How is Latin America beating the U.S., China and Europe in FDI?

Ingo Ploger, President, Strategic Council, CEAL

Latin America’s reputation remains shaken and is under fire. In Brazil, the presidency passed a vote of confidence in Congress, confirming its permanence. In Mexico, NAFTA negotiations are facing a lot of stress, causing insecurity. Chile has already launched presidential campaigns, with no clear frontrunner. Ecuador arrested its vice president involved in corruption. Venezuela is on the verge of collapse and the regime goes beyond the limits of democratic tolerance. And several other countries are facing compliance as a new reality of doing politics and business.

In this spirit of volatility, uncertainty, complexity and ambiguities (VUCA) investors don’t necessarily have the motivation to seek the region as the first option for their investments. It is to be expected that as this scenario develops, capital will wait for better times.

However, the surprise is big when we analyze the performance of foreign direct investment (FDI) as a percentage of GDP in Latin America over the last few years compared to other regions such as the U.S., the EU and China. Evaluating the last 6 years, we can see that FDI-GDP in Latin America remains constant at 3.3 percent, while that of U.S., EU and China are below 3 percent.

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Many evaluations can be made on this aspect. The first is that Latin America has been attracting FDI for its infrastructure, and that it is paying the capital satisfactorily. China doesn’t allow foreign capital in infrastructure. In the U.S. and the EU, the infrastructure is already well developed. The investment in Greenfields or in mergers and acquisitions can explain that Latin America has maintained a growth of its middle class by social insertion (Gini Index decreasing) and is keeping the interest in the investments of entrance products that are low-tech but of great scale. Mercosur’s productive chains in the areas of agribusiness and energy are growing and the Pacific Alliance’s short chains are interesting because of their competitiveness.

The outflow of Latin America in these years has served to carry out the investment of the “multilatinas” as well as profits’ remittances of international companies.  The FDI-GDP indicator is not used by economists, but it shows how the foreign investor evaluates third markets. In the comparison between economic blocks it is more common to observe the absolute value of FDI, but the relation with GDP makes sense for the performance aspect. Thus, Latin America has a high investment performance in IED, although its reputation is not among the best in the world.

What does this information teach us?

That probably the VUCA of Latin America is a symptom of transformation for the better and not necessarily for the worse. When a civil society sets out to transform itself it may generate many uncertainties, volatility and ambiguities, but if its direction is correct, then the bet will be well paid!

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