In the colonial period, foreign investment in Latin America was made as human capital in the form of the knowledge and skills of immigrants, as physical capital in the form of the animals, tools, and equipment that they brought with them, and in the form of financial investments. Funds transferred from the mother countries to Latin America for running the colonies provided resources which, after independence, were obtained from sales of bonds by the newly formed national governments.
In the early nineteenth century, Latin American nations obtained from Great Britain both recognition of their independence and funds in exchange for improved access to their markets. The increased trade provided information to the British on profitable investments, which consequently increased. The pattern of British investment, the most important in Latin America before World War I, was typical of the operation of all foreign investment in the region. Mexico, Central America, Colombia, Venezuela, Peru, Chile, Argentina, and Brazil had obtained loans in the British market before 1826. The loans often were guaranteed by customs receipts. High commissions were often paid to middlemen with political connections to place the loans. At various times, blockades of ports and armed intervention were used to obtain repayment of loans.
The Latin American nations were politically unstable during the first decade after their independence. Loans were limited until the 1850s, when new government issues were floated and railroad investment began. British loans were concentrated in transportation and public utilities, and particularly in enterprises whose obligations were guaranteed by a provincial or national government. Beginning in the 1890s, they also invested in financial, land, and investment companies. Investment was concentrated in Argentina, Brazil, and Mexico.
|Latin America and the Caribbean: Net FDI inflows by subregion, 1991–2005 (in millions of U.S. dollars)|
|bData available as of 24 April 2006.|
|Note: Excludes financial centers. Net FDI inflows are defined as FDI inflows to the reporting economy minus capital outflows generated by the same foreign companies. These FDI figures differ from those published by ECLAC in its preliminary overview of the economies of Latin America and the Caribbean because in that study, FDI was defined as the inflows to the reporting economy minus outflows from residents.|
|Source: United Nations, Foreign Investment in Latin America and the Caribbean, p. 10. Based on data from Economic Commission for Latin America and the Caribbean (ECLAC) on the basis of statistics from the International Monetary Fund and official figures.|
|Subtotal: Mexico and Caribbean Basin||8,408.9||17,468.1||23,914.4||23,834.3||23,520.8|
|Subtotal: South America||11,797.0||53,170.7||34,671.9||37.668.8||44,525.4|
|Total: Latin America and the Caribbean||20,205.8||70,638.9||58,586.2||61,503.2||68,046.3|
British investors accepted a lower rate on loans to Latin America than on funds invested in Europe because they invested in risky manufacturing ventures in Europe, whereas in Latin America the monopoly of railroads and public utilities promised safer returns. Foreign investment in railroads was especially important in Latin America: By promoting exports, the railroads contributed to increased foreign exchange earnings and export-oriented economic development. Foreign-owned railroads, however, were as extortionate in their rates abroad as they had been in their home countries, and Latin Americans demanded that they be regulated or nationalized. Increasingly harsh regulation led foreign investors to stop investing in railroads. Conflicts over the railroads and the competition from other nations for funds made Latin America a less important destination for European capital by 1913.
From 1825 to 1913, portfolio investment (in bonds) was larger than direct investment (in equities) because of the large share of government loans absorbed by the British market. However, the portfolio share fell from almost 80 percent in 1865 to less than 55 percent by 1913, when corporate securities accounted for 30 percent of portfolio investment. In 1865 almost all direct private investment (excluding government loans) was in ordinary shares, but by 1913 they constituted just over 40 percent, with preference shares rising from 1 to 15 percent and debentures and mortgages growing from 12 to 44 percent. British holdings in Latin America in 1913 comprised about one-fifth of its overseas capital and were roughly equal to the British investment in the United States.
