Foreign investment in Latin America and the Caribbean, 2005

José Luis MachineaExecutive Secretary

Economic Commission for Latin America and the Caribbean

Santiago, Chile, 12 April 2006

Contents

I: Regional overview

II: Policies for attracting FDI

III: Trans-Latins

I: Regional overview

Worldwide flows of FDI, 1990-2005(Billions of dollars)

0250500750

100012501500

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

World total Developed countries Developing countries

Worldwide flows of FDI increased in 2005: US$ 896.7 billion ( 29%)

FDI inflows to developing regions(Percentages of GDP)

6

7

0

1

2

3

4

5

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Latin America and the Caribbean AfricaDeveloping Asia South-East Europe and CIS

How the Latin American and Caribbean region’s share of worldwide FDI flows compares with

developing Asia’s share

25%

30%

0%

5%

10%

15%

20%

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Latin America and the Caribbean Developing Asia

Following a sharp decline in the late 1990s, the share received by Latin America and the Caribbean has remained relatively stable

FDI flows to Latin America and the Caribbean, 1990-2005

(Billions of dollars)

0

10

20

30

40

50

60

70

80

90

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

South America Mexico and the Caribbean Basin Total

Total: US$ 68 billion ( 10.6%)

FDI flows to Latin America and the Caribbean, 1990-2005

(Percentages of GDP)

012345678

1990

19

91

1992

19

93

1994

19

95

1996

19

97

1998

19

99

2000

20

01

2002

2003

2004

2005

South America Mexico and Central America Caribbean

Main recipients of FDI in Latin America and the Caribbean in 2005*

(Billions of dollars)

* Updated on 24/04/061.5301.160Ecuador2.5191.816Peru2.9571.518Venezuela (Bol. Rep.)

4.2747.1733.117

18.14618.244

2004

4.662Argentina7.209Chile

10.192Colombia15.066Brazil17.805Mexico

2005

FDI/GDP, 2005 (Percentages)

-4 -2 0 2 4 6 8 10

BoliviaParaguay

GuatemalaBrazil

HondurasVenezuela, Bol.

MexicoArgentina

El SalvadorAverage

Dominican RepublicCosta Rica

PeruUruguay

NicaraguaEcuador

Trinidad and TobagoChile

JamaicaPanama

Colombia

Latin America and the Caribbean:FDI recipient sectors,1996-2005

(Percentages)

0%10%20%30%40%50%60%70%80%90%

100%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Services Manufactures Natural resources

Services predominateIncrease in share corresponding to manufactures

Latin America and the Caribbean: FDI sources, 1996-2005(Percentages)

United States and Europe are still the largest investorsSpain is contributing a smaller proportionIntraregional flows are small but on the rise

0%

20%

40%

60%

80%

100%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

United States Spain Netherlands Intraregional flows Other

Top 15 non-financial TNCs in the region, by sales Firm Home country Sector

Sales, 2004

(millions US$)

% of sales in LAC Main subsidiaries

1 General Motors Corp. United States Automotive 18.8 10 Mexico, Brazil, Colombia, Argentina

2 Telefónica de España SA Spain Telecoms 17.1 45 Brazil, Chile, Peru, Mexico, Argentina

3 Wal-Mart Stores United States Commerce 14.4 5 Mexico, Brazil, Argentina, Guatemala

4 DaimlerChrysler AG Germany Automotive 14.0 8 Mexico, Brazil, Argentina5 Volkswagen AG Germany Automotive 11.8 11 Mexico, Brazil, Argentina6 Bunge United States Agribusiness 10.7 42 Brazil, Argentina

