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Published online by Cambridge University Press: 05 February 2009
Since 1982, most Latin American countries have witnessed slow economic growth and a persistent net transfer of funds to the rest of the world as a result of sharply reduced inflows of private international bank lending and large debt payment obligations. Against this background direct foreign investment (DFI) has received increasing attention as one important element in overcoming the present stagnation-cum-debt crisis as well as in contributing to renewed economic growth. This article explores the possible contributions of DFI to the future economic growth and development of the region.1
1 I am indebted to Astrid Martínez Ortiz, whose paper provided an initial impetus for this study: ‘Inversión extranjera, industria y crisis de deuda en América Latina’, presented at the III Congreso de Economistas Egresados de la Universidad National, Bogotá, Nov. 1985. I would also like to thank Jens Christiansen and anonymous referees for constructive comments.
2 In an address before the Organization of American States on 24 Feb. 1982 President Reagan, Ronald proclaimed: ‘…nearly all of the countries that have succeeded in their development over the past 30 years have done so on the strength of market-oriented policies and vigorous participation in the international economy. Aid must be complemented by trade and investment’. Department of State Bulletin 82 (04 1982), p. 3.Google Scholar
3 The convention establishing MIGA was opened for signature at the annual joint meeting of the World Bank and the IMF in Seoul, South Korea, in Oct. 1985. For a more detailed discussion see Voss, Jurgen, ‘The Multilateral Investment Guarantee Agency: Status, Mandate, Concept, Features, Implications’, journal of World Trade Law, vol. 21, no. 4 (08 1987), pp. 5–24.Google Scholar
4 Ibid., p. 8.
5 Decision 24 was replaced by Decision 220, which gives substantially more freedom to Pact members to specify their own legislation regarding DFI. For a more detailed discussion of the liberalisation of foreign investment legislation see, for example, Agosín, Manuel and Ribeiro, Vicente, ‘Las inversiones extranjeras en América Latina y el Caribe: tendencias recientes y perspectivas’, in Políticas de Ajuste, Financiamiento del Desarrollo en América Latina, SELA (Caracas, 1987), pp. 87–120Google Scholar; ‘Who is Investing Where in Latin America’, Latin American Special Reports, 4 (1987)Google Scholar; ‘New Foreign Investment Incentives in Colombia’, Colombia Today, no. 22, vol. 5 (1987)Google Scholar; and Preusse, H. G. and Schinke, R., ‘Foreign Debt, Direct Investment, and Economic Development in the Andean Pact’, Ibero-American Institute for Economic Research, University of Göttingen (FRG), Working Paper no. 44 (10 1987).Google Scholar
There are, however, exceptions to this liberalisation trend. Brazil is one country where the rules governing DFI seem to be tightening rather than loosening. The most recent evidence for that can be seen in the vote of the Brazilian Constituent Assembly to bar foreign-controlled companies from the mining sector. See ‘Brazil to Curb Foreign Owners in the Mining Sector’, Wall Street Journal, 2 05 1988, p. 20.Google Scholar
6 Latin American Special Report, ‘Who is Investing Where’.
7 ‘Japanese Foreign Investment. Sushi and Enchiladas’, The Economist, 21 05 1988, p. 85.Google Scholar The absolute amount of Japanese DFI directed towards Latin America has been declining as well since 1984.
8 Preusse, Heinz-Gert and Schinke, Rolf, ‘Debt-Equity Swaps, Foreign Direct Investment, and the Brazilian Debt Crisis’, in Coffey, Peter and Aranha, Luiz (eds.), The EEC and Brazil: Trade, Capital Investment and the Debt Problem (London and New York, 1988), p. 159.Google Scholar The stock of West German DFI in Latin America increased from $4.4 billion in 1980 to $4.9 billion in 1985. Ibid., p. 158.
