SUNS #4345 Tuesday 15 December 1998



LATIN AMERICA: BRAZIL TOPS AS FDI RECIPIENT

Buenos Aires, Dec 11 (IPS) -- Brazil has bypassed Mexico in terms of investor preference, and for the second year in a row was the top recipient of foreign direct investment (FDI) in Latin America in 1998, according to a new ECLAC report.

The 1998 report on "Foreign Investment in Latin America and the Caribbean", released by the U.N. Economic Commission for Latin America and the Caribbean (ECLAC) Thursday, says Brazil drew 30 percent of FDI in the region this year, followed by Mexico and Argentina, which accounted for 19 and 10 percent, respectively.

The flow of FDI into the 11 countries of the Latin American Integration Association (ALADI) is projected at $58.1 billion this year, almost equivalent to last year's total.

FDI flows into Brazil surged from $3.072 billion in 1994 to more than $19.65 billion in 1997, coinciding with the government's policy of stabilisation (the Plan Real), openness and liberalisation, says the report.

The Asian crisis has not affected FDI flows to Latin America, it adds. The report also cites the United States as the biggest investor in the region, highlights the rise in intra-regional investment flows in Latin America - especially involving Chilean capital - and underscores the flow of capital into the automobile industry, as well as changes in corporate strategies in that sector.

According to ECLAC, Brazil drew 30% of FDI in the region due to two different, but overlapping, phenomena: the reaction to the new economic context by transnational corporations with a long-time presence in  Brazil; and the interest of new investors in the opportunities provided by the deregulation of the Brazilian economy.

Till 1995, FDI in Brazil was largely concentrated in the manufacturing sector, accounting for 55% of the total.

But transnational corporations operating in Brazil responded to economic reforms introduced by President Fernando Henrique Cardoso with different corporate strategies: while some pulled out, others decided to restructure.

Restructuring involved upgrading or the construction of new factories - as in the case of car assembly plants - or takeovers of local firms to strengthen the company's presence in the Brazilian market - as seen in the food and chemical sectors.

In the past few years there has also been a massive inflow of foreign companies operating in the services sector, which ended up displacing manufacturing in investor preference. By late 1997, services accounted for 57 percent of FDI.

That trend was demonstrated by the privatisation of electricity and telecommunications companies, and takeovers of Brazilian firms suffering the effects of the opening of the economy, particularly in
the financial sector.

But ECLAC points out that the impressive growth of FDI in Brazil could be merely a passing trend, especially given the fact that the privatisation programme will begin to exhaust itself within the next
few years.

Furthermore, the new investor preference for services apparently accentuates the anti-export bias that has characterised Brazil's industrialisation process, which could lead to greater difficulties in
balance of payments in the future, the report adds.

ECLAC points out that the harsh economic crisis sweeping Asia seems to have favoured Latin America as a recipient of FDI flows.

Global FDI flows totalled $400 billion in 1997, 38 percent of which went toward developing countries, mainly Asia and Latin America. From 1995 to 1997, FDI flows to Latin America and the Caribbean rose nearly twofold and, despite the Asian crisis, estimates for 1998 indicate that FDI should be close to last year's level.

According to ECLAC projections based on data from the first half of the year, in 1998 Brazil will have received 24 billion dollars in FDI, Mexico 8.0 billion, Colombia 6.0 billion, Argentina 5.8 billion,
Venezuela 5.0 billion, Chile 4.7 billion, Peru 3.0 billion, Bolivia 660 million, Ecuador 580 million, Paraguay 210 million and Uruguay 160 million dollars.

The United States remains the leading investor in the region, although Europe has begun to close the gap in the past two years.

ECLAC points out that from 1990 to 1997, the percentage of U.S. FDI going toward financial centres in the Caribbean declined from 50 to 42 percent of total U.S. investment in the region. U.S. investment rose, meanwhile, in Chile (from three to five percent of the total), Argentina (four to six percent), Mexico (14 to 15 percent), Brazil (20 to 21 percent) and Venezuela (two to three percent).

U.S. FDI has gone mainly into the manufacturing sector (automobiles, electronics, textiles, food, beverages, tobacco), services (telecommunications, electricity, finance), oil extraction and copper
mining.

With respect to intraregional investment in Latin America and the Caribbean, ECLAC highlights the case of Chilean companies, which have been the region's biggest investors, followed by Mexican and Argentinian firms.

In 1997, the resources pledged by Latin American investors in privatisation processes and takeovers of local companies in various countries in the region totalled 8.365 billion dollars, according to the study.

Of that total, 58% went toward purchases of public assets, and the rest to the acquisition of private companies.

ECLAC underscores that this phenomenon has been especially marked in the Southern Cone of Latin America, where Chilean firms are especially active, and that it was fuelled by the removal of restrictions on foreign capital. Chile leads intraregional investment with 38 percent, followed by Mexico (27 percent) and Argentina (24 percent).

The list of recipients of intraregional investment, meanwhile, is headed by Venezuela (39 percent), Brazil (23 percent), Colombia (19 percent) and Argentina (11 percent).

The report cites the auto industry as one of the main poles of attraction for FDI in Latin America - part of the response by European and U.S. carmakers to Japanese and South Korean competitors, which continue to make inroads in their markets.

Last year, U.S. carmakers General Motors, Ford and Chrysler invested $33.253 billion in Argentina, Brazil, Colombia, Chile, Mexico and Venezuela. Europe's Volkswagen, Fiat, Mercedes Benz, Renault and Saab invested $26.447 billion in those six countries, while Japan's Nissan and Toyota invested $3.734 billion.

FDI in Latin America also reflected a shift in corporate strategy, designed to bolster manufacturing efficiency, ensure the provision of raw materials, and boost access to markets, says ECLAC.

Facilitating access to technology, a key element for transnational corporations when it comes to deciding on investment, plays a relatively insignificant role in Latin America, according to the study.

The search for efficiency was seen in investment in Mexico and the Caribbean in auto assembly plants, electronics and textiles.

The interest in primary materials was seen, meanwhile, in investment in oil and gas production in Venezuela, Argentina and Colombia, and in mining in Chile, Argentina and Peru.

With respect to access to national and regional markets, the most representative cases were investment in the auto industry (in the Southern Cone Common Market - Mercosur), chemicals (Brazil), food and tobacco (Argentina, Brazil and Mexico) and cement (Colombia, the Dominican Republic and Venezuela).

ECLAC also mentioned interest in penetrating the services market, as illustrated by investment in financial services (Brazil, Mexico, Chile, Argentina, Venezuela, Colombia and Peru), telecommunications (Brazil, Argentina, Chile and Peru), electricity (Colombia, Brazil and Argentina) and distribution of gas (Argentina, Chile and Colombia).