Colombia’s Outward FDI Jumps

BY ANA-MARIA POVEDES GARCES
 

Outward foreign direct investment (OFDI) from Colombia has increased considerably in the past decade, with its stock growing from US$3 billion in 2000 to US$23 billion in 2010. This growth reflects the internationalization of the Colombian economy following policy reforms and economic liberalization in the 1990s. The 2000s were characterized by enhanced national security and reforms to the investment framework that have attracted unprecedented levels of inward FDI and facilitated the growth of small and medium-sized enterprises (SMEs). A considerable rise in domestic mergers and acquisitions (M&As) in the past decade has contributed to the development of Colombian multinational enterprises (MNEs) and to increased OFDI from Colombia. In 2010, outflows showed a twenty-fold increase from their value in 2000, including an increase in OFDI to export markets, helped by greater government support for OFDI, for example by the conclusion of more international investment agreements. The rise of Colombian MNEs, or “translatinas” (i.e. Latin American MNEs whose OFDI is primarily within

Latin America), reflects Colombia’s nascent structural transformation into a knowledge-based economy. Together with Chile and Peru, Colombia has recently created the first regionally integrated stock exchange in the region, the Mercado Integrado Latinoamericano (MILA), which is likely to facilitate FDI flows.

TRENDS AND DEVELOPMENTS

Latin American corporations are going global, as reflected in their higher OFDI growth rates in recent years, compared to those of a decade earlier. Colombia, Latin America’s fifth largest economy, has joined the leaders of this trend, especially since 2005. Colombia’s OFDI stock grew from an insignificant US$136 million in 1980 to US$3 billion in 2000, and then to US$ 23 billion in 2010, nearly an eight-fold increase during the past decade. Colombian OFDI flows in 2000 were relatively insignificant at US$325 million, after which they grew rapidly. While Colombia’s real GDP grew by 185 percent from 2000 to 2010, OFDI flows increased twenty-fold. Colombia’s OFDI: GDP ratio thus rose from 0.1 percent to 1.5 percent in the same period. An increasing proportion of Colombia’s OFDI is directed toward host countries in Latin America, and most Colombian MNEs are translatinas.

Country-level developments

Colombia’s 1991 constitutional reform entailed changes in its regulatory framework that opened the economy to world trade. Major investment policy reforms followed in the 1990s and 2000s. After stagnant growth in the 1990s and following the crisis years of the late 1990s, Colombia experienced a strong economic upswing in the second half of the 2000s, one of its best performances since the late 1960s. The country’s security situation also improved remarkably during the presidency of Alvaro Uribe (2002-2010). As a result, enhanced investor confidence coupled with sound Macroeconomic policy and a rich resource base contributed to a strong increase in real GDP that averaged 4.1 percent annually in 2000-2010. In the same period, exports tripled, inward FDI stock more than sextupled and the financial sector more than doubled (as measured by assets). The Colombian stock exchange, Bolsa de Valores de Colombia (BVC), experienced a fourteen-fold increase in market capitalization and index growth during the 2000s, and the economy began commercial and financial integration with other regional economies, with large intra-regional capital flows and more pro-investment policy-making. In 2010, Chile, Colombia and Peru announced the creation of the region’s first integrated stock market, the Mercado Integrado Latinoamericano (MILA).

At the beginning of 2011, Standard & Poor’s raised the sovereign rating of Colombia to

investment grade, two levels behind Chile, and, along with those of Brazil, Mexico, Panama, and Peru, ahead of Argentina and Venezuela. By the second quarter of 2011, the other two rating agencies, Moody’s and Fitch, had joined S&P in giving Colombia an investment grade rating. That Colombia has earned back investor confidence not only  attests to the country’s mix of liberal frameworks for trade and investment with rather conservative regulatory, macroeconomic (especially monetary) and financial-sector practices, but also constitutes a safeguard against political risk, while positioning its economy and corporate players prominently in the region.

