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Latin America: How Corruption Has Deterred Foreign Direct Investment. Outline. -FDI Determinants  -Investors Attraction to FDI     -Types of FDI Seen in Latin America   -Examination of the Causes of Delayed Investment

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  1. Latin America: How Corruption Has Deterred Foreign Direct Investment

  2. Outline -FDI Determinants  -Investors Attraction to FDI     -Types of FDI Seen in Latin America   -Examination of the Causes of Delayed Investment -Correlation Between FDI and Corruption    -Black Markets     -Opening the FDI Flow Through Corruption Relief   -Comparative View: China and LA     -Current Analysis: The Impact of the US Financial Crisis   -Questions    

  3. Determinants of FDI • Size of the Economy  • Population • Human Resources • Labor Force • Infrastructural Factors • Market Protection and Expansion • General Macroeconomic Analysis

  4. The Attraction To Invest • Financing Debts  • Potential Increase for Domestic Private Investment *In 1997, Venezuela had  79.7% of private investment financed through FDI • Increase in Human Capital Resources • Lower Rates of Interest • Rising Incomes and Profits Through Increased Productivity • Development of Manufacturing Sector *Brazil, Paraguay, and Venezuela

  5. FDI definition market growth and size presence of suppliers business environment (including government effectiveness, stability and quality of infrastructures) skills and talent Cheap labor access to natural resources Access to capital markets WIPS predicted the top 15 countries that will receive FDI for 2009 - 2011: China United States India Brazil Russian Federation United Kingdom Germany Australia Indonesia Canada Vietnam Mexico Poland France FDI and Types

  6. Types of FDI By Direction Inward vs Outward By Target Greenfield investment, Mergers and Acquisitions, Horizontal and Vertical FDI By Motive Resource-Seeking, Market-Seeking, Efficiency-Seeking, Strategic-Asset-Seeking The Latin American was a strong economy magnet for FDI, funds deriving from Spain and U.S.A Basic areas of investment are manufacturing and mining Privatization of public utilities, transportation, telecommunications FDI most common in America Latina

  7. Reasons for Deterred FDI in LA • Economic Crisis (Mexico ‘94, Brazil ‘98, Argentina ’01) • Corruption • Unpredictability of the government • Financing problems • exchange rates • poor macroeconomic policies, like overvaluation of domestic currencies • Inadequate infrastructure • Crime and theft • Policy instability

  8. Reasons for Deterred FDI • "Self Imposed Limits”: LA accepts bilateral and multilateral investment agreements that do not clearly or explicitly define the objectives of a national development strategy  • Uncertainty of Macroeconomic Stability: Reliance on state-owned enterprises resulted in drastic borrowing from abroad, leading to the debt crisis of the 1980’s

  9. Statistics: Recent FDI In Latin America

  10. Corruption and the Correlation to FDI • Corruption is one of the main barriers to FDI • main reason for political instability, hurting economy • #1 reason of World Bank on barriers to doing business

  11. Black Markets • Common Names: Phantom Trades, Underground Economy, Shadow Economy, etc. • History: Countries in LA created an artificial scarcity of foreign exchange that led to black markets • Formation: Opened the idea of tax evasion; High marginal tax rate, high incentive to evade • Examples: Chile- BM in foreign exchange at almost about twice the official exchange rate (1973) • FDI: The burden of taxation through the black market premium creates an unstable economic environment, resulting in delayed FDI.

  12. Plans to Increase FDI through lower Corruption

  13. Comparative View: China & Latin America FDI • China has become one of the top recipients of FDI in the world   Example: China received $54 billion dollars worth of FDI from the USA (2004) • Respect for the rule of law is at a much lower level in LA, thus the corruption level in China is higher  • China adversely affects direct investment flows into LA economies • China has had an abundance of low-cost labor, rapid expansion of physical infrastructure, sustained growth which triumphs over their high corruption level and leads to great increases in FDI

  14. Impact of US Financial Crisis

  15. Questions?

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