“Businesses from all over the world have recognized that the ability to expand their profits either through wider market penetration or through outsourcing parts of their operations to lower-cost jurisdictions is no longer a strategy limited to the largest companies. If they don’t take advantage, their competitors will!”
– Business Law Today, April 2024
If you haven’t considered foreign direct investment (FDI) in your strategy for global growth, now might be the time to start—particularly if your strategy involves Latin America.
The 2020s have been a booming decade for international investment in Latin America and the Caribbean. In 2022, FDI increased by 55% in the region to reach nearly a quarter of a trillion dollars.
Amid all of these mergers, acquisitions, greenfield investments, and more, where are companies directing their money? According to global law firm Foley & Lardner, the services sector accounted for over half of the region’s FDI. Other sectors to watch include electricity, natural gas and water, information and communications, and transportation-related services, as well as manufacturing and natural resources.
Maybe you’ve found a market opportunity and are wondering if FDI is the right structure and level of commitment. Maybe you’re seeking to grow through a merger or acquisition and need more guidance. Which jurisdictions are actively seeking overseas capital? What overarching trends are driving this interest, along with favorable conditions for business?
Here are a few things to consider as you move forward.
FDI pros and cons
We’ve covered the many reasons Latin America is a great place to do business throughout this blog series, including abundant in-demand resources, the rise of sustainable business opportunities, and innovators breaking new ground in areas like EVs, telematics, and simulation technology. Plentiful reasons also exist for conducting this business through FDI.
The first advantage is control, which FDI offers by definition by giving you an ownership stake in local operations. From facility location to resource allocation and beyond, you have more of a say in how things are done, more so than you might with a partnership agreement or limited joint venture.
In addition, FDI connects your business to perks you likely wouldn’t get through a partnership or exporting arrangement: favorable taxes and tariffs, access to public tenders and bids, the list goes on.
Finally, FDI can be a swift and powerful way to grow a company’s regional presence. GFT’s recent acquisition of Colombian fintech Sophos Solutions is one example. “By acquiring Sophos, GFT will increase its team footprint by 20%,” FinTech Magazine pointed out, “making it a top three banking IT services provider in LatAm. What’s more, GFT Technologies says its Sophos move will increase its global delivery capabilities.”
But great power brings great responsibility, and this is where FDI gets complicated.
Because FDI is a more deeply entrenched, longer-term commitment, any headwinds you encounter could result in more substantial and ongoing challenges. Risks related to climate change could impact the facilities or resources you now have a controlling interest in. Fluctuations in the market could counterbalance incentives and other gains.
Here’s one example of the latter. Costa Rica has attracted a significant amount of STEM-related FDI through leveraging its skilled workforce, engineering sector and the U.S. 2022 Chips and Science Act. In June 2024, however, “the strength of the colón has made exporters worried about their competitiveness,” fDi Intelligence noted, asking, “Has Costa Rica’s supercycle reached a tipping point?”
On the regulatory side, transparent, predictable law, with ample and relevant investor protections, are critical to making FDI work—so investigate them thoroughly in any jurisdiction you consider. What legal protections exist against government interference, especially interference that is arbitrary and not transparent? And what mechanisms exist for filing grievances and settling disputes?
“The effect of regulatory risk on FDI is sizable and comparable in magnitude to the investment-enhancing effects of trade openness,” the World Bank’s Global Investment Competitiveness Report cautions.
Take a look at the policy landscape
To see if FDI incentives will be worth it to your bottom line, thoroughly research a prospective jurisdiction in areas such as:
- Tax incentives, protections, reforms, and regulations. The planned simplification of value-added taxes (VAT) in Brazil, for example, should “make investing in Brazil cheaper and Brazilian products more competitive,” declares JD Supra.
- Trade agreements between your business’ country of incorporation and the target market. These can offer valuable investment protections.
- Favorable regulations in critical areas like IP protection and transfer pricing. You’ll want to ensure the proper allocation of profits.
The incentives themselves can be very attractive to a company’s bottom line. For example, the Itsmo de Tehuantepec tax zone in the southeastern Oaxaca province offers corporate income tax exemptions for the first three years of operations, then 50- to 90-percent reductions in income tax payments and additional benefits related to indirect taxes.
Track the trends driving investment
Economically, politically, logistically, and more, the global order is shifting, driving countries and companies alike to rethink where and how they do business.
“If the appeal of China’s low wages once trumped Latin America and the Caribbean’s proximity in terms of language, culture and time zone, those wages are now higher than those in Brazil and Mexico,” the World Economic Forum wrote earlier this year. “The vulnerabilities of the supply chain during the COVID-19 pandemic and the intensifying Sino-Western geo-strategic tensions have investors looking to diversify their risk geographically, which is expected to persist.”
Such diversification is bringing new words to the international business lexicon.