U.S. AND OTHER NON-LATIN INVESTMENT
Both the rise of the United States as a creditor nation and its proximity to Latin America led to the emergence of the United States as the dominant source of foreign capital in the twentieth century, accounting for more than 60 percent in the 1980s. Western European corporations provided 25 percent. Japanese investment in Latin America, mostly in manufacturing, became noticeable in the 1950s and increased along with Japan's trade surpluses, but other nations became more prominent in subsequent years. In 2001–2005, the United States accounted for almost 40 percent of foreign direct investment, as shown in Figure 1. The apparent increase of foreign direct investment by the Netherlands may reflect the use of subsidiaries in the Netherlands by many companies to redirect their financial resources to Latin America, among other regions, to obtain tax benefits. In mid 2007 the weakening of the dollar made it likely that relative share of the United States in total foreign investment in Latin America would decline.
Figure 2 illustrates how the share of foreign direct investment in manufacturing increased from 1996–2000 to 2001–2005, while investment in natural resources fell, and services remained roughly constant. U.S. investments in Latin America in 1897 were concentrated in railroads (42 percent), mining and smelting (26 percent), and agriculture (19 percent). U.S. multinational corporations undertook investment to secure supplies and improve their competitive position in domestic and world markets. Latin America's changing economic structure led to a shift of foreign investment. By 1950 the share of U.S. funds in transport and communication and in mining and smelting had fallen to half the 1897 level, whereas investment in oil had risen to 28 percent and in manufacturing to 17 percent. The countries to which investment flowed reflected their governments' actions. Castro's expropriation of U.S. property was the largest in U.S. history. In the subsequent absence of U.S. investment, Cuba relied on subsidies from the Soviet Union. In 1982, 16 percent was in petroleum (reflecting the nationalization of the Venezuelan oil industry), 48 percent in manufacturing, 16 percent in finance, and 9 percent in trade. In 1992, 46 percent was in finance, insurance, and real estate, 9 percent in banking, 30 percent in manufacturing, and 5 percent in oil.
FORMS OF FOREIGN INVESTMENT
Foreign investment took increasingly varied forms over the course of the twentieth century. Direct investment, which was 75 percent of the total in 1900–1913, rose to 92 percent in 1914–1920 but fell to 15 percent in 1954–1980. Portfolio investment fluctuated widely, providing 25 percent in 1900–1913 but rising to 58 percent in 1954–1980. Supplier credit, in which an exporter extends credit to a buyer, was not important until World War II; in the 1950s and 1960s, however, it rose to 6 percent of total private investment but fell to less than 1 percent of the total in 1976–1980, for an average of 1 percent for 1954–1980. Government loan holdings fell during the Great Depression, rose to 50 percent of the total for 1939–1953, and then fell to 26 percent for 1954–1980.
The debt crisis of the early 1980s led to a net transfer abroad of $221.3 billion. The consequent fall in economic capacity led to a decline of Latin America's share in world trade to under 4 percent, just one-third of its 1950 share. To reverse this trend, Latin American nations restructured their debt and opened their financial markets. Increasingly deep discounts in the secondary market for debt issues from 1987 to 1989 led, in some cases, to the swapping of government debt for equity (attractive because the debt was accepted at close to par for conversion purposes), whereas commercial debt was reduced under the Brady Plan. Initiated by the United States in March 1989, the plan facilitated private debt forgiveness in exchange for International Monetary Fund (IMF) and World Bank debt guarantees and greater Latin American fiscal, monetary, and international commercial reforms. Consequently, the private sector increased its share of total investments from 57 percent in 1983 to 62 percent in 1990, although this was still below the 1970s level of 64 percent.
The improved economic climate for investment in the late 1980s revived foreign interest in Latin American stocks; they were increasingly purchased through foreign investment funds. In some cases Latin American nations restricted the share of a domestic company that could be owned by foreign investors. In others, trusts were established to hold accounts receivable, mortgages, and export income to guarantee the servicing of securities. Other investment techniques made it possible to acquire nonvoting shares previously restricted to domestic owners. Perhaps the most important innovation was the use of American Depositary Receipts, which eased acquisition of foreign assets. ADRs are issued when foreign shares have been deposited with the bank's overseas branch or custodian. The bank obtains dividends on these stocks, pays foreign withholding taxes, and pays the net dividends in dollars to the receipt holders.