While Colombia’s OFDI flows started from an insignificant base in 2000, their growth rate during the past decade has shown considerable momentum: Colombian OFDI flows grew twenty-fold in the 2000s, from US$325 million in 2000 to US$6.5 billion in 2010. A 2005 reform consolidated financial regulatory bodies into one entity, the Financial Superintendence (Superintendencia Financiera), perhaps one of Colombia’s most important steps toward regulatory efficiency in its domestic financial markets. After this consolidation, domestic M&As have soared, contributing to the development of many MNEs. The sectoral and industry distribution of Colombia’s OFDI is evolving. During the 1990s, the secondary and services sectors together accounted, on average, for more than 95 percent of Colombia’s OFDI flows, with financial services accounting for the single largest share of OFDI in the ten-year period. In the past decade (2000-2009), OFDI in the services sector still continued to grow, albeit not as aggressively as in the primary sector. As Colombia’s economy gradually shifted to a knowledge-based economy, cross-border investment in services (other than financial) increased rapidly (see annex table 3). Since 2007, however, Colombian FDI outflows were strongly dominated by large investments by Ecopetrol SA, now a public-private holding that was privatized in that year. Since then, the primary sector has accounted for roughly 70 percent of Colombia’s OFDI, with petroleum and natural gas accounting for most investment.

In 2010, the main recipient economies of Colombia’s OFDI flows included Bermuda (US$2.1 billion), the British Virgin Islands (US$!.4 billion), Guatemala (US$661 million), the United Kingdom (US$631 million), Panama (US$414 million), the United States (US$375 million), Peru (US$307 million), Chile (US$282 million), and Brazil (US$189 million). There is no specified economic activity in the case of Bermuda and the British Virgin Islands other than financial, suggesting a possible outflow of capital to avoid home-country taxes. Also, it is difficult, on the basis of standard data, to determine how much of this capital has returned to the country as “round-tripping” FDI.

The corporate players

Colombia has shown a tendency for state-owned enterprises to be turned into national

champions, as in the case of Ecopetrol SA, Interconexión Eléctrica (ISA), Empresas Públicas de Medellín, and, most recently, Empresas de Telécomunicaciones de Bogotá (ETB). These largely state-owned enterprises rank among the top Colombian MNEs, with OFDI mainly (but not exclusively) flowing from them to Latin American economies.

• Colombia’s largest company, Ecopetrol SA, is one of the world’s top 40 oil companies. It has activities in Colombia, the United States, Brazil, and Peru, more than tripling its

production since 2005. Ecopetrol SA had its initial public offering on the Colombian

stock exchange in 2007, selling to 500,000 shareholders and raising equity capital of

more than COP 7.7 billion.

• Colombia’s Interconexión Eléctrica S. A. (ISA) is one of Latin America’s largest

electricity providers, with operations in Brazil, Chile, Ecuador, Panama, Peru, and

Venezuela. It has evolved from being just an electricity company by diversifying its

investment portfolio into multiple infrastructure projects, including transportation and

telecommunications, under a cost-effective model entitled “lineal infrastructure systems”

(e.g. fiber-optics for communications connected to the electricity grid).

• Empresas Públicas de Medellín (EPM) is the largest electricity provider in Colombia,

serving roughly 25 percent of the national demand for electricity. EPM is developing the

Bonyic hydroelectric project in Panama, and has grown considerably both in assets and

capacity in 2000-2010. Along with ISA, EPM is largely a public holding operating with a

minority stake of private capital.

• In the financial services industry, Grupo Bancolombia, a rapidly developing translatina, is by far the largest corporate player. In 2007, Bancolombia completed one of Central

America’s largest deals with the US$790 million acquisition of Banagrícola in El Salvador. This transaction represented Bancolombia’s entry into the international

financial services market, positioning the company as a key player in Central America.

Bancolombia has also invested in foreign affiliates in Brazil, the United States, Puerto Rico, Panama, and Peru.

• Argos, a Colombian cement translatina, started its internationalization in 2000 after

acquiring the debt-stressed Belgian firm Holcim’s holdings in the Dominican Republic,

Haiti and Panama, thus opening the door for the company’s expansion and consolidation

in the Caribbean. Argos operates today in the southern United States, Mexico, Central

America, the northern part of South America (Colombia), and various islands in the

Caribbean.

• Terpel, a gasoline distributor, had been for many years (before Ecopetrol’s transformation) Colombia’s largest company by turnover, which reached US$3.4 billion

in 2009. With activities in Chile, Ecuador, Mexico, Panama and Peru, the company

competes today for second place in turnover after Ecopetrol SA.