Powershoring—locating production where energy is green, safe, affordable, and abundant—has been attracting investment in Uruguay, Paraguay, and Brazil in sectors including glass, ceramics, cement, fertilizers, paper, and pulp.
US Treasury Secretary Janet Yellen talked about the virtues of friendshoring—diversifying supply chains among partners and allies—when she met with Latin American leaders in late 2023. Legal and business platform JD Supra calls it “ally shoring” and a way to avoid the risks we’ve seen through the past years of geopolitical unrest and supply chain uncertainty. “Latin America only stands to gain from this.”
Mexico: How will elections affect an FDI leader?
Mexico, as a longtime top trading partner of the United States, has long experienced the benefits of nearshoring, particularly in the manufacturing and automotive sectors.
What will the FDI landscape look like after presidential elections in both nations this year? It’s too soon to tell for the United States, of course—and we’ll be providing our November predictions in an upcoming blog.
But Mexico’s new administration has an encouraging forecast so far, with a few cautions.
“Claudia Sheinbaum has given clear signals that she will maintain and strengthen support for the manufacturing sector and its relationship with the United States,” Industry Week reported, noting that Sheinbaum also called out “the importance of foreign investment and the relocation of production chains (nearshoring) as opportunities to also improve social welfare in Mexico.”
Yet Industry Week also notes that Sheinbaum’s administration faces “many unknowns,” citing the need to maintain economic stability, address water challenges and security issues, and more—all critical for bolstering investor confidence.
Argentina: Finding opportunity in a new regime
Argentina also elected a new president in recent months, spurring a wide range of reactions from the international business community. In April, after a 27-year presence in the country, HSBC sold its Argentina operations for $1 billion to a Spanish private financial group, citing the South American nation’s unstable exchange rate as the reason why. Italian energy giant Enel SPA had considered a similar divestiture but decided against it.
Now several months into Javier Milei’s administration and his “chainsaw” reforms, certain sectors are faring better than others. Many retail businesses are struggling right now amid the exchange rate concerns cited by HSBC and sharp declines in purchasing power and consumer spending.
In contrast, other industries are thriving. State-owned enterprises in areas such as water and rail transportation are on Milei’s list for privatization. And the country’s recently passed economic deregulation law “opens the doors wide for 30 years for multinationals willing to invest in energy, mining, agribusiness and technology,” El Pais declared in its coverage.
As the gears turn on these policies, other opportunities may be ready right now. In November 2021, we detailed the innovation that made Argentina “still a deal magnet” and think it remains a promising market for acquisitions and equity investments.
“Companies facing financial limitations often cannot expand or innovate independently, making them ideal targets for larger firms or investors looking for undervalued assets that can be optimized for improved performance,” JD Supra noted in its June Hot Topics in International Trade.
In 2024 Argentina, such a scenario can be a win-win: you gain a foothold in one of South America’s largest markets, and the company and talent you’re investing in gain vital capital during a volatile time.
Helpful tips for anticipating what’s next
How can you further sharpen your view of the FDI landscape?
- Watch where industry leaders are moving. In tech, this could include Intel’s $1.2 billion investment in Costa Rican chip-making and cloud data company Snowflake including Colombia in its expansion plans.
- Get involved with economic development organizations and initiatives. For instance, an agribusiness delegation from St. Louis, in the heart of U.S. farming country, recently headed to São Paulo, Brazil for the World Agri-Tech South America Summit.
- Keep an eye out for FDI-focused public initiatives. Government programs to attract foreign capital not only offer direct opportunities for participation, they also show state commitment to a given sector, which may be further bolstered by incentives, favorable tariffs and taxes, and so forth.
Due diligence and integration
Despite the rapid pace of today’s business landscape, time devoted to due diligence is time well spent.
“Many businesses consider their international expansion a quick and easy add-on to their US domestic business, but in fact, the unfamiliarity of overseas markets can often mean greater time should be spent on ensuring a proper approach is taken,” cautions the American Bar Association.
In any investment you make, you’ll want to mitigate risk, maximize value, and ensure strategic alignment. To do so, the International Trade Council recommends:
- Thoroughly examining the financial, legal, tax, regulatory, operational, and cultural aspects of a company’s operations
- Accounting for country-specific regulations, market dynamics, and local business practices
- Having a plan for integrating your investment into your operations
Next steps
In summary, here are a few steps to take if you’re considering growth through foreign direct investment. Consider the region—and global trends. See what’s happening in a specific industry—who’s investing, who’s divesting, and why. Investigate incentives, especially as new administrations take control and aim to make an impact. Finally, as with any merger, acquisition, or business partnership, give thorough due diligence of any target company or opportunity its due.
Specialist advisors can help you find the best opportunities for your business, in FDI and beyond. Contact us to learn more.