In 1991 Latin America obtained roughly $40 billion in new private capital flows. Private borrowing—private bonds, commercial paper, certificates of deposit, trade financing, and term bank lending—provided 39 percent; ADRs and other funds supplied 16 percent; and other direct foreign investment—in part resulting from privatization of government enterprise—accounted for 35 percent. The largest developing-nation corporations financed more of their growth from external sources during the 1980s than developed nations at similar stages of development. In the 1980s the controlling interest of privately owned firms held a higher proportion of the total voting shares than was the case with firms in the United States; the former are not expected to relinquish control by opening their capital to outsiders.
Foreign direct investment in Latin America and the Caribbean rose from an annual average of U.S. $20,205.8 million in 1991–1995 to $70,638.9 million in 1996–2000, reflecting one-time privatizations of state-owned property in South America, and settling at $68,046.3 million in 2005. Latin America was less able to attract foreign direct investment—especially investment that would generate high multiplier effects in the economy—from outside the region. Such investment was often in natural resources in South America and in processing, rather than integrated production, in Mexico. Mexico and the Caribbean received investment largely from the United States for establishing export platforms, primarily for manufactures of electronic, automotive, and apparel products, while South America received investment largely from Europe, directed to the national market for services and manufactures.
Many trans-Latins, emerging Latin American transnationals that have made direct investments outside their home countries, are concentrated in basic industries, including petroleum and natural gas, mining, steel, and cement, with the exception of América Móvil (telecommunications), founded in 2000. Soft-drink and food-product firms focused on regional versus international investments. They adjusted to competition from other transnational corporations by finding niche markets, making licensing arrangements, or selling equity in their firms to their competitors. Trans-Latin firms that obtained state assistance were more successful than other firms in moving into international markets outside the region. Recommendations by CEPAL (the United Nations Economic Commission for Latin America) to increase foreign investment by Latin American firms include both government assistance in improving and distributing technology to firms and cutting red tape and corruption affecting business.
Argentine foreign investment was concentrated in petroleum, steel, and food products, dominated by four firms, two of which have since been acquired by foreign companies. Brazilian foreign investment notably was made by Petróleo Brasileiro (Petrobras), the state-owned oil firm, which explored for oil with consortiums of foreign firms, diversifying its risk. High oil prices spurred transnational investment in biofuels and proposals for transfer of Brazil's technology. Brazilian president Luiz Inácio Lula da Silva (2003–) suggested that rich countries should finance bio-diesel projects in developing countries as a means of reducing global inequality.
Other government firms as well as private ones used their investment in other nations to become more competitive by increasing the scale of their operations, diversifying their assets, and lowering their capital costs. Chilean foreign investment, largely in Argentina and Peru, was concentrated in forestry, metals, air transportation, beverages, and retail trade. Some of the Chilean transnationals were taken over by other firms; some succeeded, and others incurred heavy losses. Mexican foreign investment was largely undertaken by private firms, in some cases affiliated with transnational corporations. Mexico's many free-trade agreements facilitated investment abroad.
THE ROLE OF FOREIGN INVESTMENT
Foreign direct capital stock in Latin America has been estimated at almost 12 percent of GNP, or 4 percent of capital stock—close to $200 per capita for 1982. The largest per capita foreign invest-ments were in Trinidad and Tobago (oil refineries), Panama (the canal), Barbados, Venezuela, Jamaica, Uruguay, Argentina, and Guyana. Latin American nations that frequently excluded some areas of their economies from foreign capital investment had lower per capita foreign direct capital stock. The relatively small proportion of foreign direct capital overall stemmed from the large amount of domestic capital in rural areas and from limitations in some countries on foreign capital to investments in raw materials, production of goods previously sold by a foreign enterprise, and to areas where foreigners have proprietary technology.
