Covid crisis

In a new report, ECLAC calls on the region’s countries to channel FDI flows – which are expected to hold steady in 2021 – towards activities that generate greater productivity, innovation and technology.

In the context of the severe health, economic and social crisis prompted by the COVID-19 pandemic, Latin America and the Caribbean received $105.48 billion dollars in Foreign Direct Investment in 2020 – 34.7% less than in 2019, 51% less than the record high achieved in 2012, and the lowest amount since 2010, the Economic Commission for Latin America and the Caribbean (ECLAC) indicated today upon presenting its annual study Foreign Direct Investment in Latin America and the Caribbean 2021.

Globally, the amount of Foreign Direct Investment (FDI) dropped by 35% in 2020 to approximately $1 trillion dollars, which represents the lowest value since 2005. Latin America and the Caribbean has experienced a downward trend since 2013, which has spotlighted the relationship between FDI flows and commodity price cycles, mainly in South America, according to the report launched at a virtual press conference held by Alicia Bárcena, the United Nations regional organization’s Executive Secretary.

The international context suggests that global FDI flows will recover slowly. Furthermore, the pursuit of assets in sectors that are strategic for the international reactivation and for public plans to transform the productive structure (infrastructure, the health industry, the digital economy) indicates that most of these operations will be centered on Europe, North America and some countries in Asia, increasing global asymmetries, the study warns.

In Latin America and the Caribbean, FDI projects experienced a rebound between September 2020 and February 2021; however, from that month to May 2021, it appears that a new drop occurred in the value of the announcements made. “In this scenario, it is difficult to imagine that FDI inflows into the region could increase by more than 5% in 2021,” ECLAC’s report states.

“FDI has made relevant contributions in Latin America and the Caribbean, but there are no elements indicating that in the last decade it has contributed to significant changes in the region’s productive structure or that it has served as a catalyst for transforming the productive development model. Today, the challenge is greater due to the characteristics and magnitude of the crisis. We need to channel FDI towards activities that generate greater productivity, innovation and technology,” Alicia Bárcena sustained.

ECLAC, she said, has identified eight strategic sectors to drive a big push for sustainability in the region. These sectors – which could be bolstered by FDI – are the transition to renewable energy; sustainable electromobility in cities; an inclusive digital revolution; the health-care manufacturing industry; the bioeconomy; the care economy; the circular economy; and sustainable tourism.

The report indicates that FDI increased in just five of the region’s countries in 2020: the Bahamas and Barbados in the Caribbean; Ecuador and Paraguay in South America; and Mexico, which is the second-biggest recipient in the region after Brazil. The natural resources and manufacturing sectors, with declines of -47% and -38%, respectively, were the hardest hit in 2020. Renewable energy held steady as the sector in the region that sparks the most interest among foreign investors.

In 2020, the United States increased its participation in the region’s FDI from 27% to 37%, amid a sharp decline for Europe (which fell from 51% to 38%) and Latin America (which went from 10% to 6%). “The smaller decline of the United States as a source of FDI is due mainly to the increase in that country’s investments in Brazil in 2020. In contrast, the inflows from the two European countries that had the most investments in Brazil – the Netherlands and Luxembourg – fell between 2020 and 2019, which led to Europe having less weight as an investor,” the document states.

In 2020, the flows of Latin American transnational enterprises (known as translatinas) also plunged (-73%), although with sharp heterogeneity: while Chile and Mexico showed an increase in direct investment flows abroad, Argentina, Brazil, Colombia and Panama recorded setbacks.

“In addition to maintaining emergency aid for the most vulnerable sectors of the population and smaller companies, the region’s countries should set in motion strategic plans both for reactivation and the transformation of production. Governments and the private sector should use their capacities so that the policy for attracting foreign capital becomes part of industrial policy as an instrument for transforming the productive structure,” Bárcena emphasized.

The second chapter of the report, entitled “Chinese investment in a changing world: repercussions for the region,” poses that “Latin America and the Caribbean’s process for recovering from the COVID-19 pandemic is an opportunity to start a new phase in its economic relations with China and to develop policies to ensure that investments by that country contribute to building productive capacities in receiving countries, to establishing ties with local suppliers, to creating employment, and to promoting sustainable development. Multilateralism must be part of this strategic approach.”

Finally, the third chapter, entitled “Investment strategies in the digital age,” analyzes digital development in the world and the region through a conceptual model that includes three dimensions (connected economy, digital economy and digitized economy) and addresses numerous challenges related to inclusion, innovation, regulation and taxation, among others. FDI can contribute to the digital transformation in Latin America and the Caribbean, ECLAC affirms, but if the structural characteristics of the region’s economies are not taken into account, digitalization could widen existing gaps and produce greater exclusion and distributive inequality, it concludes.