9 The figure for 1986 excludes Bolivia, Guyana, and Jamaica. Inter-American Development Bank, Social and Economic Progress (Washington, D.C., 1988), table D-12, p. 572.Google Scholar
10 Fishlow assumes an average annual import growth rate between 7.2 and 8.1%. The IMF study projects it to be 4.5%, and CEPAL 8.5%. For details about the other assumptions in all studies see Fishlow, Albert, ‘Los requerimientos de financiamiento externo de América Latina’, in SELA, Políticas de ajuste, pp. 37–58.Google Scholar A more recent simulation by López and Durán projects that the Latin American countries require on average $30.9 billion of annual foreign financing between 1989 and 2000, if they are to achieve an annual 2% per caput growth rate. For more details, especially about the assumptions of the simulation exercise, see López, Julio and Durán, Clemente Ruiz, ‘Alternative Recovery Strategies for Latin American Debtors for the 1990s’, paper presented at the conference on ‘Financing Latin American Growth: Prospects for the 1990s’, Jerome Levy Economics Institute, Annandale-on-Hudson, New York, 13–15 10 1988.Google Scholar
11 Sourrouille, Juan V., Kosacoff, Francisco Gatto y Bernardo, ‘Comportamiento económico de las filiales de empresas transnacionales en América Latina’, Integración Latinoamericana, vol. 9, no. 97 (12 1984), pp. 3–19.Google Scholar
12 There are clearly other reasons as well that account for the modest foreign investment response to the CBI so far, e.g. the lack of requisite infrastructure in some of the beneficiary countries. For a more detailed analysis see Paus, Eva, ‘A Critical Look at Nontraditional Export Demand: The Caribbean Basin Initiative’, in Paus, Eva (ed.), Struggle Against Dependence. Nontraditional Export Growth in Central America and the Caribbean (Boulder and London, 1988), pp. 193–213.Google Scholar
13 Jeelof, Gerrit, ‘Renewing the Incentive to Invest in Latin America’, in Latin America: Towards Renewed Growth, Inter-American Development Bank (Washington, D.C., 1988), pp. 96–9, here p. 96.Google Scholar
14 For more details on country-specific debt-equity conversion programmes see for example: ‘Debt Conversion Regulations’, Euromoney, 01 1988, Special Supplement, pp. 38–41.Google Scholar
15 In several DES programmes, profit repatriation is prohibited for a number of years after the initial investment.
16 According to ‘Debt Equity Swaps’, World Financial Markets (06/07 1987), p. 12Google Scholar: ‘Relative to the $267 billion total of debt that the eleven principal debtors owe foreign banks [end 1986] conversions until mid-87 had reached $6 billion. Chile alone accounted for over one-fifth.’
17 Mexico halted its DES programme in the autumn of 1987 for fear of further inflationary pressures.
18 For more details on the US–Canadian Free Trade Agreement see for example US President, Economic Report of the President (Washington, D.C., 1988)Google Scholar, and on ‘Europe 1992’, see for example Cecchini, Paolo with Catinat, Michel and Jacquemin, Alexis, The European Challenge 1992. The Benefits of a Single Market (Aldershot, 1988)Google Scholar; and ‘The Growing Fear of Fortress Europe’, The New York Times, 23 10 1988, Section 3, pp. 1 and 24.Google Scholar
The US direct investment position in Canada increased from $46.9 billion in 1985 to $56.9 billion in 1987. During the same time span, it rose from $83.9 billion to $122.2 billion in the European Community (assuming 12 member countries in both reference years). Department of Commerce, Survey of Current Business 68 (08 1988), pp. 47–9.Google Scholar During the same period, the direct investment position of European Community member countries in the United States increased from $107.1 billion (10 members) to $157.7 billion (12 members). Survey of Current Business 67 (08 1987), pp. 90 and 68 (08 1988), p. 74.Google Scholar
