Foreign Direct Investment in Latin America: An Analysis of its Characteristics and Efficacy

Foreign Direct Investment in Latin America: An Analysis of its Characteristics and Efficacy

INTRODUCTION

Foreign Direct Investment, or FDI, is defined as “an investment made by a foreign person or organization in a particular country” (http://www.encarta.com). In the 1990s, FDI became integral to the growth of Latin America. Traditionally, flows of FDI have constituted a small percentage of the resources flowing to developing countries (UNESCAP, 162). However, this characteristic changed in the 1990s when the share of FDI to developing nations rose from 12.7% in1990 to 41.5% in 1997. Proponents of FDI, point to its ability to foster technological innovation in the host country as well as its tendency to increase employment. Critics of FDI claim that it has increased lesser-developed nations’ dependence on foreign capital pushing them further into debt. In this paper I plan to explore both sides of this issue as well as the particular characteristics of FDI flows into Latin America.

FDI: GOOD?

The theory behind attracting FDI in developing countries is quite simple. Supposedly, FDI facilitates technological transfer and encourages more efficient management practices (Fernandez, 12). This assumption is based upon the classical economic theory that with technological transfer and innovation, these advances will filter into other areas of the economy. This is known as “spillover effects”. Foreign Direct Investment generates employment in the short-term by inundating the market with financial capital that must be maintained through labor. This can counteract the impact of the regular business cycle on the labor market (UNESCAP, 184). FDI can also improve the productivity of the rest of the economy. This has been especially true when FDI has been applied to the privatization of previously state-owned public enterprises. The result is greater efficiency and greater supply of services and products (UNESCAP, 185). During the 1990s, many state-owned enterprises were privatized, resulting in the generation of massive amounts of financial capital. The largest such takeover was that of Aueropuertos Argentina by firms from the United States and Italy worth a total of $5,134 million (USD) (UNESCAP, 175).

FDI: BAD?

Firms invest in other countries in the interest of gaining a stable long-term role in the management of the enterprise where the funds are invested (UNESCAP, 162). Therefore, FDI can imply long-term foreign ownership and control over domestic firms.