Foreign investment often went into mining and other raw materials because the capital requirements of such ventures were too large for local financiers. In Latin America the government was often the only local entity with sufficient funds to risk investing in mining or oil. Foreign investors, with more funds available, could invest in capital-intensive ventures as one of many such investments that they made in several nations. Foreign investment in banks had the advantage of serving firms from the home country with branches or subsidiaries in Latin America, facilitating their investment and trade.
Investment was tied to the growth of multinational corporations, which raised the issue of whether those firms were run for the benefit of the nation in which the affiliates were located or for that of the parent firm or nation. An often-cited example was the practice of adjusting accounting records of intrafirm sales from affiliates in one nation to affiliates in another (transfer pricing) so as to minimize the overall tax burden. Favoritism for foreign employees of multinational corporations gave rise to successful demands after World War II that jobs be increasingly reserved for Latin American nationals and that they be trained for the more skilled jobs and for managerial positions.
Opponents of foreign investment objected to its use of capital-intensive production methods. They regretted the displacement of labor-intensive artisan production. An extension of this argument was that foreign techniques and foreign goods replaced local culture and products. Foreign firms were perceived as crowding out local borrowers, and when foreign investors bought out existing firms rather than investing in new ones they were criticized for weakening the domestic entrepreneurial class and for not increasing the capital assets of the economy. Many feared that foreign capital would come to dominate individual industries and sectors. This led to restrictions on the quantity of foreign investment and on the sectors in which it was invested. At the same time, remittances of profits and capital were limited in order to alleviate strains on the balance of payments.
Andean Community of Nations members forged stringent common policies for foreign capital, requiring foreign investors to reduce their ownership in local enterprises to a minority share over a fifteen-year period. Because there was strong world competition for investment funds, such restrictions in Latin America contributed to a sharp fall in the share of foreign capital going there. The exports from U.S. majority-owned affiliates in Latin America were one-quarter of those in other developing nations because sales within the highly protected Latin American markets were more profitable than exports. But the proportion of manufactured exports to total exports of the Latin American affiliates was above the proportion for the developing-nation average.
Those favoring foreign investment point out that some foreign corporations provide services such as housing and community health and social welfare programs, as well as promoting economic development. Traditional proponents of foreign capital argued that foreigners provided capital and technology unavailable within Latin American nations, without which some domestic investments would not be possible. Some of the resentment of foreign capital was eased by stipulations that unless oil and pharmaceuticals utilized concessions and produced patented items within a few years, the concession or patent would be void.
The cost of obtaining foreign investment was reduced as a result of the increasing number of suppliers of capital and technology, and of the growing sophistication of Latin American negotiators. This made it possible to unbundle technology. Instead of seeking a single supplier to provide the technology for all parts of a process, Latin Americans broke the process into its component parts. Several suppliers who could provide the technology for some, if not all of these process segments, were invited to bid for contracts, which greatly reduced cost.
Fears that foreign trade and investment would lead to domination by foreign nations were somewhat mitigated by the distinction made between the interests of a foreign corporation and that of its government. In the early twentieth century, the United States took measures to encourage and protect U.S. investment abroad. Multinational corporations sometimes were accused of meddling in Latin American politics and bribing governments, with their greater financial strength giving them an unfair advantage over Latin American firms attempting to use the same strategy. According to Albert O. Hirschman, "internal disputes over the appropriate treatment of the foreign investor gravely weakened, or helped to topple, some of the more progressive and democratic governments that held power in such countries as Brazil, Chile, and Peru" (1969, p. 8).
Paul E. Sigmund states that broader political interest in good foreign relations not only led to U.S. acceptance of Latin American nationalization of U.S. property but also to establishment of economic boycotts by the U.S. government that harmed U.S. firms (1980, p. 304). Further easing concern about the impact of foreign investment is the indication that in 1973–1986 foreign investment was most likely to go to nations with democratic political regimes, especially those with IMF support. It has also been pointed out that domestic firms faced with foreign competition either improve their competitive performance or fail. For all these reasons, restrictions on foreign investors were eased in the 1980s.
