FDI and Multilateral Development Assistance

According to John H. Dunning, there are three motives for countries to invest abroad. This is called the Eclectic Paradigm. The three motives for FDI compromise are 1) market seeking, 2) efficiency seeking and 3) resource seeking. Most important is efficiency seeking, but all three occur.

Drivers of FDI in Latin America

• Macroeconomic stabilization (all three motives).
• Privatization – especially of public utilities (market seeking).
• Market liberalization (all three motives).
• Regional integration (Mercosur: market seeking, NAFTA: efficiency seeking).
• Commodity price boom (resource seeking).
• Trade liberalization (efficiency seeking).

In general, FDI into Latin America has been increasing and as of late the region has seen outward FDI as well. The initial impact of privatization opportunities attracted much FDI, but since the 1990s opportunities have dried up and investors took fright at crisis in major FDI recipients Argentina and Brazil. Today a similar trend might develop in Bolivia and Venezuela. It should also be taken into account that Latin American markets have always been volatile.

Target sectors for FDI are mostly services (utilities sector), but sometimes natural resources as well.

Balance of payments: Currently we see a movement towards deficit on current account, away from surplus. This is driven by the deterioration on the trade balance and poorer performance of transfers. Also, services deficit remains a structural feature.

Latin America’s own Transnational Corporations (TNCs)

The biggest multinationals tend to be located in natural resource base sector and utility services, because of access to natural resources plus scale, which generate competitiveness. Latin American TNCs are seen as vital given the thin domestic capital markets. Also, the presence of the State can also provide financial backing that is necessary for internationalization, see for example national oil companies like Petrobras. Overall, Latin American TNCs are thinner on the ground in manufacturing.

Factors driving growth of Latin American TNCs

• Access to finance.
• Deployment of technologically-based monopolistic advantage, often acquired when under State-ownership.
• Increasing internal capital resources stemming from ownership of in-region resource rights.
• Successful export performance acts as a springboard.
• Action of National Development Banks.

Key FDI-related issues facing the region

• Too little inward FDI is efficiency seeking. Resource seeking and market seeking motives dominate. This restricts the role of Latin America as an export platform.
• The emergence of Latin American TNCs tends to center on natural resources-based areas. Little spread of the trend beyond this.
• Need for the region to be more competitive

Characteristics of Official Development Assistance

• Most is bilateral, not multilateral.
• The sums involved are far smaller than private capital flows, whether portfolio or FDI.
• ODA is relatively more important for the smallest and poorest economies.
• Given budget constraints and the growing need to address development challenges, the emphasis on private flows will only intensify.

Reasons for foreign aid:

• Keep exports going.
• Keep your own economy going.
• Exercise of soft power: political favors.
• Policy conditionality:

1. Avoid international crises.
2. Support national economies which are tied to global economy.

• Washington Consensus: structural adjustments.

1. Openness to trade --> liberalization and FDI.
2. Privatization.
3. Fiscal responsibility.

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