Foreign Direct Investment in Latin America and the Caribbean 2015

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Foreign Direct Investment in Latin America and the Caribbean • 2015 among the few economies for which there are data on FDI income by sector. In terms of average profitability across sectors, the mining sector in Chile stands out for its returns of up to 25% in 2010. But other sectors have also been very profitable, including public utilities (electricity, gas and water), which have achieved returns of 10% that same year. In Brazil, mining and oil were not among the most profitable sectors for transnational corporations; rather, automotive manufacturing and cement production reached return levels above 10%. Figure I.21 Latin America and the Caribbean: FDI stock and average profitability of FDI, 2001-2014 (Billions of dollars and percentages) 2 000 1 800 1 600 1 400 1 200 1 000 800 600 400 200 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 12 10 8 6 4 2 0 FDI stock FDI income as a proportion of FDI stock Source: Economic commission for Latin America and the Caribbean (ECLAC), on the basis of official figures and estimates as of 18 May 2015. While the earnings generated in the extractive industries are higher, the effects on the balance of payments may actually be milder if these income flows are offset by increased exports of commodities. Export-oriented FDI can compensate for the profits it repatriates with the value of the exports it generates. By contrast, FDI income in market-seeking activities may put more pressure on the current account as they are not offset by exports. It is important to note that not all FDI income recorded as a debit in the current account leaves the country. In fact, about 50% of FDI income is reinvested in the same economies —a proportion that has remained relatively stable over the years. In 2009, when the financial crisis had an impact on FDI income, transnational corporations maintained their level of reinvested earnings and reduced profit repatriations (see figure I.22). Figure I.22 Latin America and the Caribbean: a reinvested and repatriated FDI income, 2005-2014 (Billions of dollars) 100 90 80 70 60 50 40 30 20 10 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Reinvested earnings Repatriated earnings Source: Economic commission for Latin America and the Caribbean (ECLAC), on the basis of official figures and estimates as of 18 May 2015. a The figures shown here do not include Brazil, since that country did not report reinvested earnings under the fifth edition Balance of Payments Manual methodology it used until recently. Chapter I 49
Economic Commission for Latin America and the Caribbean (ECLAC) Reinvested earnings are recorded as both a debit on the current account and as a liability on the capital account. This alleviates the pressure on the external accounts, but only at the cost of accumulating a higher liability in the form of FDI stock. In fact, most countries in the region have been financing their current account deficits with large inflows of capital, mainly FDI. As noted above, the ever-burgeoning FDI stock will have a long-term impact on the current account as FDI income swells. In fact, taking into account capital inflows and profit outflows, FDI is already having a negative impact on the balance of payments in some countries in the region. Over the past decade, outflows of FDI income from Chile, Colombia, Peru and the Plurinational State of Bolivia have exceeded the FDI inflows received. Of course, in the same way that transnationals’ profits in the region are marked as debits on the current account, the profits made by trans-Latin corporations abroad are registered as credits. This should offset the negative effect on the current account of the repatriated earnings flowing out of the region, but so far it has had a limited effect: FDI income outflows total some US$ 100 billion, whereas FDI income inflows have yet to exceed US$ 15 billion and are concentrated in only a few countries. Overall, the current account deficits posted in most Latin American and Caribbean economies and the role that FDI income has played in them highlight the fact that FDI, as is the case for other forms of external capital, carries a cost. While FDI has been praised for its stability (it rarely turns negative), its persistent effects on the current account are significant. In order to offset these effects, FDI should promote changes in the production structure that could boost exports in the future. Even in industries where large FDI flows have clearly increased production capacities (such as the automotive industry), the shallowness of local value chains turns these industries into net importers as well. F. Conclusions FDI inflows into Latin America and the Caribbean fell by 16% in 2014. That fall was somewhat larger than expected and has been amplified by a number of one-off events, mostly the Grupo Modelo acquisition in Mexico, which inflated the FDI figures in 2013, and the nationalization of YPF in Argentina, which was settled in 2014 and represented a large divestment. The drop in commodity prices, which began in 2012 for metals and spread to oil in the second half of 2014, led to a sizeable reduction of FDI in natural resources in the region. This represented an important change in the cycle, as FDI had been responsible, to a large extent, for the reprimarization of some economies in the region in the previous decade. Falling investment in the natural resources sector was partially offset by increasing investment in the services sector, especially in market-seeking services. Manufacturing received significant FDI inflows, but mainly in the larger economies. FDI outflows also decreased significantly from US$ 33.251 billion in 2013 to US$ 29.162 billion in 2014. The great majority of outflows still originate in a few Latin American countries and are directed towards other economies within the region. Developed countries receive some investment from the trans-Latins, but the outflows to developing countries outside the region are very small. Overall, trans-Latin corporations are not sufficiently diversified geographically to avoid being affected by the adverse economic environment in the region. Although the average profitability of FDI has declined in recent years, FDI income is having an ever greater negative impact on the balance of payments. FDI income was responsible for a large share of the current account deficit in 2014, which reached 2.7% of GDP. Addressing that growing deficit requires a large capital account surplus, which can be partially funded through FDI itself. In a context of subdued economic growth and lower international demand for its key exports, Latin American and Caribbean economies will need to attract FDI projects that can raise production capacity and help diversify their economies. Chapter I 50
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