• Another important translatina that internationalized its production in the 2000s after

going through a strategic sequence of local acquisitions is Grupo Nacional de Chocolates

(GNC), now called Grupo Nutresa after its recent acquisition in 2009 of the Mexican

food company Nutresa, which produces chocolate-based confectionary. After beginning

its operational expansion in Ecuador and Venezuela, the emerging food conglomerate is

now operating in 14 economies.

• Avianca, Colombia’s oldest airline went in one decade from filing for Chapter 11 bankruptcy in New York to becoming one of the region’s largest, most competitive airlines. Avianca’s most recent acquisition of 10 percent of Central America’s Taca has made Avianca-Taca a competitor with a strong presence outside Colombia, reaching more than 100 destinations globally and 75 in Latin America; with operations in Colombia, Costa Rica, El Salvador, and Peru, Avianca-Taca delivers an improved service to more than 30 million clients annually. (…)

The largest cross-border M&As by Colombian MNEs during 2008-2010 [include]  the ISA acquisition of Cintra Concesiones (Chile) for US$ 2.6 billion, as well as the acquisition of Grupo Aval of BAC (Panama) for US$1.9 billion and the EPM acquisition of DECA II (Guatemala) for US$758 million.

Newly emerging MNEs include Juan Valdez (Procafecol), Grupo Aval, ETB, Promigas, Gerfor, Grupo Phoenix, Casa Luker, Allus Global BPO Center, Zemoga, Supertex, Intergrupo, Corona, Ultrabursatiles, Ajover, Colpatria, Corona, and Deprisa.

EFFECTS OF THE RECENT GLOBAL CRISIS

In spite of the global economic and financial crisis in 2008-2009, Colombia’s economy has continued to grow in recent years. Although real GDP growth declined to 3.5 percent in 2008 and to 1.5 percent in 2009 (from an annual average of 4.5 percent in 2001-2007), the Colombian economy was less affected by the crisis than many other economies. Real GDP growth rates cited above were similar to those of the recession recovery years of 2001 (1.7 percent) and 2002 (2.5 percent). In 2010, real GDP grew by 4.3 percent, showing a recovery stronger than some major world economies, but slower than those of comparable economies such as Argentina, Brazil, Chile, Mexico, and Peru.

Strong domestic investment and IFDI flows contributed substantially to an increase in gross fixed capital formation, which peaked in 2010 at an 11 percent growth rate. Inward FDI flows grew from US$ 2.4 billion in 2000 to US$ 10.6 billion in 2008, and while they decreased slightly to US$ 7.2 billion in 2009, IFDI stock continued its upward trend, rising from US$ 67 billion in 2008 to US$ 74 billion in 2009. OFDI flows emerged virtually unshaken from the crisis, peaking in 2010 at US$ 6.5 billion, a six-fold increase vis-à-vis 2007. Some of today’s translatinas, including Cementos Argos, EPM, and Grupo Nacional de Chocolates (Nutresa), took advantage of the crisis to invest at record low cost and thus expand abroad.

THE POLICY SCENE

In the 1990s, the Colombian Government’s predominant method of encouraging international economic transactions did not go beyond supporting trade activities in export markets. Today’s key recipients of OFDI from Colombia are in most cases also the main recipients of Colombian exports. During the past decade, Colombia has revised its investment framework with efforts directed at promoting investment and the emergence of translatinas.

In 2005, after the creation of the Superintendencia Financiera, procedures and transaction costs for domestic M&As improved, so Colombia’s largest MNEs were able to capitalize on domestic expansion through innumerable local acquisitions that positioned many of the top firms on a path of further growth and internationalization. Also in 2005, “Ley 963 de 2005” established legal stability for investors, both foreign and domestic.

In 2006, the Uribe Government focused on investment, dedicating Chapter Four of the National Plan of Development 2006-2010 to laying out a national blueprint for facilitating investment, as well as embarking on a new era of investment promotion by promoting security, stability and competition at home. Then in 2008, the Government enacted “Ley 1253 de 2008” in which it regulates “productivity and competitiveness (…) that facilitate the incorporation of Colombia in the global economy and better export performance”. The combination of these policies has served to strengthen Colombian enterprises and their ability to invest abroad.

