In recent years, the global landscape of trade and investment has undergone significant transformations. As economies worldwide grapple with crises and geopolitical tensions, companies and governments are rethinking their strategies regarding production and supply chains. For Latin America and the Caribbean, this could mark a potential turning point if it were to take advantage of new, more favorable circumstances.
As highlighted in the IDB’s 2024 Latin American and the Caribbean Macroeconomic Report, the region faces a significant productivity challenge, with long-term growth hovering around 2%. Inadequate infrastructure, weak institutions, and political instability have hindered its economic performance. So have a focus on less dynamic sectors and difficulties in adopting modern technologies.
Foreign Direct Investment (FDI) is crucial to overcome these challenges, boost productivity and drive economic growth by introducing advanced technologies and practices.
Could This Be the Region’s Lucky Break?
While challenges abound, current global tensions present significant opportunities for the region. Brexit, U.S.-China trade tensions, the COVID-19 pandemic, and the conflict in Ukraine, among other events, have prompted companies to reassess their production locations and diversify their supply networks to reduce the risks associated with far-flung and dispersed global value chains. Recent initiatives by the U.S. government such as the Inflation Reduction Act (IRA) and the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act allocate more than $400 billion to strengthening regional semiconductor supply chains, reducing greenhouse gas emissions, and promoting close-to-home manufacturing of electric vehicles. This boosts demand for clean energy technologies, minerals, and components that the region can supply. With 50% of its energy produced by renewable sources and a wealth of minerals, including nickel, graphite, and lithium, the region is well-positioned to capitalize on these trends.
In 2022, the region experienced an unprecedented growth in FDI, from $70.5 billion to $208.5 billion. This surge was largely driven by reinvestment from companies already operating in the region, which had previously withheld earnings due to the COVID-19 pandemic. It not only surpassed pre-pandemic levels but also slightly exceeded the previous peak in 2011. In stark contrast, FDI to Asia remained stagnant, and developed economies overall saw a 37% decline.
The world as a whole experienced a decrease in FDI in 2023. But Latin America and the Caribbean maintained stable investment levels, and there has been a notable rise in greenfield FDI announcements —where companies establish new operations abroad— reaching $122 billion, an increase of 9.1% from 2022. Key sectors that have benefited include critical minerals, renewable energy, automobiles, and semiconductors.
The Opportunities Beyond the Investment in Major Countries
Of the total FDI flowing into the region, over 60% is concentrated in just a few countries: Mexico, Brazil, and Chile. While the initial investments may be initially focused on a few countries, however, they create opportunities for services, materials, and intermediate inputs that can be supplied by other countries within the region. By tapping into this potential and producing these intermediate inputs in the most cost-effective areas, Latin America and the Caribbean can develop robust regional value chains—an important consideration in a global landscape where production is increasingly segmented across multiple stages.
Mexico, for example, is currently an important hub for the automotive industry, attracting substantial FDI. This creates opportunities for other countries in the region capable of supplying intermediate products such as insulated wire and engine parts. Nicaragua, Honduras, and El Salvador already export $1.6 billion of insulated wire to Mexico, yet these exports account for just 10% of Mexico’s total imports of this product. Enhancing these supply chains could deepen further regional integration, spreading the benefits of the surge in investment from a handful of countries to the entire region.
A significant challenge for the region remains its low intra-regional trade. Only 14% of the region’s trade occurs within its own borders—an unusually low figure compared to other regions. This problem is compounded by the lack of harmonization among existing regional trade agreements, which impedes effective integration into regional value chains. Strengthening regional trade agreements, lowering intra-regional tariffs, and reducing transportation costs while addressing non-tariff barriers such as protectionist measures, subsidies, rules of origin, standards, and certifications is essential to addressing these challenges. The region’s inadequate infrastructure must also be confronted, as it exacerbates the natural barriers posed by geography and often undermines its comparative and competitive advantages.
The Promise of Shifting Global Value Chains
The reconfiguration of global value chains presents a unique opportunity for propelling the region onto a path of sustainable growth. Countries in the region can tap into the surge of FDI in two ways: by attracting FDI inflows themselves or by increasing exports of intermediate inputs within the region to sectors and countries with high investment levels. To do so, they must foster a conducive institutional environment, develop strong regulatory frameworks, and build local capabilities to absorb and efficiently integrate foreign technologies. Addressing significant barriers hindering intra-regional trade—such as tariffs, regulations, and logistical issues—is paramount. The region can leverage its proximity to the U.S., abundant resources for green energy production, broad free trade agreements, a young and skilled workforce, and its wage competitiveness. Given these favorable conditions, a more deliberate and energetic effort is necessary to ensure the region seizes this opportunity for growth and development.