The creation of the North American Free Trade Agreement (NAFTA) between Canada, Mexico, and the United States in 1994 provided for foreign investment, thus consolidating the opening of the Mexican economy in the 1980s by reducing barriers to trade, eliminating red tape, and extinguishing unprofitable government enterprises in nonstrategic sectors. Similar measures favoring investors were enacted in most Latin American nations, but more slowly in Brazil, which attracted less multinational investment than countries with stronger economic reforms or oil exports. Bilateral and regional free trade and common market agreements were made throughout Latin America in the 1990s and early 2000s, although progress was slow and it proved difficult to strengthen regional and international trade agreements.
Foreign economic diplomacy is an important part of Latin American nations' foreign policy, in the early twenty-first century, and in Brazil it has become the subject of university-level formal study. A proposal introduced to a conference held by the Organisation for Economic Co-operation and Development (OECD) in 2004 led to a regional emerging markets technology transfer network project that will implement a portal and a network for knowledge and technology transfer among emerging markets, initially including Turkey, Brazil, Austria, Spain, Greece, Italy, Pakistan, and Portugal. Governments, universities, and trade associations are to cooperate in this program. Similar programs emphasizing technology and development to meet economic competition have been proposed in other Latin American nations.
The United Nations' Economic Commission for Latin America—CEPAL—criticized Latin American policies to promote foreign investment in the region as inadequate compared to that of other regions. Richard M. Bird (2006) doubts that the nations have sufficient information to fine tune and implement tax incentives well. He suggests that incentives be few and simple. CEPAL recommends strengthening investment promotion agencies through greater emphasis on a professional staff and establishing offices abroad. It calls for integration of investment policies into national development policies, and emphasizes the need to create a better business environment by supporting qualified workers and suppliers of inputs to business. It recommends evaluation of the effect of incentives on investment and shifting from general to targeted incentives, paying particular attention to investment in research and development.
Instead of looking for ways to encourage foreign investments, some Latin American nations preferred to reduce foreign investment or modify the terms investors enjoyed in their nations. Venezuela, under president Hugo Chávez (1999–), signed an agreement to buy a controlling stake in Electricidad de Caracas from its U.S.-based owner, AES Corporation, for $739 million, and to purchase Verizon's share in the country's largest telecommunications company, CA Nacional Telefonos de Venezuela (CANTV). He planned to nationalize other smaller companies in the electrical sector.
In April 2006, Bolivia, Venezuela, and Cuba signed the People's Trade Agreement. It favored establishing joint companies that strengthen the capacity for social inclusion, resource industrialization, and food security in a framework of respect and preservation of the environment. An important feature was Venezuela's offer to buy Bolivian agricultural exports, including all the soybeans that could be excluded from sales to Colombia because of Colombia's trade agreement with the United States. In October, Bolivia and Brazil signed a framework agreement for Bolivia's nationalization of the natural gas industry, in which Petrobras is the largest investor. On February 9, 2007, Bolivia nationalized the nation's only tin smelter without compensation. The Swiss owners of the firm said that they would seek arbitration.
The Latin American nations began as recipients of foreign investment. The forms in which foreign investment was accepted shifted according to these nations' perception of their national interest. Attitudes shifted from welcoming, to placing restrictions on, to rejecting foreign investment, and later to welcoming it again. The technicalities governing trade and investment became more complex, and regional agreements were increasingly important in setting not only traditional requirements on trade and investment, but also requirements that trading partners conform to European union democracy and human rights provisions to obtain new investment. Similarly, the Central American Free Trade Agreement (CAFTA) requires enforcement of environmental and labor legislation, whereas NAFTA's impact on work conditions and the environment has led to strenuous debate over whether North American or Mexican conditions will dominate trade and investment in Canada, Mexico and the United States. Foreign investment has evolved from bilateral to multilateral relations, forming a strategic part of globalization.
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