Friday, May 21, 2010

Foreign Direct Investment in Latin America : 2009 and beyond(II)

FDI flows are important because of its impact on new technology, management models and employment . All of these are the social benefit of fostering FDI. With low social cost, FDI flows requires clear rules and stable institutional framework. Environment ,taxes , ideology are among the main reason for those conditions to change. The expected impact is not just lower FDI flows ,bvariAut a weaker prospect for growth. Although Latin America countries are these day better prepared to cope with FDI fluctuations, this does not means it is within the category of secondary importance for Latin America economies.-
What are FDI flows the most sensible to ?.The Asian economic crisis made it clear. With loses for more than U$$50.000 mill at that time, the worst for FDI are those cases with expenditure levels either whether private or public away from their fundamental, with inflationary expectations getting higher, and depreciation currency making what it is left to be done .Most of those losses ,were because of the depreciation currency which followed the misalignment of key variables from their fundamental ,and institutional disarray.
Despite the widespread drop in FDI flows in Latin America, the 2009 year flows, are among the highest in history(fifth place).Most of the investment activity is concentrated in commodity sector (Mining), low and medium- low technology manufacturing sector, with few project related to R&D.
The financial crisis of 2008 affected every one, but mainly to developed countries. This time, Developing countries did better. As a consequence, the FDI world share of developed countries fell from 69% in 2007, to 57% in 2007, and 54% in 2009.By contrast, emerging and transition economies , climbed from 32% in 2007, to 44% in 2008, and 46% in 2009.Among the most important recipients of FDI are the BRIC countries(Brazil, Russia, India and China),which have made them a new source of global economic growth, and political influence. On the other side, developing Asia on its own, has also climbed since 2007 ,from 17% up to 25% in 2009.-
On the Overall view, merger and acquisitions are strongly correlated with FDI (94% for the period 1987-2009),although in the period of 2000-2009 decreased to 90%. It follows that there is a lot of opportunities for Latin America economies, to counterbalance the ideology winds and its negative impact on FDI flows, to pursue instead an higher level of FDI with a second wave of privatizations as a target, which can be fostered further by the next round of talks between the EU and Latin American economies, to get a Free Trade agreement with all of its positive impact on economic growth , trade and development .

Friday, May 07, 2010

Foreign direct investment in Latin America: 2009 and beyond (I)

The recent ECLAC report about FDI in Latin America and the Caribbean countries, (May 2010 ) shows the high level of sensibility global investors have about systemic risk .In fact , Foreign Direct investment dropped 42% in 2009 , down from the record high registered in 2008.
Global economy financial crisis, deteriorated economic expectations at a full scale level. Thus, there was no sector left aside of negative impacts, once the global crisis started out .As a consequence, in the global economy and for the same period, FDI , dropped 39% .
These results could be considered as “usual” for recessions time, but quite on the contrary in this case, is worrisome. Let checks this out.
a.- At a global economy scale ,it should be possible to have new sectors with growth potential , to compensate those which failed , such that making the balance to keep FDI long run upward trend. Given that Merger and acquisitions are the main force behind FDI flows with a positive correlation between them, the reduction in the magnitude of both was not compensated by new alternatives like Privatizations. Latin America has moved back into the privatization process in recent years because of either ideology , wrong doings (corruption) ,bad management experiences or lack of will to go forward with a modernization of the state agenda, which consider less of the State doing business , and more doing effective social balancing.
b.- Most of the analyst expected the recession to be over toward the end of 2009, gaining momentum for a stronger pace at the beginning of 2010.Thus, new opportunities were available somewhere the global economy, waiting for fresh resources. Trade fares took place in different countries to show this opportunities, therefore it did not seem that FDI decrease is due to lack of information. In this case, the evaluation of risk these days is different to what it was before 2008.Investor are more cautious and more risk averse.-
c.- Latin America has gone through this global recession quite nicely, compared to past experience. A pragmatic evaluation indicates that the economic reform done in the nineties, were after all effective enough to allow these countries a better countercyclical approach, to cope with the consequences of the adjustment to a lower level of global income. How come that FDI flows based upon this focus until 2008 changed in 2009, when the conventional wisdom was that Latin America would get through all of this adjustment better than other countries?. There is a credibility issue about the future prospect of Latin America economics orientation, concerning the importance of the private sector and the role of the State. Too much ideology is negative for business. Moreover, the State as the main source and application of ideology,(whether it is from the right or the left) has led it to be a poverty exporter. Therefore, which of the so called “Two visions” approach to Latin America will prevail , the first based on ideology, and the second based on pragmatism, foster additional uncertainty to that one already in place.
These observations deals about three key aspect for FDI flow: Its dynamic (a), economic expectations (b), and credibility(c).There is a fourth element, which deals with its composition, which can be an interesting line of discussion as well. -