Most recently, in 2009, the Government enacted “Ley 1340 de 2009”, in which it regulates the “protection of free competition in the Colombian territory”, a norm that is attractive to both domestic and foreign investors.

In 2010, Chile, Colombia and Peru signed a commitment to create the first regionally integrated stock exchange, the Mercado Integrado Latinoamericano (MILA), which started trading operations on May 31, 2011. The MILA economies constitute the market in Latin America with the highest prospects for real GDP growth (estimated at 4-6 percent per annum) according to the World Bank, as well as the region’s most diversified turnover, with growing exports to Asia, Europe and the United States. Also, MILA members’ strategic position on the Pacific coast coupled with their increasing sales to China (which seeks their commodities) and their position as the region’s friendliest host countries for foreign investors as shown in the World Bank’s 2011 Ease of Doing Business report suggest that OFDI from Colombia will continue to expand.

These policy developments suggest that Colombia’s policy makers now understand the

dynamism and opportunity that OFDI brings, as reflected recently in international investment agreements (IIAs). Colombia has signed six double taxation treaties (DTTs) (with Argentina, Canada, Chile, Mexico, Spain, and the United States), and nine bilateral investment treaties (BITs) (with China, Cuba, Guatemala, India, Luxembourg, Peru, Spain, Switzerland, and the United Kingdom), (while most OECD economies had signed more than 50 each by 2010). Two-thirds of Colombia’s BITs were signed in the late 2000s, suggesting that Colombia has recently begun to take a more active role in international investment diplomacy.

In addition to expanding its network of IIAs, Colombia now faces the challenge of encouraging sustainable investment. Policy reforms are needed that can optimize investments in oil and gas in a world of twin energy-environmental crises, as well as encourage corporate social responsibility that balances the returns to Colombian MNEs with a positive environmental impact and the human, social and economic development of the host economies in which their foreign affiliates operate. In particular, Colombia must continue to strengthen its environmental impact assessment (EIA) system, as well as ensure a more effective application of international standards related to EIA in the public and private sectors (including as regards OFDI by Colombian MNEs), and in line with Colombia’s commitments under relevant international agreements. Recent studies have concluded that Colombia has promulgated laws regulating the environmental impact of commercial activity, but still needs to widen the (currently rather limited) scope of legal measures and administrative support, and put in place procedures for the design and implementation of environmental impact systems and follow-up and control mechanisms.

Colombia also faces specific challenges in infrastructure. Although the country is one of the region’s largest and most developed economies, bottlenecks in transport could pose avoidable limitations to the domestic growth and corporate profits of emerging MNEs, and thereby also to job creation and GDP growth. The current administration’s emphasis on infrastructure as one of the key engines of growth could contribute enormously to OFDI and GDP growth, as outlined in the National Plan for Development 2010-2014.

CONCLUSIONS

Colombia’s OFDI has shown considerable growth after major policy reforms, enhanced security and investor confidence in the past decade. Similar growth rates were recorded in the mid-1990s after the opening of the economy to world trade and other liberalizing policies of the early-1990s. The improved security situation, a stronger financial sector with increasing capital available for local MNEs, a combination of liberalized policy in trade and investment, and conservative monetary policy and financial regulations have all also contributed to strengthening Colombia’s economy and enabling the internationalization of its corporations. Colombia nevertheless faces challenges, especially in infrastructure development, in strengthening its MNEs’ capabilities, and the need to take further advantage of IIAs and seek to promote sustainable OFDI.

Ana-María Poveda Garcés, “Outward FDI from Colombia and its policy context,” Columbia FDI Profiles, September 1, 2011. Reprinted with permission from the Vale Columbia Center on Sustainable International Investment (www.vcc.columbia.edu). 

Ana-María Poveda Garcés holds a Masters degree in Public Administration from Columbia University. She previously was a consultant for the Ministry of Foreign Affairs of Colombia, the Economist Intelligence Unit (EIU) and the United Nations Development Programme (UNDP) in Tanzania. The author wishes to thank Thomas Jost, Gianluca Mele and José Antonio Ocampo for their helpful comments. The views expressed by the author of this Profile do not necessarily reflect the opinions of Columbia University, its partners and supporters.