Chapter 3 of Trade and Competitiveness in Argentina, Brazil and Chile examines how FDI has interacted with the economic structures in A-B-C and Mexico. The main finding is that although A-B-C have attracted substantial amounts of FDI, this, in contrast to Mexico, has had a limited impact on trade specialisation. In A-B-C most foreign investments were directed to primary good sectors and non-tradable infrastructure services.
Most FDI in primary and service sectors in the 1990s (% shares)
Although the multinationals' strong presence dates from the nineteenth century, there was a surge in FDI inflows in the second half of the 1990s. Most of this expansion occurred through mergers and acquisitions, notably privatisation, with Spain and the United States being the main investors. In the 1990s, two-third of foreign investment in Argentina was in oil and industry, whereas in Brazil and Chile the bulk was in services (banking, electricity, and telecommunications). Currently, in A-B-C and Mexico multinational companies account for a significant portion of economic activity, employment, gross fixed capital formation and in particular trade flows.
In all three countries foreign-owned affiliates have increased their participation in foreign trade, although their imports have increased more than their exports. In the context of increased intra-firm trade world-wide, this imbalance bears witness to the difficulties that local suppliers meet to surf on this trend, as shown by anecdotal evidence from the car industry. This has hindered foreign technology-sharing by local firms that could have been used to improve efficiency. Nevertheless some supply linkages have been created, as documented by case studies both in the non-tradable (e.g. retail trade) and tradable (e.g. mining) sectors. Similarly, FDI has contributed somewhat to institutional strengthening.
Several measures can be taken to attract more FDI. First, although all three countries have very few regulations or limits on foreign investment, as well as few barriers to regional trade within Mercosur, the attractiveness would increase even further if the regulatory regimes were streamlined (e.g. current complex rules of origin create potential inefficiencies). Second, framework conditions should be improved (sanctity of contracts, protection of intellectual property, transparent rules, good governance, and the presence of supporting infrastructure and institutions). Third, beyond the overall business environment, policy-makers should better target the multi-national companies' (MNCs) decision criteria used for choosing global production and supporting locations, without resorting to preferential treatments.
Governments may stimulate the formation of partnerships between MNCs and local firms to maximise the marginal productivity of capital and stimulate company development. Nonetheless, due to market failures (such as lack of information, reluctance to cooperate, and externalities), many governments target foreign investors at the industry level or for certain geographical regions. But the potential risk of such policies is that government failures may in the end outweigh market failures. A better option would be to target specific framework conditions considered to be relevant for the localisation of MNC in particular sectors, giving equal treatment to domestic and foreign investors.
For further information contact the chapter author Andrea Goldstein at firstname.lastname@example.org.
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