Foreign Direct Investment in Latin America and the Caribbean 2015

Economic Commission for Latin America and the Caribbean (ECLAC)
received the majority of FDI in the transport and telecommunications sector on the back of significant investments
in the expansion of telecommunications services.
The tourism industry is a key sector, attracting the bulk of investment in many countries in the Caribbean. The
transformative impact of tourism investment is constrained by the limited capacity of many economies to provide the
inputs required by the tourism value chain. To address this constraint, governments should encourage home-grown
investment in secondary services, as well as agriculture and small-scale manufacturing, to increase spillovers from the
tourism industry. Countries in the Caribbean should also remain vigilant regarding the fast rise in tourist numbers
to other regions, which may leave some ambitious expansion plans without the market necessary to support them.
Significant FDI takes place in the hydrocarbons sectors of Trinidad and Tobago and Suriname, where oil is an
important export product. The mineral that attracts most FDI in the region’s mining industry is gold. Guyana and
Suriname have substantial operations in the gold mining industry, but the largest mining investment in the Caribbean
is the Pueblo Viejo gold mine in the Dominican Republic. The construction of the mine has been completed, so
it is not currently receiving significant inflows of FDI, but it has had a positive impact on the country’s current
account and may open the door to further investment in the future.
The Dominican Republic, being the largest economy in the region, also attracts significant investment in
the export-oriented manufacturing sector, particularly from the United States. Haiti is also slowly entering this
market, but from a very low base. Export-oriented services play a much larger role in the rest of the Caribbean.
Business process outsourcing (BPO) is a key export-oriented service in several economies, while others focus on
higher value financial services. A unique export-oriented service in the Caribbean is offshore education. There are
currently 40 educational institutions that target the North American education market, with significant spillover
benefits for local economies.
One major constraint on market-seeking FDI is the small size of the subregion’s markets. However, some
firms manage to operate profitably by treating the Caribbean as a single market, rather than a collection of small
markets. This strategy is apparent in the telecommunications and financial services markets. In other sectors,
much of the market-seeking FDI is from small firms seeking niches in the different economies. Several major
trans-Caribbean conglomerates are also actively vying for share in the different markets. These companies use
their conglomerate structure to reduce risk by taking on different product and geographical markets. While these
trans-Caribbean conglomerates have typically focused mainly on the Caribbean, the sluggish economic growth
in the subregion is now pushing them to look further afield and seek investment opportunities in South, Central
and North America.
The subregion’s ability to attract significant FDI is attributable in part to a generous set of FDI promotion
policies. Currently, such policies target four areas: active promotion by an investment promotion agency; improving
the overall business climate; reducing obstacles that are specific to foreign investors; and providing financial
incentives, such as tax holidays. Most governments focus on providing financial incentives since they are easily
granted, while it is much harder to introduce structural improvements to the business climate. Nonetheless, the
complicated fiscal situation in many Caribbean countries should prompt governments to rethink their focus on
such incentives. This will be challenging, however, since competition between taxation regimes is used to attract
the largest investments, and Caribbean governments will therefore have to work together to coordinate such policy
changes across the subregion.
It is not clear whether existing FDI promotion policies have a positive or negative impact on economic
development. FDI certainly can have a transformative impact on a country’s economic situation, but only if the
conditions are right for encouraging local spillovers by integrating FDI with local value chains. This is not currently
the case for the Caribbean. Furthermore, FDI may promote growth in a country’s capital stock or help sustain
temporary current account deficits, but since the relationship between FDI and capital stock growth is weak and
outflows of FDI income have been increasing, neither of these potential effects would seem to be of benefit to
the subregion.
Summary and conclusions
While the Caribbean has attracted significant FDI over the years, it is not clear that the region has fully leveraged
that investment. Most governments could do more to harness existing FDI to encourage economic growth, while
some economies, particularly Cuba and Haiti, which have to date received very small FDI inflows, would first
have to attract those flows in order to perceive any significant positive impact.
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