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by Nicole Moussa

European Foreign Direct

Investment in Latin

America

Three Stages of FDI in Latin America

The inow of foreign direct investment (FDI) to Latin Americahas been clearly linked to the prevailing model of economicdevelopment throughout its recent history.

From the early 19th century up to the period between the wars,within the framework of the primary-export-led growth model,FDI was directed mainly at the agricultural and mining sectors,representing the focal point of the accumulation process. However,foreign investments were also absorbed by the nancial system andby transport activities (especially railroads) geared to the ow of good towards the main importers, initially mainly Great Britain,

but then, increasingly, the United States (especially in the case of Mexico). During that stage, British capital was the main provider of FDI, followed by that coming from the United States.

During the period of import substitution, a wave of nationalisation of public services and natural resources took place,along with a major push to industrialisation which relied heavilyon domestic capital in its rst stage, but became progressivelytransnational from the 1950’s onwards. Transnational companies(TNC’s) started to play a more and more important role in theindustrialisation process. Although the FDI at that time wasdominated by TNC’s from the United States, there was largeEuropean investment in the manufacturing sector mainly fromGermany and Great Britain and, to a lesser extent, from Italyand France. These investments were concentrated in three main

activities: 1) the car sector, where companies like Volkswagen, Fiat,Citröen, Peugeot, Renault and Scania were set up in Latin Americain the 50’s; 2) the food and drinks sector where some companies,such as Nestlé and Unilever, had invested since the start of the lastcentury and others, such as Parmalat and Danone, entered the eldin the 70’s; 3) the chemicals sector where companies such as Bayer,BASF, Rhône-Poulenc and Merck set up operations in Latin Americaduring the primary-export-led period. During the import substitutionstage, these companies were aimed mainly at penetrating tradebarriers and have a direct access to local markets.

Beginning with the debt crises of 1982, in the wake of thepredominance of the neo-liberal model, external, trade and nancialliberalisation become the central elements of the new policy aimed at

reintegration into the international economy. Within this new model,foreign capital in its various forms - loans, portfolio investments anddirect investment - was called to play a central role into the nancingof economic activity and FDI was considered to be at the core of the

modernisation of the economy. The opening up of nearly all sectorsto FDI, and the strong incentives offered to try and attract it, led toa large inux of investment directed towards all sectors, but whichmainly found its way to those which had previously been blocked toprivate capital: the services sector (in particular nancial and basicservices) and natural resources.

United States

Europe

Outward FDI Flows from Europe and the

United States towards Latin America

(billions dollars)

Source: UNCTAD, FDI Country Prole, www.unctad.org.

Puente @ Europa - Año V - Número 3/4 - Noviembre 2007

http://www.unctad.org/



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O n t h e R o a d

The Boom Years of European FDI in Latin America Starting in

the 90’s …

European FDI soared in the second half of the 90’s and became themain source of foreign investment in Latin America, overtaking thatof the United States. According to gures from European investmentcountries, the outward ow of FDI from Europe to Latin America jumped from an annual average of US$ 6.300 million in the period1991-1995 to US$ 35.000 million in 1996-2000, with the gurethen falling to US$ 20.000 between 2001 and 2006, in line with thegeneral fall in total FDI ows into Latin America during the period2000-2003.

The gures from some recipient countries in Latin Americaconrm that European companies have become the principle source of FDI in South America from the mid-90’s on and that their importancehas been growing in Mexico, where the United States, however, isstill the main investor. For example, 43% of the total inow of FDIto Brazil in 1995 came from Europe, and this percentage rose to 49%in 2000; 51% of accumulated FDI ows between 2001 and 2006

came from the same source. In Argentina, the percentage of total FDIcoming from Europe jumped from 36% in 1995 to 50% in 2004. Alsoin Mexico, 22% of the net annual accumulated ow of FDI between1994 and 2000 came from the same source, a gure which increasedto 30% between 2001 and 2006.