7 Endesa Spain Electricity 9.7 44 Chile, Brazil, Argentina, Peru

8 Ford Motor Co. United States Automotive 8.7 5 Mexico, Brazil, Argentina

9 Telecom Italia SpA Italy Telecoms 8.5 22 Brazil, Argentina, Chile, Bolivia

10 Delphi Automotive Systems Corporation United States Auto parts 7.0 24 Mexico, Brazil

11 AES United States Electricity 6.9 72 Brazil, Venezuela (Bol. Rep.), Chile, Argentina

12 Repsol YPF Spain Oil/gas 6.7 15 Argentina, Chile, Peru, Ecuador, Bolivia, Colombia, Brazil

13 Carrefour Group France Commerce 6.6 7 Brazil, Argentina, Mexico, Colombia

14 Royal Dutch-Shell Group Netherlands/United Kingdom Oil/gas 6.4 2 Brazil, Chile, Argentina,

Mexico

15 Unilever Netherlands/United Kingdom Home care/food 5.1 10 Brazil, Mexico,

Argentina, Chile

16 ExxonMobil Corporation United States Oil/gas 4.9 2 Brazil, Colombia, Argentina, Chile

17 Cargill, Inc. United States Agribusiness 4.8 7 Argentina, Brazil 18 Hewlett-Packard (HP) United States Computing 4.8 6 Mexico, Brazil, Argentina19 Nissan Motor Japan Automotive 4.8 6 Mexico

20 Nestlé Switzerland Agribusiness 4.7 7 Mexico, Brazil, Colombia, Chile

Exports of the top 200 export firms in the region, 1995, 2000, 2004

(Percentages)

TNCs losing market share, even in manufacturing

Primary activities

0%

25%

50%

75%

100%

1995 2000 2004

Manufactures

0%

25%

50%

75%

100%

1995 2000 2004

Total

0%

25%

50%

75%

100%

1995 2000 2004

Private local Private foreign State-owned

Sales of the top 500 non-financial firms in Latin America and the Caribbean, by type of ownership and sector, 1995, 2000, 2004

(Percentages)Manufactures

0%

25%

50%

75%

100%

1995 2000 2004

Primary activities

0%

25%

50%

75%

100%

1995 2000 2004

Services

0 %

2 5%

50 %

75%

100 %

1995 2000 2004

Total

0%

25%

50%

75%

100%

1995 2000 2004

Private local Private foreign State-ow ned

TNCs losing market share, even in manufacturingPrivate local firms on the increase

Regional overview: conclusions

FDI Inflows to Latin America and the Caribbean remained at around US$ 60 billion, but the region lost ground in relative terms

State-owned enterprises and private local firms are gaining ground among the top companies and exporters

Challenges: increasing the quantity and quality of FDI

I: Regional overview

II: Policies for attracting FDI

Attracting FDIThree policy models

Passive: based on confidence in the business environment (comparative advantages, macroeconomics, institutions, rules of the game). By definition, these policies do not distinguish between different types of investment.

Active: countries actively seek FDI through horizontal and vertical measures, including the targeting of specific companies.

Integrated: FDI is a part of productive development policy, which includes linkages, training of human resources, innovation, etc. Investment promotion agencies (IPAs) can act as catalysts for FDI if they work in coordination with other public agencies.

Characteristics of investment promotion agencies (IPAs) in Latin America and the Caribbean

Offices or representativesabroad

Date of creationor major changes

Staff(total)Budget

After2000(12)

Prior to 2000(3)

Less than US$ 500,000

(6)

Between US$ 500,000 and 1

million(3)

Over US$ 1 million

(6)

Fewer than 10 people

(5)

Between 10 and 20

people (5)

More than 20 people

(5)

No office/ rep. (6)

Mixed (mainly exports)

(6)

For investment

only (3)

Development of IPAs in the region

Policies for attracting FDI are at an early stage (most of the region’s existing IPAs were created since 2000)

Functions of the region’s IPAs are similar to those in other parts of the world, but their actions are “reactive” rather than “proactive”

When incentives exist, they are usually fiscal incentives or benefits associated with free zones ormaquila operations

Few countries use specific instruments, such as incentives to invest in innovation, to attract quality FDI

Development of IPAs in the region

There is a worldwide trend towards replacing passive policies with active policies

The region is making considerable yet still insufficient efforts to build policymaking capacity: skilled personnel, resources and instruments

IPAs must act in coordination with the productive development strategy

I: Regional overview

II: Policies for attracting FDI

III: Trans-Latins

Outward foreign direct investment (OFDI): developed and developing countries, 1970-2004

(Percentages)

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Developed countries Developing countries

Internationalization processes heavily concentrated in industrialized economies

Outward foreign direct investment (OFDI): developing countries, by region, 1970-2004

(Millions of dollars)

