Latin American and Caribbean direct investment in the United States

Multinational Business Review, Spring 1994 by Krug, Jeffrey A, Daniels, John D

Nations attempt to influence the outward and inward movement of foreign direct investment (FDI) for a variety of economic, political, and cultural reasons. For example, they frequently compete to gain jobs, tax revenues, and foreign exchange by limiting capital outflows or encouraging inflows. The aim of gaining foreign exchange through balance of payments surpluses differs from other reasons to influence FDI movements in that cross-national gains are a zero sum, meaning that one country's surplus shows up as another country's deficit. Consequently, different national policies are often competitive inasmuch as nations aim to improve their convertible-capital positions relative to each other. However, the zero sum situation does not always result in conflicts among nations because a country may be willing to endure deficits in order to achieve other aims, or it also may be willing to make trade-offs between short and long-term deficit or surplus situations.

The external debt problem of many lesser developed countries (LDCs) has complicated capital movement policies in general and has brought forth some new considerations on whether and how to influence FDI movements. On the one hand, many LDCs have lagged in servicing their debts because of having insufficient foreign exchange to make timely interest and amortization payments. The resultant practices have been well-publicized, such as the enactment of deflationary economic measures, the use of debt-equity swaps, the repurchase of debt instruments at highly-discounted market values, the sell-off of government enterprises within privatization programs and the renegotiation of debt terms. On the other hand, much capital has simultaneously been exported from the debt-ridden LDCs in the form of portfolio and direct investments within industrial nations; therefore, any analysis of only the debt situation distorts the picture of the overall capital position of the debtor versus lender nations.

The reverse capital flows to lender nations in the form of investments or capital flight are of little solace to the borrowers and lenders, who still must deal with the payment problems. This situation has led to criticism of debt forgiveness and rescheduling plans (Lawrence, 1992). Therefore, an intriguing consideration is whether outward FDI movements from LDCs enhance or retard the ability of LDCs to service their external debts. If so, should LDCs or industrial countries set policies to restrict their movements? Should these policies focus on FDI in general, or should each movement be examined on its own merits? In order to answer either of these questions, it is necessary to know much more about the patterns and movements of FDI from LDCs to industrial countries, particularly those from LDCs with debt-servicing problems.

FOCUS OF STUDY

This study examines the pattern of Latin American and Caribbean (hereafter referred to as Latin American) investment in the United States from 1980 to 1991. This was a period of external debt servicing problems by most Latin American countries, particularly to private banks within the United States. It was also a period of growth in FDI from Latin America to the United States. The results are of interest from a policy standpoint inasmuch as the investment flows have potential short-term debt repayment implications. There are longer-term implications as well because of the effects on trade, growth, and foreign earnings. The results should also be of interest from a theoretical standpoint since a casual observation of Latin American FDI in the United States indicates that it is not wholly consistent with the theories developed by studying flows from either industrial countries or the newly-industrialized countries of Asia.

Data for this study are taken from public sources, primarily U.S. Department of Commerce publications. Because of gaps in Department of Commerce data, this study examines FDI cases by year from 1980 through 1988 and FDI changes in book value between 1981 and 1991. Since the United Sates does not have registration requirements for foreign direct investors, there are undoubtedly errors in both the number and value of FDI estimations. For example, between 1980 and 1988, the U.S. Department of Commerce identified 528 new direct investments in the United States from Latin America. The publication Mergers and Acquisitions identified 57 investments, of which only six were listed by the Department of Commerce. The two lists are combined in this study. Larger investments and acquisitions are probably more likely to have been noted than smaller ones and start-ups, respectively. Concomitantly, there is a dearth of reliable and/or comparable information on outward FDI published by governments of Latin American countries; and some movements take place surreptitiously in spite of capital controls. Therefore, any future U.S. or Latin American restrictions must consider problems and costs of measurement and enforcement.

Since the 1960s, there have been countless studies on foreign direct investment worldwide, focusing primarily on motivations, patterns, and effects. From a donor standpoint, most attention has centered on industrial countries. This is understandable inasmuch as over 95 percent of the worldwide FDI value is estimated to originate in industrial countries. But direct investments from lesser developed countries (LDCs) make up a substantially higher (about 10 percent) portion of direct investment value in the United States; and more than two-thirds of this comes from Latin America. By 1990, the value of FDI in the United States from Latin America was estimated at $16.22 billion. Although this figure was small compared with the $62.49 billion of U.S.-owned FDI in Latin America, the book value from Latin America to the U.S. increased by 199 percent during the 1980s as compared with an increase of 78 percent from the United States to Latin America.