Spain has been the main European investor in Latin America,with an average of annual FDI of US$ 11.000 million between 1996and 2003, representing 40% of the total of European investment inLatin America in this period. These investments were an integral partof the restructuring processes carried out by large Spanish economicgroups within their strategy to acquire a better position on themarket ladder after the liberalization of some sectors of the Spanisheconomy at the beginning of the 90’s (energy, telecommunications,air transport, etc.). One of the characteristics of Spanish investmentfrom that period is the strong concentration in the service sector(telecommunications, energy and banks), while other Europeaninvestments, albeit mainly directed to the services sector, also gainedaccess to industry.

Germany

Switzerland

France

Netherlands

United Kingdom

Portugal

Spain

Outward FDI Flows of the Seven Largest European Investors in Latin America

1996-2003 Annual Average

(millions dollars)

Source: UNCTAD, FDI Country Prole, www.unctad.org.

...in a Context of Economic Weakness of Hosting Countries…

At the beginning of the 90’s, Latin America was emerging from theso-called “década perdida” during which, under the auspices of theInternational Monetary Fund, “orthodox adjustment policies” wereimplemented in response to the external debt crisis of 1982. Thosepolicies stunned the region into economic stagnation, worseningthe internal and external unbalances which they should help toovercome. Instead of adopting economic reactivation policies based

on savings and national investment, Latin American countries,experiencing a time of high economic vulnerability, stuck to therecipes of ‘structural reforms’ and strong incentives to attract foreign

capital imposed by the credit organisations. At the same time, atthe beginning of the 90’s, the international nancial context wasalso changing, with the freeing of capital in search of businessopportunities in emerging countries.

...which Offered Strong Incentives to Attract Foreign Capital.

Foreign capital were mainly attracted to Latin American countriesby the cut-price privatisations of large, state-run companies in

sectors where they held a natural monopoly (such as the energyand basic services sectors), by the possibility to access numerousnatural resources (gas, oil and minerals) and to penetrate new





markets with the speeding up of the trade and/or customs unionprocesses, by national treatment, by the liberalisation of themovement of capital, etc.

These measures, which involved a radical change towardscomplete liberalisation of the economies, were accompanied byother processes aimed to guarantee its future viability and to limitthe policy options of the governments involved concerning foreigncapital. Guarantees on prots and tariffs were offered, as well asx tax levels. Bilateral investment treaties (BIT’s) were signed,creating obligations for the host country towards investors from theother signatory and recognising international arbitration in the caseof differences between the companies and the recipient state. BIT’sthrived from the 90’s on, as the developed countries pushed at rstaggressively to protect the investments made by their companies.Later, developing countries such as China, India and Thailand-whose companies have been looking to invest more in foreignmarkets- have also sought to sign this type of treaty with othercountries in the Southern Hemisphere. This allowed foreign investorsto fastrack commitments and obtain better conditions than thosewhich could normally be obtained within a framework of multilateralnegotiations. Up to the end of 2006, Latin American countries hadsigned 566 BITs, of which a total of 434 have been ratied.

A “Reconquest” through Globalisation?

Most European FDI in Latin America during the 90’s consistedof the purchasing of existing companies (generally followed byan increase in the company’s capital), rather than completely newinvestments. The acquisition of local companies was concentratedin the services and hydrocarbon sectors. Among the Europeancorporations which took over private or state companies in LatinAmerica there were: BBVA (Spain), Santander (Spain), HSBC(United Kingdom) which took over banks; Unión Fenosa, Endesa,Iberdrola, Electricité de France, Totalnaelf, United Utilities andNational Grid which bought electric companies; Vivendi, Suez,RWE, United Utilities, Aguas de Barcelona, Aguas de Valencia,Anglian Water which all acquired water companies; Telefónica,

Telecom Italia, France Telecom, Portugal Telecom which took overtelecommunications companies; nally, Repsol y British Petroleum,which bought oil companies, etc.

