Countries that dismantled protec-tionist policies are still attracting FDI, despite the commodities bust. Others aren’t doing so well.
Latin America’s foreign direct investment fell by 19% to $153 billion in 2014. Ordinarily, so considerable a drop would be worrisome. In reality, the decrease had more to do with the boom in commodities prices the year before—and a $5 billion divestment. The region continues, however, to be buffeted by the fall in oil and global commodities prices. What’s more, countries that failed to tackle structural reform back when the cost of commodities was sky-high will find it increasingly difficult to undertake now.
The World Bank’s annual ranking of the best countries for conducting business tells the tale. The Latin American nations that have commenced reforms rank the highest. Colombia is ranked 34th, Peru 35th, Mexico 39th, Chile 41st and Panama 52nd. Those that haven’t started down the road of reform are far down the list. Nicaragua comes in at 119, Brazil at 123 and Argentina at 124. Bolivia and Venezuela rank near the bottom.
FREE TRADE, POOR DECISIONS
Howard Kleinman, partner at law firm Dechert, predicts Mexico will continue to see strong FDI in 2015. He cites the reform of the Mexican energy sector as proof of the country’s commitment to change. “I think Brazil will need to instigate reforms to attract foreign investment,” states Kleinman. “The question is whether the current administration has the political will, given the crisis at Petrobras.” The oil producer has been ensnared in a corruption scandal.
Global automakers last year announced plans to funnel a combined $7 billion into Mexico. Kia, for one, indicated it aims to build a $1 billion plant in Monterrey, in the state of Nuevo León. Audi, which broke ground on its $1.3 billion plant in San José Chiapa, Puebla, is on course to begin production in 2016.
“Mexico’s existing trade relationships, particularly its numerous FTAs with some of Kia’s strategic markets (including the USA and Canada under Nafta), were certainly a very important factor taken into consideration when deciding to locate our new factory in Mexico,” notes Michael Choo, the general manager of Kia Motors’ overseas public relations team. Javier Valadez, a communication and government affairs spokesperson for Audi Mexico, echoed the thinking: “Mexico offers many advantages. Our presence there reduces our costs and gives us competitive advantages, such as faster delivery times and greater flexibility.” He adds that from Mexico, “We can export to the USA, Latin America and Europe without having to pay customs duties.”
UPS last year decided to expand its healthcare presence in the region. The parcel delivery service aims to put up three healthcare-dedicated facilities in Mexico City, São Paulo and Santiago. “In Brazil,” states Jose Acosta, president of operations and public affairs for UPS Americas, “we worked with the government to bring our operations to the State of Goiás. The government provided state-sponsored tax incentives, which presented an added value that we could pass on to our customers.”
Each country in Latin America boasts different cultures and customs. “Take the time and get to know the local market,” Acosta advises. “Eat, sleep and think as the locals do. This will help give insights into what works and doesn’t work in a particular area for certain people—and, more importantly, how to successfully conduct business. At UPS all facilities are managed by local nationals who bring globalized standards to local folks.”
Dechert’s Kleinman believes structure and local due diligence minimizes FDI risks. “Investors will continue to evaluate the political and economic risks of doing business in each country in the region. Investments need to be structured to account for the relevant risks/regulations.”
Despite the difficulties, many countries remain firmly on the FDI radar, including Mexico, Colombia, Peru, Chile and Costa Rica. But those nations with relatively protectionist policies—Argentina, Brazil and Venezuela—are, at least for the moment, off the screen.