FDI trends diverge widely: up in South America and down in Central America and the Caribbean

Geneva, 17 September 2009 - Foreign direct investment (FDI) inflows to the Latin America and Caribbean region rose overall by 13% in 2008, to US$144 billion, the World Investment Report 2009(1) reveals.

The UNCTAD report, subtitled Transnational Corporations, Agricultural Production and Development, was released today.

But there were wide variations within the region. In 2008, while FDI inflows grew by 29% in South America, they were negative (-6%) in Central America and the Caribbean. This divergence reveals the differing impacts of the global financial crisis on the two subregions´ economies. The downturn of FDI to Central America and the Caribbean was largely due to the strong decrease in inflows to Mexico (-20%), which was hit hard by the slowdown of the United States economy. South America, on the other hand, was affected by the crisis much later, so that inflows continued to increase for much of the year. There was robust growth of inward FDI to Argentina (up 37%), Chile (33%) and Brazil (30%), and, to a lesser extent, Colombia (17%). Together, these four countries accounted for 89% of the subregion´s total inflows (as shown in the table).

Activities related to natural resources continued to be the main attraction for FDI in South America, and natural resources are increasingly becoming a significant FDI target in Central America and the Caribbean. In particular, FDI in the metal extractive industry boomed in 2008: cross-border mergers and acquisitions (M&As) targeting this industry amounted to US$9 billion - an eightfold increase from the previous year. In contrast, the value of cross-border M&A sales in the oil and gas industry turned negative, indicating divestments by foreign firms. The manufacturing sector as a whole saw a decline in FDI due to a sharp drop in flows to Central America and the Caribbean, where foreign-owned export-oriented manufacturing activities are closely tied to the United States economic cycle. In South America, on the other hand, FDI in manufacturing was more or less stable. This is because the sector is highly concentrated in natural-resources-related activities and is more oriented to the internal market and to export destinations other than the United States.

FDI outflows from Latin America and the Caribbean increased in 2008 by 22% to US$63 billion. Soaring outflows from South America, which grew by 131%, more than compensated for a 22% decline of outflows from Central America and the Caribbean. Brazil registered the strongest increase, with outflows amounting to US$20 billion - 189% higher than the previous year. By contrast, outflows from Mexico plummeted to US$700 million from their previous level of $8 billion. Cross-border acquisitions by Mexican firms declined in 2008 (down $358 million from 2007) because sales of existing foreign affiliates of Mexican-based TNCs were higher than the purchases of firms abroad by Mexican-based TNCs. The global financial crisis and the fall in commodity prices have revealed the vulnerabilities of Brazilian and Mexican TNCs, which are exposed to volatile exchange rates and commodity prices.

Declines are expected in 2009 in both FDI inflows and outflows, as the impact of the global economic and financial crisis on international trade and credit markets for investment begins to spread to the whole region. However, in the medium term, higher commodity prices could attract more natural-resource-related inward FDI. Prospects for FDI outflows will depend on world economic growth trends, and on the capacity of Latin American TNCs to overcome financial problems deriving from the global crisis.

ANNEX

Tables and figures

Table 1. FDI flows of selected countries in Latin America and the Caribbean, 2008-2009, by quarter(Millions of dollars)


Source: UNCTAD, World Investment Report 2009: Transnational Corporations, Agricultural Production and Development, table II.17