-5000

5000

15000

25000

35000

45000

55000

65000

75000

85000

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Latin America and the Caribbean Developing Asia

Developing Asia is outperforming Latin America

FDI stock as a percentage of GDP: selected Asian and Latin American countries, 2004

(Percentages)94.5

In relative terms, the region has significant FDI stocks

01234

56789

1011121314

1516

Singapore China Republicof Korea

Malaysia Brazil Argentina Mexico Chile

The main TNCs in developing countries are Asian

BY ORDER OF EXTERNAL ASSETS, 2003 (Billions of dollars)

6.159DiversifiedHong Kong, ChinaJardine Matheson Holdings Ltd10

7.118ElectronicsRepublic of KoreaLG Electronics Inc.9

7.827PetroleumBrazilPetroleo Brasileiro (PETROBRAS)8

8.457TransportChinaChina Ocean Shipping Co.7

8.676TelecommunicationsMexicoAmérica Móvil6

11.054CementMexicoCemex S.A.5

12.387ElectronicsRepublic of KoreaSamsung Electronics Co., Ltd.4

16.114PetroleumMalaysiaPetroliam Nasional Bhd (PETRONAS)3

17.911TelecommunicationsSingaporeSingtel Ltd.2

59.141DiversifiedHong Kong, ChinaHutchison Whampoa Limited1

External assets

SectorCountryCompany

Although 3 of the 10 companies with the most external assets are Latin American, only 7 of the top 50 are from the region (4 from Mexico and 3 from Brazil). In 1977, 14 of the top 30 were Latin American.

Economic reforms in the 1990s: a boost for internationalization

-2000

0

2000

4000

6000

8000

10000

1980 1985 1990 1995 2000 2005

Argentina Brazil Chile Mexico

OUTWARD FOREIGN DIRECT INVESTMENT (OFDI), 1980-2004(Millions of dollars)

Available statistics indicate the direction of the trend, but not its actual proportions. OFDI is concentrated in a few countries (Argentina, Brazil, Chile and Mexico).

Common factors• Economic reforms in local economies• Saturated local markets• Opportunities in neighbouring countries • Specialization pattern• Diversification of reserves of natural

resources• Risk diversification• New relationships with TNCs• Limited State support for external

operations

Leading trans-Latins, 2004

XXX63.200PetroleumVenezuela (Bol. Rep. of)PDVSA1

XX4.523BeveragesBrazilAmBev15

XXX4.623FoodMexicoBimbo14

XX4.704PetroleumChileENAP13

X4.863ElectricityChileEnersis12

XXX5.275DiversifiedMexicoGrupo Alfa11

XXXXX6.421SteelArgentinaTechint10

XXX6.666PetroleumArgentinaYPF9

XXX7.383SteelBrazilGerdau8

XXXXX8.142CementMexicoCEMEX7

X8.426Beverages MexicoGrupo FEMSA6

XXXXX10.377MiningBrazilCVRD5

XX12.086TelecomMexicoAmérica Móvil4

XX12.443TelecomMexicoTELMEX3

XXXXX40.763PetroleumBrazilPETROBRAS 2

OTAPEUNALA

Operations in regional marketsSales (billions

US$)

SectorCountryCompany

Some of the main trans-Latins were acquired by TNCs seeking rapid access to Latin American markets.

ECLAC interviewed executives from 45 trans-Latins.

Process concentrated in a few sectors

• Basic industries• Strong State support at the start• Internationalization was a necessity• World leaders in their respective segments

• Food and beverages• Predominant influence of the top TNCs’ global

strategies• Prevalence of “shooting stars” and links with TNCs

• Service sectors• Trans-Latins following privatization: rapid growth but

an uncertain future in the face of competition from TNCs

• Creation of competitive advantages and capture of market niches

Conclusions• Main Latin American corporations are

internationalizing• Largest and most competitive trans-

Latins with the highest international profile are concentrated in basic industries

• Manufacturing and service trans-Latinshave faced stiff competition from top TNCs

• Striking number of “shooting stars”• New challenges for trans-Latins

Foreign investment in Latin America and the Caribbean, 2005

José Luis MachineaExecutive Secretary

Economic Commission for Latin America and the Caribbean

Santiago, Chile, 12 April 2006