Friday, May 7, 2010

The Count: friday FDI wonkiness

40 to 50... the percentage that foreign direct investment (FDI) to Latin America is expected to grow in 2010. After contracting sharply between 2008 and 2009 during the world financial crisis, FDI is expected to make a big comeback this year due largely to stronger than anticipated recovery across the region. Or at least according to Eclac's new annual report on FDI.

The climate of uncertainty, tight credit conditions, falling commodity prices and recessions across the world that followed Lehman's collapse caused FDI flows to Latin America to shrink a whopping 42% from 2008 to 2009. The biggest contractions, predictably, took place in countries that in the past have attracted the most FDI. For instance, flows to Brazil shrank $19 billion, a 42.4% decline. In Argentina, FDI flows contracted by $4.8 billion or by 49.6%.

But while in almost every country FDI, though slowing significantly, was still coming in, in Venezuela FDI just wanted to get the fuck out. In 2008 FDI inflows to Venezuela were just barely positive. And during 2009, Venezuela experienced net FDI outflows of $3.1 billion, a 990% decline! This was due mostly to the various nationalizations that took place in 2009.

But before we predict doom and gloom for the Venezuelan economy, we should remember that it's not exactly Greece, has plenty of oil cash lying around, and just signed a $20 billion deal with China to develop it's heavy crude refining capacity.

Whatever. In any case, the regional decline is indeed quite impressive. But why don't we put it in perspective? The graph below shows FDI flows to Latin America and the Caribbean between 1990 to 2009 in billions of dollars.

As can be seen, the lead up to the 2009 crisis was nothing short of an FDI bonanza. In fact, 2007 and 2008 were historical records for FDI. And even after its huge decline, FDI inflows in 2009 were still the 5th largest ever recorded. In other words, FDI flows to Latin America have wethered the crisis quite well, all things considered.

On a compositional note, the sharpest decline between 2008 to 2009 was in FDI flows to natural resource extraction. As can be seen below, this surged in 2008 coinciding with the large worldwide rise in commodity prices. The share of the service sector, the largest recipient of FDI, remained more or less at its 2008 level.But while FDI flows to the manufacturing sector retook the second place, its technological content remained weak. Moreover, Eclac notes that the technological content of FDI to Latin America has been low accross the board. This takes us to our final graph:
The graph above divides all announced FDI in Latin America into "low", "medium-low", "medium-high", and "high" technology content. As can be seen, low and medium-low dominate new FDI inflows.

This is a big problem because one of the biggest supposed benefits of FDI in textbook economic theory is that it transfers technology to developing countries, leading to positive "spillovers" into other industries and thus increasing overall productivity. Of course, no one seriously believes that FDI in and of itself leads to technology transfers and productivity growth. Smart developing countries, like China for instance, have always used industrial policy to harness FDI to suit their development strategies. It's a real shame that so many countries in Latin America have abandoned this type of thinking.

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