Investors Are Flocking to Latin America For Sun, Sand, and An Economy That Isn't Terrible

Latin America and the Caribbean saw a record-high $173 billion in foreign direct investment (FDI) in 2012, a 6.7% increase from 2011, despite a 13% decrease in overall worldwide FDI flows, according to a report by the Economic Commission for Latin America and the Caribbean (ECLAC). 

Driving this change has been the convergence of favorable market growth in Latin America, high commodity prices, and an air of uncertainty surrounding the United States and European Union economies. This has led investors to prefer Latin America, which boasts “extremely high returns obtained by corporations in the extractive industries, especially metal mining, in the past few years,” the report stated. ECLAC expects this year’s FDI to continue in the range of a 3% decrease to 7% increase.

Brazil received the lion’s share of investment at $65 billion, followed by Chile ($30 billion) and Peru ($12 billion), which has come mainly on the back of extractive industries such as iron, copper, and gold mining. U.S. and European Union countries continue to be the principal investors, even as investment within the region has increased significantly, representing 14% of the total.

Peru and Chile saw the largest increases from 2011 (49% and 32%, respectively), while other countries whose investment grew included Argentina (27%), Paraguay (27%), Bolivia (23%), Colombia (18%), and Uruguay (8%). In Central America, the biggest increases were in El Salvador (34%), Guatemala (18%), Costa Rica (5%), Honduras (4%), and Panama (10%). The Dominican Republic remains the largest recipient in the Caribbean, seeing an increase of 59%.

The report was quick to note that increased investment does not necessarily benefit Latin American countries’ economic well-being in the long run. Although “foreign direct investment results attest to the good current performance of the Latin American economy,” said Alicia Bárcena, ECLAC executive secretary, “we see no clear signs of FDI making a relevant contribution to generating new sectors or creating activities with a high technology content — as changing the production structure is one of the main challenges facing the region.”

Concerns of an overreliance on natural resource exports are shared by many, and the ECLAC report argues that increased FDI is only entrenching, not changing, the system. It concludes that “There are no clear signs that FDI is making any significant contribution to generating new sectors or to creating high-tech activities in any of the countries. Yet, changing the production structure is precisely one of the most important needs the region is called upon to address.”

Additionally, increased FDI in natural resource extraction, which is capital-intensive, is not a large generator of employment. Whereas investment in commerce, construction and manufacturing create seven jobs per $1 million, investment in mining creates a mere one job for every $2 million.

The report concludes by urging leaders to “tap the region’s advantages as an FDI destination to improve the countries’ production matrices. This could be achieved by making greater efforts to channel part of the profits from transnationals into funds for production development and by pursuing initiatives to direct FDI towards sectors which the countries view as priorities.”