Foreign direct investment in Latin America

• The flow of foreign direct investment (FDI) in Latin America and the Caribbean increased in 2022 by 51%, representing a total of $208 billion USD, largely due to the existence of greater demand for commodities and minerals called “critical” (lithium, nickel, cobalt, graphite, manganese, among others).

• In Mexico, the second largest recipient of FDI in Latin America, only behind Brazil, the FDI increased 12% in 2022, representing $35 billion USD, with new investments in equity instruments and reinvested earnings.

• Net worth in cross-border mergers and acquisitions (M&A) in Mexico increased to $8 .2 billion USD (in the year 2021 it represented less than one billion).

• In the last five years, there has been an increase due to trade agreements between countries such as the Asociación Latinoamericana de Integración (ALADI, of which Mexico is a member) and the Mercado Común del Sur (MERCOSUR).

• Cross-border M&A activity increased by 80% ($15 billion USD) The manufacturing sector recorded the highest increase in net sales, particularly in food, beverage and tobacco, chemicals, paper, and paper products.
  

  
  

The indicators above mentioned are of interest when taking into consideration that, in the same year, 2022, the FDI ́s reported a worldwide decrease by 12% (1 .3 trillion USD) generated mainly by geopolitical tensions (war in Ukraine) that had an impact on the financial sector, which generated a lower volume of FDI in developed countries (the volume of negotiations fell by 25%, where the volume in M&A worldwide decreased by 9%).

Notwithstanding the above, there is a trend of increase in FDI in developing countries, including countries in Latin America where there is still a deficit in annual investment with respect to their activity to achieve the Sustainable Development Goals (SDGs) related to renewable energies, as agreed in the 2015 Paris Agreement to which Mexico is a party (agreement to reduce global warming), revealing the 2023 World Investment Report that international investment in renewable energies has almost tripled since 2015, with three countries being the most benefit in 2022: Brazil, Chile and Mexico, attracted three- quarters of all renewable energy projects announced in the Latin American region in 2022.

This report also reveals that in developing countries there is no direct and significant domestic investment in renewable energies, which means that these countries turn abroad to look for financing up to three quarters of the cost of projects in this type of energy .

The report points out that developing countries require annual investments in renewable energy for amounts close to $1 .7 trillion USD to achieve the aforementioned SDG targets, where in 2022 FDIs were reported for only $544 billion USD, therefore the UNCTAD makes an urgent appeal to support developing countries, so they are able to attract significantly more foreign direct investment for their transition to renewable energy.

In accordance with the above mentioned, it is expected that in the coming years there will be an increase in financing in developing countries to invest in the aforementioned transition to renewable energy and thus achieve the SDG goals for 2030, where, for example, Banks shall have to transform their business models and risk approach in order to take advantage of their funds to attract a greater volume of private financing for the aforementioned transition in developing countries.

At KRESTON BSG we understand the importance of this type of report as it allows us to comprehend the trends of investment in the world; with relevance on those items necessary to achieve the Sustainable Development Goals (SDGs) by 2030.

Author: Mauricio González - Legal Manager, Kreston BSG

This article was first publish by Kreston Global in the magazine Doing business in Latin America, click here to see.