SANTIAGO, Chile, CMC – The Economic Commission for Latin America and the Caribbean (ECLAC) Monday called on countries in the region to improve their policy design to take advantage of the contribution that foreign direct investment (FDI) can make to the energy transition and the region’s sustainable productive development.
ECLAC said Latin America and the Caribbean received US$224.579 billion in FDI last year, 55.2 percent higher than the previous year’s levels and marked the highest value on record.
It said the global FDI scenario in 2022 was heterogeneous and that while these flows grew in Latin America, the Caribbean, and other regions, they decreased in the United States and some European Union countries. Overall, global FDI inflows shrank by 12 percent versus 2021, totaling 1.29 trillion dollars.
According to the report, nearly all Latin America and the Caribbean countries received more Foreign Direct Investment in 2022.
There was also a positive change in FDI inflows to the Caribbean, fueled mainly by more significant investment in the Dominican Republic, the second-largest recipient country after Guyana.
ECLAC said that the 2022 results are 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 rise 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. The document states that these flows also increased as a share of regional gross domestic product (GDP) in 2022, accounting for 4.0 percent.
“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 changing globalization,” ECLAC’s Executive Secretary, José Manuel Salazar-Xirinachs, told a news conference as he presented the report’s main conclusions.
“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,” he emphasized.
At a regional level, 54 percent of FDI went into the services sector, although 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.
The United States and the European Union, excluding the Netherlands and Luxembourg, were the leading investors in the region, while FDI coming from countries within the Latin America and Caribbean region experienced a significant increase, rising from nine to 14 percent of the total.
The document Foreign Direct Investment in Latin America and the Caribbean 2023 points to a more than 80 percent increase in FDI from Latin America and the Caribbean to destinations inside and outside the region.
In 2022, the amount invested abroad by transnational Latin American companies, known as translations, reached a historic high of 74.677 billion dollars, 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 percent 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 percent of the total, followed by the automotive industry (13 percent) and renewable energies (11 percent).
The study also includes an analysis of 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 critical role of governments in this area, identifying challenges and opportunities and making policy recommendations.
ECLAC identifies the energy transition as one of the sectors driving economic growth that can become a significant engine for the region’s productive transformation. Countries and territories should prioritize it within their product development policies and agendas.
The percentage of installed renewable energy capacity 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 producing goods that are being produced today in countries with comparatively less clean matrixes. FDI can accelerate the energy transition, facilitate technology transfer, and enable emerging technologies.”
ECLAC said governments must coordinate strategies for the energy transition’s success in the region.
“They are responsible for ensuring that non-renewable energy activities are reduced radically, as required by the climate commitments, while mitigating their adverse effects and economic and social costs, especially regarding 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 in a context in which energy from clean sources is a factor of competition,” according to the report.
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 generating revenue to address social demands related to product development and 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 product development processes,” ECLAC added.
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