Foreign Direct Investments into South America
FDI stands for ‘Foreign Direct Investment ’ and represents the amount of money attracted by a country or region that is not funded nationally but internationally. Looking at foreign direct investments can tell us a lot about an economy and its attractiveness as a potential market.
South America is a global driver of foreign investments and the purpose of this article is to highlight some of the dynamics the region faces.
According to the United Nations Conference on Trade and Development (www.unctad.org) World Investment Report, FDI flows to Latin America and the Caribbean increased by 16% to a record $217 billion in 2011, driven mainly by increasing inflows to South America (up 34%).
The inflows to Central America and the Caribbean excluding offshore financial centers increased by 4% while those to the offshore financial centers registered a 4% decrease.
The high growth of FDI in South America was mainly due to its expanding consumer markets, high growth rates and natural-resource endowment. In 2011 Brazil remained by far the largest FDI target, with inflows increasing by 37% to $67 billion – 55% of the total in South America and 31% of the total in the region. The size of Brazil’s domestic market explains its attractiveness, as does its strategic position in South America, which brings within easy reach other emerging and fast-growing markets, such as Argentina, Chile, Colombia and Peru.
Another important driver for FDI growth to South America has been the relatively high rate of return on investments in the region. Since 2003, South American countries have witnessed significant growth of income on FDI: from an annual average of $11 billion during 1994–2002, equivalent to 0.84% of the subregion’s GDP, to an annual average of $60 billion during 2003–2011, equivalent to 2.44% of GDP.
In 2011, FDI income increased another 17%, reaching $95 billion.
The rise in FDI income during the 2000s, in parallel with the increase in FDI stock (a nine-fold increase between 1994 and 2011) and share in GDP (from 11 to 28% share in current GDP), was in part driven by increased investment in extractive industries, which have enjoyed high profit-ability and have attracted a significant part of FDI inflows since the commodity price boom.
The rates of return on inward FDI in the extractive industry in Argentina and Chile were about 20% in 2010 and 30%
in 2011, while those on all inward FDI were about 11% in 2010 and 14% in 2011. The importance of FDI income is evident in the high share of reinvested earnings, which re-presented 45% of FDI flows to South American countries other than Brazil in 2003–2011, compared with only 11% in 1994–2002. Although high and rapidly growing FDI profits boost investment in productive capacity in host countries, they also entail risks, where cash flows are available for repatriation or for short-term investment in local markets.
Where has the investment into Brazil come from?
According to a 2011 study provided by Ernst & Young, the US continued to be the largest investor in Brazil in terms of projects (up 43% to 149%), value (US$12.4 billion) and
jobs created (35,195). This is largely explained by the geographic proximity and the development of trade agreements between the two countries. Historically US investors have primarily targeted the ICT, manufacturing, business services and financial services sectors in Brazil.
The UK jumped from being the fifth largest investor in Brazil in 2010 to second in 2011 by project numbers with 45 and the total value of UK investment was nearly on a par with the US at US$ 12.2 billion. Although UK companies have been present in Brazil for many years, they are now looking to expand their investment across a wider array of sectors including business services, manufacturing, mining, metals, and ICT. Spain was the third largest investor in Brazil with Germany fourth in terms of projects numbers. Although the value of German investments emains low at US$3.0 billion this is likely to increase in the near future given the involvement German companies have with the infrastructure upgrades for the World Cup and the Rio 2016 Games. Both Germany and Japan, which ranks fifth and increased its FDI projects by 57% in 2011, are also beginning to invest heavily in the energy sector.
China has emerged as the fifth largest investor in Brazil in terms of value of FDI with investment increasing six-fold since 2010 and a 70% increase in project numbers. It also ranks fifth with the number of jobs created at 9,049.
The recent boom in the Brazilian consumer market has also led to an increase in investments by small and medium-sized Chinese companies in the country‘s manu-facturing sector. In the future, Chinese investment is also expected to be directed at the areas of technology, logistics and infrastructure. The overall momentum across all sectors is also expected to increase as a result of a joint communiqué signed in 2011 to promote cooperation in trade and investment. As Jorge Menegassi, CEO, South America and Brazil at Ernst & Young explains, “Brazil is an attractive investment destination (…) thanks to its vast natural resources in oil, gas and minerals.”
A proud partner and helper
Some of the largest projects in the world are underway in South America. BBC Chartering is ‘indirectly’ involved in most of them and continues to be an important pillar for the logistics of these projects. BBC Chartering vessels have been involved in delivering components and equipment for the many mining ventures for Iron ore, Copper, Nickel, Coal, Gold, Uranium and Lithium in Argentina, Brazil, Bolivia, Chile, Colombia, and Peru. Also the energy sector requires heavy lift and multipurpose tonnage from BBC Chartering which can handle mission critical energy and power equipment and components. Moreover the transport and infrastructure industry requires partners that can reliably deliver logistic equipment (e.g. harbor cranes or rail cars) to South America.
Today BBC Chartering covers South America with one of the most extensive liner networks for project cargoes in the world. For the past 12 years the carrier not only brought important equipment and machinery to South America, BBC vessels are also helping the continent’s export industry to stay competitive.
Due to the unique force of the BBC Chartering network, there are plenty of options for shippers to make use of attractive market opportunities on a BBC Chartering service.
With established regular services BBC covers both coasts, first with the Americana Line in the East, and second with the Andino Express Line in the West. Embedded in a global network, there is a North American Service, a European Service and a Far East Service. Also a regular service to
the Middle East and a service from the Mediterranean is available. Depending on the connection, the carrier’s service frequencies vary from one to four sailings per month.
Svend Andersen is proud that South America follows its path and states, “The future holds its challenges but we are confident that the hosting of the soccer World Cup in 2014 and the Rio 2016 Games will more than contribute to the ongoing success and development of Latam and Brazil. It may help to attract significant additional investments into the country which will in turn require the world to work together to get things done. In this respect, BBC Chartering considers itself a proud partner to South America: in the past, today and in the future.”