You are here
Foreign Direct Investment In Latin America And The Caribbean 2015
Foreign direct investment (FDI) in Latin America and the Caribbean fell by 16% in 2014 to US$ 158.803 billion. Outflows of FDI from the region were also down, by 8%. Both these trends were driven by the decline in prices of export commodities and the economic slowdown in the region. Nevertheless, FDI remains very important for the economies in the region, especially for smaller Caribbean economies.
Global FDI flows were down by 7% in 2014, but flows to developing and developed economies differed significantly. Flows to the developed economies fell by 14%, as FDI to North America plummeted by 54%, owing principally to a single divestment in the United States. The Russian Federation faced sanctions, among other economic challenges, which led to a 51% fall in inflows to the transition economies in 2014, while inflows to the developing economies rose by 5%. Decreased flows to both Latin America and the Caribbean (16%) and Africa (2%) were offset by a substantial increase to developing Asia (15%).
As a share of GDP, FDI inflows in Latin America and the Caribbean stood at 2.6%, which is somewhat lower than the region’s long-term average, although this proportion also varies significantly throughout the region. Smaller economies generally have high FDI-to-GDP ratios, with economies in the Caribbean regularly reaching levels as high as 10% of GDP. Larger economies typically have much lower ratios, for instance 1.5% of GDP in Brazil1 and 2.0% of GDP in Mexico.
FDI is very important for the Caribbean, where FDI inflows in many economies make up a much larger share of GDP than in Latin America. In 2014, FDI inflows in the subregion fell by 5% to US$ 6.027 billion. The Dominican Republic and Trinidad and Tobago are the largest recipients in the Caribbean, absorbing 37% and 23% of total inflows, respectively. At the other extreme, Cuba and Haiti receive only small amounts of FDI, despite their large populations.
Of the economies in the Caribbean, the Dominican Republic’s FDI inflows are the most balanced in terms of distribution between natural resources, manufacturing, tourism and other services. The inflows of many other economies typically depend more heavily on a particular sector. The Bahamas and the members of the Organisation of Eastern Caribbean States (OECS), for example, receive the bulk of investment in the tourism sector, while inflows to Guyana, Suriname and Trinidad and Tobago are driven primarily by natural resources. In 2014, Haiti and Jamaica 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.
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.