This is how, in a short period of time, a small numberof European companies, many of which did not have muchinternational experience, achieved a leading position in highlystrategic sectors of the economies of most recipient countries,such as banking, energy, telecommunications, and infrastructurein general. These are sectors which have a strong impact on thesystemic competitiveness of any economy and a signicant weightin the daily lives of the citizens who are, after all, the end users.Many of these services are critical and, when managed under theconstraints of prot-making companies, they can affect basic aspects

of the lives of large sectors of the population.The sheer size and speed of the investment inux into thecontinent carried out by European banks and companies (mainly of Spanish origins), as they bought up emblematic state companies,was viewed by some as yet another “conquest”, or a return tocolonialism. This perception was reinforced by the weakness of therecipient countries, which sold off their public companies, in part,to comply with the conditions imposed by the international nancialorganisations which, in turn, were controlled by the governments of the countries from which those same investing companies came.

What is the Evaluation of European FDI in Latin America?

Conventional wisdom assigns to FDI many potential benets for the

country receiving the investment: access to new nancial resources,technology and markets; the creation of links to the rest of the globaleconomy; the generation of employment; an increase in exports;

and, consequent to all of these, a positive impact on growth anddevelopment. However, quite frequently the reality does not matchwith the theory as described and the blame is then put on the policieswhich could not take full advantage of the potentialities of FDI. Atthe same time, however, the adoption of “FDI-friendly” policiesis also usually recommended in order to attract investment. Thismainly entails the liberalisation of the economy, a free hand forinvestors and lack of intervention on the part of the state.

Politics do make a difference on the impact of FDI in the hostcountries. How can we otherwise explain the different impact thatFDI has had, for example, on manufacturing in countries such asChina and Mexico? In the former, it contributed to the transfer of technology and the development of domestic companies, while inthe latter it remained limited to the area of the northern border withthe United States, strongly linked to the companies and the marketof that country. In the case of China, investments were accompaniedby an interventionist policy, which was liberal in the case of Mexico.In Latin America, the spread of FDI has been coupled with a suddentrade liberalisation which has led to an increased dependencyon imports of nished and semi-nished products and capital, agrowing specialisation in primary production and a reduction inresearch and development competences.

Yet another important difference between the countries of Asia

and Latin America lies in the fact that the former have been moreselective in attracting FDI and, more recently, in the opening upof services, above all of the non-exportable ones. This reluctancecan be explained by some of the characteristics of the FDI in theseareas which make them less attractive than those allocated to themanufacturing sector, producing for internal consumption. Thistype of FDI does not, by denition, generate foreign currency andthe initial capital inow is rapidly overtaken by external payments(in terms of imports of equipment and technology, repatriationof prots, etc.). Moreover, the high xed costs and the existenceof externalities transform the provision of some infrastructureservices, such as telecommunications, energy, water, transport,etc. into natural monopolies. Sectors which are essential to thecompetitiveness of the economy and the wellbeing of the population

at large nd themselves exposed to the dangers of abuse of dominantposition. Developing Asian countries have generally preferred tokeep state control of these areas, resorting to service contracts withTNC’s when they see t.

In a sharp contrast to this, the highpoint of FDI in Latin Americain the 90’s was due to the opening up of the services sector and thegreat interest of European companies, and particularly Spanish ones,to invest in this area.

The process of liberalisation of the services sector in LatinAmerica has turned into a controversial issue. In general,opinions tend to split along the lines of supporters and critics of privatisation, the former being generally those who are involvedin the implementation of the process and who point to working

documents or publications of the World Bank, the Inter-AmericanDevelopment Bank (IADB) and the International Monetary Fundto back up their claims. Not seldom, different investigations cometo different conclusions (and indeed sometimes opposite opinions)on the same cases or general aspects.

Those who defend the process, while admitting that problemsexist, take an overall positive view and emphasize aspects such as animprovement of the quality and reach of the services, an increase incompetitiveness and a decrease in prices, increases in protabilityand productivity, a raise in tax earnings and a fall in the subsidiespreviously granted to state companies1.

