Losing the Foreign Investment Race

Latin America is in serious trouble when it comes to foreign direct investment (FDI). True, inward FDI reached about $70 billion in 2006, but this is below the 1998-1999 peak, and a large share came from Latin American firms investing in neighboring countries, whereas inflows from Europe and the United States have fallen. Many companies are withdrawing from the region, and large investments from China, particularly in Brazil, though promised, have failed to materialize.

At its peak in the 1970’s, and again in the 1990’s, Latin America’s share of total global FDI reached 17%. Now it is only 8% (in 2006), after averaging 11% over the previous five years. Among developing countries, Latin America’s share of global FDI also fell dramatically, from 40-50% in the 1970’s to about half that in 2006.

Redressing the problems of high unemployment and large informal sectors – where almost half of all goods and services are produced – is perhaps the region’s most urgent policy challenge, particularly because most investment and growth by domestic firms is related to high commodity prices, which do little to create new jobs. Likewise, FDI inflows have been expanding only in resource-intensive sectors, while falling in services and practically stagnating in manufacturing.

What is lacking are effective government policies to attract high-quality FDI, particularly for exports, which could have a multiplier effect domestically, creating both direct and indirect employment. But, in addition to the right legal and regulatory framework to ensure appropriate links to the national economy – which is also lacking in most of the region – the search for desirable investors requires an effective foreign investment promotion agency.