FDI flow to South America double-edged?

Oct. 26, 2012 at 5:14 PM
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BUENOS AIRES, Oct. 26 (UPI) -- Foreign direct investment to Latin America is rising but analysts wonder if the trend is altogether a good thing for the recipient countries.

FDI infusions into 17 of Latin American countries during the first six months this year rose 8 percent to $94.3 billion, data released by the Economic Commission for Latin America and the Caribbean indicated.

ECLAC experts said the rising FDI was due to the region's economic buoyancy and stability and continuing strength of commodity prices, which continue to encourage investments in mining and hydrocarbons, particularly in South America.

At the same time, investment by Latin American enterprises in and outside the region rose 129 percent in the first half of the year.

FDI inflows rose in Argentina, Chile, Colombia, Dominican Republic and Peru but those to Brazil dropped 2 percent, at last partly in response to government measures to contain overvaluation of the national currency, the real.

Brazilian currency rose against the U.S. dollar in response to FDI flows and other inward investments and exports suffered as a result as FDI flows impacted on the strength of the real.

Still, the Brazilian economy, Latin America's largest, accounts for about 46 percent of FDI received by the region in 2012.

Chile followed as the second largest FDI recipient in the region.

Mexico received 19 percent less FDI in the first six months of 2012 than in the previous year but the trend is expected to reverse in the second half of the year because of a $20.1 billion acquisition by Belgian brewery AmBev of the Grupo Modelo.

AmBev also bought the Dominican Republic's main brewery, Cerveceria Nacional Dominicana, for $1 billion contributing to the Caribbean nation's FDI profile.

FDI flows to Panama and Costa Rica remained constant but Guatemala posted a 47 percent increase and El Salvador and Nicaragua saw inflows fall.

Some of the trends are likely to continue into 2013.

But critics differ on how good FDI is for developing countries and emerging markets. FDI's role in promoting growth and sustainable development has never been substantiated, "there isn't even an agreed definition of the beast," says Sam Vakinin, in a study on Global Politician website.

"In most developing countries, other capital flows -- such as remittances -- are larger and more predictable than FDI and Official Development Assistance.

Vakinin says FDI can constitute "unfair competition with local firms and crowds the domestic private sector out of the credit markets, displacing its investments in the process."

"Foreign investors of all stripes jump ship with the first sign of contagion, unrest, and declining fortunes. In this respect, FDI and portfolio investment are equally unreliable. Studies have demonstrated how multinationals hurry to repatriate earnings and repay inter-firm loans with the early harbingers of trouble. FDI is, therefore, partly pro-cyclical," Vakinin says.

He said FDI also did not help with job creation in recipient countries as "most multinationals employ subcontractors and these, to do their job, frequently haul entire workforces across continents. The natives rarely benefit and when they do find employment it is short-term and badly paid."

New Zealand economist Don Brash says most of the opposition to FDI is irrational and the key to FDI success remains profitability of ventures it supports.

Prakash Loungani and Assaf Razin, in an International Monetary Fund study, support a "nuanced view of the likely effects of FDI."

While FDI can have a beneficial effect it can also pose some potential risks, they say in a study, "How Beneficial Is Foreign Direct Investment for Developing Countries?" for the IMF magazine, Finance and Development.

They warn that "a high share of FDI in a country's total capital inflows may reflect its institutions' weakness rather than their strength."

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