In the context of a second straight year of declines in global Foreign Direct Investment (FDI) flows, Latin America and the Caribbean in 2023 received $184.304 billion dollars in FDI, a figure that is 9.9% below what was recorded in 2022 but is still above the average notched in the last decade, the Economic Commission for Latin America and the Caribbean (ECLAC) reported today.
The weight of Foreign Direct Investment inflows as a share of the region’s GDP also declined: in 2023, it represented 2.8%. However, the region’s participation in global FDI flows (14%) was higher than the average percentage seen during the 2010s (11%), according to the annual report Foreign Direct Investment in Latin America and the Caribbean 2024, released at a press conference in Santiago, Chile.
The decline in FDI flows received by Brazil (-14%) and Mexico (-23%) – the two countries with the largest share of total inflows – largely accounts for the regional outcome, the study indicates.
In South America, Peru experienced a very sharp drop in FDI inflows (-65%), while Argentina and Chile experienced an increase (57% and 19%, respectively).
Central America and the Caribbean also received more investments than in 2022 (12% and 28%, respectively). In Central America, nearly all the countries received more FDI, with particularly notable growth in Costa Rica (28%) and Honduras (33%), while the increase in the Caribbean is due mainly to greater inflows in Guyana (64%) and the Dominican Republic (7%).
“Foreign Direct Investment can help tackle, in particular, the first of the three development traps in which Latin America and the Caribbean is caught: the trap of low capacity for growth. To this end, we need policies to attract investments that put emphasis not only on attracting them but also on what happens once they are established, and that connect these policies with the productive development policies of countries and their territories. All of this requires strengthening the technical, operational, political and prospective (TOPP) capabilities in this area,” ECLAC’s Executive Secretary, José Manuel Salazar-Xirinachs, said upon presenting the study’s main conclusions.
With regard to the sectors involved, 46% of Foreign Direct Investment in 2023 went to services, although this sector received fewer investments than in 2022 (-24%). For the second year, more FDI was received in manufacturing (+9%), with increases in Central America, Colombia, the Dominican Republic and Mexico. Inflows in the natural resources sector also grew (+16%), despite the decline seen in Brazil.
In terms of the components of FDI, reinvested earnings increased by 15%, representing nearly half the inflows in 2023, while equity and intercompany loans fell by 22% and 36%, respectively.
The United States and the European Union were the main investors, with the former accounting for 33% of the total and the EU (without the Netherlands or Luxembourg) accounting for 22%. China, meanwhile, reduced its investments in the region.
Meanwhile, the region’s investment abroad dropped by 49%, returning to normal levels after peaking in 2022.
With few exceptions, FDI continues to be concentrated in sectors and countries that offer relatively inexpensive natural resources or labor, ECLAC says. The goal is to add more value, in the case of natural resources, as well as to diversify into and scale up sectors with more skilled labor, and increase the technological spillover and productive linkages that are derived from such investment, the United Nations regional organization states.
More specifically, in the report’s second chapter, 17 guidelines are presented for formulating and strengthening policies to attract FDI as a factor in the region’s sustainable and inclusive productive development.
To this end, the report analyzes the experiences of Investment Promotion Agencies in eight Latin American and Caribbean countries (Argentina, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Panama and Uruguay), along with initiatives in this area by countries such as Malaysia, Poland, South Africa and Turkey, among other sources of information.
In a similar vein, and given the importance of incorporating a territorial approach into productive development efforts, in the document’s third chapter – based on case studies from Argentina, Brazil, Chile, Colombia and Mexico – six guidelines are offered for promoting subnational Foreign Direct Investment.
In addition to designing policies to attract investment as part of their productive development policies, it is key that countries base their implementation on governance arrangements at the highest political level and strengthen their TOPP capabilities, José Manuel Salazar-Xirinachs emphasized. Similarly, it is urgently necessary to involve actors from the public and private sectors, academia and civil society in the construction and implementation of FDI strategies to ensure legitimacy, cooperation and the harnessing of benefits once the investments are established.
It is also necessary to provide Investment Promotion Agencies with resources, qualified staff and stability in the continuity of efforts to effectively promote investments; implement a rigorous system for monitoring and evaluating policies, incentives and conditionalities; develop policies and projects to strengthen the business climate, including well-designed incentives and the promotion of cluster initiatives that address specific bottlenecks; and foster activities in Research & Development (R&D), the training of human talent, and supplier development.
Furthermore, it is important to attract FDI to sectors or areas that are considered a priority for the region’s sustainable productive development. ECLAC has proposed at least 14 driving sectors in industry, services and areas related to the Big Push for Sustainability. These include the pharmaceutical and life-sciences industry; the medical devices industry; the exportation of ICT-enabled modern services; the care society; e-government; the energy transition; electromobility; the circular economy; the bioeconomy; sustainable water management; and sustainable tourism, to name a few. It is important that efforts to attract FDI include a sectoral and cluster approach, with the aim of maximizing benefits.
Having infrastructure, productive capabilities, skills and a set of complementary activities all along the value chain has proven to be essential for investment decisions and subsequent benefits, ECLAC sustains.
Finally, national and territorial agendas must be underpinned by multi-stakeholder and multi-level institutional arrangements that would allow for harnessing synergies and minimizing duplication, strengthening capacities and coordination among different actors.