Meanwhile, those who oppose the reform processes reply thatthey did not full their stated objectives and, in many cases, theysimply replaced a state monopoly with a private one, transforming

the logic of a public service aimed at satisfying a demand into alogic of prot to be obtained, therefore damaging the poor sectors of society and workers in general. Although they recognize that some


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O n t h e R o a d

of the privatised companies improved their service performanceand productivity, they argue that the progresses were a long waybelow the contractual commitments and that the reduction in the

companies’ operating costs ended up in increasing prots as opposedto decreasing tariffs2.In terms of social perception, opinion polls have been recording

a rising discontent and mobilisation against privatisation and theopening up of public services, something which could affect the midand long-term sustainability of private investment in some of theseactivities. Attempts to privatise state companies in recent years havebeen paralysed by strong rejection and large social protests, such asthe “water war” in Cochabamba, Bolivia, and the refusal to allowelectricity distribution in Peru and Ecuador to fall into private hands.

Surveys carried out by Latinobarómetro show that 46% of theinhabitants of Latin America thought that the privatisations had beenbenecial to their countries in 1998. This gure dropped to 31% in2001 and then to 19% in 2004. The percentage of people who were

dissatised with the process was 71% in 2003 and 75% in 20043.This dissatisfaction increased even in Chile, a country which hadbeen frequently cited as an example of the success of privatisations:the percentage of “satiseds” decreased from 58% to 37% between1998 and 2005.

Although those who defend the opening up to private andforeign capital admit that there is a “general rejection of the processin Latin America”, this has not brought them to question theirpositive evaluation of the process. In the opinion of specialistsfrom the World Bank, for example, these negative attitudes havearisen in spite of the positive results achieved. Their analyticalefforts are therefore focused on “the divergence between realityand social perception”4 and their ndings show that “the failings

in communication [are] amongst the main deciencies of theprogrammes”. According to these specialists, “the countries involvedfailed to develop a proactive communication strategy prior to, duringand after the reform process […] In particular, the governments

involved were wrong in that they didn’t give any publicity to theimprovements achieved in the process”5.

Latin America was one of the rst regions to put into practice

the opening up of public service activities to private capital,anticipating the majority of developed countries. Among this groupof developed countries, only the United States and the UnitedKingdom already had private companies working in the area inthe 80’s (although these were exclusively made up of domesticcompanies, as opposed to foreign ones). The service companieswhich invested in Latin America at the time, mainly European,lacked experience both in the international arena and in themanagement of private business as many of them were still state-runcompanies or had only recently been privatised when they landed inLatin America. In many cases, the setting up of regulatory bodies, orat least regulatory policies, was a rushed affair which was carried outat the same time as, or even after, the FDI arrived.

This haste resulted in weak regulatory frameworks which

allowed for the renegotiation of the contracts soon after theywere awarded. It is estimated that 30% of the more than 1,000infrastructure project contracts signed in Latin America and theCaribbean between 1985 and 2000 were renegotiated. This gurerises to 55% in the transport area and 74% for water and sanitation6.These renegotiations took place on average 2,2 years after theawarding of the contracts and most resulted in signicant benets forthe private contract holders which were not anticipated in the originalcontract. This generalised practice of renegotiating could be putdown to the lack of experience and excessive optimism on the partof the winner of the contract, but also to a “malicious and recklesslowering of the cost of the service offered, based on the hope of thecontract winners that, once the contract awarded, they could ask for

a renegotiation with an administration which would be vulnerableto their blackmail due to the key role played by the service theyguaranteed within the economy”7.

Latin America

Venezuela

Brazil

Colombia

Mexico

Chile

Uruguay

Ecuador

Peru

Honduras

Nicaragua

Guatemala

Argentina

Bolivia

Paraguay

El Salvador

Costa Rica

Panama

1998-2005 2005

Percentage of Public Opinion in Favour of Privatisation in Latin America between 1998 and 2005

Question: Do you agree strongly, agree, disagree, or disagree strongly with this sentence: Has the privatisation of state companies beenbenecial for the country?These gures only reproduce the “agree strongly” and “agree” answers.Source: Latinobarómetro press releases, 1998 to 2005 (www.latinobarometro.org).

http://www.latinobarometro.org/

http://www.latinobarometro.org/

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