ECLAC: Foreign direct investment in Latin America and the Caribbean fell 9.9% in 2023, but the amount received is higher than the average of the last decade

In a context of a second consecutive year of decline in global foreign direct investment (FDI) flows, US$184.3 billion in FDI entered Latin America and the Caribbean in 2023, 9.9% lower than in 2022, but still above the average for the last decade, the Economic Commission for Latin America and the Caribbean (ECLAC) reported today.

The share of foreign direct investment inflows in the region’s GDP also fell: in 2023 it accounted for 2.8%. However, the region’s share of total global FDI flows (14%) was higher than the average percentage in the 2010s (11%), the annual report notes. Foreign Direct Investment in Latin America and the Caribbean 2024 disclosed at a press conference in Santiago, Chile.

The decrease in FDI flows received by Brazil (-14%) and Mexico (-23%), the two countries with the largest share of total inflows, largely explains the region’s result, the study indicates.

In South America, Peru also experienced a rather sharp decline 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, almost all countries received more FDI, with growth standing out in Costa Rica (28%) and Honduras (33%), while the increase in the Caribbean was mainly due to the increase in inflows in Guyana (64%) and the Dominican Republic (7%).

“Foreign direct investment can help to address, in particular, the first of the three development traps in which Latin America and the Caribbean are mired: the low growth capacity trap. This requires investment attraction policies that place emphasis not only on attraction, but also on what happens after establishment, and that connect these policies with the productive development policies of the countries and their territories. All of this requires strengthening technical, operational, political and prospective (TOPP) capacities in this area,” said ECLAC Executive Secretary José Manuel Salazar-Xirinachs, when presenting the main conclusions of the study.

From a sectoral perspective, 46% of foreign direct investment in 2023 was directed to services, although this sector received less investment than in 2022 (-24%). Investments in manufacturing grew again for the second consecutive year (+9%), with increases in Central America, Colombia, Mexico and the Dominican Republic. Inflows into the natural resources sector also grew (+16%), despite the decline recorded in Brazil.

In terms of FDI components, reinvestment of profits increased by 15%, accounting for almost half of inflows in 2023, while equity contributions and inter-company loans decreased by 22% and 36%, respectively.

The United States and the European Union were the main investors, the former with 33% of the total and the EU with 22% (excluding the Netherlands and Luxembourg). China, meanwhile, reduced its investments in the region.

On the other hand, the region’s investment abroad (translatinas) fell 49%, returning to normal levels after the maximum reached in 2022.

With few exceptions, FDI continues to concentrate on sectors and countries that offer natural resources or relatively cheap labor, says ECLAC. The objective is to achieve greater value addition, in the case of natural resources, as well as to diversify and scale up towards sectors with more qualified labor, and to increase the technological spillovers and productive chains that derive from this investment, says the United Nations regional organization.

Specifically, the second chapter of the report presents 17 guidelines for the formulation and strengthening of FDI attraction policies as a factor in sustainable and inclusive productive development in the region.

To this end, the experiences of the Investment Promotion Agencies of eight countries in Latin America and the Caribbean (Argentina, Brazil, Chile, Colombia, Costa Rica, Panama, Dominican Republic and Uruguay) are analyzed, as well as the initiatives in this area of ​​countries such as Malaysia, Poland, South Africa and Turkey, among other sources of information.

Along the same lines, and given the importance of providing a territorial approach to efforts in productive development, in the third chapter of the document, based on case studies of Argentina, Brazil, Chile, Colombia and Mexico, six guidelines are offered to promote subnational foreign direct investment.

In addition to designing investment attraction policies as part of productive development policies, it is key that countries base their implementation on governance arrangements at the highest political level and strengthen their TOPP capabilities, stressed José Manuel Salazar-Xirinachs. Likewise, it is urgent to involve actors from the public and private sectors, academia and civil society in the construction and implementation of FDI strategies to guarantee legitimacy, cooperation and the use of post-establishment benefits.

Investment Promotion Agencies need to be provided with resources, qualified personnel, and stability in the continuity of efforts to promote investments effectively; implement a rigorous system of monitoring and evaluation of policies, incentives, and conditionalities; develop policies and projects that strengthen the business environment, including well-designed incentives and the promotion of cluster initiatives that address specific bottlenecks; and promote research and development (R&D), human talent training, and supplier development, among others.

It is also important to focus FDI attraction on sectors or areas considered priorities for the sustainable productive development of the region. ECLAC has proposed at least 14 driving sectors in industry, services and in areas related to the Big Push for Sustainability. These include the pharmaceutical and life sciences industry; the medical device industry; the export of modern services enabled by ICTs; the care society; digital government; the energy transition; electromobility; the circular economy; the bioeconomy; sustainable water management; and sustainable tourism, to name a few. It is important that FDI attraction efforts have a sectoral and cluster approach, in order to maximize benefits.

Having infrastructure, productive capacities, skills and a set of complementary activities along the value chain has proven to be essential for investment decisions and subsequent benefits, says ECLAC.

Finally, national and territorial agendas must be supported by multi-stakeholder and multi-level institutional arrangements that allow synergies to be leveraged and duplications to be minimized, strengthening capacities and coordination between agents.