestimating the share of OFDI flows in financial services; it can be assumed that most of these funds are channeled via these offshore centers to other locations. A caveat of these statistics is that an important share of Chile’s OFDI corresponds to net reinvestments where neither a sectoral nor a geographical destination is specified.
The corporate players
The biggest Chilean outward investors during the past decade, have been mainly concentrated in the primary and service sectors, with a small group of firms in the manufacturing sector:
1) Firms engaged in primary sector activities, producing natural-resource based manufactures and supplying basic inputs to the industrial sector, such as Empresa Nacional de Petróleo (ENAP), Arauco, Empresas CMPC, Molibdenos y Metales (Molymet), Madeco, and Masisa. These companies invested mainly in Latin America in their search for natural resources and markets and are primarily involved in hydrocarbons, mining and metal processing, as well as pulp and paper.
2) Firms in the service sector, previously owned by the state and local enterprises, that responded to the new competitive environment created by the reforms of the 1990s, such as Lan Chile, Compañía General de Electricidad (CGE), Compañía Sudamericana de Vapores (CSAV), and firms engaged in real estate, consumer products and retail, such as Fallabella, Ripley, Mall Plaza, and Cencosud.
3) Firms engaged in manufacturing sector activities, such as Compañía Cerveceras Unidas (CCU), Embotelladora Andina, and Empresas Carozzi.
Three industries stand out from among the top merger and acquisitions (M&As) and greenfield investment projects of the past three years. The first one is the pulp and cellulose industry in which Arauco and Empresas CMPC invested heavily in Brazil and Uruguay. On the real estate, consumer products and retail side, the Chilean champions Cencosud, Ripley, Fallabela and, until this year, D&S (now owned by Wall Mart), expanded their presence in Latin America. D&S’s expansion strategy may well become more aggressive as Wall-Mart seeks to penetrate the South American market from its Chilean base. The other industry worth mentioning is transportation, where Empresas Navieras y Compañía Sudamericana de Vapores (CSAV) invested in Malaysia and Hong Kong (China). Although this may be the firm’s initial investment in Asia, it might indicate its interest in the Asian market. Likewise, Molymet recently invested in China, making it the biggest Chilean investment in that country.
After Brazil and Mexico, Chile is the country that headquarters the largest number of the so called “trans-latin” MNEs in Latin America and the Caribbean.
Effects of the current global crisis
In 2009, OFDI from Chile registered its fifth year of consecutive growth and reached a new historical record. In other words, the global financial and economic crisis did not stop Chilean firms’ expansion, especially the ones operating in the natural resources sector that managed to accumulate capital during the boom years. In addition, some industries (like retail or pulp and paper) were not hit hard by the crisis as the demand for their products has a low income elasticity of demand, which enabled firms in that industry to continue to expand despite the economic slowdown.
The policy scene
In the past few years, Chile has pursued an ambitious strategy to foster the internationalization of the country. It has signed a number of free trade agreements (FTAs) and investment protection agreements with its main trading partners and other countries whose economies offer growth prospects. In 2009, Chile’s FTAs with Australia, Colombia and Peru came into force, and Chile signed a free trade agreement with Turkey and initiated conversations with Malaysia and Vietnam. In January 2010, Chile joined the OECD. Although these initiatives have been important for the development of exports, their impact on Chilean OFDI is yet unclear. In the past, Chilean firms have preferred to operate in close and well-known environments and have used trade to exploit more distant markets. Nevertheless, outward FDI to other destinations, such as East-Asia, has increased in the past five years.
Since the restoration of democracy in 1990, Chile has enjoyed the political and economic stability that has created a solid base from which its firms can pursue new business strategies outside the country’s borders, even during the recent economic crisis. In January 2010, after twenty years of a centre-left government, the centre right coalition won the presidential election. This political change is not expected to alter Chile’s strategy to integrate further into the global economy, and thus on the behavior of Chilean firms toward international expansion.
Chile has slowly become one of the main foreign direct investors of Latin America and the Caribbean, even outperforming emerging markets of similar size in other regions of the world, such as the Czech Republic, the Philippines and Thailand. Chile’s OFDI has had an outstanding performance, even during the recent economic crisis. In 2009, Chilean outward FDI reached a new record level, surpassing 2008 outflows.
Unlike other countries, Chile has not followed an explicit policy to promote OFDI or to create national champions. The Chilean government has provided stable economic conditions in the domestic market, which has served Chilean firms as a platform to expand their business abroad.This shows that the best policy to support OFDI is perhaps a sound policy to promote stability and competition in national markets. Chilean firms have shown that they can compete successfully outside their borders. As growth prospects for 2010 improve, domestically and internationally, it is very likely that Chilean MNEs will continue to expand abroad.
Carlos Razo and Álvaro Calderón, “Chile’s outward FDI and its policy context,” Columbia FDI Profiles, March 12, 2010. Reprinted with permission from the Vale Columbia Center on Sustainable International Investment (www.vcc.columbia.edu).
Carlos Razo and Álvaro Calderón are Economic Affairs Officers at the Foreign Direct Investment Unit of the United Nations Economic Commission for Latin America and the Caribbean (ECLAC). The authors wish to thank Jerry Haar and Nicole Moussa for their helpful comments on this Profile. The views expressed by the authors of this Profile do not necessarily reflect those of Columbia University, ECLAC or their partners and supporters.