Foreign direct investment in Latin America and the Caribbean rose by 55.2% in 2022, reaching a historic high
In a new report, ECLAC calls on countries to improve their policy design to take advantage of the contribution that FDI can make to the energy transition and to the region’s sustainable productive development.
(July 10, 2023) In 2022, Latin America and the Caribbean received $224.579 billion dollars in Foreign Direct Investment (FDI), a figure that is 55.2% above 2021 levels and marks the highest value on record, the Economic Commission for Latin America and the Caribbean (ECLAC) revealed today.
This result is mainly attributable to the increase in FDI in some countries, particularly in Brazil; to growth in all the components of FDI, especially earnings reinvestment; and to the increase in FDI in the services sector. This dynamic is consistent with the post-pandemic recovery and it is unclear whether it will stay at similar levels in 2023, according to the annual report Foreign Direct Investment in Latin America and the Caribbean 2023.
FDI inflows to Latin American and Caribbean countries had not topped $200 billion dollars since 2013. These flows also increased as a share of regional GDP in 2022, accounting for 4.0%, the document states.
“The challenge of attracting and retaining Foreign Direct Investment that contributes effectively to the region’s sustainable and inclusive productive development is more relevant than ever. There are new opportunities in an era of reconfiguration of global value chains and geographic relocation of production in the face of a changing globalization,” said ECLAC’s Executive Secretary, José Manuel Salazar-Xirinachs, who presented the study’s main conclusions during a press conference in Santiago, Chile.
The senior United Nations official emphasized that “the challenge is not only to attract and retain, but also to maximize FDI’s contribution to development, and to this end countries must focus on post-establishment productive development policies, which include the promotion of productive linkages, policies for adding value and moving up value chains, for human resources development, infrastructure and logistics, and building local capacities.”
The global FDI scenario in 2022 was heterogeneous, ECLAC indicates. While these flows grew in Latin America and the Caribbean and in other regions of the world, they decreased in the United States and in some European Union countries. Overall, global FDI inflows shrank by 12% versus 2021, totaling $1.29 trillion dollars.
According to the report, nearly all the countries of Latin America and the Caribbean received more Foreign Direct Investment in 2022. Leading the list were Brazil (which received 41% of the regional total and ranks as the No. 5 destination for global FDI), followed by Mexico (17%), Chile (9%), Colombia (8%), Argentina (7%) and Peru (5%).
Costa Rica was the main Foreign Direct Investment recipient in Central America. In Guatemala, these flows showed a significant decline due to an extraordinary value recorded in 2021, but they returned to their historical average.
There was also a positive change in FDI inflows to the Caribbean, fueled mainly by greater investment in the Dominican Republic, which was the second-largest recipient country after Guyana.
At a regional level, 54% of Foreign Direct Investment went into the services sector, although both the manufacturing and natural resources sectors also rebounded. Financial services; electricity, natural gas and water; information and communications; and transportation-related services had the largest share of investments in the services sector as a whole.
The United States (38% of the total) and the European Union (17%, excluding the Netherlands and Luxembourg) were the main investors in the region, while FDI coming from countries within the Latin America and Caribbean region experienced a significant increase, rising from 9% to 14% of the total.
In fact, the document Foreign Direct Investment in Latin America and the Caribbean 2023 points to a more than 80% increase in FDI from Latin America and the Caribbean to destinations both inside and outside the region. In 2022, the amount invested abroad by transnational Latin American companies, known as translatinas, reached a historic high: $74.677 billion dollars, which is the highest figure recorded since this series began to be compiled in the 1990s.
Furthermore, the amount of FDI project announcements in Latin America and the Caribbean grew by 93% in 2022, totaling nearly $100 billion dollars. For the first time since 2010, the hydrocarbons sector (coal, oil and gas) led the announcements, with 24% of the total, followed by the automotive sector (13%) and renewable energies (11%).
The study also includes two chapters that analyze FDI trends in non-renewable and renewable energies in the context of the energy transition and fulfillment of the Sustainable Development Goals (SDGs). In addition, they address the key role of governments in this area, identifying challenges and opportunities and making policy recommendations.
The energy transition is identified by ECLAC as one of the sectors driving economic growth that can become a major engine for the region’s productive transformation, which means that countries and their territories should prioritize it within their productive development policies and agendas.
The percentage of installed capacity of renewable energy in Latin America and the Caribbean is higher than the global average, and the electrical power generation matrix is among the cleanest in the world. Therefore, if the region were to increase its supply of renewable energy, it could become a place of origin for the production of goods that are being produced today in countries with comparatively less clean matrixes. FDI can play a critical role in accelerating the energy transition, facilitating technology transfer and enabling emerging technologies.
Governments must lead the coordination of strategies for the energy transition’s success in the region, the Commission underscores. “They are responsible for making sure that non-renewable energy activities are reduced radically, as required by the climate commitments, while managing to mitigate their negative effects and their economic and social costs, especially in terms of investments, employment and income. One of their central functions is to develop long-term policies that promote investments in renewable energy sources, so that the transition is rapid and secure, and does not leave the region lagging behind in a context in which energy from clean sources is a factor of competition,” the study states.
Nonetheless, ECLAC also warns that in this process, consideration must be given to the importance that the non-renewable energy sector still has for some countries in the region, especially in terms of generating revenue to address social demands, those related to productive development and to energy security.
Beyond the challenges of the energy transition, the report insists that Latin American and Caribbean countries must improve the design of policies to attract investment and strengthen their institutional capacities in this area. It is essential that progress be made on articulating efforts to attract FDI with countries’ and territories’ productive development strategies, and that FDI begin to be used with greater directionality as a strategic tool for furthering sustainable productive development processes.