Software and IT, the third source of FDI in Latin America

Last year, foreign direct investment grew in Latin America, but it must be of a higher level.

In 2018, the Software and Information Technology (IT) industry represented the third source of foreign direct investment (FDI) inflow in Latin America, according to a release by BNAméricas on FDI in the region, based on the report of the Economic Commission for Latin America and the Caribbean (ECLAC).

In the report on FDI, ECLAC stressed that Latin America should focus on attracting certain types of foreign investment and not just trying to increase the volume of investments for the region. In this way, you will have the opportunity to benefit from technology transfer and promote development in other areas.

FDI grows in the region

For the first time in five years, Latin America increased the volume of foreign investment, growing by 13.2%, which meant 184,287 million dollars for the region in investments. These results contrast with the global trend, which contracted by 13% because of the trade war between the United States and China.

However, most of the FDI was due to reinvested earnings and loans between companies. The FDI in the region isn’t representing new capital contributions. The figure is far from the growth registered between 2011 and 2012 by commodities, which attracted $ 210 B annually in the region. 

“In an international context of reduction of FDI flows and strong competition for investments, policies should not be aimed at recovering the amount of FDI flows, but should increasingly aim to attract the type of FDI that contributes to form knowledge capital and move forward in the shift towards sustainable production, energy and consumption patterns,” says the report. “The growing incorporation of a sustainable development approach in the strategic decisions of the world’s major transnationals is an opportunity to design policies that accompany this paradigm shift.”

Latin America can benefit from the US trade war – China.

For the Canadian consultant DBRS, the trade war between the United States and China can mean investment opportunities for Latin America. DBRS also warns that both sides will probably want the countries of the region to establish a position. 

Thomas Torgerson, co-holder of sovereign ratings at DBRS, said Latin American countries could continue to be neutral in the dispute. In this way, they will have the opportunity to expand their commercial links and advance the production of items with higher added value. Torgerson believes that with adequate internal policies, there are opportunities for Latin America to take advantage of trade diversion such as the relocation of production operations caused by the trade war.

For ECLAC, Mexico has the potential to be the most benefited nation in this dispute. 

“In Latin America, Mexico could benefit from greater investments in medium technology sectors by transnationals that want to take advantage of their potential to enter the United States,” said the UN economic commission for the region. “

Brazil, the Latin American country that receives more FDI

In the past year, Brazil was the Latin American country that received the most investments, totaling $ 88 B. Mexico and Argentina are the second and third Latin American countries with the highest FDI, with $ 37 B and $ 12 B received last year.

Most of the FDI in the region came from the manufacturing sector, which accounts for almost half of the resources (47%). Services and natural resources follow them.

In the inflow of capital through mergers and acquisitions, the software and IT sector represented the third place in the region, behind the mining and oil sector. Among the most critical purchases, last year is the acquisition of the Chilean mining company SQM by the Chinese company Tianqi Lithium, which bought 24% of the company.

The primary investments in Latin America came from Europe, the United States, and China. The Asian giant has focused mainly on investments in the primary sectors, such as mining, agribusiness, or energy. In contrast, European and North American investments are more diverse.

ECLAC highlighted the growing presence of FDI in South Korea. “The sectorial specialization of Korean FDI, although focused on activities of high technological complexity, has not always contributed to the development of local capacities in the countries of Latin America and the Caribbean,” says the report. “In the electronics industry, for example, a large part of the activities correspond to assembly processes characterized by the importation of components and therefore have few technological spills, unlike what could be expected in an activity that is at the technological frontier. On the contrary, in the automotive industry and the steel industry, Korean transnational companies have supported the creation of local capacities in the region.”