FOREIGN DIRECT INVESTMENT IN LATIN AMERICA:
A REFLECTION OF CHANGED CORPORATE STRATEGIES

Three main strategic objectives lie behind the recent large increase of foreign direct investment (FDI) in Latin America, argues the 1998 edition of ECLAC’s annual report, Foreign Investment in Latin America and the Caribbean. These are increased efficiency in manufactures, the search for raw materials in the primary sector, and greater market access for manufactures and services. However, a fourth goal generally sought by transnational companies in their investment decisions, enhanced access to specialized technology, plays little role in the region, says the report.

Understanding the strategic goals pursued by the principal corporations in their investments throws important light on the changing nature of FDI flows into the region. Firms, especially US corporations facing increased competition from Asian imports at home, have sought to establish more efficient manufacturing operations in Mexico and the Caribbean Basin in order to compete better in their own markets. Foreign investment of this kind is common in the automotive, electronics and apparel industries. US firms take advantage of relatively low wages in tax-free export-processing zones, and preferential access based on national, and sometimes regional, norms of origin (the North America Free Trade Agreement, NAFTA, for example) in order to obtain a competitive edge. Such investments have produced a considerable increase in intra-firm imports between US plants in Latin America.

The acquisition of secure raw material supplies has always been important to enterprises extracting natural resources. The novelty in Latin America is that several countries have made access to national sources of raw materials much easier than in the past, opening up previously restricted sectors to FDI by way of concessions or the privatization of state assets. Concessions have been particularly important in petroleum and gas in Venezuela and Colombia, while the privatization of YPF was the centerpiece of such developments in Argentina. There has also been a significant increase of FDI in the mineral sector.

Market access has been a particularly important goal for manufacturing companies - above all, the automotive, chemicals and food, beverage and tobacco products industries - operating in the larger Mercosur countries, Brazil and Argentina. In these industries, as well as in the cement industry in several smaller countries of the region, mergers and acquisitions have been a principal means of gaining access or defending existing market shares. The aim of this strategy is to defend local market shares in a globalizing world.

Market access is even more important for non-tradeable services. Mergers and acquisitions have been very common in the financial services sector, while the privatization of state assets has also played a role, though of less importance. In others services traditionally reserved for the State, such as telecommunications, electricity generation and distribution, and the distribution of gas, the sale of state assets has played the leading role. Much of new FDI in Brazil, the country that received most such investment in 1997, is related to the service sector, especially through privatizations.

However, Latin America offers little to transnational corporations in the area of specialized technology, given the lack of world-class developments in the region. In this respect, other developed or developing regions, such as Asia, offer more.

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