19 For examples of studies of developing countries where the net foreign exchange contribution of DFI was found to be negative, see United Nations Centre on Transnational Corporations, Salient Features and Trends in Direct Foreign Investment (New York, 1983), p. 16Google Scholar; and Paus, Eva, The Role of Direct Foreign Investment in the Development of Chile, 1958–73, M.A. Thesis, University of Pittsburgh, 1978.Google Scholar
20 See for example Eva Paus (ed.), Struggle Against Dependence; Balassa, Bela, Bueno, Gerardo M., Kuczynski, Pedro-Pablo and Simonsen, Mario Enrique, Towards Renewed Growth in Latin America (Washington, D.C., 1987)Google Scholar; CEPAL, ‘El desarrollo de América Latina: escollos, requisitos y opciones’, Comercio Exterior (Mexico) 37 (02 1987), pp. 102–15Google Scholar; and Ffrench-Davis, Ricardo, ‘Financiamiento externo negativo: tendencias, conse-cuencias y opciones para América Latina’, in SELA, Políticas de ajuste, pp. 59–74.Google Scholar
21 CEPAL, Las empresas transnacionales y el comercio exterior de América Latina (11 1984), p. 9.Google Scholar See also Lahera, Eugenio, ‘The International Corporations and Latin America's International Trade’, CEPAL Review no. 2; (1985), pp. 45–65.Google Scholar
22 Ibid., p. 11.
23 Ibid., p. 13.
24 In 1982, the share of exports in total sales of US MOFAs ranged from 1.1% in Venezuela to 54.4% in Ecuador.
25 Sourrouille, et al. , ‘Comportamiento ecónomico’, p. 13.Google Scholar
26 A recent advertisement for the Dominican Republic states: ‘Foreign investors are attracted to the free zones by a convenient, sheltered environment, free of taxes (for 12 to 20 years) and import duties, with unrestricted repatriation of profits.’ Business Week, ‘Investors Bullish on the Dominican Republic’, Special Advertising Section, 4 04 1988, pp. 113–22, here p. 114.Google Scholar
27 See for example Mathieson, John, ‘Problems and Prospects of Export Diversification: Jamaica’, in Paus, , Struggle Against Dependence, pp. 145–68.Google Scholar
28 Part of the increase in DFI in the Caribbean Basin area is the result of a relocation of assembly-production from relatively higher-wage Asian NICs.
29 In a study of export processing zones in India, Rajiv Kumar concludes: ‘It must be recognized that EPZ are best suited as instruments for exporting surplus labor embodied in manufacturing components or assemblies ideally combined with net private investment flow. To impute other objectives to them will prove inefficient.’ ‘Performance of Foreign and Domestic Firms in Export Processing Zones’, World Development, vol. 15, nos. 10/11 (10/11 1987), pp. 1307–19, here p. 1316.Google Scholar
30 Jeelof, , ‘Renewing the Incentive…’, p. 99.Google Scholar
31 Díaz-Alejandro, Carlos F., ‘The Future of Direct Foreign Investment in Latin America’, Economic Growth Center, Yale University, Discussion Paper no. 131 (12 1971), pp. 6–7.Google Scholar
32 There are obviously other factors as well that influence the competitiveness of a country's products on the international market, e.g. the exchange rate and input costs. I have argued for the importance of productivity growth in nontraditional export growth at greater length elsewhere; ‘The Political Economy of Manufactured Export Growth: Argentina and Brazil in the 1970s’, Journal of Developing Areas, vol. 23, no. 1, (01 1989).Google Scholar
33 See for example Oman, Charles P., ‘New Forms of Investment in Developing Countries’, in Moran, Theodore H. et al. , Investing in Development: New Roles for Private Capital? (New Brunswick and Oxford, 1985), pp. 131–55Google Scholar; and Dañino, Roberto and White, Eduardo, ‘Tendencias actuales sobre el tratamiento de las inversiones extranjeras’, in SELA, Políticas de ajuste, pp. 121–38.Google Scholar
